Ep14. Public Market Volatility, AI Air Pocket, $GOOG Ruling | BG2 w/ Bill Gurley & Brad Gerstner

**Brad Gerstner** (0:00)
The idea that we're going to go through this phase shift with CapEx and Revenues perfectly aligned and perfectly matched, right? It would be the first major phase shift we went through where that's the case. Hey, Bill, good to see you. Great to see you. So much for a smooth, nice exit to the summer. I mean, what a week.

**Bill Gurley** (0:31)
Been a rough summer.

**Brad Gerstner** (0:32)
I mean, it reminds me of this video going around with Peter Lynch in it, you know? It's 1987, he's managing the Magellan Fund. I think it has like 12 billion bucks in it. He finally, his wife convinces him to go away to play a couple of days of golf in Ireland, right? And it's hard to actually keep track of the market in 87 He says in two days, his fund goes from 12 billion to 8 billion. He's like, I took two days. And he lost 30% of the value in his fund.

**Bill Gurley** (1:02)
Oh, rough, rough. I don't think it's been that bad, but it's been bad. It's been, you know, a lot of stocks have been reset pretty dramatically here. And one thing that I thought would be great, and to talk about today is just to spend a lot of time on these public markets. This is the world you live in every day. I did participate, I had a brief career as a South side Analyst, arguably three decades ago. So I consider myself more of a sideline player to the public markets, but I do pay attention. I've often said that the public markets are the buyers of private companies, and you got to know them, you got to know them, you got to study them, you got to know what they want to buy. So I do pay attention. But let's focus it your way. So just to run down some numbers, S&P down 8%, which wiped out $4 trillion. The QQQ down 11%.
There were three worst days since March of 2020 Mag-7 is down $1 trillion. Crypto, which you kind of would have thought maybe would have rallied with what's going on, didn't. It traded down in sympathy. And we've seen this a bit where you hope for it to be uncorrelated, and then, oh shit, it's correlated. And then everyone's talking about Buffett jumping out of his Apple position. So you did speak about taking risk off at the beginning of the summer. And it looks like that was a smart move. Congratulations. But tell us what you think you're seeing out there, and how people should put all this in perspective.

**Brad Gerstner** (2:42)
I think that's the key. This is not 1987, in fact. We've seen this big bounce back the last couple of days. And while we've been having these big gyrations, if you just put it in context, since Q1 of 2023, remember, when everybody was really nervous at the start of 23 about Mike Wilson's hard landing. So that's just six quarters ago, right after ChatGPT hit the screens. Stocks are up 60%. I mean, that's a huge move in six quarters. And the Qs were up nearly 80% at their peak in July. Many individual stocks have more than doubled, like Nvidia. So I put what's happened this week and what's happened over the course of the last month in kind of run of the mill, healthy consolidation of these big gains that we had in these six quarters. But what I said at the beginning of summer, we're active managers, right? So I live with one foot in the venture markets, where we think about five or ten year time horizons. But in the public markets, we have to think about risk reward every day. And as stocks have run up, it has been accompanied by what we think is a deterioration in some of the conditions, right? So this means the skew has gone from very positive at the start of 2023, when everybody was nervous, to a little more negative by the beginning of the summer. And just like when you and I are playing in a game, our house game of poker, when the skew gets more negative, when cards get turned over, when our probabilities of winning dissipate, we got to reduce the bet size. So I talked a couple of weeks ago about reducing units of risk, and I got some questions online about that. So here's a really simplified depiction of how we were thinking of things in January of 2023, and how we were thinking of things at the start of July in 2024 So as you can see on this chart, at the beginning of 2023, we looked at it. Prices were in the toilet, so you started with really low prices. We expected big earnings beats because consensus was really beaten down. People were super negative on where earnings would come in, and we expected there to be rate cuts, which would be further stimulatory of the economy. So we looked at it, and just again, very simplistically, we said, hey, we think there's an 80% chance that the names that we like in technology can be up a lot because we expected big earnings beats, so up 50%.