VALUE: After Hours (S02 E06): Greenwald on Local Competition, Oil Pops the Bubble, Jack Henry JKHY

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Summary

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

  • Bruce Greenwald: We’re Moving Into An Economy Based On Local Scale Advantages
  • Will A Spike In The Oil Price Be The Pin That Pierces The Everything Bubble
  • High Performance Compounder Jack Henry & Associates
  • What Is Driving The Reduction In The Number Of U.S Stocks
  • Where Should Investors Focus – Stocks At 52 Week Lows, Or 52 Week Highs
  • Why Is Low Vol Performing So Well
  • How Can Anyone Justify Telsa’s Valuation?
  • Tobias Tries To Teach Bill Latin

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

Tobias Carlisle:
All right. You ready? Let’s do it. Hi, I’m Tobias Carlisle. This is Value After Hours. I’m joined by my co-hosts Jake Taylor and Bill Brewster. Bill, what’s your topic this week?

Bill Brewster:
My topic is Bruce Greenwald’s theory of service-based businesses and local economies of scale.

Tobias Carlisle:
That’s a good one. And, Jake, what are you doing?

Jake Taylor:
I’m going to be discussing if potentially oil prices spiking could be the pin that pricks the quote unquote everything bubble. How about you, Toby?

Tobias Carlisle:
Ominous. I’ll be talking about Jack Henry and Associates. It’s another high-performance conglomerate, high-performance compounder, and I got all the information that I read in it from the Intelligent Fanatics book by Sean Iddings and Ian Cassel, so direct all questions their way right after this.

Speaker 4:
Tobias Carlisle is the founder and principal of Acquirer’s Funds. For regulatory reasons, he will not discuss any of Acquirer’s Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirer’s Funds or affiliates. For more information, visit acquirersfunds.com.

How Can Anyone Justify Telsa’s Valuation?

Tobias Carlisle:
Let’s talk about it. So today we’re recording February third. Tesla has blown through $760 right now. At once Tesla was up more than 19. It was up almost 20% for the day. It’s pulled back a little bit now. This show comes out in about 10 days, so we don’t actually know exactly where it will be when it comes out but –

Bill Brewster:
Call it 950 a share.

Jake Taylor:
4,000 is the price targets now, right?

Tobias Carlisle:
I’m starting to think that Kathy Wood is onto something. Maybe she’s too conservative.

Bill Brewster:
That’s right.

Jake Taylor:
Boy, where do we start with that?

Bill Brewster:
Well, a couple interesting things. One, I saw somebody tweeted, “Tesla has added a Fiat Chrysler today.”

Tobias Carlisle:
Wow.

Bill Brewster:
That’s crazy to think about. And two, with a lot of these names that have this far out duration cash flow that people are counting on, I get back to the Buffet quote where he just goes back to basic math, right? And it’s like okay, say you want a 10% return on equity, you’re paying $110 billion for Tesla’s equity today –

Tobias Carlisle:
It’s 130. The market cap is 130. The EV’s 140.

Bill Brewster:
For EV.

Tobias Carlisle:
No, the EV’s 140 something.

Bill Brewster:
Oh really?

Tobias Carlisle:
Yeah.

Bill Brewster:
Okay. So let’s just assume it’s all equity for purposes of this conversation, right? So in theory it should be printing 13 billion of cash flow this year if you want your 10% returned.

Jake Taylor:
Today.

Bill Brewster:
Yeah. And it’s one. Now I know that the real world doesn’t quite work like that math equation, but if you’re out of the gate down 13 billion on your cash flow target. the backend duration better be huge to make up for that. So I don’t know. It’s very interesting.

Tobias Carlisle:
It’s an extraordinary run, and I think it’s amazing the number of guys in the Twitter stream today who say basically what Tesla has demonstrated now is it’s self-financing. If you think Tesla can be self-financing at any stage, then the short thesis is broken, and so there’s no way that Tesla’s a donut. It’s not a zero from this point.

Bill Brewster:
Tesla Q might be broken. I don’t know.

Tobias Carlisle:
Tesla Q might be broken.

Bill Brewster:
The short thesis is not necessarily broken, but then you get into shorting valuationing. Good luck in that game.

Tobias Carlisle:
Right. That’s the change. But I still think it’s got … It has to do with capital race here, right? They still need capital. We don’t actually believe they’re self-financing, do we?

Bill Brewster:
Look, I got into some sort of thing in my DM. First of all, to the listeners, thank you for being engaged. I appreciate all of you. I’ve gotten really good comments legitimately. I know we joke about there being 10 of you. You 10 are rabid. So thank you, and bear with us if we make any mistakes. We’re trying to do this in good faith, so I appreciate the back and forth. Somebody had written me that Tesla was a software company to which I said, “Look, I’m willing to be wrong on my short thesis, but I’m not willing to buy that this is a software company.”

Tobias Carlisle:
But by that definition, every company is a software company.

Bill Brewster:
That’s exactly right. Yes, you use software to deliver your product. I get it. But that doesn’t make you a software company.

Tobias Carlisle:
I think that means full self-driving, right? That’s the thing that makes the software company, but it’s lagging in that area.

Bill Brewster:
You still have to make cars and carry inventory and introduce finance … The complexity of running that organization is so much more difficult than software with marginal unit cost. It’s just not the same thing.

Bill Brewster:
So anyway, we got into it, and I said, “If I was Elon, I’d raise 15, 20 billion here.” Then they got super mad at me and they were like, “Well, this stock’s going to 6,000, so you’d be dilutive.” I guess. Pick up Bruce Greenwald’s Competition Demystified and just read about Mercedes and incumbence in auto industries, and maybe this time is different, but you’re betting heavily against the base rate.

Tobias Carlisle:
I think that the shape of that Tesla price trajectory at the moment looks to me, without doing any statistical analysis on it but just eyeballing it, looks to me like a [sore net 00:05:52] wave.

Bill Brewster:
It looks like an efficient market to me, man.

Why Is Low Vol Performing So Well

Tobias Carlisle:
When they get rapidly bought like that, when every dip gets rapidly bought, not that there have been any dips, no pull backs, but it looks to me like … And I think it’s getting close to the point where it breaks down. I hesitate to say that, because that could mean weeks. But I was saying to Jake just offline before we came on, I’ve been looking at deep value strategies against other strategies, so what does it look like against momentum, what does it look like against growth, what does it look like against low vol. Nothing’s doing exceptionally well except for low vol.

Tobias Carlisle:
So this is something interesting. Low vol has not been historically a way to materially outperform. What low vol does is it delivers what it says it does. It gives you a lower volatility return than the market, but you pay a slight penalty for having fewer draw downs. You get a smoother ride, but you don’t get as much of a ride, except for the last five years. It’s really materially outperformed the market, and it looks almost inverse to deep value.

Jake Taylor:
Is that a function of … When I imagine low vol, if it’s up a little bit every day, which it kind of describes a lot of securities prices over the last couple years, it’s just up a little bit every day. Does that then become a low vol candidate?

Tobias Carlisle:
Yes, it would be.

Jake Taylor:
So it’s almost a momentum on the back of it, underneath if you peeled away the layers.

Tobias Carlisle:
It means it goes down less than the market when the market goes down. It goes up a little bit less than the market when the market goes up. It’s literally lower volatility relative to the market. It seems to have been going up much more than the market has over the last … I look at it over the last five years.

Tobias Carlisle:
When I look at it versus my own strategy, the times when it really outperformed my strategy, and this is the… version of it, 2009 bottom. As you can imagine, it doesn’t draw down as much, so there’s a real mountain peak of low vol outperformance there. The other one is 2012, where value was quite weak through 2012, had a big peak then, and there’s another big peak now. And the peak now is comparable to the 2012 peak, not to the 2009 peak.

Tobias Carlisle:
But I was sort of struck by how vertical it was. We’re really at that asymptotic edge of the vertical part of the asymptote where it’s really getting vertical, and that typically is close to it breaking down.

Bill Brewster:
When you’re talking about your strategy and deep value, are you referring to just a strict quantitative deep value strategy or do you have a short overlay on the back test that you’re doing?

Tobias Carlisle:
I do both.

Bill Brewster:
Yeah, that’s what I’m asking.

Tobias Carlisle:
I was talking then about … That’s the… version. The long-short version’s not market neutral. It’s still heavily long-biased. It doesn’t look that different. It just looks a little bit more exaggerated. So we’re actually a little bit peakier on the long-short version that has … It’s still 100% exposed, but it’s got that 30-30 short portion attached to it. It’s looking very peaky.

Jake Taylor:
I’d like to give you guys a little more on that base rate that Bill was just talking about. I came across this little study that I found that might be helpful for some of us. Here are the numbers. These two professors, Wiggins and [Ruthley 00:09:32], I guess, I’m not sure how they pronounce it, but they looked at 6,772 companies across 40 different industries from 1974 to 1997. Now what they looked for were superior performance within that industry and how sustainable was that, and in the population, 5% of the companies had a 10-year run where they were superior to their competition, a half of a percent had a 20-year run, and a .04%, so four bips worth, had a 50-year run. That’s three companies out of almost 7,000.

Tobias Carlisle:
Can you give me the names of those three companies?

Jake Taylor:
I can’t remember what they were. They’re unlikely to be the same ones going forward, right?

Bill Brewster:
I’m just going to check my portfolio and see all the big companies that are about to die. Thank you very much.

Jake Taylor:
Well, it’s more the question is do you think that you have a 1 in 200 chance of picking the one that’s going to be still an amazing company 20 years from now, because that’s what this base rate is saying. Are you that amazing of an analyst that you know what the 1 in 200 looks like? I’m sure there are people out there who do, but –

Tobias Carlisle:
I’m guessing it’s 1 in 200.

Jake Taylor:
Okay, well, if you’re the smartest person that you know out of the 200 people, then I guess bet on yourself. However, if you have any doubts about that, a 20-year run of that kind of magnificence is very rare, and the way that everything is priced today, a lot of these companies that are great today, it seems very unlikely that they’re all going to be great 20 years from now based on the base rates.

Jake Taylor:
The other part of it was that during this the actual chance of losing your superior status accelerated by … It doubled over the course of the study. So competition was getting harder from 1974 to 1997, which probably fits a lot of world views of globalization and maybe technological change. So, if anything, the base rate might be overstating your chances from this study.

Tobias Carlisle:
’74 to ’97, so it was 23 years.

Jake Taylor:
Yeah.

Tobias Carlisle:
They need to do an update, because that’s 23 years ago now, right? ’97 to 2020.

Jake Taylor:
It’s probably due for an update.

Tobias Carlisle:
So it’d be interesting to see –

Bill Brewster:
Math checks out.

Tobias Carlisle:
I got a question. If your investment start is to try and find the better company at a fair price, is it to find something that is better than the market averages at a price that is equal to or less than the market averages?

Jake Taylor:
Is that like the Fun Smith kind of approach basically?

Tobias Carlisle:
Would that outperform? That probably outperforms, right?

Bill Brewster:
Yeah, I think it probably does.

Jake Taylor:
I mean, where is that company that’s trading at the market average right now?

Bill Brewster:
So I’ve been hung up on Heico since we talked about it. It’s like the hot girl that I saw for the first time. I think about, since I just had my big introduction to GARP, now I’m no longer a value investor, according to some people, thank you very much. That would be the type of company that I could really understand betting on the duration.

Bill Brewster:
There’s a point where the multiple … Please don’t misconstrue what I’m about to say, multiple matters. But, if you look out over 20 years, the fade of the multiple, the contraction in the multiple hurts you less if you’re willing to actually take that duration on a per annum basis. So I think you have to be extremely confident in the growth path.

Bill Brewster:
And something like Heico would make sense to me because you have some element of regulatory capture and they’re not trying to hike price. So I don’t see them as being the people that are going to piss everybody off.

Jake Taylor:
Not like a [Transdigm 00:13:50].

Bill Brewster:
Yeah, that’s right. Even if there’s some pushback some time over the next 20 years, I don’t know that they’re the recipients. If anything, maybe they benefit, because people say, “Everyone should do business like them.” So that would be the type of business that I would be more willing to pay up for. Now how much are you going to pay? I don’t know. I think if you’re not really willing to lock up the capital for 20 years and the multiple rerates on you quickly, you’re screwed. It’s like any long-duration asset once … The small moves cause huge price fluctuations and long-dated bonds, long-dated assets generally, all that stuff.

Tobias Carlisle:
Without mentioning –

Jake Taylor:
You have to be willing to ride through the quotational contraction to get to the longterm return on equity.

Bill Brewster:
Yeah, and to be like, “Fine, the market rerated this downward, but my initial underwriting was right, and I’m not going to take” –

Jake Taylor:
Double down.

Bill Brewster:
– “this massive sort of double down.”

Tobias Carlisle:
It just makes life easier to buy at a discount, though, doesn’t it? I would rather have the margin of safety be on my side, where if I’m wrong on the longterm growth rate, I’m paying a little discount that already has that fudge factor built into it.

Jake Taylor:
That’s so 2003, man.

Tobias Carlisle:
That’s old-school thinking. That’s real old school. That’s hurt my returns for the last decade.

Bill Brewster:
I think a legitimate criticism of some deep value … I think where deep value guys mess up is … Gabelli is genius with his deep value with the catalyst, because it unlocks what you think you see. Buying deep value without a catalyst in an undiversified basket, to me, you really risk falling into these value traps, and the IRR can just suck.

Bill Brewster:
Now people will say, “Well, value in and of itself is it’s own catalyst.” I sort of get that, but I’m not sure I really … I think you can fall into ice cubes in deep value, and with growth I think you can pay up and then you find out the growth isn’t what you thought and you end up losing down the road. It’s sort of a different way of finding out your bet was wrong, but I think it’s just a different way of thinking.

Tobias Carlisle:
I think if you have free cashflow…

Jake Taylor:
Go ahead.

Tobias Carlisle:
I was just going to say, if you have free cash flows and the company’s buying back stock, you’re going to get the rerating eventually. That’s all. Sorry, Jake. Keep going.

Jake Taylor:
I think that’s fair. I was just going to say that I’ve never quite understood this term value trap. To me it sounds so much like resulting in the Andy Duke sense, of the ones that didn’t work out were a value trap and the ones that did were a good value play. You don’t know what’s going to happen necessarily. You just know that, as a population, if I buy enough of these type of situations, they tend to work out over time. So to call one a success and one a failure is blind to the genius of the strategy.

Bill Brewster:
I agree with that, and I also think that people mess up when they see rule number one is don’t lose money, and then they look at one value bet and you lost money and think that was not right. Buffett has said he would wager significant amounts of money on a coin flip if the odds are right.

Tobias Carlisle:
The payoff.

Bill Brewster:
So that can theoretically violate rule number one in an independent trial, but over time it does not violate rule number one. And I think some people are not thinking about a portfolio basis rather than an independent bet basis.

Jake Taylor:
Look up ergodicity. That’ll help you understand it a little better.

Tobias Carlisle:
There’s been a lot of discussion of ergodicity on Twitter over the last week or so.

Bill Brewster:
I saw it. I looked it up twice and I still can’t figure out exactly what people are saying. It reminds me of law school when people started speaking Latin and I was like, “You’re kind of being a dick. Just speak English.”

Tobias Carlisle:
Ceteris paribus, non-sequitur.

Bill Brewster:
And you know the person that spoke Latin never knew his shit as well as the people that just put in terms that everyone could understand. They just hid behind big language.

Tobias Carlisle:
Post-hoc ergo propter hoc.

Bill Brewster:
See, you lost me.

Tobias Carlisle:
Who’s topic are we going to do? Who’s got a good topic?

Jake Taylor:
Bill, why don’t you go first?

Bruce Greenwald: We’re Moving Into An Economy Based On Local Scale Advantages

Bill Brewster:
All right. I’ve been noodling on Greenwald speeches lately, and it actually sort of goes to Jake’s point and maybe some of what Toby was talking about earlier in that Greenwald’s whole theory of the case is that we are moving into an economy based on local scale advantages in service-based businesses. So John Deere is the example that he loves to talk about, where they really understand the strategy of going in and dominating a local market, and then now with the data that they bring in house they know or at least can help the farmers figure out what their soil needs and how they need to use their tractors and whatnot, and it’s removed an element of cyclicality out of the business that used to not be there. His theory of the case is basically that those businesses are going to have more enduring economics, which I thought was pretty interesting.

Tobias Carlisle:
A local monopoly is going to do better than something else?

Bill Brewster:
Yeah. Service-based companies with local economies of scale is sort of how he would advise to think through things. It reminds me a ton of how Malone talks. Malone, everything that he talks about in scale is within the relevant geography, and he wants to beat you in his relevant geography. And it makes sense to me, that strategy. That’s what I try to look for. That’s one reason that I like AB InBev, despite what’s going on in some of the end markets. Beer is an incredible industry structure.

Tobias Carlisle:
How so?

Bill Brewster:
Almost all of the markets are consolidated and owned by two players, and then you’ll have a third player that maybe has 10% to 15% share, but 60% of the share in almost all the markets are made up by two people. If you look at price taking throughout the industry, it’s basically a cartel.

Tobias Carlisle:
So it’s difficult to compete because you can’t get distribution. You can come up with a better tasting beer, but you can’t get it to the tap at the bar, you can’t get it into the fridges at the supermarkets. You just can’t compete.

Bill Brewster:
That’s right, or a baseball game. And then in a world where marketing used to matter a lot more they could spread the cost to the Super Bowl over more units. They can’t exactly do that now.

Bill Brewster:
I sort of wonder, with the internet going where it’s going, if … I think it takes a lot less to meet minimum viable scale. If you just want to be some brewer who’s selling his beer in his restaurant, you can do that a lot quicker. Maybe you can sell some stuff to your local market, buy some internet advertising I guess on Facebook. But for real distribution, I still think these big guys can buy a lot more of the clicks. If Amazon is delivering to your house, I don’t understand why AB InBev can’t have a local brand that they’re buying the advertising space on Amazon that you just click and you see, “Oh, it’s made locally and it comes to your house.” Long term, that’s not an implausible outcome.

Tobias Carlisle:
So you’re saying the only way to compete is at the local level.

Bill Brewster:
I think so. I think you’ve got local and maybe regional. There’s some regional players in beer. Heady Topper’s super big in Vermont. 3 Floyds is really big here. You guys have the people that do [Pliny 00:22:04]. But I don’t think you can get super regional brands. I think it’s very, very hard without the distribution.

Jake Taylor:
I met this guy last week who’s doing something kind of interesting. I’m not going to say what industry he’s doing it in, but he is white labeling a product that you use every day and allowing influencers to basically have their own version of it.

Tobias Carlisle:
Brilliant.

Jake Taylor:
So he’s capturing this so long tail of marketing that these people have been doing for 10 years now, of building trust with a small little group, and they get to make their own blend of it that’s unique to them that they like and then they sell it to the people, and this guy just handles the production and the shipping. I think it’s actually really smart.

Tobias Carlisle:
I did wonder how all of those influencers, all the bodybuilding guys had their own supplements and things like that. That probably makes sense.

Jake Taylor:
It’s white labeling of products. There’s a few companies behind there that are doing it. So you don’t have to have your own brand.

Tobias Carlisle:
I don’t actually know if that’s what they’re doing, by the way. Jake and I haven’t discussed that offline. I don’t know what the product is.

Bill Brewster:
I covered food for a while when I was at BMO. It’s amazing. When you start going down the whole value chain, it’s like, “Oh, there’s really only” –

Jake Taylor:
It’s like one company.

Bill Brewster:
Yeah, like 10 big chicken companies and they sell all the chicken, or there’s three processors. It was fun. We would have discussions sometimes about financing equipment and how many chickens you could kill quicker. It’s a sick life. But you got to get your costs per head down.

Jake Taylor:
I saw something. We kill like a million chickens an hour or something.

Bill Brewster:
Those machines are wild. Anyway, I digress.

Jake Taylor:
Yeah, me too.

Tobias Carlisle:
Let’s talk about Jake’s topic. What’s your topic?

Bill Brewster:
Wait, real quick. The thing is the moat that has eroded is distribution for the most part. So now you can white label and get your distribution out to your influencing group, which is why I sort of think Google and Facebook are just the tax on everything now, because all those influencers, their platform is that. Twitter has a really unique thing, but I don’t know how you monetize it quite as well. But, man, the interactions that I have on Twitter are crazy, and it’s opened a world that would not be opened otherwise.

Tobias Carlisle:
The problem for the platforms, Instagram, Facebook, so on, the next thing comes along. The platform changes, because the kids don’t want to be on the same thing that the olds are on. So TikTok blows up because they don’t want to be on Instagram, which is all the 30-year-olds, and then TikTok will have a run for a little while and then it’ll be the next thing, because the kids don’t want to be on the thing with all the olds.

Jake Taylor:
Not according to my DCFs in my spreadsheet, Toby.

Tobias Carlisle:
Marcello Lima alerted me to the fact that Facebook is still the … monthly active users, daily active users is still growing. I got to say, I have a little bit of trouble believing it, because I just don’t know anybody who still uses it as often. When I check into those things, there are a handful of people who use them all the time, but they’re largely ghost towns to me, not Instagram obviously.

Jake Taylor:
I think it might be a little bit like McDonald’s, where no one wants to admit that they eat there but they still eat there sometimes. No one wants to say that they’re still going to Facebook, but I think there’s enough people still going. I don’t know.

Tobias Carlisle:
That makes sense.

Bill Brewster:
I still go occasionally. I’ll jump on the grenade.

Tobias Carlisle:
I log in and I look, but I don’t post is what I’m saying.

Bill Brewster:
The quality of the interactions has declined, I think, fairly substantially. The other thing is WhatsApp is awesome. I know that that’s not disclosed. They do the Facebook disclosure and then they do all their within the all-our-disclosures thing. To me, once they remove the Facebook proper disclosure and they just go to total global users or whatever, WhatsApp is going to distort all those user metrics a lot, unless they figure out how to monetize them.

Bill Brewster:
I was talking to somebody last night at the Super Bowl who’s got an Oculus, though, and he was pretty pissed that he didn’t have his Oculus with him, because he said you get one NBA game a week, and the Super Bowl was in VR, and he said it’s actually a pretty cool product. He said it’s got a ways to go but it’s pretty cool.

Jake Taylor:
No experience with that yet.

Bill Brewster:
I don’t either.

Tobias Carlisle:
I think VR is potentially completely game-changing, because you get VR then you’re not going to need necessarily a laptop. You don’t need a desktop. You just need a powerful computer, and you put this on and you’ve got a TV on the wall over there, desktop here. It definitely changes the way we interact with … It just needs to get fast enough, and that’s getting pretty close, if it’s not already here.

Jake Taylor:
That might be the biggest bite of software eating the world, right?

Tobias Carlisle:
Right. The person who controls that part controls the … That’s the choke point.

Bill Brewster:
The new metaverse, bro. I’m still not sure what that is.

Jake Taylor:
Sci-fact.

Bill Brewster:
I’m working on it.

Tobias Carlisle:
I’ve gone back and read quite a few of those old sci-fi, William Gibson and Neal Stephenson. I just can’t think of the names of the –

Jake Taylor:
Snow Crash.

Tobias Carlisle:
Ready Player One. Yeah, Snow Crash, Ready Player One, and there’s a few of them. They’re all great. They describe … It’s an interesting take on what they thought it was going to be, but it doesn’t make sense really until we get VR, VR proper.

Bill Brewster:
Ready Player One was just recommended to me, and I asked if it was similar to the Matrix, and they said not totally but sort of. I don’t know. But I’ll watch.

Tobias Carlisle:
It’s kind of young adult. It’s fun.

Bill Brewster:
I’ll check it out.

Tobias Carlisle:
I’d read Snow Crash, and I think that’s being turned into a movie, too.

Jake Taylor:
Oh, is it? That’d be good.

Bill Brewster:
I’m not 1000% sure we’re not in Inception right now. This might just be a dream layer. I don’t know. Elon Musk might’ve figured something out here.

Tobias Carlisle:
That’s because you’ve been incepted.

Bill Brewster:
I know, man. I’m questioning everything.

Jake Taylor:
There’s only one way to get back to the real. I shouldn’t even say that.

Jake Taylor:
All right –

Tobias Carlisle:
Jake’s topic.

Jake Taylor:
– so my topic for this week –

Bill Brewster:
Good transition.

Jake Taylor:
Yeah, before we say something we’ll regret.

Tobias Carlisle:
It’s too late for that, mate.

Bill Brewster:
Yeah. I’m sure no one got upset with anything we just said. We’ll probably get some DMs that tell me how dumb I am to not know the metaverse and whatnot, and I appreciate all them. Thank you for reaching out.

Jake Taylor:
We’re more about quality over quantity of fans, right?

Bill Brewster:
Yeah. I’m telling you, man. A couple people have reached out to me on Ollie. I really appreciate it. Just trying to find the truth, so thank you. Please keep doing it.

Will A Spike In The Oil Price Be The Pin That Pierces The Everything Bubble

Jake Taylor:
All right, so my topic this week is about what if a spike in the oil price is the pin that pierces what some people have called the everything bubble. I saw this quote from Jim Puplava. I don’t know exactly who he is, but he said that the price of oil is the new fed funds rate. And the idea behind that that the cheap oil has been what has really allowed us to sort of keep the party going here, maybe more so than we would’ve ever been able to.

Jake Taylor:
When you think about the economy as a complex, adaptive system … the second law of thermodynamics: you’re fighting entropy. So you have to take information and materials and energy to combine those in a way that fights entropy, and if one of those inputs is energy and it’s especially cheap, for whatever reason, that can be a huge boon to everything that’s happening within the economy. It’s a prime mover in a way that maybe little else is.

Jake Taylor:
But if you go back and look at … There’s some really interesting correlations when you look at the price of oil and then different prices of indexes. Even going back … The famous one is kind of 2008, because oil was … It jumped up to $150 a barrel in, what was it, May of 2008.

Tobias Carlisle:
That’s crazy.

Jake Taylor:
Yeah.

Bill Brewster:
Different times.

Jake Taylor:
So let’s say June of 1973, which was also kind of right before a big popping of a potential bubble, really rough time in the stock market, June of ’73, $20 a barrel, January of ’74, so six months later, it’s $55. It more than doubled, almost tripled. November, ’98, $17 a barrel, August of 2000, $50 a barrel.

Jake Taylor:
So we have all these little kind of interesting correlations. I don’t know the exact causation, and I don’t know how tight the linkage is, but it is an interesting thought experiment that if we were to see … what would happen to all of these valuations today if we were to see a spike in oil price for whatever reason. I’m not smart enough to understand oil and all the inputs and make any kind of predictions about the price, but if I had a lot of long-duration assets that might be repriced, or if i was an index holder, and I saw the price of oil going up dramatically, I would probably start to feel a little bit nervous about where we are.

Jake Taylor:
And one more thing to add there, wouldn’t it be kind of an interesting scenario if the price of oil was to allow all of these energy companies who have been just absolutely sucking wind that a lot of value guys have gotten caught up in and beaten down by, and what if that was what brought value back to kind of winning again, because the energy assets at $150 a barrel start to look pretty attractive again and it causes a repricing of all of the other things in the world that are dependent on the energy. All of a sudden we’ve really tipped the scales from one side to the other in an interesting way. So chew on that one, guys.

Tobias Carlisle:
That’s interesting. What’s more important: low prices for money, can you borrow cheaply, or low energy prices? I guess they’re both very important, but not every business is necessarily borrowing all the time.

Bill Brewster:
What if one leads to the other?

Jake Taylor:
Well, hold on. Low prices of money do not create any new material wealth. They don’t create new information, they don’t create more energy, and they don’t create more material.

Tobias Carlisle:
They make your multiples go up.

Bill Brewster:
I think they might actually create more energy, because you have a lot of people when the opportunity cost of capital is low that might be willing to finance a lot of exploratory projects that otherwise they would not be willing to.

Jake Taylor:
I will concede that it may pull things from the future forward, but by themselves I don’t believe that they create wealth of any kind.

Tobias Carlisle:
Well, that can’t be right, because there must be projects that aren’t financially viable at one interest rate price and are financially viable at another one. So if it’s cheap enough … And that’s not necessarily pulling forward from the future. That’s just something that is … It’s viable at one level and it’s not viable at another.

Jake Taylor:
Hmm. I’ll have to think about that.

Bill Brewster:
Yeah.

Tobias Carlisle:
We’re getting very theoretical here.

Jake Taylor:
Bill, don’t act like you said it.

Bill Brewster:
No, I did not. I didn’t. I think energy’s somewhat interesting. I mean, here, Energy FinTwit, please come at me. Shout out to them. They’re one of the funniest FinTwit groups out there.

Tobias Carlisle:
Don’t pull down the thunder. Don’t call down the energy thunder.

Bill Brewster:
No, I actually, and it’s Kyler –

Tobias Carlisle:
I like watching it.

Bill Brewster:
It’s Kyler Hasson’s idea, but I really think he might be onto something. The big MLPs, like Enterprise products and Magellan Midstream, you talk about a hated asset class and then a hated structure within that asset class –

Tobias Carlisle:
And a big… input.

Bill Brewster:
It’s really not a terrible business. You’re not in the EMP business. You’re in the transportation business. I don’t care what millennials think about what oil should do. We’re not getting off oil any time soon. And EDP is more natural gas, which is a cleaner thing to burn than oil, and they’re transporting it.

Jake Taylor:
Just to give you an idea of what the global energy usage looks like today, in case you don’t know. 32% is oil, 26% is coal, 23% is gas, 9% is electricity, and 10% is biomass. So the energy that we use on this planet is still very heavily … We’re still very much in the… carbon game.

Bill Brewster:
Dude, the authorities tried to stop you again. You went back into the Matrix. But you’re right. My buddy just got a Tesla in Denver, and my other buddy and I always tease him. I’m like, “Oh, good, the coal plant is powering your car.” Natural gas needs to take share from coal. That’s got to happen.

Tobias Carlisle:
What about nuclear? Where’s nuclear?

Bill Brewster:
It’s not politically viable, but it should be.

Jake Taylor:
I think that’s counted in the electricity number there.

Tobias Carlisle:
That’s interesting. I’d never known that there was that much of a connection between the timing of those spikes in the oil price and the collapses in indexes. We’ve had very low oil prices for an extended period of time here, too, and I own some energy, because it’s all beaten down and everybody thinks it’s going away, and I don’t know if it is or not, but it’s certainly priced that way. So if it isn’t you’re going to get paid.

Bill Brewster:
My buddy that made a fair amount in oil, he thinks that we’re pretty range-bound and that the fracking industry has sort of shortened the cycles, so somewhere north of 60 … The amount of latent supply that they can just flick on is crazy. And then below 40, it just doesn’t really make sense. Now I know people like Chanos have said that there’s never been free cash flow in the industry. I have no idea. Jim, I should call him Mr. Chanos, is way smarter than me. But my buddy has said, he’s like, “The problem that Wall Street either doesn’t understand or there’s a disconnect between how we’re doing it on the ground is the game isn’t really a free-cash-flow game. The game is prove your reserves and flip it to an oil major.”

Tobias Carlisle:
Shouldn’t they get the free cash flow then?

Bill Brewster:
You would say eventually yes. Yeah. You would hope.

Tobias Carlisle:
The thing that … Price sort of leads sentiment. In oil and gas it seems to me that there’s no discussions of peak oil when the oil price is really cheap. You get discussions of cheap oil when the oil price is really expensive, and then people say … Whatever, there’s some tiny, tiny margin. We produce … These numbers are wrong, but we produce a million barrels of oil a day and we consume a million barrels a day. The margin is just absolutely minuscule, so if you get it a little bit wrong one way or the other, the price goes up pretty rapidly.

Tobias Carlisle:
And so you get these discussions when the oil prices … I remember 2008 very vividly in relation to the oil price as well. It moved like Tesla did today. It used to whip around like that. And that was when people were very loud about peak oil. It happened 10 years before that, too. The late 1990s there was something similar going on. I kind of think when the oil price is low, yeah, there’s lot of supply around, but we’re going to move up a little bit and then I bet you we’re having a discussion about peak oil again.

Bill Brewster:
Somewhere Kyle Bass is listening to his pulling his hair out, because he claims he counts the best oil barrels out of anybody. I’ve heard him say that before. He’s like, “We have the most accurate count.” So, Kyle, reach out to us. Let us know please.

Tobias Carlisle:
He’s a listener.

Bill Brewster:
Shout out to Mr. Bass. I don’t know. Oil’s interesting. It’s interesting how hated it is right now and how loved it was in the past.

Tobias Carlisle:
Not that long ago, 10 years ago.

Bill Brewster:
There’s no barriers … Somebody on Twitter said that it’s like tobacco. It’s not at all like tobacco. There’s no barriers to entry. You don’t have pricing power. It’s not consolidated. Quit it with that nonsense.

Tobias Carlisle:
I think they meant like tobacco in the sense that people hate it.

Bill Brewster:
Yeah, well that’s –

Tobias Carlisle:
It’s politically unpalatable.

Bill Brewster:
That’s where it rhymes.

Jake Taylor:
Yeah, it’s getting dropped out of every ESG fund, right?

Bill Brewster:
Yeah, and that makes some sense. And even Kramer recently was saying, “I’m out of oil stocks.” His reasoning was no one’s going to buy them.

Tobias Carlisle:
Because they haven’t done anything.

Bill Brewster:
Well, no, and that a lot of money managers that are trying to impress younger people don’t want to hold oil. All right, I’ll buy it at the right price.

Jake Taylor:
Yeah, and take a 10% dividend or something along the way, because no one wants to own it.

Bill Brewster:
That’s sort of why I’m intrigued by the MLP idea. I’m not in it for ESG. I’m in this to make money. I’m trying to put food on the table out here. I’ll donate some trees or something.

Tobias Carlisle:
You can buy carbon offsets. I saw Bernie’s campaign spent a few million dollars on flights, and for $32,000 you can offset it all with … a few million dollars in private flights, $30,000 offsets it. It doesn’t seem to be that it’s that big an issue. That’s a tiny … That’s, what, 1.5% … covers your … that’s your carbon credits. It’s sorted out. What are we worried about?

Bill Brewster:
That’s it.

Tobias Carlisle:
Let’s move on, before we get too much hate mail.

Jake Taylor:
Yeah, please.

High Performance Compounder Jack Henry & Associates 

Tobias Carlisle:
So I’m talking Jack Henry. It’s another high-performance compounder, because that’s one I’m obsessed with at the moment. It’s a very interesting story. It started in ’77 by two guys who knew each other, Jack Henry, and Jerry Hall, not the model, who’s married to Murdoch, another guy with the same name. They’re in Monet … It’s in Missouri. It’s a little town in Missouri.

Bill Brewster:
Oh, it’s Monet.

Tobias Carlisle:
Monet. I was guessing.

Bill Brewster:
If it’s Missouri …

Jake Taylor:
Oh, boy. Hate mail.

Bill Brewster:
Shout out to Kansas. Oh, wait, Missouri, sorry.

Tobias Carlisle:
Kansas City.

Bill Brewster:
Kansas City, Kansas.

Tobias Carlisle:
They each had to program. They had to learn software code. It’s like a little farming … Shit, I know nothing about this town, other than what I read in Intelligent Fanatics. Sean Iddings and Ian Cassell, send the hate mail to those guys about the description of the town, because that’s what I’m talking about. I’m sure it’s a beautiful little town. I come from a little country town. I’ll continue on. They both had to learn to code for their jobs, and they were the only two guys in town in 1977 who knew how to code, so they used to get together for coffee to talk about coding problems, lament the lack of community for coders.

Tobias Carlisle:
They both got unsatisfied with their jobs, got out, decided to get together. One of them worked for a bank installing IBM, coding IBM for the bank. He kept the rights to the source code. There is the key, same thing that got Bill Gates started. Hold onto the rights for the operating system. So he got the rights to the code. So the business started out providing information-technology services to little community banks, because they didn’t have any way of tracking all the relationships that somebody might have with the banks. They just didn’t know. You could have a car loan and a house loan and they had no idea that you were the same person. So they were trying to bring some sort of better tracking, that kind of stuff.

Tobias Carlisle:
The business grows very quickly, because they’ve got this great culture. Basically they just look after their employees. They get to a stage where they’ve got private planes. They fly their employees on the private planes to engagements. If somebody’s sick, they’ll fly them to the hospital. If it’s someone they know, family, they just basically look after their employees.

Tobias Carlisle:
There are periods of time when it’s tough. The employees have to take reduced wages. Jack Henry and Jerry Hall cash their checks on alternate weeks, so they’re still being paid the checks but the company doesn’t have enough cash. At the end of that, once they get through, they give everybody a $1,000 check, which evidently makes up for it and more whatever had been lost, so very focused on looking after the –

Bill Brewster:
Stakeholders.

Tobias Carlisle:
Yeah, the employees.

Bill Brewster:
Yeah, good for them.

Tobias Carlisle:
And then they hope the employees look after the customers. They basically hire … Sorry, they promote two guys internally.

Bill Brewster:
Real quick, sorry. Tobi, were they public at the point that they were doing this, do you know? Or were they –

Tobias Carlisle:
Still private.

Bill Brewster:
– still doing this private?

Tobias Carlisle:
I think the culture has continued on. It’s a point of pride for them that they have this culture, but this is before they go public. They go public in about ’85. So they started out 1977, $115,000 in sales, $9,000 in profit. 2016, this is according to the book, $1.35 billion in sales, $250,000,000 in profit. It’s a good business.

Tobias Carlisle:
Two guys who start as high school students eventually end up kind of running the business, these two Mikes, Mike Wallace and the other gentleman, whose name I can’t read my handwriting. They have this … That’s when the acquisition strategy kind of kicks off.

Jake Taylor:
Not going to work here anymore.

Bill Brewster:
Not going to work here.

Jake Taylor:
Sorry.

Bill Brewster:
Great movie.

Tobias Carlisle:
So they start buying, but basically they … You guys have derailed me.

Jake Taylor:
They know. Sorry.

Tobias Carlisle:
The acquisition strategy starts in the ’90s, and basically they have this … The arbitrage, if anything, it’s kind of like a cultural arbitrage. They buy these companies. They get the employees all together. They say, “We’re not going to have any layoffs.” All the new employees get a $1,000 check, and then they get them together in this place where they get to meet all of the existing employees, and the existing employees say, “This is a much better way of living, and the whole enterprise is going to be better as a result.” They give everybody amazing levels of autonomy. Company went public in 1985. According to the book, they’d acquired 50 companies by that stage.

Tobias Carlisle:
This is not so much a discussion on the acquisition strategy, just a discussion on the importance of corporate culture and sort of treating folks the right way. The funny thing is I kind of regard … A lot of what they were discussing in the book I just think is kind of par for the way you should treat another human being. I wasn’t going through and counting up a lot of these as like birdies and eagles, but I appreciate that some companies go through and there are rounds of layoffs and these guys just refuse to do that sort of stuff and so on.

Jake Taylor:
I think … Well, that culture may be one of the most anti-fragile things maybe in the universe. If you really think about it from a biology standpoint and sustainability, this idea of win-win that some people propose just makes so much sense to me. And it’s kind of shocking that you don’t see it more actually. Even the big companies that we celebrate today have a fair number of win-lose relationships and that make you wonder how sustainable it truly is.

Tobias Carlisle:
So Uber’s an example of win-lose, right, because the guys who drive for Uber are potentially … It works out to … Maybe it’s like minimum wage.

Jake Taylor:
Yeah.

Bill Brewster:
[crosstalk 00:47:20] don’t you dare talk 3G. Don’t you dare.

Jake Taylor:
One of the stakeholders in that universe is regulators, and Uber has been famously … gave the middle finger to regulators their whole existence basically, or at least until very recently. That’s not sustainable. Eventually someone’s going to get tired of that happening and they’re going to make a dramatic change that could potentially wipe them out. I think you can’t really rest your hat on sustainability unless all the players in the ecosystem are feeling like this is winning and wants you to win as well.

Tobias Carlisle:
Is Uber an example of something … The regulatory system was a problem. There weren’t enough taxis around. The taxis weren’t good enough once you got in. You couldn’t pay with a credit card, all that stuff that’s pretty basic. Uber hasn’t done anything, again, that amazing, but it is a far superior product.

Bill Brewster:
Yeah. Well, the taxis were regulatory arbitrage, right? It was supply constricted and people were paying people. That was BS. I sort of understand why Uber did that. Jake and I actually talked about this earlier this week, and he had brought up 3G as an example of somebody that pushes their suppliers maybe too far and eventually that could bite them, which is why I made that comment.

Bill Brewster:
The culture thing is something that I was thinking about, because on our last podcast you had asked, “Isn’t that replicable?” One, I think it’s super interesting that we’re talking about a Missouri company. I think Brent Beshore is in the process of doing this again. I tried to give him money. He didn’t need my money. That’s fine. If he ever goes public, I’m going to give him money. I think Brent Beshore is legit the real deal. I don’t hang out with him normally. I might be wrong. But we’ve hung out a couple times, and he’s a really impressive individual that I think is worthy of the praise.

Bill Brewster:
And we were talking about Markel. Tom Gayner is who everybody knows, but one of the guys, Dan, that he hired, that guy’s background was from grants or at least –

Jake Taylor:
Interest-rate observer.

Bill Brewster:
Yeah, he had written for grants. That wasn’t his whole background. That’s sort of a different mind frame. Bringing in [Sirab 00:49:49] to me is incredibly smart. Sirab is a gem of a human, really, really intelligent and interested in things, brings a tech background, is a gateway to India. There’s just a thousand ways to win.

Bill Brewster:
And I think that when you have someone that’s looking to hire other people like that, that is interesting to me, and that creates conversations internally that I think make the organization much stronger.

Jake Taylor:
Let me ask you this: does the market misprice those kind of situations?

Bill Brewster:
I don’t know that it’s mispriced. I know that I have an allocation to Markel because I want to be partnered with those guys. I think that they are reasonably good at business, and I like the way that they look at the world. So if I’m going to give my money to somebody … Some of this is almost like Guy Spier. There’s some metaphysical attraction, whatever. But I want them to succeed. I think they will succeed. The IRR may not be as perfect on a spreadsheet as you might want, but I bet that the outcomes are higher than what you’ve underwritten in an organization like that. That’s why I made that bet.

Jake Taylor:
Well, that’s the question. Do you … Does something about the characteristics of the business give you a better chance of winning than what the market maybe even appreciates about a culture, especially if it’s earlier on and it’s harder to see the amazing things that can emerge from the soup of the correct ingredients?

Bill Brewster:
Yeah, I don’t know. Go back to Beshore, right? It’s early. He’s not public, so I don’t know what the valuation of his company or whatever is, but that guy has it. He’s not selfish. He’s focused on the long term. I bet in 30 years people are like, “He did really big things,” if he wants it. He may not want it in 10 years. He may be like, “All right, this was a good run. It’s over.” Yeah, I think –

Jake Taylor:
I wouldn’t…

Tobias Carlisle:
I suspect not.

Jake Taylor:
– permanent equity then.

Bill Brewster:
Well, his company could go on and he could become chairman or something like that.

Jake Taylor:
I know. I’m just teasing.

Bill Brewster:
I just think that whatever the valuation is that you’re paying today, I bet it’s a pretty good bet, unless it’s just something completely egregious, which I doubt it is, because I know some of the people in there know what they’re dong.

Tobias Carlisle:
I do think that there’s something about … I think companies have a little bit of momentum at the corporate level in the sense that if their thing is “We’re always profitable,” and they go through a very tough period, they just find a way to maintain profitability through those tough periods. There’s a company that loses money all the time. They get really good at finding ways to mess it up and they get a lot of money coming in the door. I do think that there’s something about … It’s like a behavioral … It can be explained through a behavioral … just maintaining consistency with the world. This is what you guys are.

Tobias Carlisle:
The problem is it creates sometimes fake profitability. It creates fraud and things like that. They’re trying to catch up to something else. But if you’re satisfied with the integrity of the guys and you like the momentum of the culture and of the business, then they’re just going to find a way to win I think.

Bill Brewster:
Yeah, and if you lose, at least you lost with a group of guys that are trying to find a way to win the right way. I don’t know. There’s no guaranteed outcomes in life. I don’t know why if you find that culture in a reasonably priced bet why you wouldn’t take that versus maybe a different culture that’s a little bit cheaper, to me, is probably less good value over the long term.

Tobias Carlisle:
I think it’s a good discussion. We’ve got a gigantic mailbag, as always. I don’t think we’re going to get through the entire mailbag today, but I think we’ve got time for three. So here’s the first one. One topic of further discussion could be the monopolization of the market and its consequences for investing. I find it amazing there are only half as many public stocks trading in the US as there were in, say, 1997, and for those remaining just five FAANG, that’s F-A-A-N-G, accounted for 25% of the growth. I think Damodaran mentions this number in his latest update in the last decade. That didn’t sound like a question, did it? But that was … Yeah.

Bill Brewster:
Rates need to go up. Ken Fisher nailed this in ’09. He wrote a letter that was like, “Buy the shit out of stocks.” He didn’t say shit, but I bet in a conference he did. He just said, “Buy stocks, because fundamentally it just makes sense to recap your company. The cost of equity is so much higher than the cost of debt now with rates down here that the supply of equity is going to go away.” And he was completely right.

Bill Brewster:
And then you’ve got organic growth slowing, and with rates here you’ve got a lot of M&A. And then private equity blew up, because obviously active management in equities is the dumbest thing that anyone could ever pursue, so why not lock it up and give it to people with perverse incentives for 10 years. We’ll see how all that turns out. But they’re going to need to exit someday, unless they’re just going to trade stuff and all mark shit up together, which they may do. But those companies will come back out at some point. I’d be careful buying from them, though.

Jake Taylor:
I like this interesting metric, which is number of stocks divided by number of stakeholders, so imagine how many stocks are there and how well picked through are they by maybe someone who’s a reasonable judge of the company, and that number has gotten very disadvantageous over the last couple decades, a lot more CFA holders, a lot less stocks. You probably would predict a more efficient market in that world. So that’s not encouraging.

Tobias Carlisle:
That’s interesting. I think that the thing that’s driving the reduced number of stocks is…. Obviously materially you need be much, much bigger to be listed to pay the million dollars or so a year in compliance costs, and there are now additional risks, so why wouldn’t you just take money from private equity and do it that way? Having said that, the stock market is still much bigger now than it was when all that started about 20 years ago, so it’s easier to list overseas. I think there are going to be a lot more companies listing not in the US. It’s just US listings we’re talking about here.

Tobias Carlisle:
And there are other first-world countries that have strong rule of law, deep capital markets that can absorb companies, and I’ve seen that in Australia. There are US companies listing in Australia all the time, because it’s a low listing standard and you get on the big board. You get ASX. You’re not on the venture exchange in Toronto and you’re not on the AIM in the UK. You’re on the big board with lower listing standards and you get access to all of that super fun money down there.

Tobias Carlisle:
I don’t know that there’s anything that can be done about it. I think it’s just one of those things that some [inaudible 00:57:29] change some of the law. Somebody will get worried. There’ll be a job … listings out of nowhere, then we’ll be lamenting that 10 years after that.

Jake Taylor:
A Cambrian explosion of new businesses going public.

Bill Brewster:
It just feels, to me, like all the allocators … if you are at a pension fund or some endowment or something, you lose your money if you pick the wrong public equity, or you lose your job if you pick the wrong public equity strategy, so just index and then your job’s safe. And then you go out with the private equity guys and they are showering you with nice meals, and you can say, “Oh, well, I have access to all these deals that no one else can have access to,” and you shower them with money in return, and you can justify your existence. I’m looking forward to 20 years from now seeing who does better. I guess it’s index and then I’d like to see active stripped out of the closet indexers, because screw those people.

Tobias Carlisle:
The closet indexers stripped out of active.

Bill Brewster:
Yeah, that’s right. Get that nonsense out of here. True, active management against private equity and then an index against private equity, I’m looking forward to.

Tobias Carlisle:
I got a longer =

Bill Brewster:
Famous last words.

Tobias Carlisle:
That first question was from Mikael. Thanks very much for that question. It was written in Cyrillic, I think. Is that the Russian … I had to stick it into Google Translate to get Mikael, Michael, so thanks for that.

Tobias Carlisle:
Here’s the next question from Bruce Calini. Bill seemed to mentioned … I didn’t quite understand in obiter … There we go, Bill. There’s a little bit of Latin legal term for you: obiter dicta. You ever encounter that?

Bill Brewster:
Nothing, no.

Tobias Carlisle:
If it’s not the decision, it’s obiter.

Jake Taylor:
I barely knew her.

Tobias Carlisle:
Just for anybody who actually cares, obiter dicta’s the stuff that’s written in the decision but that’s not law. It’s just the commentary. So Bill discussed in commentary last week that you don’t want to be on the other side of Brookfield vis a vis, here we go, vis a vis … There’s lots of Latin in this one. Graphtech. EAF is a darling of the value investor community right now thanks to Pabrai’s roadshow, and it’s worked on me. But Bill is smart and he’s saying … early retiree is saying on seeking offer. Minority shareholders are actually bidding on cash flows, which currently almost totally float into Brookfield’s pockets. Is that the issue?

Bill Brewster:
Look, man, make your own bets. Don’t follow Pabrai. Don’t follow me. Do your own work. To me, I thought that Brookfield had gotten the $22 a share. It did not. I issued a correction on Twitter. I think it was $13 a share that they ended up getting bought back. This is all scuttlebutt. I don’t know Bruce Flatt. I don’t know anyone at Brookfield. I don’t know anything when it comes to this except for my perception. I would rather be on Brookfield’s side of everything than be on the other side of them, and that’s how I see it, and EAF may really work out. It’s not really the type of entity that I’m looking for right now, so I probably have a bias against it anyway. I don’t understand why long term they’re necessarily going to win. But the shipping man with the five, that guy’s got a great thesis on it. So there’s two sides to the trade. I didn’t mean to try to scare you out or anything.

Jake Taylor:
When I think about that one and I think about risks and losing permanent capital, in that situation … I’m not an expert on this one either, by the way. I haven’t done a ton of work on it. But I think Brookfield owed something like 80% of the company, and we’re all just sort of along for the ride on the other 20%. I know of a different time where the price of something that they had a similar situation got cheap and they ended up buying it out at that price.

Bill Brewster:
Yeah, you get taken under.

Jake Taylor:
So one of the ways that you can definitely lose is if the price was to go down enough, they could take you under, in which case that is a very real risk that you have to price into it. If it never goes down, I think you probably can win pretty well based on what is it at like four or five times PE or something of a business that sounds like might be pretty reasonable as far as they’re vertically integrated in a way that the other competitors aren’t and they have some kind of supply access that others don’t. Okay, that’s interesting.

Bill Brewster:
They’ve got take-or-pay contracts. Everybody likes that. It’s as good as the credit worthiness of your counter-party, though. That’s not set in stone in the steel industry.

Jake Taylor:
So if it goes poorly, it may go very poorly. So to me it doesn’t sound like much of a Dhando bet. Tails you will lose a lot potentially.

Bill Brewster:
Could, could, yeah.

Jake Taylor:
You could. You couldn’t say, “Well, I couldn’t have seen that coming.” There’s a precedent already.

Bill Brewster:
People are going to hate us after this. People love EAF. How dare … I get it.

Tobias Carlisle:
Those are good thoughts. In the words of the great man, I have nothing to add. So here’s another one. Abtrajer: when you were starting out or even now perhaps did you have any private personal money run by other managers? Who was the manager? What type of fund? Value I assume, mutual fund, ETF hedge fund. With the same thinking, who are some smaller managers or super investors whose 13F’s pay a lot of attention to, besides… Big Larry of course.

Jake Taylor:
Never heard of him.

Bill Brewster:
The answer is yes, I did. I’m not going to name them, because we parted and they have a very good reputation, and I’m sure they tried to do a good job but it didn’t work out for us. They were a value manager. People that I am starting to morph into following are more guys like [Akre 01:03:54] and [Russo 01:03:56], although his stuff’s a little bit bigger. But I like Ensemble. Those guys are really smart. I’d pick people like that, Fun Smith. I’m becoming a quality compounder bro. It’s so depressing. It’s like everything that I’ve railed against forever, but I do think there’s a lot of merit in it, so here I am.

Tobias Carlisle:
Jake?

Jake Taylor:
I mean, I’m always looking for people who I think are doing smart things and whether I can team up with them by putting money into a business that they are managing or whether they are managing funds that they’re selecting the businesses. The lay of abstraction from business and investment can vary depending on what the vehicle is, but I’m always trying to imagine and find different people who I’m like, “You know what? I would be very comfortable with that person managing 10% of my net worth, or whatever the number is.”

Jake Taylor:
Anything other than that is to assume that I understand the world better than all of these people, like I’m the one making all the decisions, and I’m actually not comfortable with that. I don’t want to name names at this point, because I’m still always looking to add, but if you wanted to share names with me, that’d be great. Nah, I’m just kidding. It’s all the same people that you probably already know. I don’t have any unique, special people who I’m hiding.

Jake Taylor:
But it really is very idiosyncratic to you of what makes sense to you also. There’s some approaches where I’m like, “Eh, I just can’t quite get there with them,” but other ones that I’m like, “Oh, that’s perfect. I love what they’re doing and I would give them money to manage [inaudible 01:05:52].” So it’s no different than almost deciding what business that you’re comfortable investing in, same thing with the people.

Bill Brewster:
The reason that I parted from my manager was they had bought some stocks and the stocks had gone down substantially, and I called them and I said, “Buy more,” and they wouldn’t. The reason that they wouldn’t … The answer that came back to me was portfolio construction, and what I said to them was, “I’m not asking for standard portfolio construction. We have an SMA agreement, a separately managed account agreement, I’m telling you if you’re not wrong to buy more here, because it’s better value. And if you’re wrong, that’s sort of a different discussion.” That conversation happened two or three times, and then last December happened and they just didn’t buy anything. It was just … It had been five years.

Bill Brewster:
So what I would say is it’s really hard when you’re young or green, inexperienced, to ask the right questions of the manager, but I think those are really important questions to just think through, like, “Okay, well, let’s say you buy something and it sells off hard, are you going to buy more? Are you more worried about sort of portfolio construction or are you comfortable being concentrated?” And then think through “Am I comfortable being concentrated?” and stuff like that. That’s my take, because it’s a marriage. It’s long term.

Tobias Carlisle:
It depends on your strategy a little bit. I think if you’re in the … if your value is a philosophy and you’re not necessarily screening using metrics, then it makes sense to have a whole lot of other people out there helping you who are looking at stuff if they find something, just because it’s hard to track down. You like the way somebody thinks, when they find something you’re probably going to like the company, too, the business, too, so it makes sense to track 13Fs of Ensemble and the other ones that you’ve mentioned, [Berkshire 01:07:59], so on.

Tobias Carlisle:
I don’t do it because it’s not the way I invest, but I haven’t been doing that well so maybe I’ll start doing that.

Tobias Carlisle:
Here’s the next question. Daniel [Olshanski 01:08:11] –

Bill Brewster:
You shouldn’t put yourself down like that. You’ve got a good strategy, man. You’re going to win long term.

Tobias Carlisle:
I heard that you’re not supposed to criticize the warrior inside, because otherwise that offends the warrior. It’s a Japanese kind of … I think I read it in one of the … What’s the … God, now I can’t think. Clavell, James Clavell, he had that series, very famous one, Shogun.

Bill Brewster:
Oh, I know that, but I don’t know it.

Tobias Carlisle:
Shogun Tai-Pan and Gai-Jin, I think somewhere in that was you shouldn’t put yourself down because the warrior hears it and the warrior is diminished, so I take that back. I don’t want to diminish the warrior.

Bill Brewster:
No, you don’t.

Tobias Carlisle:
Value will rise again.

Bill Brewster:
That said, almost all of my humor is self-deprecating, so … I don’t know any other way.

Tobias Carlisle:
I don’t mean anything I say, so that’s how I get away with it.

Where Should Investors Focus – Stocks At 52 Week Lows Or 52 Week Highs

Tobias Carlisle:
How often do you position your investments after a stock had a major draw down versus finding a company that’s undervalued but may still be at a 52-week high?

Bill Brewster:
Jake?

Jake Taylor:
What’s the question?

Tobias Carlisle:
I think he’s saying do you look at whether a company’s at a 52-week high or if it’s had a major draw down before you buy it. Does that influence the way that you invest?

Jake Taylor:
Used to. I mean, it shouldn’t theoretically, but it probably does for me. I have a hard time buying at a 52-week high, but it’s just some sick little goblin inside of me that doesn’t want to do that. GuruFocus has this cool little feature. I’m not sure if it’s not part of the paid or not. But they will take the highest price-to-book value and lowest price-to-book value or earnings or cash flow, a couple different metrics, and they’ll then make bands of it around the stock price. So the stock price is always contained within it, and you can kind of see where is it trading historically to those metrics. I’m guilty of always probably looking for the one that’s down towards the bottom of the band. It’s the cheapest that it’s been in quite a while.

Tobias Carlisle:
That’s different to looking at the stock price, though. You could potentially have something that performs strongly on a fundamental basis not recognized in a stock trading at the bottom of its bound.

Jake Taylor:
That’s right.

Bill Brewster:
Yeah, I do look at historical valuation.

Jake Taylor:
You don’t know what numerator or denominator, what’s driving the result.

Tobias Carlisle:
What we’re saying is not that we necessarily, and you’re saying the same thing, Bill, we’re not looking at the stock price, but you’re looking at the stock price relative to the fundamentals. I think that makes sense.

Bill Brewster:
Yeah, I look at that. Tom Gayner said I think it was two or three Markel meetings ago, he said, “When I started out I used to look at the 52-week lows, and then I realized the 52-week highs might be a better hunting ground.” I think that it really depends on the strategy that you’re trying to run and what you’re trying to accomplish. If you’re looking to put money out today, it’s probably better to look among the lows than the highs. If you’re looking to sort of accumulate knowledge, studying the highs is probably the smarter strategy.

Tobias Carlisle:
The problem that you have is that momentum is a real thing. The momentum factor is real. If you’re picking off the 52-week lows list, you’re picking companies that have no momentum or negative momentum. That’s not a good place to be. You’re dead for a year doing that on the base. You’re better off picking …

Jake Taylor:
Only one year? It sure feels like longer.

Tobias Carlisle:
It takes a year for that momentum to work itself off. If you’re a value guy, it should be irrelevant to you what you’re hunting. To the extent that you have any bias, you should be biased towards the 52-week highs list. But that’s a different question to looking at the fundamentals. I think it’s hard to justify paying a higher multiple than something has ever been on before or the highest multiple. The highest multiple for the year, I guess I would look back over a full history and see where it’s traded over its full history, but I’d feel very nervous buying something at the highest multiple it’s ever traded at.

Bill Brewster:
Sorry, go ahead.

Jake Taylor:
It’s a really interesting thought experiment to see how big the ranges are, too. It kind of reminds me of Greenblatt would go into the first class when he was teaching and he’d pull up 52-week high, 52-week low, and then tell everyone, “Do you think that the business really moved that much in the actual intrinsic value? Come on, that’s silly.” But this isn’t…

Tobias Carlisle:
It’s possible now, because everything’s starting at the bottom left-hand corner of your screen and going up to the top right-hand corner of your screen. The business has got that much better over the course of the year.

Jake Taylor:
We’re going to need a bigger screen.

Bill Brewster:
The other thing this is –

Tobias Carlisle:
Zoom out, enhance.

Bill Brewster:
– you got to think through … Media is trading at a lower multiple than it has historically. That compression is justified. Now whether or not the outlook changes or not, that’s sort of a different issue. But I don’t know that you can look at media today and media of the past and be like, “Oh yeah, the same multiple should be warranted.” A lot has changed over the last seven years. You got to be mindful of the landscape and what is it the map. What do you want to know? Something about terrain. I don’t know.

Tobias Carlisle:
Yeah, the map is not the terrain. It’s called Korzybski’s Dictum.

Bill Brewster:
There you go.

Tobias Carlisle:
That’s not obiter dicta. That’s law.

Tobias Carlisle:
All right, fellas, that was a good episode. We’re running out of time, so let’s sign off, and we’ll see everybody next week.

Bill Brewster:
Sounds good.

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