During this week’s episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss the investing version of Marry, F#&%, Kill – Buy, Trade, Short:
Jake Taylor: Well, in the name of the holidays, I thought it’d be fun to play a game. There’s this kind of fun game that you can play that’s called Marry, F, Kill, the F being you know what you think it is.
Bill Brewster: Yeah, we get it.
Jake Taylor: Typically, you play it with celebrities. You’ll name three different celebrities and then you have to decide which one would you marry? Which one would you F and which one would you kill? We’re going to adapt it to be Buy, Trade, Short. You have to make a decision now on the first one is buy. This is a single security-
Bill Brewster: That’s marry, that’s marry.
Jake Taylor: That’s marry, yes. You have to buy it at today’s price and you have to hold it for 30 years. You also have to assign X percent of your net worth to it. Let’s start with that one.
Tobias Carlisle: Just before we do it. Can I give you my predictions for what everybody says?
Jake Taylor: Yeah.
Tobias Carlisle: I think buy, everybody says Berkshire.
Jake Taylor: Yeah.
Bill Brewster: [crosstalk 00:30:28] No, I’m not going to go there. I’m going to someplace.
Tobias Carlisle: I think so. Everybody says Tesla, I know that that one’s going to happen, but trade is kind of up in the air. GameStop.
Jake Taylor: It’s actually interesting. It’s actually very difficult. I’ll tell you the rules of the trade after we go through the buy first.
Tobias Carlisle: What’s your buy though?
Bill Brewster: I think I’m probably going to buy LVMH.
Jake Taylor: Interesting.
Bill Brewster: That might be really stupid. This might be peak luxury, peak quality, but they perform pretty strong through the downturn. You’ve got an emerging market that’s getting wealthier over time that got a lot of brands that people want to peacock with. I don’t see that going out of style. I think that might be where I go with this.
Jake Taylor: Is that like buying the cake manufacturer that makes the cake specially for other Royal family right before the French revolution?
Bill Brewster: Yeah, it could be. I was talking to my buddy, Tieso, the science of hitting investing and he was saying that. I was like, “Well, you know luxury, you just don’t have to invest a whole lot. You can push price mid single digits and you got EM.” And he said, “Yeah, that sounds a lot like CPG five years ago.”
Tobias Carlisle: Yeah.
Jake Taylor: Ouch.
Tobias Carlisle: That’s hard.
Bill Brewster: Yeah. That’s very true.
Tobias Carlisle: I’m going to say Berkshire just because I know you want to say Jake. Maybe not. I don’t know. Yeah, I think just because I think it’s… I don’t think you lose money in Berkshire. I think you get at least kind of S&P 500 better than S&P. I think you’re paying like S&P 500-ish multiple. I think it’s a slight premium on a multiple, on a PE basis at the moment. But, I do think the underlying businesses are better than that. It would make me a little bit nervous that the two Todd’s are going to be swinging at stuff like Amazon and [crosstalk 00:32:13].
Jake Taylor: Yeah, and restoration. Is that not in your-
Bill Brewster: Hey, he bought low.
Tobias Carlisle: But, I think that if the timeline is 30 years, I think for me, that risk becomes, the stock doesn’t make it to the 30 years. So, I think that you need something pretty diversified, financially strong where they’re thinking, at least they’re thinking about capital allocation, whether they’re doing it right or not. I think it’ll be there in 30 years.
Jake Taylor: I think it’s a great pick like one, most people, you would sleep easy with that one. I’ll be a little different and I’m actually going to say Fairfax. My logic is one, you already took Berkshire. Two, after going to the meeting now for several years in a row, I’ve come to appreciate the bench strength that’s behind Prem. I think it may be just as good as Berkshire is because Prem I think has been quicker to outsource more things than Warren has just based on my observation of both of them.
Jake Taylor: The businesses are not as good as Berkshire’s, but there’s a lot more international element to it as well then than Berkshire. They’re much more willing to go do other things outside and they always have been. They’ve been pretty good insurers. The investment results I’m hoping will revert to some kind of mean at some point because they have not been great the last few years. I think the company’s still around in 30 years and I think it’s still reasonable. And you’re paying probably about half as much as you are for Berkshire’s assets in the ballpark there.
Bill Brewster: You said that the investment results aren’t good or what they should be, this is probably small pennies in a bucket or whatever, but they bought Toys “R” Us, Canada out of bankruptcy, right? And then, they got Bower out of bankruptcy too, right? What, The Bat Company too?
Jake Taylor: Eastern-
Bill Brewster: Yeah. I did not appreciate what Prem was doing in the private distress market until I went to that meeting. And I said, “Oh, that’s pretty interesting.” If I trusted him from a macro basis, I think I’d be more willing to make that bet.
Tobias Carlisle: Do they also have Blackberry?
Bill Brewster: Yeah, but that’s public.
Tobias Carlisle: The good of big chunk, they’re the guys, they’re kind of Blackberry, aren’t they?
Bill Brewster: Yeah. This is a technical term. That’s a shit show right now.
Tobias Carlisle: Yeah. I think it’s been a short a few times in my screens. I don’t think I’ve actually pulled the trigger on it, but it’s been in there close by.
Bill Brewster: Even the way that he pitches it, he’s just like John Chen’s really smart. They had some IP. I hope he figures out what to do with it.
Jake Taylor: Yeah. Like I said, the investment results the last 10 years I would say have been not great. If you go the 10 years before that though, they’re pretty good. They made a lot of money in the downturn. They’ve, they’re run pretty conservative. They’re not as conservatively run as Berkshire, but-
Tobias Carlisle: The stock that they got before that though, they were also a global short, they were in a lot of trouble.
Jake Taylor: Right. That’d be my only real concern with them is that last, one of our previous episodes, we talked about how Berkshire’s always been kind of an N minus one acquisition company where they’re a little slower to… They’re always one deal behind with and have extra cash. Fairfax has not been that way. They’ve been more of an N plus one sometimes in my view. I’m a little overly aggressive, but hopefully they learn from that and get a little bit more. It’s been better the last few years I think is what I should say.
Tobias Carlisle: I’m trying to find the… There’s a fund that was established in the wake of the ’29-crash. Did you guys read about this this week? Basically, they wanted to take away. They gave it a permanent holding. I think they gave it 20 or 30 stocks and they said, “You’re not allowed to trade these stocks. You have to hold these stocks.” And it’s gone through five different owners and countless management teams since then. It’s still going though. I think a lot of the reason why, I think it’s outperformed the market, which is the most amazing thing. So-
Jake Taylor: What happens with a bankruptcy on M&A?
Tobias Carlisle: They don’t replace it. But in some instances, what happened is Berkshire bought one of the companies and did it for stock. So they picked up some Berkshire, which has helped them a lot. I just can’t, for the life of me, find the name of it.
Bill Brewster: This is very anticlimactic.
Jake Taylor: Let’s move on to F or AKA Trade. For this one are that you’re forced to day trade this and you have to pick at the beginning of every day, every session, are you long or short for that day? This is only for the next, let’s say five years. This is like dating the stock a little bit or effing it a few if you want to.
Tobias Carlisle: So I have to day trade it or can I hold it for three years? I can’t hold it for three.
Jake Taylor: Yeah. Well, you could just be long every day for three years. Yeah, you can.
Bill Brewster: Where you don’t miss the gaps. I don’t want to miss the gaps up because obviously what I’m trading is gaping hard.
Tobias Carlisle: We’re still talking about stocks here, right?
Bill Brewster: Yes. I’m going with the glasses for this one, going into classes.
Tobias Carlisle: That’s so good.
Jake Taylor: Can you see to the future with those?
Bill Brewster: I can and I might even be breaking some rules. Hello. I’m day trading American Airlines options.
Jake Taylor: Oh, all right.
Bill Brewster: I think that I don’t want the equity of that company at all. It’s got a lot of debt. The CEO is relying on his liquidity in a downturn. If that’s the case, you got more debt so you got a bigger interest burden, but they’ve invested a ton over the last five years. They say they’re of the, CapEx cycle. You’ve got three billion of debt being paid down over the next two years. If everything goes according to plan on a $12 billion market cap and the EV tends to hover around 40 billion. So, it usually trades debt and equity. Meanwhile, they’re buying in 10% of their shares. I could see that thing going a lot higher. The squiggly investor in me would note that it’s already formed to lower or higher lows. You got a bottoming position and the glasses say you got to buy. Also, this is not financial advice and position size as well because you could lose it all.
Jake Taylor: So that was a… Yeah, we didn’t say how long would you be your, what’s your percentage that you’re putting into Berkshire and LVMH?
Bill Brewster: Oh, well. I got to own this for what, 30 years?
Tobias Carlisle: Is that one stock for 30 years?
Bill Brewster: Yeah. I think that’s what it is. I’m going YOLO. I got to have 70%. I got to have some dry powder for all this American Airlines money I’m about to make.
Jake Taylor: Okay. How much are you going to allocate to your trading portfolio?
Bill Brewster: I probably like 10% but I’m expecting to lose, I’m not putting 10% down everyday.
Jake Taylor: Yeah.
Bill Brewster: I got to be able to take some draw downs in the trading account.
Jake Taylor: Right.
Tobias Carlisle: I’m going to interpret the trade as, this is potentially a zero, but it’s something that I think, I don’t know how long it’ll take to work out, but it kind of, it hasn’t worked out in three to five years. It’s not going to work out. So this is sort of more of the stuff that I do on a regular basis. I’m not going to talk about anything that I actually hold. This is a company that’s a little bit too small for me and I heard the pitch from an investor who I like and respect a lot. The tick is CRC, it’s California Resources Corporation. It’s a spin-out. It’s oil and gas play, $5.4 billion in debt, $400 million in market cap.
Bill Brewster: I love it.
Tobias Carlisle: It’s clearly, it’s highly levered and it’s highly levered to the oil price. I think-
Jake Taylor: You buy options on the equity.
Bill Brewster: That’s right. Leverage on leverage on leverage.
Tobias Carlisle: [crosstalk 00:41:03] Equity is the option in this one. Clearly, there’s a risk that this is a zero. Because oil volatile, they’ve got debt, you can blow up, you can lose all of your money in this thing, but it’s also one of those stocks that because it’s so heavily leave it and leave it to the oil price. If you get a reasonable move up, it’s one of those things that does go up 10 or 20 times, some silly amount like that. That’s my trade.
Bill Brewster: Then, you get the Momo buyers that come in after it’s up 10x. That’s awesome. I love it.
Jake Taylor: That’s a good segue because that was how I tackled the trade portion was I wanted to look for what has momentum persistence. Each day, is it more likely to just go up a little bit the next day or if it’s going down, to go down a little bit the next day? I did a little research on that and it really pulls up some strange names if you look it for recently. But, the one that I just picked out of the grab bag there, because I don’t think that you can actually like pick one that makes more sense than another, but was actually a Greek ETF.
Jake Taylor: It’s just basically owning Greece. I thought well, there’s going to be so much headline, probably problems because Greece is the redheaded stepchild of Europe. If Europe goes bad, you can just short this Greek thing as much as you want along the way every day. When things like when the news dies down, maybe you just go along a little bit everyday and it takes its way back up as people stop paying attention. It’s kind of the Canary in the coal mine approach to it.
Tobias Carlisle: Yeah, I like that one.
Bill Brewster: You’re pretty levered the Greece. You got a Greek bank that Prem owns too.
Jake Taylor: That’s right.
Bill Brewster: I like that. You looked through Greek exposure is quite high.
Tobias Carlisle: How did you asses that it has this persistence on a daily basis?
Jake Taylor: I just did actually a quick screen on like relative strength and that pulled up a basket of names that have over certain time periods have persistence.
Tobias Carlisle: It’s both directions. It just tends to be… Is it more volatile than the market or no?
Jake Taylor: I don’t know if you would call it more volatile, but it’s-
Tobias Carlisle: It’s persistence.
Jake Taylor: Yeah. Just the price persistence like tends to go up when it’s going up or down when it’s going down. But-
Tobias Carlisle: You may have just found the rentec position there.
Jake Taylor: Yeah, it might be. Huh?
Tobias Carlisle: You just gave it away.
Jake Taylor: That’s what we’re good at here.
Bill Brewster: Give away the good stuff.
Jake Taylor: Yeah, so this one is kill and this would be a short that you have to be short it for let’s say five years.
Tobias Carlisle: Oh.
Jake Taylor: You got to start now.
Bill Brewster: I’d say Tesla, but it won’t be here.
Tobias Carlisle: That’s okay, right? You get to cover-
Jake Taylor: That’s a good answer, then yeah.
Tobias Carlisle: I think we’re all going Tesla, right?
Bill Brewster: I’d be fine shorting Peloton too. I’ll take whatever one you guys don’t want.
Jake Taylor: Okay. Well, what’s the reasoning for wanting to short Tesla then for you, Toby?
Tobias Carlisle: Lots and lots of debt. Metal bender. I’m about to see a huge amount of competition. I think that the whole space is still fairly volatile because there’s a transition to self driving cars coming. And despite what Musk says, I don’t think that they’re at the forefront of self-driving cars. I think there’s a pretty well known shot that does the rounds that’s got other companies, Google particularly, that have much better self-driving technology. I think the CEO’s a little bit of erratic. It’s run up a lot this quarter so it’s much, much more expensive, which doesn’t necessarily make it a better short. But, I think that it is a pretty good short, I think most people have kind of figured out that it’s a pretty good short. I have been short before and I am still short now.
Jake Taylor: With that price action, you’re still short?
Tobias Carlisle: Yeah.
Bill Brewster: Man, that hurts.
Tobias Carlisle: Yeah. I mean it’s small.
Bill Brewster: That’s been robbed. I just sold some call spreads in the old IRA today, but boy that thing is ripping.
Tobias Carlisle: Yeah, it’s moving-
Jake Taylor: What is the logic of, I guess that’s… We can’t really know what the logic of any of this stuff is, but it hasn’t been a lot of volume. That’s one thing. But why, it’s up over 70 billion now for the equity, who looks at that and says, yeah, that’s a $70 billion company with another, how much do they have in debt? Like 10 or 20 more billion or something like that. It’s like, okay.
Bill Brewster: Well, again, in the investment advice category, that’s how I look a little bit long dated on the call spreads and I say, “Okay, well, this thing would need to be like a $90 billion company in order for me to lose on this.” Maybe I’m risking 1% to 1.5% of the portfolio on it. It’s in my IRA. It’s tax advantage. I’ll take that bet.
Tobias Carlisle: Yeah, that’s a good bet.
Jake Taylor: But in the meantime, those are priced at zero now.
Tobias Carlisle: I would say that the interesting thing about Tesla, I think the current price section in it, I think it does illustrate the Soros line about a reflexivity being a real thing. When Tesla was down, I think it actually was a better short than where it is up. Even though it’s much, much more expensive now than you could theoretically expect more for the reason that it would have been much, much harder for them to raise money when they were down. Now, it’s 70 billion. If they go to raise money, there’s much less dilution.
Bill Brewster: [crosstalk 00:46:48] They get comfort that they can stock settle if it’s north to 330.
Jake Taylor: If you’re the 3D chess wizard that Musk is supposed to be, how are you not in this market environment? How are you not issuing all the equity you can get your hands on right now at this price?
Tobias Carlisle: It’s perplexing. I’ve said that counter. I’ve given this to a few people. The counterexample where instead of getting off the plane to Vegas, but buying it out at 420 funding secured, he says, “We’ve taken $5 billion in investment. It was a $60 billion market cap thing. We’ve taken $5 billion in investment.” That’s not much dilution. That’s a lot of fire power. That keeps him going for a few more years. It’s a totally different story for Tesla now, right? Instead now, he looks a little bit of erratic. It’s been a wild ride. Maybe they can still get it away though. Do you think there are many big investors who are going to stump up that kind of money or do you think they’ve got to do some sort of ride so far or something like that to get it from retail?
Jake Taylor: [crosstalk 00:47:49] Oh, I wouldn’t put anything past a sovereign wealth fund at this point.
Bill Brewster: You got Gerber Kawasaki, he’s going to take down some of it. ARCS going to take down some of it.
Tobias Carlisle: But 5 billion, that’s a big, I don’t know how much they’re going to do it.
Bill Brewster: [crosstalk 00:48:01] Barron’s probably take down a slug.
Tobias Carlisle: They need that amount. Right? They need a big, like they need a big chunk. That’s hard to, that’s not lying around any more now than SoftBank’s not doing it.
Bill Brewster: Have you seen the Cybertruck?
Jake Taylor: Have you driven one, bro?
Bill Brewster: Yes. The old working capital from the cluster fuck. Don’t worry about it.
Tobias Carlisle: I still haven’t delivered the Roadster. That was announced two years ago. Is there like-
Bill Brewster: Oh yeah.
Tobias Carlisle: Have they boot the factory to deliver the roads? Do you need a factory? How do you do these things?
Jake Taylor: Just some tents. You’re good to go.
Tobias Carlisle: Yeah. Just take a bit, take lose a bit of parking.
Bill Brewster: You got to tip your cap to him. I thought he was on the mat earlier this year and doesn’t look like it now.
Tobias Carlisle: Cybertruck turned around.
Jake Taylor: Did you guys happen to know? The other thing that I think is very interesting about that is the amount that he’s borrowed against his shares.
Bill Brewster: Yeah.
Jake Taylor: There has to be some price point that margin calls happen that are like, it’s the deathblow because he has to raise money, so he’s selling to cover his leverage.
Tobias Carlisle: TSLAQ’s all over it.
Bill Brewster: Yeah, TSLAQ is all over this.
Tobias Carlisle: I think TSLAQ said it was 150 or 160, it’s something like that.
Jake Taylor: So it didn’t get that far away from it. It was down at like what, two something earlier this year?
Tobias Carlisle: Yeah.
Bill Brewster: I think it was under that. I think it had a one handle on something.
Tobias Carlisle: I think they get it on to 200.
Bill Brewster: Sky, he’s got a SECURUS trade going on.
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