But in the case of Netflix, you've got to keep an open mind, and I did keep an open mind in this case, developed a much greater appreciation for the company. So when I covered-- I've short it from 80 to 200. I covered my short. It went to 300. I felt pretty smart. Then it felt eventually to 50 navigate to this website.
It fell 80% in a matter of about three months. And I want to kill myself, because everything I predicted in my short thesis came true. And I said, Whitney, you idiot. My learning was is don't get scared out of a short. You have conviction in it, right? But that actually wasn't the right learning, though, because Netflix was a massively better company than I thought. And the key pillars of my short thesis were there's no moat around the business, and sort of wacky management, and competitors are going to come in and eat their lunch. All of my pillars of my short thesis were wrong. I was right to cover, no matter what happened to the stock. But what it did is is by gaining appreciation of the company, I was ready to pounce when the stock collapsed. And so that's a great example. I wish I were that open-minded and learned and had great experiences like that more often. So that's a good case study. Anything to add, John? JOHN HEINS: I would say a lot of it is understand why you made a mistake. It may be that you didn't really make a mistake. The analysis was good, it was sound. And then something else happened that made it go wrong. And so you shouldn't necessarily-- if you understand why you made the mistake, you shouldn't necessarily just not do that exact same thing again next time. AUDIENCE: Sorry. I have two questions. The first one is your portfolio has about 15 stocks. It has a very small number, right? So how do you screen off the thousands of stocks? What are some of the top three or five factors you use as filters? That's number one. Number two is my general impression is that the market tend to ignore balance sheet items. So just like a lot of cash, investment, the P/E number, totally ignore balance sheet. What do you think? How do you think about that issue? WHITNEY TILSON: Well, I use a four-step-- I actually have it taped to the wall next to my desk. My four-step process is first, when I look at any new stock is circle of competence. Do I know something about this industry? Is it knowable? Is the future predictable here? It's almost like a yes or no thing. There is some gray area where maybe I don't know it very well, but I think I can do some research and get some. So circle of competence. Then it's do I like the company. And I look at financial characteristics, cash flows, return on equity, et cetera. So I evaluate the company. And by the way, I'll invest in sort of crummy companies if it's cheap enough. But ideally I'm looking for higher quality businesses that I can compound over time. Then I look at the industry, because a good company in a crummy industry, eh, is going to struggle. So it's a company and industry analysis, then management. And that's really important. Both, do they run the business well? Do they allocate capital well? And do they treat shareholders well? And here's the thing. I can find-- right now I can find hundreds of companies that I understand really well, great industry and company dynamics, wonderful management, treats shareholders great. So what's the problem? The stock's not cheap. Everybody else on earth can understand it and likes the company and the industry and the management, and therefore, the stock price reflects it.
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A 20 multiple or so, if you can continue to grow at 20% is a reasonable thing to assume. Might go up, might go down, but that's actually probably not unreasonable. And therefore, the stock just follows that same trajectory. And making 20% compounded over the next four years isn't spectacular, but it's pretty darn good. If I thought this stock was very likely, with low risk of downside, very likely to be a double in four years, I don't know all day, on a real high quality company where I think I can double my money in for years. So that's sort of what I'll be digging into because there are very few companies this size that can grow at that rate.
Already at $66 billion, already at a $300+ billion market cap that can double again from there in four years. That's pretty rare, but you guys have been doing it. So I certainly wouldn't bet against it. The question is is for a guy who only owns 15 stocks, is this one of the best 15 stocks in the universe I can find? That's the real question. So with that, do you want to come up, John. We're happy to take questions. AUDIENCE: I'd like to ask you how to learn from mistakes. So you said that Google was one of your mistakes, but you also said that it's like buying a lottery ticket. Like even if you win the lottery, it doesn't mean that it was a right decision to make. So I just want to ask if you make a wrong decision, do you learn from it, or do you say, OK, this is just how it happens? WHITNEY TILSON: Yeah. It's hard. In the investing world-- the analogy I would give you is is if you walk through a dynamite factory with an open torch, and you get through to the other side safely, was it a good idea? And the answer's of course not. It was an idiotic thing to do, and the fact that you didn't die was just good luck. But you should never do that again. So the investing world has-- you can learn a lot of false lessons in the investing world. You can totally screw up the analysis and make money, and by the way, can do good analysis and lose money, right? So learning from mistakes isn't as simple as simply saying, well, did I make money or lose money, because the goal of investing is to make high probability bets. But even the highest probability bets sometimes work against you. So the lessons-- but here, I do think one of things I've learned, like I was trained as a traditional value investor in the Warren Buffett kind of school. You don't look at tech stocks, et cetera, et cetera. And I was trained to think about the competitive moats of companies-- Coke's brand or Costco's low cost service or whatever. And what's happened in the last 10 years, the kind of companies that have been created that are almost like virtual companies, that can grow very rapidly to become global companies with enormously high profit margins without the need to invest incremental capital. So you guys can grow to countries all over the world and you don't have to manufacture stuff, you don't have to ship it, you have no inventory. These are light business models that create returns on capital at a rate and a scale and a scope, a global scope, and a speed that has never existed in history. And it really requires you to-- you can either just say-- you can be like Warren Buffett and just say I don't understand any of this and I'm just going to stay away. I'm not going to short it, not going to long it, go long it. I want to understand it because I plan to be investing for another 50 years. And so the real learning here, from getting my head handed to me, being short Netflix before finally appreciating it and making nine times my money. I flipped around. So in other words, my learning from getting killed on the short side is I went and did a lot more work. And losing millions of dollars focuses the mind. So losing millions of dollars forced me to rethink what I was missing here. Now sometimes you're not missing something. Sometimes a short runs against you and you're absolutely right and you've just got to be patient and your thesis will eventually play out, because being early and being wrong look the same, either long or short, right? I think, by the way, Google has made a number of very savvy acquisitions over the years. Somebody should be kicking themselves at Google. You didn't buy Netflix when it had a $3.2 billion market cap. It was a great business. It is a great business. So I'm actually sort of intrigued with Google.
The other thing, by the way, is it's such a big company with such a large market cap it's hard to make a lot of money buying things with multi-hundred billion market caps. I mean just size is sort of an anchor. I run a pretty small fund. I tend to look for smaller companies. But it's pretty interesting. I'm intrigued by Google. I'm going to do some more work on it. So let's just talk about last quarter's earnings. You guys have probably already seen this, but revenues grew 20%. Margins got squeezed. Expenses rose a little faster than revenues, which squeezed margins. Depending on whether you want to look at non-GAAP or GAAP earnings, earnings either went up or down a little bit. But the real questions to think about is can the company continue to grow at least sort of high teens, 20% rate, and will those margins at least stabilize? And when you think about Google, by the way, if Google were to separate itself out and spin off Google Fiber and the self-driving car stuff, like Google is-- a lot of those expenses are investing in things that are currently not generating any revenue. It's just straight out losses. Like actually, I think a reasonable way to think about Google would be to sort of take out all the money losing stuff where-- these pie in the sky things-- where Google actually has a pretty darn good track record of developing really valuable things down the road. And I might give Google credit for that and say, how much is their core business really earning, x-ing out all these expenses. And it might be quite a bit of expenses, and you might actually say Google's core business trading for 15 times earnings or something like a market multiple, and then you're getting a free call option on stuff that-- self-driving cars. If you guys nail that, that could change the world. That's a worldwide game changer, and you guys will own it. I'm not sure I'd give Microsoft much credit for that. They have a horrible track record of just pissing money away over the years, and projects and acquisitions that just create no value. And Microsoft shareholders are sort of rebelling. But you guys seem to be a lot better at that. So again, that would be the argument for owning Google stock is is that it's really not as expensive as it appears because they're expensing-- a lot of their expenses, their core business is actually even much more profitable than it appears. One of the world's greatest businesses. And then they're investing in a lot of new stuff where there's likelihood to pay off. So this gives you a sense-- by the way, again, what I sort of missed is is companies that have a lot of optionality to get into new businesses, make acquisitions, et cetera. So this was the three billion revenues when I was disparaging the company. And the core business grew 10x. But then stuff that didn't even exist back then doubled to 20x revenue growth. So this is cool, right? And if you think this kind of thing can continue, things that don't exist, don't generate a dollar of revenue today, like Google Fiber, self-driving cars or whatever, and that this kind of thing continues again, this stock may look really cheap today if you can develop some amazing stuff and start to monetize it. So I think this is the last slide and then we can do Q&A, which is if you make a case for the stock today is look at the pieces overall. You continue to grow your revenues 20% for the next four years, if your margins just stay flat, that means the earnings go up 20% a year. That's a double in four years. |
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