VALUE: After Hours (S02 E30): Asimov’s Foundation, $WFC And Buffett’s Miss, And Blackrock’s Fade Value

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

  • Asimov’s Foundation
  • ROIC, Returns, And Nose-Bleed Valuations
  • BlackRock Quant Sees Stock Valuation a Mystery Not Worth Solving
  • Buffett’s Miss
  • $WFC Down 51% YTD
  • The Counter-Argument To Buying Berkshire
  • Which Is The Best FAATMAN Stock To Own?
  • John Maynard Keynes – Good Investor, Bad Economist
  • SEC Removing 13F Reporting
  • Pat Dorsey – Capital Allocators
  • Rights Issues Over Other Types Of Capital Raising
  • SPAC’s Are Hot Right Now

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Tobias: And we’re live. 10:30 AM West Coast, 1:30 PM East Coast, 5:30 UTC, 12:30 in Bill’s neck of the woods, Chai Town. What’s happening, gentlemen?

Bill: Zero eyeballs.

Tobias: Zero eyeballs.

Bill: They’re coming. They’re going to come.

Jake: Negative 10.

Tobias: But there are folks listening at home who’ve just heard that wonderful intro music and now they’re getting this.

Bill: How jealous are we of them?

Tobias: [laughs]

Jake: Oh. They’re probably better off just listening to that on loop for an hour.

Tobias: Three eyeballs. Yeah, Grace Mesa, How We Do It, it’s called. Great song.

Bill: Shout out to the dedicated three.

Tobias: Here we go, 15. Chapel Hill, Brad Shultz, first man in the house.

Bill: Who’s using a VPN to make us think that there’s more than 10? I appreciate you.

Tobias: Evanston, Toronto, Bangalore. I love it. Nigeria, Ottawa, Jakarta, come on, in the house.

Jake: Worldwide.

Tobias: Worldwide.

Bill: You asked me, what’s going on? Nothing, just hanging my professional reputation on a shitco. Other than that, everything is great.

Tobias: Gee, Wells Fargo has fallen a long way, that it’s now regarded as a shitco.

Jake: The fall from grace.

Tobias: That was one of Buffett’s wonderful companies not that long ago.

Jake: Yeah.

Bill: Nope. Yeah, it’s a bad company, bad manager, can’t own it.

Tobias: Bad dog.

Jake: Yeah, that’s a fall from grace.

Tobias: Is that your topic? You’re going to talk Wells Fargo? I thought you had an interesting one there too.

Bill: I might. I might rant about how this notion of, you earn the returns that a business returns over time. I may just rant about that because I think this is one of these good ideas that’s been taken far, far, far too far.

Tobias: I love that idea. I love discussing it. I love that.

Bill: I think I’ll go there though.

Tobias: I’m interested to hear it. I think we should get a Wells update too.

[crosstalk]

Jake: I want to hear your thesis on why Buffett and Munger missed out on the decay of wealth.

Tobias: Couple of good topics there. What about you, JT? What’s on the menu today?

Jake: Well, I’m going to talk about why Isaac Asimov would say that maybe Toby’s a genius.

Tobias: [laughs]

Bill: We should start with that.

Tobias: Now I’m nervous.

Jake: Yeah. [chuckles]

Tobias: Because I love Isaac Asimov, hard science fiction.

Jake: Yeah, he loves you too.

Tobias: [chuckles] That’s good.

Bill: Allegedly– [crosstalk]

Jake: How about you, Toby? What do you got today?

Tobias: Yeah, a little article out from, I’m sorry, it’s Christina [unintelligible [00:02:36]. I forget who she writes for, it could be Bloomberg. But she’s spoken to some quants at BlackRock who say that value is dead, everybody should move on from value. And I’m here to endorse that sentiment, value is dead. Everybody should move on from value. Who wants to go first?

Bill: Jake, why don’t you tell us why Toby’s a genius.

Tobias: I’m very nervous about this.

Jake: All right. I will, right after this. We didn’t really do the intro.

Tobias: Whose intro was it?

Jake: I guess it’s mine.

Bill: We all did it together.

Tobias: JT, you do it. We haven’t had you for a while.

Jake: All right. Welcome to Value After Hours. I’m here with my superb guest– hosts as you’re always, Toby and Bill.

Bill: It’s a terrible intro.

[laughter]

Tobias: That’s the casual intro.

Bill: First of all, we already did the intro when we announced our topics. Jake just called us guest hosts Who’s going on next.

Jake: Yeah, you got demoted down to a guest host.

[laughter]

Bill: I deserved it.

Asimov’s Foundation

Jake: All right. Let’s jump into it. I’m going to start off with a quote from Isaac Asimov. He says, “The individual molecules of a gas move quite erratically and randomly. No one can predict the direction of motion of a single molecule at any particular time. But you could predict the total behavior of the gas very accurately using the gas laws.”

Asimov in the Foundation series, which is being hopefully made into something decent, I think Apple’s the one who took that on. Looking forward to that one.

Tobias: Yeah, that will make me subscribe, genuinely.

Jake: Yeah, I’ll [crosstalk] on for that, for like, one free trial for a month and then you bounce out, right?

Tobias: That’s it.

Jake: [chuckles] He has this character whose name is Hari Seldon. This guy is what he calls a psychohistorian. What Asimov says is that you can explain the aggregate behavior of societies. You can’t tell what anyone man’s future looks like, but you can explain the aggregate behavior across galaxies and across time because there’s these principles that hold. Where this happens to fall, why I think Toby’s strategy is genius is that he’s doing a very similar thing where he’s looking at the aggregate behavior of a population and not the individual ideas necessarily.

When someone asks him, “Toby, what do you think about stock XYZ?” It’s a stupid question, because it’s very irrelevant to actually what he’s doing. It’s more the emergent of this whole portfolio of what, over enough timeframe, you could expect from that portfolio.

Tobias: Yeah, that’s fair.

Jake: Yeah. Bill, anything to add to that at this point?

Bill: Not at this point.

Tobias: I just love the Foundation book– I forget it, is it first Foundation or Foundation– The first book? The first book is the first Asimov book that I ever read and absolutely loved it.

Bill: I know nothing about this guy, so I’m not going to be particularly good at this.

Tobias: I’m a massive Asimov geek.

Bill: Well, he thinks you’re a genius.

Tobias: No, [chuckles] JT does.

Bill: Look, I guess, at this point, if I have to add something, what I would say is, I think that Toby’s strategy, as I perceive it, as described in books and everything that he does, because he’s as authentic as it comes, makes a ton of sense. The idea of buying a basket of companies that have the catalyst of returns of capital to shareholders, makes a lot of sense to me. The only outstanding question that I have is whether or not it would be better to hold that portfolio, as it’s introduced into the portfolio, for a year or two, or if the term benefits, but I know you’ve done the work and you found that the term benefits but that’s only like–

Tobias: Well, it’ll be held for a year. They are held for a year at a minimum unless there’s some deterioration that makes them– become no longer tenable, but they’re held for a year at least.

Bill: [crosstalk] -balance slightly more frequently.

Tobias: The rebalancing is quarterly, but that means that there’s four quarterly portfolios rather than– it’s not quite as simple as that. But that’s roughly the idea. But I do like the idea of setting up a much longer-term vehicle that would trade much less frequently, and just try and pick them out of the bottom and then hold them for maybe five years or more.

Bill: Yeah.

Jake: So, the next part of our discussion then is that I think another part of the genius of how you’re structured it is that things are equally weighted. I think people get into a lot of trouble not having the humility enough to consider equal weighting. I think we’ve been told, “Oh, why put more money into your 15th best idea when your best idea is available?” That that assumes that you really know maybe it’s often more than you actually do about the universe. We’ve talked about this dark matter, and how there’s a lot of information that’s hidden from us in this game.

Well, I think an exercise that everyone should do, if you’re serious about this, is go back and look at your 1/N portfolio. And so what that just means is, take all the positions that you’ve held at different time periods and equal weight them as opposed to how you weighted them, and see how did that perform relative to your performance? I bet you would find a lot of people would have better 1/N portfolios than they do their individual weighting portfolios, which would tell you that maybe you’re not adding a ton to the actual portfolio process by deciding how you weight things, but you really don’t know that until you test it. I don’t think that’s a very common practice, like a lot of people are blind to that, but I would encourage you to try to figure out a way to do that.

Tobias: It’s hard. There are some folks who do outperform the equally weighted portfolios. Icahn is one, historically outperformed. So, he is identifying– probably because he’s the creator of the catalysts, so he can size up into a position and then force the catalyst and then take it down as he’s got the big bump.

I think probably Buffett must be another one too because I think that he probably performs an equal-weight version of himself. But for the most part, it’s extremely difficult because there’s so much randomness, particularly even at 30 names, there’s a lot of randomness in those portfolios. There’s no reason why things have to get equivalently discounted from intrinsic value before they start moving back up again.

Somebody could have been waiting for a long time and they’ve got the money to move the market back up again. I think that equal weighting is just an admission that you can’t control it if you’re already weighed down into that concentrated portion of the market. That’s sort of the way that I do it.

Jake: Yep. I think that’s smart. I think we could all use that humility, at least check to see, are you adding value there or not?

Tobias: There’s also a rebalancing benefit to it where you’re taking down positions that have worked and you’re taking up positions that haven’t worked, so you’re doing what a value investors should, which is buying a little bit when the stuff has gone down.

Jake: Oh, I got to let my winners run, what are you talking about?

Tobias: But you’re not necessarily selling out, you’re just selling down. So, they could be in there and you get that Shannon’s demon effect in your portfolio. It works in the long portfolio, works a little bit better long, short.

Bill: I got nothing.

Jake: [laughs]

Tobias: I do love those Foundation books.

Jake: Thanks for playing.

Bill: Well, I have no idea. You look at somebody like Russo and Akre, I just think– I guess my gut and this is completely not on data, so don’t listen to it, but I’m on a podcast, so whatever. I do think if you’re going to take this strategy of letting your winners run, I find it very, very hard to really let them go. And I think you’ve really got to let them go if that’s going to be how you’re going to play that game. That I think is harder to actually stomach than many people may think when they’re thinking through like, “Oh, I can let my winners run.” Can you really? Because it’s going to become a big part of your portfolio and it’s going to feel really rich at certain times.

Tobias: That’s the challenge. You can see it in market cap-weighted portfolios. The S&P 500 appear at– various times, it’s been 40% Exxon. Now, I bet that makes people nervous right now. I bet at the time, people are like, “Well, that makes perfect sense that you’d have Exxon biggest and best company in the world is your 40% waiting,” but I’ll bet you right now people get really nervous when they think about that, and they think, “I’d much rather have a good company like, I want Google.”

Bill: FAATMAN.

Tobias: I want FAATMAN to be the 40% waiting. Exactly, right.

Jake: Are they nervous about that? I feel like they’re pretty bulled up on that idea at this point.

Bill: I’d rather own FAATMAN than some of the smaller ones.

Tobias: Yeah, that’s a fair point. But at the time, at the peak, people felt good about Exxon too. Not necessarily the peak, just [crosstalk] get some.

Jake: Peak oil? Like oil’s going to like $400 a barrel? Exxon looked like a dream come true.

Bill: People, sometimes they’re like, “Well, you’ve got to buy the best,” and it’s like, “I know, you dumb shit, but it’s not offered at the same odds. Like that’s the whole fucking game.”

Tobias: [laughs] That’s the hard part.

Bill: Yes, I agree. If I had the fastest horse with the best jockey at the same odds, I wouldn’t bet on the fat one.

Tobias: [laughs]

Bill: It’s not how the game works.

Tobias: I’m just looking for the fat one to show, it doesn’t have to win. I just want the slow one to show.

Jake: Just finish.

Tobias: Yeah.

Bill: Frustrates me so much because people, “Don’t you want to own a better?” Yes, I want to own a better business. I get it, I get it. I’m not like somebody that’s looking through garbage and thinking it’s [unintelligible [00:13:15]. I just think you’re paying too much.

Tobias: That’s kind of Buffett’s genius. Buffett, aside from the fact he’s smart, it’s the discipline to say, “I’m going to wait for Google,” or, “I’m going to wait for Apple to fall into that really cheap basket, and then I’m going to buy it and then I’m going get that bump when it goes back to its value. But then after that, I’m going to get the growth too, so I don’t have to sell it.” He’s not trying to meet with the space station– He’s not trying to get the rocket to meet the space station in space. He’s just stepping over the one-foot hurdle on Earth.

Bill: Yeah, I think that’s fair.

Jake: Game’s passed him by. I don’t know what you’re talking about.

$WFC Down 51% YTD

Bill: Well, that would be like one of my knocks on Wells is, how much is it really going to grow and what are the returns on capital really going to be? But you could still get double-digit returns on equity and the probability underperforming I think is pretty low, but we’ll talk about that one when we get there. But like that was what made [unintelligible [00:13:15] so freakin’ smart. The returns on capital were so good and it had such a long growth runway and he made a lot of money for a really long time. That may arguably be cheap now.

Tobias: Do you think it’s a mistake not to sell it when it gets expensive? The way that he thinks about it is, it is so hard to get into these things. When you get one, then you just take the ride and if it gets expensive, then so what? You got it really, really cheap and now you own the business.

Bill: I think he’d sell a lot more frequently if he was you and I. He said it before, he said that his turn would be a lot higher if he was a lot smaller.

Tobias: Has he?

Bill: Yeah. I think if you’re Berkshire and you have that huge of a capital gain, then how the heck do you get out of it? And then when you get out of it, you’ve got to disclose, and it goes down further. And he’s probably just like, “Whatever. Screw it. We’ll just own more from the buybacks.” It’s too hard to figure out how to sell and buy back in. I think in that entity, his behavior is forced to be the way it is, but I don’t think he would argue that’s ideal behavior.

Tobias: You don’t think it’s– He never incurs tax. Yeah, that’s what I think too.

Bill: Yeah, well, that’s fair. Yes, I think the way he set up Berkshire– he’s playing in the better mousetrap. Within that mousetrap, I think there are some costs that maybe are not theoretically perfect, is I guess how I would say it.

Tobias: Focuses the mind a little bit too. Can’t get out of this easily.

Jake: Yeah, you can’t get out, what do I do? Better make sure I’m doing a good thing getting in.

Tobias: Better make sure I like it.

Bill: Yeah, I think that’s fair.

Jake: To say buy value and hold growth, is that–?

Tobias: Yeah.

Bill: No. No more value, that’s gone.

Tobias: Value is dead.

Jake: [chuckles] Oh, yeah, I forgot.

Tobias: Value is dead is dead.

Jake: I needed that memo 10 years ago.

Tobias: I’ll tell you what, if we’d been doing this yesterday, I would have been much more inclined to believe that. Yesterday for those who don’t know, because I track FAATMAN, the definition has changed as I’ve gone along, but it’s Facebook, Apple, Amazon, Tesla, Microsoft, Alphabet, Netflix. I just track it as like– Did I miss Amazon? Alphabet, Amazon, Apple–

Bill: We might have to tap an S on that for space.

Tobias: I know. I track space too, because I think it’s funny but I don’t include FAATMANS. Yesterday, so FAATMAN over value was more than 5%. That’s a big move.

Bill: Dude, did I see Amazon tacked on 8% yesterday?

Tobias: Possibly, yeah.

Bill: That is a big day.

Tobias: Tesla might have done that too. Tesla might have been more than that. Might have been 9% or 10%.

Bill: What is that?

Jake: It added a Ford yesterday.

Bill: Is that $80 billion? Is that what it is? That make sense?

Jake: Yeah, it’s something like that.

Tobias: That was punishment for my hubris calling it Icarus.

[crosstalk]

Bill: Yeah, they used to be a lot of money back in the day. Hmm. Oh, well.

Jake: [crosstalk] — market cap is an antiquated concept anyway. Don’t worry about it.

Tobias: Yeah.

***

ROIC, Returns, And Nose-Bleed Valuations

Bill: This is probably a reasonable time to do the ROIC and return comments.

Tobias: Yeah.

Bill: Look, we have gone too far with this discussion. I understand that, over a long enough time horizon, your returns will mirror the returns of the business presuming that you pay for growth. Or that the business continues to grow.

When Buffett bought Kraft Heinz, that business printed like $7 billion in EBIT and he paid like $100 billion. Guess what? If it doesn’t make more than $7 billion in EBIT, it doesn’t matter what the returns on capital are. You’re not going to earn more than your earnings yield on what you purchased. The way that I think about it is you get the weighted average of your purchase price-earnings yield, plus how the business grows over time. Whatever the earnings growth is over time, you are accumulating the business’s return in that– like in the incremental earnings. But you can’t egregiously overpay for an asset, hold it forever, and argue to me that you’re going to get the assets return. It’s just not how the math works. A lot of your return is on so far out, it doesn’t even matter down the road.

Now, I agree that in a world where multiples continue to expand that thought has not– there’s never been over the past, I don’t know, 10 years or whatever, you haven’t had to worry about the multiple coming in on you. So, from an IRR standpoint, yeah, you buy it, it grows at a certain rate, you flip it at the same multiple, maybe it expands, your IRR is better than what even the business returned or whatever, but you just can’t– If you listen to what Buffett said about Kraft Heinz, I think it was two years ago, or two interviews ago now, after our meeting. He said he’s like, it’s only going to earn $7 billion, the business is still a fantastic business. Look at the returns on capital. He’s not going to–

Jake: We paid too much, that’s what he says.

Bill: Yeah, he’s not going to earn more. He’s not going to get bailed out by returns on capital. You paid too much. You paid too much.

Tobias: What did he expect to have happen and why didn’t it work out?

Bill: I think what he thought was I think that he was relying a little bit too much on legacy distribution advantages. I think he underestimated the risk of private label taking share. And I think he thought the entity would grow a little bit more. If the entity grows and the returns on capital are what they are, you can pay $100 billion for $7 billion today. But if the entity doesn’t grow, it doesn’t matter if the returns on capital are good. You’re fucked.

Jake: And that’s the lesson, I think, for everybody is that you have to be right about that, what does the future look like for this business, for that to have been an appropriate price to pay. Even somebody like Buffett, who’s been watching consumer goods for 70 years now, can swing and miss on something, like you can too. So just because the multiple has been very favorable for you or the expansion of that over the last 10 years, does not necessarily a genius make and does not necessarily mean that you’re going to get the same result over the next 10 years.

Tobias: Do you think he expected 3G to chop a lot of cost out and to make that look a little bit better than it actually was?

Jake: Probably.

Bill: I don’t know. I think that he and 3G both made an error thinking that you didn’t need– Jorge Paulo Lemann said this last year, he said, we were dinosaurs. I just think that they overweighted legacy distribution advantages, and they got caught. I don’t think either one of them has been particularly good at pivoting their minds. Berkshire has seen it throughout history with like World Book, but he sort of knew that that erosion was coming. But I just think maybe they overweighted the incumbent advantage.

Tobias: It’s tough, though, right? Because you would look at that very long history of growth in those goods and you’d say, “Well, we’re going to stumble up and down a little bit, but roughly, this is probably what we’re going to continue to do.” Because the private label stuff was– who really foresaw that happening? Maybe there’s a whole lot of VCs out there who funded and who knew it was coming. But I didn’t think it was obvious. We still shop at–

Jake: The VC of Costco?

Bill: Private label, you could see that coming. I don’t think that was that hard because I was banking in food when that was really taking off and it was steadily taking share. I do think it grew much bigger than people thought. And Kirkland has objectively become a much bigger brand than I think even the most bullish Costco investors would have projected.

Tobias: So, it’s that private label, it’s not that Instagram folks who are like– [crosstalk]

Jake: –direct to consumer.

Tobias: –direct to consumer. Yeah, sorry, I’m confused.

Bill: Yeah, I think private labels are much bigger.

[crosstalk]

Jake: Are you buying your sliced cheese off of direct-to-consumer Instagram? [laughs]

Tobias: No, but I buy a lot of stuff over there. We shop at Trader Joe’s and it’s all private label. They’re really sneaky. They get something in there that people like and then they tell them– I think they tell the people who make that, “Hey, guess what? Now, you’re making it for us and you’re making less so, we’re going to stick it under our brand. Cool? What are you going to do?” It’s all margin on sales.

Bill: I’m sorry, man, I didn’t mean to cut you off. I found the quote that I wanted to say and I cut you off. I feel like an ass for that.

Tobias: That’s it. That’s all I was going to say.

Bill: Oh, all right. This is his exact quote. He said–

Jake: Who is this?

Bill: This is Buffett. “Now, the interesting thing about Kraft Heinz is that it’s still a wonderful business and that it uses $7 billion of tangible assets and earns $6 billion pre-tax on this. So, the assets required to run the business $7 billion, they earn 6 billion roughly after depreciation pre-tax, but we and certain predecessors, primarily we paid $100 billion more than the tangible assets. So for us, it has to earn $107 billion, not just on the 7 billion that the business employs, and we don’t have a way. It would be wonderful if we had a way to deploy another $7 billion and earn $6 billion, but it’s not there.” Right?

This is the whole fucking argument against SaaS that I have. When you’re paying 30 times sales, you’re not earning the return that the business– The business can earn that return. You need the business to earn that times the 30 times multiple of sales that you’re paying. I get they’re great businesses. I get it’s growing [unintelligible [00:24:14] in debt. You’re not some savant for figuring that out.

Jake: Paging CEO of Sun Microsystems, Scott McNealy.

Tobias: Yeah. 10 times used to be expensive. 10 times, that’s a value stock now. That’s deep value.

Jake: Jesus.

Bill: [crosstalk] It’s just a bit frustrating to me that people can’t like– A lot of these people are very smart people. And I don’t know if it’s motivated reasoning. I don’t know if people aren’t thinking. I don’t know what it is. But you earn what you pay and the underlying earnings stream growing from there. You don’t earn what the founder put in and that stream growing. It’s not how the game works. You are the other people’s money. You’re not earning the levered return.

Tobias: But it’s understandable. It’s just been a market that has rewarded growth with multiple expansion. So, if you’ve had that for a decade– [crosstalk] a decade is a long time. You really think that we’re going back to a value-type market where you get the lower-growing cheaper company does better? That’s ridiculous.

Bill: Yeah, I was asked on one idea. Honestly, it is sort of ridiculous. I guess that the answer for that question is what I think is over the long term, if you hold those businesses and you underwrote them well, and you buy that type of business, you’re going to do better. Do I think that you’re going to outperform over the next year? Probably not. Momentum is probably going to keep ripping and value’s probably going to still get shat on. One year is not an investment career. And then you do it for 20 years event, eventually you get bad stuff that happens. I don’t know where It’s going to happen. I’m not smart enough to figure that out. If I was, I wouldn’t be sitting here.

Tobias: Fundamentals matter eventually. Just don’t know when.

Bill: Yeah.

Tobias: That’s the only Zen thought you have to get to. Once you realize that, then you don’t really care what the stock price does. You’ve just got to watch your own businesses and you’re totally fine then. You’ve reached this sort of moksha.

Bill: Yeah. Look, at the same price and the same multiple, would I rather own Shopify or Wells? Shopify, I get it. You’re not buying it at the same price.

Tobias: Probably at a premium too, right?

Bill: Yeah, that’s right. Yeah, that’s exactly right. And a pretty steep premium, might I add.

Tobias: But this might be a little bit too much.

Jake: Not the one being presented to you today.

Tobias: Not the one on offer.

Bill: Yeah. I just feel right now these valuations, you’ve seen a cokehead with a bleeding nose and he’s about to fall over and have a seizure, you just don’t know when. You’re like, that’s a nosebleed valuation and it’s not going to end well. You just don’t know how long it can go on before that guy falls over.

Tobias: I forget who [unintelligible [00:26:58].

Bill: Maybe not a great analogy.

Tobias: It’s the last five shots of tequila at the bar. The first two drinks are great at the start of the night and you wake up in the morning and you don’t even feel those, but the shots of tequila just before you bust out, last call, better get some shots, that’s what ruins the next two days, particularly if you’re my age.

[laughter]

Bill: Actually, at my age, it’s probably the third shot that puts me down for the next day and a half.

Tobias: Yeah, it’s a two-day hangover now. I just can’t do it.

Bill: Yeah, I’m with you. Anyway, that’s my rant. I was very amped up about that rant. Look, they’re very nice people and I think they’re very smart that are making this argument to me, but it’s like, I know what you’re saying, I get it. Maybe I’m the moron. But I really don’t think you’re thinking here.

Jake: Well, nothing sedates critical thinking like easy, quick money.

Bill: Yeah.

Tobias: Narrative follows price.

Bill: I was going to say, and I do get the knock on value. So, that Intrepid Potash that I continue to go back to, that guy had a lot of money, he invested in a shitty business, he’s eroded value, he invested in oil assets. I think normalized, you’re probably going to be able to print $20 million of free cash flow on a $105 million market cap but I could be off on that, whatever, do your own work. Bottom line is that guy has lost a lot of money. He has misallocated capital for a very long time. That asset should trade at a discount because there’s nothing to convince me that you’re going to get the capital out.

In that sort of a value trap pitch, I get why people say it’s a trap. In stuff that like Toby’s buying where you have buybacks as a catalyst, that’s a different argument. You’re drawing the cash out of the business today. It’s not some hope.

***

The Counter-Argument To Buying Berkshire

Tobias: Yeah. The risk for value guys is you just gets stuck in something that never– Like Berkshire, I understand the counterargument to Berkshire– just bear with me for a moment. The counterargument to Berkshire is–

Jake: Choose your words carefully, sir.

Tobias: It’s got the conglomerate–

Bill: And assemble.

[laughter]

Tobias: I’m an owner and I’m a huge fan. I’m playing devil’s advocate. I just understand the other argument. The other argument is there’s this big conglomerate discount, so many moving parts to it, doesn’t pay a dividend. I think maybe he’s bought back a little bit more stock this time around but didn’t buy back stock when we had the big opportunity in March. And so, folks are like, “Well, how do you get the money out of this thing? How do you make money in the next quarter in this thing?” You can’t make money in the next quarter in this thing. You’ve got to have this view, where the company’s going to be bigger in 5 or 10 years. Then you say, well, I love management. Management’s 90 and 96. That’s the counterargument.

I happen to disagree with it, but I do understand it. I think it’s a pretty strong counterargument. My bias is towards– I just like undervalued high-quality things. I think it’s genetically built to outperform, and Buffett is going to be there for quite a bit longer, I hope, and I still think beyond that. It’s not going to matter because it’s so well constructed and the team that’s there is so good, this thing succeeds no matter what.

Bill: I also think in something like that, your shareholder base is such high quality, like the three of us, obviously. But it gives them such leeway to do things– and look, I do think eventually you’re probably going to have some spinoffs from Berkshire. I think eventually the business is probably going to have to morph a little bit and I think that there’s a way to do it that’ll probably piss off some of the OG shareholders, but you don’t have to sacrifice what it is.

Fundamentally, the ethos of that company, I think, survives. I think that having the shareholder base that’s willing to allow that sort of– I don’t know why metamorphosis is the only word that I can think of. But that’s important. I think that having Charlie and Warren there as the church that people pray to, I think that’s really powerful. It’s why I hold the shares. It’s currently my biggest position.

Tobias: What do you think that they could do that will piss off the OG shareholders?

Bill: I think you start getting into some spinoffs, some people are going to get pretty nervous, start selling, some businesses are shuttering– I get why. It’s a delicate balance, and maybe they don’t do it but– [crosstalk]

Tobias: Well, the nice thing about Berkshire is they’re all decentralized. So, it’s probably reasonably easy to do that. It’s not like they’re taking all of that. There are no synergies. It’s not like they’re chopping up the treasury function. They just buy it and they just leave it alone, as I understand it from the outside, but that’s what they tell us they do.

Bill: No, I think you’re right. I think the risk is some of the founders start to retire and now all of a sudden the second in command maybe doesn’t have the same tie to Berkshire, and now they’re not working for Warren and Charlie, they’re working for Ted, Todd, and Greg. It’s going to be interesting to watch that happen, and you’ve got to pay attention to it. But I’d still rather bet on that set of assets and those jockeys than a lot of other ones.

Jake: Yeah, you’ve got to still like– even if it’s 75% of the original culture, that’s still pretty damn good culture.

Bill: Yeah.

Tobias: Yeah. It’s going to be hard to– if you’re the person who takes over with everybody watching you and having grown up under it, it’s going to be hard to pivot and, “Hey, guess what? We’re spinning this thing off.”

Bill: Yeah. [crosstalk]

Jake: [crosstalk] this baby up, we’re buying back shares.

Bill: Man, [unintelligible [00:33:11] zero in Europe. I’m not going to hate on that. That’s free money.

***

BlackRock Quant Sees Stock Valuation a Mystery Not Worth Solving

Tobias: I don’t have a particularly long topic here. I’ve just noticed there’s quite a few death of value type articles around which does warm my heart to see them because I know that the end of value’s underperformance is near because narrative follows price rather than the other way around, which it should be. I just think it’s hysterical that– BlackRock has come out, Justine– I think I said Christina before, I’m sorry about that. But BlackRock has come out and said, BlackRock’s co-head of systematic active equity, quants should move on from value. Stock valuations are essentially unknowable and rather than scale a data set by price, just see if it predicts returns. Aside from the gobbledygook in the second part, which I don’t really understand, I’ve seen that argument a few times.

Jake: Explain that to me as if I was a five-year-old.

Tobias: No, I can’t.

Bill: Yeah, I think it means stocks go up, stop trying to care about fundamentals.

Tobias: Well, there’s a lot of that going on at the moment.

Bill: [crosstalk] –that is what I translate that to.

Tobias: Even FAATMAN, I mean, I can’t believe I’m going to say this but it’s FAAT, just before I trigger anybody. FAATMAN. When I look at FAATMAN’s valuations, FAATMAN’s stretched, I think FAATMAN’s expensive. Don’t misunderstand what I’m going to say here. But FAATMAN, they’re not–

Bill: Are you claiming that 60% up year to date is stretched? How dareth thou?

Tobias: The percentage performance of the prices is irrelevant. What is it relative to the underlying business? I think if you look at those things– somebody sent me some analysis yesterday saying, if you’re looking for a 4% nominal return in Amazon, you’ve got some pretty bullish assumptions you got to make these days, like 30% growth, got to return a lot of capital. In a 4% nominal, that’s not much in this kind of– I mean, I don’t really know.

Jake: I started with my line down here and I draw through where it went. And then I just keep going. And [crosstalk] to the end point, dude, we’re rich, I don’t know what–

***

Which Is The Best FAATMAN Stock To Own?

Bill: I’m going to piss some people off of this, Lord Almighty, please forgive me. Amazon’s the one I like the least. AWS, I like, I get it. I get that Bezos is a genius. I don’t know. I’m really, really interested to see operating leverage flow through Amazon over the next three years if I’m even moderately directionally correct on the economy, and I know somebody’s going to be out there. “Well, they deliver the lowest price.” Okay, let’s see. AWS is a monster though. It is a monster, but you’re paying a lot for it.

Tobias: And there’s some competition there too. But you think Amazon– of the businesses in FAATMAN, which business do you–

Bill: Well, T is the worst by far, but I don’t even consider that. It’s only there for the acronym.

Jake: Yeah.

Tobias: Well it’s been FANG, it’s been FANMAG. But we’re FAATMAN now because–

Bill: Microsoft, I like the most. Facebook’s probably the best business, but God I can’t get over how much I don’t like Zuckerberg. Google Search is incredible if they can figure out how to allocate capital, that’d be a hell of a business too. It already is, but take care of my friends over there. But other than that, stop this other bets nonsense.

Tobias: [laughs] Dude, that’s how they stop the people with the pitchforks and the torches from coming for them.

Bill: Netflix, we’ll see, but I think Disney is a much, much better business than Netflix. And if you’re comparing the two of those, I just think that– I’m not as convinced on Netflix’s ability to scale spend as some people are, but I’m also not some huge Netflix hater. I get it, global scale is important.

Tobias: What’s your favorite, JT? I think I know the answer, but just let you articulate it.

Jake: Well, if I just have to own one of those businesses, my entire network–

Tobias: Yeah, you can own the business. You don’t have to pay the price. Do you know what I mean? You get them all at the same valuation.

Jake: I’m taking Google.

Tobias: Yeah. Me too. Why?

Jake: And I’m just going to cash checks because it’s just a money-printing machine that will continue to– is the most likely to keep printing money for a long time, I think, relative to the other ones and is less likely, I think, to be disrupted than the other ones.

Bill: Also, the people out there are awesome humans. I only met with a select group that’s into investing, but they’re thoughtful, they’re intelligent. They ask questions that I wish–

Jake: I don’t think that has a lot to do with the money-printing machine. I agree.

Bill: Yeah, well, it helps over the long term.

Tobias: In one sense, to me, Google is the most frightening of all of them, which means it’s the one that I want to own the most. Google is in every part of your life. Google’s got YouTube. You probably use Gmail. You most likely use Search. It’s just too hard to use anything else other than those ones. You just don’t even notice that it’s all Google collecting all of your information all the time. Whereas you do notice Facebook, like there’s an ick factor when you go to Facebook, I don’t use it a lot. I think a lot of people don’t use it a lot. Google, like much more embedded under your skin. It would be very hard to get that removed and survive. And people don’t really think about it that much. Somehow, it’s crossed that uncanny value where you trust it–

Jake: Benign cancer.

Tobias: But then, on top of that– it’s good bacteria or something like that. Beyond that, it’s disguising discussing how much it makes. They’ve got all this other bets nonsense, they’re just like, “Yeah, we’re just going to do some stuff so nobody knows how much money we make.” And so, they’re just hiding out there, camouflaged in plain sight, totally embedded under your skin and nobody knows what’s going on. Google’s a scary beast.

Jake: All right, I’ve got to go place some buy orders– [crosstalk]

Tobias: [laughs]

Bill: I argue they mismanage some of their competitive advantage in YouTube too. I don’t understand why YouTube isn’t much, much bigger. I don’t understand Google Music. There’s some weird things. On one hand, they completely pivoted the business to mobile search and released Android, and that was an insanely good business move. On the other, they’ve had some assets that they’ve really squandered, and I’m not sure why.

Tobias: They kill assets all the time. Like the RSS feed, the landing page that I used, homepage, RSS feed. They’ve killed something else recently too.

Bill: You know what they should bring back is like Google history, used to be able to google like– I don’t know, like a search phrase and then you could see all the times in history that it’s come up. So, like Ken Fisher used to write about that back before he was a sexist pig all the time. He would google his topic that he wanted to write about and Google would return to him all throughout history different dates that a similar headline had come up. And it was like, look at how often people have complained about this and look at what stocks have done since then. That was a cool feature.

Tobias: There’s still something like Google Trends, is that the same thing?

Bill: No, it’s different. This is more of a historical thing. I think Trends more picks up like what’s currently going on.

Tobias: No, you can go back over a few years, it might go back five years.

Bill: This is a lot of history. Also, sorry, Ken, I didn’t mean to throw you under the bus. You did it to yourself though.

Jake: Played yourself.

Bill: Played yourself. I learned a lot from that dude. I feel bad that he turned into somebody that’s sort of a pariah.

Tobias: Aggressive marketing.

Jake: Hey, while we’re on FAATMAN, a few Tesla numbers.

Tobias: Yeah, have they come out?

Jake: No.

Tobias: You got something.

Jake: Yeah. This is actually from Jonas at Morgan Stanley recently talking about what does Tesla look like at the $300 billion market cap relative to what did Apple looked like when it crossed the $300 billion threshold and what did Amazon look like at that same threshold. Apple, twice as much revenue and five times as much EBITDA as Tesla at the same 300 market cap.

Bill: Hey, wait, real quick follow-up. Can we get a free cash conversion to EBITDA calculation on this because pretty sure Apple’s a cash machine and Tesla isn’t.

Jake: Fair. Tesla is 70% smaller than Amazon on revenues and one-third of the EBITDA that Amazon had at that same valuation. As far as forward EBITDA, Apple was at 11 times, Amazon was at 22 times, Tesla’s at 61 times.

Tobias: Oof.

Bill: Yeah. [crosstalk]

Tobias: Doesn’t matter.

Jake: Everyone who is so saying that Tesla is the next…, you’re praying for an incredibly optimistic future even relative to those guys that were total outliers against every base rate that’s out there.

Bill: Dude, and what are your returns on capital in the growth?

Tobias: Well, I know that because I went and had a look at it. Do you have those numbers?

Bill: Low to quite low.

Tobias: So, I looked at Amazon at the request of Samson Narokobi. He’s often on here, I don’t know if he’s on today, but he wanted to know what Amazon and Tesla look like since inception over the last decade. This is on a gross profit on total assets. This is the Novy-Marx measure. Joe Weisenthal tweeted this out like five or six years ago saying Amazon is the top earning on this metric of Novy-Marx, which is like a substitute for return on invested capital. It’s just one of those return on equity, return on assets [unintelligible [00:43:09] measures. Variety of reasons why it might be a slightly cleaner measure this one, but he looked at its gross profit, revs minus cogs on total assets. So, what did it cost you to get here? What are you earning before you feed it through the machine?

Amazon for the first decade, 49% on assets, which is pretty good, that’s a good business. Over its full life, it’s earned 35 or something like that. 35.4, very, very good. Tesla has earned 10.2 over its full life. So, it’s less than a third as good as Amazon. It’s currently twice as expensive on a variety of different measures. So, it’s like 6x relative to Amazon at the moment in my estimation. Tesla’s very best year, it earned 18.9%. Amazon’s worst year, earned 23.1%. So, Amazon has never been– even in its worst year it’s better than Tesla in its best year. Amazon is the better business.

Bill: I’d be interested to know what Zooplus is doing on that metric? I bet it’s pretty good. Zooplus is an interesting asset. I don’t know how they go tangentially, but it’s basically e-commerce for pet stuff. But dog food is like–

Jake: pets.com?

Tobias: It’s Amazon’s for pet stuff.

Bill: No, it’s not that. It’s European and it’s a better business than I pitched it as. [crosstalk] no, it’s just I’m telling you, man. The delivery of dog food, it removes a lot of friction from your life. You don’t want to carry like a 50-pound bag of dog food.

Tobias: But now you’ve got to ship a 50-pound bag of dog food.

Bill: You need some efficiencies there. Carvana thinks they can do it with a car. I think you can do it with dog food if you get enough people going but I don’t disagree with your– [crosstalk]

Jake: Value to weight ratio is totally [crosstalk] that.

Tobias: I think there’s a lot of VC money subsidizing a lot of this stuff and you’re not going to know until we come out the other side.

Bill: It’s a reasonable possibility. You’re correct.

Tobias: Throw your questions in, folks. We’ve got 15 minutes to go. I wonder about a lot of that stuff because I think we’re in the golden time of having stuff delivered to you. Or getting picked up from your house. I think Uber, probably the prices have to go up or– I don’t know how it works exactly. But I think that it’s just hard to see how you can– Uber is one example of just VC-subsidized taxi rides. I think a lot of these things are just VC-subsidized food to your house. I mean that’s true.

Jake: Can I read you guys something real quick?

Tobias: Yeah.

***

John Maynard Keynes – Good Investor, Bad Economist

Jake: All right. So, the inhabitant of any city could order on his phone, sipping his morning coffee in bed, the various products of the whole world and in such quantity as he sees fit, and reasonably expect their early arrival on his doorstep. He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprise in any quarter of the world. He regards this state of affairs as normal, certain, and permanent, except in the direction of further improvement and any deviation from it as aberrant, scandalous, and avoidable.

Tobias: What is that today? 1900, what the future is going to look like?

Bill: Yeah, that’s right.

Jake: No. That is John Maynard Keynes writing in 1919 about how, before even World War I, everyone expected that the world was going to be really easy. And I changed a couple words in there like– He originally said London and telephone instead of on his phone. But, yeah, the whole idea that it’s just this smooth, easy line that goes straight up into the right. Probably doesn’t reflect history very well.

Tobias: Yeah, that’s amazing. Keynes, lots of bad ideas, lots of good ideas. Good investor, bad economist.

Bill: That’s a good pull, man. That was a good pull.

Tobias: Yeah, that was impressive. How did you grab that? Just memorized it?

Jake: It’s actually part of my next quarterly letter I’m working on.

Bill: [crosstalk] –daily affirmation.

Tobias: Don’t give away the magic trick.

Jake: Yes, that’s fair. Just had that on the top of my head.

Tobias: That’s what you should have said. Yeah. Something I like to meditate on every now and again.

Bill: Did you guys see the– I think I sent it to you that 1995 Buffett quote about– Buffett said, “Newspapers still make a lot of money.” And Munger was like, “Ah. But you’ve told me many times that people don’t care about what floor they’re on. They care about the direction that the elevator’s going.” I was like, “Man, those guys are just so smart.” That’s such a good way to explain what is psychologically going on with valuations and how to just plainly think about things. It’s like, “Oh, yeah, we don’t make any free cash flow, but it’s a great business. Look at how much it’s growing.” Okay. We’ll see.

Jake: Elevator —

Bill: Yeah. [crosstalk] -some guy’s like, “You dumbass, you invested in airlines.” Whatever. I got the pandemic to beat me.

SEC Removing 13F Reporting

Tobias: It’s not over yet. I’ve got a good one here. The SEC is removing the 13F reporting. I don’t know if this is actually happening, if they’re just discussing it, but removing 13F performing for companies under 3.5 billion AUM. I’m not entirely sure about the detail. I thought they were removing it also for funds at some level as well.

Jake: Yeah, like $2 billion or something, moving the cap up. I’m not sure, something around there?

Tobias: What’s the reason for this? There’s saying that it’s too expensive to do it or something? Wellbeing?

Jake: I don’t know. IP, you don’t want to put out your portfolio. It’s going to make it a lot harder to lose money as a copycat.

[laughter]

Tobias: Isn’t that the truth.

Jake: Yeah.

Bill: Yeah. I don’t mind that. I was saying when I saw the news, I do hope that it doesn’t– I like to look at shareholder basis. I do like that and I hope that there’s still a way to figure that out. I don’t care much about what people are buying when they’re buying it, but I do like to know that they’re in the shareholder base.

Jake: You don’t feel good when you buy something for cheaper than what someone that you know what they bought it at. That always feels kind of good.

Bill: Yeah, I think that that exercise has cost me way, way more than it has–

Jake: Delivered?

Bill: Yes. The amount of money that I’ve lost following people and ideas is far greater than the benefit.

Tobias: James L. [unintelligible [00:49:43], I don’t know if that’s how you say his name, but he pitched S.A.C. Capital, Steven Cohen.

Bill: Hang on, I’ve got to go buy it real quick.

Tobias: With this idea that he would buy only the stuff that the big guys had bought, but only for cheaper based on the 13F. This was a long time ago, I guess, when it was harder to get this information. What do you think about that? I get the feeling you’re saying that– And I feel the same way and I don’t know why. But I’ve never really succeeded buying under what somebody else has paid for it.

Jake: It’s a lot easier if you’re them to just trade on inside information instead– [crosstalk]

Bill: I’d be interested to see this study. I bet you do better buying after when the stock is higher than when the stock is lower. These big guys can be wrong.

Tobias: Yeah, that might be a signal, might not that they’ve released that– somebody smart says that they own something and everybody else looks at it and says, “No.”

Bill: Yeah. Whereas if it’s up, I bet their thesis is starting to play out.

Tobias: So, I’ve got another good one here. The Amazon slide that’s been going around that shows how they’ve transformed every cost center into a source of income. What are your thoughts on that?

Bill: Bezos is a genius.

Tobias: Yeah.

Jake: I sort of understand, you’re looking for ways to– You create some productive capability within your business for it to function. And you say, “Ah, hey, I wonder if anyone else maybe outside of our organization could use this.” That’s not like a masterstroke of genius or anything. Everyone has been doing that. Oil companies before Rockefeller used to throw away all of this sludge, and it turns out that all that stuff could be made into plastics. That was also a waste on the balance sheet, or the income statement turned into some productive asset. So, this is nothing new. It’s just a–

Bill: It’s still smart.

Jake: Yeah, no, it’s smart– [crosstalk]

Tobias: The genius isn’t in having the idea, right? The genius is in executing that idea which–

Jake: In marketing.

Bill: Yeah.

Tobias: They’ve almost systematically– they’ve turn that into part of their business [crosstalk] let’s just find our cost centers. And then, they’re probably everybody else’s cost centers too. And that’s probably where AWS came from.

Bill: Yeah. That is mostly correct. The other people that do it is Starbucks with those big roasteries. You turn what would be a huge rent expense into an income-generation machine and now, you have a huge– the amount of marketing exposure that Starbucks gets on Michigan Avenue, Chicago. Now, all of a sudden, you’re not spending that, you’re bringing in money. I mean, those are pretty incredible ideas, but you’ve got to do it right. The execution is harder than the idea.

Jake: Every expense has to be measured against, is it providing value to the customer or not.

Bill: Yeah.

Jake: So, if you’re doing that and you can you come up with ways to monetize that, that’s what every business should be doing. Thinking about ways to delight their customer and earning a certain percentage of that delight back as their revenue, that’s just called capitalism.

Tobias: So, just on Amazon, would you say that Amazon delights you as often now as it did, say, five years ago?

Bill: No, sir.

Tobias: Why?

Bill: I said this. I think it was last or maybe it was two podcasts ago.

Jake: Second season of Jack Ryan. That was where–

Tobias: That was terrible. Yeah, I agree.

Bill: Look, they’re in a lot of parts of my life. They’re also in part of my life because when I watch Netflix, it runs on their server. They are very connected to me. But I think that their products have gotten crappier and crappier. If you buy toys off it, they’re mostly garbage. I don’t know.

Tobias: There’s a lot of fakes. That’s the thing that really gets me. There’s a lot of fakes. And they don’t seem to police it.

Bill: I don’t really trust their reviews.

Tobias: Yeah, the reviews are fake and a lot of the products are fake. I just saw this today, they do this thing with a– somebody finds a product that’s selling well, they replicate it, like they rip it off. They make it in China and then sell it in the US. And then, Amazon will go and give them like Amazon’s Choice on that rip-off product. And this guy tweeted out, said that they’ve got a lawsuit against this firm, and Amazon’s– after the lawsuit, go and given the competitor, that’s ripping them off, the Amazon’s Choice brand. So, you’ve got to be careful, even with Amazon’s Choice.

Jake: That’s just an algorithm probably, like this is selling a lot and it’s a good margin for us, therefore Amazon Choice.

Tobias: Yeah. They’ve got to be careful though. We don’t shop so much on Amazon. We go to Target and Walmart because my wife’s more confident that the stuff you’re going to get– you know when it’s baby stuff you’re going to get it, it’s the real thing, you’re not getting some fake.

Bill: Yeah. I probably won’t buy baby stuff off Amazon, other than diapers. The diaper subscription’s nice. But I would not–

Jake: It’s the only things that you’ll literally shit on.

[laughter]

Tobias: Not even, Bill.

Bill: Yeah, I mean, sort of. I don’t really trust a lot of the product quality on it. But I still use it. So, maybe that’s the definition of a drug addict.

Jake: Well, their whole point is to be super customer centric, and maybe the eye’s off the ball a little bit there, if that’s the opinion that you guys have.

Tobias: Yeah.

Bill: Yeah. I think customer centricity is some Silicon Valley narrative for screwing people a lot of the time.

Jake: [crosstalk] –suppliers.

Tobias: Yeah, that’s what I mean.

Bill: That’s fair.

Tobias: They’ve just been clear about what they’re doing.

Bill: Look, they’ve driven price down. They’ve benefited my life in a lot of ways. I have a much stronger brand affinity towards Costco than I do Amazon, much.

Tobias: Value Stock Geek said, referring to Meb Faber’s book. Meb Faber did a book on 13Fs, did a backtest 13F investing outperforms. The only wrinkle to it, I think, is that you shouldn’t hold the biggest position in the 13F because that’s probably the one that’s gone up the most, not necessarily the one that they’ve got the most conviction in. Got a good question here. Any CEOs you’ve come across that practices like the one in the book, The Outsiders?

Jake: I’m not going to give you my– [crosstalk]

Tobias: [laughs]

***

Pat Dorsey – Capital Allocators

Jake: Bill, was it you that tweeted about Pat Dorsey’s– He has this nice little one-page sheet about capital allocators and why it’s a hidden inefficiency in the marketplace.

Bill: Hmm. No, it was not me.

Jake: Well, never mind, it doesn’t exist. We’re not going to share that one.

Bill: Fair. Send it to me later.

Jake: Okay. [laughs] His reasoning is it’s hard to model. It’s typically lumpy returns because the buybacks happen and more tender offer style than do the braindead buyback in a bubble that you see for most companies. And that it’s an anti-fragile argument for good capital allocators.

Rights Issues Over Other Types Of Capital Raising

Tobias: There was a question earlier about rights issues, about the impact of rights issues. And I know that you and I, Jake, have discussed this before. You prefer rights issues over other types of capital raisings. Do you want to elaborate why?

Jake: Yeah, I think they’re genius. They’re typically cheaper than a full equity issuance. And they allow you as an existing shareholder to keep your exact ownership that you had before. And if you don’t want to– the warrants have, they have some value in the marketplace that you could sell them for if you wanted to raise cash. So, I like them as a good alternative to just– [crosstalk]

Tobias: That’s a fairest way of doing it, you think?

Jake: I think it’s a fairer way of treating your shareholders. It’s a capital call. You could participate in the same percentage that you own the business and not be diluted if you don’t want to.

Tobias: Why don’t more companies do them?

Jake: I don’t know, because no one else is doing them?

Tobias: Maybe because it’s a pain because it’s easy to do a private placement. You just go and find somebody big, you deal with one person, you say, “Do you want to do this or not?” They say, “Yes.” Or if they say, “No,” you move on to the next guy. Whereas with the rights issue, there’s a little bit of a risk. But I think if you’ve got the rights, you can sell into the market so somebody else can pick them up and take advantage of them. Because you often get a little discount, there’s some option value in the rights and then you get a little discount as the investor.

Jake: Yeah, for the same reason that spinoffs are often mispriced is like, “Ah, this is just in my account. I don’t want it there anymore. Sell it.”

Tobias: Yeah. And it’s got a liability attached to it.

Jake: Yeah.

***

Tobias: When it shows up. Kirkland Signature brand versus Amazon Basics. I don’t think there’s any comparison but–

Bill: Kirkland is way better.

Tobias: Folks, any more questions? We’ve got about a minute.

***

Buffett’s Miss

Bill: On the Wells thing. I think Berkshire missed it because it’s super decentralized and they promote from within. And I think that those are both things that Charlie and Warren really value, but I think it– well, I’m confident in saying in Wells case, it was their Achilles heel. I think that when the regulator’s wanted an outside solution, there was no one within the company that had the answer. So, they hired a bunch of consultants. And then the consultants were pitching a plan that they were then forwarding to the regulators. But since no one had the internal knowledge to actually execute the plan when it came time to execute the plan, they were like, “Yeah, we’re almost done,” but they hadn’t even started. And then everybody got pissed off.

I think that Charlie and Warren like, really, really missed that. And I think Sloan was completely worthless. The amount of time that he wasted there was ridiculous. I get why Charlie likes him because like all those guys are credit guys, but they didn’t need credit at the moment. So, I think that’s an interesting case study on where even Charlie and Warren can have a blind spot. Whether or not they can fix, it’s a different question, but–

***

SPAC’s Are Hot Right Now

Tobias: We’re coming up on time but there’s just two good parts here. So, Tracy Britt Cool has got this SPAC. Tracy Britt Cool, who was like Buffett’s assistant for a while there. What role was she playing?

Jake: It’s a little [crosstalk] probably demeaning.

Tobias: Hatchet woman, is it demeaning? Not assistant? What would you say, apprentice?

Jake: Fixer maybe? I don’t know.

Tobias: Fixer. Okay. Yeah, that’s a better term. I didn’t mean it in a demeaning way. I just didn’t know exactly what her– She got the Harry Bottle treatment where you do okay in one thing, you get moved on to something else and you do okay there, all of a sudden, you’re like– yeah, fixer, I guess, you’re right. That’s a better term. She’s got a SPAC. They’re going to buy some Buffett-type company in the SPAC. Have they identified it yet?

Jake: I don’t know. I haven’t heard that yet.

Tobias: SPACs are hot right now.

Bill: If I’m rolling with the SPAC, I’m doing this Howley dude from the outsider SPAC. That’s the SPAC I’m rolling with.

Tobias: Nick Howley?

Bill: Yeah. And who’s the dude that– Will Thorndike, they got a SPAC together.

Tobias: That’s some good marketing, isn’t it?

Bill: No, it’s great marketing. It’s almost as good as being Ackman.

Tobias: Yeah, gee. Lots of dudes raising SPACs at the moment. Are there any questions? Last one, before we got to go, will Amazon spin off AWS?

Bill: I have no idea. It seems like it would unlock some value.

Jake: But why bother?

Tobias: Yeah, it’s a lot of effort. You don’t do it at a high valuation. You do it when your valuation’s in the toilet. Get a little bit of recognition for it.

Jake: [crosstalk] Well, if there’s more competition coming in the cloud space, this may be as good margins as they’re going to show.

Tobias: But they’re still going to get some growth out of it. It’ll still be a bigger business over the next five years.

Bill: Dude, it’s also an insane business. It does like 30% returns on assets. You spin that off, lever it up, and turn it into a REIT? Oof.

Jake: Sure. When you’re the only cloud service provider, those are your margins.

Bill: Yeah. I think they’re going to be pretty okay. It’s a scale game, they’re going to win it, but they got competitors, no doubt.

Jake: Price wars, I can’t wait.

Bill: [crosstalk] levered REITs.

Jake: Zoomers win.

Bill: Levered REITs.

Tobias: That’s time, folks. Thanks so much. It’s always fun. We’ll see you same time next week. I’m going to be off. We’re all going to be off the week after that. But we’re all good for next week. See you then.

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