Archive for the ‘Strategy’ Category

During this week’s episode of VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss Bill Nygren’s $1,000 Comp Number For Netflix Subscribers:

Tobias Carlisle: Let’s start with what’s Bill Nygren’s take on Netflix?

Bill Brewster: He’s using HBO as the comp for the Netflix valuation where AT&T purchased, what is it a Warner, for approximately $1,000 a sub, right? No, our guy fell. That’s terrible. Oh well, so those on YouTube, at least Jake and I are in the Christmas spirits still.

Bill Brewster: Anyway, his whole thesis is the takeout value based on the AT&T transaction for Netflix is approximately $1,000 a sub. I just think it’s important for people to think for themselves on this. I sort of understand why in Barron’s, Mr. Nygren’s using that as an easy pitch. But if you look at the Recode conference that Michael Nathanson did, he talks about HBO and Disney having brands that create spend efficiency.

Bill Brewster: Matt Ball recently, I think he’s about to change the way that people talk about Netflix and he said, “I find it bizarre that people have criticized Disney pluses. One to two point billion original content budget is being laughable in today’s streaming wars. Putting aside the strength of Disney’s library, this 1 to 2 billion spend is probably several times more impactful per dollar than the 1 to 2 billion that would be spent by Netflix. And HBO is one and a half billion in original programming is modest compared to Netflix is 10 billion, but they generate equivalent Emmy nominations and I am the beep traffic.” I just think it’s sort of interesting. You read Barron’s and it’s a neatly packaged pitch, but you look a little bit deeper and AT&T history of acquisitions leaves a little bit to be desired and the efficiency that HBO and Disney have to acquire customers and put it out the distribution machine. There are different businesses. I don’t think that you can say that their comps.

Bill Brewster: Why are the different businesses?

Tobias Carlisle: Well, I think HBO traditionally, at least as I perceive what AT&T wants to do with that asset, you probably got a higher income base. They were traditionally distributed through a cable package. Now, AT&T can sort of bundle it with their wireless or total bundle offering and AT&T, it sort of makes AT&T’s distribution system more efficient. Right? As opposed to Netflix who has to produce content to keep people hooked to keep them watching. It’s just a very, in my mind, a different: a. Business model and b. Reason for owning the content. Plus, Netflix is global. HBO only really has the rights in the US so it’s just not, in my mind-

Tobias Carlisle: Don’t they converge over time?

Bill Brewster: Well, I think longterm, it’ll be interesting to see how HBO or HBO Max actually performs. I would not be shocked to see HBO distributed through Netflix in the very long term, but medium term, I could see it being a real problem.

Tobias Carlisle: I think it’s funny the way… I know that Netflix spends a lot of money, but I don’t see a lot of really great shows coming out of that money spend it. If I think about the amount of time that I spent, we would watch HBO much more often than we’d watch Netflix and Disney Plus like Disney’s got one show really. It’s got the Mandalorian, which that’s hitting south pretty quickly. I think Bill Burr dropping the alien was a big, was the highlight of like the last two weeks.

Bill Brewster: Well, I think that you could say that is sort of what Netflix is really good at. Right? Even if a lot of the content isn’t great per se, they are very good at continuing to release content. Now, it comes at the cost of free cash flow.

Jake Taylor: How? Yeah. I mean you could probably do a pretty good job if I wrote you a check for 15 billion a year to spend on just go make stuff. Right?

Tobias Carlisle: Would you make The Irishman if you hit that much money?

Bill Brewster: I did not like The Irishman.

Tobias Carlisle: No, not a at all.

Jake Taylor: I didn’t even bother watching it after hearing all the people can’t get that life back, those three hours.

Tobias Carlisle: I was prepared to watch it because I kind of like Scorsese. I like all those guys. I love Main Streets and Godfather and Casino, all that stuff. I’m the kind of person who would watch it and enjoy it. I just couldn’t… Like DeNiro, it’s just not believable even though they aged. He’s supposed to be 37. They aged him to 57. He still looked old.

Bill Brewster: His walk was still 70.

Tobias Carlisle: He still looked old. Like when he was stomping that guy, I felt bad for the kid. I felt bad for DeNiro. I thought he was going to throw a hip out.

Bill Brewster: Throw his back out. Yeah. It took me a long time to watch. I think I watched it over three nights. I don’t know. I wanted it to be Casino and it just wasn’t, which is probably unfair.

Tobias Carlisle: I saw somebody, it was Tony Greer actually, I’d feel bad calling him out. He said he loved the Irishman, but he hated Once Upon a Time on Wall Street, which I felt the reverse. I loved Once Upon a Time on Wall Street. Once Upon a Time in Hollywood. Sorry.

Bill Brewster: Yeah.

Tobias Carlisle: Freudian slip there. Have you seen it?

Bill Brewster: Yeah and I loved it. I like to think that I can appreciate a good film. Actually, I’ve used that as my example of like, no, I can appreciate film, but I don’t know, the Irishman just didn’t do it for me.

Tobias Carlisle: I didn’t know anything about Once Upon a Time. I watched it all. I was cheering at the end because I had no idea. I don’t want to ruin it for anybody who hasn’t seen it. But, I had this sick feeling the whole way through and I was literally like cheering out loud in the final scene. I loved it so much.

Media Streaming – What Metric Are People Using To Determine Return On Content Spend?

Jake Taylor: That’s an interesting, like what are people using now for different metrics for returns on content spend? You mentioned IMTP, you mentioned traffic. What are people using now instead of actual cash as the marker of success?

Tobias Carlisle: Well, they try to win the awards road. They’ve all tried to win Emmy’s and Oscar things.

Jake Taylor: That doesn’t correlate with actually what people want to watch. Right?

Tobias Carlisle: Maybe it makes you credible for future content.

Bill Brewster: Yeah, I think, I don’t know, we’ll see. AT&T’s probably doing it. They’ll probably measure it return reduction, Disney’s going to argue that it gets you in their ecosystem and create some revenue synergies, I guess.

Tobias Carlisle: Let’s just go back to Nygren’s $1,000-

Jake Taylor: Comp.

Tobias Carlisle: … comp. Yeah. What’s the average revenue per user for a Netflix? Do you have any idea what that is, Bill?

Bill Brewster: Oh, not off the top of my head. I’m not looking at my spreadsheet. You guys have seen the sheet though. It’s quite long.

Tobias Carlisle: What’s everybody paying for?

Jake Taylor: Well, you need it to be that long to get out to where they’re actually making money out into that distant future. It’s a big spreadsheet.

Bill Brewster: Yeah. I don’t know. I think that their cash spend and what they’re bringing in is pretty aligned on a forward user basis. Where I got super nervous at that is when they hit the user hiccup because it got me pretty worried that something in the little algorithm had changed and statistically speaking, it was a pretty big miss. I think there’s-

Jake Taylor: Can you, if I remember right, you said that is, you felt like as long as they were accurate about predicting sub changes, then you felt comfortable with it but then they swung and missed on what they said they were expecting.

Bill Brewster: Yeah. I thought that if they could keep their spend per projected user flat or within a range. Right? I felt like they had the algorithm figured out. That hiccup, my math might be a little wrong, but I thought it was south of two standard deviations. When you’re spending that much, that’s not a cheap stock, right? You don’t have a lot of room for error.

Tobias Carlisle: I got to say in full disclosure, I have been short, but we’re rolling out of the short literally today. I think that the reason, and I’ll just tell you why we’re taking it off, I still think that it’s overvalued and I still think it’s got a lot of trouble. It’s got a lot of issues like big, big negative, free cashflow, lots of debt, lots of competition. It’s just that there are better opportunities out there at the moment. I think it’s really, really beginning to look like a target rich environment for shorts.

Bill Brewster: You’ve been dreaming about this forever.

Tobias Carlisle: Well, I think it’s been-

Jake Taylor: Other than that though, how was the play [inaudible 00:00:11:03]?

Tobias Carlisle: I’ve heard there are lots of investors who I respect who are on the other side too. Lots of investors. Bill being one of them who have been long and I continued to believe in that total addressable market is massive. That SaaS business is going to scale easily. Need to bear some of that in mind that there are pretty good arguments on the other side too. I still think it’s probably kind of a no man’s land at the moment. I don’t want it to be long, but I definitely I don’t want to be short at the moment either.

Bill Brewster: I still think longterm they can win, but I think that there is going to be a lot of pain inflicted between all these streaming platforms. I remain fairly convinced that we’re probably going to see a situation where everybody’s just trying. I watched the Irishman, I turned off the Netflix. I don’t miss it right now. I’ll probably be back at some point.

Tobias Carlisle: Would you know if anything comes on?

Bill Brewster: Yeah. Well, that’s the thing, right? I’m going to watch Disney Plus for a little while and then I’ll go back to Netflix and then maybe I’ll check out HBO Max. I’m just going to turn off all these things.

Tobias Carlisle: Prime is very good. I watch a lot of Prime.

Bill Brewster: I do too. It is pretty good.

Tobias Carlisle: It feels like it’s free because you kind of paying them whatever it is annually so they can send you the packages over or not. All right.

Bill Brewster: The thing about Netflix that’s tough, I think, is they’re US streaming is where a lot of the money is, right? They’re going to try to scale into India with like $3 a month subscriptions. I don’t know how much you can make on $3 a month, but I just think-

Tobias Carlisle: If it’s all margin.

Bill Brewster: Yeah. Once you hit the point where-

Jake Taylor: But it’s not though. Isn’t there… Don’t they have to, aren’t they making content specific for different artists?

Tobias Carlisle: Actually, their local content, I’ve watched some of that Indian content, I think it’s excellent. I think it’s some of the better stuff that I have.

Bill Brewster: Well, what’s interesting that I don’t think maybe people here appreciate, their international competition, at least according to Matt Ball is really not very strong. The way that the rights are split up around the globe. Netflix is sort of the only one that owns all the rights to all their distribution. I think it can work. I just don’t think that you can say, well AT&T who almost objectively overpaid for direct TV and doesn’t have any good history of making great acquisitions is all of a sudden my comp for Netflix. That’s crazy to me. But I’m sure-

Jake Taylor: My condo in 2007 in Las Vegas comped at $1.2 million. So, it must be worth that, right?

Tobias Carlisle: I don’t think. I’m always a little bit skeptical of those kinds of analysis because it’s so hard to compare the two. $1,000 for per sub for Netflix like that’s bullish if you’re talking about $3 monthly gross revenue from some of the folks outside the US.

Bill Brewster: Yeah, well. And then, he said like they’re going to add so many subs and then you multiply it by a thousand so they going to gain like 25 billion of value this year. Well, I don’t know. That’s some funny to add.

Tobias Carlisle: It’s 7.2 billion people in the world with $1,000 per sub. That gets a $7 trillion.

Bill Brewster: That’s exactly right. Now, those guys are super smart, so I bet if you’re sitting in their office, it’s a much more detailed conversation, but-

Jake Taylor: We’re going intergalactic to get the real Tam.

Tobias Carlisle: Netflix is the company on that.

Bill Brewster: That’s right. Yeah.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Here’s a list of this week’s best investing reads:

Charts of the Decade (A Wealth of Common Sense)

The Twitter Types (The Irrelevant Investor)

The Top Performing Stocks of the Decade (The Reformed Broker)

How To Turn $100,000 Into $20 Million (TAM)

The Financial Illiteracy Epidemic (The Rational Walk)

Ancient Funds That Are Still Beating the Market (Validea)

Mohnish Pabrai: 4 Great Questions Answered On The Current State Of Value Investing (TAM)

A Way to Detect Bias (Paul Graham)

Candy Land (HumbleDollar)

Ponzi Schemes, Private Yachts, and a Missing $250 Million in Crypto (Whitney Tilson)

Michael Mauboussin: 10 Rediscovered Lectures From Benjamin Graham (TAM)

A Pragmatic View on the Existence of Billionaires & Government (Prag Cap)

technical debt (Research Puzzle)

What Nervous Investors Are Buying to Feel Brave (Jason Zweig)

The Virtuous Investor: Rule 18 (Klement)

Panera Bread and the Illusion of Fresh (MOI Global)

Julian Robertson: One Of The Most Important Lessons – Double Up, Not Down! (TAM)

Stock Price Guidelines (Focused Compounding)

What’s Really Important In The Market (TradeFeed)

What’s Your Delta? (Of Dollars and Data)

Why Value Investing Works (Safal Niveshak)

Markets Are Up 30% YTD. Your Portfolio Is Not. Here’s Why (The Big Picture)

Bill Nygren: Here’s Why Alphabet And Netflix Can Be Classified As Value Stocks (TAM)

The Foundation Stones Of Good Investing. Part 2 – Five Effective Investment Practices (FBB)

3 Financial Statements to Measure a Company’s Strength (Schwab)

A “Conservative” Stock Selection Model Built for the Long-Term Investor (Sure Dividend)

Lessons Learned From The Recent Recession Scare (The Capital Spectator)

What Can Investors Learn From Ray Dalio’s Mentorship With Sean ‘Diddy’ Combs (TAM)

The Fundamental Problem for Indexes (WisdomTree)

Buy, Sell, Or Hold? (GMM)

This Time is Different, Energy Icons, Cyber Attacks (Jamie Catherwood)

How Does The Endowment Model (Of Investing) Work? (TAM)

Charts of Stock Market Strength (PAL)

Flushing Money Down The Toilet (Ramp Capital)

Steeper Yield Curve & Improving PMI (UPFINA)

Working (Barel Karsan)

It’s Not So Much … (Epsilon Theory)

The Dumb (Timing) Luck of Smart Beta (Flirting with Models)

The Fundamental Law of Lifestyle Inflation (Your Brain On Stocks)

Position Sizing: How to Weight the Stocks You Own? | by Paul Perrino, CFA (Intrinsic Investing)

Global Pension Funds: The Coming Storm (CFA Institute)

The Ultimate 2020 Market Playbook (bps and pieces)

Nasdaq 10,000 ….You Can Taste It! (Howard Lindzon)

Paul Volcker: The Great Disinflator (Dr Eds Blog)

2020 Outlook for Emerging Markets Equity Investing (Advisor Perspectives)

Protecting the Downside of Trend When It Is Not Your Friend: Part 2/2 (Alpha Architect)

Trendline Wednesday – 12/11/2019 (Dana Lyons)

Is there a bull market in feeling bad? (Brinker)

This week’s best investing podcasts:

(Ep.42) The Acquirers Podcast: Mark Yusko – Endowment Value, Endowment Model, Value Investing, Crypto And Bitcoin (TAM)

The Best Investment Writing Volume 3: Ben Johnson – When Markets Are Tough, Don’t Look (Meb Faber)

Where Do FAANG Stocks Go From Here? (Stansberry)

Josh Gets Schooled About Good Coffee (The Compound)

Where to Find the Best Value Stocks in 2020(Value Investor)

Esther Duflo on Management, Growth, and Research in Action (Conversations with Tyler)

Rohit Prasad: Amazon Alexa and Conversational AI (AI Podcast)

Charles Plosser & Dennis Lockhart (Behind the Markets)

#10 – George Pearkes (Jelly Donut)

Building Unicorns in Europe (Expotential View)

Neal Triplett and Kim Lew – Issues of Management at Duke and Carnegie EP.116) (Capital Allocators)

This week’s best investing graphic/video:

Charting the World’s Major Stock Markets on the Same Scale (1990-2019) (Visual Capitalist)


(Source: Visual Capitalist)

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Here’s a list of this week’s best investing reads:

A Random Watch Down Wall Street: Boiler Room (A Wealth of Common Sense)

The Rise and the Fall (Irrelevant Investor)

Writing and speaking publicly about stocks; Commitment bias; Listening to contrary opinions; Buffett’s mistake not selling Coca-Cola (Whitney Tilson)

The Danger of Judging Investment Metrics Based on Performance (Validea)

Buffett’s No Called Strikes (Novel Investor)

FREE PASS: Tobias Carlisle, Plus A Bunch Of Other Investing Experts At The Online Wealth365 Summit January 2020 (Wealth365)

3 Reasons Why Some Companies Never Pay Dividends (Sure Dividend)

G.A.U.P – Growth At An Unreasonable Price (AM)

The Man Who Solved The Market (Barel Karsan)

Credit Suisse: Countdown to QE4? (Credit Suisse)

Beware These Investment Traps (Financial Bodyguard)

2020 Global Market Outlook: New Heroes Needed (Schwab)

Bitcoin and other crypto assets: what are they really? (EBI)

Tracking your dividend growth is just step 1 of investing with confidence (Dividend Guy)

Bonding With Bonds (HumbleDollar)

The Tablecloth to Napkin Financial Analysis Model (AM)

The Two Chinas (Intrinsic Investing)

My View on “Late Stage Capitalism” (Prag Cap)

Can US Continue To Outperform Global Equity Markets? (UPFINA)

A Framework for Regulating Competition on the Internet (Stratechery)

Why Stock Borrow Costs Matter (Shortsight)

10 Important Questions to Consider Before Investing in a Company (Behavioral Value Investor)

What Type of Investor Are You? (GuruFocus)

People have a hard time understanding inflation (Klement)

A Conversation on Rebalance Timing Luck (Flirting with Models)

Digging For Broken IPO’s (Howard Lindzon)

The Phantom Metric: What Really Drives US Equity Valuations? (Advisor Perspectives)

Paul Volcker dies – The champion of monetary pragmatism (Mark Rzepczynski)

The Intellectual Investor – The Intelligent Investor, Plus Creativity (AM)

Global Impact of Investor Home Country Bias (Alpha Architect)

Inflation Remains in a Coma in Major Economies, Frustrating Central Bankers (Dr Ed’s)

Nine Nuggets of Rock-Solid Advice for Retirement-Age Clients (CFA Institute)

How To Evaluate Smart Beta ETFs (FactorResearch)

Small Caps have been packing a punch, and that could be big for the market (Brinker)

This week’s best investing podcasts:

My Conversation With Annie Duke (All Star Charts)

Episode #179: Dan Ferris, “What We Do In The Markets, It’s An Unnatural Act…You’ve Got To Have Some Discipline” (Meb Faber)

How Nearly Two Decades Of Fed Policy Contributed To Bubbles, Busts, And A Boom In Debt (Odd Lots)

(Ep.41)  Vitaliy Katsenelson – Value Intellect, Softbank, Telsa And Value (The Acquirers Podcast)

Buffett is Buying Energy and Retail: Should You? (Value Investor)

Ronald-Peter Stöeferle: We Are Still at the Beginning of a Big Bull Market for Gold (Palisade Radio)

Morningstar’s Kunal Kapoor, Storyteller in Chief(Take 15)

Kip McDaniel – How to Get an Allocator’s Attention (EP.115) (Capital Allocators)

Joe McLean – How to be a Pro’s Pro – [EP.143] (Invest Like The Best)

Mike Krieger (Know Your Risk Radio)

Growth and the Energy Transition with Vaclav Smil (Exponential ETFs)

Mounting Recession Signs: Prescient Economist David Rosenberg’s Warnings (WealthTrack)

Noam Chomsky: Language, Cognition, and Deep Learning (AI Podcast)

This week’s best investing graphic/video:

The Dramatic Rise and Fall of Cannabis Company Stocks (Visual Capitalist)

(Source: Visual Capitalist)

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During this week’s Value: After Hours podcast Taylor, Brewster, and Carlisle discuss John Malone and his very simple approach to screening for opportunities. Here’s an excerpt from the discussion:

Tobias Carlisle: I gotta say I love Malone. He’s one of my favorite kind of investor operator guys out there, along with Bernard along with Warren. They’re just, he’s such a great investor. And one of my favorite parts, as I was watching this thing and I watch it, he does these annually now. And it’s a really pleasant way to spend an hour if you like investing in you like this stuff.

Tobias Carlisle: He talks about how he bought $75 billion worth of discovery I-D-I-S-C-A is the ticker and he said, “I ran, my favorite screen is levered free cash flow and market cap.” I ran the screen, the top name was, I was like, “Oh, surprise the top name is Discovery Disco.” And so, I bought $75 million worth I was like, “That was like that was the full extent of his analysis.” Clearly he knows the business really well. I’m not arguing the toss of it, but I kind of liked that it’s a very simple approach to investing. I kind of like it.

Jake Taylor: Would you say though that there’s some, there’s a little bit of survivorship bias with him where like, he has levered up his entire career and benefited from increasingly cheap debt over and over again. There is some tailwind there that he captured now whether he was just a genius, and saw it, and bought pretty reasonably cash flowing assets and levered them up. But there is some alternate universe, where things got really sideways, and he defaulted and exploded then he’s a cautionary tale. Right? Am I the only one who thinks that way?

Bill Brewster: Now is the time that you can apologize to John Malone. Thank you very much.

Tobias Carlisle: That’s effect. I don’t know the story well enough. I’ve read Cable Cowboy. But I read it so long ago now that I can’t remember, if they were the early periods where they were struggling?

Bill Brewster: Yeah. TCI was in the, the original entity was not all, rainbows and whatnot. But he’s abnormally smart, and I think he understands debt way better than most. This is another disclosure to any listeners, his discovery and his Qurate positions came out of when he was running TCI, and he could buy him a bundle, he was part of the distribution and he knew if I put these channels on my cable networks, I can actually make them succeed. So his cost basis … Yes, he’s putting real money in today, but the other thing is, I don’t know, 75 million on a couple billion like, that’s like you and me. That’s, you gotta think about that. What’s the percentage weight in the portfolio? And it’s crazy to think, but it’s not like that huge for him.

Tobias Carlisle: So the things that he has done very well. Did he create TCI entity and I know he was the CEO of one of these, right? He didn’t found one. He sort of came into it.

Bill Brewster: Yeah, he joined TCI, he didn’t found it.

Tobias Carlisle: So the debt, I thought that he had my recollection of it, which is imperfect, but I thought that he had inherited that situation and he had kind of turned it around.

Bill Brewster: Yes. I think that’s an accurate representation

Tobias Carlisle: Because I think-

Jake Taylor: But then there was a lot of M&A after that, that was mostly debt fueled and didn’t have to go the way that it went.

Tobias Carlisle: So the argument would be… he figured out early that you could get some sort of scale, and you would get some benefits to having the scale. And so, he did that, what the, in my Marcela Lima podcast, he calls it land and expand, which is where you’ve got to spend so much money up front. So that’s why, Netflix is spending so much money because they’re landing and expanding, and he was kind of like, “Well you just going to get the biggest network that gives you all of the network effects. So we just got to build that and we have to win this race.”

Jake Taylor: It’s a great story.

Tobias Carlisle: But you’re right, that could have, that didn’t necessarily have to work,

Jake Taylor: Or kind of reminds me of the joke about, how do you become a billionaire? You borrow $1 billion and then pay it back. Right?

Bill Brewster: The only thing that I will say is, those guys are super focused on cash flow. So I don’t … Malone did try to buy Netflix, so I can’t say that he wouldn’t have done it, but I don’t think that Netflix would necessarily be run the same way if he had pulled that transaction off a while ago.

Jake Taylor: That’s an interesting, what if?

Bill Brewster: Yeah. Well, he thinks so too. And that, I guess Reed said, “I’m not selling to you.”

Tobias Carlisle: That was a fascinating, that was the whole, the whole thing is fascinating. He’s an incredibly smart guy, and if you have some background to it, you know that he’s, he doesn’t like paying taxes. So that’s why nothing ever gets sold, it gets spun out, and that’s the part of the reason for the debt to that. If you’ve got a little tax shield there and it’s been a benefit to have some debt in a business, and it makes sense in a recurring income business to have a little bit of debt, that’s a great idea. Well that’s the only business that you’d have the debt anyway.

Bill Brewster: That’s right. One, they can service it.

Jake Taylor: So just roll it over. That’s obviously you just borrow more there’s no-

Tobias Carlisle: Just keep on rolling. Are you keeping rolling it over at lower interest rates? It’s an easy game.

Jake Taylor: That’s right.

You can find out more about The VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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During this week’s Value: After Hours podcast Taylor, Brewster, and Carlisle discuss the return of value investing. Here’s an excerpt from the discussion:

Tobias Carlisle: That actually we got to come back to this in a moment, but you go on with your tangent.

Bill Brewster: No, I was just going to say, it’s interesting because I’ve been going through your other podcasts, right? And to have this conversation on the back of listening to Marcelo P. Lima and then the guys that ensemble, where it seems the modern day value investing, has just deviated so much, right? I’m listening to Sean and Todd talk about, the persistence of ROIC, and how at the firm level it’s persistent, right? Even though in a market level it’s mean reverting. And there’s a, where are the bus ticket collectors in the bag holders? They’re sort of a shutting up shop, right?

Tobias Carlisle: It’s been very tough, it’s one of those markets that has, if you’re … What historically happens when you divide the world and divide the investment universe into deciles based on some value metric, the cheaper ones tend to out perform the next cheap, and so on. Until the most expensive ones don’t work, or they generate a return that’s lower than the market.

That’s not been true for the last five or 10 years, that more expensive ones have worked. So I can understand what a lot of investors, particularly value investors have evolved because that’s, you find that the things that work, are the more expensive things that compound and the things that don’t work, or the cheap things that they don’t go up.

Tobias Carlisle: So there was a Chris Meredith, who’s one of the quants at O’Shaughnessy, he had this little metric, or this little table yesterday that he shared that, he was just looking at the late 1990s versus today. And he said, “Basically just looking at the movement in the multiple of the value portfolio versus the multiple of the growth portfolio. And so, in the late 1990s, the multiple for value contracted multiple for grammar expanded, that’s a typical.” And so, it led to this out performance for glamor over value of 15% or 19%, something like that.

Jake Taylor: What was the multiple on? Was it book, earnings?

Tobias Carlisle: Earnings?

Jake Taylor: Okay.

Tobias Carlisle: Yeah, sorry. So that, and that built on some previous work that they had put together, where they said that, the way that growth companies do, their earnings do go up, but the multiple compressors with value, the earnings go down, but the multiple expanse. And so, when that reverses, that’s when you get something like this in the market, where growth outperforms so materially. So I think it’s a totally rational evolution, for guys to evolve away from this style of deep value investment. But I do think it’s cyclical.

Bill Brewster: Well, and I guess what they would probably say is, especially the ensemble guys, because you guys got talking to, I think Sean had mentioned, over a five year period earnings growth is what actually drives returns. As you expand your horizon, the persistence in the actual underlying business drives most of your return, which I think … I don’t know a lot of us value people are really focused on the entry multiple, and it’s, got me thinking whether or not I worry too much about that. But then I talk to myself and I say, “How good are you at really predicting a business 20 years away?” And that’s where my hangup then comes. Right? So-

Tobias Carlisle: It’s funny, 10 years ago, I did not hear a lot of people saying, “Gee, I wish I’d paid up for that business.”

Bill Brewster: Yeah.

Tobias Carlisle: I missed it. I should have just pulled the trigger, is it 30 times earnings? Now it’s 60 times earnings. I should have pulled it when I was at 30. It was the other way around, everybody was like, “Damn, I wish I hadn’t been so impatient, I should have just waited until I got my price.” It’s just the turn of the market. I think it’s cyclical, I’m probably one of the very small handful of people that actually think that, and I probably look like an idiot until it gets proven otherwise. But I’m prepared to do that.

Jake Taylor: I think I might … My big concern is that, technological change has happening faster than probably any time in history, and the risk obsolescence of many of these businesses, the returns on capital can disappear overnight even, for some of these potentially. I don’t know which ones and I don’t think anyone does, that’s kind of the point.

You’re making this bet implicitly that, the returns are going to stay high for some of these companies. And frankly, some of them, if you kind of use like a Lindy effect view, where like some of them have only been around a little while, to assume that they’re going to be around for another 50 years, when they’ve only been around 10 to start out with, I think is a little bit dangerous. And I don’t really hear anyone talking about that very much, except maybe the three of us.

Tobias Carlisle: I kinda liked that. I actually thought you were going to be talking about value stocks then. I thought you’re going to say those are the ones that risk of obsolescence. That was an unexpected twist there.

You can find out more about The VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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During this week’s Value: After Hours podcast Taylor, Brewster, and Carlisle discuss Paul Graham’s – The Bus Ticket Theory of Genius. Here’s an excerpt from the discussion:

Jake Taylor: So I’ve got, Paul Graham’s essay about genius, that was making the rounds on Twitter, that was pretty popular. So we can talk about that.

Tobias Carlisle: Let’s do that.

Jake Taylor: Okay. So this essay that Paul Graham posted was talking about, how … Everyone kind of understands that it’s natural ability plus determination or grit, but he also added this other component to success or genius which was being obsessed about some topic, having some interest that you’re just obsessed about. And he reckoned, he made it like these, the bus ticket collectors, people who collect bus tickets, like it does know, there’s no real economic value to any of these things, but they’re just obsessed with collecting bus tickets, and this recipe that he kind of lays out, I found it very interesting.

The idea that maybe you actually have to waste a lot of time looking around at different things that you’re interested in, and not so much worried about, how is this going to lead to me being successful, necessarily.

Jake Taylor: So I’m thinking about like Steve Jobs, and he took Calligraphy classes in college. What was the point of that? Well, it turns out later, all these dots connecting that having beautiful fonts and an Apple was a differentiator for their products. So we really can’t know what is the, where does this go necessarily, but we just kind of have to pick things that we’re interested in, and be willing to deep dive on them. So Bill, what do you think about that?

Bill Brewster: No, I think that makes … That’s it was an interesting essay to read, and the idea of being interested in the process, right? And not looking to do something for the purpose of finding something tangible today. I think, it was pretty interesting, and the notion of, if you’re obsessed with something, you’re willing to stick with it, even if there’s not as I said like an immediate tangible benefit. You think about digging through some of these stocks. A lot of them are nos, right? And the knowledge builds and you hope eventually you can use it. And I think that it’s at least a healthy way to think about, getting through some of the nos at a minimum, right? Like I’m getting closer, and I think that was a useful framework.

Tobias Carlisle: I think it’s a good model, for finding folks who are going to be successful investors. It might be a good VC model, for finding good CEOs, but I think about it also in terms of, Joe Rogan has this podcast, right? We’re on a podcast, everybody’s got a podcast these days. But there’s no reason why that podcast isn’t as successful as a CB radio show rod. Joe Rogan could easily be, “Hey, you remember that dude who was on this TV show, in the nineties news radio, his now,” he commentates on the UFC, which is now that’s very successful, but it’s possible that wouldn’t be successful too. And guess what, he’s got a CB radio show that services, some tiny little areas somewhere. He just feel like that’s an interesting kind of tidbit to know about that guy.

Tobias Carlisle: But it turns out his CB radio show is podcasting. And so, now there’s some study out there that says that, or Andrew Wilkinson did this analysis of, he says, “He’s probably a billionaire from this podcast platform.” He could probably, he’s making like a hundred million dollars a year, he could probably sell a portion of it for $1 billion, he’d get a billion dollar valuation if he wanted it. What I think that speaks to, is that, you can get very lucky. You can be a Transporter, you could be collecting bus tickets, you can be Joe Rogan. And that’s basically what we’re trying to do work, we’re trying to not be collecting bust tickets, we’re trying to collect things that ultimately have some great value.

Tobias Carlisle: Because I have seen, I’ve known deep value guys years and years ago, they were all very odd, norm like dudes in their little offices that would look terrible, in threadbare carpet, old filing cabinet. But there were just guys who just loved the chase, they loved just finding these little nuggets, and that explain to you why they’re buying something that you’d be … That’s a terrible business, it makes fabric or something like that. Why would you invest in that? And then if you find out five years later they’ve got 10 X or something on that position, so I think it’s a good model.

Jake Taylor: I think the part for me that was the biggest takeaway, was when he was talking about the kids and what he does for his kids, which was really encourages them to dive deep on anything that they’re interested in and just kind of get work the muscle out of really getting deep into something. You don’t have time to do that at school, and it’s probably discouraged as well. Like you’re always moved on to the next period for, close your math books, it’s time for English. So for me, I’ve been trying to think about different ways that I can encourage my kids to whatever it is that they’re interested in, to really push them to dive deep on it.

Tobias Carlisle: And so, what do you do?

Jake Taylor: Well-

Tobias Carlisle: Just feed the curiosity.

Jake Taylor: Exactly. Just like keep asking them questions. It’s really more like, don’t discourage them when they want to dive deep on something probably.

You can find out more about The VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Here’s a list of this week’s best investing reads:

There’s Always a Bear Market Somewhere (A Wealth of Common Sense)

Elastic: Flexible Thinking in a Constantly Changing World (Farnam Street)

Elon Musk’s Notorious Promises: Why Tesla’s Future Success Might Not Be in His Hands (Vitaliy Katsenelson)

Unit Economics – A Modern Value Approach (AM)

My Decade (The Irrelevant Investor)

What Machine Learning Will Mean for Asset Managers  (HBR.org)

With the End in Mind (Safal Niveshak)

Beware These Investment Traps (Financial Bodyguard)

Ironing Out an Investing Mystery  (Jason Zweig)

The Softbank-WeWork End Game: Savior Economics or Sunk Cost Problem? (Aswath Damodaran)

The Greatest Money-Making Machine of All Time (Of Dollars and Data)

The First Question To Ask When Analysing Opportunities – What Is The Customer Value Proposition? (AM)

Quality Is The Lone Equity Factor Beating The Market This Year (Capital Spectator)

Bogle was right. Character counts (Evidence Based Investor)

Integration and Monopoly (Stratechery)

The Bus Ticket Theory of Genius (Paul Graham)

Oh, How Times Have Changed: Ben Graham’s 10 Criteria For Valuing Stocks (AM)

10 Things Fund Managers Say and What They Actually Mean (Behavioural Investment)

There’s more to market patterns than “sell in May and go away” (Brinker Capital)

Do Activist Investors Create Value? (CFA Institute)

My Annual Talk at Boston College (Mohnish Pabrai)

How Amazon Wove Itself Into the Life of an American City; Thousands Protest Amazon; PayPal’s scam; The seven ways getting rich increases your odds of divorce (Whitney Tilson)

Security Analysis: Introduction (Part 1) (Focused Compounding)

How To Screen For Potential Opportunities – Using Other Smart Investors 13F’s (AM)

Risky Business (Frank K Martin)

This week’s best investing research reads:

Myth-busting: Fed Actions and Stock Prices (Alpha Architect)

What Is The Chance Of A Recession & Does It Matter? (UPFINA)

For Growth Stocks, Profits Are the New Normal (Advisor Perspectives)

Five Charts that Show there is Nothing Unusual with Stock Market (Price Action Lab)

Three Things I Think I Think – Tesla and the Broken Window Theory (Prag Cap)

The Dumb (Timing) Luck of Smart Beta (Flirting with Models)

Momentum plus – Control volatility or other factors and risk-adjusted returns are improved (Mark Rzepczynsk)

Zombies in the Fed’s Soup (Dr Ed’s Blog)

This week’s best investing podcasts:

Sean Stannard-Stockton and Todd Wenning on The Acquirers Podcast | by Ensemble Capital (Intrinsic Investing)

Episode #190: Radio Show: Buying Stocks At All Time Highs…Fund Manager Sentiment…Year End Questions for Advisors and Brokers (Meb Faber)

Money & Behaviour: Understanding Investing from a Psychological Perspective with Daniel Crosby (EP.75) (Rational Reminder)

Joe Ricketts Discusses Trade and Deregulation (MIB)

(Ep.40) The Acquirers Podcast: Bluegrass Capital – Unit Economics, Incremental Returns And Intangible Capital (The Acquirers Podcast)

TIP270: Jesse Itzler – NBA Owner, Entrepreneur, Best Selling Author (TIP)

Jean-Marie Eveillard – Taking a Top-Down Approach to Value Investing (Value Investing with Legends)

The Stock Market Doesn’t Care How Hard You Try (with Barry, Michael, and Morgan Housel) (The Compound Show)

#70 Scott Adams: Avoiding Loserthink (The Knowledge Project)

Ben Hunt – Epsilon Theory: Part Two (EP.62) (The ETF Experience)

Episode 129: Is Bitcoin Breaking Away From a “Crypto Winter?” (Stansberry)

Gavin Baker – Tech and Consumer Growth Investing – [EP.149] (Invest Like The Best)

This is How Economic Crisis and Precarity Shaped the Millennial Generation (Odd Lots)

This week’s best investing graphic/video:

Structured Notes: The Secret to Improving Your Risk/Return Profile? (Visual Capitalist)

(Source: Visual Capitalist)

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