VALUE: After Hours (S02 E23): Mastering Investing, The Right Size, Aerospace Decimation

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

  • The Art Of Mastering Investing
  • Opportunities In The Decimated Aerospace Value Chain
  • The Right Size In Investing. Competition, And Growth
  • The Market Can Leave The Smartest People Behind
  • What Are Your Chances Of Being A Successful Compounder
  • The Tipping Point Between Online Sales And Face To Face Salespeople
  • Underrated Bill Miller
  • Jimmy Chill’s Portfolio
  • The Problem With Back Testing
  • Carl Icahn’s Portfolio
  • The Bull Case For Disney

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: And we’re live. It’s June 2nd, 2020, 10:30 AM on the West Coast, 1:30 PM East Coast, 5:30 PM UTC. Coordinate your clocks from all around the globe. I don’t know what that is Australian Eastern Standard Time, you’ll have to calculate that yourself.

Jake: What time is it on the International Space Station?

Tobias: Do they use UTC? Are they Zulu? [chuckles]

Jake: I don’t know but they’re– Aren’t they moving pretty fast through the time zones? I mean it’s–that’s hard to coordinate.

Tobias: Yeah. That was very cool, that launch. Wow, that was inspirational stuff.

Bill: That boat was autonomous?

Tobias: That was crazy. Yeah, the drone.

Bill: I mean, fuck, man. All the Elon hating, you gotta tip your cap to that. Even if you’re like, “Oh, the science is BS,” he had to orchestrate all that stuff. I mean that’s saying like, “Oh, you can’t play all the instruments.” Well, dude had the vision to bring all that together and put it together. Not everyone can do that. Even if you think he’s a complete fraud, you gotta at least say, “That’s a hell of a fraud,” because he put a spaceship into space with two people in it.

Tobias: Yeah, personally. [chuckles]

Bill: Well, not like personally-personally, personally.

Tobias: Yeah, that was amazing. That was inspirational. When that blasted off, I was like, “Woo, alright! Maybe it is worth being an astronaut.”

Bill: I’ll tell you what, before we start, I’d like to give myself a shoutout for never buying Dollar General and for getting out of Restoration Hardware. That’s been fun. Fuck me.

Tobias: We’ve got an awesome lineup of people from all over the world here. Israel, North Carolina, Chesterfield, Chicago, Mexico, Perth, Toronto, Nashville, Tennessee. How you doing? Jake’s gonna do the intro today. You wanna take it away?

Jake: Yeah. Welcome everyone to Value After Hours with your hosts, Toby Carlisle, Bill Brewster, and Jake Taylor. Toby, what are we gonna be talking about today?

Tobias: Yeah, I was going to talk about the brief little run from value that started April 2nd, but it’s a little bit boring. I’m gonna talk about that too, but I wanna talk about, just very briefly, mastery, Jiro Dreams of Sushi style mastery.

Jake: William?

Bill: I am going to take us to aerospace world. I was gonna talk Twitter, but maybe that’ll be next week.

Jake: And I’m gonna have another vegetable serving of–on being the right size and we’ll be back right after this.

Bill: Six inches!

Tobias: [laughs] Who wants to take it away?

Bill: Anyway–great! Yeah. Good start.

Jake: Toby, why don’t you start it this week?

Bill: Let’s do it.

The Art Of Mastering Investing

Tobias : I thought you’re gonna let me gather my thoughts. Well, it’s inspired a little bit by Anthony Jeselnik when he appeared on Joe Rogan. It’s one of my favorite style of Rogan episodes where he talks to a comedian, just because it’s so foreign to value investing. And I love it when they talk about their process about having to develop material over an extremely long, like two or three years–two years to get it to the point where you can then refine it and then deliver it and get it tight over another year and then deliver a special, dump the lot, start again, kind of an extraordinary way of generating new material, living your life.

Everybody has seen Jiro Dreams of Sushi by this stage, so that’s kind of a–just totally different again from comedy where, just by going through mechanically doing the same process over and over and over again. In a very small scale, Jiro has developed this, one of the finest restaurants in the world. Three Michelin chef’s hats, three Michelin stars?

Bill: Stars.

Tobias: Who gives out the chef’s hats?

Bill: Why do a bunch of brothers from a tire company get to decide what’s good food? That’s a better question.

Tobias: Because they travel around, I guess.

Jake: Chef Boyardee, I don’t know [crosstalk] hats.

Bill: [crosstalk] rating. I mean they rarely go somewhere that they mentioned that’s bad, but it’s a nice way to spin being rich into business.

Tobias: It’s a little bit self-fulfilling too, isn’t it?

Bill: Yeah, for sure.

Tobias: But I think about that in terms of investing, what does it take to master investing? And I don’t know if you ever actually master it. I mean, Buffett is a phenomenal intellect.

Bill: Has-been?

Tobias: Phenomenal memory, learned from the master. I missed it, what did you say?

Bill: I said a has-been.

Jake: He didn’t buy the dip, dude.

Tobias: Yeah, he did not. And has spent his entire life doing it. Investing is one of the–really the only endeavors, one of the few endeavors anyway, where you just keep on getting better. Like chess, the best chess players in the world, top out of 35, you’re mechanically or your ability to calculate peaks at about 35. And then experience can keep you in there for about another five years and by the time, you’re 40, you’re too old to compete at the top level. So chess. Maybe poker, you can keep on getting better, but then poker evolves so rapidly. It was–the kids came through who’d play a million hands online, which was the same number of hands that some 72-year-old guy would have played, if you’d just been sitting at a [crosstalk]

Yeah. If you’ve been–And so they develop this incredibly aggressive loose way of playing which would maximize returns. So investing is really one of the only places where you just keep on accumulating knowledge and sharpening your skills and getting better, but it’s complicated by the fact that the market moves in these very long cycles. Whatever you learned up to the–1999 didn’t serve you very well from 2000 to say 2009. And then what you learned in that decade didn’t work very well in the last decade and who knows what’s gonna work next, maybe being [crosstalk]

Jake: Are you calling out Robinhood traders right now with this?

Tobias: Well, I think they get a little bit too much–

Jake: Flak.

Tobias: Yeah, I think they get a little bit too much disrespect. I don’t really know. It’s hard to say. Everybody–they’re not very big accounts, they trade too much. But when you look at the stuff, they are dip buyers at least. And if you’re a dip buy, you’re either a bag-holder or a value investor. And at the moment, they’re both the same thing. So, I can’t be too critical of those guys. But I’m interested in mastering investing, getting it right, and I’ll keep on reading and learning. Not too much. I’m sure there are people out there who’d say, “Well, you should have evolved into a compounder by now.”

Jake: That’s fair argument.

Tobias: I got a point of view. So, I think that these valuations are stretched on that side. And I think that some evidence for that is the fact that I’ve been calling a bottom-in value for a long time, have had a couple of months of running now. It’s June 2nd, started at April 2nd. I think we’ve had a pretty good run for two months. Last year, we had one that ran from about August 27th through to about December 17, not to be too precise. So, I can’t tell you the hour of the trading day that it started and finished, but that’s about the performance. So that was about four months, so we need this one to go on for a little bit longer than that. Got a lot of ground to catch up for Valley.

Jake: Yeah, what happened in March?

Bill: Or from January?

Tobias: This year?

Bill: Yeah. I’m a little salty here. My retirement account who I treat, like the account I hate is–was pretty much long energies and financials for the year because of a tax advantage dividend strategy. Yay. It has just gotten hammered. So, any reprieve that I find over the last couple days or months or whatever is nothing compared to the drawdown it took.

Tobias: Is that more of a like a deeper value portfolio? You’re just like slinging it around doing whatever you feel like?

Bill: I don’t treat that like I treat the account that I would run that I care about and that I would run for people, so–

Tobias: This is where you get your gamble out.

Bill: I’m being a little more speculative with it.

Jake: It’s a grudge F account.

Jimmy Chill’s Portfolio

Bill: That’s right, yeah. And when energy got beat up earlier, I was early on that and then all this happened. Can we just talk real quick because I gotta give our boy, Jimmy Chill, a shoutout. His recommendations last night, checked it. First of all, they might work. If you’re a compounder-bro and you know more about this space than me, fine, whatever. Okta, Zscaler, Zoom, Proofpoint, CrowdStrike, DraftKings, DocuSign, Amazon, Facebook. That’s the Jimmy Chill buy, buy them now.

Tobias: Did he pick that March 23?

Bill: No, dude, he was pitching that yesterday.

Tobias: That’s a good March 23 portfolio.

Bill: Direct quote on DraftKings, “Is the online betting company really worth 13 billion?” The questions are relevant to this set of buyers who take the stock up every day there’s an opening somewhere. And people wanna know why I watch that guy. It’s amazing.

Tobias: The recommendations, is he’s saying, “Just hold this until the next time I’m on,” and the next time he’s on tomorrow night, so he can get it over then.

Bill: I don’t know. I was a little wired. I had a school board meeting last night and it ends, and I can’t go to bed. So, I had a couple beers and I watched Jimmy Chill pitch this. I almost fell out of my chair. I don’t know how sophisticated his audience is. I do know you better know what the heck you’re doing if you’re buying those.

Jake: That’s a piece of–

Bill: Momo

Jake: Valuation doesn’t matter, huh? Okay.

Bill: Well, the thought–it was triggered when Toby was talking about the young poker players playing fast and loose, and I was like, “Oh, man, Jimmy Chill was fast and loose last night.”

Tobias: I’ve never heard more people say valuation doesn’t matter. So, Chamath says valuation doesn’t matter. There are lots of guys out there like, “Valuation doesn’t matter anymore.” I don’t know if valuation matters or not, but I kind of think that if a lot of people start saying that, I really wanna go back and make sure that my valuations are tight before I–I’m not abandoning valuation right now–

Bill: Dude, they’re putting in a different game.

Tobias: Well, they’re trying to make money–

Bill: How do you–how do you–yeah but that’s the thing. It’s a promotion.

Jake: You’re trying to be right in principle?

Tobias: Yeah, that’s right, theory. I’m trying to be right in theory.

Bill: Yeah. What is space exploration worth? It’s worth whatever story you can spin. So, like you can’t–fine. You wanna build me a DCF, that’s cool. I had a DCF on airlines that was great till it got exploded. I mean, the amount of speculative nature in many of the things that something like Chamath is looking at, yeah, of course, valuation doesn’t matter. It’s–can you create more hype?

Jake: Very interesting that–why did that Virgin Galactic go up after the space launch? So, imagine that you own a gas station and you’re thinking about building a gas station there. And across the street, they open up a gas station and it’s like going gangbusters. Would you think then that your gas station is worth more because of that? The competition just proved that they could do something pretty amazing. That’s good for you now. I don’t follow the logic–

Tobias: Maybe what they’ve proved is that there’s a market for gas stations. There’s a market for gas in your area.

Bill: Aggregate flows into gas stations. I could see that, but it’s just a different game, which is fine.

Tobias: I do think that sometimes what they’re doing is that they think, well, a lot of people will have watched the launch and now they’re gonna think that this is a hot space. Now I’m gonna go and– what else is in there that–?

Jake: [crosstalk] those people.

Tobias: Yeah, I’m gonna front run everybody else and everybody else is thinking that too. I’ve seen people saying, “I’m gonna go and buy ZoomInfo,” because people are gonna confuse that for Zoom because they already did that with Z-O-O-M to go for ZM, when they meant ZM.

Jake: That’ real 3D chess there.

Bill: I almost owned Z-O-O-M for a while because they were licensing their technology to Motorola to make modems. Not exactly the video conference. I mean, that’s the thing, Zoom Videos, $58 billion company, because I can go on the internet and watch a video with my friends for free, like get out of here!

Tobias: I think the topline is about $600 million.

Bill: Yeah. Okay, well, you’re gonna have to grow into a rosy projection.

Tobias: I find Zoom a little bit interesting because Zoom is the worst of all of the video platforms that I use. I don’t get it. There’s so much competition out there.

Bill: Yeah, they got distribution now in universities, so that’s pretty big. We’ll see. It’s not a show producer because there’s not that much cash flow now. [laughter]

Jake: Brewster’s feisty today.

Bill: That’s right! I’m back home out of the closet.

Jake: Out of the closet.

Jake: Toby, let me ask you this to circle back to what you were saying about wanting to become a master. What do you have built into your process to make sure that it gets a little bit better all of the time? Because you’re looking at quantitative signals and do they translate into opportunity? For you, what does that look like?

The Problem With Back Testing

Tobias: Well, it’s not even necessarily quantitative signals. I’m just looking at new papers all the time, not even just papers. What’s the impact of a short having free cash flow over the last 12 months going into it over the full dataset? Does that help it or hurt it from the perspective of the short? Does having a really heavily indebted short, is that more dangerous because now that equity stubs should be much more volatile? Or is it less dangerous, because that’s a company that fundamentally is going to run into some trouble?

Some things I don’t think you can reason to from first principles. You just gotta go and test them and see. But there are lots of other things that you probably can reason to from first principles, and it doesn’t really matter what the back-test says, because it should be in there. So, it’s a balance between the two. It’s constantly evolving.

I’ve published a lot about the big muscle movements in the process, but I don’t talk a lot about the finer detail of it because some of it’s– I kid myself, it’s not proprietary. I hate that word, but it’s like some of it’s a special sauce, so I’m trying to outperform at some stage.

Jake: Yeah, that’s fair.

Tobias: I think that there’s a lot of traps in back-testing in that you can just run a back-test throwing anything in there and see what happens. And sometimes, probably a lot of the time, it’s gonna work and it might be the fact that you’ve just equal-weighted your positions and you’re comparing it to a market-capitalization-weighted index. It might be underperforming, because this is a time when a market-capitalization-weighted index is outperforming. So, there’s a lot of ways that you can fool yourself. As the great Richard Feynman says, “You gotta try to avoid that because you’re the easiest person to fool.”

So, a lot of it’s what is sensible? What does that look like in a test? It’s that kind of stuff. I’m sure that everybody ends up at the same point. Just trying to get this sense of– I’m not trying to squeeze the last few percent out either. I would really rather give up some return in a back-test for something that makes more sense, to me as a value investor.

Jake: [crosstalk] Yeah. So, not like the Rentec, which is more– they were actually—I think preferred the signals that made no sense, because then they thought no one else would be looking for it.

Tobias: Right. And that seems to have been a good way of doing it. I think that also they’re running many, many signals and devoting a little bit of the portfolio to it too, which I can see that that would work.

Bill: Remember when Toby kept them off his fantasy list for greatest investors ever, which is ridiculous.

Tobias: Well, I introduced the additional criteria in that you had to pay for it and they were the topline, so I put mine together with everybody off the bottom line. I think I got [unintelligible [00:16:43]. I think I didn’t– [crosstalk]

Bill: You left your money on the table. That’s fine. I spent too much, I went on margin, so I got called.

Tobias: You had nothing to invest but you had some great investors in there to run– [crosstalk]

Bill: That’s right, yeah. I had to pay a lot of borrow, but boy, I was gonna catch up, make it up in scale.

Tobias: All right. Let’s do somebody else. We’ve extracted everything that we possibly can from that–

Jake: Dead horse? [crosstalk]

Opportunities In The Decimated Aerospace Value Chain

Bill: [crosstalk] the aerospace value chain, because it’s super decimated as many of you may know, all 10 of you. I had a good conversation with a buddy that works at Boeing last night. And just the amount of slack that is in Boeing’s system right now, he was telling me that at some point they were talking about maybe producing eighty 737 MAXs a month and now, they’re looking at, I mean, it’s almost stopped right now. But you’re looking at— I think 30 is the number that I heard is the plan. And just how that trickles through the supply chain, like Spirit AeroSystems delivers them. They refer to it as shipsets, I think it’s fuselages and wings for the most part. And Boeing was paying Spirit– or had agreed to have Spirit produce like 50 to 55 last year, even though the MAX was ramping down production. So there was already excess inventory in that system that had to be worked off. And now this, so it’s just been a pileup of issues. I need to get like a deck together and sort through my thoughts. It fits nicely within the acquisition project that I’m doing because you’ve got like TransDigm or Heico, or within the space.

But it’s been interesting, the security that is pretty interesting to me or a set of securities is united bonds actually. You get a lot of yield. You’re higher in the capital structure. It’s the operating entity or the holdco rather, so you’re not secured by the airplanes, but you also don’t have the equity risk. All that they’re talking about is prudent management and paying down debt. Scott Kirby’s a G, that guy knows how to run an airline. They got a lot of cash right now, they got about 250 days of cash burning $20 million a day, so obviously by the end of the fourth quarter, but you gotta assume that they’re gonna get some delay or some traffic coming back, which these riots probably aren’t helping very much, but that one’s interesting to me. And then I’m going through all of them. But I have to think that there’s some value somewhere in there. From a high level, just thinking about how valuation occurs and is built and whatever.

The truth of the aerospace supercycle is going to continue into perpetuity, that was obviously flawed in December. But it is also not as bad as it feels today. That’s normalization, and there’s no visibility right now. So, the idea that people are not going to get more amped up about it over time, I think is almost– the probability is almost zero and that’s going to reflect in the models. You’re not buying into a rosy outlook is the short story. And I think if you got some companies that can survive, you got a reasonable shot at having a pretty good puff in three to five years.

Tobias: And so, you’re moving up the cap stack a little bit to get the debt because it’s got a fatter yield rather than sitting in the equity?

Bill: I’m thinking about it, yeah. United, you’re looking at 11% to 13% yields to maturity for a couple years. Out to 2022, I think it’s 13.3% or something. And it’s an equity hybrid security. It’s not safe, but it’s a whole lot safer than the equity, and you get a pretty good yield there. So, it’s how I’m thinking about that particular part of the value chain. But I’m thinking about stuff like Hexcel, they make composites that are taking greater share of airplanes in general. They also sell into windmills. I don’t know enough to talk about the entities, but I’m trying to work through like, where’s the kink? And I think just from a capital cycle theory standpoint, three to five years out, this shit is going to be tight. I mean they’re firing all their labor, they’re gonna be lean. If you think about, “Okay, how’s this look in a couple years?”, I need to figure out where the profits are gonna flow, but they’re gonna flow somewhere. The supply chain is not gonna be stopped forever.

Tobias: That’s a bold take.

Bill: Well, you don’t have to have the smartest take in the room, you just gotta be right.

Tobias: I hold love and SPO equity.

Bill: You got Spirit?

Tobias: I got Spirit, yeah. That’s worked out okay.

Bill: They are decimated right now. I think their stock’s off like 70%. It’s just one of those things like, just from a gut check—and I know that without doing the math, I get that I’m just talking out of my ass here, but what’s the probability that the value of a perpetual asset has changed 70% in three months? I would say almost zero. So now you get into questions like, was it valued properly before? Is it valued properly now? I don’t know. What I do know is if you’re trying to stack the odds in your favor, looking in areas like this seems to be a better way to stack the odds in your favor than buying whatever Jimmy Chill recommended.

Jake: Does the– M&A component of that when you talk about TransDigm or Heico, is that that you just think they’re going to have a richer opportunity set here over the next couple years of stuff that they can buy?

Bill: I don’t know. You get into a problem with size with both those entities. It is easier to build through M&A on a small base than a larger base. But I think the idea that the big don’t find some people to swallow up is hard for me to fathom because I gotta think if they’re struggling, everyone is struggling.

Tobias: When do we normalize?

Bill: Hexcel, they called off a merger recently. Does that restart down the road? I don’t know, but that’s what my research project is right now.

Tobias: When do we normalize? How do you think about that?

Bill: I don’t know, man. I mean, anyone that knows, they’re just lying. So, there are a lot of competing thoughts that I have. One is, airlines are gonna retire these older aircraft before they have heavy maintenance because they don’t want to incur the cash outflow. The other side of that is United is saying, “We have a young fleet. We’re not gonna buy new airplanes right away. So, we’re gonna stretch out our fleet age,” which is what Delta did, pretty much from ‘09 to today. They took a week and improved our cabins but not our fleet, and that worked out. I don’t know how it all shakes out. I really don’t. What I am confident saying is wide body will come back slower than narrow bodies. So, the 737 and the A320 is gonna come back quicker than the dual aisle transcontinental stuff.

Tobias: I think it comes back pretty quickly and I’ll tell you why. I’ve sent you guys that chart on mobility and what that chart shows we’re basically back to baseline for walking and for driving. So, the peaks now look like the troughs previously and that was a few weeks ago, so we’re probably now getting back to baseline. Public transport still basically zeroed out, but I’m not sure how much public transport is actually running. Where you fit flights in that is a little bit harder. It’s not public transport necessarily, but it’s also not driving your own car, you’re not as safe as that. 9/11 equalized in about three months, normalized in about three months. Even if it’s not three months, that’s still– we’re a pretty adaptable species, we forget really quickly.

Bill: I have 27% of my portfolios in travel-related stuff. So, I have a pretty big bet that it’s gonna come back.

Tobias: Yeah, I think so too.

Bill: If that doesn’t come back, then I’m just wrong but I’m as confident in that as I am in anything like– [crosstalk]

Tobias: Were you priced? You got the right price for the bet?

Bill: Yeah, and I bought a lot of it in March when everyone was terrified. So, we’ll see. This is what I have said that I would wait for forever, is to have a view on something, have the world present an opportunity, and swing. So, I fucking did it. If I’m wrong, I’m wrong, but that’s what I did.

Jake: Can you hedge that travel bet with the Jimmy Chill portfolio?

Bill: No, I’m not messing with Jimmy Chill’s portfolio.

Tobias: The [crosstalk] portfolio, Zoom on one end, Spirit on the other.

Bill: [crosstalk] Splunk. That’s the only one that makes it in.

Tobias: Did he recommend Splunk?

Bill: What? No, Jimmy Chill would never recommend Splunk. It’s got problems.

Jake: The problem is people aren’t buying it fast enough.

Bill: Hey. Come on, man.

Tobias: There’s a lot of growth in it. Growth is not the issue.

Bill: There’s good people over there. I don’t know, but that’s what I’m doing right now. And it’s interesting to think of all the slack that has been introduced to a system that was predicated upon tightness, and how does that come back and where does it– it’s bound to create some sort of seat shortage eventually or some sort of inflation somewhere. It’s a lot of research I gotta do, but it should be fun and it’s interesting.

Jake: Yeah, it’s good way to learn about a new industry.

Bill: If anyone has suggestions, I don’t have answers, so let me know.

Tobias: What’s a good way to learn about a new industry? Losing some money? [laughter]

Jake: Like tuition?

Tobias: I’m right there with you, Bill. I’m not criticizing, I’m just asking questions for my own purposes.

Bill: Yeah. Obviously, I don’t own any of the stuff that I’m looking at now. But I’ve got a pretty strong view on the airline industry and what I think is going to happen and why I liked it. So, then it’s a matter of just working back and seeing, are any of these suppliers to it actually worth a bet or not? They are decimated. Hexcel was a compounder before this, and now what? It’s like a company you cannot own? Get out of here.

Tobias: I think Chris Bloomstran said he held it and might have sold it.

Bill: Yeah. We had chatted on Twitter real quick. There may be reasons not to own it, but that’s just one. My buddy from Boeing says, “We cannot manufacture the 737 without Spirit AeroSystems.” Okay. So, maybe that’s a clue that it’s a business that’s got some value, so what’s the value? I don’t know. But I like to search in headline risk.

Tobias: Me too, filled up a portfolio with it.

Jake: Just called value?

Tobias: Yeah. Well, I got AGO in– AGO is for people who like living their life right on the end of the wedge. It’s [unintelligible [00:29:20]. And every time there’s some bad news with some council somewhere failing, they’re right along there with them, AGO, underwriting the debt. But still compounder, adjusted book value has been compounding really quickly. It’s an interesting position and it’s cheap, but I’ve held it for a while. I know it pretty well.

Bill: Compounders are just stock price, man. That’s not the underlying business. You must be mistaken.

Tobias: Yeah, I’ve learned that.

Bill: Yeah, well, okay. I’m glad that we– Also, did you know that growth and value are tied at the hip?

Tobias: I’ve recently been told. I haven’t seen a drawing of it yet but–

Bill: I just wanted to–

Tobias: I want to see how it works.

Bill: [crosstalk] this is an old conversation we had and I just wanted to come back with that.

Tobias: Growth is just expensive stuff, right?

Bill: I think so, yeah. I’m not sure. I know it’s joined to value somehow. That’s all I know. I’m just reciting Buffett-isms.

Jake: It’s cheap on the 2050 earnings.

Tobias: Yeah, it’s gonna grow into its valuation. Valuation doesn’t matter anymore anyway.

Bill: Not when you discount in negative rates.

Tobias: Well, that’s a good point. That is the one thing that I can’t figure out either. If maybe fan mag is the place to be if we go negative.

Bill: Yeah. Look, I like those businesses in general. Though Facebook’s found themselves in a world of shit with their employees, turns out that it’s not an easy dynamic to manage. And maybe I’m overexaggerating, but it does seem like if you’re– part of your advantage is human capital. This is a delicate time, as is Twitter’s.

Jake: Yeah, at least you have a lot of cash to figure it out with your Facebook.

Bill: Yeah, and they print it every day, which is nice.

Jake: If you can get that.

Bill: Yeah. With no cost of goods sold. Well, I guess they got storage and stuff, but at least you got all the people that are all mad, creating your content. It’s like Fox News without the personalities. Pretty good combo, when you don’t have to pay your talent.

Tobias: Jake, do you wanna take it away?

Bill: All right, veggies.

The Right Size In Investing, Competition, And Growth

Jake: Yes, it’s veggie time. We’re gonna be talking about an article—or I guess an essay, you would call it, from 1926, that’s called On Being the Right Size and it’s written by a geneticist whose name is J. B. S Haldane. He was a science popularizer of his day, like a Richard Dawkins or Stephen Jay Gould.

In this article, he’s talking about how every type of animal has the right size that it’s supposed to– that it becomes. And it’s really it comes down to math is the reason why. The first thing that he asks us to imagine is: Take a normal man and turn him into a giant. He’s 10 times as tall, 10 times as wide, and 10 times as thick. That would then make him 1000 times the normal weight of a man, which would be probably around 80 tons or so. If you took a cross-section of his leg and looked at his femur, his femur would only be 100 times the size of a normal man’s. Basically, that bone would have to be 10x the strength of a normal man’s, otherwise it’s likely to break. Every square inch of giant bone has to be that much stronger because the mass is growing at a faster rate than what the cross-section of the surface area of the bone. And it just so happens that the human thigh bone does break under about 10x the normal human body weight. It’s likely that a giant if it had a similar bone strength would break its leg on every single step that it took.

Bill: That’s unfortunate for the giant.

Jake: You can imagine– Well, maybe this is why Yao Ming’s career was so short. This is a pretty good argument for why he would have foot trouble. Now, let’s imagine gravity for a second. If you take a mouse and drop it down a 1000-foot mineshaft and it lands on a reasonably soft surface, it will be days but it will live. Haldane tells us that a rat when dropped that same will die, a man will be broken, and a horse splashes. This is what he says, it’s pretty gross.

But what it has to do with is the weight to surface area ratio of a falling body. If you imagine that– this is why a parachute works, is because it greatly increases your surface area that the air has to move around while not adding as much weight. This is why insects can crawl on the ceiling because the gravity doesn’t hardly affect them at all. But insects instead where they get afraid is actually around water. If you got out of the bathtub, due to the surface tension of water, you have about a 150th inch layer of water on your body as you get out, which weighs about a pound. We don’t notice it because one pound evenly distributed over your body doesn’t really register. But if you’re a mouse and you’re getting out of water, it’s about your entire body weight, a wet mouse needs to be able to carry its whole bodyweight out. Now, if you’re a fly that lands in the water, it’s many times your bodyweight, that you have to be able to fly to get out. That’s why you see like– [crosstalk]

Bill: Stuck in the water.

Jake: They get stuck in the water. This is why most insects have a– they called a proboscis I think it’s called, which is basically like a tube that sticks out of their– to be able to drink water so they don’t get too close to the edge and fall in.

I was trying to think about like what does that do for a business? What’s the business context of– what’s the weight of water, and maybe it has to do with like regulation and compliance. If you are a little insect in the business world, and you have to try to get your own body weight out, and you have this compliance, it’s weighing on you, you can end up drowning in it. Whereas if you’re a really big company, you don’t even notice the compliance problems. If you’re JP Morgan, you have an entire team of compliance officers who can take care of this stuff. You could see when it comes to size, compliance kind of things matter. I don’t know if you guys have any comments on that before I jump to the next part?

Tobias: No, I like it so far.

Jake: Oh, Bill, you’re muted out.

Bill: My bad. How do you own Berkshire when you’re talking about size? This is the whole argument against them, right?

Tobias: We’re not clear if it’s a benefit or negative yet, are we? Berkshire can get out of water and it doesn’t even notice the water clinging to it, but it kind of clings to the ceiling.

Bill: Yeah, maybe it’s too big to do anything– [crosstalk]

Tobias: It’s toast if it falls down the wall.

Bill: –previously could have been doing.

Jake: All right, we’ll cover some more ground and then we can come back to Berkshire. Now, imagine a worm that has a smooth skin and a straight alimentary canal, like basically the food that comes through. Now, take that worm and make it 10 times as big. Well, what ends up happening is that you would need to have 1000 times as much food and oxygen, so the worm it absorbs oxygen through its skin and it absorbs nutrients through its alimentary canal. You have to have 1000 times as much food and oxygen available for this worm to support a 10x in its size because the surface area of inside the worm and the outside of the worm only grows at 100 times whereas the mass grows at 1000 times. Now, how evolution has got around that has been to create more complex shapes. Our human lungs are incredibly folded up and dense and they have incredible surface area. It’s actually about 100 square yards, which is about half of a tennis court, your lungs have that much surface area inside of them. That’s how we’re able to draw so much oxygen out of the atmosphere.

Now, think about insects. They breathe through their skin, through these little holes. They don’t have lungs, they don’t actively pump oxygen through their body. It’s just about the sheer diffusion of molecules like bumping into each other that move around. So, what ends up happening is that any insect that is– the hole is more than a quarter of an inch away from the air, it won’t diffuse enough and that will be then an oxygen-depleted area of an insect. That’s why they don’t get to be bigger than they are is because they don’t have a way to pump oxygen throughout their body.

Tobias: And thank God.

Jake: Yeah, maybe thank God. Let’s bring this back to the business world and think about oxygen as sort of information and information processing. Every business takes all of these inputs – energy, information, human talent, capital. And they arrange it in some kind of miraculous way that is able to fight entropy enough and then the output of it is that we have delighted customers, like they’re doing things for people that they want to get done.

Well, if you think about the information processing as like the oxygen, you can imagine that the customer interaction and the information from that has to be able to diffuse throughout the entire organization. Otherwise, this is like the insect that gets too big and it can’t get oxygen or information about what’s making the customer happy, deep enough into the organism to be able to have it the information process correctly.

When we think about that, imagine like a restaurant owner– the guy owns the restaurant, he sees every customer, he can see the smile on their faces or when they’re pissed about something, he’s got the direct feedback. He’s almost like an insect and that the information is right there, but it can’t get above a certain size because otherwise it breaks down. Well, let’s think about what does work-from-home mean for this if we’re trying to process information. Think about a business as an information processing organism.

Well, there’s this famous 7% rule study that– it’s a little bit problematic in that, there’s been replication problems with it, but just as a thought experiment– 7% of communication is the words that you’re saying, 38% is the tone, and the other 55% is body language. Now, I don’t know about you, but on a Zoom call, okay, we have the words, we have the tone. I don’t know how much of the body language comes through in a Zoom call.

The Tipping Point Between Online Sales And Face To Face Salespeople

Tobias: Andrew Wilkinson had an interesting tweet where he said it’s like talking to someone on the spectrum because you’re looking at them, but they’re not quite looking at you. They’re looking in a funny place. He said [crosstalk] off-putting–

Bill: This is why the people that are saying that there’s going to be like permanent changes to business travel have never done sales, like a bunch of spreadsheet nerds, it’s like, “Oh, I don’t–[crosstalk]

Tobias: But it’s a cost-benefit analysis. If you’re selling something hugely expensive, you’re still gonna send the dude out. If you’re selling like this– the point at which you can sell something cheaper or more expensive is marginally higher.

Bill: I don’t know, man. One of the best sales people that I ever encountered was a paint guy. He used to have this move where he would hand you the clipboard and the way that he would hand the clipboard, the pen would roll down the clipboard and hit your hand first. You automatically had a pen. He closed so many sales. You can’t do that on Zoom.

Jake: I agree.

Tobias: Equally, you can’t replicate that over lots of different sales guys run. It’s something that was a trick that maybe he can–

Bill: Sales is a personal game, man. I think big sales, small sales, all sales.

The Bull Case For Disney

Tobias: But then there are companies– when Jake was talking before, I was thinking this is the huge advantage that companies like Microsoft, Facebook, fan mag have. They have this– everybody who tunes in gets the same screen and there’s a small group of people can optimize that relationship– doesn’t work for everything, but you do have a huge advantage where you can control each and every customer interaction and get it to where you want it to be.

Jake: Yeah, I think there’s something to that actually, on the quality of the data. If you imagine that using data to make customers happier. If you have some kind of advantage in the data, it’s almost like you’re breathing oxygen-enriched air relative to your competitors. Or maybe–

Bill: You, sir, just laid out the bull case for Disney.

Jake: Well, maybe. You think about-

Bill: Yes. That’s it. The data from Disney+ — [crosstalk]

Jake: -Netflix, the recommendation engine maybe, Google with the search and the fact that like they see where you click once you try to answer the question that you just asked Google and they see if it like worked or not, and they can get that feedback loop and then present it to the next person. Yeah, maybe is an argument for winner take all because of that, that maybe the richness of the data allows you to delight the customer in a way that your competitors couldn’t.

Tobias: Do you think that Netflix is getting there with that? Is Netflix doing that?

Jake: I don’t know. Their recommendation engine’s supposed to be super sophisticated. I’m not sure how it’s– I’ve never been that impressed with [crosstalk]

Tobias: Well, it’s missing me. It doesn’t know me.

Jake: [laughs]

Bill: It’s just the bundle, it’s just the direct bundle. The bundle has a bunch of stuff that you don’t like in it either. It’s gotta get you the one thing that you do like. Like Tiger King, which everyone likes.

Tobias: I didn’t like it.

Bill: Of course, you’re not human. Oh, God.

Jake: Can’t watch it.

Bill: Probably because it reminded you of your hometown in Australia, sir.

Tobias: There’s something to that. That’s not entirely wrong. The original conception of Netflix, I thought, was gonna—it had this very long tail of movies that– there are lots of little cult films that there are small groups of people wanna watch lots and lots of times and so we’re gonna capture that. Then it changed to, “Well, we’re gonna get better data and we’re gonna make better movies and TV for people to watch,” which I think is much, much more difficult.

If I go on YouTube Movies now, if you go on there, they have that long tail. If you wanna see Predator, it’s on YouTube. If you want to see any of those banging action movies from the 80s, Predator stands up really well. The original one, don’t mess with anything else. Or you can watch the second one, that’s great too, but everything else has been terrible. You can find that long tail on YouTube. Maybe YouTube wins that battle.

Bill: This is the Disney argument, man, evergreen content, franchises you can roll out now, data on what people are watching. How do you reinvest in the parks? What experiences do they want? 100% [crosstalk] content that pays for itself. [crosstalk] out there.

Jake: Let me throw a wet blanket on this a little bit.

Bill: And they got 55 million direct-to-consumer customers.

Tobias: I got one less now. I cancelled it over the weekend.

Bill: Oh, you hate it. All I was thinking about, Jake, before you throw a wet blanket on this, is mid-caps were screaming in my head because I think that’s probably the size– I’ve had this thought for a while, but I think mid-caps are probably where you’re big enough to get some scale advantages but small enough to be personal.

What Are Your Chances Of Being A Successful Compounder

Jake: Hmm, interesting. Let’s talk about base rates a little bit. From 1994 to 2014, S&P 1500, what percentage of companies had a great than 30% growth rate for more than five years?

Tobias: Less than 1%. I’d say 0.1%.

Jake: Bill?

Bill: I don’t know.

Jake: You have to answer.

Bill: I’d go with Toby’s. I go 0.11%.

Jake: No. It’s actually 2.9%. You have a 1 in 34 chance of, if you throw a dart at the S&P 1500, finding a company that had grown that consistently. Okay, how about a 20-year run? What do you think that odds are?

Tobias: I should know this because I read this study. It’s low. It’s lower than that.

Bill: It’s base rate paper, basically.

Jake: It is. So, it’s 0.3%. You have a 1 in 330 basically chance. If you’re a compounder and you like that as an investment style, you have to little bit ask yourself, like what are the chances that I’m God’s gift to analysis, enough to be able to be the one that– I’m the one who’s going to pick the 1 in 330 base rate. Kudos to you if you are. I’m a little skeptical that we’re all that smart.

Tobias: I guess the rebuttal to that would be you could add some other analyses to that to– what criteria do those ones that perform, what unites them? Let’s look at those characteristics. And then you could say, what are the consequences for slightly missing there if we get such a blockbuster run out of those? I don’t know the answer, but that’s an interesting line of inquiry.

Jake: I guess my last thing I’ll say is, do you want to bet on insects or elephants in the world? And keep in mind that 25% of the known species on the planet are beetles.

Bill: Yeah, but an elephant is really smart, dude. I’m just saying.

Tobias: Ants eat elephants. Not the other way around. And there’s probably more ants by mass than any other animal on earth. As if somebody knows that, but somebody’s got that. That’s a true fact. It’ll be out there on the internet.

Jake: [laughs] I don’t know how they can tell those kind of things. Actually, the microbes outweigh us by a lot. If you count soil microbes in the soil, we’re just playing a little game, but they’re the real deal for Earth.

Tobias: Yeah, but they don’t have Netflix, so we win.

Jake: They don’t have Netflix, yeah. All right. I’m done with giving [crosstalk] some vegetables.

Bill: I think I’d bet on crocodiles, that’s what I’d I bet on. They’ve made it a long time. You didn’t give me the chance, but that’s what I would bet on.

Jake: Is that mid-caps? Are crocodiles mid-caps?

Bill: I don’t know. I pretty much don’t even know what we’re talking about if I were to be perfectly honest.

Tobias: [laughter] [crosstalk] I like it.

Bill: I’m at the point where I’m thinking about if I want to own an ant or an elephant.

Tobias: If Meb Faber was here, he’d say the biggest company on the stock market, almost invariably underperforms. More recently, that hasn’t been true but for most of the history of the stock market, you can just about [unintelligible [00:49:23] the biggest one relative to everything else, I guess for a number of reasons. If you get to be the biggest, you’ve gotta be very mature, and you’ve also gotta be—valuation’s probably a little bit stretched, but that’s not been true for the last little while. I think it’s been Apple been doing pretty well. There’s few others in there. Microsoft, Google kind of duking it out for number one, probably true– [crosstalk]

Bill: A bit of a problem too. If you pull up Heico’s 10K, and you look– I think it was 2016, they really decoupled from the composite. Obviously, if you knew about Heico in 2011 and you bought it and you believed, like you crushed. But somebody like me, that’s coming in to data research it, I’m already paying for a lot of the stuff that’s been revealed. What’s the probability that I’m not the sucker at the table and how long can that continue and all that stuff?

Tobias: Depends on what portion of the valuation is [crosstalk] in.

Bill: Well, you almost certainly have that problem with the biggest stock in the stock market. It’s like, who’s the incremental buyer? I mean, at some point, flows do matter.

Jake: It’s the other way around. At some point, fundamentals matter. Flows are the only thing that mattered the last [laughs] few years.

Tobias: Hit us with your questions.

Jake: Yeah, question time.

Bill: You think that the best stock in the stock market has bad fundamentals at any time, I’d imagine that the fundamentals are pretty strong and you get somewhat of a–[crosstalk]

Tobias: How do you define best?

Jake: Probably relative to price– [crosstalk]

Bill: The biggest. I would think the biggest usually at the time looking at it has some of the best fundamentals. It would be odd to me to think that the biggest stock in the stock market is just some shit company.

Tobias: The biggest stock in the stock market will be the one that looks like it has the brightest future because it’s the one that gets bid the most.

Jake: Right. And the one that’s probably likely to have a reversion to the mean in the fundamentals.

Tobias: The most popular one.

Bill: Yeah, I’m just saying that I think it’s probably popular because the fundamentals are pretty good at the time.

Tobias: I got a question.

Jake: They have been good.

Bill: Yeah, they are good today. You were making a– is it going to continue to be good? I’m saying, today it’s good.

Jake: And that’s what I’m saying is that the mathematics of genetics and insects and all these things would say that there are some kind of limits on to these things and that if you’re just projecting outward on a straight line, like extrapolation, I have a little bit of a question mark about that. That’s all I guess I’m trying to say.

Bill: Okay, so we’re not buying ants or elephants?

Jake: That’s for you to decide in your heart.

Bill: Look, man, I totally agree. Just look no further than aerospace. People extrapolated in December, they just got screwed.

Carl Icahn’s Portfolio

Tobias: I got a couple of good questions here, fellows. Let’s dive into questions. Did anybody see, I posted Icahn’s portfolio yesterday. Lot of commentary, and I was surprised actually. Most of the time those portfolio tweets just slip through, but Icahn’s got picked up. Icahn stubbed his toe on Hertz, but I heard from a buddy over the weekend who’s in mortgage-backed security structuring and stuff like that. Commercial, there’s this portion– I’m gonna mess this up, apologies to anybody who actually knows what I’m about to try to talk about.

CMBX, there was a big short. This time around, the big short was in the CMBX, the bottom tranche of that. And there was a fund set up to capture it, the guy had $700 million in it. Investors just ran out of patience and they had to dump the whole portfolio. Icahn swooped in, picked it up, made an absolute killing when the market got destroyed. And so that’s why I think he’s come out and he’s been prepared to just say, “Yeah, we messed up on Hertz,” and he’s dusted a billion there, but he’s made much more than that on the other side on Hertz. The question is what do you think about his portfolio? It’s a deep value portfolio. Did you guys see it? See what’s in it?

Jake: Hmm-mm.

Bill: It’s a bunch of energy and what else does he have? He’s probably got IEP in there. And then he’s got some other quasi-activist holding. I’d imagine, I have no idea.

Tobias: IEP portfolio, this is the listed company IEPs that you get, Icahn Enterprises, I think.

Bill: Yeah.

Tobias: Have a look at the stock price on that thing. It’s crushed at the moment. It’s in a trough, I don’t know exactly where it’s trading, but have a look at the runs that that has gone on from– I think it got put together in the mid-1990s. It’s had these two monster peaks and it clearly goes on very big rounds when deep valley gets a little bit more–

Bill: Holy crap. Its dividend yield is 16%. I guess it’s an LP, but still. That’s crazy.

Tobias: Is it an LP?

Bill: Yeah.

Tobias: It’s had some monster runs and it’s looking more like it’s in a trough. I don’t know, I haven’t looked at it really closely. I just looked at it because I got the question yesterday on Twitter and so it’s interesting, it’s worth digging into.

The Market Can Leave The Smartest People Behind

Jake: Yeah, I find some of these almost a close-in fun type of argument for some of these guys, a little bit interesting. Greenlight–

Tobias: Yeah. Ackman’s

Jake: Yeah, Ackman’s. There might be something to that. Especially Einhorn, he’s about as cold as you can get right now reputation-wise. Everybody’s bailed on him.

Tobias: Yeah, and [crosstalk] discount too.

Jake: At some point, I would still bet on him. I think he’s smart. Maybe you get a nice reversion to the mean and his results as well as like, since everyone’s just shit-canned it.

Tobias: Yeah.

Bill: The world can leave smart people behind.

Tobias: Forever or momentarily, what are you saying? Forever.

Bill: I think people can lose their act– [crosstalk]

Jake: Forever ever?

Bill: Yeah. What you got, CPQ, Freeport-McMoRan, Occidental, Cheniere. I have no idea about any of these things. I’ve absolutely none that could outperform the one we got [crosstalk]

Jake: -advocating about it.

Bill: Well, it’s a bunch of commodity plays. He’s gotten his ass handed to him in the Permian. He’s not good in energy. I think objectively speaking. Occidental? I don’t know, was that the world or was he just wrong? I have no idea.

Tobias: He was there with Buffett too.

Bill: Well, Buffett is higher in the cap stack.

Tobias: It’s getting paid out lower in the cap stack. That higher on the cap stack is turning into lower and the cap’s turning into common equity.

Bill: It’s true.

Tobias: Bill Miller picked up FTCH. I know you’re researching RH for a while.

Bill: I don’t know anything about it. Sorry. Farfetch.

Jake: What’s the company?

Bill: It’s called Farfetch, I think. It’s UK luxury brand, I think. I don’t know. I’m sorry.

Jake: It sound a little farfetched to me.

Bill: Bill Miller is a beast, man. That guy sees things before it happen. I think he is very, very underrated in the community of people to follow.

Underrated Bill Miller

Tobias: Is he underrated? I think he’s got– [crosstalk]

Bill: How many people talk about him, man?

Tobias: Yeah, I’ve seen him around a while.

Bill: [crosstalk] on him because he blew up.

Tobias: Well, that’s fair. You get a little question mark if you blow up one time. Ackman’s got the same thing.

Jake: Deservedly so.

Bill: Well, you guys just said that smart people have bad results sometimes and the world doesn’t leave them behind forever. Maybe, he got a little bit risky.

Tobias: Einhorn hasn’t blowing up so much as he’s just underperformed for an extended period of time.

Bill: I think that’s blowing up. It’s not blowing up, but you suffered a pretty big permanent impairment.

Jake: There’s a difference between closing up shop on your LPs though, and leaving them holding the bag and then starting something else again. That’s a different.

Bill: Maybe.

Tobias: Did that happen to Miller? It was a mutual fund. Did he get pushed out? I don’t know or was that– I’m purely speculating here. I’m asking a question, not speculating.

Bill: There is a difference for the record, I get that. But you underperform for that long, you’re pretty close to– you’ve done a disservice to your clients.

Tobias: Well, what do you do? You stick to what you’re supposed to be doing? Which is what he’s done and it doesn’t work.

Bill: Yeah. If I was talking to him and he gave two shits what I had to say– I mean [unintelligible [00:58:20] short Netflix forever?

Tobias: It depends on how you size it, right? Depends on what you’re in– what size [crosstalk]

Bill: Yes, but the returns would suggest that it hasn’t been a good trade. Maybe you just don’t know that entity. And sometimes, it’s okay to be really frustrated by something like Tesla and not put odds on it and not cost your clients money because you think you’re smarter than everybody as the market rips in your face year after year after year after year. Eventually, you’re the one that’s wrong. And even if you’re right, you’re wrong because you’re paying the drawdown fee the whole time, you got carry in that.

Tobias: Depends on how you size that. Depends on what the function of the position is. If it’s a hedge against– clearly that stuff’s gonna get dinged up when we go through a drawdown. And there’s a lot of stocks that have that trajectory, like there’s no earnings, there’s no cash flow, they’re basically living on stock sales. And they’re fattish and popular and they get a big rip, and then they fall back to Earth eventually. Some of them haven’t done that yet.

Jake: Tesla is up 60% year to date or something. [laughs]

Tobias: Yeah, I would say it’s probably more than that, isn’t it? I don’t know. It’s up a lot anyway. I track it. I don’t have a position in it anymore. I’ve donated some money and I’ve made some money and donated some money again. So, I think I’m probably down on it.

Bill: I mean, it’s like Greenwald on Amazon. These guys are really smart. If they could have avoided the discretionary shorts, I think that probably their returns would be much, much better.

Jake: Well, that’s true of every single bull market. Ten years on, anything– [crosstalk]

Bill: No, this wasn’t a bull market. Greenwald, I think he lost $16 million on Amazon. That’s not a bull market. You are wrong. That’s just the world.

Jake: Okay, that one, but I’m saying in general, any driving with the parking brake on over the last 10 years would have looked foolish.

Bill: Yeah, I guess. After 10 years, you’re wrong. How many careers have 10 years to go underperformance? Yeah, fine. You can sit there and be like, “Well, on a 1000-year spectrum, this is just 10 years that are not good,” but part of the game is also identifying when the world is shifting. And if you’re not doing it, — [crosstalk]

Tobias: The world’s always shifting though. The question is, is it secular or cyclical? And sometimes, they look the same and that’s the difficult thing,

Bill: No doubt, but I think that the hard thing that managers have to answer for and after 10 years, I think it’s easy as managers to say, “Well, it’s all fad induced and it’s all passive driven,” and all that. There’s a vehicle that adapts to the world and it’s the index.

Tobias: Well, the index was flat from today 2000 to 2010, and it had a monster drawdown a couple in the middle. If that was an active manager, he’d have been fired. She’d have been fired.

Bill: Yeah.

Tobias: So, I don’t think you can look at– the thing is, you have to make the decisions in real-time the whole way through. And if you have some sort of discipline, you gotta keep on applying it. You can’t look at the fed and change the fed because the feds always look secular at the point that you’re putting on the– every market boom has this, it’s changed, this time is different. It looks secular, and it’s not.

Bill: Yeah, I think that’s why people that come to this podcast pray at a value church. It’s sort of your North Star where you say like, “I am going to buy things that I perceive to be good value.” My only point is if you’ve underperformed for a decade, there’s a chance you’re not very good at picking good value as the world is now.

Jake: There’s a fire in the basement of this church. [laughs]

Tobias: Well, you can look at those value [unintelligible 01:02:09] and that’s got no human skill in there. That’s just what the [unintelligible [01:02:14] has been that beaten up, if you had priced the book-style guy that started underperforming in like 2006, I think. If you’re a flow guy, you’ve been able to hold on for a little bit longer, but Einhorn, I think, looks a lot like an EV/EBITDA-style investor and he’s tracked EV and that was a monster run first part of the decade, first decade of the 2000s, less good run, second decade of the 2000s, might be like turning the corner a little bit since April 2nd. I’m calling it! value is back! I’m not.

Bill: I hope it is, everybody hopes it is.

Jake: [crosstalk] -curse this.

Bill: There’s just a lot of people that I think have been left behind and it’s hard to argue that some of them haven’t– I don’t know Einhorn, obviously. I don’t study him, I have no idea. Maybe, he’s still got it but it just seems to me that some of these guys have been so dogmatic in how they’re thinking that they missed the world changing.

Tobias: Maybe it’s a cycle.

Bill: Maybe you’re right, maybe the world hasn’t changed.

Jake: This time, it’s different.

Bill: No, it’s not different. Every time, people get left behind.

Tobias: That is true.

Bill: [crosstalk] life, every time that somebody can’t iterate their process, they become old, then society forgets about them– [crosstalk]

Tobias: Well, here’s one thing. Valuations have become increasingly stretched. In the day that we have, 1852 to today, valuations are higher. So, if you’ve had this discipline, where you’re like, “I’m not gonna pay more than X,” you’ve been left behind. That’s what’s happened. The new younger guys come in who are more prepared to pay up. They’ve been able to survive for a little bit, but then as they’ve become old guys, the valuation stretches away from them too.

Bill: Yeah, no doubt. Eventually, valuations stretching too far is going to be a real problem.

Tobias: Or you become a Momo guy. And then you ride it and you’re a hero right at the top, and then you get your ass handed it down 90% when momentum comes back to Earth, which it does on a regular basis. Hasn’t this time around yet.

Bill: Some Twitter Momo guys get quoted by Bloomberg. The ultimate Momo, bro.

Tobias: Fellas, we’ve run way over time.

Jake: Good session, boys.

Tobias: Thanks to everybody for tuning in

Bill: Have a good one, people. See you next week.

Jake: Stay safe out there.

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