In this week’s episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Chuck Akre – The Art Of (Not) Selling. Here’s an excerpt from the episode:
Tobias Carlisle: Bill, do you want to do Chuck Akre? Chuck Acre…Akery? How do you say it?
Bill Brewster: No, I don’t. I don’t want to do it at all because it has really messed me up.
Tobias Carlisle: I want to talk about it cause I think it’s a super interesting topic but they never sell. They’ve come out with these two crazy pieces recently, right? What was the other… We had them at the Netflix, HBO comp of $1,000 per subscriber.
Bill Brewster: Oh no no no.
Tobias Carlisle: Oh. I’m sorry. I’m sorry. Yeah.
Bill Brewster: No but Akre, I mean it’s The Art of (Not) Selling is what the paper’s called, and it basically says once we own something, the only thing that we’re looking at is degradation and business quality. So a multiple, in and of itself, is never going to be the reason that we sell. I think that the real possibility could be either that it’s a theory that avoids a human bias and gets them focused on businesses that they want to own forever. And then they have said the benefits of this outweigh the cost of occasionally holding a great business too long, or through a period of extreme overvaluation. Or… I don’t even know what the other logical reason could be. Because there’s, there mathematically is some multiple that it just doesn’t make sense not to sell.
Tobias Carlisle: Well, you’ve got two issues, right? You’ve got the tax that you incur when you sell and then you got the opportunity cost.
Bill Brewster: Which they never address, but it’s got to be embedded in what they’re talking about.
Tobias Carlisle: But you’re going to reinvest in something, right? You can stick it back in cash. Maybe you are marginally better off holding a great company earning high returns and investing capital sustainably so over the next 20 years than you are sticking into cash yielding nothing.
Bill Brewster: Maybe, I don’t know. Is Buffet better owning Coke when he coulda got out in 99? I mean, I don’t know. Probably in that entity, but if he was a small investor, I think he’d be out of that thing.
Jake Taylor: So I talked to one of my good friends Rishi at Google about this and he had some interesting perspectives. He sent me this paper, the author’s name is Hendrick Bessembinder and it was a journal of financial economics. And the finding was that, they looked at a crisp database, 1926 to 2018 or 17, four out of seven common stocks did not beat the one year treasury. So already more than half of the stocks, if in when you buy and hold for the whole thing.
Tobias Carlisle: So randomly selected in any given year? Or over that entire period?
Jake Taylor: Every stock that was available, if you bought it and held it to its entirety didn’t beat treasuries. Okay. So, okay. Number one, it’s already… Buy and hold forever is a very, very difficult proposition. It gets worse though. 4% of companies accounted for all of the gains of the market. So if we start from base rates, we’re looking at approximately a one in 20 probability that we will be the one to find that hidden gem that we can hold forever and get all of these returns, right?
Bill Brewster: You’re about to sell me on indexing right now by the way.
Tobias Carlisle: I was going the same way.
Bill Brewster: And, podcast over see you guys later.
Tobias Carlisle: We’re all bogle heads, thanks for coming.
Jake Taylor: Exactly. Well I mean that positive skew of the distribution is what lures us all in thinking we can be the one in 20 right? I mean that is the kind of the bitch of it. But I understand their logic in wanting to… When they find it, you just don’t let go if you think that you found that company. But like you said about Coke, I mean if you were to describe a company that had maybe like one of the most unbelievable moats, the amount that they could spend on advertising compared to anyone else. The just the actual physiological response to Coke of the sweetness with the saltiness, the hyper palatability of it, their distribution network. They have so many advantages and yet they couldn’t… If you look at the numbers from a 99 to today and not only has the stock done poorly, which it’s got, if you count dividends, it’s two and a half percent return from 99 to today.
Bill Brewster: Wow. Really? I didn’t realize it was that low altogether.
Tobias Carlisle: Per year? Or all together?
Jake Taylor: Per annum, yeah. And then, but the business in size-
Bill Brewster: With dividends included?
Jake Taylor: Yeah.
Bill Brewster: That feels low.
Jake Taylor: Well this was according to Rishi. He sent me a spreadsheet. He’s pretty solid. Hi Rishi. The other part was that the revenue and net income has only grown at three and a half percent. So you have the business fundamentals inside of it haven’t grown like you would’ve ever thought for this compounder. Right? So it’s-
Tobias Carlisle: What’s the issue? Is it changing… People don’t like the sugar? Is that the issue? People getting away from the sugar?
Jake Taylor: I think it’s sugar. I think-
Tobias Carlisle: Kombucha. Red Bull.
Jake Taylor: There’s so many different options now. You go to the store and it’s like there’s 25,000 choices of what to drink. I don’t know.
Bill Brewster: Also some of it was the valuation rerating downward. Right? So I mean the business has to grow a lot to catch up to that valuation degradation, or rerating downward so we had… One of the mailbag questions was I read a lot and how do I figure out how to invest, right? My perception of how traditional value works is I see the world today and I’m trying to buy what I know today for a lower price than I think it’s worth.
Bill Brewster: And growth is definitely a component of what something is worth today. But I am less certain in what is on the come. So maybe I’m less willing to pay for the growth than someone else that feels more certain. Where I think I would be uncomfortable in Akre’s shores, at least without really living it, I guess, and maybe I should try. I don’t know. That’s why it’s so in my head. But how do you prevent yourself from becoming a frog in the boiling water, so to speak? And how do you know when there’s enough degradation in the business to actually get out? And just a lot of it feels amorphous to me at that, for lack of a better term, I hope that’s the right word.
Tobias Carlisle: What if you think about it this way? It’s really hard to find those high quality businesses when they’re selling at bargain prices, right? It’s hard to get them so when you get one, you just, that’s your big bet for that year. You take that position and then you just let that run and come hell or high water you just hold onto that. And then you spend your time looking for the next big opportunity. Now, I think for most people who’ve got an income that are looking for something to invest, that’s a pretty good way of doing it. If you’ve got a fixed amount of capital in a fund that you have to redeploy, that’s a much more difficult proposition, right? You don’t have any more income to rely on, you kind of got to… Then I think you’ve got to be thinking about at least trimming.
Bill Brewster: Yeah, well I think that’s the studies that you’ve published in the past and deep value and whatnot. I think that value outperforms, if you rotate on a year to year basis, and where-
Tobias Carlisle: I don’t know that it has to be quite as often as that, but I think yo do need to rotate.
Bill Brewster: To turn it a little bit right? And then I think the Ackre and Ensemble and probably Bluegrass, I’m not sure, view of the world is buy these great businesses, and if you hold them long enough, then you can outperform as long as you’re paying a reasonable multiple. The way that I do what I do is I just need to understand what I’m applying to the asset that I’m applying it to and really be able to understand it. And as far as the question goes, I would just say read a lot of different investors. I mean I’ve learned more… I started out, I was only reading like Buffet and Graham and I feel like I wasn’t really growing. And then I started to pay attention to guys like Bill Miller and I mean thankfully Twitter has opened my eyes to a lot of different ways of thinking. And now I can at least identify why people are taking positions.
Jake Taylor: Well, let me ask you this. If you… We know how hard it is to find that that company that can redeploy capital at high rates, has a good management that won’t mess things up, and maybe even has some reasonable multiple, and you found all of those things that you believe in. Why would you tell anyone about it? I feel like this is a secret that you never want to tell. I mean you-
Bill Brewster: Yeah, I don’t know.
Tobias Carlisle: You filled up. You want the glory.
Bill Brewster: Yeah.
Jake Taylor: No, I want to be able to buy even more if I can.
Bill Brewster: Well, it depends is how big it is.
Tobias Carlisle: If you take away one of the elements that you said then was a reasonable PE, if you take away that and you say, let’s identify the best hundred companies globally, there’s probably only 80 to 100 companies globally that fit those other criteria, right? Where they’ve got that sustainable high… They’re just going to grow for the foreseeable future. It’s hard once you’re in those, you’ve got to wait around for another one to kind of get cheap and I think that more likely is what happens is they all get cheap at the same time. Crash or something like that. Or there’s something that happens in the business that brings into question their ability to keep on doing what they have been doing. That’s the really hard thing, right? They get cheap right at the time that the single thing that you like about them is now in question.
Jake Taylor: Question. Right.
Bill Brewster: Like Chipotle when that-
Jake Taylor: I think, I mean Buffet was buying that at what, eight to 11 times earnings? Depending on what-
Tobias Carlisle: Coke?
Jake Taylor: No, Amex when he really went big on it. I mean that’s eight to 11 times earnings does not describe much of today’s universe of compounders, right?
Bill Brewster: Yeah. No. Chipotle, I mean, I don’t know. It’s, it’s definitely not Amex. But when they had that scare, my whole theory was this is going to break people’s habit of going to Chipotle. I mean, I was obviously wrong. But I was concerned that they were going to lose the habitual purchase. So I stayed away from that sell off. And in retrospect, that was a mistake. But to your point, how do you know when something’s a permanent change and when it’s not? I don’t know. It’s judgment. You probably find out about the people that judged correctly and don’t hear about the ones that judged wrong.
Tobias Carlisle: That’s right. It’s a survivorship bias game.
Jake Taylor: Huge survivorship bias.
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