[00:03:10] Tobias Carlisle: I’ve got some, I’ve got some observations. I don’t know how much of this is causative or what’s really going on. But the first thing I would say is like you guys, I am not a macro investor.

[00:03:20] Tobias Carlisle: I largely ignore the macro, not because I don’t think it’s important, but because I don’t think I can figure out what’s happening. I’ve looked back through, you know, you guys know I love a little bit of market history. If you look back over the last few hundred years, there’ve been wars and crashes and depressions and none of them were predictable.

[00:03:37] Tobias Carlisle: Even in hindsight, they’re not predictable. So the best setting is just to invest according to where you are in life. You have your exposure set and you plan for anything that could happen. You can have a bust, you could have a crack up boom, and you’re just in a position where whichever one happens, you don’t really care.

[00:03:55] Tobias Carlisle: I call it regret minimization, that’s really my objective. Whatever happens, I just want to be the least upset. So if it goes up a lot, I’ll be fine. If it goes down a lot, I’ll be fine. I don’t really care. So that’s the, that’s everybody should get to that point. So you don’t have to be predicting what’s going to happen to position yourself because that’s very hard and the one time you get it wrong, you could blow yourself up.

[00:04:16] Tobias Carlisle: What I think has been happening though, the stock market inversion continues on, it’s the sorry, the 10-3 inversion, which is basically short dated interest rates, treasuries are high, and longer dated interest rates are lower, and it’s unusual, because ordinarily, when you’re putting money out at risk, the longer you put it out, the more you get, because you’ve got to contend with inflation, there are risks that you won’t get your money back.

[00:04:43] Tobias Carlisle: You don’t have the use of your money. So for all of those reasons, they typically attract longer rates for the more time you got to put it out and you get lower rates for shorter periods of time. That’s not happening at the moment because the Fed has lifted up the front end rates. That’s the three months.

[00:04:59] Tobias Carlisle: And they do that in an effort to slow the economy because it was too hot. We had inflation. The Fed has a dual mandate. It’s full employment and stable prices. Employment’s at all-time lows. Prices have been not stable because we’ve had a lot of inflation, so put up the interest rates to try and cool the economy, and the result will be some unemployment.

[00:05:19] Tobias Carlisle: And that’s typically what has happened, and that manifests an inversion in the 10-3 yield. And so when that happens, after a period of time, it’s unpredictable. There’s usually a slowdown in the economy. When you have that, you typically have a stock market crash, real estate market crash, everything gets set lower, and I think that’s probably explicitly what Powell’s been trying to do, get housing prices down, maybe stock market prices down.

[00:05:43] Tobias Carlisle: None of that has sort of happened yet, and it’s the longest inversion we’ve ever had, or going back in the data, there may be longer inversions that aren’t captured in the data. It was also the steepest or the deepest inversion at one point. There’s no real correlation between any of those things and the resulting recession or depression or whatever follows, other than the fact that they tend to be for about the same length of time.

[00:06:06] Tobias Carlisle: Because the lag is so long between raising rates and it actually impacting the economy. It’s like 18 months or 2 years or longer. So, Fed raises rates, waits, nothing happens. 18 months later, there’s a stock market crash. And they panic and they lower rates as rapidly as they possibly can, but it has no, you can see in all of these crashes, the Feds lowering rates rapidly.

[00:06:29] Tobias Carlisle: And it has no impact because the lag is so great and they’ve sort of overplayed their hand a little bit. I don’t know what’s going to happen here, but I probably guess it’s something similar to that. I think the reason that it hasn’t happened yet and the reason that stock market’s at all-time highs, real estate market’s flying along, unemployment remains low.

[00:06:47] Tobias Carlisle: We’re running massive deficits on the fiscal side. So the federal government has these Inflation Reduction Act, which is actually doing the opposite of what it says. There’s a lot of spending, and that spending goes out into the economy before the money is collected. To pay for it in taxes because it’s done on debt. It’s done with debt.

[00:07:09] Tobias Carlisle: And Milton Friedman, it’s funny that you raise his name. Milton Friedman used to say, the thing about inflation and spending is that it feels best at the start. It’s like drinking. It’s like alcoholism. You feel great while you’re drinking and the hangover then follows after the fact.

[00:07:23] Tobias Carlisle: And so nobody thinks they’re making a mistake while they’re doing it and the more you do it, the better it feels. And then you wake up the next morning and that’s when you get the hangover, so. I think probably that’s where we are at the moment. It hasn’t shown up yet because there’s so much spending.

[00:07:37] Tobias Carlisle: Obviously because we’ve got an election coming up. There’s always, that’s one of the levers that the incumbent administration can pull. They can spend a lot of money. That makes the economy look better than it otherwise is. And then you get the other side. I don’t think it really matters. I’m not particularly political when it comes to the economy.

[00:07:53] Tobias Carlisle: I think whichever team comes in, they’ll be both spending. So I don’t really know. We’re in a grand experiment. I don’t think any of this has been tried before. We’ve got the brakes on and the accelerator on at the same time. So interested to see which one person’s got their foot on the accelerator. The other person’s got their foot on the brake. No one’s got their hands on the steering wheel. Should be fun.

[00:08:14] Hari Ramachandra: Yeah, that was interesting, Toby. Thank you. And we are in for a fun ride, I guess, in the next couple of months.

[00:08:21] Tobias Carlisle: It’s like the Chinese curse, may you live in interesting times.

[00:08:24] Hari Ramachandra: Yeah.

[00:08:26] Stig Brodersen: Yeah, I think you ask a great question, Hari, you know, about the current conditions. I should probably also do my disclaimers and then do a long rant afterwards and then end by saying, I don’t really know, but I think the, I think I want to take one step back and then say that to Toby’s point, whenever we talked about, you know, wars and everything else, the bigger macro events. And I remember whenever I started investing a long time ago and I had my right of passage going through all Buffett’s letters and whatnot.

[00:08:53] Stig Brodersen: And he has this famous paragraph about. You know, how well the Dow has been doing and keep in mind, like we’re talking about olden days now, because we’re talking about the Dow, not like the S&P 500, like the modern people who talked about the S&P for 40 years now, but talking about the Dow and he talks about how well it did in the 20th century.

[00:09:11] Stig Brodersen: And then he lists all the problems we had in the 20th century and just the stock market matching on. And I think we can come up with a lot of reasons why, you know, this time is bad. You know, time has always been bad. And so I think the way that I do this and I don’t do anything that’s very sophisticated.

[00:09:28] Stig Brodersen: I don’t do, like, I don’t have a quant AI fancy algorithm or whatnot. I’m very much in stocks because I’ve, I do believe in general that the economy is expanding and we all become more productive and, you know, so I don’t think I bring anything new to the party about on that. And I do think you, most people do the self a disservice if they look too much at the macro and deem that now’s not a good time to invest.

[00:09:53] Stig Brodersen: And then at the same time, I also want to have a better insurance like I do. See, I completely agree with Toby. Like whenever you look at the fiscal deficit and like there are some funky things out there. There’s huge debasements and of currencies and you’re like, there are a lot of people out there who are going to tell you that they know what’s going to happen.

[00:10:10] Stig Brodersen: They’re probably smarter than me. I have no idea what’s going to happen. I do see a lot of weakness. And so the way that I’m trying to hedge my best by being along in the stock market and have ever always been along in the stock market is that I hold physical gold and you know, that has looked like a foolish trade for a very long time.

[00:10:28] Stig Brodersen: I don’t remember the last time I pitched a gold here in the mastermind is probably like three or four years ago, something like that and gold has just more or less done nothing. And then here recently it’s been on a tear and I don’t make any kind of naive assumptions that goal are going to perform the stock market or you know, we’re going to go back to a gold standard, anything like that.

[00:10:47] Stig Brodersen: That’s not why I invest partly. I do it because I get taxed way better in my after tax returns are what I’m optimizing for. Not my pretax returns, but also because it is my insurance to perhaps the stock market doesn’t keep on going up whenever you were rolling back over the past 20 years or whatnot.

[00:11:01] Stig Brodersen: And so far, so good. So that is my boring answer to that question and how I position myself.

[00:11:09] Hari Ramachandra: No, they were both really helpful, actually. Thank you. And I really, the key point both of you are making is regret minimization and position yourself that it’s a kind of an all-weather portfolio so that you don’t have to keep guessing what happens to the economy and gold is a very interesting point.

[00:11:24] Hari Ramachandra: You brought up Stig, because I remember Jim Grant saying you would like to have an investment that he kind of doesn’t really agree and if nothing is hurting in your portfolio, something is wrong. So in that sense, I think these are really good answers and thank you.

[00:11:41] Tobias Carlisle: What do you think about Silicon Valley from your perspective? Cause that’s been a big engine of growth for the US probably versus the rest of the world.

[00:11:49] Hari Ramachandra: Yeah. I think as you might have seen in most of the quarterly announcement, what I’m seeing, at least in many of the companies is the focus has been moving from growth, just revenue growth or growth at all costs to responsible growth.

[00:12:06] Hari Ramachandra: I’m seeing a lot of companies highlighting their margin growth more than their revenue growth and, in some cases, the revenue growth is slowing down too but, in some cases, even if the revenue growth is healthy, they are basically projecting their margin growth, which also reflects the sentiments. The wall street is kind of, you know, reflecting on them.

[00:12:26] Hari Ramachandra: And also the, it’s also the life cycle. Many of the high tech companies are in their twenties now. So, and they’re kind of probably realizing that, okay, they’re entering midlife. But what is interesting is for a while, we haven’t seen another Uber or another Google come out of Silicon Valley. Now, that means what I’m saying is there haven’t been many IPOs, but there haven’t been companies of consequence for the last 10 years.

[00:12:55] Hari Ramachandra: There was in the 2010s, there were like a bunch of companies like Facebook and others that went public, which became companies of consequence, but lately after that, at least there aren’t companies that are weak of a consequence yet. Maybe OpenAI. That’s where I see that, you know, things changing in the valley in terms of focusing on Marvians.

[00:13:22] Hari Ramachandra: Acquisitions also have kind of dried up, even though they, we still have, we still see acquisitions here and there, but less acquisitive companies. So, that’s what I see in the Silicon Valley.

[00:13:34] Stig Brodersen: We, and I should probably not take everyone else who was investing down with me on my low level whenever I say this, but I think I, or at least I hear a lot of people talking about where there’s so much disruption right now.

[00:13:47] Stig Brodersen: And I’ve heard myself say that many times, like, oh, like disruption is like. Faster and faster, better and better and like, it’s so difficult in today’s market. And then I read this book the other day. I want to say the name of the book was the new Goliath and it’s not a great book, I should say. So please don’t go out and buy it.

[00:14:03] Stig Brodersen: But like, it had the premise of we don’t get disrupted that much. Most of us know the innovators dilemma, right? And he said like, that was around the time that disruption were peaking and then he, the author makes the argument that because of big tech and mainly, and there are a few other reasons, but he assumed in on big tech to your point, Hari, and you don’t really see a lot of disruption right now because they’re so big and they have so much market power.

[00:14:29] Stig Brodersen: And so I kind of felt that was an interesting take. Do you think he’s right about that? It’s just too difficult to compete with the big tech companies now, or I mean, not saying that we won’t see any disruption. I just don’t think that’s how capitalism works, but are you seeing a downward trend in the valley right now in terms of disruption?

[00:14:47] Hari Ramachandra: Yeah, I think that’s a very good point Stig. In fact, Balaji Srinivasan, who was one of the VCs, he was former CPU of Coinbase in an interview said like, AI is a technology that makes centralized power more powerful. Whereas crypto or chain is a decentralized technology, so it makes the centralized power, less powerful.

[00:15:15] Hari Ramachandra: So that’s why the Chinese Communist Party would go after the crypto and the blockchain, but they would embrace AI because that makes them more powerful. Similarly, in the context of big tech, because of the resources involved, there is a horde now to get Nvidia chips and not everybody is getting it. It’s either Amazon, Google, Microsoft, or Meta.

[00:15:41] Hari Ramachandra: So even open AI cannot afford it. That’s why they partnered and kind of, you know, went with Microsoft because they could use Azure. So it makes it harder and harder for small companies to come up. The only encouraging sign I see now is Lama, which is an open source LLM by Meta and Meta completely batting it and they have their own motives to open source it.

[00:16:10] Hari Ramachandra: But that might help smaller companies get a leg up, but still it is very hard. And that’s, I think, whatever that book is quoting might be actually true. In fact, Peter Thiel also says, and his tagline for his book or his fund also is, we were promised flying cards, all we got was 140 characters. So, and Peter Thiel’s for a long time, his guide was that we aren’t innovating fundamentally the way we did in the 1900s, we are just going off to photo apps or social network apps and stuff like that and thinking it is innovation, but it is just application of a fundamental innovation, which was internet that was made.

[00:16:58] Hari Ramachandra: So I think in that sense, yes, innovation has definitely sold on. And I think we are, especially in Silicon Valley and maybe in other places to read. Equate digital innovation to innovation. I think digital innovation is just an application on top of innovation. It’s the fruits of the innovation that was internet but what I think Elon Musk is doing with SpaceX or Tesla, those kind of companies are far and few.

[00:17:25] Stig Brodersen: So my pick for today, and I should probably preface this by saying that whenever I look at the stocks, I pitched at the early mastermind episodes, you know, it was usually cigar butts. And yeah, optically they’re cheap.

[00:17:38] Stig Brodersen: There’s some hair on it. And then I started, I got this horrible habit of pitching high quality stocks and with high multiples. And I kind of felt I wanted to mix it up and go back to the roots here. So I wanted to pitch a cheap stock with hair on it. And I think I was going through like my Rolodex of different picks.

[00:17:57] Stig Brodersen: And I was like, I want to see if I can impress Toby and see if I can find a lower PE than Toby this time. I think we go, we’re neck to neck on this one here though. I just looked it up here before we start recording, but the stock I’m going to pitch today is Burberry and the stock is trading on the London stock exchange under the ticker BRBY.

[00:18:18] Stig Brodersen: And you can also find the OTC in the States on the ticker BURBY and full disclaimer, this is not a stock that I own. And I was, there’s a little hair on this, not. I’m not going to pitch like a three P a stock, unfortunately, it’s trading around a 10, 10 PE, which is quite unusual for a luxury stock and I would also say that it’s not a, it’s not a high quality stock.

[00:18:44] Stig Brodersen: It’s not going to compound for decades, even though it has shown decent growth. So we’re not looking at a growing pie. I think the thesis I want to present for you today is let’s call it a discounted pie. And, you know, a lot of value investors have said something like discounted pie all the years and find themselves with a value trap with something that looked cheap and then time just passed by and opportunity cost and they regretted that.

[00:19:12] Stig Brodersen: So I’d be very curious to hear how much you’re going to beat up this pick, but let’s get into it. So for those of you who are not familiar with Burberry, so it’s a company providing clothing accessories for men and women. Perhaps it’s best known for its iconic transcode. But you know, you can think about it as a fashion retailer.

[00:19:30] Stig Brodersen: I do want to bring the argument that perhaps we’re talking about luxury and not fashion later here in the discussion. But you know, you can think shirts, pants, back shoes and whatnot. It’s a very opposite of AI. If I can be as liberal as that. So you can find Burberry in 235 stores worldwide. They also have 133 retail concessions and a small number of outlets.

[00:19:55] Stig Brodersen: The biggest markets are Asia Pacific. Then you have Europe in the Middle East and then America’s. And I think it’s important to say that whenever you’re looking at Burberry, it’s not a company that is growing its footprint right now. It’s currently going through a refurbishment of stores worldwide.

[00:20:13] Stig Brodersen: It’s a halfway through and it expects to complete it by fiscal year 2026. The bigger stores, and after they’ve been refurbished, they’re going to have a VIP shopping area, most prominently the flagship store on Bond Street in London. And so this is a brand from 1856 founded by Thomas Burberry, and it’s built around the idea of modern British luxury.

[00:20:38] Stig Brodersen: And a brand, of course, it means a lot of different things to a lot of different people. But I think that there is a consensus right now in the industry that the changing creative directors have created some confusion around the brand and is also trading near a 52 week low. And so the current chief creative officer, so not to be confused with a CEO, he started in 2022.

[00:21:00] Stig Brodersen: His name is Daniel Lee and then a new CEO came in, Jonathan Ackroyd, and he came from a position from Versace and also the sales for Michael Kors. Whereas Daniel Lee, he came from a successful time at Bottega Veneta before then and so as I’m going through this breakdown of Burberry I just want to say, I’m going to give you British pounds unless stated otherwise.

[00:21:22] Stig Brodersen: So one of the traps of analyzing a stock is listening too much to what the management is saying, because whenever you do that, all of a sudden, the valuation starts to look very appealing. So let’s see if we can discount for that. But right now they have around 3 billion. And top line, and then if you go through the filings, they talk a lot about 4 billion in medium term, 5 billion in long term, of course, without defining whenever medium and long term is, but you know, it is a stuff that has shown decent growth in the past.

[00:21:53] Stig Brodersen: So where’s that top line growth is going to come from? Some of that is going to come from, you know, having these stores, like I mentioned before refurbished, we’ve already seen or investors, the company have seen proven a 15 percent ish in sales per square meter in those stores that gone through the process.

[00:22:09] Stig Brodersen: Another thing I also want to add is as a luxury brand, you also have decent pricing power. So some of the top line is also going to come from that more than volume necessarily. It’s one of those things where you don’t want to. Focus too much on volume because then you also end up diluting the brand and so they have a stronger focus now with a new creative director of 50 percent should come from accessories.

[00:22:33] Stig Brodersen: And that’s currently at 37% and so I think the sort of like to place Burberry on the map, it’s very easy to compare them to high end luxury brands, like the MS of the world, and then say, well, Burberry kind of sucks, and this is a terrible company. And you might also say, well, Burberry is not true luxury, like it’s not MS, it’s not Chanel.

[00:22:55] Stig Brodersen: I have like, why would you invest in that company? And the first thing I would say is that, well, MS is trading at 50 times earnings. Burberry is trading at 10 times earnings. That is probably the first time I would, first thing I would say. But I’ll also just say that within the luxury category, you also have a lot of different tiers and whenever you are looking to buy a 2,000, 3,000 Burberry bag, you’re not looking at buying a Birkin bag that can be more than, you know, that could be more 100,000 for a Birkin bag, even though they started what 12, 000 now, like the customers are very different and then you go, you bring an argument.

[00:23:32] Stig Brodersen: Well, you know, Burberry doesn’t fully control their supply chain the same way as the high end luxury producers. They’re not all produced in high income countries and you’ll be Very much right about that. But the thing I would want to say to challenge whether Burberry is fashion or not, and I do think it’s important to make two jobs because as soon as you, you put them into a group of fashion, it also means that you have to look at the future discounts a little bit different.

[00:23:58] Stig Brodersen: And so what do I mean by that? Well, Burberry was established in 1856. And 50 percent of the revenue comes from these core products. It doesn’t come from the newest collection. In a world of abundance and AI, you want to look at which companies are anti fragile. And I’m not saying that Burberry is antifragile, but it is a brand that’s been there for more than 160 years.

[00:24:21] Stig Brodersen: And it’s not depending on whether or not the latest collection for the summer or whatnot is perceived cool or not. Like the strategy is quite different for a company like Burberry and it’s sort of like also takes me to the point of, and also keep in mind, of course, I’m providing the bull case here for Burberry.

[00:24:39] Stig Brodersen: You know, if I didn’t spend all my time talking about why it’s an inferior company to MS for example, but instead said, hey guys, I found this company. It has stable 70 percent gross margins to a stable 20 percent operating margins. Decent growth. It’s trading at 10 times earnings. You know, it’s been there for more than 150 years.

[00:24:59] Stig Brodersen: You would probably be like, tell me about it. Like that sounds promising, but let’s talk about some of the bad stuff. So one of the things I’ve, I really like about a company is if there’s a high insider ownership, if management is charged, and that’s. It couldn’t be more the opposite whenever it comes to Burberry.

[00:25:16] Stig Brodersen: So I do think that is a concern that I would have. Management own very little stock, and a significant part of the compensation is tied to how well the company is doing, which by definition can work against you as an investor. Because they could have the wrong incentives. Let’s say they would start issuing shares that you don’t want to at the wrong valuation or whatnot.

[00:25:40] Stig Brodersen: The management do have some ROIC and there’s a return on investor capital, which is sort of like counter to that. But if you look at how the compensation is structured, it doesn’t carry the same weight. And actually I would say that what is a little ironic whenever you look at what happened since the new CEO came in 2022 is that I think he’s done a better job than what his KPIs are telling him that he should.

[00:26:05] Stig Brodersen: And, you know, in a way it’s kind of like nice that looks like he has so much integrity to do the right things for the shareholders, despite what I kind of feel are a bit inferior. And in a way you can also say it’s pretty bad that the incentives are not fully aligned in the first place. All of that being said, there are some guardrails though, where, for example, whenever I’m looking at a stock where it’s not at the highest quality, it’s decent, you’re worried that you’re going to catch a falling knife.

[00:26:35] Stig Brodersen: I do like to be paid while I’m waiting and there’s a very decent 50 percent payout ratio on adjusted earnings. We can go into some of the adjusted numbers afterwards, but they’re somewhat straightforward. And so that is roughly 5 percent yield that you will be getting right now while you’re waiting.

[00:26:51] Stig Brodersen: And so they bought back 400 million pounds here in 2023. And they did that really fast. And at the time it was equivalent to 5. 6 percent of the shares outstanding. Now it would be equivalent to 10 percent if they did at today’s prices. And I would love to see more share repurchases soon. And those decisions are usually made by the board and not by the management.

[00:27:12] Stig Brodersen: So there are some guardrails in terms of like what they can do and how they’re incentivized that comes from the board that is everything else more aligned with you as a shareholder than if you just read the proxy statement. So there’s a bit more to be said about Burberry, about the valuation and whatnot, but I wanted to throw it over to you Jens first before I proceed with that.

[00:27:33] Tobias Carlisle: I’ve got a question for Stig that Burberry famously rebranded, and it was famously associated with the early 2000s sort of mid 2000s. That’s a, that’s like a dysphemistic term for folks in the UK. I don’t know how, I don’t know how bad that word is to call somebody. I think it’s a pretty mild insult, but they wore the, they famously covered themselves in Burberry.

[00:27:57] Tobias Carlisle: It was like they’re sort of museums. And there was this period where it got picked up on, all the newspapers knew about it, all the television shows knew about it, you know, they’re shameless and other things like this sort of dug into that subculture a little bit where these people were wearing the famous Burberry kind of grey check, you know, which is what Burberry is known for, and that damaged the brand.

[00:28:20] Tobias Carlisle: And so they had to find this way to pivot away from this subculture and sort of make themselves back into this aspirational luxury brand, which they’ve evidently, they’ve done that over the last sort of 15 years to kind of get away from that because it’s not a, it’s not an issue now. But it is kind of interesting to me that there must be a lot of people around who are sort of my vintage who remember that pretty clearly and people who are like our vintage are the ones who have the, you know, excess cash to spend on stuff like this.

[00:28:49] Tobias Carlisle: So, what’s going to lure people like us back to that brand and is it sort of irretrievably damaged or do you think they can turn around? Or they have turned around.

[00:29:01] Stig Brodersen: Toby, I think that’s just a great question and I was discussing Burberry in our mastermind community and one of the members brought that point up exactly.

[00:29:12] Stig Brodersen: You know, a brand means so many different things to different people and originally I thought and now I might have to think differently about it on my very small sample size, but I thought, you know, if you were a certain generation and perhaps if you’re based in the UK and perhaps it wasn’t just a UK thing, that they have the 8 percent of their business in the UK.

[00:29:36] Stig Brodersen: I was about to come up with a cheeky comment about you call football and not soccer, like half of our listeners do. Like perhaps that’s an issue, but then also you look at the, you look at the main market and that is in countries that are really into football and they probably don’t remember and they don’t know what a Millwall hooligan is, or you’re just like, perhaps it’s not a thing.

[00:29:56] Stig Brodersen: And so I don’t really know how to best respond to that. And they have some, they break down like the generations, not very detailed on age, but a generation like Gen Z’s, millennials or whatnot in your annual reports. Yeah, and I was going through that after having spoken to a community member who talked about like, How, what do people think whenever they think the famous check.

[00:30:16] Stig Brodersen: And, you know, I especially think that a brand like Burberry, and I would completely forgive you if you went into the website and it’s like, this is pretty ugly. And I, this is not my way of saying brevity is cool. I do think that what’s important about whenever you as a stock investor is not just to think about how you see the world, but look at the numbers and like, what does the world think?

[00:30:41] Stig Brodersen: And if you would wear a brand like Burberry, like, it’s very like in your face and there are some people in some cultures that would like to display that more than others. I’m really trying to be political correct as I’m saying all of this. And I think that’s just, I think that’s very important in terms of, I’m not saying one thing is right or one thing is wrong.

[00:31:02] Stig Brodersen: Let me give you an example of that. Okay. I was listing a Burberry store in Manila, Philippines some time ago, and I was looking for a belt. And there’s a long story why, because it probably sounds super off. What were you doing Manila? And why were you looking for a belt? Let’s not go there this time.

[00:31:19] Stig Brodersen: But I remember going in there and thinking that the store looked, had a very different feel than say the flagship store in, in bond street in London. And the belts were very explicit and the brand was very explicit. Let me put it like that. And so I, so, and of course, you know, it’s a higher brand.

[00:31:40] Stig Brodersen: So you’re surrounded by salespeople who want to give you a wonderful service. And so I asked her like, oh, like, do you have a belt, like, where you can’t like to see the brand and she looked at me. It’s like, I was asking her, well, I could walk on the moon. It’s just like, why would you want that? Why would you have something that’s Burberry if people can’t see it’s Burberry.

[00:31:58] Stig Brodersen: And that’s because like in, in the Danish culture, if you wear like a big brand, it means that it’s you know, to some extent it means like either it’s a knockoff or you’re like, it’s a very quiet, luxury type of culture. So you’re not supposed to wear brands. It’s frowned upon to a large extent. And so. I think that there’s something to be said about the perception of brand and understanding.

[00:32:18] Stig Brodersen: Well, who’s the core customer and are you the core customer? If you’re looking at some of the products and you’re like, this is odd. Why do they have 3 billion, 3 billion pounds in top line? Well, that’s because people don’t agree with you on what looks nice, apparently so.

[00:32:36] Tobias Carlisle: The other question I had, there’s a huge debt that it took on a whole lot of debt a few years ago. What was the reason for that? Did they make an acquisition or were they buying back stock or where’s that come from?

[00:32:46] Stig Brodersen: Yeah. So I’m really happy you brought that up. So if you look just at the total debt, it’s important to, because they actually have very little debt. So they have operating leases.

[00:32:57] Stig Brodersen: So it’s the way it works. And so if you look at IFRS. They’re supposed to, like, it’s counted as debt, but it’s counted as right of use assets in the assets column on your balance sheet. So, so they do have net cash is the first thing I’d say. If the thought of T accounts just make you fall asleep and you have no idea what you’re talking about.

[00:33:18] Stig Brodersen: That’s perfectly fine. What I’ll do is that I’m going to link to this specific example of RFS. So in the US you use GAAP, Burberry would be, so you could come in and basically the rest of the world, they’re using RFS. So I’m just going to link to an example of how that’s been counted and why the debt they have on the balance sheet isn’t quote unquote real debt. So I kind of feel I cupped out on that one, Toby.

[00:33:41] Tobias Carlisle: That’s good. Otherwise I think it’s a, I think it’s a really strong pick. It’s got all the things that I really like. It’s got, It’s a very cheap valuation, and as you point out, it’s got huge margins, so it’s one of those things where, you know, I can see this working out really well, over a long period of time, because it’s been around for so long, it’s a great brand, it’s got good margins, so they are able to convert that brand into, people will pay up for it, it’s got good top line, it’s so cheap, this is the sort of thing that I would buy, I don’t know, but it is the sort of thing that I would buy.

[00:34:11] Hari Ramachandra: Definitely the brand and especially many of these countries that are growing their GDP is with a lot of middle class coming up. This can be a very good aspirational brand in those countries. And also, I think one interesting thing you brought up was, it’s not about volume here. It’s about margins because it’s a luxury brand.

[00:34:32] Hari Ramachandra: And I’m assuming the margin compares to other luxury brands. The only thing that I’m, I was curious was about lack of insider ownership because Many of these luxury brands are family owned and they’re able to make long term bets. And that might be the only risk here, if the management is not able to make those long term bets but I think the price is so attractive that, you know, you kind of bake into it already.

[00:35:01] Stig Brodersen: Yeah. So I’m really happy that you say that Hari, because you are right. Many of the luxury brands are owned by families and they do not focus on ironically the focus on shareholder value, but they don’t really focus on shareholder value, which is one of those wonderful things about capitalism that sometimes shareholder value can be an indirect effect of thinking long term, but I bullish here as I’m saying this.

[00:35:26] Stig Brodersen: Let’s say that there is a bull case and then this is like a base case and then a bear case. Then you might say that there’s a put option to some extent on the bear case because it’s not family owned and because it could be snapped up by a luxury conglomerate. Like LVMH would probably be the most obvious choice, not caring, considering everything you’re going through right now.

[00:35:49] Stig Brodersen: And I have thought about that and I’m not saying that it’s a big part of my thesis that you would have that production, whatever you want to call it, that someone would come in and buy them up. Because I, you know, again, I was discussing this with our mastermind community and then someone said to me, well, if that is the case and it’s so cheap, why hasn’t it been acquired.

[00:36:10] Stig Brodersen: And that’s a great argument, you know, what is that, that we’re not seeing, but I think it’s important to say that the lack of inside ownership can in its own way. And I’m trying to be very positive. I’m saying this, but it might even be a catalyst potentially if there were to be acquired. So let me give you one example.

[00:36:26] Stig Brodersen: LVMH really wanted to buy MS some years back and I think they’re quite up to 20 percent and the family’s all, because there are many families, there’s six generations now with MS, they’re all joined together in the set. We don’t want to be acquired regardless of the price. That is not the strategy that Burberry has.

[00:36:42] Stig Brodersen: And so actually with the previous, under the previous management, there were rumors, you know, close to management and board, whatever that means, they came out and said, we really want to be acquired. And I was just thinking like that type of rumors that probably started themselves. They wanted to get a tender off or call it 20 or 30 percent above market price.

[00:37:01] Stig Brodersen: Would not be something you’ll hear from a lot of brands. And I kind of feel that’s, that is an interesting element to this. But if we can go back and talk about, hey, if this is a, if not a great company, then at least a decent company. Why is it so cheap? And like I mentioned, you know, there’s some hell on it.

[00:37:18] Stig Brodersen: And so one of the thing is that the industry is facing some short term problems. And now I’m not a, I’m not an expert whenever it comes to what looks good in terms of clothing and whatnot. But so I’m not the right, I don’t think I’m the right person to say the creative output isn’t the way it should be.

[00:37:36] Stig Brodersen: I think I probably take the long term view of saying. This is a high end brand that’s been with us for more than 160 years. It’s not really about the last few collections that’s come out, whether or not it looks good or bad. I think it’s up for you to decide, but it is an industry wide issue right now.

[00:37:52] Stig Brodersen: The luxury sector is in a slump. I’ve previously pitched LVMH here on, on the show. And so I’ve been reading, you know, their earnings reports and whatnot. And they’re a good indicator of, because they’re more, I wouldn’t say they are the industry, but they have so many brands in the industry. You can also see Kering just coming out.

[00:38:09] Stig Brodersen: They tanked 7 percent like Gucci. I think it went down to, I want to say revenue fell 21%. Like you see a lot of pain right now in the luxury industry. And so you might be saying that doesn’t make any sense. Like MS send out their last quarterly report and they were up 70 percent on revenue. And you’re like, what’s going on?

[00:38:26] Stig Brodersen: So again, we have different tiers within the luxury segment, where for a company like Burberry, that it’s at the lower end, they have a lot of what’s referred to as aspirational luxury shoppers. So they’re way more hit by the economy. Exactly. And by inflation to, to extend that, you know, call it old money, the quite luxury type people who would buy the MSS of the world are just not.

[00:38:52] Stig Brodersen: And so a part of the thesis and. I’m always ashamed of saying this because it is a bit about, do I dare say timing the market? It sounds terrible. So I read this memo a long time ago from Howard Marks, and he talked about whenever you have market cycles, what kind of, of company that would be hit the hardest and which kind of company that would benefit the most.

[00:39:14] Stig Brodersen: And he talked about how Whenever industry is in a slump, how you should make sure to buy low quality companies. And it sounds so counterintuitive, but his take was that those are the companies get punished the most. And if they have clean balance sheets, they’re also going to rebound the most compared to their masses of the world that’s trading at 50 times earnings because people know they’re doing well.

[00:39:35] Stig Brodersen: And so I took that and then I squared it with, you know, Peter Lynch’s wonderful book beat the street. And he talks about investing in cyclicals. And I kind of felt he had this wonderful quote where he talks about investing in second class is like playing blackjack because if you stay in too long, the houses is eventually going to win.

[00:39:53] Stig Brodersen: And so there is this thing, whenever you buy cyclicals, especially not the high end luxury, but discretionary still, you want to, it is a bit of a game of what do other people think and when do they think that is so and so whenever I’m looking at that, I think that there is a very interesting case here for Burberry.

[00:40:14] Stig Brodersen: I am acknowledging now that they’ve been out with profit warnings. Some of the training earnings are not going to look as nice whenever it comes out here. And yeah. They already addressed that at length in the press releases, but I can’t help, but think if we buy it at the current price. So the market cap right now is 4 billion.

[00:40:30] Stig Brodersen: Keep in mind, if you look at the enterprise value, we have the IFRS 16 thing about operating leases. So let’s just call it 4 billion right now. So would I buy the entire company at 4 billion? And right now the stock is trading at 1150 pence. So 1150 pence. I would probably like a bigger margin of safety, especially because as much as we like to talk about asymmetric bets, I do think that there is case to be made that things can go worse, even for a brand like Burberry.

[00:41:00] Stig Brodersen: But let’s say that we have 4 billion in top line, which I think is absolutely achievable. Right now it’s 3 billion. We have a PE of 20 and we have operating margins of 20%. And so if we, if you do all the math and knowing that the corporate tax rate in the UK is 25%, so we are probably looking, let’s say that this is going to come to fruition.

[00:41:22] Stig Brodersen: We are looking at a company that should have a market cap of 10 to 12 billion British pounds. Again, trading at 4 billion right now. Of course, this is the bull case. The base case for me is closer to five and a half to 6 billion. And then we have the bear case where I want to argue that there might be a put option somewhere. So with all of that being said, that’s my pick here for today, Burberry, please continue your bashing, Gents.

[00:41:49] Hari Ramachandra: I liked it. Yeah. I don’t find much to bash here, Stig. I think you can, you know, give both the cases, the bull and the bear already. It’s an interesting pick. It’s just a question of like, you know, what’s the upside, because it looks like a lot of the bad news has been baked into the price. So I think would I invest in this compared to say, just investing in index fund, maybe yes, because indexes are now overvalued in US.

[00:42:15] Stig Brodersen: All right, thank you so much for your feedback, gents. Who wants to go next with his pick?

[00:42:20] Hari Ramachandra: I think Toby, you want to go?

[00:42:22] Tobias Carlisle: I got a short and sweet one. So the stock is Playtika. The ticket is PLTK.

[00:42:27] Tobias Carlisle: They make mobile games. I can read off a list of these names. It’s Board Kings, House of Fun. If you guys play any of those on your phones, then you’re playing a Playtika game. The stock IPO-ed in 2021 at north of 30. It’s currently trading at 7.24. They’ve torn up 80 percent of their valuation. I think they listed in the tech kind of mania, and a lot of the heat has come out of it.

[00:42:54] Tobias Carlisle: Combined with the fact that they had some pretty good growth when they listed, pretty good historical growth when they listed, and the growth has slowed very materially there. They’re growing about 1 percent year on year, which is probably less than inflation. So in real terms, they’re probably shrinking, which is why the stock is down so much, I would say.

[00:43:15] Tobias Carlisle: I think they sort of blame it on they say there have been these privacy updates, which have made my, I’m guessing this is like an iPhone through the app store, mostly, but evidently that’s made it much harder to market these games, and it’s made it much harder to monetize these games for these guys. So that’s been their big problem.

[00:43:36] Tobias Carlisle: They tend to have these like celebrity endorsements of their games. That’s how they do it. They have some celebrity play the game. So each game is associated with a celebrity. I’m not going to mention them because I don’t think you’ll recognize the games. It’s not a very big company. It’s a 2. 7 billion market capitalization now.

[00:43:53] Tobias Carlisle: It’s got a little bit of debt. So EV’s 4. 2. For that, they’re expecting for this year revenues of 2. 6 billion. So it’s about one times revenue, which is pretty good considering that because it’s a tech company, because it’s a gaming company, their gross margins are north of 70%, which is, that’s very fat. So they’re making lots of money, EBIT, like 472 million.

[00:44:17] Tobias Carlisle: So EBITDA is 745 for the year to come. So it’s like six times on an EBITDA basis, free cash flow, like 436 million, so 9.5 times free cash flow. PE is about 11, and it’s still run by the founder, CEO, who established it in 2010. One of the things that they’re doing in a sort of effort to resuscitate the stock price, resuscitate the business a little bit, is they’re doing what all of the rest of Silicon Valley is doing.

[00:44:48] Tobias Carlisle: They’re doing this efficiency push, which means layoffs, and so I think when you look at this company, it looks like stocks down 80%, growth has slowed to a standstill, they’re doing layoffs, and they’re saying that there are problems with marketing and monetization of their games, which doesn’t sound particularly good.

[00:45:07] Tobias Carlisle: And then on top of that, they’re Israeli and they’ve got some employees in the Ukraine. So they’re involved in both sort of geopolitical conflicts that are on the news at the moment. So all of that is very bad news for this business, but I like it for the reason that they definitely do have very substantial free cash for this business that they don’t need to grow this business and they don’t need it in the business.

[00:45:32] Tobias Carlisle: So they’ve said that they’re going to start paying a dividend. They’ve started at 150 million a year. Which at the current market price is a dividend yield of 5.5%, which is a pretty fat dividend yield. They also said that they plan to do some acquisitions and so the founder CEO, he wants to do these acquisitions.

[00:45:48] Tobias Carlisle: Evidently there’s some stuff out there that they can buy. They may be a target themselves. There are other bigger gaming companies, app loving and various other sort of names that you would recognize in this industry. So, I think optically it’s something that looks like it’s got a lot of problems. Under the hood, the balance sheet, financial statements, balance sheet, it’s probably less than ideal because of the debt, but they seem to be able to set debt pretty well, but I should mention that the Altman Z score is trending, is towards distress here, so it’s, my system excludes things that have, that fail on various statistical measures of earnings manipulation and fraud and financial distress, and that’s one of the measures that I look at.

[00:46:27] Tobias Carlisle: But it wasn’t triggered in my system because I try to look at the things that are that collectively have all of these problems and this is sort of this is a unique problem. When I look at the rest of the financial statements, I figured it’s okay. So it’s generating top line is still huge. Margins are huge.

[00:46:43] Tobias Carlisle: There’s lots of cash flowing into this business manifesting as free cash flow and dividends and they’ll be able to do acquisitions. So I think it’s very healthy. I buy these companies for my funds. I own this company in the fund. It’s one of the companies that I own in Zig, which is my mid cap large.

[00:46:59] Tobias Carlisle: It’s one of 30 positions in that company. I buy them all at equal weight. I rebalanced them at equal weight. Come the next rebalance date, it’s entirely possible that I sell out of it. I don’t know where we’re going to be at that point. It’s entirely possible that I continue to hold it. I just don’t know before I come to the rebalance state, what’s going to happen.

[00:47:17] Tobias Carlisle: So if you hear this after the fact, and then you go and look at the portfolio, it’s not in there. That’s the reason why. I can see the stock price up two times from here, and I still don’t think it would be a particularly expensive company. So that’s my pitch. It has obvious problems, but I think that in the context that I buy these things as part of a portfolio, it’s a nice risk adjustment, so I’ve put it on, Gents.

[00:47:38] Hari Ramachandra: It’s a very interesting pick, Toby. Especially gaming, I have a teenager at home, so I’m looking at all the different gaming companies too myself. I think there are It’s a very interesting company because, as you said, the margins are really high. It’s a profitable model. Distribution is also not that difficult for them because they’re on the platforms.

[00:48:00] Hari Ramachandra: However, I think that a couple of concerns is, one, if it is, if I look at it as a long term holding, I don’t think you are looking at it that way. It’s kind of probably medium term for you. So, if I look at it as a long term holding, then I have a few concerns in the sense that, number one, why are they declaring dividends so fast?

[00:48:21] Hari Ramachandra: That’s just out of the IPO a few years back. Number two is their organic growth has been not that great. It’s always through acquisition in terms of their revenue. And now that they can’t acquire more, their revenue is kind of declining or stagnant. And then their daily active user is also declining by six or 7 percent year over year.

[00:48:48] Hari Ramachandra: This tells me that the mode is like narrow or low. It’s like it’s switching cost is not there. Gamers can be flickery and then they also have this casino stream of business or games that can have regulation risk at some point or the other in some geography or the other. So those are all some of the risks to the stock.

[00:49:09] Hari Ramachandra: Having said that, I think of course the geopolitical risk, but what I’ve found in my experience is Engineers in Israel are the most resilient ones. There might be like middle silence going off, but they’ll be still working. So I wouldn’t worry about the geopolitical risk that much. Why are they not able to grow revenues organically?

[00:49:35] Hari Ramachandra: And whether they’re able to hold the attention of the gamers, who are very easy to kind of, you know, lose. Fickle. Fickle, yeah. Yeah, I didn’t want to use that word, but yes, that’s accurate.

[00:49:48] Tobias Carlisle: Yeah, I think that’s exactly the problem with this thing, that nobody, games, I think maybe that’s not right, maybe it’s adults as well, but people play these games, they run out of interest pretty quickly, and then they just move on to the next one.

[00:50:00] Tobias Carlisle: It’s a little bit hit or miss. Having said that, they’ve got, they’ve sort of got this machine for developing these games, or buying these games, monetizing these games. That’s sort of what you’re buying rather than any particular That’s why I didn’t spend too many games, because it’s going to be irrelevant.

[00:50:15] Tobias Carlisle: The next they have a way of marketing, getting attention, getting people to play the games. That those wells run dry very quickly, so then they have to move on to the next thing. I agree with all of that. And that’s a problem for these guys that they will have to find something that works. But you know, I, I kind of feel that’s what they do.

[00:50:32] Tobias Carlisle: They’ll be able to find something. I don’t think it’s going to be a blockbuster. I don’t think that this is the sort of stock. I don’t think this is as good as Burberry where I don’t think in 150 years’ time, Playtika will still be there. Maybe I’ll be wrong, but there’s a good chance Burberry will still be there.

[00:50:46] Tobias Carlisle: So I agree with you in the longevity of this thing. There’s a limit to it, but it’s very cheap, throwing off a lot of cash, found a CEO still there. So I like operator owner type CEOs. I think that they often know the industry pretty well and they know their way around to it. I like this as a bit, but I agree.

[00:51:05] Tobias Carlisle: As I said before, I can roll out of these things pretty quickly. So it’s not a, they’re never, I never, I always plan to hold them for a long term. But you know, if there are better opportunities or it goes in the wrong direction, I’ll be out.

[00:51:17] Stig Brodersen: I just want to say here from the latest earnings call, the celebrities here, Sarah Jessica Parker for Solitude Grand Harvest, Jason Alexander for World Series of Poker, and they continue the partnership with Drew Barrymore for Bingo Blitz.

[00:51:33] Stig Brodersen: So whenever I was looking for the celebrities for like a Burberry’s website, I didn’t know any of them, which to me meant they were probably cool. I know all the therapists here for this company, and if you haven’t watched TV in the 90s, you might not know them and I kind of like that.

[00:51:50] Tobias Carlisle: There was one more guy that I didn’t even recognize him, the fourth guy, Ty Pennington.

[00:51:54] Stig Brodersen: Yeah, who’s that?

[00:51:56] Tobias Carlisle: Couldn’t tell you. Didn’t even look it up.

[00:51:58] Hari Ramachandra: He’s a celebrity for someone.

[00:52:00] Stig Brodersen: You know, I was reading this study here the other day. I think it was from Bain and I’m always a bit worried about, you know, if it’s created by consultants, I don’t know if I’m going to insult any consultants by saying this, but if the advice you get from the consultants are you need more consulting, I just always get a bit worried.

[00:52:19] Stig Brodersen: And so Bain made this conclusion that the more companies you acquire, the better it is. What’s obviously for a company that relies on M& A fees, it makes sense to make that conclusion. But if you do think about it, there are some companies that do a very good job acquiring companies and make it their skill to acquire companies. Of course, it requires a… [Crosstalk].

[00:52:40] Tobias Carlisle: Constellation of Berkshire or something like that.

[00:52:43] Stig Brodersen: Constellation of Berkshire. Yes, most serial acquirers. I’ll cut from a very different cloth and they can’t pull it off. Like it’s very difficult to grow through MNAs and so it very much depends on how well the MNA gene is, like a part of the company DNA.

[00:53:02] Stig Brodersen: And what a lot of companies do after they’ve matured is that all of a sudden, they say, we can’t really grow organically. So let’s start to acquire stuff and grow that way. And that is usually always a bad decision. So it’s very important whenever you look at a company like this to ask yourself, is this how they’ve grown so far?

[00:53:19] Stig Brodersen: Are they good at it or is it a new shift in strategy? Then whenever you read about their capital allocation, and I’ll be the first one to say that I, it’s not because I like being taxed on dividends by any means, but I do think that there’s something to be said about a certain type of quality company And here I refer to not at the highest quality company, it’s probably okay to get a dividend.

[00:53:43] Stig Brodersen: And especially if you’re a bit worried about whether or not it’s a value trap, while you’re waiting for that multiple expansion, which is part of the thesis here, it’s okay to be paid. And so I completely understand where you’re coming from, Harry, whenever you’re talking about, wow, that dividend came in fast.

[00:53:58] Stig Brodersen: Whenever I’m looking at the financials, I’m looking at, you know, sales and marketing went up 24 percent year over year. And it’s not because it’s crazy that it’s the case because, you know, they do have 70 percent gross margins and they have very decent, like it used to be low twenties. Now it’s like high teens in terms of operating margin.

[00:54:12] Stig Brodersen: Like it’s very common for those type of companies that they do spend a lot of sales and marketing. But also in the industry where, you know, you need distribution to your point before you need to bring people in, you know, it is a cost of doing business. And so for a company like this, that might have matured to some extent, that’s trading at a low multiple, like they talked about it on the earnings call that they would look into share repurchases.

[00:54:34] Stig Brodersen: I do think that is probably not the right strategy for a company like this. Whenever you’re looking at share repurchase, you would say, what is the intrinsic value and do I buy below the intrinsic value? And I think that’s, that, that is how you should be looking at it. Another framework I want to share is asking, is the business getting better?

[00:54:55] Stig Brodersen: Which again, of course goes into what’s the intrinsic value. That’s a part of that calculation. But a lot of companies have tried to boost their share price by buying back stocks and simplistically, you don’t want. A company to spend their cash on buying back 50 percent of shares outstanding, if you as a shareholder then own, you know, you have twice the ownership of a company that’s worth half of what it used to be, you would probably rather get paid that in dividend instead. Yeah, so that would be my feedback here for your pick. Toby.

[00:55:29] Tobias Carlisle: Great feedback. Thanks Stig, I’ll take all of that on board and so that’s my pitch. Should we do Hari’s?

[00:55:35] Hari Ramachandra: Thank you and my pick is not at all in the value corner at this time. So Toby and Stig, please forgive me but I wanted to bring this up because I’ve been chatting with a lot of folks, especially my investor friends in India.

[00:55:51] Hari Ramachandra: And my own experience looking at the market, and I’m hearing a lot about, hey, how do you get into the India investing game? Or how do you get a slice of big growth in India? And one of the ways I was thinking is how about if you look into the banks in India, because one of the things I see with India is it has a really positive demographics and that’s going to stay for the next 30 years.

[00:56:20] Hari Ramachandra: The GDP is growing seven to 8%, even with all the headwinds that we are seeing. In fact, like if the condition gets better, it will cross 10%. So India is like where China was in the 1980s. There is a lot of appetite. And a lot of need, actual need to build infrastructure so that both public and private and the government is also making policies that are conducive for business.

[00:56:54] Hari Ramachandra: In a way, I see India is turning capitalist with huge enthusiasm. But when all this happens, you need a lot of credit for the economy to grow. So it’s at 4 trillion today. It will be 10 trillion in a few years. So when it is growing at 7 to 10 percent, like, you know, 6 8 years, it might be 10 trillion. How do you capture some piece of it?

[00:57:20] Hari Ramachandra: And one of the ways I was thinking was through banks and the reason there is another bunch of catalysts for banks in India. So one I already talked about the sustained credit growth and the need for credit growth. It has been growing at 10 percent over the past decade, and I believe it will only accelerate.

[00:57:39] Hari Ramachandra: The second more important thing is the adoption of digital technologies. It has made lending more efficient and distribution also more efficient, whether it is banking or lending, credit approval and everything. In fact, the last few years, the digital lending market has witnessed a CA compounded growth of 40 percent almost.

[00:58:07] Hari Ramachandra: It is projected to surpass 720 US billion dollars by 2030. And a total 1. 3 trillion digital lending market opportunity on top of that, the government is also very supportive in terms of its policy. One, I think, is a very famous policy by Prime Minister Modi, which is called as the Jan Dhan, wherein he brought hundreds of millions of people to the fold of banking for the first time they were getting Banking accounts.

[00:58:37] Hari Ramachandra: In fact, the rate at which a number of people having bank accounts have grown in the past 10 years is astounding. Like in 2013, there were 450 or 460 million people or accounts, at least bank accounts in India today in 2023, by 2023, it might be more today. By March 2023, it was around 3 billion accounts.

[00:59:03] Hari Ramachandra: Some Lord of especially all classes of people have been brought into banking and now they’re going digital on top of that because of demonetization and the India stack has the colic, which is the fintech stack in India. Now, when I go my personal experience, even the beggars are the, we call it beggars or the homeless, they have a QR code.

[00:59:28] Hari Ramachandra: So, a street vendor has a QR code, nobody uses cash. So a lot of digitization has happened. So a lot of money is flowing into the banking system as well. And on top of that, there is a recognition by the government that Having India used to, especially when we were, India was socialist 30 years back, they used to despise big banks because they feel like they will have more power.

[00:59:58] Hari Ramachandra: So they started breaking down and nationalizing a lot of banks, 40 years back. Now it is the reverse and the government has been pushing for privatization and also consolidation because they feel having a lot of small banks is not helping build the infrastructure they need to build because the kind of credit that needs to be made available for bigger banks.

[01:00:21] Hari Ramachandra: It’s important. So there’s a lot of consolidation happening in the banking sector and the banks are going to go bigger, and that’s the intention of the policy. They’re also supporting them by introducing politics like bankruptcy code. Imagine till 2016 there was no bankruptcy code in India. So if you go bankrupt, the, there was no clean resolution and because of that it was very hard to hold the businesses accountable.

[01:00:50] Hari Ramachandra: There are a lot of businesses who would kind of, you know, take money, but never give back that a lot of feedback happening, there was less transparency and there was less risk for the banks because a lot of it was driven by the government or corruption and stuff like that. So all that has been cleaned out and that is visible in all the NPAs, non-performing assets or credits across all the banks, not just ICICI that I’ll be pitching today, but everybody has cleaned up in the last five to six years.

[01:01:21] Hari Ramachandra: And they’re now in a state where now they can again focus on aggressive credit expansion. And that’s why the asset quality is improving. And then they have very good capital adequacy ratios right now. So the entire banking sector is at around 16 percent now, which has a very good cushion. And as we are talking about consolidation now, there are the top five banks now today hold 50 percent of the entire deposits of the country.

[01:01:52] Hari Ramachandra: And. ICICI is one of them. It’s the number five and HDFC that I had for brought up like some time back is number two. So ICICI has around $128 billion and deposits for comparison. HDFC has 189 billion in deposit the top bank, which is a state owned bank, it’s called State Bank of India, is, it has the highest.

[01:02:20] Hari Ramachandra: It has around 491 billion just as a comparison and 23 percent of the entire bank deposits. HDFC has around 9 has around 6%. However, the reason I’m pitching ICICI and I would be comfortable holding both HDFC and ICICI because those are the only two ADRs available. If there is anybody from India listening in, I would suggest you can expand your basket to another bank called Kotak Mahindra.

[01:02:52] Hari Ramachandra: There is Axis Bank and then there is a NBFC called Bajaj Finance, which I’m a big fan of, which has much higher growth and profitability than all these. So if you make it a basket, then you’re really capturing the entire Indian growth. But today I’m going to be talking about ICICI. Which is the fifth largest bank, as I said, one $28 billion in deposits growing at 10% CAGR for the last five years.

[01:03:18] Hari Ramachandra: They had a scandal in 2014, 13, 14, 15, which when a lot of banks had scandals, they were one of them. And because of that, they added quite a time, restructuring everything till 2018. After that, they recovered and they’ve been growing steadily. Their bank deposits. Their loan growth is at 14 percent CAGR and the revenues are on 27 billion net income of 2. 25 billion, which is growing at 17 percent over the past five years CAGR and a net interest margin of 4.3%. They’re definitely not cheap because their price to book is 3. 7 and their P.E. ratio is 18.5 but when you look at the growth rates in terms of revenues or the interest income, and also when you look at the overall India story and how India’s GDP is growing, how the bank, the banking inclusion is growing, and with that, they’re also getting this opportunity to cross like for a very long time, when I was growing up in India, all we did at bank was just go deposit money and get the money back. But now when I go to any of these banks, I go to ICICI HDFC. Whenever I go, I have my accounts there. They pitch me different products, whether it’s insurance products, whether it is portfolio management products, whether it is mutual funds, whether it is fiction deposits, money market funds and private banking facilities.

[01:04:58] Hari Ramachandra: They have a bunch of different products, many similar to us back. So if I think of these banks, they’re all like what Wells Fargo or J. P. Morgan chairs or Bank of America were in the 1950s, probably that at that nascent stage, so my pitch here is you got to hold on to this for the next 15 to 20 years and the RBI, which is the Fed of India Reserve Bank of India has three banks or two banks, I believe HDFC and ICICI has been recognized as the systematically critical banks. So that means they are covered by the equivalent of FDIC insurance. So, to Toby’s point, for the next 30 years, Toby, I’m pretty sure these banks will stay. As long as the India growth story is alive, these guys will do well.

[01:05:51] Hari Ramachandra: So that’s my pitch. I would submit to you in terms of valuation, what do you think? I know that, you know, it’s right now hot, the Indian market, but among them, I felt ICICI and HDFC are kind of relatively reasonably priced for the growth that they’ll capture in Indian market.

[01:06:10] Tobias Carlisle: I like the pitch, Hari. I looked at, I read a book called Concentrated Investing. I have it here. Came out in 2016. I was just trying to remember that we had an interview with one of, with an investor who had looked at all of the Indian banks quite a long time ago. And I just, I don’t think that investor actually made it into the book. So I can’t remember if I’ve told this story in the book or not, but they looked at the Indian banks as a way to get into, for exactly the same reason that you have identified them, that India was going to do very well.

[01:06:43] Tobias Carlisle: They wanted to be exposed to India. That was the. The smartest, easiest, most direct, highest talk, highest return on investment way of doing that was to be invested in the banks and they had done it much earlier. And so we wrote concentrated investing in 2016 and I had a look in 2016 and his thesis was you want to be invested in the biggest bank.

[01:07:04] Tobias Carlisle: Rather than many, or the second biggest or the third biggest rather than a long way down the list because that was the surest, safest way of doing it. And I looked in 2016 and I looked at ICICI just then and I noted that when I looked at it in 2016, the stock price hadn’t gone anywhere since 2005 and it had gone up and down quite a few times in that period of time.

[01:07:27] Tobias Carlisle: It just hadn’t moved at all over that period. And it was trading around five bucks in 2016, or maybe even a little bit less than that, five bucks in 2006 or 2005, and I had a look at it then. I think it’s trading closer to 30 bucks now. So I did finally get that giant run. It looks like it’s run really hard and it’s looking a little bit stretch, but you point out that there’s, so, there’s massive growth coming in India for infrastructure, and it’s going to require all of this credit.

[01:07:55] Tobias Carlisle: So it’s likely that these banks continue to get better. But my questions are and I think I do vaguely remember us doing an Indian bank discussion on a mastermind some years back. So I think my question is the same now as it is then. Why not? Is this one of the biggest banks and therefore it falls into that category of you’re going to be fairly, you know, you don’t need to go finding the value bank here, you just need to find banks that will be beneficiaries of this theme that you’re identifying and is as this bank therefore in that bucket of banks and it’s safe to buy this bank for that reason.

[01:08:29] Tobias Carlisle: And the other question is, do you feel like this valuation is stretched and the problem might be, even though you do get all of that underlying growth is the issue that. It takes a little while to catch up to the valuation and you have something similar to what happened between 2005 and 2015 or 6 and 16 where the stock price didn’t really go anywhere. Just interested in your thoughts on those two.

[01:08:53] Hari Ramachandra: Yeah. No, thank you, Toby. I think those are really good questions. I’ll answer the first one that, is it one of the biggest bank? I think it is one of the biggest banks in terms of the private bank. So in the top five, there is three state owned banks and two private banks, that is HDFC and ICICI.

[01:09:15] Hari Ramachandra: And ICICI is one of the top five but the reason they were not doing well between 2005 and 2016 is because they had a lot of scandals then. And during that regime in general, in India, there was a lot of corruption and scandals, and that’s the reason that government was booted out. And ICICI was no exception to that, except HDFC, which stayed clean throughout the time.

[01:09:39] Hari Ramachandra: And that’s the reason they’re always richly valued. What I’ve seen with HDFC. I think that might be the one that we had the discussion. Long time back. Anytime I saw HDFC, it felt expensive, but they always grew and ICICI-I am assuming will be now that it is clean and there is a new operator, CEO, Sandhi Xi, who’s really well regarded in the industry.

[01:10:03] Hari Ramachandra: Finally, I’m assuming that a CI will get into the class of HDFC because 2005, 6, if you look at their deposits, they were both saying, in fact, he was slightly lower than ICS here, but then because of all this candle, I see, I kind of lost its way, but now they’re coming back. So that’s number one. Number two, I agree that, you know, how holding the largest banks will be the best, but the, what I’m seeing is the value migration from state bank to the private banks because of the services they offer and not just the volume, but the quality of deposits.

[01:10:39] Hari Ramachandra: The kind of customers who tend to be with private banks are the ones who are the high value customers and the state bank usually attracts the low kind of, you know, LTV kind of customers because of the facilities, the private banks give it’s on par with any other U.S. bank in terms of their online digital banking facilities and also customer service.

[01:11:00] Hari Ramachandra: If you cross a certain amount of deposits in the bank, you get a private bank who will be available to you, can help you. Many times when I go to India, I don’t even go to the bank, they come home and help me with all my stuff. And then you also brought up the other part is like, you know, just the valuation.

[01:11:21] Hari Ramachandra: Well, I think when I look at their valuation in terms of price to book, which is a good measure for any bank. 3 and 4. Yeah. But when I look at say something like JPMorgan Chase, it’s 1.87 almost 2. So, so relatively they are valued higher, but then the way I’m looking at it is JPMorgan is like so big, but growth opportunity and compared to JPMorgan and if you look at the market gap of 93 billion and the deposits that are there and it’s going to grow in terms of the rate of growth of the GDP.

[01:12:01] Hari Ramachandra: I’m assuming you know that the valuation will catch up eventually, but it’s provided we are willing to hold it for a longer term. But yes, as at present, they’re stretched and any stock in India today will feel like that.

[01:12:16] Stig Brodersen: Yeah, I was looking at the Cape ratios for globally and perhaps no surprise to you, Hari, India’s is the most expensive, just overtaking the US now.

[01:12:26] Stig Brodersen: And it’s kind of interesting when you look at how the sector has been different sectors been broken down. So in the States, financials are 25 percent and it’s almost 38 percent in India. I know there’s a lot that of course goes into that weighting. I was a bit surprised to see that also considering how much is still public.

[01:12:45] Stig Brodersen: I don’t know, perhaps some of that is floating in the public markets and, you know, so perhaps that explains some of it. To me, it’s tricky. I can’t, like, I completely buy into the thesis of the rise of India. I think most people do. Whether or not banks are the right way to play that, I don’t know. I went through the earnings call here and tried to read the balance sheet.

[01:13:07] Stig Brodersen: And I, frankly, I just don’t understand it. And I don’t know, it probably says more about my limited skillset than it says about the complications of it. You know, they, and there, you know, they break down, it’s wonderful. They have slides and they give their own ratings to the different assets. And that’s who am I to say that whether it’s I, you know, a minus or not, I don’t really know, I think it’s.

[01:13:27] Stig Brodersen: To me, it’s a tricky bet. And you said 3. 27 hard before on price to book. It’s, it seems high, but again, there might be some wonderful quality that I don’t really understand. Speaker 3 What’s interesting from a currency perspective is how much it has recently stabilized rupees say compared to the US dollar, for example, which has definitely been an issue in the past.

[01:13:51] Stig Brodersen: It seems like there is for better, for worse, a more stable environment right now in India than in a long time. So I don’t know the best way to, to play the bull case for India. I’m almost inclined to say something along the lines of buying a passive ETF. But then I also just said that it’s priced. Very expensively, but at the same time, you know, it’s also the fastest growing on the big economies in the world.

[01:14:17] Stig Brodersen: And why wouldn’t it be priced as the most expensive? So those were my two cents on your pick Hari. Very interesting. Thank you for bringing it to the group.

[01:14:25] Hari Ramachandra: Yeah. Thank you, Stig. I think you brought up an interesting part. Why is India’s like a 38 percent of India’s stock market is financials. One of the reason is we don’t, they don’t have big tech like us.

[01:14:37] Hari Ramachandra: In fact, like I think the way I look at it is India is getting industrialized now seriously compared to the past at a very high rate. So I think there are a lot of different industries coming up now, but I think that’s a good point actually. Yes, the financials are quite a big component of the overall market.

[01:14:55] Hari Ramachandra: In the 90s and early 2000s, it was only outsourcing companies like Infosys and TCS who would just take projects and do for US companies but lately, in the last 10 years, I’m seeing product companies, whether it is Fresh World, Soho, Zomato, there are many that went public recently in India, and there are many in the pipeline for all product companies, mostly SaaS based companies.

[01:15:23] Hari Ramachandra: Right now, it’s more like you take the model in the US, copy for Indian context, or you become the low cost producer of the same product. That’s the model that they are taking now. So it will be really interesting what next 20 years will bring or will there be innovation for Indian market will be yet to be seen.

[01:15:42] Stig Brodersen: All right. Fantastic. Hari and Toby. As always thank you so much for your time. Before that you go could you kindly give a hand of Hari, perhaps you first to where people can learn more about you.

[01:15:54] Hari Ramachandra: Yeah. I mostly hang out on Twitter. Oh, sorry. X now. @HariRama is my handle. I would love to engage with you there and look forward to your comments and feedback. My blog is bitsbusiness.com.

[01:16:06] Tobias Carlisle: I run Acquirers Funds. We have two funds, Deep, which is small and micro domestic US value, and Zig, which is mid and large cap domestic US value. I’ve written some books that are all in Amazon under my name, and I have a website, acquirersmultiple.com, which has got some free screens and all of our blog posts and podcasts and various other things there. Thanks for having me, Stig.

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