The Wide Value Spread

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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed The Wide Value Spread. Here’s an excerpt from the episode:

Tobias: All right, good stuff. Shall we move on to mine? Not really a huge topic this time around. I’m just noticing value getting absolutely destroyed. The spread is as wide as it’s ever been. The growth stuff, expensive stuff, glamour stuff going absolutely vertical. Very tough time to be a long, short value investor, I’ve got to tell you. It’s unpleasant in the market at the moment.

Jake: Other than that, how was the– [crosstalk]

Tobias: Getting punished on both sides of the book is– that sucks when the market’s just going up. I don’t know how long it can go on for. Obviously, it can go on for a really long time, it can be really extended. Then again, could just wake up tomorrow and play the rack three as Taleb used to frame it up. Taled used to say, his whole strategy was just, you lose a little bit of money every day and one day– it’s like trying to learn the piano. You can’t play chopsticks. You can’t play anything. One day, you wake up, you can play the rack three. I keep on hoping to be able to wake up and play the rack three, but not yet, not today, certainly not today.

Cliff Asness – Bubble Logic

I talked to Cliff. Cliff wrote this paper in 1999. He didn’t actually ever get around publishing it because at the time that he wrote– I’m going to slightly mess up the name, but it was like Bubble Economics or something like that. Do you guys know the name of the one that I’m talking about?

Bill: No.

Tobias: Pretty famous paper. It’s not formally published, but you can find it everywhere. It’s on AQR, it’s on SSRN, it’s all over the place. Basically, just saying that the market was failing all of these– then better companies– not better companies, but still. They’re just way too cheap the way they’re trading, and a lot of money was flowing to the darlings of the day. And he didn’t get to publish it because the market turned around in the interim overnight or in the weekend or however long he had it in with compliance, whatever happened. I was hoping some sort of cargo cultists that, if I built my little airport out in the middle of the jungle that I could wave in some cargo from some planes flying overhead, but it didn’t work, surprisingly enough.

Jake: Not yet. You didn’t try hard enough.

Tobias: Yeah, got to get back and do it again.

Bill: More coconuts.

Tobias: [laughs] Not sufficiently. Not similar enough to the airport to get it to come in. Bubble logic, thanks very much.

Bill: I don’t know what the paper says, but I feel there is some bubble logic out there right now because there are a lot of valuations that you say, okay, well, like what does this have to look like? A, for you to make a return on the stock. B, what is the underlying free cash flow have to look in year five or six of that stock that is returning? Even 6%, 7% from here, and you do the math, and there’s a long way to go. I’ve been saying it since the podcast started, I’ll probably be wrong for a while longer, but it does seem one of those things that the higher valuations go, the more people are just like, “Yeah, well, I could see it.” And it’s like, “Well, I know you can see it. That’s why the valuation is where it is. But what’s the probability of it actually occurring? What’s the bet priced at? Why is that a bet worth making?” There’s only one Triple Crown winner, everything can’t win.

Jake: Yeah, it’s priced as if disruption is over or post disruption. Even though that was what got those guys the valuation, but now we’re done. RCA in the 20s, that was just a flash in the pan, all the way up through Microsoft in the 90s to Amazon today.

Bill: The thing that’s different about Microsoft is that business is a hell of a business and it’s enterprise focused. I like that the most out of all of them from a business standpoint. Amazon, I agree with you because I can identify 1000 different ways in their life– or that they’re in my life, I can’t really articulate to you what they do better other than mindshare, which is super important. But there are other people that can serve all the needs that Amazon fulfills at this point in my life. Inertia is a powerful thing. But that distribution, it costs a lot. What if e-commerce is just the next retail? What if it’s just this huge capital-intensive business that everybody just starts eating each other’s share? I understand the internet like–

Jake: Of course, it’s going to be that. That’s what economics is. That means progress for all of us as consumers.

Bill: Yeah. I do sort of agree with you. I guess that it seems to me that on the internet the ability to capture attention is more sticky than retail because in retail, you’re driving by it and you see it every day where the internet is more habit based. But, yes, I agree with you.

Jake: Don’t you remember being a kid and the Sears catalog showing up at your house. Dude, you couldn’t wait to tear through that–

Bill: No, you old ass.

Jake: –and look through all the toys and stuff.

Tobias: [chuckles]

Bill: I was Sharper Image, bro. And also, I was too busy looking at my magic cards. Shoutout to my magic fans, Magic: The Gathering, what up? I played a black and a white deck for all you nerds.

Tobias: What’s that mean?

Bill: Exactly. You don’t know.

Tobias: [chuckles] Of all the fanmags, Netflix doesn’t belong in there but fanmag, they’re all great companies. They’re all hard to extricate from your life, Facebook, Amazon. Could live without Facebook. Probably can’t live with that Amazon, can’t live without Google. Can’t live without Microsoft. Apple, probably can live without it, but don’t really want to.

Bill: You know the discussion that I liked on Apple? Well, I guess and you got fanmag, so you got Netflix, but you already disqualified them. Fatman.

Jake: I like Fatman.

Tobias: Yeah, I should have gone with that one.

Bill: Yeah. Oh, the Ben Thompson discussion with Patrick O’Shaughnessy, I thought that he articulated the Apple OS stickiness better than I have heard it articulated in the past. In that, he said, basically the phone is the smallest iteration of a screen and what’s the next– You probably aren’t going much smaller. Unless we start to get into like chips in your house.

Jake: But Josh Wolfe would disagree with that.

Bill: No, that’s right. Yeah, if chips get in your body, all bets are off. But as far as subject to the next big technological leap in that way, I think that the way that he talked about the OS being the stickiest thing since Windows was something that I had not thought of before.

Tobias: Why does he say it’s so sticky?

Bill: They own the most important screen in your life. The screen is probably not going to get much smaller.

Jake: No developer is going to be working on some third OS that’s not Android or iOS. There’s no one there.

Tobias: The VR.

Bill: Yeah, that’s possible. People have said a lot of good things about Oculus, I’ve got to to try one.

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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