During their recent episode, Taylor, Carlisle, and Chris Bloomstran discussed: Warren Buffett’s Greatest Achievement: The Math Behind Berkshire Hathaway’s ...
During their recent episode, Taylor, Carlisle, and Chris Bloomstran discussed:
- Warren Buffett’s Greatest Achievement: The Math Behind Berkshire Hathaway’s Returns
- Where Value Investors Are Finding Cheap Stocks in 2026
- Are SaaS Stocks Finally Cheap? ServiceNow, Adobe & AI Disruption Risks
- Oil Prices, Iran War & Airline Stocks: How Chris Bloomstran Is Investing the Crisis
- What Baseball WAR Can Teach Investors About Capital Allocation (Jake’s Veggies)
- Why Homebuilders, Builders FirstSource & Housing Stocks Could Rebound
- The Future of AI Revenues: Hyperscalers vs. Consumer Subscriptions
- AI and the Capital Cycle: Will Massive Capex Harm Tech Margins?
- OpenAI vs. Microsoft: Who Wins the AI Infrastructure Race?
- SpaceX and Twitter: Anticipating the “Pixie Dust” S-1 Filings
- Beyond the Magnificent 7: Finding Value in the S&P 493
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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TRANSCRIPT
[Tobias] We’re live, this is Value After Hours. I’m Tobias Carlisle, joined as always by my co-host, Jake Taylor. Our special guest today, he’s a regular.
He’s back again, we love to have him. Christopher Blomstrand, Semper Augustus. How are you, Chris?
Good to see you.
[Chris] I’m doing great, how are you guys? It’s good to, it’s always good to be on with you, the two of you.
[Tobias] You’ve completed your annual opus. It was as good as you’ve done, I enjoyed it.
[Jake] New record on length, thanks for that.
S&P 500 Outlook: Analyzing the Secular Plateau and Market Valuations
[Chris] It was indeed, I thoroughly intended to not do that lengthwise. What happened? Well, I added a section on AI that I thought I would try to tackle, not being an expert on it.
And then I was gonna cut, some of it is, I update the portfolio each year, and that’s a little bit repetitive. And then some of my Berkshire subsidiary work, and various of the valuation tools that I use, are updating, and with new text, and kind of an update on what the subsidiaries are doing. And I was gonna cut about 30 pages from that, and Lincoln edits, and ran it by a couple friends, and they said, man, if anybody thinks it’s too long at 150 pages, who cares if it’s 180?
It’s your letter. And I carried it around in my briefcase, and I’ll pull it out in meetings, and just to remind me of what’s happening with some of the numbers, and what I thought at year end. So one of these days I’ll shrink it, hopefully next year.
But I thought it was a good one. I’ve had some great feedback, and there were some fun things in it that were pretty interesting. In fact, some of the things on little tribute to Warren Buffett on his retirement, and his performance record that were astonishing.
[Jake] Yeah, give it a mose.
[Tobias] Let me take you through it, Chris, because I got a few questions. So let’s talk about, let’s just talk about, let’s start with the overall valuation of the market, into play of Magnificent Seven margins. Let’s talk about that.
What’s your view? Where are we?
[Chris] Well, I wrote, I modified my note, my notion that we were at a secular peak to a secular plateau. Yeah, I like that. I saw that.
Going back to Irving Fisher, because I thought we were at a peak in 2021, which on the, whatever the S&P declined for the year, 18 or 19%, and the NASDAQ down 35, looked fairly prescient, but then you snap back with back-to-back 25% years. And so valuations essentially at the end of 25 were either back to 21 levels, and in some cases, slightly beyond. So I think for the cap-weighted, large-cap US investor, prospects are pretty grim for a long-term horizon, 10 or 15 years.
And I go through my five factors. We can get into that. Yeah, let’s do that.
Well, so just to get right into it. So in 21- No foreplay. In 2021, you had a 10-year period where the S&P earned 16.6%. And you had just an explosion in profit margins and in multiples. Not much top-line growth, but you had the market trading at 22 point something, 22.8 times a record profit margin of 13.3%. And we’ve talked about Warren Buffett having been wrong in his 99 Fortune article. You had a various combination, confluence of factors that drove margins higher over time, a lower corporate tax rate, certainly lower interest rates. I mean, it allowed a very high amount of leverage on the corporate balance sheet to not be financed at much of an interest burden.
And that added about three full percentage points to the margin. Then you had the cap-light businesses, the big tech companies that sit atop the market now that have been properly rewarded for a lot of revenue growth, very high margins, much more growth than you’d get anywhere else. And so I don’t think the market got those wrong, but they’re very fully valued.
So at 22.8 on a 13.3 margin, you didn’t leave a lot for future return. And so in the interim, you had a big decline in margins in 21 and then a recovery. So you’re back up to 12.8% at year end. So you’re not back to the 13.3, but you’re close, but the multiple is even higher. You’re 26 times. And you can go through any combination of the factors, revenue growth, what might happen with the share count, which is actually rising in the last few years and stunningly for 25 years, the share count’s higher than it was, despite an enormous amount of cash from operations going to share repurchases.
And so I’ve got scenarios by which you’ll have margin compression and multiple compression, and you get to a best case 10-year return of 5%. And if it gets a little more grim, you can make a case that you’d have negative returns, much like you had after the stock market peaked in 1999, which- You mean 5% compound or 5% over the entire- Oh, annual, annual returns. Annual returns.
And so you can play around with all those numbers, but I ran scenarios to get to the Ibbotson long-term stock market return of 10.5%. So if you’re starting at a near record profit margin and a 26 multiple, which is really at levels never before seen on high margins, I mean, you can have a really high multiple on depressed earnings. If you’re in a recession and earnings dropped to nothing like they did in 08-09, the market can trade it 40 or 50 or 60 times or can trade it in infinite multiple if you have losses, which you had for a couple of quarters. But if you run a 10-year, let me find this, because it’d be fun to get the numbers right.
So if you take an expectation of earning 10.5, you’re going to get there through some combination of margin expansion or multiple expansion. So if you hold the margin over the next 10 years constant at 12.8%, it’s going to require a 43 PE on a 12.8 margin. And then you basically get your sales growth in what starts as a 1.2% dividend yield. So the prices are so high, the dividend yield’s low. If you do it at the other extreme, getting it all through multiple expansion, or margin expansion, you’ve got to take the margin from 12.8 to 20.7%, holding the multiple at 26. And if you just simply do a 50-50 and combine your multiple and margin expansion, you take the margin up to 16.4 and the multiple to 33.3. So all you get is your sales growth and your dividends and then just an enormous amount of margin and multiple expansion, which isn’t going to happen. To me, there’s no way to make 10.5% unless you’re in a hyperinflation and you just own tangible assets because you’ve got incredibly high inflation. But otherwise, if you have a rational economy, there’s no way to make 10.5 in the cap-weighted S&P 500.
[Tobias] Just to play devil’s advocate, because we’re all in the choir here, but the thesis would be something like AI spurs top-line growth, the likes of which we’ve never seen before.
[Jake] Or takes cost out in a way we’ve never seen before.
[Tobias] That’s true. How do you feel about that?
AI and the Capital Cycle: Will Massive Capex Harm Tech Margins?
[Chris] Yeah, plausibly, but I would take the counter-argument and in my AI section, simply take the amount of capex that’s now being spent by these formerly capitalised businesses and the dollars are so great that you’ve introduced trailing, growing depreciation expense, which begins as a fraction of your capex, depending on your depreciation schedule. And who would have thought that Microsoft would no longer have net cash on the balance sheet? I mean, these guys have gone from capex being 12% of cash from operations to what’s gonna be darn near 100% this year, from 23 to 26, four short years, you’re gonna spend all of your cash from operations on capex.
That crowds out share repurchases. It’s requiring leverage. And so, you’re already starting to see declining margins and because you’re introducing capital intensity to these capitalised balance sheets, you’re already starting to see declining returns on equity and returns on capital.
So, this may be the classic capital cycle where the dollars wind up being spent redundantly by, I mean, everybody doesn’t need to be building their own LLMs. I mean, we didn’t need as many fibre optic networks as were being built in 1999. You didn’t need the number of track miles that we built in railroads 100 plus years ago, 150 years ago. So, you’ll have beneficiaries of the tool.
We’re a beneficiary of the tool. You guys are beneficiaries of the tool, but I don’t know that the revenues and the profits can even plausibly catch up with what was $400 billion in capex last year by the hyperscalers, which is gonna be north of $700 billion this year and 3 trillion, let’s say, cumulatively or higher by 2030. I mean, just last year’s capex, 400 billion.
Depending on who you listen to, the revenues that are being produced on AI are somewhere around 30 or 40 billion. So, less or equal to the capex. Well, if you’re spending the capex, you wanna make a return on the capex.
And so, if you’re gonna make a 15% return on capital, you need 60 billion in profit, and your revenues are half that. You extrapolate that out to $3 trillion in capex, which is being depreciated, and depreciated over somewhere between six, seven, eight years and there’s an argument as to whether the scaler should’ve, whether it was reasonable or conservative to extend the depreciable lives of chips from three or four years to five or six years. To me, that’s not the argument.
If the argument is the depreciation expense is coming, the capex is there. So, on $3 trillion, to make a 15% return, you have $450 billion of profit. I mean, Microsoft’s revenues are $300 billion.
Each of the hyperscalers, you know, you take Microsoft, you take Amazon, you take Google, you take Meta, they’ve all just got somewhat north of $100 billion in cash from operations, which roughly equates to net income. So, the numbers in a four-year period of time, at least for those that are spending the money, don’t make sense. So, I have a hard time thinking that you’re gonna get margin expansion from here.
I think rather to the contrary, you’re already seeing front and centre margin contraction. And I think if they really do spend the amounts that are suggested over the next three or four years, I don’t think there’s any way in aggregate society or the aggregate of the S&P 500 benefits enough to offset what’s gonna happen to these handful of tech companies that are spending enormous sums of capital.
[Tobias] I guess the bulls would say that the uptake is still fairly low for chat GPT subscriptions and so on. And probably there are super users who are paying hundreds of dollars a month. So, you transition the $20 plan to a $50 plan and the hundreds of dollars to a thousand dollars and you get some more growth and that’s how they…
And then you look at Anthropic’s been growing very quickly too. They’ve like doubled their, went from four to $8 billion over 12 months or something like that, which is…
[Jake] I think they’re like 30 billion, right? Yeah, it’s been…
The Future of AI Revenues: Hyperscalers vs. Consumer Subscriptions
[Chris] Yeah, it’s in the enterprise world. It’s in the business world where you really generate revenues. And then on the offset, if you’re Google or you’re Met and you’ve already got an enormous advertising platform, the retail side of your business, the individual subscriber will pay subscriptions.
I mean, it’s coming. They’re giving it away at first. It’s the crack cocaine dealer.
They’re eventually gonna charge you for it, but it’ll be augmented with advertising revenues. I mean, Sam A., Sam Altman said, we’re never gonna advertise and guess what they’re advertising. You just can’t recover the capital without trying to push the top line, but the numbers are stunning.
I mean, the numbers are already 1.5% of GDP on CapEx and they’re gonna be close to 3% this year. They’re enormous amounts of money.
[Tobias] So, you think this looks something more like railway build-out or a fibre optic cable build-out, both of which had very long lives and chips have a much shorter life. So, I guess that’s a problem.
OpenAI vs. Microsoft: Who Wins the AI Infrastructure Race?
[Chris] I think that there are a lot of parallels. All of those prior capital booms from canals to railroads to the auto and infrastructure and electricity, a lot of that was debt financed or it was financed by the government slash the taxpayer. The fibre boom was financed with leverage.
I mean, it was the pipeline companies. It was anybody that had rights away, but the leverage that was introduced was enormous. So far, the leverage isn’t that big, but unlike a railroad that was building 100-year assets, these things depreciate.
I was having a conversation the other day. I think what I haven’t got my mind around and maybe some that are a lot smarter in this space have, but will be the transition from training to inference. And so, once you’ve built the models and once you’ve essentially appropriated all of the knowledge in the world, does the chip and the data centre cost of simply using the LLMs, is it materially lower?
In other words, is maintenance CapEx a thing on the CapEx being spent now or having built the railroad, does it become somewhat less expensive to maintain it? I mean, Warren Buffett talks about the trillions of dollars that would be required today if you were to build the railroads from scratch in today’s dollars. And many of the assets are very, very old and fully depreciated.
You wouldn’t do that, of course. And so, I have no idea what the capital intensity winds up being five years from now or 10 years from now. If it winds up being cap light and you just have a short period of time where you spend a whole bunch of capital, then I think you can lean more into the bull case and the scenario you just talked about.
But the dollars are so large, I’m still, I’m very sceptical.
[Jake] Yeah, I think, I mean, one way to maybe think about it is the sources of data that are being used for the training. And so right now, it’s been the corpus of all of written history, basically, and IP rights be damned, sounds like in a lot of cases. But at some point we kind of run out of raw materials of original words that were put in orders for it to train on.
And then you need to have something else for it to look at. And that’s where I think it’s a little bit interesting when you think about other forms of intelligence, like language is one form, but there’s also, a squirrel has a certain type of intelligence from just being out in the real world and experiencing data as it comes in of, I put this, I plant this nut here and then I can find it later. Well, the modern equivalent of that might be robots who have all these sensors that can then learn in the real world, like how things work, like a real world model of things, not just language based.
In which case the training may be for as long as the eye can see to incorporate these new data sets over time as they get built out. So who knows? I mean, it’s obviously starting to get into sci-fi stuff, but it is interesting.
[Chris] Yeah, and I’m, as an investor, I’m gonna go back to the capital and the dollars being spent. And so you have the enormous sums that were spent on fibre and massively redundant, massively overbuilt. You’d lit something like 4% of the fibre that was laid was actually lit by 2001.
And then everybody went bankrupt. But had you not laid the fibre, you wouldn’t have had YouTube, you wouldn’t have had Netflix, you wouldn’t have had all the streaming. And so there was an end user that benefited from it, but it was not the ones that spent the money.
Microsoft can spend, I mean, Google’s gonna outspend everybody on this and they can do it. I mean, I don’t think there’s, unless Sam continues to be as apparently impressive as he is when he’s raising money. And he actually can spend $1.4 trillion. Google’s gonna spend to make sure they’re the ones that win this thing. But all the CEOs have said, look, we probably don’t all need to be doing this. We don’t need five of these things.
We don’t need seven or whatever it is. So clearly portions of society are gonna win. And because they generate so much money and they’re already so big, they will grow and they’ll have revenues that grow out of this thing.
But I think it comes in the case of the tech companies at harming their profitability, harming the returns on capital. And Wall Street does not generally like paying 35 times for declining returns on capital. So we’ll see.
I mean, it’s a hard thing and we don’t have direct investments trying to benefit from it. We don’t have direct investments other than a really tiny short on NVIDIA, which is really just valuation. And the notion that I don’t think they can maintain a 58% net margin, especially as this thing evolves.
[Jake] But, you know, as a user- It’s also probably a little underappreciated that when these guys were CapLight and making all that money, they kind of ceded territory of different things to each other and didn’t compete all that hard where they were overlapping. But it seems like this, you know, the LLM world is lots of overlapping use cases, lots of competition potentially. And it’s like, you know what competition does to profit margins, right?
[Chris] Well, and capital spending forces competition, especially when the sums are so enormous that you get redundancy. So they will compete on price. The enterprise user is gonna negotiate and play one against the other for capacity.
And again, much like the fibre, you just don’t, you didn’t need it all immediately. So we’ll see.
[Tobias] And there’s some free, there are free models around. And it seems like the new model sort of makes the old model obsolete, even though the old model is probably pretty useful. So I think there’s gonna be plenty of people using older models for specific tasks that won’t need to update all the time.
Plus the Chinese free models that seem to be popping up right.
[Chris] Yeah, they’re gonna have to charge. But, you know, open AI, and I’ve got a, I went through and looked up all of their funding rounds and where the source of their capital came from. Well, I mean, by year end, before this last funding round, they’d raised something like 73 billion, had already burned through 50 billion of it.
And you listen to Sam A on an interview last year, and they were trying to tease out what his revenues were. And he said, well, they’re 20 billion. And somebody said, Sam, it can’t be that high.
And essentially what he’s done in his mind is taking the current minute or the current quarter’s run rate, multiplying it by four. Well, that’s the stuff out of Kenny Lay when Enron was telling you that their revenues were the largest in the world and he wouldn’t commit to the dollar revenue amount. Well, if your revenues were 12.7 and they’ve increased their funding rounds, I mean, they just raised over a hundred billion in an 800 something funding round. Microsoft is only in on the first couple, three funding rounds at something like 13 billion. Revenues need to come from somewhere. If I had to bet at this stage, who wins and who loses, OpenAI probably loses this thing.
And in that case, Microsoft wins because if OpenAI doesn’t make it, they own the IP. But Microsoft does.
[Jake] What do you think about this potentially big IPOs that might be coming down the pike? Is this good or bad for the average person, SpaceX, maybe OpenAI?
SpaceX and Twitter: Anticipating the “Pixie Dust” S-1 Filings
[Chris] Oh, I just can’t wait. I cannot wait to read the S1s. This is gonna be the entertainment value of the year.
Particularly SpaceX’s. To see what has happened with the shareholders, the Twitter buyout with the leverage, Morgan Stanley being able to get out of their debt. I mean, I think you’re gonna wind up reading and maybe they’ll figure out a way to not detail it in the footnotes.
But let’s just go Twitter. It pays whatever, 44 billion for it, put all the leverage in it. Elon’s got equity.
Larry Ellison’s got some equity. Well, the revenues immediately got cut in half from whatever it was, 4 billion to 2 billion. And with the debt in the business, I think they had $1.2 billion of interest expense. And so they were burning through a whole bunch of cash. So my understanding is, and I couldn’t get verification of this because I couldn’t get the summary. Presumably there were some summary financials, maybe not fully audited, but summary financials.
But when Morgan Stanley and the others sold their debt, Elon said, well, we’re making money. How are you making money? Well, my understanding is XAI paid a billion or a billion two as a royalty payment to Twitter, which gets booked above the line.
So it gets booked as revenue, not as a capital infusion. And so you can say, well, we’re generating a billion two of EBITDA because there’s no cost associated with a royalty payment. Well, shortly after that, the guys with the debt got out of all of it.
And immediately the equity owners of Twitter slash X wind up merging and owning XAI, and then they’re gonna roll XI into SpaceX. It’s gonna be really interesting. I’ve got a friend who’s one of the largest investors in SpaceX.
It’s his largest holding. It’s a big investor in terms of dollars under management. And he was in at one of the early funding rounds.
Starlink is flex. I mean, Starlink is now starting to generate an enormous amount of cash flow. But if we’re gonna do this valuation at 2 trillion, I mean, this is gonna just get into the Elon stuff of pixie dust where there’s, to me, there’s just no way to support it.
And data centres in space, and I guess we’ve backed off from data centres and populating Mars, having just sent astronauts around the moon. The time it took, you do the miles to the moon and the miles to Mars. I think between these big techs, the offering documents are gonna be interesting at a minimum.
[Tobias] One of the things that Jake and I have talked about a little bit has been the strength of the S&P 500 last year because of the Magnificent 7. And then Magnificent 7 seems to have fallen off, but not the S&P 500. It’s managed to be the other 493 companies are now pulling their weight in the S&P 500.
But how do you think about that interplay between the concentration, dispersion, what’s keeping the S&P 500 up?
Beyond the Magnificent 7: Finding Value in the S&P 493
[Chris] If you continue with the cap-weighted and you pull out the Mag 7 from the S&P 493, the 493 were still trading at 22 plus to earnings. I mean, on a cap-weighted basis, they’re still expensive. So there are a bunch of companies from Costco to Walmart to some of the drug companies that are still very, very expensive, 40 plus times earnings that don’t have the revenue growth or the potential to expand margins to support it.
Under the hood though, when you drill down into, and I hate doing sectors and I don’t like doing market caps and I don’t like doing international jurisdictions, but there are a whole bunch of companies that are very, very reasonably priced, if not giveaway cheap. International markets had a big year last year for the first time in a long time. The MSCI XUS was way ahead of the S&P and you’ve still got an enormous small cap versus large cap valuation disparity.
The reality is there aren’t that many companies left. I mean, the Wilshire 5000 has something like 3,600 components in it. And over all these years, a lot of the great businesses either grew to be mid cap or large cap companies or they were acquired.
And so you’ve got an awful lot of mediocre companies, both smaller cap in the U.S. and abroad that just aren’t great businesses. So again, I don’t think the market’s got it wrong, but the multiples being paid today for where the money in the U.S. stock market is concentrated, things are still pretty expensive, but from an active investor’s perspective where you can buy differing sizes and not constrained by the Berkshire Hathaway type, enormous amount of capital where the pond you can swim in is pretty limited. There’s an awful lot to do with money.
[Jake] I think S&P’s historical portfolio right now is probably maybe attractive even on an absolute basis as it’s been not even relative basis. Do you agree with that?
[Chris] Well, I mean, we made up a bunch of money last year. We were up 40 whatever percent, 42%. February of this year, we were up something like 12 for the year and then we were down every day for three weeks.
So the minute my letter was out, I mean. That’s a cute thing. Every single day lost money, but then.
So I think we wound up the quarter up about three for the year. But we’ve been very active. And by very active, this is not 100, 150% turnover, but taking advantage of the tariffs last year, having invested a big chunk of money in various corners of the energy patch.
In 2020, we bought a couple of refiners in the fall of 2020 for one and a half times cash flow, Valero and what’s now HF Sinclair, the old Holley Frontier. Numerous international energy assets, some of the integrateds. Well, we’ve taken advantage of A, early, especially in the case of Valero, we trimmed it way back on the Maduro extraction, but then here with who would have predicted Iran, but we’ve shaved big, big chunks of our energy holdings.
And to me, they’re cyclical assets that you can’t own for 30 years. You buy them when nobody wants them and when you get oil tight like it is, it’s a pretty good time to trim those, but we’ve peeled back big chunk of the gains we had in dollar general. We’ve been using gold as a source of capital.
And so we’re finding places at the moment that are really, really attractive and really cheap. And so, yeah, I think we probably ended the year at about 12 to earnings on the portfolio versus 26 for the S&P. And that’s about where we’ve been historically.
At the end of the prior year, we were 10X. And so you wouldn’t have predicted a 42% return, but we also didn’t grow the multiple from 10 to 14 because of portfolio activity plus ongoing earnings progression of the things that we own have things pretty reasonably valued. And we’ve really concentrated capital with the proceeds from the not small sales into six or seven companies that are very, very, very cheap.
And so I like how we’re positioned. We’re generally pretty tax efficient with our taxable clients, but we are distributing capital gains this year. And I don’t hope that we have before year end some unrealized losses, but we just don’t have unrealized losses in the portfolio and offset gains where typically you do.
But at the prices that we’re getting, harvesting some of the profits that we’ve made on assets that you don’t want to own for 30 years. As to your point and to your question, yeah, the portfolio is still pretty darn cheap.
[Jake] Do you feel like you’ve been able to move up in quality a little bit out of some of the more cyclical things that have started to work the last couple of years?
Active Value Investing: Portfolio Strategy and the Pitfalls of “Buy and Hold”
[Chris] Yeah, I think if you’d say, well, energy is cyclical and it’s not high quality just because it’s cyclical, then yes, but we still have some cyclical things. And at some point the construction world is gonna turn and even the housing market’s gonna turn. So we’re doing some things there that would still be cyclical assets, but you’re on the front end of the cycle instead of the back end of the cycle.
There was this notion that we talked about in the fall, Jake, and it was just the whole concept of value investing. And there’s a bunch of our world that defines value investing as Warren Buffett’s notion that you buy something and the ideal holding period is forever. Well, yeah, that’s been the case at Berkshire with the wholly owned businesses, but his portfolio over the years has been very actively turned.
If you go through the list of holdings, which used to appear in the chairman’s letter for years and years and years, you’d see wholesale changes and he tended to own various cyclical things. And then I think the other thing is the concept of 100 baggers and buying a business and owning it forever. Those are hard.
There aren’t that many you can get. And even where Warren screwed up with Coca-Cola, having made a mountain of money, buying it in 98 and 99, or 88 and 89, got $1.3 billion invested. By June of 98, he had the high-class problem where that was 30% of assets.
60% of equity was just Coca-Cola. And it went from trading from 15 times earnings to 58 times earnings. They had grown sales at 9% a year for that first decade that he owned it.
And the margin went from 12% to something like 19%. But then the stock traded at 58X. So he later acknowledged he should have sold it, but he did essentially double Berkshire’s assets nearly by buying Gen Re, which cut the Koch position in half.
And I’ve got one of my five factors in the letter that showed Berkshire’s Koch position compounding it something like 36% a year for the first decade. Well, what do you think the compound return has been for the last, since 98, 27 years, per year, annual? Not much, low.
Now, four and a half. Four and a half, yeah. And the S&P was expensive.
The S&P has only done eight or eight and a half. But Koch did four and a half. Like 60, 65% of the returns come from the dividends.
And so you didn’t have ongoing eight, 9% sales growth. Sales growth slowed, margins no longer expanded, but the multiples come back down to the mid-20s from 58. And so that’s what generally happens with, everybody’s got a list of the great compounders that have been phenomenal businesses in the last whatever period.
Some of the beverage companies, Pernod Ricard, Brown Foreman.
[Jake] Yeah, Monster.
[Chris] And for years, they would trade at 40, 50 times earnings. And once the growth is obviously and apparently slowed, or you get some disruption in your industry, or you overbuild, they just shoot these things. And the valuations just get crushed.
And so in the ashes of some of that, you’ll find some great assets. But to me, you’ve gotta be willing to sell things when they’re either on the back end of a cycle, or if you’ve got a business that’s still gonna grow, but the price is just wrong, you have to be willing to sell. You cannot have an infinite permanent holding period, I think.
[Jake] It’s been really interesting to see a lot of the CPG companies, which were almost bond proxies five years ago, if you remember when everyone was like, there is no alternative, why would I want 1% T-Builds, I’m gonna own Campbell Soup instead. Like you heard that all the time. And now that whole CPG complex has really been taken to the woodshed.
I find it very interesting how the narratives change on these things.
[Chris] You weren’t gonna get much more than nominal GDP growth. And in some cases, you don’t even have that because tastes change.
[Jake] Yeah, direct to consumers, I heard a lot of that, core brands.
[Chris] But a nominal GDP growing business that’s already max profitable, that’s introduced leverage upon leverage upon leverage under the balance sheet to finance share repurchases, to finance incremental bolt-on deals, nominal GDP growing business that’s got a lot of leverage is not worth 40 times.
[Jake] Yeah, you shouldn’t do a 2% earnings yield on that.
[Chris] No, Costco is one of the best business in the world and it traded at almost 60 times earnings a year ago. It’s still trading at 50. I mean, and I love the company.
It’s probably the best run business I’ve ever encountered. We’ve owned it. I still own little stubs in taxable accounts where my basis is $19 a share.
But you are not gonna make money owning Costco. You’re not gonna make much money owning Costco at prices above or at where they are today. I mean, and there’s just a number of those companies that have been the best businesses in the world, but price matters.
[Tobias] Let me do a quick shout out around the horn. And then JT, you got some veggies for today? I do.
Okay. Petitikva Israel, what’s up? Pittsburgh, Tampa, Florida, Philly, Valparaiso, Boise, Lausanne, Switzerland, Breckenridge, Bethesda, Fredericton, Canada, Toronto, Wagga Wagga Australia, what’s up?
Tallahassee, Zagreb, Madeira Island. That’s in Portugal, you’ve already won. Skipped ahead.
Mosfelsberg, Iceland, how’d I go with that pronunciation? Let me know. Vancouver, Bologna, Italy, what’s up?
Jamaica, nice. What’s up, Manny? JT Veggies, let’s go market folks, six minutes past the hour.
Cincinnati, Ohio, last one. Okay.
[Jake] So, you know, Iran war happening. We’re gonna be talking about war, but actually there’s a little twist to this cause I know Chris is also a sports fan. So we’re gonna be talking about war and baseball.
So Babe Ruth hit 714 home runs and by this modern measure of war, you know, he wasn’t maybe even the most valuable position player of his era. It might’ve been Rogers Hornsby. That probably sounds wrong, right?
Cause Ruth is sort of the patron saint of home runs. You’re the Babe Ruth of XYZ, you know, it’s the best of all time kind of thing. But war says otherwise, and war stands in baseball for wins above replacement.
And it’s asking a different question. How many wins did this player produce that the next guy in line wouldn’t have done? And what does this like next guy in line really mean?
This is actually more like a bench player, triple A call up, a minor league veteran on a one year deal. Every team at baseball has access to this replacement player at a minimum cost. He’s not average.
Average is actually pretty good in the league. Replacement is the floor. You know, what can you get if your starter goes down and you have to grab someone off the waiver wire on a random Tuesday afternoon?
This is the baseline that war is built on. And it changes really kind of how you think about the value of things. So war puts a number to all of this.
And once you have this baseline, you need a unit of measurement. And for baseball, this is, it’s runs. And every action on the field either creates a runs or prevents the other team from scoring runs.
So a single, a walk, a stolen base, a diving catch in the gap, like all of it gets translated into runs. So a home run is worth more than a double. A double’s worth more than a single.
A walk has value because it doesn’t make an out. That, and this last point sounds kind of boring, but it sits at the centre of the modern game right now. You know, Bill James spent decades arguing that avoiding outs was undervalued.
And Billy Bean read about this and he built a playoff team in the Oakland A’s in 2002 that was, you know, now Moneyball. And every front office now in baseball understands this. So, but then let’s add in base running, which is even more subtle than hitting the ball.
Like going first to third on a single, tagging up on a fly ball, not grounding into double plays. None of these things show up in the highlight reveals, but over 162 games, they really do matter. And a good base runner might generate five to 10 extra runs a year just by making smarter decisions on the base pass.
And that’s worth, you know, roughly one win. And defence is where war really starts to get kind of messy because, you know, hitting produces these clean events. A pitch is thrown, contact is made, or it isn’t.
You can count the result. Defence doesn’t really quite work that way because, you know, did that shortstop make a great play because he was positioned brilliantly and he knew that a changeup was coming and that the batter was likely to be early? Or was it because the ball was hit right at him and it was just luck?
So defensive metrics require quite a bit of estimates. They look at thousands of similar batted balls and ask how often does an average player convert that into an out? And so players who consistently make like the low probability, the spectacular plays, they get credit for that.
And different systems make different assumptions. So this is why there’s a fan graphs war versus a baseball reference war. And sometimes they disagree on a player based on their assumptions.
And so once we take everything here and denominate it in runs, war is this final calculation which is converting the runs into wins. And that’s typically like 10 to one. So 10 extra runs that a player produces translates into one extra war in their season.
So let’s get a little bit of the scale for some context. You know, zero war is a replacement level player. Two war is a solid everyday starter.
Five war is an all-star. Eight war is like an MVP candidate. So, and Mike Trout has had seven seasons above an eight war, which is why he’s gonna go to Cooperstown someday.
Babe Ruth had 10. And you could sort thousands and thousands of players over decades by this one number. And, you know, it’s important to note that war has some context to it.
Like there is actually, it’s actually context neutral. A home run in the third inning of a blowout game counts the same as a home run in the bottom of the ninth of, you know, game seven of the World Series. Like there’s no real clutch factor to it.
And that’s kind of what makes fans often not like it, you know, because those big moments feel different. Like you wanna, you need that clutch player, right? So, but war strips that all out on purpose.
It’s trying to measure an underlying ability, not the situation that the player happened to be walking into. And so obviously it has limits. And here’s, we’ll try to stick the, stick a little bit of an analogy.
So the reason that maybe some of this matters outside of baseball is that that same kind of logic applies anywhere where capital and talent might be getting allocated. And maybe we’ll talk about M&A as sort of the cleanest example. Research indicates that roughly 70% of acquisitions destroy value for the acquiring shareholders.
And that the average premium paid is somewhere around 25 to 35% over the market price at that time. And that premium has to be earned back through synergies, which are usually overestimated by at least half on the revenue side. And they almost always arrive years later than the slide deck promised.
So CEOs will justify a deal anyway by pointing at the accretion that happens. They’re looking at the earnings per share number. Oh, it went up, so the deal must be working.
You know, an AOL bought Time Warner in 2000 in a deal that was accretive on day one and went on to then vaporise roughly $200 billion. And HP bought Autonomy for 11 billion and wrote it down $8 billion the next year. But both deals cleared this EPS accretion bar in the slide deck, and both were total disasters.
And so accretion here in the EPS is a bit of a financing trick. It’s almost like RBI logic. The actual question is what could that cash have been used elsewhere?
So, you know, typically the cleanest alternative might be buying the company’s own stock because management should likely know that asset better than any other potential target, right? And a buyback at a fair price is sort of that replacement level capital allocation move. It’s almost like a war.
It’s available, it’s typically pretty cheap to administer, doesn’t require a 30% premium, you know, or three years of potential integration risk. And you usually get to size it kind of however you want. So most acquisitions measured against that bar instead of this imaginary do nothing bar are negative war deals.
They look like eight war signings on the day, and they turn out to be like zero war contracts on like paying all star money for it. So Babe Ruth hit 714 home runs. War doesn’t take that back, like that still counts.
But what it does is kind of widen the field of what does count. You know, the walks count, the defence counts, the first to third on a single counts. And none of that really looked much like anything in 1925, but it all adds up into wins, which is what you’re really trying to get towards.
And markets kind of work in that same way. The obvious things get priced. The subtle things often wait around to be measured.
And war is just one example, you know, someone deciding to count subtlety. And so, of course, you know, markets eventually arb every edge, everything that you would count, just like, you know, walks in baseball have been arb’d away. So you have to kind of keep looking for new approaches to arrive at value, but while still not sacrificing your principles.
So there’s a little bit of baseball brought into the investing world.
[Chris] For the lay fan of baseball, or for the investors that don’t follow the sport, if I may, Jake, I’ll just summarise what you’re saying. You’ve got the entirety of MLB trying to figure out how to optimise their war to be able to beat the Dodgers, which they won’t be able to do.
[Jake] That’s the issue, yeah. I think salary cap or lack thereof might be one of the issues.
[Tobias] Chris, for the last 15 minutes, can we talk about where you’re finding opportunities sector-wise, factor-wise, size-wise? I mean, country-wise, what’s interesting?
Where Value Investors Are Finding Cheap Stocks in 2026
[Chris] Oh, like I said, we’re starting to get some money invested into the home building type world. I guess you’ll see tomorrow, we just bought position in builder supply. I still think Decker’s is pretty cheap.
Working through whether that’s a value trap, if you don’t know the company, they own Hoka and Ugg. They’re two primary brands. And Hoka’s doing three billion in revenues on running.
Their Swiss competitor’s doing three, as against Nike’s 30 billion of shoe revenue out of their 50 billion. So those two companies have taken pretty good money. And meaningful market share.
Ugg does two billion. It’s been around a long time. Stock traded above 200, like 250 a couple of years ago.
And our basis in it is not much over 80. It’s trading a little over 100 today, maybe 108, 109. But with a billion and a half of net cash on the balance sheet, we bought it at 12 times earnings.
So it’s pretty clear that the Hoka brand in North America is gonna slow. They’ve got a lot of room internationally. They do 40% of their business direct to consumer, which is much higher margin.
I like the management team a lot. But I’ve got price as a margin of safety. So maybe it’s trading at 14 times.
Margins will come down. They’ve got the highest margins in the athletic shoe industry. We’ve got some international investments that I won’t name specifically, because we don’t have to disclose them.
But trading at some Norwegian and Swiss companies, trading at kind of five, six times earnings. We’ve been trimming gold only because we’ve made so much money. The position sizes got very big.
And so when I buy something, I tend to force myself to sell it.
[Jake] So- When you say that, you mean the miners, right? Not the- The miners. Yeah.
[Tobias] Let’s talk about Bula for a little bit, because I think that, you don’t have to talk about Bula specifically, just the housing and construction is interesting at the moment, because the number of sales that are going through are lower now than they were in the 2008, 2009 global financial crisis. And there are a lot of theories why one is interest rates are too high, even though I think interest rates are sub the long run average. The other one is just, there’s a huge divide between buyers and sellers in the market.
There was a chart doing the rounds yesterday that showed that we’ve never had so few buyers. And I think there are twice the number of sellers. So, it moves around a fair bit.
But the idea is just that housing is as expensive as it’s been. Median house price relative to the median income is as expensive as it’s been in the data going back 50 years or something like that. So it seems like we need to have house prices come down pretty materially before buyers move back into that market.
And that has knock-on effects for all of the housing industry and so on. So there are a lot of housing and construction businesses that are not doing as well as they might be. Look better when the cycle ticks up a little bit.
What’s your thesis there?
Why Homebuilders, Builders FirstSource & Housing Stocks Could Rebound
[Chris] I think there’s a nuance to how the median housing price is calculated that distorts that perspective a bit. You’ve got this apparent huge rise in median household prices. But if you go back a handful of years when the mortgage rates were sub-three, two and five-eighths, two and three-quarters, everybody refinanced their mortgage.
And when mortgage rates crashed through six and spiked up to seven and eight, if you were in a two and three-quarter percent mortgage and your household income and assets were not at the upper 1% or top 5% of the population, you were not selling your house. You were not trading homes unless you moved and your house was not gonna sell unless you died because you’re not leaving that two and five-eighths mortgage. And so the transactions that have taken place nationally tend to be at higher home prices.
So that makes the median household price appear as though it’s moved up. And it did move up for inflation and lumber costs and construction costs and labour costs. So it is higher, but it’s not so much higher.
So you’re starting to see in the last three, four years, you’re starting to see the proportion of 30-year mortgages that are at 6% or higher start to move up because you do have activity, you relocate your job. There is transactions, there are transactions taking place in multifamily and in smaller homes, but it’s the preponderance of activity is in larger homes. To me, it’s interest rates.
At a level of rates somewhere south of six, which is about where you are now, at five or four, I think there’s an enormous amount of pent-up demand for homes. You don’t have much construction activity. So I think you’re probably gonna have somewhat of a shortage against all of the young generation that are living in their parents’ basements.
So they’re living below their lifestyle expectation of where they wanna live and where they wanna move, but they’re not going until the mortgage rate makes housing prices more accessible. And so I don’t know what it’s gonna take to get there. It’ll certainly get there in the next recession.
If you have a bad crisis or if you have another panic, the Fed, because they’ve shrunk the balance sheet from nine trillion to six and a half trillion, they have room to do at least another or multiple rounds of QE. And so I almost think the housing market and the construction market as a surrogate of that are pretty good recession hedges in that if things get really bad, my guess is you’re gonna see more real estate activity from the pent-up demand. And the prices of some of the very well-run home builders like an NVR or a Lenar have come in.
We want builder supply, think lumber yards, but with higher margin product that home builders like. So instead of stick build, they’ve got full truss systems and full siding systems and wall systems. It’s a very well-run company.
So I don’t know, but I can’t give you a timeline. I just know that the prices as the stocks have come down and down and down and down are starting to be pretty attractive. And time will be the enemy of making a bunch of money, but if the economy gets worse sooner than later, I think they become a similar hedge to bad times like a dollar general has historically been where you get trade downs from the middle class, but you also get an accelerated use of SNAP, which are food stamps.
And so I think in housing and construction, I think there’s a bit of a contra cyclicality to them because of what’s happened in the last five or six years with interest rates that make these things pretty attractive.
[Tobias] Do you have a view on oil other than when it spikes like this, you’re trying to trim back a little bit. Do you think that it’s a risk to the rest of the economy if it stays elevated? What do you think these levels are fine given the changes in just inflation over the last five or 10 years?
[Jake] We’ve heard the argument that the price of oil might be its own kind of like fed funds rate in a lot of ways.
Oil Prices, Iran War & Airline Stocks: How Chris Bloomstran Is Investing the Crisis
[Chris] I don’t know. We have clients that trade oil and energy that until Iran couldn’t make much of a long-term bull case for oil. We do have steadily growing 1% a year increase in demand for oil.
I mean, the world thought a few years ago you wouldn’t have the global consumption of north of a hundred million barrels and you’re seven or eight million barrels north of that. My working assumption is we get through this Iran thing sooner rather than later. You’ve got an awful lot of disruption in the meantime, but here’s another place where I think we’re taking great advantage of this short-term pain.
Airlines are gonna just lose money because they hadn’t hedged out this immediate spike in fuel costs. So you’ll see in our 13F that gets filed tomorrow, we’ve made Alaska air despite airlines being terrible industries. Alaska is really well run.
They’re working off a merger. They historically have run kind of net cash on the balance sheet, which is very aberrant, but they’re more exposed to the surge in jet fuel prices than some of their competitors. They’ve added international routes.
Now they’re flying to Asia. They’ve got some longer haul. They fly to Mexico, they fly to Hawaii, but the stock traded into the low 30s and it’s worth a heck of a lot more.
And so with oil having come back down the last few days on the apparent peace negotiations underway, oil’s declined, the energy stocks that we’ve been selling have declined, and Alaska, it’s up like, it’s up 7% this morning before we jumped on the call. So we’re delicately long some places that I think will benefit from oil reverting, kind of mean reverting back to where you were, but if you get a protracted war and if you don’t run refining and energy assets, yeah, you start to have problems, but I think we’re a long way from that. What about the destruction that seems to have gone on through the Middle East?
Yeah, I don’t know. Qatar had some of their LNG terminal assets harmed, something like 20% of their assets. I don’t know how durable that’ll be.
I think you’ve got enough ability to turn the crank, even from the U.S. perspective. I mean, we can send more LNG. We’re putting a rope around the Chinese at the moment.
We’ve gone after their proxies, I mean, going after Venezuela, going after Iran, most likely Cuba next, rightly or wrongly. I’ve done a lot of reading. I don’t think we’ve durably harmed energy assets, but if we take out a million or a million and a half barrels of Iranian capacity to refine and export, I mean, they import things like jet fuel.
Their refining capacity is not the complex variety that Valero and Holley have here in the U.S. I don’t think we’ve done much damage, but if we or the Israelis bomb Karg Island and some of these more durable energy assets, yeah, you could definitely have a problem. You could see oil price a heck of a lot higher, and if that’s the case, we’re not gonna make money, at least in the short or intermediate term on something like an Alaska Air, but I don’t know. I think we’re close enough to the end that if we get through it, you’ll have oil back at 60 in pretty short order, I think, but who knows?
[Tobias] I mean, it’s always the challenge of value, right? You gotta buy it in the middle of the crisis, not knowing when the crisis passes, but knowing that eventually it does.
[Chris] Yeah, you didn’t know, we had no idea how quickly we would clear COVID and the lockdowns, but at one and a half to cash flow, we were buying Valero and Holley, and right after we bought Holley, they bought a refinery in Washington State for 350 million, 250 million net of inventory, finished product and raw crude, and in the hands of the management team, it’s a better asset than it was when Royal Dutch Shell ran it and so they basically paid one time’s cash flow and stole the asset.
California, I mean, Valero’s closing one of the refineries, Phillips is closing a refinery. I mean, there are places in the world that have very irrational energy policy, and we can take advantage of that, Holley can take advantage of that by distributing via rail to California. I don’t know, I’m not sophisticated enough on geopolitics or on pandemics to know the outcome, but I mean, generally these things in my 35 years investing, whatever the imminent crisis is, front and centre, tends to resolve itself, and when it resolves itself, oil will be lower and airlines will be higher.
[Jake] We’ve clicked around through any of the SaaSpocalypse names. I mean, things are off quite a bit, and it’s kind of not traditionally been where you look, but at some point there’s a price for every asset, right?
Are SaaS Stocks Finally Cheap? ServiceNow, Adobe & AI Disruption Risks
[Chris] No, I mean, doing a bunch of work on ServiceNow at the moment and Adobe, I mean, there are some clear businesses that are harmed, and ServiceNow might be one. They enjoy very, very high margins, so I don’t think they’re gonna lose in the IT world that they cater to, their big S&P 500, Fortune 500 clientele. They’re not gonna get displaced from the processes that are in place, but incrementally they may not drive 20-plus percent revenue growth, and if you do get a disruptive competitor via AI that uses a much cheaper tool, at the margin, you’ll see margin compression pretty severely.
In the ratings world, in some of the businesses, like S&P Global’s very interesting, Moody’s, if it gets cheaper, very interesting, but the SaaS things are so funny because you look at them, and forever they traded at crazy multiples to revenues and crazy multiples to earnings if they had them, and there’s just been an awful lot of evisceration, and anytime you get this, sometimes it goes too far and sometimes it doesn’t, so we’re spending a lot of time on it.
[Tobias] Chris, we’ve got about a minute left, but I just thought you might wanna say some words about Buffett stepping down. It was one of the sections in your letter just to recover what you discussed in that. In one minute.
Yeah, sum up a 16-year track record in one minute. It was two minutes before we started talking SaaS.
Warren Buffett’s Greatest Achievement: The Math Behind Berkshire Hathaway’s Returns
[Chris] That was my 180-page letter. 90 or 100 was Berkshire, and I do have a tribute. So I won’t get into the math, but I’ll leave it.
I mean, he was the best investor of all time, but he was also the best operator in terms of running a business with morality and ethics and executive compensation, and he was just such a great mentor to all of us in terms of how to behave with honour. It’s something you don’t see in a lot of places, but the performance track record, which is just a component of it, I’ve got a section starting on, I don’t know, page 95 of the letter, and I had that, I had the, I told Warren in a note a few years ago that I did the math, just a quick simple algebra that Berkshire could lose 99%, 99.3% of its market cap and share price and still outperform the S&P 500 since he got control of Berkshire in 1965.
And he said, wow, that’s, Ben Graham would be proud. That’s a testament to compound interest. And so I mentioned that to Charlie a couple months later at the Wesco meeting, and he said, Chris, this is, it’s just compound interest.
That’s nothing special. And so I just went. This is basic math.
I’ve got it, I’ve got it. So in doing my long-term compounding against the Ibbotson, it dawned on me, well, I’ll just tell, if it, I’ll take 30 seconds. So what one day in the history of the U.S. stock market, one, what single moment would be the best time to buy the stock market via the S&P 500? I guess like the 29 low? The 32 low. The 32 low.
June 1 of 32, the S&P had fallen 86%. The Dow had fallen by a little bit later in July, 89%. So if you bought the S&P 500 on an 86% decline and owned it through today, you’ve compounded at 12.2%, which is way better than the Ibbotson 10 1⁄2. And had you bought the peak in 1929, you compounded at something like nine. Well, over a century, that’s huge. Instead, had you bought the S&P 500 at the low, the absolute day of the low, and held it until September 30, 1964, which was the end of Berkshire Hathaway’s 1964 fiscal year, and been willing to lose 99% of your money and put all your remaining money, so $100 from the low in 1932 to 1964 compounded at 15 1⁄2%, from $100 invested to $10,000.
You could go back from $10,000 to 100 by Berkshire and still have outperformed with Berkshire. So you essentially sit on cash for 33 years, 32 1⁄2 years, earning absolutely nothing, and then by Berkshire. And in a third of a century shorter, compound $100 in Berkshire’s case to 6.1 million, where the S&P 500 from 1932 grew to $4 1⁄2 million. Where it only grew to $45,000, the S&P being it from 1965. So essentially, you could lose 99% twice in Berkshire’s case and still have beat the market. I think Charlie would have been impressed with that, with that figure, even though it’s simple mathematics, compound interest.
[Tobias] Amazing. On that note, Chris, if folks wanna get in contact with you or follow along with what you’re doing, what’s the best way of doing that?
[Chris] Well, I used to say, check me on Twitter. I’m not on very much. I did post something on Cathie Wood on the weekend, but for sure our website.
So we’ve got the archive of a bunch of our annual letters on the website. And then any interviews or podcasts we tend to post. So whenever you guys post this thing, we’ll put the YouTube link and the podcast link on.
So we’ve got, I don’t know, 20 or 30 or something interviews and podcasts in addition to all the letters on the website, SemperAugustus.com. JT, any final words?
[Jake] Just always good catching up with Chris. Thanks for coming on.
[Tobias] Christopher Blomstrand, Semper Augustus. Thank you very much. Thanks, gents.
[Jake] Folks, we’ll see you next week.
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