In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- Value and the Market
- Decision Making: Iterating
-
Focusing On The Market Can Be A Mistake If It Impacts The Way That You Run The Portfolio
- Small Steps to Accuracy: Incremental Updaters are Better Forecasters
- Nothing Changes Sentiment Like Price
- What Impact Will Q1 And Q2 Earnings Have On Long Term Investments?
- Michael Burry On Twitter
- Magical Thinking On Wall Street
- Buffett Selling Airlines
- What Odds Would You Assign To A New High From Here In 2020
- Do Some CEO’s Deserve To Lose Everything
- Principal Agent
- The Numbers That Come Out In July Could Be Mind-boggling
- There’s A Ticking Clock On A Lot Of Businesses
- This Is A Huge Opportunity If You’re A Small Business
References In This Episode:
Small Steps to Accuracy: Incremental Updaters are Better Forecasters (Pavel D. Atanasov)
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
Tobias Carlisle:
April 7th, it’s 10:30 a.m. Pacific, 1:30 p.m. Eastern just so the folks at home know. If you want to listen to this live you can. Just go to the Aquarius Podcast YouTube channel. Subscribe and you’ll get a notification telling you that when we go live.
Bill Brewster:
What are we? We’re 2% up on the day. Let’s check Royal Caribbean up 20%. Wait, wait, I do this for a reason. American Airlines up 17%. And Delta’s up five, so I guess that the lower quality names are ripping a little more than the higher quality ones. I don’t know. Maybe that’s too small of a sample. Three is not statistically significant.
Bill Brewster:
But regardless, welcome to Value After Hours. I’m one of the hosts, Bill Brewster, with my co-hosts Jake Taylor and Toby Carlisle. Jake, what are you going to be talking about today?
Jake Taylor:
I’m going to do a little segment on a research paper that just came out about decision making that might help us all during times when there’s a lot of information flow.
Bill Brewster:
All right, and Toby, what are you going to talk about?
Tobias Carlisle:
I’ve spent the last few weeks talking a little bit about the market, not really what I actually do when I’m running the portfolio, so I thought I’d just talk about why focusing on the market can be a mistake if it impacts the way that you run the portfolio.
Bill Brewster:
All right. And I am going to be focusing on the market today.
Tobias Carlisle:
Sorry, mate, I set you up for that one.
Bill Brewster:
It’s all good. We’ll talk about that right after this, but that I mean right now.
Tobias Carlisle:
So we’ve got Hawaii, Singapore and San Diego in the house.
Bill Brewster:
Very global. Thank you, thank you. Shout out to the 10. Let’s start this off right. So I’ll start with just sort of what’s been going on. I might as well start with a mail bag question, since it’s a perfect dove tail to my segment. The mail bag question says, “The market is at Spring 2019 prices. It seems stocks are reacting to the health and stimulus news more than realistic forward fundamentals. Many businesses may close down permanently. New hiring and business expansions won’t just pick up where they left off later this year. Every operator I know will be more cautious next year than if coronavirus hadn’t happened. Is the rally getting ahead of the fundamentals?”
Bill Brewster:
Obviously when you see price action like this, both down and up, right, I guess the best way that I know how to frame what I’ve seen in the market over the last three weeks is emotionally, it has been way more of a whipsaw than it has mentally. I’m still trying to square what I think is actually priced in here with what I perceive reality to be. I guess I just have a couple talking points, and then maybe we can just discuss some of this.
Bill Brewster:
So today, Kudlow came out and he said that the economy’s going to open up again, right, but it’s going to be different. And Scott Gottlieb had said something about an 80% economy or whatever the other day. I think about the way the operating leverage works, I mean, that last 20% is where a lot of your profit comes from.
Tobias Carlisle:
Yeah, good point.
Bill Brewster:
So 80% is almost structurally unprofitable for many businesses. Goldman, I was reading through their view of Boeing today, and I think that this is a slightly different comment because they were saying that planes are going to be motivated to fly. That doesn’t mean they’re going to be full. Your load factor and how much you fly are sort of separate questions.
Tobias Carlisle:
Why are they motivated to fly?
Bill Brewster:
I guess because they need the revenue in the door, so they’re going to try to pick up as many legs as they can profitably. I guess that fundamentally the numbers are just so big and hard to quantify here that it’s just very hard to get my head around what we’re actually looking at a couple years from now, and how quickly that all happens or a recovery would happen.
Bill Brewster:
I guess in short, if we come up with some sort of treatment, this is almost undeniably a great buying opportunity. We don’t have a treatment for SARS or MERS. I don’t know what the world looks like. It feels very, very hard right now I guess is the best way to square the circle. So that’s most of my comments. I don’t have a lot to say, but it’s been confusing and confounding.
Tobias Carlisle:
Yeah, it has. I couldn’t agree more. I think that before the bounce we would have expected in a normal bear market to see a number of rallies, and I think that I have said previously that the mistake, to the extent that it’s a mistake, to the extent that it impact anything that any of us have made, I looked at 2011, 2016, 2018, as potential 2002 or 2007 as some sort of smaller bear markets that are almost just technically bear markets, like they hit the 20% and bounced back as opposed to a mega-bear, which is 2000, 2002, or 2007, 2009.
Tobias Carlisle:
I still think that this is probably more likely to be one of the bigger ones, even though we’re bouncing here just for the reason that we haven’t seen any of the filings come in yet. To me, it’s almost like magical thinking to think that we can just go back to what was already a very, very expensive market, just without ever having seen any filings, without seeing any damage.
Tobias Carlisle:
So now you come in with a whole lot of earnings that are going to look pretty ugly, and the market is rocketing to a new all-time high. To me, that seems hard to fathom. I always say you can’t distinguish a bottom from a bear market bounce until you’ve got a year, because you just don’t know. It’s just indistinguishable from anything else.
Tobias Carlisle:
And I don’t know, this doesn’t feel like one thing or the other, like I have no feeling one way or the other, I just sort of think it’s hard to imagine how we only go down a regular bear, like a little bear, and then bounce like this. It’s like the… I’m starting to sound like Goldilocks, aren’t I?
Jake Taylor:
Baby bear.
Tobias Carlisle:
It’s just rambling at this stage. It doesn’t really impact the way that I invest. We’re all just speculating here about what we’re looking at, but it seems hard to imagine we’re back to where we were spring 2019 without seeing any filing. It just seems hard for me to believe that.
Bill Brewster:
Jake, do you want to… Do you have thoughts?
Jake Taylor:
A little bit. I don’t have anything… No one really knows the answers to these things obviously, so it’s just kind of fun to speculate. But I have been doing some research on networks, like the math of networks and also how it relates to biology. Anytime you get interconnected systems that are very interconnected, and you introduce shocks into them, you have no idea how it propagates throughout the entire network, and this is one is those kind of shocks. It skewers along some really interesting fault lines. Some businesses are obviously benefited, others are hugely impacted in a negative way.
Jake Taylor:
I don’t get the sense that we understand the second, third, fourth order effects of all these things, especially the economic impact if we continue to be shutdown like we are. All these things are going against a time. That’s a part of it too, is that the leverage levels coming into this were so high, especially the corporate level. That means that there’s a ticking clock on a lot of these businesses, and unless we can somehow put more sand in the top of the hourglass through the government on [crosstalk 00:08:49].
Tobias Carlisle:
More sand in the gears.
Jake Taylor:
Well, that becomes sand in the gears later, like more debt, more everything. I don’t know. I find very interesting is how quick we have been on both sides of the aisle to just completely abandon freedom and responsibility for a quick grab of, “Hey, government, we need everything out of you right now.” There’s nobody talking about how there’s any kind of overreach at this point, or very rarely at least in the circles I’m seeing.
Jake Taylor:
I remember 2008 and talking about TARP. It was very contentious, like especially the amounts. There was a lot of debate about how much was the right amount. Obviously they’re just pulling numbers out of their ass to come up with 750 billion or whatever it was. But there’s no arguments now. The only real argument is, “This is not enough.” That’s the only thing that anyone ever says. Two trillion, not enough.
Tobias Carlisle:
Yeah.
Bill Brewster:
The reason is Republicans have control. I say that as a registered Republican.
Tobias Carlisle:
Both sides are saying it.
Bill Brewster:
Yeah, I know, but the thing is when Obama was trying to spend, there was no incentive to give him… You could both made a principled argument not to spend, and curtail his economy a little bit by saying, “No, no, no, don’t spend.” Now, when you have the power it’s much easier to be like, “Oh, we got to spend,” because you want to keep the power.
Bill Brewster:
Like I said, I’m a registered Republican, but I think ignoring that dynamic, like if Biden gets in, which I think a real risk that’s not priced in is if Biden gets in, I think that there’s a real strong probability that Republicans refined their financial, “We can’t overspend out means grounding,” and then you could have some problems with some of the stimulus that’s on to come, that stimmy, that everybody wants.
Tobias Carlisle:
I got a good question up on the screen. “How does the entire world pull away from this without doing what Japan did for the last 30 years?” Do you think that’s a fair analog?
Bill Brewster:
So I guess I don’t really know what the question is, but I think that what they’re saying is there was so much debt on Japan that it sort of held back growth [crosstalk 00:11:13].
Tobias Carlisle:
Very expensive market. Market collapses. Just this ongoing QE now for 30 years. Market’s never regained those heights. It’s been a pretty good market for value, which I’ll come to in a little bit. BHA owns 75%. If this is wrong, feel free to jump into the comments and tell me, but my understanding is that the BHA owns about 75% of the Japanese stock market now through ETFs. Massive amounts of QE, just ongoing QE.
Bill Brewster:
I don’t know. I’m not sure that that analog is particularly good. I personally think that the U.S. is a little bit more vibrant from an entrepreneurial’s perspective, and that’s really what is going to get us out of this is entrepreneurs finding ways to solve these new problems that have been thrown up. I’m actually incredibly bullish on small business over a longer term.
Bill Brewster:
This is the opportunity, this is the meteor that kills the dinosaurs, and now the nimble, small creatures have a completely new ecosystem to find ways to survive. And if they’re agile. That’s the big thing. They have to be quick to figure out how to solve all of our problems under these new constraint sets. But they’ll be new, evolutionarily stable strategies that come out that evolve. This is a huge opportunity if you’re a small business person.
Bill Brewster:
I know that it looks scary, but being willing to move, I think, is your biggest advantage.
Tobias Carlisle:
Value stocks gigs says the demographics were different in Japan declining birth rates, which depressed inflation and interest rates. Demographics are different worldwide.
Bill Brewster:
Yeah, that’s fair.
Jake Taylor:
By Africa, is that the answer then?
Bill Brewster:
Now with coronavirus going, I don’t know.
Tobias Carlisle:
There’s also an argument that puts these pandemics that you get higher real wages, that everybody seems to do better. I don’t fully understand that because a whole bunch of the population’s missing.
Bill Brewster:
It could be.
Tobias Carlisle:
So, mate, what about this? What about the fact that we’ve actually had by virtue of the virus or the government shutdown is this massive shock to the economy? If you just ignore the money for a moment and you look at what’s actually happened underneath, businesses just aren’t doing business. I’m sure all of you… Like I paid my credit card bill. It was down 25% from the month before. I’m sure that all of you guys are in the same sort of boat. How does just putting a whole lot of money into the system make up for the fact that business is really not selling. There’s no business going on, or there’s not much business going on, or less business going on?
Bill Brewster:
Well, I don’t think it does make up. I think what it prevents is a deflationary bust. I mean, if you don’t extend the liquidity right now, and all the equity needs to… And it’s not all, right? Let’s call it 20% of the businesses that are actually impacted. I mean, there’s a lot of the economy that’s less impacted. I don’t think anyone is completely not impacted.
Bill Brewster:
But if you have all that equity have to recap itself, I mean, you follow those, your real estate values go down because people have less money. The pensions become more underfunded. I mean, this is propping the system up, because without this in my mind, the whole system collapses. I think this is truly systemic risk.
Bill Brewster:
Glad your notes pay zero for that. I mean, this is what risk-free actually looks like, which is a-
Tobias Carlisle:
Return-free.
Jake Taylor:
Return-free risk.
Bill Brewster:
Yeah. Like the world is not risk-free ever.
Jake Taylor:
I think a lot of it is a psychology play, I think, to make you not reevaluate what’s the appropriate price of a lot of things, a lot of assets. And whether that is a logical conclusion in that, “Shit, inflation is coming because of all this money printing. I need to just keep these assets,” and the price is right now because it’s going to get inflated even higher.
Jake Taylor:
You don’t want everyone to go at the same time like, “Oh, this cap rate on this apartment complex is ridiculous.” No one should have been paying this the whole time. If everyone wakes up at the same time, the pricing changes dramatically, and then you have some real systemic cascading that on central bank can control. So I think it’s sort of a bandaid type of thing, really more a bandaid to go over your eyes to keep you from looking around.
Bill Brewster:
One point that I did want to make before I finish this portion is I do think if you put in a DCF, like just build the really simple 25-year DCF, a 20% reduction in today’s prices, you can get some pretty Draconian assumptions in some of the years within the DCF. Like I did one and I got a 23% reduction in price or whatever. It doesn’t mean anything. It was just a fun math problem for me.
Jake Taylor:
What does that come from, Bill, just from nuking these first two years in your model?
Bill Brewster:
Yeah, I mean, it was even the first four to five.
Jake Taylor:
Okay.
Bill Brewster:
But I also did… I didn’t just nuke year two and then go, “Okay, well now we grow 3% from here,” right? I mean, I did have some rebound in the growth rate to get back. So I do think doing some basic math helps contextualize around what 20% really means. But the perception of risk in my head has gone up so much. I don’t know that actual risk, it’s almost like in physics where you have potential energy and kinetic energy, I think maybe most of the time we’re just walking through the world ignoring potential risk, and then risk happens and we’re like, “Oh, shit, this is really risky,” but it’s just we disregarded a lot of the risk for a lot of the time. I don’t know, it’s just things I’ve been playing with over the last month.
Tobias Carlisle:
That’s like the multiple paths. You only get to one live one path, but at any stage there’s all these potentialities of other things that you can do. And being a good investor is preparing for every single one of those paths, and then whichever one you take, you either make sure you make it through or you make sure you do very well, with the focus being that the downside is going to make it through.
Bill Brewster:
Yeah. Well that’s almost like taking value investing to portfolio management, right? You try to figure out what scenarios are possible within your ability, and then manage how you’re priced along the downside risk versus your upside capture. I guess that’s sort of at the core of it what we all try to do.
Tobias Carlisle:
What’s your discount in that, Bill? The folks want to know.
Jake Taylor:
Negative 10.
Bill Brewster:
No, I think I just hit it with a 10% rate. I just wanted to get a sense of what the math was.
Jake Taylor:
10%? How are you buying anything then? Everything’s got to look crazy overpriced if you’re putting in a 10% rate.
Tobias Carlisle:
Yeah, I’ve got some stuff.
Jake Taylor:
Yeah, well you do.
Bill Brewster:
You know, a lot of it rests on your terminal value.
Jake Taylor:
But that’s put a 10% on that, and now your value’s going to be pretty small, right?
Bill Brewster:
I can send you the spreadsheet if you’d like to see it.
Focusing On The Market Can Be A Mistake If It Impacts The Way That You Run The Portfolio
Tobias Carlisle:
That’s a good point for a segue. I think it’s good to talk about what the market does, because I do think you at least understand, you need to contextualize where you are a little bit. You need to understand. It’s hard when you look at the portfolio and it’s down 30% and you’re just such a monk about this whole thing that you’re completely ignoring the fact that the market’s down 30% as well.
Tobias Carlisle:
That’s clearly you haven’t made a huge mistake. There’s something bigger going on. In that context you go and have a look at what the market’s doing. You might feel a little bit better about what you’re doing. But I think you need to be particularly careful as a value investor because… And just looking at the last 20 years for example.
Tobias Carlisle:
So in 2000, if you’re a value guy and you’re looking at CAPE, you would have said, “Oh, my God, the market’s so overvalued. I don’t want to be in the market at all,” and you would have missed what was a generational opportunity to be a value investor. To make just a long-only value investor was up in 2001, up in 2002, while the market was falling over.
Jake Taylor:
That dispersion, baby.
Tobias Carlisle:
Yeah, exactly right. Well, you have a great article on that, which we’ll link to on the show notes when we do this. That opportunity didn’t… And now that we’re going to talk about that opportunity didn’t exist in 2007 because it was one of those things where it was such a good run from 2000 to 2007. Value actually got pretty expensive, and value was almost sort of generationally expensive at that point. A lot of that is why value’s had such a rough run since 2007, ‘8, ‘9. There was a bounce out of the bottom in 2009, but then values had a rough run over the last decade plus.
Tobias Carlisle:
But the important point through that 2007, 2009 period was November 2008 value basically started working, and you had four months where value was going ahead while the market was still falling over. Value rocketed again when the market actually started going up. It’s kind of interesting to watch. It’s one of the relationships that I watch and I’ve spoken at Chris Cole, he discusses he watches it as well.
Tobias Carlisle:
So I often think how real is this bounce, and I’ll go and look at a variety of different value investors and value indexes and strategies. So the last few days, value’s been participating very strongly in this bounce, and the market has been sort of less so. Then I look at things like FANG-M, and FANG-M has been a little bit flat to sort of not participating as much, which is kind of interesting, which makes me think that we may be starting to see that regime change to a slightly more value regime.
Tobias Carlisle:
I don’t know what that necessarily means we’ve bottomed or anything like that. It’s possible that it’s just value’s the accelerator, and value kind of takes off and then perhaps it sells off first as well, but it’s one of the things I often think about. Even though I have talked about the market quite a bit recently, partly because I want some bragging rights about not calling the bottom, even though I have see a lot of cats going to product. I’m not going to call it yet. I’ll call it in a year. I’ll call it in a year and two months or something like that.
Bill Brewster:
There’s a 40% chance we bottom.
Tobias Carlisle:
40% change, there we go.
Jake Taylor:
Exactly.
***
What Impact Will Q1 And Q2 Earnings Have On Long Term Investments?
Bill Brewster:
So the reason that I started this show with Royal Caribbean and American and Delta and stuff was I was trying to get a sense of what has been sold really, really hard, and how it’s reacting today. I think modest proposal had a good tweet thread that was, I guess, paraphrasing what Gavin Baker had said to Patrick O’Shaughnessy. I didn’t listen to that interview yet, but basically in the beginning of a market you get rewarded for doing what’s obvious. And then in the end of a bear market, I guess Gavin said something about like, “You get rewarded for doing what’s uncomfortable.”
Bill Brewster:
The thing that’s been really tough for me is I don’t run a lot of traditional value screens, but I do watch what’s been punished. Stuff like casinos… I mean, Eldorado Resorts is one that I follow a lot. I want to buy that thing, but I just think the risk of we open up, everybody goes to the casino, coronavirus spreads like crazy, we shut down again. I think is just a very, very real risk right now based on what we’ve seen, and given that Singapore is re-shutting down.
Bill Brewster:
So the probability to me that people are really eager to go on cruise lines again-
Tobias Carlisle:
There are people still going.
Bill Brewster:
I know. And 80% of people just re-book their reservation. I don’t doubt that people are going to make a ton of money in those stocks when the time is correct. I am very, very worried that the time is early right now. And even in four months, I could see a scenario where everything’s open, the first cruise ship leaves, and then like 17 days later there’s some story about how they’re all stuck at sea again, and people are dying on a ship. I’m not comfortable with that risk being removed from those entities.
Bill Brewster:
So I do think that they’re going to massively outperform on the other side of this. I just don’t know that it’s risk I can get myself to hold.
Jake Taylor:
I think barring some miracle medical breakthrough that happens somehow, and even then, the distribution of that miracle is another miracle that’s required to get it to everybody in an expedient manner. But aside from that, I don’t know how you can be that optimistic without seeing some of the numbers in at least Q1, and especially probably Q2.
Jake Taylor:
I mean, July could be, the numbers that come out in July could be absolutely mindboggling, and way worse than anyone expects. To go back to your operational leverage idea, you take away a ton of revenue from some of these companies, and it could be mindbogglingly bad earnings announcements. I don’t know, it’s hard to say much now. We’re all just speculating until we actually see some numbers, right?
Bill Brewster:
Yeah, the only pushback that I would give is that’s only one quarter, right, so unless that quarter results in a permanent impairment of the balance sheet, which it’s obviously going to relative to what it was in February, but one quarter just isn’t that much of a terminal value. It’s just not that meaningful over a 20-year time horizon.
Bill Brewster:
So I think this is when A) people that are truly long-term actually do have an advantage, and then you’ve got to be really right on the thing being able to survive. Yeah, that’s right. That’s why I can’t hold the cruise lines and stuff right now. That’s why I couldn’t hold airlines. I’m just not convinced that at an 80% economy and call it 80% load factors, I mean, what, you’re in between 60 and 70% of your normal operating capacity, you’re not making money.
Jake Taylor:
That’s 100% of your profit.
Bill Brewster:
It’s probably more than that. I don’t know that you’re running, and yeah, they got the credit card relationships, I get it, but people are spending less. I don’t know, these are tough right now.
Tobias Carlisle:
So I’ve got a question here. This is calling out Mike Green’s theory, “No one’s saying it but maybe the stock market’s going up because of 401(k) contributions and automated buying of ETFs.” What do you think about that?
Jake Taylor:
I don’t know. Maybe.
Bill Brewster:
I think it’s pathetic that I was afraid to say eight times eight is 64 in my head because we’re on a podcast, but I just double checked on a calculator, I was right. I was like, “It’s 64. Just say it.” Then I was like, “But if I’m wrong everyone’s going to think I’m an idiot.”
Bill Brewster:
Anyway, I don’t know about Mike Green’s theory. I have no idea what’s going on right now with the market. The thing that’s tough about it is why would Mike Green’s theory be valid when the market’s puking like 32% in three weeks, and also be valid now? I haven’t seen the numbers. I don’t know him from Adam. He would be the one to ask, but I don’t think that that’s the incremental part of demand that’s driving the market up. That’s hard for me to understand.
Jake Taylor:
How about, let’s frame it this way: What odds would you assign to a new high being made from here in 2020?
Bill Brewster:
In 2020?
Jake Taylor:
Yeah.
Bill Brewster:
Like 17%.
Jake Taylor:
Toby?
Bill Brewster:
I can see that one out of seven times.
Tobias Carlisle:
I’ll take one out of six times just to slightly undercut Bill and I’ll have all the under.
Jake Taylor:
So I got to take one cut below you.
Tobias Carlisle:
You can take the over.
Jake Taylor:
Yeah.
Tobias Carlisle:
Oh, don’t take the under. I should have got yours first. Smart.
Jake Taylor:
One dollar.
Tobias Carlisle:
That’s smart.
Bill Brewster:
I only took 15% anyway. Once you said that I was like, “Oh, I think that’s…” Yeah, my math is pretty crappy today. My apologies to everybody.
Tobias Carlisle:
So I’m just thinking through this now, but what if the reason that value bounces so hard is just because value tends to be filled up with the junkier companies? It’s stuff that’s at real risk of going to zero. And maybe this bounce is not so much a value bounce, it’s just stuff that was down the most bounce.
Bill Brewster:
That’s what I think it is. I mean, I think one of the reasons you don’t see FANG-M participate in the rally is they just didn’t sell off very much.
Tobias Carlisle:
And they’re still relatively expensive. Oh, now you get hate mail for that.
Bill Brewster:
How dare you. Yeah, I think that’s what’s going on. If you just sort of look at some of the big names that are rebounding. They’ve been punished.
Tobias Carlisle:
There’s a comment here that the 401(k) and ETF buying’s pretty insignificant. Sorry it slipped past. I missed it.
Bill Brewster:
It’s all good. Thank you for the comment. An important 10% of our community right there.
Tobias Carlisle:
Take two.
Bill Brewster:
You know, Hilton-
Tobias Carlisle:
Sorry.
Bill Brewster:
No, I was just going to say Hilton, that’s one I may have missed, but they got destroyed here for a while. I was off 50%. That should bounce at some point, you’d think.
***
Tobias Carlisle:
You know what we haven’t discussed that we should in this context is Buffett selling the airlines.
Bill Brewster:
Oh, the Buff-dog.
Tobias Carlisle:
Who wants to take a shot at that?
Bill Brewster:
The only good theory that I heard that I hadn’t thought of is that maybe there is a provision in the bailout package that doesn’t allow him to own over 10% of… It would preclude Delta from getting relief. I did not see that provision. I don’t know. I honestly think he just changed his mind because the facts changed.
Tobias Carlisle:
The nature of the selloff though was interesting, right, because he just dove out of those things to get under 9.9 for the filing, and then somebody said he doesn’t then have to file what he’s done with it until, could have been July, possibly even next year. He’s got this very long period to then file, so now he can kind of sell down at his leisure.
Tobias Carlisle:
And the other possibility is that he’s selling down to get under 10% so therefore he can now take one over in its entirety.
Bill Brewster:
Everybody loves to think he’s going to take one over. They’ve been so consistent saying they don’t want to own one outright.
Tobias Carlisle:
Yeah. So that makes the first one more likely, doesn’t it?
Bill Brewster:
I mean, maybe. I’ve always thought they’d buy the whole industry, but not just one. Right, like if you could present him with a deal to do Southwest, United… I mean, if he could have a monopoly on air travel, I think he’d buy it in a second. It’s just, he can’t.
Tobias Carlisle:
Don’t you achieve it by earning the basket?
Bill Brewster:
No, because he doesn’t pull all the strings, right? Once you actually own everything, then you can say to American, “Stop being a moron,” and don’t do a levered buyback strategy here.
Jake Taylor:
Above my pay grade. I think you’re better off not listening generally to what he says, and just observing more what he does.
Tobias Carlisle:
What’s he doing? Well, that’s what we’re trying to figure out, right.
Jake Taylor:
Yeah, I don’t know. I don’t think we have enough data to really say.
Bill Brewster:
I did a very back of the envelope thing yesterday, because although I’ve taken a loss on them, I can’t fully walk away from airlines, which is probably part of the issue that I have. I thought that Delta was pretty close to 90 cent, dollar.
Jake Taylor:
Is this like stalking your ex on Instagram?
Bill Brewster:
A little bit, yeah. But it’s so much less anti-fragile now. I mean, God forbid something happens next year. Part of the whole thesis is they got the balance sheet to make it through. They don’t have that anymore. They don’t have a ton of liquidity. They need government money, so I think if the world gets turned on, and people can start flying with fuel where it is, they’re going to print money. I mean, look at what they did in ’15 and ’16, but they have a lot of debt they’ve got to pay down.
Bill Brewster:
You can’t get dividends and you can’t get repurchases until they pay this government money back. I don’t know. I think the facts have changed a lot.
Tobias Carlisle:
Going to be hard to do buybacks, the optics of buybacks for a while, I think.
Bill Brewster:
Yeah.
Jake Taylor:
I’m disappointed that the interest rates aren’t more punitive on this free money.
Bill Brewster:
Dude, you’re trying to hammer these people when they’re down.
Jake Taylor:
I want them to actually take it if they need it, and I don’t want all the other ones who are just like, “Oh, here’s a free check, I’m going to grab that.” Capital should be unlimited, but very expensive.
Tobias Carlisle:
I mean, that’s the way in past crises, that’s been what’s happens, right? Because there are guys who are guys who are prepared to go in there and lend that are in the debt or in position, bankruptcy, leave it, high-yield guys who are… But their money comes at a price, and so they get equity returns with debt downside.
Jake Taylor:
Wait, are you saying that capitalism already has mechanisms in place to solve some of these problems?
Tobias Carlisle:
Yeah.
Jake Taylor:
Okay.
Bill Brewster:
The difference is in this scenario, capitalism is not allowed to work because the government has shut it down for a public health reason. That is a different set of circumstances than some moral hazard you were over-indebted and ran your business poorly.
Tobias Carlisle:
I agree with both things that you just said, and now I think that… The businesses have been shut down by the government, so fair enough they should be helped a little bit by the government in that circumstance, but many of them have gone in, I mean, prior to this I would have said, “Gee, there are a lot of really ugly balance sheets out there, and they’re doing buybacks with borrowed money at very high prices just to goose the last little bit out.”
Tobias Carlisle:
Then you see guys like the Boeing guys. I posted the return on invested capital line of Boeing a few podcasts ago. You know, they spent 20 years doing 15%, and then they’ve spent the last five doing some 80% kind of bananas number, which you only get by shenanigans. I don’t know exactly how they did it, but just shenanigans. Either accounting shenanigans or just not spending money on CapEx, just doing lots of silly things.
Tobias Carlisle:
And then they’ve had one incident, which is the plane isn’t working as well as it should, and now they’ve walked into a second one.
Jake Taylor:
You mean falling out of the sky?
Tobias Carlisle:
Is that bad? Should planes fall out… I don’t know how it works. I’m not an engineer.
Jake Taylor:
This plane is not working as designed, as in it’s falling out of the sky.
Tobias Carlisle:
From what I understand, it was trying to put a bigger engine on a smaller plane, which made it out of balance, which means you have to come up with a software solution, which is not uncommon. I’ve read that Skunk Works thing where the guy talks about… They make these planes, basically they’re just rocks that tumble through the sky without software. That’s a fun thought to jump in and fly on one of those things.
Jake Taylor:
Sorry, anyway. So what’s the takeaway then? Should we be clawbacks or something for these-
Bill Brewster:
Yes, that CEO needs to lose everything. That guy sucks and he’s part of what’s wrong with America and limited liability. But, if you start to go and you say to Boeing, “You guys are going bankrupt now.” They are one of the bigger union… I mean, if you care about labor, labor doesn’t usually do that well in a bankruptcy. I mean, I don’t know, there’s competing interests. Boeing is very annoying to me.
Bill Brewster:
Restoration Hardware, something else that you guys can all do a drinking game to the amount of times that I mention it. That guy has put at risk, I think he has a legitimate shot at creating an eight to $10 billion company, like very legitimate. I think he also has introduced the possibility of a zero, because he has traded owned real estate for operating leases in search for return on investment capital, and he’s levered up to buy-in shares to burn the shorts. Which means he may be a legitimate retial genius that has completely screwed himself over financial engineering. That’s a shame, and I don’t have much sympathy for that guy.
Tobias Carlisle:
That’s one of my objections to, pursuing growth at the expense of being a little bit more conservative with your balance sheet. That’s the theme that I return to over and over again that annoys me, and I don’t pay up for it. That’s why I just kind of… It introduces this level of risk into the business that’s not otherwise there.
Bill Brewster:
Yeah. Matt Brice. Shout out to Matt if you’re one of the 10 from The Sova Group. He pushed back on me a little bit on RH. I was like, “Yeah, you really do have a point there,” which is frustrating to admit, but also true.
Tobias Carlisle:
Just one thing. I don’t think it’s a problem with capitalism. That’s a problem with principal agent. It’s an ongoing problem that’s been around forever and ever and ever, and I’ve written about it in several, at least in Deep Value, I get into it a little bit in Deep Value. Can’t get too much into it, because it’s a boring legal theory, but it has very real implications. Building means is the original kind of discussion of all of this. There are socialists, they were sort of again completely, but principal agent is dealt with by a board and having strong shareholders. You don’t necessarily need a lot of legislation regulation in there provided that there is a downside for bad actors.
Bill Brewster:
Yeah. Well, and I am a card-carrying capitalist like Buffett, but limited liability presents challenges. I think the benefits far exceed the cost, but you do see when these CEOs lever up a company, get a ton of money out, and then they hide behind limited liability or the losses are socialized, that is a very frustrating thing to watch over and over again.
Tobias Carlisle:
You want to re-litigate Solomon and Solomon from, what is that, 1820 or something like that? Did you study that in law school?
Bill Brewster:
I’m sure I did. I’ve just [crosstalk 00:39:01] out of my mind.
Tobias Carlisle:
Original limited liability. I’m probably wrong on those details. Somebody let me know if they not. Jake, we’re going to miss your topic. We’ve got 20 minutes and we’ve got to do questions.
Jake Taylor:
Okay.
Bill Brewster:
Oh, my gosh, hurry up. Talk fast.
Jake Taylor:
Billy, you hogged all the time with your-
Tobias Carlisle:
I think that was my topic honestly.
Small Steps to Accuracy: Incremental Updaters are Better Forecasters
Jake Taylor:
So this research paper came out this week. The author is, and I’m probably going to say this wrong, but it’s Pavel Atanasov. Atanasov, something like that. I apologize Pavel.
Jake Taylor:
Exactly. So he’s a PhD researcher in decision making science, and the name of the article or the research paper is Small Steps to Accuracy.
Bill Brewster:
Sorry.
Jake Taylor:
Incremental belief updates are better forecasters. So they took these four years’ worth of forecasting data where people are making probabilistic predictions in these prediction tournaments. And 400,000 observations, so it’s reasonably robust, but what they found was that the more accurate predictors made frequent small updates to their predictions, and the low-skill predictors, they confirmed their initial hypothesis and made large and frequent revisions to their. So they didn’t make little adjustments to what they thought the world was going to look like, it was like all or nothing in big swings.
Jake Taylor:
So the best quote in the whole thing was, “The best forecaster seemingly experienced the prediction task as a long sequence of slight surprise, rather than a short string of hard collisions with reality.” So all of us right now are dealing with a lot of what feels like reality changing. Perhaps we need to increase our dampening of prediction changes and maybe not move so quickly in one way or the other and stay a little bit more true to your original thesis, and slowly update rather than bounce off the guard rails, which I feel like I’ve been doing that more than I should be at this point.
Tobias Carlisle:
That’s great, isn’t it? That’s like a little bit of Bayesian updating to your original thesis, and the more little iterative moves you make, the closer you get to reality without overshooting. That’s so funny. I saw a tweet today, somebody must have read something like that and they said, “The better investors through these periods are just making incremental changes to their portfolios rather than tossing everything out and starting again from the very bottom.” It’s an interesting… I think it’s a great approach.
Bill Brewster:
I think that’s interesting. It sort of supports the idea that maybe the market is somewhat fairly valued here, right? I mean, maybe over the long term this is just a smaller change than feels like it right now. It’s very interesting.
***
Tobias Carlisle:
Do you feel, sorry to hijack it and go back to this market thing again, but do you feel like there’s been a change or do you feel like we’ve had kind of like a month maybe of disruption, and now because the market’s up it feels like everything’s back to normal?
Bill Brewster:
Yeah, price certainly drives feeling, and narrative for that matter.
Jake Taylor:
For sure. Nothing changes sentiment like price.
Tobias Carlisle:
Yeah.
Bill Brewster:
I think right now we’re mostly trading on news, and I guess the data would be the deaths and whatnot like that. I do think that the small predictions is really important to keep in mind. You hear people saying, “Oh, what whole scale changes to society will come out of this?” I don’t know. Neither do you. This is nice Twitter click bait, but nobody actually knows the answer to this crap.
Tobias Carlisle:
What’s everybody think about work from home? That’s my big kind of… I think that that’s going to be just more broadly adopted, or it’s going to accelerate the adoption of work from home.
Jake Taylor:
Yeah, I think it’s be more of a gradualism as well, like maybe one day a week or something you get to work from home instead of having to come in. That was already happening.
Tobias Carlisle:
Yeah, I think a lot of people were already at that level.
Jake Taylor:
Speeds up a little bit, but how would we even know really?
Bill Brewster:
I think where it could change is an industry like banking that so regulated and sort of like old, for lack of a better term. Some of those types of industries are maybe forced into a change that they otherwise wouldn’t be, but I don’t see a scenario where people just don’t come into the bank anymore. I mean, if you’re at J.P. Morgan you still need to go in for certain meetings, so I don’t know.
Bill Brewster:
I think on the margin work from home probably increases, but-
Tobias Carlisle:
So far I’ve got two, “Work from home sucks.” That’s not happening anytime soon.
Bill Brewster:
Yeah, that’s the thing. I really miss people. Not being around people sucks. I don’t know that I’m going to go out to a concert right away-
Jake Taylor:
Is your family not people?
Bill Brewster:
I mean, they’re fine. I know them very well at this stage.
Tobias Carlisle:
Yeah.
Bill Brewster:
I wouldn’t go to a concert because people are sweating and very bunched in, but I would be open to going to a restaurant [crosstalk 00:44:26].
Tobias Carlisle:
Straight into the mosh pit, mate?
Bill Brewster:
Yeah, well, you’re more brave than I am.
Jake Taylor:
Get some.
Tobias Carlisle:
Go back to a punk concert and get in there and do that punching and kicking and headbanging. Get the sweat on you in your mouth. Awesome.
Jake Taylor:
That would feel kind of good though, right? There’d be something cathartic about it.
Bill Brewster:
You could tell Boris Johnson hello.
Jake Taylor:
Ouch. Too soon, Bill.
Bill Brewster:
Is it? Not with that guy. That guy deserves it.
Tobias Carlisle:
It’s got 15 minutes. Throw some questions in. I’ve got a banger already up on the screen. This is a Bill question probably. So I’ve got this podcast set at the moment with Stephen Clapham. He runs this thing called Behind the Balance Sheet. He’s got all of these little tricks for uncovering fraud in businesses. Awesome chatting to him.
Tobias Carlisle:
One of the tricks that he had, and I put this up on the Twitter machine today was when you see very fat margins, he said, “When the margins are way out of line with the peers, that’s a telltale sign, and the reason is it’s so much easier to fudge profits than it is to fudge revenues.” There’s a record of revenues. What were you saying there, moat?
Jake Taylor:
Yeah.
Tobias Carlisle:
I think I put that term. I said, “That’s often a sign. That’s something that people look for too,” but then he said then he did get and he looked for other in this year as well. So the question is, “The podcast on fraud sounded a lot like TDG, margins way higher than peers, tons of addbacks and debt. Narrative driven story, which Howley pushes Berkshire of aviation aftermarket.”
Bill Brewster:
You sound a lot like Citron in 2016. Next.
Tobias Carlisle:
No, go on. Have a go at it.
Bill Brewster:
No, I mean, look, they run a levered operation with their strategy is to go after niche parts. So there’s a reason people don’t like them. I don’t think they’re a fraud. That’s a big jump. But whether or not treating [crosstalk 00:46:25].
Jake Taylor:
What do you say to the argument that it’s a regulatory capture thing where they’re just basically jacking up the prices on stuff that the government has to buy and now we’re all paying for it?
Bill Brewster:
No, I mean, okay. That’s the world you live in, right, so the idea of, “Oh, we’re all paying for it.” Well, if nobody else is making it and the plane had to sit there for a long time, they incur costs that way also. I think that if you believe in capitalism, it is not impossible to replicate the regulatory capture. So if it’s that profitable and that extractioning, or whatever, you would think there would be somebody else that would copycat them.
Bill Brewster:
I think part of the issue is that their parts are so specific that it reduces the incentive to come in and do that, but because of that you get outside margins. I mean, I think that’s sort of the tension between the two arguments.
Jake Taylor:
So you would have been a fan of Valeant?
Bill Brewster:
Uh, no.
Tobias Carlisle:
Yeah, so how did you avoid Valeant in real time?
Bill Brewster:
I know nothing about pharmaceuticals. That’s it. That is game, set, match for me.
Jake Taylor:
How did I avoid it?
Tobias Carlisle:
Yeah.
Jake Taylor:
Eh, just kind of looked like a hedge fund hotel to me, not that interesting.
Tobias Carlisle:
Yeah. It’s too expensive for me.
Jake Taylor:
I’m hesitant for some of… Like, especially the very, very rapid acquires that are growing in organically that way. There’s so much, like the accounting decays pretty relatively too of more normal business and makes it hard to say how clean or dirty that business is. It just muddies the water any time you have a lot of acquisitions like that.
Tobias Carlisle:
That’s why you do it.
Jake Taylor:
Well, that’s fair.
Tobias Carlisle:
I mean, that’s why they do it.
Jake Taylor:
Yes.
Bill Brewster:
That is my one beef with TransDigm is they cite organic… Their organic growth number that they cite does not strip out, it’s like, “Okay, we made the acquisition this year,” and then next year it’s organic. That’s not really-
Jake Taylor:
It’s organ-ish.
Bill Brewster:
Yeah. Yes, it’s like a chick-a-duck. It’s not quite a chicken or a duck.
Tobias Carlisle:
When I was watching that F1 thing on Netflix-
Bill Brewster:
Drive to Survive.
Tobias Carlisle:
Drive to Survive. Yeah, it’s excellent. First season has this-
Bill Brewster:
What’s up Greg Mathee?
Tobias Carlisle:
First season has this entrepreneur. I don’t know anything about him really. The guy who runs the Force India things. When I saw him come onto that, I had this flashback to all these ’80s entrepreneurs, they called them entrepreneurs. Those finger things. They called them in Australia, they were just leverage buyout roll-up guys.
Tobias Carlisle:
It cured Australia of backing these things for a long time because all these guys blew up and they either ended up in jail or in not extradition treaty countries or dead. When I saw that guy-
Bill Brewster:
That’s not a great way to end up.
Tobias Carlisle:
When I saw that bloke being interviewed, and he said a few things when they asked him questions, I was like, “Ha ha. I’ve seen this before. I know everything about you without even knowing what you do,” because it’s just all smoke and mirrors. So when I saw, all due respect to Canadians, but I think if you like Australians, when I saw a Canadian roll up, massively expensive, I was like, “Yeah, just don’t touch that one with a 10-foot pole.”
Speaker 1:
Yeah.
Tobias Carlisle:
Here’s a question, “How do you value or buy a company right now without any idea what the earnings or the financial metrics are?”
Bill Brewster:
Well, I think you got to normalize it. Here’s what I would say is how can you buy a company looking at the next quarter’s earnings knowing that they’re not representative of what the company actually looks like? And also knowing that, I mean, how many standard deviations outside of normal are we actually right now when a company has zero revenues? So why would you be any more comfortable buying after the next financial print than now without looking at the last 20 years and trying to figure out how does this company perform.
Tobias Carlisle:
Yeah, so you’re saying no change really.
Bill Brewster:
Yeah, well it just feels easier to see the numbers to me, but I don’t know that… Like this quarter is not going to be representative of anything except for if the next pandemic comes what does this look like? I would look at ’09 for cycling in my head. Jake, I think you have a different view, right?
Jake Taylor:
No, I mean, I think in theory you’re very right. This is one or two quarters. If that’s all that it is shouldn’t impact valuation that much. My argument has been that it was already too expensive to begin with, and it’s not really gotten dramatically cheaper, and there’s been a lot of existential risk added that wasn’t there in December of 2019. It’s like not really priced in to me. So, I don’t know. It feels like it’s an under-reaction to maybe bigger problems. The price implications to me at this point.
Tobias Carlisle:
I just think it’s the same thing that we always do. There’s always some issue. You always got to go in and figure out whether you want to own it or not. I think that at a macro level the impact is going to be probably a little bit bigger than everybody’s anticipating at this stage. But I also think that we are a balloon looking for something sharp to pop ourselves on for quite a while and here it turned up in the form of coronavirus.
Tobias Carlisle:
But like I said last week, Ken Harvey had already come out, there are all of these signs out there that there was an issue. I just think for me, it’s really business as usual. Things get cheap and I buy them when they get cheap. I would never really think about the next quarter. I think it’s going to be hard for the whole market to kind of shake it off without even having a look at the numbers, but maybe everybody’s rational, everybody just discounts the next quarter year and looks out 30 years on the horizon. Seems unlikely, but maybe.
Bill Brewster:
I assure you that I’ve been trying to do that, and I also haven’t been rational the whole time. It’s been pretty scary at times. Also, sorry Greg Mathay for calling you Greg Mathee. I had billions in my head. My bad. I just want to make sure that we take care of all 10 listeners.
Tobias Carlisle:
Good question. Did you guys see the AQR paper where they looked at value investing and they looked at whether the fundamentals justify a level of valuation, and they say whatever valuation the company has beyond that, they call it speculation. Did you guys catch that paper?
Jake Taylor:
I saw a little something about it, but I didn’t read the original.
Tobias Carlisle:
Yeah, it’s the most recent value paper. It’s worth digging into for this method, which I think is kind of interesting. So I’ve got a question up from Kevin, “In a quick sample of about 40 S&P companies, the max percent of the valuation using AQR’s method in the next two years was 10%.” Kevin, was that the max percentage of speculation in the valuation that you’re talking about there? Which would seem to suggest that things are maybe… Like maybe they’re 10% too expensive.
Jake Taylor:
How do they come up with that fundamental number?
Tobias Carlisle:
That’s hard. I think I was looking at the next two years.
Jake Taylor:
Oh, and put a 15 multiple on a next two years’ earnings or something?
Tobias Carlisle:
Could have been something like that. I can’t remember the exact detail.
Bill Brewster:
I mean, the thing that’s really hard, and I analogize a lot of stock investing to real estate because it’s more tangible to me, but a high rise in downtown Chicago is going to trade at, I don’t even know now, but let’s call it a three cap. Something in Omaha in some suburb, like some rental house may be a 10 cap. Is that disparity, is that speculative? How are we defining it, because there is fundamentally… That three cap is never going to be a 10 cap if the world is normal, right? And if the world is abnormal, that 11 cap is no longer that. It’s probably a 20.
Bill Brewster:
So there are inherently spreads that assets trade at, and I just don’t know… I would need to read the paper to get a sense of how that balances that.
Tobias Carlisle:
Yeah, there’s a little bit of… Kevin says, “That’s the amount you’d lose if you zero out the next two years. Speculation puts a multiple on two-year-out earnings.” I thought it was a really interesting analysis that they did. I still don’t want to use it, but I thought it was very interesting. Maybe if I was a little bit more discretionary I would use it.
Bill Brewster:
I do like Cliff. I’m happy he’s back on Twitter. That’s been the best gift coronavirus has given.
Jake Taylor:
Did you guys see Bury got on Twitter?
Tobias Carlisle:
Yeah. You guys all seen Bury?
Bill Brewster:
Came out hot with-
Tobias Carlisle:
Came out swinging.
Bill Brewster:
And the shutdown tweets, which Mike, do your thing, but man, that’s not the way to ingratiate the audience.
Jake Taylor:
Hey, he has aspirators. That’s not a concern. He just calls it like he sees it.
Bill Brewster:
He’s also super long tailored brands and no one’s buying suits right now. Nobody blames him for talking his book. Oh, because he’s Burky.
Jake Taylor:
Yeah, if you get Christian Bale to play you, then you get to do whatever you want.
Bill Brewster:
Yeah, he’s long middle-of-the-mall retailer and a suit seller and you wonder why he wants to end the lockdown. Motivated reasoning.
Jake Taylor:
Now everybody’s talking their book in different ways. Don’t ever forget that.
Bill Brewster:
I know. Same goes for me.
Jake Taylor:
Me too.
Tobias Carlisle:
So give Ryanair question for you, valuation aside. They’ve got the most uncomfortable chairs among the low-cost airlines in Europe.
Jake Taylor:
Polish.
Bill Brewster:
We hear he’s a beast. That guy is awesome to read his conference calls. I love Ryanair as a business, just not right now.
Tobias Carlisle:
I’ve got another question.
Jake Taylor:
Just as long as it wasn’t an airline you really love.
Bill Brewster:
Yeah, just under normal circumstances when they can actually sell a seat, I tend to prefer their business.
Jake Taylor:
When they pivot to a SaaS somehow, that’s really going to be…
Bill Brewster:
Dude, Ryanair Labs. That’s the SaaS multiple. You got a sum of the parts that thing.
Tobias Carlisle:
So I got a question about looking for longs in the commercial real estate space. So there’s the mortgage rates. I’ve got friends that trade that kind of stuff. They were all going absolutely berserk that weekend they were liquidating over the weekend. One of the portfolios was getting liquidated, and I had guys trying to set up hedge funds and raise money and doing all sorts of things over that weekend because they all wanted to take advantage of it.
Tobias Carlisle:
I haven’t followed all of those names super closely since, but I did notice on that Monday they were all up like 30-something percent. I’ve got a lot of shorts on the commercial rates. You know, I think that this next quarter’s going to be interesting just seeing what happens… I think they’re already kind of expensive and ugly balance sheets, and I just wonder if a knock like this really, if we see some real damage in that sector. But I don’t know. I don’t have any kind of macro view. My shorts are all bottom-up shorts.
Jake Taylor:
I’ve been thinking about what does muni debt look like in this world right now where I’m not paying hardly any gas taxes. I’m not paying a lot of the sales tax that I was paying.
Tobias Carlisle:
Speeding tickets.
Jake Taylor:
Speeding tickets.
Tobias Carlisle:
Red light tickets.
Jake Taylor:
None of that. There’s all kind of ways that I previously was paying money that I am not now. I have to imagine some of these municipalities have to get over a barrel at some point pretty quickly, right?
Tobias Carlisle:
They’ll just get buy out, won’t they?
Bill Brewster:
Return-free risk.
Tobias Carlisle:
Everybody’s in a stimmy.
Jake Taylor:
I don’t know.
Bill Brewster:
I think that is phase four of the stimmy actually. I heard that disgust.
Jake Taylor:
Is that right?
Bill Brewster:
Yeah, I don’t know about the mortgage rates. I do know Simon Property Group bought a lot of the shares. Directors and David Simon bought their shares in the open market. I don’t understand that trade. Annaly is one that I looked at. Dividend yield today. Right now, 21.5%. And a lot of it is Fannie Mae-backed mortgages. I don’t understand why that product trades there, but what scares the shit out of me there is you’ve got long-dated assets and short-dated debt. It just seems to me that if rates were to go up eventually, that seems to me to be why that is priced where it is. I might be wrong, but that seems to be how you lose.
Tobias Carlisle:
I was on a Ryanair flight and they tried to sell lottery tickets over the loud speaker and they fled.
Bill Brewster:
Good for them, man, more revenue.
Tobias Carlisle:
They know their clientele.
Bill Brewster:
Yeah.
Tobias Carlisle:
And agency rate’s still very cheap. 20 to 35% dividend yields in Morningstar.
Bill Brewster:
Yeah, but why? Why in the world where rates are so hard to come by has an entire asset class been thrown away? I’d need to answer that question before I just see the headline yields and say yes.
Jake Taylor:
Because those dividends are getting cut.
Bill Brewster:
Yeah, right. And they’re levered.
Tobias Carlisle:
We’re coming up on time, fellows. What do we normally do at this point?
Bill Brewster:
Play an awesome song and say, “Good luck.”
Tobias Carlisle:
Da da da da dut.
Bill Brewster:
Thank you all for tuning in.
Tobias Carlisle:
Yeah, thanks folks. That was really fun, and great questions. Let’s hope the market keeps on doing what we all want it to do.
Jake Taylor:
Whatever that is.
Tobias Carlisle:
Whatever that is. Hope your stocks go up and nobody else’s do.
Jake Taylor:
Yes.
Bill Brewster:
Shout out to the 10.
Tobias Carlisle:
Thanks, fellows. See you next week.
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