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The Press Box is here to catch you up on the latest media stories hosted by Brian Curtis and David Shoemaker.
These guys have the Insight on the biggest stories.
You care about.
Check out the Press Box on Spotify or wherever you get your podcasts.
Today’s podcast begins with a bit of an economic mystery.
0:16
Since the pandemic started.
I know a lot of people who bought Peloton bikes a lot.
A lot of people who bought Peloton bikes from my very narrow Vantage Point Peloton was like the biggest winner of the entire pandemic but last week the company announced that its business had basically collapsed by collapsed.
0:35
I mean new bike, purchases have declined.
So much for Peloton in the last year that they’re going to pause manufacturing them.
Early for several weeks, just to hope that demand catches up.
So I’m reading this news and I check in on the stop Peloton stock.
0:51
I see is down 80 percent 80 percent from its 2020.
Hi, this darling stock of the pandemic is now lower than it was before covid started.
I’m like, how is this even possible?
So I go snooping around in the company’s quarterly earnings statements and it is prudent in their bike sales are down.
1:12
Down marketing and administration costs have more than doubled.
This company is a mess and suddenly my question for Peloton, changes on a dime from this company is a stallion.
What the hell is going on to this company is a disaster.
What took so long?
1:29
If you zoom away from Palatine, you see a similar dynamic in the entire stock market tech stocks are in the toilet this year, Bitcoin and other cryptocurrencies are doing even worse Disney Netflix, Twitter, Amazon Gap starts.
Bugs.
All these companies are at or near their 52-week low.
1:47
So something important it and very interesting is happening in stocks right now.
But the thing about stocks is they go up, they go down, they go up again.
And if you try to fit a narrative to every tiny little gyration, you are going to look like a big idiot.
In fact, when I started recording, this very podcast.
The Dow was down several hundred points, and I checked that two hours later.
2:06
It’s up several hundred points.
The stock market is like a Chiefs bills, playoff game, except it happens every day.
If you Like the score, just wait 13 seconds.
So to guide us responsibly through the Mayhem of the 2022 stock market.
I’ve brought back Morgan, housel the best-selling author of the psychology of money, which is probably for my money.
2:26
The best investment book I’ve ever read.
Morgan is also a partner at the VC firm collaborative fund.
We talk the history of Market Corrections.
The dance between number crunching, and storytelling and investing.
And most importantly, we Deep dive into what’s happening in tech, stocks and pandemic stocks.
2:43
Have tanked in the last year.
I’m Derek Thompson.
This is plain English.
3:11
Morgan, welcome back to the podcast that me Derek happy to be here.
So Morgan as we are speaking Monday afternoon.
The Dow is down 2,000 points.
The last five days.
Crypto has crashed trillion dollars, wiped out there, NASDAQ, which Is the tech-heavy index is down more than any January since 2008 during the Great Recession.
3:31
I don’t want to do Just So Stories here where you and I pretend to have like a perfect understanding of everything that’s happening and why it’s happening.
But give me your read here.
What are we looking at?
We’d one thing I the first thing I’d bring up whenever we have something like this is to point out how normal this is.
3:47
Particularly if you’re looking at like the S&P 500, if you go back and look at 100 Years of data, you’ll see that the S&P 500 has a 10% decline.
Like we’re experiencing right now on average every 11 months for the last century.
Now.
I think it’s hard for people to remember that in real time because the stock market tends to go up.
4:04
So we have this knee-jerk reaction of like I’m invested in the stock market, it goes up.
I make money and then when it goes down, it’s like what, what is this?
They feels broken.
It feels like something is wrong.
If you look at the data, you’re like this is completely normal.
And this is, you know, the worst stock market crash that we’ve had since the last one that nobody remembers is basically how to fix a point on if you were to look at At the NASDAQ or a bunch of individual tech companies, some of which have gone down 50% in the last like, two months, or even more than that that I think is a little bit something different.
4:35
That’s not a normal declined.
Although you could say there is this thing when investing that I really like this, you’re a stick where however, fast your investment goes up.
That’s the half-life for how quite fast.
It can go down.
Like if you double your money, in three months, you should expect it to be able to lose half.
4:55
If its value in three months, so if you look at some of these companies, like upstart and whatnot, that have declined sometimes 80% in the last four months really, the other context of that is their stock prices are back to where they were like last July and then in that context, it’s like, yeah, that’s really not that big a deal.
5:12
So, really quickly before I move on, if Corrections like this, aren’t unusual.
What is unusual?
What are we seeking?
That might be a little bit out of the norm.
That’s like, huh?
That might be something to pay a little bit of attention.
Because that is not the sort of thing that happens every 11 months.
5:27
I think, when you see a 10 percent decline in the S&P 500, that’s that’s pretty normal.
When you see a company go down 80% on virtually, no news.
That’s, that’s, that’s not normal.
The flip side of this.
As I just mentioned, though, is a company that goes up 400% in six months on no news.
5:45
That’s not normal either.
I mean, it was only two months ago that rivi and the truck company had which had at the Times the electrical truck company electrically.
And the truck looks amazing, by the way, it looks so cool.
But at the time when it went public, they had never sold a single truck.
6:01
They did not have any revenue and they were worth twice as much as Ford there with 150 billion dollars for a company that has never sold a product before.
So you look at things like that and you’re like, that’s that’s what’s not normal.
A lot of times.
It’s not the crash.
That’s abnormal.
It’s the bull market that preceded.
6:17
It, that is crazy.
And that, that context can be kind of hard to piece together as well.
There’s another side of this Derek.
I’m sure you’re gonna have some And as well, which is that we are very likely heading into a period where 0% interest rates and the Bazooka a free money from the FED is coming to an end and that has a big impact on valuations and business cycles and the amount of cash sloshing throughout the economy that we’ve enjoyed for the last not just couple of years, but really for the last decade or more than may be coming to an end.
6:48
Even perfectly anticipated, my next question.
So I want to point out before we jump into potential explanations for this broader.
Decline that a lot of times the financial news media will report on stock volatility with like the fools gold of an explanation rather than an actual causal explanation.
7:06
Like the get these headlines stocks plummet as Putin mol Invasion stocks fall as American ice skater slips in Beijing.
Like it sounds like you’re describing a causal relationship, but what’s really happening here, is the headline writer whose on deadline is putting together two things that happened roughly at the same time side.
7:25
Side, even if they’re not related at all.
That said, I do want to throw out some observations and I repeat sweet listeners.
These are not complete and total explanations just observations that.
I think are developments worth.
Keeping our eye on as we’re.
Looking at a rather dramatic, correction in a lot of stock prices.
7:46
You mentioned Morgan, the fed the FED in interest rates.
The FED is talked about raising interest rates rolling back quantitative easing that overall is going to raise Raise the price of money for companies and could pull down Equity values even further than they’ve already been pulled down.
8:01
The second thing to point out before, I throw it back to you, is that Stocks by some measures are pretty rich.
There’s this thing called the Schiller price-to-earnings ratio.
That’s the ratio between the stock price and the profits of that company.
The historical average is about 17 to 20 in December the PE Ratio touched 39.
8:23
So stocks aren’t Cheap and the FED is starting to shift the Titanic and change its strategy when it comes to interest rates and quantitative.
Easing.
So throwing back to you Morgan.
Tell me a little bit about how we should think about the interplay between monetary policy.
The Federal Reserve and stock prices.
8:41
Here’s one way to think about this, every investment valuation, whether it’s a stock or a bond, or a house, whatever it might be is the result of taking a number from today, and multiplying it by a story about tomorrow.
That’s what all valuations are.
And when Interest rates are zero as they’ve been for the last couple of years.
8:58
The the number from today doesn’t really matter that much because there’s no, there’s no competition for your money from bonds or savings accounts that might earn.
You a good return.
You’re not going to earn any money in those Investments.
So, whatever a stock company is producing today and profits, their earnings today, doesn’t really matter that much.
9:18
There’s no competition for your money this year.
So, then in that situation, you multiply it by a story about tomorrow.
And In today’s social media economy, that story about tomorrow can get crazy.
People can make up these ridiculous stories about the potential of a company and then, so that’s when like the whole value of a company in an era where interest rates are zero is heavily heavily driven by narratives that’s always the case, but when interest rates are low, it’s that’s all that’s driving the market virtually and this is why for the last couple years you have companies with no profits.
9:51
No potential profits, no real viable business model.
Well, that could be worth tens of billions of dollars in an era.
If you go back to, let’s say the mid-1990s, when interest rates were, you know, five to seven percent that by and large did not happen in an area where interest rates looked more reasonable.
10:08
And what example, I give of this is Michael Dell found a Dell computer.
Of course, he posted one time the profit and loss statement from Dell computer when he was still running up from his dorm.
He was still a dorm room company and when he was running this brand new startup out of his dorm, he had, Percent net profit margins.
10:26
Like it was a very healthy profitable company because that’s what a real business was back during the day today.
If you come to a venture capitalist and you say I have a start-up and it has 20% profit margins there.
Like get out of here.
We want nothing to do with you.
I’d like the idea of free cash flow and profits just hasn’t really been a thing that you needed to do for the last five or ten years and in an era where interest rates are rising that flips.
10:51
And I think you’re probably going to be heading towards an era where profitable companies that produce real profits with cash, flows become more favorable to companies that just have a story that they could sell.
That was so appealing during the mass five years.
I think this is a lovely way to think about it.
That stock prices are a dance between today’s reality and tomorrow’s story and that there are periods of History where the story just wins.
11:14
Like, why was rhydian and electric truck company that has barely sold a single car worth more than Ford at the end of last year.
Ford a company that sells one.
Eight million cars a year.
It’s not because of reality.
It’s because of a story that people thought that rivi in like Tesla would surf.
11:33
This wave of electrified vehicles that would engulf the world.
And you can say, oh, that’s because of speculation, created by the fed.
Or, oh, that’s people betting on Meme stocks because of the Biden stimulus, checks, and maybe they’re right, or maybe stock prices are just a dance between reality and story and we’re just in a moment where the weight is being passed from one dancer.
11:51
The other and reality is taking the lead.
It reminds me of Matlab.
Seeing writer at Bloomberg, who coined the term boredom Market hypothesis and Matt’s boredom Market.
Hypothesis is basically that during the pandemic, there was nothing to do outside.
12:06
So a lot of people stayed inside posted to Reddit and traded stocks all day because it was fun like, betting on stories about the world is Fun making money on stories is fun Morgan.
Are you a fan of the boredom Market hypothesis?
I think it makes sense.
The other side of this that that’s that’s that’s actually it’s kind of Function of one that was talking about is there’s just so much momentum and inertia in markets.
12:29
And if something is gone up that catches people’s attention and something cause goes down that catches people’s attention and like people are buying because it went up and it went up because people were buying that can snowball on itself for months or years and then read the process reverses again, so, I think it’s really just like a big extrapolation of what happened in the previous six months.
12:50
That’s that tends to be all of investing history.
It’s just extrapolating, what?
Just happened into the indefinite.
In it.
Future one other side of us, Derek, I think is easy to overlook, is the difference between a good product and a good business, and they can be very different.
And there are a lot of companies out there that are amazing products that people love with, with millions of customers, happy loyal customers, but they’re not good businesses and that’s important because those companies can gain a big narrative following of like, oh, this company is a future.
13:20
I love this company, but but it really if you dig into the numbers on the income statement, the balance They’re not good businesses.
And therefore in a world where you’re heading into higher interest rates when profits become more important.
Those are the narratives that can unwind really quickly.
One good example of this is Netflix, which is like the darling of America, everyone.
13:38
You I use it, you use it.
I spent the weekend binging Ozark, this weekend, like Netflix is not only like, is it a good practice?
Like one of the best products has been investing invented in the last 20 years, but Netflix is not a very good business.
They don’t produce very much free cash flow.
They burn a lot of calories.
13:54
Cash through lots of their annual periods.
They cost a tremendous amount of money to buy and produce all this content.
So from a business standpoint a financial standpoint.
It’s not a great business at all.
Hoover, is another one of like, amazing product that people love whether it was before covid, and you are taking rides to the airport or breathe, but it’s a terrible business.
14:12
It just doesn’t produce a lot of profits.
So those are the kind of companies in there.
So many of them, they can get Unwound really quickly and it surprises.
A lot of people because you’re like, how can Netflix be down?
20%, everyone has net.
Except Netflix is so amazing.
Yes, but that’s actually kind of a shitty business.
14:29
That’s that, that I think plays into why this happens in a way that surprises people.
I take your point and this isn’t to say, you’re not saying, Netflix and Uber are worthless.
You’re saying these are companies whose businesses are historically, valued at X.
And right now their stock price is 1.5 x.
14:47
So that would suggest that at some point narrative and reality will converge and the stock price will fall to X, but the thing, I guess I do.
Not quite understand yet, and maybe it’s just that nobody understands this why?
Now, like why is the market having this moment in January 2020 to rather than sometime last year.
15:06
Is there a single trigger that you can see that Sparks the sell-off?
Or is it more complicated than that?
This is one of the ultimate questions in in the history of Economics is like, for example, why did why did the stock market crash on October 29th?
15:22
1929.
Why didn’t happen a year?
For two years before.
We’re almost 100 years past that.
And historians economists, still, there’s nothing in there.
If you go back to the newspapers in September and October of 1929.
There’s nothing in there.
There’s no trigger the same thing.
15:37
Like, why did the why did the the.com bubble collapse in March of 2000?
Nothing happened in March of 2000.
I think, I think these things just reach reach a point where, you know, one person starts selling and that creates a little bit of momentum, and it just kind of Fester’s on itself from there.
15:54
So, when the market, It is that fragile when valuations are that high?
It doesn’t take a little bit of selling to snowball into something catastrophic, but I don’t think in any of the history of these things.
There’s a real trigger.
Now, sometimes like when Lehman Brothers, went bankrupt in 2000 that was a trigger, but there’s, you know, most of the time, there is no explanation in the newspaper that in the even in hindsight.
16:16
You can go back and say this is the event that caused it.
Yeah.
It’s sort of like a natural Calamity.
It’s like it’s like earthquakes or tornadoes like someone can explain.
Ain the nature of weather patterns, or the nature of tectonic plates that makes earthquakes inevitable, or next makes tornadoes more likely to happen in Kansas than in whatever New York City but figuring out exactly where and when the tornado is going to strike or where and when that earthquake is going to happen.
16:42
The timing is much harder to pinpoint than the general Universe of causes.
Is that it.
Does that make sense to say, holy make sense.
The example I use is Alan Greenspan, who was the former chairman of the Federal Reserve he first used.
Is the phrase irrational, exuberance to describe the stock market in 1996 and he was right.
17:00
The stock market was irrationally, exuberant in 1996.
And it’s urged for another four years.
Like the big bulb market in the 90s had like not even really begun when he accurately defined it as irrationally exuberant.
So there’s a big disconnect between like, identifying a market bubble and identifying that something that’s crazy and knowing when that’s going to turn and I think that’s always the case.
17:21
You could have also said that the US housing market was a bubble in 2003.
And you were right.
Like in 2003, it was a bubble and it.
And, but in hindsight like prices, had not even begun.
Their big surge, upwards, yet that, it kept going for another 45 years.
Speaking of narrative, followings, got to talk about crypto.
17:39
My general philosophy of crypto prices.
Is that crypto is basically like the entire stock market except more.
So like stocks, go up stocks go down.
This is Troy stocks.
Crypto goes up a thousand percent, then it crashes and it goes up.
Two thousand percent.
Like crypto is just stocks on steroids.
17:55
What are you seeing right now in the crypto Market, you know, the the best the best analogy for what Bitcoin is is digital gold.
That’s the analogy.
That makes the most sense.
Okay.
So let’s run with that.
That’s true.
Let’s look at the history of gold.
18:10
Then gold is a constant history of going up 5 or 10 x and then crashing and sitting there for 10 years and then flatlining for another 10 years.
That’s the whole history of what gold is.
And I think it makes sense to, if you think about what we spoke about a few minutes ago of all.
That means is a number x a narrative.
18:27
Well for both Bitcoin and gold, there’s really no numbers per say there’s no earnings.
There’s no cash flow.
So therefore all that’s really driving.
It is the narrative and the nerve can be ridiculously profitable and powerful, and that’s why Bitcoin is, you know, worth a trillion dollars.
That’s a, it’s a really powerful appealing narrative to millions of people, but it’s a narrative.
18:46
It’s not really anchored by anything.
That is unemotional.
It’s purely an emotional play and that’s why back to like the the half-life of Investments if You can have an investment that triples in one year.
You can have an investment that declines 50 or 75 percent in one year, that’s completely normal.
19:02
And rational what you should expect and that’s been the history of Bitcoin as well.
Bitcoin has had several 50 to 75 percent declines during its roughly decade life and I would expect that going forward just as been the case with gold for hundreds of years.
So that it’s really not that surprising to see this particularly also in Bitcoin where there is a lot of Leverage in the system.
19:23
A lot of people borrow.
A tremendous amount of money, huge sums of money to purchase their crypto Investments.
That’s when these unwinds these kind of flushes where you get these declines just kind of fester on themselves and maybe it would have been reasonable for a 10% decline.
But you have so much leverage and people who are forced to sell, that it turns into it.
19:41
Twenty Thirty forty percent decline more.
Get, let me push back just a little bit on your interpretation of Bitcoin.
And it’s very possible that I’m wrong or that were saying the exact same thing, but people have been saying for years that Bitcoin was a currency and my response to that.
19:57
As I’m sure your response will be, as well, was no.
Of course.
It’s not like a good currency needs relatively stable, value to encourage transactions.
Like that’s what money is for Bitcoins value.
Goes up, nine hundred percent at fault 50%, It goes to 300%, like, if the dollar did this, you would go to your local coffee shop.
20:14
Depending on the day, a lot, a would-be $10.50 or $30.
Like, that’s not a good currency.
So then the explanation was no, it’s not a currency, its digital gold, but digital.
Gold seems to me to be a hedge against inflation or other stock volatility.
20:30
A good hedge maintains its value in the face of declining stock indices.
But Bitcoin right now is down like 40% in the last three months by more than the the tech index.
So I’m not saying Bitcoin is good or bad for your portfolio.
Whatever.
20:46
I’m just saying this thing is behaving for now, more like a tech stock on steroids, then it seems to As to me to be behaving then like digital gold, tell me where that interpretation is wrong to you all wrong.
21:01
I think, I think you’re definitely, right, but I would go back to saying, that’s kind of the history of gold as well.
Gold.
If you, if you look at the data is a terrible inflation hedge.
Now, what’s true, is that over a very long period of time, gold tends to match the Consumer Price Index.
21:17
If you look over 100 Years, you’ll get any reasonable period of like time frame 5 or 10 years.
It’s a terrible inflation hedge.
We’d go.
Peaked in the early 1980s and then decline for the next 18 years during those 18 years from let’s say 80 to to year 2000.
21:33
There was a lot of inflation.
There was big inflation like cumulatively.
I don’t know, a hundred, two hundred percent and gold declined during that period so it tends to be like rather than just neatly tracking the CPI index over time.
It’s these huge booms and busts.
That’s what gold is done.
And if you do think of Bitcoin as digital go, that’s out what I would expect to do as well.
21:52
It’s never going to be the case that it’s just like a perfect.
T’ hedge in every time period that’s never going to exist.
So, you’re saying even physical gold isn’t very good gold.
If gold is understood as an inflation hedge, like even physical gold doesn’t do that.
That’s right.
That’s kind of funny.
22:08
So this is obviously the the fall of of Bitcoin and a lot of other cryptocurrencies, pretty bad news for people that are heavily invested in crypto that have been holding Bitcoin as a religious practice or investing in ether Doge or whatever else.
What about the broader economy?
22:24
The crypto draw.
Giant drawdown is erased about trillion dollars in wealth.
Do you expect that’s going to have any spillover effects in the broader economy.
Yeah.
I think it probably will now we’re also heading into a period.
Have been in a period when there was so much money in the system and such a broken supply chain, that we are facing real inflation for the first time in 40 years.
22:48
So the the fact that some of that fuzziness, some of that that that fizziness is being pulled out of the economy and kind of unwinding is probably not the end of the world.
Particularly if you contextualize it by saying, look, the crypto Market is back to where it was last July.
23:03
Like this is not this is not the Great Depression yet.
At least this is like, this is like the the drawdown that we’re looking at have to be contextualized to say, look.
This is not the end of the world.
But yeah, I would I would definitely think that particularly in high-end markets of selling like high-end vacations.
23:20
One not for people that were going out and splurging because they made so much money in the stock market.
An orphan crypto, I mean, like the extreme example of this are like the number of Lamborghinis that were purchased when crypto is surging.
So like yeah, there there is some pull back from that but they’re still just so much money sloshing around the economy, probably too much that it would not worry me right now relative to if it would say in 2010 or 2009.
23:43
That was an area where it’s like.
When you lose that much wealth and economy is already weak to begin with.
There’s already such a whole demand hole in the economy.
That’s when it can really Fest around itself.
I have another question for you about the intersection between covid and crypto that right now is a little bit of an amorphous idea in my head, but maybe you can help me tease it out.
24:03
It seems to be really deeply ironic that a lot of the investors in crypto in the US are members of Gen Y and gen Z, which are Generations that have grown up at a time when stocks have basically year-over-year gone up and up and up and up.
24:24
And up while the world around the stock market has been a cluster shit.
You had 9/11, you had the Great Recession you had covid just one effing thing.
24:41
After another it’s like generation crisis in the physical world and generations stock, boom in the financial world, and I wonder whether there’s something about that.
That intersection that might also explain why so many hopes and dreams have been funneled into the stock market among people in this generation.
25:06
Mean one thing that I’ve always thought is interesting is just how kind of Our Generation Derek my and your generation kind of mid to older.
Millennials will View covid and the Nuance here is that I graduated college in 2008.
I think you are you’re probably similar give or take a few years.
Maybe is that right?
25:23
I don’t want to. 2008 great professors Nate right on the dot and so when you and I graduated college, we walk into the job market during the peak of the Great Recession, the worst jobs Market in a generation.
It was a terrible time to be looking for a job.
That was our opening experience into the quote-unquote real world.
25:41
And then there is a step in recovery from 2010 to 2020.
And then things fell apart again in 2020.
And that’s all that our generation has known and we are not kids anymore.
I’m 30.
I’m weird.
We’re approaching 40.
If I’ve kids.
It’s like we’re not kids and all we’ve known for our entire working.
25:59
Life is collapse to tepid recovery to collapse to maybe now, like crazy bubble in the last two years.
I think I think when that’s all you’ve known, it can leave a scar on you and I’ll tell you why.
Because after 2008 Our Generation could say this is bad, but this is a once in a century experience.
26:17
This is not something that’s going to happen.
Again.
We just got unlucky by facing this, this once-in-a-century storm, but then whenever Falls apart again in 2020, then it’s easy to say this is just how the world works every five or ten years, the world breaks, and everything that I thought I knew was stable vanishes and a heartbeat.
26:37
And that’s how the world works and I think that can leave a scar.
It’s like fool me once shame on, you fool me twice.
Shame on me.
I think people have been fooled twice by the economy.
Now Our Generations been full twice in a way that will stick around.
Maybe it’s somewhat analogous to like the generation that lived through the Great Depression.
26:54
And then as soon as that was over, they got thrust in the World War, Two, that Generations.
Been so well, documented went the rest of their lives.
Pretty tepid and pretty conservative, didn’t invest a lot in stock market.
Didn’t go into a lot of debt.
They were left thinking, maybe rationally that every five or ten years, the world’s breaks.
27:11
And so that’s, that’s like the biggest mindset shift that I’ve probably seen with covid.
I think we’ll have a long enduring impact on how our generation, who is in the next couple of years.
Going to come into the most managerial Authority, the Wealth etcetera.
Etc is fundamentally scarred and just in terms of how to think about risk.
27:32
I want to close by talking about some specific pandemic, stocks, that are really, really mysterious to me.
So Peloton at home fitness.
Zoom video teleconferencing, Lululemon.
Athleisure, Robin Hood online, trading.
All of these stocks went to the moon sometime last year and all of them are crashing right now.
27:52
If one year ago, you invested 1000 dollars into zoom and a thousand dollars in the Peloton, you would have lost 600 and 800 dollars there respectively.
And I’m really interested in.
This turnover like the end of the age of pandemics docks in the beginning of something else.
So to do a little bit of a deep dive here, let’s start with pellets on down 80%, 80% over the last year company, just announced layoffs.
28:14
They’re going to pause manufacturing of its bikes for several months.
It really is just a total across the board.
Mess Morgan, what happened to Peloton?
I mean, I would answer that question by asking a rhetorical question, which is why was an unprofitable exercise.
28:32
Bike Company, worth 50 billion dollars to begin with.
That’s the question that needs to be answered if you want to defy.
If you wanted describe, like why did it crash?
You have to describe why it was worth that to begin with, and I don’t think anyone could justify that in any reasonable financial terms.
It was kind of caught up in the hype.
28:47
A lot of these companies to back to Great products, great businesses.
If you are an unprofitable company and your business surges, you have like tons of demand.
That could actually be like a bad that just means you lose more money in the future.
If you’re losing money on every bike you sell.
And your business goes up 10 x, you just lost more money.
29:05
So for a lot of these businesses, like that big surgeon to man wasn’t necessarily a good thing and particularly for a company like Peloton that extrapolated that demand and way over produced their bikes, and now they’re caught, they have to shut down their manufacturing because they have warehouses filled with these bikes that nobody wants.
Like, that’s a really tough spot to be in, Zoom.
29:23
I think is maybe something similar.
It’s an amazing product, you and I are using it right now as we speak, but it’s okay business.
It’s not the best business in the world and Once you get caught up in the hype, I think there was really like a lot of hype in 2020.
The zoom was going to fundamentally change the entire world and in some ways it has, but it probably just got way extended to where it was.
29:43
And now, it’s kind of reverting to back where it should be given the realities of his business.
Maybe some of these business, I would say, I would take that back.
Not, maybe it’s almost, it’s almost certain that a lot of these businesses, five years from now.
We will look back on as incredible Bargains and maybe you and I will be on a podcast.
29:58
Five years.
Now be like, I can’t believe we didn’t by zoom in. 20:22.
What were we thinking?
That has a long history and investing as well, you know after the.com bust you could have bought Amazon it like $2 a share and that was after it failed. 90% and people were like Amazon as a joke.
30:14
It’s never going to work.
There’s a long history of that too.
It’s just always hard to tell preemptively what that’s going to be.
Yes, so I own a Peloton bike.
My wife is obsessed with Peloton.
I like Peloton just fine.
I was telling her about this episode and I said, did you know that Peloton stock is down like 80% in the last 12 months?
30:32
So she said, I don’t understand, they’ve sold a lot more bikes.
Right?
And I said, yeah, they sold a ton more bikes.
They had a huge 2020, but it’s kind of like if you’re a cookie store and you sell 100 cookies, and then you buy do 4000 cookies, and then you only sell 50.
30:48
Cookies.
Like your cookie sales are going down as your expenses, are going up and that is the worst possible place for a growth stock.
A growth company to be.
So I looked straight into the 10-q, the, in the Second quarter or first quarter earnings report from Peloton.
31:05
Just want to read you some numbers here because they really are pretty striking.
These, you’re comparing the three months ending September 2020.
The three months, ending, September, 20 21.
So subscription revenue is up.
That means people who bought bikes are reliably paying for that big iPad and streaming the workouts.
But revenue from workout equipment declined between 2020 and 2021.
31:25
So they’re selling fewer and fewer bikes, that’s bad, but actually gets worse because the operating expenses sales.
Marketing Administration, Rd, all of that more than doubled.
And so you are getting to this, the unit economics, right?
That is how efficient are you at selling one unit of your thing?
31:43
Whether that thing is a service or a product, the unit economics, here are going to hell in a handbasket.
And in a way, I think that another gloss we could put over the last say, five years.
Is that the last five years were like the death of unit economics?
32:01
No one can.
Hard.
No one cared.
How efficiently you were making your product as long as the product had story value narrative value.
It was cool.
People talked about it.
They tick talked about it.
It appeared in HBO shows.
Your product was an IT product, but now it looks like a lot of investors are turning toward unit economics and asking, okay, we get that.
32:24
Your bike is cool.
We get that there.
The instructors are many celebrities.
What does the profit look like?
What does the quarterly earnings report?
Look like and if investors are asking those questions, it means they’re not listening to the story.
They’re not listing their narrative.
They’re just looking at the numbers.
32:41
It makes me wonder though.
You know, how much of this is just Peloton being and not terrible business.
But okay, business that pulled forward.
So much revenue, so much business into 2020.
They just got totally discombobulated and are now in a position where they can’t match supply and demand.
32:59
Yeah, lots of it.
I also think there’s a thing of it’s like You are an unprofitable business during a period.
When the market has a lot of hype, they’ll be like hey your unprofitable now, but don’t worry in another year or two.
You’re going to be super profitable.
Like don’t worry about it.
Facebook at one point was unprofitable.
33:14
But then they became this Prophet Juggernaut, like don’t worry about it.
But after a year or two goes on and the unit economics, keep getting worse, then it’s like, okay, maybe not massive.
Growth is not your ticket to Big profits.
Maybe you’re just an unprofitable business.
Maybe it’s just really hard to make exercise bikes, and to Them profitably and the more time that goes on, the more, the reality starts to show that like, hey, this is just actually isn’t a good business.
33:39
That’s when particularly, if your stock has been priced for high price for Perfection.
And then the reality of like this is a great business sets in.
That’s when you can have these 80% unwinds, that’s there’s a long history of that too.
There are companies that are great products and amazing businesses, Apple, and Google in particular of like amazing profits would be ridiculous lie.
33:57
Good businesses, but it’s few and far between there’s a lot of bad products.
There’s a lot of bad.
Businesses with are a lot of great products that are bad businesses.
The combination of good product.
Good business is very, very rare.
And that’s why when you have it, they are these like, one in a million companies like Apple and Google.
34:14
So how does Palace how to become a good business?
Raise prices lower costs?
That’s this isn’t, this isn’t that the ticket to it?
I haven’t I have a third door.
I’m doing number three.
And this is a door that a lot of, I think, a lot of their investors want to open, just get lucky and get bought.
34:32
You know, I don’t know who buys them.
I don’t know if that makes the most sense for Apple.
Maybe Apple says, you know what?
We could burn 10 billion dollars in R&D, developing a workout bike that can, you know, sync to your Apple.
Watch that can sync to your phone that can help you manage your own EKGs and health, or we could just buy Peloton in a fire sale.
34:52
I could see Nike, maybe getting a little bit interested in moving from you know, Shoes and software into a hardware business, that people are obsessed with.
And people who have Peloton.
It seems somewhat obsessed with it.
I could even see like, maybe Amazon thinking.
35:08
Hey, we can get you on the bike that’s mindshare that’s time in front of essentially a jumbo iPad.
We can sell people certain Goods on Amazon after they finish their rides and hook them into the prime ecosystem.
Do you see any possibility that pellet sound could be acquired by any of those?
35:26
Companies or a similar.
Juggernaut sure, that makes a lot of sense.
Yeah.
I mean, of course, I could happen.
The question is what price, but here’s another point that I want to bring up here.
If you look at public companies, not private startups, public companies over a long period of time, 30 or 40 years on average, 40 percent of them will go out of business.
35:48
Not not be acquired, not bought by another company.
Forty percent of them, will go bankrupt affect the basically.
That’s what’s happened over the Last 40 years, that’s what happens in these 40 year periods, and that’s during a period when the economy was really strong and the market was really strong.
So the the hard Truth for all businesses.
36:07
My friend, Brent be short, says running any businesses, like eating glass will being punched in the face like business is hard.
It’s just ruthlessly competitive.
And a lot of times forty percent of the time.
It just doesn’t work out and that’s for public companies that have already reached some level of maturity.
36:23
So that’s not, that’s not a comment on Peloton in particular.
Or any of these companies but it’s completely inevitable. 100% guarantee that in five or ten years.
A lot of these Darlings that are household names will no longer exist and that’s doesn’t break any historic precedent.
36:39
That’s always how this has worked.
It also makes you kind of realize why Jim businesses work.
Like exercise equipment is really effing expensive and the best way to essentially mortgage, it is to sell a bunch of subscriptions to a Diversity of exercise equipment, that people use what that a large number of people use over and over.
37:01
And over again, that is a gem business, but buying individual exercise equipment.
For individual, houses means you have to sell the equipment at a loss.
You hope to make it up over the subscription Revenue where people are, you know, watching these workout videos week after week after week, but you might not make it.
37:17
You might just run out of money before you can make up the money that you’re losing on the exercise equipment.
So, in a funny way, the unbundling of the The gym, business helps to prove why the gym business has worked like you, you need to share these costs over a large number of people.
37:35
Very last point.
I want to bring up with you.
This is the one year anniversary of the GameStop Bonanza.
If you miss the GameStop Bonanza of 2021, basically a bunch of dudes on Reddit help to bid up the price of GameStop, a ho-hum gaming retailer in part to crush a hedge fund that had shorted the stock.
37:56
And it sparked, this interest in so-called meme, stocks, stocks that people were plowing their money into basically, to steal, your Morgan, your explanation because of the story that they were basically throwing their money.
38:12
After the most fun story of the moment, and it’s not lost on me that we’re talking about the Revenge of value.
One year after maybe the height of meme stock Madness.
Maybe just tell me.
Me a little bit about what you see, as as the legacy of GameStop, and how it intersects with this moment, where a lot of these exact kind of companies, or crashing back down to earth.
38:38
If you, and I were in an MBA finance class right now, they would teach us that stocks are valued by discounting their future, cash flows back to today, adjusted for the marginal tax rate.
That’s what that’s in theory.
How a stock is valued GameStop is just the perfect example of just like, no, that’s not how it works in the real world.
38:56
That’s Works on the chalkboard and then spreadsheet in the real world.
It’s totally different in the real world.
It’s whatever people want to believe for whatever the reason they want to believe it is.
What happens.
Now, if you are a GameStop shareholder, that was amazing, you are like a beneficiary of that, huge, ridiculous surge, but that can go the other way and people can believe whatever they want in the other direction.
39:18
And maybe some of these kind of these stocks are ridiculously cheap right now, but that’s that’s the other side of investing in a market where It is run wild and that’s the reality of it.
So GameStop was a perfect example of how crazy things can get detached from financials from the spreadsheets and the chalkboards.
39:36
And that could be fun.
If you’re part of it.
It also goes in the other direction and it can hurt like hell.
When you are on the other side of it.
You are a fantastic Svengali for people who are dealing with the daily.
Gyrations at the stock market.
What is your final piece of advice for investors on this roller coaster?
39:56
Esther today, I would just point out that every past market crash looks like an opportunity and every current and future market crash looks like a risk.
And if you understand the irony between that, I think that is a huge portion of successful investing over time is acknowledging and kind of laughing at that.
40:15
Irony.
That every time we look at a past market crash.
Like I wish I could have bought in March of 2020.
What was I thinking?
But now, if I were to say, hey Derek the market might crash 30% next month.
That’s not a forecast for just hypothetically.
It’s like, oh, that’s terrible.
I should get out.
I should sell everything and like that, that disconnect is why investing is so hard.
40:35
And I think just wrapping your head around, that can go a long way to improving your investing returns as, that’s lovely.
I think you’re right.
I think we’re, we are the media included linear thinkers in a Trampoline World, you know, whenever stocks are going down your mind, just says, you’re by just extends that Arrow all the way down to zero.
40:55
This is the The stock market when stocks are going up.
It’s like, nothing can stop me and you look back over time.
You look at the S&P, you look at the Dow over the last 10, 15, 30 years.
It’s, it’s a lot of bungees.
It’s a lot of trampolines and every single time.
41:13
You see the dip.
There are 30 40 stocks.
You can think, man.
If I had bought at that bottom, like, you know, how great wiper for your look now, but these things are harder time, the the tectonic plate, Metaphor returns to me again, that that we understand the variables, but figuring out that the timing of the earthquakes is is hard to do Morgan.
41:33
Thank you so much for coming back and we’ll see you soon.
Again.
Derek planning this.
With Derek Thompson is produced by Devon.
Manzi.
Thank you so much for listening this show.
If you like us, follow us on Spotify rate and review.
On Apple podcast.
We will be back with our second episode this week.
41:50
On Friday.
We will see you then.