VALUE: After Hours (S02 E14): Grain-of-Salt Indicator, Restoration Hardware, and Consensus Consensus

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

  • What Can We Learn From Restoration Hardware’s Recent Earnings Call
  • The New Grain Of Salt Index
  • The Consensus Of The Consensus Is That The Market’s Going Down And Coming Back Up
  • Different Strategies For Different Market Situations
  • Will The Fed Start Buying U.S Stocks
  • What Does The Giant Unemployment Spike Mean For Future Markets
  • Will Working From Home Become The New Norm
  • Buying Stocks That Haven’t Moved For A Long Time
  • Is Now A Good Time To Buy Oil Tankers?
  • Distressed Debt Investing
  • What’s The CAPE Ratio Of The Market In The Movie Idiocracy?

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Jake Taylor:
We’re running a little late today.

Bill Brewster:
Is it?

Tobias Carlisle:
Nothing’s happened yet. No, I’m just kidding. Bouncy castles, everything off Amazon. All right. We’ve got some folks on. Hey Samson, what’s happening brother? It’s 31 March, where’s the market? Let’s do it, just to let everybody know.

Bill Brewster:
Nice and settled. Panic is gone. Bye, bye, bye, dip is in. Bottom.

Jake Taylor:
V-shaped.

Bill Brewster:
I don’t know about that.

Jake Taylor:
What’s ironic is no one likes it for all the reasons why it makes sense.

Tobias Carlisle:
That’s right.

Jake Taylor:
That’s the part that’s really confusing to me.

Tobias Carlisle:
It is bread, get that bread. All right, Jake, is it your turn to do the intro?

Jake Taylor:
Yeah, let’s do it. So welcome back to Value: After Hours, V-shaped recovery edition apparently. Bill, what are you going to be talking about on our segment today?

Bill Brewster:
I’m going to be talking about Restoration Hardware’s call, it was super candid and very off the cuff, probably 90 minutes of somebody talking about how they’re thinking about what’s going on and it was all Q&A. So I would recommend it as a listen regardless of whether or not people are interested in the stock.

Jake Taylor:
Toby?

Tobias Carlisle:
I’ve been trying to work out what the consensus is. The consensus is that the consensus is that the markets going down and coming back up, which means that’s not going to happen. That it’s really, really confusing. I’ll get into it in a moment.

Jake Taylor:
Good. I’m confused already. I’m going to be debuting a brand new metric for everybody, so let’s jump into it right after this.

Tobias Carlisle:
So what I’m doing now is I’m putting the music at the very start, so if you’re listening at home, you will have already heard that awesome intro. But people who are doing it live, I haven’t worked out how to do that yet, sorry.

Bill Brewster:
Dude, as long as the outro is still good, that’s all anyone really listens for anyway.

Tobias Carlisle:
I forgot the outro. I’ve got to put that in there.

Bill Brewster:
Speaking of which, let’s give Jake a quick shout out for a big appearance on The Investors Podcast. However, I take a little bit-

Tobias Carlisle:
Nothing that comes before the but is…

Bill Brewster:
Yeah, I’m not sure that that’s the big league, sir. This is a league.

Tobias Carlisle:
I saw that too. I saw that too.

Bill Brewster:
I mean, you know, it’s one thing to shit all over your own podcast, but now you’ve got co-hosts.

Tobias Carlisle:
To be fair, The Investors Podcast is like the fifth biggest business podcast around, and the other ones ahead of it are like famous people. So give those guys credit.

Bill Brewster:
To be fair again Sir, Albert Pujols was something cool when the Angels signed him, but Mike Trout’s coming up. We are Mike Trout.

Tobias Carlisle:
Baseball references mate, lost on me.

Bill Brewster:
Yeah, that’s fair. Basically one’s old and tired and we’re coming for you. No, I’m kidding. You guys do a good job.

Jake Taylor:
They do a really good job, and their production capabilities are a little above ours at this stage of the game.

Bill Brewster:
Were you live when you recorded?

Tobias Carlisle:
We’re going live here.

Jake Taylor:
I know that’s big.

Bill Brewster:
Live for the people.

Tobias Carlisle:
All right. Who wants to go first? Who wants to take the pain today?

Bill Brewster:
Jake does.

Tobias Carlisle:
I nominate Bill.

What Can We Learn From Restoration Hardware’s Recent Earnings Call

Bill Brewster:
I’m fine to talk. I thought Restoration Hardware, I was just saying, I listened to a call yesterday, it was just a really interesting call of the way that they do it, it’s all Q&A, so you don’t have any other prepared remarks. And Gary Friedman the CEO is somebody that I’ve sort of gone back and forth on.

Bill Brewster:
I didn’t trust him at first and, I mean he has done everything that he said he would do, so at some point your execution matters. They’ve got themselves in a bit of a debt situation that I am confused on. Their 10-K today says that they have to settle in cash if their stock price is under 118. I was reading the actual indenture and never saw that provision, so if anybody listening can point exactly to where that language stems from, I’d be greatly appreciative.

Bill Brewster:
But anyway, it was an interesting call listening to a guy that’s in the retail business. He basically laid out the short thesis for all of the apparel retailers and whatnot. I mean he’s like, “Walk through any of these displays that have any Easter related anything or any spring color or anything like that, those companies are just screwed. You’re going to have to liquidate that inventory for almost nothing.”

Tobias Carlisle:
Who is hit by that stuff, the spring stuff?

Bill Brewster:
Dude, like Macy’s furloughed practically their entire-

Tobias Carlisle:
Nordstrom.

Bill Brewster:
Yeah, Nordstrom. I mean Nordstrom’s got a little bit better online presence, but I think they’re screwed too.

Tobias Carlisle:
So retailers are just hammered through this stuff of course, unless they’re Amazon of course.

Bill Brewster:
Yeah, that’s right, because all your seasonal traffic is basically gone.

Tobias Carlisle:
Got to give a shout out to Stryker677, “Wife is in labor.” Good luck brother.

Jake Taylor:
Wow, yeah.

Bill Brewster:
Thanks for tuning in, making room for the important stuff in life. I appreciate that.

Jake Taylor:
They might want to get out in front of this and roll out their all-black colors first for dark days ahead maybe.

Bill Brewster:
Maybe. You’re a little too pessimistic man.

Jake Taylor:
I’m a little pessimistic.

Bill Brewster:
We’re going to be out of this. But anyway, I thought it was an interesting call, and Gary talks a lot about or did talk a lot about not sacrificing the short term for the long term strategic vision and he talked about what Cheesecake Factory did by sending their landlords that letter.

Bill Brewster:
A lot of his riffing was about building partnerships for the long term and how would your landlord feel if you did that to them, and it was just sort of an interesting call. If they have to settle in cash, I mean I think they’re going to have to refi, and the debt markets aren’t exactly open. They could have to draw on the revolver. That’s not an ideal situation. Could be the Icarus trade coming home to roost.

Jake Taylor:
Is anyone buying furniture right now? Is that a thing? Like we’re stuck in our house or like, “I hate this ottoman?”

Bill Brewster:
Well, so here would be if I was going to do a bull pitch, this is exactly what I’d say. Their cohort is primed to work from home and all of the women in that cohort, and I mean I’m not trying to be sexist here it’s just women drive buying decisions at the house, I mean they’re looking around the house looking at things that they don’t like. We just spent a fair amount of money on sheets-

Tobias Carlisle:
What kind of threat count did you get Bill?

Bill Brewster:
I don’t know, but-

Jake Taylor:
Egyptian cotton.

Tobias Carlisle:
You got like that canvas sail.

Bill Brewster:
Dude, I spend where I sleep. That’s a lot of your time.

Tobias Carlisle:
You also got to get a second couch now, because you got the work couch and you’ve got your TV couch.

Bill Brewster:
Well, so honestly, your kids are beating the shit out of your house right now, because they’re not at school. So I actually don’t think it’s that crazy to think that some of people’s budget goes into the home. Now will it save a company? That’s a bit of a stretch, but I don’t think it’s crazy.

Jake Taylor:
Is anyone buying clothes right now too? Like I’m wearing the same sweatpants pretty much every day. If you’re not dressing up for other people now-

Tobias Carlisle:
Brent Beshore had a good comment to that effect, he was like, “Is it Zoom leisure or what do you call it?”

Jake Taylor:
Leisure for Americans.

Tobias Carlisle:
Leisure, apologies.

Bill Brewster:
No, it’s okay. Leisure sounds much better.

Tobias Carlisle:
You totally derailed me, but the point is you only need a shirt now with a tie. It’s pants optional.

Bill Brewster:
Yeah, I don’t wear underwear or pants. I’m not even wearing them right now, obviously. So I think spending has collapsed. I think it’s going to be interesting to see how debt and landlords and equity interact through this, because I mean you could say debt can foreclose on all these businesses.

Bill Brewster:
That’s, A, not really their business and, B, they would have a ton of businesses foreclosing at once. That’s not an easy thing to manage. So it seems to me like the incentives are for people to manage through. That said, when people get threatened with losing money, they do some crazy stuff.

Tobias Carlisle:
I got a good question for you here, it’s up on the screen. “Restoration Hardware call was interesting. Do you agree with his point that home goods and experiential retail might have some pent up demand after this?”

Bill Brewster:
Yeah, I do. Look, I think that guy understands. I mean I used to hate that idea. I think in November I went on this huge tirade on Twitter about it or whatever. I think he’s right on his strategy within that segment, I think he’s right that physical locations are more beneficial to the economics of that business than going fully online.

Bill Brewster:
If they have to settle these notes in cash, I don’t know how they don’t face a liquidity crunch unless they can refi, and their agents like US bank, that’s not a predatory bank. I think BMO was involved in the lending group. If those are bankers that work with you, if it’s credit hedge funds you got a problem potentially. I say that not knowing what I’m talking about, it’s just how I think about it.

Tobias Carlisle:
How hard line do you think everybody’s really going to be on the other side of this?

Bill Brewster:
That’s what I don’t know, but then the question is do you want to take that risk?

Tobias Carlisle:
You don’t want to take that risk, but a lot of folks have not got that choice at the moment. I mean a lot of businesses haven’t got that choice, I’m not even talking about individuals. You mean as an investor do you want to take that chance?

Bill Brewster:
Yeah, that’s right. I mean at RH, Gary’s got like four and a half million shares that are vested at a hundred bucks a share. I mean you sort of need him to execute this vision if you’re a creditor. You really don’t want to take over a furniture retailer and just kick it to some schmuck CEO, and he’s got 450 million reasons to bargain pretty hard. I do think you’ve got to weigh that stuff, but you’re making a bet. I mean it’s no slam dunk.

Will Working From Home Become The New Norm

Tobias Carlisle:
Just a more global macro question, what about work from home? What does this do to work from home? Does it make it more likely that people are just like, “Never again. I’m getting out?”

Bill Brewster:
I don’t really enjoy this right now. I mean I think it probably depends, but I crave human interaction. This sucks. I don’t want to meet people through Zoom and work from home.

Tobias Carlisle:
That’s what the podcast is for.

Bill Brewster:
Yeah, that’s right.

Tobias Carlisle:
This is the perfect level of human interaction.

Bill Brewster:
I am very hesitant to make any bold claims about what a temporary situation does to permanent behavior.

Tobias Carlisle:
That’s fair. What about you JT?

Jake Taylor:
Not much to add. I think I agree with with Bill.

Tobias Carlisle:
Don’t want to stick your chin out?

Jake Taylor:
I don’t know if we change the world dramatically. Honestly just sitting down and having lunch with someone, I would be pretty appreciative of that at this point.

Tobias Carlisle:
From a business perspective, it kind of make sense that if you don’t have to pay for all that office space, you can get someone to work from home, I mean it’s pretty compelling I think.

Bill Brewster:
Yeah, but there’s benefits to coming in and forming a team.

Tobias Carlisle:
You’ve got Slack, you’ve got Zoom or Skype, email.

Jake Taylor:
I think it depends what… So if you want to draw this to like biology with let’s say like you know why insects can only be as big as they are? It’s because they have holes all throughout their body that the oxygen just kind of comes into and out of, so they can’t circulate it into the deeper parts like having a heart and a circulatory system.

Tobias Carlisle:
Thank God.

Jake Taylor:
They can only get so big.

Bill Brewster:
Yeah, no shit right? Like a tiger sized ant or something. Fuck that.

Jake Taylor:
Yeah. So let’s draw then back to the business side, if information is sort of the oxygen of a business, you can’t get as rapid of information flow and all the subtle non-verbal communication that happens in person.

Tobias Carlisle:
I’ll buy that.

Jake Taylor:
I think there’s still limits to work from home.

Tobias Carlisle:
Well, what about an infrequent get-together? Like you come in for lunch once a week or something like that? You work from work once a week.

Bill Brewster:
I think it’s more probable that you’re at work three days a week and home two, or something like that. I don’t think that work is going to go away. I do think that bosses will be more amenable to, “Hey, can I work from home this day a week?” or something. It’s slightly better, but I think getting together as a group is still important, and I think it was fully synergized on the Twitter machine, it could have been pref shares.

Bill Brewster:
One of them was the point of going to a meeting, like everybody’s saying business travel’s done, people don’t go to business travel because they think it’s going to be fun. They do it to show seriousness in the deal. And I thought that that’s pretty true.

Tobias Carlisle:
It’s also pretty fun.

Bill Brewster:
Yeah, well, you don’t want to tell your wife that.

Jake Taylor:
Don’t tell my wife that. Shut up Toby.

Bill Brewster:
So I thought this is interesting, this is from the guy that started Skift. This is a Twitter threat, he goes, “There’s a mass delusion in the travel industry about recovery. If my LinkedIn posts YouTube videos et cetera are correct, people are expecting like a V-shape recovery. There’s no V-shape recovery waiting at the end of this. We don’t even know what the end is or what it will look like. For now an L-shaped recovery awaits. The luxury of elective travel will have to wait years, maybe a decade to come back to pre-Covid form, if at all.”

Bill Brewster:
I feel like that’s a bit like ringing the alarm bell prematurely, but the dude runs a travel based website, so that’s his take. Who knows?

Tobias Carlisle:
Stoic thinking about the worst case scenario.

Bill Brewster:
Yeah, well, anyone that says that they know is full of shit.

Is Now A Good Time To Buy Oil Tankers?

Tobias Carlisle:
So there’s a cool question here, we were kind of kicking it around a little bit before we came on. “What do you think about contango and buying tankers to play it? Most of them are still selling below book.” Jake, one of the Jake tricks just as that question came in. Jake’s going to empty out his pool and fill it up with oil.

Jake Taylor:
I feel like, yeah, for whatever, is it $4 a barrel right now in a lot of places? How do we arbitrage that one? Because that feels like it’s kind of too low, doesn’t it? I mean just imagine the amazing thing that even a gallon of gasoline does for you, like allowing you to travel 30 or 40 miles or like to actually move something that far, or I mean it’s actually one of the wonders of the world for us. So the fact that it’s cheaper than a gallon of milk right now is kind of surprising to me.

Bill Brewster:
That’s weird, because I thought that it killed all of society and was going to be our doom. Here we are saying that gas is actually necessary and maybe a net benefit. Odd.

Tobias Carlisle:
It’s still like top-shelf booze in California, it’s still three bucks something at the pump.

Jake Taylor:
Yeah.

Bill Brewster:
I know a lot of people like the tankers, I don’t love saying this name because it’s pretty a illiquid, but I’ve been looking at TGS-NOPEC quite a bit. If anybody knows anything about that, hit me up on the Twitter machine, because I’m interested in doing some more work there. But I think there’s ways to play oil.

The New Grain Of Salt Index

Tobias Carlisle:
Jake, do you want to do the Taylor rule, the new Taylor rule?

Jake Taylor:
That’s not the name. The name of this new metric is the grain of salt index and probably should give a shout out to Ian Cassel, because I’m sure that he’s already thought about this one a million times given his approach, but where this came from was I noticed in one of the positions that I own that’s very, speaking of illiquidity, it moved, it changed market cap by $60 million based on the most recent tick for that day.

Jake Taylor:
And then on that was the volume that dictated that was $1,400 worth of transactions. So if you imagine the change in market cap divided by the dollar volume, that gives you an idea of what the grain of salt index is. And the idea is like we’re taking every single market price with a grain of salt, so the bigger this number, the more that you should probably take it with a grain of salt.

Jake Taylor:
So in this instance for the thing that I was in, $1 of volume drove $43,000 worth of market cap change. That seems a little bit weird to me. So I don’t know if anyone else can come up with a higher number than that one, but I’m sure that there are some illiquid thing out there that’s changed even crazier than that. But it’s kind of a fun thing to think about of how much should I be taking every up or down tick with a grain of salt.

Tobias Carlisle:
It is funny though, isn’t it, that there are a lot of companies out there and particularly in crashes you see often there’s a lot of volume in a crash, so that I’m not necessarily talking about that, but often there are companies that are taken down on not much volume and the very vast majority of shareholders aren’t going to sell anywhere near that.

Tobias Carlisle:
That why illiquidity is such a great metric, even though it doesn’t really make much sense. Just illiquidity in and of itself is actually a driver, is a reasonable predictor of returns in just about everything. Housing, you can go and look at housing indexes, at the bottom there’s no liquidity. Nobody wants to sell their house when they know that it’s way under value. The only reason they’re selling is because they’re for sellers, they’ve either got to move for work or they’re unfortunately losing their house.

Jake Taylor:
Yeah. Bill, what do you think, you got any of those high grain of salt indexes?

Bill Brewster:
I just think if you’re looking at something that’s thinly traded, be careful about… I mean you can afford to have your price out there and just throw your bid and wait for somebody to come ping it, and if you’re used to getting filled quickly and you start to go into the smaller names, get ready to not get filled right away and it’s totally normal, and sometimes you got to wait for a long time. But I think there’s a reasonable case to be made most the time for the big cab names being priced pretty close to reality, but there’s some weird stuff in small-cap land for sure.

Tobias Carlisle:
It’s tough in debt too. I’ve got some friends liquidated a debt book last year and you’ve got to call people up and get where the market is from them without tipping your hand that you want to sell to them, without tipping your hand you’re trying to liquidate the whole book. So that’s a tough business.

Bill Brewster:
I mean that’s where a real market maker actually is worth their salt, finding blocks and placing them and whatnot.

Jake Taylor:
Do we still have those? I thought it was all machines now.

Bill Brewster:
I think in some things.

Tobias Carlisle:
There are differently market makers in ETFs. There are multiple market makers in ETFs. There are leads and there are others. I assume it’s all automated, I assume they just put a bid in and ask around where they think the NAV is and just trades around there.

Bill Brewster:
I mean what’s been interesting to watch in some of the smaller names that I just look at, is like some of these things just appear at least to be like truly orphaned, and I mean people just don’t want to touch them. So you can get a capital allocator that actually understands what the heck they’re doing, that can turn out pretty well. Who did you interview? Was it Steven Kiel, was that your boy? Is he the one that does the smaller cap activism balance sheet to income statement?

Tobias Carlisle:
Yeah, that’s Steve. He got control of a smaller enterprise and he’s just working that one out. That’s what he does though, yeah, balance sheet to income statement. Shout out to Steve.

Bill Brewster:
Hope you’re one of the 10.

Jake Taylor:
One of the 10.

Bill Brewster:
Hope so.

Tobias Carlisle:
You got any more comments on that one? There’s an interesting comment up on the screen, “End of last year every time the market was making all-time highs on trade talks going well was on minimal volume.”

Bill Brewster:
Hmm.

Tobias Carlisle:
Eric Balchunas got this, but I call it this but I call it the Balchunas indicator. He talks about it’s not a real sell-off until you get a big spike in volume, and I think he says it like 60, I might get this wrong, 60 million shares, maybe it’s $60 billion? I don’t know, it’s one of those two, once it gets over that level, then you know it’s a real sell-off.

Tobias Carlisle:
And he used that in 2018, he was saying there’s not enough volume going through for this to be the real thing, and then this time around he was calling it and saying there’s a lot of volume going through here. This is like going through a spy, so he was talking about the ETF and it looked like the real thing.

Jake Taylor:
Yeah, I wonder how the indexation of the world changes this a little bit? If maybe it’s more of a nothing happening and then all of a sudden everyone wants to sell at one time. Like they all kind of capitulate around each other more than when it was a little bit more independent thinking around it. I don’t know.

Index’s Delaying Re-Balancing

Tobias Carlisle:
What do you make of all of the index’s not rebalancing? What’s that about?

Jake Taylor:
I don’t know. I’ve heard it’s-

Bill Brewster:
What are you talking about? Let’s take a step back since I’m a newb when it comes to rebalancing.

Tobias Carlisle:
So I’ve got to tell you, I read some articles yesterday and it was like repo, I was just like, “I’ve got no idea what’s going on here.” From what I can understand there is some big pension funds and I think some of the index has delayed rebalancing. So it was coming up on the end of the month, you’re supposed to rebalance if you’ve got a monthly rebal.

Tobias Carlisle:
Or it was the end of quarter two, so there’s a lot of quarterly rebalancing going on. For some reason they delayed the rebalance, and I read the articles. I frankly don’t understand it, but what I understand, and this is probably wrong, and I’ve spoken with some people and what they say is that because the debt is so illiquid and the debt markets are all blown to bits, if you have to sell down some debt to buy some equity or the reverse, it’s tough to implement that in this kind of market. So they just delayed it.

Bill Brewster:
Especially last week. I’m pretty sure it was last week, whenever I was buying some of that debt, it just blew apart. There was no bid anywhere. It was beautiful.

Jake Taylor:
You’re the only guy in there?

Bill Brewster:
Yeah, my bonds at one point they were down 15%, now they’re up 26. Thank you Fed. Shout out.

Will The Fed Start Buying U.S Stocks

Tobias Carlisle:
Well, here’s another question, “Do you think the Fed will start buying US stocks? They announced that they’re buying corporate ETFs.”

Bill Brewster:
Maybe, I don’t know.

Tobias Carlisle:
I really hope it doesn’t come to that. I think that there’s something wrong with the Swiss National Bank being able to create a billion dollars in Swiss Francs and then use that to go and buy Apple.

Bill Brewster:
Yeah, and Google. I would agree with that.

Tobias Carlisle:
I mean they’ve got a huge… Why wouldn’t you? I tweeted this out when the first time that I heard that, and you can buy shares in the Swiss National Bank too. I forget the ticket, but they traded somewhere. It’s like 500 bucks a throw, something like that. I was like, “Why wouldn’t Papua New Guinea or someone like that who’s got oil and gas, but could print a whole lot of PNG bucks, and then you go and buy a whole lot of US industry?” Why wouldn’t you do that?

Bill Brewster:
Yeah.

Tobias Carlisle:
Joe Weisenthal said it would be because you’d turn your currency into a trash fire. But I don’t understand why. Nobody wants to die with that grenade.

Jake Taylor:
I don’t know.

Bill Brewster:
No. Well, look, this is what I’d say. I think that if you were paying attention over the past couple years to certain people talking about debt markets, liquidity was something that they talked about a lot. I am not active in debt markets too often, so I’m more of a interested observer of this stuff.

Jake Taylor:
Tourist I think is the word you’re looking for.

Bill Brewster:
Yeah, that’s right. But to the extent that the Fed is coming in to provide some liquidity right now, and to the extent that they are stabilizing the debt market, I am much less upset than if you had told my 22 year old self that they were going to do it. I would be super pissed off, because I was part of the Ron Paul audit, the Fed crew.

Tobias Carlisle:
Why do you want them to stabilize it though?

Bill Brewster:
Because I don’t think right now… Look, these people that are like, “Just have the airline’s go bankrupt and that’s the equity risk.” Okay, that’s fine. The other side of that is you got over 700,000 union jobs that are going to get fucked if you do that, and it’s happened before. So if you’re stabilizing liquidity for a temporary event and the balance sheets going to be impaired anyway, and you’re going to get paid back, I don’t find it that offensive.

Tobias Carlisle:
But aren’t we talking about two different things here?

Bill Brewster:
Probably.

Tobias Carlisle:
We’re talking about the Federal Reserve diving in and buying equities on one hand, and then on the other hand we’re talking about the Federal Reserve buying corporate debt, that’s still a very long bow from my perspective. Surely if we want to stabilize an industry, isn’t that the role of elected officials rather than the Fed? Don’t we all get a say in it?

Bill Brewster:
Yeah, well, I mean they’re sort of outsourcing that to the Fed. From what I understand I mean I’m not a Fed expert, but I guess the reason that I made the connection is I think the question stems from what the Fed is doing in the bond market, and I think the reason that the Fed is doing it in the bond market right now is to stabilize a temporary situation.

Bill Brewster:
I don’t think it’s a permanent operation designed to depress yields. Whether or not it becomes that and whether or not QE was that, is sort of different to me.

Tobias Carlisle:
Like we wound back all that QE from 2008 and 2009.

Bill Brewster:
Yeah, well, I mean that’s the market, so what are you going to do about it?

Tobias Carlisle:
Well, I’d rather that they don’t do it.

Bill Brewster:
Yeah, but you can’t control that.

Tobias Carlisle:
There’s nothing I can do about it. I can bitch about it on the podcast.

Bill Brewster:
That’s right, yeah.

Jake Taylor:
The dog ate my homework too.

Tobias Carlisle:
I can’t vote on it. I’ve got no vote in it.

Bill Brewster:
Well, I mean look, I think anybody that thinks that we live in a perfectly free market probably needs to look at what market we live in.

Tobias Carlisle:
I don’t think anybody does think that, but what I’m saying is that I’d like it to be a little freer.

Bill Brewster:
Well, and I guess what I’m saying is I think that it is still somewhat free and probably isn’t going to get to the Fed buying equities.

Tobias Carlisle:
Okay, that’s good. So we got you to stick your chin out on that one.

Jake Taylor:
I will take the other side of that and say that they will at some point. Within the year, I’ll even say.

Tobias Carlisle:
There’s a mark.

Jake Taylor:
40% chance.

Bill Brewster:
Well, I guess so what does the world look like when they do that?

Tobias Carlisle:
Well, it’s down 30% probably.

Jake Taylor:
I mean it’s just to stabilize the perception of prices so that no one wants to… That we don’t get movements in anything that are too big to cause disequilibriums. And really a lot of it to me is sort of a duration problem. We have a lot of longer term assets that are levered up against shorter term liabilities, and if those two things get disconnected too far because of economic dislocations in the meantime, then they need bridges to get there, and I think that’s what the Fed sees its role as. To me that’s the repo stuff is, is fixing the duration mismatch in cash flows for a lot of debt and assets.

Tobias Carlisle:
Yeah, I don’t understand repo either. I have to get you to explain that to me offline.

Jake Taylor:
I have to probably learn it myself first.

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

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.

Distressed Debt Investing

Tobias Carlisle:
I’ve got a good comment here. “Verdad came out with a research report saying that companies with high bankruptcy risks tend to be poor stock investments. How does deep value square with this?” Also, it’s almost time, so start throwing your questions in. We’ll start answering the questions too.

Tobias Carlisle:
So I would say that I 100% agree with that and I’ve written, I think in almost every book or maybe just quantitative value, you’ve got to screen out bankruptcy risk. The problem with bankruptcy risk is that you only really know about it after the thing is bankrupt. So you can’t hunt for bankruptcy, you hunt for distress, then you use financial strength to make sure they’re not even trending in that direction using modified version of the F score that takes into account share issuance and other things.

Tobias Carlisle:
I look for earnings manipulation and fraud. I mean zeros in the portfolio are hard to recover from, so you want to avoid them unless you’ve got some sort of option view on it where it doesn’t go down much and then it comes back 10 or 100 times. So good question.

Bill Brewster:
What does our boy Dan Sheehan say about that? Not bankruptcy specifically, but he had a good comment on position sizing. And I think, not to try to put words in his mouth, but I think that his view on that was like if you see that and you think that they can survive and you really think that the reward is worth the risk, it makes sense to make the bet, but you can’t size it big. Because if you size it big and bankruptcy risk occurs, you’re screwed.

Tobias Carlisle:
You [inaudible 00:41:20] it.

Jake Taylor:
He calls it variance drain.

Bill Brewster:
Yeah, there you go.

Different Strategies For Different Market Situations

Jake Taylor:
Dan’s the man. Dan, if you’re one of the 10, shout out to you. I have a mailbag question, and it will be a good segue. This is from Jonathan who’s the service member in Hawaii, so thank you for your service Jonathan. He asks if in a bear market kind of situation, do you have specific cash that’s earmarked for specific strategy? So let’s say net nets or something like that. Do you keep part of your portfolio dry for a specific value opportunity that may come along? Did I do a good job of paraphrasing his question?

Bill Brewster:
I think so.

Tobias Carlisle:
I don’t, because I’m all in one strategy at the moment, so I don’t do that. I haven’t done that in the past either. I like the optionality of cash. When you test holding cash, you almost invariably underperform, but you perform with more volatility. It’s very similar to that Buffett Munger line where he says they prefer a lumpy 50 into a smooth 12.

Tobias Carlisle:
If you have a strategy that will give you a lumpy 15, you can turn it into a strategy that gives you a smooth 12 by putting some cash into the portfolio and sort of buying more when it goes down and selling it in a Shannon’s Demon type scenario. Where when it goes down, you allocate more cash to the equity, and when it goes up you take some of the equity out and turn it into cash.

Bill Brewster:
Yah, I think I’d be careful about allocating to too many different strategies, because then you’re pretty much just the SMP. But I think it makes some sense to have different strategies that you play in different things. I mean like my own portfolio, I have a fair amount of what you’d call compounders, but I have some cigar butts that I’m looking for a puff off of. Just I try not to mix the two strategies in my head, otherwise you can get yourself into some trouble.

Jake Taylor:
So for me, I think about each dollar as dollar number one that gets invested is my lowest hurdle dollar, that’s the easiest one to part with. And my last dollar that’s uninvested is the hardest one, it has the highest hurdle. And so in my mind there’s a sliding scale that goes from easiest to separate from me, all the way up to like good luck getting this dollar deployed.

Jake Taylor:
So depending on what the opportunity set then is, dictates how much of it gets peeled out. But that’s how I think about it.

Tobias Carlisle:
That’s interesting. I’ve never heard anything like that before.

Bill Brewster:
I love all my soldiers equally. I don’t like to sacrifice any of them.

Tobias Carlisle:
You don’t have pawns? You don’t send the pawns out there?

Bill Brewster:
No, no. Well, I guess I sort of do. The pawns run into Nordstrom when I think it’s undervalued.

Jake Taylor:
They took an airplane to nowhere.

Bill Brewster:
It worked out. That worked out. But I’m glad they’re not still in it, that would be bad.

Tobias Carlisle:
“What about Mauboussin and Santos’ counter that long-term CAPE average may be unduly skewed by the late ’70s and early ’80s?” Every single decade has unduly skewed it, because every single decade has been different from every other one. What about the ’90s and 2000’s when earnings was super high?

Tobias Carlisle:
You got to make some assumption about what is normal, and nobody really knows. That’s what the CAPE is trying to do, say, “Here’s cyclically adjusted inflation adjusted earnings.”

Jake Taylor:
I think this is true of every single kind of data, call it mining operation, but in finance we’ve only had actually let’s call it 10 or less maybe true full cycles to even look at. And so that’s a very small end, and just because you take a minute-by-minute measurement of something and you think that you have a million data points, the relevant data, it’s under 10.

Jake Taylor:
And so you can’t draw too much inference from any data set that is that small, but it’s the best we have at the moment. It’ll probably keep getting more relevant as we add more data to the series, but I don’t think you should ignore it, but you also have to just realize that the actual data set for a lot of the things that we look at are much smaller than what we imagined.

Tobias Carlisle:
And it’s from the U.S., which has been one of the best perform stock markets in the world. The Russian data that ends with Stalin coming to power and the [inaudible 00:46:09] coming to power, and the Chinese data that ends with Mao coming to power. That would change your assessment too.

Jake Taylor:
Good point.

Bill Brewster:
I mean I think you need to also overlay it in context of where we are. I’m going to give you a trigger warning politically here, but it’s not too shocking that a reality TV star cheerleading the stock market as the president also coincided with the peaking CAPE. I don’t think that’s the craziest thing in the world, on top of tax cuts, on top of deregulation.

Tobias Carlisle:
Plus low interest rates.

Bill Brewster:
Yeah, so if you’re buying into that environment, I think you have to ask yourself, “Given what I know about what’s going on around me, what is the likelihood that people are being conservative in their underwriting?” Now I think underwriting has come in a little bit, I do think a lot of people are expecting a much more rapid recovery in the economy than I am comfortable underwriting. That said, I still think that there’s a lot of value out there in certain places.

Jake Taylor:
Here’s a fun game to imagine, if you want to think-

Bill Brewster:
Sorry if you upset anyone.

Jake Taylor:
I don’t think you did.

Bill Brewster:
Let’s talk politics, you’re bound to.

Tobias Carlisle:
Just send those emails straight to Bill.

Jake Taylor:
Yeah.

Bill Brewster:
I’m not advocating a lot of the left either. It’s a bad situation all around.

What’s The CAPE Ratio Of The Market In The Movie Idiocracy?

Jake Taylor:
What is CAPE ratio of the market in the movie Idiocracy?

Tobias Carlisle:
Do people know how to buy stocks in that?

Jake Taylor:
Sure, they’re all indexed.

Tobias Carlisle:
They’re on day trading.

Bill Brewster:
No, dude, they’re on Robinhood trading. They’re all trading something on Robinhood.

Jake Taylor:
I’m sure someone will have a clever answer to what the CAPE is in the movie Idiocracy. Tweet us that answer.

Tobias Carlisle:
“How do you think about the markets fair value?” Anybody want to take a shot at that? Bill’s going to avoid that one.

Bill Brewster:
No.

Tobias Carlisle:
JT, you want to have a go?

Jake Taylor:
Boy, it seems still historically expensive to me, especially relative to the perceived risk. But the timing of any of that and how more unrealistic it can get, I’ve been humbled enough to not make those kind of predictions.

Bill Brewster:
I mean there’s just so much stuff out there that’s cheap though. Like really decent businesses that are trading, Progressive is one that came up in a conversation recently. That’s a good business. They are good managers. It’s trading an 11 PE, I understand earnings is not a perfect measure. But that’s roughly a 9% earnings yield. Where else are you going to get that? Is that going to be a 4% earnings yield? Is trailing earnings going to decline that much because people are gonna stop driving? It’s hard for me to understand how that stock has 40 or 50% underneath it.

Jake Taylor:
What does their portfolio look like inside of there?

Bill Brewster:
I don’t know. I should probably do more work before I talk shit.

Jake Taylor:
Something I’ve been thinking about-

Tobias Carlisle:
Sorry, I might have misread that question. I think he’s asking about Markel’s valuation, not the market. Sorry guys.

Bill Brewster:
Well, the thing on Markel that everybody is worried about-

Jake Taylor:
Same answer.

Bill Brewster:
… is this phantom insurance liability, right?

Tobias Carlisle:
Do you want to aerate that a little?

Bill Brewster:
Yeah, I think that people are worried that there’s some underwriting that they either have in their policy, or that lawmakers are going to try to stick them with, and I think that generally when people lose money they like to come at insurance companies. And given the uncertainty, sort of what are you looking at, I would just say you got some really good people over there, and if you believe in the long term, they’re probably acting as rationally as you would want them to, if you like the stock.

Bill Brewster:
I think the probability that fair value is much lower than here is not too high, if that makes sense. I think you’re probably buying into some pessimism that may be unwarranted, and if not, it’s probably in the price.

Tobias Carlisle:
Well, here’s the best time to take the risk adjusted bit. It’s been more expensive than this most of the time, 2013 there’s a quarter where they motor traded at 80% of book for very, very briefly. It almost looks like an aberration in the data, 2009 they got down to about this valuation. About a week ago was the lowest they’ve got, which was slightly just under book, it might have been like 97.

Tobias Carlisle:
I realize this is the TTM book, not the updated book, but their book is also going to go back up again too. I think that they are about as cheap as you ever going to get them, except for once a decade. So now is the chance, even with all that other stuff going on. That’s why they’re cheap, that’s why you get the chance. This is not an investment advice.

Bill Brewster:
Tom’s portfolio has gotten whacked like all of ours, so that’s going to come out of whatever people think the look through value is. Is that a permanent impairment? He’s going to be buying shares today, he’s going to be buying shares tomorrow, and he’s going to be buying shares the next day. I think if your long-term bullish on America, it’s not the worst bet to make.

When To Pull The Trigger And Avoid Analysis Paralysis

Tobias Carlisle:
“How do you know you’re ready to pull the trigger on an investment and avoid analysis paralysis?” Great question.

Bill Brewster:
Jake?

Tobias Carlisle:
That’s a good question for both of you guys.

Jake Taylor:
My process is more to accumulate slowly and keep learning more as I go, and not assume that I have it all figured out. It’s not a binary thing for me. That has tended to be annoyingly uneffective in these just every dip bouncing off of… You just start to get excited about something, you buy a little bit of it, and now it’s gone. That sucks, but there will be another point someday, I don’t know when, we’re moving slowly will allow you to accumulate a lot more shares at even better prices and better understanding all along the way.

Jake Taylor:
And that will be a good time for me with my process. So it’s really how comfortable can you get. I don’t like binary as much, but like I said, it has its downfalls as well.

Bill Brewster:
Yeah, I don’t really know how to answer it, because my beloved airline investment, may it rest in peace, I mean that took a long time to get comfortable with, and it turns out I shouldn’t have been comfortable.

Tobias Carlisle:
Give you credit though, you did change your mind and change the position. So I respect that.

Bill Brewster:
No, I know. I know. Look, I think a lot of stock selection is very similar to underwriting insurance, and you put the bet out and then you see whether or not… I mean there’s always a distribution of outcomes. I think anybody that thought that this distribution was definitely going to happen is lying to themselves.

Bill Brewster:
But you can only play one path. So I don’t know, it depends how much I know about something, it depends whether or not I followed them before. I’m probably more comfortable with the Liberty complex than a lot of people might be, because I met those guys. So if there’s a quick dislocation, I’m more comfortable moving into that than I would be on a name that I don’t know anybody on.

Bill Brewster:
I think it’s just sort of accumulated knowledge, and each situation seems different to me you.

Tobias Carlisle:
You like to get to know management personally?

Bill Brewster:
Probably.

Jake Taylor:
Give a little effect.

Bill Brewster:
Fuck you. You go to Berkshire all the time. I mean look, I think that there are definitely cognitive biases that enter the process when you start to meet some of the better sales people.

Tobias Carlisle:
You learn stuff you don’t know too. That’s the balancing act, right?

Bill Brewster:
Yeah, and I also think that you end up like with Tom Russo’s capacity to suffer when you’re able to put a face to a name and understand how the person thinks about something it’s easier to stay in something, in my opinion. So it just depends.

What Does The Giant Unemployment Spike Mean For Future Markets

Tobias Carlisle:
Just whole Jake recovered from the Big C, here’s another question, “What does the giant unemployment rate spike mean for the markets now and in the future? Are you guys worried? I know a lot of people being laid off and furloughed in Seattle,” from Bread.

Tobias Carlisle:
That is absolutely terrifying for me. The stock market loves it, but I think there’s genuine underlying damage to businesses and to individuals, and I think that that takes time to repair. So I don’t know that there’s going to be a lot of growth for a while. I think that probably we’re going to be doing a lot of repairing from a lower base. I don’t feel particularly good about that for the next few quarters, but I honestly don’t know, and I probably tend to being a little bit more pessimistic than folks.

Bill Brewster:
Best way I know how to answer this is like how my money is expressed. I am in big for the most part. I’m in a couple small things, but most of what I’m in is big, and the fundamental reason is I think that this is going to undo a lot of the progress that was made on small versus big, wealthy versus poor, all that stuff. I think it’s going to get blown out of the water.

Bill Brewster:
And I think that it’s a terrible shame that the people and businesses that were struggling to make it are going to be the ones that are hurt the most here, and whether or not it’s Restoration Hardware’s core consumer can work from home and collect their check and be fine and the waitress can’t, Or whether it’s some big exploration and production oil company can actually survive this and all the small guys get obliterated, I don’t really know, but I think that access to capital is going to determine competitive position in 12 months, and I think big gets a lot more access to capital, unfortunately. I hope I’m wrong, but I don’t think I am.

Jake Taylor:
I would be curious to see a study of 2015 to 2020 lobbying dollars correlated to future returns of 2020 to 2025.

Tobias Carlisle:
There big ROI in that money. That’s the best money.

Jake Taylor:
It’s huge. I actually did this one time with tarp, and I just looked at, it was very simple, but who got most of the money and then how much did they spend in lobbying efforts? And the returns were just sickeningly astronomical. I can’t remember what the exact numbers were, but it was like 1,000 baggers more, 10,000.

Bill Brewster:
That’s what you want out of your capital allocation.

Tobias Carlisle:
Yeah, that lobbying money, that’s the big return money. So last question, “First thing I look at is usually the long range charts, do you find this useful or is it a bad practice as a value investor?” So I don’t use it at all in my process, I’ll say that, but I would be lying if I said to you that I didn’t pull up some ratios and look at the price earnings, price book, price to cash flow, just to get an idea how close I’m buying. So they’re low in terms of those. I do that all the time. It doesn’t factor into my process, but I’m guilty of it, but not the price returns. I don’t care about those.

Jake Taylor:
Yeah, I mean I like that too, where GuruFocus, shout out to them, have this cool little thing where it will show the price to book or price to earnings or whatever metric, and then the highest it’s ever been and then the lowest it’s ever been. So you have these bands, and you can see where has it traded within the bands of highest versus lowest. And I’m guilty of that anchoring bias of wanting to look for ones that are down at the bottom of their lowest booked band.

Bill Brewster:
Well, I think it sort of depends too on the company. This one crappy company that I had follow for no darn reason [crosstalk 00:58:56]. No, it’s not. It’s a stupid Intrepid Potash, I should just stop looking at it. It’s like this junior freaking potash miner in New Mexico. I don’t even know why I care about them. It’s emotional, but like price-to-book makes sense to that. I mean you’re basically buying at a discount to replacement cost, if you think the assets are worth anything.

Bill Brewster:
I look at the relative valuation over history as to where the assets traded, and try to figure out whether or not there’s a reason that it’s changed, or if it’s temporary, or if the group has changed. I like to look at how comps have traded. I think that that makes a lot of sense, because a lot of the times like LVMH, for instance, that asset I mean fundamentally hasn’t really changed over the last five years.

Bill Brewster:
It’s maybe gotten stronger, had some tuck-ins, whatever, but I do think that looking at how that traded over the last five years can give you an indication of how much current heat or coolness is in the name.

Buying Stocks That Haven’t Moved For A Long Time

Jake Taylor:
How do you square that with your 52 week high versus low hunting list?

Bill Brewster:
I have stopped looking at lows as much. I mean I would be more inclined if something was definitely at the bottom of the list to ask why has this not gone anywhere. And especially on a 10-year chart or something, if the stock hasn’t moved at all, I think you really got to ask yourself why you’re right at this point in time versus everyone that’s thought it over the last 10 years. Now there could be a very legit reason.

Tobias Carlisle:
That’s had monster winners doing that, that’s looking at stuff that hasn’t moved. Like Walmart hadn’t moved for a decade or more when I looked at it, and it was just cheap. I think a lot of things, what happens is companies get way ahead of themselves and spend a decade getting back to a fair valuation. Then everybody looks at it and says-

Jake Taylor:
No, prices get ahead of the business itself.

Tobias Carlisle:
Yeah, sorry, that’s what I meant. And then everybody’s like, “Well, I’m not going to touch this thing, because it hasn’t done anything for a decade.” But quietly underneath it’s grown into its valuation, all of a sudden that’s really cheap. That’s a good time. And there’s no vol in the options. That’s the best thing. There’s no vol in the leap, so you can get nice big fat calls in them.

Bill Brewster:
But in that scenario if you pull up a long-term chart, the chart is way up into the right, and then what it’s done is its consolidated its valuation blow-off over time and people have given up.

Tobias Carlisle:
Sometimes. Flatten down.

Bill Brewster:
That makes sense to me.

Tobias Carlisle:
I mean look at the decade of Walmart before like two or three years ago. It hadn’t done anything.

Bill Brewster:
No doubt, I agree with you, and that’s actually part of how I screened and found Starbucks before it had its breakout. It didn’t go anywhere for five years, same thing with Disney. I do agree with you.

Jake Taylor:
Microsoft is the principle example of that.

Bill Brewster:
Yeah, but there you’re not taking up a 20-year chart and seeing something that’s gone from the top left to the bottom right corner and being like, “Oh, I’m the one that’s right, right now.” It’s just sort of I think you just got to understand the story.

Tobias Carlisle:
Fellas, we’re the only ones left. It’s time.

Bill Brewster:
All right.

Jake Taylor:
Ouch.

Tobias Carlisle:
Thanks for dialing in everybody. We’ll see you next week.

Jake Taylor:
See you next week.

Tobias Carlisle:
Stay safe, stay well.

Jake Taylor:
Stay quarantined.

Bill Brewster:
The panic has subsided, nobody wants to stay anymore.

Jake Taylor:
Makes sense.

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