VALUE: After Hours (S02 E26): Bill’s Robinhood Follow-up, Bernstein’s Deep Risk, $INTC and $LMT

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

  • Bernstein’s Deep Risk: How History Informs Portfolio Design
  • Great Opportunities Today For Deep Value Investors
  • Munger’s FOMO Moment Made Him Millions
  • How Would A Young Warren Buffett Invest Today?
  • Bill’s Robinhood Follow Up
  • Comparing This Century’s Returns To The 20th Century
  • The Mount Rushmore Of Investing
  • Tontines: Mortality-Pooled Investments
  • Investors Are Blind To The Risk In Bonds
  • Is It Time To Short DraftKings
  • Does A Stock, Bond, Treasury Portfolio Still Make Sense?

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

Bill: –Back office, it reduces the incentive. It helps somebody say, “Okay, well, this is why I should actually sell.” You’re reducing the friction of running a business that you may not want.

Tobias: We’re just talking about Michael Girdley of Dura Software, their strategy. Interviewed Michael on the podcast. It’s out currently. They buy these small software businesses and then take all of the– what Brent Beshore calls, “tastes like chicken layer,” do that at head office. So, it makes the business more fun to run. How’s everybody’s doing?

Bill: What’s happening, folks? Anything happened last week?

Jake: Hey Bill, did you do anything last week?

Bill: No, man–

Tobias: I know you guys don’t like this, but we got the best call out ever. They’re tuning from an oil rig off Western Australia at 1:30 AM.

Bill: Whoa! No, I respect that.

Tobias: That’s the best one we’ve ever heard.

Bill: Yeah, dude, props to you. And also, what are you doing with your life? But I do appreciate it.

Tobias: A wahoo. It’s 10:30 AM on the West Coast, the best coast. 1:30 PM on the East Coast, the least coast. 12:30, we’re–

[laughter]

Tobias: Oh, I’m going to get some feedback about that one.

Bill: [laughs]

Tobias: 12:30 where Bill is in [unintelligible [00:01:17].

Bill: [crosstalk] –middle of flyover country. Let’s insult everybody that’s not on the West Coast.

Tobias: 5:30 PM UTC. Oh, what’s happening, fellas?

Bill: Just decompressing, man.

Tobias: How’s your value portfolio going? Just some extra misery?

Bill: Who, mine?

Tobias: Everybody’s.

Bill: I haven’t even looked at mine in a while. It’s probably a good thing. I bet it’ll be one of my better weeks. I should adopt this strategy of looking less.

Tobias: Philly, Sweden, Minneapolis, Nassau, Dublin, Boston. Hoo!

Bill: Here it goes, folks. He can’t help himself. [laughs]

Tobias: I love it. New York. [laughs]

Bill: Classic. Whose intro is it today?

Tobias: Got no idea. It might be back to me.

Bill: Yeah, let’s do it, man.

Tobias: Good morning, afternoon, evening, wherever you are. This is Value: After Hours, with my amigos Bill Brewster and Jake Taylor. Jake, what’s your topic this week?

Jake: I’m going to be talking about Peter Bernstein’s lovely little book called Deep Risk.

Tobias: Bill, what are you talking about this week?

Bill: I’m going to talk about my last week and send some thank-yous and why I was where I was with the whole thing, and we’ll talk.

Jake: Did I say Peter Bernstein? I meant William Bernstein. Sorry.

Tobias: [crosstalk] I thought that was the same person.

Bill: Probably twins.

Tobias: I’ll be talking about some changes that I made to the portfolio. Once again, can’t believe the kind of stuff that just gets– It’s let fall into deep value land. If you’re software, you’re off to the races. If you’re not software, you’re not. But let’s start with Bill. Let’s get an update from– So, what’s happened since the podcast?

Bill’s Robinhood Follow Up

Bill: Yeah, well, I mean, I have basically in a multimedia war against Robinhood, which was fun, I guess. It was the most conflicting week of my life because on the back of just a total personal tragedy. The more and more I found out, the angrier and angrier I got. And I don’t know the facts and circumstances behind why what happened happened. I assume if you’re listening to me right now, you understand what I’m referencing. But there was enough feedback into my inbox that continued to get me angrier and angrier and lend credence to my perception of what is at least possible that happened. And just some of the stuff that I received, just got me more and more upset over what I think is like a really big societal issue.

I have family members that have mentioned suicide to me in the past. I was probably triggered a little bit by foreseeing– maybe putting those family members into a similar situation where they would be triggered. To me, a lot of what happened, at least in one potential version of events, was very foreseeable. I don’t know if that version of events is actually the facts. That’s part of the difficulty of piecing together a puzzle when the person that has the answers is gone.

What I can only say is I appreciate everyone that reached out and said that I did a good job, and that they were proud of me and stuff like that. And there’s a big part of me that’s proud. But there’s also a big part that’s just really, really sad that I had to even go through that. The kid that I lost whether or not, whatever was going on in his head– it’s a family member that I have very fond memories of, and I wish I had reached out to him more. What I’m trying to do now is just be around my family more, be more attentive to what my wife says is bothering her and just take these moments to not just hear what’s going on around me, but to really listen to the people that matter in my life and not internalize their problems through my lens and really listen to them, is really my takeaway.

I’m happy to answer any questions or whatever. But real quick, Friday, I was in a place by the end of the week that I was worried about my own mental health. I was working on very, very little sleep. I sent a draft or something that I was thinking of sending to Ramneek Kundra. It was a very big moment for me, and he provided really good feedback and saved me from a strategic mistake, and I owe him a particular shoutout. But there’s so many of you. Barry Ritholtz, Morgan Housel, the people that listen to this podcast. I mean, all the dopamine hits of the likes and the retweets and the encouragement, it just would have been impossible without the community. I guess I say thank you, and I just feel really conflicted about being proud about something on the back of a real tragedy.

Tobias: What was the resolution?

Bill: Look, Robinhood released a statement, and I think that people should read the statement that they released and judge for themselves. That was not an easy statement to make and given the circumstances and the high-profile nature, I got to give them some credit for doing what I perceived to be the right thing. Actions speak louder than words. I hope that people not name me. I’m not even a trader, I’m not part of that community. I just tried to be respectful of the trading community through the process, but I hope people that are members of that community hold their feet to the fire a little bit. I hope those guys really think about my perception of the pushes and the pulls that they’ve embedded into their product, and what that can do to a young person’s mind and how important it is for millennials to be able to trust investing. It’s just some things with how that’s set up.

For instance, when I signed, I signed up just to see what was going on, and you get confetti. Let’s take a charitable explanation of that and say, “Okay, well, we’re celebrating your investing journey.” Then they say like, “You’re going to be rewarded with this stock.” Well, you pick from one of three tiles, but the tile was, at least my perception of it, is that it looks like a raffle ticket. I am offended that investing is associated with a raffle ticket. And then they ask you to touch your phone and scratch your raffle ticket to find your stock. That to me reminds me of what you would do at a gas station at the lotto.

Then, they give you a stock. I got a mining stock. I don’t want that dog crap company. I have to sell it, and look at how easy it is to dispose of your ownership. It’s just really something that I would encourage them to seriously think about the responsibility that they’re asking for, if they’re going to grow accounts among millennials. I’m not making a legal statement. I’m not making anything. I’m just saying, from a financial services industries perspective, I think that they need to do more to deserve the duty or the responsibility that they’re asking for. And some of that was what really had me heated. And I hope I didn’t over-personalize the issue. I know that I was always fighting for the right reason. I doubt that anyone else in my family was quite as passionate about the issues as I am. But it killed me, man, and I lost something really huge in the process. And all I knew how to do is fight.

Tobias: Robinhood released a statement where they say they’re going to review some of the things that they’re doing, they’re going to make a donation to a suicide prevention group.

Bill: They said that they would embed education in part of the process. What more are you going to ask a company to come out and say in seven days? I was looking for a response that addressed the severity of what I perceived some of these issues to be pushing into society. Look, I don’t know what the heck they’re going to– They don’t know what they’re going to do yet. It’s not realistic to expect them to have all the answers, but what I do think that statement at least indicated is they get it. They get what I was saying, and they’re working on the solution. How am I going to begrudge that at this stage? I wish they had thought about it earlier, but I bet they wish that too.

Jake: They’re not the only ones that have been dopamine hijacking. There’s a lot of big companies and a lot of market cap that’s been built on dopamine hijacking, unfortunately.

Bill: Yeah, man. This isn’t the type of podcast, but it’s true. And it all intersects with all these companies that we look at with the FAANG market caps for the most part. Not so much Netflix and maybe less so Google, but I would argue YouTube is somewhat in the same category. Self-harm among young girls is up. There’s a lot of stuff out there that– I commend tech for a lot of the advancements that they’ve made in society. I have two hopes out of this. One, I hope that it creates and furthers the conversation that’s important for tech to have with itself. Two, I hope that people realize that there may be family members out there that look fine and aren’t fine. Or if family members are saying that they’re– Like my family members who have mentioned suicide before. I need to pay attention to that. I need to not– I can’t save those people, but I at least need to talk to them and figure out how I can be there or whatever.

I used to look in the mirror and see shame. That shit’s gone now, but that took a lot of work. If you’re in that moment in your life, you don’t have to stay there. And I don’t know how to help– I can’t help you out, but there are ways out. And I just hope that as a society, we can just get rid of all that. Not all of the stigma but it’s time to destigmatize this shit. It’s 2020.

Tobias: [unintelligible [00:12:42] coming from the community. Bill, thank you for having the courage to share your story and push for change. The investor community really owes you a debt of gratitude. FINRA needs to get involved too.

Bill: Well, I appreciate it. A lot of people need to thank that kid’s dad and his mom. That took a lot of courage on their part. They’re still trying to piece together what happened too. It took a village. So, thank you all for being part of it.

Tobias: And so, you’ve compressed a little bit over the last few days.

Bill: Dude, I haven’t done anything. The only thing that I am somewhat more interested in is Twitter as an investment thesis because I have seen from the inside the power of that platform. So, the question is whether or not they can capture it.

Tobias: Well, you’ve got to think Elliot and whoever the VC firm is, they have got a good chance there.

Bill: Yeah, well, my understanding is it’s a pretty siloed organization or has been between product and revenue. And you would think that smart activists might say, “Guys, is there a way to bring these two focuses together and how can we?” And I don’t think it’ll ever be Facebook and Instagram. But, man, if that’s not the most powerful media outlet in the world, I don’t know what it is.

Tobias: Yeah, it’s an amazing tool.

Bill: What say you, Jake? What say you?

Jake: About Twitter specifically?

Bill: Yeah, I mean we’re nothing. We’re Segway. I don’t really care.

Jake: It’s interesting. Sometimes, I think about it as, is this the new newspaper? And there’s only one newspaper in the world now and it should be doing really well then. But then, it seems a lot of times like they can’t get out of their own way–

Tobias: There’s still Facebook. Facebook still serves that purpose for a lot of people.

Jake: Yeah.

Bill: I think that’s the difference. There’s no longer a distribution advantage by geography. It’s an attention capture game. But it is where news happens, undeniably.

Jake: Way before you’ll hear it anywhere else. Not even close.

Tobias: You get the raw feed and then you get the spin on it before it even turns up on any of the major news outlets.

Bill: I had to correct a couple of people. For the most part, they were good, but there were couple of quotes that I was like, “I didn’t really actually say what you’re saying I said.” That was– [crosstalk]

Jake: That’s better than what I said. [laughs]

Bill: No, it wasn’t. I think that there was only one that I had real issue with. But it was an interesting experience. I hope I never have to live it again and I hope none of you do. Next! Go ahead, Toby. Let’s hear about value.

Tobias: Difficult segue from that one. I think we probably need some wisdom here. And I think JT is the king of the wisdom.

Jake: Oh, Jesus, I’ve got to follow this one?

Tobias: Sorry, brother.

Bill: [laughs]

Bernstein’s Deep Risk: How History Informs Portfolio Design

Jake: All right. This week, I’m going to be talking about this neat little book by William Bernstein, and it’s called Deep Risk. And it’s nice because it’s just a little 50-pager that you can get through pretty easily, but what I like about it is that it moves beyond the mean variance framework of Markowitz, that has kind of come to define what risk is. And instead, it uses history and almost turns it into an insurance problem. And so, what is the probability and the impact and the cost to insure against, and those are all important things to understand.

I guess the first thing that’s interesting about it is that, he says that that loss has two dimensions. You have the magnitude and the duration. There’s an integral, like an area under the curve of loss. Let’s say you were down 50%, but it was only for a year, and let’s say it came back all of a sudden quickly, that would not count as much as say being down for a much longer period of time and then flat. There’s a duration to it as well.

Then, he sort of breaks it up into what he calls shallow risk and then deep risk. And the shallow risk is more what I think most people would consider risk. They think about like, “My portfolio is down.” Okay. Well, he says that over a short term, and then his short term is like 7 to 10 years by the way, so already we’re like talking way different than most people. But short-term risk like that would be a typical market correction, a bear market. But that’s short term and shallow in nature, and that eventually it tends to come back and then you make new highs. If you can get through that, the behavioral gap there, that’s not actually a real risk to your portfolio.

The real deep risk comes from– he has four different things. He has a sustained hyperinflation, a sustained deflation, confiscation in taxes, and then devastation, so like war and things like that. And those are the real actual deep risk to a permanent impairment of your portfolio.

Tobias: You can protect against that?

Bill: No.

Jake: Yeah.

Tobias: That’s like a Russian stock market, getting ended in 1900 or whatever it was.

Jake: We’ll go through it.

Bill: No, I would say my visceral reaction is you can protect against devastation because that would be a big bet on the wrong company or something like that. But a lot of that stuff, you just sort of living in. I guess asset diversification could protect you, but I will let you go on and we’ll see where you end up.

Jake: There’s your answer here. Just hang in there.

Tobias: Bitcoin.

Bill: [crosstalk] Yeah, that’s right.

***

Investors Are Blind To The Risk In Bonds

Jake: One of the things that’s interesting is that the– I think that a lot of people are blind right now to the risk that bonds pose because we’ve been in basically like an entire generation, maybe two generations’ worth of a bull market for bonds. So, people think bonds are this very, very safe thing. But historically, bonds have actually created a lot of deep risk. A good example, World War II, both like during and after, Germany and Japan, the stock market for both of those was down about 90%. But you’ve recovered within 10 to 15 years. Okay, so that turned it actually that equity was a shallow risk. But the bond portfolio that you were in was down 95% and basically turned into worthless pieces of paper and that became a deep risk.

So here, you have two countries but different flavors of investment that created different risk profiles. And I think people right now, because of such a long run of good returns, mostly capital appreciation, which is not what you should probably be chasing with a bond portfolio [chuckles] but here we are. They’re probably not thinking, I think, enough about that type of risk that their bonds pose. And Buffett’s done a good job of talking about that in– When did that paper come out? He wrote that op-ed. I think it was like maybe 2014 or something like that, where he talks about–

Tobias: The emissions one?

Jake: No, he talks about– or maybe is that– I can’t remember if it’s also in there– [crosstalk]

Bill: This dude’s [crosstalk] anyway. Why are we talking about him?

Tobias: What’s Davey Day Trader saying?

Bill: Yeah, come on, yeah.

Jake: Yeah. Where’s Davey Day Trader on deep risk?

Bill: [crosstalk] What’s your opinion on [crosstalk] again?

Tobias: Stocks only go up.

Jake: Well, what I would maybe tell him is Japan from 1990 to 2013, what was the real return for Japanese large-cap companies?

Tobias: I would guess negative. Negative 2% a year? Maybe negative 1% a year?

Jake: Billy, what do you got?

Bill: No, I got nothing, man. Nothing worth guessing, but I’ll go with Toby. Toby knows this shit.

Jake: So, I don’t know if that’s right in the compounding, I’d have to do the math, but the total was negative 58%.

Tobias: Okay, so– crosstalk]

Bill: Whoa!

Jake: You put in 23 years and cut your money in half over that time period in real returns.

Bill: Yikes!

Tobias: You can do that with value right now.

[laughter]

Bill: Yeah, why not? I could just buy a value basket. [laughs]

Jake: Yeah, exactly.

Bill: That’s a good joke, Toby, well done.

Tobias: [chuckles] Yeah, I’m living that reality.

Bill: [laughs]

Jake: Yeah. One of the things that Bernstein says it’s interesting is that, these different time periods– over the short term, shallow risk is more on your mind, but then– let’s say less than 10 years, but then after 20, 30 years, the deep risk is more In your mind. And what’s hard is that in-between period of the 10 to 20 years, that’s where it switches between the two. And that’s where it takes some real talent to understand the risks, like what are the bigger risks that you’re facing between those two.

Let’s talk about like the first possible one, that’s a severe prolonged hyperinflation, which has happened lots of times. Interestingly enough, equities tend to do pretty well actually. Not as far as like actual big returns, but they tend to keep purchasing power, or at least not lose that much. Even in some South American countries that are often cited for their crazy hyperinflation, their equity markets tended to return not that far off of even what longer-term returns would be for an equities portfolio. So, the nominal return is huge.

Tobias: So, they look great on nominal basis, yeah.

Jake: Yeah.

Tobias: Yeah, that’s what I was going to ask.

Jake: But real is pretty modest, but not compared to paper or bonds, which you’re absolutely getting devastated by. Different ways of mitigating that are obviously like an international portfolio of equities, tips, gold potentially. And then also even just something as vanilla as your fixed-rate mortgage if you can get it at a good price, that’s actually a pretty good play. The severe–

Tobias: Can I just ask just before you move on?

Jake: Yeah.

Tobias: Tips. What inflation rate do you get with the tips? How is that calculated? Who calculates that?

Jake: I think they’re CPI linked, aren’t they? So, they’re probably always trailing reality.

Tobias: So, I’d say it’s a little bit game then, so there’s probably a way to trade that run. Anyway.

Jake: I don’t know. Actually, Bernstein in another book talks about this and doing like a laddered tips approach as for your retirement has been a pretty reasonable way of going about it. Trying to duration match what you need with what your assets look like. I find that to be an interesting idea. Can we move on?

Tobias: Yeah, sorry.

Jake: A severe prolonged deflation– deflation, when you talk about that, it’s really means an economic disaster depression type. That is much more rare compared to the inflations actually, especially for a long duration one. Cash and bonds and gold tend to do better than equities. Confiscation taxes, the way around that is actually foreign domiciled assets, whether it’s you own property somewhere else, also contingent with that is having a good escape plan, that’s one of the things he talks about. You have to be able to potentially get out away from being confiscated. Actually very hard in the US.

We have these expatriation taxes where even if you tried to bail, they’re going to try to take their cut, no matter what. The US is pretty mercenary compared to even other countries. Uncle Sam is like a good bookie.

Tobias: But you’re not escaping the US unless there’s some regime change. Maybe they fixed that law.

Bill: Meanwhile, though, I got a buddy that’s in Dubai and he doesn’t pay any income tax on anything he makes. I don’t understand it.

Tobias: If he’s American, he’s got to pay in States.

Bill: Oh, I’m not trying to out him. But I’m not sure he’s doing it.

Tobias: They’ll track you down.

Bill: [laughs] Yeah, well, okay. All right. [crosstalk]

Tobias: They tracked me down is a noncitizen when I was earning here in 2004, I think a long time ago. And when I got back to Australia, they sent me a note and I was like, “Eh, not a citizen.”

Bill: Really?

Tobias: Yeah.

Bill: Huh. Now you’re here and you just said that?

Tobias: I’m back. Now, I’m a citizen. Now, I have to pay– [crosstalk]

Bill: I guess statute of limitation is– [crosstalk]

Tobias: Well, I wasn’t a citizen at the time. But they’re just– automatic machine just figures out who you are, where you are, sends you a notice, and then you’ve got to figure it out.

Bill: Huh.

Jake: Yeah. So, the last one is that devastation and that’s like wars and things like that. Also, geographically diversifying your assets is one way to hold some of your purchasing power against potential– actually like physical assets that the companies maybe you’re invested or owned getting bombed to smithereens. Also, probably an escape plan is a good idea in that one as well.

Tobias: So far, I’m hearing fanmag and Bitcoin.

Jake: Yeah. Probably. The market sniffed that out a long time ago.

Tobias: Yeah, we’re behind the curve on that one.

***

Comparing This Century’s Returns To The 20th Century 

Jake: So, here’s an interesting question for you. 1899 to 1949, first half of the 20th century, what do you think that global equities portfolio real returns look like?

Tobias: Over what period, sorry?

Jake: 1900 to 1950, let’s say.

Tobias: I’d say they’re pretty good, I’d say they match. We’re seeing global or international XUS?

Jake: No, this includes US, I think this is just a global portfolio– basically owning businesses around the world.

Tobias: Pretty good. I’d say probably comparable to what the States did, I’d say probably you’re getting 9% or 10%, something like that.

Bill: Yeah, I don’t know. I’m just trying to think through, and this is tough. You’re like right after World War II, so you’ve got some pretty bombed out economies but it’s probably mostly– I don’t know, 6%, 7% per annum?

Jake: 2.8%.

Bill: Ooh! [crosstalk]

Tobias: A real?

Jake: Real.

Bill: Real, who does [crosstalk] real.

[laughter]

Jake: Good point.

Bill: How the game’s played, loser!

Jake: Yeah, real is for suckers. Real is if you actually need it to like, buy groceries–

Tobias: If you’re going to live on it.

Jake: –and stuff. Like a real pleb–

Tobias: That’s the only time that matters, when you’ve go to live on– calculating returns to do that nominal–

Jake: Yeah, that’s a good point. Real is for suckers. All right. So, then 1949 to 1999, what do you think that the real returns were?

Tobias: Well, like I said, I’d say 9% or 10%. Real? Hang on. No, real 6% or 7%?

Bill: Yeah, that’s where I would go. I go closer to 5% to 6%.

Jake: 8.5%. We’re looking at pretty big differences in a 20th century that was considered pretty favorable for equities. So, I guess the question then is does 2000 to 2050 look more like the first half of the 20th century or the second half?

Bill: I’m just going to go bottoms up and avoid all this crap. I’m not smart enough to figure this stuff out.

Tobias: Yeah, I think it’s hard because I think the US is expensive but I think the rest of the world is pretty cheap. But then, the US has better businesses on average, or better businesses in the index at least, for the most part. It’s really, really hard but I think [unintelligible [00:29:33] is probably more likely.

Bill: Well, the point about bonds and whatnot like, I spend how long being, “Oh, bonds make no sense, bonds make no sense.” And then in March, it looked like for a second, debt holders were going to own all the equity of every cyclical company. I don’t know.

Jake: We don’t do that anymore here.

Bill: Yeah. Now we’ve got that– [crosstalk]

Jake: –money. All right. So, last little thing that I found interesting in there is, he’s talking about– [crosstalk]

Tobias: Are you going to give us the answer for the next 50 years?

Bill: Yeah, what’s going on? You don’t get to get on these, you just float the questions, huh?

Jake: That’s right. Being a professor has its privileges.

[laughter]

Jake: If gun to my head, I would say it’s got probably looks more like the first half of the 20th century than the second. All right, so last thing. If you’re a younger investor, you should be worrying about the deep risk, but actually seeking out the shallow risk, which is when prices tend to be lower. That’s when you’re going to be accumulating more, which is common sense, I think. But people don’t really frame it in a shallow risk, deep risk kind of way.

***

Bill: And if you’re listening to this, you probably know this, but stay the fuck away from options. Start owning businesses. You want to dabble in some stuff? Fine. It can’t be your core strategy. I am not a registered investment advisor. I’m just imploring people to save young and let compounding be on your side.

Tobias: They have their place. You just need to be careful with them. You need to know what you’re doing.

Bill: You are a pro. You’ve written how many books on investing? They have a place for you. I agree.

Tobias: I agree with. I know what you’re saying. The caliber of our listeners though, I know like half of the people who are commenting here.

Bill: For sure. We have a very sophisticated listener base.

Jake: Ooh.

Bill: They scare me. I’m afraid to talk to our listeners sometimes. I’m like, “Oh, God, they’re going to know how dumb I am.”

Tobias: The nice thing is you get corrected in the comments pretty quickly. There’s been this ongoing conversation about international tax. We’ve resolved it. Thanks, guys.

[laughter]

Jake: Comments are where the real gold are in this show–

Tobias: That’s why I go back and watch, so I can learn.

Jake: Good point. All right, veggies are done. What have we got for you next?

Tobias: No, I like that. I think that’s a really good discussion. Somebody made the point. John Archibald, I’ve got it up on the screen right now. “Convo reminds me of Chris Cole’s Dragon Portfolio.” I thought exactly the same thing. And probably that’s where Chris might have been inspired. Certainly sounded that way when you’re talking about the different portfolios, that’s the way Chris defines the serpent and the– whatever the other animalisms, sorry, I forgot. The serpent and the eagle, I think.

Jake: Yeah.

Tobias: I think it’s sometimes hard to work out how to incorporate those macro-observations into the portfolio, but I do think that it’s worthwhile reading them and understanding them because it gives you an idea what your own base rate expectations should be for what you’re doing. I think it is worth– I do think that the forward return is going to be a little bit lower. But then again, if we create a whole lot of these singular businesses that dominate these verticals, and they earn all of the money and it’s one organization or one business that does that, then maybe you’ve just got to own those organizations and you’re okay. But if you own the broad index, maybe they just get taken over. If you own the cheap stuff in the broad index, then you just get left behind.

Bill: It’s interesting to see how behavior goes into niches within these different things to like– there are segments within the platform. It’s why Facebook’s dating app didn’t do much to Match. It’s interesting how it’s all shaking out. Well, you talk, Toby, I’m just going to hold this up.

Tobias: Is the problem with Facebook’s Match—It’s that Facebook’s dating profile that you can see everybody’s political opinions all the time and you’re just like, “There’s no way I’m dating any of these lunatics.”

Bill: Yeah, I think I probably has something to do with the fact that Facebook’s where you go to learn that people that you thought you like you hate, and Twitter does the opposite.

Tobias: It used to be that you weren’t allowed to talk about politics or religion. There might have been something else in that too.

Bill: I think polite company.

Tobias: And polite company. I thought that was a pretty good rule for the most part.

Jake: It’s a great rule.

Tobias: Facebook’s violated that rule and now this is what we get.

Bill: All right, Toby, you’re going to tell us what we need to know?

***

Great Opportunities For Deep Value Investors

Tobias: Yes. The portfolio that I run got rebalanced. I’ve also got a new one out there, tracking an index called the Deep Index that you can check out. We took that over on Friday.

Jake: Full of deep risk?

Tobias: Well, I think it’s full of stuff that looks like it’s full of deep risk, but I think it’s deep valley. I don’t think it’s deep risk. I continue to be astonished by the quality of names that fall into the deep value portfolio. So, this time around, I picked up Intel. The Intel, not a different– I-N-T-C is the ticker. It’s an absolute beast of a business. If you calculate Greenblatt’s version of return on capital, it’s earning something like 50% on capital. Now, I don’t know why something like that should be valued in this market. I could have thought that that would have been a trillion-dollar company in this market. But it’s on 10 times EV EBIT, little bit north of that, which just seems outrageously cheap to me for something that throws off the free cash flow that it does too.

And I picked up Lockheed Martin too. I understand that Intel’s got a specific issue where Apple seems to be taking its business away. Apple is going to make its chips in house. But Intel is a phenomenal business [unintelligible [00:35:35] Apple still. It’s like 5% of revenues. [crosstalk]

Bill: AMD has increased its competitive– No, I’m not going to fade it. AMD has, from what I understand, I don’t cover semis, but they’ve closed some of the gaps. I don’t know how far the gap is. I’d have no idea how to handicap that. Not a space I play in, but I do know that part of the story.

Tobias: I would have said like a year ago, it was hard to find high-quality– really high-quality names in the cheap basket, because I think there was some high-quality stuff in there, like that portfolio on an aggregate basis, I thought, looked really good, would look like something that I would buy. But now, it’s full of brand names, which I find– it’s kind of astonishing to me that there’s a handful of names that the market likes. And if you’re in that handful of names and you don’t even know that there’s been much of a bear market, and as far as you know, you’re up 18% for the year, nothing happened in the interim. But for the rest of the market, like the other 495 names in the 500, they’re down for the year. And if you’ve got any exposure, then you’ve got a different view of the way that the market is going.

Jake: [crosstalk] –another thing you have going for you is that INTC, there’s a lot of those tiles in the scrabble bag. Those are popular letters, so you have a good shot at getting a Davy [unintelligible [00:36:53] that’ll just send you to the moon.

Tobias: [laughs] I didn’t know where you’re going [crosstalk]

Bill: Yeah, I didn’t know either [crosstalk] that is true.

Tobias: Someone alert Davey Day Trader, need some of that juice in the portfolio.

Bill: Why is that guy on CNBC and they are not saying like, “By the way, this is just a marketing arm for like your gambling app that’s coming out–” [crosstalk]

Tobias: Because CNBC is a marketing arm.

Bill: Yeah, they did me right there. I’m not going to take shots at them, but I don’t like how they [crosstalk]

Tobias: It was newsworthy.

Bill: Yeah, you’re right. Okay.

Tobias: Not to criticize. I’m not criticizing you at all. I’m criticizing them.

Bill: Yeah. No, I understand.

Jake: [laughs]

Bill: If the market keeps these brand names cheap enough, our man, Dan Sheehan might come out of retirement, put together another run.

Jake: That would be great.

Underappreciated Value Investor – Dan Sheehan 

Tobias: What’s the Dan Sheehan story?

Bill: He’s just a beast, man. He’s the most underappreciated beast out there. And he’s a great guy. Great guy.

Tobias: I don’t know Dan. Can you tell a story?

Jake: Started a fund out of Toronto in ‘99. Put up just insane returns for 20 years, shut down last year.

Bill: Mid-teens, right? Returns?

Jake: Yeah, I think maybe even 20s, I can’t remember, but it was a lot. He did it the right way too, like treating partners really fair, and just a classy guy all around.

Bill: Legit mensch, just like a good human, not arrogant. He’s the man.

Tobias: I’d like to try and get Dan on the podcast.

Bill: Yes, you do. I’m pretty sure we’ve– [crosstalk]

Tobias: You guys might have told me that.

[laughter]

Jake: If I had dollar for every time.

Tobias: I’m like a goldfish. It goes in one ear and goes out the other ear.

Bill: It’s worth prioritizing. He’s a great guy.

Tobias: And you guys throw some questions up and we’ll take a shot at them.

Jake: Put some answers in there too, so that we can sound smarter.

Tobias: I got a good answer here. As a systems programmer, Intel’s chips are far too clever and full of securities flaws. I bet AMDs are too, just nobody’s gone out of their way to discover them.

Bill: Uh-oh, you’re going to get the answer right now. It’s how it’s going to happen.

Tobias: Yeah. How good. I still think it’s too cheap and I don’t think you get a lot of options.

Is It Time To Short DraftKings

Bill: I got a question for you guys on DraftKings since this thing’s been explosive. You think about that business model, it basically transfers money from their new customers to sharks, or at least that was a problem that it had in the past. How is that sustainable long term? And with this valuation, I’m not going to short it, but like, man, if I was a short, I would be salivating. It just doesn’t seem like it’s sustainable.

Tobias: You want to get in front of a freight train like that?

Bill: No, that’s why I don’t mess with that stuff. I played with that fire with Tesla. I’m not going back to that life. But I’m just saying like, man, that’s one that I would be zeroing in on if I did like that life.

Tobias: So, I got a question here. It’s asking me for my legal opinion. I don’t really have a legal opinion on this to be entirely– [crosstalk]

Bill: There are no legal or investment opinions on this podcast.

Tobias: Bill also has a law degree, so Bill might have a more relevant opinion than I. “Does anyone have a case of negligence against Davey Day Trader if things go to shit and his followers lose money?” I don’t think so because there’s a big disclaimer at the start of every single episode. It’s for entertainment purposes only, just like this podcast.

[laughter]

Bill: That’s right. Do not get it twisted. This is financial entertainment, folks. I think we say in every podcast, right? Make sure.

Tobias: I think the more the more likely issue for Davey Day Trader is the thing that gets the newsletter writers into trouble is where they buy something that’s really illiquid first and then they pump it to their followers and dump it to their followers. So that’s an issue. And I have seen a few suggestions that– I don’t think he’s behaving maliciously. I just think he doesn’t know. He just pulls up a name that he likes out of the scrabble bag and buys it and then most of the names in there don’t have much volume. And then all of a sudden, a whole lot of volume.

Bill: I have had some conversations with some smart people over the past week. And I think that something that a lot of them have come back to me and said is there’s no strong view on whether or not this market is going to crash necessarily. That’s not the comment. But there was a lot of put selling in 1987. There was a lot of options day trading in 1999. There’s a lot of options activity right now. What that turns into? I don’t know. Those are just facts. And there are three particular parts of market– you said it, like a week ago, Toby, there’s a lot of gamble in this market.

Tobias: Yeah, I think that that’s true. I think that GMO—Grantham’s final check on his checklist was retail participation in the boom to make it. That was the thing that you needed to clear the bubble. [crosstalk] Yeah. And we hadn’t had that prior to the March bust. And now, funnily enough, we’ve–

Jake: I just can’t believe that it came with the economics backdrop that it came with. You could have told me in 2019 that retail comes in and now like, “All right, now we’re in it.” But with this economic backdrop, it just makes it all the more ludicrous to me.

Bill: This is part of my melt-up thesis.

Tobias: What’s your melt-up thesis?

Bill: I’ve always thought we were going to have a melt-up. Now, if we’re like close to where we were, with this economic backdrop, you could make an argument to me that this is the melt-up. I wouldn’t fade that argument. I also wouldn’t be shocked if we go a lot higher. Crazy, it can get double crazy.

Jake: Yeah, if you felt like you were taking crazy pills right now, wait until you see what market cap to GDP looks like when we put up the GDP number that we’re going to put up. Wait till you see the earnings that look like and what a P/E looks like on [crosstalk] 12 months.

Bill: Fake news, bro. It’s trough.

Tobias: Is that all short-term stuff, does it matter?

Bill: It’s trough and you got to add it back to CAPE. Everybody knows this.

Jake: I don’t know.

Tobias: I think it does matter. I think the CBO says, if we don’t go back to–

Bill: I’m triggering Toby.

Tobias: I don’t know the answer. I’m happy to hear those–

Jake: Just fundamentals matter. That’s the bigger question.

Tobias: Can the fed just paper over the top? That’s my question. I think that fundamentals do matter and the fed can’t paper over the top.

Jake: Wrong.

How Would A Young Warren Buffett Invest Today?

Tobias: But that seems to be wrong. [chuckles] I’ve got no idea what happens. I think run-up to the election and after the election, maybe it happens then but who knows. Got a good question. Got a Superchat. So, the question was, Buffett gets a million dollars. What does Buffett do to get his 50% a year out in this market?

Jake: Scrabble bag.

Tobias: [laughs]

Jake: I don’t know.

Bill: Man, if I knew that I’d be doing it myself.

Tobias: Yeah.

Bill: I bet given his knowledge base today, it would probably be something Beshorey. I’m not sure he would be in the market. He might go liquidation on some small caps and run some activist campaigns. That dude was a monster when he was young. It wasn’t always some jovial grandpa.

Jake: Get that inventory below this line that I painted in the warehouse or else you’re all fired.

Bill: Yeah, you get Buffett some money today and give him some hunger, I think he’d probably go activist on some names.

Tobias: Well, small-cap value has really bombed out.

Jake: I think he’d actually be international. I think he’d be in South Korea or something right now.

Bill: I don’t know, man. That’s outside his circle, but maybe.

Tobias: He’s done [crosstalk] his PA.

Jake: [crosstalk] PA.

Bill: Yeah.

Tobias: [crosstalk] Korean flour mills in his PA. I think—[crosstalk]

Bill: Maybe.

Tobias: Small-cap value is really bombed out. You can find some names in there that are too cheap. You take your million, put it with your other, invest this money or maybe just do it by yourself. I don’t know. There’s probably some stuff that’s small enough where you could get control. That’s really difficult stuff to do and you’ve got one bullet so you don’t want to get it wrong.

Bill: Yeah, then you go activist. You create some value and then do it. Yeah, that’s what I would bet he would be more likely to do.

Jake: Why aren’t we doing that then?

Tobias: Ah, it’s a lot of work.

Bill: One, I don’t know that I have the skills, but I sort of just proved that I might. So, I’m not totally opposed to it. I don’t know that I would have the motivation, certainly not right now. That was a unique combination of motivation and something within me saw a good strategy, I don’t know.

Tobias: Here’s a suggestion, leap option on a midstream oil company-

Bill: Fuck, no.

Tobias: Good chance at 50% of your money, 10x your money?

Bill: No. [laughs] Whoever you are, watch your risk.

Tobias: Yeah. What’s a leap? This ain’t leap. And he’s saying 50% chance of a 10x.

Bill: Yeah. Okay. Well–

Tobias: Not with the whole million, obviously.

Bill: It all depends on how you’re sizing it.

Tobias: Sticking it to Kelly?

Bill: Yeah, well.

Jake: It says 100% when I did this. It actually says I need to lever up the leap and says 200%.

Bill: My response to that is I have no sense of how to assign the probability of winning in that particular game.

Tobias: You see what the market was, saying 50%. 50/50.

Jake: That’s a coin flip. And it’s a 10x for a coin flip.

Tobias: Yeah, it’s got positive expected return.

Bill: Yeah, I mean that’s–The math checks out–

Tobias: And then you go activist.

Bill: I’m just not sure I’m going after that math.

Does A Stock, Bond, Treasury Portfolio Still Make Sense?

Tobias: So, a question from a younger investor, do you still think it makes sense to have a mixed portfolio bonds, stocks and treasuries or do you just think value stocks are the way to go? That’s probably a question for a financial planner.

Bill: I think you should read this.

Tobias: Bill’s holding my book Deep Value for folks at home.

Bill: Yeah, I don’t know you got–

Tobias: Read The Acquirer’s Multiple, it’s a shorter, easier read.

Bill: It’s not as good of a book. No offense. The Deep Value is the best investment book I think I’ve ever read. I told you that when I met you, I will tell you it again, that The Acquirer’s Multiple is a very good version of that for most people. I don’t know. My general feeling is I tend to lean towards equities for my own portfolio. Maybe it’s a function of the years that I’ve been alive. But, yeah, I would talk to a financial advisor, come up with a plan and stick to it.

Tobias: Yeah, I think that’s the answer there.

Jake: I say normally in most time periods that that is probably sound to have a– I think what you said before about what Greenblatt does with tying yourself to the mast of– it’s 70-30 and if you’re really bulled up, you can go 80-20. You’re really bearish, it’s 60-40, but God, the risk reward on bonds right now to me just seems so asymmetric against you.

Bill: [crosstalk] in March.

Jake: It’s been true for a decade [crosstalk] so I’m not saying I have any timing on this but–

Tobias: [crosstalk] It’s been a short for five years and you’ve just had your head handed to you if you’ve done that.

Bill: Yeah.

Jake: I wouldn’t short but I won’t feel great about long either.

Tobias: The opportunity is so bad, it looks like a short. It’s more of a short than it is a long. Probably, that means don’t play, but they do serve a function when the market falls over. There is that flight to treasuries or there has been. Who knows if that continues– Maybe they’re going to trade like stocks the next time around.

Jake: Okay, so here’s my argument against that, is that they’ve now been used for chasing capital appreciation, not protection. So why wouldn’t we think that maybe they correlate with equities as opposed to when–

Tobias: That’s what I think is the risk.

Jake: –they were supposed to zig when the others were zagging.

Tobias: Yeah, that’s what I think is going to happen.

Bill: Well, you do but you’re higher in the cap structure, so I guess in a real downside, in theory you should be better off depending on where you are in the structure.

Tobias: Are you talking treasuries?

Bill: No, I’m talking corporate bonds. I would never touch treasuries right now. But I’ve been wrong on bonds forever, so why would I be right now? Watch super long duration treasuries outperform everything from here.

Tobias: Yeah, that’s what’s been the case.

Bill: I know. Why would it stop?

Tobias: That’s Hoisington, just blanking on his name at the moment.

Jake: Lacy Hunt.

The Mount Rushmore Of Investing

Tobias: Lacy Hunt, thank you. Yeah. Who’s on everybody’s Rushmore of investors? Can’t have any overlap. That makes it hard, Buffett. Good luck, everybody.

Bill: I’ll take Munger.

Jake: I’m doing it in draft order.

Bill: [crosstalk] I don’t know. I’m not– [crosstalk]

Jake: We’re playing this game with– [crosstalk]

Tobias: You can’t do it with Buffett. You’ve got to rule out Buffett. Can’t do it with Munger, you’ve got to rule out Munger.

Bill: Look, I know people hate on him. I think Ackman is pretty freakin’ good at what he does when he stays in his lane. I think he’s gotten over his skis. I disagree with a lot of people on the CNBC interview. I’m sure people are lighting me up right now. But he is pretty good.

Tobias: I think [crosstalk] a great analyst.

Jake: I’m not going to say it because then– we’ll build statues for them and then they’ll just get torn down anyway so it doesn’t—

[laughter]

Tobias: I’m going to go Einhorn. I know that sounds crazy, but I think Einhorn’s got a big decade coming up.

Jake: That’s a good that’s don’t come [unintelligible [00:50:47]. I mean he’s colder [unintelligible [00:50:51] I did around Huskies.

Tobias: You can get him getting cheap.

Jake: [crosstalk] at this point.

Bill: Jake, you’re going to take Prem Watsa to go deep value on the other side?

Jake: I mean that’s another value pick. I have to pick for who’s going to do the best over the next 10 years?

Tobias: It’s just who’s on your Mount Rushmore. Really, it is just stuff that they’ve achieved in the past. I’m just making up my own rules as always.

[laughter]

Jake: Okay. Yeah, I’m going to go, I guess, Greenblatt. He’s always underrated in my book.

Bill: He’s a beast, man. And that guy is so good at packaging stuff, and disseminating the information. He is really, really intelligent. I know that’s like stupid to say, but he is.

Tobias: You got to put the Druck up there. I guess Jim Simons, someone’s giving him a shoutout. Schloss, Thorpe, they’re all up there in the conversation. Buffett’s head and shoulders above everybody else and then it’s just– we’re all trying to figure out who supports MJ underneath that run. Who gets the possible MJ?

Bill: Dude, Munger is the smartest though. If I could be anyone, I’d be Munger because he was smart enough to identify a guy that was a genius to drive and be like, “Alright, dude, drive this car. I will help you get smarter but like this is you, and if we disagree, this is you. And I’m just going to chill in California and live a nice life.”

Jake: Yeah, think about being able to put your ego away that way. Because he was managing money and he realized like, “God, this guy is a machine at this. He’s better than I am probably.” “Here you go, take it over, buddy.”

Bill: And also recognizing when you’re that smart to have the ability to step back and say, “Boy, the sum of these parts is greater than myself.” That’s not easy to do as a mortal, forget about being Munger.

Tobias: Munger is only Munger because he is–

Jake: I’m waiting for one of you to emerge as that guy, so I can just turn it over to you.

Tobias: Keep waiting.

Bill: Yeah. I certainly won’t be that in the next two weeks. I’m hanging out with family.

Tontines: Mortality-Pooled Investments

Tobias: I’ve got a good question here. A couple of you have mentioned already but Ack Attack’s got his mega SPAC out there, the Ack SPAC. Any guesses on what he’s going to buy? Have you guys had a look at the filing for that?

Bill: No.

Tobias: Very Buffett like– [crosstalk]

Jake: It [crosstalk] so it must be good.

Tobias: They called it tontine. I know what a tontine is.

Bill: What’s a tontine?

Tobias: It’s called the Pershing Square Tontine SPAC. I’m getting the name, it’s not exactly–

Jake: Is that what they’re calling it?

Tobias: Yeah, I think it’s Pershing Square Tontine something. I don’t know [crosstalk]

Bill: What is tontine?

Tobias: Tontine is where a group of people pool their money and the last person living collects. I think that’s what he means. Maybe it is, I don’t know. Maybe someone knows.

Bill: Huh.

Tobias: So, the filing reads like Buffett’s little letter that he always sticks in everything of the kind of companies that he wants to buy, high returns on invested capital, moats, lots of free cash flow.

Jake: Well, that’s not a crowded space right now.

Tobias: Yeah, but he’s got three– or they want to raise $3 billion to do it.

Jake: Chipotle at 100 times earnings.

Tobias: Yeah.

Bill: Somebody pinged me about that [unintelligible [00:54:01] SPAC. I don’t know. There’s some interesting ones out there. I find the economics of the SPAC deal– it’s just hard for me to be like, “Yeah, I want to participate in that.”

Jake: What does it typically look like? What’s the theory?

Bill: I don’t know, pooling up man. The one that made me disgusted, I was looking at– I think it was Bluebird, the bus company or something like that, it turned into a bus company. I was just reading the documents and I was like, “God, the deal for the promoter is just like insane.” I couldn’t get down with that.

Tobias: There’s just no reason to buy them before they do the deal. And then, you probably don’t have to buy them after they do the deal either but just beforehand is just crazy. Unless it’s like in the little months that they have before, they have to wind it up and hand the capital back. That’s because it often trades at a discount, that’s when you want to be in there.

Bill: Well, it’s the old patsy at the table thing. If he’s got such a good deal, why am I not the patsy here? It’s a hard question for me to answer. So, I tend to stay away.

Tobias: We forgot to mention Icahn before, so I Icahn is probably in my list. Peter Lynch.

Bill: I don’t know about Icahn.

Jake: I feel like you need to have done it in different ways.

Tobias: What do you mean you don’t know about Icahn?

Bill: [chuckles] Look, I need–

Jake: Hertz recency bias is what I’m hearing.

Bill: No, it’s not that. You’ve got to drill in his recent past and you take out Netflix, I just don’t know– I don’t know. When I say I don’t know, just let me leave it at I don’t know. Maybe I’ll do some research given how triggered you got by that. Some of the stuff he has done in the past is super, super impressive. I agree with that. I think maybe the world has passed him by a bit.

Tobias: I think he’s a deep value guy who’s managed to avoid a lot of the deep value issues. Although if you looked at Icahn equity partners, that’s pretty bombed out at the moment.

Jake: Yeah. Kind of interesting actually.

Tobias: I think it’s interesting where it is, yeah.

Bill: I’m sorry, but I went– [crosstalk]

Jake: If you’re going to do a closed-in fun, basically which is sort of how I would look at it, it’s not a bad guy running it.

Bill: Yeah, no. But are you on the same side of the trader he is in because I wouldn’t want to be on the other side of the table as Uncle Carl?

Tobias: Yeah, it’s had some monster runs. It’s had some very good runs. I don’t know that you’re– you’re not obviously on exactly the same side because he’s getting management fees, but he takes his management fees in units in the trust.

Bill: Yeah, so we got an alignment.

Tobias: That’s how he’s holding his buildup. But then I don’t know how interested he is in making it work. Maybe he just can’t help it and he’s going to make it work. When value works, that the run on it is just ridiculous. But when it doesn’t–

Bill: You got so mad, I’m sorry, I didn’t mean to trigger you. [laughs]

Tobias: I think it’s Buffett and Icahn are up there. Buffett wins because Buffett’s got a better structure, but Icahn is up there.

Jake: Yes.

Bill: Huh. I give him respect if I ever said– who am I? I’m certainly not him. But I need to research a bit more.

Tobias: You’re the bloke with the podcast.

Bill: Yeah, that’s right. Hey, Carl, how you doing, man? I got a podcast.

[laughter]

Bill: He’s like, “Get out of here, loser.”

Tobias: Richard Rainwater, there’s some good names coming through here, marathon. Yeah, we’re missing a lot.

Jake: Yeah.

***

Munger’s FOMO Moment Made Him Millions

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: Amen.

Tobias: [laughs]

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.

Jake: Mercilessly.

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.

Jake: [laughs]

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.

Bill: Yeah.

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.

Amigos, that’s time.

Bill: All right, people. Take care. Love your family.

Tobias: Thanks, folks. That was really fun.

Jake: Yeah.

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