In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- Will We Still Be Talking About The Coronavris In Twelve Months?
- Are We Approaching A Golden Decade For Value Investing
- Use Ben Franklin’s ‘Prudential Algebra Rule’ To Make Better Investment Decisions
- What Is Berkshire Really Worth?
- Investing In Airlines And OTAs
- Your Attitude To Current Market Events Determine The Sort Of Investor You Are
- What Is The Right Number To Keep Earning ‘Stealth Returns’
- Darwin’s Pros and Cons List Of Getting Married
- The WHO Is Talking Stock Market While The Fed Fixes The Wu Fu
- Mark Leonard’s Son Damian, CEO at Pinetree Capital Ltd
- Coming Soon – I AM ONE OF THE 10 LISTENERS – T-Shirts
References in this episode:
Darwin’s Pros and Cons List Of Getting Married (University of Cambridge)
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Full Transcript
Bill Brewster:
All right. Ladies, gentleman, all 10 of you, welcome to Value After Hours. This is one of your hosts, Bill Brewster, with my co-hosts Toby Carlisle and Jake Taylor. Jake, what are you going to be talking about this week?
Jake Taylor:
I’m going to be discussing the prudential algebra of Ben Franklin that might help you improve your investment process.
Bill Brewster:
Toby, what are you going to talk about?
Tobias Carlisle:
The first decade of the 2000s was expensive names with surging fundamentals and flat stock prices, where value did very well. Second decade was the reverse, surging fundamentals led to surging stock prices and value stayed flat. I’m wondering what happens over the next decade.
Bill Brewster:
All right. And I’ll be talking about the joy of owning financial an travel companies right now. It’s the best. Right after this.
Speaker 4:
Tobias Carlisle is the founder of Principles Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by the podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.
Will We Still Be Talking About The Coronavris In Twelve Months?
Tobias Carlisle:
Yeah, so this week, we’re going to do a big therapy session because markets are off. There are 15.5 at one stage, which was getting pretty gnarly. We’ve gone through 2016. We’re a bigger draw down in 2016, at the bottom. Not as big a draw down as 2018 yet, which was 20%, like a golf ball off a concrete path and back to the all time highs. I think yesterday we saw-
Jake Taylor:
[inaudible 00:01:45] bitterly.
Tobias Carlisle:
Well, yeah. I was long, but I wasn’t… I had a whole lot of shots that got shredded in it. Then yesterday, we had that monster 5% rip, which I think is probably, arguably still bear market type behavior. You get the big volatility rips and mores but what’s happening, Bill? What are you seeing?
Bill Brewster:
I didn’t see a 5% rip yesterday. I guess that’s because I was looking at my own portfolio.
Tobias Carlisle:
It happened all the way at the end of the day, at the close. It was looking shaky for a little while.
Bill Brewster:
Oh, that’s weird because I looked at 5:00 PM and I still didn’t see it. I guess maybe there was a glitch on my screen.
Jake Taylor:
Were you at least green yesterday?
Bill Brewster:
Yeah, I think I was.
Tobias Carlisle:
That’s how you know you were preppier, if you were red yesterday.
Investing In Airlines And OTAs
Bill Brewster:
Yeah, that’s a good point. Look, I have talked about airlines. I don’t really want to go down as the airline guy. That’s not the bet that I’m trying to make. I have been buying into this weakness a little bit. As I have learned many times in life, Buffet beat me a little bit on the price and quite [crosstalk 00:03:06].
Tobias Carlisle:
Did he really?
Bill Brewster:
Oh, yeah. Well, he also, yesterday, bought and now people feel like it’s okay to buy Delta. Let’s see how they feel in four days. I tweeted out after the investor day, it had a good day. I said, “Welcome to the pain train.” These things are not easy to own. Fundamentally, I do not expect to be with the market right now because I am deploying some capital into travel related entities. The notion that I would keep up right now is silly.
Tobias Carlisle:
When you say travel related, what’s your definition of travel? Airlines like Delta is one. What else?
Bill Brewster:
Yeah. I own Ryanair, some booking holdings is one that I’ve been buying.
Jake Taylor:
OTAs.
Bill Brewster:
Yeah. One OTA.
Tobias Carlisle:
What’s an OTA?
Bill Brewster:
Online travel agent.
Jake Taylor:
Online, yeah.
Bill Brewster:
I don’t like Expedia or Tripadvisor like I like booking. I’ve been looking at Eldorado a little bit, ERI. I haven’t done anything with that, but I hear that they’re great operators. I’ve heard that from a couple people, so it’s something that I have on my radar. My thesis is, this is where the pain ends. Something that is difficult about owning pain when pain occurs, is if you’re long airlines, in my opinion, you need to own this to deserve the return. If you’re going to get scared at this, you’re not owed the return that the business is going to deliver, that’s by definition.
Bill Brewster:
Now the other side of that is, I’m seeing how people are reacting to the coronavirus. What I’m about to say, I’m not trying to offend anyone and I’ll probably piss off everyone. I’m looking at the South Korean data because people say it’s the most reliable. It appears to me to be sort of flu like and a 0.6% death rate doesn’t seem to be the craziest thing in the world. I went to Target the other day, there is no toilet paper, there is no Advil, there is no nothing. You look at these pictures at airports. Things have just stopped, conferences are getting cancelled. I just think of the knock-on effects of what that means. McCormick Place is going to sit vacant for a lot longer than it has in recent history down here. You got restaurants, hotel rooms, cab drivers. We’re about to incur a lot of economic pain running from something that I’m not sure we need to run from. I say that as somebody that’s uninformed. Anyway, that’s what’s going on in my life.
Jake Taylor:
Are you sure that wasn’t a Sears that you went into and not a Target?
Bill Brewster:
Dude, it was crazy. It was really nuts. I had a woman in front of me, I think she’s trying to wholesale toilet paper. Lady, how long do you think you’re going to be locked down and how much do you shit?
Tobias Carlisle:
Is toilet paper on top of your priority list when you’re prepping?
Bill Brewster:
It is on hers.
Jake Taylor:
It’s huge, yeah. Have you had the flu?
Tobias Carlisle:
Yeah. But-
Bill Brewster:
And I want the right kind. I do want the right kind. I want-
Tobias Carlisle:
I’ve never had the flu, no.
Jake Taylor:
Yeah.
Bill Brewster:
I was sent to get a specific type. Then I brought back not that type.
Jake Taylor:
Oh, first world problems here.
Bill Brewster:
Well, she was like, “Why didn’t you get the type?” I said, “Look at this picture. There was none.” Everyone likes your toilet paper.
Jake Taylor:
You got that scratchy ass, one ply particle board.
Bill Brewster:
No, I still got two ply. I’m not an amateur.
Tobias Carlisle:
So here’s the question. What’s the impact to the economy? Whatever happens, I think that this is pretty… Putting aside all of the debts, in the quiet words of Bill Burr, 2% of your people have got to go. I think that’s what we can deduce from everybody’s take on this. There’s a lot of people that’s going to die, basically we hope that it’s not us. It’s going to be stimulated for the economy, is what I can take from most economists at this point. All of this buying is going to front in and load Q1.
Bill Brewster:
Well, yeah.
Jake Taylor:
It’s so a broken window logic there. I can’t-
Tobias Carlisle:
Yeah. My real thoughts are, I think that Emanuel Derman had a great tweet the day where he said something like, “Worry about the people first and the economy will sort itself out.” I do think that that’s the right approach.
Bill Brewster:
Yeah. For sure.
Tobias Carlisle:
When the WHO is commenting on the market, I don’t really want their take on the stock market. I want them fixing the problem, but whatever happens, it’s not going to turn up until we report and the Q1 reporting doesn’t come out till Q2. Q1s almost over. So the real impact I think is in Q2 which doesn’t come out until midway through Q3. I think this is something that’s with us rolling all year long in a very expensive market where the Fed’s already cut 50 bips emergency today. So I didn’t know that the Fed had the cure for the [inaudible 00:08:26]-
Bill Brewster:
And the market puked it.
Tobias Carlisle:
… worthless psyche to get to the day.
Bill Brewster:
And the market puked the fed cut. Right?
Tobias Carlisle:
Yeah.
Bill Brewster:
So I mean do your point, I thought we were dealing with a virus situation. Maybe the tax cuts will help the virus and not the Fed cut.
The WHO Is Talking Stock Market While The Fed Fixes The Wu Fu
Tobias Carlisle:
Well the WHO is watching the stock market and the Feds got the fix for the year for the… they said, “Maybe we need to switch those organizations around.
Bill Brewster:
I mean look. I want to be really careful so that people don’t think we’re like taking this lightly. Right? I don’t want people to think that like is just… We’re just having fun with this. But the fact is I just don’t know, you’re running from a boogeyman in the argument because the argument is this is going to shut down everything and the world is going to needs to come to a stop so we can prevent this disease.
Bill Brewster:
But the only data that I’ve seen show that it really isn’t that much worse than the flu and I could be an ignoramus. I mean I’m open to that possibility. But to your point, I mean we are going to cancel conference season. We’re going to cancel March madness. This is going to get played without people-
Tobias Carlisle:
The Olympics.
Bill Brewster:
… in the stands. Well, yeah, I guess Japan came out and said they’re not going to do that.
Tobias Carlisle:
Yeah.
Bill Brewster:
Yeah. That’s right.
Jake Taylor:
Exactly.
Bill Brewster:
I mean, I don’t know. Is everything going to come to a halt? I have no idea. I don’t think that you can be an equity investor and puke out this fear and then try to buy back when the fear recedes and expect that you’re going to like earn the return that equities deliver. That fundamentally I think is a losing strategy, but I underestimated people’s reaction to this news.
Investing Principles Are Easy To Have In Good Times And Tough When They Matter
Jake Taylor:
I mean this really is one of the ultimate kind of tests of what is your time horizon, right? Because there are probably taped bombs coming for you in everything that you own and the pain is probably coming, but if you’re more than a five to 10 year investor, then it’s probably not the end of the world. But if you’re shorter term than that, like there is probably definitely quotational pain coming your way and if you’d know it’s coming, do you sell now? I don’t know. This is totally… this gets back to what’s your philosophy as an investor?
Jake Taylor:
Pincipals are easy to have when times are good. It’s when they’re tough that they matter, right?
Bill Brewster:
Yeah, that’s right.
Tobias Carlisle:
Like John Maynard Keynes, I update my view as more information comes in. I don’t mean anybody to interpret what I’m doing is taking this lightly. I think the whole situation is completely ridiculous. I think it could be an incredibly leaf of ours, but I think that it’s ridiculous the way the Fed responds to it, the WHO responds to it, the government responds to it. I don’t think that any of it helps any of us at all. I think you’ve basically, you’re on your own, so wash your hands.
Bill Brewster:
Pardon me if I don’t get a little bit less trusting. If everyone’s looking at the stock market, let me do that. You guys worry about the health, right? Geez, what is going on here? So I don’t it’s crazy. I mean, I don’t know if you saw a Schwab, but after that cut they were off 8%, all the banks got hammered. Berkshire got hammered. I mean at some point, what are we doing to our financial system here and who are we doing it for and what the hell is basically what I can sum up the cuts-
Tobias Carlisle:
We’re doing for Robinhood.
Bill Brewster:
… and the tax breaks.
Tobias Carlisle:
The Robinhood traders who can’t access their account.
Bill Brewster:
Yeah. Well you all loaded them.
Tobias Carlisle:
In memoriam volley.
Bill Brewster:
Yeah. Look, I’m not trying to be somebody that’s bitching. I mean, I’m long cable that’s going to help me there and whatever. But-
Tobias Carlisle:
Because everybody’s going to be at home watching TV.
Bill Brewster:
Well, no they’re also levered. Now you can do, if rates keep going down you just roll your debt. But I just don’t understand what we’re all trying to accomplish here. And what-
Tobias Carlisle:
What does it mean that there’s a rate cut. In 50 bips, pretty material given where we are and the market pukes pretty seriously. What’s that indicate?
Bill Brewster:
I don’t think it’s a good thing. I mean, I think that if you want to put your tinfoil hat on and you say that-
Jake Taylor:
The hats do that.
Has The Market Lost Faith In The Fed?
Bill Brewster:
Yeah. The market’s lost faith in the Fed.
Tobias Carlisle:
That’s a disaster for them-
Bill Brewster:
I don’t know-
Tobias Carlisle:
… if that’s the case.
Bill Brewster:
Yeah. Well, I mean this is what the Austrian school has been waiting and waiting and waiting for years, right?
Jake Taylor:
Every Australian right now.
Bill Brewster:
Yeah.
Tobias Carlisle:
What do you think about pal coughing during the presser? Was that like 3D chest to throw everybody off the scent?
Bill Brewster:
I don’t know that Jim Brandt spraying the champagne right now. No, I shouldn’t say that. Jim, I’m sorry. I know you listen. One of the 10. But yeah, I don’t know. Everyone is worried. The thing that is confounding to me, and I guess when the tenure goes down like this, you got to keep the curve somewhat up slope to the extent you can. But this is a demand shock. It’s not a demand shock because there’s not enough credit. This is a people’s willingness to buy issue. Tax cuts don’t fix that. Rate cuts don’t fix that shit. Instilling confidence in the people that the virus is contained and that they’re going to be okay. That’s what fixes this.
Bill Brewster:
Shutting down every event and cutting your… The Fed cut seems to induce panic to me more than anything.
Tobias Carlisle:
Is the selloff caused by with flu or do you think it’s got some deeper issue?
Jake Taylor:
I mean, it was so damn high to begin with, like you just, how many more? You didn’t need a whole lot for people to say like, “Well, is this really worth that much at this point?” Maybe not. I mean, things have been going along so rosy for so long and just nothing mattered, right? It felt like nothing mattered for the last five years.
Tobias Carlisle:
That nothing can stop it.
Jake Taylor:
Maybe nothing could stop it, but maybe finally this matters. And people are like, “Well, we had a good run. Let me take my wins before and get them out of the casino before everyone else decides they want to leave this party.”
Bill Brewster:
Yeah. Well, I think if travel is in the indication time horizons are getting shorter. So if it’ll be interesting to see. I read that Estee Lauder, a lot of their sales come through duty free at airports now and that has no traffic. Our Estee Lauder shareholder’s going to be as long duration if this thing continues for six months. I don’t know. I mean-
Jake Taylor:
The second and third order effects of all of this are kind of mind boggling really. I don’t think anyone really knows what could fully happen.
Bill Brewster:
Yeah. This thing, if it’s a three month disruption economically it doesn’t matter. And if we’re all healthy, that’s great, whatever. If people maintain this level of concern, I mean, they say it’s going to come back next fall. So if this is a 12 month issue, I have questions on how strong the system is with all this leverage on it. I’m not sure that it doesn’t become a really big deal.
Jake Taylor:
Well, let me ask you this, as far as what is the Fed trying to accomplish other than just to kind of make everyone feel better with lower rates, but who in the corporate world, who governments, who on earth has not been able to borrow enough money at this point? Is that really been the problem is they couldn’t get access to liquidity, that doesn’t help anything adding more.
Bill Brewster:
Yeah. I mean, I think they’re just trying to keep the curve somewhat flat to up sloping. I mean, the 10 year right now is just… I mean, what I saw today, it’s like almost in a percent-
Tobias Carlisle:
Remember the inversion?
Bill Brewster:
[inaudible 00:16:40] want to wait. Yeah.
Tobias Carlisle:
Remember the curve inverted. That’s preceded every single sell off in the market.
Bill Brewster:
Then we got an uninverted, which Gunlock said is what normally happens and now we’ve reinverted right? For a second. Yeah. You’re like Tom Cruise. That’s right.
Tobias Carlisle:
You’re inverted.
Bill Brewster:
We were inverted.
Tobias Carlisle:
Keeping up foreign relations.
Bill Brewster:
So you’re the.
Tobias Carlisle:
Giving him the book.
Bill Brewster:
That’s right. So yeah, I don’t know. It can’t be good.
Are We Approaching A Golden Decade For Value Investing
Tobias Carlisle:
So I’ve got a topic going to throw this out that probably going going to get a lot of hate mail for this one, but this is what I think. So I’m going to say it anyway. First 10 years of my career like roughly early 2000 to 2010, very expensive, but good stocks were flat for that whole decade even though the underlying fundamentals of them was surging. So there were a lot of stuff, GE is an example, there were a lot of companies that were lionized in the late 1990s because they could beat by a penny.
Tobias Carlisle:
They were very strong. They rode it all the way up to the top and then just traded water for a decade. As even though the fundamentals continue to be very strong, I’ve seen that analysis done of Microsoft and Microsoft did-
Jake Taylor:
Microsoft was-
Tobias Carlisle:
… very well for the most part through the next decade. Last decade, those companies have, once again, the stock prices have done very well. Even though the fundamentals have been largely the same and value stocks, which did very well in the first decade. Even though they kind of junky accompanies that not as good fundamentals, they’re a bit rougher have not done as well. This decade, there’s been that price compression in them to the point now where I put this out on Twitter yesterday, the fame of French, but French of fame of French has a data website where you can pull up different return streams. It’s all free. You can just pull down a CSV file and you can go to town on it, do whatever you want with it. So I put down price to cashflow because I think that’s a pretty good proxy for the way that a lot of guys invest on a enterprise value to cashflow will be better.
Tobias Carlisle:
We’ve got to work with what we’ve got. It shows that the cheapest decile the cheapest portfolio, the value portfolio is now yielding more than its long run average. And the only two times that that’s happened in recent memory was 1998 to 2000 and 2009 at the bottom and both times value in on a very good run, straight afterwards. So I just wonder if we’re about to go into another decade where extremely expensive stocks are going to trade flat for a decade, even though the fundamentals continue to be quite strong value stocks, even though the fundamentals are pretty rough, I think they’re going to have a better run on an absolute basis, but certainly on a relative basis.
Jake Taylor:
Yeah, I would love to know what the debt looks like on that portion of the cheapest 10% versus the cheapest 10% and the other timeframes where it did well because my anecdotal, just like digging through the garbage bin like I do has been a lot more leverage that makes me uncomfortable compared to previous-
Tobias Carlisle:
Almost certainly.
Jake Taylor:
Gabbage mainly.
Tobias Carlisle:
Almost certainly, yeah.
Jake Taylor:
Which makes the game a little harder. There’s probably just more zeros baked into there. So I don’t know. It’s will you get the same outcome? Maybe, but it might be a little bit different this time than it was in those other times. I don’t know.
Bill Brewster:
Yeah. Those are the two thoughts that I had. How much leverage is on top of the equity and then how cyclical are the underlying earnings, right? I mean, that’s how you capture the both parts, right? And then the question is, well, was it any different back then? I mean, I don’t know. I think that-
Tobias Carlisle:
You think it’s [inaudible 00:20:42] for her.
Bill Brewster:
Yeah. Well, one way that you could probably mitigate that is a repurchases. Now, some cynic would say, well, share repurchases are procyclical, so that’s not going to do anything for a cyclical business. But I don’t know. [crosstalk 00:20:58]-
Tobias Carlisle:
You guys don’t cry my golden age of value thesis, new golden age for value.
Jake Taylor:
I would love to if that was the case. I mean, there’s no one rooting for that more than the three people sitting on this podcast right now. However, I just am a little nervous about if actually we have apples to apples here.
Tobias Carlisle:
That’s because you’ve got Stockholm syndrome. You’ve been brutalized for a decade.
Jake Taylor:
That’s fair.
Bill Brewster:
I just think it’s going to be really hard for… I mean the game is hard. It’s going to be hard in the future. And there’s some names that [inaudible 00:21:37] scratched.
Tobias Carlisle:
What do you do? Go by name by name? Is that what you’re saying?
Bill Brewster:
Yeah. Well look, I mean, the way that I know how to approach it is like, I mean I’m buying booking it’s not financial advice. Don’t do it if you don’t know what the hell they do, but I think it’s great business-
Jake Taylor:
They make books, right?
Bill Brewster:
Yeah, that’s right. I think it’s a good business. I think they’ve demonstrated their ability to survive with Google flexing on them a little bit. You’ve got a secular grower at an average multiple. So that’s how I try to invest.
Tobias Carlisle:
Can I just say hats off to whichever advertising agency came up with that booking. It’s booking excellent. Or booking great. Booking.com. That’s one of the best ads I’ve seen in a long time. Unforgettable.
Jake Taylor:
Hey Bill, are you-
Bill Brewster:
[inaudible 00:22:26] was pretty good too actually.
Jake Taylor:
Are you a secular grower or a secular shower?
Bill Brewster:
I’m more of a neither. I’m more of a turtle. Anyway-
Jake Taylor:
It’s cold in Chicago.
Bill Brewster:
That’s right. That’s exactly right.
What Is Berkshire Really Worth
Tobias Carlisle:
So I’ve got a little somebody shot a note on Twitter about… I think I said that Berkshire was better than average and I might’ve quoted return on invested capital. And I think that, I do think, I still think that that’s the case in terms of their holdings. And I said, I think it’s better companies probably evidenced by better return on invested capital available at less than a market multiple. So that seems to me like a pretty safe bet.
Tobias Carlisle:
And someone said, “That’s not what you’d buy. What you buy is the whole thing. And if you include all of the other, the float and all of the companies that they hold, you’re not getting that… It doesn’t matter that the return on invested capital is better. What do you guys think about that? How do you value Berkshire?
Bill Brewster:
I tried to do with some of the parts when I do it. I don’t disagree that the return on invested capital maybe better in other companies, it may be below average. I haven’t looked where it is. I do think-
Tobias Carlisle:
Once you back up the float and the companies that it holds.
Bill Brewster:
I don’t think you can back out the float. I mean I view that as like working capital for them, but dude, you have the best utility in the entire United States. That, sure. It’s not a strong-
Tobias Carlisle:
It’s so exciting.
Bill Brewster:
… return on invested. Yeah. Well I mean, look, that’s the stuff that you make money over the really longterm, that’s a durable stream of cash. In a rate where the tenure or in a world where the tenure just went to one, what’s that worth? And when you can fund some of your CapX with some insurance float, to me that’s an above average business. Now if the returns on invested capital are lower, I can understand why somebody may not want to pay as much as maybe I wouldn’t, am willing to pay for the certainty of what’s here today.
Bill Brewster:
But I think my return stream in Berkshire is tighter than the average company. Even if the return on invested capital is somewhat less optimal, if that makes any sense.
Jake Taylor:
Yup.
Tobias Carlisle:
What do you mean about tighter?
Bill Brewster:
I don’t think that you’re-
Tobias Carlisle:
More likely.
Bill Brewster:
… I don’t, so there is someone out here that’s going to laugh at this and be like, this guy’s going to get destroyed by when Buffet dies and it’s all a fraud and it’s the next GE. So I apologize for being-
Tobias Carlisle:
That’s not as much dead [inaudible 00:25:16].
Bill Brewster:
Well, I think that there were a lot of things that happened and I have liked that in the past, so I’m just not going to go back there. But-
Tobias Carlisle:
Rest in peace Jack Welsh.
Bill Brewster:
Yeah.
Jake Taylor:
Mm-hmm (affirmative).
Bill Brewster:
I guess at what I would say is I don’t think that your downside and Berkshire is as far down as your potential downside. I think that business is very, very durable and I’m not sure that you’re entitled to a superior return than the average business in good times. But I definitely think you’re probably a lot more likely to avoid landmines in the downtimes. Over time, I think that works.
What Is The Right Number To Keep Earning ‘Stealth Returns’
Jake Taylor:
Well, it’s an interesting thought experiment in that if you, let’s say that you could take company A that has 40% returns on capital, but by definition almost that is bringing in the competition that will make those shorter lived returns on capital or company B who maybe flies under the radar a little bit with a 10% return that’s not really attracting a lot of attention and doesn’t then also attract competition and you put up 10% for 30 years straight.
Jake Taylor:
That’s going to be a bigger number than the high flying 40 for even 10 years, that then decays and is low for the remainder. So if you’re on a really long duration type of investment, there’s an argument to be made that you almost want the returns on capital not to be outrageously high. You almost want them to be like stealth returns on capital.
Tobias Carlisle:
What level flies below the radar? That is what’s the best you can get below the radar, 13.5, 14. A guy is screaming 15-
Jake Taylor:
Right wherever Berkshire is, I don’t know.
Tobias Carlisle:
You ask anybody, where do you screen 15% return on invested capital, that I want the 14.5%.
Jake Taylor:
Yeah, that’s fair.
Tobias Carlisle:
Forever and ever.
Jake Taylor:
I mean a lot of 15 to 20 is probably where a lot of screening cutoffs would be, be my guess.
Bill Brewster:
If you want to pick Berkshire apart you say okay, great. So your long banks, that’s fantastic in a world where rates are going down in a nonstop fashion, a year long Coke, which I think is almost subjectively rich here, year long… Well it’s definitely not objective, but I think it’s rich. Fruit of the loom. What’s that got left in it? Dairy queen. I get how people can say it’s a bunch of tired brands. I think that my bet is that those people are underestimating A, how good Buffet is in banks.
Bill Brewster:
Banks have a lower return on capital or assets than most businesses, but you’ve got the best bank investor in the world taking them. Two, I think culturally, like from what I’ve seen from Ted and Todd, I think that the future size may be the condition that hurts this, but I’m not very worried about them being able to carry the torch. Like those guys are really good at what they do.
Tobias Carlisle:
Just a segue. Did you see terminal value account I follow very funny. Jack Welsh passed away at 84, and the street estimate was 83.
Bill Brewster:
Yeah, I did like that. That was a funny joke.
Tobias Carlisle:
Big, but yeah. That’s solid.
Bill Brewster:
That was a funny joke.
Mark Leonard’s Son Damian, CEO at Pinetree Capital Ltd
Tobias Carlisle:
I got a mailbag comment rather than a question, but I thought as a [rippersie 00:28:42]. I want to share it. So Mark Leonard has a son-
Bill Brewster:
Oh, yeah.
Tobias Carlisle:
Damian Leonard and Damian Leonard got control of a company a few years ago to utilize the net operating losses and invest in a tax efficient manner. He’s got this company primarily invest in publicly traded software tech names, but definitely approaches investing with a value mindset. This particular company, it’s 65% of book as of 9, 39, 10, so September last year. Half the portfolio was in cash waiting for a pullback. That’s from Steve [Vefia 00:29:19]. And the ticket is PNP.TO. It’s a Toronto stock exchange listed stock PNP. It’s called-
Jake Taylor:
Pinewood or something like that.
Tobias Carlisle:
What did you think when you looked at it?
Jake Taylor:
I just verify that all those numbers were true. That then what he said and seemed to be true. It’s very, very early on in the story to ascertain if this cap location skip a generation or not? We don’t know.
Tobias Carlisle:
It’s Pinetree Capital. It’s what it’s called.
Jake Taylor:
Pinetree.
Tobias Carlisle:
It barely trades. So just take it easy and it’s probably going to get a little rip from [inaudible 00:30:03].
Bill Brewster:
Is it showing any promise? You don’t want to be the guy that passes up [inaudible 00:30:08] junior.
Jake Taylor:
Well the problem is… Yeah, good point. I mean we’re talking like a couple thousand dollars of volume a day right now.
Bill Brewster:
I just didn’t know if the business was showing any promise.
Tobias Carlisle:
I think it’s an investment company. I think they kind of half cash looking to buy the publicly listed SAS names.
Jake Taylor:
Yeah. [crosstalk 00:30:33].
Bill Brewster:
[inaudible 00:30:33] got some like nephew or something in Boston. I think he’s doing the same thing with signs like outdoor[crosstalk 00:30:40].
Tobias Carlisle:
Yeah.
Jake Taylor:
Boston Omaha’s the company.
Bill Brewster:
Yeah, that’s right.
Jake Taylor:
And when the article came out about them, I think it was in Wall Street Journal, like that thing ripped.
Bill Brewster:
Yeah.
Jake Taylor:
Everybody wanted to be involved. If you want to try to play that, this Pine tree might be a Canadian version of that, but that’s not really the game then.
Tobias Carlisle:
[crosstalk 00:31:01] I don’t have a holding. I’m not talking my book. If it spikes it’s not benefiting me at least.
Jake Taylor:
But it was because of us. If it does.
Tobias Carlisle:
Yeah, that’s right. If it doesn’t work, that was somebody else’s fault.
Bill Brewster:
It could be [crosstalk 00:31:16].
Jake Taylor:
I love this kind of optionality.
Tobias Carlisle:
This is great.
Bill Brewster:
Steve could… Yeah. He can be pumping it on Twitter. if it goes down-
Jake Taylor:
This is what it’s like to be a newsletter writer. You just get to talk [crosstalk 00:31:27]-
Tobias Carlisle:
Can you as a newsletter writer?
Bill Brewster:
I don’t think that’s right.
Jake Taylor:
I don’t know.
Bill Brewster:
I think if you disclose, you just got to be, in my opinion, you got to be honest with everybody. You can’t pump your name and own it and not tell people that’s not-
Tobias Carlisle:
Your honor.
Bill Brewster:
… Yeah.
Jake Taylor:
But how am I going to know what’s the next Amazon that you can’t afford to miss out in your portfolio?
Bill Brewster:
That’s a good point. And you should, to be fair, you should have to disclose how much weight you have in the portfolio, right? Like you can’t be pumping something and not own it. For real. I don’t think-
Jake Taylor:
Well, I bought the S&P 500, so technically I do own.
Bill Brewster:
… There you go.
Jake Taylor:
Yeah. I own everything. And then now you can… All right, let’s change gears or take off Tinfoil hats.
Tobias Carlisle:
If I get a Tinfoil, I want this one.
Use Ben Franklin’s ‘Prudential Algebra Rule’ To Make Better Investment Decisions
Jake Taylor:
All good. My topic was, in your investment process, it’s very easy to keep digging and digging and digging into a company and you’re adding data points. And a lot of times, I’m not sure if you’re always adding actual relevant information. And so one of the things that you can do then is to take a page out of Benjamin Franklin’s book, which he called Prudential Algebra. And what he did was he’d basically make a pro and con list and then he would assign weights to the pros and cons so that it wasn’t just the sheer amount of data that are entries that you put in, but you had to assign some kind of a weight to them. They do this in advertising too, where like, they’ll put up a really long list of features. Most of them may not even be relevant to you, but the more features that you even just see, the more good things that you associate with whatever that is.
Jake Taylor:
And so our brains are wired to take the number of entries often and not necessarily the weight. Sometimes I think we give ourselves a false confidence by the amount of research that we do and we add to our confidence at a faster clip than we add to our understanding. Another way to do that actually is, and this is taking a page out of computer science, it’s called Regularization. And what happens if you have a model and in this case it’s really your mental models, and you have a model that is like perfectly explains the previous data. It’s called Overfitting. You can end up with it explaining perfectly in the back, but then nothing going forward because it’s too fine-tuned for the past data.
Jake Taylor:
Well, one way of of regularizing that is to, you just take like your top five most salient pros and cons and look at those and weigh those against each other rather than trying to have, I’ve got a list of a thousand things I like about it and 200 that I don’t. Well, maybe there’s a couple in that 200 that are actual deal-breakers, but because the numbers don’t match up our brains are not really wired to handle that very well. That’s a little thing that I’ve been working on adding to my investment process to try to control some of the biases that I know exist.
Tobias Carlisle:
Yeah, I like that. There’s two papers on it. One looks at college students handicapping college football and another one, same theme professional horse race, handicappers handicapping horse races and they give them, say there’s 50 data points. They divide them into 10 groups of five data points and they give each of the college students or the handicappers all of the information eventually, but they get some information. First, you randomized which group of five data points you get. By the end of it, everybody gets the same. But at the start you get wildly different amounts. And what they find is that people anchor onto their first decision. The first five data points become the most important data points that you get. And then you include or discard each data point that you receive after that based on the initial assessment that you make.
Tobias Carlisle:
You have to be very careful with that initial assessment. I think a better way of doing it is either decide on which data points are important to you and then only look at those or make your decision and then start hunting for disconfirming evidence. And so you’re only now looking for things that prove the thesis wrong. But I liked that Benjamin Franklin approach. That’s the same kind of way of dealing with the issue. That’s smart.
Darwin’s Pros and Cons List Of Getting Married
Jake Taylor:
Darwin also did this in a way where he made a pro and con list about getting married and he had written a bunch of things, but he actually regularized it by, he kept it only to one sheet of paper. He had to put the most salient things onto that one sheet of paper, which is a kind of way of keeping from over-fitting his model.
Tobias Carlisle:
Was it getting married or getting married to a particular girl?
Jake Taylor:
Period just fall, getting married.
Tobias Carlisle:
Just getting married.
Jake Taylor:
Yeah. If you find it and read it, it’s pretty funny. Like some of the things about like horribly boring conversation that you get stuck in because… I wouldn’t know anything about that. But I’m sure that that happens to other people.
Jake Taylor:
[Crosstalk 00:06:54] never listens to this.
Bill Brewster:
I enjoy every moment. I don’t know what to talk about. That I think was so smart that I’m going to have to listen to this episode three times. I am one of the 10. Yeah, I think that’s-
Coming Soon – I AM ONE OF THE 10! (Listeners) – T-Shirts
Jake Taylor:
We need T-shirts that say that I am one of the 10.
Bill Brewster:
We would be the only people that would wear that. [crosstalk 00:07:12] Well, we figured out. It’s us, Gates Buffet, my band Ian Castle, shout out Ian Castle, Corey Hoffstein.
Tobias Carlisle:
That’s it.
Bill Brewster:
That’s pretty much all we got that Bill. Did I say Bill Gates and Jim Grant today? Shout out to everybody. When you were talking, it reminded me of something that preferred shares on the Twitter machine had said and he said that the best investor that he ever had known was the worst financial modeler. And the thing is the guy was just very, very good at drilling down to what are the two or three things that matter and then just researching that. I find it easier said than done obviously, right?
Bill Brewster:
That’s probably the dumbest thing I’ll ever say on this podcast, but it really is. The airlines bring them up again because why not? In the underwriting, when you think about consolidation from my perspective, it’s like, okay, well what happens if, nine happens again? What happens if nine 11 happens again? A pandemic that shuts down all the travel for an indefinite period of time. That’s a hard thing to underwrite.
Tobias Carlisle:
There are lots of flights being cancelled now.
Bill Brewster:
Yeah. Well, one thing that I think will be interesting is the four executives, at least the big four are going to Washington to sit with some people tomorrow. I would be shocked if some discussions about coordinated capacity reductions don’t happen.
Tobias Carlisle:
It’s an interesting perspective [crosstalk 00:39:02]
Bill Brewster:
Yeah. If you don’t let them do it, they might need a bailout. You have got to figure out when you’re going to enforce the law and when you’re going to let them actually cheat a little bit. And I think this may actually be a point where you let them cheat a little bit for the quiz.
Jake Taylor:
[crosstalk 00:39:16] You would say that being long airline.
Bill Brewster:
I’m saying it as a tax payer dude.
Jake Taylor:
I’m just teasing you.
Your Attitude To Current Market Events Determine The Sort Of Investor You Are
Tobias Carlisle:
I do think it’s funny that things like this happen in the market and your attitude to it kind of dictates the sort of investor that you are. If you look at this and you say, I need to get out of everything, then that’s one attitude. And another one is this creates an opportunity to get these things pretty cheap. I think that airlines were already pretty cheap. I’m sure that there’s a lot of decimation of the portfolio because I have some outlines as well.
Tobias Carlisle:
Have an airline at least. And I’m short Expedia with full disclosure. Not because I foresaw Coronavirus just because it’s got its own problems. But I think that there are times like this in the market where I really don’t think we’ve actually, even though we’re down 15%, we were at the absolute pinnacle. I sort of still think we’re in no mans land. Nothing’s really happened. We haven’t sold off enough that I’m particularly excited about what’s there.
Jake Taylor:
I don’t feel like my hand has been forced to like, I got to buy something here. This is just too stupid cheap.
Bill Brewster:
Well, if you didn’t like it in October, you’re not going to like it now.
Tobias Carlisle:
Right.
Bill Brewster:
And it’s not like we’ve come down that much.
Jake Taylor:
Wait, October of which year? That’s the problem for me.
Bill Brewster:
Yeah. Well I looked after the big summer of-
Jake Taylor:
October of 2015?
Bill Brewster:
Yeah. Well we were down to like January, 2018 levels. Right. I didn’t think that things were like run outside with buckets in January of 2018.
Tobias Carlisle:
I do think that we’re going to get to that point. I mean, I don’t know. I’m not predicting a crash. I’m not doing anything like that. I have been doing this for long enough to know that just whatever you say is going to be max embarrassments. But I think that you get to this point where, I mean I remember this in 2009 there was this point where I just woke up one day and I thought, “Holy cow, everything is just ridiculously cheap here.”
Tobias Carlisle:
And I started buying sub liquidation value because I thought these things could go to zero and at least you get a little bit of a bio that clearly that was not going to happen. I don’t think that’s going to happen this time either, but I do think you wake up one day if the market’s down and you’d be like, “Holy cow, this is as good as it gets. It’s time to really pin the ears back and start buying,” but it’s not now.
Bill Brewster:
Yeah. The only thing that I would push back that you said, you said clearly that wasn’t going to happen. I don’t know that it was not that clear. I think that is easy to say in hindsight and if people lived it and paid attention at the time. I mean when you would wake up and see bank after bank after bank down, 10, 20%. I mean I remember right after Lehman Field that was crazy and people were talking about Goldman was going to go under it. If Goldman Sachs had gone under-
Tobias Carlisle:
Well they got this switched over to the bank holding company-
Bill Brewster:
… I know.
Tobias Carlisle:
… To get the protection.
Bill Brewster:
I’m saying I’m not so certain. It was clear that, I mean-
Tobias Carlisle:
That’s banks though. I don’t think industrials, if you’ve got an an industry without any debt, I don’t think the industrial is going to zero. That was my sort of-
Bill Brewster:
That’s fair.
Tobias Carlisle:
… The first time I’d seen the big crash, I didn’t have any money. The second time I saw the big crash, I had some money in the market and I’d been cut to pieces and I didn’t know… I think now in retrospect and if we encounter that again, which I think we will at some stage. I’m not saying now, but at some stage I don’t think we’re going to zero. I think we’re going to, things are going to get torn up. They’re going to be a little landmines, but I don’t think the whole market goes to zero. I don’t think that’s ever happened. Even in a 29 style crash, it still functions and still goes on.
Jake Taylor:
Wait for that 100% passive, all wanting to sell at the same time. [crosstalk 00:43:02]
Tobias Carlisle:
That is going to create the opportunity that doesn’t, it’s got to create distortions that create opportunities.
Jake Taylor:
But what if all of the people who previously would have been buyers on the way down, that kind of buyer of last resort have been fired? And-
Tobias Carlisle:
I mean ultimately on the business [inaudible 00:43:17]. I don’t mind holding out if the equity gets cheap enough. I’ll buy it as a business guy. If you can leave her into it. Like there’s a million ways to get control of these things. Like what you do that wouldn’t you?
Jake Taylor:
Oh yeah, for sure. Yeah. Is there enough private equity on the sidelines ready to take out some of these public companies that get cheap enough?
Bill Brewster:
Probably.
Tobias Carlisle:
There’ll be money around.
Bill Brewster:
Yeah.
Tobias Carlisle:
You can cobble something together and get control of a little. The guys in the 30s and 40s were doing that. The White sharks of Wall Street cobbled together, whatever they could get control of these things. If it trades down cheap enough that you can get a full list in the cash that it’s got in it, then that’s a pretty good buying signal. Whatever happens, there’s going to be opportunity. I’m not worried at all. In fact, I think that I would rather see a big sell off because I think that that creates opportunities for guys like us.
Bill Brewster:
I don’t know that it’s common. [crosstalk 00:44:22] I don’t know that I think things are that rich.
Tobias Carlisle:
I think things are that rich.
Jake Taylor:
Oh, that’s the richness that I don’t feel, I don’t feel like I’m going on a limb to say it’s rich right now, but-
Bill Brewster:
Where else are you going to go?
Tobias Carlisle:
Tenure.
Bill Brewster:
The tenure is touching one or are approaching, I mean I think it was one or eight, where are you going to put your money?
Jake Taylor:
… That was the same thing everyone told me in 2004-
Tobias Carlisle:
Sorry [inaudible 00:44:49].
Bill Brewster:
I get it. I get it.
Jake Taylor:
I’ve got to buy a house now. Otherwise you’ll never be able to buy it. There’s no alternative to this. You have to buy a house now.
Bill Brewster:
Look, I get it. I’m just saying, I think that the desire to push people out on the risk spectrum has been in effective policy decision and-
Tobias Carlisle:
The Fed loves to take people up the risk curve.
Bill Brewster:
… Oh, it’s the best. Right? And I think that it’s hard to argue they haven’t done it.
Jake Taylor:
I put out a little tweet this morning just because I was annoyed about this rate cut but I said something to the lines of elderly people are the most susceptible to this Corona virus and yet also elderly people who can’t get any yield now because the Fed is lowering the rates and also by the way, like pushing them out on a risk curve. And playing with the potential of lighting this whole thing on fire and in an inflation and killing them from a fixed income standpoint. It’s like who are we helping or hurting here? What’s the goal?
Tobias Carlisle:
Not saying that’s a false equivalency, but there was another one too, which is if you” think that the fed shouldn’t intervene, you probably also think that the CDC shouldn’t intervene.”
Bill Brewster:
Yeah, that feels a little bit stretchy to me.
Tobias Carlisle:
It’s stretchy.
Bill Brewster:
Yeah it feels stretchy. [crosstalk 00:46:09] It’d be nice if we could get some like coordinated fiscal policy that actually made some sense like, I don’t know, say an infrastructure bill, but right now it seems like people wouldn’t go outside to build a road. I mean, maybe that’s an overstatement, but that is how some of the sentiment around this Coronavirus thing feels like. If you advocate going into public, you’re endangering the species. I’m not there. I don’t want people to die. That’s not who I am. I just don’t want us to shut down out of fear.
Jake Taylor:
That’s fair.
Tobias Carlisle:
That’s a cheery thought to end the whole thing on. I think that’s uplifting-
Bill Brewster:
No mailbag. [crosstalk 00:46:48] next week.
Jake Taylor:
It’ll be interesting to see what happens in the time between when we recorded this and when it comes out. Because I feel like history is kind of moving a little faster right now than it has in recently. [crosstalk 00:47:02].
Bill Brewster:
I hope it is. That’d be awesome. [crosstalk 00:47:05]. I hope the same goes away.
Tobias Carlisle:
Sometimes nothing happens in decades and then decades [inaudible 00:17:08] that’s why we’re in that kind of environment now.
Bill Brewster:
Yeah.
Tobias Carlisle:
But that’s what we got time for. Not a big mailbag this week. See you next week.
Jake Taylor:
See you next week.
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