VALUE: After Hours (S02 E24): Price Drives Diligence, The Right Size II, Bankruptcy Gamblers

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

  • Price Drives Diligence
  • The Right Size II
  • Bankruptcy Gamblers
  • Why Has The Pendulum Swung So Far Against Concentration?
  • Davey Day Trader
  • Direct Democracy
  • Value Unusually Undervalued Right Now
  • Druck Missed It Again
  • Good Investors Consider All Possible Paths Before Investing
  • RSI At Highest Level Ever

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: We’re live, fellas. It’s 10:30 AM Pacific, 1:30 PM East Coast, 5:30 PM, UTC, no idea what time it is on the International Space Station. No idea what time it is in Sydney. The way you find that out is you put 5:30 PM UTC into Google and it’ll tell you what time it is where you are. Now, send your request to me, I’ll look everybody’s up individually and let you know what time it is for you. [crosstalk]

Bill: It’s always the time when Dave Portnoy is crushing.

Tobias: He’s crushing all the time.

Bill: [crosstalk] –crying, watching Portnoy crush.

Tobias: There you go. Perth, it’s 1:30 AM. Thank you. First in, let us know where you’re coming in from, we’d love to hear it.

Bill: Also, you either have a–

Jake: [crosstalk] no one else cares.

Bill: –have a problem, or you like us too much if you’re waking up at 1:30 AM, but much appreciated.

Tobias: Maybe rolling through from the night before.

Jake: Yeah.

Bill: That’s what I’m saying. Dude, I couldn’t sleep last night. It was brutal.

Jake: [crosstalk] –after hours.

Tobias: So, what’s happening, fellas?

Bill: Stoolpresidente bottom-ticked all these airlines. Good for that guy, man. That’s the new kind of analysis. I like that.

Tobias: So did every day trader out there.

Bill: Real talk. That guy is a great entertainer. There’s something to learn from him. He is funny.

Tobias: That’s the second best daytime podcast around.

Bill: Yeah, well, ours is weekly. His is every day. But he is what he is taking over. Jimmy Chill is my guilty pleasure.

Tobias: Yeah, it’s good. We got lots of places. We got Calgary, Scotland.

Bill: Probably they’re all telling us what time it is?

Tobias: Philly, Dublin– [crosstalk]

Bill: How the hell [crosstalk] saying that you’re from all these places? It doesn’t make sense. You’ve got some nerdy [crosstalk]

Tobias: Denmark, Wisconsin, Sactown, Switzerland. This is great. Nashville, what’s up? I also gotta give a shoutout to– I’ve just completely blanked. Bermuda.

Jake: Scintillating.

Tobias: Number two podcast in Bermuda. “Number two investing podcast in Bermuda.” Thanks, guys. Appreciate that. [laughs]

Jake: Three-man division.

Tobias: Yes, there’s three podcasts.

Bill: Hey, I liked your podcast with Huber, man. That was good stuff.

Tobias: Yeah. Thank you. I’ve known [crosstalk] for a long time. It was good to chat to him. See what he’s been doing.

Bill: He’s nice guy. Smart guy.

Tobias: Absolutely.

Jake: Easy to root for.

Tobias: Yeah, very much so. Yeah, that was a fun podcast. I remember when he started Base Hit Investing. It’s crazy how long ago that is. It’s 2012 or something.

Bill: I subbed to that for a bit. I learned a fair amount from John.

Tobias: Flo Rida, Montreal, what’s up? Delaware. Cool. Kamloops.

Welcome to Value After Hours. Whose intro is it? What are we doing here?

Bill: I think it’s yours. You’re doing it.

Jake: Yeah. You got all that momentum.

Bill: You just wanna read out where everybody is watching from [crosstalk] hour.


Tobias: It’s the most entertaining podcast we’ve ever done. Welcome to Value After Hours. I’m Tobias Carlisle. I’m joined as always by my cohosts, Jake Taylor and Bill Brewster. Jake, what are you talking about today?

Jake: I’m bringing part two of on being the right size. We had insects last week. We’re doing eyeballs this week.

Tobias: Awesome. What’s your topic, Bill?

Bill: I don’t know [crosstalk] I’m smiling thinking about being the right size. I’m probably gonna talk about price changes questions, like the price offered requires different questions to be answered than the higher price offer.

Tobias: I like that.

Jake: It’s a sneaky good topic.

Tobias: It’s a little bit reminiscent of the time that Brent Beshore went to lunch or dinner with Buffett, and Buffett had that kind of comment like price is the diligence, the more you gotta pay, the more diligence you’ve gotta do.

Jake: Prices by due diligence.

Tobias: Yeah, that was smart. I’m just gonna talk about– we’ve been in this ripping market. There’s a lot of Davey Day Trader, Robinhood.

Bill: Don’t come at stoolpresidente, man.

Tobias: Everybody’s getting hilariously rich. It’s almost as if we’ve completely forgotten like, was it just 10 weeks ago? It wasn’t that long ago that we were the other way. Looked like we were gonna go through the hard deck at speed. I think now we’re gonna go into space at the same speed. I don’t think that’s gonna happen either. But talk about it–

Bill: Lots of [unintelligible [00:04:58].

Tobias: Yeah. Right after this. Who wants to take it away? You wanna go, Bill? I like that topic.

Price Drives Diligence

Bill: Yeah, I can do it. I guess the security that resides in my portfolio that is both the biggest and is most on my mind is TransDigm. And when I bought it, I bought it the week of March 16 to March 20. And it’s a company that I had followed because I’d followed aerospace, I’d messed around in GE in the past, I messed around in the airlines in the past. So, I had a view on travel and the airline sector and the aerospace supply chain. And I had a general sense of why I think the TransDigm and Heicos of the world rightfully have some compounder bro following.

I was never really able to get there on the valuation. I just thought that at the prices that they were offered at, you had to have a view on the business that I wasn’t really comfortable with. And that week of March 16 to March 20, everyone in the world was panicked because of TransDigm’s leverage, which I understand, but when I was back at the bank, when companies would go to work out, we wouldn’t really talk about leverage all that much. It was all about liquidity. And you got to have the liquidity to get through.

Now, obviously, that presumes on the back end for someone like TransDigm. I think they have a slug of debt that’s maturing in 2025 I think it was. They’ve got to be able to refi it. So, you need to have the trends of travel going in the right direction to get people comfortable rolling the debt and whatnot. But their maturity profile was not one that I thought warranted real quick concerns over bankruptcy that were imminent. And I have a couple of people that I talk to a lot that had called me to ask about their covenant issues. They have a springing covenant, if the revolver is 35% drawn, and it was pretty clear that it wasn’t gonna happen.

When you mix those questions in with the price action and the uncertainty of what was going on in the market, it was pretty clear to me that it was panic selling, and people that maybe were comfortable holding businesses while the outlook was rosy, being uncomfortable with a distress time. And the questions that I had to ask myself to buy the security there are so much different than the questions that I have to know– I don’t even know what to tell people about it now.

Tobias: How much has it moved in that period?

Bill: I mean off some of those buys, 100%.

Tobias: Yeah, okay.

Bill: Today, it’s down 5%, so whatever, but it’s 10% of my portfolio, I bought it hard when I swung. It’s just been a face ripper. It’s even outperformed the rally. So, I trimmed it on Friday. It got to 13% of my portfolio and the valuation just got a little stomach-churny.

Tobias: Yeah, you don’t wanna take that kind of bet at 13% of portfolio. [laughs]

Bill: Yeah. I took down 3% of the portfolio and brought it back down to 10%. But it’s hard to now have 10% of the portfolio in a company that I don’t have is– I don’t know how to analyze people in this security, and I think at these prices, that’s what you need to do. What I’m somewhat falling back on is, I believe I made a really good buy. I believe the cash flows will be there. They give special dividends and cold hard cash. I think I will get some in the future. But it’s odd to be in a scenario where when I bought it, I asked myself, “Are you willing to live through a 50% drawdown?” And I’m actually looking at the exact reverse.

Tobias: Can you hold through a 50% gain. [crosstalk]

Bill: No, but I don’t even mean it like that. That’s not what I’m trying to say because it’s everywhere. But I have been talking about– just last week, I talked about Spirit AeroSystems and Hexcel is two things that I thought were sort of interesting that– honestly, I was thinking of paring down TransDigm, I own a little Heico, not much because that one’s never really got all that cheap. But I wanted to pare down those to go into the other, the more cyclical ones was sort of where my head was at. And all of a sudden those have ripped. The freaking United Bonds that I said that I liked at 11 are down to 7. The speed at which stuff is moving, I don’t even have the time to do any of the work that’s necessary to have a view on the stuff. Like the second [crosstalk] is gone.

Jake: Neither does anyone else. [laughs]

Bill: Yeah. So, my default position has been to hold what I know I own because I do like the asset quality. If it costs me some performance, at least I can go to bed at night knowing that like I’m not– in order to play a different game, I would need to be gambling. And that’s what I am trying to avoid. But it is been tough to watch the stuff that I think is cheap just like fly on me before I can even open up the 10K. It’s crazy. [crosstalk]good segue into your topic, Toby. [laughs] [crosstalk]

Jake: I think what Bill’s touching on though is an important idea in that, at different price levels, there’s different skillsets required. And probably at expensive prices, you have to be an above-average analyst to expect to do well. But when the game shifts to low prices and fear, then you have to have a psychological edge, and you don’t have to be as good of an analyst, probably when everyone’s just trying to dump and get to cash as quick as they can.

Tobias: Just need some mangoes.

Bill: Yeah, I think that really is the issue because fundamentally what that bet came down to, and we’ll see if I’m right over time, but is do you think that travel will rebound. And the amount of research that I’ve done in the past, I was comfortable owning airlines and all that, I didn’t have to answer that question. That question, it’s already been answered. So, then the question to me was, do they have the liquidity and do I think they’ll be able to roll the debt? Those to me were like the questions that mattered. And even people that I really respect that have owned it for a long time that bailed on it, some of them were like, “I just don’t deal with distress.” I don’t really mind distress all that much if I understand what’s going on.

Tobias: Well, here’s my question. If everything is moving as quickly as this, are you rationally being Davey Day Trader? Are you behaving rationally trading the stuff faster because there’s some stuff in my portfolio, I like it at one price, I’m not smart enough to analyze it where I hold it now. Now, do I punt now? It’s not day trading, but you gotta trade a lot more. I almost wrote a piece saying this is one of those weird times where value goes and I made it on the way down, where value guys gotta do something they’re not comfortable with, which is do a lot of trading. I didn’t really think about on the other side, but now I’m looking at some of these positions. There’s still cheap stuff around that hasn’t moved, and I’ve got this stuff in my portfolio that’s like, now you gotta have a view.

Bill: Yeah. I think that’s the tough thing. And I guess that, taxes start to get involved. Somewhere in March, I was still chewing through short-term losses. So, it was like, “Oh, well, I can trade this.” I was incurring some short-term losses for that matter. But I’m through that. So, the questions get harder now. Now, it’s like, “Well, do I wanna trade an asset that I think legitimately I bought at a good price that has a good fundamental cash flow underneath it for a puff that I might have to pay taxes on later?” And my answer has been no. But if I look back and I underperform going forward, it’s not gonna shock me. I mean, TransDigm and Heico– I said it, gut-churning. I mean they’ve come off a little bit from where they were, but on Friday, I was just looking at them, “How the hell are these businesses trading at this price right now?” I get it. I do get it on a spreadsheet, but I’m not sure I get it, if that makes sense.

Jake: The irony of that, I don’t know if you guys have seen that meme where it said like, Sub 100 IQ. It’s going up, buy it, bro. And then 100 to 130 is, things are messed up. How could you be buying? The feds intervening. And then 130 IQ above says, it’s going up, just buy it, bro. It’s so different than what you’re talking about, Bill.

Tobias: Well, that’s been true for the last 12 years. Anytime you’ve done anything risk managed for the last 12 years, you’ve just been an idiot. Even as recently as the March drawdown, anything you were doing to protect yourself, it turns out that was dumb because we’re back to all-time highs. From March 5, 2009 to today, just a straight line up, except for a few pullbacks, which were– evidently they were all buying opportunities, buy the dips, maybe the Robinhood guys are right.

Bill: Well, look, the other part about the TransDigm thing is, I say like, “Oh, the questions are easy.” I bought a fair amount of the debt too. I mean that was yielding 11 and its coupon is seven and a half, I like that. And I was like, “All right, I guess if I’m wrong on this at least maybe I can protect myself on the debt.” And I feel like fucking Buffett after ‘09 when he was like, “Yeah, I should have just bought all the equity.” What was I even thinking about the debt for? It was stupid. I think it was smart, but in retrospect, it’s just like, “Man, you’re dumb to worry about risk at all.” [crosstalk]

Tobias: Because you only live through one path of all the possible paths.

Bill: That’s right.


Good Investors Consider All Possible Paths Before Investing

Tobias: The thing that really good investors do is they consider all possible paths. And if there are paths where you [unintelligible [00:15:31], then you don’t take that path because if you do it enough times, you’re gonna get the donut eventually. You just keep on investing, maybe you’re taking away some of your upside to make sure that the donut isn’t on the table and then you get to be an old man investing still in the game without having ever blown up.

Bill: That’s what I’m trying to do, but it feels real dumb right now.

Tobias: Eh, it’s short-term pain.

Bill: I mean that as a joke. I don’t actually mean that but when we talk about, what are the behavioral consequences of some of this? I do think– if somebody said, I’m just gonna buy equity and then if I keep some cash around in the next– I’m just gonna wait for the government and the Fed to announce their program and then I’m just gonna buy like crazy and go on leverage,” I’d say, “That’s actually a fairly rational response to the last two crises.”

Tobias: That’s like 4D chess. I can’t play 4D chess, I can barely play 1D chess.

Bill: I can’t either, but it’s interesting to me if somebody said that’s their strategy, I’d say, “Yeah, that might be an Icarus trade, but I don’t necessarily disagree with it.” It seems like a dumber strategy is to try to be prudent and have cash around waiting for a real drawdown because it seems like those– famous last words, they’re not taken off the table. We might incinerate fiat currency trying to do this, but it does seem policy in general is going to be against you all the time.

Tobias: Well, I think that there’s some weakness in the US dollar over the last few weeks that seems to have been somewhat responsible for the run in the stock market. I’ve sent a few charts to that end.

Bill: Yeah.

Jake: I’d like to think about it sometimes, the stock market is a secondary market. So, I don’t think a lot of people think about that. Imagine if we had some kind of government program that tried to prop up all the prices on eBay for all the shit. And so, you go on eBay and you look and you’re like, “Oh, my couch is like worth a lot more right now. Great.” And you’re all excited about that your couch is worth a lot because you went on eBay and looked and saw that it had been pushed up for some reason. That doesn’t seem that logical to me. I feel that if you back out a little bit or maybe imagine yourself an alien coming down and looking at it, you would go, “That’s fuckin’ stupid.”

Tobias: That doesn’t make sense.

Jake: Why would you wanna do that?”

Tobias: That’s a great analogy.

Bill: If stoolpresidente is one of the 10, I know he was hammering himself for taking some profits. He said only losers take profits and I respect that sentiment. Balls of steel on that, man. But what I might suggest is as someone that’s followed the airlines for a while, there may be a little more fundamental weakness than current prices anticipate. To your point on secondary market– [crosstalk]

Jake: Like 50% down GDP, like that kind of weakness?

Bill: Yeah. This is the type of recipe that is toxic for them. Overcapacity, smaller airlines, more debt, just read some history and you’ll see– [crosstalk]

Tobias: What’s the worst thing that can happen? It’ll go into bankruptcy and then it’s like a 10x from there. This is an easy game.

Bill: Then what you do is you have the cash on the sideline, you buy the day at files, boom.

Tobias: Quadruple down.

Bill: 10x– [crosstalk]

Tobias: Buy all of it.

Jake: So, you guys understand that one at all?

Bill: I don’t understand half the shit that’s going on right now. I think this is crazy.

Bankruptcy Gamblers

Tobias: It’s just the market is full of gamble at the moment. I doubt that most people who are buying that even know that it’s in bankruptcy. But if they do, you just look at something that’s down gigantically and you think, “Well, if this thing goes back to where it was, that’s like a 10x. Gonna make so much money here. It’s worth having a punt on it. It’s worth gambling on.” So, they put a position on, 10x it, let’s go find some other bankrupt stocks to buy. It’s like why wouldn’t you?

Jake: Yeah. I think there was somebody was talking about how the NBA season is starting up soon. And if you don’t understand why that’s bearish for this market. I find that to be very compelling actually. Having another outlet for gambling.

Tobias: Was it Meb?

Jake: No, I forget who said it.

Tobias: I saw Meb commenting on it, I think.

Jake: Oh, is that right? I think there’s some truth to that maybe.

Bill: Although honestly, my draft king is Jimmy Chill, says, “Who cares if it’s worth this valuation? Every game, people will buy the stock”

Jake: Yeah.

Tobias: The Ramtel boys have got a betting ETF out, Betz, B-E-T-Z. They’re good fellas, so check it out.

Bill: Yeah, there’s no possible way that that’s toppy. Also, if you’re just tuning in, this is not investment advice at all. Do your own due diligence please, don’t come here for that.

Tobias: I’ve got just like a running list of all of the crazy stuff I’ve seen in this market. I’ve just been writing it down since we’ve been talking. So, the Hertz’s bankrupty, that’s been on us. We’ve seen that kind of behavior in Tilray, we saw it in Beyond Meat, we saw it in Tesla, happens all the time. And Tesla repeatedly. Davey Day Trader, what a phenomenon. He’s a hilarious guy, gotta watch out. I’ve got no idea if he’s making money or not. But it’s funny as hell. Tesla gets a competitor. They name it Nikola. I don’t know if he’s got a middle name, but if he does, then we’re gonna go get that dotcom and launch that piece of dog shit.

Bill: Wait, before we get into this, wasn’t Ubben behind this? Ubben’s no joke.

Tobias: I don’t know. He’s gone the sideways a little bit recently. We’ll see.

Bill: Just saying.

Tobias: Is that how you say it? Ubben, two Bs?

Bill: I don’t know.

Tobias: No, he’s very smart.

Bill: I don’t have a strong view on that one. Only because I don’t know.

Tobias: But he’s not buying that retail. He’s buying the spec, like this is– I endorse, this kind of strategy, go buy the spec. Wait first, get taken over then, wait for it to rip 70% or whatever. That bloke, it’s like a $9 billion–That guy’s worth $9 billion. The whole thing’s like $30-billion-dollar enterprise. Got no products. Just got a name.

Bill: Dude, I don’t disagree with you. When somebody asked me about Chamath and his back, read spec documents and see what the guys that put the spec together, their deal and your deal are completely fucking different.

Tobias: Ubben is a seller in that scenario, he’s not a buyer in that scenario. You’re on the wrong side of the table.

Bill: Yeah, that’s right. He created the pixie dust. You’re just buying it at a huge premium to what he paid. It’s actually a great value investment if you can pull it off.

Tobias: I’ve got some more stuff on my list. I got Druck, missed it again.

Bill: Yeah, loser.

Tobias: if he goes all in [crosstalk] It sounds like he was getting ready to pull the trigger again.

Bill: Yeah.

Jake: Is this him getting sucked into TMT and 99 all over again?

Tobias: That’s what I’m thinking. The real Harbinger last time was Tiger closing up shop in March 2000 with Julian Robertson saying, “I don’t understand this market anymore.” Ring a bell, that’s the top. So, what’s the equivalent now?

Jake: Baupost, I don’t know.

Tobias: Yeah, let’s see if we can– I think we’re live. Hold on, let’s see. Gonna have to edit this one a little bit?

Bill: Little? Just a little?

Tobias: Sorry, team. Mouse fell out of the wheel.

Bill: We’re back.

Tobias: I got him back in his wheel.

Bill: Hey, they say, “We’re back.”

Tobias: Sorry.

Bill: What’s up, people? Yeah, so Toby, who’s your internet three? You better not say Charter.

Tobias: That was Cox.

Jake: Yeah, it was.

Bill: Come to the good guy.

Tobias: But do I have any choice? There’s one choice, isn’t there? Otherwise, it’s like satellite, which is like dialup.

Bill: Sort of point of the industry structure that I like, but yes. You don’t have much choice.

Tobias: What a disaster.

Bill: Also, we still can’t see your video, at least Jake’s on the–

Tobias: It’s on.

Bill: I don’t know. All right. Well– [crosstalk]

Tobias: I’m pretty sure it’s going– Hey team, guys who are out there, can you tell me if you can see my video? Is it coming through?

Bill: Fire the tech team. The people are upset, sir.

Tobias: Yeah, I’m gonna take the tech team and kick the shit of them. [laughs]

Bill: I’m gonna have to turn off these comments. I can see them, they are sort of tough.

Tobias: But I can see it’s awesome.

Bill: [crosstalk] talk about European stocks. I can but it wouldn’t do any good. I don’t know anything. Anyway, where were we? I don’t know JT was about to say something about Baupost and then the powers that be at Google shut us down.

Tobias: Yeah. We got shut down.

Jake: Make sense.

Tobias: Too political, too much truth. That’s what happens.

Bill: Yeah, that’s right. Yeah, you start talking [crosstalk] or COVID-19 and you’re not making any money.

Tobias: Too much truth.

Bill: All right. Well, we’re gonna have to get this going again.

RSI At Highest Level Ever

Tobias: Well, there’s two other things I wanted to mention and then we’ll move on to Jake’s. One of them is that the RSI is at the highest level ever. So, I think that’s really the strength index. It’s how hard everybody is bidding the stocks.

Bill: That’s just because you’re coming from so low, keep going up, duh. Next.

Tobias: I don’t think that’s how it works. But I think it’s like– [laughter]

Bill: It’s science, that’s how it works for sure.

Druck Missed It Again

Tobias: And I think I said Druck. Druck pulled a lever somewhere.

Bill: Oh, yeah.

Tobias: Anyway, you and I’ve got the same topic. Basically, there’s a lot of gamble in this market.

Bill: The thing about Druck is you just can’t– I mean, he changes so quickly and the way–

Jake: He’s too nimble.

Bill: Yeah, and the way that he talks about stuff– I think Vitaly said this to me that, it can both be true that the market can have risk reward problems, but you can still find good risk reward within the market. You don’t know what Druck’s looking at when he’s talking about it and stuff like that.

Jake: I think his words are a lagging indicator as to what his portfolio looks like more than most.

Tobias: He did rip up $6 or $7 billion in 2000. That’s real money, back then that was real money. Now, that’s what you pay to get your car washed, but that was a lot of money back then. [laughter]

Bill: And he’s crazy that he did that. But the crazier thing is that he could do that and his record is still pretty good.

Tobias: Yeah, just a lot of volatility. Tepper has a volatile track record, still very good. And I think Buffett and Munger would probably have a much more volatile track record if they didn’t have all the ballast from the—floating from a few other things in there.

Bill: The Phantom on Twitter was talking about yesterday. He was talking about has there been any concentrated investor other than Buffett and Akre that hasn’t blown up. And I think that that’s a pretty good question to ask, especially for some of us that want to look up to those guys. Akre, I think is somewhat different, but I might be wrong. The market that Buffett and Munger were playing in, the bets were much easier to make, I think, and maybe that’s not true, but it certainly feels like it’s true that– I don’t know.

Value Unusually Undervalued Right Now

Tobias: I hate to keep on harping on this because I know it’s my bias talking, but I do think that value is unusually undervalued at the moment. I can find a lot of stuff around, last I looked anyway, which is probably a week now, but I can find a lot of stuff that I wanna buy. It’s getting a little bit frothier though, value is starting to run a little bit. Get off the train tracks, here comes value.

Bill: Yeah. The other thing though, just so that we’re clear because I think it’s important for people to understand what you’re talking about. I was looking at your portfolio the other day. I don’t perceive that to be the deepest value. I look at those names and I’m–

Tobias: It’s up a bit.

Bill: -like, “That’s a bunch of stuff I could own for a long time.” No, I know, but I’m saying you’ve got quality in there too. You’re picking good businesses at good prices.

Tobias: That’s what I’m trying to do.

Bill: Well, you’re not [crosstalk] shit and hoping to hit.

Tobias: But I’m just not trying to buy growthy stuff. That’s the difference. I’m trying to buy strong balance sheets and cash flows and the buyback stocks. They tend to be– the bottom line grows pretty quick, but the top line is a little bit slower. Still better than inflation.

Bill: Yeah. My point is just I don’t want people thinking that you’re out there buying miners at a deep discount to a book when they have unproven reserves.

Tobias: [laughs] I probably not.

Bill: You’re not saying [crosstalk] I’m just saying you’re not.

Tobias: They wouldn’t get through because probably not enough cash flow for the most part.

Bill: Yeah, that make sense.

Tobias: And by the time they’re cash flowing, they’re probably not where I wanna buy them. But I appreciate that. Thanks, man.

Bill: [crosstalk] -you use enterprise value, it already creates sort of risk mitigation in a way.

Tobias: Yeah, it favors cash on the balance sheet. I’ll buy something with debt, but it tends to have a lot of operating income in that scenario.

Jake: Yeah, it has to.

Tobias: We gotta do JT’s topic.

Jake: All right. We’re ready for some veggies.

Tobias: Part two.

The Right Size II

Jake: Part two of on being the right size, Bill.

Bill: [crosstalk] three inches.

Jake: Last week, we talked about how insects can only get to be a certain size based on limitations of oxygen diffusion in their bodies. Well, this week, we’re gonna continue with that same paper that J. B. S. Haldane wrote in 1926. In this, now we’re talking about some of the advantages of size. All warm-blooded animals lose heat through their skin at the same rate of the unit of area that’s exposed. What’s interesting is if you took 5000 mice, they would be the same weight as a man, but because they have so much more surface area, they actually require 17 times as much food and oxygen as a man would. A mouse will eat about a quarter of its body weight every day, and a lot of that is just to stay warm. What ends up happening then is that you don’t see a lot of small animals in really cold countries. Spitsbergen, which is this island that’s in Northern Norway. Very cold obviously, close to the Arctic Circle. The smallest mammal there is a fox. So, you don’t have mice, you don’t have anything smaller.

Bill: Do we know what the biggest is?

Tobias: A whale.

Jake: I don’t know, but if you just think about in the Arctic, what animals do you imagine in the Arctic?

Bill: You got orcas, you got seals.

Tobias: Polar bears.

Bill: Not for long.

Tobias: I think they’re coming back. I think they’re okay.

Bill: I hope. I like the polar bear. Kind of a dick species, but I like them.

Jake: You would.

Bill: They’re like the TransDigm of species, they’ll tear you up.

Jake: Let’s talk about the human eye. Inside in your retina, you have about 120 million rods and about 6 million cones. And the diameter of each of the rods and cones happens to be the exact average wavelength of light. Each one is basically capturing a wavelength. So, for two objects to be distinguishable for you, you have to have sensory input enough to capture both inputs and create the electrical signal for your brain to see. If we had fewer rods and cones, and they were bigger, we wouldn’t actually be able to see as well. But they’re not smaller than a wavelength of light, because that doesn’t even really make a whole lot of sense because it wouldn’t– that same amount of light would then fall across two rods and cones and wouldn’t be able to produce a differentiated signal for you to read.

What that does is that small animals have unusually large eyes relative to their body mass, and big animals have unusually small eyes. You think about a whale or an elephant, like their eyes are not much bigger than a human eye. You think about mouse and all these other smaller animals, their eyes are unusually large. A lot of that has to do with, being able to create enough rods and cones to be able to see.

What we’re really talking about is Mother Nature backing into through physics and math, economies of scale. It takes a certain amount to be able to see, but it’s not going to waste resources, like with a whale having a giant eye, it doesn’t need it. All right. What’s the punchline of this for in a business context?

A lot of this is inspired actually by Andrew Wilkinson talking about these smaller internet businesses that produce $100 to $200,000 maybe of cash flow, but not more than that, really, because it’s just too niche. Well, I personally think that our way out of the economic malaise that I think is coming towards us, maybe not, I don’t know it. But I think our way out is not printing money and it’s not trying to prop up eBay prices of businesses, which I’m going to start calling the stock market now.

Bill: Don’t hate.

Jake: [chuckles] I’m hating. It’s going to be through people discovering that starting these little businesses and serving some little niche that they’re uniquely capable of serving will be able to create much more economic opportunity. How this relates to the eyeball thing is, if you think about like, you need a CRM maybe, you need an accounting system, you need some way to interact with customers like an emailing program, like Mailchimp or whatever.

Bill: Sounds like you need Microsoft.

Jake: You need Microsoft.

Bill: Yeah. Teams, they got your cloud.

Jake: Yeah, but that’s the amazing thing. All of these things now are available in a stack for probably under 100 bucks a month. You could create a pretty reasonable business. Whereas if you had to have farmed that out, 20, 30 years ago, the size of the business that you would need would be much bigger. Now to have an eyeball, which I’m trying to draw the correlation here, in an economy of scale, to have an eyeball in a business, it requires much less resources. So, the size of the businesses that are sustainable could actually be much smaller than they were 20 or 30 years ago. I think that’s our ticket out of economic problems, and it’s not printing money, and it’s not throwing money at the big businesses and then trying to get them to promise not to lay anyone off. I have bad news for you. They’re going to lay people off as soon as it’s politically expedient. If we actually end up with 50% down in GDP. These are rational actors. They’re not going to just sit there and subsidize employees. That’s bad news.

Tobias: I love that analysis. I just wonder what the second order of that is, if everybody can make money from home, day trading or running their Shopify business, does that mean that things that require, if you have to cut somebody’s hair, or you have to get your hair cut, does that mean that those services become slightly more valuable because those people can’t get any operating leverage. They’re just going to be a one to one native physical store. I wonder if they get a premium, they probably deserve one.

Bill: I don’t know. But I’ll tell you what I have said for a long time to my wife and she thinks I’m joking. If my kids don’t like school, I am going to send them to be plumbers because I think being a plumber is an incredible profession. If you look at it the right way and it’s something that can’t be displaced. And to your point, if you think about it, like a business, you can grow it to scale. It’s got local economy benefits. You’ve got service based revenues. It’s a good business. I don’t know why your thought triggered that maybe I’m just trying to fit a thought in that conversation.

Jake: [crosstalk] -plumber roll up strategy. That’s what I’m hearing.

Bill: Well, it’s sort of like what [unintelligible [00:37:11] is trying to do in different ways, I think. The two thoughts that I had about the right size, and I know I’ve talked about a lot, but now that I’m talking about it, I might as well be public about it. The thing that I think that I have started to understand about how aerospace works is like Boeing is so big and the R&D cycles are so long, and GE is so big and the R&D cycles are so long and you get stuck in like these perpetual R&D cycles. It’s like, okay, this plane is coming off the bat or off the line, now we got to invest in the next one. And all our suppliers need to do it. There are little pockets of a value chain like that, where you can be the right size to actually generate the profit. And the mammoth in the whole ecosystem is too big to focus on that, that profit center. But that mammoth also requires you to deliver parts quickly. And there are things that scale enables that like the mom and pop just can’t do.

When people talk about going through supply chain and finding the kink where the economic benefits sort of like a crew, I think that’s a good way to think about it, is where is the right size to be in this and what are the recurring cash needs and who maybe doesn’t quite have that, but can benefit from some of it? I don’t know, it’s an interesting thought to keep in mind.

Tobias: There’s some great commentary, when you guys go back and watch this show, you have to see the commentary because you got some smart listeners, I’ve been really enjoying it. Keep going, JT.

Jake: I have one more.

Bill: They light me up saying that– [crosstalk]

Tobias: It’s all good.

Bill: -lose everything. Bring it, bitches.

Jake: The last, how to encloses this essay is that just as there’s a right size for every animal based on physics and math, there’s a right size for every human institution. He’s talking about like Greek city states and how they had direct democracy. You could sit there and have an orator talk about what legislature and they could vote on it directly. But you could only get to be a certain size to have because of the technology available at that time. You can only yell so loud for the crowd to hear you. Well, we found a way around that through representative democracy republic’s, Rome, and then even the UK and then the US. We’ve had an ability to have a bigger organism based on using representative, but I can’t help but wonder myself, and this is what’s really interesting is that Haldane was actually a really devoted communist in his youth. And after studying all this stuff, he recognized that communism probably couldn’t solve all the problems because it was too big. Like too many factors involved, too many people, too many opinions. I don’t know if it’s kind of a joke, but he thought Henry Ford could run Luxembourg, because Ford as an entity already had more employees than there were citizens, but he didn’t think that it could be able to run the US.

Well, this has me thinking a little bit more about, we have some tools nowadays that are absolutely amazing as far as communication goes, and I can’t help but wonder if, I mean, let me ask you guys, do you guys feel represented by your representatives in government today?

Tobias: Negative.

Bill: I don’t know, this is sort of a hard question. I mean, the real answer is, I think that people go and try to do the right thing. And then the size of the federal government requires fundraising all the time and incentives gets screwed up. And then within the communication tools that we have, the loudest voices are the ones that tend to win. The conversation gets skewed to the polls, but when I usually start talking to people or listening to representatives talk about non hot-button issues, I am more often than not pleasantly surprised and there’s more common ground than is perceived. That’s the real answer.

Direct Democracy

Jake: Well, let me ask you this, do you think it would be possible to now with these tools have a more direct democracy again, and where we can all vote on things that we care about, and they can ask us instead of having a–

Tobias: Does that create a huge burden? What’s the next implication of that? Now you’ve got a lot of things you got to follow and I’m flat out keeping track of everything in my business and my family. I’ve got to run the government as well. I don’t think I could do a worse job.

Bill: Ben Thompson wrote what I think is a really good article, my man, Science of Hitting Investing is the one that put me on it, something about dust or whatever, I think he wrote it Tuesday, but or maybe it was Monday. I’m not giving anyone anything that they need here. But, a lot of it was about how the internet enables all speech. And while there are bad parts of that, there’s also really good parts. I think you look at what Twitter has enabled people to show on some of these marches, it’s also why I think Scott Galloway is pretty wrong when he wants to turn Twitter into a subscription service. I think you lose a lot of what makes it actually really, really great because I do think that it’s somewhat democratize the conversation and obscured it at the same time. It’s odd.

Jake: I think maybe part of the tradeoff is that, so you, Toby, don’t want to keep track of all these issues, I get it. But you also in exchange for that, ignorance are– how much leakage is there now between your representative and pork barreling of different things. Imagine fixing, we could all vote, that we want to fix the pothole on the street, and then directly debited out of your account that you put, that you had to put money in that you can track of, we could all decide like, “Yeah, that’s what we want to do,” as opposed to now where it’s like, “Oh, they had a committee.” And then there were how many administrative people involved to-

Tobias: That makes more sense.

Jake: -decide to fix that pothole.

Tobias: There’s like a buy now. You got to hit the button, you got to buy now. And then that money comes out of your account. You want to fix that pothole for 27 cents. Yeah, let’s do that. You want to bomb that third world country for $5? No, thank you.

Bill: I think you’re making a very compelling case for the capital C conservative vision of the world right now.

Jake: Is that direct democracy?

Bill: I think pushing things down to a local level gets you a lot closer to that. I think as you centralized decision making, whether it’s business or government or anything, you get a lot further away from the things that you are advocating for.

Tobias: What happens to all of aerospace? I think that they’re going to be quite as profitable.

Bill: Yeah, well, you can’t do it there. I mean, good luck having local businesses vote on or local people vote on like whether or not Boeing should develop a F5. There’s certain things should be done at the local level and the federal, I don’t know. We’re getting into politics now.

Jake: Well, let’s bring it back to very hot-button issue right now, which is like police and their budgets. Would this problem if– [crosstalk]

Bill: You’re gonna get us fucking defunded. I need this dollar 25, man. I got three kids.

Jake: I know but think about it. Now, if you–

Bill: You just put extra cheese on the Kraft Mac & Cheese.

Jake: Well, that was your first problem. With this, all the problems, with the police that we’re seeing now that are raring into huge, huge issues. Some of the friction in the system have been sort of ironed out if we had been able to vote all along, to lower some of their budget along the way because we were mad about how they were treating people. Does it have to get all the way to full scale violence? If we can vote every day with our dollar as opposed to waiting for big referendums to vote for things.

Bill: I think your theory is nice. I don’t think it’s practically applicable, but maybe technology will enable some of it.

Tobias: I like the theory. I like where you’re going.

Bill: I do, too. I just don’t know if it actually works.

Jake: [crosstalk] -exercise that.

Tobias: My cynical view is that when people go into politics, they go into politics because they have the Libido Dominandi. The desire to rule, the desire to tell other people what to do, and they also want to be the person who gets to do it, they want their face out there, running things. And anybody who’s got good intentions just can’t make it. You have to be a political animal to get all the way through to keep those fires burning and fight those fights and push it through the subcommittee’s and do all those sort of things. I still think that even [crosstalk] with direct democracy, they just find a way to get in there and be between you and the event until you’d be voting on, you’re like, how are we voting on this thing again, how does this come up? Now it’s got a different name and it’s got some politically palatable name on it and it’s described to you in a particular way. But you got to read right into the fine print to find official. I liked the idea, anything that fix for you, that would be better–

Jake: One of the basic questions, I guess, in that whole thing is, do you think that people are trustworthy enough to be in charge of themselves or not?

Tobias: Yeah, I do.

Bill: I believe in people as individuals, but not groups. Groups are really, really dumb. Individuals, in general, are not.

Tobias: Quoting Tommy Lee Jones from Men in Black.

Bill: Am I? There you go, good for him.

Tobias: Paraphrasing. [crosstalk]

Bill: All right. So, you want to talk about the group is gambling on the stock market right now?

Tobias: Well, they’ve been right so far.

Jake: Good point.

Tobias: Yeah. I think people should be able to govern themselves, 100%.

Bill: I was trying to make a transition to your topic, but I fell flat. I’m not good at the transcation.

Tobias: Let’s do some questions.

Jake: Yeah, let’s do the Q&A– [crosstalk]

Tobias: I like that topic, Jake, that was well thought out, well described. You’re playing 4D chess.

Jake: I’m trying to bring it back to checkers.

Tobias: Checkers as–

Jake: King Me.

Tobias: King Me, yeah. There’s a great book, which I have back in my– The Education of a Speculator, help me out with the name, I’m blanking a little bit, anybody in the comments. There’s a great discussion in there about checkers, saying that checkers is much tougher game than people realize, if you play against a world class checkers player, and they will say to you, “You can win or you can lose in order to win this game.” If you draw, I win, and they’re just so good, they can play you to a draw every single time.

Jake: It’s Tic-tac-toe.

Tobias: Tic-tac-toe too. Victor Niederhoffer.

Jake: Oh, yeah, Niederhoffer. [laughs] Not gonna make that joke.

Tobias: Not allowed to make that joke anymore. [laughs]

Bill: That’s dumb.

Jake: All right, Toby, hit us with some Q&Q, man.

Tobias: Yeah. I’m trying, there have been many but they’ve drifted past. Hit us up, guys, if you got a question. Here’s one. All right, let’s do it. If you’re pro self-government, why the angst with blockchain and crypto? I got no angst with blockchain or crypto. Crypto is a currency. I don’t trade currencies. I don’t want to be sitting down at the table and be the last smartest boy at the table. I got a tiny little agent equities, I think. I don’t think I got an edge in currencies. I don’t think anybody’s got an edge in currencies. I don’t know if you want to, but you’re kidding yourself if you think you’re gonna have another 2000% run in there. It’s not doing its job if it does that.

Jake: I have nothing to add.

Bill: I don’t either.

Jake: That’s a good answer.

Why Has The Pendulum Swung So Far Against Concentration?

Bill: I mean, I see this, Toby. Why do you think the pendulum has swung so far against concentration? It used to be the thing to do now, everyone is saying the concentration sucks. I mean, I don’t think concentration sucks. I just took a 10% position in something. I’ve got 50% of my portfolio and six securities. It’s pretty fucking concentrated. But, the other side of it is, I got kids and a family. I mean, I respect that the market knows a lot and I’m not here to stroke my own ego. I mean, that is what it would be for me. I’m not saying for other people. I’m running my own money. I have my own family to feed. I don’t need to do some hero trade being 50% in something, it’s just not what I need. [crosstalk]

Tobias: Let’s define our terms a little bit here, because people say concentration, diversification, like I’ve talked to guys who are private equity guys, and they think that more than 10 positions is an index. And then, you talk to other guys and they get 40 positions on and they’ll tell you that that’s conviction. We need to define terms a little bit here. I would say that Kelly betting concentration is the outer limit of how concentrated you want to be. And then diversification is like the S&P 500. So concentration is closer to the Kelly betting. And you don’t have to go all the way there, but probably 10 positions is, you can consider yourself concentrated 20 positions, you’re probably not concentrated. Is that fair?

Jake: Didn’t you write a book on concentrated investing?

Tobias: Yeah, I had this argument in it. [laughter]

Tobias: But it’s one of those things, I had the conversation at the time, I have somebody telling me how concentrated– like how much they believe in concentration are gonna look at the portfolio. I’m like, “This is not concentrated by my definition.” Is that fair?

Jake: Actually, my topic next week is going to give you a physics-based reason of why concentration might be more dangerous than you think.

Bill: I mean, there’s survivorship bias and all the heroes that are concentrated, there’s 10,000, that thought that they were super smart, and you never hear about because they’re the people that got concentrated on the wrong bet. So, if you want to make that bet, go make it. Let’s see. Like Buffett said he’d be 50% in his top position. I think Buffett is at least five times smarter than me. So 10% my top position is enough for me. [crosstalk]

Tobias: That was literally the point that I was gonna make, not to that same extent, but the guys we’re talking concentration is Warren Buffett. Just run your own investing expertise on that scale and that tells you how concentrated you want to get.

Jake: Do you think there’s anything about the opportunity set, though, that should dictate your concentration?

Bill: Yes.

Jake: I mean, there are certain times where– all right, to bring it back to a biology example where, let’s say, there’s a whale, and you want to kill it, you want to get that whale to eat, because you’re gonna eat on it a long time. And then there’s other times where you need to bring a net and catch like a million minnows and you can eat those for a long time.

Tobias: What are the times? What are those two times?

Jake: Let’s say 2009, and there’s tons of nets out there, and you just come out with a basket, and you buy all of them and you don’t need to concentrate. You don’t need to be a hero and you collect all those little minnows and you know that you’re going to eat pretty well for a while. And then there are other times where maybe in more expensive markets actually where you’re like, “Okay, I can’t really shoot with a shotgun here because there’s not that much– It’s not that target rich of an environment, I better get the rifle out.

Tobias: That’s short selection rather than how much would you hold the rod. Would you necessarily become more concentrated because there are fewer positions around?

Jake: That was my experience over the last few years was I felt backed into being more concentrated because I didn’t have more ideas to round out and diversify more. So, I don’t know.

Tobias: I just wonder whether that means that you just– should you hold more cash in that scenario or– [crosstalk]

Jake: Yeah.

Bill: That depends how good the idea is.

Tobias: But that’s not so much a time of the market question. It’s not so much about this is a time for fishing net, or this is a time for whale harpoon. You’re looking at the animal and you’re saying, “I need a harpoon for this one,” or, “I should just get up the fishing net.”

Jake: Yeah.

Davey Day Trader

Tobias: Is Dave Portnoy the new Buffett? No, he’s the new Jimmy Chill.

Bill: The new Jesse Livermore. Portnoy is the man.

Tobias: Jimmy Chill. He’s like Jimmy Chill, except he doesn’t know anything. [laughs]

Bill: Jimmy Chill does know a lot of stuff. It’s pretty impressive what he pulls up out of his brain.

Tobias: I said Portnoy doesn’t know anything.

Bill: No, I know. But I’m calling importantly Jesse Livermore though. That trading, it’s clearly never going away. Dude is a beast.

Jake: [laughs]

Bill: You know my favorite comment? “People have been betting against me for 20 years and no one’s cashed that check.” Good for him. I don’t care. I love the entertainment. I just wouldn’t take advice from him.

Tobias: That’s true of all of the dip buyers for the last 12 years too. No one’s cashed that check yet. No one’s had their cards yanked for buying dips so far, new all-time highs, buy the dip.

Jake: That is investment advice. [laughs]

Tobias: [crosstalk] You can’t that check either.

Jake: Oh, boy.

Bill: It’s a real problem for– I don’t know what behavior it’s going to create down the road. We’ll see. I remain steadfast in my belief that like we could easily double from here. I don’t think we’re that crazy yet. And I think we’re pretty nuts. I think people could get like really, really carried away with this stuff, but if we go down 50% or 30%, I’m not gonna be shocked. But I think highers where we’re going. It just feels like that. It’s nuts. I’m very uncomfortable right now.

Jake: Recency bias alert.

Tobias: Yeah, I’ve got no idea.

Bill: It’s not that, man. It’s the size of what the Fed is doing and the amount of the government stimulus and the idea that– there’s still skeptics out there, and there’s still people that are arguing that things are cheap relative to rates. So, I mean, when Munger was talking about the NIFTY 50, and he said, “We’re not even close to that.” I mean, he means we’re not close to that. So why couldn’t we get close to that? We’re not there now.

Tobias: We’re gonna answer the question in the next little while, whether the Fed can print us over a gigantic crevice. Are we gonna get over this whole thing and just land safely on the other side? Or does the underlying matter? If the underlying matters and as a value guy, fundamental guy, I tend to think that it does.

Bill: If it doesn’t, we need a new job, man, it’s gonna be devastating.

Tobias: Well, if it doesn’t, it’s gotta change the way you invest, right? You become a flow of momentum, go, go, go.

Bill: Yeah, you trade momentum all the time and the CFA is like–

Tobias: Gone.

Bill: [crosstalk] –needs to shut down

Tobias: Security analysis [unintelligible [00:58:06]

Bill: Yeah, you just become chartered market technicians.

Tobias: So, this is a question that follows on from the same thing. Why is Warren Buffett doing so poorly? I think he’s doing okay.

Jake: He’s too old, the game passed him by.

Tobias: Yeah, there’s a new sheriff in town. Davey Day Trader.

Bill: It’s a size problem. When you’re at that size and you do a billion-dollar acquisition, it doesn’t move the needle.

Tobias: But what about when you sell airlines? What about when you sell Bank of New York?

Bill: I think it’s a little too early to determine whether or not he was wrong on those. But in the short term, it sucks.

Jake: He’s not losing any sleep over in this, so I wouldn’t– Don’t feel too bad.

Tobias: Yeah, I think he’s doing okay. I’m not too worried for him.

Jake: He couldn’t give two shits about what Davey Day Trader says about him.

Tobias: I think he’d enjoy it, wouldn’t he? It’s funny as well.

Bill: I think he would like it. I mean, I don’t see how you can watch it and not like it. I also like Portnoy was like– he’s a Hall of Famer, he’s great, but the old band lost it. Now I’m taking–

Tobias: I’m the captain now. [crosstalk] Look at me, I’m the captain now. [laughter]

Tobias: Hilarious.

Jake: It’s just math. He’s better.

Bill: Dude, if I’m Buffett’s age and somebody saying that Brewster lost it. That means I’m good enough to be known. So, bring it. I hope I have haters. If I have haters, I’m doing something right.

Jake: I was telling Bill, Toby was on a vacation there. On the one hand, like part of me is very sad for a lot of the people who are going to get, I think, gonna get shellacked by this type of behavior. On the other hand, I can’t help but wonder if this isn’t like 2004 World Series of Poker, Chris Moneymaker winning and just sucking in all of the dumb money and the minnows and the sharks are all rubbing their hands together. And the same people who are putting that amount of thought into buying will put the same amount of thought into selling at some point, and we’ll have our opportunity.

Tobias: Well, I saw a great tweet today that was something like all of the bigger guys, they’ll have to chase now because everything’s run and everybody’s been to risk off and so they’re gonna have to buy into the market and they’re gonna be buying from all of Robinhooders, so the Robinhooders had made their money, they’re gonna offload to the pros, wait for round two.

Jake: Yeah, that’s not how this works.

Tobias: [laughs]

Jake: In fact, I was thinking about it. I’ve been actually my kids have been wanting to learn how to play poker. And so we’ve been playing as a family and I’ve been played a fair amount of poker in college.

Tobias: What do you– playing Hold’em or PLO?

Jake: Yeah, Texas Hold’em.

Tobias: More action in PLO.

Jake: Yeah. We used to call them baby rattlesnakes because they don’t know their own power and they’re like overly aggressive, and you just have to hang back, you wait a little bit until you have a nut, lock hand. And then you take all of their money. I think that same analogy applies here. You need to be patient. You need to wait till you have a lock hand. They’ll be trying to out-aggressive them at this point.

Tobias: I don’t know, I’ve been patient for like 11 years and push my chips in on 320 and here we are. Nothing’s changed.

Jake: Yeah. Usually, there’s more time in between bottom and blow out top.

Tobias: Here’s the next part of that scenario though, we’re talking about poker like you could be a seven-year-old dude who’s been playing his entire life. And you come across all of these kids who are, they’ve just learned a new game and you don’t know how to play that game. They’ve went the hyper aggressive lose style. And it looks crazy. It looks chaotic too, but there’s method to it. I don’t think that’s happening.

Jake: Those kids playing like 10,000 hands a day. And but that’s not what’s happened here. Like you’re buying stuff out of bankruptcy, or in actively in bankruptcy. That’s not like I’ve seen this 10,000 times. And I know that there’s– [crosstalk]

Tobias: You don’t think they cracked the security analysis, went to that section on distressed investing and calculated the net net value, like figured out the 4D chess of the bankruptcy process and worked up, they’re gonna make some money there?

Jake: If they have, then kudos to them.

Tobias: I don’t think so either. Just playing devil’s advocate. Alright, guys.

Bill: Wait, Gavin Baker had said this on Twitter, and I think he’s right. He said, has any stock that had a liquidity crisis, not doubled. Out of everything that I saw, the two that sort of eat at me are letting go of Restoration Hardware and letting go– and not buying, I held it for like literally overnight and I just couldn’t sleep, Eldorado Resorts. And those are two businesses that I’ve watched for a long time and I really wanted to own. Eldorado, on a risk-adjusted basis, I messed up by not holding that, but they were legitimately on the verge of bankruptcy or at least my perception of it.

Tobias: You missed out on a great opportunity.

Jake: Yeah, sucker.

Bill: From 8 to 46. The equity was true priced as an option, and I guess I was not creative enough to allow myself to see the ways out. And I really didn’t buy the theory behind the government might be able to save a lot of these companies. I think that that’s the right way to think. I think the reasons that I wasn’t able to hold them are the correct reasons, but the results suck to watch. And I hope that when this happens again, which it inevitably will, it seems like it’s gonna happen once a decade. I just hope that I don’t get stupid with the assumption of what I’m learning today. I mean, that’s the argument of moral hazard or whatever. I just hope that I stick to security analysis because that’s the true north, the price action doesn’t really matter. And there is no guarantee that it will work every time but it does suck to watch.

Tobias: I’ve been playing devil’s advocate here.

Jake: We’ve got runner [unintelligible [01:05:06]

Tobias: Yeah, that’s right. I’ve been playing devil’s advocate a little bit here just so everybody’s clear. I don’t believe any of the shit that I’ve just been saying. I think that if you look at the history of these things, 18 bottomed in 21, 29 bottomed in 32, we’re in the middle of the– there’s lots and lots of time left in this little epoch that we’re going through this. This is a wild time. It’s not over.

Bill: Did you see– there was something that Momo Bro tweeted out, who actually– I’ve got to commend him. He’s got some value stuff now. But he tweeted out, how long it has been between the bottom in the stock market and the end of a recession? I think the longest was 11 months and the shortest was three months. And I was thinking to myself like, I guess if you define a recession is when we get back to growth this recession like in theory could end. But if you think about it from like, where we were to where we’re going, we are not– there’s no freakin’ way that this pain is gone.

Tobias: 2030 according to the [unintelligible [01:06:13].

Bill: –in 11 months, like no way, 2030. [chuckles]

Tobias: And they pushed that back from 2027 which was their first estimate.

Bill: Is that what they said, 2030?

Tobias: Yeah.

Jake: And that’s to get back to 2019 level basically.

Tobias: To get back to where we were, yeah.

Jake: Good luck with that.

Tobias: On that note–

Bill: We’re ready for a slide. That’s why I’m glad I pick stocks, not the index.

Tobias: Yeah. Thanks, folks. That was really fun. Sorry for the technical difficulties. I’ll have the tech team shot. See you next week.

Bill: Yeah, quickly.

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