Big Tech’s Tipping Point Is Here: Jim Mellon On Biggest Short Of All Time

**Jim Mellon** (0:00)
I think it's a sort of a general tipping point in markets, and I've been calling it too early. You have seen that the US market has not done well this year, actually, compared to other markets around the world. And I don't think most people appreciate that. Although the US market has done well over the last five years, it's been highly concentrated in what it's done.
Now, it's really looking pretty bad. And I think the main signal for that was the SpaceX thing, which I wrote in the Master Investor letter, was the biggest short of all time. And so it has proved, it's down 50% now from its high, which is incredible for such a big IPO. And it exposed so many weaknesses in the US financial system. If I had to choose markets now, I would say UK smaller companies are extremely attractive. And you can see UK companies being picked off one by one, three or four a week, which is tragic, but hopefully there'll be other companies that come along and replace them, which is why I'm quite bullish on the UK. But we're talking there about P ratios between 10 and 11, free cash flow yields of about 9%, dividend yields of 4 to 5%.
It's extraordinarily attractive. I think we just repeat Muhammad Ali, dance like a butterfly and sting like a bee. You've got to be a gorilla in these markets. If you think that you can lay down your portfolio for the next 20 years and you'll be fine, then I think you're making a big mistake. And if you feel hesitant about the markets, just don't go into them. Don't feel that you have to be involved at all times and just wait it out. There'll be an opportunity to buy much cheaper.

**Wilfred Frost** (1:30)
Welcome to The Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders, and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by LSEG, Interactive Brokers, The World Gold Council, and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes.
My guest today is my great friend, podcast co-founder, and the legendary investor, Jim Mellon, who comes back to the podcast for the fourth time. I'm delighted to say, Jim.

**Jim Mellon** (2:18)
Very happy to be here. I'm very delighted that you didn't use the word veteran investor.

**Wilfred Frost** (2:24)
No, but you just have.

**Jim Mellon** (2:26)
I know, because obviously I have a sore spot about it.

**Wilfred Frost** (2:31)
That's not a very nice word to use. I hope the other members of the press don't. Jim, great to have you back.
We want to get straight into the action. I didn't know whether to rejig things with oil prices pulling back today, but maybe we'll get to that next. But first off, we've had most of the mega cap tech earnings now for this quarter. Clearly haven't gone down that well with the market. One or two of them massive single day sell offs like IBM and Google. What's your takeaway of some of those earnings and reactions to them?

**Jim Mellon** (3:03)
Yeah, well, I just looked up the MAG7 performance since the June 24th highs, and the average looks like to be down 30%, which is incredible considering how big they are as a component of the S&P and also in terms of their huge size of funds.
I guess it's basically because there's investor fatigue setting in with the whole tech thing. There's an understanding that these companies are moving from being cash flow positive, we know this, to being generally speaking cash flow negative, and in some cases, maybe oracle in a pretty precarious place. An understanding that there is no real sign that they're going to make any money out of all the expenditure they're making. So, the business model has changed, not for the best, and the business they've gone into doesn't look like being a profitable one for a very long time to come, if ever.

**Wilfred Frost** (3:55)
Do you feel like sentiment, whatever the sort of median investor is, has shifted to be negative towards those business models yet, or is it just the start of a tipping point?

**Jim Mellon** (4:08)
I think it's the start of a general tipping point in markets, and I've been calling it too early, but you have seen that the US market has not done well this year actually compared to other markets around the world, and I don't think most people appreciate that. Although the US market has done well over the last five years, it's been highly concentrated in what it's done. Now, it's really looking pretty bad, and I think the main signal for that was the SpaceX thing, which I wrote in the Master Investor letter was the biggest short of all time, and so it has proved. It's down 50% now from its high, which is incredible for such a big IPO, and it exposed so many weaknesses in the US financial system.