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All Becomes One!

 

These companies are the modern day local media monopolies, except they're more scalable. This is literally an oligopoly market and there are only a few winners. I suspect the growth rate will remain high for longer than most value guys expect...

 

Why settle for buying cheap growth stocks like GOOG and FB when you can burn the midnight oil reading SEC filings of shit-tier companies you're going to try to get one last puff out of, but may be too soggy?

 

It's an interesting question...

 

Too many value guys outsmart themselves. Sad!

 

http://fortune.com/2017/01/04/google-facebook-ad-industry/

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To play devil's advocate, what makes you convinced that Facebook isn't the Valeant of the internet?

- Conversations regarding Facebook tend to drift to a cult of personality around Zuckerberg. How do they plan to generate a reasonable ROE from Whatsapp users? Zuckerberg. How does Oculus fit in? Zuckerberg!

- Revenue growth seems to be driven primarily by channel stuffing (higher % of ads per page) and price increases (market driven based on ad success, to be fair). While user growth continues globally, user growth in areas that have high ARPU is fairly limited (Slides 3 & 12: https://s21.q4cdn.com/399680738/files/doc_presentations/FB-Q4'16-Earnings-Slides.pdf). On one of the calls recently they said they likely can't increase ad volume any further.

- I'd be surprised if  a material percentage of new accounts in the US aren't fake. I get an average of ~1 friend request per week that is blatantly fake (girl with lots of pictures from different places all added within the last hour). I'll report these as fake and Facebook doesn't seem to remove them (admittedly I don't usually check).

- I'd also be surprised if daily minutes per daily active using isn't declining. This is a year old at this point but based on anecdotal evidence the decline has continued: http://www.businessinsider.com/facebook-sees-personal-sharing-decline-2016-4?r=US&IR=T&IR=T

- Innovation is fairly limited that I see. People may point to livestreaming but I haven't seen any evidence this is catching on. I don't see anything to indicate that Facebook is becoming the "content hub" of the internet as they'd hoped. Instagram continues to innovate a bit and seems to be stealing market share from SNAP but Stories don't generate any revenue at this point. 

- Their strong Q4 was aided by a massive amount of political ads. A lot of people I've talked to are burned out on Facebook because of the election and the post-election. Possible these people just need a break.

 

Curious for your perspective. I'm short but would like to understand the bull case better. Google I agree is definitely an incredible company and never ceases to amaze me with their new products/services. I recently signed up for Project Fi (their phone service). The international coverage is what I've always wanted but no other company was either willing or capable to do (data nearly anywhere in the world is $10/GB, free text messaging, calls are more reasonable and I think you can use data calls on Wifi).

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To play devil's advocate, what makes you convinced that Facebook isn't the Valeant of the internet?

- Conversations regarding Facebook tend to drift to a cult of personality around Zuckerberg. How do they plan to generate a reasonable ROE from Whatsapp users? Zuckerberg. How does Oculus fit in? Zuckerberg!

- Revenue growth seems to be driven primarily by channel stuffing (higher % of ads per page) and price increases (market driven based on ad success, to be fair). While user growth continues globally, user growth in areas that have high ARPU is fairly limited (Slides 3 & 12: https://s21.q4cdn.com/399680738/files/doc_presentations/FB-Q4'16-Earnings-Slides.pdf). On one of the calls recently they said they likely can't increase ad volume any further.

- I'd be surprised if  a material percentage of new accounts in the US aren't fake. I get an average of ~1 friend request per week that is blatantly fake (girl with lots of pictures from different places all added within the last hour). I'll report these as fake and Facebook doesn't seem to remove them (admittedly I don't usually check).

- I'd also be surprised if daily minutes per daily active using isn't declining. This is a year old at this point but based on anecdotal evidence the decline has continued: http://www.businessinsider.com/facebook-sees-personal-sharing-decline-2016-4?r=US&IR=T&IR=T

- Innovation is fairly limited that I see. People may point to livestreaming but I haven't seen any evidence this is catching on. I don't see anything to indicate that Facebook is becoming the "content hub" of the internet as they'd hoped. Instagram continues to innovate a bit and seems to be stealing market share from SNAP but Stories don't generate any revenue at this point. 

- Their strong Q4 was aided by a massive amount of political ads. A lot of people I've talked to are burned out on Facebook because of the election and the post-election. Possible these people just need a break.

 

Curious for your perspective. I'm short but would like to understand the bull case better. Google I agree is definitely an incredible company and never ceases to amaze me with their new products/services. I recently signed up for Project Fi (their phone service). The international coverage is what I've always wanted but no other company was either willing or capable to do (data nearly anywhere in the world is $10/GB, free text messaging, calls are more reasonable and I think you can use data calls on Wifi).

 

Who's trolling who, here?

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I recently signed up for Project Fi (their phone service). The international coverage is what I've always wanted but no other company was either willing or capable to do (data nearly anywhere in the world is $10/GB, free text messaging, calls are more reasonable and I think you can use data calls on Wifi).

 

My wife has Project Fi and we love it.

 

But you're wrong about the bolded. T-Mobile has had this for the last 5-10 years.

 

Project Fi only has it because they MVNO on top of T-Mobile (and Sprint, but not for Intl coverage)

 

I have T-Mobile for 17 years now...

 

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To play devil's advocate, what makes you convinced that Facebook isn't the Valeant of the internet?

- Conversations regarding Facebook tend to drift to a cult of personality around Zuckerberg. How do they plan to generate a reasonable ROE from Whatsapp users? Zuckerberg. How does Oculus fit in? Zuckerberg!

- Revenue growth seems to be driven primarily by channel stuffing (higher % of ads per page) and price increases (market driven based on ad success, to be fair). While user growth continues globally, user growth in areas that have high ARPU is fairly limited (Slides 3 & 12: https://s21.q4cdn.com/399680738/files/doc_presentations/FB-Q4'16-Earnings-Slides.pdf). On one of the calls recently they said they likely can't increase ad volume any further.

- I'd be surprised if  a material percentage of new accounts in the US aren't fake. I get an average of ~1 friend request per week that is blatantly fake (girl with lots of pictures from different places all added within the last hour). I'll report these as fake and Facebook doesn't seem to remove them (admittedly I don't usually check).

- I'd also be surprised if daily minutes per daily active using isn't declining. This is a year old at this point but based on anecdotal evidence the decline has continued: http://www.businessinsider.com/facebook-sees-personal-sharing-decline-2016-4?r=US&IR=T&IR=T

- Innovation is fairly limited that I see. People may point to livestreaming but I haven't seen any evidence this is catching on. I don't see anything to indicate that Facebook is becoming the "content hub" of the internet as they'd hoped. Instagram continues to innovate a bit and seems to be stealing market share from SNAP but Stories don't generate any revenue at this point. 

- Their strong Q4 was aided by a massive amount of political ads. A lot of people I've talked to are burned out on Facebook because of the election and the post-election. Possible these people just need a break.

 

Curious for your perspective. I'm short but would like to understand the bull case better. Google I agree is definitely an incredible company and never ceases to amaze me with their new products/services. I recently signed up for Project Fi (their phone service). The international coverage is what I've always wanted but no other company was either willing or capable to do (data nearly anywhere in the world is $10/GB, free text messaging, calls are more reasonable and I think you can use data calls on Wifi).

I'd say that one reason why Facebook isn't the Valeant of the internet is the absence of debt. On top of that they have real cash earnings. Not adjusted cash EBITDA or whatever nonsense Valeant was calling it.

 

The valuation is another matter altogether. They now have a 400+ B market cap that's 15x sales and 40x earnings. That's really rich. I don't think that Google is cheap. But their valuation is 6x sales and 29x earnings and I think that google is a much more superior company/platform. On top of it Facebook's money is linked to advertising. That is very different from a company like Apple that can invent deices and take greater share of the wallet as people go from owning a PC to a PC, smartphones, laptop, tablet and a retail operation supporting the whole ecosystem.

 

The global pool of advertising dollars isn't expanding a lot. So for them to be worth their valuation they need to pull some really serious market share. Now they may be able to do it but a whole lot of things need to go their way for that to happen. So the way I see it is that best case scenario you make a normal rate of return. Otherwise it's worse. Or maybe I'm wrong ad something brilliant happens. Either way, it doesn't have that ring of a fat pitch.

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Just saying "Hey fuck it, let's buy these mega large cap companies that have outperformed massively and call it a day." is not a strategy, it's just following the crowd imo. The general market knows these companies are scalable monopolies, that's why they are priced the way they are. In fact, over time I believe most face plenty of regulation risks. But we'll see.

 

This should remind people of the Nifty Fifty really. As with those, returns can be very satisfactory for most of those stocks over the long run. That doesn't mean buying them now at current valuations is the best way to go at it. I'm not willing to take that bet at market highs, in a low rate environment, great economy and a super low volatility period. No thanks! Better opportunities might be around the corner and if they don't show that is also fine. No need to swing when feeling uncertain. Anyway, very few people are able to withstand the pain of losing most of their wealth during 5-10 years because they paid too much over the short term.

 

edit: To be clear, I otherwise agree with your point that investors often make it too hard. Most just can't make it investing in mediocre companies. I too wished I focused on quality a little more than pure valuation in the past. Being wrong isn't as painful either. That said, some people just like to read obscure fillings. Rare creatures but they exist!  ;)

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I recently signed up for Project Fi (their phone service). The international coverage is what I've always wanted but no other company was either willing or capable to do (data nearly anywhere in the world is $10/GB, free text messaging, calls are more reasonable and I think you can use data calls on Wifi).

 

My wife has Project Fi and we love it.

 

But you're wrong about the bolded. T-Mobile has had this for the last 5-10 years.

 

Project Fi only has it because they MVNO on top of T-Mobile (and Sprint, but not for Intl coverage)

 

I have T-Mobile for 17 years now...

Interesting. I looked at TMUS just a few months ago but didn't pull the trigger. Hard to quantify their "don't make the customer hate us" strategy...

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Although I am an owner of Alphabet, I believe Facebook has much better targeting capabilities.  I welcome the ads on my facebook mini-feed because they are almost always products or articles which interest me.  I cannot say that the advertisements on Google or Youtube are welcome, I view them as a nuisance.

 

I'm very excited to see how Youtube progresses, but the search engine is under a lot of competitive pressure IMO.  Bing has been steadily gaining share and I view Apple is a long-term threat as well.

 

I'd love to own facebook, however, I have never been able to become comfortable with valuation given the huge stock based comp expense.  It deserves a lot of thought.

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Just saying "Hey fuck it, let's buy these mega large cap companies that have outperformed massively and call it a day." is not a strategy, it's just following the crowd imo. The general market knows these companies are scalable monopolies, that's why they are priced the way they are. In fact, over time I believe most face plenty of regulation risks. But we'll see.

 

This should remind people of the Nifty Fifty really. As with those, returns can be very satisfactory for most of those stocks over the long run. That doesn't mean buying them now at current valuations is the best way to go at it. I'm not willing to take that bet at market highs, in a low rate environment, great economy and a super low volatility period. No thanks! Better opportunities might be around the corner and if they don't show that is also fine. No need to swing when feeling uncertain. Anyway, very few people are able to withstand the pain of losing most of their wealth during 5-10 years because they paid too much over the short term.

 

edit: To be clear, I otherwise agree with your point that investors often make it too hard. Most just can't make it investing in mediocre companies. I too wished I focused on quality a little more than pure valuation in the past. Being wrong isn't as painful either. That said, some people just like to read obscure fillings. Rare creatures but they exist!  ;)

 

I mean to be fair you could have said the same thing about Amazon 3 years and 200% ago. I am not a big fan of "the market knows" arguments b/c you don't know what the market is really forecasting; all you know is the aggregate superficial valuation.

 

These stocks have traded at high multiples consistently, and they've done well regardless thanks to the underlying business performance. The biggest edge on any company is having the ability to wait; most investors are way too short term oriented, and don't have time to let the world's best companies work their wonders for them. As good as the market thinks these companies are, they may actually be perpetually undervalued because a lot of people are scared away by high multiples. It's arguable the multiples aren't as high as they should be and that's why they consistently outperform.

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As good as the market thinks these companies are, they may actually be perpetually undervalued because a lot of people are scared away by high multiples. It's arguable the multiples aren't as high as they should be and that's why they consistently outperform.

 

ScottHall just (re)discovered one of the big claims of The Gorilla Game.

 

 

 

News at 10, crash at 11.  8)

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Just saying "Hey fuck it, let's buy these mega large cap companies that have outperformed massively and call it a day." is not a strategy, it's just following the crowd imo. The general market knows these companies are scalable monopolies, that's why they are priced the way they are. In fact, over time I believe most face plenty of regulation risks. But we'll see.

 

This should remind people of the Nifty Fifty really. As with those, returns can be very satisfactory for most of those stocks over the long run. That doesn't mean buying them now at current valuations is the best way to go at it. I'm not willing to take that bet at market highs, in a low rate environment, great economy and a super low volatility period. No thanks! Better opportunities might be around the corner and if they don't show that is also fine. No need to swing when feeling uncertain. Anyway, very few people are able to withstand the pain of losing most of their wealth during 5-10 years because they paid too much over the short term.

 

edit: To be clear, I otherwise agree with your point that investors often make it too hard. Most just can't make it investing in mediocre companies. I too wished I focused on quality a little more than pure valuation in the past. Being wrong isn't as painful either. That said, some people just like to read obscure fillings. Rare creatures but they exist!  ;)

 

I don't know -- I've made good money in crowded, megacap growth companies. Should I give it back?

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Just saying "Hey fuck it, let's buy these mega large cap companies that have outperformed massively and call it a day." is not a strategy, it's just following the crowd imo. The general market knows these companies are scalable monopolies, that's why they are priced the way they are. In fact, over time I believe most face plenty of regulation risks. But we'll see.

 

This should remind people of the Nifty Fifty really. As with those, returns can be very satisfactory for most of those stocks over the long run. That doesn't mean buying them now at current valuations is the best way to go at it. I'm not willing to take that bet at market highs, in a low rate environment, great economy and a super low volatility period. No thanks! Better opportunities might be around the corner and if they don't show that is also fine. No need to swing when feeling uncertain. Anyway, very few people are able to withstand the pain of losing most of their wealth during 5-10 years because they paid too much over the short term.

 

edit: To be clear, I otherwise agree with your point that investors often make it too hard. Most just can't make it investing in mediocre companies. I too wished I focused on quality a little more than pure valuation in the past. Being wrong isn't as painful either. That said, some people just like to read obscure fillings. Rare creatures but they exist!  ;)

 

 

I mean to be fair you could have said the same thing about Amazon 3 years and 200% ago. I am not a big fan of "the market knows" arguments b/c you don't know what the market is really forecasting; all you know is the aggregate superficial valuation.

 

These stocks have traded at high multiples consistently, and they've done well regardless thanks to the underlying business performance. The biggest edge on any company is having the ability to wait; most investors are way too short term oriented, and don't have time to let the world's best companies work their wonders for them. As good as the market thinks these companies are, they may actually be perpetually undervalued because a lot of people are scared away by high multiples. It's arguable the multiples aren't as high as they should be and that's why they consistently outperform.

 

There might be such an effect in "value circles" . God knows I'm guilty of having rejected stocks outright because they traded at 25x. But most of the market is not like that. Most of the market loves companies where they can extrapolate a good CAGR from the historical stock price action. Preferably without going against recent trends in the price and the news.

 

Your argument is somewhat contrarian on this board and that is a decent start for any thesis. Now it just has to be right too. And the momentum traders which you find yourself in company with are sometimes right for incidental fundamental reasons, so it's not like it's impossible.

 

Your case is well-argued. It is also the same case which has been made in any financial mania in history, they are never illogical at their core. The problem is that you can't reason very well against them with only logic, you have to use analogies. Analogies are poor persuading techniques because they are never perfect, they always have ill-fitting aspects to them, which a well-read bull can point out quickly. And obviously they could be the wrong lens, it really might be different this time. I think most people by now have realized that America in 2016 was not Germany in 1933, but many people believed that sincerely recently. Some might still do. Consensus is very alluring to humans, we find consensus so appealing that we actively distort reality to fit our logic into the consensus.

 

Have you noticed that mean-reversion of profit margins is almost laughed at these days? It's so blatantly obvious that the composition of the economy is different. Making steel versus social media. But are historical competitive pressures on margins forever a thing of the past? Will crowded areas of tech never see competitive margin pressure? Is modern network effects the end of free capitalism? Some people are in the middle of very high jumps, but I still believe in gravity.

 

Historically, the highest valued quartile of stocks has performed abysmally. In light of that I find it not a tantalising prospect to bet on megacap high-flyers despite seemingly convincing arguments in favor of it. I'll take my middling returns if that's the price I have to pay. 

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"The funniest thing in the world to me is that the tech bubble people were right, just ahead of their time."

 

No, they were not right! Thousands of these have disappeared, lost over 90% of their value, only a very few percentage have survived or delivered any return to their shareholders.

 

Even large ones that did survive including Cisco, Intel and Yahoo show a negative return since that time. Even mighty Microsoft is only up 11% since its peak over 17 years ago!

 

Sure there is Amazon which you are so proud of and is up 8.8 times over that period or a whopping 13.5% a year but, you should not make a general statement based on one company that by the way has never generated profits in any kind of way to justify its valuation vs a Google for example.

 

Bottom line is that you should not ignore valuation. When things get pricey or hard to value, history is not kind.

 

Cardboard

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"The funniest thing in the world to me is that the tech bubble people were right, just ahead of their time."

 

No, they were not right! Thousands of these have disappeared, lost over 90% of their value, only a very few percentage have survived or delivered any return to their shareholders.

 

Even large ones that did survive including Cisco, Intel and Yahoo show a negative return since that time. Even mighty Microsoft is only up 11% since its peak over 17 years ago!

 

Sure there is Amazon which you are so proud of and is up 8.8 times over that period or a whopping 13.5% a year but, you should not make a general statement based on one company that by the way has never generated profits in any kind of way to justify its valuation vs a Google for example.

 

Bottom line is that you should not ignore valuation. When things get pricey or hard to value, history is not kind.

 

Cardboard

I think Cardboard is pretty spot on. I might add that using Amazon as an example is kinda cheating. The one company who's stock has done well over the period.

 

If you look back at what were the "FANG" stocks back then - AOL, Microsoft, Cisco, Yahoo, Amazon - and you bought them as a basket you would have had a pretty bad experience over the period. This is mainly because their future earnings have been greatly overestimated. Basically their valuations were too rich. Also, generally as a group their margins (the ones that had margins) shrunk and they got new competitors.

 

As a thought experiment let's also assume that everything would have gone according to the script. I'd say that then's Yahoo and Microsoft is basically represented today by Microsoft, Yahoo, Google, and Apple. If you combine their market caps and look at the return over the period it would still be pretty pedestrian.

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"The funniest thing in the world to me is that the tech bubble people were right, just ahead of their time."

 

No, they were not right! Thousands of these have disappeared, lost over 90% of their value, only a very few percentage have survived or delivered any return to their shareholders.

 

Even large ones that did survive including Cisco, Intel and Yahoo show a negative return since that time. Even mighty Microsoft is only up 11% since its peak over 17 years ago!

 

Sure there is Amazon which you are so proud of and is up 8.8 times over that period or a whopping 13.5% a year but, you should not make a general statement based on one company that by the way has never generated profits in any kind of way to justify its valuation vs a Google for example.

 

Bottom line is that you should not ignore valuation. When things get pricey or hard to value, history is not kind.

 

Cardboard

I think Cardboard is pretty spot on. I might add that using Amazon as an example is kinda cheating. The one company who's stock has done well over the period.

 

If you look back at what were the "FANG" stocks back then - AOL, Microsoft, Cisco, Yahoo, Amazon - and you bought them as a basket you would have had a pretty bad experience over the period. This is mainly because their future earnings have been greatly overestimated. Basically their valuations were too rich. Also, generally as a group their margins (the ones that had margins) shrunk and they got new competitors.

 

As a thought experiment let's also assume that everything would have gone according to the script. I'd say that then's Yahoo and Microsoft is basically represented today by Microsoft, Yahoo, Google, and Apple. If you combine their market caps and look at the return over the period it would still be pretty pedestrian.

 

To me,

 

It can be boiled down to investing long term in :

 

1. Companies with a material positive cash flow, that cash flow being sustainable - at least in the mid term,

2. Combined with the trust in management [both board and CEO], to allocate the accumulated excess cash intelligently.

 

It reads pretty simply and obvious.

 

In pratice, it is not. It does not matter if we are talking about FANG stocks, or perhaps something as boring as BRK, or perhaps - in my case - some even more boring [and - to most people on this board - unknown] Scandinavian conglomerates.

 

Long term, it's all about the same.

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At its dot.com bubble peak, Microsoft traded around 65x EBIT ($620 billion market cap - $40 billion net cash and investments)/($9 billion operating income after accounting for SBC).  [Numbers are from 6/30/00 annual report]

 

Today, Google trades around 21x EBIT ($580 billion market cap - $80 billion net cash and investments)/($24 billion operating income, includes SBC).

 

I understand the belief that 21x EBIT is too much to pay, but is it really comparable to 65x EBIT?

 

 

 

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You're all welcome to ignore me if you'd like, but the fact is that my topics are often hotbeds of activity. A topic about my own life of all things is 11 pages long.

 

Maybe someone should think about the applications of that.

 

Can I be your agent and sell ScottHall Brand?  8)

 

 

We gonna make multi-BUHLLIIOOONS!

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You're all welcome to ignore me if you'd like, but the fact is that my topics are often hotbeds of activity. A topic about my own life of all things is 11 pages long.

 

Maybe someone should think about the applications of that.

 

The funny part here is, that you are already - for my part - on my ignore list. I'm just nosy about what you are posting, reading it all. The board technicaly alows me.

 

Widening your mental state of thinking using pot etc. is to me not the way move forward. Cardboard has posted about it earlier on this board, based on personal experiences related to persons close to cardboard earlier, and personally I agree with cardboard.

 

To me, most likely, you'll end up as a train wreck of a person - the same as investor - if you do not get a hold on your self with regard to this.

 

- - - o 0 o - - -

 

The first person to treat you as deserved is your self! : Never forget that!.

 

- Good luck, Scott.

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Just saying "Hey fuck it, let's buy these mega large cap companies that have outperformed massively and call it a day." is not a strategy, it's just following the crowd imo. The general market knows these companies are scalable monopolies, that's why they are priced the way they are. In fact, over time I believe most face plenty of regulation risks. But we'll see.

 

This should remind people of the Nifty Fifty really. As with those, returns can be very satisfactory for most of those stocks over the long run. That doesn't mean buying them now at current valuations is the best way to go at it. I'm not willing to take that bet at market highs, in a low rate environment, great economy and a super low volatility period. No thanks! Better opportunities might be around the corner and if they don't show that is also fine. No need to swing when feeling uncertain. Anyway, very few people are able to withstand the pain of losing most of their wealth during 5-10 years because they paid too much over the short term.

 

edit: To be clear, I otherwise agree with your point that investors often make it too hard. Most just can't make it investing in mediocre companies. I too wished I focused on quality a little more than pure valuation in the past. Being wrong isn't as painful either. That said, some people just like to read obscure fillings. Rare creatures but they exist!  ;)

 

I don't know -- I've made good money in crowded, megacap growth companies. Should I give it back?

 

You will. 8)

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