Tesla Hathaway (EP.28)

Episode Summary

Executive Summary: The episode blends market commentary with behavioral finance and personal investing lessons. The hosts critique WeWork’s “community-adjusted EBITDA,” Tesla’s public-market theatrics, and Buffett-related comparisons, while arguing that most endowments and individual investors should favor indexing and long-term discipline. They also discuss housing as consumption, retirement shortfalls, Argentina’s crisis, active fund outflows, the hidden value of “free” internet services, and the case for staying invested rather than waiting for a correction.

Main Topics: WeWork, leverage, and accounting gimmicks (Priority: 5/5): The hosts use WeWork’s bond sale and invented profitability metrics to illustrate late-cycle excesses and the dangers of financial storytelling that ignores real costs and cash burn. Tesla, Elon Musk, and the public-market distraction (Priority: 5/5): They argue Tesla’s capital needs and weak free cash flow make its public status a constant source of pressure, while Musk’s trolling underscores why the company may be too difficult for public investors to analyze. Buffett, Berkshire, and the limits of scale (Priority: 5/5): The discussion pushes back on claims that Buffett has “lost it,” arguing that Berkshire’s size naturally limits outperformance and that matching the market at that scale is still a strong result. Indexing vs active management in endowments (Priority: 4/5): The hosts contrast Buffett-style indexing arguments with Yale’s active approach, concluding that only institutions with exceptional governance and patience can sustain active edge, while most should index. Homeownership and the true economics of housing (Priority: 5/5): They stress that housing is often consumed, not invested, and that taxes, upkeep, financing, and transaction costs greatly reduce realized returns versus popular assumptions. Retirement saving, compounding, and starting early (Priority: 5/5): Using retirement balance statistics, they show how little it can take to reach median outcomes over decades and how waiting to invest drastically increases the required monthly contribution. Macro context: Argentina, active fund flows, and demographic opportunity (Priority: 4/5): They highlight Argentina’s extreme rates and inflation, the ongoing migration from active to passive funds, and Africa’s long-term population growth as a potential investment theme.

Key Arguments: WeWork’s bond pricing and customized EBITDA metrics show how late-cycle markets tolerate dubious narratives until reality catches up. Tesla’s investors ask legitimate questions; a company with positive free cash flow in only 4 of 37 quarters should expect scrutiny, not hostility. Berkshire should be judged relative to its size; at $400B-$500B market value, matching the market with no fees or taxes is impressive. Most endowments and foundations lack the governance and patience needed for active management, so indexing is the default sensible choice. Housing is better thought of as an asset/service consumed over time than as a pure investment, because taxes, maintenance, and financing costs materially reduce returns. The biggest retirement challenge is not market returns alone but saving early and consistently; delaying contributions dramatically raises the amount required to catch up. Waiting in cash for a correction is a behavioral trap: investors typically move their target lower as prices fall and often miss long stretches of compounding. Active mutual funds may be bleeding assets, but rising markets have masked the damage; in the next bear market, outflows may accelerate toward index funds. Free digital services have real economic value that GDP misses, but survey-based estimates of that value are inherently noisy. Africa’s population growth could create major long-term economic opportunity, but the payoff is likely multi-decade and difficult to access cleanly through current public markets.

Data Points: WeWork bond issuance: $702 million - Amount of bonds sold by WeWork WeWork bond coupon: 7.875% - Seven-year bonds sold by WeWork WeWork valuation: $20 billion - Valuation discussed alongside the bond sale WeWork adjusted EBITDA: negative $193 million - Reported profitability metric excluding adjustments WeWork adjusted EBITDA before growth: $49.4 million - Alternative adjusted profitability measure WeWork community-adjusted EBITDA: $233 million - Custom metric excluding general and administrative expenses Tesla free cash flow: 4 out of 37 quarters positive - Used to argue Tesla faces valid capital and solvency questions Berkshire Hathaway market cap 10 years ago: $20 billion - Scale comparison used to explain why outperformance is harder at Berkshire’s size Berkshire vs insurance ETF 10-year return: 125% vs 119% - Comparison to an insurance-sector ETF over the last decade Yale manager turnover: 7.7% average over the past decade - Implying a 13-year average holding period for managers Carthage College endowment ranking: Beat 90% of peers - College endowment invested entirely in index funds over 10 years Median retirement account balance ages 56-61: $25,000 - Cited from St. Louis Fed blog discussion 60/40 portfolio contribution needed for median balance: $6 per month since 1980 - Illustrates the power of compounding over a long horizon Contribution needed for 90th percentile retirement balance: $160 per month - Approximate monthly savings needed to reach about $855,000 Argentina policy rate: 40% - Short-term central bank interest rate after multiple hikes Argentina inflation: 25% average over the past five months - Illustrates severe macro instability Argentina peso performance: down one-fifth vs. dollar - Worst-performing emerging-market currency mentioned Active equity mutual fund outflows: nearly $1 trillion in four years - Cited by Eric Balchunas Active fund asset growth: about $1 trillion to $6.5 trillion - Assets rose despite outflows because of market gains Active fund fee revenue: $40 billion to $45 billion annually - Despite deposit losses, rising asset prices lifted fees Google Maps compensation to give up for a year: $3,600 - Estimated value of a free internet service Email compensation to give up for a year: $8,400 - Estimated value of email access Google search compensation to give up for a year: $17,500 - Estimated value of access to Google search Current expansion length: 91 consecutive months - Positive month-over-month jobs growth streak Jobs added since June 2009: over 17 million - Cumulative non-farm payroll growth chart San Mateo median home price in 1995: $305,000 - Housing return example San Mateo median home price in 2005: $763,000 - Sale price in the housing return example Mortgage rate in housing example: 7.5% - 30-year fixed mortgage assumed in the calculation Monthly payment in housing example: $1,700 - Estimated payment on the San Mateo home Price appreciation annualized housing return example: 23.4% annualized / 803% total - Before accounting for upkeep, taxes, and other costs Pre-tax annualized housing return after comparison: 11% - Used as a more realistic high-end result in the best-case market Ohio/other market comparison: Seattle 2% annualized; Austin or Cleveland negative - Shows housing outcomes vary greatly by location

Pivotal Quotes: "Those expenses don't matter, though. They're just general. I wouldn't worry about it." — Michael/Ben (banter): Mocking WeWork’s exclusion of general and administrative expenses in adjusted EBITDA "Boring bonehead questions are not cool." — Elon Musk (quoted in discussion): Described as Musk’s response when asked about Tesla’s capital needs "A house is a liability masquerading as an asset." — Morgan Housel (referenced): Used to frame the hosts’ discussion of homeownership economics

Implications: Listeners should be skeptical of flashy financial narratives and focus on cash flow, costs, and discipline. For most people, low-cost indexing, early saving, and a long time horizon matter more than trying to outsmart valuations or chase active-manager prestige.