The Consensus Of The Consensus: The Market’s Going Down And Coming Back Up

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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed The Consensus Of The Consensus: The Market’s Going Down And Coming Back Up. Here’s an excerpt from the episode:

Tobias Carlisle:
All right, let’s move on to mine and then we’ll start taking some… we’ve been taking questions, but we’ll make a call for questions.

Jake Taylor:
I’m going to have a mailbag question too when we we get to that.

Tobias Carlisle:
I think this is a really terrible way to invest, I’m just kind of like having fun just seeing what everybody thinks. Every time I point out that somebody thinks that… I’ve spoken to a lot of people. A lot of people don’t think the low is in, a lot of people think there’s another low to come. I have no idea. I think it could be up 50% or down 50% from here. I have no idea. There’s a gigantic range, but every time I post something like that somebody comes in and says, “Well, that’s what everybody thinks.”

Tobias Carlisle:
So I’m going to pretend like it’s going straight up. Anytime I think there’s a new low, so I have no idea what the consensus is, and it’s just like that Keynesian beauty contest where you have to guess what the average opinion is of five girls in the paper, which one is the prettiest. So it’s not which one you think is the prettiest, it’s which one you think the average person thinks is the prettiest. I think it’s a really tough way to invest.

Tobias Carlisle:
I think that the consensus is now that the consensus is everybody thinks a lower low and we finish the year higher. I don’t know what to do with that information. I think you just get twisted into it and not trying to figure it out. I do think that the better way is just to look at the values. But then if you look at the values, so this is probably going to make it sound like I’m saying lower low, but like the market is historically still pretty expensive on a CAPE basis.

Tobias Carlisle:
I know nobody looks at looks at CAPE and it doesn’t work, but it is expensive on a cyclically adjusted earnings basis, and we’re going to see some lower earnings for sure from this quarter, probably from next quarter, maybe from Q three, maybe even Q four. I don’t know how long this sort of pain goes on, but that’s the purpose of the CAPE is to adjust for those cyclical earnings, for the earning cycle, which is why it’s sort of somewhat useful.

Tobias Carlisle:
So I don’t know that we’ve ever bottomed this high before, and it’s not uncommon in these big bears, if you go and look at them, the number of bounces to lower lows is kind of sickening. 2007 to 2009, I think I counted 13 or 14 new lows, and it would hit a low, bounce pretty significantly, find a new low, bounce again, and that was the exhausting thing. And I think that the low that came in, in like November 2008, I think everybody was well and truly exhausted by that stage, and that was not it.

Tobias Carlisle:
There was one more to go four months later in March, and that was the real heart breaker for everybody, because it did bounce pretty significantly off that way. I just think the bear market is not necessarily over, because you see a 20% bounce. That’s perfectly normal bear market behavior. But as I say, I don’t know if you had thought that in 2018, you were wrong, ’16 you’re wrong, ’11 you’re wrong. So I don’t, what do you guys think?

Jake Taylor:
Yeah, I agree with you, I think it’s a really difficult game to play of guess the consensus of what everyone thinks the consensus will be of other people’s consensus.

Tobias Carlisle:
Yeah, that’s where you get to.

Jake Taylor:
Yeah. I’ve only got three layers that I can get down before my brain shuts off.

Tobias Carlisle:
What’s the study where you got to guess two thirds of the… Your number has to be two thirds of the average to win the game, and so say it’s out of 100, if you guess 66, you haven’t understood the game. If you guess two thirds 66, you’ve understood, but you think everybody else is going to get 66, so you think everybody else is idiots.

Tobias Carlisle:
But then whatever two thirds of 66 is 40 or something like that. If he gets 40, then you’ve kind of thought far enough ahead that people will guess that’s 66. So if two thirds of that, what does that get you to? 23 or something, is that what you said? So in the 23 scenario, you don’t think everybody else is an idiot, you think everybody else is going to go around one time and think, not 100, not 66, but 40 is where everybody’s going to land, even though if you iterate it, you get all the way to zero.

Tobias Carlisle:
But not everybody thinks all the way to zero. So that’s the other thing, you’ve got to think about the fact that there will be some people who will guess 166 and 40, so what the number falls at, at 23.

Jake Taylor:
That’s, I believe, the average layers that people go down into the inception, like the dream within a dream. But, yeah, it’s a very apt game to play, and I guess what it comes down to really is how smart do you think the market is. How efficient do you think that it is? Is the market very good at sniffing these kind of things out, or is it driven by fools and maniacs? That will tell you how many layers do you go down in this meta game.

Tobias Carlisle:
How do you learn to play 4D chess? Any commentary, Bill? You’re in the matrix.

Bill Brewster:
No. I mean look, I have no idea about the market. I really don’t, which is part of the reason I don’t want to own the S&P. I don’t know. What I know is that I think that when you can get a 15% or a 13% cash flow yield on Liberty SiriusXM, that the probability that that thing trades at a 30% free cash flow yield in a 0% world seems very low to me, and is most people are either too scared to take risk or are allocating to bonds at 4%. If I get 15%, I’m probably going to end up wealthier over time.

Bill Brewster:
If I’m not the most wealthy guy in the world, I guess I’ll have to live with that. I’m not that concerned about being that game. So I just think that there are individual names that I just ask myself like, “Okay, well what’s the probability that this actually goes 30% lower, and what do I have to believe in order to believe that? And then even if that were to happen, where do I think it is five years out, and can I live with that draw down?” and that’s sort of how I try to manage.

Bill Brewster:
I could be the idiot. I mean there’s a lot of OGs around that are saying, I mean like you Toby, “Don’t blow it all in the first go down.” And there’s a lot of guys that I talk to on Twitter that I look at you know in mentorship type roles, and some of them have been like, “Look, I lived through this in 2000, 2009. We’re going lower. I don’t care what you think.”

Tobias Carlisle:
I didn’t know that’s happening. I think that there’s probably more risk of that happening than the market seems to be pricing right now, but like you, I’m not buying.

Bill Brewster:
I didn’t mean to put words in your mouth there. I’m just thinking from the market standpoint, because people are making that claim. Ironically in a world where you’re paying really high multiples, now this obviously rests on the presumption that there is a return to this multiple environment, which may be a flawed presumption, but the near-term cash flows just don’t matter that much to the terminal value, because so much is in the terminal value.

Bill Brewster:
So it’s weird and when we talk about CAPE and stuff, I just think dismissing it is really foolish, but I also think that not recognizing that there are much better businesses. Like what happened and a lot of the reason our supply chain is so messed up right now, is we outsourced a lot of those really shitty businesses and kept a lot of the asset light stuff. So that’s worth more on a multiple basis.

Bill Brewster:
Now is it sustainable and anti fragile? That’s sort of a different conversation, but that’s how I sort of think about it.

Tobias Carlisle:
Yeah, so I mean I’m trying it by individual names here, and shorten individual names as well, but that doesn’t make for a very good podcast.

Bill Brewster:
Yeah, that’s fair. That’s fair.

Tobias Carlisle:
The reason I like arguing about the market is because it doesn’t impact anything that I do one way or the other. So it’s just sport, it’s just speculation.

Bill Brewster:
I mean I got into it about fucking Royal Caribbean for no reason. I could care less about that stupid-ass company, but somebody comes at me after it rips like 20%, they’re like, “Oh, your mom should have taken advise.” Okay dude, like we’ll see. Give me a year and show me-

Tobias Carlisle:
With prejudice.

Bill Brewster:
Yeah. Well, it’s funny how people chirp when stocks are up and then they go down and it’s as if the argument wasn’t even happening. Okay, whatever. So to the extent that the market is made up of asset heavy companies that have operating leverage, I am terrified of all of those, and those I think are… I’m sure people are going to make a ton of money betting correctly on those. That is a tough, tough game right now in my opinion, because I have no view on duration.

Bill Brewster:
I don’t know if we cheat and then this virus explodes and then we come back into this. I don’t know if we cheat and the virus explodes and people say, “Screw it, we’re going through and if we have to walk by dead bodies that’s what happens.” I don’t know if we actually do this and we succeed. It’s just all very difficult when you’re talking about high fixed costs right now. It’s terrifying to me, especially when you layer on leverage.

Jake Taylor:
Well said.

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