Dark Matter, And Why It’s Important To Investors

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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed dark matter, and why it’s important to investors. Here’s an excerpt from the episode:

Jake: Bill, focus right now. 18% of the matter based on mass in the universe is visible to us and the other 82% is dark matter that we can’t see. So it’s like a 4:1 ratio, which I think is– [crosstalk]

Tobias: We can’t see because it’s too far away, or we can’t see because it’s like– what’s dark matter? That’s another podcast. All right. I’ll look that up myself.

Jake: Yeah, look that one up. I’m sure there’s a tweet about it that’ll explain the whole thing. But let’s think about, is it possible that– when we’re all sitting around trying to figure out the cash flows that are gonna be created by a business over time, is it possible that we might have the visible part? Maybe it is we have about 18% of the information that we would need to know the exact number and the rest of the information is dark matter that we can’t measure, we can’t see it. We won’t know the answer.

Things like, we would never know the managerial squabbles that are happening inside of a company. We would never know if the CEO maybe was sick, and it’s like Game of Thrones happening, and they’re like, who’s gonna try to take over. We wouldn’t know that employees were planning on leaving, especially I think this is exacerbated by big stock option grants that turn, especially early employees into millionaires, and they’re hanging around waiting until they can cash those checks, and then they’re leaving. We don’t really know what’s happening inside of every customer’s head. People try to do like net promoter score and things like that to get a gauge at it, but this stuff is pretty sloppy measurement.

We don’t really know what assessing what the culture looks like from the outside, no different than we don’t know what is happening on the inside of a family from the outside. You could meet some family and think like, “Man, these guys are great.” And the inside, when no one’s around, they’re terrible to each other or who really knows. So, this is very similar to celebrity divorces that just happen. And we’re like, “Oh, they seemed perfect for each other.” It’s a very manicured, textured, or cultivated presentation that they’re giving you, and it’s the same thing with the companies that we’re all looking at. They’re putting their best foot forward for you on a public domain.

On top of that, there are also these external factors that you can never really know the answer to. You don’t know what their competitors are working on and cooking up. We don’t know what’s in some garage somewhere that a kid is working on that’s going to totally disrupt the business model that you depend on all those future cash flows for. We don’t know if the government’s cooking up an antitrust suit against them. We don’t know if there’s environmental impacts, like perhaps a pandemic that you didn’t see coming. Who knew that there was a guy in China eating a bat in November that turned into all of the things that we’re looking at now.

Bill: Fuck that guy. That sucks.

Tobias: Poor bastard. They probably serve them up all day every day.

Bill: Yeah, I do sort of feel bad for him. But this has not been a great year.

Jake: No, it hasn’t. So all of which is to say, if the ratio really is four to one on what you can see and measure to things that you can’t see and measure, I think that that then really, you should take that as like a– you have to be more conservative with your position sizing. You have to be a little bit more intellectually honest about like, “How much do you really know about these companies” I think you gotta back off on your certainty a lot because you think you see the entire universe because you did all the work to see the 18%, there’s a whole other 82% potentially that you have no idea the answers to. I think it calls for some intellectual humility.

Bill: This is where the value school says pay a low price. And then, you are reducing the probability that the other 82% hits you in the face. And that is what value has 100% correct.

Tobias: Or the impact of it.

Bill: Yeah.

Tobias: So, I got a couple of good comments. Don’t wanna let them slide by. Oracle Brouhaha says, “You really don’t know these things if you’re diversified. If you only own a few companies and you have energy, you can actually do this kind of research.”

Bill: I think that’s probably truer on the smaller ones than the bigger ones. But I don’t disagree with that.

Tobias: You wanna comment, JT?

Jake: Yeah, I’m gonna push back on that. I think maybe in earlier time periods, it was easier to do that. Like how the universe is expanding at something like 46 miles per megaparsec. But what’s happening there is, I think we’re increasingly in a global world and business is done at global scale. And so, I think it’s harder and harder to know more of the answers because it’s gotten so much more complicated. And I’ll give you an example.

Munger has talked about this guy, his name is, I can’t pronounce it well, but it’s John Arriaga, something like that. And this guy bought tons of real estate around Stanford’s campus before it was Stanford, before it was Silicon Valley. And this guy’s now worth a couple billion dollars. And Munger said before that, that this guy never left his little circle of competence. He knew that area and he stayed in that area and he created this really an empire from just knowing that little area. And by the way, I think he’s a Marc Andreessen’s father-in-law.

Bill: Oh, really?

Tobias: Smart.

Jake: Yeah. Anyway, this guy’s worth $2 billion because he stayed in his little circle of competence.

Tobias: And his circle of competence happened to be Silicon Valley.

Jake: Yes.

Tobias: That helps.

Jake: So, there’s definitely some kind of survivorship.

Tobias: My circle of competence is a little country town in the Australian Outback, that wouldn’t help.

Jake: That wasn’t gonna do it. Yeah.


Jake: Well, all of which is to say now, I think it’s harder to– the world has gotten so much more interconnected. And really it’s harder to have these little localized markets like that for most goods and services. Most things are competing on a bigger scale. There’s therefore, I think, more information to be able to have to process to get some of these more extreme outcomes.

Tobias: Yeah, I would push back on that a little bit too. I worked as general counsel of a public company and the sell-side research that we always talked to, they had worked out what we were gonna grow to in any given quarter. And to be fair, that was reasonably accurate over time. And I think part of that is sort of being able to take a step back. But being inside the machine that hit those numbers was an entirely different thing altogether, because it was– literally it’d be 430 in the afternoon on the last day of the quarter, and we’d need a material sale to close to hit that target, and it was turning on whether the sales guy and the general counsel could get it done in an hour to finalize that agreement.

So, I sometimes think that the statistics maybe don’t realize how much sweat and effort there is underneath and that how coin-flip some of these things, and it’s not necessarily bad if they miss. It’s not necessarily great if they hit. It’s just randomness.

Bill: Well, and I mean even people within organizations don’t know what’s going on. It’s a function of complexity, size, and how many human interactions there are. When I was at BMO, I barely even knew what our group was doing. I knew what our team was doing, but I didn’t know what our group was doing. And that led up to a group head and that led up to a commercial bank head and that led up to that, you don’t know what the hell is going on for real. You just know the culture.

Tobias: There’s a great line in Sherlock Holmes where he says that, and I forget who he’s quoting in that, but he says that, “Man is basically– no one knows what any individual man is gonna do, but men in aggregate start to conform to some statistical..” I put the quote in one of the books, which is, it’s the way I feel about having seen it from the inside out. There’s a lot of stuff going on all the time. It’s enormously random, what hits and what doesn’t hit, but over time and in aggregate, the numbers do get a little bit clearer. So, I don’t mind that’s sort of the way that I invest, is a little bit step back, not drilling down, because I don’t know that it gives you usable information. Maybe it does, but I think that you can do fine, step back, looking at aggregated numbers, and just being humble and careful about recognizing what the limitations are. And that might mean diversifying a little bit.

Bill: Well, Jake, I mean, you and I have talked about this. And I don’t know if we’ve had the same conversation, Toby. But I mean, that’s why we’ve talked about organizational culture is antifragile. Working on, analyzing– like Markel, for instance, is a group I know. And I just know who those people are and I think they will try to do their best over time. And over time, I think that works out well. I don’t know what this quarter is gonna look like. I don’t know who’s trying to stab who in the back within the organization, if it’s even going on. I don’t know any of that stuff.

Tobias: But you trust them because you can look back and see what they have done as manifest in the numbers that they’ve put up run rather than what they’ve said.

Bill: That’s correct. And honestly, I probably overweight this. I really think the hiring of [unintelligible 00:27:02] that was a lot of signal to me. I thought that that was very out-of-the-box thinking and I think he’s a great addition.

Tobias: Yeah, agreed. Anything else, fellas? Do we move on to mine, we’ve got about 30 minutes before we hit the–?

Bill: Yeah, well, it can be 15 or whatever, but yeah.

Tobias: Mate, I’m gonna hit that mark right dead on the nose.

Bill: I know you’re very good at time.

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