VALUE: After Hours (S02 E20): AQR’s Is Value Dead, Baumol’s Cost Disease, Weird Times

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

  • AQR – Is (Systematic) Value Investing Dead?
  • Baumol’s Cost Disease
  • If You’re Confused Right Now, You’re Not Alone
  • This Time Is Different!
  • Berkshire’s Going To Do Better Than The S&P 500 Over The Next Decade
  • Take Notice When The World’s Greatest Investor Is Still Sitting On Cash
  • Can Anyone Explain Brookfield’s Accounts?
  • Right Now, Would You Take A 10% Return For The Next 10 Years And Not Touch Anything Else?

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:
And we’re live. It’s Tuesday, May 12th, 10:30 AM Pacific, 1:30 PM Eastern, 5:30 PM UTC coordinated time. What’s happening fellas?

Bill Brewster:
Not much just stuck in a closet.

Tobias Carlisle:
In Florida?

Bill Brewster:
That’s right, here for the foreseeable future. This would be the background. I thought it was funnier than blurring it, so here we are.

Tobias Carlisle:
It is funnier than blurring it. How about you, JT?

Bill Brewster:
Jake, how’re you doing?

Jake Taylor:
Doing well. A little rainy this morning, which is different for California. It’s been nice here. In fact, it’s been hot, so it’s a nice change.

Tobias Carlisle:
I’m up against the beach, so it’s always overcast. Anyway, we’ve got Cal [Ki 00:00:54]. My eyes aren’t good enough. Sorry buddy. Tell us where you’re from. I love going back through all of these and seeing where everybody’s from. We got all four corners of the world.

Jake Taylor:
What is your fetish with that?

Tobias Carlisle:
I just like seeing where everybody’s dialing in. The future, man.

Jake Taylor:
Okay.

Bill Brewster:
What do you think? You think Fauci is going to come in and be one of the 10 today or you think he’s tied up? He’s got that testimony, but-

Tobias Carlisle:
Fauci.

Bill Brewster:
… I know he probably blocked off some time for this, don’t you think?

Tobias Carlisle:
He always does. He doesn’t miss an episode.

Bill Brewster:
I know, thanks. Thanks Toby. Shout out.

Tobias Carlisle:
Sometimes, he just got to watch it afterwards.

Bill Brewster:
One of the 10.

Jake Taylor:
He probably listens to it while he’s running, that makes more sense.

Bill Brewster:
You think? You think it makes him amped up?

Jake Taylor:
Yeah, he likes it.

Bill Brewster:
All right. Well, we should probably kick it off. Huh?

Tobias Carlisle:
Take it away, sir.

Jake Taylor:
Whose turn is it? I think it might be mine.

Bill Brewster:
Go ahead.

Tobias Carlisle:
Oh, you go JT.

Jake Taylor:
All right. Welcome to VALUE: After Hours with my esteemed co-hosts, Bill Brewster and Toby Carlisle. I’m your third wheel, Jake Taylor. Bill, what do you got for us this week?

Bill Brewster:
Nothing. We’re going to be talking about how confused I am.

Jake Taylor:
So this is the Seinfeld segment, I guess. How about you?

Bill Brewster:
Yeah, I need some help thinking through what’s going on. That’s really what we’re going to be talking about. I actually might ask the… Well, I am asking the collective 10 to come together. Maybe we can get a hashtag going on Twitter or something and crowdsource some thoughts.

Tobias Carlisle:
That’s a good idea.

Jake Taylor:
Toby, what do you got?

AQR – Is (Systematic) Value Investing Dead?

Tobias Carlisle:
Yeah, I saw Cliff Asness had a third bite at the value cherry, Is (Systematic) Value Investing Dead? Spectacular paper. I read it in one go and I’ve gone back and read it a few different times. I think it’s very thorough. I think Cliff writes incredibly clearly, and I like the conclusion to say, so I’ll be talking about that paper soon. What are you on, JT?

Jake Taylor:
I’ve got some more vegetables for us. This is going to be a thing that I learned about recently, that’s called Baumol’s Cost Disease.

Tobias Carlisle:
Yeah, I’ve heard of it before.

Bill Brewster:
Aren’t we fighting enough disease, right now? Just saying.

Jake Taylor:
We’ve been fighting this one for a long time and you probably didn’t know it, so …

Bill Brewster:
That’s fair. Those are the worst kind.

Tobias Carlisle:
This is VALUE: After Hours.

Bill Brewster:
Starting right now.

Tobias Carlisle:
Right now. You guys want to let me do Cliff first?

Bill Brewster:
Yeah, for sure.

Tobias Carlisle:
Get Cliff out of the sight?

Bill Brewster:
So I made a bunch of valued people tuned in, we might as well give them the porn first.

Tobias Carlisle:
Here’s the value porn. So great paper worth checking out on AQR’s little series, Cliff’s Perspective. I don’t know why they didn’t call it Cliff’s Notes. I feel like that was easy, low hanging fruit there.

Bill Brewster:
Missed opportunity for sure.

Jake Taylor:
How about, Going off a cliff.

Tobias Carlisle:
That’d be pretty good.

Bill Brewster:
That’s him on Twitter? Shout out to Cliff. I do like his stay on Twitter.

Tobias Carlisle:
He’s one of the 10, he listens to situations every week.

Bill Brewster:
For sure he does easily.

Tobias Carlisle:
It’s just because he wants me talking my book about value. It makes everybody feel good. So all of the guys who are deep in value with me, said very comprehensive review of the value spread for various different value metrics. And he shows what it looks like over the full data set that they have. Every chart looks almost identical. Basically what they show is that the spread is the widest now that it has ever been when you use the composite of all of those measures and you use the measures that AQR uses internally. Which, is something that I have seen too. When you apply all the things that you would normally do, the internal quality, balance sheet health, profitability, so on leverage, so on. You get these results now that basically show that the value spread is as wide as it has ever been wider now than the GFC wider now than the.com peak, which is kind of extraordinary to go back through this time again, given how recent the last peak was only 20 something years ago.

Tobias Carlisle:
And then he sort of asked, he goes through and he asks all these questions. Why, has the world changed? So is it due to some sort of several very highly profitable monopolies that are skewing the results he carves them out and still gets the same answer. So it’s not a winner-take-all monopoly or tech phenomenon. Basically he says, “All that’s happening is we’re paying more for some companies than we ever have in the past. And we’re paying less for other companies than we have in the past.” That’s created this massive spread. The other thing that he looks at is inside each of those portfolios, is it due to some sort of deterioration in value stocks or some sort of like better quality in growth stocks than usual? So what you typically find is that value stocks are at the time that you’re buying them they do look, they’re not as good as the growth year story stocks in terms of their leverage and profitability and so on.

Tobias Carlisle:
But the question is, it’s a mispricing question. You’re not trying to find the best stock on the stock market. You’re trying to find the most mispriced stock and value is very, very mispriced at the moment. And particularly, so when you break down the two portfolios on the basis of profitability and leverage, value is no worse than it normally is. The growth stuff’s no better than it usually is. It’s just an unusual phenomenon. It’s interesting that in 1999 and JT, you pointed this out that the value stocks are actually better than the growth stocks in 1999.

Jake Taylor:
So re return on assets, or for the cheapest decile, I think it was, was better return on assets across that segment than the most expensive, which is like really pretty shocking, right?

Tobias Carlisle:
Absolutely.

Bill Brewster:
That there were no returns, right? In 99 and high docile, right?

Tobias Carlisle:
It was less. Yeah. And then one of the other things you do that I just missed was he compares the most expensive stocks to the middle, to those in the middle and runs that for the full data series. And then he compares the middle stocks to the cheapest and runs that for the full data series to see whether is this an expensive stock phenomenon or is this a cheap stock phenomenon? Which side of the alligator jaws are driving the spread? What he says that, which is something that I didn’t expect to say, but it’s actually the cheapest stocks. It’s both. The spread is very wide on both sides, but it’s the cheapest stocks are wider now are cheaper relative to the middle than they were historically. And if I can square that up on an absolute basis, if you look at price to cashflow and the famous French series, you get a similar answer that we’ve got.

Tobias Carlisle:
I think value is cheap or by itself, the spread is very, very wide. The final question that everybody wants answered is when does it turn around? When does Valley start working again? Cliff, didn’t answer that question. Nobody can answer that question. He says that the odds are very good right now, value is a very good strategy. So it’s just a matter of kind of waiting. So nothing’s really changed, I guess it’s just more food for my bias, which I love.

Jake Taylor:
Yeah. One of the things they used in his report was the… I was curious about debt levels always with this, because I’m more an enterprise value type of guy. And he talked a little bit about that, but they used a debt to book value, basically equity book value. And I would have liked to have seen something more in like of a cashflow type of coverage ratio comparisons over time. I’d be curious to see if that gave you a different answer as far as leverage ratios go.

Tobias Carlisle:
Could Ev/EBITDA or EVBitz answer that question for you?

Jake Taylor:
Yeah. Ev [inaudible 00:09:03] would answer that.

Tobias Carlisle:
Wes’ website has that EVE, but to get into that website you got to scale a wall and swim through the mud. It’s hard to get into it’s free and anybody can get into, it’s just hard to get into. The last time I checked both of those Ev/EBITDA was sort of saying it’s a 1999 type opportunity and EVE, but was like pretty close to that. So at least a 2007 type opportunity.

Jake Taylor:
When I looked at it last week, it was not as pronounced as 99 was. So you have sort of a… There’s probably a little bit more debt and then there’s, the assets are probably not as good as 99. So it makes it like a little bit less obvious to me, a little bit harder to really pound the table. But it’s definitely we’re in the ballpark of where, like you could create some value gurus from that starting point.

Tobias Carlisle:
Raining on my parade JT almost [crosstalk 00:10:08] almost.

Jake Taylor:
It’s pathological for me at this point.

Tobias Carlisle:
Well, you got to, I mean, valley has let us down so many times you’ve got to be asking the hard questions too.

Jake Taylor:
Try to.

Tobias Carlisle:
I just need the inspiration to keep going.

Jake Taylor:
That’s fair.

Bill Brewster:
I don’t know where I stand on this. I guess let’s go back and add back COVID, [inaudible 00:10:36] if it weren’t for COVID I think I would be more willing to really bet on the data right now. And this is why the opportunities exist. I mean, I had sent out a tweet about the small value factor when I read Dan Rasmussen’s piece. And I was like, I just don’t know that, that’s the place you want to fish anymore. Not that there are not opportunities, there clearly are within the set, but as far as a factor goes, it’s like 15 years of under-performance. I mean, at some point you got to kind of ask what’s going on here. And I guess that what my perception, and this is fraught with bias and why I’m running my portfolio the way I am, but my perception is just that access to capital and size are so important right now that running to that sector of the market was certainly rational in March.

Bill Brewster:
I mean, whether or not it’s still is sort of a different question, but I think that as a basket it would not shock me to see that basket outperform. Certainly at some point it’s going to just rip, I just don’t know how to handicap the odds within a particular stock. I mean, it’s obviously everything is a situation dependent, but man small scares me right now. Just because I think the path of the outcomes is so wide that the ability to raise the liquidity is so important. And I mean, I just don’t know. And I know that the natural, like if I’m arguing with myself, I’d be like, “Yeah, dude, well, when’s that ever not been the case?” And I get that, but like right now it just feels scary.

Tobias Carlisle:
[crosstalk 00:12:31] I mean, it’s a pretty good argument.

Jake Taylor:
Major bifurcation.

Tobias Carlisle:
That’s a pretty good argument for it.

Jake Taylor:
Yeah.

Tobias Carlisle:
If I look at [crosstalk 00:12:39] where’s the opportunity sitting out, like the top end of the market tech has just run as far, not as far as it can go, obviously I’m not saying you can run as far as it can go. Who knows? I’d never be that mad to say that it’s run as far as it can go, but gee, it’s run a long way relative to the fundamentals. And value sort of just has kind of been falling behind further and further, particularly small Valley. At some stage the opportunity just becomes so great that you kind of compelled to bet on some main reversion. Like I would’ve said that that bet was pretty pronounced a year ago, but I think that the bet is I mean, it’s just more pronounced now. Who would’ve thought that we’d get to like close to [inaudible 00:13:26] whether we’re through it or not. We’re kind of at, we’re close to the peak of the last time that value had a really spectacular run.

Bill Brewster:
Yeah. I mean, I fully understand all the psychological reasons that what I just said is stupid. I just think that it’s I don’t know. It’s going to be interesting.

Tobias Carlisle:
[crosstalk 00:13:48] You can wait for it to start working.

Bill Brewster:
… independent.

Tobias Carlisle:
You can wait for it to start working. That’s that’s one thing that I’ve… I don’t think you necessarily have to be betting on the way down in the factor that right now, I think you could wait for the turn because I think that it’s going to work for 10 or 15 years.

Bill Brewster:
Yeah, I think that’s arguably fair. And I know like personally, when I look at [crosstalk 00:14:14] well, when I look at the mistakes that I made, I’m often early on something. And I think that I have not… I’m so focused on trying to not bottom tick, but get a deal that I find myself buying and then stuff immediately goes down, 10, 20%. And it’s like, Oh man, if I had just sort of like forced a little bit of patience, not that you can pick the bottom, but the other side, it’s not like something re rates 100% on you over a day, unless it’s like Roku, but that’s sort of a different issue.

Jake Taylor:
Premature accumulation.

Bill Brewster:
Yes.

Jake Taylor:
Happens to the best of us.

Tobias Carlisle:
What’s your concern there JT, you didn’t want to fully endorse my wait and see?

Jake Taylor:
I just think that the real returns are made, I think like Buffet says about, waiting until you hear the Robbins for spring, it’s kind of too late. Until it gets all cleared up, I guess when it comes down to it, the bifurcation that we saw in 99 was this story around, the dot.com and new economy, and really having like lower cost structures because you don’t need brick and mortar, et cetera. And probably all true, right? It just like took longer. Well, and that was how quick it was going to happen was mispriced I think. So you were able to buy a lot of stuff that was going to last for a long time and was earning better than their counterparts, at least at that juncture. Fast forward to today, similar bifurcation. But now is the question, is it mispriced in the consequences of COVID and the damage that’s being done to these businesses versus the ones that are holding up and is that mispriced at this point?

Jake Taylor:
And I don’t know, I’m not sure what the answer to that is, as it’s not as easy, I guess it was probably harder then, like when the new economy seemed to be working and yeah, of course, all these dinosaurs are going dead. This was a meteor that hit right? I guess you could say the same thing right now about all this stuff that’s in a value basket, energy, retail travel, a meteor hit, right? These are all dinosaurs that are going to die. This game is not easy I guess, is what I’m trying to say.

Bill Brewster:
My perception of how value works and where I like to fish is like energy. I don’t know anything about EMP. I would get destroyed trying to pick, like junior oil companies or some shit like that, forget that noise. But like energy infrastructure assets. I can get my head around that and I can get my head around why that’s a long duration asset and I can get my head around why the future probably looks a lot more rosy than people are contemplating right now. And like, that’s a way that I can understand value right? Or travel. I have a bias and have bet on and will continue to probably bet on that people will come back to travel. I understand searching for really good assets and beaten up sectors.

Bill Brewster:
I am less at least running a discretionary portfolio. I am less certain that I can pull up like small value as a factor and then go through and pick the winners out of that that subset. I guess that’s sort of where I’m coming from when I say what I say. And I’m sure there is some listener being like, he doesn’t understand that the entire reason that value works is because no one wants to buy it. I’m telling you I get it. But that’s how my mind works. I’ve accumulated some exposure that’s tangentially related to energy over this time period. I’ve accumulated a lot of travel related exposure. So that’s sort of how I’m trying to play value [inaudible 00:18:37].

Jake Taylor:
Would you say that a bottom up in that kind of stock-picking makes it really hard to buy anything out of the basket of small cap value and at your price better serve, not thinking about it bottom up and more, making a broader bet kind of shotgun, that some of these are gonna work out better than the ones that don’t work out. I’m going to capture that asymmetry and that I’m just betting on the entire population. Not bottom up research of like, well, this one’s really crap. I’m going to throw that out.

Bill Brewster:
Yeah. That’s what I mean. I get it from like a quant basket approach. It makes sense to me in that type of approach. It just doesn’t make that much sense to me, like for me to go in and pick discretionarily. I mean, I don’t deny there’s some great opportunities there. Right. But it’s just, how am I going to find them and know and all that is sort of the questions that I ask.

Tobias Carlisle:
I think that’s a legitimate concern. I think that’s where you go… That’s where you run into trouble when you try to discretionarily pick out of some of those more beaten up names. Although, there are definitely folks out there who are doing it pretty well. I don’t know how, I don’t think Ian castle, Oh, I think I name check him every single time I record these things, but impressive returns. I think that he’s… I don’t know if he would characterize himself necessarily as a value guy, but he might say that he’s more growth in his… But he’s certainly doing that, picking them out named by name.

Bill Brewster:
Yeah, like here’s the plug for his service. I mean, I have been trying to think about what is a good, I’ve been trying to figure out, like when will I have the time to research a micro cap to submit to that network group. Right? Because, Micro-Cap club is something that I want to get involved in. I do want more focus on Micro-Cap and my network group is really focused. We’re mostly focused on media and experience. I mean, that’s most of the conversations that I’m having day to day. I’m not in the Micro-Cap network. And I would like to work on my network that way, because I do think that you can find great ideas and stuff. But I think that you cultivate them in a similar way that I cultivate what I do. And that’s like talking the ideas with a network of people. So that’s why I’m not inclined to just like pull up a small factor or a small value factor and then just go through the list.

Tobias Carlisle:
It won’t work. It took me a decade to get from when you do a back test and you get the output from the back test to like the output from the back test, it’s garbage. It takes a long time to get a back test that delivers a list of names that you would actually buy as a sane individual. That then also tests. Well that is really the challenge of the process. Because the first time you run it, it just pulls up all this stuff that has somehow filled the screen. Like it’s just through there. Because, it’s got some obvious problem with it. And it’s not [crosstalk 00:21:43].

Bill Brewster:
Like data fitting or something like that with your prospectus.

Jake Taylor:
All the horses have broken legs and the model doesn’t know it.

Bill Brewster:
Yeah.

Tobias Carlisle:
Yeah. There’s genuinely something wrong with it. Like it’s just for whatever reason. So if you use Ev/EBITDA and you pull up some financials, you’ll see that it’s just wrong. You need to be doing those other things. Some little quality cashflow checks, very sort of things to get to a point where it produces a portfolio that is sensible.

Jake Taylor:
And that you could psychologically hold.

Tobias Carlisle:
Yeah.

Jake Taylor:
Half of it, even if its not the best. Even if maybe it was a suboptimal return than just picking the pure flat, whatever it showed, the fact that you couldn’t handle it and ride the horse to the finish line matters also.

Tobias Carlisle:
That’s a lot of it, that’s under appreciated how difficult that is to do that. You really have to believe. I mean, people are seeing that with value as an entire strategy. Like just, it’s hard to believe in it, given how badly it has performed. It’s hard to see what needs to happen for it to start working again, even I would struggle to explain to somebody why I think it’ll start working and I’m sort of fortunate to have invested through a period of time in the early two thousands when it did work very, very well. And so I have seen it work and I’ve also seen the flip side of that, which is that even very high quality companies with very high rates of growth. If they get extremely expensive, they’ll just go sideways for a decade. That’s what happened in the early two thousands. There were great companies in there, things that were darlings in the late 1990s, they just didn’t do anything for 10 years.

Tobias Carlisle:
Fundamentals look great every time, just it’s not like this thing now, where you put on Microsoft at 2.8% free cashflow yield and it goes up, you put a Microsoft at a 2.8% free cashflow. The sales go up 30%, and now it’s a 3.5% cashflow yield. And it hasn’t gone anywhere. That can happen.

Bill Brewster:
But your 10 years is only 0.8%.

Tobias Carlisle:
That’s true.

Bill Brewster:
In theory, true is how high it could go.

Tobias Carlisle:
But is it? So this is the thing, right? The direction of the interest rates [crosstalk 00:23:59].

Bill Brewster:
I say that [crosstalk 00:24:01] pulled their eyeballs out. [inaudible 00:24:03] serious.

Tobias Carlisle:
That’s a fair question. Probably the direction of interest rates is more important than the absolute level of interest rates, right? Where everybody just adjusts to the absolute level, but it’s the change that maybe we go negative. I don’t know what happens then. I have never, I can’t… That’s through the looking glass who knows what happens in that scenario?

Bill Brewster:
I was thinking about that today. I was like, man, you could really get valuations going nuts. And then a negative rate environment. People almost certainly put a floor under it, but who knows?

Tobias Carlisle:
I mean, it’s infinite run. It’s infinite at zero. Like what happens when it goes through zero? Who knows?

Bill Brewster:
It’s just so tough to handicap the odds because there’s a lot of money. I don’t do this kind of work, but like the incremental flows, right. If you have negative rates out there, what do you do if you’re a pension manager? You just have to plow and [crosstalk 00:25:02].

Tobias Carlisle:
You just assume 8%, you just keep on putting 8% into your model.

Jake Taylor:
PE VC who are going to mark to whatever you need them to market to.

Tobias Carlisle:
Mark to model.

Bill Brewster:
Yeah. It’s a very, very hard question. I mean, the answer is probably you raise taxes and then try to actually fund that way. But that’s not fun for anyone.

Tobias Carlisle:
Did you look at Japan? Is Japan going negative? Like when did Japan get actually negative?

Bill Brewster:
I don’t know, but Greek Fire on Twitter, that dude, he roasted Trump today was saying, if everybody else says negative rates, like we should enjoy the gift too. And he was like, yeah. Because those continents and [crosstalk 00:25:44] that’s really who we want to be.

Tobias Carlisle:
That’s funny. Right? It’s so hard, because I have no idea. Macros too hard for me. I’ve got no idea.

***

If You’re Confused Right Now, You’re Not Alone

Bill Brewster:
Yeah, no doubt. Well, good. I’m going to get into more of it. Because, I’m going to talk about how confused I am. What is so difficult to square right now as a human for me, right? Maybe I just have like a pea brain, but I watched buffet and I think I’m not the only one that’s confused is, I get that people are saying, look at the last quarter and look at how some of these tech companies grew last quarter. And I get that the economy has not stopped. Right. But let’s think through, how quick can unemployment, how quick this employment come back? And in a world where certain policy proposals are at least being floated where school may or may not happen next year. That’s not like common, but it’s out there in a world where you can’t hire fundamentally enough people because your restaurant can’t get to the capacity that is required. In a world where United is saying, “Hey, in October, once this payment or payroll protection long rolls off, we may decline by 30% the amount of pilots that we have.”

Bill Brewster:
How does capex on the business side? Like how does that ramp and what are all the multiplier effects of all this velocity coming in? I have no fucking clue how we make it out of this okay. Other than like blind faith, it’s just hard, man. And I don’t want to be like I really want to be careful not to get to Jake. I like that. You got your trying emoji. I really don’t want to get into some like bear rant and I want to be rational about it. And I sit on Twitter. It’s not impossible for me to be optimistic here, but man, is it hard? And it’s really hard when I read, I’ve gotten privy to a couple of real estate conferences like Barry Sternlicht. He is, I think you would be hard pressed to qualify him as bullish, Sam Zell, like all the OGs are really worried right now.

Bill Brewster:
And [crosstalk 00:28:33] well, you’re right. I mean, that’s [crosstalk 00:28:37].

Tobias Carlisle:
Need some young gunslingers to come in here and really mess it up for you.

Bill Brewster:
Yeah. Well that’s the knock, right? Like they don’t understand how the world works now, but it’s like, I don’t know, man. You want to, I mean-

Tobias Carlisle:
You need to get [inaudible 00:28:50] get a couple of young guys who aren’t scared. Come in and just rip that seven billion up for you.

Bill Brewster:
To be fair, I think it was March 12th or 13th or something. I said, I think that there are certain things that are cheap, but the world has changed a lot since then. I mean, we have had quite a rally and a lot of stuff. So now it’s not as cheap as it was to say the least. So I don’t know. I mean, how do you guys think through that? How do you even start to build the thoughts?

Jake Taylor:
So I think if you’re going to be listening to other people in times of high uncertainty, you probably want to air towards the older people, near all other things equal because one, they’ve seen more things. And the fact that they’ve survived enough to make it to this time period, at least tells you something about the resilience of how they’ve handled things. So if I know nothing else about them, I think you probably want to favor the old lion a little bit. Because you know that he got here, he’s stood up to some tests to get here. So when guys like Zell, and Buffet are concerned, I think that should make everyone scratch their head a little bit and maybe back off the animal spirits that they might be feeling. But, [inaudible 00:30:12].

Bill Brewster:
Why we throw them alone in there. Right.

Jake Taylor:
Pretty much anybody who’s been around for a while. Have you seen anyone older who is bullish right now?

Bill Brewster:
No. Not really. I’m sure there are some people I mean in the middle of March-

Tobias Carlisle:
Through that to the crowd.

Bill Brewster:
Well, John Rogers had come out and he said that he thought it was a generational buying opportunity. I mean there are a lot, but again, March is a lot different than right now. [crosstalk 00:30:41]. Yeah. I mean, things changed. And I also want to be really careful with myself of not being like too focused on short term fears and for going longterm thinking. But the way that the Lollapalooza of all this and how it could unravel on the downside has a very legitimate chance of impairing longterm growth. It’s not just like a short term quarter concern, right?

Tobias Carlisle:
Dividends went back to where they were by 2027. So it’s not impaired forever. It’s just like seven years.

Bill Brewster:
Yeah. That hurts.

Jake Taylor:
Longterm growth. I’m worried about the asset value of things already in the ground. I mean more or less is anything growing.

***

Take Notice When The World’s Greatest Investor Is Still Sitting On Cash

Tobias Carlisle:
I said this last week, but I’ll say it again. I was pretty nervous, not nervous, but I’m like realistic to negative probably at the moment. And when I saw Buffet hadn’t done anything that really sent a shot of adrenaline into my body and ruined that entire weekend for me. And I’m sort of slowly forgotten about it. So I don’t feel quite so nervous anymore, but when the greatest to ever do it is cashed up and all he does through something like that is sell down. If you don’t take notice of that and just like consider what that means a little bit, then I think you’re an idiot.

Bill Brewster:
I sort of agree, and I’m not like in a debate with people, but I float Starbucks, it’s a brand that I know it’s a brand that, I do love Starbucks.

Tobias Carlisle:
Starbucks will be fine. They have proven that you can sell terrible coffee and still make lots of money.

Jake Taylor:
It’s an experience.

Bill Brewster:
But the issue is, and are they going to be fine? Right. The issue is what does fleet-wide throughput look like and how long? I mean, you’re paying over $100 billion for that company. That implies some rosy stuff. I mean, how many companies in history have ever hit $100 billion Ev? I get, you got ROIC-

Tobias Carlisle:
Tesla.

Bill Brewster:
And it’s a longterm grower. Yeah. That’s fair.

Tobias Carlisle:
Just [inaudible 00:32:56] greats.

Bill Brewster:
Fucking Tesla, and Elon Musk is acting a fool right now. Huh?

Tobias Carlisle:
He’s got a new baby, that’s what happens.

Bill Brewster:
Is it, what do you do if you’re that kid? I’m not trying to pick on that kid. That kid’s just as innocent as any other kid, but what do you do if that’s your name?

Tobias Carlisle:
So I’ve seen some explanation that the X-

Bill Brewster:
You got to go change it.

Tobias Carlisle:
The X translates to… They’re clearly having fun with everybody. Right? The X translates to Chi, the IE…

Bill Brewster:
I think he said Ash or something like that on Rogan’s podcast.

Tobias Carlisle:
I saw somebody broke it down, somebody who can code, broke it down. They say basically it’s Kyle, pronounced Kyle, and said probably that’s what the name is. It’s just that they’re just messing with everybody because why wouldn’t you?

Jake Taylor:
[inaudible 00:33:43] Kyle.

Tobias Carlisle:
Yeah. He must not watch lots of South park. Maybe he does probably.

Bill Brewster:
Well, it sounds like we were not getting closer to the answer. I don’t know. I think there’s just so many variables right now that when you get to like the Charlie Munger Lollapalooza stuff. You’re fighting a virus, I think politics, you’re starting to creep into how people actually see that you’ve got an election year. There’s like signaling that’s impacted by that, the freaking bundle. I just saw that satellite shout out to my man, Francisco Allavara first for sending this to me, it looks like satellite growth… It looks for the quarter was down 14% pay TV subscriber growth. That’s not great. You got no sports, cable news is got every incentive in the world to get as sensational as possible to get people tuned in.

Tobias Carlisle:
You got the last dance I started watching it. I’m three episodes in and they haven’t mentioned the most important player on the team. I’m kind of amazed.

Bill Brewster:
Luc Longley?

Tobias Carlisle:
Luc Longley.

Jake Taylor:
Yeah.

Tobias Carlisle:
A couple of you got there before I did.

Bill Brewster:
He’s not the most important but-

Tobias Carlisle:
Are you joking?

Bill Brewster:
Certainly a glue guy.

Tobias Carlisle:
That man is a national treasure.

Bill Brewster:
That may be, we’ll take Jordan. You can have him. Luc Longley, good for him. So anyway, I don’t know. It’s like one of those scenarios where I just think man, you could get I think that’s why Buffett’s monologue was so what’s the right word for his-

Tobias Carlisle:
Somber.

Jake Taylor:
Chilly, chilling.

Bill Brewster:
Yeah, somber. And the reflexiveness like we talked earlier about the reflexive nature of this virus and how people react. If you go through an extended period of stagnation, or like just unemployed. I mean the amount of optimism that is embedded in cap rates and multiples right now, it can fall apart and if it falls apart, it can stay that way for a long time.

***

Jake Taylor:
So Toby, how do you square all of that scary stuff with Cliff’s paper and like shit, it’s time to push your chips in. And if you’re a value guy?

Tobias Carlisle:
Well, that’s what, 1999, 2000 to look like too. I think well here’s one implementation of it, right?

Bill Brewster:
I don’t think so, man.

Jake Taylor:
You didn’t have the same type of economic scare in ’99.

Bill Brewster:
30 million people unemployed, man that’s not in ’99 [crosstalk 00:36:29].

Tobias Carlisle:
It’s not going to be 30 million.

Bill Brewster:
[crosstalk 00:36:31] tech rally.

Tobias Carlisle:
It’s not going to be 30 million though. Like it’s 30 million while everybody’s fell, well that will come back a bit. It’s still going to be very, very bad. I’m not saying that it’s not very, very bad. I’m saying it’s not 30 million, but I do think that this is-

Bill Brewster:
Then what is it? How do you think through that? That’s the question.

Tobias Carlisle:
It’s a.com mashed up with the GFC. We’re having them both at the same time. So you can go through and you can look at what happened in both of those things. And I’ll tell you what I would do. I would implement a long, short value strategy that gets along a whole lot of really undervalued stuff and gets short a whole lot of really expensive junky stuff. That is me talking my book, but that is exactly what I would do. I thought about it before I launched it. I’m doing what I think is going to work in the very near term. And I think it’s going to work for a long, long time.

Jake Taylor:
That’s fair.

Bill Brewster:
That makes sense. That is a rational answer and a good way to plug what you do.

Tobias Carlisle:
Gracias [crosstalk 00:37:27] Do you want to do your veggies, JT? Save the veggies for last.

Jake Taylor:
Is anyone even hungry anymore? I don’t know.

Bill Brewster:
That’s it.

Jake Taylor:
Oh, did we get squeezed out again down into like a two minute segment?

Tobias Carlisle:
No, no, no.

Bill Brewster:
No, no. We’re going long. You know what? I’ve I’ve heard people don’t mind long, so let’s go long.

Jake Taylor:
Alright. So-

Bill Brewster:
[inaudible 00:37:45] does matter.

***

Baumol’s Cost Disease

Jake Taylor:
I’m not going there. This 1960s economist named William Baumol. He came up with this idea that you start with this thought that imagine like a quartet performing Beethoven symphony. And over the last 200 years, that has not had any gains in productivity. It takes the same amount of time, the same amount of training, the same instruments, the same number of people to perform that quartet. Four probably, right?

Tobias Carlisle:
Damn that’s a great joke.

Jake Taylor:
In general, productivity has occurred in much more in things like manufacturing and places where it’s not humans doing some kind of special required service, or labor. So what you ended up happening is really like all of our material wealth in society comes from increases in productivity. So imagine that I said, “Bill, I need you to go dig a giant hole, and I’m going to give you a big earth mover to do it.” How much could you get done in amount of time. Versus Toby, I’m giving you a spoon and you have to move the same amount of dirt. And it’s going to take you like, years to do the same amount. Well, we are all wealthier based on the capital structures that we have, based on the training that we get, based on the processes and procedures and technologies that we figure out how to do things to achieve our aims.

Jake Taylor:
Well, in the service industry in general, it’s much harder to get those same kind of productivity gains because it requires a human to do that. And they can’t all of a sudden do things 100 times faster than they could. So you imagine things like education, like grading papers. I can’t do that at 10X, the speed if I’m actually reading it and, writing notes to a student.

Bill Brewster:
[inaudible 00:39:56] help you though, right?

Jake Taylor:
It can, eventually, yeah. So nursing, for instance, applying a bandage on someone, we can’t get nurses to do that at 100X speed somehow. Even things like government, police officers, firefighters, some of their tools can improve, but in general, going to the DMV and processing a new license application has had no productivity gains, right. And Baumol, predicted in the 1960s that we would see the service sectors basically the costs of the services rising because they still have to compete with the manufacturers for the labor pool. Otherwise, no one goes and does those services. So he predicted that we would see huge price increases in things like education, government healthcare. And part of me being sympathetic to Astorian, or libertarian tendencies I would look at those type of things and say, “Oh, well, those are the things that government’s pretty heavily involved in. And that’s why they kind of suck and why the price has gone up. And there hasn’t been material improvement.”

Jake Taylor:
And the things like apparel and computers and TVs have all gotten much cheaper in the last 20 years. And I would attribute that to like, “Oh, well, that’s the free market at work.” That’s good things happening, that’s competition. And maybe that, that was a little bit of an uninformed viewpoint given Baumol’s Cost Disease. That it’s more the service versus the productivity of manufacturing and the gains that we can get there that, that are actually driving some of these results. So any comments at this point before I tell you what kind of, some of my takeaways were from this idea.

Tobias Carlisle:
I have some thoughts, but I don’t want to derail you. I want you to keep going just in case you answer them.

Bill Brewster:
I think he just asked you for your thoughts though.

Tobias Carlisle:
One is that I think that the healthcare issue is, I think that’s an interesting one because there’s an enormous amount of technology that makes healthcare so much more. The analysis is so much more penetrating than it used to be because we’ve got MRI machines, we’ve got testing and things like that, that we can do. We’ve got better drugs, we’ve got better procedures, we’ve got robotic procedures. We’ve got like the technology in there is amazing. And I don’t think that the US is sort of unique globally in that it has an enormous spend and the results in terms of life expectancy, aren’t keeping up with the spend, or aren’t keeping up with the rest of the world. And I think personally that the problem is that you have this separation of, the person who gets the service doesn’t pay for the service that goes to the insurance company.

Tobias Carlisle:
And then they bill your employer. So you’re at no stages there are any cost discipline or any shopping. And when you look at, for example, when you look at cosmetic procedures, which don’t benefit, don’t have access to that same infrastructure, cosmetic procedures have got rapidly cheaper. You drive don’t drive around the streets here you can see, you can get botulism. That’s what it is, the Botox shots, they’re ridiculously cheap now. You basically walk in off the street and get your shots done.

Bill Brewster:
Yeah. All the people on Netflix is too hot to handle it. Got all their work done with just $5,000 winnings. They also look like it to be fair. Some of those girls ruin themselves. Anyway, I digress. I would also add that on education. These are really tough issues for me, because like with education, I think that we should let students declare bankruptcy and get out of it-

Tobias Carlisle:
Its crazy that they can’t do that.

Bill Brewster:
And then you would have less incentive to lend money to it. And then you can like gouge people. So I just think it’s a little bit tougher and with the TVs and stuff, globalization, it’s so easy to just go to the cheapest country to make it. [inaudible 00:44:04] services you can’t do that with. So I don’t know. I don’t have a good sense. But I do sort of viscerally agree that service productivity is a little bit slower. Like if I think back to when I was at the bank, the ability to roll out new software and processes within a big organization, it’s just slow. Manufacturing the same, but I don’t know. I guess you get locked into how you do things.

Tobias Carlisle:
I think education is such a huge opportunity to really do something spectacular where you could have… So there’s the master class, I don’t know if you have seen that, but that’s kind of an interesting approach where I don’t see why you can’t find the best single presenter of each subject in the nation or globally. And then put them together into some sort of Netflix type lecture series. And then you gamify it the way that Khan Academy has. And then you have some-

Bill Brewster:
I’m going to give a shout out right now and hope that the three of us can get some sort of access, but in practice, have you seen what they’re building for investing?

Tobias Carlisle:
No. Is it good?

Bill Brewster:
They’ve got really good interviews. If that guy continues down this path, he’s going to have a sweet service. It’s sort of not masterclass because [crosstalk 00:45:20] interviews.

Tobias Carlisle:
Yeah.

Bill Brewster:
But it’s interviews with old CEOs, industry execs. It’s good stuff.

Tobias Carlisle:
That’s what master class is, it’s just interviews. And then they’ve been kind of systematic about the way that they’ve asked the questions and put it together into some sort of order like that. Each one is different. I think that when you see Thomas Keller cook eggs, you’re like, “I want to go and eat in that guy’s restaurant. I don’t want to cook eggs like that.” I thought that was an interesting insight. I think if you see a lot of people who are very good at what they do, do what they do, you realize that really there’s a level of mastery there that’s taken decades to kind of get to that point. And it’s not something that you can just pick up and be good at having watched a series like that. But I do think that-

Jake Taylor:
I don’t know, I’m like Steph Curry now just want to shoot [crosstalk 00:46:02].

Tobias Carlisle:
To train in three pointers from anywhere. I think that if we had independent testing centers that could verify that you can go in and take a test and pass all the things that you’ve been taught, that would be a much better system than you go to Harvard and you get some specialized teaching there. I just think there’s a better way of doing it. That would be much, much cheaper that would solve that problem.

Jake Taylor:
So that would be technology kind of disrupting, turning what was previously a human very involved thing into more of a manufacturing, almost type of scaling.

Tobias Carlisle:
It makes it sound dirty when you say it like that, but that would be the idea.

Jake Taylor:
GRD in a good way. One of my takeaways was that our fight to not have robots replacing us for our jobs, I think is actually probably a bad idea. And what we should embrace the robots who can come and do some of these service jobs for us and have that productivity gain to grow the pie enough, that would be a way of fighting some Baumol’s Cost Disease.

Bill Brewster:
You’re going to end up the first quasi Austrian libertarian that also supports UBI.

Jake Taylor:
I think there’s people-

Bill Brewster:
The robots are going to do it all. And then we’ll just collect the dividends.

Tobias Carlisle:
That’s Marxism, that’s literally Marxist utopia as the robots do all of the jobs and we go to the beach. That sounds great.

Bill Brewster:
It doesn’t sound bad, it’s awesome in a book.

Tobias Carlisle:
Who builds the robots?

Jake Taylor:
Don’t worry [crosstalk 00:47:37].

Bill Brewster:
Robots. Yeah, exactly.

Tobias Carlisle:
Look, I’m coming up with strategy, that’s tactics. That’s somebody else’s job.

Bill Brewster:
That’s fair.

Jake Taylor:
So one of my other takeaways was that a lot of the new jobs that were added in the last 10 years, I think were primarily service-based jobs. The COVID perhaps impacts those more than normal. You can’t go get a haircut, you can’t get your nails done, or go to a restaurant.

Tobias Carlisle:
Turns out you don’t need a haircut.

Jake Taylor:
I beg to differ.

Bill Brewster:
I’m going for three more inches here. I’m going to really grow it out.

Tobias Carlisle:
Longer hair too.

Bill Brewster:
Because its great.

Jake Taylor:
Good one. So if you imagine that [crosstalk 00:48:29].

Bill Brewster:
[inaudible 00:48:32] I’m not looking to double things, Toby, come on that’s greedy.

Jake Taylor:
Speaking to [crosstalk 00:48:38] Oh God. Right now we’re at about two times profit margins for S&P 500 over compared to historical mean. Gosh, you have to imagine that if we back off of some of this globalization, because of COVID, which I think is probably a very rational response and something we could expect to see, it has to impact profit margins. Right? Like we can’t…

Bill Brewster:
I don’t know, man.

Tobias Carlisle:
That’s loser talk. We’re going straight through this.

Bill Brewster:
No, I’m not trying to go there with you, but like, I’ve been thinking of it. Like OMAB, O-M-A-B it’s a Mexican airport, conglomerate or not conglomerate, but they own airports in Mexico. Something that I was thinking about is like, if we onshore more stuff to North America, I could see that it helps enough people that I am unclear what happens. So let me just put it that way.

Jake Taylor:
So I would agree that, that would help people, which they are increasing your productivity, but then some of that has to be shared with the workers and their wages coming up. Right? I think, and also to the… as government, everything gets more expensive because it’s more cost based, or it’s more service-based. Don’t we have to have higher corporate taxes again, at some point-

Bill Brewster:
Yes, I do think that’s a fact.

Tobias Carlisle:
Capital’s had a really good run against labor. And this is-

Bill Brewster:
A lot like 50 years or something.

Tobias Carlisle:
This is about as stretched as it’s ever got before.

Bill Brewster:
I agree with that.

Tobias Carlisle:
I personally think the FED has a lot to do with that. If you pump up asset prices, that’s what happens. You set interest rates too low, you get bloated asset prices makes…

Bill Brewster:
Yeah, man, and the thing that sucks about that shit is like the people that don’t understand the game and are just like savers, get just fuck. You know what I mean? What do you want-

Tobias Carlisle:
There’s no savers anymore. You can’t be a saver and survive.

Bill Brewster:
That’s a problem.

Tobias Carlisle:
You have to move out the risk of the FED loves taking people right at the risk of.

Bill Brewster:
That said something that I do think that we have talked about. And I don’t necessarily, I don’t know how I feel about this, but the way that we’ve talked about like companies are so lean and they run optimally, like levered and stuff like that. I do agree that you’re giving up fragility, but you are getting a benefit in velocity of money going through the system. I mean, it is more efficient. I don’t know-

Tobias Carlisle:
Isn’t velocity of money like, isn’t it flatlining?

Bill Brewster:
well, yeah.

Jake Taylor:
It has been for…

Bill Brewster:
But what I’m saying is if you then say, well, we should just accumulate all this cash on the balance sheet, you should see velocity implode. Right. Because I mean, like if you reduce buy backs and you just accumulate cash… If corporations become huge savers, that’s not good.

Tobias Carlisle:
That’s Japan type scenario. Right. Where they just load up the balance sheet and that they’ve got the interlocking holding. So there’s nothing you can do.

Bill Brewster:
Yeah. And you’re just like trapped in there.

Tobias Carlisle:
Toss any questions guys?

Jake Taylor:
[crosstalk 00:51:45] buy that… I know that that like consumption as it’s a good thing for us. And people like to make that argument like, “Oh, I’m stimulating the economy by going and racking my credit card up.” Which, is kind of what corporate America did. I don’t know if I buy that, pulling forward demand from the future through credit doesn’t necessarily to me sound like the smartest behavior.

Tobias Carlisle:
No, that sounds like it’s so that you might run out of runway [crosstalk 00:52:16].

Bill Brewster:
Leverage equity, bro. It keeps…

Jake Taylor:
You’re so right until you’re wrong.

Bill Brewster:
I’m going to show, I’ll send you a DCF. You’ll get it.

Jake Taylor:
Fair enough. All right, it’s Q&A time.

Tobias Carlisle:
Throw out the questions.

***

Bill Brewster:
I didn’t mean to be so vague with my topic, but like I’ve just been sitting around thinking about like how to even think through it.

Tobias Carlisle:
That’s just a market. I think it’s a good question. I think it’s good. That’s what everybody’s thinking about all the time. [crosstalk 00:52:46].

Bill Brewster:
Yeah. I’m just like trapped in this towel closet, terrified. That’s really why I’m in here. I just can’t open the doors.

Jake Taylor:
[inaudible 00:52:55].

Bill Brewster:
But like, if you just argue, forget about numerically risk reward, what’s the upside here? Like really, really, really what’s the upside. And then I can construct a pretty terrifying downside. And I think you usually can do that, but like, I don’t know. Sometimes I just have to get my head rational right now, and I’m just like really struggling to stay in my brain and not in my fear, if that makes sense.

Tobias Carlisle:
My fear lives in my brain.

Bill Brewster:
Mine too. [crosstalk 00:53:28].

***

This Time Is Different!

Tobias Carlisle:
I got a question. What do you think of developed markets ex US underperforming market cap for the Nasdaq 100 now exceeds the market cap for the MSCI World ex US 1000?

Bill Brewster:
Duh, because America is the bet, next.

Jake Taylor:
What now? What’s it saying that the developed world that’s not the US is done worse than EM. Is that what it’s saying?

Tobias Carlisle:
No. It’s saying that the Nasdaq 100, now has a market cap bigger than the MSCI World, excluding the US, because the US is in the MSCI world. So the Nasdaq 100 is bigger than the rest of the world, which is just like that’s FANMAG is bigger than everything else in the world.

Jake Taylor:
All the little bullshit countries.

Tobias Carlisle:
It’s the same it’s-

Bill Brewster:
FANMAG is [inaudible 00:54:19] businesses. I just think we all have to acknowledge that. And like that matters, worth a lot.

Tobias Carlisle:
The grid businesses. That’s absolutely right.

Bill Brewster:
And it’s growing.

Tobias Carlisle:
It’s the value phenomenon. It’s the reverse market cap so that, equal weight index is underperforming market cap weight index, biggest out performing small, cat are mating with dogs, I don’t know, the world is upside down, weird things are going on.

Bill Brewster:
I sort of studied Europe a little bit and to any European listeners, if I say anything, shoot me a Twitter message and tell me I’m wrong. But like, when I was studying at Ryan air, man, the amount of regulations over there and just how hard it must be to piece together that whole union and just how… it doesn’t seem efficient. And I know that we’re the same [inaudible 00:55:13] but we’re not like it is a structural advantage. So I don’t know, as a group, I could see the US outperforming. They obviously have certain incredible companies, but I’m not sure. I don’t know.

Jake Taylor:
It reminds me though of that. There’s a little graphic that shows, I think it’s each decade and it shows like what were the best performers? And what’s the narrative at the time? And it was like 1980s, Japan inc, taking over the world. And all those Japanese companies are like the best. 1990s, it was like.com. And it’s like Cisco Microsoft at that point, a million things. And the narrative was, it’s a new economy. 2000s you get into, I don’t know Countrywide or some bullshit narrative there. And now this is, Fang basically. This is the time it’s different. And this is when the narrative is finally completely right. I don’t know.

Bill Brewster:
But Mungers, said it was a lot different, right? At daily journal, he said like, “This is nowhere near the Nifty 50.” And I do think that like, these really good tech businesses are really awesome. And they are worth a lot. Now, whether or not they’re worth what people are paying, that’s sort of a different issue. But we as a country are producing some pretty impressive stuff.

Tobias Carlisle:
That’s all true.

Bill Brewster:
GMO is a great resource for this stuff. I like what they write. They tend to be a little bit too into commodities for me all the time. But I do really like what they write.

Tobias Carlisle:
It’s only because commodities have been losing.

Bill Brewster:
I know, but it’s like-

Tobias Carlisle:
If commodities start working [crosstalk 00:56:59].

Bill Brewster:
No, I’m not like resulting. I just don’t understand what constricts commodity supply. And to me, that’s exactly the game there.

***

Can Anyone Explain Brookfield’s Accounts?

Tobias Carlisle:
I got another question here. This is like Howard Marks memo is all ready they sent to me. So I don’t actually know which Howard Marks memo we’re talking about here, but any thoughts on Howard Mark’s latest memo?

Jake Taylor:
I haven’t read it. I’ve read the last… well, I read him intermittently. Sorry, Mr. Marks.

Bill Brewster:
I didn’t read his last. Oh, he definitely listens. I don’t think I read the last one, whatever he put out in March. I thought it was interesting. I thought that was one of the first memos he actually said something in a long, long time. He’s another one that’s not exactly bullish, though he never really is. Except when he’s selling out the Brookfield and screwing his shareholders.

Jake Taylor:
Too soon, Bill, too soon.

Tobias Carlisle:
Anybody who can read Brookfield’s accounts drop me a line and tell me how you do it. Because I’ve had a go I’ve had lots of other folks who I know and respect with PhDs and they kind of had a go. Can’t figure it out.

Bill Brewster:
Dude. They’re getting blown up right now because I guess they’re lending. I mean, I don’t follow the whole complex, but I guess they’re lending to certain entities to get other entities paid. You know clearly, if that rumor is true it would be interesting to say the least.

Jake Taylor:
How’s your Graphtec doing?

Bill Brewster:
My beloved Graphtec, I wonder how they are. The steel industry must be ripping right now.

Tobias Carlisle:
Yep.

Jake Taylor:
It’s lower. That’s the answer?

Bill Brewster:
I don’t know. You never… Yeah, it is, it’s quite a bit lower.

Tobias Carlisle:
I kind of like this analogy, but I think FANMAG is a little bit like the Nifty 50. Nifty 50 was, they were all regarded as being like, single decision stocks, because they were so high. The businesses were so high quality growing so rapidly, also extremely expensive. And we went from Nifty 50 into the 70s, when that that was a value investors market right there. So I kind of feel like there’s something like that, that’s going to happen here. I know I’ve said that a few times. Just want everybody to know what my biases are.

Jake Taylor:
Yeah.

Bill Brewster:
That’s Graphtec, it’s not what you want to see. It was [crosstalk 00:59:30].

Tobias Carlisle:
It’s some high quality graphics in the [crosstalk 00:59:32].

Jake Taylor:
So that’s one of those weird paradoxical things to me where the lower, the price goes, the bigger the risk actually, because of the take under problem. So normally the lower the price, the less risk that you’re taking, but in that situation, I think your problem of getting taken under makes me afraid. Every take down is a tick up and risk for me.

Tobias Carlisle:
Did you guys see Mango’s comments on Amazon having to worry about Costco?

Bill Brewster:
I think Mango likes Costco a bit too much. I love me some Costco. I’m not trying to like shit on Costco, but Amazon doesn’t have to worry about Costco.

Jake Taylor:
Well, they provide totally different things. Like Costco is a core set of things that you want to buy. And then, Amazon is in the long tail of all the random shit that you would end up buying, and you don’t want to like work that hard for it to show up at your door.

Bill Brewster:
Yeah. I mean, when Costco has the infrastructure, the internet attached to it, then maybe Amazon can worry about it.

***

Berkshire’s Going To Do Better Than The S&P 500 Over The Next Decade.

Tobias Carlisle:
So here’s a good question. And Bill, you might want to, as a seller of Berkshire, [inaudible 01:00:48], sold a huge amount of Berkshire in his latest filing. How do you feel about that?

Bill Brewster:
I own 7% of my portfolios in Berkshire, first of all. So I’d like-

Tobias Carlisle:
But you’re [inaudible 01:00:58].

Bill Brewster:
to the deal [inaudible 01:00:58] cheap.

Jake Taylor:
But you’re a fucking sellout.

Bill Brewster:
But the stuff got cheap, it got cheaper. I don’t know. Somebody responded to me that they thought that I mean, it was a small position anyway. But Akre, to have a spot in the portfolio means something with Akre. I don’t know, man. Look, I think people bail on the old dog right before he shows his last trick. I think Buffett’s still got one up his sleeve.

Tobias Carlisle:
What it shows you is that-

Bill Brewster:
I think it’s going to take a while.

Tobias Carlisle:
Nobody will give you the benefit of the doubt. Even if you crush it and become the richest man in the world of your entire career. There’s still going to second guess you.

Bill Brewster:
No, that’s not it, man. It’s just the size [crosstalk 01:01:42] It’s the size of the entity. I mean like Berkshire Hathaway Energy, just announced some billion dollar deal. It’s going to be awesome. It doesn’t really move the needle.

Jake Taylor:
No, but they’re bitching about not enough buybacks, or not pulling the trigger in March. Now they’re definitely, they’re coming at the King.

Tobias Carlisle:
You never get the benefit of the doubt.

Jake Taylor:
[crosstalk 01:02:03] I don’t buy it.

Bill Brewster:
Look, I’m an apologist, right? I don’t think he’s missed what he’s actually waiting for. I just think he’s playing a different game.

Jake Taylor:
That’s fair.

Bill Brewster:
I don’t think he’s sitting there, at the end of his career being like, “Oh boy, I can just do this buyback. It’s going to be the greatest thing ever.” That dudes waiting for like real [inaudible 01:02:29] I think.

Tobias Carlisle:
Well, I think we’ve come up on time, fellas. Any closing comments?

Jake Taylor:
I feel like we shortchanged the Q&A session a little bit.

Bill Brewster:
Yeah, let’s do a couple more questions. Come on, come on Toby. I know you’re not going anywhere.

Tobias Carlisle:
I’m running out of-

Jake Taylor:
Unless there’s no engagement.

Bill Brewster:
There’re no questions.

Tobias Carlisle:
[crosstalk 01:02:55] There’s lots of comments.

Bill Brewster:
No one cares anymore.

Tobias Carlisle:
There’s lots of comments.

Jake Taylor:
Jump the shark.

Tobias Carlisle:
Okay. Who are the people to follow now that are better than Buffet?

Jake Taylor:
Here’s my list. Nothing. There’s nothing on there.

Bill Brewster:
Yeah. I don’t know. I think Akre, I think you follow Akre if you like that kind of stuff. But I don’t think anybody’s bigger than the King. I just think the King got so rich that the opportunity set shrunk on him.

Tobias Carlisle:
Still, a great business, still run by the world’s greatest capital allocator, still high return on invested capital. Just got too much cash on the balance sheet. And that problem is going to be solved in, I would say the next three to six months.

Bill Brewster:
And the other thing is even if it takes, let’s say that the bull case takes off and whatnot. Let’s say he does a big buyback in 12 months. It’s going to be suboptimal, but I don’t know the way that they look at that business. You’re not going to be starving if that’s the outcome, the rest of your portfolio is probably done fine. And that stock’s going to do fine too. And you’re going to do a hell of a lot better than bonds. So it’s like a wealth preservation machine, it’s a pretty darn good one.

Tobias Carlisle:
Berkshire’s going to do better than the S&P 500 over the next decade.

Bill Brewster:
I hope.

Tobias Carlisle:
Cheaper, growing faster, or at least as fast better balance sheet.

Jake Taylor:
Better capital allocation.

Tobias Carlisle:
Better capital allocation. But if he can rely on that for the next decade, but I do think that, that’s true for… I hope the whole lot, but for the near term.

Bill Brewster:
Sure. Berkshire Hathaway Energy, is freaking legit. Again, you’re paying a lot for it, but like it’s worth a lot. And I know that utilities is not what’s going to get young people super amped up, but that’s a hell of a good one.

***

Right Now, Would You Take A 10% Return For The Next 10 Years And Not Touch Anything Else?

Jake Taylor:
Well, what would you pay right now for a magic box that you could put your money into, and it would give you a 10% return for the next 10 years?

Bill Brewster:
Quite a bit.

Jake Taylor:
That’s basically what [crosstalk 01:05:04]

Bill Brewster:
[crosstalk 01:05:04] too much you wouldn’t get your 10%. That’s the nature of this game.

Tobias Carlisle:
[crosstalk 01:05:08] is that what you’re asking, what guaranteed return do you need before you?

Jake Taylor:
Well, I’m just saying that he has basically that in Berkshire Energy and the railroad. And those are really valuable I think in these kinds of times where expected returns probably should be tamped down from here. And if you have a regulatory 10%, that you can plow billions of dollars into, that’s a pretty… he’s playing a different game. And it’s a good game.

Bill Brewster:
Yeah. Well, and it’s not direct exposure to tech obviously, but a lot of those data centers and stuff, Berkshire Hathaway Energy, is like, as they get built, Berkshire Hathaway Energy supplies the energy. I mean, it’s-

Jake Taylor:
Let me ask you in a different way.

Bill Brewster:
You got a good utility.

Jake Taylor:
Would you take a guaranteed 10% return right now for the next 10 years and not touch anything else? And just take that 10%.

Bill Brewster:
The rational part of me would say, yeah that’d be great. And then I know myself, so I would have to touch other things. I like the game too much. I can’t not touch anything. I’d be-

Jake Taylor:
Toby, what about you. Could you be chased and take a 10% from here for the next 10 years? And call it a…

Tobias Carlisle:
I kind of think I can do better.

Jake Taylor:
Wow. All right.

Tobias Carlisle:
I think it’s going to be close.

Bill Brewster:
[crosstalk 01:06:29] myself for 20 years, I’d be pretty okay. That would be nice.

Jake Taylor:
10 for 20. You would take?

Bill Brewster:
Yeah, I’d take 10 for 10, but I’m just saying, if we’re playing the game, let’s keep going with it.

Jake Taylor:
Alright.

Tobias Carlisle:
On that note…

Bill Brewster:
Take care everyone, enjoy the outro music.

Jake Taylor:
Stay safe.

Tobias Carlisle:
Thanks folks. Next time.

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2 Comments on “VALUE: After Hours (S02 E20): AQR’s Is Value Dead, Baumol’s Cost Disease, Weird Times”

  1. Can somebody provide the link for the “In Practice” reference (the interviews w/ CEO’s etc). Googled and couldn’t find. Maybe I’m looking for the wrong thing. You guys are hilarious (and informative) Thanks!

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