Break the Playbook with David Einhorn

Welcome, David Einhorn to our new series, Break the Playbook, where we invite investors like you with a more unconventional thinking for a candid conversation with us. Well, thanks for having me.

with us. Well, thanks for having me.

It should be exciting.

Talk me through the hat.

The hat. The hat.

Well, this is what I wear when when I play in a poker tournament.

And the hat is every time I play, I play for a different charity that we already support.

And hat I'm wearing right now is the Citizens and Scholars hat, which I wore when I just played in the the super high limit, super high roller event of the World Series finished third and won $1,700,000 for them.

Third. Yes.

You're a bit of an underachiever.

I thought third was great.

The hands, are they some kind of voodoo, psychological warfare?

They are my children's hands.

Okay.

They are not.

So you decide what that is.

They're not psychological warfare.

I think in poker, it's a game of hands and you want to bring your best hands.

So I'm wearing my children's hands.

And as I've noticed, they've gotten older and they've made me updated sweatshirts, the hands have gotten bigger.

So now I want to have more big hands when I play poker.

Why not sunglasses?

Well, I'm getting older and I like to be able to see everything.

I want to be very candid, given it's the theme of the interview.

When I left my house this morning, I told my daughter, who's eight years old.

I said, I'm going to interview my good friend David Einhorn.

And she said, Mommy, who is David Einhorn?

And I said, David Einhorn is an investor who spots things before other people spot things.

How did I do?

I don't know.

I think what I do is pretty simple.

I don't think I'm spotting things before.

I think I'm seeing the same things and maybe just interpreting them different.

Let's stick with poker.

Many of our viewers, and I think investors, want to hear you talk a little bit about that.

People like drawing relationships between poker and investing, for better or worse.

So what I'm curious to hear is when you sit down at a poker table with people that you have not played with before, what are some tells that you can spot right away?

You know, when you sit down, the first thing you start doing is you start trying to identify patterns and you try to figure out how people are playing certain hands, how frequently they're playing.

And as the information gets revealed, when you sit down, you don't know anything.

But after playing with them in these poker tournaments, we'll often play 8 or 10 hours a day with the same people by by the middle of it, you should have a pretty good idea what everybody is up to.

Do you, do you pick things quickly, or do you need those 4 or 5, six, seven hours to start identifying patterns?

Well, you begin trying to identify patterns in the first two minutes.

Tell me.

But because, you know, somebody plays the first three hands, the person, you know, somebody folds the first 20 hands, you're beginning to already figure out a pattern, and you'll begin to start seeing this sort of stuff in half an hour.

But the thing is, is maybe they just got bad cards for 20 hands in a row, and they were planning to play lots of hands.

So you have to adjust your thinking as new information kind of comes.

Are you self-aware of how other players are trying to identify you?

Like who are you when you sit down to them?

Yes. It's important.

It's it's just as important in trying to figure out what everybody else is doing, to have a self-awareness as to how other people are perceiving you.

Sticking with maybe not poker, but decision making.

So if I were to follow you for a month, sit next to you and follow every trading decision you make, what would surprise me most?

Well, I think you'd be surprised how few decisions I actually make.

Like, my ratio between trading decisions and naps is much higher towards naps, I think, than people would expect.

You have a very good sense of humor.

It's quite special.

If we took away your sense of humor, would you be a worse investor?

Yeah probably.

I mean, I think sense of humor is a lot about just seeing things and interpreting them a little bit different and creating maybe a bit of a element of surprise.

A slightly different question, but staying with the style, let's say your data checks out, but your gut feeling says no.

How do you resolve that?

By making the more conservative decision.

And does it work in reverse where your gut feeling says yes, but the data you have says no?

Again, I'll choose the more conservative decision, whichever that is. If I'm if I'm conflicted.

that is. If I'm if I'm conflicted.

If you're down 30% on a position, your thesis in theory has not changed.

What do you do? You buy more?

I tend not to.

My instinct is, is if we've lost 30% in something, we must be wrong about it.

So we tend to redo the work.

Think about it some more.

Usually the choice is deciding that we actually did find something wrong and to exit.

Or maybe to keep it.

Once in a while we will add to it and say, all right, we really did the work here and we really do think we're right and our timing just wasn't perfect and we should size this up more.

But I don't want to be in a habit of just presuming that the previous work was right.

And now it's the stock price that it's changed.

Because if you do that, you're going to create a portfolio where your biggest ideas are the things where you're the most wrong in.

And I don't want to do that.

Is there a personality trait that you have that has lost you the most money over time?

And equally, is there a personality trait you have that you think has made you the most money over time?

I think the the trait of just being very even keeled.

That's the answer to which one?

Actually both.

That being very even keeled helps make money when things aren't going our way, when things are emotional and the rest of it.

I tend to not get too excited when things are going well.

I tend to not get to upset when things are going badly, and kind of keeps me a clear head.

And I think that that over time has helped.

On the other side of that, is sometimes things are really going wrong, and maybe I'm a little too complacent and too patient and too willing to let the noise settle when I should be taking action.

So it probably sometimes it helps and sometimes it hurts.

Do you score yourself only on the quality of the outcome?

I assume you do because your money manager.

So the scorecard matters.

But do you also grade yourself on the quality of the decision regardless of the outcome?

Yeah, we do both.

We do both.

We don't grade every decision, you know, shortly thereafter.

But we get to the year end and we look at what's happened in the portfolio and we look at the results that we've had.

And I work with the analysts because compensation comes in.

And so there's questions of who did what.

And so yeah then you're looking both at, you know, ultimately we're in a scoreboard business.

And so we do want to have good results.

But we also do want to look at the quality of the decisions and in calculating compensation and stuff like that.

It's a it's a subjective thing.

We look at it objectively, the numbers and then we subjectively try to see, well, you know what actually happened here.

I would be very curious to hear about a decision where you thought it was a very good decision, but the outcome was not a very good outcome.

I mean, I think one of our worst decisions, in terms of outcome, was selling Apple stock.

Apple was a very large holding for us for a good number of years.

And in fact, it was probably like the most profitable investment that we've ever had at Greenlight.

I spent a lot of time owning Apple.

It was at six times earnings, net of the cash, eight times earnings, net of the cash, while it was growing 15, 20, 25, 30% and stuff like that and thinking, look at this, we have, I think, the best company in the world.

And it's trading at, you know, a half or a third of the market multiple or something like this.

And thinking what a wonderful thing this was.

And we held it for a number of years, and eventually it began to re-rate.

And we also saw the business slowing down at the same time it was rerating.

And so when it got to 15 or 16 times earnings, we sold our Apple.

We probably sold it right about the same time that Warren Buffett was buying it.

So maybe we sold the stock to him for all I know.

I mean, he didn't actually show up and say, you're selling to me now, but that may have been the timing seems to make sense.

And we know how awesome that has worked out for him.

And so Apple was a was a tremendous investment for us.

And we were probably more right than we realized.

It really was maybe one of the best companies in the world.

And it probably did deserve a consumer brand multiple, like I always argued, I just didn't have the patience to stick around to, you know, to watch that materialize.

So I started our interview by complimenting you.

And it's true, you have a very sensible way of framing things and quite unconventional, but good, solid way of making decisions.

What is something you've had to unlearn?

A behavior or a way of thinking about investing that you've changed over the years?

You know, there have been a couple of major changes, one of which is, you know, we started out just as a long, short value fund, and it was pretty much all equities.

And our view was to focus on micro analysis and just ignore the big picture.

And we said if we buy stuff that's cheap enough and misunderstood enough, and we sell short stuff that's overvalued or has other problems, that goes along with the overvaluation, we should do fine over time.

And sometimes macro will be a tailwind and we'll just catch an extra boost.

And sometimes macro will go against us and it'll be a headwind and it'll just kind of all even out over time.

And then we ran into 2008, And then we ran into 2008, and I had to just completely redo that thinking, because we did a good job of understanding the first level of the financial crisis, by which I mean what was happening in the financial institutions.

And we were short all of them, everybody knows this, but we still lost 18%.

And it was because I didn't incorporate a macro view into, so what happens if we have this kind of financial distress within the financial institutions?

What does that mean for our industrials and commodity companies and the things we had in the long part of our book?

So even though we made a ton on our shorts, we lost even more on our longs.

We finished the year down 18%, and I just thought that was completely unacceptable considering we had such a front row seat and so much good insight into what the problems were.

So since then, we've had to change the portfolio construction, and I think about both the portfolio as a whole from a macro perspective.

And I think about each position also from from a macro position.

Not everything has to fit in.

But sometimes we'll say, all right, well, so let's see if we have some things that are hedging each other.

If there's a particular macro risk that we're concerned about like do we already own something that's very similar.

So it's not a big quantitative analysis.

We're not running like computer programs figuring out factor analysis and stuff like that.

But we are trying to just think qualitatively.

How is the portfolio position for different types of macro outcomes, and what type of macro outcome do we actually expect?

And one of the things that made me think that we could actually analyze the macro, was two years before the housing crisis, Stan Druckenmiller stood up at the Sohn conference and talked about exactly what was going to happen in the housing.

And I heard this speech and it made completely perfect sense to me in terms of what he was saying.

Like, I thought it was all true, but I didn't have any sense that it was mattered or could matter in any kind of a timely way that you could implement.

So like, if this housing thing was going to go on for another five years, ten years, like Stan could be like completely right.

But why miss out on all these great bottom up opportunities?

We were long homebuilders and stuff like this at the time.

And in hindsight, when I saw what happened, I said, you know, I really should have listened to him and I can try to do that.

Like, this is knowable.

It's like he wasn't doing voodoo.

He was looking at big picture things that were going on and drawing logical conclusions.

And so I've just tried to emulate that in my own way.

to emulate that in my own way.

How does that look like right now?

What's interesting in macro that has your attention at this very moment?

Well, there's a few things.

I think the the overwhelming long term issue in macro is the US fiscal situation, which I think is completely not yet under control.

The Treasury Secretary says we're going to get to 3% deficit to GDP.

That's his plan.

And I don't really see how he's going to do that.

So far, it doesn't seem like he's made a lot of progress.

And I think I think ultimately everyone agrees that this is not sustainable.

So then the question becomes how do you deal with that and when?

And we just taken a very long term view.

And so this is a long term problem.

It doesn't appear to be under control.

And so our largest long position in macro, unsurprisingly, is gold.

Many people may not know that.

But you actually own a home builder.

And I think you're the chairman or president of a home builder.

I'm the chairman of Green Brick Partners.

I think that gives you a very unique perspective on the economy and home building.

What can you tell us about that part of the economy and home builders in general that most of us may not appreciate?

You know, I think the big debate in homebuilding, at least among the home builder companies, is how to structure the balance sheet.

And there's been a huge trend towards what they call land-light.

So basically, you have all of this land that you're going to put houses on over three years, five years, eight years, whatever it is.

And if you can get that land off your balance sheet, it looks like you have fewer assets.

And so then you can earn a higher return on asset.

And what this has done is I think it's led to a lot of nonsensical economic decision making by our peers because they could borrow money, they've got good credit ratings, they could borrow money at 5% or something like that, maybe 6% unsecured, and hold all this land on their balance sheet and have control over the land and not be worried about the schedules and the rest of it.

And instead they go to land banks and they pay 10 to 15% interest, and they put a 10 or 15% down payment down, and they have a takedown schedule.

And if it takes longer than expected, there's escalators involved.

So it's probably costing them, I don't know, 6 to 8% extra per year to hide this land off of their balance sheet.

And if you have an average holding period of, I don't know, two years, when something is in the land bank that's, you know, that's 15%.

And if 15% cost increase on on the land, which is 25% of your sales price, you know, that's 3-4% of margin that's being sacrificed by inefficiently financing to try to create this notion for, for Wall Street.

And and as things slow down, it gets worse because these things have escalators.

So if something you thought you were going to take in two years takes you four years because there's less demand and your community didn't build out as fast, then effectively there's penalties.

So it gets worse and it adds sort of a pro cyclical component to the to the problem.

You don't like to structure yourself in a spot where things get worse for you when your business gets worse.

That's a that's a not an optimal way to finance yourself.

When I saw you the other day, we had a conversation about a broader conversation about housing, and you have some thoughts, broader thoughts about housing and the economy and behavioral shifts by Americans when it comes to buying a home.

Can you tell us a little bit about that?

Well, it just seems like the younger generation is somewhat less interested in owning a house.

There's the view that I was brought up with that I think my parents experienced and and maybe even my grandparents experienced - you buy a house sometime in your late 20s, you raise a family there, you get a mortgage, you pay the mortgage every month.

By the time you're ready to retire, the mortgage is paid off.

You own the house free and clear, you have equity.

You can use that to fund your retirement.

In the meantime, there's maybe some appreciation in the in the value.

And so this is a savings vehicle in addition to a living vehicle.

And I think the younger generation doesn't doesn't view it that way.

They look at the monthly payment for the mortgage, assuming they have one, and they compare it to the rental payment.

And it's like, well, why? Why pay more?

Why waste money on a mortgage?

And it's just it's just a change, I think, in philosophy.

And it's leading probably to more demand for rentals and less demand for for ownership.

That will continue, you think?

I mean, does that does that equation you just described, does it make sense still?

Is it a behavioral thing or is it a mathematics thing?

No, the math still works.

Like if you were 28 and you did this, when you're 58, you'll have paid off your 30 year mortgage and you'll own your property, you know, free and clear.

So it's totally a behavioral kind of thing.

But, you know, I sense the younger generation is just more impatient.

They'd rather, you know, speculate in crypto or speculate in stocks or speculate on sporting events and try to build wealth by guessing those things correctly.

And some of them will have some success with that, and others will have less success.

Buying a house and paying off your mortgage over 30 years, you know, that requires long term patience and discipline and that might be in short supply.

Selfishly, I want to talk a little bit about options and derivatives.

So what sends you to the derivatives market?

Well, we do derivatives when when we think of the derivatives is mispriced or we think the correlation is wrong or we think the tails are unusually wide, or we really want to just limit risk in something.

So there's different reasons to to use derivatives.

Can you think of maybe a trade over the past couple of years in the options market that you're quite, quite proud of?

Sure.

Since 2008 or 2009, we've had a core holding in gold, and it's varied, and sometimes we've sized it up and sometimes we've sized it down.

But a couple of years ago, it really felt like when we seized the, the Russian assets that that there was going to be a de-dollarization and there was going to maybe be a move away from dollars toward gold.

And gold, really, we thought it was going to have its time, and we already had a pretty large position.

And so we risked a few dollars and bought out of the money digital options at $0.05, at $0.10, at $0.20.

And they have just they worked out spectacularly.

They added minimally to our overall sort of exposure.

And then when they paid off, I mean, if you get paid off on a, on a five cent option at par, or even if we sold them at 85 when it got to that, that's that's really wonderful.

And so we had a nice supplement to gold and then, and then this year when the gold market kind of topped itself out, the options, once they become in the money, they're not at 100, but they're above where the strike is.

All of a sudden they become asymmetric the other way.

Like you can now only make the last $0.05 or $0.10, but you can lose $0.90 on the way down.

And so it provided a really good opportunity for us to just say, look, we've gotten most of what we have here.

We can just take, take a profit.

That timing actually worked out pretty nicely.

Let's pivot to AI because we can't have an interview without talking about AI.

Well it's all anybody wants to talk about, so.

That's right. There you go.

And I think the holy grail of AI stock picking might be picking something in AI that David Einhorn likes.

I think this Venn diagram of a stock that's not expensive and passes the David Einhorn test, but is an AI is the perfect stock. Does it exist?

Do you invest in anything AI related?

Yeah.

Well, we're not long stuff that people would think of directly as the AI plays.

Those are very picked over, and I find that to be very controversial.

And I understand that they're going up or they're usually going up.

Last month, maybe they didn't go up, but maybe next month they'll go up.

I don't really know.

And in my view, they're not cheap and everyone's paying attention to them.

We go to these dinners, you host these dinners, and 85% of the conversation is about the same 15 companies.

I'm so glad that we've moved on to memory, because two years ago, all we were talking about was liquid cooling and stuff like this.

And it gets boring after after a while and everybody's looking at the at the same kinds of things.

For me, the question is who's eventually going to be the beneficiary of AI?

And I think this is an open question that I don't think enough people are paying yet enough attention to.

It's generally presumed that the providers of the AI, the big tech companies, whether it's the labs or whether it's the hyperscalers, are going to be the long term winners of AI.

And the thing is, is AI is going to create a lot of value.

And the question is, is who's going to capture that value?

Is it going to be the the providers of AI, or is it going to be the users of AI?

Like who gets that surplus?

And I'm coming to the view that it's more likely that it's going to be the users of AI that are going to get most of the value, because I don't see the competitive moats being created on the provider side that lead to sort of long term winner take all or monopolistic profits right?

If you think about like network effects, which is what made some of the some of the Mag 7 into their phenomenal things. Right?

If no one else is on Facebook, Facebook is kind of useless.

But if everybody's on Facebook, it's an incredible business with a tremendous competitive moat.

That's a that's called a network effect.

But with AI, you don't really have that.

Your AI experience is your experience, and my experience is my experience.

And I'm not benefiting much from from your experience.

And so you don't really have this network effect.

And then the question that are you having like like scale economies like from software, right.

Where, you know, Microsoft makes a version of Office and they only have to program at one time and they can sell lots and lots of copies at the same price.

And there's very, very little variable costs to Microsoft.

So once you get over your your initial low sunk cost, you a very high incremental margin.

And here, it's not so clear.

You know, this isn't a capital light business.

This is obviously it's a capital intensive business, right.

Otherwise everybody wouldn't be spending trillions of dollars on it.

So obviously this needs a lot of capital.

And so it's not an IP business the same way that we've seen in traditional software-based businesses.

So it's unclear to me that you're going to have the type of "software is eating the world" type of economics that we saw with the great software companies over the last 10 or 15 years.

That doesn't mean it won't evolve that way, and it won't eventually turn into something like that, or we won't eventually be able to monetize the users time on the system through advertising or click through sales and stuff like that.

But so far it really hasn't shown up.

And to me, it's sort of just unclear.

Who's benefiting?

Well, if I'm a corporation and you can convince me to use AI and I can save a lot of costs, the question is, is how much am I going to pay you for that?

And if you are the single provider, you have the software.

I'm going to buy your software solution to my problem that is going to save it.

Then you can get a reasonable percentage of those profits because you're the only provider.

So we'll split them.

You know, maybe I'll keep half and you'll keep half or something like that.

But if there's ten AI providers that can all provide me more or less the same thing, and I can switch between them at a relatively low cost that I anytime I want to, well, I don't have to share that much of the profits.

You're going to price it marginal cost plus a little bit, as you should.

And I'm going to get most of the benefit.

And so I think there's a decent shot that the surplus from AI goes to the users of AI, the consumers who are using it for whatever they're using it for.

The corporations who are using it for the productivity opportunity.

And so where we have AI within our portfolio is in places that we want to own anyway, because we like the investment stories, but we think that they can be long term beneficiaries from the productivity that will come out of AI.

So one example would be like Centene, which which is a huge, huge provider of insurance, health insurance.

There's a tremendous amount of data that has to go back and forth, and papers and documentation and all that.

As more and more of that stuff can get automated, presumably they can take costs of their system, and AI could be a good provider of the types of solutions to do things that right now they have humans doing.

And if that happens, they'll get cost savings.

And if it doesn't happen, I like the stock anyway because we own it for other reasons.

Sticking with AI.

A very animated debate - is AI inflationary or deflationary?

Where do you come out on that?

Well, initially it's probably on the margin inflationary, because you have all of these companies that are trying to develop all of this AI infrastructure, however you want to define it.

And they're in a huge hurry, and they seem to have unlimited capital and money is no object.

And so they're paying whatever it takes in order to get things through quicker.

So the price of memory can go up by multiples and they're still buyers.

Or the price of electricians can go up by substantial percentages.

And there are buyers of electricians as well.

So when you're just chasing very aggressively limited supply and you want it first or faster as opposed to at the, you know, lowest price, and you're and you're not price sensitive, you're more of a price taker than a price maker because you're in such a hurry, it drives up the prices of all of those components.

And on the margin, it's probably inflationary.

Over a longer period of time, if AI turns out to be successful, as people expect it to be, it should be an enormous productivity enhancer.

And so that should bring down the costs of providing goods and services.

And so that ultimately should lower prices.

We should have a nice productivity boost, which is fundamentally deflationary.

Is the inflationary impulse of AI a big enough input to rates, taking it back to macro?

Is it a big enough input to rates right now to matter?

And are rates reflecting that?

I doubt it.

You know if the AI spending is what do they say $1 trillion a year or something like that.

That's like less than 3% of the economy.

And so if 3% of the economy is experiencing, I don't know, 10% price increases, cost increases even seem to the extent that's even captured, because they'll probably say a lot of this stuff isn't even a consumer good anyway, like the electrician labor, they're not going to capture that expenses inflation, even though it's obviously an inflation of something.

You know, the impact on CPI is going to be, I think, pretty small.

What matters for rates, do you think over the next 3 to 6 months what's what's going to move rates the most?

Well let's just talk about the the Fed chair and what he's doing because I think it's really very interesting.

He he hasn't outlined his clear policy like this is how I'm going to frame it.

This is how I'm going to decide what I'm going to do.

If this happens here, I'm going to do that there.

And here's why I'm doing all of these things.

And what he said instead is a top down view, which is I'm not going to tolerate inflation above 2%.

And to me, this kind of has a couple of impacts.

First of all, it gives him maximum flexibility because he hasn't said how he's going to do it.

He can decide later or he can decide in real time.

As events change, he's not boxed in to something and saying, well, here's how I'm going to approach it, and everybody knows what I'm going to do.

And then if I change my mind, I have to explain why I changed my mind.

He hasn't said what he's going to do, which gives him the flexibility to adjust in real time.

Now, this is really irritating a lot of journalists, economists and stuff like that because they want to be in on it.

They want to be on the inside and they want to know what the playbook is.

And, well, what if the playbook and I'm just speculating because nobody knows what the playbook is.

What if the playbook is, I want to bring rates down by creating uncertainty and rates and drive up the term premium of debt, not the not the inflation assumption, but the real interest rate?

And that's exactly what's happening.

And what if he his goal is to just create this uncertainty, drive the real interest rate up, have the real interest rate therefore be higher, have it slow down on the margin some capital investment, maybe on the margin hurt the stock market a little bit, yake maybe some of the froth out of some of the wealth effect that might be doing, slow the economy somewhat and use that to, you know, fight the inflation

without ever having to change rates.

You know, it reminds me a little bit of what Draghi did.

And in Europe a number of years ago when the European peripheral bonds were spreading out, he didn't say how he was going to fix it.

He said were I'm going to do whatever it takes.

I'm going to do whatever it takes to bring these spreads in.

And people perceive that to be whatever it is that they wanted to do.

But they gave him credibility and believed it.

And the market just brought the spreads in.

So he wound up succeeding in doing whatever it takes to achieve his ends without actually doing anything.

And that very well might be what what Chairman Warsh is doing.

Reflexive.

Sure.

Let them let the market do it for it.

And if he doesn't like what is happening, he can always react to it at that point.

Next up, we're going to get a little bit more existential, existential and philosophical.

Why don't we start with predictions?

I love predictions, especially long term predictions because nobody is going to check us.

Well, you know, predictions are very difficult, especially when it comes to the future.

So I've heard.

What is a somewhat contrarian prediction you have for the next five years?

Let's have some fun with it.

I would say a out of box view would be, I think that gold will outperform the Nasdaq over the next 3 to 5 years, and perhaps by a lot.

Tell us more.

Well, I think the case for gold is pretty clear.

I think that we're going through a de-dollarization.

I'm not getting into the trading dynamic of how it spiked in January or February and came back down and this and that, but in the secular case, for gold is just very, very clear.

The monetary and fiscal policies of the largest countries in the world, particularly the fiscal policies, are out of control.

And there's a competing regime that would like the dollar to be less central to world trade.

And foreigners have reason to have less confidence in the dollar.

Seizing the Russian reserves was a was a blow.

And it said, look, I mean, your reserves are supposed to be there when you need them, and if they're not there for you, well, then what kind of reserves are they?

And I think a lot of the world has taken the message that we can politicize, you know, our government bonds and stuff like this and sees things so that moves the world towards gold.

And it and the Chinese seem to be taking a lead in this.

And so I just think that the secular case for, for gold as an important part of the world monetary system continues to grow.

And if we have a crisis, I'm not saying we will in the next 3 to 5 years, but if we do, then you're really going to want to have have gold.

Are you surprised that gold didn't do as well during the Iran conflict?

No, I don't I didn't find it one way or the other.

Gold had sort of a parabolic blow off in January or February.

And whenever anything does like that, where it ends, nobody knows.

But then once it does, it usually takes a while to digest.

It won't surprise me if gold doesn't do anything for another year or a year and a half.

This is a multi year long term view.

Five years.

And this is a this is a long term projection or whatnot.

And I would say within five years it will have absorbed whatever speculative spike happened peeking out this year in January.

And it should resume, Okay on the gold piece, but you said gold is going to outperform Nasdaq.

And my question is why do you want to make your life hard and pick Nasdaq instead of just saying S&P.

Well I think over an intermediate period of time the Nasdaq has a has a problem.

These very large companies, and the S&P has has the same problem, just maybe to a smaller extent.

But these large leading companies, the great businesses that have carried this for the last decade or so, are going through an enormous transition.

They're transitioning from being capital light monopolistic businesses to highly capital intense businesses.

You know, right now there's a big bubble in in corporate profit within the tech sector.

And it's driving all of the returns and the excitement.

And you hear I mean, I'm sure Morgan Stanley's probably calculated how fast earnings growth was this quarter and and so forth.

But if you think about how that's being constructed I mean, some people have talked about yeah, they've got the mark to market gains and the private investments like take that out.

But like think about another big source of profits, which is the capital spending boom that's happening in AI where say, memory prices have gone up, you know, say five times or something like this.

So if memory prices have gone up five times, it means that the memory provider is selling to the hyperscalers at five times the price.

Now, no new economic value is being created.

If they sold it at the previous price, just as much memory would be going back and forth, just as much compute capacity would be created or however you want to look at it.

The increased price just reflects a transfer from one corporation to another.

So the hyperscalers is paying to the memory provider a higher price.

Now that higher price shows up as profit today for the memory provider and it's booking, I don't know, 85, 90% margins on stuff that traditionally is a commodity.

And that can happen when there's a real shortage of any type of a commodity.

And that flows right on through to Nasdaq earnings or S&P earnings or whatever you want to talk about.

The other side of that, though, you'd think, well, one side's revenue should be the other side's expense, but it doesn't work that way.

They capitalize it.

And they say that this equipment, these chips, whatnot, they're going to last for some number of years.

The expense today, the day I buy them is zero.

And I'm going to depreciate them over a long period of time.

And I saw one calculation that said, well, why don't you if we do this whole big AI build out of however many trillions per year and the hyperscalers do whatever they're going to do, you know, when you look at 2033, the depreciation expense is going to match the profits that they have on the existing business, and that even assumes the existing business continues to grow at the historical rate

between now and 2033, which if that holds true, and this buildout happens the way it does, and this depreciation shows up the way that it does, in order for those companies to have any profit in the future is going to have to all be from the incremental return that they get on their AI businesses.

And I think the pressure on that is very high, which means I think over an intermediate term, there's a decent chance that these stocks are going to have to de-rate as they shift from being capital light monopolistic businesses to capital heavy, competitive, intense businesses.

And they can make money in a period when there's a shortage of during the ramp up and the rest of it, but eventually there's going to be enough of it.

And in a capital intensive business, the capital chases the return.

It seems like there's plenty of capital trying to chase these returns.

Eventually, the excess returns get essentially competed away, and when that happens, I think the Nasdaq will probably derate.

Is there something that we will look back to 20 years from now and say, how did we let that happen?

You know, it's funny you asked that.

I was asked that at a dinner party.

It was a couple of years ago.

It's a dinner party kind of question.

The dinner party kind of question.

And, and everybody gave their answers.

And at this time, this conversation was going on.

Everyone was talking about like cloning humans and whether that was a good idea or not a good idea.

And it seemed to me like one of the risks we face is allowing science to just proceed at the speed of science, at the speed of science, because all the incentive is for science to just progress as fast as the scientific discovery.

Like the person who can figure out how to clone people wants the Nobel Prize, or he wants the scientific credit, and you look back 20 years from now, that might not be a great idea if we allow that to go unfettered.

You know, last year we were at your conference, then you had a dinner speaker.

He was an AI specialist, obviously a brilliant guy, maybe, maybe a genius. Right.

And he was explaining how AI was going to be such a enhancer that it was going to eliminate most of the jobs.

And his big concern was, how will people be left with any sense of purpose at all once this AI thing has played itself out fully?

And I sat there and thought to myself, well, if that's the end outcome that you're going to achieve, why is that worth pursuing?

Like, who wants to have a major investment where the outcome is, is humans lose their their sense of purpose.

And I can think about why that's in his interest to do it, because the people who are the proponents of this, running the big companies that are that are leading this area with views of changing society and major, major ways they stand to become billionaires or multi-billionaires or trillionaires or gosh knows what.

So they have a huge incentive to push this all along.

I just wonder if enough attention is being paid to maybe limiting this somewhat to make sure that society doesn't look back on it 20 or 25 years ago and say, well, why exactly did we do all of this?

What is your base case on how it will unfold?

I don't have the foggiest idea.

When you said I don't have the I thought you were going to say something else.

Well okay then that might be your next guess.

Is there a moment in recent history that you think that we have collectively misunderstood the consequences of an event or a situation?

Yeah, I think the way we handled the 2008, 2009 financial crisis, I think a lot of credit has been given to the policymakers for keeping everything in order and keep the trains on the tracks and keep things moving forward, but I think there was a very large consequence that we're paying since we're paying today, and I think we're going to be paying in the future,

which is I think it undermined the response to the crisis, undermined the American ethos that I think was so important in making America turn into what America has, has, has grown into be, which is the sense that when somebody is accomplished or successful, it's because they either had some natural ability

or they worked harder or or maybe even they had some luck.

But at some combination of, hey, if I were a little more talented, or if I'd worked a little bit harder, I could have done what that other person did.

And so America has been more tolerant than other societies of divisions that come from success, and that has promoted success in America.

And I think that what happened in the crisis, whether it was large corporations or financial institutions or individuals who got themselves overextended, essentially the people who weren't that smart, the people who made risky decisions that turned out not to be great decisions, didn't wind up living with the consequences of their decisions.

Right.

And they remained essentially in place.

And that left people who were more prudent, who didn't extend themselves, or corporations who were more prudent and didn't extend themselves into into danger.

Looking back and saying, look, that other guy is more successful than I am.

Not because he worked harder and not because he was more talented, but because he got bailed out.

And that has created, I think, a societal resentment.

And I think we see it up and down in the politics and in the and in the culture.

And I think it's a, it's a, it's a real it's a real cost that came from the policy decisions that were made at that point.

So I have one last question for you.

It's in 63 parts.

Back to school.

Back to school okay.

So we're going to play one of my favorite games, not poker.

We never play poker with you.

But my favorite game is fill in the blanks.

So I'm going to start a sentence and you're going to finish it.

And you are not going to get us in trouble.

Okay? Okay.

In the first five minutes of meeting someone, I can tell whether.

They're a good listener.

Gold will stop being my friend the day that.

The federal budget comes under control.

I would describe the US economy currently as.

Strong.

If I did not invest, I would spend my life.

Teaching.

I can see it.

If I had to teach a class that had nothing to do with investing, it would be.

Philosophy. Maybe.

Maybe ethics.

The difference between conviction and stubbornness is.

The outcome.

The important lesson I have learned from poker that applies outside of poker is.

Nothing.

Not everything has a lesson.

It's a game.

It's a game.

My children would say I am terrible at.

Remembering their friends names.

And they're right.

I sympathize.

I know someone is bluffing when.

They're uncomfortable.

So David, we have covered markets, poker, the economy, the distant future.

I think we've done enough damage for a day.

Thank goodness.

This has been marvelous.

It was great to have you.

You asked terrific questions. 63 of them.

Is that how many?

Thank you very much for being here.

My pleasure.