Breakfast in Omaha Meeting 2024 – Session Two

In 2022, I started a new tradition, and so this year too I hosted my readers for breakfast in Omaha.

This was a wide-ranging Q&A session. We discussed

• Will you write a little book on stoicism?
• What attributes do you look for in a business you are looking to invest in?
• How did you manage your emotions when your Uber position went up?
• Discussion about self-driving cars
• How do you protect your clients’ money?
• How do you know you succeeded as a parent?
• How do kids feel about you writing about them?
• Would you consider investing in China?
• How do you decide your position on stocks?
• How do I deal with having a smaller position rather than going all in?
• How do I deal with prospective clients who have a short-term time horizon?
• What are your current thoughts on tobacco stocks?
• Do you have a checklist manifesto?
• How do you feel about serial acquirers?
• Further details on self-driving cars
• How do you get comfortable with technology changes, especially AI?
• Are you looking to invest in Israel?
• How do I quiet pressures from the market?
• What opportunities are you most excited by?

Breakfast in Omaha Meeting 2024 – Session Two transcript

I don’t have a speech. I am so lucky to have so many people who came to Omaha to see Warren Buffett, and when they got an invitation to get free food, they said yes. 

I’m here to answer your questions. If you don’t have any questions, this is gonna be a very short meeting, but I’m sure you have a few. So we’re gonna start from this side, how about this?

Question 1: Will you write a little book on stoicism?

It’s a good question. I don’t think I would have the courage if I didn’t write Soul in a Game. I don’t think I would have the courage to do it. But the feedback I received on that email was so favorable that I’m seriously considering it.

If I do it’s not going to be published by Harriman. For many reasons, but one of them is that it would take a year and a half, maybe a year, from the point I write it until it gets published. I don’t want to wait that long, so I’ll probably end up doing it. I’m looking forward to it because there’s so much more I can learn. And if I do it, I probably would incorporate so much Eastern wisdom as well.

Question 2: What attributes do you look for in a business you are looking to invest in?

Boris brought three students, high school students, to this event, which I think is very admirable. 

So what do I look for in a business? So number one, it has to be something I can understand. There are a lot of great businesses that I’m not smart enough to understand. That’s number one.

Number two, it has to be a high-quality business. I find that my EQ is the highest when we own high-quality business. It has to be run by good management. What does good management mean? It’s people who are good at running the business and allocating capital, which is two different skills. 

And third, so I talk about quality. You know, I want to buy when it’s undervalued.

If I get those things, then it becomes something that could make our portfolio.

Question 3: How did you manage your emotions when your Uber position went up?

First of all, for somebody who is 18 years old, your questions are very good. It’s tricky because psychologically it’s not very easy.

When we were buying Uber, it was more difficult and easier at the same time, right? It was easier because I didn’t have to have a rich imagination to see that they can earn three dollars of earnings I had to make sure that it survived during the pandemic. I had to have the psychological strength to own something that everybody hates. Like literally when we bought Uber, this was the most controversial stock we ever owned because like in a matter of a few days after we bought it, we got emails from clients and calls saying, are you kids buying stocks for us now? Like what happened to value investing Vitality? 

I ended up writing, I forget, what is it, 5,000-word research report on Uber to explain to him that it’s not my kids who are making the investment decisions in their portfolio. So those are the things we had to face when we bought it.

Now it runs up, and you start questioning about what is the earnings power of Uber. Now, a lot of it still lies in the future. And with companies like Uber, you have to be a lot more patient. Now, there are very few companies like that. Like, very few companies where the company has a significant competitive advantage, a huge moat, a high return capital, and it has a huge, huge growth runway. And I think with these companies, you have to be a lot more patient. Nnormally we look five years out, for Uber we look seven years out or more.

So if I had a, my whole portfolio was only, if I only had Uber-only stocks, it would be a lot more difficult, but I don’t, right? And therefore, in the context of my portfolio, I’m absolutely fine. That’s what I try to do, I try to zoom out and say, look at it in the context of the portfolio, and not just as one stock. You see what I mean?

Question 4: Discussion about self-driving cars

The problem with self-driving is that getting to 99% is difficult, but it’s relatively easy. It’s the last percent, one percent or even less, this becomes difficult. It’s all the edge cases. Because you have to deal with situations where humans look at this and they say, for us, it’s an easy decision, but for the computer it gets confused.

Like, I read about different cases where a Tesla car would stop in the middle of the road and they couldn’t figure out why, and then they figure out there’s a billboard, of lawyer holding a stop sign on the billboard. That was one case. Another case was, that there was a guy, for a reason that I still don’t understand, who was walking on the highway, on the side of the highway, with a stop sign. And it’s these kind of silly cases, right? So how do you train a computer for all these weird situations?

So what they did, Tesla, and I’m talking about Tesla, but I’m sure other companies had something similar, but not as much. Tesla has a whole bunch of cameras. They do a lot of video recording. Then they have researchers in the labs, so when you get home, this video gets uploaded over Wi-Fi to Tesla.

And then they study cases where the car suddenly stops or the edge cases, and then they start marking it. Oh, when you see a guy on the side of the road with a stop sign, maybe don’t stop. Like, you know, okay, this kind of stuff. 

So that’s what they did before. So, and then, with version 12, they flipped it upside down. They said, instead of us trying to train the computer, what we’re gonna do, we’re gonna identify the best Tesla drivers. And they can objectively do this. They can objectively identify who are the best Tesla drivers and then what we’re gonna do, we’re gonna take that video from their driving and we’re gonna tell the computer nothing else but to do this “Behave like them”. Behave like Tesla’s best drivers. And so we’re not gonna tell the computer that this is a stop sign, stop and  you’re not going to tell the computer if this is a green light, go, and whatever, yeah, and a red light, stop. Just behave like them, and that’s how we’re going to train them. And that has led to much better software, which is much better than previous versions.

However, it’s still not perfect and there are a couple more issues. Number one, Tesla can still deal with one little fact. I have two Teslas. I’ve been using self-driving. When it rains, it doesn’t work. When it snows, it doesn’t work. It still gets me to the wrong places at times. When I drove from Denver to Aspen, it was absolutely incredible on a highway. My son and I would go, it was absolutely incredible on the highway. It’s a much better improvement.

But you have a lot of issues there. Number one, you have a legal issue. Who is responsible for a car crash? Tesla or the driver? We don’t have a legal framework for that. If you want to get an Uber-like service from Tesla, as long as you go in less than 40 miles an hour, as long as you are, the weather’s perfect. There’s a lot of limitations.

Now, where it’s gonna work fine, in very restricted areas. Waymo works well in San Francisco in very restricted areas. Another issue there, another issue is this. I read a lot of books about Uber, when I was doing research, the most important KPI Uber is looking for is when you push a button, how much time does it take for the car to show up?

Okay, and here you have a very interesting dilemma. If Tesla tomorrow launches a service, they need to basically, I think they have five million, I forget how many, they have three or four million Uber drivers in the United States, or maybe it’s global, I forget the number. So Tesla launches a service, and you push Tesla button, you know, creating this network is incredibly difficult.

The only way they’re going to do this, is if they plug Tesla into the Uber network. Now, so what’s most likely going to happen is that Tesla and Uber are going to work together, despite whatever Elon is saying, just because it can’t work otherwise. Unless they go in a very dense way, in other words, in San Francisco, they’re going to go, they have to have a huge investment. If you go through this very carefully, you realize that you have legal issues, you have technological issues, you have psychological issues. How many people would actually want to be in a, some people are going to be absolutely fine in the self-driving car, and some people won’t be. So here’s what I’m gonna say this way.

Elon Musk is a very complex individual. There is a genius and Archie Bunker at the same time. That’s what you get. So Elon Musk right now is facing a problem. And the problem is this. Tesla sales have peaked. Why have they peaked? For different reasons. They peaked not because of Tesla, but because of the size of the battery, a 300-mile battery or 350-mile battery, they get Tesla and that applies to all-electric cars. This is as much market share as they’re going to take. Because people have range anxiety. People like me already have those cars.

People who live in an apartment cannot have an electric car. Therefore, Elon Musk has a problem. His car company is priced as a software company. 

And so he’s trying to right now to justify this valuation while his sales are declining. And what does Elon do? Elon does what he usually does. He comes up with great stories. A lot of times the stories come through. A lot of times they’re five or 10 years late. And so right now he’s telling selling everyone on self-driving. And my point is, at some point in the future, we’re going to have self-driving and it’s going to be very gradually coming in. The Uber network is going to have a self-driving and a driver. 

Yeah, so it’s going to be a very, very gradual introduction and it’s going to take a long time. And so I look at this and I say, so I’m hoping that Uber stock  will get crushed and I’ll buy more of it. So anyway, because I spent a lot of time thinking about it, I realized it’s far, far away. 

Question 5: How do you protect your clients’ money?

All right, I have no idea what the market is gonna do over the next six months, over the next year. I agree with you the market is expensive, but I don’t own the market.

The beauty of this, if I had a portfolio of ETFs, I have no idea what I would tell my clients. Because I would not know, I honestly would not know what to do. But I own individual stocks. The companies we own are undervalued. Even Uber, by the way. If the market declines, will they decline? Some yes, some will, some won’t. 

People who come to me have a long-term time horizon. And if you invest in stocks, you should expect volatility. So when people come to me, they give me the equity portion of their portfolio. Yeah, so I’m not there to manage their bond portfolio, etc. So people give me money that basically when they come to me, I say, give me money that you don’t need for the next ten years. If this is the money you need for the next ten years, don’t come to me.

Question 6: How do you know you succeeded as a parent?

This is kind of interesting. Now, there was a couple here, I think they left. They have a book club. And they said, last year when I met them at Omaha, they said, you know, we had your book in the book club. And we were talking about this year, and they said, you know, Vitaly, you wrote a book about parenting. I didn’t know I was writing a book about parenting. So I guess I was just writing, right? Trust me, I never thought of myself as ever writing a book about parenting.

So I think the way to judge, this is complicated. First of all, I look at my kids and look at how they turned out. And two out of three are right there and I have this incredible parental pride. And not just because of my wife and me, just not, this is not me. You know, this is my wife and myself. And that’s number one.

Number two, I also realized how much luck there is. I have friends who are, who I actually call a lot of times for parental advice and they would have a lot of issues with their kids which I never did. So there is a lot of luck that plays in this and so I don’t know how much credit I can take for them. I honestly have wonderful kids and I’m not saying this just because they’re sitting there, but they really are. There’s a lot of luck in this.

Another way, I just look at the relationship we have with them, and I have a very special relationship with them, and that’s, to me, how I, I guess, another way to judge it. And then I look at also how they face life, how they interact with life, and then I can see if I was successful with that or not. And then you can ask them. You can ask them what they think. 

My father always told me that his job as a parent was to make sure he raised kids that would be able to face this life and to be able to stand on their own feet and go through life and be good human beings and that’s what I try to do, I guess. And if my kids are doing that, if they deal with adversity well, then I think I succeeded. So I guess it’s a multi-layered answer.

Question 7: How do kids feel about you writing about them?

I have undeserved fame. But it’s actually because there’s an accountability  loop, so the way that we live our lives is, I guess, we’re more subconscious. When you know that what you’re doing may be written about in the public eye, you think about the way you structure your life in a more thoughtful way. I think it’s cool because a lot of times when you meet new people, the first interaction you have is filling in on your life. For us, we can just skip to the good stuff. Yeah, so it’s a weird privilege that we’re, I mean, it’s an amazing opportunity, but it definitely gets weird sometimes.

Jonah said something that really resonated with me. I’ll give you an example. I write about our special trip to San Francisco, right? Or actually even better, Hannah and I go into a bookstore. Okay, I write about this. But it’s not like we go to this bookstore every day, right? It’s not like we go, like, but what happens is this, when I write about this, now I have actually an accountability like, I’m writing about the highlights of my life, right?

But now I’m trying to live up to that all the time. So what it does, actually, to me, it makes me a better person because I’m trying to be the person that you read on the pages, and I promise you I’m not that person all the time. But I try to elevate to be that person more often. So it’s actually rewarding for me as well, and I guess it has impact on them in a similar way.

Question 8: Would you consider investing in China?

China is still uninvestable, and it’s a, there are so many ways to answer this question, right? Think about this. In my portfolio, I only, like, we want 20 to 30 stocks, right, so I only have, let’s say 25 stocks just to make it, I have 25 slots. And so therefore, from that perspective, I only have, to look at the world, and say, out of 10,000 companies out there, I only need 25. Which ones are gonna fill the slots?

There’s a lot of, you know, there are always cheap companies out there. Actually, there’s a joke. The guy walks into a store, and they say, I want high quality, undervalued. The guy says, here’s a high-quality aisle, here’s an undervalued aisle, and you can’t have both. So, my job is actually to find both on the same aisle. I don’t want to own companies where I can wake up in a country, when I can wake up one morning and find out I don’t own it anymore. Like what happened to Russian investors, first with Yukos in 2006 or 2007, and then, like, you know, in 2022, right?

So I don’t want to be in this situation. I want to own, this again, I don’t want 25 stocks, I want to own them in countries where there is a rule of law. So, China is undervalued, and Munger did not have a problem with that like they have a, you know, but Munger had a problem investing in Russia, even though to me there’s not that much difference between Russia and China. And Munger, a couple years ago, he did an interview and he said, and I think he was very honest about it, he said, maybe that’s my behavioral bias. I’m comfortable in China, but I would not be comfortable in Russia.

So there are a lot of cheap companies in China right now, but I think they’re cheap for the very right reason. And there will be investors, maybe they will make money on them, but it won’t be me. But again, I don’t have to make money on every single undervalued investment.

Question 9: How do you decide your position on stocks?

Okay, so think of it as a matrix. You have quality and valuation. Let’s say you have a very, very cheap company, and it’s very, very high quality. Let’s say it’s a 5 to 7% position. Let’s say you have a high-quality, very undervalued, right here. And then you have low quality and expensive, it would be right here. It’s a spectrum.

So first of all, if it’s a low quality and overvalued, I probably should not own it, right? But you get the spectrum of it, right? But then you have companies kind of somewhere on the spectrum, so you can try to manage, to kind of marry quality and evaluation, right?

So one thing you know, that quality doesn’t change as often as valuation. So we can have one company at one price would be, let’s say high-quality company. At one price, it could be small position. At another price, it becomes high-percentage position. It’s price-driven, because how much undervalued that is. So at one, like when you buy an Uber, it was 3% position at first, and then we added it when it became lower.

Okay, and in case of Uber, I would argue its quality has increased over time. And you see, here’s the problem. The problem is everything I’m telling you is this, like the problem is our network, our framework. We have A, B, C, and D rating for each company. When you buy an Uber, I thought it was an A, but then it’s actually, the quality improved. What’s a letter less than A? I don’t know, so it’s A plus, or A double plus, you see what I mean? So it’s still a lot of judgment that goes into it, but this is kind of our framework.

So what I try to do, when I analyze a company and I find that the quality is too low, we just stop. We just move on and say, because I found my EQ is not very high when it comes to low quality companies. So we want to be on high quality and undervalued.

So position size is usually, like, in rare cases we have 7% positions. McKesson was a 7% position because I felt like I understood the company extremely well and I thought the chances of permanent loss of capital was almost zero. So it was a 7% position, but those come very rarely. It’s usually five, it’s where we step out.

And part of the reason for that, because to your question, when people come to us, a lot of times we manage most of their money. Because if people need, most of their equity investments, and a lot of times it’s all their investments, because that’s what it wants to do, therefore we look at this as the money that is irreplaceable. In other words, imagine when you’re young, you have a luxury of making mistakes, and you know you’re still gonna be working for the next 30 years, so you can recover from those mistakes. When you are 60, and you’re at the end of your working years you can’t really recover from those mistakes, right?

So therefore, I look at it, I manage their money as if it was irreplaceable capital, so therefore, we have this very mechanical, quantitative position sizing framework, and it’s there to really protect me against me. Because, you know when you find a company, you fall in love, you’re not supposed to, but you do, you fall in love with it, and you can get emotional, you say, this is a 50% position. It’s not, okay, because nothing can go wrong. And as you can always discover, things will always go wrong. So this is why we have a portfolio and we have 4-5% positions. There were rare exceptions, when we had a, when we felt like we were buying a lottery ticket. Like, it was a 50 basis point position once, where it was 100x upside and 100% downside. So, if you had a 50 basis point once, but usually it’s a 2% position is the smallest.

Question 10: How do I deal with having a smaller position rather than going all in?

So I’ll just, since you kind of brought up, what we did with McKesson we had a 14% position and is we trimmed it to 10%. I think their undervaluation shrunk a lot. McKesson is a company where the market is growing three to five percent a year, and it’s kind of the market, so the range of outcomes is much narrow.

For Uber, I think it’s the growth runway is very different. So for Uber, we haven’t sold a share yet. But Uber, we hedged it. Uber, and we’ve done it twice, I wrote about this, so I’m not going to bore you too much, but we put color, we bought a, we sold a call and bought a put, and so when it was at $80 we limited out for half of the position, not the whole thing, we sold a $100 call and bought a $70-something put. So that’s how we hedged it, because it became a large position for us. But that’s how I deal with that.

You know, it’s kind of interesting. Chuck Ackery, who I have tremendous respect for, said his biggest asset is the ability to sit on his hands and do nothing. And I’m trying to learn this, and it’s difficult, and I’m getting better with this but it’s still very difficult.

Question 11: How do I deal with prospective clients who have a short-term time horizon?

IMA is very different in this regard, is that we kind of do reverse marketing. And what I mean by this, I write articles, people read them, and in my articles, I kind of talk about what we do, and when people get interested in our services, they download our brochure.

In our brochure, we tell them exactly what we do and what we don’t do. And then they reach out to us, they basically usually read my articles for years, they read the brochure, in fact, they will not be able to talk to any member of my team if they haven’t read the brochure. If they haven’t read the brochure, they say, we would love to talk to you after you read the brochure.

Okay, and then, we tell them, to be our client, you need to have three things. Number one, you need to have a long-term time horizon. Number two, you need to buy into our philosophy. And number three, you need to, like three or four times a year, you’re going to get an email from us that’s going to have a PDF attached to it. It’s going to be 20 to 30 pages long. It’s my letter to clients. And you have to read it. If you’re not willing to do any of those three things, don’t be a client

And so it’s a kind of a, it’s a reverse selection. We basically, we just don’t take clients who don’t buy into it. I say this, sometimes we want clients to sneak in. When we discovered that people who said they have a long-term time horizon has happened to us. I wrote a very good letter about this. I was very proud of this. I forget the, it was a Dear John letter, basically.

We had a client who started, who became a client, I forget, in July, and in September, he was writing to us, well, S&P was up 8%, you were up three. What’s your excuse? I was like, I don’t know what to tell you. So I wrote him a letter explaining that he might have joined the wrong tribe, and that client left.

Question 12: What are your current thoughts on tobacco stocks?

Point number one, Jonah and Hannah don’t smoke.

Okay, I’m just responsible for my kids, not for your kids, okay? So the tobacco business is usually misunderstood. So number one, there is a tobacco business in the United States, tobacco business outside the United States. In the United States, it’s a shrinking business.

Outside the United States, it’s shrinking a lot less. In the United States, when it’s shrinking, tobacco companies raise prices, so if you look at Phillip Morris International, if you look at Outrears, which is US only, Phillip Marlboro, if you look at their revenues, if you knew nothing about the company, you would think this is actually mildly, it looks like McKesson. It looks like top line is slightly growing, the margins are expanding. Okay, I mean, obviously the profit margin is much different, but it looks like a decent business because what’s been happening is people quit smoking, but they raise prices, and that’s actually been an okay business.

Outside of the United States, if you go to Eastern Europe, you can see a lot more people are smoking, if you go to Europe, you can see that the cessation rates are much lower than the United States. So that’s one perspective.

But then there is another layer to this, is that they have a, there’s a new generation of products that’s coming out. And there’s basically two type of products. I’m kind of ignoring vaping for the most part, butPhilip Morris International created this product called heated tobacco. It’s basically a tiny little cigarette, you stick it into a stick that looks like a USB stick, and instead of burning tobacco, it heats it up. Because of that, you receive a fraction of carcinogens than you receive from smoking. Again, Jonah and Hannah, don’t do that.

Here’s the thing. We all have vices. Coffee is a vice, possibly. If you’re doing too much of it, you’ll be jumping on the walls. Alcohol is a vice.

So we all kind of have certain vices. If you make it less bad, you know, these companies are now making nicotine less bad. And the way I look at tobacco companies is they’re nicotine-delivering companies. Nicotine-delivering companies.

So the IQOS product has a tiny fraction of carcinogens, so it’s a lot less bad for you. Now, they also bought a company called Swedish Match, which makes nicotine pouches. So, which is actually not bad for you at all, as I understand.

And I think that is their future, and really it’s about transition from tobacco, from traditional cigarettes to this. Like, we own British American tobacco, and we own two companies. We own British American tobacco, and we own Phillip Morris. They’re on the complete opposite spectrum. I think British American tobacco traded six or seven times earnings, six times earnings, six times, forget about earnings, six times free cash flows, it has a almost, I forget, 10 or 12% dividend yield, and it’s half of the business in the United States, half of it outside the United States. And it has a, it’s taking the next generation products seriously, but it’s not as far along as Philip Morris International.

Philip Morris International, it’s all outside of the United States, except now they bought Swedish Match so they have a presence in the United States as well. And Philip Morris International, 30, 35% of their sales now comes from this kind of next-generation products. And this is not my thought. Somebody who came to ValueX kind of made this comment which really stuck with me. The way I look at Philip Morris International Icos business, it’s almost like the Nespresso business for Nestle. You buy a machine and then you keep buying the pods. Same thing for Ico’s business. You buy the stick and then keep buying the little heats forever. And that is a very high quality, high margin, high recurring revenue business. And so obviously, Phillip Morris International is more expensive stock. But I look at them, they have I think a much higher growth rate than British American Tobacco.

And for them, they have almost no sales in the United States and they’re just entering the United States. And that’s going to be a huge market for them to come.

Question 13: Do you have a checklist manifesto? 

So I actually read that book, and I’d say, there are books that should not be books. There are books that should be chapter books or essays. That’s a book that’s like, I think it’s ideas that are wonderful. It’s just, I don’t think I got through the whole book, but it’s one of those books that I got the point, like five pages into it.

I think I have a mental checklist. I don’t have a formal checklist, but I mean, my checklist has been seared into, usually what happens is this. How do you create a checklist? It’s by pain. Like when you make mistakes, it gets seared into your memory so hard, so I usually don’t make the same mistake twice just because of that. But I think it’s actually, like if you’re starting investing, you don’t have the painful experiences yet. I think if you’re young starting now, I think it’s a good idea.

Question 14: How do you feel about serial acquirers? 

It’s a good question. So, companies are serial acquires it has to be their business model. In other words, it’s a very different skill set than somebody acquires companies occasionally. And they have, obviously, consolation software, that is the business model. Donahur, that is the business model. So, companies that are very, very good at that, I have no problem with them. It’s just, it’s the companies who decide to kind of become a serial acquire tourists.

That’s where I usually struggle, because a lot of times it’s a different skill set and different cultural skill, different culture. It’s very difficult to value them. We used to own SSNC software, and they’re kind of serial acquirers. And the problem with them is that, especially, they are at the mercy of valuation in the market, and this is what SSNC problem was. At some point, valuations got so high, is that you pay a lot of money, but you get very little, because, you know, and so, so, and I think that, you know, they made mistakes there, so it’s not something you usually see in our portfolio, but I think there is a place for them.

Usually, Constellation’s usually expensive, and other ones are usually expensive. Danica’s usually expensive. So I don’t have a problem with them, but it’s like knowing that, I think if one of my companies decided to become a serial inquirer, I would probably sell the stock, because this is a case where you got to prove it to me first

Question 15: Further details on self-driving cars. 

For self-driving to come in, you’re gonna have a huge regulatory burden of a whole bunch of, I don’t know, like, either county by county or states or whatever, accepting that, and there’s gonna be a true double standard for self-driving versus humans.

In other words, every time there’s gonna be a car accident with self-driving, you’re going to have, it’s going to happen somewhere in a tiny little county in Utah. And you don’t even know where it’s located, but it’s going to be front-page news in Paris. Because, so the burden, can you imagine you are, you are the, I don’t know, literally, I don’t know why I’m picking on you, but you’re this bureaucrat that approved self-driving in Utah, and now you’re on the front pages in Paris. Can you see the risk? So therefore, the standard for self-driving to be approved, it has to be several magnitudes better than humans.

Question 16: How do you get comfortable with technology changes, especially AI?

Well, I think it’s this is gonna be one of the impediments for AI is adoption. And I’ll give you an example. It’s going to take a long time for law firms to adopt AI. There are several reasons. One is easier to overcome, it’s just because of privacy issues, they don’t want the contracts to be leaked out to the Chat GPT universe.

But the second issue is that the cost of hallucination is too high. The problem is AI, it hallucinates. And when it hallucinates, it may give you wrong answers. If you go and check GPT and ask him about ValueXVail, it’s going to tell you, like the conference we organized, he’s going to tell you, it’s a conference organized by Vitaliy Katsenelson, who is a value investor, whatever, has three wonderful kids, and at the end of the conference, Guy Spier,, Warren Buffett, and Charlie Munger.

Well, Guy Spier, who is a good friend of mine, has never been to ValueX, and I promise you, Warren Buffett and Charlie Munger have never been to my conference as well, but it’s fine, they say, it’s fine, those names in the soup of data, and it just puts them in. So, that’s a hallucination. So I think it’s gonna be a while because before in the high stakes verticals, Chat GPT, like the lawyers, gonna start using it. I think most likely we’re gonna start seeing adoption coming from, like I say, in the law industry. It’s gonna come from companies that decide to become disruptors there.

As an investor, let me give you an example. Personally, I use AI all the time, but there’s an app called Perplexity AI, and it’s like Chat GPT, except when I ask a question, it gives me an answer, and it gives me links to different sources. So I click on the links, it’s like using Wikipedia basically, right? I click on the links and then I verify, it depends how, if you and I are talking about what’s the population of Utah, that’s a low-stakes answer, so I’ll accept an answer, but if you’re talking about something very important, I’ll start, if I’m doing research, I’ll start going through the links.

So I think that’s, I’m not sure I’m answering your question, but this is kind of, I’m thinking through your question.

Question 17: Are you looking to invest in Israel? 

I would love to invest in Israel. I think this is one of the emerging markets that I would love to invest in. And I have many reasons for that. I think there is a rule of law, let’s start with this. There is a rule of law, and I think this is a country that once it gets through this difficult time, is gonna be incredibly successful. And I think that success is going to be… by the way, there’s a lot of bias in what I’m about to say. I’m very proud. I’m Jewish. I’m very proud of this. And Israel is very dear to me. But also, there is something that’s very objective. I think Israeli culture is primed for great R&D.

There is this, I don’t know if you guys know the story how Intel came out with this microprocessor for laptops, and I think that tells you everything you need to know about Israel. So Intel has R&D division in Israel, and they come out, so for a long time, Intel only focused on one thing, speed of processor. They did not care about power consumption. And Israeli R&D units figured out that, actually, power consumption is important. Because in the portable devices, power consumption determines how big the device is.

So they went to Cupertino and said, listen, we came out with this microprocessor. Yes, it’s not as fast as a Pentium, but it consumes a lot less power. And Intel said, get lost. If this was a unit somewhere else in United States, wherever, they said, well, they told us to get lost, so we get lost. No, no, no, Israelis, they don’t have these issues. They say, no, this is a really good idea. They keep coming back, coming back, and coming back. And it took them a lot of repetition coming back for Intel to wake up to see, you know, to see that side of the argument.

My point is, the Israeli culture is very direct. They don’t take no for an answer. If you, and there are many reasons for that, but one of it is because everybody has to serve in the army. And by the way, it’s a very small country and everybody has to serve in the army, so you’re going to have on this table, you’re going to have a general, a corporal, and a lieutenant, and just a normal soldier, and whoever is the closest to the coffee pot is that that person is going to get up and get the coffee.

They don’t really respect the authority the way in other cultures. Like in India, for instance, because of its history, the respect for authority is much different. And therefore, when your boss tells you no, say, okay, he’s my boss. So for that reason, this creates a lot of, like when you are doing R&D, you need to have this frank communication. This is one of the examples.

We were looking at, I’m very passionate about this because we were looking at defense companies in Israel. And there’s Elbit, we don’t own the stock, but we talked to Elbit’s management, which is one of the Israeli defense companies, and they talked about how they are so much better at actually designing, designing and building defense products, because, think about it, most of the workforce actually served in the military.

They actually know how to use the product. I mean, they know how it’s gonna be used. Israel, because it’s a small country, they have different constraints. So like America, they spend $900 billion in defense, and when we design a missile, you’re going to have a feedback from three or four different departments, and missile is going to have a checklist of 150 items.

It has to be able to work on equator, in tundra, in North Pole, it has to have air conditioning, and therefore it’s gonna take us 15 years to design a missile. By the way, that is a true number. It takes us 15 years to design a missile. Think about how much technology changes in that 15 years, right?

So in year seven, we realized, wow, technology has changed, we have to go back and redesign it, right? It took Israel four years to design Iron Dome, because they said we have to design it very fast because we have a lot of friends around us who wish us peace and therefore we need to have very good missiles. So therefore it took us four years to design Iron Dome system. And it was, and so that there is a, I’ll give you one more example, sorry, you ask a question that I have a lot of thoughts about.

Israel created this protection against missiles that attack tanks. In other words, there is a little radar that sits on the side of a tank, and if the missile is flying towards the tank, it basically uses a shotgun like technology to shut them down. Okay, so it works incredibly well.

And they use the cheapest radar, the cheapest shotgun, whatever the technology is, and it works extremely well. They sold the technologies to Germany, and Germany tried to improve it. And they’ve been working with it for the last six or eight years, and it’s still not working. And so the Leopard tanks that went to Ukraine have the German technology that’s not working. To answer your question, I would love to own something in Israel, and I hopefully may get an opportunity.

Question 18: How do I quiet pressures from the market? 

So I think the number one, I have the luxury of owning the individual stocks so I kind of try not to spend much time thinking about the market, but think about individual businesses. I have an ability when the market is expensive, and there are few opportunities to own a lot of cash. I have the right clients who are comfortable with me doing that. And I’m extremely aware that if I allow the market to waltz into my office, and if I look at the portfolio all the time, the market will get the worst of me, and my frequency will calibrate to the frequency of the market.

So I rarely have my TV on, or if I do, it usually plays classical music or something. A lot of times I go throughout the day forgetting the market is open. I think you are, so to answer your question, I think you have to actively work on this, knowing if you do nothing, you’re gonna lose, meaning the market will, the market is gonna, you need to work in the environment you’re in, and if you do nothing, the market will waltz into your life, and it’s gonna be running your life.

I’ll give you one more example. So I have my office where I have computer screens, and then I have another room, I call it my reading. Why it’s called a reading cave? Because it’s a very low temperature, because I like cold, yeah, I like cold temperature, and there is no computer, just a chair, and a blanket, and headphones, and an iPad that’s connected to the internet, but doesn’t have Slack or another text message, et cetera, and I just sit there and read. And so I’m kind of forcing myself to be disconnected from the market.

The key here is it’s an active process. I’m wired as badly as everybody else. If I do nothing, I’ll become a victim. So you have to be proactively doing these things.

Question 19: What opportunities are you most excited by? 

So if it was any other human being right now, all you would have heard that, I wrote about Apple, the stock quadrupled, and let’s have a dance. I’m not gonna go there.

What I’m gonna do is I’m gonna tell you, that was it, like Apple was a mistake for me. And I’ll tell you why, when we bought Apple originally in 2012, it was a hated stock, and my insight was that it’s not a hardware company, it’s a hardware and software company, it has an ecosystem, therefore there was a lot of recurrence revenues, et cetera. So we bought the stock, it has done well, and then it got to whatever that number was, and then it got more expensive and we sold it.

And then it doubled and doubled again. So I missed out on Apple. And Apple actually was, this is a case where you can be right on the stock and wrong on the stock at the same time. We were right on the stock, and I would say the first double was a mistake, the second double wasn’t. And the first double was a mistake because, and this is where Buffett got it right, and I got it wrong. Buffett saw in Apple a brand, a very powerful brand, and when you have a brand, you can raise prices. In our models, we were assuming what every consumer electronic company did to that point, declining prices.

Apple did the unthinkable and they basically doubled, didn’t double, but maybe raised the prices for iPhone by 30, 50% or whatever the number is, which means the earnings ended up being a lot higher. That’s why the first part, this is where I got it wrong. I mean, this is where I got it wrong. But I think then the valuation of Apple today, I think it’s silly, so I’m not worried about the, I don’t feel bad about the double, the second double, because I think it’s just valuation went from fair value to overvalued.

So, but that’s not, your question was about something else. Where do I see other opportunities on the horizon? I mean, obviously the obvious answer is AI, but I have no, like, that’s too easy.

Let me answer it my way. I think I would argue that anything resource-related, natural gas, oil, even coal. I think this is where a lot of opportunities, this is extremely non-sexy. But I think this is where a lot of opportunities are because guess what? Five years from now, we’re going to be using more natural gas, not less. And by the way, if you’re looking for a way to play AI, I think it’s natural gas. Because guess what? Those data centers run on electricity, and they consume a lot of it. So I would argue that we’re going to be consuming a lot more of that. You know, in nuclear, same thing.

When it comes to AI, everybody, it’s kind of, has been discovered by everybody, it’s kind of boring because everything is priced for perfection. And I would argue that this non-sexy sector, so that’s where probably we’re, just because nobody wants to look at that, right?

Who wants to own a coal company, right? Or who wants to own a natural gas company?

Thank you so much for coming.