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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.

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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.

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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.

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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.

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During this week’s Value: After Hours podcast Taylor, Brewster, and Carlisle discuss how in hindsight it’s easy to pick a winning stock, but who could have predicted Amazon’s AWS? Here’s an excerpt from the interview:

Tobias Carlisle: That’s the reason that people in… Like when you see the data on… Here’s what glamour stocks or growth stocks, or whatever you want to call the most expensive decile, here’s the value stocks, so the trash stocks that nobody wants to own. Value pretty consistently outperforms growth, hasn’t been true for the last decade.

Tobias Carlisle: And people say, “Well, why… ” If you look in that historic, it’s worked over the last decade, so it’s easier to make the argument, but historically people would say, “Well, why would anybody buy the most expensive ones knowing that they don’t perform that well?” And it was this behavioral argument that all of the really big winners, individual winners, came out the expensive stock.

Jake Taylor: Come out of that population. Right.

Tobias Carlisle: So there’s companies like Walmart, Walmart just never got cheap through its entire… like the 25 years that it grew insanely. Microsoft, never got cheap through the whatever, 25, 30 years that it grew in certainly. Amazon, never cheap, just always grew insanely fast. Always was optically expensive on a ratio basis, but always growing just so rapidly that you just could never find a way to rationally value it. You just had to trust that it would outgrow the overvaluation that it apparently had at the time.

Bill Brewster: Which by the way, anyone that thinks that they could of held Amazon, like go read Brad Stone’s book and really think about all the executive departures and all that stuff, and tell me you would have held. No way.

Tobias Carlisle: You had to foresee AWS.

Bill Brewster: Yeah right. I mean basically, the only one that held was-

Tobias Carlisle: Jeff.

Bill Brewster: … somebody that said, “I love Bezos and I’m just going to let him do what he wants because he’s a genius.” Which, turned out to be right, but I fundamentally disagree with people thinking that they could have watched that day-to-day and been like, “Oh yeah, I’m fine.”

Jake Taylor: It’s fascinating because you find that Amazon dominates so many investment conversations these days. Everyone talks about the… Like when they’re looking at a business, “Well, oh, how is this… Could this be affected by Amazon?” And I don’t remember a time, or another company where it was that kind of apex predator that everybody worried about.

Bill Brewster: I wonder if Sears was. I mean, and I know that that sounds silly, but Sears had quite an organization back in the day.

Jake Taylor: They did, but they-

Tobias Carlisle: Sears was the Amazon of its day, right?

Bill Brewster: Yeah, I mean, that’s from what I understand and I mean, I don’t know all the entities that were spun off, but I think if you follow the Sears spin offs you’d be like, “Whoa, I didn’t realize that all that came out of it.”

Jake Taylor: I agree what retail and component of that and some of the manufacturing stuff, but-

Bill Brewster: They had a financial division. I don’t know.

Jake Taylor: All right. Yeah, fair point.

Bill Brewster: I think it was an impressive organization.

Jake Taylor: Oh, no doubt. It was an incredible organization.

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During this week’s Value: After Hours podcast Taylor, Brewster, and Carlisle discuss a game that helps us to decide whether investing is more luck than skill. Here’s an excerpt from the interview:

Tobias Carlisle: So gents, other topics, what have we got?

Jake Taylor: Well one thing that came up during this weekend that was kind of a fun, call it a game, and I’ll see what you guys have to say about this, but here are the ground rules for it, and maybe if you’re… Try playing this game with your friends and see what they come up with and maybe we can crowdsource what’s a good answer to this because there were some very unsatisfying answers that we came up with.

Jake Taylor: So here are the rules, you’re allowed to pick any security long or short, I guess credit or equity, and so no derivatives, no options, but here’s your goal, you have one year and you have to get the lowest possible return that you can get, lose the most money. Ideally you go to zero. Okay?

Jake Taylor: Sounds like it would be easy, right? And this is why it’s interesting is that it’s really trying to get Michael Mauboussin’s idea about when you try to determine luck versus skill of something, if you can fail on purpose, then that means maybe there is some skill involved.

Jake Taylor: So you think of a roulette table, I could try to lose by putting all my money on one of the numbers, and I’m likely to lose but I could also win really big. So there’s the rules. What do you guys have? Bill, why don’t you start since you kind of already answered a little this weekend.

Bill Brewster: Yeah, I mean, I’d probably go to a levered minor or something like that, but you know with-

Tobias Carlisle: Long, long the levered minor.

Bill Brewster: Yeah that’s right. But with my luck, they end up getting a bid and I end up six X and then it’s like a Brewster’s Millions type problem. But we were talking about… I mean, I think the tough thing about this is that it also hits on the second order thinking, right? It’s easy to say, “Well, I just buy this piece of crap,” but that piece of crap is priced like a piece of crap. And if something changes, you’re going to have a lot of money that you got to blow in the next… Let’s say it takes six months, you only have six more months to lose it all.

Bill Brewster: I think what we were getting to is over the short-term there is a lot of luck in this game. What do you say Toby?

Tobias Carlisle: Yeah, the-

Jake Taylor: I would add that… I mean, it means also literally one year results are meaningless.

Bill Brewster: Yeah.

Jake Taylor: Completely meaningless.

Tobias Carlisle: The issue… So if you had… Just taking the roulette table example, you can’t have the win, but if you can play all day long, every day for a year, you can vaporize that money, right?

Bill Brewster: Yeah, that’s true.

Tobias Carlisle: You could grind all the way through it because the vague and the… you’re getting a return that’s less than one all the time.

Tobias Carlisle: I think I could… I don’t have to trade it, but I think that if I could trade it I could get you much closer to vaporizing that money. I’ve got a short string, I got things that I think are going to go down.

Tobias Carlisle: But it does illustrate one of the problems that Bill brought up then, that you do have to have… you’re looking for stuff that’s overvalued, or is mispriced anyway.

Jake Taylor: Yeah.

Tobias Carlisle: And that’s the problem with investing. A lot of stuff is pretty well priced, even the junkie stuff is pretty, it’s accurately priced. I’d be going through that list of short names and I’d be buying them long and buying one of them long and then I’d trade them more regularly. Because I think that although you got zero cost trading that, right? You can really set yourself on fire with that.

Jake Taylor: Yeah.

Tobias Carlisle: It’s hard, but I do think that investing is a game of skill and I do think you can lose over the course of a year, and I think that that’s some proof that there’s some skill in it. I think that there is an enormous component of luck though, which is what makes it so hard.

Bill Brewster: Well, there’s definitely… I mean, I think what we were talking about is like there is certainly skill over a five year time horizon. The one year, I think we were backing into almost our little version of-

Jake Taylor: Depends on those five years though.

Bill Brewster: Yeah.

Jake Taylor: Like let’s say 2009 to 2014, did you need a ton of skill to make money?

Bill Brewster: You needed guts. Right?

Tobias Carlisle: That’s true.

Bill Brewster: I mean, a lot of people were hiding.

Jake Taylor: Yeah, all right.

Tobias Carlisle: That’s very true.

Bill Brewster: Which I think that’s a learned habit, right? I think a lot of… I mean, certainly me back then. I mean I was an amateur back then. I was a lot more afraid than I think I’d be now.

Jake Taylor: Okay, how about then 2014 to 2019? That might be the better sample of-

Tobias Carlisle: That’s a hard one.

Bill Brewster: Yeah, yeah.

Jake Taylor: Was that luck or skill?

Bill Brewster: I guess we’ll see, right?

Jake Taylor: Yeah.

Tobias Carlisle: I think that that period is an interesting period because the value, I don’t want to say factor because factor’s price to book, but the guys who are like me who are buying more on yield, care less about growth, definitely have not performed very well through that period of time.

Tobias Carlisle: If you’re somebody who leans a little bit more heavily on growth, so if you’re trying to buy growth at a reasonable price, or that Buffett compound style, then I think it’s probably be quite good period for it. I think it’s… you’ve done quite well.

Bill Brewster: Yeah. Well I think what those guys probably did well in aggregate is realizing that the path of distributions was mispriced. I guess the tough thing about that is as that thesis gets proven out, the world gets priced in a rosier and rosier way, and eventually there’s not a lot of-

Jake Taylor: You start being-

Bill Brewster: There’s not a lot of people out-

Jake Taylor: You start being right for the wrong reasons now.

Tobias Carlisle: You’re saying that that was this fundamental change wrought by the internet where that marginal cost, that marginal sale was at zero cost, or virtually zero cost? That’s the software as a service, or anything distributed over the internet.

Bill Brewster: Yeah. I mean, I think what certainly I missed, I don’t know about the market or whatever, but is just how much margin inflection was on the horizon and how persistent that would be. And some people saw it. Then some people probably got lucky, right? But they’re not all lucky by any stretch. The question is going forward what’s the right bet? Because anyone can know what the history said.

Jake Taylor: So my answer to what I would try to do is I thought about how could I find one particular thing that might change that I would be very highly levered to. So for me, I got to thinking, “All right, I want to be long the most ultra-duration that I can get.” So I would short the Argentinian century bond. And it either is going to work spectacularly, or totally blow up in my face, but I’m basically making a huge interest rate bet as much as I can and hoping that that changes somehow.

Tobias Carlisle: If you’re a macro investor and you had… So let’s say you don’t put 100% of your position into this, right? Let’s say you put, I don’t know, some sense, like one or 3%, something like that, and then you build out a whole portfolio of these things, because that’s such a contrary bet, I’ll bet there’s almost nobody in the world who thinks that that’s a good trade, right? So it’s probably…

Jake Taylor: Well, what’s ironic is that actually I might also take the long, the Argentinian century bond as my bet. I think-

Tobias Carlisle: Well that’s what I-

Bill Brewster: [crosstalk 00:25:08] straddle. You’re just betting vol.

Tobias Carlisle: You’re betting on the move, yeah.

Bill Brewster: Yeah.

Jake Taylor: Either one of those has probably a decent chance of being such a crazy val that maybe it helps you [inaudible 00:25:21].

Tobias Carlisle: The thing you have to… The only way that you win on that though is if the val is too low, if the val’s already in those prices, then that catches you. That’s why it such a hard game. It’s the expectations game, right?

Bill Brewster: Well that’s where people get crushed in options, right? I’ll have friends that’ll be like, “Oh, I think this is going up.” And I’ll buy the calls and I just say to them, “If you don’t know what the term val crush is, you should stay as far away from options as humanly possible because there’s nothing worse than being right and losing your money.”

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During this week’s Value: After Hours podcast Taylor, Brewster, and Carlisle explain why Warren Buffett is the G.O.A.T (greatest of all time), and discuss Berkshire’s secret sauce. Here’s an excerpt from the interview:

Jake Taylor: Yeah, I didn’t take umbrage to it too much, but it was… It’s definitely a… It does highlight an interesting I think phenomena that maybe we’ll get to as some point during this podcast where we have… The information now has gotten so readily available that if you were just a value guy in the ’60s, even just looking through the numbers gave you such a huge advantage and now it’s gotten much tougher now to really try to find value that other people aren’t finding.

Tobias Carlisle: Well that’s the kind of the informational argument for value, right? But is that the… I’ll lean more heavily on the behavioral. I think that, and I always bring it up and I should get John Huber on the podcast at some stage, but John Huber wrote this great piece where he talked about even in very large cap companies, they vary from two thirds, like 30% tripling over the course of the year. And he gave the example of JP Morgan, which I don’t think it backed off at all through 2007, eight, nine. It might have had a couple of years where it didn’t grow book value, something like that.

Tobias Carlisle: But the share price was wildly all over the place. And if you just kept an eye on even book value, as unpopular as that is, but that’s probably a pretty good way of valuing financials, valuing banks, if you kept an eye on the book value, you bought it at a big discount the book value, you’ve done really well.

Bill Brewster: Yeah, well I mean, look at Apple since December, right?

Tobias Carlisle: Apple.

Bill Brewster: I mean, you going to tell me that that company has changed 70% value? No way.

Tobias Carlisle: It goes to show what a G.O.A.T [greatest of all time] Buffett is, backing up the truck and buying a ton of it when it was down like that.

Bill Brewster: He’s a beast. I mean, I think the thing about that is it’s always easy in retrospect to be like, “Oh yeah, that was a buy,” Pulling the trigger and catching a falling knife and knowing when it’s not a knife that’s going to stab you and when it’s a butter knife or whatever. I mean, that’s what makes the greats the greats I think.

Tobias Carlisle: So how do you do it? What’s the secret to that?

Bill Brewster: TBD [to be defined] man. I’m still working on it. But I mean, for me I got more lucky than good I’m sure, right? In December part of it was watching. Like I said, part of it was being lucky and part of it was like this is panic right now. And the stuff I’m buying, I’m comfortable owning, right? Like the cashflow underlying, even if I have to wait a while. Especially with Apple, you’re going to benefit so much from the buyback if the shares go down. I actually just let go of it today.

Bill Brewster: The capital return story doesn’t go as far with these valuations. And I don’t know… I mean, I’ve even having a little seller’s remorse, right? But it was so much easier to identify that it was cheap than… Was it right to sell? I mean, I don’t know. That’s sort of a harder question to answer, but we’ll see.

Tobias Carlisle: Well they’re two sides of the same coin, but buying is hard, but selling’s even harder.

Bill Brewster: Yeah. You know, that’s like Munger says, right? He’s like, “I’m good at buying. I’m not very good at selling.” I feel like I probably suffer from the same thing.

Tobias Carlisle: The people who are best at selling never sell. You just hold onto it. A decade later you’re like, “Oh, we’re up 1000%.”

Bill Brewster: Yeah.

Jake Taylor: I think that’s one of the maybe the secret sauces of Berkshire that doesn’t get talked about enough is that that constant replenishment of cash coming into the inside of the company. They never really have to sell anything if they don’t want too.

Tobias Carlisle: Right.

Jake Taylor: And there’s always new money coming in to buy the next interesting idea. What a huge advantage compared to when you’re… If you’re managing a fixed portfolio that you have to dump something, that can give you a lot of remorse.

Bill Brewster: Well yeah, Markel benefits from that, Fairfax to a certain extent too, right? I mean, I think Markel’s philosophy is closer to, “We’re going to focus on companies that are quality and we’re going to sort of… We’ll maybe buy a little bit more when we think they’re cheap. We’ll maybe dollar cost average throughout,” but I almost think of that portfolio like a levered quality portfolio.

Bill Brewster: I mean over time, if you have strong underwriting and you’re reasonably good at identifying when to buy something, which they obviously are, you would think that that’s going to be a powerful engine.

Tobias Carlisle: That was AQR’s analysis of Buffett too, wasn’t it? That he was 1.7 times levered to the quality factor I think. And there was very little value in there.

Bill Brewster: Yeah.

Tobias Carlisle: Which is surprising to me.

Bill Brewster: Well it’s so different from the partnership days, right?

Tobias Carlisle: Right, which doesn’t get discussed very much.

Bill Brewster: At least from what I understand. Yeah, that’s right. When he needed to make the money, he was a value guy, right?

Tobias Carlisle: Buying it like a net-net guy, a liquidation investor if he needed to be. Like a pretty hardcore activist who actually went in and shut down the business and liquidated, even though the townsfolk were upset about it and they were writing letters in the little local newspaper.

Jake Taylor: My favorite-

Bill Brewster: Don’t ruin his image, Toby. Come on.

Jake Taylor: Yeah. My favorite story of that-

Tobias Carlisle: Corporate raid Buffett.

Jake Taylor: … was from when he just went… He painted a line inside of the warehouse and said, “If you don’t get the inventory below this line, then everyone’s fired basically.”

Tobias Carlisle: We’re going to shut the business down. Yeah, that was… Was that the first… Was Harry Bottle the man who had to do that?

Jake Taylor: Yeah, that was the Dempster Mills activist position.

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