Random Ramblings May 2025
Walker thinks markets have recovered faster than the economic outlook has. After falling roughly 10% around “Liberation Day,” the Russell was about flat for the quarter and the S&P slightly positive by May 10, despite year-to-date declines of roughly 10% and 3%-4%, respectively. His concern is that two months of corporate “delay, delay, delay” on plants, stores, deals, and capital spending may already have damaged a fragile economy.
AI may reshuffle which investing skills are scarce rather than merely making every investor more productive. Walker’s Steph Curry analogy is that changing rules and technology can elevate players whose weaknesses once would have ended their careers while pushing yesterday’s useful archetypes “off the field.” AI might neutralize quantitative work, business-model analysis, and tasks such as comparing successive 10-Ks, leaving judgment-intensive abilities—especially reading management in real time—as the new differentiator.
Management meetings are structurally dangerous because investors are facing elite salespeople on radically unequal terms. A CEO who successfully sells medical products to time-starved plastic surgeons is “literally at the top of his field,” while a value investor who spends perhaps 95% of his time reading is “the JV team playing against a professional.” Walker increasingly wonders whether direct access provides enough incremental information to offset the excitement and narrative capture it creates.
The difference between a true endorsement and a carefully framed economic exchange can hide inside management’s wording. One company said major TikTok influencers promoted its product without being paid, which initially sounded like extraordinary organic virality. Another person pointed out that the influencers may instead have received perhaps $15,000 of product for free in return for testimonials that might otherwise cost $50,000—still potentially attractive, but not literally free.
Personal dislike of a product is evidence, but not necessarily a reason to reject the stock. Walker, who disclosed being long Seaport, disliked Meow Wolf immediately despite expecting to fit its target market; yet the Vegas venue was packed, and Seaport had secured the long-term lease it needed. He says he is sure the New York location will do well, though its opening was mentioned as 2027 “or something.” Celsius, Monster, alcohol, sugar, and even Boeing illustrate why “I don’t like it” cannot substitute for evidence about customer demand or investment economics.
Busted-biotech management teams often mistake gross clinical upside for shareholder value because they omit probability, time, and the overhead that preserves their jobs. A supposed $85 million opportunity—$100 million upon success less a $15 million trial—falls to $25 million after a 50% success rate and time discount, then becomes deeply value-destructive when two years of roughly $50 million annual overhead are included. Walker notes that more sophisticated teams may risk-adjust and count direct trial costs, but he says they still commonly ignore overhead. His incentive diagnosis is blunt: “Whose bread I eat, his song I sing”—management itself is the overhead, may own little stock, and disappears if the company returns its cash.
1. The market rebound masks an economy frozen by uncertainty
Speaking as of May 10, Walker notes that the “Liberation Day” shock took markets down roughly 10% almost instantly, yet they had recovered completely: the Russell was about flat for the quarter and the S&P slightly positive. Year to date, the S&P remained down 3%-4% and the Russell roughly 10%—ordinary-looking declines that obscure how violent the path was.
His unease comes from what companies have done during two months of tariff uncertainty. Essential decisions still happen, but upgrading a plant, opening a new store, or pursuing a business deal can wait; across management commentary he hears “delay, delay, delay.” That marginal withdrawal of spending is, in his framing, “how the economy goes into a recession.”
Walker concedes that bull markets “climb a wall of worry” and that one tariff-removing tweet could send stocks higher. But another tweet could reinstate reciprocal tariffs after the 90-day pause, while CEOs now know policy can reverse overnight. Meanwhile, speculative growth remains “priced for absolute perfection,” as cyclical stocks appear to price an even larger, more imminent recession than they did a year earlier.
2. AI could change which investors belong on the field
Walker uses Steph Curry to frame technological fit: without a three-point line or coaches willing to tolerate 10-plus attempts per game, Curry’s defining skill would have been diminished. Walker also thinks modern shoes and strength and mobility work helped his weak ankles support a long career; in flat Converse decades earlier, he imagines those ankles might have forced retirement after six years.
Evolution also creates losers: the “plodding big” once had a natural place near the basket but has largely been played out by spacing and three-point math. Walker’s investing question is therefore two-sided—could AI rescue an investor whose former blind spot was career-ending, while making another investor’s previously valuable process “superfluous”?
Comparing successive 10-Ks is his simple example: AI can identify a newly added risk factor that a human might miss. More speculatively, it could level quantitative and business-model analysis, amplifying investors who excel at shaking management’s hand, reading credibility, and judging whether near-term earnings will be good or bad—and whether that outcome is priced in. “I don’t know,” he stresses; this is a possibility, not a forecast.
3. Management access can become an unfair sales contest
Walker’s busted-biotech work has made him increasingly skeptical of management and of the boundary between a productive relationship and friendship. Watching companies with $100 million of cash choose to “light this on fire on one crazy project after another” has made him question how much confidence investors should place in direct rapport.
Consider a CEO selling medical products to plastic surgeons. Walker speculates that a plastic surgeon’s time might be worth $1,000-$2,000 an hour and that a surgery might generate $5,000-$10,000, while acknowledging that he does not know the exact figures. Those customers face constant pitches, high opportunity costs, and many product choices, so the CEO has succeeded at selling in what Walker calls “the hardest of hard modes.”
Put that CEO across from a value investor who spends perhaps 95% of his time reading 10-Ks, reading books, and thinking about businesses, and who averages roughly one management call a day. Walker expects the CEO to “eat you alive.” The investor is “the JV team playing against a professional” and may leave convinced this is the greatest business ever. Walker genuinely goes back and forth on whether management access beats simply reading filings, transcripts, and the evidence of management’s actions.
One parsing lesson came from a company claiming that major TikTok influencers used and promoted its product without receiving payment. Another person Walker spoke with suggested that the exchange may instead have involved roughly $15,000 of free product for an endorsement that might otherwise command $50,000 in cash. That can still signal real demand—the customers apparently want the product—but “we haven’t paid a single one of them” painted a materially rosier picture than the full transaction.
4. Disliking a product does not settle the stock thesis
Walker disclosed that he is long Seaport, which signed Meow Wolf to a long-term lease. Expecting to fit the target audience, he visited the Las Vegas location with three friends and “flat out did not like it.” Yet it was packed and, in his view, doing fantastic; he says he is sure the New York location will do well when it opens, perhaps in 2027. His disappointment did not change the lease economics.
The broader dilemma reverses Peter Lynch’s familiar product-to-stock intuition. Investors who dismissed Celsius or Monster because they disliked the products missed major winners, just as avoiding every sugar or alcohol company would exclude large investable categories. Walker lands tentatively on yes, one can own a company without loving its product: personal taste cannot overrule observed customer demand, though he understands why some investors require a product they personally believe in.
5. Biotech optionality disappears when the whole cost structure counts
Walker starts with what he presents as clinical base rates: he describes each transition—phase one to phase two or phase two to phase three—as roughly a 50% proposition, implying about 25% across both. Small companies nevertheless insist their science is different: “We’re 95. We’re 99.” His response is deliberately unsparing: “Get out of here. Come on. You’re 50%.”
Suppose a two-year trial costs $15 million and success creates $100 million of value. Management may call that $85 million of value, but Walker first risk-adjusts the payoff to $50 million, then discounts it to roughly $40 million for time, then subtracts the $15 million cost. The result is $25 million—not $85 million—though still attractive before considering the company around it.
Walker notes that more sophisticated teams may risk-adjust their trials to 80%-90% and may account for direct trial expenses. But he says some ignore those expenses, many assume that a successful product will be worth billions, and even the more sophisticated teams commonly pretend the overhead does not exist.
The omitted burden is overhead. A small, single-asset biotech might spend $20 million annually supporting R&D and another roughly $20 million on overall corporate overhead, including the CEO, board, accounting, and public-company costs; Walker rounds the total to $50 million per year. Across two years, that is $100 million beyond the $15 million trial cost, overwhelming the approximately $40 million present, risk-adjusted payoff.
Extend that logic to a company with $500 million of cash and a phase-one asset that might be worth $500 million if approved eight years later: probability, direct spending, and time can leave the product on its own barely profitable, while eight years of corporate overhead can be disastrous. Management is itself part of the overhead; with little stock ownership or other incentive to liquidate, returning the cash also eliminates its salaries and livelihoods. “Whose bread I eat, his song I sing.”
Full transcript
You're about to listen to the yet another value podcast. This is my monthly random ramblings for May 2025. In it, I'm going to talk about some thoughts on the overall market. We're going to talk about AI and investing and kind of use the sports analogy. We're going to talk about management teams' relationships with them a little bit more and how I'm worried that management teams are just so much better at selling, and value investors are kind of the JV team to their varsity team when we're talking to them and listening to them pitch a stock. We're going to talk about what happens when you don't like a company, a piece of a company, or their product but you think the stock is interesting. And we're going to talk about management teams and sunk costs with a little bit of an eye to my broken biotech pieces that I've been harping on for months. Really good podcast. I hope you enjoy it. We're going to hop to it in one second, but first, a word from our sponsors.
This podcast is brought to you by AlphaSense. Those of you who've been following the podcast and the blog know that I've been doing a lot of work recently on shareholder engagement, particularly at these busted biotechs. You know, I've done recently a podcast on Sage and Kos. You guys can go and look in the show notes. I've posted a lot on the blog about busted biotech, why this time is different, all of these companies that are trading at enormous discounts of cash. So given my focus on corporate governance and shareholder engagement, I worked with AlphaSense and they said, "Hey, let's do a free webinar. We'll get you in touch with the corporate governance experts. Let's do a free webinar and kind of bring some information and get you a little smart on it." So we did the free webinar. It was really excellent. It was with a professor at the University of Chicago who actually teaches corporate governance, has been on a hundred boards, including almost 20 public company boards. We had very differing views, but it was really interesting to get his insights as someone who's been there, his insights and kind of his differentiation from how I'm viewing corporate governance. So, you can go check out that webinar. I'll include a link in the show notes, or you can just go to alpha-sense.comyavp to get a free trial and kind of show them thank you for the support of this podcast.
All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it always means a lot if you can rate, subscribe, review wherever you're watching or listening to it. You know, I've joked before, but I listened to the Zack Low podcast and he came out and it said, "Hey, I'm about to launch my new podcast on my new feed, and I checked and his podcast already had more reviews than my podcast did." And he hadn't even launched an episode yet. And it really hurt my feelings. So, if you could rate, subscribe to view wherever you're watching or listening to it, that would mean quite a bit and would really help the show grow, which helps create more of them. Before we hop into this month's random ramblings, there's a further disclaimer at the end and a disclaimer in the show notes as well.
It is May 10th, and I’m going to randomly ramble for about 30 minutes. Today, I’ve got a bunch of things to talk about. We’re going to start with market thoughts, then I’ve got some more thoughts on AI, some thoughts on management teams, what happens when you don’t like a particular piece of a company, and a little bit on sunk cost.
Let’s hop into it. It is Saturday, May 10th. I’ll provide a little bit of updated market commentary because the last podcast—the last ramble I did—was in the middle of April, and I did a little bit of market commentary then.
Look, markets have recovered quite a bit since Liberation Day, or Tariff Day. As I’m speaking, Liberation Day was right at the start of April. The markets were down about 10% in a hot second on that, and they’ve recovered completely. It’s kind of crazy to me. The Russell is basically flat for the quarter, and the S&P is up a little bit on the quarter.
That’s not to say there hasn’t been a little bit of pain on a year-to-date basis. I think I checked right before I did this: the S&P is down 3% or 4% so far this year, and the Russell is down about 10%. They’re down a little bit, but that’s kind of par for the course—vanilla for markets. Those are typical swings. I wouldn’t really bat an eye at that.
I’ll be honest: I’m a little surprised, and I’m pretty nervous. I don’t know if I’m just being crazy or anything. Every bull market climbs a wall of worry, and this bull market—this start of a bull market since Liberation Day—has certainly climbed a wall of worry. There’s all sorts of stuff: investors are as bearish as they’ve ever been, and all this sort of thing. I get it. Generally, you want to be buying when investors are bearish, and during the start and middle of April, when things were just terrible, I thought it seemed pretty good. I thought there were good opportunities for investors.
That said, the thing with the tariffs is that, with the initial way they applied them, if they had kept them on for a few months, it would have just shut the entire economy down. I get it: bull markets climb a wall of worry. The tariffs have come down, you’re seeing some trade deals, whatever. I totally get all that, but I worry that it feels very complacent for an economy that feels very fragile.
When I talk to managers and CEOs, or when I hear them talking, all you’re hearing is uncertainty. For the past 2 months, what CEO or what company is going to have been able to make any investment decisions? If you have a decision that absolutely has to be made, you’re going to make it. If there was a fire, and you asked, “Should we clean it up?” of course you’re going to do that.
But if you said, “Hey, we’ve got this plant. It’s probably time to upgrade it or replace it,” or, “We’re this growing food chain. Should we build a new store or not?” why wouldn’t you delay? All I’m hearing from companies is, “Delay, delay, delay,” for the past 2 months.
That sounds silly, but that’s how the economy goes into a recession, right? CEOs who would normally make capital-spending decisions, trading decisions, or business deals decide, “Hey, I would have done this, but let’s just put it off for a little bit because of the uncertainty.” Let’s put it off. That really starts impacting things on the margin. That’s how you flip from growth to recession pretty quickly on the margin.
I feel like you’ve had 2 months of it, and I don’t feel like that’s going away anytime soon. I understand it takes 1 tweet for things to go straight up. Just take all the tariffs off or something. But even then, it seems like damage has been done.
Again, you’ve got 2 months of uncertainty. If I’m a CEO, I say, “Yeah, okay, great. The tariffs are gone, but they could be back in a day. I don’t know.” Yes, 1 tweet can make things go up, but 1 tweet can also make things go down. For some reason, the president could decide, “Hey, I don’t like the offer that the Chinese made me. I don’t like the offer that the EU made me,” and tweet out, “Based on their rudeness, the reciprocal tariffs stay on, and they’ll go higher.”
Or, “Hey, we paused the reciprocal tariffs for 90 days, but now we’re coming back and unpausing them,” or, “The 90 days is up. The pause is over.” I understand things can go up in a second, but they can also go down quickly.
I’m pretty cautious. The other thing I’ve been saying for a year, and it just gets worse and worse, is that the most speculative places in the markets, or the growthiest places in the markets, continue to seem to me to be priced for absolute perfection.
Whereas the more cyclical pieces of the market—anything with cyclicality or sensitivity to the economy—a year ago, I would have said they were pricing in a pretty imminent and big recession. Today, I’d say they’re pricing in a more imminent and even bigger recession. It’s a strange market out there.
That’s it for market thoughts. Let’s go to AI.
I’ve been posting about AI and its impact on investors for 2 years. I realize I’m far from alone whenever I talk about it. There are some investors I talk to 2 or 3 times a week, and there are some investors I catch up with once every 18 months or something.
I caught up with a couple of investors I see once every 18 months, and the thing I keep hearing over and over again from people I haven’t talked to in a year or so is, “Man, I’m using ChatGPT. Half my day is spent in ChatGPT, just going back and forth.” It’s such a knowledge enhancement. It’s such a value lever.
I understand I’m not the only one thinking about AI. I did the webinar with Loup on AI, and I released that as a podcast a couple of weeks ago. I’ve written a few things about AI and investing. It’s just really interesting.
On some levels, I’m really impressed with what it can do, and on some levels, I’m disappointed by what it hasn’t done. But one thing I’ve really been thinking about is AI. Let me use a sports analogy.
In sports, there are some athletes today who are absolutely elite because of the way both the sports field and medicine have evolved around them. Let me give you an example.
I think Steph Curry would actually be the perfect example, right? If you were playing 50 years ago, the NBA didn’t even have a 3-point line, right? So Steph Curry’s skill set would have been, I guess, 60, not 50, but Steph Curry’s skill set would have been completely diminished, right? His crazy 3s. The game also hadn’t evolved.
Larry Bird was a fantastic 3-point shooter in the ’80s. He didn’t even shoot 1 a game because all people wanted to do was drive to the rim and take jump shots, rim shots, all that sort of stuff. So, if Steph had come along 60 years earlier, his game was just not ready for the way the game was being played then, right? First, the 3-point shot wasn’t there, and second, coaches would pretty much actively discourage 3-point shooting.
They wouldn’t have had him taking 10-plus a game and instilling fear into the defenses. If he’s taking 1 a game, it’s not the same. So, the game has evolved towards Steph Curry in a lot of ways.
There have also been advances in medical technology. Steph Curry famously had really bad ankles coming out of college. He hurt them a few times in his first years, and he signed with the Warriors. His first extension was at a big discount. If the max was 20 million per year, I think he signed for 11 million. I think the discount was actually bigger than that.
That has all sorts of follow-on benefits for the Warriors as they’re building their team. The reason they could sign Kevin Durant to a max contract—and for those of you who don’t know, they signed Kevin Durant to a max contract—is because they had Steph Curry at a huge discount. But neither here nor there. What I’m saying is that Steph Curry’s ankles are weak, and I think one of the reasons he’s able to play in today’s NBA is modern technology.
The shoes are much better. If Steph Curry had played 50 years ago, he’d be playing in flat Converse with no ankle support. We didn’t know the strength and mobility drills to keep his ankles pristine. He probably would have had to retire after 6 years because his ankles couldn’t handle it. Today, he’s going to play for 20 years. He’s in his 15th year, and he’s still in his prime.
Medical technology has really varied. You can think of LeBron James, or you can think of the ’80s, when you tore an ACL and it was a 2-and-a-half-year injury, and you never came back the same. Today, you tear an ACL and you could be back within a year. Maybe it takes 15 months for you to really ramp up, but you come back quicker.
So the medical technology keeps advancing. There are people who would have injured themselves years ago and never been able to play, but today, because of medical technology, they can play—and they can play at super-elite levels.
On the flip side, there are people who get outdated. To stay with basketball, if you think about a plodding big who can’t shoot 3s, 20 or 30 years ago there was a space for them, right? Especially before the 3-point line, you just put a big guy as close to the basket as you could and tossed the ball to him.
Today, there’s no space for those guys anymore because of both the way the game has evolved and the math. Those guys have been played out of the league. Now you can be a super-athletic big, you can be a big who shoots 3s, all that sort of stuff, but there really isn’t space for plodding bigs.
Why do I mention all this? I think about AI and the way investing has evolved, and I wonder: Are the best investors of today, or 2 years from now, going to be investors who would have failed, let’s say, 20 years ago, but AI has in some way benefited something that would have been a glaring weakness and taken them out of the game before?
I’m trying to think of a good example of a skill set. It’s actually very hard to think of one, but you could imagine that there’s 1 investor who is particularly weak when it comes to comparing 10-Ks over time. Not that that’s a huge skill set, but you could imagine an investor who, 20 years ago, would have had a career-devastating loss because a 10-K evolved from 1 year to the next, a risk factor evolved, and a fantastic investor would have started, “Oh, they just added this risk factor. Huge red flag. I’m out,” right?
This investor wouldn’t have been able to do that, so he’d get tripped up by companies and their evolving risk factors. Well, guess what? With AI, you can just toss the 2 10-Ks into AI and tell it, “Compare these 2 10-Ks and tell me the largest differences,” and it’ll sort it out and say, “Hey, they added this risk factor.”
Maybe that’s not a perfect analogy, but maybe this 1 blind spot for this investor has been aided. Conversely, I think 50 years ago, AI is going to play some investors off the field, right? If you think 50 years ago, if you could just calculate a price-to-earnings ratio and buy stocks that had really low price-to-earnings ratios, you could do pretty damn well there.
Those guys have gotten played off the field by quantitative research. But I wonder if AI is going to play some investors off the field today who did really well in the 2010s and the pre-AI world, but AI takes what they were doing and makes it superfluous.
That’s 1 thing I’ve thought about. I could imagine 1 example of an investor who might be elite tomorrow who might not have been elite yesterday. I could imagine an investor who is really good at talking to management and, in real time, telling whether their business is going well or whether they can trust this investor or not.
I could imagine that investor would have been good 10 years ago, but maybe that investor was weak on business models and weak on quantitative analysis. So 10 years ago, they simply couldn’t play because they were weak in those areas. I could imagine today that AI can do the quantitative work and AI can do the business-model analysis, so all of that gets neutralized, right?
Every investor is kind of doing the same thing if AI is the best at that. The investors who get rewarded tomorrow are the investors who can go and shake management’s hands, look them in the eye, and determine really quickly, “Is this guy really good or really bad?” Or, “I’m talking to them about the earnings for this year. Are earnings going to be really good or really bad this year, and is it priced in?”
20 years ago, that might not have been enough. Today, that skill set might be amplified. I don’t know. But it’s just something I’ve been thinking about a lot: The game evolves over time. How is AI going to evolve the game over time?
Let’s stick with the management thing while I’m there, because I could imagine we’re in a world where your ability to decipher management is increasingly important because AI takes some of the more quantitative research things out, or kind of levels the playing field for everyone.
Those of you who’ve been listening to me, or especially reading me, know that I’ve become increasingly skeptical of most management teams over time. I think I mentioned it in my March ramblings, but 1 of the things I’ve really been thinking about is: Where’s the line, when you’re dealing with a management team, between a good working relationship and a friendship? Does 1 of them start to impact the other?
My experience with Busted Biotech recently has made me really, really jaded. You can only watch so many biotechs with 100 million of cash on their balance sheet decide, “Hey, instead of returning the cash to shareholders, let’s light this on fire on 1 crazy project after another,” before you get really jaded with management teams.
But, speaking to the AI aspect of deciphering management teams, 1 thing I really worry about when talking to any management team is that, as an investor, when you’re talking to a CEO, you’re getting played by a salesman. You’re talking to a salesman who is literally in the top professional NBA team, and you’re probably like a JV high school team person they’re selling to.
Let me give an example. Every investor—most investors, at some point—gets attracted to a company that is selling medical products, right? Let’s say you’re looking at a company that sells medical products to plastic surgeons.
CEOs of companies get promoted to the top level of companies or industries, or anything, for lots of reasons. They’ve got skill sets, and they’re at the top of their field in a lot of different ways, but the main thing they’re good at is selling. They’re good at selling themselves, and they’re good at selling their products.
Let’s go back to the plastic surgeon example. If you’re talking to the CEO of a company that sells to plastic surgeons, plastic surgeons are the core customers. For plastic surgeons, time is literally money. Every minute that they’re talking to someone who’s not a customer—what does a plastic surgeon make? 1,000 an hour? 2,000 an hour? How much do they get paid for a surgery? 5,000? 10,000? I don’t know. But it’s a lot, right?
Their time is extremely valuable. When they’re doing something that isn’t cutting on a patient or talking to a patient who will eventually get cut on, they’re giving up a lot in opportunity cost. So plastic surgeons have high opportunity costs.
And guess what? Because plastic surgeons have such high margins, because there are so many different options they have, and because they have so much leeway between choosing 1 tool and another, they’re getting bombarded by salesmen left and right, right?
So if you’re talking to the CEO of a company that is selling to plastic surgeons, you are talking to a CEO who is literally at the top of his field and selling to people who are very difficult to sell to.
Right. So he made it. He’s got this core customer that is completely difficult. He’s playing on the hardest of hard modes every time he’s trying to make a sale, and he did it successfully at the top level.
Now, say that you’ve got a one-on-one with this guy, and you’re a value investor who probably spends 95% of your time reading 10-Ks, reading books, and thinking about businesses. I’m sure you’re very good at that. How many management meetings are you doing every day? One. Are you talking to 1 management team on the phone? Maybe. I mean, probably on my schedule, I average about 1 a day. Some days it might be 3. Some days it might be 0. Probably about 1.
That’s probably a general phone call where you’re calling a business that you know well and talking to them about things. Say you go to a conference and you get in a one-on-one with this CEO of a company serving plastic surgeons, and you’re trying to learn about the business. He’s going to eat you alive. Again, you are the JV team playing against a professional. He’s going to destroy you, and you are going to come out and think that business is the greatest business of all time.
Hopefully, you will go home and let the sales pitch cool off, and you’ll research the company. But every time you talk to them, you’re going to get more excited about the business. It’s just an unfair competition. I think about that a lot when I talk to management teams.
I go back and forth, but I wonder: Should I not be talking to these guys? Every time I talk to them, I’m going to get excited, and I’m not sure if the trade-off of hearing their spin is worth it. They are so much better at this than me. I’m not sure if it’s worth the risk of taking myself out of, “Hey, let’s just read these 10-Ks. Let their actions speak for them.”
I can read the transcripts. I can listen to them on the call, but let’s just let their actions speak for them versus letting them paint these colors. I don’t know. I go back and forth.
I’ll give you 1 more example. One thing I’ve had to get very careful about is parsing management’s words. There’s a company I’ve talked to a friend about. I think he’s got a great thesis on it, and I’m a little bit hesitant, I think, for all the reasons I just mentioned.
There’s a company, and they said, “Hey, we are extremely popular on TikTok. All of the big influencers on TikTok are using our product, mentioning that they’re using our product, and telling their fans they’re using our product. And guess what? We haven’t paid a single one of them for mentioning our product.”
I hear that and I’m like, “Oh, my God, this is the greatest thing ever.” This company is completely viral. These influencers—if I was a brand and I wanted to work with them, I might have to pay them $50,000 to mention me once in 1 of their posts. They’re mentioning the company in multiple posts for free. This is insanity.
“No free ads” is a popular thing among podcast people. These influencers are giving out free endorsements on TikTok. It’s like, this is crazy. This is a huge win.
Talking to another person, they’re like, “Yeah, but you need to parse what they say.” They’re not paying the influencers for the product, but the product is a very expensive product. They’re giving the product to the influencers for free in exchange for the endorsement.
The customers are probably taking a little discount. They’re probably getting $15,000 worth of product in exchange for a testimonial that they would normally get paid $50,000 for or something. But they want this product. It’s not that the product isn’t good. They want the product, they’re using the product, but they’re getting the product for free and giving the endorsement in exchange for that.
That’s a real cost. It’s not like they’re Coke, giving away a free Coke in exchange for an endorsement. The Coke costs a buck. This is a multi-thousand-dollar product, so they’re getting it for free.
It was just another example. It doesn’t mean bad or good. I actually still think it’s good. Again, the customers really like it, and they’re willing to take a huge discount for the product. But it’s 1 of those examples where I was dealing with a master salesman.
When he said that, I was like, “Oh, this is great.” If you didn’t really think about and parse his words, you could have come to the very wrong conclusion. It speaks to my earlier point: When you’re dealing with these companies, they’re going to paint everything in such a favorable light, and as an investor, I don’t know if you’re going to be able to handle it.
Let’s come back to management teams in a second. Just 1 other thing, completely separate from that. You often hear the old Peter Lynch thing: If you love the product, you should think about the stock or something, right? I think he actually mentioned it when he’d go to the mall, ask his daughter what she was really interested in, and look at those stocks and buy some of them.
You’ll frequently hear people make a fortune because they bought Tesla in 2016. They loved the car, so they bought the stock. They loved the product, so they bought the stock.
Outside of the past 5 to 10 years, I think history says that’s actually a bad idea. Products that people love can either be huge fads—think Beanie Babies or something—or the stocks are super rich because everybody loves the product. They pile into the stock, it’s a retail frenzy, and then the moment the fad fades or the retail interest fades, the multiple comes down. They’re priced for more than perfection.
I’ve been thinking about something different. What if you don’t like the product? I’ll give you an example. I did a podcast recently on Seaport. I am long Seaport, so there’s my disclosure.
Seaport recently signed a long-term lease with Meow Wolf, and I think the long-term lease is great. It’s everything they needed. Meow Wolf, for those who don’t know, is an interactive experience. I think there are about 5 across the country. I think there’s going to be a sixth opening up in LA, and then New York will be the seventh one when it opens in 2027 or something. Meow Wolf is in Vegas. I was really excited for Meow Wolf—not just because they’re going to Seaport, but because I’ve heard so many people talk about it. I saw so many reviews from people who have interests similar to mine and who are really into it.
I went to Meow Wolf in Vegas, and I was so excited for it. I went with 3 other friends, and I’ll tell you, the moment I walked in, I was super disappointed. I flat-out did not like it. I feel like I should have been their target market.
Now I’m kind of looking at it, and I don’t think it changes anything for Seaport. They’ve got a long-term lease, and the results speak for themselves. Meow Wolf was packed when I went there, and the thing is doing fantastic. I’m sure it will do fantastic in New York, but I was pretty disappointed by it.
I’ve had this thought: What happens when you don’t like a product for a company? I don’t know the answer to that. Meow Wolf is only 1 piece of Seaport, but I’m disappointed. I was hoping I’d love it and gain a little conviction.
You can’t reject a company just because you don’t like the product, right? I’ve seen it time and time again. Celsius’s stock has come down quite a bit from its highs, but it’s still a multi-bagger over the past few years. Monster is 1 of the best-performing stocks of the past 25 years.
I’ve seen people dismiss both out of hand because they’re like, “I don’t like the product.” And guess what? The stock went straight up. A lot of people today give up sugar or alcohol. If you’re dismissing all sugar and alcohol products simply because you personally don’t like the product, that’s fine, but you’re probably dismissing a whole lot of companies out there.
I just think it’s difficult, right? When you want to like a company’s product, you want to invest in things you have conviction in generally, and it’s just weird when you’ve got a company with a product you don’t like. Can you do it? I don’t know. I think the answer is yes.
But I can also understand why you say, “Hey, I only want to invest in companies that I completely believe in and whose product I love.” Again, somebody’s got to invest in Boeing airplanes. There are people who love airplanes, but I don’t know anyone who’s like, “Oh, the 737. I love this specific plane so much.”
You can buy products that you have no view on, that you don’t like, and all that sort of stuff.
All right, the last thing I want to talk about is management teams and sunk costs. I’ve been on this busted-biotech theme quite a bit recently, and I had a call this week that really illuminated this. I think it’s applicable to a lot of companies and management teams, and to how management teams that don’t have a lot of skin in the game or stock ownership look at projects, spending, and all that sort of stuff.
Let me give an example. Let’s just use a simple example. Say you want to flip a coin. If it comes up heads, you get $1. If it comes up tails, you get nothing. The NPV of that is 50 cents: $1 times a 50% payoff equals 50 cents.
If you pay 50 cents for that coin flip, you’re NPV-neutral. A lot of investing is like that, right? You build something, and there are odds.
For some things, it might be 95% odds of success. For some things, it might be a 5% chance of success. You need to look at how much you're laying out and what the expected returns are. Clinical trials in particular are like that. Obviously, the payoffs can be very different, and the odds can vary slightly, but the base rate for most trials, if you look at history, is actually about a 50% chance of success, almost regardless of what type of disease you're studying or what type of trial it is.
From phase 1 to phase 2, there's a 50% chance. From phase 2 to phase 3, there's a 50% chance. If you're talking about going from phase 1 to phase 3, that's 50% times 50%, or about 25%, but you get the point. Every trial is about a coin flip. Let's use that for simplicity.
When I talk to these busted biotechs about having 1 product left in their pipeline, and it's a phase 1 product, I ask them, "Tell me how you're thinking about it." They'll say, "Look, this is really simple. We've got a phase 1 product. If we spend $15 million on it over the next 2 years, we think it will be worth $100 million if the trial is a success. It costs us $15 million to get there, and there's $100 million in value if it's successful. $100 million less $15 million equals $85 million in value."
Obviously, that's wrong. We can debate the ways it's wrong, but I think there are 3 particular things they're missing. First, I've talked to multiple of them, and it's crazy to me that they haven't even said, "The trial is a coin flip." They'll always say, "The science behind this is so good. This is so much better than a coin flip. This is a sure thing. The science has been great. In preclinical, it was awesome. In phase 1, it was awesome."
They'll say, "Yes, the base rate for phase 2 is 50%, but our science is unbelievable. We're way better than that. We're at 95%. We're at 99%." Get out of here. Come on. You're at 50%. So, before expenses and before time value, it's 50/50, or $50 million. Maybe you can adjust the base rate up a little bit if your science is incredible, but I think a lot of these small companies delude themselves. Instead of $100 million, you've got $50 million, or $50 million of risk-adjusted value. Less the $15 million, there's $35 million of value there. We've gone from $85 million to $35 million already.
Then you have to adjust for the time value, right? If you get this $50 million in expected value 2 years down the line, it's actually maybe worth $40 million. The $15 million you spend will be spread over 2 years, but let's just say it's up front. You time-discount the $50 million to $40 million, take the $15 million out, and now you've got $25 million of value.
So, $100 million if it's successful, with a 50% chance, gets you to $50 million. A $10 million time-value adjustment gets you to $40 million. Less the $15 million in expenses gets you to $25 million. That's still a great return: $25 million of expected value on $40 million of value and $15 million of expenses. You're creating almost 3 times your money on a risk-adjusted NPV basis when you do that.
Except for 1 thing: the companies I talk to are only talking about the direct trial expenses. There are a lot of overhead costs a company needs when it's designing and running these products. You need scientists, you need doctors, and you have a chief medical officer who's looking at all these things. There are a lot of overhead costs, and you can read the 10-Q or 10-K of one of these companies. Most of them will break out, "We spent $5 million on this drug, $7 million on this drug, and then $25 million on overhead in our research and development department." The overhead is real, and it's often in excess of the cost of these trials.
If you're Pfizer and you're running dozens and dozens of trials at the same time, the overhead is spread over dozens and dozens of trials. Maybe you can add 1 more trial without really factoring in the overhead cost. But if you're a small company with 1 drug, the overhead cost to support the research and development department is a real cost.
Not only is that 1 drug propping up the entire research and development department, but the company as a whole has overhead. There's the CEO, public-company costs, the board, the accounting department, and all this sort of stuff. For many of these small companies, the overhead of their R&D is $20 million per year, and the overhead of the company overall is $20 million per year. Let's round it up to $50 million per year in R&D plus overall corporate overhead.
I just said that this trial is going to create $25 million in value over and above its costs, but that didn't account for any of the overhead costs. I just said the overhead costs of these companies are running $50 million per year. This is a 2-year trial, so if you're a 1-product company and you exist just for this 1 product, you're going to spend $100 million in overhead over the next 2 years.
All of a sudden, this drug, which on an NPV, risk-adjusted basis has $40 million of value plus $15 million in costs, has $115 million of cost there. So, it's actually destroying huge amounts of value once you account for the overhead and everything. It's funny: I talk to multiple of these companies, and they're not really thinking about the overhead.
The more sophisticated ones are definitely risk-adjusting, though. I think they're saying, "All of our trials are 80% or 90% likely to succeed versus the base rate of 50%." A lot of them are accounting for the expenses of the trial, although I do think some of them ignore those expenses. I think a lot of them assume that if the trial is successful, every product they have will be a $5 billion product. I push back on that, too. But they're pretending that all this overhead doesn't exist.
Again, I am a broken record with these broken biotechs, but it's crazy. You'll have these companies with $500 million in cash and 1 product that, if it gets approved, will be 8 years down the line and will be worth $500 million. But you risk-adjust that, account for the expenses of just the product and the time value, and the product on its own is very popular, barely profitable.
Then you say, "We're going to have 8 years of supporting this company as a standalone." That's a disaster for shareholders. It destroys tons of shareholder value. I think it speaks to these smaller management teams: they're not thinking about the overhead and the expenses when they're making these decisions.
Maybe it's because they're not incentivized to. Whose bread I eat, his song I sing. These guys are the overhead. If the overhead goes away, they go away. Their salaries go away, and their livelihoods go away.
I understand the incentives, but it's crazy to me because you lay the math out on paper and write down the full company income statement. You say, "You need to have a 100% probability of this product being a success for this to even be borderline sensible for you to invest in it once you factor in the overhead costs and everything."
I understand that these managers' salaries and bonuses mean they don't want to admit that reality, but once you start breaking it down, it gets really obvious to me. So, all right. I’ve rambled for a while there. We’ve talked about a bunch. Look, as always, I’m really looking forward to a lot of interesting podcasts in the near future. We’ve got our book club with Burn Hobart. We’re going to be doing The Snowball this month, which I’ve already got lots of thoughts on Warren Buffett to talk about. We’ve got some other interesting podcasts. I’m always happy to chat. Shoot me an email, shoot me a DM, whether you want to talk about this stuff, other stuff, whatever. Always happy to chat. I appreciate you listening to me ramble for 30 minutes. I’m going to go on a run and then go get on baby duty, and we will chat soon.
A quick disclaimer: nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.