VALUE: After Hours (S02 E07): Gayner’s Sizing, 700 Year Decline In Rates And Marathon’s Capital Account

Johnny HopkinsPodcasts

Summary

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

  • Tom Gayner’s Take On Position Sizing And Strategy
  • Marathon Asset Management and Capital Account
  • What Can We Learn From Capital Spectator’s – 700-Year Decline In Interest Rates
  • Ram Bhupatiraju – If You Like Everything About A Company, But It’s Overpriced, Take A Small Position
  • Tobias Calls Down The Thunder On Constellation And High-Performance Compounders
  • Dee Hock And Chaordic Organization
  • If All You’re Holding Is Gold Somebody’s Going To Come And Kick Your Ass
  • The Universal Lesson In Running A Successful Business Is To Treat Other Human Beings Like Human Beings

References mentioned in this episode:

Expecting Higher Interest Rates? 700 Years Of History Beg To Differ (The Capital Spectator)

Capital Account: A Fund Manager Reports on a Turbulent Decade, 1993-2002 (Sullimar Capital)

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

Bill Brewster:
All right. Oh, you entered the matrix, that’s why I didn’t start. Welcome to Value After Hour. This is Bill Brewster with my co-hosts Jake Taylor and Toby Carlisle. Jake, what are we going to be talking about this week?

Jake Taylor:
I’m going to be talking about a little video that came out about Tom Gayner on position sizing and some interesting takeaways from that.

Bill Brewster:
And Toby, what are you going to talk about?

Tobias Carlisle:
Capital Spectator article on the 700-year decline in interest rates and I’ve extrapolated that out and I think that it’s going to be paid somewhere in the order of about 35% to be a borrower in about 2700.

Bill Brewster:
It’s going to be-

Jake Taylor:
Skate to that puck.

Bill Brewster:
Really good for 3G. And I’ll be talking about Marathon Asset Management and Capital Account.

Tobias Carlisle:
Right after this.

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

Tobias Carlisle:
Who wants to start off today? Jake.

Tom Gayner’s Take On Position Sizing And Strategy

Jake Taylor:
I’ll go first. I’m going to be talking today about this video that circulated on Twitter where Tom Gayner was discussing different position sizing and strategy around how much should you own to kind of force yourself to do different amounts of research.

Jake Taylor:
So, the bigger story of that is that Tom was talking about how he views it, one, like a … Well, I’ll start first with he’s talking about if he’s watching a college football game with a friend and he doesn’t know either of the teams. He’ll place a friendly wager something small just to have a little bit of skin in the game.

Jake Taylor:
And he applies that same idea to investing where he views different investments as there’s the majors, there’s minor league teams, there’s even lower Single A and depending on how much he feels like he knows about the company, the more he gets to know it, the more I can escalate from the Single A to Double A to Triple A, all the way up to majors for your biggest position holdings.

Jake Taylor:
So I found it to be an interesting framework to tackle the idea of what do we do with position sizing.

Tobias Carlisle:
Right. It kicked off the discussion right. Like he’s saying and I think his argument is a good one. And it’s one that we’ve discussed previously on this podcast a few times and it’s one that I subscribed to too, that until you buy something, you don’t follow it closely enough to really form an opinion on it.

Tobias Carlisle:
And so a few people objected to that in the comments and they said, “You don’t need to do that. You can just have a tracking portfolio, a paper portfolio that just follows those positions.” I think what that misses though is that, I mean, unless you’re including the price at which you discovered something.

Tobias Carlisle:
That’s kind of the thing that I find sometimes in my PA and more discretionary holdings in the past. I don’t have any now. But you might see that something has gone up or down a lot, and that might be the thing that piques your interest.

Jake Taylor:
Yeah, the other analogy he made was that it’s like a library card where you’re checking out a little bit of the company, not paying much for it but it forces you to read it because you brought the book home.

Tobias Carlisle:
Yeah, I like that analogy.

Bill Brewster:
Yeah, that was good. So the guy who find the value that commented, I mean, I know him IRL and he’s a really impressive dude. And like he is the type of guy that I don’t think minds watching 200 companies in an Excel sheet and waiting to take bets.

Bill Brewster:
But that is aligned with his personality. And I think that what Tom has found and what I think you need to really think about when you’re trying to adopt somebody else’s strategy is like Tom’s goal is to make Markel a long-term compounding machine.

Bill Brewster:
So whatever drag that Tom gets from like a 5% position from library cards doesn’t matter in the real accomplishment of his goal. And if you look at his actual concentrated holdings, they don’t really change that much. So as a Markel shareholder, is it more important that Tom runs like a theoretically sound fund strategy or is it more important that Tom executes what he needs to execute in order to make you wealthy.

Play The Investing Game That Suits You

Bill Brewster:
And I just think that it’s a different conversation and you need to … Whatever your game is, just like play that game for you and that, I think, takes a long time to figure out what your game is.

Jake Taylor:
I agree. I think … What do you guys think about this as a possible interesting way of approaching it? What if you could kind of gamify a little bit for yourself where after a certain, let’s say, a certain number of 10Ks that you read will unlock a percentage that you could bet on it. Or maybe if you were tracking your time, it could show you that you’ve spent enough time to be comfortable to unlock a bigger percentage of equity that you could invest into an idea. What do you think about trying to game yourself a little bit?

Tobias Carlisle:
I like that idea and it’s something that we discussed when Bill was trying to work out how much he should buy. I was like, that should be like, if you find something and you’ve done a little bit of work, you read enough of it. You should be able to buy a little bit just to keep on digging into it. Maybe not a full position until you’ve completed your entire checklist.

Tobias Carlisle:
But I think that makes some behavioral sense.

Bill Brewster:
Yeah, and I think too. Like I think what Bruce Green … Well, what he has said in the past is have any index fund or whatever your preferred … Like say I want deep value exposure. Okay, fine. There’s an ETF that does that. Have something there. Now, I’ve got my exposure and I don’t have to have the race to put money out.

Bill Brewster:
I mean, I think that for me, the hardest thing was now my portfolio is somewhere that I don’t need the next idea to enter in. So I don’t really have that much of a pressure cooker to find something. So I’m more comfortable with like a watchlist.

Bill Brewster:
But in the beginning, I think cash drag is real. I know that cash doesn’t matter until it does. But to get some exposure, I think having some sort of base strategy and then some tracking stocks is not the end of the world. And I just think what Tom does is immaterial relative to the overall accomplishment of his goal. I don’t think that those tracking stocks create a significant drag.

Tobias Carlisle:
Somebody has pointed out in the comments that however you’re doing it, it’s probably fine as long as it works for you. But I think it is helpful to hear how other people do it. And that’s one thing that I have found personally when I’m a little bit more discretionary is to earn a little bit because I don’t really pay enough attention to it until I do.

Tobias Carlisle:
And then if it moves around a little bit, that’s kind of my trigger to dig in a little bit more.

Bill Brewster:
Yeah, well. I’m sorry, researching, and I know I’m sorry that people have to hear about it again, but researching [inaudible 00:08:23] is like so much different than owning a little piece. And once you actually see the financial engineering piece and lived through some of the asset sales, like it’s just so different.

Bill Brewster:
So if you need that tracking position to feel that, I think that’s important.

Jake Taylor:
I agree. I think it’s smart actually. And there’s optimal that maybe you’re giving up some tiny little percentage by having those. But if it means that you have a better shot at catching like those one or two that probably can make an entire career, then it becomes completely immaterial.

Jake Taylor:
And your odds are even if it seems like kind of a local maximum to be efficient without having any of those frictional points in there, you’re probably blind to a bigger maximum by not having it potentially.

Ram Bhupatiraju – If You Like Everything About A Company, But It’s Overpriced, Take A Small Position

Tobias Carlisle:
So I found a great … This is slightly on the same topic but slightly different for us. I only discovered this gentleman this morning and I’m going to mispronounce his last name Ram Bhupatiraju. Sorry, Ram, if I’ve mispronounced you-

Bill Brewster:
It sounds right.

Jake Taylor:
Yeah, that’s right.

Tobias Carlisle:
I only discovered him this morning, but he had this nice thread where he’s talking about … He’s like, if you like everything about a company but the only thing stopping you from buying is you think it’s overvalued and I’ll buy it if it falls X percent.” Then he says, “For god’s sake, buy a small amount one quarter or one third of the overall position size you would have bought at your dream perfect valuation.”

Tobias Carlisle:
And he gives the examples of, he found Shopify in 2016 at $36, VEEV at $37, PAYC at $45, did all of the initial research which he says, “Good enough for an individual investor. I didn’t buy them because they are too expensive. Hoping that he’d get that pullback, didn’t ever get that pullback, finally bought them two years later at much higher prices.”

Tobias Carlisle:
He’s an advocate for. And I-

Jake Taylor:
Late cycle talk?

Tobias Carlisle:
Well, I got two thoughts on that, and I’m trying to figure out … Well, honestly, I’m trying not to … I actually think it’s a good idea.

Jake Taylor:
I do too. I was just teasing.

Tobias Carlisle:
I think if you think that the company is strong enough, then if you think the business is strong enough, then like I tweeted out, somebody requested that I run the numbers on Microsoft enterprise value price-to-sales, and then somebody’s enterprise value-to-sales. I don’t use those metrics. I just wanted to have a look at it because I was asked about them and I published it.

Tobias Carlisle:
And Microsoft sold like nearly 11 times sales. It’s been 36 times sales at the very peak 20 years ago in 1999. In between then, it’s been cheaper than it is now, or since it listed, it’s been cheaper than it is now like 84% of the time. So it’s expensive now.

Tobias Carlisle:
Then I saw a husband tweeted out this morning something else about every decile. He’s tracked every decile back 20 or 30 years and he just shows, he considered ’99 bubble where the top decile gets very expensive, bottom decile gets cheap. Now, it looks a little bit similar and it doesn’t look like we’re all the way through that same cycle where that top decile gets very expensive. It’s about 11% cheaper than it was in 2002. That’s kind of immaterial in the grand scheme of that.

Tobias Carlisle:
The bottom decile isn’t nearly as cheap but it’s definitely trending in that same direction. It’s going down or that top decile is going up which is why all the value investors including me had been complaining about it for so long.

Tobias Carlisle:
Jake at EconomPic said here’s a funny thing if you’d bought that most expensive decile in 1999, your return today, you’d be up about five and a half times which is about an 8.8% [inaudible 00:12:33]. Since then despite that valuation because these companies are so strong, and so I just thought about it in relation to Ram’s point that if these things are strong enough businesses, then it probably does make sense to have a little bit of a holding in them because it does focus your mind on the [inaudible 00:12:47].

Tobias Carlisle:
If they do at some stage get cheaper, then they’ve done the work. You know the stock you buy really, you buy it. If they keep on going up, then you’ve already got a little bit exposure to it, so you know it pretty well.

Bill Brewster:
I think the third or quarter is a little bit tough, right? I mean, I’m trying to be 10% at cost on some of my positions so to just like sort of throw away at 3% position, that’s not so easy. So make sure, I would say if you’re going to employ the strategy, make sure it’s small enough that you can come over the top, and like really buy into the valuation that you want should that happen.

Bill Brewster:
But my buddy and I were talking about this last night. If you’re worried about inflation, Visa is an inflation hedge. Like there is going to be … If the dollar goes-

Tobias Carlisle:
Bitcoin, bro.

Bill Brewster:
Yeah, all that too. So I mean, you might get attacked by that, but as long as the rails are the way that you pay, where does Visa really lose and I don’t know how much … I’d rather own that equity than a long bond. I just don’t understand the notion of buying long bonds here.

Bill Brewster:
Like does it outperform an equity index? Probably not. Do I sort of view it as better than bonds? Yeah, 100%. That American tower, I mean all these things that look crazy on the face. If your alternative is some 10, 15, 30-year bond, I’d much rather own those growing businesses and watch them. It’s not risk-free. But shit, neither is a bond.

Jake Taylor:
Oh, I tell Toby explains to you why the US is going nerp on us and those long bonds will suddenly make a ton of sense.

Bill Brewster:
Yeah.

Tobias Carlisle:
You guys know I was just in Austin recording a Real Vision interview and the guy who was in front of me was Lacy Hunt.

Bill Brewster:
Yeah, I love Lacy.

Tobias Carlisle:
So Lacy made his name … He’s basically been a long bond guy for 30 something years and-

Jake Taylor:
And you’re a Ballard, Toby. You’re hanging out with all the cool kids.

Tobias Carlisle:
Lacy and Dan DiMartino Booth and Chris Cole who’s a good friend of mine but now he’s a hedge fund baron as well. It’s a funny world where those bond guys have outperformed, I think on an absolute basis also on a risky … Massively on a risk-adjusted basis equities. You would have been better off just being piling into the long bond and not worrying about anything else for the last 30 something years. That would have made your life easy.

Tobias Carlisle:
And this argument that the long bond is a terrible place to be right now, that’s been going around for five years and it’s still the best place to have been over the last five years, longer maybe.

Bill Brewster:
Duration has kicked ass. I mean, I don’t care what it is, the longer out, the better it’s performed.

Tobias Carlisle:
I am honestly struggling in this market when I look at … Somebody tweet … I think it was the Fundsmith where somebody tweeted out, this is what the average cash shield on the portfolio was-

Bill Brewster:
My man, Science of Hitting investing did that.

Tobias Carlisle:
Was it Science? Yeah, it was a great point. Sorry, I forgot the exact detail of the tweet. I was just reminded of it when you were discussing your buddy before, Bill. He said, “The yield in that portfolio in 2016,” and these numbers are wrong about the point. He was like, “The yield in 2016 was 5%. The yield in 2017 was 4.5%. 2018 was 4%. 2019 was 3.5%. This year it’s like 2.8%.”

Tobias Carlisle:
I could see myself pulling the trigger on somebody’s positions at a 5% yield with an off growth like pretty, chunky growth. I can do that. At 2.8%, where are you going?

Bill Brewster:
Welcome to compound town, baby.

Tobias Carlisle:
I said at 5%. I could do it in 2016. So that means that a lot of the return has come from multiple expansion.

Bill Brewster:
This is true.

Tobias Carlisle:
That was the point that I thought it was an interesting exercise in Microsoft yesterday that I know that Microsoft has very fat margins. So I know the margins are great. The point that I’m making is that it’s multiple expansion over an extended period of time in addition to some compounding.

Bill Brewster:
Yeah. Now, look, you own the infrastructure of enterprise software and now the infrastructure of the internet. So it’s not like its’ a stupid bet on its face. But to your point, the expectations are a lot higher and the way the expectations treadmill works is you sort of have to fun faster to satisfy Wall Street.

Bill Brewster:
And if you don’t, there’s going to be a drawdown. I mean, that’s just sort of how this game works.

Tobias Carlisle:
Have any of you guys looked closely at it? Do you guys have a feel for the valuation of Microsoft?

Bill Brewster:
I have not looked closely enough to like have a real informed feel. My gut tells me it’s probably pretty fair here. I don’t know that you’re going to outperform but like I don’t know, if you have your kids’ capital and they really have a really long duration, I mean, you got risks. It’s not risk-free but I can’t argue it’s mispriced. It might be gut-wrenching. But they got a hell of a business.

Tobias Carlisle:
It’s just, I think it’s hard to come up with a … I consider all these businesses are growing really quickly and they’ve still got a good yield like really great balance sheets. Management is probably smart, all of those things. I think that they’re probably going to do okay over the next … You probably you don’t lose money in the next 10 or 20 years. I just have trouble pulling the trigger at this kind of level of valuation. Honestly, I can’t do it at this level.

Jake Taylor:
20 years, no. 10, eh. 5, uh-uh. I don’t know.

Bill Brewster:
And that is sort of the point that I think we’ve all talked about in the past is like you got to be willing to truly lock up money for that duration, and you have to be right for that duration. And that isn’t the easiest thing in the world to when you’re staring in a 16% drawdown. After 10 years of everything going up, everybody thinks they can do it. But you find out who the pros are from who’s just sort of a tourist once the drawdown happens.

Bill Brewster:
Two Decembers ago, you found out some of it and a lot of people were freaking out.

Jake Taylor:
And that was nothing, really.

Bill Brewster:
Yeah, that was like an itch.

Tobias Carlisle:
It’s 20%, right?

Bill Brewster:
Yeah, please over three months and then V’ed back. Get out of here if you think that’s a drawdown.

Tobias Carlisle:
I don’t even know what a drawdown looks like anymore.

Bill Brewster:
Apparently that.

Tobias Carlisle:
I mean, aside from the [inaudible 00:19:29] portfolio.

Marathon Asset Management and Capital Account

Bill Brewster:
I’m going to slip my topic in here real quick because it’s a long conversation. And Jake’s got to go. But like I was reading Capital Account and I did that summary of it. And it’s amazing how many parallels there were between what they were writing in the late ’90s and what I see today. And I’m not here saying, oh, we’re ready for a 2000 crash or any of that nonsense.

Bill Brewster:
But I am saying that there’s a lot of value in going back and reading what people that were smart were saying in the late ’90s and thinking about it.

Tobias Carlisle:
What were they saying, Bill? Because I think, from my perspective, it’s possible that this market is different to the one in the late ’90s. So the one in the late ’90s, maybe this is why I’m interested in what you have to say that it looked to me in the late ’90s like there was a lot of really … the dot-coms didn’t have much in the way of even revs certainly not anything the way of profitability.

Tobias Carlisle:
I do think that there are a lot of very smart guys looking at these compounders and getting them right. And that needs to be … I respect the fact that they’re getting these things right. And I respect the fact that they pulled the trigger what looked to me like optically expensive valuations that have been preceded on to be kind of cheap because they’ve grown so quickly.

Tobias Carlisle:
So that doesn’t indicate to me that there’s likely to be this massive drawdown at some stage, but when I look at … The market looks like on a cape basis. What’s funny is that kind of metric is to everybody listening. That’s been proven to be a completely worthless metric. But it still looks expensive to me on that basis.

Bill Brewster:
Yeah. So I think it’s true that there are different business models out there. I think what they would say to this comment and one of their core frameworks is when your valuation exceeds the cost of replicating your business, it incentivizes competition, right? That is the foundation of capitalism.

Bill Brewster:
And unless you can have some sort of lock-in, you are unlikely to make economic profits for extended durations when valuations of this is happening. Conversely, if your valuation is below your replacement cost, there’s capital that’s fleeing the industry which is more likely to add a more … Or which is more likely to result in a more positive outlook going forward at the same time when the outlook is depressed which creates sort of excess return.

Bill Brewster:
What I think that they would probably say and my skeptics had on the Sass thing, is if these businesses can grow this quickly, and this gets to some of what Jake has said in the past too. You really need to bet on the lock-in and the duration of the growth. And if 100 million of sales is showered with a $3 billion valuation, there is a pretty huge incentive for some sales force to come out and try to steal that relationship from the incumbent.

Bill Brewster:
And these Sass names are sort of proving that the relationship is there to be stolen. So they better be good at defending that relationship too. And it reminds me of what a smart person said, running a business, scaling a business, and running a business at scale are three different skill sets. We know that these guys are good at attacking or they’re good at defense. And I don’t know what the answer to that is.

Tobias Carlisle:
Can you say that again? Running a business, scaling a business and running a business that scale are three different-

Bill Brewster:
At scale.

Tobias Carlisle:
At scale. I see, sorry.

Bill Brewster:
… are three different skill sets.

Tobias Carlisle:
What’s the difference?

Bill Brewster:
I think that they require different operational capabilities. I think that the ability to … So you look at somebody that’s running, like Big Lots is a retailer that has no sales growth but they are extremely good at keeping their operating income exactly where it is. And they’re buying in a ton of shares, so on a per share basis, you’re getting a fair amount of growth.

Bill Brewster:
Scaling a business, that’s a completely different skillset. How are you hiring the sales force? How are you managing it? How are you just like not pulling your hair out every day? And then running a business at scale is something that I … Arguably, 3G is really good at it, maybe they’re not. But I think that’s sort of the skillset that you’re looking for. Optimization and defense would be what I would think would be the important things.

Bill Brewster:
So anyway, I think Marathon would say these current valuations are going to incentivize a lot of competition in the future. So how can you be sure that you’re defending?

Tobias Carlisle:
The things you’re reading, that’s the update. That’s the second decade, because I’ve written …

Bill Brewster:
That one is first. That’s why I shared it because it’s like so hard to get. It’s like a $500-book, it makes no sense. The second one is Capital Returns, so the one that I outlined was 1990 to 2005. And then I probably will write like 2005 to 2015 or whatever that second one is. That was more readily available, so I didn’t spend time disseminating it.

What Can We Learn From Capital Spectator’s – 700-Year Decline In Interest Rates 

Tobias Carlisle:
Well, I like those points. I think we’ve got to move on just for time. My topic, Capital Spectator has come out with this argument that if you’re expecting high interest rates, there’s this 700-year history of interest rates that beg to differ. And I’ve got this chart that shows, and on this chart, you can see things like Simon van Halen lending to Edward III in, it looks to me like maybe 1335, something like that. He was getting 35% interest rates. Amadi/Rommel loaned to King Sigismund 18% in about like 1380 over with estimate.

Bill Brewster:
[crosstalk 00:28:37] my time.

Tobias Carlisle:
They’ve got always dots on this chart and then-

Jake Taylor:
Are those BBB, or what’s that?

Bill Brewster:
This is Buffett terms right there.

Tobias Carlisle:
Lacy Hunt would have been all over this thread 700 years ago. So basically, the thing has … Over time, they’ve got this chart that purports to show that, I fitted a line to it, and it points to basically zero interest rates in 2018. I hit a couple of problems with this. One, I don’t think we really have enough data 700 years ago, 500 years ago, 200 years ago to draw any really strong conclusions about where the market was back then. I think maybe capital is a little bit harder to come by and we didn’t have quite the same. But maybe that’s the argument. Maybe that’s the argument that they’re making that it should be close to zero.

Tobias Carlisle:
But within sort of living memory, not my own but other people’s, we had zero interest rates in 1937. And in the ’86, we had like 16% interest rates. We had stagflation in the ’70s with very high interest rates. And now through the intervention of central banks, we’ve come back to like virtually 0% interest rates. I don’t see that that’s directionally down. I think that that’s the bottom of the cycle. I don’t necessarily know that we go back to higher interest rates to the other side. But I think that what that shows is in a cycle rather than it’s directionally down. Anyway, clearly, I’ve got no idea what I’m talking about because we’re at zero, and the arrow points down to zero.

Jake Taylor:
So just for fun, I’ll take the other side of the argument. And I was thinking about this that one of the biggest things that is a marker of how successful an economy will be is the level of trust between all of the participants. And I think you could make the pretty strong argument that we have probably more trust than they did 500 years ago. I think if you look at like … They’ve looked at different hunter gatherers societies and measured their level of trust and it correlates really well with productivity and even just trading, all those kinds of things require a higher level of trust.

Jake Taylor:
I think we’ve also seen a centralization of power on a lot of different fronts that we might be peak centralization right now. And that doesn’t mean necessarily that it’s something that can keep going on because I think eventually that sort of thing fragments and we get more decentralization again. But one of the things I think would correlate with the centralization would be higher trust rates. Therefore, it doesn’t surprise me that maybe lower interest rates are part of that.

Tobias Carlisle:
Yeah. I liked that argument. I can also see looking at that chart, data is better now than it was and it’s maybe just reinforcing your point but data is so much better now than it was. And I think that we all sort of know we’ve got a rough idea where the market is, you know what the market is for different credits. You can work out what sort of credit somebody is, so maybe we are just getting better at lending to them.

Tobias Carlisle:
But I think that absent that central bank’s pinning interest rates is negative or zero, I don’t think that they come down to negative or zero. I just don’t see why you would lend to someone without getting some return on your lending.

Bill Brewster:
Well, fundamentally, you’re getting paid for risk, right? I mean, that is what an interest rate is. So you’re giving out money today to get money tomorrow. It’s just very hard for me to think that in a world where the central bank has turned rates negative, that isn’t incenting behavior that is more risk-seeking and therefore compressing spreads. It’s just very, very hard for me to believe that when you have all of Europe seeking for yield, that that doesn’t have some impact on the overall rate market.

Bill Brewster:
And I don’t know how to quantify it. I don’t know how to put it into numbers. It’s just sort of like a common sense thing to me that may not be common. I might be wrong but my brain says, with this many people are looking for some yield, it’s down to compressed yields.

Jake Taylor:
Bye, bye, bye.

Bill Brewster:
Yeah.

Jake Taylor:
I’ve only heard one argument for negative interest rates that makes any sense to me. And it’s, if you think about a bond as more of like a piece of art, because there’s no yield to a piece of art. However, you can speculate that someone will pay you more for it later. And maybe there’s even storage cost of a piece of art. A bond that is being speculated on could also be bought at a negative interest rate if you believe someone is going to come and pay you more for it. So it’s a giant greater fool theory. There’s only speculation. It’s the only reason you’d ever take a negative interest rate on a bond.

Bill Brewster:
Or if you think the world is going to shit and you want some guaranteed return and you think it will be less bad-

Jake Taylor:
What return?

Tobias Carlisle:
Aren’t you guaranteeing your loss?

Bill Brewster:
Yeah, you are. But if your bet is that others will lose more, you could lose a little on paper but gain wealth.

Tobias Carlisle:
But then why wouldn’t you direct it to another asset? If it’s a negative interest rate, for a bond-

Jake Taylor:
The world is insane, what do you want?

Tobias Carlisle:
Why didn’t you then go and buy some … Doesn’t that make you want to buy gold?

Bill Brewster:
No, it makes you want to buy Visa.

Tobias Carlisle:
That’s fair. But Visa-

Bill Brewster:
Because I think the way you get out of this problem is destroying the value of currency. I think gold bugs are probably right on that. And if that’s the case, more currency flows through Visa’s pipes and they combine shares and they can grow.

Tobias Carlisle:
And so does Bitcoin, right? Bitcoin benefits in that world.

Bill Brewster:
Yeah. That’s why I just don’t understand why people are buying bonds right now. I get if you have some mandate. Fine, that’s your job. But if you are actually trying to build wealth, it’s just very, very hard for me to understand, not financial advice.

Tobias Carlisle:
The argument for gold is that there’s no counterparty risk, right? If you hold the actual physical, you don’t have to worry about. Visa still it’s very good credit but there’s still counterparty risk there.

Bill Brewster:
Not really. I mean, they’re just skimming. I mean, it’s-

Tobias Carlisle:
[crosstalk 00:32:20] no risk.

Bill Brewster:
It’s not no-risk but the world that Visa doesn’t get –

Jake Taylor:
Technological risk, but that’s kind of probably about it.

Tobias Carlisle:
In a sense that they could just go and put a whole lot of gold, somebody can figure that out at some stage.

Bill Brewster:
Well, in a world where Visa’s counterparty risk is a problem, I don’t think we’re discussing Visa’s counterparty risk. I think we’re trying to figure out how to eat. So the thing about gold is you got a thousand years of history and I guess in theory, like Bitcoin can’t come destabilize the network.

If All You’re Holding Is Gold Somebody’s Going To Come And Kick Your Ass

Tobias Carlisle:
[crosstalk 00:32:52] got a great joke where he says, “If you’re just holding gold looking for the end of the world,” basically he’s like, “The biggest guy in the block is just going to come and turn you upside down and hit you until your gold coins fall out on the ground.”

Bill Brewster:
It’s 100% what I said to my buddy who’s a huge gold bug. I’m like, “Paul, you want all this gold, somebody’s going to come and kick your ass. You better invest in bullets too.”

Tobias Carlisle:
It might be a prison economy. It might cigarettes the currency in the next go around.

Bill Brewster:
That’s right. [crosstalk 00:33:23] But in that world, the bet on Visa is not your biggest problem, like you got much bigger issues.

Jake Taylor:
So Visa is your Noah’s ark bet then. If it rains for 40 years, you want to own Visa?

Bill Brewster:
And I don’t own it.

Jake Taylor:
Other than that, great advice. I have no skin in that game.

Tobias Carlisle:
What’s your free cash flow yield on Visa at the moment?

Bill Brewster:
It’s not high. I mean that’s the issue. It’s probably 2.5, I mean, I don’t know, maybe 2. It might be under 2. I mean that’s the issue.

Tobias Carlisle:
But at the rate that it’s growing, if you buy it now, it will be like 2.8% in like five years’ time. So that’s great.

Bill Brewster:
Well, and you’re going to be able to [crosstalk 00:34:04]. The terminal value is not going to zero on that in all probabilities. I don’t know. That’s one of those that I would understand buying despite valuation and just saying like I think it’s probably okay over the long-term.

Jake Taylor:
The terminal value of everything is zero over a long enough timeframe.

Bill Brewster:
It might be. I mean famous last words.

Tobias Carlisle:
I’m trying to find that mailbag questions for the week.

Bill Brewster:
I’ll tell you what it doesn’t satisfy, the precondition of low expectations.

Jake Taylor:
That is not peak pessimism that you’re buying into right now.

Bill Brewster:
Yeah. So they’ve got to deliver on some pretty high expectations.

Jake Taylor:
Yeah, they probably will though, that’s the problem.

Bill Brewster:
Yeah. I mean, it’s a hell of a business. And it’s like a tax on global payment. I mean, if you’re going to make a bet, I’d rather bet on that than a freaking bond.

Dee Hock And Chaordic Organization

Jake Taylor:
Did you ever read Dee Hock who is the founder of Visa, his autobiography? He talks about founding Visa?

Bill Brewster:
I did not.

Jake Taylor:
It’s quite good. He talks about this … He calls it a chaordic organization. So it’s like chaos and order mixed together. And basically, he sets up the rules so that’s the order part, and then allows it to emerge and that’s the chaos part. And he calls-

Bill Brewster:
He sounds like Mark Leonard.

Jake Taylor:
… chaordic. Yeah. Actually, he sounds like a lot of smart people that we look up to.

Tobias Carlisle:
[crosstalk 00:35:30] that signal, Mark Leonard.

Bill Brewster:
Wait, I have to look up from the phone.

Tobias Calls Down The Thunder On Constellation And High-Performance Compounders

Tobias Carlisle:
Here’s one thing I’ve been thinking about in relation to Constellation and the high-performance compounders. There was a previous mania for conglomerates in the ’60s that then turned into a mania for buyouts in the ’80s where they were pulling apart these things. And I just thought really the trick that Constellation does is that they buy a solar business. That’s not a great business, like organic growth out of their acquisition is like 4% a year which is basically inflation. They buy them at four or five times enterprise multiples and then they are valued on a 30 to 50 times enterprise multiple. How really impressive is that trick?

Bill Brewster:
Oh, boy, you’re going to get people mad at you.

Jake Taylor:
Yeah, calling them a thunder.

Bill Brewster:
Yeah. Why don’t you go do it, man?

Tobias Carlisle:
Well, that’s exactly the point there.

Jake Taylor:
That is a good point.

Tobias Carlisle:
Why not then just go and do that?

Bill Brewster:
They got a process. Kyler Hasson had a good thread on why Constellation has an acquisition, I guess, advantage over other people.

Tobias Carlisle:
What is it then?

Bill Brewster:
Speed of execution, consistency of underwriting, guarantee of deal done. He had a friend that tried to sell something and it was really, really hard for them to do it. And Constellation close pretty quick, or at least I’m pretty sure they did. But read his thread.

Tobias Carlisle:
Yeah. I can see that, and I do believe that there is some of that and that is real. But if I get some guys who roll out … If I get some young guys who roll out of Blackstone and I can get enough, if I can get a hundred million dollars in cash behind me, do you think that I can go and pull off some deals really quickly? I bet you that I can.

Bill Brewster:
I think that a lot of people attribute them both to execution. And a lot of people underestimate how hard good execution is to execute or something like that, one too many executes in that.

Tobias Carlisle:
Deals are really tough. Deals are messy as hell. They’re really, really tiring and tedious. I did it for a decade, hundred-hour weeks. It’s brutal doing those sort of things. Deals try to die all the time too. There’s lots of … You go through the other side’s document. There’s all of these hand grenades and tripwires and things that you find in it. It’s a game of imperfect information. You were just trying to get to the point where you kind of know where all of the potholes are to do the deal. Even still, there’s a lot of guys out there who do it. You can still get it done.

Bill Brewster:
Roeper does it. I mean it’s different but Roeper has got a similar thing. I don’t think acquisition as a strategy is inherently replicable. But they’ve got some secret sauce there. I mean, you got to at least look at the history and say, “These guys have done it long enough to bet on it a little bit.”

Tobias Carlisle:
There’s going to be competition, right? Because it’s not impossible to imagine competition to something like that. And it has to be an … If there’s a big arb between a private market value and a public market value. And in this case, we’re talking you can buy them at four to five times and get a 30-time multiple in the market. That’s 6x. You think I can pay 10 times and get a 20 times multiple? It’s still a really good return. I’m still doubling my money in the market. I’d say this to someone who loves this strategy.

Jake Taylor:
What is the 30x on your equity though really matter in the Deal structure?

Tobias Carlisle:
We can pay an equity.

Jake Taylor:
They don’t really do that though, right? I thought they mostly pay cash.

Tobias Carlisle:
You could though. It gives you the option. If they’re valued at the multiples that they’re paying, I guess we’re still talking about free cash flow generation.

Jake Taylor:
Yeah. Unless you’re using it as a currency, it’s not really that big of an advantage to have a big multiple. It’s better that that they’re vacuuming up four and five times earnings and then being smart enough not to do it capital.

Tobias Carlisle:
Oops, you just went into the matrix.

Bill Brewster:
Oh, matrix again.

Tobias Carlisle:
That was really good one too.

Bill Brewster:
All right. Well-

Tobias Carlisle:
Just say it and I’ll edit it, or not because it’s funny.

Jake Taylor:
I said isn’t the magic that they’re paying four or five times earnings and then smart enough not to redeploy capital into those verticals that then crushed the returns on capital.

Tobias Carlisle:
Do you know that trick now? So do I. we can go and do that.

Jake Taylor:
I’m game. What’s our first deal?

Tobias Carlisle:
I don’t think that …

Jake Taylor:
Bill, are you in?

Tobias Carlisle:
The multiple that they earn in the market is not the issue. The multiple they’re given in the market is not the issue. All I’m saying is that you’re buying them right now at a 30 times multiple. And what you’re getting for that is them buying stuff at four to five times multiples. And I’m saying, “Can I access that four to five times multiple without going through them?” So maybe I can’t get it to four to five times. Maybe I got to pay six times, but still 20% of what I’m paying for by then.

Bill Brewster:
A lot of people don’t mind to go out and do it themselves.

Tobias Carlisle:
Yeah, that’s fair.

Jake Taylor:
It is a pretty good premium though to hire that service, right? Because really the Constellation customer is small software companies that they’re buying, right?

Bill Brewster:
Liberty, hit us up. Give us some thoughts on the Twitter machine about this because he has thought about it a lot, I’m sure. McKenzie has some thoughts. I was just reading them on multiple arbitrage. I can’t put anything articulate out right now. I know that they don’t like it out of all the strategies, that’s the least … I think they like it the least. Maybe I’m confusing them with the Marathon. But anyway, I don’t disagree with you. You’re paying that kind of multiple, you certainly want some organic improvement maybe as well.

Tobias Carlisle:
But then seems to me that the trick, the thing that all these guys have done really well is that they don’t then go in … I mean Buffett doesn’t go in and tell them how to run their business. Barry Diller doesn’t go in and then tell them how to run their business. I’m not so sure about [inaudible 00:41:54]. Maybe they have figured out how to run those businesses a little bit better.

Tobias Carlisle:
But Constellation certainly does not. That’s their whole point, and Mark Leonard says we don’t interfere with their culture. Some of those cultures are going to be good and they’re going to go really well. Some of them are going to be bad and they’re going to die out but I can’t tell the difference. And so I’m happy to let them figure it out for themselves.

Bill Brewster:
Yeah. Well, I think they just help with the capital allocation in a lot of instances where they just say, “If you’re going to spend over this, then I got to approve it.” Other than that, go at it.

If Berkshire Is Oil Then The Daily Journal Is Rocket Fuel

Tobias Carlisle:
So you guys are in Los Angeles where I am? You’re not quite in Los Angeles yet, Jake. You got the same old background. But we’re all going to be in Los Angeles for Daily Journal. So what’s happening?

Jake Taylor:
Well, we’ve got a couple hours of Munger time and that’s something not to be missed. I think it’s going to be live streamed if I remember right. But yeah, I mean even two hours’ worth of Mungers at 96 years old is worth the trip down for me.

Bill Brewster:
Yeah. And I would say a lot of the great relationships that I have made have come out of these circles of people. So I just try to put myself in more circles like it. And if you’re interested in this stuff, the Berkshire event is kind of a circus but it’s a hell of a networking opportunity and it’s a great time to get together with friends. I think Daily Journal is somewhat similar. It’s getting a little big for my taste though. Last year, I sort of was like, eh. So I don’t know, but how many times do you get to see Charlie?

Tobias Carlisle:
We’re going to have to get … You’ll get your takes on it next week.

Bill Brewster:
Sounds good.

Jake Taylor:
I would say that if Berkshire is oil, then Daily Journal is more jet fuel.

Bill Brewster:
I’ll tell you what though I wish people would stop asking them how to live a fulfilling life. Ask them stuff that’s … I mean, I’m sure he’s fulfilled but come on, folks. [crosstalk 00:43:50] stop asking this shit.

Jake Taylor:
Minutiae on the Wells Fargo instead is I would-

Bill Brewster:
Well, ask them strategy questions or something like that. These guys aren’t freaking life gurus, don’t come to them for that. Go to Tony Robbins. Geez. Anyways-

Jake Taylor:
I don’t know, man. I’m fading that take. I think the things that Buffett-Munger teach you, the money part is nice but there’s a lot more outside of that that I’ve gotten out of it.

The Universal Lesson In Running A Successful Business Is To Treat Other Human Beings Like Human Beings

Tobias Carlisle:
Just before we go this week, as I was traveling around this last week, I read the Intelligent Fanatics books by Ian Cassel and Sean Iddings. And I got to say I found it really inspirational. I only read the one on Jack Henry for our talk last week, and so I’ve spent the last time actually reading through the stories. And I got to say the things that stands out, I do think that there are these universal life, maybe not life lessons but universal lessons for running businesses. And maybe it just comes down to something as simple as treating other human beings like human beings as radical as that sounds.

Jake Taylor:
Reciprocity is pretty well baked into human psychology and even Newton’s Third Law is a form of reciprocity, right? An action has an equal and opposite reaction.

Bill Brewster:
I think that’s fair.

Tobias Carlisle:
I also think it’s something that you can apply on Twitter. I see these guys on Twitter all the time who are very smart but they’re complete assholes and I don’t follow them because I don’t follow assholes on Twitter. And I just think if you have to tell everybody how smart you are and how dumb they are all the time, and that’s your thing, then you’re missing like a lot of the experience on Twitter which is not just to show everybody how smart you are but also to build friendships and learn something a little bit deeper.

Tobias Carlisle:
I get a little bit tired of these guys taking shots at everybody all the time. I don’t care how smart you area, everybody in this room is smart.

Jake Taylor:
Welcome to Toby’s TED Talk.

Tobias Carlisle:
Thank you for coming to my TED Talk.

Bill Brewster:
I think where I will feed myself on the Buffett-Munger thing is I do think you’re right, Jake. As they’ve gotten older, I think they have preached more balance. I will say that if you are trying to be them though, they didn’t get to where they are by being balanced. Like they got to where they are by neglecting their family and now, they regret a lot of the neglect that they gave. And they’re saying maybe this isn’t worth it, right? So that is something to listen to and internalize but you can’t, in my opinion, have both.

Bill Brewster:
And as far as Twitter goes, I could not agree more. I mean, I approach it from like a collaborative mindset and the people that I met are incredible. But yeah, some of these guys just have something to prove, like fine, they’ll prove it to somebody else.

Tobias Carlisle:
I think that’s all we got time for this week, gents. Thanks, everybody. See you next week.

Tobias Carlisle:
(music)

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