VALUE: After Hours (S02 E13): Mauboussin’s BIN, Liberty Hedge Fund Hotel, and Value Portfolio Upgrade

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

  • Michael Mauboussin’s Paper – BIN There, Done That
  • Blowups In Hedge Fund Hotels
  • Value Portfolio Upgrade
  • Why We Like The CAPE Ratio
  • Is The Market Still Expensive?
  • What Can We Learn From Buffett Not Making A Large Purchase Yet
  • Holding Cash Is Almost Always The Wrong Decision
  • What Are Q1 Earnings Numbers Going To Tell Us, If Anything
  • Is Now The Time To Buy Good Companies That Have Become Cheaper
  • Should Investors Be Buying Individual Stocks Or The SPY

References in this episode:

BIN There, Done That (Michael Mauboussin)

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Full Transcript

Tobias Carlisle:
Live. Hello, fellas. It’s March 24, monster rally today after selling off every day like waterfall sell offs day, after day, after day. No idea where anything is today. I don’t know where the market is. Do you know where the market is?

Bill Brewster:
We are approximately in the middle of a face-ripping rally of 7.4% on the S&P. Congrats to the people that bottom ticked American Airlines up 33% today.

Tobias Carlisle:
Whoa.

Jake Taylor:
Wow.

Bill Brewster:
Strong day trade for you.

Tobias Carlisle:
Whoa.

Bill Brewster:
Much respect.

Tobias Carlisle:
Penny stock.

Bill Brewster:
We got some big ones out there.

Tobias Carlisle:
High Yield index continues its meteoric ascent, it was 10.8 something today. It’s a vertical line. I’ve never seen anything like it before. It’s going to blow through 2000, which took two years to get there.

Jake Taylor:
Don’t be a Debbie Downer on an up day.

Bill Brewster:
The feds coming in.

Tobias Carlisle:
Well …

Bill Brewster:
They’re going to buy it all.

Tobias Carlisle:
The only saving grace is it’s yesterday’s data. I don’t have it live. I’ve got the clause. Do you want to do the intro, Bill? Let’s find out what we’re all talking about.

Bill Brewster:
Yeah, sure. Welcome to the face-ripping rally edition of Value: After Hours. We don’t get to say it very much, so we might as well today. Jake, what are you going to be speaking about today?

Jake Taylor:
I’m going to be talking about Mauboussin’s newest white paper that’s talking about biases, information, and noise.

Tobias Carlisle:
The BIN.

Jake Taylor:
BIN there, done that, that’s called.

Bill Brewster:
Toby, what are you going to be talking about?

Tobias Carlisle:
I did some buying and selling on Friday. I just want to talk about the … I’m astonished at some of the things that I have had the opportunity to buy. I think it’s interesting and how the portfolio is positioned for the coming quarter.

Bill Brewster:
I’ll be talking about some of the blowups in the hedge fund hotels that I saw, specifically the liberty complex has been destroyed. We’ll be speaking about that right now.

Tobias Carlisle:
Right after this, ta, dat, ta-da, ta-da. I like that intro. I miss that intro. We can have it cut that in here somehow.

Bill Brewster:
Tell you what, man, that outro music is hot too.

Jake Taylor:
[crosstalk 00:02:20]

Tobias Carlisle:
It’s the same song.

Bill Brewster:
I find myself like it too sometimes.

Tobias Carlisle:
How we do it by Grace Mesa. I think it’s on YouTube.

Bill Brewster:
Strong song.

Tobias Carlisle:
Yeah.

Jake Taylor:
Yeah. She gives me that old fashion special feeling.

Bill Brewster:
That’s for you and her to discuss. This is a family friendly podcast.

Jake Taylor:
Sort of, yeah.

Bill Brewster:
Sort of family friendly. Although trigger warning, again, we do curse on this thing, especially when the markets are down. Today we’ll be happy.

Jake Taylor:
Speaking of family and …

Tobias Carlisle:
The other thing is you should throw some comments. I’m reading the comments, it’s just I might concentrate a little bit more on the conversation this time because I was totally distracted last time. Definitely, love the comments. If we see anything, I’ll throw it up and we can chew on it. If you want to put a question into, that’s where it should go. You want to kick it off, Jake, with Mauboussin?

Jake Taylor:
Yeah, since mine is probably the most academic of the …

Tobias Carlisle:
Let’s eat the veggies up the front.

Michael Mauboussin’s Paper – BIN There, Done That

Jake Taylor:
Yeah, let’s eat our veggies upfront. Now this paper, if you’re making any kind of decisions, discretionary in an investment context, this paper I would call must read. Really, the gist of it is, is that we all suffer from biases and everyone …

Tobias Carlisle:
Speak for yourself, man.

Jake Taylor:
Yeah, well, it’s true. Most of us have read about them, but it turns out that that almost does nothing. Just knowing about them does nothing to protect against them. You actually have to bake it into your process, how to control for it. What’s really fascinating is that the study that Mauboussin is largely quoting from is that they break it down into biases, information, and noise. What would you guess was the most important factor of those three things?

Bill Brewster:
Say what?

Tobias Carlisle:
Information to noise? I don’t know.

Jake Taylor:
Let’s …

Bill Brewster:
I don’t think you want to reduce noise and bias. I don’t think I’m adding anything to this conversation.

Tobias Carlisle:
Can you just …

Jake Taylor:
Maybe I’ll …

Bill Brewster:
I’m going to back to the corner now.

Tobias Carlisle:
Let’s define with that. Can you define what they are? Let’s talk about what they are.

Jake Taylor:
Yeah, sure. Bias would be defined is when you use rules of thumb or mental shortcuts that can lead you astray.

Tobias Carlisle:
The heuristics.

Jake Taylor:
Heuristics, yup. Actually, Mauboussin has done this one himself where he’s had 10,000 subjects take this test, where it turned out that on average, we had a 70% confidence on our guesses, but we were right 60% of the time. In his dataset, we’re 10 clicks overconfident, which is probably what you would expect at a minimum. Information is a subset of signals that are used relative to the full amount of information that’s available to make the decision. You think about if you have unique information, if you update your views faster than other people, and then the waiting of components of information can make a difference.

Jake Taylor:
Basically, the quality of your information and how do you interact with it. Then noise is actually chance variability in judgments. The funny study that they cite for this is Money magazine did this thing where they interviewed 50 accountants. They gave them the financials of a theoretical family of four that made $120,000 a year. They said, what’s this family’s tax bill? They came up with the range varied from $10,000 to $21,000.

Tobias Carlisle:
Woah.

Jake Taylor:
The range then tells you what the noise is. It basically like a standard deviation of those things. Based on the same inputs, tells you how much noise there is. I’ll cut to the punch line. It turns out that 25% of the errors can be explained by bias, 25% by information difference, and 50% is actually from noise. Noise cancellation, being mindful of noise turns out to be hugely important.

Tobias Carlisle:
How do you avoid it?

Tobias Carlisle:
Get the pros headphones on.

Jake Taylor:
Great question.

Bill Brewster:
Three minus new air pods, dude.

Jake Taylor:
[crosstalk 00:06:45]

Tobias Carlisle:
That was weak.

Bill Brewster:
The air pod pros, come on.

Jake Taylor:
Three ways to reduce noise according to Mauboussin. Number one, combine judgments. That means independent and errors offsetting. This is basically like wisdom of the crowds. That’s one way to reduce noise. Use algorithms. Set rules beforehand, but do think a checklist fall under this category. Then number three, they call it mediating [crosstalk 00:07:19].

Tobias Carlisle:
Just got sucked into the matrix then. You got to [crosstalk 00:07:20] again.

Bill Brewster:
Right into the bet. The checklist matrix.

Tobias Carlisle:
That I want you to know it’s something that they don’t want you to tell us.

Bill Brewster:
This is the really good stuff.

Jake Taylor:
All right, number two, use algorithms, which means setting rules and then following checklist. Number three is what they call mediating assessment protocols. What do you think about that is you basically define what attributes you think are the most important for making the decision. Then you gather facts and then you assign some score to them. It’s almost like an algorithm, but run through a human processing. Those are the ways that Mauboussin talked about to reducing noise.

Tobias Carlisle:
Yeah, I love that.

Bill Brewster:
I feel like one of the thoughts that I had when you were talking is rather than trying to be so precise in what you think fair value is for something, widening your fair value estimate a lot. I know it’s really unsatisfactory for people to hear that you think something is worth … I don’t know, say, it’s $7 to $14 billion. That is not precise at all. What it does say is I think if it’s less than seven materially, it’s a good buy. If it’s north of 14 materially, it’s probably a sell and anywhere in there. It’s I think embracing some of the imprecision, is a smart takeaway.

Jake Taylor:
You’re not going to sell any newsletters with that attitude.

Bill Brewster:
Yeah, I know. I can’t pound the table on my … I’m not in that business, which is helpful.

Tobias Carlisle:
I think that it’s a pretty good explanation of those. If you find it trading at 3, and then 7 to 14, that’s a good deal. Let’s just finish trading at 10 and your range is 7 to 14, that’s not very helpful.

Bill Brewster:
Yeah, then you stay away or hold, right?

Tobias Carlisle:
It’s a pause, but most positions of that way, anyway. Most things is 7 to 14 and it’s trailing at 10. That describes 90% of the positions that stocks that are out there at any given time. Maybe not now.

Jake Taylor:
Maybe.

Bill Brewster:
Yeah, now it’s been a little nuts.

Tobias Carlisle:
I really loved that approach. I build that into my process. I have very strict screening, very strict update, without side information, build portfolios in a particular way. I 100% agree with that and adhere to it as strictly as I possibly can because I think that I’m guilty of all of those bias and so on. I’m too competitive about it. It makes me to get the juices flowing too much. I got to wind it back and get a little bit cooler when I’m doing the trading and putting positions on.

Jake Taylor:
Yeah. Bill, how about you? I think you’re maybe the little more discretionary, little more qualitative.

Bill Brewster:
I certainly am now. I tell you, my brain reacted a weekend ago or so by trying to go to what I perceive like quality at a discount and a lot more diversified than I normally run. Then at the bottom of the portfolio, this is not investment advice. I don’t know how many different ways to say it. I picked up Sabre. It’s tiny. It’s really tiny. I think it’s a debt special situation. Their credit agreement indicates to me that the lending group understands that these type of events happen and that they might be willing to amend. Given my background, I think it’s possible that they amend. If they do, I think it’s a three to four X.

Tobias Carlisle:
What is it, Bill? Can you just give us a little more background of that?

Bill Brewster:
Yeah. They’re basically like the back end, what certain people see when they’re booking seats and stuff like that. Basically, it’s a bet on hotels and airlines coming back at some point. I think right now, it’s a debt bet more than anything. I think it’s an amendment issue. I don’t even think business quality. I don’t know that it’s a business I’m trying to own for the really long term, but I view it as a dead special situation.

Jake Taylor:
Is it traveling the streets and SaaSing the sheet?

Bill Brewster:
It’s definitely not SaaS. They like to say they’re SaaS. It’s like super cyclical. If bookings aren’t happening, it’s not getting revenues to the extent that they write. It’s not a true recurring business, but anyway. I don’t know, that’s what I found.

What’s A Sizeable Size Trade In Your Portfolio?

Tobias Carlisle:
Given the true more diversified here, let’s just quantify that a little bit. Because Pabrai who famously was very concentrated going into the last big drawdown and then he said that that was a mistake, and he became a little bit more diversified or he said that he became … I don’t know practically what that means. Then a few years ago, I noted that he went back to being concentrated again. What’s your definition of how you’re weighting positions? What’s a special situation trade size for you in the portfolio?

Bill Brewster:
That’s nothing. It’s 0.5%. Because, one, I don’t know the business as well as I need to. Two, I really do think it’s a debt work out situation. I think it could be a zero. I’m not …

Jake Taylor:
Half a percent though, by typical finance standards, is actually not that small of a bet.

Bill Brewster:
Yeah, but I don’t believe in typical finance standards.

Jake Taylor:
I know. I’m just trying to add a little context there.

Bill Brewster:
Yeah. I’m 21 positions right now.

Tobias Carlisle:
But doesn’t it that implies …

Bill Brewster:
That’s probably too many.

Tobias Carlisle:
… 200 positions, doesn’t it?

Bill Brewster:
Yeah, that one’s tiny.

Tobias Carlisle:
That’s 200.

Bill Brewster:
I mean the top of the portfolio, the top 10 is still 60%.

Tobias Carlisle:
I like it.

Bill Brewster:
I have a lot at the bottom that normally I wouldn’t have necessarily.

Jake Taylor:
What are the …

Bill Brewster:
Now you can say, well, why not just pile into the top 10? I don’t think that you have the most certain of times right now. I’m trying to pick things that I think give some counterweight to what’s going on at the top and can make it. I’m more concerned with making it through this period than I am getting super greedy.

Is Now The Time To Buy Good Companies That Have Become Cheaper?

Jake Taylor:
One of the things that I’ve been struggling with a little bit lately is the last couple of years, I feel like I’ve been forced into and down into some more marginal businesses just because that was the only thing that even got a little bit cheap. No good businesses were really on sale in my opinion. I got anchored into a lot of studying these businesses that were marginal businesses to begin with.

Jake Taylor:
Now, it’s like, oh, they’re cheap and I know them. Should I add more to those or, as it turns out, there’s this great chance to maybe potentially upgrade your portfolio quite a bit in business quality now. Struggling a little bit with the sunk cost fallacy of like, well, you already know this one and it’s a lot cheaper than before. Stay with the horse that got you here, but maybe here isn’t where you want it to be. It’s a weird intellectual exercise to try to force yourself out of the things that you feel like you know.

Tobias Carlisle:
Well, it’s not only that, you got the consistency bias too that you want to be even if it’s only to yourself and to your clients. You’ve got this idea that if you change your mind quarter to quarter, does that mean that the thing you did a quarter ago was a mistake? Therefore, you’re admitting to a mistake, whereas it’s hard because …

Jake Taylor:
What if that rips right after you sell it? You’re like, oh. It’s hard.

Tobias Carlisle:
I agree with that 100%. That’s the thing that I’ve been talking about without naming names too much. I know I’ve been talking about Berkshire. Clearly, I’ve bought some Berkshire. I didn’t think I’d ever get the chance at Berkshire. I used to poke fun at guys who were … It’s barbarian capitals line where he calls the 13Fs from … There’s a whole lot of value guys who will huddle together and who buy all exactly the same stuff. He calls it generic value partners when you combine their 13Fs. Generic value partners is always Berkshire number one, probably Markel, Fairfax. That’s just standard.

Tobias Carlisle:
No matter what’s happening, that’s in the portfolio, and then whatever the hot thing of the day is. For a while, it was Valiant, until Valiant took everybody to the woodshed. More recently, I guess, it’s like Microsoft and a few other things like that. I don’t want to call down the thunder from the compounded cost, but there’s …

Bill Brewster:
Well, that trend …

Tobias Carlisle:
Am I throwing it right?

Bill Brewster:
I don’t know. Look at what TransDigm did.

Tobias Carlisle:
It’s gone.

Bill Brewster:
That was crazy. That was one of the ones that I think is almost certainly hedge fund liquidation because it went from 600 to 250 in no time. I get that they have leverage. I understand that people think they’re predatory and stuff. I think that was a massive unwind. It’s interesting to watch these Momo names. Now that they’re not Momo, and see who’s going to hold through all this stuff, I think you get to find out who’s a real compounder versus who is a momentum trader. Sorry if you can hear the children. That’s my life right now.

Tobias Carlisle:
I get some of the background too.

Bill Brewster:
Dude.

Tobias Carlisle:
That hasn’t been shown to be a problem yet. One of the interesting things that I saw yesterday, it’s a Bloomberg article about the fact that the NASDAQ-100 is outperforming the S&P 500 by the widest margin. I don’t want to say ever, but ever since the 2000s. I haven’t done this analysis myself. I really don’t want to do it myself. I’m hoping that someone already knows where it is out there, but some way of comparing the composition of the NASDAQ-100 to the S&P 500. There’s basically two streams of thought in my Twitter feed when I raised that. One of them is this is just a blow off top in tech. We’re going to see that reverse at some point.

Tobias Carlisle:
This is NASDAQ versus S&P 500. The other view is, well, these are superior businesses. They generate more free cash flow. They’ve got better balance sheets. They’ve got high returns on invested capital. It’s entirely appropriate that they are extending a lead through this period of weakness. Also, because many of these businesses, they’re not really that affected by the shutting. Everybody is still using Google. Everybody is still using Microsoft. It’s not like an airline or energy. I don’t know what the answer is. I’m interested to know and I would like to see that data. Or if anybody knows of any research comparing the composition of those two, I’d love to see it.

Jake Taylor:
I wouldn’t …

Bill Brewster:
I think it’s probably both, to be honest. Right now, I think people are fleeing to quality. The cash flow quality is huge in something like Microsoft. I do think that the growth is going to slow. They can’t withstand a lot of businesses closing without having their numbers reflect some of that. They’re not immune. I also think that if you’re an RIA and your clients call you and they say, what do you own, and you say, oh, well, we got Microsoft through this period, that’s a whole lot easier than saying like, oh, we’re taking a risk on Dollar Tree or whatever. Even if it’s not the right move, I think a lot of people are going to make good money picking some of these bombed out names and winning. I think right now, a lot of institutional incentives are not to have that phone call come at what … I mean, how close are we to quarter end? How many people want to record …

Tobias Carlisle:
Very close.

Bill Brewster:
… or report that, oh, we own a bunch …

Jake Taylor:
Window addressing.

Bill Brewster:
Yeah, we own a bunch of junk. Here’s your portfolio.

Jake Taylor:
TransDigm.

Tobias Carlisle:
I bought those airlines after they blew up.

Bill Brewster:
Yeah, that’s right.

Tobias Carlisle:
Through the blow off.

Jake Taylor:
Anybody who is long a lot of those, I would recommend going and looking at what advertising look like in last time we had an economic contraction.

Bill Brewster:
Yeah, it’s like a one-and-a-half multiplier.

Jake Taylor:
That’s a line item that can change. I’m not a sanguine about ad revenue coming in the door … problem.

Tobias Carlisle:
The other side of though is Facebook just rumored to make a multibillion dollar Indian acquisition if they’re allowed to. They have an insane balance sheet. Even if advertising takes a hit for two or three years, business is still in a much better position than a hotel.

Jake Taylor:
I can’t argue with that.

Tobias Carlisle:
What about those two articles yesterday? Yeah, I think it was yesterday about … I think one was Wall Street Journal, the other one might have been New York Times. Evidently, they are independent. Somehow they both came out at the same time in the discovery for one of the … It’s related to the advertising. Somebody, not a very big entity, is suing them, possibly it’s a precursor to a clause section. They’ve got this discovery and they’ve got a whole lot of emails where they were copying Sheryl Sandberg and so on where it’s telling people if they’re going to get these numbers. The population doesn’t exist in this geographic area where they were telling them the wrong numbers. Do you think that is going to hurt them? Isn’t that basically the core of what they do?

Bill Brewster:
Tina, baby. Where else you’re going to go?

Tobias Carlisle:
It’s cheapish. Maybe that’s why it’s cheap.

Bill Brewster:
Yeah. I don’t know. I find that to be one of the harder ones to get my head around because I always struggle with the duration of the asset. The other side of it is I do think that there’s just a ton of latent earnings power in Instagram and WhatsApp, is pretty much enterprise software in the third world and developing generally. I really don’t know. That one’s hard one for me. I bet, they end up okay even if they’re lying about stats.

Jake Taylor:
I think kind of hard to root for a little bit for you.

Tobias Carlisle:
Yeah.

Bill Brewster:
Yeah.

Tobias Carlisle:
I think the bigger risk for them is just … What seems to …

Bill Brewster:
I don’t know.

Tobias Carlisle:
It seems to me that there’s now this trend where you have the social network, whatever is the most popular social network of the day, disappears because older people don’t use it as much. The youngsters are the ones who are really social. They don’t want to be on the same network as they’re older. That’s why you get this movement from MySpace to Facebook, and then to Instagram. Facebook buys Instagram, and now it’s TikTok. Or it was Snapchat for a while and now it’s TikTok. There’s a point where you’re just too old to keep on moving on to these new things. I got to move on to another thing and discover everybody again just so I can share photos of my kids. I hardly ever log into Facebook. I think I got a business type account in there, but I hate it. I feel sick every time I open it up.

Bill Brewster:
The flipside is they say that their whole system’s melting down because so many people are on it. I don’t know.

Tobias Carlisle:
Fair enough. I say the same thing to Marcelo Lima who knows it really well. He was like, “Well, none of that is reflected in the numbers. The numbers are just staggering. They’re really good and growing.” That a bit of counter argument.

Bill Brewster:
Lot of cash, lot of cash coming in the door.

Tobias Carlisle:
Also, yeah.

Bill Brewster:
I guess to the point that, look, if it’s C level people writing email saying like, oh, this is fraudulent representation, that seems to be a problem. I’m not sure like Nielsen, are those numbers any better than what Facebook gives you like …

Tobias Carlisle:
It’s hard to imagine.

Bill Brewster:
It seems like you got a shitty comp as it is. I don’t know.

Blowups In Hedge Fund Hotels

Tobias Carlisle:
Well, let’s do the next topic because we’re about a third away through. Do you want to jump on it, Bill?

Bill Brewster:
Yeah. I had hinted at it already with TransDigm. It was just like I think Wednesday, I watching the tickers that our hedge fund hotels. Formula one, Liberty …

Tobias Carlisle:
FOK.

Bill Brewster:
Yeah, Liberty SiriusXM, that discount blew out, just like a bunch of stuff that TransDigm was a compounder until people got scared and then they bailed on it. I think that it’s a combination of probably redemptions and maybe a little bit of a leverage and a little bit of put selling all coming together at the same time to just … I mean, some of the drawdowns in those names. Like LSXMA has always traded at a discount to what theoretically it should have, but the discount recently has really blown out. That’s when I had said like, I think that there’s a lot of evidence of pain going on. The Energy MLP space I follow because of Kyler Hasson and then I got involved in Energy FinTwit.

Tobias Carlisle:
Good account.

Bill Brewster:
That’s hilarious.

Tobias Carlisle:
Energy FinTwit is hilarious. It’s worth going having a look. Definitely don’t make any comments because you’ll just be roasted.

Jake Taylor:
Word blows.

Bill Brewster:
Yeah, you’re going to get killed. You deserve it. Those guys are like the oh geez of energy.

Tobias Carlisle:
The apt.

Bill Brewster:
Like Mrs. Skilling had …

Tobias Carlisle:
Yeah, that’s a right account.

Bill Brewster:
Like a tweet with four closed end funds that basically just looked like liquidation phases. If you look at the MLPs on that day, they all just got slaughtered. It was interesting to watch a lot of the tape. I guess one interesting takeaway as I was listening to old Buffett stuff yesterday. He was talking about the SMP puts that he sold, because he understands structuring. He sold the European options. The American options, you can put them at any time and that stuff …

Bill Brewster:
… feels good in a bull market, but it can hurt when all correlations go to one.

Tobias Carlisle:
What are the standard ones that are traded over the … Not over the counter, the ones that are traded, they expire on a date. That’s the American style.

Bill Brewster:
Yeah, but you can be put them at any time. You always have to worry about rolling them, whether or not somebody is going to exercise on you. On thinkorswim, for instance, the account that I use, it’s all American style. I can’t sell a put and wait until expiration. I have to worry every day that somebody is going to put it to me, which is why I always buy a put under the put I sell, try to manage my risk. Although my recent history on Tesla has just suggested to me that I should just avoid the game completely because …

Tobias Carlisle:
I rolled out of Tesla. The computer says no. I was out of that one. The funny thing is for this quarter, even though it’s like a complete chitchat in face-ripping rally, it actually ended up making money throughout the end of the quarter. It’s one of the weirdest things I’ve ever seen. Definitely not worth it for the … The risk reward was all wrong there. When you talk about Hedge Fund Hotels, because Zero Hedge rest in peace tip one out for Zero Hedge and now you can’t even click on a link on Twitter to get through to Zero Hedge without getting a warning. They used to have this.

Tobias Carlisle:
They used to publish this pretty regularly where they said here are the concentrated hedge fund holdings and they were all likely to underperform. How are you determining that something is a hedge fund hotel? Are you doing that quantitatively or you just know that there’s a whole other [inaudible 00:27:12]?

Bill Brewster:
No. I just watch. I mean, charters the hedge fund hotel. You do the 13Fs and you can see where they’re bunched. I do think a lot of the times, they are hedge fund hotels for a reason. These aren’t a bunch of dumb guys making a choice or some stupid decision to pump something. At least, I don’t think so in charters case it’s something I know about. You got to be willing to live through some serious vow when stuff happens, because there are situations when they’re all just liquidating. You got to be able to take that drawdown and know what you own to not take your response from the price action. You’ve got to be able to be like, no, this is fine. It’s just what’s going to happen in this name.

Jake Taylor:
Think about it, if this was a private business and those were your other business partners, it’s an interesting way to imagine like, oh, okay, that’s who I’m in business with right now.

Bill Brewster:
Yeah. I’d be okay with it if there are hot money and they just get secured. I’d be like, all right, I’ll buy your shares and whatever.

Jake Taylor:
Well, that maybe is the right answer.

Tobias Carlisle:
There used to be some pretty good research that those kind of concentrated holdings underperformed. It was one of the things that I always wanted to look out for. Because for so on the short side, that’s also the case where there’s shorter smart. There’s this kind of meme. I see it on Twitter all the time, meme, meme, that’s my accent. There’s this thing on Twitter all the time where people like, oh, there’s a whole lot of short interest in this thing. If you buy it, you’re going to get this explosive move to the upside. That’s not right. Shorter smart, shorter in stuff. They typically go down.

Tobias Carlisle:
Lots of research out there on that, wrote about a few of the papers in quantitative value. The thing you have to be careful of as a short is being in something that’s too heavily shorted, because then you become subject to the whims of the other shorts in it. The borrow gets very expensive, becomes hard to make money. It’s a pretty good signal for a long as this concentration, hedge fund concentration. Hedge fund just sort of everybody, they must all know each other, go and talk to each other on Twitter or whatever, get concentration of the same thing without doing their own research. It’s not a great signal for the most part.

Bill Brewster:
Well, like charter, when I got into it, was when they had that integration issue. People sold that thing like crazy. I don’t have any data to support this. I think when there are hiccups in those names, people just liquidate them abnormally more than maybe some other things. Maybe I’m wrong.

Tobias Carlisle:
Do we know of any blow ups? Does anybody listening at home know of any blow ups? I’ve heard of a few, but they were stuff I’ve never heard off before.

Jake Taylor:
I never heard of a company … Yeah. No name [crosstalk 00:29:55].

Bill Brewster:
There have to be.

Tobias Carlisle:
There was one I heard that blew up, but it was one of those ones where everybody can trade their own book. There’s no single person calling the shots. That makes me super nervous whenever I hear something like that. You just got some guy that they’re selling, puts into the market and, “Hey, we blew up the whole fund, sorry about that.”

Bill Brewster:
Well, Modest Proposal when MVR was trading like crazy. He put out something that I think was English, but also might have been gibberish. It turns out that it was English.

Tobias Carlisle:
What did he say?

Bill Brewster:
It was some pod shop had blown up. He wrote a sentence that I didn’t understand anything, but he was completely right. He was like, something in the market is messed up, somebody is …

Tobias Carlisle:
Liquidating.

Bill Brewster:
… blowing out right now, and it was.

Tobias Carlisle:
Well, to what do you attribute the big run-up today?

Bill Brewster:
Probably short covering.

Tobias Carlisle:
It’s also rebalancing.

Jake Taylor:
Stemy.

Tobias Carlisle:
It’s end of month. The Stemy.

Jake Taylor:
When did the Stemy?

Tobias Carlisle:
It’s been Stemy all the way through this day.

Jake Taylor:
Yeah, there’s a lot of Stemy on the come.

Tobias Carlisle:
When do we get our $1000 or $2000? When does that come through?

Bill Brewster:
You’re phased out if …

Jake Taylor:
You got to pay it back. Apparently, is that the right … I don’t know. It’s hard to keep on all of this stuff.

Tobias Carlisle:
It’s Stemy.

Jake Taylor:
It’s almost not even worth it.

Tobias Carlisle:
I want to know where I go if I’m going to buy that.

Bill Brewster:
Some of the Stemy you got pay back, for sure, but three years. You have …

Tobias Carlisle:
Zero interest rate Stemy and zero interest rate line, I’ll take it. I’ll take a swing at Berkshire.

Jake Taylor:
Yeah, I want that. I want to get in the fed window type of planning.

Tobias Carlisle:
Get $100 million and pounded on Berkshire leaps. If you can’t pay it back, so what?

Jake Taylor:
Not my problem. Yeah. Well, you just described the hedge fund.

Tobias Carlisle:
Yeah, that’s exactly right. I just described a big bank, honestly.

Jake Taylor:
Yeah, pretty much.

Tobias Carlisle:
They shouldn’t be able to. You can’t have both. You can’t have proprietary trading and be able to access all of that free money. Because otherwise, it doesn’t take long, either consciously or unconsciously for them to put together the idea that you can just go on, should as much as you possibly want into the market. If heads all win tails, that’s a great trade.

Jake Taylor:
Shouldn’t really surprise anybody at this point, right?

Tobias Carlisle:
We just got monetized. It was a Super Chat. I don’t even know what that is. Thanks, Jason. Appreciate it.

Bill Brewster:
Sweet.

Jake Taylor:
What?

Tobias Carlisle:
He just paid us for YouTube’s non-monetization because I’m about to say coronavirus. It’s six bucks.

Bill Brewster:
There it goes. Feed the family, man. You can’t say coronavirus out here.

Tobias Carlisle:
How’s everybody going at home? Tell us how you’re doing. If anybody’s going nuts or anybody’s finding something interesting, we’re interested in it.

Bill Brewster:
Do you see the picture of the baking soda on the floor of my house the other day?

Tobias Carlisle:
I saw one of your boys’ rooms.

Bill Brewster:
Dude, these little fuckers, they took baking soda and poured it all over the house, all over.

Tobias Carlisle:
Oh my God.

Bill Brewster:
I walked outside, my wood floors were white.

Tobias Carlisle:
Oh my God.

Bill Brewster:
That’s not easy to clean up.

Jake Taylor:
No. Just add vinegar. I told you, it’ll just boil up. It’s a science experiment.

Tobias Carlisle:
That’s also a cure for coronavirus.

Jake Taylor:
Yeah.

Bill Brewster:
I love them, but they’re testing right now.

Jake Taylor:
We were joking about starting the podcast off saying bad words and I was like I was going to make an observation that in our household, there’s probably been more swearing in the last two weeks than the two years before that. Everyone’s just a little bit on edge. It doesn’t take much to tip over to where daddy’s dropping things …

Tobias Carlisle:
Definitely.

Jake Taylor:
… he wouldn’t normally say.

Bill Brewster:
Yeah, still four to five weeks. We’ll see how we’re all doing at the end of it. Might have a battle royale.

Tobias Carlisle:
My little fellow, my two-year-old, likes to walk around saying if and nay, nay. We’ve persuaded him that what he should actually be saying is peanut butter. Now he tells everybody that peanut butter. It’s pretty funny. This is devolving. Let’s move on to another finance related topic, I guess months up.

Jake Taylor:
Toby, you’re up.

Bill Brewster:
Oh, peanut butter.

Value Portfolio Upgrade

Tobias Carlisle:
Peanut butter and your peanut butter. I’ve done a rebalance in the portfolio. Like I said, I’m absolutely astonished at some of the stuff I got to pick up, picked up Berkshire, picked up Markel, picked up Schwab. They just all light up every single metric in this deep green color, which makes me feel really good because that doesn’t often happen. Often there’s a little trade off to get them really cheap. Cover your ears, daddy’s stocks are down. I rolled out a trade because it’s caught a bid. I rolled out of HPQ, that’s Hewlett-Packard. That’s the printed division, the really sexy part of the business because that caught a bid to an icon in there trying to force something to happen.

Tobias Carlisle:
I’m happy with the price that I got. I’m rolling out of that one too. Then the short side of the book, there’s a whole lot of commercial rates in there. It’s not a macro bit at all. It’s just that that’s what happens when things get really gnarly underneath, and the market hasn’t quite recognized what’s happened. It always makes me nervous when the model starts leaning towards some sort of what looks like a macro bit. I’m somewhat heartened by the fact that I can seems to agree in this instance and he’s also a short commercial rates and commercial mortgage insurance.

Jake Taylor:
What metric is it basing that off of right now? It feels like it’s happened so fast, how is that incorporated?

Tobias Carlisle:
What it likes is it hunts for negative free cash flow, really heavily indebted balance sheets, lots of share issuance. Those things are getting picked up by it.

Jake Taylor:
That’s why I like Tesla.

Tobias Carlisle:
Yeah. That’s not enough. If you put that in, you’re still picking up stuff that’s going up 30% a year. The thing that it also looks for is this broken momentum, which is that’s a little bit foreign for a value you got to use. I know a lot of quanti guys and I’ve tested it so much. It’s real. The momentum factor is more robust than the value factor. That’s more of a recent thing I think. It’s definitely a real thing. It’s works long and short like value does too. It’s been a better side of my book through the whole time that I’ve been alive. The longs are just letting the team down all the time. The longs have been really terrible, but the short books been pretty successful so far. I’m very happy with it, particularly because it just provides some protection there too. Even on a day like today, the shorts are lagging the long book on a day like today.

Bill Brewster:
The broken momentum makes some sense to me because I do think that when you follow the discussion that happens around certain names, when they’re going up, they’re these great compounders. Then the price breaks down and people are like, oh, that business is never that great. I was like, well, you guys just talked about it like …

Tobias Carlisle:
Narrative full of surprise.

Jake Taylor:
Yeah, that’s …

Bill Brewster:
Yeah, that’s right.

Jake Taylor:
It’s ex-girlfriends. It’s like, ah, she wasn’t that hot.

Bill Brewster:
That’s right. I think that makes sense. People start to look at the price and then be like, oh, maybe it’s not what I thought it was and then everybody avails.

Tobias Carlisle:
Sometimes it’s just the business cycle too. Some things look like they’re compound, it’s just because they haven’t seen a full cycle yet. You don’t know what they look like through the downside of the cycle.

Bill Brewster:
This one’s going to be interesting because I don’t think I ever contemplated the economy stopping for three months. Upon listening to our previous podcast again, I realized that maybe I should have been listening to the conversation while we were having it.

Tobias Carlisle:
The one that we had on 25 of February.

Bill Brewster:
Yeah, but I …

Tobias Carlisle:
You sounded like you are listening today, you’re responding.

Bill Brewster:
I was, man. Even when I was saying like, are we really going to do this? Living right now, I still don’t know if you rewound me three weeks what I would have assigned the probabilities to this actually happening being. I think this is a unique case of humans coming together to try to spare a lot of other humans from the virus. I don’t know that I would have bet that we would have done this.

Tobias Carlisle:
I got to say, at this point, I’m really, really struggling to get a bid on what is happening. Because it seems to me the stream is filled with two types of stories. One is, that this is completely overblown. Everybody is already asymptomatic. It’s like a regular flow. If you’re already older than firm, it really isn’t great for you. For everybody else, this is what you get, you get some cold once a year. Then on the other side of the stream, is just these absolute horror stories of things that are happening to people when they get it. The numbers are exploring. I honestly don’t know. When I don’t know, I want to ere on the side of caution.

Tobias Carlisle:
I would rather that we stay like this for a little bit longer. Let everybody who’s already got it get over it and not transmit it to everybody else. Then when we reopened and whatever, it’s like a week or so, and then see where we are at that point. I still think the numbers are looking pretty scary. It’s just hard to get a good data.

The Ackman Plan

Bill Brewster:
That’s why I like the Ackman plan.

Tobias Carlisle:
What’s [inaudible 00:39:42] plan?

Bill Brewster:
It’s not like he’s not unique in it. It’s just what I think is the right take. You shut everything down for a month. Maybe it’s a month and a week, maybe it’s just under, I don’t know. In the meantime, we got to get the fucking tests. Get test out so that we know where we are. Because right now, it’s just a bunch of people arguing over stuff that we don’t have any clue about. You can’t argue when you have no idea what the numerator is. You can’t argue fatality rates when you’re only testing the worst cases. Nobody knows anything right now. It drives me nuts that we don’t have the tests.

Jake Taylor:
Yeah, we …

Bill Brewster:
Then we also got to get the test to figure out who’s immune, and then we can go back to life. This month, hopefully people are doing what the hell they need to do to get us where we need to be in 30 days. Then I think we could go back to some semblance of socially distance life according to people like Bill Gates and others.

Jake Taylor:
I’m very optimistic. We will band together and figure this out as a species and humanity and even like capitalism and people switching over to making things that we need and stepping up for each other. At the same time, I’m not very optimistic that our government response will be adequate or that as helpful. It’s like, all right, well, if everyone is depending on government to be the answer to this, then I’m very nervous. If people aren’t, then I’m like, okay, we’ve got a good shot.

Bill Brewster:
The one thing that I wanted to do that I didn’t have time to do today is to go through like the sectors of the United States and try to quantify what really is the impact here. My boy Carson, shout out to Carson’s’ Ribs, ribs.com, if you need any takeout. His dad didn’t even know what the internet was and bought ribs.com as a domain name and just crushed it in delivery. He was really bummed. He’s the guy that I was talking about, went from 170 tables to 70 in a week, and then to nothing. They’ve already innovated their delivering craft cocktails and barbecue sauce like jars. It’s very cool. Thankfully, they were busy with delivery on Friday night. I hope that continues for them, but it doesn’t help the waiters much. It doesn’t get tips to the bartender. It can try to keep the business alive, but it’s tough going.

Tobias Carlisle:
We’re coming up on 15 minutes. Throw your questions in now and we’ll get to them. How do you guys feel about the market here? This is just speculation, just for fun. We’re just talking about nobody’s got any idea what’s happening. I’ve seen a lot of bottom calling last week. There was a Brady bottom. There was an Ackman bottom. There was a TIPA bottom. I think that the guy who was the least confident was TIPA. I’m sure they’re hoping for him to give a balls to the wall kind of comment. Instead, he was like, oh, which stocks? Yeah, I’m buying some stuff, but I’m buying stuff that not I’m not just indiscriminately spraying money around trying.

Jake Taylor:
Probably not what you’re buying.

Tobias Carlisle:
Tepper, funnily enough, he’s the guy who’s called the bottom at the moment. I see a lot of guys who are like swing for the fences right at the very top. They’re the ones calling a bottom every single day. Like I said, I thought it was rude to call tops. Evidently, you can call bottoms like you got unlimited raised bonds in this game. I don’t understand the rules honestly.

Bill Brewster:
Well, I think that there are certainly interesting opportunities right now. I don’t know what the overall markets going to do. That’s too hard. There’s a company …

Tobias Carlisle:
Just for fun.

Bill Brewster:
Twitter would call it a ShapeCo for sure, intrepid pot ash. That company is so cheap. The equity versus what they put into the business now, a lot of their investments were to serve the oil patch that’s blown apart right now. People would say they’ve been horrible capital allocators. Not necessarily untrue, but like it is cheap. That’s not something that I’m going to buy in size, but I have looked at it very closely to include at the bottom half of the portfolio. I don’t know. Something like LSXMA … I mean, my boyfriend Cisco Olivera was telling me yesterday about it. I think you’re at 12.5% cash flow yield out of the gate. Today maybe it’s 10.5. That’s a subscription business. Are people going to cancel their SiriusXM? I think there’s bets out there to make, but the overall markets probably got lower to go.

What Are Q1 Earnings Numbers Going To Tell Us, If Anything

Tobias Carlisle:
What about you, JT? What are you doing?

Jake Taylor:
I hate these kind of questions. I will say that I’m keeping a lot of reserves for potentially better buying opportunities. I could be totally wrong and we go right back into the pain zone for …

Tobias Carlisle:
For value.

Jake Taylor:
… guys like us, which honestly would not surprise me at this point. There’s been lots of points already where I thought things were going to devolve from where they were, and they didn’t. It came back even harder. Why not? I’m very, very curious. I want to see Q1 numbers at least before I would ever want to push all chips in.

Tobias Carlisle:
Here’s a question. What are you going to learn from those Q1 numbers? Because you already know they’re going to be funky run.

Bill Brewster:
Not funky, totally fucked.

Tobias Carlisle:
Well, this half of the quarter was okay.

Bill Brewster:
You got a month of no revenue.

Jake Taylor:
Yeah, I don’t know. I’m not sure the market necessarily is discounting how bad it could look.

Bill Brewster:
Okay, well, you say that. The other side of that is, and I don’t know what Bridgewater’s process is, but JP Morgan cited Bridgewater. They said that the market right now is anticipating 10 years of lost earnings.

Tobias Carlisle:
Oh, come on.

Jake Taylor:
That’s true.

Bill Brewster:
That’s what they’re saying.

Tobias Carlisle:
It’s not statistically true.

Bill Brewster:
Take it to JP Morgan, don’t take it to me. I’m nothing.

Tobias Carlisle:
One of the funny things that I’ve been …

Jake Taylor:
The maps have not checked out there.

Bill Brewster:
All right, well.

Why We Like The CAPE Ratio

Tobias Carlisle:
I spent a decade that included ’08 saying this is what the show a cape is. I’d get these guys coming in all the time saying that the Shiller cape is wrong. It underestimates earnings here because it includes ’08 and that was an outlier year. I’d say that’s the point of it, to take a 10-year inflation adjusted average of it. Now when I put comments about the Shiller cape up, people come in and they say, “Yeah, but that includes 10 years of supernormal earnings. You just can’t wait.” That’s the point of the thing. It’s better than price to sales. It’s better than a single year P. I’m just using it for context. It’s not a trading tool. I’m just using it to explain where we are in the process. When I look at …

Jake Taylor:
Where are we right now?

Tobias Carlisle:
It’s still expensive. I would be astonished if this is all done at this point. I feel okay saying this on a big update because I’m not fear mongering on a big update. I’m not trying to do anything.

Bill Brewster:
Do you want to cry? You can cry if you want to cry.

Tobias Carlisle:
Do I look like I’m about to cry?

Jake Taylor:
I don’t cry, I work out.

Bill Brewster:
No, I’m just saying you could go [crosstalk 00:47:16] if you want.

Tobias Carlisle:
Yeah, I see, I see, on a big up day. Man, I’m Australian. I’m only led to shed a tear if a dog dies, on a big up day like this.

Bill Brewster:
[crosstalk 00:47:29]

Is The Market Still Expensive?

Tobias Carlisle:
On a big up day, I feel okay saying it. Here’s what I think. I think it’s still super expensive. I think we’re still below all the moving averages and all that stuff. We’re about to go through a rebalance period. Funky stuff happens. Rebalances goes up and it goes down, moves all over the shop. High yield spread is still exploiting the TED spread, which is the difference between U.S. and label blowing out. I haven’t seen there’ll be a print out today. It was at 0.86 last week. Once it gets over one, gets really scary. My thought is probably that there’s a fair bit more to come here. I’m saving my big bazooka shot for either June or September when we go through it. That’s my two cents. I’ll be hung by that. You go, come back and roast me in a year’s time when that’ll turns out to be wrong.

Bill Brewster:
I’ll tell you, if I was super bullish, I’d be looking at small and crappy, and my portfolio still skews pretty big.

Jake Taylor:
Did you see the Patricks?

Bill Brewster:
Because I think there’s going to be more pain.

Jake Taylor:
This morning, O’Shaughnessy came out with a little research paper that was talking about … Maybe we’ll talk about on the next podcast, but just to tease it.

Tobias Carlisle:
I haven’t read it properly. I skimmed it [crosstalk 00:48:32].

Bill Brewster:
It might be really cheap, man, but you got to pick the ones that survived. Right now, you really want to pick small. I’ll tell you who’s not getting bank lines. I’ll tell you who’s not getting a lot of help. To me, if you want to be somewhere, you want to be big. That’s also why it’s going to rip when it does.

Tobias Carlisle:
Here’s a few questions, because we’re running out of time a little bit. Here’s the first question. This has been thrown up a few times, so I’m going to … How are younger non-value investing generation supposed to accumulate wealth at these low interest rates, expensive share prices, real estate bubbles, climate problems, et cetera?

Bill Brewster:
Buy bitcoin. Next.

Tobias Carlisle:
Come on. You got to give an answer.

Bill Brewster:
Well, what do you mean by non-value investing? It’s like Munger says, all investing is value investing.

Tobias Carlisle:
Old intelligent investing.

Bill Brewster:
Yeah.

Jake Taylor:
He’s saying if I’m buying an index, why won’t these boomers let me have good prices? Is that the question basically?

Tobias Carlisle:
Yeah.

Bill Brewster:
I would just say that when in history has owning assets ever really been a bad thing. If you do it over your time and you use your paychecks … I mean, this is why Buffett says just dollar cost average over time. Now maybe …

Tobias Carlisle:
The key is to spend less than you earn. That’s the key.

Bill Brewster:
Yeah, and keep eyeing.

Tobias Carlisle:
Stick it into assets. Just keep on doing that. You’ll be so far ahead of everybody else who won’t be funny.

Bill Brewster:
The federal bail you out until you can’t anymore, and then we’ll have different conversations and nothing will matter.

Jake Taylor:
That’s too dark, man. Bring it.

Holding Cash Is Almost Always The Wrong Decision

Tobias Carlisle:
This is the more technical one. This is a good one. If you have a disciplined holding period and a few stocks in the portfolio at the end of it, do you act as you would regardless of this market drawdown or do you delay taking action?

Bill Brewster:
Smartest move I’ve seen has come from somebody who I think is a very intelligent investor. He went to all cash before all this started. That’s what he did. I wrote an article about airlines and how I was going to hold it through all this and sold it the following week when the information changed. I don’t believe in rules right now. I think you have to look at the facts and figure out what you need to do to live with yourself. You’re bound to make a mistake. I’m not comfortable going into cash, because I personally want to own equities over the long term. I don’t think I’m going to be good dancing in and out, but I have made moves that I never thought that I would make within the portfolio right after being pretty public about saying that I’d hold them.

Jake Taylor:
I would …

Tobias Carlisle:
The cash is almost always the wrong decision, almost always the wrong decision.

Bill Brewster:
His was right. He was right for the right reason, but I agree with you.

Jake Taylor:
There’s a little bit of research on this that I’ve seen where discretionary investors tend to hold positions a little bit longer than they should and suboptimally, and lose some of their alpha from it. If you have designed to sell rules, I would probably try to stick with them. I think they’re there for a reason. Selling is obviously the hardest part of this game. I would say follow your procedures that you created during times of calm and don’t try to get cute when it’s panic time.

Tobias Carlisle:
Endorse.

Bill Brewster:
Endorse.

Tobias Carlisle:
Steven, isn’t Shiller cape still expensive because Q1 numbers haven’t come out? I just answered that question.

Jake Taylor:
Boy, I mean …

Bill Brewster:
Don’t get him started again.

Jake Taylor:
No. If anything that makes it even more …

Bill Brewster:
[crosstalk 00:52:11]

Tobias Carlisle:
He’s corrected just a little bit there. The point is that you’re already taking a 10-year average of inflation adjusted earnings. There are going to be ups and downs through that period. That’s the point of it that it gives you this …

Jake Taylor:
Some smoothing.

Tobias Carlisle:
Gives you some smoothing.

Bill Brewster:
I do think something that you guys have talked about and I think is almost certainly true at this point, I would like to think I should say that we’re going to end up insourcing a lot of American manufacturing. I think margins could come in. The idea that , right? I mean, the idea that EBIT margins are always going to be this. I could see there being some labor pressure on your SG&A if we insource stuff. There’s a lot of ways for earnings to come in. I think there’s a reasonable chance that Biden’s going to get elected. I could argue that corporate taxes are going to go up. There’s some riskier.

Tobias Carlisle:
What does that make you do?

Bill Brewster:
Nothing. I just think that …

Jake Taylor:
Take all of macro valuations that are earnings based with a grain of salt right now. We were going into this 2X history’s normal profit margins. That has been a very long mean reverting dataset and had been defying gravity for quite a while. I don’t know. At your own risk, you think that things will go forever that have historically been mean reverting.

Why Is Selling Stocks So Hard?

Tobias Carlisle:
A good question here from Martin Titus. Why is selling the hard part? Nobody knows, but everybody agrees. I don’t know. We all think about buying. We all spend 99% of the time thinking about buying and then the first time you get to sell something, that’s the first time you think about it.

Jake Taylor:
I think it triggers a lot of our behavioral problems where disposition effect, where the things that you own, you assign a higher value to them than other people would. A lot of sunk cost on research, commitment consistency bias. It’s a minefield of behavioral issues for selling much more than buying I think.

Tobias Carlisle:
Yeah, good answer. I agree with all of that. You want to take a stab at discretionary, man?

Bill Brewster:
No, I don’t. It’s been pretty beneficial for me. I was looking back in performance.

Tobias Carlisle:
Selling?

Bill Brewster:
Yeah.

Tobias Carlisle:
What’s your sell cue? Just when it’s overvalued? Obviously, you’re looking at more than that because we …

Jake Taylor:
Back pains, is that the …

Bill Brewster:
Yeah, probably back pains.

Tobias Carlisle:
I put your quote up on Twitter about the airlines. I thought that was interesting about the left tail manifesting, like underweighting it in your initial assessment, and then bringing it in, and then thinking about it, like seeing it manifest and changing your view. I thought that was a good question.

Bill Brewster:
I never even would have fathom this.

Tobias Carlisle:
Yeah, no one would.

Bill Brewster:
Somebody was like, oh yeah, park half the plans and then have the rest of them be 20% full, and be like, what the heck are you talking about? That’s crazy. That was a sell decision. That and Budweiser or ABM Bev were almost the exact same sell decision where I got privy to facts that I did not think we’re going to exist when I underwrote it. I was like, I’m not holding through this risk. I mean …

Tobias Carlisle:
You’re not saying, there’s not inside information. You’re just saying you just read something, not …

Bill Brewster:
Yeah, yeah. I was on a JP Morgan call and the guy was like, this is going to decimate emerging markets. All of ABM Bevs and markets are emerging. I’m not trying to hold through that, not with that kind of leverage. The bet had changed. How do you know when the bet changes? I don’t know, but that time I knew.

Tobias Carlisle:
There was a question before about space. Sorry, I can’t scroll back and find it, but anybody who have got Virgin Galactic? I’ll say this about Virgin Galactic. You don’t want to short momentum on the way up because it makes you look like an idiot. You don’t want to short it on the way down because it makes you look cruel. I wouldn’t touch Virgin Galactic with a 10-foot pole. You live your life. I wouldn’t go anywhere near it.

Jake Taylor:
I made a joke on Twitter when it was like … I probably pretty close to what it top ticked, but it’s something like six billion times sales because I think …

Tobias Carlisle:
Is that a lot?

Jake Taylor:
I don’t know about your valuation criteria, but …

Tobias Carlisle:
It’s a very good compound. That’s a compound.

Bill Brewster:
Just a crazier discount rate, man.

Jake Taylor:
Yeah, true. What’s the growth rate that you need on that to grow into six billion times sales?

Bill Brewster:
That business, the market is so tiny.

Tobias Carlisle:
I guess …

Bill Brewster:
I just don’t get it. I don’t know. Maybe I’m the adult. That’s fine. I’ll live without owning it.

Tobias Carlisle:
I think this is possible in our lifetimes that intercontinental long haul flights become flights that go out into space and come back down. Sydney to London, which is a 24-hour flight and you got to transit through Asia somewhere, becomes a three-hour flight which you can do on the weekend. I don’t know how it works, but I’m not a physicist. You get out of this air and you zip over and then you come back down, weekend in London.

Jake Taylor:
Yeah, sounds fun.

Tobias Carlisle:
Sounds great.

Bill Brewster:
Is there only going to be one competitor? I mean …

Tobias Carlisle:
Well, total eventually supplies, you guys often plan.

Bill Brewster:
Yeah. Car industry is not a great industry. Airline industry turned out to be not so great for me. I’ll let people handle space on their own.

Tobias Carlisle:
Bill, question on Envia, are there any thoughts?

Bill Brewster:
Not really. Nothing that anybody else doesn’t have. People love its balance sheet. They love the guys that operate it. Culturally, it’s supposed to be fantastic. I don’t have any unique insight.

Should Investors Be Buying Individual Stocks Or The SPY?

Tobias Carlisle:
Here’s a good one, Marc B. Instead of picking single stocks in … I’m sorry. Instead of picking single stocks in this current market environment, wouldn’t it be safer and a lot easier to just buy the spy?

Bill Brewster:
Na-da. First of all, real quick, back to the NVR question. Buffett in 2009 laid out I think how he thinks about housing. That was a really good discussion. The 2009 morning session is worth listening to. No, I think picking individual stocks is the best thing to do right now. Also, that’s what I do for a living. I’m not the right person to ask here.

Tobias Carlisle:
Jake Taylor?

Jake Taylor:
Long enough time horizon, no problem with that. I think you may experience pain along the way that best be ignored and dollar cost average into. Let’s imagine the S&P 500 as a single company that I wanted to buy, I don’t find the metrics of that company to be particularly compelling relative to the cost of it. Now I disaggregate it. There’s probably some things in there that maybe make more sense. I think we’re heading more to a stock picking time period. We have not been in one really, I don’t think for the last … I don’t know, five years at least.

Tobias Carlisle:
Yeah, I agree with all of that. That’s exactly what I think. What metrics do you look for when you’re picking a bottom? No one can do it, it’s impossible.

Bill Brewster:
I just do it as much as possible and send out newsletters every day …

Tobias Carlisle:
Everything that I …

Bill Brewster:
… so that I can say that I picked the bottom.

Tobias Carlisle:
Yeah, you want to be …

Bill Brewster:
I’m going to setting up the next 10 years of my life.

Tobias Carlisle:
It’ll only be obvious in retrospect, you only know a year later and you have missed it by that point.

Bill Brewster:
I’ll make sure that I cite the day that I sent out the right thing. That’s how I hedge my bets.

Tobias Carlisle:
I’m going to tweet it out every day and delete it at the end of the day.

Jake Taylor:
You sent half up, half down to your population and then that next one you send the next market call half up and half down. Then eventually, you’re a hero to a small subset of your mailing list.

Bill Brewster:
That’s right.

Tobias Carlisle:
No piling for that. Unintended consequences of high corporate taxes under Biden.

Jake Taylor:
Many.

Bill Brewster:
Yeah, I don’t know. I’m just telling you what I think is probably coming, not the consequences.

Tobias Carlisle:
Which should make things that just what it was.

Jake Taylor:
Yeah.

Bill Brewster:
Yeah, but that’s an unintended consequence.

Tobias Carlisle:
You got to think about that. If it’s worth something at X tax rate, if you’re doing a valuation, you got to put in a new tax rate that changes the value.

Jake Taylor:
Wasn’t that 2016 basically? Everyone was willing to pay more for corporations because of lower tax rates.

Bill Brewster:
Yeah, that’s right.

Jake Taylor:
The opposite seems like it would hold.

What Can We Learn From Buffett Not Making A Large Purchase Yet

Tobias Carlisle:
I got two, one more from Martin. Does it say anything that Buffett has not come in and bought anything with all his cash?

Bill Brewster:
Jake?

Tobias Carlisle:
I don’t think it does. For mine, I don’t think it does. I assume he’s just crazy busy doing stuff. Why would you tip your hand when you’re in there doing your work? I would just get it done and then let everybody know after the fact. I think some people have concerned that they’ve got some big insurance liability there that they’ve underwritten something funky and it’s going to put a hole in them. It’s just not the way that they operate. They know the size of all the stuff they underwrite. They know roughly the likelihood that it’s going to happen and they get a big fat premium. This is for the Ajit Jain funky super-cat stuff that they do. All of the other stuff is just run of the mill. I don’t think they’re going to get dinged too hard.

Jake Taylor:
I’ll take the counter argument just for fun and say that it does tell us something. I think it tells us a little bit about the quality of the opportunities that have so far been served up. It feels like at least in my estimation of looking at a lot more financials … Not financials, but a lot more financial statements lately, that the good businesses are still not on just like knock your socks off sale at this point. It’s been a lot of the other stuff that was already of a little questionable to begin with.

Tobias Carlisle:
Value stocks.

Jake Taylor:
Yeah, and the stuff that Buffett wasn’t really probably going to be that interested in anyway. That’s my opinion. I think it tells us a little bit more of the bifurcation of the selloff.

Bill Brewster:
Yeah. The other thing is I think people need to keep it in context. We are on March 24th. February 28th, the world was …

Jake Taylor:
Three weeks into this …

Bill Brewster:
… still going well. All of a sudden, all these distressed calls are coming into Buffett and they’re these great businesses. I just don’t buy it. I think he can probably do a lot in the distressed market with high yield spreads blowing out like they are. I don’t know …

Jake Taylor:
Why shoot your wad now? Why not wait till you see the whites of their eyes?

Bill Brewster:
Yeah. Well, he …

Tobias Carlisle:
Because it’s been a long time maybe. It’s not Buffett style.

Bill Brewster:
He might not be able to see the whites of their eyes. There’s …

Jake Taylor:
It’s been sitting for five years more on tons of cash. What’s another couple of weeks for him, while the pain ratchets up?

Bill Brewster:
Well, I don’t know what the government’s going to do with these big liquidity lines. They may take a lot of his opportunity right out from under them.

Jake Taylor:
Yeah, that’s my nightmare, is the fed crowding out all the value investors.

Bill Brewster:
Yeah, I mean, I …

Tobias Carlisle:
That’s Chris Cole’s thesis. He said that before, that he thinks that the fed diving in every time it gets cheap, means it’s been hard for value to get value.

Jake Taylor:
Amen.

Bill Brewster:
Yeah. All these people need liquidity. They’re basically saying like we are going to open the spigots of liquidity lines. I just don’t know how many opportunities there are for Buffett. I think everybody thinks there are, but I’m not sure there are.

Tobias Carlisle:
Last question, just for fun. If you had to pick the single worst thing to invest in right now, what would you choose?

Bill Brewster:
[crosstalk 01:04:15]

Jake Taylor:
Boy, space is pretty hard top.

Bill Brewster:
My most hated thing is cruise lines because like, screw them. They don’t pay taxes here. They’ll probably rip if they get a bailout. Criticizing casinos, man, the casino stocks, if those things can make it, they are going to rip.

Jake Taylor:
Congress. Is that a …

Tobias Carlisle:
Yeah, I want to see all the cruise lines and all the casinos get the bailouts. That’s where the really important money should go. That’s a joke. Everybody doesn’t understand that. Anybody got any other bets for the worst thing to invest in?

Bill Brewster:
I’d look small and a lot of operating leverage and a lot of financial leverage. That would be my combination to find the worst.

Tobias Carlisle:
Yeah, and then get some …

Jake Taylor:
Although, yeah, and everything clears up and that’s 100 bagger on you.

Bill Brewster:
That’s right. Well, at some point, these things are going to rip. You just got to pick the one that makes it.

Tobias Carlisle:
Short-vol. Folks, that’s my pick, short-vol. Shorting-vol is almost always the wrong answer. That’s how you get taken to the cleaners once every seven years. That’s Taleb’s whole phases. That’s why I read the book.

Jake Taylor:
The pennies in the steamroller.

Tobias Carlisle:
That’s time, folks. Thanks very much. It’s been super fun as always. We’re going to try and do this every week from here on in until, I guess, we get tired or you do, whichever happens first.

Jake Taylor:
My money is on us.

Tobias Carlisle:
Thanks guys.

Bill Brewster:
See you.

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