In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- The Difference Between Growth And Value Stocks
- The Importance Of Slack In Life And Investing
- What Impact Will The Cost To Insure A Telsa Have On New Sales?
- DCF’s Are Too Academic For Everyday Investors
- How To Deal With Selling Too Early
- Stock Based Compensation Treatment In A DCF
- Sayre’s Law
- It’s Necessary To Be Slightly Underemployed If You’re To Do Something Significant
- Most Employees Prefer Cash To Shares
- Don’t Write Off Warren Buffett!
- Was AWS Luck Or Skill?
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:
We’re live. It’s 10:30 AM Pacific, 1:30 PM Eastern, 5:30 PM UTC Universal Coordinated Time. It’s Value After Hours. What’s happening fellas?
Bill Brewster:
Still in a closet last week. I’m coming out next week. I’m going home.
Jake Taylor:
Yeah. That’s great.
Tobias Carlisle:
How about you JT, good long weekend?
Jake Taylor:
Yeah, I guess so. I mean, are there weekends anymore? I don’t really know the difference between, I guess the market’s closed. That’s the only real difference.
Tobias Carlisle:
That’s how you tell. That’s how you can tell. If the market’s closed-
Bill Brewster:
Like [inaudible 00:00:36] ground where no one can tell if the market’s open when you’re working? Magic.
Tobias Carlisle:
What a [inaudible 00:00:45].
Bill Brewster:
I think it was Klarman was describing them and he said that they say that you can’t tell if the market’s open around there.
Jake Taylor:
I would say the same around this office.
Bill Brewster:
Shout out to my boys over at Tweedy, Browne. My man Fred and Jay Hill, if you’re two of the 10. Hello?
Tobias Carlisle:
Yeah, I had a good interview with the Tweedy guys. I got five of the seven partners, so that was fun. I was a little bit nervous for that one, honestly.
Bill Brewster:
I listened to that one.
Tobias Carlisle:
Good guys.
Bill Brewster:
My boy Cliff over there. What’s up?
Jake Taylor:
They’re good people.
Tobias Carlisle:
I’m trying to get Cliff on. I’ve been pestering him in the DMS. He kind of, he’s sent me to the marketing team, but he said he could override them, so fingers crossed.
Bill Brewster:
He could override them? Dude, don’t you don’t want this.
Tobias Carlisle:
I don’t know if that’s a good thing or a bad thing, but I said that he’d get a very sympathetic hearing from me on value.
Jake Taylor:
Okay. That’s good.
Tobias Carlisle:
If we could confine the conversation to the last three papers that he’s written in the paper that his colleagues wrote, we’ll be money good. If we get into momentum, I don’t know what we’re going to talk about.
Bill Brewster:
I [crosstalk 00:01:55] I just hope he doesn’t kill himself. Hypertension is an issue with this COVID stuff. Cliff needs to calm down sometimes on the Twitter machine. Like, “You’ve won the battle. Walk away.”
Tobias Carlisle:
Yeah. He did win that battle. I think comprehensively.
Bill Brewster:
I’m on team Cliff, so-
Jake Taylor:
[inaudible 00:02:13] victory there.
Bill Brewster:
I’m going to log off of this and I’m going to be Taleb.
Tobias Carlisle:
Yeah. You think he’s like Google searching for COVID in coronavirus. “Oh, demonetize the podcast.” Is that $7 we’re never going to get back.
Bill Brewster:
Ouch. Seven, you holding something from us? Because I thought it was like a buck 20.
Tobias Carlisle:
I think we got, yeah, it was 100 bucks for the last 28 days. Something like that. It’s growing. Gee, it’s growing quickly.
Bill Brewster:
I like how people are like, “Yeah, niche audience is a really… You can monetize them.” Then I think about this podcast. No, you cannot.
Jake Taylor:
Yeah. We’re the riches in the niches. Isn’t that the same?
Bill Brewster:
That’s right. Yeah. Shout out to Scuttleblurb.
Tobias Carlisle:
Is it me? Am I doing the intro?
Bill Brewster:
I think so.
Tobias Carlisle:
Welcome to Value After Hours. I’m Tobias Carlisle. I’m joined by my co-host Jake Taylor and Bill Brewster. Jake, what’s your topic this week?
Jake Taylor:
I’ve got a double helping of veggies this week and we’re going to be talking about slack in systems.
Tobias Carlisle:
I love it. What about you Brew, what you got on?
Bill Brewster:
I don’t know, in honor of the vaccine, I want to go YOLO on everything travel related, but I’m probably just going to rub my nose and how painful it was to watch RH rip.
Tobias Carlisle:
Are you in it? Are you not in it?
Bill Brewster:
I’m not in it.
Tobias Carlisle:
I guess we’re going to find out in a moment.
Bill Brewster:
And we’re going to talk about it and it makes me a little sad, but also I think I did the right thing.
Tobias Carlisle:
I want to talk about the difference between value and growth. Every time I talk about it, somebody comes in and says, “I’ve read Warren Buffett’s letter. Buffett says, there’s no difference. Growth is a component of value.” I do understand that. I want to talk about why I distinguish between the two and why you should at least be aware of the reason for the distinction. Coming up right after this, you want to go Brew, you want to start off with your…
Bill Brewster:
Yeah, I can. Hang on and wait real quick. Just to follow up on yours. Are we going to rename these this week or are we going to after this week continue with value?
Jake Taylor:
All in due time.
Tobias Carlisle:
Well, we can talk about that.
What Impact Will The Cost To Insure A Telsa Have On New Sales?
Bill Brewster:
Yes. So first off, let’s start out with my Tesla story that I had to take down from Twitter. Thank you to TSLAQ, you’re all are crazy. My grandma, very nice lady, my kids are playing tennis across the street from her and she is not as able to walk as she once was. So she wanted to drive over to watch and she was pulling the Tesla out of the garage and I guess started with the rear bumper, didn’t totally realize that she was hitting the garage and pressed down on the gas a little bit all the way to the front driver’s side door, the side of the garage raked along the car.
Bill Brewster:
And then I think at some point she got a little bit I don’t know, confused, worried, whatever. And she cut the car to the other side and with the front right, hit another part of the garage. So long story short, nana, I hope you’re not listening. She’d be embarrassed that I’m telling this. I don’t think she listens. Hopefully she’s one of the 10 now. Anyway, I call up insurance and I’m like, “Hey this is what happened. And we got this quote. I would like to process this.” Anyway, long story short, the quote to fix the cosmetic damage, this is cosmetic, right? She hit a garage driving at slow speed. 25 grand of damage.
Tobias Carlisle:
It’s a few panels, right? How many panels? Back, right bumper?
Bill Brewster:
It was most of the driver’s side and the front right quarter panel. So I mean it’s not nothing to fix. Don’t get me wrong, but you’re not talking about structural stuff. It’s all cosmetic. Anyway, Kelley Blue Book value on the car was 31 grand. She was going to try to pay out of pocket because she didn’t want it on our insurance. And I was like, “No, this does not make any sense.” And the agreed upon value is 43 grand. So that’s what she’s going to get from the insurance company. To the person that may be listening that accused me of insurance fraud, you are a moron, sir. It’s not insurance fraud, it’s how insurance works. Next.
Tobias Carlisle:
So let’s just-
Jake Taylor:
Are there any-
Tobias Carlisle:
Sorry.
Jake Taylor:
… Tax credits you can get, EV tax credits to get a repair job?
Bill Brewster:
I don’t think the repair job, but it’s going to get another one. She’s very excited. We’re getting her the model three, the smaller version so that she can tool around in that. But it’s amazing how much that costs to fix on something that really doesn’t feel like it should cost that much. Montana Skeptic tweeted that out and that’s when my Twitter feed went from. “Oh, this is sort of a funny, cute story to I am going into the vortex of TSLAQ hell.” And I deleted it.
Tobias Carlisle:
So, what side were you cast on? Are you TSLAQ or are you, Tesla, whatever that is, Tesla?
Bill Brewster:
I mean I interact with Charlie Grant occasionally. Charlie is a great guy. If you’re listening, what’s up Charlie?
Tobias Carlisle:
He’s one of the 10.
Bill Brewster:
He’s obviously one of the 10.
Tobias Carlisle:
So is his dad.
Bill Brewster:
Jim, I don’t know. Maybe, I hope so.
Tobias Carlisle:
Jimmy comes in here for the [crosstalk 00:07:37].
Bill Brewster:
I don’t know. Charlie retweeted it and he sent me a DM, he was like, “Sorry I had to make you go viral.” And it was funny. I mean I shared it because I thought that the punchline of my joke was funny, but then once Skeptic got in. His followers are a little bit now, they’re looking for meat a little bit too much and I wasn’t trying to be their dinner. I’m just trying to share a story from my life.
Tobias Carlisle:
So basically, so what has happened is your grandma has backed out of the garage and it’s dinged up some side panels.
Bill Brewster:
Yeah, super slow.
Tobias Carlisle:
And then-
Bill Brewster:
I mean, I think she just got a little bit nervous, heard something scratching, hit the gas. That thing does have a ton of torque. It was a 2014 Model S and just started raking against the garage.
Tobias Carlisle:
But then they’ve treated the car as if it’s totaled.
Bill Brewster:
It is totaled.
Tobias Carlisle:
What does that mean? What does totaled mean? From an insurance perspective, as in it’s just cheap, it’s too expensive to fix it, we’ll just get you a new one or it’s not drivable?
Bill Brewster:
No, they’re going to send it to Copart who’s going to sell it as a salvage car. So my dad wants to buy it out. He got the auction lot number and he’s going to be their bidding on the car to try to fix it. But I mean it goes to auction and then somebody that has the body shop or something or thinks they can fix it, will fix it. So I mean-
Tobias Carlisle:
What’s the broader-
Bill Brewster:
… I don’t know if it’s that easy.
Tobias Carlisle:
What’s the broader takeaway for Tesla? What did you deduce from that?
Bill Brewster:
Well, what Montana Skeptic’s point was if this is the outcome from a fairly small incident, how are these things insurable down the road? And I do think that’s a legitimate question to ask long-term.
Tobias Carlisle:
They’ve had some trouble insuring the cars. I’ve had some trouble insuring the board too. But let’s just talk about the cars for a moment.
Bill Brewster:
Oh, we got jokes early. I like it. Yeah, I don’t know. I mean it pulls forward some demand in the short-term, but if you can’t get insurance for the car, it becomes a problem down the road.
Tobias Carlisle:
Does Tesla make money out of that because they get another car being bought from them? That’s the insurance company’s issue, not Tesla’s.
Jake Taylor:
Yeah. Well its Tesla’s issue when your total cost of ownership goes up so much because your insurance that then there isn’t demand for your product.
Bill Brewster:
Yeah, that’s right. I mean that’s the one thing that made me a little bit nervous. I mean this really, if I even showed you the pictures, you guys would be like, there’s no way that car is totaled. But it was.
Tobias Carlisle:
Who makes the determination? Tesla or was a Tesla certified repair shop that does then?
Bill Brewster:
It’s a Tesla certified repair shop.
Tobias Carlisle:
So it’s an independent third party, right?
Bill Brewster:
Or Tesla. Correct.
Jake Taylor:
The insurance company makes the total decision or not.
Bill Brewster:
Correct. Yeah, she’s insured through Chubb. I contacted Chubb. Chubb knows the repair shop. They talked and then the Chubb whatever, adjuster or whatever called me up and he was like, “Are you sitting down?” And I said, “Why?” And he’s like, “The car is totaled.” I’m like, “What the hell?”
Tobias Carlisle:
What’s your job? “I’m a Chubb adjuster.”
Bill Brewster:
[crosstalk 00:10:53] total loss.
Jake Taylor:
Crazy.
***
How To Deal With Selling Too Early
Bill Brewster:
I was like, “I don’t know that I need to be sitting down for this bro, but whatever.” Anyway, it was an interesting story. So on the RH hand or note or whatever I’m trying to say, I have enjoyed watching it rip from-
Jake Taylor:
Restoration Hardware for everyone by the way.
Bill Brewster:
Yeah.
Jake Taylor:
Sorry, keep going.
Bill Brewster:
From 80 to 210 or something this morning based on no news. I guess the credit card data was somewhat good. The theory that people are spending some money on their house might actually be playing out, but-
Tobias Carlisle:
Yeah. Home Depot and a few of those kinds of stokes have had a good period of, I mean, absolutely chock a block through the hole locked down and they’ve done well. So RH is participating in that a little bit. Is that the theory?
Bill Brewster:
Yeah. I think so.
Tobias Carlisle:
People are nesting?
Bill Brewster:
What’s that?
Tobias Carlisle:
People are nesting?
Bill Brewster:
Yeah. I think, and I mean I think it’s been shown by now that Americans aren’t very good at saving. So if you give them a bunch of money they’re going to spend it.
Tobias Carlisle:
I guess this is where it goes. Right?
Bill Brewster:
Yeah. Because it’s getting taken away from travel right now and going into their home I guess. I think there’s a couple interesting things. One, I am not sure whether or not selling it was the right or the wrong decision. I mean I bought it fairly quick into the sell off. My cost basis was 120 bucks a share by the time that I was done accumulating it. I got out at roughly even after my views on the economy and the virus and everything had changed. I think one thing that I probably should have done is I, and this is all hindsight speaking, but maybe let it settle in a little bit more about what I thought would actually be the economic consequences of the virus and the layoffs and all that stuff before I may be bought a luxury furniture retailer.
Bill Brewster:
My thought was, I think people have this wrong, I think people are going to spend in their house. I may have been right initially I wasn’t able to sit with the risk, so I don’t deserve the return. But we’ll see whether or not the market’s wrong or whether or not I was right. But looking at stock price in between a decision and the outcome can really make you not feel great about the decision. And it’s still, I won’t know for two years. Whether or not it was the right idea, because a lot of what I was thinking is not, “Oh, what’s going to happen in April and May?” I’m more concerned about December, January, February next year, that kind of thing than I am right now. So we’ll see.
Jake Taylor:
Isn’t that one of the hard things about this game is that you’d almost be better served if you could somehow get the data pricing or pricing data, I should say. When on different intervals than every second by second.
Bill Brewster:
Yeah, well you got to do that yourself. Right? But I do like to pick.
Jake Taylor:
But how hard is it to keep from wanting to look at it and just see what’s happening and like, “Oh, did I make a good decision or not?” Where if you could just say, “All right, put this in a time capsule in two years from now, remind me to go back and look what the price was and see what it did.” And then I’m going to ignore it otherwise, I don’t want to know. I think you would probably learn a lot more and have a lot less heartache.
Bill Brewster:
This is what Guy Spier’s book told me to do, but I hate myself. So I check.
Tobias Carlisle:
I think Taleb said that as well. The lower your frequency of checking, the more likely you are to have a positive outcome when you check and there’s a point, I forget where it is, but probably daily where if you’re checking you’re more likely to be down than up.
Bill Brewster:
Yeah, I think that’s probably right. And if nothing else, I mean I’m talking to myself now, you’re introducing emotional pain where it doesn’t really need to be and there’s probably better and higher uses of time.
Jake Taylor:
Taleb’s argument, if I understand correctly, is actually the loss aversion angle of it. So even if it’s half the time you’re up 51% of the time and down 49% of the time. A year from now over enough and you’re going to be winning. So you would only notice winning. But if you’re checking every single day, your feeling of loss stacks up at twice the rate as the feeling of gain. So it makes it that much harder.
Tobias Carlisle:
What if you’re a value guy and you want to perform seven days out of 10? How’s that feel?
Bill Brewster:
Better than seven out of seven.
Jake Taylor:
You need those other three days to be really strong in it.
Bill Brewster:
Ironically, I don’t mind being down on a position, that doesn’t bother me that much. I do fundamentally think that RH, I mean I believe in their future, I was nervous and remained nervous about the amount of financial and operating leverage given their debt maturities.
Jake Taylor:
Then can’t beat yourself up about it. Go on your process.
Bill Brewster:
Yeah, no, I dig, I dig. It’s just it’s not fun to watch something and be ready and then have the opportunity come and then not have the guts to hold it, I guess-
Tobias Carlisle:
You ever think about changing the-
Bill Brewster:
And then watch it rip, and then wonder if you’re right.
Tobias Carlisle:
… Changing the bit from like a binary on or off to a sizing question or even an instrument question? Change it from equity to options, leaps or whatever?
Bill Brewster:
Yeah, it was never a big one in my, I mean the max percentage that I ever made, it was two anyway, so it wasn’t like a big bet. But the other thing is I’ve got enough leverage in my portfolio as it is. I don’t really need that. But it just sucks, so we’ll see. Hopefully it comes back down and then I’ll be ready to swing or they go bankrupt and I say, “”See, I was right.”
Jake Taylor:
“See how smart I am.”
Bill Brewster:
Yeah, that’s right. Anyway, the emotional toll of the game.
Jake Taylor:
Toby, why don’t you go next?
***
The Difference Between Growth And Value Stocks
Tobias Carlisle:
In the course of doing that last little bit of research that I did, my state of value address, part of that is looking at alternatives that you have. So value defined in that paper as the value decile. That’s the 10% that is cheapest on any given simple price ratio. And then I looked at a combination of those price ratios and to find what does the… if you don’t believe in price to earnings or price to cash flow, enterprise value to EBITDA, whatever, what do they all say together to give you a rough idea. And then just I also acknowledged in that paper and I liked the way Cliff did it actually, Cliff gave me the idea for it. I didn’t put my own model in, but Cliff did and his paper and the idea is basically that when you apply, so I don’t just use price ratios just so everybody’s clear on that.
Tobias Carlisle:
I also look at balance sheet, health, risk of financial distress, fraud, earnings manipulation and a variety of other things that I don’t always talk about but including in there is share buybacks on the long side, on the short side, basically it’s an inversion of that process, negative free cashflow, and so on. When you add all of those things in, the spread looks a lot wider than it normally does. And the spread that I’m talking about is between the most overvalued and the most undervalued. But included in the most overvalued stuff I don’t want to own because it’s a junky balance sheet. It’s negative free cash flow on the long side. It’s a good balance sheets, it’s positive free cash flow. It’s buying back stock, issuing stock for the most part. Any of those things by themselves is a pretty good distinguisher between the cheap and the expensive.
Tobias Carlisle:
Having said that, you still go through these periods of time where the expensive leg, the growth, the glamour, however you want to describe it, we might have to come up with another name for it. But I think glamour is a pretty good description of what it is because it’s basically the narrative has wildly diverged from what the financial statements are telling you. The financial statements are, if you looked at them, they’re almost uninvestible while they’re uninvestible their stocks, their shorts but they still go up a lot year after year, after year often because the top line is so good. But the top line growing and none of that falling to the bottom line or the company having to keep on financing. Sometimes those things do tend to integrate businesses, but it’s much, much rare than everybody thinks. So I just make a distinction and I know in the literature the distinction is between growth and value and the distinction is the price that you pay for the assets.
Tobias Carlisle:
So value tends to pay lower, I mean much, much lower multiples. In fact, they tend to often that value basket is the price is less than the flow. So you’re paying less than one times earnings, so less than one times book or much less than one times book. And on the long side you’re paying multiples of those things. So there are markets where that long side works. We’ve been through one recently for the last five years, particularly where the long side has worked really well. But you have to realize that that is an unusual thing. Now, Buffett says value, growth is a component of value, which is absolutely true if you’re doing a discounted cashflow analysis. But when you’re thinking about these things, you should think about the amount of weight that is in the terminal value versus the amount of weight that’s in the foreseeable years that you’re discounting back.
Tobias Carlisle:
If you find that you’ve got an enormous amount of weight in your terminal value, you’ve got a lot of work to do to prove that up. I’m not saying don’t do it. I’m just saying recognize the bit that you’re making. So when I do these things, I don’t like to have a lot of weight in the terminal value. I like really near-term cash flows because I think that they’re much, much more achievable. When I test it over the full data set, you get good returns. Now, the argument is that something has changed over the last five or 10 years. We’ve got so good at screening. Everybody knows what these companies are. Everybody’s hunting for these undervalued companies. You’re better off paradoxically hunting for them in the most overvalue because nobody’s looking there for longs.
Tobias Carlisle:
And so that seems to have been a better bit, but I make a distinction between the two, just so everybody knows what style of value investor I am and what I am doing when I’m discussing these things. It’s not confusing at all. You don’t have to be confused about this stuff and you don’t have to remind me about Buffett’s quote. I’ve read Buffett’s letters a few times. I’ve written about them a few times too, so I don’t need to, I’ll listen every time.
Bill Brewster:
Wait, do you understand that growth and value are joined at the hip?
Tobias Carlisle:
I’ve never heard that expression. What does that mean?
Bill Brewster:
Well, I just I wanted to maybe say it a different way. They’re a component of each other. Yeah. No, I think what you’re saying makes… I mean, it’s a ton of sense. It’s a shame to put it in longer terms, the two terms, cabbage people’s minds, right? And then they just, people start shouting past each other. I think that with what we’ve just been through, it has illuminated some of the risks to the near-term cash flow. But I also think you have to understand that this is a greater than three standard deviation event at a minimum. I don’t know how many standard deviations it is, but we’re definitely not living in the normal, so I don’t know that you can go underwrite what would this business look like at zero revenues for however long to stress the near-term cash flow?
Bill Brewster:
But yeah, I mean the terminal value, you introduce a ton of interest rate risk into your bet too. As you said, know your bet. I don’t know which one is right or wrong. I just think people that can articulate what the bet is are the ones that are going to ultimately hold the bag.
Sayre’s Law
Jake Taylor:
So what are some good names than what we could use to end this argument that it’s academic versus practitioner in a way of value growth?
Tobias Carlisle:
I always say it’s a good example of Sayre’s law.
Jake Taylor:
I love glamour. Glamour’s a winner there, right? We have that one [crosstalk 00:23:26].
Tobias Carlisle:
And I use glamour. I don’t use growth. I think for the most part I try and use glamour because I’m not trying to describe high growth companies. There’s nothing wrong with owning high growth companies. Just as long as you recognize the risks to owning high growth companies, you got to look at the statistical tables, you got to look how likely it is that they can sustain that growth rate. Some of them do.
Jake Taylor:
What’s that law? It’s pretty funny.
Tobias Carlisle:
Sayre’s law, that one, the intensity of the argument is inversely proportionate to the size of the stakes. The lower the stakes, the more intense the argument. It’s an academic kind of thing. I don’t care. I know what I’m doing and I’m describing mine as value. So if somebody else wants to describe it a different way then being my guess, but I’m a value investor.
Bill Brewster:
The thing that I found-
Tobias Carlisle:
I’m a deep value investor.
Bill Brewster:
Well the thing that I found interesting from talking to you, I didn’t know that your second and correct me if I’m wrong, but in your portfolio the second strongest factor is quality.
Tobias Carlisle:
Right. And that’s just because I like everything. My objection is just a return on invested capital just because it tends to be highly mean reverting. But I like cash flows on cash flows or balance sheet cashflow buying back stock, all indicia of quality I agree with of course you want to learn that stuff. Actually if you’re going to ask about things that should be joined at the hip, I think quality and growth as quality and value are joined at the hip. I don’t see how you get value without quality. You got something that’s cheap on all of its ratios. Who cares? I want something that I want to own cheap on those ratios. That to me is the definition of kind of value investing. Something that you do want to own at a low price.
Jake Taylor:
I wonder if there is another kind of z-axis to this to help maybe us figure this out? What about one is a version of looking backwards that would be the kind of more academic ‘value and growth’ and then one is kind of more looking forward, I’m making projections about the future. I wonder if we can come up with a smart way to rename them based on the fact that there’s sort of time differences.
Tobias Carlisle:
I’m still making a prediction about the future that I am saying, I think that these things, I think there’s going to be a mean reversion, although that [inaudible 00:25:46] paper that I put in that I was surprised by that when it came out. That was a new analysis. That’s in fact is from scratch the [inaudible 00:25:53] from scratch. What they showed is that the earnings tend to deteriorate over the holding period for value stocks. And that’s been true over the full dataset. I was a little surprised by that because the way that the data is usually analyzed, it looks like the portfolio is getting cheaper and cheaper, and the reason that has been that people have ascribed to that, including me is mean reversion in the underlying earnings. But it turns out that that’s not right. I don’t know if that’s exactly what’s happening in my portfolios because I tend to own things.
Tobias Carlisle:
I own Berkshire, I own Markel, I own Schwab, they’re all growing, they’re all going to be bigger. The rate of growth across my portfolio is 11% top line. Sorry, sorry, let me be clear. 5% top line, 11% bottom line, because they tend to buy back a lot of stock. So there’s growth in the portfolios, but I’m not buying on the basis of that growth. I’m assuming there’s going to be some growth and I think it’s a bonus in over five years. That’s very material growth. But in the short term, who knows? I just think they’re mispriced. I think they’re below market and they’re trading below market and they’re worth more.
Don’t Write Off Warren Buffett
Tobias Carlisle:
I’m all for a different name for it, but I don’t think there’s a good one. I think deep value versus franchise value or Buffett style value is pretty good distinction. We’re going to cross over sometimes too. I mean Apple was in my screens when Buffett bought. Berkshire’s in my screens, I was surprised that he didn’t buy it this time around, but I guess he’s got other things going on.
Bill Brewster:
It’s not over, man. It’s not over. I mean, look, if he has changed his mind on what he thinks the potential path of outcomes are, he’s got a shot right now to buy it at not that much higher. I mean, people have fully thrown in the towel on Buffett, which-
Tobias Carlisle:
Astonishing.
Bill Brewster:
I mean even I did according to some people, I will let those people know that my new money has been going into Berkshire over everything else. So I am not.
Tobias Carlisle:
You probably traded It well, did you sell it at the top and buy it back at the low?
Bill Brewster:
No. No. But if I did, I’d start a newsletter and tell everyone I did.
Jake Taylor:
[inaudible 00:27:56].
Bill Brewster:
Next. Sacrifice a little integrity for dollars today.
Tobias Carlisle:
Do you have something that you want to save up?
Bill Brewster:
No, I think I’ll leave that for offline and private conversations. I would just say that it takes a lifetime to build a reputation and a minute to tear it down.
Tobias Carlisle:
That’s a good point.
Jake Taylor:
And a mailing list to tear it down.
Bill Brewster:
That’s right. And I would be even more cautious about doing something like that if I built my lifetime of reputation around a group of people that agreed with that concept.
Tobias Carlisle:
This is all very oblique. People are listening confused as hell right now.
Bill Brewster:
[crosstalk 00:28:40] they are.
Tobias Carlisle:
All right, JT, my Ted talk is over. Let’s eat the veggies. Let’s get to the good part.
***
The Importance Of Slack In Life And Investing
Jake Taylor:
All right, so hat tip first of all to Baker Street Partners for sending this paper over to me and it’s called Studies on slack and it was by Scott Alexander on the Slate Star Codex website. So I want you to imagine there’s this planet that has all these animals on it that none of them can see. And they’re in this fierce competition. You could almost imagine like Pandora from Avatar it’s just much more competitive than even earth. Now, obviously it would be a huge advantage if one of the animals could evolve an eye, but it takes some metabolic energy and it’s actually a cost to get that eye evolved. They are at a disadvantage. So when the competition is crazy high, there’s not enough room for an eye to evolve, even though it over a longer period of time would be very, very advantageous.
Jake Taylor:
So the fact that you need a little bit of slack basically, is a very interesting concept that I’m going to apply to some other places. So one way to think about this in evolutionary biology, they call it adaptive fitness landscapes and landscape is really the operative word here. So imagine that you’re standing and you pour a bucket of water out and it’s at a puddle at your feet. Now water wants to go to the lowest level that it can because of gravity. Now, if you could imagine that just up over the hill from you, there’s a crevice that’s super deep, but the water can never quite get up over the hill and get down into that crevice because the gravity, the competition is so strong. Well, if you relax gravity a little bit, the water can find its way up and over the hill and find a much, much more, a happier place to be.
Jake Taylor:
And hopefully you can kind of see the interplay there between competition and slack that can allow a species or in this case water to find the landscape and find its way over it. Okay, so couple of things. Number one isn’t this fascinating that you need both competition and slack to find the optimal way. This is out of the Tao Te Ching type of thing. It’s very yin and yang, right? So the first thing to think about would be think about the stock market as especially the more original version of the stock market, which was to actually raise capital and not just a secondary market for people to exchange shares of ownership. But you are taking, if you think about money as a storage of time, you were taking other people’s slack time and reallocating it to others who are going to then use it to maybe build something even bigger. You’re giving them a chance to climb from that little puddle over the hill and into a much bigger potential outcome.
Jake Taylor:
So slack savings, turning into an investment if everyone’s living hand to mouth, it’s very hard to make any kind of progress, if we’re all in just dire competition. We can’t find that next level. So another thing to think about, with the economy, when I think about, we had a, call it a 4% GDP contraction in 2008. Now any system in my mind that couldn’t handle a 4% change seems kind of boggles my mind. You would think if 4% of the squirrels in the forest disappeared, would anyone notice? Would it go into history books as this amazing thing that we should all study? It makes me wonder about how tightly we run all of our systems. So what’s the opposite of slack?
Bill Brewster:
Why do you hate squirrels?
Jake Taylor:
Well, whatever animal you want to make it, but what’s the opposite of slack?
Bill Brewster:
I mean, we run it pretty tight, I don’t disagree with that. I don’t know that we don’t derive enough benefit to justify that though. At least in normal times. But if I was arguing the other side, I’d say, well that’s true if you socialize the losses, you anti-capitalist pig.
Tobias Carlisle:
Yeah. It’s like overclocking or something, right? Overdrive.
Jake Taylor:
It’s leverage.
Tobias Carlisle:
Leverage.
Jake Taylor:
That’s the opposite of slack. So we’ve run our system at this way that’s probably overleveraged where you would think a 4% change would not lead to such crazy outcomes. So when I think about when you think about all of us have in our heads this list of our wants and needs at a given time and that can change based on the world around us. So COVID has been a pretty good example of that. All of a sudden we don’t want to travel as much, but we do want to watch more Netflix or whatever. All of our lives have had some pretty drastic shifts relative to normal times. Bill, you look like you want to jump [crosstalk 00:33:55].
Bill Brewster:
I don’t know that people don’t want to travel. I would push back on that just a little, but I agree that they are precluded from traveling right now and choosing not to for the time being. One thing that I was thinking just real quick is it is possible and I know that this is going to really upset some people. So get ready. It’s possible that the policy things that we have done through the Fed and the government have maybe enabled us to swallow a greater slack this time around than the financial crisis because the financial markets aren’t going to lock up. And in March, that was a legit risk. And I think that we were way fragile in March and maybe aren’t as fragile now, but we’ll see in a year.
Jake Taylor:
Okay.
Bill Brewster:
Or a five. Right.
Jake Taylor:
One idea that I had about kind of the economy and how we operate given that we should allow for some slack. I think we should really do everything we can to probably destigmatize actually bankruptcy and also unemployment and do what we can to help people to transition to change, going into really actually building the structure of production that will create all the things that we want as consumers. So to reduce some of the friction in the whole system of being able to transition people from one thing to another, whether it’s an entrepreneur who’s looking to build things or the employees who are coming along to help them. I think whether that means like more training or even more lenient bankruptcy laws, let’s have things die in competition and let’s get you right back into the game.
It’s Necessary To Be Slightly Underemployed If You’re To Do Something Significant
Jake Taylor:
So another an interesting quote, and this is from James Watson, who was the co-discoverer of DNA with Francis Crick. He says that it’s necessary to be slightly underemployed if you’re to do something significant. So that’s really another form of slack. He had a lot of time to be working on these really big ideas he had. He wasn’t working a crazy schedule based on that comment. So maybe this is an interesting argument for universal basic income.
Bill Brewster:
Oh God, Jake, come on.
Jake Taylor:
Hey, let’s expand our thinking a little bit and imagine. So here’s one of our-
Bill Brewster:
Jake the Marxist. This has really taken a turn.
Jake Taylor:
Yeah. The character arc. Well, just imagine for a second though, what if we use that UBI with a little bit more than just to not sit on the couch and watch more Netflix. But what if people actually worked on building cool shit that we all wanted? They took that slack in there, they’re not commuting anymore. They’re not killing themselves for 60 hours a week jobs. And they were working on things that were actually maybe it would move the needle in a bigger way. I find that to be an interesting idea.
Bill Brewster:
Oh men, we’re going to have to tag AOC in this.
Tobias Carlisle:
Google kind of did that, right? Google used to have that you could use one day of the week, like Fridays 20% of your time you’re allowed to go and work on other projects. And then they killed that right at about the time that killed the don’t be evil thing. So I wonder what they discovered.
Jake Taylor:
Yeah. I don’t know. That’s a good question. I’m sure we have some friends at Google who can tell us the answers. So let’s talk a little bit about slack when it comes to your personality. And just like Jordan documentary is, everyone is all ra ra about it and granted, I thought it was fascinating and very interesting, but I mean, Jordan was obviously very hard to get along with. And very exacting and demanding. I think about this like the 20th century theoretical physicist named Paul Dirac who was apparently just as smart as any of the other guys, but was really hard to talk to, really prickly and kind of a pain in the ass. And then you contrast that with someone like Richard Feynman, who everyone loves and it’s because he had this more of a slack in his personality to find new things to… He was always playing the bongos, drawing women in strip clubs, doing all this crazy stuff, lockpicking-
Bill Brewster:
[inaudible 00:38:29]?
Jake Taylor:
He probably would have been. He’s a pretty good artist. He had all of these different places in slack and his personality compared to Dirac who was no nonsense, a pain to talk to. Who would you rather hang around with? Who would you rather have lunch with? Everyone would say Feynman and yet they both got a lot, they got things done. I find that interesting maybe we could all use a little bit more playfulness in our approaches.
Bill Brewster:
This is why I don’t think people should ask Buffett and Munger for life advice. You want to be Buffett? Go be Buffett. I bet you end up unhappy. It is a unique personality that lives that life and gets that outcome and if you’re wondering how to raise your children and have a happy wife, that dude isn’t the guy to ask.
Jake Taylor:
That’s fair. Speaking of Berkshire, I think another point would be there’s almost a group selection kind of evolution thing happening at Berkshire where Buffett’s calendar, you look at it and I bet it’s mostly empty and there’s a lot of slack in his calendar versus the people below him. I bet Abel’s got a 60 hour a week calendar and I bet all the other CEOs do as well. So you have this kind of intense competition at one level and then slack up at another level that can help process and maybe find that, evolve that eye, if you will, from the biological example.
Tobias Carlisle:
Yeah. I love that idea that you need the competition to force the evolution, but if the competition is too intense, then nobody can spare the energy to make that evolution. That’s really fascinating. I’d never heard that idea before. You need some slack in that system in order to… Doesn’t it fly in the [inaudible 00:40:15] there’s that guns, germs and steel article where they say that there’s a reason that there’s this tiny little island that was covered or tiny little areas that were covered with lots of people who had to fight each other all the time. And so they had to develop better weapons and they all got immunity. And that was part of the reason why they were then able to go and colonize the rest of the world.
Jake Taylor:
I don’t think it was the weapons so much, but at least for the immunity part. It was they lived with livestock close and livestock. They swap germs back and forth with the livestock over and over and developed immunity and then took it over to a place where they didn’t have that immunity. And then-
Tobias Carlisle:
But that’s a separate idea. There are three ideas, they’re guns, germs, and steel and steel being technology. But the guns is if you’re at war with somebody, if you can come up with a better weapon then you probably you’re going to win that war, probably.
Jake Taylor:
Yeah. So there’s an interesting example of, I don’t know if you guys ever played Civilization but there’s kind of two strategies there. They call it like the axe rush is one strategy. So you’re just as fast as you can try to get to have the technology of the axe. And then you just go chop up all of your competitors and win the day.
Bill Brewster:
[crosstalk 00:41:28]. I like that.
Jake Taylor:
Well then the other strategy would be called build and that’s, it’s more of the kind of you’re going to just keep working on your technologies, building it. And eventually if you’re not under pressure from the people who are chasing the axe, if they’re not subject to the competition, you can get to the point where you’re so much better that, you can just go defeat them at your leisure because you’re so much more advanced. So two strategies and a lot of them have to do with how much competition versus slack do you have? And a lot of that can be geography based. How hard is it? How isolated are you to kind of build versus having to go fight and chop right away?
Bill Brewster:
I used to play Magic: The Gathering, shout out to the Magic nerds. And that was different deck strategies. Do you attack quickly or do you have something that has more power in it? Just like magic nostalgia. I wonder why I never touched a boob for a long time. Thanks, Sarah.
Jake Taylor:
All right. So I’m done.
Bill Brewster:
Magic and a forward that had a purple shaft. I didn’t stand a chance for a while.
Jake Taylor:
No.
Bill Brewster:
Oh well, it worked out. Three little boys, the Brewster nerds will live on. I have taken this the wrong way.
***
Jake Taylor:
I think it’s time for some Q&A, unless you got any, Toby, you want to?
Tobias Carlisle:
Yeah, shoot some questions through, I saw some earlier that were good and I just couldn’t grab them. So shoot them in. There was one, Kevin’s at [inaudible 00:43:00], I saw he had a good one.
Jake Taylor:
Hey Kevin.
Bill Brewster:
The only slack that I think is, I don’t know I defend them a lot, but the airlines, I think other than American, which is why I am so mad at them because they gave the whole thing a black eye. But I think that there was a lot of slack there. I just think that this particular event was one that capitalism is not set up for, at least the way that we do it. And I don’t know that you would want… Well, I do. I don’t think you would want to live in a world where we set up for this kind of event and built that much slack in the system by design. I think that the benefits of how we have set things up generally exceed the cost, but I don’t disagree with you that maybe we pushed it too far.
Jake Taylor:
Yeah. [crosstalk 00:43:51].
Bill Brewster:
I mean, if I really wanted to build a more sustainable system, I’d eliminate stuff like limited liability. Because I think that incentivizes a ton of risk seeking, but I also think there’s a lot of benefits from that, so.
Ratios Vs DCF’s
Tobias Carlisle:
I’ve got a question ratios versus DCF. I have a preference for not so much ratios as expectations investing. I just think you can see some things and it’s the same, it’s the same process, right? Ratios, multiples expectations. You can see where there’s a divergence. Whereas I think the DCF is asking you to get two things right. You’ve got to get the discount rate right. And you’ve got to get the growth rate right. I think that gets hard. And I don’t know. So for now, and for the last decade, the discount rate has been really hard question, do you assume normalization, do you assume that it stays where it is? I-
Jake Taylor:
You wouldn’t have bought anything then.
James Montier – The 13th Labour of Hercules: Capital Preservation in the Age of Financial Repression
Tobias Carlisle:
But I don’t know the answer to that question. And I’ve read a lot of smart guys who don’t know the answer either. There’s a great piece by James Montier where he talks about the age of financial repression where he talks about making exactly that bit. I don’t know the answer. So I just prefer to ignore that part of the equation. Think about the ratio where it is, think about the expectation where it is and not worry too much about what the correct discount rate is. Sometimes you’re going to be right. Sometimes you’re going to be wrong. I think that on an on balance, the other things that you get in that are outweigh it, but horses for courses.
Bill Brewster:
I think if you are a newer investor and I think if you’re seasoned, then you figure out your own process. But if you’re new, I would really encourage doing a DCF to force yourself to think through. Okay, do I think that they’re going to get working capital efficiency and why? And it forces, or has forced me in the past to really think through what levers a business can pull, where are they in their cashflow cycle? Is the inventory bloated? Is it not? Questions like that, that I think are multiple at least with my personality type, I can get lazy and skip really important questions. So I don’t think that you should do a DCF, see some pinpoint estimate and be like, “Oh, that’s the value of the company.” I think that is insane. But I do think that there’s a lot of merit in thinking through the drivers of a DCF.
Tobias Carlisle:
I got a super chat from Jonathan Wallace. Thanks, Jonathan. This is a $2 question insight on EV/EBIT adjusted for market debt value. I don’t know that I’ve looked at the market on an EV/EBIT basis, I looked at the value decile in that paper that I wrote a few weeks back.
Bill Brewster:
What he’s saying adjust the debt to the trading value. Rather than just assume it’s all a par. Is that what the question is?
Tobias Carlisle:
Sorry. You’re right.
Bill Brewster:
For two dollars you get a follow up for it. Make sure it-
Tobias Carlisle:
A clarification.
Bill Brewster:
To clarify, but I think that’s what he’s asking. Right? If the bonds are trading at 80, do you adjust the debt to that and do your EV based on that?
Tobias Carlisle:
Yeah. If you can get that data, you should. Absolutely.
Bill Brewster:
The only odd thing about that is then you start doing the market cap and you’re at the whim of the market. I don’t know. I think it’s probably better to just do your own [crosstalk 00:47:28].
Tobias Carlisle:
There are companies out there now buying back the debt in the market at a discount. I like to see that kind of maneuver.
Jake Taylor:
Yeah. I guess my challenge-
Bill Brewster:
Strong.
Jake Taylor:
… My challenge to that would be, you think the equity market, the market is wrong about its pricing, but you are implicitly assuming the debt market is right then.
Tobias Carlisle:
The debt market is available in the market at that time. So I’m assuming they can take advantage of it in much the same way that they can. And maybe that’s wrong. I guess your obligation is still where it stands. Yeah. It’s a good question. I don’t know the answer to it.
Bill Brewster:
I mean, the problem is you do have to pay back 100 cents on the dollar, right? Like [crosstalk 00:48:07].
Tobias Carlisle:
Unless you bought it back.
Bill Brewster:
Yeah, that’s right. But a debtor that’s holding to maturity is not going to say, “Oh, your market price is quoted at this. We can just settle off and I’ll take a loss.”
Jake Taylor:
Well, they will though sometimes.
Bill Brewster:
No, I know, but I think generally I would rather value the debt at 100 cents on the dollar to be conservative rather than say, “Oh, this is cheap based on the where the total [inaudible 00:48:31].” If you were to file bankruptcy, for instance, the judge is not going to be like, “Oh, it was only 25 cents on the dollar before you went into BK.” Right?
Jake Taylor:
Right. True.
Tobias Carlisle:
Do you think commission free trades rise of day trading has a material impact on prices? [crosstalk 00:48:48].
Bill Brewster:
No. I think it has a material impact on investors results though, negatively.
Tobias Carlisle:
Look at the Robinhood traders. I tweeted this up. I kind of didn’t really even follow the tweet because I took off for the weekend and didn’t check my Twitter, but it got a lot of action that Robinhood traders. And I don’t know if this is like, basically Robinhood traders pick the bottom. They were not in SPY much until the bottom. And they’ve just exploded and they’ve bit it really hard out of the bottom. And so everybody says, well they’ve made lots of dumb trades, Robinhood traders are dumb. I think that either Robinhood traders are bag holders or they are value investors. And I don’t necessarily know at this point in the cycle, I’m getting the-
Jake Taylor:
Insert the Spider-Man pointing back and forth.
Tobias Carlisle:
Yeah. Well that’s fair. I think they’ve done pretty well. I think they’ve bought a lot of bottoms and maybe it’s only a short-term bottom. Maybe it’s going to be more, I don’t know, but you’ve got to pay effect. They did it-
Jake Taylor:
Some of the names are kind of surprising too there. Ford is really high up and obviously like the airlines. I mean some of these-
Tobias Carlisle:
Cheap.
Jake Taylor:
Yeah. I mean, you would think that it would have been all like FANG, Shopify.
Tobias Carlisle:
There’s a lot of that in there though to the [crosstalk 00:50:10].
Bill Brewster:
Yeah. It’s hard to stay away from right now is allegiance spirit and Southwest. It’s very hard. [crosstalk 00:50:16]. No man. So Allegiant, they said that 60% of their customers intended to fly before December 31st. Royal Caribbean, I was listening to their call. They have-
Jake Taylor:
[crosstalk 00:50:33].
Bill Brewster:
Yeah. But it’s going to come back. I mean Royal Caribbean they said that they have 20 million hardcore cruisers or whatever, almost like a substantial majority. I don’t want to put out a percentage, but high, high majority are opting for a delayed cruise. I think you get 125% credit rather than getting your money back. Sort of somewhat counterintuitive to me from a health standpoint, boomers are opting to stay with their crews and millennials they’re asking for cash back which I thought was interesting. I think leisure is going to come back a lot faster than other people do. I think Americans don’t care and they’re going to start looking at the data and the young ones are going to say, “I really don’t have that big of a risk, though low.”
Tobias Carlisle:
What about using the 10 year? Sorry, so this is just going back to what we’re talking about. What about using the 10-year treasury rate as the assumed terminal growth rate? Damodaran does that yeah. That’s fine. You can use whatever you want. The issue is whether that if you’re using a sub normal sub natural rate and the rate mean reverts back to where it has been, normally now you’ve overpaid for those things. That’s the exact question that we’re trying to wrestle with here. Not what actual rate you stick in, but whether you assume that that rate stays where it is or whether that mean reverts, and that’s been the whole thing that everybody’s been wrestling with for the last decade and to the extent that you’ve assumed a lower rate, you’ve done better. If you’ve assumed mean reversion, you haven’t been able to bid up for these things. So Damodaran’s been right. Yeah. Just-
***
DCF’s Are Too Academic For Everyday Investors
Bill Brewster:
I personally think these are way too academic for a practitioner. I mean, I think that-
Jake Taylor:
But it affects your evaluation. You think that’s academic?
Bill Brewster:
For sure. But I-
Jake Taylor:
If you’re doing a DCF.
Bill Brewster:
But I don’t put that much effort. I don’t put that much faith in my valuation. I mean really when push comes to shove, if I can get my head around an idea, I look at my entry free cashflow yield plus or minus whatever additional debt I think could be recapped to equity plus or minus whatever working capital is going to be taken out of the business and plus, or minus some multiple fade. And you’re going to say, well, how do you get to a multiple fade without knowing what your long-term growth rate is? I mean, I try to figure out something that I think is pretty reasonable and lay the bet accordingly. I’m not worried about the precision of the price because I think that that’s a great way to get lost in a model for me and forget everything that matters. Because I think Excel, you can lose a shit on a time and all that time could be much better spent on competitive position, business, franchise growth value, analyzing CEO comp that stuff to me matters a lot more than whether or not my long-term discount rate is right.
Bill Brewster:
Because if my long-term discount rate is off, the whole market is screwed. I mean, I guess I can play some game where I’m smarter than the market on discount rates. I don’t have any competence in that gains.
Tobias Carlisle:
So what does that mean? You just use whatever’s prevailing and you don’t worry. So you don’t assume mean reversion.
Bill Brewster:
No, I try to make bets that I understand when I see them. When I bought a small slug of visa, it was trading at, I don’t know, 24 times trailing. So my big risk, I think in that is spending comes big time in, and the long-term growth rate is impaired, but if you’re paying 24 times for visa, I mean, you’re going to tell me a world where visa is a 15 times earnings stock? Fine, then everything else is going to be four. I mean, that’s an exaggeration, but I don’t think you get hit that hard on a company like that if you’re going in at what appears to be a reasonable historic valuation, that’s more how my mind works.
Bill Brewster:
Now, if the business deteriorates, I’m fucked, right. I mean, there to our point earlier, lI have a lot of terminal value risks in that asset, but at least I know it.
Jake Taylor:
I mean, you’re getting a little bit of that by fading the [inaudible 00:54:36], your multiple, but one way of introducing maybe a little bit higher discount rate. Everyone assumes, like we’re just not going to pay as much for the multiple out in the future.
Bill Brewster:
Nygren says that he has it basically a market multiple as his terminal value. I don’t know that I agree with that. Shout out to Bill, I know you’re looking to me for advice, but-
Tobias Carlisle:
You’re on the Bill slack. Everybody called Bill has their own slack.
Bill Brewster:
Yeah. So I don’t know. I just, I don’t know that I would worry too much about it for me trying to outmaneuver the market on what the long-term discount rate is. I think that is time spent better places.
Tobias Carlisle:
So what’s the hack, what are you doing?
Bill Brewster:
Well, so on visa, I think that I’m probably going to be able to sell that for North of 20 times.
Tobias Carlisle:
So you’re just assuming that the multiple doesn’t change over the course that you own it?
Bill Brewster:
I am trying to buy that asset I was not comfortable paying North of 30 because if you’re going to sell it at 20 and you hold it for 10 years, that’s what? I mean, roughly 5% a year. I mean, that’s not nothing but 24 to 20, over a 10-year holding period. That’s not the end of the world to me, especially for that asset. I mean, so.
***
Stock Based Compensation Treatment In A DCF
Tobias Carlisle:
So I’ve got a good question here. I don’t know what the answer to this one is, but it’s a good question. Can you discuss stock-based compensation in terms of being a non-cash, but also a real business cost? Don’t add back to FCF important to consider their dilutive potential question mark. Yeah, that’s a really good question. So I hate seeing lots of share-based compensation. No, no, no. I don’t hate seeing lots of, I hate seeing it material to like when it’s 10 or 20% of what they’re generating in revenue, you’re having a laugh at that stage. It’s a scam. I think that’s something like… I hate naming names, but snap is ridiculous. The amount of stock-based compensation relative to the amount of money that they make. It’s just a clever kind of accounting trick to hide what is a real cost born by the owners, even if it’s not necessarily reflected in the results of the company.
Tobias Carlisle:
So I don’t adjust anything for it, but I don’t like seeing lots of it. And on the other hand, I do like seeing lots of buybacks. So it’s just I just use it included as a factor that I consider not necessarily as something that needs to result in an adjustment. How do you guys deal with it?
Bill Brewster:
I don’t know, I’m sitting here bothered about my mental math, and I hate doing math and my mind on the podcast because I’m always wrong. So please forgive me. Share-based compensation, how I think about it is it’s basically dilution. So for a growth company, I’m okay with that, I do understand these earlier companies do sometimes need to depend somewhat on the benevolence of their employees to fund some free cashflow shortages. So I do think that you are somewhat dependent on that. I get a little frustrated when I look at a company that issues a bunch of shares and then buys back the shares to offset that dilution and everybody the free cash flow without looking at the bought back shares. That doesn’t make a whole lot of sense to me if you’re spending three billion on share dilution and then spending three billion to reduce that, that seems like an operating expense to me a lot more than a capital allocation decision especially for mature businesses.
Tobias Carlisle:
Why is a mature business issuing so much stock though? That’s my question. You’re saying it’s fair enough when the early on. But why they’re listed in doing that?
Bill Brewster:
Well, I mean, look at what Google does. I don’t mind having employees that are put into a vision, I would much prefer for that shares or those shares to probably go to mid-level managers than then they go to top management and that’s not how it works in reality, but-
Tobias Carlisle:
Well here’s the crazy thing.
Bill Brewster:
… I don’t know.
Most Employees Prefer Cash To Shares
Tobias Carlisle:
Most employees prefer cash to shares. That’s what the studies say. I was shocked when I saw that because I always thought it was the other way around.
Bill Brewster:
Yeah. [crosstalk 00:58:54]. That’s interesting.
Jake Taylor:
Well, think about it from their point of view, your current income is based on this company and if you’re keeping all of your shares, a big part of your kind of future net worth is also based on this company. You start to get pretty heavy, you could see why they tend to dump them as soon as they get them and try to diversify out of it. It’s not illogical.
Tobias Carlisle:
I think it’s more a problem that it’s kind of a lottery ticket. You can work really hard and get a big slug of these things and it could be worth nothing.
Jake Taylor:
And then it’s Enron.
Tobias Carlisle:
Yeah. Or just doesn’t for whatever reason, you just go through an air pocket. So there are some guys who get there and they get a really good run and there are some guys who get there a bit lighter and get a really bad run or vice versa. And it’s not anything to do with your output. It’s all to do with what the share price doesn’t, who knows what that’s going to do in the short-term.
Bill Brewster:
Something I thought was pretty interesting when I was at BMO, the share price really drove… I mean, people wouldn’t not go to work if it was down, but people would bitch about it. It really does drive morale to a certain extent. And there were certain times when it would just languish and people be like, “Fucking stock.” Under their breath or whatever. So it’s interesting.
Jake Taylor:
I’m not sure about having that as a barometer that’s always around.
Was AWS Luck Or Skill?
Tobias Carlisle:
Last question and then I’m going to declare time. Was AWS luck or skill?
Bill Brewster:
Probably a little bit of luck. Well, a lot a bit of luck and a lot a bit of skill. I mean, the more you practice, the luckier you get. And they’re fucking smart. So they figured it out and then they figured out how to apply it to other people. I don’t think anyone thought it was going to be what it was going to be, but I mean, that’s of one of the embedded options that some great management teams create. So it’s clearly not as a certain, as it looks in hindsight.
Jake Taylor:
Yeah. A little bit of extra slack to throw more spaghetti against the wall. And you evolve an eye, right?
Bill Brewster:
Well, the interesting thing, yes, first of all, certainly. And then you think about today, Google has taken a lot of heat for all their bets. Do they not have enough leeway from their shareholders? Have their shareholders put up with enough? I mean, one of the things that I think is I have a buddy who may or may not take a company public, I don’t know. But I’m trying to talk to him about, if you do this from day one, set your IR communications up correctly and tell the street the same message from the beginning and have it belong. Give yourself the ability to build an enduring organization by treating shareholders like long-term owners and Bezos allowed himself to have that kind of slack. Same with Hastings, a lot of Netflix’s success is people’s faith in Reed. Tesla, the whole fucking reason that company is still around is because of Elon Musk. Even if you think he’s a nut.
Tobias Carlisle:
Reed sells a lot of stock.
Bill Brewster:
Yeah. Netflix is worth a lot of money though.
Tobias Carlisle:
Less that it’s trading at.
Bill Brewster:
Going ar Netflix. Suck it, Netflix.
Jake Taylor:
I would be curious to see more companies listing on this long-term stock exchange idea. I don’t know if you guys have seen that before.
Bill Brewster:
Yeah, it’s called the NASDAQ. Anyway-
Jake Taylor:
No, it’s not.
Bill Brewster:
It could be, it could be, that’s going to turn into the same thing everything else will. Please, people are morons.
Jake Taylor:
That’s the point of this.
Bill Brewster:
The interesting Netflix thing you got to look at their US sub growth. It was not quite as good as you might think in the middle of a pandemic. If you were [inaudible 01:02:38] and you thought that they were peak at 90 million households. Twitter unleash on me.
Tobias Carlisle:
And on that note, thanks very much everybody. We’ll be back same bat time, same bat channel, next week.
Bill Brewster:
Peace.
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