VALUE: After Hours (S02 E28): Christensen’s How to Measure Your Life, Cheap Banks, Wide Value Spread

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

  • Christensen’s How To Measure Your Life
  • Cheap Bank Stocks
  • The Wide Value Spread
  • Cliff Asness – Bubble Logic
  • Tesla Up 50% In Last Five Trading Sessions
  • David Sokol, Prem Watsa, And Atlas Corp
  • Warren Buffett’s Dominion Energy Purchase
  • Mohanram’s G-Score
  • Covid 2.0
  • European Banks Harder Hit Than US Banks
  • Finding Natural Hedges Against Portfolio Leverage
  • Tobias Uses A Pixel Phone

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Full Transcript

Tobias: And we are live. It’s, as always, 1:30 PM Eastern, 12:30 PM where Bill is, 10:30 AM on the West Coast, 5:30 UTC. Got zero eyeballs. [chuckles]

Bill: That’s all right. That’s about what we deserve.

Tobias: I was like, just give a minute for everybody to check in. Here we go, first eyeballing. What’s happening fellas?

Bill: What’s happening? I don’t know. A bunch of confusion. What’s happening over there?

Tobias: Illinois, in the house.

Bill: I’m Illinois.

Jake: Did you post yourself?

Tobias: [chuckles]

Bill: I did. No, would have been funny though.

Tobias: Toronto.

Jake: Yeah, not much going on except for unhinged markets.

Tobias: This market.

Jake: Although, Toby, you called it. You said in March, there’s got to be one big more blowoff after this.

Bill: I’ve been talking about the melt-up since we started this, motherfucker. Come on now.

Jake: All right, both of you get credit.

Bill: All right, thank you. I’m not even sure we’re in it. We’re getting close so.

Tobias: Yeah, get that retail participation. Somebody asked me about that. I don’t know where Jeremy Grantham said it. I think, Jake, he was saying that retail participation was the last leg.

Jake: The last box to check of the bubble criteria.

Tobias: We’ve got it now. Wow. Be careful what you wish for.

Bill: I’m going to be real dumb here but I don’t know that Grantham is who I’m going to go to for the bubble talk, although he is the go-to bubble guy. So, who am I?

Tobias: A little bit arbitrary, right?

Bill: Who am I? They’ve been wrong for a long time. I don’t know.

Jake: They’re always wrong for a while though before they’re right.

Bill: Yeah, it’s been a while.

Tobias: If you’re a disciplined value guy, that’s what happens.

Bill: I guess. Look, I think that there’s a difference between– I was with a disciplined value shop. They underperformed for five years, that cost me a lot of wealth. Is that being disciplined? Or is that just wrong? I’d argue after that long, it’s just wrong. That sucks, but I’d say the same thing to myself. Eventually, it’s got to say, “What’s going on here?”

Tobias: So, what do you propose that people do? You’ve got a discipline that you’re following and for whatever reason, you know that it periodically underperforms. So, at the time that it’s underperforming, what do you do? You abandon it and you become a growthy value guy?

Jake: YOLO [crosstalk]

Bill: No, that’s not it. I would say the thing that I was most upset with how that relationship went is a significant reason that they underperformed is they never put cash out the door. I think that when you’re allocating equity manager, you’re not necessarily allocating to that person to make cash decisions on your behalf. So, they were comfortable buying things at certain prices and then when they went lower, they wouldn’t buy more because of portfolio construction issues. Meanwhile, cash drag was just like assholing me. I was asking them, if you’re wrong, then sell, but if you’re right, then let’s buy more. That’s where my beef came with that particular relationship. No, I don’t think that you abandon your strategy. I think that’s a very foolish game. But I do think that particular– my beef with that is different.

I think that GMO has made tactical asset allocation decisions and been wrong for a while. Now, whether or not they’re wrong over 100 years, I don’t know. But I think that their 1Q letter that I read last night, I think they said there’s something like 22% equities. That’s a really bold call. It might work, I don’t know, you run into a lot of risk, a lot.

Jake: That’s in timber.

Bill: And like phosphate– [crosstalk]

Jake: They kind of stopped talking about that, didn’t they? I remember that timber was one of the things that actually showed on the little projected seven-year and that sort of went away.

Bill: Yeah, [crosstalk]

Tobias: Is it gone? Did they take it off?

Jake: I don’t think it’s there anymore. At least last couple– [crosstalk]

Tobias: Is it that bad? Or it’s not an asset class anymore, it’s too bombed out?

Jake: Yeah, I don’t know. Maybe.

Tobias: Whose intro is it?

Bill: [crosstalk] Who the hell am I? I’m just some schmuck on a podcast and they’re like, GMO, but at the same time, Goliaths can fall at times too.

Tobias: That’s true. It’s an interesting line of inquiry and I think we should continue on with it. I just don’t want to be one of those Netflix shows where the intro comes after 20 minutes into the show.

Bill: Welcome to Value After Hours. I’m your host, Bill Brewster, with my cohosts, Tobias Carlisle and the esteemed Jake Taylor. Toby, what are you going to be talking about today?

Tobias: Yeah, it’s a real struggle to figure out what I want to talk about, value getting absolutely shellacked, getting bombed out at the moment. Buffett bought something, so that’s nice. Tesla up 50% in the last five sessions, to the moon. There’s a lot of those Didier Sornette waves out there, Shopify has got one too. Everything’s going vertical. Nothing that [unintelligible [00:05:36] doing that. But it’s interesting to watch it.


Bill: It’s like being a Bears fan and watching the Packers destroy you.

Tobias: There you go. [chuckles]

Bill: Jake, what are you going to be talking about?

Jake: I did a little bit of homework. I’m showing up with How Will You Measure Your Life? which is a nice little article from Clayton Christensen.

Bill: Nice.

Jake: How about you, Bill? What you got?

Bill: I don’t know. I’ve been thinking a lot about financials lately. I guess we’ll probably talk about that. I’m more confused than I’ve been since probably May-ish. So, we’ll see, right after this. Jake, you want to talk about living a good life first, like, let’s get this thing– [crosstalk]

Tobias: Lots of people tuning in for the veggies.

Bill: Yeah? All right. Let’s give it to them.

Jake: All right, we can go first.

Bill: [crosstalk] –podcast, learn life. It’s basically a Berkshire meeting. Let’s do this.

Christensen’s How To Measure Your Life

Jake: [laughs] That’s right. So, the first thing is, how this came up was– I’ll give you guys a little hack that I do. How you read an article or maybe a blog post, or even sometimes a book where you’re like, “God, that was really good. And I know I should probably read that again at some point.” Then, you put it on the shelf and you forget about it, and then maybe like 10 years later, you come back and you see it and like, “Oh, I probably should have been reading that two or three times in the interim.”

Well, what I started doing was, I’ll make an actual like calendar appointment for myself with a– it’ll just say like, “Read this.” I have this particular article set to pop up every six months, I think, because it’s a five-minute article to read. It just is a really nice way of re-grounding what’s important in life. Without further ado on that, it’s a Harvard Business Review from 2010 article by Clayton Christensen, who’s popularized a lot of work on disruption, which maybe we’ll get into more disruption stuff talk later when we talk about some of these things that are happening.

What’s really nice about this is that he wrote this towards the end of his life actually. I don’t know if he knew it at the time, but he probably kind of knew. He asked himself– He’s talking to all of his students, because he taught at Harvard for a long time. He asked them three questions. Number one is, how can you be sure that you end up happy in your career? Number two was, how can you be sure that the relationships with your spouse and family are enduring sources of happiness for you? And number three was, how can you be sure that you stay out of jail? Everyone thinks he was joking about that. Skilling was a classmate of his at HBS, so it’s a very real thing. There were multiple guys that he went to school with that he said were good guys in school that ended up in jail. So, you can somehow find yourself there even if you’ve never had that intention.

He’s talking about how the most powerful motivator for people isn’t money. It’s the opportunity to learn, to grow in responsibilities, contribute to others, and be recognized for your achievements. He said when he thinks about that, you have to look for that in your own career, but then also your ability to give that to others, by being a manager is actually a huge opportunity for you to do great good in the world.

Here’s a great story that he has. He was in the Rhodes program at Oxford. He spent one hour per night thinking about, and praying actually, to figure out why was he put on earth. He spent hour after hour every day thinking about that, basically meditating on that. And what he said was that, that was the single most useful thing that he ever learned, and that it kept paying him back multiple times over the rest of his life, as opposed to if he could have taken that one hour and learned some, he says, like some new econometric technique, he would have used that maybe two times the rest of his life. But every hour that he spent every night paid for the rest of his life.

He says how you allocate your time, energy, and talent will shape your life strategy. I find that to be a really interesting idea, that we all have strategies that our life can unfold from just like a business.

He says if you have a high need for achievement, it’s most likely going to be directed into your career because the feedback loop is the closest there. You get the promotion, you get the pay raise, you get recognized, you get to feel like you’re making a big difference. But that tends to then people under-invest in their family, because it’s a longer time horizon on those things. By the time that kid’s 20 years old, you realize you did a good job or not, but all along the way, it’s hard to get that same feedback as opposed to in your career where it’s a closer feedback loop.

He says that all families have cultures just like companies. Eventually, the power tools of coercion and threat and punishment that can work in a hierarchy in a business will not work on a teenager. So, you have to work on your culture the whole time while they’re young so that everyone’s on the same page. How do they respond to problems? That’s sort of what a culture is.

Maybe the most interesting thing is, he talks about how marginal cost thinking will lead you down paths that end up getting you in trouble often. You have this idea, the marginal cost of this action, there’s extenuating circumstances, I’m only going to do it this one time. That then becomes this slippery slope that then turns into– that’s how you end up in jail. He gives a story about how– he played basketball while he was at Oxford, and you may not know this, but he was like 6′ 8″ and he was like their starting center. They went undefeated. They’re in the British equivalent of the NCAA tournament, and they get to the championship game. It’s on a Sunday and he’s taken an oath to basically– he won’t play ball on Sundays because it’s for religious reasons.

He goes to tell the coach like, “Hey, I have a problem. I can’t play in the championship game.” The coach is like, “Surely you can bend the rule for just this one time, right?” All of his teammates are like, “We need you. You’re our starting center. This is the championship game.” He doesn’t play. What he says is that he’s found that it’s much easier to hold your principles if you commit to 100% than to allowing 98%. While at the time felt very painful and felt like the wrong decision, I bet that that paid for itself lots and lots of times throughout his life later when he could fall back on those principles.

After he was diagnosed with cancer, which ended up killing him eventually, he said that– he’s written all these books and pioneered a lot of research on disruption. He said he doesn’t care about any of that. It meant nothing to him when he was on death’s door. What he realized was it was the impact of working with people, the changes that he made in people’s lives was the only thing that he cared about.

I guess the important thing for us is to think about, especially like trying market times, when we’re probably going to be lamenting through here for the next 45 minutes, there’s bigger games here than just that. Maybe if it’s a rough patch, don’t over-invest in that with your energy and your mental capabilities. Maybe spend a little bit more time with your family now and look at this as a gift to open up the time to do it. If the market’s giving you nothing but confusing sliders in the dirt, maybe take the bat off your shoulder and go take your kid for a walk instead and come back later and maybe you’ll get some pitches more to your liking. Trying to draw that back into investing a little bit, but I thought, wow, that’s a good message for me to just go read every six months or so. Take five minutes, refresh the brain a little bit, put that back into the RAM, and then go back to life.

Tobias: Practically, what do you do having read that?

Jake: That’s none of your business.

Tobias: [laughs]

Jake: For me, it’s just more of a mindset shift of– You know what? Don’t stress so much about some of these things. It’s going to come around. This too shall pass. Go enjoy a little bit more time with your family right now, and not feel like that that’s the only one game that matters necessarily.

Tobias: I like that. I did the same thing except I watched the movie A Good Year because my wife loves it. I’ve watched it so many times, but only because she– I’ve basically got it memorized because she wants to watch it. Every now and again, I put that on because it’s the escape fantasy, the guy goes to the French vineyard, decides that he’s not going to be a trader in the city anymore. Be nice to inherit a French vineyard and not have to do that. But if you don’t have that, the equivalent, I guess, is spending a little bit more time with a family, remembering this stuff outside.

Jake: Yeah, get outside, get in nature, get refreshed, and you’ll probably have a fresh take on what the world looks like when you get back. Either it changed or you changed– [crosstalk]

Tobias: I also like the systematization. Everything you do, you should be doing it infinitely. It’s repeatable and you should do it over and over again. If it’s an exercise that you do infinitely and it leads to ruin and it doesn’t work, because you never know if the next one could be the time that leads to ruin. So, you need to find things that infinitely put you in a better position.

Jake: Yeah, that’s right. I think our very smart friend, Dan, Bill, would call that variance strain, right?

Bill: Yeah.

Tobias: What’s that?

Bill: When you have hiccups, you want to reduce the size of the hiccup as much as humanly possible. You want to avoid big drawdowns in any facet of life. The less that you can go down, the greater the probability that you increase at a fairly steady state over time.

Jake: Even it means truncating some of your upside.

Bill: Yeah.

Jake: Narrowing the range of outcomes little bit can make a big difference.

Bill: Fuck, man. I should have called him in March. He has such good ideas on positions. He’s just smarter than me That’s the problem. There was some stuff that I probably should have had, option size positions that– but I don’t know, it goes back to what you’re talking about. Don’t sacrifice on your principles. I don’t know how to have option size positions, but also try to have a high enough hurdle that not everything gets through, so at some point, you’re just an index fund if you do it that way. I digress.

One-Percenters That Pay Off

Tobias: We can weight more heavily to the ones that have more conviction and you just have a few one-percenters.

Bill: Yeah, I just don’t know that that’s right for my personality. I don’t disagree with that at all. I just think I might get a little bit too loose if I was okay with that too often.

Tobias: I like one-percenters that pay off in like a quarter, so you’re either right or wrong in a quarter and then you just move on. Not currently, but in the past that’s what I’ve done. You’re going to make the decision in the short term. Because it’s more random, in the short term, it’s random. But if you’ve got a view and you want to express it and you just want to see short-term 1%.

Bill: Yeah. Well, the two I complain about, Restoration Hardware and Eldorado Resorts. I held Eldorado Resorts for like two days at 9 and I’m pretty sure it’s at 50 now, so that hurts. But I didn’t think that have the liquidity, so I probably shouldn’t have bought it in the first place. If you can’t sleep with it for two nights, you probably shouldn’t own it. That’s probably rule number one, but whatever.

Jake: Is this dating advice now?

Tobias: [laughs]

Bill: That’s right. Rent it, don’t won it.

Tobias: You want to do it, Bill?

Bill: What am I doing?

Tobias: Your topic.


Bank Stocks Look Like Bargains

Bill: Yeah, I’ll do my topic. I’ve been on this financials deep dive because I just look at where they’re all trading and this is– I feel I’m looking back in waters that I narrowly escaped from, but the valuations are a whole lot lower than they were. There’s a bunch of entities. I don’t even care which one you look at, like Ally is one that I’m not super familiar with, but my general idea of that story is they were spun out of GM, created an online bank for deposits, quasi-internet bank now with the car loan legacy product feeding a lot of its current cash flow, and then they’re using that cash flow to invest in online bank. It’s growing like crazy. I think it’s trading somewhere between like 0.55 and 0.6 times book.

As a quick correction, the United MileagePlus thing went out at 6%. If you hear me say a number on podcast, numbers are not my strong suit off the top of my head. I am not Buffett, so check my numbers. My general competitive stuff, that’s what I spend most of my time focused on. If I’m wrong on that, I actually thought about it and I’m just wrong. If I miscite a number, that’s a brain problem– and this is all entertainment. None of this is investing advice. Anyway, Ally is interesting, Schwab is a steamroller gathering assets. The TD Ameritrade deal, I think is super smart. They sign this deal with USAA. USAA happens to be a military-focused organization, I suspect. I have no idea, but I bet the military is a loyal customer base. It would make sense to me that it’s a good partnership. USAA is going to refer Schwab, a lot of their wealth management or relationships in that realm.

That business, I think, is something like 90% funded by deposits. You’ve got a small section of preferred shares that I think are yielding seven-ish percent. When you’re 90% deposits and you’re buying residential mortgage-backed securities, are we going to get to a world where mortgages are 1.5%? Maybe, but in that world, who else can actually survive? It seems to me that with no trading fees, it’s a scale game and they’re stepping on a scale advantage the exact way that I would want them to.

Then you got Wells, which I know is a total shitbox but it generates roughly $15 billion of net income a year over the last 12 years. It’s gone through the global financial crisis, swallowed with Covia, lived through a pretty strict regulatory regime in the Obama administration.

Jake: Survived Bodie ghost town.

Tobias: [laughs]

Bill: Then they had the account scandal, then they were run by a CEO that wasn’t a banker. Their efficiency ratio is completely out of whack, and they’re still trading it like a mid-team cashflow, if you normalize it. I don’t know, maybe that’s an unownable asset. But I just look at some of the other things out there, and I’m like, “This doesn’t fully make sense to me.” With Wells specifically, I guess the high-level thoughts that I have is, I think the asset cap has driven them to better relationships within their commercial and industrial business. I don’t think that when you have asset restrictions, you’re just lending money out the door to everybody. Then, within the consumer side, you’re long a lot of real estate. It’s pretty strong LTVs. Your FICO scores are pretty good. I guess there’s a world where everything erodes and the loan book is no good and buying it at point eight times is a crappy bet. But my question is, if that’s the outcome at Wells, how’s the rest of the world look?

Jake: Yeah, there’s a serious mismatch there.

Bill: Yeah. You’re going to tell me all those businesses are going to go under and somehow Microsoft is going to go through unscathed? No. They’re going to lose a ton of licenses. And yes, they’ll start up again, but will Wells lend again? Unless you think it’s an idiosyncratic bankruptcy situation or something. There’s just the spread strikes me a little bit crazy. I listen to you talk to Cliff Asness, Toby. There’s just a layering of what I feel I see, what I think the retail participation is, what every smart person that’s a quant is telling me the dispersion between growth and value or cheap and expensive or however you want to slice the [unintelligible [00:24:18] or whatever. [crosstalk] Yeah, that’s right.

Then what I just viscerally feel and see and what I’m going through, it just doesn’t make sense to me here. It just feels too wide. Like major league’s home run, too high, too high.


Bill: What do you mean too high?

European Banks Harder Hit Than US Banks

Tobias: Let me play devil’s advocate because everybody knows they’ve got a big weighting towards financials and banks and insurance and things like that. I get this question a lot. I’m interested in what you think because you got a slightly different approach to me. What if American banks start looking like European banks?

Bill: Look, I think it’s possible. That is why I favor the scale banks rather than the– I know somebody that I think is pretty sharp and he plays the regional banks. He plays them on the theory that he thinks that they’re going to have to acquire each other to scale up. I think that that’s a reasonable strategy. But I worry about the amount of tech investments that they’re going to need to embark on to make their product relevant. I guess that the larger American– JP Morgan, for instance, and Wells with what they lead on the debt side, I just think that there’s a lot of fee revenue that might be there that may not exist elsewhere. But I’m also sort of stupid in this area, I probably shouldn’t have a strong opinion of other banks. But I do think that there’s something about American culture that I viscerally feel would probably be able to extract more fees than, like Japan, for instance. But that may be wrong.

Tobias: How have Japanese banks fared?

Bill: Not very well. I’ll tell you though– [crosstalk]

Jake: [crosstalk] –actually from–

Bill: Yeah, it hasn’t been good. But my portfolio, I have a lot in Charter and TransDigm. So, in a world where rates go to zero– some value guys are going to hate me, because we’re going to recap those companies and get huge dividends out of them. They’re going to be like, “But they have so much debt,” I’ll be like, “Let’s just keep heaping on more because it costs nothing.” So, for me, it’s a natural hedge to have some financial exposure. And Schwab to me is just one gigantic call option on rates, which may never go up. But if it’s not, you’re bringing in a lot of assets in the meantime. I know that you’re swimming upstream, but it’s just very intriguing to me.

Tobias: Does the thesis require REITs to really pay? Or can you get there just Schwab doing better and absorbing some of this other stuff?

Bill: You could not have a scenario where you’re investing deposits that cost you zero, at less than zero. That would not work. But, yeah, I think if you could get a 150 to 200 basis points spread over zero, yeah, that business could probably work. You’re probably not going to get super-rich on it, but I don’t think your downside is huge.

Tobias: I’m a value guy, mate. I’m not trying to get super-rich. That’s what I’m trying to do, avoid the downside.

Finding Natural Hedges Against Portfolio Leverage

Bill: But that’s what I mean. Everybody questions about Schwab and interest rates, and where they’ve been going. That’s why it’s trading where it’s trading. if interest rates were 6, that company would be huge. The question is, is it at all possible that all this fiscal policy and all this debt issuance and all that shit actually happens to push rates up someday? Maybe it just creates excess capital and it never happens. But maybe it’s–

Tobias: Has it ever happened before? Have rates recovered before?

Bill: Well, my best analog would be the 70s and 80s. Rates went up then. So, why would it never have been?

Tobias: They weren’t zero. They get close to zero in the 40s or 50s, I think, late 40s, early 50s, it was zero. I guess they recovered then. But some might say that was a unique situation because the US was the only place in the world that wasn’t really bombed down literally.

Bill: My REIT idea is no better than anybody else’s. I guess what I’d say is, they are using deposits to buy five-year– It appears to me five-year ARMs. Is a five-year adjustable rate mortgage going to be zero? That’s just a hard world for me to fathom. Like I said, if that’s the case, Charter is going to be worth a lot, so will TransDigm. Your debt stack now costs nothing. So, okay, let’s just do it. That doesn’t make sense.

Jake: I think if you’re calculating a range of outcomes based on different variables, you have different ways to win or lose from different scenarios. Rates go up, maybe you win with Schwab. Rates go down, maybe you win with TransDigm. I think that’s a smart way of doing it. You’re trying to cover– placing bets in a way that allows you to not get too tilted in one direction or the other about things that literally no one on earth knows the answer to.

Bill: Yeah, that’s my general theory. It’s a natural hedge against some leverage in your portfolio. Also, to the listeners, if rates go up, Buffett’s going to make it rain.

Tobias: He’s going to pay a dividend?

Bill: No. Don’t get crazy.


Bill: He’s also not going to buy stock. I’m just saying. A lot of cash will accumulate in the entity.

Jake: [crosstalk] –insurance companies look like, again, I mean–

Bill: Yeah, I guess that’s harder though because when rates are low, the underwriting gets harder. Then when rates are high, it gets softer.

Jake: [unintelligible [00:30:33] a hurricane doesn’t care about rates?

Tobias: Yeah.

Bill: I know. But when rates are high, people will underwrite at a loss to get the float to invest the float, I don’t know. [crosstalk]

Tobias: Yeah, I think the insurance cycle is a little different. I don’t think it’s necessarily rates driven.

Bill: [crosstalk] –bank holdings are going to go through the roof if rates really go up, subject to default risk.

Tobias: Good one. So, what are you looking at, Ally, Wells, Schwab?

Bill: Well, I’m doing all of them. I’m just interested in figuring out–

Tobias: Just digging through.

Bill: I don’t have a strong view. Wells feels too cheap to me and Schwab feels like a bulldozer that I want to partner with. Whether or not the cheapness offsets the crap in the entity is another story, but that’s the age-old investing question.

Tobias: What about Bank of America or something like that?

Bill: Yeah, I like that, so does everybody else though. I don’t know.

Tobias: Not according to the stock price.

Bill: Yeah, well, that’s fair. But yeah, Moynihan has done a good job.


The Wide Value Spread

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.

Tobias Uses A Pixel Phone

Tobias: I don’t have an Apple phone. I use a Pixel phone, and I love it because it’s the only one that– [laughter] Because their search is so much better. [laughter] The search is so much better. It understands my accent, so I can talk to it. I talked to Apple and it doesn’t understand what I’m saying.

Bill: You’ve already got away, so you don’t need an Apple, the Peacock but– [crosstalk]

Tobias: They look identical, like if that was–

Bill: [crosstalk] –it was important to have the Apple on the table. Let people know I can afford this. I’m no Pixel user.

Tobias: There you go, there’s mine.

Bill: [laughs]

Jake: You’re no Pixel hobo.

Bill: That’s right. I’ve heard about those Pixel guys. They all have accents and– [crosstalk]


Tesla Up 50% In Last Five Trading Sessions

Tobias: [laughs] Let’s talk about Tesla very quickly. Tesla’s up 50% in the last five trading sessions. I have been short Tesla in the past. I know everybody already knows that. So just I have a little bit of bias, just going to be upfront about that. But it just seems absolutely bananas to me that– I don’t know how it gets– I’ve got Fatman up on the screen. I guess, it’s in that brace of names. I guess people are just mashing the keyboard and buying that along with everything else, but there’s no way in the world that company is anything like any of those other companies in there. I frankly don’t get it.

Bill: Well, that’s because you look at things like free cash flow, sir. The most frustrating thing about Tesla is that– Ross Gerber who I know is not one of the 10, sits there and shits all over Buffett and then makes a ton of money on Tesla. It’s just so frustrating.

Tobias: I’m not sure that he does. He has some–

Bill: You know who deserves it, is my man, Vitaliy– How do I properly say his name? It’s Vitaliy, right?

Tobias: Vitaliy Katsenelson.

Tobias: Yeah.

Bill: Yeah. That guy deserves it and I’m happy for him because that was not an easy leap for a guy that’s publicly a value investor to come out and take that position with the research that he did on that stock. I am all in on supporting him. Ross Gerber, you get no such love.

Tobias: To give Ross credit, he has said in the past that when it traded it down, he sold out. He’s got some sell discipline there based on– I don’t know exactly what it is. I just noticed he had a tweet where he said something like that.

Bill: He did people to trim. That’s true.

Tobias: Ross gets a lot of hate and he calls a lot of the hate on himself.

Bill: That’s right. That’s why I dish it out.

Tobias: That’s fair. I’m just saying that he’s a little bit less caricaturish perhaps than his Twitter might make you think because I have seen him tweet out some things that I was like, “Oh, that’s financial advice. That’s proper financial advice.”

Bill: 100%. He’s just a troll, so I troll him back.

Tobias: That’s fair. You can troll.

Jake: I’m very disappointed though to see the victory lap that Elon seems to be doing.

Bill: Do it. Dude, you would hate me if I was–

Jake: Taunting the SEC. Why don’t we have– I don’t like people flouting the rule of law like that when everyone else.

Tobias: What law is he breaking? We’re talking about suck Elon’s C, S Elon C.

Jake: Okay. That part is not necessarily–

Tobias: You’re not even including that?

Jake: No, that’s just poor sportsmanship and not how the game should be. And not the example that you should be setting other people.

Bill: Oh, I disagree. You need heels in life. Dude, if he abided by the rules, he wouldn’t be what he is. If this is his Icarus trade and he falls, then I’ll point at him and say, “See, you know what? You should have done it.” But if I was him, you would hate me. I would be bragging like crazy.

Jake: You can win with class also, though.

Bill: Dude, think of all the hate he takes. It’s not him. You want him to be a different guy. It’s not who he is. Just treat him like a heel, like the guy that you hate. But he’s good for ratings.

Jake: I want to like him. Actually, I want him to inspire a whole new generation of kids to dream bigger. And I think people do look up to him from science and like–

Tobias: There’s a lot of people who do, yeah.

Jake: [crosstalk] –Stark type of persona that he crafted. So, why not then take the next step of being classy about it and then setting a good example for all those people, and not being a dickhead about it?

Tobias: [chuckles]

Bill: It’s not in his DNA.

Jake: Come on.

Bill: It’s not.

Jake: Well, let’s aspire to be better than our DNA.

Bill: I would never want my kids to be Elon Musk. I don’t aspire to be him at all. I’m just telling you who he is, is the heel in my world.

Jake: And I’m saying we need heroes in a time like now. And that’s not heroic behavior.

Bill: Yeah, well, no doubt, but that’s why I go to Berkshire.

Jake: That’s fair. I get it. I just want better for humanity, I guess.

Bill: Yeah. Well, look, the Peter Kaufmans of the world, they’re not as visible as Elon Musk.

Jake: That’s where we went wrong.

Bill: Well, but he doesn’t want it. You know what I mean? He’s the guy that deserves the adoration but, in my experience, the guys that I admire are not people that most people know. There’s some that just got so successful that you can’t help but be known. I don’t know. It’s like my man, Tupac, said, “All I want is money. Fuck the fame. I’m a simple man.”

Jake: That’s fair.

Tobias: Yeah, I don’t mind it when Davey Day Trader does it. I think it’s funny.

Bill: I did. I was pissed at Elon over the “420 funding secured” tweet. That was not cool.

Tobias: Yeah.

Jake: You’re not a big fan of securities fraud?

Bill: No, that I don’t like.

Jake: That’s cool.

Bill: But this last–

Jake: That’s a bold take.

Bill: This last stock rep, I would– [crosstalk]

Tobias: It turns out we should have done that deal.

Bill: I know.

Tobias: 420, that seems like an insanely low– now it’s at 1400. It’s $1,000 more.

Bill: Yeah.

Jake: If you are today paying 1300 or 1500 or whatever the hell it is right now today, and how long ago was it? I think it was in–

Tobias: Little bit over a year.

Jake: No, two months ago, he said when the price was like at $700, like 50% ago, that’s too high. Nothing has changed in the fundamentals– [crosstalk]

Tobias: Did he say expensive or high?

Jake: The price is too high, I think, was the exact quote. I don’t know but–

Bill: He’s smoking something.

Jake: [chuckles] If you’re the CEO of the company, all of it– well, a big chunk of his net worth is determined on that number is telling you that it’s probably too high and now you’re paying 2x that and you’re just pretty happy about it? Ooh, boy.

Tobias: Well, it’s a momentum trade, right? It’s 100%. Like I was saying earlier, it’s in that Didier Sornette wave right now. It’s going vertical until it’s not.

Bill: Well, and Vitaliy.

Jake: You never go full Didier Sornette.

Bill: And Vitaliy put out on Twitter the other day, he was like, “I’m a bull also, but you’re paying for a lot of the optimistic projections at this point.” I really respect how he’s gone about it and told people like, “All right–“, not that I don’t think he said I sold or anything but he’s maybe pump the brakes on the expectations. 250 billion is a lot to spend on a car company. And I know [crosstalk] not a car company– [crosstalk]

Tobias: What if they raise money? What if they go and buy Fiat?

Bill: I don’t know.

Jake: Buy all of your competitors, you’re already priced it. All of them. Why are you carrying any debt at all when you can get the equity at this price?

Tobias: Pay out the debt. Pick up a competitor. Raise a little bit of money. Impregnable, never lose.

Jake: [crosstalk] –shitty balance sheet with a bunch of fresh cash.

Bill: Yeah, I’d be issuing shares.

Jake: Hard.

Bill: I’d be issuing shares if I was a lot of companies right now.

Tobias: Shopify.

Bill: Yeah.

Jake: All of the shares.

Bill: I don’t know about all of them.

Jake: Shares gofer.

Bill: Here’s the problem though. If you start to dilute your share– What I don’t know about Shopify and what I have begun to appreciate more is how much share price can attract talent. If you start to issue shares, what is your talent think? And if your share price goes down, what do your new hires do? What are the options [crosstalk]

Tobias: But you’ve got to look further [crosstalk]

Jake: [crosstalk] –stock-based compensation?

Bill: Yeah, and then you just rebase your options and then investors say, “Oh, you’re growing. We don’t care about any of that anyway,” but I don’t know. I don’t know how easy it is. It’s maybe more easy to say in theory than reality.

Tobias: I don’t know how hard it is to do. I think you’ve got to think about the next 5 years, 10 years.

Jake: Hertz.

Bill: Yeah.


David Sokol, Prem Watsa And Atlas Corp

Tobias: Throw your questions in. I’ve got a good one here. How come nobody focuses on David Sokol’s new company ATCO. He built MidAmerican Energy from zero and now has a public entity trying to do something similar. You guys know a little bit about that, don’t you?

Jake: Who said we’re not focusing on it?

Tobias: Yeah, we’ve talked about it before. Let’s talk about it.

Jake: Well, I don’t know enough to speak super intelligently about it, so I should probably just shut up now, but it’s interesting to me. I think Sokol might have gotten a little bit of a raw deal there on his way out.

Bill: Ooh. [laughs]

Jake: I’m not going to say that maybe certainly some punishment wasn’t deserved but it feels like a little bit of a quick hook there. [crosstalk]

Bill: Dang, you talked to Charlie about that when you called him? Were you like, “Yo, that Sokol thing was messed up, boss.”


Jake: No, that didn’t come up, but I probably should have.

Bill: That’s odd.

Jake: Because it’s actually a good question. What happened there? Yeah, he’s obviously a talented operator. MidAmerican was a pretty successful company that he put together and did it for a long time, so it’s not like he’s some bozo. I know Fairfax’s involved there financially. There’s a lot to like, I think. Maybe a little still early though. Well, who gives a shit about natural resources right now? That’s like nothing.

Bill: The Buff Doge does.


Warren Buffett’s Dominion Energy Purchase

Tobias: Yeah, so let’s talk about that. I got a question about Berkshire’s recent purchase. Let’s do that.

Bill: Yeah, I don’t have particularly good line of sight into Dominion. I have some scuttlebutt that says that the assets are closer to demand-pull than supply-push. So, if you think about it, they apparently benefit– when people are using natural gas from the utility, they are transporting from storage to the utility, and then I guess the utility gets it to the people. Is that how it works, Jake? You’re the energy guy or the power [crosstalk]?

Jake: I think so. I’m not sure if I followed how it works. I’ll just say yes.

Bill: No, I think that they’re less subject to random natural gas people just drilling and trying to shove gas into their pipes as opposed to a toll road on true demand that is baked in. So, it seems the EBITDA from what I’ve heard is fairly bankable. I like all those assets. Natural gas transmission to me makes sense as long as we continue to produce it, which the energy reports seemed to say that we’re going to for the foreseeable future– [crosstalk]

Tobias: The US is the Saudi Arabia of natural gas, I read that somewhere.

Bill: Yes.

Jake: We can’t afford to get off of it at this point. Not yet.

Bill: I’m just going to still take share from coal. Now, I guess the less oil we drill, that’s going to take some gas out of the market because they’re gassy wells and stuff, but I suspect he’s going to do fine on that transaction.

Tobias: What does it say about the range of expected outcomes that Berkshire did it?

Bill: It says to me that if you think that Buffett’s fairly smart, the energy MLP space might be a reasonably bombed-out place to play.

Jake: I think that’s a reasonable conclusion. Prices say the same thing.

Bill: Yeah. I read in Grant’s the other day, it might have been last night. Something about like–somebody said investors are too fatigued to invest in energy anymore. Okay. That’s intriguing. I don’t know if it’s true.

Jake: Buy on fatigue, haven’t heard that one.

Tobias: Yeah. By that measure, you should be all over value.

Bill: That’s old school stuff.

Jake: You should what? What’s that, Toby?

Tobias: You should be all over value.

Jake: Because it’s tired AF.

Tobias: It is so tired value. Oh my God, deep value, fatigued.

Bill: It is deep.

Tobias: Need some more questions in here, fellas.

Bill: It says there is real investor fatigue around this parade of legal and regulatory headwinds to energy projects. So, okay, sounds like if there’s a– that many headwinds, maybe there will be fewer projects funded and if there’s fewer projects funded–

Jake: Capital cycle theory?

Bill: Yeah. If you believe in that stuff. My antenna went up when I read that.


Mohanram’s G-Score

Tobias: I got one about, will I be using the G-score? I think the G-score is really, really interesting. I wouldn’t necessarily use exactly that formulation, but possibly because you’ve got to pay royalties to the person who put that together. If you want to use that, I might use my own formulation of that. But I’m not going to do it at this point in time in the cycle This is a value time in the cycle. You want to be loading the boat with value.

Jake: 2011 was G-score time.

Tobias: That’s right. I think you want to be countercyclical in the market. You don’t want to be trying to–G-score is probably going to be the best out of every part of that decile over the next decade. But I just think that’s a very, very tough decile to be in for the next decade. You could be the world’s worst value investor and do pretty well over the next decade. I’m probably going to show people how that works.

Jake: What about it’s just sort of a hedge for you? If this takes two more years, you need a little G-score mixed in in the meantime. Even though I know it’s going to hurt on the 10 year, I got to survive the 2 years.

Tobias: Yeah.

Bill: Now we’re talking style drift for career risk purposes.

Tobias: It’s like business insurance, business hedge.

Bill: [crosstalk]

Jake: It’s real though. Look at every value portfolio.

Tobias: Yeah. It’s a business hedge. I wouldn’t do that because I just think that– there’s a chance to be– I don’t want to say heroic, that’s the wrong word, but there’s a chance to make a name by being the value guy when the market turns and so that’s what I’m trying to do here. I don’t want to muddy the– I’m not going to put–

Jake: [crosstalk] –options or something just for– buy yourself two years’ worth of time if that was to–

Bill: Dude, why are you trying to make my man style drift? Geez.

Tobias: I can’t do it.

Jake: [crosstalk] say devil’s advocate.

Tobias: It’s just against my DNA to do it.

Bill: My kid is outside my window running with the hose between his legs. It caught me off guard. It looked like he was well endowed and not wearing pants.

Jake: That’s not a hose.

Bill: Sorry, Toby. I didn’t mean to interrupt. Jake trying to make you style drift.


Tobias: Another good question. How did value do during the disruption of railroads? No data. That’s the analog. No, roads is the analog. Value is done okay following every little boom. I think railroads were about 1825. It was Vanderbilt coming off the steamships. They decided they should put a steamship on rails. I forget the exact run but it was like Albany, something like that. Very, very interesting period. I’m reading a book about it right now. I’ve got four other books on the same period to get through and then I’ll come and give my book report to everybody on that. [laughs]

Jake: Yes! Veggies from Toby.

Tobias: On that time.

Bill: Isn’t the answer most likely going to be that there are periods in history where everything looks like it’s going to change and everything looks rosy and people naturally pile into that, and then because of that, there are assets that are forgotten. And lo and behold, once the change of history is not what people projected, the assets that were forgotten outperform. Isn’t that sort of–? Wouldn’t we expect the data to be that?

Tobias: Yes, but this time might be different.

Jake: Yeah. But the difference is– rosy isn’t even in the cards. Look at the unemployment number. 2019, you could have told me that that might have been true.


Covid 2.0

Bill: Dude, I’ll tell you what’s tough, is you look at how all of this is flaring up in places and I get that deaths are not up and it’s skewing younger and all that stuff. But it seems to me that the reason that the southern states are flaring up is because people are inside right now. I would suspect that the northern states are going to do some of the same when people go back inside.

If you’ve got a quarantine for two weeks– I was talking to my mom, my mom’s in Arizona. Illinois said, if you come here, you’ve got to quarantine for two weeks. How are people going to travel? Then any discretionary travel that you may have had that’s interstate or north to south, that’s going to go under– in Chicago, if you can’t be inside, how our businesses going to operate at all in the winter? I just think there’s going to be– and I understand the markets forward-looking. I get we’ve been through that. I understand that was the March selloff and we were down 35%. Now you’ve got to think 18 months, I get it all. It’s just hard for me to process. It’s hard for me to see–

Tobias: Square that data with California. California, basically, you’re outside all the time. Cases, I think today when I checked the data, it was the largest number of cases on a single daily basis that we’ve seen, and the deaths are six. So, the deaths are as low as they have been since March 22. I think I had to run it back to look. I think there’s something very odd happening with that data.

They’re clearly bundling in with the new tests that they’ve found was somebody had it previously and they’re not currently sick. There are some states that do seem to be struggling a little bit. I don’t know what causes that. Maybe you just got to get to 20%. Once you get to 20% of people who’ve had it, for some reason, they can’t then pass on. So, New York’s kind of there, it looks like they’ve just about conquered it. California’s getting there. There’s states that haven’t got there.

In Australia, they just didn’t let anybody in, so nobody really got sick. But now they’re having a real second wave. And I just think it’s because they’ve got no immunity to it, it’s just got to burn through. The objective of flattening the curve is just so we don’t overwhelm the hospitals and things like that to the extent that we can do that. But otherwise, there’s no way of avoiding this thing. It’s going to be like the flu, it comes around once a year, probably. To shut everything down again, I think, is suicide.

Bill: Well, I agree with that. I don’t know, we’ll see. I just think that it was easy–

Jake: You’re not going to a restaurant anytime soon, and you’re not going to be [crosstalk] wintertime.

Bill: Not if I’ve got to sit inside. Yeah, that’s right. I just won’t, but I also have high blood pressure even though I appear to be a pretty calm guy. I’m not trying to die over this shit. Because if I needed a steak, I’ll just cook it at home.

Jake: Isn’t that– [crosstalk]

Bill: [crosstalk] –I have high blood pressure.

Jake: Even if you weren’t to die though, some of these stories I read about the longer tail of lasting problem–

Bill: Fake news. They’re just trying to scare you.

Jake: Really? I don’t know. Rudy Gobert still doesn’t have a sense of smell months later. I don’t really want that. I don’t know. I just feel like maybe this is– [crosstalk]

Bill: [crosstalk] taste.

Jake: Of course.

Bill: I could give up smells. If I never had to smell myself again, I’d be totally fine with that. But the taste thing I would be bothered by.

Tobias: As much as I’d like to continue down this track. [chuckles]

Bill: This is really– I’m sure we have like zero eyeballs now.

Tobias: We’re right on time. So, thanks, folks. It’s a cracking episode. We’ll see you next week.


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