00:00You know, the three B's of public speaking and writing are be brief, be bright, be gone.
00:04Axios! Nick Johnson did that in Axios. Okay. Microsoft.
00:09Microsoft, we know, has this war chest of cash.
00:12Microsoft has proven through the years that they can monetize these new things that they take on.
00:18I think Microsoft, in particular, of all of the, you want to call it a hyperscaler or software company,
00:24has been unjustly beat up, and as you've seen, the spending's not going to go away,
00:31but in terms of how, on AI, by the way, but how they've been able to continue through a longer
00:37-term perspective,
00:38manage these properties, that's why we own Microsoft, and we're going to continue.
00:42Microsoft was down in the second quarter, hurt our portfolios.
00:45We still had great performance in the second quarter, but at the end of the day,
00:49we're longer-term investors, and we believe in hub, the management there, and we believe what they're doing.
00:53It just comes down to, what I find challenging, I think, as you think about the software stocks,
00:58the software as a service stocks, is, yes, I can see a case where AI could disrupt a lot of
01:04their business,
01:05but I don't even know what AI is going to do.
01:08No.
01:08I can't figure that out, and so much less than to say,
01:13Microsoft's going to be hurt, or ServiceNow's going to be hurt, or Soft, you know.
01:16But I guess the market's just saying, we're selling now, and we'll figure it out later.
01:20Yeah, I just, like, the meta news is confounding to me.
01:24I know everyone was excited about how the stock was up double digits,
01:26but now they're spending on cloud, and now they're pivoting this way,
01:30and now they're trying to chase this, building it versus spending on it.
01:35I just think that Microsoft's been much more consistent in its operations,
01:38and I want to stick with the consistent deliverers.
01:41Jim Chanos, with Bloomberg Money here two weeks ago, nailed the meta thing.
01:45He calls it the Neo cloud.
01:47We can't figure out what to do with AI, so we're going to compete with Amazon on the cloud.
01:52Nadella, and major shout-out, Bradley Olson and Tina Lee at the Wall Street Journal,
01:57with his definitive Nadella interview, I read his bio, Nadella's not normal.
02:03I think a huge body of the investment public doesn't understand his internal drive.
02:09I don't think so.
02:10And remember, too, when he took over, that company was, you know, after Steve, and no one likes Steve.
02:20And I remember I was at, both at Piper and Merrill during those days,
02:25and we had huge presence in the Pacific Northwest.
02:29You know, Pacific Northwest, in particular, owned a lot of Microsoft stock, and they did not like him.
02:33And so the private wealth perspective of that really started to, when he came in and brought more process and
02:40discipline
02:40and how they were monetizing these new properties and moving away from the subscription service
02:46into more of the deliverable software and all that kind of stuff, that's where it really took off.
02:53So I'm a believer, we're there, I think of a stock that now it's becoming more of a value stock.
02:59You take a look at the balance sheet and the price to free cash flow on that company, it looks
03:04pristine.
03:04So we really like it.
03:06It's much more contrarian, Paul, I would say, than trying to pick the bottom and be a hero in Salesforce
03:11or Adobe.
03:12We just don't think that they're in the same league, and that's why we're sticking with it.
03:16We had a small mid-cap portfolio manager come in this week and finally with a smile on her face.
03:21Because her performance in the Russell 2000 is 2x out of the S&P 500 this year, which doesn't happen
03:28very often.
03:28How do you think about small mid-cap stocks?
03:30No, we've been believers for a while, and we've been wrong, aside from the second quarter.
03:35And the way that we look at it is we look at the small mid-cap indices within the S
03:39&P 1500.
03:41And if you take a look at the mid-cap, the small cap, the SML, dramatically outperformed the mid-cap
03:47at like 500 or 600 basis points.
03:48And the reason why the Russell 2000 outperformed the S&P 600 is because you have a lot more companies
03:55in the Russell 2000 that don't own money.
03:57So there was GoGo, JoJo, the juicier companies.
04:00But if you take a look at the S&P 600 small-cap SML, price-to-cash flow, balance sheet,
04:07earnings discernibility,
04:08better than large cap, and the growth rates for the second half of the year are better too.
04:13So I think in this world of the need for liquidity, and people love private equity, they love private markets.
04:21All these private equity, private market companies are smaller companies, so I think they're going to seek liquidity in small
04:26cap.
04:26Brian Belsky with us here before Jobs Day, 20 minutes away.
04:29Lisa Mateo will follow on here in a bit, but thrilled to have the gentleman from Humilis with us.
04:35I look at July 2-ish, and it tells me, and people know where I am on rebalancing.
04:41Sell your winners.
04:42I'm like, really?
04:44Rebalancing this time around.
04:47Violent.
04:48Because think about what Micron did to a lot of the indices.
04:52Now, full disclosure, we don't own Micron.
04:55Do you rebalance?
04:56Yes, you do.
04:57Because we did a lot in June 1 because of what happened in May, and so we had a couple
05:04positions that doubled in May, and then we rebalanced back.
05:08We don't own Micron, but it messed up some of the indices.
05:12For instance, if you take a look at the Russell 1000 value technology sector, it was up over 100%.
05:19Come on, man.
05:20And Micron is a value stock?
05:22I just don't – I didn't get that, but, I mean, we underperformed the value index by 200 basis points.
05:28We were still up double digits.
05:29I mean, it's crazy.
05:31So, yeah, you have to rebalance.
05:33We use drift in our portfolios, as you should, because you never try to outsmart the market.
05:37So what's drift?
05:38Drift is you just let the positions kind of go over time.
05:40So, say, if you – my position, my core position, XYZ is 4%, and it goes to 4.75%.
05:46I'm not going to rebalance back to forward.
05:47So when you rebalance, you don't sell the whole position?
05:50No, no, no, no, no, no, no, no.
05:51Because I think the biggest problem with institutional portfolio managers – and some of them took over our prior job
05:58– that own 200 stocks, guys, right?
06:01They have 200 stocks in these big, fancy portfolios.
06:04When you run separately managed account portfolios, you're catering to Paul Sweeney, high net worth individual right here.
06:10And he's got taxable gains in all of these companies in these 50 stocks.
06:14If you blow out XYZ stock by owning it for 10 years, he's not going to be happy with you
06:19because you have a taxable gain.
06:20Well, if you're an institutional person and you blow out positions, you don't have that same thing.
06:25So on an SMA like we run, 40 to 50 stocks, period, we have low turnover.
06:31And you – say if a position goes up to 6%, he cut a half, he still owned the position.
06:37What you just heard there, folks, bronze it.
06:41We will have Belsky on Bloomberg Money because what you just heard was the clearest discussion of the madness of
06:49selling all of a winner with the memory of Benjamin Edwards III right there bronze it on selling the top
06:57positions.
06:58Let's go – you know, when they talk about high net worth, they never look at me.
07:02They look at you.
07:03I don't know what that's about.
07:05Paul Sweeney with Brian Belsky.
07:07What is your positioning in AI?
07:10How are you trying to play it right now?
07:12Is it still just own the chips or the picks and shovels as people talk about?
07:17How do you think about it?
07:17You know, we've owned and we've had the very honor of owning NVIDIA in various portfolios and various jobs since
07:232018 or so.
07:24So we're sticking with that.
07:25And we love the AMD.
07:28We love the Broadcom, Qualcomm for more value.
07:31But that's it.
07:32The key thing to investing is, I think, is that you don't have to own everything.
07:36You don't have to own everything.
07:38Have conviction and stick with it.
07:40But you know what I think people are missing is we're building out these data centers.
07:45So how do you build a data center, man?
07:47Well, people talk about Caterpillar.
07:49Well, we like this company called Acuity.
07:51We own it in our small mid-cap.
07:53And they make the tiles that go on top of the buildings between the ceiling and the top of where
08:02the tiles are because in between that are the wires.
08:05The wires heat up.
08:06So Acuity makes these tiles that are cool enough to keep the heat.
08:10I mean, it's really – but people aren't thinking like that, right?
08:14And so stuff like that or old-school power companies like Nextera because you've got to plug in the power
08:21or Southern Company.
08:23And so that's, I think, the next derivative down.
08:26I think the biggest theme, though, that some play is cybersecurity because I just don't think people understand it enough.
08:33And that's why we own Palo Alto by far, I think, from our view, the best company in there.
08:39They've integrated in a couple of new acquisitions, one of them CyberArk, the last year or so that kind of
08:45took some time to get going.
08:46But they certainly got paid for owning CyberArk the last month or so.
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