During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed how Munger’s FOMO Moment Made Him Millions. Here’s an excerpt from the episode:
Tobias: So, I got a question, bit personal to me. But if I had to write Deep Value today, would I add or remove anything from the book based on what I’m seeing the current market conditions? I don’t think so. I think that the thesis remains sound. I just think that it’s a feature of the market that every strategy underperforms for– has to stay underperforming and it has to stay outperforming. And I think we’ve had a particular long period where value has underperformed to the point where people wonder if it can ever rise again. I don’t know, I think it can. But there’s not a lot of evidence to suggest in recent times that that’s the case, I think you’ve got to look back over the full dataset.
Jake: That’s an interesting question. So, if you imagine that, if one of the prerequisites of outperforming was that you had to have all the bandwagoners off, and you have to have all the people who don’t have the high conviction to leave, is there something inherent to value because it is often so fundamentally based that it’s harder to scrub the bandwagon? And so therefore, you should expect long, hard periods just inherent to the strategy.
Tobias: Yeah, just because value guys just tend to be disciplined and bloody-minded, pretty tough and just don’t let go easily. Really, the only way they get taken out is they retire. They set up a family office. They close down the fund. That’s happened again. It happened again yesterday. This German group shut down their deep value fund just because it was causing too much mental anguish or something like that. I just laughed, I’m sorry. Yeah, I know how that feels.
Jake: Yeah. So, what if that’s inherent to the value strategy that you have to expect to suffer more than the average strategy because people are so wedded to it when they are wedded to it.
Tobias: The thing that really stood out to me, when I pulled up the French data and I ran it back for price to earnings and free cash flow and book value, all the way back to the start of it– the start of the dates– 51 for the two flow ones and 26 I think it is for book value. And then run the cheap decile against the expensive decile, massive, massive outperformance over the full data set for the cheap decile of the expensive decile. But here’s the really weird thing. The cheap decile underperforms 70% to 80% of the time. That’s what keeps me awake.
Bill: Yeah, that was crazy when you said that. When did you dropped out? Like almost a month ago now or something, but when it rips, it rips.
Jake: And now it’s up to 90% of the time.[laughter]
Tobias: It’s only one month [crosstalk] probably, I guess it’s thousands of months.
Bill: That was shocking when you had said that. I’m pretty sure I was in Florida, so I think it was a month ago or so.
Tobias: I have to go back and check that every now and again because I can’t quite believe how much it underperforms. If you just can’t take that pain of the market beating you, 7 days out of 10, 7 years out of 10.
Tobias: There’s a different version of it where Greenblatt says, you’d outperform like three years out of four or something, that’s probably true because you catch up. You have lots of little catch-ups through it. That’s not true recently, but that has been the case in the past. When it catches up, it catches up very violently and then it tends to be behind. If you’re watching it frequently, then it’s a painful strategy to follow. But if you’re watching it infrequently, it’s a probably pretty pleasurable one to follow [unintelligible [01:01:10] in the recent past.
Jake: It’s the argument for a little value till and then Rumpelstiltskin it and don’t check.
Tobias: That apocryphal story about the farmer who comes down from his farm when everything’s bombed out and buys once every seven years or so, that’s probably the way to do it and then just don’t worry about it for the next seven years, wait until you get that bust.
Jake: And that’s kind of what Munger has done. He waited till there was a crack up and then bought a couple of things.
Tobias: Yeah. Hold his car over the side of the road.
Jake: Made a decade and a half worth of returns on two decisions and then moved on with his life.
Tobias: Isn’t that crazy? He’s so patient, and then he gets his price and he’s literally driving along the 405 or something out here and pulls over the side of the road to make the trade, that’s FOMO.
Bill: But I guess the important thing about that story, is if you’re going to copy that strategy, I think you have to be really honest about yourself, if you’re that patient and that disciplined, and then willing to swing that big when you see it. I personally, no, I’m not. I admire what those guys have done. I admire what they’ve built and I’ve tried to adopt a lot of what they said, but I know if I try to be them, I’m not going to be them well.
Jake: You couldn’t bring clients along on that kind of ride either, I don’t think.
Bill: It’d be tough.
Tobias: You need permanent capital. It only works with permanent capital.
Tobias: With permanent capital, you can justify the fact that you haven’t done anything for a long time because the stuff that you hold is doing stuff. You’re just commentating at that stage on what’s happening to the portfolio.
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