Greenbackd

Summary

In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:

• Paul Graham – The Bus Ticket Theory of Genius
• The Bag Lady of Business – Ron Brierley
• When Will We See The Return Of Value Investing?
• LVMH To Buy Tiffany – Is It A Good Deal?
• Was Telsa’s Pickup Launch A Failure Or A Great Publicity Stunt?
• Why Buffett And Munger Don’t Short
• Position Sizing Strategies And Portfolio Management Risk
• Qurate Retail Subsidiary QVC –  Senior Secured Notes Expiring 2068
• John Malone Has A Very Simple Approach To Screening For Opportunities
• To Equal Weight Or Not To Equal Weight – What Should You Do?
• Recognize Your Own Hipocrisy

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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Full Transcript

Jake Taylor: … But I want to start it over. That was a … You’re killing it, right?

Tobias Carlisle: I’m trying to think what I’m actually going to say.

Bill Brewster: Welcome to the After Hours.

Jake Taylor: Ooh yeah.

Tobias Carlisle: Welcome to the After Hours Podcast. I’m Tobias Carlisle. I’m joined by Bill Brewster and Jake Taylor. Jake, what’s your topic this week?

Jake Taylor: Hey, Value Nerds. This week we’re going to be talking about Paul Graham’s essay about a genius that recently was making the rounds on Twitter.

Tobias Carlisle: And bill, what’s your topic?

Bill Brewster: We’re going to focus on the absurdity, of the debt that Qurate Retail got to issue this week.

Tobias Carlisle: That’s Liberty and John Malone, and I’ll be talking about the Tesla truck. Come on, coming up right after this.

Speaker 4: Why is Carlisle, the founder and principal of Acquirers Funds for regulatory reasons. He will not discuss any of the Acquires Funds on this podcast, all opinions expressed by podcast participants are solely their own, and do not reflect the opinions of Acquires Funds or affiliates. For more information, visit acquirersfunds.com.

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.

Tobias Carlisle: Just while we were telling that story, just reminded me of, the investor Ron Brierley, who I wrote about in deep value and he’s a Kiwi, he spent some time in Australia and then he ended up in the UK and he’s got that very deep valley style, where he likes balance sheet value, he also does … He was a Raider back in the 80s, and he’s still an activist, he still tries to get control of boards and do things like that. His UK company was GPG, and GPG had a big holding in this company called Coats. I don’t know if you guys know what Coats is, but basically what Coats is that, at the time I, they made like thread and make wool. And so now, I looked them up online, they say, “We’re the world’s leading Industrial Thread Business, harnessing talent and technology and textiles to enhance people’s lives.”

Tobias Carlisle: So I just think that’s a pretty good demonstration of, they used to call him the bag lady of business because he just liked to go, just he’d go around with this little plastic bag and fill it up with all of these random businesses like that. And he’s one of the world’s great investors. So that’s my aspiration to be the bag man of a, maybe not bag man, that’s not a good term.

Jake Taylor: You are the Hobo of Valley.

Tobias Carlisle: The Hobo of Valley just collecting all these garbage, all businesses. Hopefully, they tend to be really good ones.

Bill Brewster: Well, that’s why I say you’re the modern day, Walter Schloss.

Tobias Carlisle: That’s kind, it’s not true, but it’s kind.

Bill Brewster: Well, the aspirational one.

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’s, 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 that 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. There’s, 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.

Bill Brewster: Well, like a firm like Ferrari, I think that you can bet on the persistence of that brand. LVMH is one that I pay some attention to, it’s incredible what they’ve done with those brands, but here they are buying Tiffany, and Tiffany might be cheap here, but it’s definitely not a distressed asset. So they sort of getting into one of these issues, where now to get your next growth, you’re paying up for a business that maybe is not what you think it is, and how much can they get the synergies out of pushing it into their method and distribution system? I don’t know what, I’m not smart enough to know what can go on at Tiffany, but I just sorta wonder if you’re backward looking, and now they’re doing a big acquisition for growth. What is the forward return of that business look like? Stuff like that gets hard, but I guess they’ve done it for a while, so.

Tobias Carlisle: it’s Bernard Arnault, how do you say his name?

Bill Brewster: I think you’re right.

Tobias Carlisle: He had a great quote. I think possibly you shared it on Twitter yesterday. The one about, he thinks that he can grow the prestige of the brand over the next decade.

Bill Brewster: That wasn’t me.

Tobias Carlisle: I think that his focus of it was something he thought, not so much the financial performance, but he if could make the brand, more attractive for one of a better word over the next decade, then he would regard that as success. That’s what he’s aiming to do.

Jake Taylor: Okay. Well, how do you do that? You spend money on advertising, and lower your returns on capital.

Tobias Carlisle: I kind of think that, I’ve read a little bit about him. He’s one of those guys, a little bit like John Malone, who we should come back to in a moment. But there are these, I think there’s some brilliant guys out there, and one of the things that he does is he says, he … Early on in his career, he was buying these companies that had the low returns on invested capital or low sort of margins and he said, “You struggle along with the low margin, so you get these things they’ve got very fat margins.” And that’s for he’s attracted to luxury, because you can always charge gigantic prices that aren’t supported by what you’re actually selling that, you have to have some of that brand magic in there. And that Tiffany’s is a great example, right? They sell the same jewelry as anybody else, it’s just that it comes in that little, Aqua box or whatever color that box is, and that’s the entire, that’s it. That’s what you get for the, for the premium.

Bill Brewster: Well, and do you get a smile on your significant other’s face? Right. But that, I guess that that is where my question on that acquisition comes from and it’s … I’m not informed on it, but I do wonder like, “That brand has value today, that’s why they can charge what they can charge.” So how much can you really improve it? And the answer may be-

Tobias Carlisle: What are the metrics? How expensive is it?

Bill Brewster: Oh, I don’t know of the top, my head I don’t want to start talking numbers, because I’ll look like a moron. But I just think, from a story perspective, right? Where do you take Tiffany? I don’t know.

Tobias Carlisle: Name another jewelry brand.

Bill Brewster: Yeah. I really can.

Tobias Carlisle: Every kiss begins with K.

Bill Brewster: Yeah. Well, then you have the higher end, you got Cartier and stuff like that. Right? But I don’t know, Tiffany is just like Starbucks of jewelry to me.

Tobias Carlisle: It’s Starbucks of luxury jewelry run?

Bill Brewster: That’s right? Yeah.

Tobias Carlisle: So they’re masstige, they’ve got that nice point between, there like a BMW maybe.

Bill Brewster: Yeah.

Tobias Carlisle: It’s like, you see BMW is everywhere all over the road, but it’s expensive car. So it’s like, it’s not like, a Rolls Royce, where you see a Rolls Royce once a quarter, or something like that. You see 10 BMWs every time you go out on the road. So BMW is probably making more money out of that kind of brand. Maybe Tiffany’s the same thing, It is aspirational but they’re also selling a lot of it.

Jake Taylor: I just want to point out, it’s funny that you say that you would see it once a quarter, most people would say like once every three or four months.

Tobias Carlisle: Well, that’s how I think.

Jake Taylor: I know.

Tobias Carlisle: I live my life a quarter mile at a time, whatever that a quarter at a time. I thought you were going to say, I thought you were having, because I’m in Los Angeles, like they probably are at a large, a number of them around then, I don’t know other places.

Bill Brewster: The IPO cycles.

Tobias Carlisle: Yeah, maybe San Francisco. The problem with San Francisco is you’d never be able to park it. Whatever you pay for the car, you’ve got to pay just as much again, for the parking. That’s the prestige item in San Francisco.

Bill Brewster: That exempts, and that’s why people Uber. Right?

Tobias Carlisle: So let’s … I have a couple of topics, I’ve got to throw away one, because I want to talk about the Cyber Truck a little bit.

Bill Brewster: Oh yes, let’s do this.

Tobias Carlisle: So I think that Musk is an incredible genius, because he’s had the most profitable Kickstarter ever, where basically he’s come out and he’s shown a prototype of a car that it could have just gone down to a soundstage in Los Angeles and he said, “Give me your like space-age looking thing, give me some truck that’s come off the next episode of mad max.” And he’s driven that on stage. And he said, “Here’s the website where you go to.” He gives me a hundred bucks refundable, and he’s taken 200,000, he’s got 20 million bucks. That doesn’t make much difference to Musk one way or the other. But that’s a pretty impressive Kickstarter, wouldn’t you say?

Jake Taylor: Well, here’s the question, is he such a genius, that he knew that the glass was gonna break, and then that was all a publicity stunt to have everyone talking about it? it’s kind of that 48 laws of power of the-

Tobias Carlisle: Publicity design of the truck. The kind of the weird design of the truck was the thing that was supposed to get attention, because he knows that’s not straight legal. Right? You can’t have sharp corners and no,

Jake Taylor: Mirrors

Tobias Carlisle: No mirrors yet. He should’ve just had big spikes on it. Like that last mad max fire coming out of the [inaudible 00:19:35]. That’s just a straight legal.

Bill Brewster: It is a truly atrocious looking truck, which I’m sure people are going to get mad at me saying, “But it’s like a bad DeLorean.”

Tobias Carlisle: Yeah.

Bill Brewster: Which is so weird because the Model S, I think is a pretty car and it’s got styling and then here you roll out like a metal box, like a Terminator box.

Tobias Carlisle: But then you said you can’t, because it looks plainer, because the cold rolled steel, you can’t punch it into a shape, because it breaks the stamping machinery. That’s why it has to look like that.

Bill Brewster: So basically if you get in an accident with this thing, it’s just going to plow through your car and destroy everything.

Tobias Carlisle: It’s going to vaporize any pedestrian?

Jake Taylor: Yes, It’s basically a snow plow if you crashed into somebody just,

Bill Brewster: Okay. I’ll know to avoid them.

Jake Taylor: I did enjoy the, all this stuff on Twitter about it, like the different jokes, and memes that came out. And I often think about that like, “Gosh, if only we could harness all this creativity in the world for good.” It ends up manifesting in making fun of things because the creativity is off the charts to me, like it’s 10 out of 10, but there’s some really good ones on that one.

Tobias Carlisle: Have you got any examples? Am I going to put you on the spot?

Jake Taylor: Oh yeah. I really like the … They showed the, I don’t know if you remember the Tomb Raider, Laura Croft had these very angular-

Tobias Carlisle: [inaudible 00:21:06].

Jake Taylor: Endowment and it did look like the front of the truck. It was like this triangular, scale or looking.

Tobias Carlisle: Assuming you’re one with a, and it was the guy who programmed the computer game, where you’re … I can’t think what the name, but it’s the one that they make the red versus blue, comic out of other red versus blue cartoon, no?

Bill Brewster: I don’t know.

Jake Taylor: I don’t know [inaudible 00:21:37].

Tobias Carlisle: Well, one of us are computer game players, but they had the guy who designed the original truck was called a Warthog in this computer game. He said, “It basically looked the low polygon version of it, looked exactly like the truck, and then they put in the characters from it in the back with a big gun and one of the characters driving it.” It was very funny.

Bill Brewster: It’s one of those that I just assumed that the longs have done a lot better research on, than I have, because I’m not sure did either because I’m just terrified of getting my face ripped off on it. But I don’t understand. I think to me Musk and Trump are the same. The people that like them see one thing, the people that hate him see another and there’s crazy polarization around them, and he rolls out this crazy cyber truck and we’re talking about whether or not he plays 40 chess. If it’s anybody else, that’s just a crazy idea. Right? But here he’s got the posits and people love it. So, and now [inaudible 00:22:33] made it.

Tobias Carlisle: It’s so funny, when I saw Cyber Truck written, because it was written in that funky lettering, I read it as clusterfuck and it had like the blowing windows. I was like that’s [inaudible 00:22:42] nobody did, nobody changed the wording at the back.

Jake Taylor: I didn’t like the, I liked how the Tesla Q community jumped on the video, because he had another one that came out later, where they showed it not breaking. And that turned into the Zapruder film, were like they’re just tearing it apart frame by frame, looking for clues, who was on the grassy Knoll, it was …

Tobias Carlisle: Because they said that the window had been impacted in that first test, where the dude threw the ball and it bounced off the window. Right? It looked like it had been collapsed a little bit or it fell off to, they threw that ball at it.

Jake Taylor: Well, and I think they had like the door was open already, and they had some blanket over it to like hide that the door was open. I don’t know, it’s so funny the level that people will want to see what they want to see.

Tobias Carlisle: Of course the test free had the two trucks wrote, the truck, I said the truck was only two wheel drive, and there was no weight in the back. Whereas the Tesla Truck is four wheel drive and it’s heavy, because it’s got the battery in the back. And then they had Neil deGrasse Tyson leans in and he says, “Give some explanation about talking.” And then some, that’s T-O-R-Q-U-E and friction. And then some formula, one driver leaned into the same conversation, like this is the power of Twitter, right? But basically they all calling bullshit on mosque.

Bill Brewster: Well at Tesla Q those guys are, at this point it’s just wolves looking for any scrap of meat that they can get. And I don’t say that lightly, some of the stories that I’ve heard, are like community I feel really badly, right? Because some of the research is really impressive, and from the anecdotes that I’ve heard, the sizing of the bets, has really taken some people out.

Tobias Carlisle: That’s [inaudible 00:24:30].

Bill Brewster: I don’t wish that upon anybody, but, man you see Tesla Q get loose on any scrap of fraud and it’s like, “Oh, let’s go.”

Tobias Carlisle: It’s hard to say like, and there’s other, there’s smart guys at like chinos who’s a legendary short seller who’s been a short seller for so long that he just knows how to survive. He is very negative on Tesla. He very critical, pulls apart the accounts. Like if he’s negative, if he’s attracted to it. That’s pretty comprehensive, that’s pretty conclusive isn’t not Like, it’s not.

Jake Taylor: [inaudible 00:25:07].

Tobias Carlisle: [inaudible 00:25:07].

Jake Taylor: Out accounts receivable, things like he wants to see why are accounts receivable ballooning the way they are? And he’s like, people are tagging KPMG, like the accountant or who I think-

Tobias Carlisle: It’s PWC.

Jake Taylor: PWC. Okay. Yeah. Tagging them in it. Like, “Hey, you guys better be like looking a little harder or else you got lawsuits coming.” It’s so funny to me the way the information coalesces into Twitter.

Tobias Carlisle: In full disclosure, I am sure, in some of the things that I do, and it’s ripped my face of this quarter. We only short to a very small, but I only short to a very small percentage of the portfolio. And so, it’s good because it’s gone the wrong direction.

Bill Brewster: This is the stuff that I’ve re listened the Buffet and Munger talks shorting, and MUnger’s whole thing is, I know that I’ve seen, so let’s assume that Ilan is a fraud for this purpose, right? He says, “I have seen frauds and I’ve seen the stock double on you while you think it’s a fraud, and it’s just not worth the stress in my life to identify these things, even if I know it’s right. I just rather live without that.” So even if Tesla Q is right, which to some of them, I hope they are. I may not, or at least I hope that their returns mirror their dedication to the course, but it’s like, man that’s, you’re really changing your life for this. I don’t know whether it’s worth it.

Jake Taylor: I think Buffet it’s been even more emphatic about it. Saying like, “I’ve never been wrong on a short, but I’ve just never been the timing, it’s just never been worth it.”

Bill Brewster: Yes.

Tobias Carlisle: But it don’t necessarily have to short like that. Right? You don’t have to short, I think shorting is different to owning long. You can be short across the portfolio, and do I think that that portfolio is going to do worse than the inverse of the index. So is it going to go down more than the index goes down, when the market goes down? Absolutely. They’re just, you buying vapor, you’re buying just like hot air completely, or you shorting hot air and you’re just waiting for the whole, for that to come down. I don’t, but I’m short Tesla, so I’m in that kind of, I look at Tesla Q and I think they’re nuts as well, but I’m just, I’m not going to not put it on or put it on because what other people are doing. I’ve got my own assessment of it. And I think that it’s a short, even knowing all of the dangers of shorting.

Bill Brewster: Well, I think what I like about how you, proceed in what you do is, you’re taking a basket approach to a lot of this stuff,

Tobias Carlisle: All right?

Bill Brewster: And then when you have a momentum overlay to something that you perceive to be borderline fraudulent or super expensive, that makes a lot of sense to me and, mitigate some of the risk that I think.

Tobias Carlisle: And we could quite easily be out of it this quarter, by virtue of the fact that it’s gone up so much. That’s just one of the things that is in our, is in the model that if it moves that much against you, then you shouldn’t be … You’re missing something

Jake Taylor: Or you need to show more. I don’t know. What’s the-

Tobias Carlisle: Well, rebalance at least. And rebalancing typically means taking a short, that’s not worked down. Reducing the size, because that is the big problem with shorting. If you’re wrong and a long, and you just stay in bed and you can’t get out because you just so sick with what you’ve done, that problem eventually solves itself because it goes to zero. Whereas with a short, at some stage you have to grasp the nettle and take the loss. And so, you have to have some process for dealing with that. So I’m pretty comfortable with the process that we have.

Jake Taylor: I had a pretty-

Tobias Carlisle: Sorry, go ahead.

Jake Taylor: I was going to say, I heard it pretty interesting idea. Everyone thinks about position sizing, you don’t want it to get too big, because you’re trying to mitigate risk. I’ve heard someone advocate actually for minimum position sizing, so if you get down, if something shrinks enough to where it’s, let’s say it gets down to 1% for either the rest of your portfolio grew or it shrunk there, you could make the argument that either you need to just sell and punch out, or re up to get back up to a more normal position size. So using that as kind of a forcing function, to reassess some of your positions I think is an interesting idea.

Tobias Carlisle: That’s interesting.

Bill Brewster: Well, it can cause you to dollar cost average at the right time. If you’re not, if you think you’re still right, then, my rule says I have to buy more.

Tobias Carlisle: I like to-

Jake Taylor: All right, this is really easy to just sit there and twiddle your thumbs and kind of that something fixes itself.

Bill Brewster: Yes.

Tobias Carlisle: I liked John Hampton’s approach to Dollar cost averaging. Well, he wrote a great post on where, there’s this two schools of thought, right? There’s that, “Loses average loses.” which is the Paul Tudor Jones famously has that chart above is above his desk when he was younger. So that means don’t, if you make a mistake and it goes down, then you don’t double up on your mistake, don’t compound your mistake by buying more. Then you’ve got the value guys like Buffet, like where, and if you ask most value guys who’ve been around for a long time, they will say that a great deal of their return has come from doubling down onto those positions that went against them.

Tobias Carlisle: And I think Hampton said, “Do it but do it with some care” I think you can be a little bit more precise, you just have to be careful what kind of business you’re doubling down on. If it’s a cyclical, you shouldn’t be doubling down on cyclical, cyclicals can go against you and vaporize what you hold. If it’s a business, that’s a little bit better quality business. And I know I talk a lot about, it’s hard to tell the difference, but there are better quality businesses than others. If a better quality business is going against you price wise, but the underlying businesses performing, okay, there’s no problem with buying a little bit more of it if it’s, that’s where you’re going to get a lot of return run.

Jake Taylor: Ideally, isn’t that one of the difficult things to untangle though is kind of what’s cyclical and what’s secular? It goes down typically for a reason, and it’s something that everyone is like, well, they start to question the validity of the business, right?

Bill Brewster: This is a fantastic time, to give listeners a reminder to do their own research. And the reason, and this is real, right? You don’t know when somebody’s thesis changes, and if you don’t know when their thesis is right or wrong, you don’t know whether or not you should be buying more or selling. I had circulated the blue links thesis to you guys a year ago, right? And I thought it was a pretty decent thesis, and ultimately I passed. If I had gotten in that and didn’t know why, the last couple of days have just been brutal in that thing. And this is the … You got to figure out if you’re right or wrong, if you’re long that thing, and if you are, by hand over fist and if you’re not, so I don’t know. It’s an interesting question and it’s hard to know if you’re right, [inaudible 00:32:12] don’t find out the answer for a couple of years, which is not exactly the most fun thing in the world.

Tobias Carlisle: It’s the tough thing about this business that there’s no immediate risk. You don’t know whether you’re doing the right thing for, like you’ve been doing it for five years and you doing the right thing and you could still be underperforming.

Jake Taylor: Yeah. The conviction required to see it through, to see if you’re right or wrong, can really take a lot out of you, psychologically.

Tobias Carlisle: That’s why you need to be that bus ticket collector guy who just, you just like the, you like the color of the tickets, you just like collecting them. You’re not doing it for any other reason. What’s your topic, Bill?

Bill Brewster: Well, I had gotten on the persistence of ROIC a little bit, but I’m going to pivot, since we talked about that and talk a little bit about Liberty day. And one of my men crushes a John Malone, and they were up there. So they have a entity called Qurate Retail. It’s Q-V-C-H-S-N and Zulily, and then I think there’s a couple other little assets in there. They were talking, they had just issued debt, I might get the year wrong, It really doesn’t matter, because once I tell you the decade, the actual year doesn’t matter. They issued notes in QVC and HSN. Somebody bought these. They expire in 2068.

Jake Taylor: Oh God! And what, like 2% rate?

Bill Brewster: No, six and a half. So at least you get a little bit of money. But that’s equity risk. Who owns that? I don’t under, the equity is yielding almost 16% free cashflow yield. You know that, how these guys work, they’re going to continue to issue debt and buy in the shares, if they think the entity has any viability. So you’re basically just letting them arbitrage their free cashflow yield and taking equity risk. It’s insane to me what’s going on in the debt markets.

Jake Taylor: You’re the livid finance guy, so how do you assess that? What’s the, give us your expertise?

Bill Brewster: Man, I don’t know. I think there’s a lot of dumb buyers out there, and I have to think that maybe it’s asset liability matching, where they’re forced to do it or maybe it’s some ETF or, it boggles my mind, how any rational human would say, “Yeah, that’s the paper I want to accept.” I just really don’t understand it,

Tobias Carlisle: [inaudible 00:34:53]?

Bill Brewster: Yeah, well that’s right.

Tobias Carlisle: It’s Liberty. It’s probably they’re good managers. That’s got lots of free cashflow, they’re probably going to be able to pay it.

Jake Taylor: We need a yields [inaudible 00:35:03].

Bill Brewster: Yeah. Well, that’s what I think it is, right? Like, “Oh, how are we going to hit this hurdle rate we need to? Oh, just take this, piece of crap and throw it in the portfolio.” But the rumor that I heard is that retail took down a lot of that offering, and that the professional stayed away. But I, that was anecdotes. I’m not able to confirm or deny that that rumor. I know I didn’t take any of it down, that I know, you will not be finding that in the Brewster Household Portfolio anytime soon.

Tobias Carlisle: Well, what’s a good, this is way outside my area of expertise. What’s a good yield? Like what yield are you going to buy that stuff at?

Bill Brewster: Nothing. You can’t pay me enough to own that piece of paper. I guess, 25%, but they’re not going to issue it at that. There’s no deal that I would be on that side of, that’s actually rational, right? Like they would say, “No, I’m [inaudible 00:36:00] just not going to do it.”

Tobias Carlisle: Since it’s a 40 year note. Is that?

Bill Brewster: Is a 50.

Tobias Carlisle: 50 year note.

Bill Brewster: [inaudible 00:36:09] risk.

Tobias Carlisle: Yeah. It’s hard to-

Bill Brewster: Unlike, if that defaults,

Jake Taylor: Equity might not even be that long a duration for the average company’s life is what, 25 years or something.

Tobias Carlisle: Yeah.

Bill Brewster: We were laughing when they were talking about issuing the paper, and even Greg Buffet was saying, he was like, “We’re not going to be around when this thing expires.” and they … it’s not nefarious what they’re doing. Right? If somebody will buy it, I almost, don’t see the reason not to do it. It just like-

Tobias Carlisle: You always have a fiduciary obligation to issue it, don’t you?

Bill Brewster: That’s right.

Tobias Carlisle: Your obligations to your, to the company and to the shareholders. Yeah. I can’t comment on that directly, but I did watch Malone’s interview, on CNBC on Friday afternoon. Have you guys seen that?

Bill Brewster: Yeah.

Jake Taylor: [inaudible 00:37:02] launched it yet.

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. 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 [inaudible 00:39:25], 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. [crosstalk 00:39:47]. 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 [crosstalk 00:40:35], 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. Like [inaudible 00:42:28].

Tobias Carlisle: So let me just, this is the question of the week. This is from Colby … Oops. I’ve just lost it, hold on. That’s not good. Here we go. Do you advocate higher weighting positions based on opportunity, or would you rather equal weight, positions in the portfolio? And so, I’ll throw that out to Jake first.

Jake Taylor: What do I personally do?

Tobias Carlisle: What do you prefer? What do you advocate? What do you do?

Jake Taylor: Well, I think hypothetically, you should be following some kind of Kelly formula. I think that that is also can be dangerous if you’re not very conservative with it. I would say if you’re running more of a quant strategy, I would think that equal weighting is probably the smarter play. There’s some research behind that, that shows that models that are equally weighted, tend to, across a broad selection of different domains, tend to have better results. And I think it’s really, when you don’t have the equal weighting, you can kind of get your own biases baked into the algorithm. But I think if you’re doing more concentrated individual fundamental research of a business, and you have a best idea, I think it makes some sense to, to bet more on that idea. If you talk to all of our heroes, they would say, “Yeah, why put money more money into your 25th best idea when you like your first best idea better.” But it doesn’t mean it’s easy and often, it feels like your 10th best idea does better than your best idea. And it’s very frustrating. So,

Tobias Carlisle: So your are advocating for some like fractional Kelly, or some like Kelly like, but not necessarily doing the Kelly calculation.

Jake Taylor: I think having the Kelly framework in your mind, just as far as risk reward and probabilities, is the right way to think about it.

Tobias Carlisle: Would you simplify to earn more of the better opportunities to earn more of the cheaper opportunities.

Jake Taylor: That’s right. I think that’s right. But it’s easier said than done. And I think should always be approached with a fair amount of caution, and backed off from any kind of like what a gambler would come up with for a Kelly bet on a very known universe of, on a roulette table, that’s a very different thing than then the investment universe.

Tobias Carlisle: What about you Bill [inaudible 00:45:10].

Bill Brewster: I mean, I have to say that if you look at what I do, I increase my position is I like the idea. The hard thing about that is some of my best investments have made me physically ill to pull the trigger on. So to be ill, and to size it, is difficult. So I think that honestly, with a lot of this stuff, I think you got to do what works for you, especially if you’re running your own type of portfolio. I guess if I were to go to some sort of ETF I would probably favor an equal weight one just because the studies do seem to show that they outperform market cap, but-

Tobias Carlisle: But that doesn’t necessarily. So there are studies like, will not study so much but you can look at An Individual Investor with a long track record says, someone like Carl Icahn, his portfolio outperforms an equal weight version of his portfolio, which suggests that he knows which companies are going to do better.

Bill Brewster: [crosstalk 00:46:15].

Jake Taylor: Yeah. Do you think that that is representative of the broad kind of fundamental investor universe?

Tobias Carlisle: No, I think that’s almost as rare as like, that’s why you know, his name. And there’s Warren Buffett, and you know his name, and maybe there’s John Malone, and you know his name, but I don’t think that there’s very many folks who can do that. And in fact, I shared something on Twitter last week about, a fam whose name just escapes me right now, but the guy did an analysis of his own returns and he said I would have done better if I had just equal with my position. So that was what he did. He now equals his positions, and I equal weight my positions because I think once you, if your universe and my universe is 1500, I’m holding 30 long. So a decimal is 150, so am taking 30 out of 150, which is 150. So I’m taking like a tiny little portion of the pool of the universe and I just think it’s too hard to work out which ones are going to outperform.

Bill Brewster: Sounds rational to me. I yeah, I don’t know, position sizing is, I think one of the harder parts of the entire practice [crosstalk 00:47:22]

Tobias Carlisle: I agree.

Jake Taylor: Although you could make the argument, it’s kind of interesting that you have all this conviction that like, these are the best ones to hold in the entire all the universe of businesses that we could buy. And then you completely punt on, that these like, I can’t pick the winners out of this little basket, right? Isn’t there some little bit of irony there?

Tobias Carlisle: So you’re saying for consistency sake, I have to therefore go in and white some of the more heavily.

Jake Taylor: I’m just saying, recognize your own hypocrisy.

Tobias Carlisle: Oh, yeah. I’m a hypocrite. I fully embraced that. What’s that great line from Tombstone? It appears my hypocrisy only go so far. And then he comes back later and he says my hypocrisy knows no bounds. That’s where I’m at hypocrisy knows no bounds. Also, a foolish consistency is the hobgoblin of a small mind. I think that’s Jefferson, could be wrong might be Franklin. I think that that was a great question from Colby. Unfortunately, that’s all we have time for. So we’ll be back next week. [inaudible 00:48:43]. (singing)

Summary

This is the start of a new podcast series here at Greenbackd called VALUE: After Hours featuring hosts Tobias Carlisle of Greenbackd, Bill Brewster of Sullimar Capital Group, and Jake Taylor, author of The Rebel Allocator. Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment. In this episode Taylor, Brewster, and Carlisle chat about:

• What Do You Do When You Get A Call From Charles Munger?
• Warren Buffett Is The G.O.A.T And Berkshire’s Secret Sauce
• At Today’s Levels, Even If Value Does Start To Outperform, Maybe We’re Not Going To See The Same Out-Performance As We Did In The Past
• Google Is The Tax On Everything These Days
• Here’s A Game That Helps Us To Decide Whether Investing Is More Luck Than Skill
• Why Is Apple TV Diverting Me To The Disney Arcade App?
• Why The Mandalorian Is A Must Watch
• Kinetic Energy And How It Applies To Investing
• How Did Jim Simons Become So Successful And The Big Problem With Indexing
• When Do Buy-Backs Make The Most Sense?
• In Hindsight It’s Easy To Pick A Winning Stock – But Who Could Have Predicted Amazon’s AWS?
• Is it important to understand if a company’s revenues or profits are sustainable or overstated, understated due to boom or bust conditions?

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:

 Apple Podcasts

 Breaker

 PodBean

 Overcast

 Youtube

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 RadioPublic

 Anchor

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 Google Podcasts

Full Transcript

Tobias Carlisle: All right gents, ready?

Bill Brewster: Ready.

Tobias Carlisle: Hi, I’m Tobias Carlisle. This is a brand new podcast. We don’t know what it’s called. We’re thinking After Hours, but if you’ve got a better suggestion let us know. I’m joined by my regular co-hosts, Jake Taylor, author of The Rebel Allocator. He got a telephone call from Charlie Munger. We’re going to talk to him, hear about that right after this.

Tobias Carlisle: Then, my third co-host is Bill Brewster Sullimar. I can never say it correctly. How do you say it Bill?

Bill Brewster: Sullimar Capital Group.

Tobias Carlisle: We’re going to talk to each other right after this.

Speaker 3: Tobias Carlisle is the founder and principle of Acquirers Funds. For regulatory reasons he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates.

Speaker 3: For more information, visit AcquirersFunds.com.

Tobias Carlisle: Gents, anything interesting happen this week? This is gold.

Bill Brewster: Jake, you want to go ahead?

Tobias Carlisle: This is absolute gold.

Jake Taylor: Yeah, nailing it.

Bill Brewster: You know it’s like, you know when Seinfeld started and you kind of like the first season you knew it was going to be good, but they didn’t quite understand when to come in? We’re just ironing out the kinks.

Jake Taylor: Yeah, for sure.

Bill Brewster: It’s all going to click.

Tobias Carlisle: I think that that sounds great.

Tobias Carlisle: Let’s talk about the Rebel Allocator and getting a telephone call from Charlie Munger. Anybody who hasn’t heard that story, let’s hear that story Jake. That’s a great one.

Jake Taylor: Okay, well I’ll give the quick version because it’s… Even I’m tired of hearing about it at this point. But I wrote a book that basically tries to teach some of the lesson CAPA allocation through a fictional story. And Munger and Buffett obviously factor heavily into it because they’ve been so prolific about teaching about all kinds of topics.

Jake Taylor: But I sent Mr. Munger a copy of the book and maybe about a month later I get a phone call at my office, and it turns out it’s Munger on the line and he wants to talk about the book. And his biggest thing was that he actually wanted to encourage me to get it made into a movie, which is its own kind of daunting project to consider.

Tobias Carlisle: Where’s that up to? Is that happening? Is that in train?

Jake Taylor: There are some developments at this point. Maybe some screenplay-

Tobias Carlisle: Wow.

Jake Taylor: … writing happening. Not by me, but I’m helping a little bit with someone who’s more talented than I am, so we’ll see. That whole thing is so far outside of any of my area of expertise that I don’t even know what’s right or wrong. But it’s fun to work on it.

Jake Taylor: So then Charlie… Yeah, to sort of just wrap up the Charlie story, he’s encouraging me to get it made into a movie, and he also had some comments about maybe looking a little bit more widely as an investor and don’t try to fish where everyone was fishing. And that kind of turned into a funny story in the Wall Street Journal about calling all of us value guys cod fishermen. So I think we’re… You know, there’s a bunch of cod fishermen on this podcast right now.

Tobias Carlisle: Was that Jason Zweig?

Jake Taylor: It was, yeah.

Tobias Carlisle: Cod fishermen. That’s probably fair for value guys.

Jake Taylor: Yeah, I didn’t take umbrage to it too much, but it was… It’s definitely a… It does highlight and 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 goat 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 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 knit-knit 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.

Tobias Carlisle: So while we’re talking about value, this was my topic for the week. I’ve been kind of collecting these things on Twitter and I’ve been pumping them out. It just seems to me like there’s a crescendo of guys out there shouting about the fact that value is so vastly underperforming momentum, or glamor, or growth, or whatever you want to call it. And the spread, however you measure it, is now sort of… It’s not quite at 2,000 levels, but…

Tobias Carlisle: So AQR, Cliff Asness had this piece that came out last week I think where he said, “You’re basically now faced with the prospect of value has two sort of paths. Either it’s going to blow out to dot com levels, which is possible, but unlikely. And if you exclude the dot com period from the data, then you’re in the one hundredth percentile for value under performance,” which would seem to suggest to me that it’s pretty stretched and we should be going into, if not immediately, if it hasn’t already started, which I think there’s some possibility that it has, we’re going to go into it soon. We’re all value guys, we’re all talking a book, how does that strike you?

Jake Taylor: You go first Bill.

Bill Brewster: Jake, do you want it? All right. Well-

Tobias Carlisle: Nobody wants to jump on that grenade.

Bill Brewster: No, no. I’m fine jumping on it. You know, I’m sure I don’t want to upset compounderville at all, but what… So Jake and I participated in a weekend where we got together to talk about subscription businesses or recurring revenue, and Jake’s comment was, “This is sort of toppy if a bunch of value guys are coming together to talk about recurring revenue businesses, right?” But the one theme that I think everyone could agree on is if the business was close to like a real recurring… I mean CPG is sort of recurring revenue it in its own way, right? But I’m talking something sassy or peloton.

Tobias Carlisle: For the folks who don’t know, what’s CPG?

Bill Brewster: Oh, like consumer package goods, right? Like I’ve [crosstalk 00:11:15].

Tobias Carlisle: Like [crosstalk 00:11:15].

Bill Brewster: Yeah, that’s right. So like the continual consumption of Diet Coke is pretty recurring. But the new sort of sexy version, these valuations that we were all talking about, I mean, we were all scratching our heads, so I don’t know that value is the side of this that makes the alligator jaws collapse.

Bill Brewster: I’m pretty sure that growth investors, like traditional just… I don’t even know what top decile evaluations, I don’t know that that returns very good returns unless you really are skilled at picking the right winners.

Jake Taylor: I’m going to take the contrarian view on this I think, even though I would love to be rooting that like this is… You know, the rubber band is stretched so far that it’s time for value guys to come back to the, being heroes again.

Jake Taylor: When I look at the relative valuations of let’s say the cheapest 10% today versus the cheapest 10% in ’99, those two baskets are completely different. The cheapest today are typically debt-laden, really poor quality businesses. And I’m fine buying things that are poor quality for the right price, but even then, the price is just relatively cheap to that most expensive today. It’s not that cheap compared to the ’99.

Jake Taylor: So if I think about kind of a GMO analysis of like, “Well, where’s your starting price, and I’ll kind of tell you what you future return might look like,” I would more imagine value putting up very small, maybe positive numbers over the next 10 years, and everything else being bigger negative and that… So yeah, it’s ready for out performance, but it may not be the performance that you actually want.

Jake Taylor: To me, from these levels where we’re starting, there is no real great outcome available.

Tobias Carlisle: I see… The problem I see is… I wrote a book ages ago, Concentrated Investing. Nobody’s ever read it. But it’s-

Bill Brewster: It’s somewhere on this bookshelf right here.

Tobias Carlisle: There you go. That’s one of the dozen people who bought it, one of the dozen copies. There’s an interview in there with Glenn Greenwall who’s a brave warrior, formerly Chieftain. And he talks about his methodology, what his method was to… he wanted a 10% free cashflow yield in the next two years.

Tobias Carlisle: So what that means is he could buy at whatever, six or 7% free cashflow yield provided that he could see that there was this pathway to growing the business enough that in two years’ time it would be at a 10% free cashflow yield.

Tobias Carlisle: Now, if you’re looking for a 10% free cashflow yield in this market, even one that’s a few years out, that’s really, really hard to find because that’s… In my very deep value basket, my free cashflow yield in that basket is 10%, but it’s… The reason is that it is that way is a lot of these businesses look like they’re declining. So 10% is a very fat yield. What do you think?

Bill Brewster: Yeah, I mean, I agree. I like to think of investing as you have two ways out, right? You can add price appreciation to the point that you think it’s sort silly and sell, or you get paid back your cashflow.

Bill Brewster: One business that came up a lot this weekend is Rollins. They do termite… They kill termites. You’re paying like 30 times earnings. So out of the gate, let’s just assume for purposes of this conversation earnings and cashflow are the same. I mean, the earnings base that you’re paying for, you get a 3.3% cashflow yield.

Bill Brewster: Now yeah, the incremental dollars that they can deploy, you earn the businesses returns, but it’s not as if this is a tiny company. You have to wait a really long time to start to… They say it trends towards [Roik 00:15:35]. I mean, that’s going to take a long time. And I’m not sure that people fully understand that right now. I think when the difference between 3% discount rate and two, you can get a lot of price appreciation off that.

Tobias Carlisle: Why is a business like that defensible? What’s the mutt there? What’s the competitive advantage?

Bill Brewster: I suspect it’s like one of these local economies, the scale of service-based things, you want a termite killed you’re not going to try to go to… I’m pretty sure they’re Terminix, I’m not sure. That could be wrong, but I’m not sure that you want to have like Toby and Bill’s, and Jake, sorry, like termite killer.

Jake Taylor: I don’t want into that business.

Bill Brewster: No? You’re not into it? It’s a great business.

Jake Taylor: Yeah.

Tobias Carlisle: What if it’s cheap? What if we just come in at half the price?

Jake Taylor: Well that’d [crosstalk 00:16:27].

Bill Brewster: I don’t think it works that way. Especially at a restaurant, right? You want everything killed. So I think it’s probably, off the top of my head, it’s a low-cost, high certainty of kill recurring type business. So that’s what I think people care about there. I doubt they’re price shopping that much.

Tobias Carlisle: You don’t think so for termites? I’ll bet if you open up the phone book, that phone book that used to exist before the internet, if you went and looked on… If you went and Google searched terminator, termite terminators in your area, there’s be like three pages of them.

Bill Brewster: Yeah, but maybe this guy buys, maybe the big guy buys all the ads.

Tobias Carlisle: Buys the advertising. Then where does the value for that flow? Does is flow to the termite guy or does it flow to Google?

Bill Brewster: I think Google’s the tax on everything these days.

Tobias Carlisle: Yeah.

Bill Brewster: As is Facebook.

Tobias Carlisle: That means you got to win Google, right? Google at any price.

Bill Brewster: Gap.

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 val.

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.”

Tobias Carlisle: Which is an interesting point that you bring up because the fix, the index, has been, it’s treading close to all-time lows. I think somebody’s thinking about taking it private. It’s been beaten up for so long and it hasn’t done anything.

Bill Brewster: Is KKR going to do it and LBL are the fix?

Jake Taylor: Taking it private.

Jake Taylor: That’s [crosstalk 00:26:11].

Tobias Carlisle: But I think it’s one of those things that when VIX gets beaten up like this and you can go and get val calls at cheap, VIX calls, front month calls, they’re all cheap, they’re all like thrown away at the moment, you can pick up some of that stuff, the probably you’re going to throw them away. This is the old Taleb strategy where he’d be trying to short closer to the main, closer to where the price is and he’d be long further out in the tails, which means that you lose money most of the time, but you gain it all back. Like every seven years, you get the thousand year storm.

Tobias Carlisle: Anybody playing that? Anybody doing that?

Bill Brewster: That’s not how I’m going to run my money, but I like the theory.

Tobias Carlisle: I’ve done it. I’ve thrown away all my money that I’d put into it.

Jake Taylor: I’ve experimented with that as well. I like the bet. I don’t think… It was 100% loss on all of the money that I did that with, but I still don’t think it was a bad bet at that time. I thought that it was very mispriced.

Bill Brewster: Well to be fair, the odds are such that… I mean, it should be 100% loss, right? You’re not really betting on getting your… The expected value of the bet may be correct, but that one particular bet, the expected probability is not good.

Tobias Carlisle: You have to work out, as a proportion of your portfolio what you’re prepared to lose on every month or quarter, or however you’re positioning the bet, so that over the course of the year, you burn one or 2% of your portfolio hoping that, knowing that at some stage, there is going to be a big bust and you’re going to capture it.

Tobias Carlisle: The problem is, I did it pretty consistently and I caught two big busts. I caught the 2018 one and there was an earlier one. I forget now, 2016 or something. In both instances, these things were explosive. They were rocket fuel. This is just in my PA. This is not anything I’d ever do professionally. In both instances, they got up to something like 30% of my portfolio value, starting out from-

Bill Brewster: Wow.

Tobias Carlisle: … 1%. Here’s the problem, in both instances I wanted to hold them through expiry, which was like at the end of the month, which was only a week or two in both instances. And in both instances they expired worthless.

Bill Brewster: Wow.

Tobias Carlisle: That was violent.

Jake Taylor: That’s the problem with those European style options that they expire only on that one day.

Tobias Carlisle: Well you can punch out of them. You can sell out of them.

Jake Taylor: Yeah, but the problem is, is that the people, the market… I think it goes back to psychology actually of like you will take a gamble to try to avoid a big loss, but you won’t do that for the game at the same way. It’s kind of loss aversion.

Jake Taylor: So they will see that… They maybe have this really big payment coming if that was to expire and they were on the hook for it, they’ll roll the dice. So they won’t buy themselves out of the position, they won’t hedge, which the hedge would be it being closer to what you would want to get for being on the other side of the trade. Does that make sense?

Tobias Carlisle: The volume does pick up as they move into the money. They become much more liquid as they move into the money. So when you buy them, like you basically if… You buy them out of the money. You buy them like two or three standard deviations out of the money. And they’re basically illiquid. You can’t roll them. You’re in them until you sell them. But, if you get a move where the VIX approaches your strike, or goes through your strike, they because very liquid at that stage and you can sell out of them.

Tobias Carlisle: Just in both instances I was thinking, “This is a hedge, so I’m not going to close out this position,” because I’m still long everything else and I’m trying to get longer on that side. But in both instances, after being well in the money, that… January 24 that was looking like a pretty good Christmas, but that was the absolute pinnacle. Then they expired 21 January and they expired worthless over that period of time.

Bill Brewster: Oh yeah, especially with this B bottom.

Tobias Carlisle: Right.

Jake Taylor: Yeah, that was a sucker punch there.

Tobias Carlisle: Looked like value was going to start working then too.

Bill Brewster: It has to be fair. It’s-

Jake Taylor: Well, that’s the part of them that I always found attractive was that I was going to be granted a very large amount of capital right when I really wanted to be able to put it to work.

Tobias Carlisle: You get that third pocket.

Jake Taylor: Yeah. That’s appealing to me.

Tobias Carlisle: If you take advantage of it in the sense that you start investing longer and then they expire worthless, I don’t think you’ve lost out in that… even though I’m upset about the fact that the call expired worthless and I would have made a lot more money if it hadn’t, but I was at least buying stuff longer in my PA that I may have been nervous about, but I was like, “Oh the PA’s up a little bit. I should be buying some more stuff here. I should be getting longer.” Unfortunately, I was buying value stocks. So it didn’t work out quite as well as I hoped.

Jake Taylor: Double whammy.

Tobias Carlisle: And none of it was Apple because I thought Apple was going to get cheaper.

Bill Brewster: Eventually they were going to buy in their own shares. They just have too much cash.

Tobias Carlisle: Well, that’s a funny thing about Apple that it goes through that three-year cycle where it’s mid iPhone and everybody thinks, “Oh, it’s all over.” And then I bring out a new iPhone, “Oh, it’s all good again.”

Bill Brewster: I still don’t… I mean, it’s not like particularly rich here. But then there’s the part of me that’s like it’s also a trillion dollar company. That’s objectively-

Tobias Carlisle: Is it 1.5-

Jake Taylor: Two.

Bill Brewster: … a big number. Yeah.

Jake Taylor: Right? 1.2.

Bill Brewster: Yeah, but then they got a hundred million [crosstalk 00:31:49].

Jake Taylor: [crosstalk 00:31:49] at, yeah.

Bill Brewster: Or something like that. They got 53 billion coming in every year. I mean, the cash… that thing is a cash machine. It’s incredible. Even at this valuation, they can buy-in 5% market cap every year, which is sort hard to fathom.

Tobias Carlisle: Do you use an iPhone?

Bill Brewster: Yeah.

Tobias Carlisle: Do you use an iPhone, Jake?

Jake Taylor: I do.

Tobias Carlisle: I’m on an Android. I refuse to get locked in.

Jake Taylor: This podcast is over.

Bill Brewster: Yeah, that’s [crosstalk 00:32:18].

Tobias Carlisle: It’s being recorded on a Mac. That’s a Mac.

Jake Taylor: We’re not going in with this podcast.

Bill Brewster: No, I’ll tell you what I found really interesting, the other night I was watching The Morning Show, the Apple show that they… You know, with Jennifer Aniston.

Tobias Carlisle: Is it fiction, or is it a… What is it?

Bill Brewster: It’s fiction, yeah.

Tobias Carlisle: Okay.

Bill Brewster: Yeah.

Tobias Carlisle: It’s not like an actual morning show?

Bill Brewster: No, it’s a…

Tobias Carlisle: I get it. Sorry.

Bill Brewster: It’s okay. So anyway, it got me into the Apple TV ecosystem again, right? It did what it was supposed to do. And then there’s this little icon for Disney+ and I was like, “Oh, I’m a shareholder, I’ll definitely buy Disney+ through Apple.” I click on Disney+ and it diverted me to the arcade app. And I was like, “This is not at all what I want.” And it blew my mind that they’re spending all this money to get me back into the ecosystem. I’m back there, and then it felt like so gimmicky and not very Apple to get me into the arcade, just to what? Say like I’ve signed up for the arcade and they have X amount of users?

Bill Brewster: It just… I don’t know. Something rubbed me really wrong about that move. And let’s say it was a software glitch, that should not exist. It’s Apple.

Tobias Carlisle: Well, there’s been some problems with the streaming, right? They didn’t get the streaming right.

Bill Brewster: Yeah, but I think this is an Apple issue, not a Disney+ issue.

Tobias Carlisle: Well I heard some issues with Disney. You think so that the streaming was an Apple issue, or the streaming was a Disney issue?

Bill Brewster: I didn’t even get to sign up. So it was like a… It was as if they were diverting me to sign up for something before I was allowed to sign up for something, or… Sorry. Or it was software glitch. I don’t know what. Either way, it did not just work so to speak.

Tobias Carlisle: I saw a lot of discussion on Twitter over that period when it was supposed to launch of people who couldn’t get in and they couldn’t watch what they were supposed to be able to watch. I didn’t sign up until after all that went through. I have signed up now because I wanted to see The Mandalorian, which is excellent by the way, surprisingly good for a Disney Star Wars type movie.

Bill Brewster: I saw a guy watching it on the plane and I almost looked over his shoulder to watch it.

Tobias Carlisle: It’s pretty cool.

Bill Brewster: I decided not to be.

Tobias Carlisle: It’s the best Disney Star Wars movie that I’ve see. I mean it’s a TV show. It’s a half hour episode, but it’s much better than any the other new stuff that’s come out. I think the first of the episode seven, does that make sense? Not the original ones.

Bill Brewster: Yeah. Yeah.

Tobias Carlisle: Not the reboot from 20 years ago, the reboot from like five years ago. That first one was great because it was a throwback to the original stuff. The second one was unwatchable. I couldn’t tell you what happened in it. But The Mandalorian’s pretty good. It’s interesting.

Bill Brewster: I’ll be signing up soon. I mean, I have kids that are right at peak Disney age.

Tobias Carlisle: Me too.

Bill Brewster: They got me for years.

Tobias Carlisle: It’s pretty cheap. It’s like seven bucks a month, or they say you can get the whole year for 70 bucks, I was like, “All right, I can do that math in my head. I’m a finance guy, I’ll buy the whole year.”

Tobias Carlisle: Bill, what’s your topic? What have we got?

Bill Brewster: I’ve been thinking a lot. One of the concepts that came up was if you think about where you’re going, right? Kinetic energy, the formula is one half mass times volume… or, times volume, yeah right… times velocity squared. So in that equation, the speed or velocity is much more important, but velocity is speed times direction, right?

Bill Brewster: So you’ve got to make sure… Step one is go in the correct direction. And then step two is the speed that you are going in the correct direction is more important than whatever size you are at the time. And that was… We discussed it talking about Berkshire and I thought that was a pretty interesting way to think about the idea that maybe they’ve always in their head been going in the right direction and then sort of accelerating and slowing down as the time sees fit, but they’ve done everything that they can to not let the mass sort of drag them.

Bill Brewster: I don’t know if I messed up some of that, but that’s sort of how I’m processing it.

Tobias Carlisle: I haven’t done physics since grade 12, so I might have to lean on the electrical engineer. Are you an electrical engineer?

Jake Taylor: Not-

Bill Brewster: I am not, no.

Jake Taylor: Not technically, no.

Bill Brewster: The person that said is the person that had the thought. I am merely reflecting on the thought, which is why I said volume and not velocity.

Jake Taylor: At least you didn’t say volatility.

Bill Brewster: That’s right, yeah.

Jake Taylor: No, it is an interesting concept. I’m not entirely sure. That’s sort of a… It sounds like you’re reasoning from first principles, but it almost may be still be like reasoning by analogy in some ways. But it is an interesting concept and I do think Berkshire represents it pretty well in that… One thing of… What’s the number one rule of investing? That’s kind of like don’t lose money. And then that’s sort of like don’t go in the wrong direction. Then a lot of things that Buffett will say will be like, “Play center court. Don’t push towards the line. Not too much leverage.” All those things are in effort of not kind of going in the wrong direction. So yeah, I think it makes a ton of sense myself.

Bill Brewster: You know, and it’s interesting, you look at Fairfax, and this could be resulting, but that hedge it really set them back, and I think a lot of people it’s almost tainted what is otherwise a really good career. I don’t know, it’s just interesting. Avoiding the big loss is just something that I’ve been ruminating on since this weekend.

Tobias Carlisle: It makes me think of two things. One is that Rentec Jim Simons. I hope I’m saying it… It’s Simmons or Simons. How have they done that? That’s insane those-

Bill Brewster: Yeah.

Tobias Carlisle: … 70% pre-fee for 25 years, is it longer than that? That’s bananas.

Bill Brewster: Yeah it is.

Tobias Carlisle: Are they paying out all the capital? How are they doing that? It’s no compounding surely. It’s bigger than the stock market now if it’s compounding.

Jake Taylor: Yeah, I think they kept it trimmed at a pretty small level. And I think the, if I understand it right and maybe I don’t, but that number that referenced was for their internal employee.

Tobias Carlisle: [crosstalk 00:38:53].

Jake Taylor: Yeah. And not necessarily-

Tobias Carlisle: Rafe.

Jake Taylor: … whatever everyone else got.

Tobias Carlisle: Which is Rafe, right.

Jake Taylor: Yeah. So I don’t know they how they did it. There was one funny thing I saw, I think it was in Wall Street Journal, that they asked some of the guys there… The money had to kind of come from somewhere. Who was on the other side of all these trades? And one of the guys I think maybe being a little more diplomatic said, “You know, it’s probably traders were making bad choices, or not being decisive enough, or whatever.” And then another guy said, “Yeah, probably a lot dentists.”

Bill Brewster: Yeah, that’s right, yeah.

Jake Taylor: “We just took all the dentists’ money.”

Bill Brewster: Yeah, we fleeced retail.

Tobias Carlisle: Do they have that much money?

Jake Taylor: I don’t know. I mean, I think dentists do pretty well, but…

Tobias Carlisle: I mean the… I don’t mean dentists specifically, I mean the… Is there enough retail turnout there for Medallion to make that much money?

Bill Brewster: I have no idea.

Jake Taylor: Well, that’s why I would probably take the under going forward on doing that again. Because I think… Just like the… Actually, Mauboussin was talking about on your podcast with him, on the Acquirers podcast, and he was talking about how like the poker games, when it got popular in 2003-ish, and all these new people started playing, and all the sharks had all these minnows to feast on.

Tobias Carlisle: Right.

Jake Taylor: And it was like the heyday for poker. You could probably say that that was pretty similar to maybe what Rentec saw. And then all the minnows get eaten and now all that’s left that are sharks swimming around trying to eat each other and maybe that more accurately describes what the… With so many people opting out to index, they’re kind of taking their chips off the table a little bit for the other players that might have been feasting on them before, so-

Tobias Carlisle: Even Jack Ryan. Did you see that?

Jake Taylor: I did. Yeah. What is he, like someone asked him for a stock tip.

Tobias Carlisle: And then you Tom Clancy, yeah. Give me a stock tip doctor of economics, and he says, “Get a low-cost S&P 500 fund.” That was great advice 10 years again. I think that’s not great advice now.

Bill Brewster: It’s tough to look at some of these things and think I’d want to own a lot of those. Right? I mean…

Tobias Carlisle: You get them for basis points though, so there’s that.

Bill Brewster: There is that. You might be worried about pennies and missing the dollars though. I’m not sure.

Tobias Carlisle: One of things that-

Bill Brewster: But I am bias, right? I believe in active so we’ll see.

Tobias Carlisle: Yeah, so do I. I think if I work the problem backwards, if you go to construct a portfolio, would you build the portfolio like the S&P 500? There’s just no way in the world you’d do it that way.

Bill Brewster: Right.

Jake Taylor: At a minimum, you would at least equally wait or something. I mean, the market cap waiting to me seems really dumb, and discriminates against some things that you really want like high insider ownership maybe, or at least some skin in the game. The fact that Buffett has what call it 20 or 25% of Berkshire, takes that out of the flow completely.

Tobias Carlisle: Right.

Jake Taylor: Therefore less liquidity, therefore less representation in the index. Well that’s kind of boneheaded. He has skin in the game here. I want to be on his side more. So I don’t know. There’s definitely some, what a good idea taken too far can lead into stupid behavior.

Tobias Carlisle: I think it’s less egregious now than it has been at various times in the past. Because there were, in the ’80s I think Exxon… Sorry, XON, that’s Exxon, isn’t it? Am I losing my mind? XON was 40% of the index. So do you want a gigantic oil company, would you hold 40% of your holdings in XON? You wouldn’t. No way in the world unless you’ve got some high conviction view on what the oil prices doing, which I don’t think really anybody does. Now it’s like the biggest-

Jake Taylor: So there was a funny story from Canada actually when… In the dot com Nortel got gigantic. And it was probably like 30% of the index. And all of the fund managers who didn’t have enough of it in there, because they couldn’t keep up with any index unless they were just absolutely super long Nortel.

Jake Taylor: But then after that completely blew up, the managers were kind of like patting themselves on the back. Like, “Look how much money we saved everybody by not having you in Nortel.”

Tobias Carlisle: Nortel.

Jake Taylor: But what actually what it was is that they could only own 10% in any one idea, or any one security in their mutual fund. So they couldn’t keep up because of that regulation, but then they… When it blew up, they took all the credit for not being so long Nortel.

Tobias Carlisle: Having some risk limits in the portfolio?

Jake Taylor: Yeah, exactly.

Tobias Carlisle: I think one of the theories that I have heard about the dot com boom was that all of these dot com stocks though are pretty low flow, there just wasn’t much around. So when the indexes kind of tracked them going up like that, it was… I don’t know if you remember the Janus funds, they would like jam, they were very big funds that would jam themselves into these small dot coms and blow the dot coms up. And then keep on buying into that dot com and it was like this self-reinforcing-

Jake Taylor: Wasn’t that Oakmont Stratton? Didn’t they do the same thing?

Tobias Carlisle: That’s the Wolf of Wall Street, right?

Jake Taylor: Yeah.

Tobias Carlisle: But I think the Janus fund thing, that was a real one and those guys were kind of heroes at the top and zeroes at the bottom. And I think that was a microcosm of what was happening in the index, except it wasn’t just one fund, it was a whole lot of funds pushing in.

Tobias Carlisle: So that’s one of the arguments for the rise of passive being a dangerous thing because as these funds become bigger and more of the market moves to passive, that they push. That has this huge distorting effect on the markets that now the active guys can’t ever kind of push the markets back into order.

Tobias Carlisle: I don’t like that. I think it’s a bad argument because I think that if active survives on distortions you want as much distortion as you can possibly get run. I want stuff left behind.

Jake Taylor: Well I think it’s the… Well it goes back to Cain’s about can you stay solvent as long as [inaudible 00:45:22]. You can’t stay liquid as long as the market can stay irrational. So if you have every person who would be paying the right price is just getting dominated by the flows that are happening, if they go extinct, then how many of them are left to fix it? I don’t know. It’s an interesting argument.

Tobias Carlisle: But I wonder if you do… Like if you’re just a long only manager and you’re picking up… If you can get a 10 or 15% yield on these big stocks that are still growing and doing pretty well, do I care whether that anybody else is buying them or not? Probably not, right? That’s part of being a value guy is not expecting to see performance in the names that you hold. Trying to get the returns from the underlying performance of the business.

Bill Brewster: Yeah, you just want to rational capital return strategy, right? I mean the thing that drives me nuts is these companies that are like, “Yeah, we’re going to buy back shares.” At any price? I mean, what does that mean?

Bill Brewster: But yeah, to your point, if you buy it cheap enough, as long as management understands how to get it back to you in a reasonable way, it should not matter. I mean, it shouldn’t matter if the market’s closed, right?

Tobias Carlisle: I kind of like the fact that there has been… I mean, I think that there’s a little bit of a resurgence of buybacks in certainly the names that I follow. So I hold ConocoPhillips, that’s announced at $3 billion buyback, and I hold… ugh, name’s just escaping me. HPQ, which has got Carl Icahn. He’s owns Xerox and he owns HPQ. He wants them to combine.

Tobias Carlisle: HPQ, they’ve forecast $3 billion in free cashflow for 2020. You can buy it now for an enterprised value market cap. There’s virtually no debt, $30 billion. So that’s a 10% free cashflow yield, plus a $5 billion buyback announced on top of the 1.7 they’ve already got outstanding. If that doesn’t move the stock, then nothing moves the stock.

Jake Taylor: I mean, it is what you… That’s probably the best thing that you could hope for your basket of, your style of EV to E-bit, buying back at cheap levels of that. I mean, there’s probably nothing they’re going to do that’s going to move the needle as much, right?

Tobias Carlisle: Well, I kind of hope that there’s going to be… I’m trying to buy these things at a business trough. So I’m hoping that I’m getting some up swingers that as the business comes back to them a little bit, I appreciate that that’s harder to do than it is to say, but that’s the idea.

Tobias Carlisle: If I look at the historical growth in my names is terrible. It’s like four or 5%, so it’s a little bit better than inflation. But the Ford growth is pretty high. And this is like looking at their reinvestment rate, looking at how much money they’re making, how much they’re reinvesting. That’s how I’m interpreting the Ford growth.

Tobias Carlisle: The Ford growth is 11 or 12%, which I think is… I’m kind of hoping that 10% free cashflow yield, 11 or 12% in reinvested growth, that should… If that doesn’t work, then value investing doesn’t work anymore. That’s my definition of investing.

Jake Taylor: So that’s interesting that you’re using their reinvestment as a… I mean don’t… You don’t really have any-

Tobias Carlisle: Reinvestment times historical return on investment.

Jake Taylor: Okay. That makes more sense now. I was going to say you’re just assuming that return on investment is kind of equal across the universe, but no.

Tobias Carlisle: Well I’m saying their historical return on investment is a reasonable proxy for what they’re going to do forward. I don’t actually know if that’s what they’re going to achieve, but that’s what I’m kind of hoping that if you reinvest this much in your business, you got some maintenance capex, you’ve some growth capex, but you should be able to maintain your return on invested capital across a year or so. So I can get a pretty good idea that they at least will be growing.

Tobias Carlisle: Whereas I look at some of these expensive companies, they can’t buy back much stock because they’re just too expensive relative to the size of the business in there. And if they’re reinvesting at these rates, they’re kind of chewing up capital.

Bill Brewster: I mean, I’m a dinosaur, but the-

Tobias Carlisle: So am I.

Bill Brewster: Some of these SaaS names, the software as the service, the thing that I wonder is, especially when it comes to enterprise, to me, a lot of that game is the quality of your sales force, so it’s like a sales and distribution game. And let’s say the market starts to care that you’re spending as much in SG&A as you are in revenue, and you start to have to cut people. Then does your stock get re-rated on an earnings multiple? And then if that happens, do your sales guys just look around and be like, “What am I even doing here? There’s other jobs that I could get and get different… ”

Bill Brewster: Because at some point your stock comp almost becomes demotivating, right? If the price is so far out of the money, what are your options really worth? It’s just fairy dust. Right? I mean, it’s like okay, fine.

Jake Taylor: You went to work there to probably in those situations, to leave with a very, very healthy amount of equity in that company, right? Or I mean I guess-

Tobias Carlisle: To change the world.

Jake Taylor: Right. So, yeah it’s to change the world.

Bill Brewster: Well I think this is what Greenblad is getting at when he says, “Some of these are going to be what people are pricing.” All of them are not, right? So out of that basket there is a pretty high degree of certainty that you’ll under perform. And that’s why on my Twitter feed and whatever, I just tell people, “Know what you’re doing.” Right? I mean, some of these guys know exactly what they’re doing and I’m sure that they’re… Well, I’m not sure, but I would bet a higher probability that they will be fine in that game. But me, I would just be donating my money to these people right now. I mean, I don’t know what the heck I’m doing in that space.

Tobias Carlisle: Isn’t that kind of-

Bill Brewster: I’m trying to learn.

Tobias Carlisle: That’s the reason that people in… Like when you see the data on… Here’s what glamor stocks or growth stocks, or whatever you want to call the most expensive [inaudible 00:51:30], here’s the value stocks, so the trash stocks that nobody wants to own. Value pretty consistently out performs 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 Branstone’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 Besos 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.

Tobias Carlisle: We’ve got a question from a listener wants to know, this is Austin from Melbourne, “Is it important to understand if a company’s revenues or profits are sustainable or overstated, understated due to boom or bust conditions? If so, how do you go about this?”

Jake Taylor: Yes.

Tobias Carlisle: Is it important first?

Bill Brewster: My man, I would say that’s the entire game, and if you figure out how to do it let me know. No I mean, I do. If you think that you’re in a boom time, you better be paying a trough multiple and if you’re in a trough time, you can pay a rich multiple. I think that’s a pretty hard question.

Tobias Carlisle: Is that a market question? Is that a sector question? Or is it specific to the business?

Bill Brewster: Well, I’m talking about a business.

Jake Taylor: D, all of the above.

Bill Brewster: That’s right, yeah.

Tobias Carlisle: Yeah.

Tobias Carlisle: I think that Eric [Synamond 00:54:54], who I talked to, he has an approach that sounds more like Graham’s, where you go through and you find… you average the last decade. That takes out the business cycle, then you try to buy at a discount to the average earnings.

Tobias Carlisle: The problem is we tested it in quantitative value taking averages from everywhere from one to eight years and we didn’t ever get better performance doing that. So it’s a really, really hard question. I think in an individual company, you want to be trying to buying close to the… you want to pay at trough multiple and trough earnings. I think that’s super hard to do.

Jake Taylor: I think if you read Edward Chancellor’s Capital Returns that maybe gives you the best chance of having a framework for understanding that capital cycle theory. It doesn’t make it easy though. I mean, even though you know it, it’s still really hard to recognize what is cyclical and what is secular.

Tobias Carlisle: Well how about this, why don’t we work backwards? We could say you don’t want to buy a commodity in a boom time, right? You don’t want to pay a peak multiple on a peak, on a high price for a commodity. So any company that’s cyclical like that, you have to very, very careful.

Tobias Carlisle: As for other companies that are kind of not necessarily commodity inputs, then that’s a more difficult question, right? Are you paying a peak price? Do you assume the kind of trajectory of growth? That’s a much more difficult question.

Bill Brewster: Can entrance come? I mean the thing that Jake and I always joke about is everybody talks about TAM, but nobody talks about TES, which is total eventual supply. Right? I mean…

Tobias Carlisle: So that’s total addressable market. Everybody talks about how big the market is, but nobody talks about their competition.

Bill Brewster: Yeah, and what can go on with it. And that’s that Capital Returns book, right? They sort of look at the world backwards and say, “Okay well, what are supply constricted industries for some reason or another,” and then work into what they want to look at. So that’s a great book. People should read that.

Tobias Carlisle: So I think we’ve kind of… we’ve given all of our thoughts on it, which is we’re pretty limited on that question, so that’s a good question. Thanks Austin from Melbourne.

Tobias Carlisle: Now if folks want to get in contact to further illuminate any of the questions that we’ve talked about today, or to submit questions, Jake Taylor, how do they get in contact with you?

Jake Taylor: I’m pretty easy to find online. My email’s not too hard to find if you want, but also Twitter’s a good place to find me. I’m @farnamjake1.

Tobias Carlisle: And I’ll stick that in the link to these notes. And Bill Brewster, how do people track you down?

Bill Brewster: Always on Twitter, @BillBrewsterSCG, as in Sullimar Capital Group.

Tobias Carlisle: And I’m Greenbackd, G-R-E-E-N-B-A-C-K-D on Twitter. Also, greenbackd@gmail if you want to shoot through to send me an email that I can read out on this.

Tobias Carlisle: Gents, that was our first one. What do you want to score us for that one?

Bill Brewster: I think it’s better than a five.

Tobias Carlisle: Out of what? Out of a hundred?

Bill Brewster: Out of 10.

Tobias Carlisle: Out of 10.

Bill Brewster: I had a good time. I hope somebody enjoyed listening to something we said. It’s going to get better. I had a good time.

Jake Taylor: I would give us a seven. I think it’ll keep getting easier to not step on each other’s toes as well because it’s a little bit of a lag sometimes when you’re recording these things. You don’t want to talk over somebody, so but we’ll get it figured out.

Tobias Carlisle: I think for a first effort, I think it was pretty solid. I think I’ll give us a B+ for our first effort, but we’re shooting for an A+ and so it’s going to get better.

Tobias Carlisle: Thanks very much everybody. We’ll be back in a week.