In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- Stoicism for Value Investors
- 195 Years of Value
- Fade $SBUX
- Bill Brewster’s Business Insider Article On Warren Buffett’s $800 Million Bet On $BAC
- Kodak Shares Rise More Than 1,000% On Covid Drug Loan Deal
- Is This The Most Dysfunctional Time In History?
- Billy Beane Of Moneyball Launches SPAC Blank-Check
- Perth Tolle – Investing in Freedom
- What Drives Forward Returns?
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:
Tobias: And we’re live. It’s 10:30 AM in Los Angeles and in Sactown. It’s 1:30 PM, East Coast. 12:30 PM Central Chai Town. What’s happened, gentlemen?
Bill: What’s happening Chai Town?
Tobias: You want to let everybody know why we couldn’t make the podcast yesterday, Bill?
Bill: I had to play golf with some people.
Jake: Bill’s personal schedule, it’s messing everyone up.
Bill: Ah, it’s not like that. It was totally business. Well, I shouldn’t say that. I’m good friends with those guys, but–
Tobias: Business golf. [chuckles]
Bill: -I’m living where I am–
Bill: -for a while, and I needed to see those guys. Those guys are good scuttlebutt machines. It was nice, but thank you all for bearing with me.
Tobias: You’re not talking to your wife?
Bill: No, I’m just telling you. I didn’t ditch you all for nothing. There’s a reason.
Jake: I was working hard, honey.
Tobias: Sweet. Maryland, Montreal, Texas. Come on. Albuquerque in the house. Utrecht, Netherlands. Portland, Austin, Atlanta, Germany. This is awesome. Global.
Jake: Not much Asia though, huh?
Tobias: Yeah, wrong time of the day, I think. It’s like 4:30 AM Aus, anybody in that kind of time zone. COVID, Florida. [laughs] Dayton, Ohio.[laughter]
Bill: Yo, COVID, Florida, where you at?
Tobias: Bill wants to know so he doesn’t go there. [chuckles]
Jake: Yeah, Bill is on his way.
Bill: I’m on my way.
Tobias: NZ. Hey, NZ is up. This is awesome. Boston, Ontario. Whose intro is it today?
Jake: I went last week and messed it up. I think it’s someone else’s turn. [chuckles]
Tobias: I can’t remember. I’ll do it.
Welcome to Value After Hours. I’m Tobias Carlisle, still struggling with a noisy mic, quiet mic. No idea what’s going on. I’m joined by my cohosts, Bill Brewster and Jake Taylor. Going to get some audience feedback on the microphone in just a moment. But how you doing, fellas?
Bill: Doing well, man. Going to talk about some Starbucks today.
Jake: Yeah, looking forward to that one. I have on investing like a stoic. So, we’ll see. [crosstalk] philosophy.
Tobias: I like that. Marcus Aurelius. It’s amazing. Marcus Aurelius, Roman General Emperor writes these letters for living your life. That’s the kind of guy I want to get some life lessons from.
Jake: Yeah, no doubt.
Tobias: What have you done? Fellas, just let us know how the volume is. Thank you, David, got it. Yeah, if it gets too loud or something, I don’t know what’s going on. It’s crazy. It seems to be changing over the course of from one podcast to the next. If it gets wacky, let us know and we’ll try and fix it live. That’ll be an absolute disaster but could be fun.
My topic is going to be, I talked to Mikhail Samonov. He’s a quant, runs Two Centuries Investments. He has run this value backtest all the way back to 1825, stitching together Cowles Data and, I’m going to mispronounce it, but Kurtzman I think is the is other data set. Kind of fascinating, the number of just gigantic crashes and recessions and depressions that have just completely disappeared from our collective memory, captured in this very long backtest. I went back and I just looked at any time there was a big dip, what was going on at that time? What caused that dip? It’s a funny history, I’m just going to go through it. What’s your topic, Jake? Oh, you’re doing stoic. Sorry.
Tobias: Who wants to kick it off?
Bill: Jake, you want to go? I think this value crowd probably use some stoicism.[laughter]
Jake: All right. Right after this.
Tobias: Right after this.
Stoicism for Value Investors
Jake: I am doing, how to invest like a stoic. What’s amazing about it is that, like you said, these guys were mostly from 2000 years ago. And what you come to realize is that all the same problems that we have now, things bother us, they bother these guys too. What’s interesting is that they develop this philosophy of life that actually you could call The Aspirin of Philosophy. For 2500 years, people knew that the willow tree, for whatever reason, had healing properties for someone. It wasn’t until much, much later that we understood that it was acetylsalicylic acid.
Tobias: That is paracetamol, right? I forget what the– Tylenol. No?
Jake: Tylenol is ibuprofen, I think. Anyway–
Tobias: What is it then? What’s the brand name? Sorry, I’ve totally derailed you already.
Jake: Bear, I think was real early on in the Aspirin world.
Tobias: Is it aspirin?
Jake: Yeah, aspirin. We know now that that’s the compound that also is found in willow bark that is healing. Now, these guys 2000 years ago stumbled upon an operating system for how you view the world that they couldn’t tell you the psychology research that would support that particular finding but it worked for them as well. So, almost empirically, they have this a good result from it. I find that to be interesting. Now, what this whole segment is inspired by is a lovely little book by William Irvine that’s called A Guide to the Good Life. If you haven’t done much research, if you haven’t read the original materials of Seneca or Marcus Aurelius, this is a really approachable book for getting some of the tenets of stoic philosophy. It’s relatively short and it’s easily digestible in a couple of sessions for the reading.
Tobias: It’s very hard to read those translations, I’ve found. I found a couple of translations for free online. Haven’t gone all the way through it. Can you give it to me in 10 bullet points?
Jake: Right. Yeah, exactly. Well, I have eight tips for you today.
Tobias: That’s even better.
Bill: Just the tips, please.
Jake: Six-minutes abs. What about five-minute abs? Tip number one. The first thing about having a philosophy of life is that you really should have some sort of bigger goal, some kind of grand goal. And in the investing world, maybe that for you is setting yourself up for retirement or financial independence or maybe there’s charitable endeavors that you’re interested in–
Tobias: World domination.
Jake: –or maybe it’s [crosstalk] world domination is another option.
Jake: But the risk of not having a philosophy, of just drifting through is that you get to the end and you realize that you wasted so much time. It is important, I think, to have some sort of bigger– what you’re trying to accomplish. I was thinking about for this segment, by the way, eight tips is a lot, so I’m going to try to move quickly and you guys just jump in after. Okay?
Jake: Don’t be shy. Tip number two is this idea of negative visualization. What you’re doing there is you’re picturing what is the worst-case scenario. Value guys, in general, I think are pretty good at this in that you’re always worried– take care of the downside and the upside will take care of itself. We have a lot of maxims that have developed from that. A margin of safety is another way of sort of predicting what’s the worst possible thing.
The other place where that’s helpful is that by imagining that negative visualization, you’re creating an immunization to when bad things actually do end up happening because you’ve already thought that something bad’s going to happen. It’s when you’re surprised is when it’s extra hard to control your emotions.
Bill: Shout out to the Wells Fargo shareholders.
Jake: [chuckles] Too soon.
Tobias: To all value investors out there.
Bill: Well, I’m talking about negative surprises. Finding out your CEO didn’t do anything for two years was a negative surprise, but that’s different.
Jake: All right. Tip number three, is this idea called the trichotomy of control. What that means is you can basically break up the world into three buckets. Bucket number one, things that you have complete control over, things you have no control over, and the things that you have partial control over. Now, what you want to focus most of your efforts on are is obviously the things that you have complete control over. The goals that you set for yourself, that’s the values that you adopt, like how you want to live your life.
I do a fair amount of coaching for my kids’ baseball teams. One of the things that we always talk about, almost every game, is that when you’re at bat, there’s only two things that you have control over. You can control which pitch that you swing at. So, pitch selection. And number two, you could control how you swing, like did you take your good swing or not? Those are the only two things that you have any control over. In the investment context, obviously choosing the pitches that you swing at is investment selection. And then, how you swing, like taking your good swing, how well did you work your process to come up with what you’re doing?
Now, what do you have no control over? Almost everything else. The outcomes are very, very– number one, difficult to predict. But also, there’s so much stuff out there that you just can’t know, and luck is still a very big factor, especially over shorter periods of time. We end up doing a lot of resulting, I think, because of that.
And then the things that you have partial control over. In baseball context, you don’t want to pick external goals, necessarily. You could say we want to beat that other team. Well, not everything you’re going to be able to do to beat that other team. You can, however, set an internal goal of wanting to play the best that you’re capable of. Winning the external game might be like, I want to have the best returns ever. Okay, well, good luck with that. But the internal goal might be like I want to produce the best investment process that I’m capable of doing. That is an internalized goal that you have some partial control over.
Okay? Nothing? We’ll keep moving on?
Bill: Yeah, no, that makes sense.
Jake: Tip number four is welcome your fate. You want to be fatalistic about the past. You can’t change it. There’s no sense in really ruminating about it. I think that’s self-explanatory. A lot of times we like to sit there and lick our wounds about our losses.
Number five is you want to welcome discomfort and practice poverty. That one’s been very easy for value guys to internalize for the last five years.[laughter]
Jake: In the stoic context, they would purposely maybe a couple of days a month wear rough clothes and eat really poor food, poor like low nutrition, not fancy foods, just so that you would resensitize yourself to the other good things that you have around your life.
Tip number six, meditate and be self-aware. How that shows up in the investment context is really doing a postmortem on all of your investments. You want to improve, keep an investment journal, keep track, learn from your mistakes. At bedtime, one of the philosophers said, “You should ask yourself what ailment of yours have you cured today, and where can you show improvement?” For us, that’s basically where could I have improved in my process? Where did things go wrong? Maybe if it didn’t work out, where did I get lucky? Potentially, if it did work out, even though you missed something important? They say even to count injury is profitable, because it’s a chance for you to test yourself, to prove yourself, and to prove your virtues. I think another way of saying that would be like learn from your losses.
Tip number seven would be, and this one is pretty common in the investing world or the value world, is following your inner scorecard. If your goal is to win the admiration of others in this game, then almost by definition, you have to be willing to adopt their values, or maybe even set another way their benchmarks. If you’re following your own inner scorecard, it’s much easier to be a little bit detached and not take on everyone else’s baggage.
And then finally, tip number eight is, there are two primary sources of human misery. Number one is insatiability. We could almost call it greed, maybe in the investment context. And then, number two is then worrying about things that are beyond your control, so what Andy Duke would call resulting.
Roll all those things up together, in summary, I would say the advices to stoically work your process, try to improve every day, ignore the crowd, and then accept your fate.
Tobias: Yeah, that’s great. I love that list. Good aspirational list.
Bill: Just remember, if you underperform, you visualize this, continue the process.
Tobias: What other choice have you got? I guess you could change though.
Bill: Well, I don’t know. I had a really good conversation with somebody about Wells who thinks I’m early on it and I think he’s got a lot of really good points. But that’s not really the game that I’m trying to play. I’m trying to buy an asset base that I see that I think can generate cash for a reasonable price. I might underperform for a while on that. But I told him I don’t care because that’s not really how I’m going to be measured. Over time, I certainly hope it all takes care of itself. But in a year and a half, that’s super easy to say, the day you’re buying the position like, “Oh, I don’t care if it’s dead money for a little while.” But it sucks after a while. To be able to constantly look at it, and maybe part of the answer is don’t constantly look at it. But it’s similar to COVID, preparing mentally and then living it emotionally are two different things.
Jake: What are the odds that you are going to bottom-ticking anyway?
Bill: Yeah, none. I’m not a genius. I’m just some dude.
Tobias: That’s luck anyway. Bottom-ticking is luck.
Jake: There’s no genius [crosstalk] bottom ticking.
Bill: Unless you’re Munger, man. Ah, Munger pulling over to the freeway, knowing he’s bottom ticking.
Jake: No, he didn’t.
Bill: He did. No, he didn’t. But it’s so legendary if we say he did.
Tobias: [unintelligible [00:15:58] to the month, probably.
Jake: Look at Munger-Wheelers LP results, and they’re all over the place. That’s an indication. Over the longer sweep, they’re good. But interyear volatility was like off the charts. That’s a sign of not being able to bottom tick.
Tobias: Sometimes, it’s also like– you can only play the opportunity set that you’re presented with. Just to steal it for my own topic, but I look at that long sweep of that 195-year history that we have, and it’s just striking. Graham gets famous running from basically post the Great Depression for 20 years. And then, Buffett picks up 56 to– Buffett partnership ’56 to ;69. That’s 13 years, it’s like nothing in that four period, but it’s some of the best years in that period. If you’re just a value guy at the right time and you outperform even value, all of a sudden, you’re Benjamin Graham or Warren Buffett, but you don’t hear of a lot of guys who are–
Jake: How about that 2000 to 2006 period? That’s a short time.
Tobias: Well, then there’s Einhorn. He captures ’96 to 2006, and he also captures 2006 to date. It’s almost like he’s two different guys. Finkle and Einhorn.
Bill: Yeah. I saw you put that tweet out the other– It was earlier this morning, right?
195 Years of Value
Tobias: This morning. Yeah, that was from last week from our last session. For me, it’s helpful to go back and look at those. I like running through backtests and I go through them in pretty granular detail. I look at what’s the mood from day to day, month to month to the extent that you have that data.
It’s shocking. We’ll come to this in a moment. I don’t want to foreshadow too much, but I do many of those things that you’ve listed out there by going back and reliving that data and thinking what would you have done through this period of time. You’d have had this extremely long periods of time where you would have been underperforming, similar to what we’ve gone through now. There’s a lot of people out there who are calling value dead. Who am I to say that it’s not? All I can do is look at that data and say, “I don’t think that it is.”
Jake: Toby, the other– I guess I can wait until your segment, but if we’re already in there, let’s just go for it.
TOBIAS: We can segue.
Jake: What’s your sense of the average period of time of the snapback from severe underperformance? Can you time–
Tobias: It’s very rapid.
Jake: -that at all or is it–?
Tobias: It’s funny that there’s that old stock market [unintelligible [00:18:38] that stocks take the escalator up and they take the elevator down, that they go down much faster than go up.
Jake: Value is the opposite.
Tobias: Yeah, in terms of underperformance– Let me just go through the data. I’ll get through it a little bit of granular form. I’ll link to the charts in the show notes because they’re fascinating. And then, Mikhail Samonov, who’s the gentleman, founder and runs Two Centuries, he’s been a quant for very long time. He kindly sent me the underlying data. I’m thinking about making it into a chart with some annotations on it. There are these enormous events that we’ve just completely lost to the sands of time. But the data starts in 1825. To contextualize that, there was this period of time when Vanderbilt is born in Staten Island, it’s all sailing ships. To go across to New York was a big event. New York was smaller than Philly, I think, at the time. And there’s this industrialization in the States that takes this– New York becomes this financial-industrial center, and the US explodes and Vanderbilt rides that first wave. He gets his first fleet of steamships in 1825. 1827, the railroad mania starts. That goes on for quite a long period of time.
But the first panic occurs in 1837, value factor, this is long-short value. You can go through the data and see which side drives it, but basically, this is driven partly by a similar scenario where you have tech stocks running away, the tech stocks are railroad stocks. At this time, the only data they could get there, 237 issues out of 600, and they were dividend payers, that was how they assessed. That’s the only way you could assess value. So, they’re saying [unintelligible [00:20:18] high dividend payout ratio.
Jake: [crosstalk] accounting of any of- [crosstalk]
Tobias: You don’t know what’s internal. All you can do is construct it from outside. So, the dividend payers get smashed up. The rapidly growing things do very well. That’s the first big drawdowns. Panic of 1837. It bottomed in 1841 down 50%. 1844, three years later, telegraph is invented. I find this fascinating that this stuff happened. That kicks off this next technological revolution again. Then, there’s the Panic of 1857, value is down 49 by 1862. Interesting thing in that period, 1861 to 1865, American Civil War goes on.
Jake: So, when you say value is down, you mean that relative to the top-performing–?
Tobias: I’m talking excess return, long short. What we’re talking about is, if the market’s running away, your long-short return is down 50% relative to where the market is, you’re 50% behind, you’ve got half as much money as if you’ve been in the market long only. Your long short down is 50%.
Fast forward a few years, coming to the end of the railroad mania, which went on for a really long period of time. At the time, they called this The Great Depression, and it subsequently was renamed to The Long Depression, when The Great Depression– it was actually Great Depression 3.0, 1929 was a Great Depression 3.0, but they’d forgotten that there was a Great Depression at the start of the 1800s as well. It’s devastating, when you see it in the chart–
Jake: We’re going to take that back for 2020.
Tobias: Well, I hope not. It’s not out of the question. This is the thing that taught me that many of these things that we viewed as sort of being events that are only one-off, like The Great Depression was a one-off, and it happened so long ago, like nearly 90 something years ago now. They’d been three. Three in the first 100 years of the data, and there’s been none since then. So, they do pop up much more frequently than people realize. The Panic of 1901, bottoms in 1904, value factor down 59%. That’s significant because it’s the same amount that we’re done now, relative to the panic. So, the Panic of 1901, similar kind of scale for value to where it is now.
Then, you get the great crash of 1929 to 1932. Value factor again down 54% and that leads into the Great Depression. Takes a long time to come out of that. Basically, you get out of that in about 1939. And then, Mikhail calls this period, 1940 to 2006 is the golden era for value. It’s basically the fewest drawdowns, the shallowest drawdowns, best performance, and that’s where most of our data is. The Fama-French data often starts in 1950 other than the price to book data, which starts in 1920. So, during this golden era, we have the oil crisis in 1973 and 1974, value factor is down like 25% long short because you’re protected by the shorts in many of these.
Tobias: Black Monday, 1987. It’s hard to find it on the chart. It’s a tiny little drop-down, it’s less than 20%. Black Wednesday, 1992, it is a little bit bigger than 30% percent. Dotcom, ’98 to 2000, not in the top five, but down 40%. GSC, 2007-2009, same amount. Current one, I don’t know what you call this, COVID Death of Value, down 59%. So, we’re enduring, it’s a truly historic period that we’re going through. We’re all living the Chinese curse, may you live in interesting times. For me, it’s very much practicing that stoic philosophy of going back and looking at, here are all the worst things, here are all the really bad things that have happened, here’s how frequently they happen. Depressions and recessions and stock market crashes are basically the order of the day. They’re the things that you should expect. You shouldn’t expect bull markets because most of the time the market’s in a drawdown.
Bill: For the values, is that a price to book factor? I’m just trying to get a sense of what the factor is that you’re discussing.
Tobias: They knitted three things together. I’m slightly mispronouncing this name, but Kurtzman is a researcher who’s put together– they went and found every report that they could find from these — they’ve had to reconstruct this data looking at dividends and stock prices to the extent that they could find them. And then, there was the Cowles data, it was famously– he put it on to these punch cards. And that ran– I think, it was 1875 to early 1900s. That was the thing that Graham referred to when he said, I’ve looked at this backtest for value and it’s done 15% a year over the last 25 years, I think he said, so he was talking about the Cowles data.
And then, there is Fama-French and it all gets more granular and better as you go along. But basically, it’s price to book. Kurtzman is price to dividend, patchy to the extent that they could put it together, then Cowles, which was punch card, and I think it’s price to book and then current one is price to book again.
Jake: The underperformance can come from absolute losses versus relative underperformance. Is there a common theme between each value’s underperformance?
Tobias: There’s not. This is not something that Mikhail teased out of the data, but this is something that I ran myself, because I can look at both sides and look at the drawdowns. It’s very hard to knit the data together, it’s not as easy. There are several periods where it’s really quite amazing that the value underperformance is driven by the bubble size. 73-74, pretty reasonable underperformance, but it’s driven by the expensive stocks, I think that was like a nifty-50 period. Same thing, again, in 99-2000, it was a bubble type– and this time, it’s pretty evenly distributed, but if anything, it’s more to the value stocks underperforming than it is to the growth stocks outperforming, but there is growth outperformance through that, pretty significant growth outperformance.
Jake: That makes sense, I guess for ’73, except it was more mild. It probably more has to do with the absolute than the relative, if that makes sense.
Tobias: Yeah. From 1940 to 2006 is really not many– this is drawdown that I had to track down and try and figure out what it was. There was this thing called the Eisenhower Recession in 1957. I bet there’s nobody alive who remembers that or even knows what that was. But there was basically this mild drawdown, and value long-short didn’t work very well, for a very short period of time. Forgotten depression 2021, that is pretty significant on the chart, but again, nowhere near. So, 1857, 1904, 1929, and today are the really significant ones.
Tobias: Dotcom, it’s in there and it’s a significant one, but it’s not in the first four that you look at on that chart. And that would be the most famous one in my lifetime. I think that every value guy who was around then will say that was the toughest period, but this thing is much, much worse. The really scary thing is that often, when you see this sort of underperformance in value driven by the long side of value, it has tended to lead into these really nasty periods. I think even outside the stock market, there’s been these long periods of very, very– American Civil War, World War 1. That period of time, there’s a lot of stuff going on. We haven’t seen much of that for a long period of time. It’s Steven A. Pinker view of the world where everything’s just getting better, or it’s Taleb view of the world where we just don’t have enough data and these big black swan–
Jake: It’s day before Thanksgiving.
Tobias: Yeah, it makes me a little bit– not nervous, it’s the wrong word, but it makes me a little bit more circumspect about the prospects for– it’s all a little bit more fragile, I think, than I originally thought anyway.
Jake: It’s pain that scrubs off high valuations and high multiples. It takes a decade almost of having your ass kicked for them to declare the death of equities that brings an [unintelligible [00:29:13] that then leads to the giant returns later.
Bill: Yeah. I feel I have conflicting thoughts on this because part of me says [crosstalk] yeah, I mean, a little bit, and I guess– ’08 was both a liquidity issue and an earnings issue, and the liquidity issue just isn’t here this time. Sp. not have this totally heart-crushing selloff doesn’t really shock me all that much. I do wonder how long can the disappointment continue before some of the– I don’t want to say like euphoria, but optimism gets deflated out of some of the multiples. And that can have a reflexive– it’s reflexive, I think, to a certain extent. But I don’t know. That’s not a very helpful comment, I don’t think, but it’s why I’m not waiting for ’08 again. I just don’t think that’s the right bet to make.
Jake: I want you guys to handicap right now, what are the chances of value catches up or everything else catches down? What are the odds on those two prospects to close this gap?
Tobias: I think it’s a little bit of column A and a little bit of column B. I think it’s like 80%.
Jake: That’s bullshit.
Tobias: [chuckles] Well, okay, that’s fair.
Tobias: 40%, that’s my guess. I think it’s mostly the high multiple stuff is going to come down, but I also think that value is going to get dinged up through here too. I think that the long-short value factor telling us that it’s down 59%, in a world where that happens, that long-short value factor is going to do very well because it’s equally weighted long-short, it’s going to be long the stocks that don’t get down as much as the short side goes down.
Jake: [crosstalk] –short book is going to carry the day probably for that period more?
Tobias: I do, and I think that’s what’s happened in the past. Often, these value underperformances have terminated with the bottoms of infamous massive stock market crashes. I’m not predicting a massive stock market crash or anything like that. I’m just saying that the market is expensive. It’s been a long time.
Jake: I can read the Business Insider article already.
Jake: Value Manager, Toby Carlisle, declares massive crash imminent.[laughter]
Tobias: [sighs] I don’t know.
Jake: [crosstalk] -multiple boss declares. [laughs]
Bill: Yeah. I hope it comes out soon because I’m a member for approximately 28 more days. I paid my dollar to see whatever they quoted me and I was like, “Oh, okay.”
Jake: Actually what’s [crosstalk] funny, it’s actually going to say Bill Brewster. [crosstalk] [laughter]
Bill: It was more than that, but that was sort of funny how they– I mean, I didn’t mean to take credit for your Apple’s the greatest trade ever. That was not my intent.
Tobias: Oh, no. I figured that was the journalists picking up the most interesting comment out of the whole thing and then making it the headline.
Bill: The funniest thing is, I didn’t even think that was the most interesting comment that I made. But then, that was– they say Apple, that’s the one is going to get– [crosstalk]
Tobias: Well, you get Apple and Buffett together, and that’s a good headline. When I was writing Greenbackd, I used Golden Buffett in a headline, that’s going to go through the roof.
Bill: Yeah, that makes sense.
Bill: The clickbait that can’t be ignored.
Tobias: Yeah, it’s still stunning to me that so few people have talked about Buffett’s trade in Apple. If you’re Paulson, someone’ll writes a book about you. If you’re Buffett–
Bill: It’s expected.
Tobias: Your stock price goes down.
Bill: I tell you the thing that sucks though, that’s a legit criticism. And this is, Jake, when we were talking offline about absolute and relative valuations. That stock has not gone. It’s underperformed a lot over the past 10 years. [crosstalk] Yeah. And he’s needed the Apple trade to keep treading water and that’s some of what I think there’s a legit– I don’t want to say criticism because I don’t think that’s really the right way to frame it. But I think that there would be merit to the argument of saying once you get to a point of having so much excess capital, even doing something like running a levered SMP strategy or returning the capital to shareholders faster, I just think sitting on the cash and being so rigid about your hurdle rate. There are multiple paths to the world, then we’re sitting here at all-time highs and maybe this is resulting and I get it, but there’s another view of the world that says you maybe a little bit too big to be sitting on all this cash waiting for that kind of–
Jake: I’m going 100% fading that.
Tobias: Yeah, so am I.
Jake: Did you listen at all to the Markel call yet?
Bill: No, not yet.
Jake: Well, I’m not completely done with it because it was just this morning, but it sounds like insurance pricing is hardening up quite a bit.
Jake: I love the fact that Warren’s going to have all of that capital be riding against hard prices. I would expect combined ratios over the next couple of years to look pretty attractive.
Tobias: Happy to hear that. I own a lot of insurance.
Bill: Yeah, so do I. I’m just saying, you think he’s going to be able to put $100 billion to work? That’s a lot of money.
Tobias: I think he gets his chance.
Bill: I hope so.
Jake: I’m doing the Jack Nicholson nod.
Tobias: We’ve got to do your topic, Bill, or we’re going to run out of time.
Jake: Yeah. Let’s go, Bill, Starbucks.
Bill: I’ll knock that out in no time. But that’s what I said to the Business Insider people. I said it’s time to press the advantage. He spent all this time getting all this capital like– fuck it, man, go ham all these competitors. Invest like crazy in these businesses that can’t go– anyone that’s over-indebted, go kill them. This is what we’ve all waited for. I just don’t know that he can put that much capital out the door.
Tobias: The thing that makes Blake the best investor in the world, is that he doesn’t listen to– The reason that Blake’s got $100 billion stacked up is because he’s the most patient investor in the world, and he’s just sitting there waiting with his $100 billion stacked up.
Bill: I get it. If you listen to him over the years, he acknowledges that size is a problem. It is a problem. I think he’s done some good deals. I think the Dominion deal–
Tobias: Let him do one more.
Bill: No, no, that’s not–
Tobias: Give him one more. He’s earned it.
Jake: Hey, he’s okay at this game.
Bill: That’s not what I’m saying. I’m saying the Dominion deal appears to be a good deal from what I understand. I like the Bank of America buys. I like that he’s buying in shares. I’m sure he’s underwriting insurance. I’m not trying to have him drag $100 billion of cash around for the next decade. It’s too much. We’ll see. The market, I think, recognizes some of it and I think the market is stupid on some of it. Like most good things in life, there’s no clear answer.
Tobias: Let’s hear your topic, Bill.
Bill: I’ve debated people on Starbucks, and I’m not saying like, sell the stock or short the stock or anything like that. What I am saying is, it’s not an idea that intrigues me at all right now.
Jake: Price or what’s the problem?
Bill: Well, I think that the business is harder to handicap than most people do right now.
Tobias: I was shocked at how expensive it is. I looked yesterday very quickly. I was like, “How did it get that expensive?”
Bill: Rates, bro.
Tobias: I guess so.
Bill: That’s the only answer. People are saying while it’s a great business, look at returns on invested capital, we sort of went through that last week how I think through that. I get that it’s a great business, you’re paying for a pretty big installed base of earnings here. You’ve got to grow the earnings. You’re looking at a situation where habit is forced to change right now. Somebody said– it might have been my man, Corporate Raider, said, what’s different about now in the global financial crisis? The differences in the GFC, people were still going to work and the high-income earners were still going to Starbucks. This is a system sustained force change of everyone’s behavior, and there’s a potential for work from home to take off. I get that people drive out of their house to go to Starbucks. That is way different than like 10 people at a bank or a law firm or whatever, every day at 2:00 PM, saying, the office sucks, I’m going to go to Starbucks to take a walk, getting all those sales. You really want to argue that that many people are going to go gather at Starbucks? Definitely, not right now because you can’t gather. And once it gets cold outside, you’re going to drive to Starbucks, you drive back home, you’re not going to hang out inside the third place. Let’s say this goes on for 12 months. That is a habit business, and habit is forced to change. The idea that habit-based business is priced almost at its all-time high right now, I haven’t put numbers to paper, but I can look at the price and tell you my assumptions would be more bearish.
Tobias: I agree with that. I saw the announcement yesterday and then I had a quick look at the valuation. I was just stunned at how expensive it was, how selective people– Nobody’s going there. I still think that most of that’s going to come back. I think it’s all going to normalize and it’ll all be fine eventually. But I’m not going to pay top dollar for it.
Jake: Are you implicitly long cities, if you’re long Starbucks?
Tobias: We’ve had pandemics before, and we’ve become increasingly centralized. That’s never going away. That’s people just like living near other people, because all the stuff is here including the Starbucks. I like going into Starbucks, even though the coffee is terrible and I can’t drink it. I just like going into– they’re nice places to hang out. If the coffee was halfway decent, they’d take over the world. They’ve already taken over the world. Doesn’t matter.
Bill: I don’t mind– [crosstalk]
Bill: I like the brand. I have three people that I interact with. They’re not friends, but I’m friendly with them enough that I know this information about them. They’ve all bought high-end coffee makers through the pandemic. If that can grab one cup per day or two cups a week– throughput matters a lot. I remember thinking this with Chipotle when they had the listeria thing and I was too freakin’ dumb to realize how many boxes they could open to grow that way, but I think that the per store throughput, it has a real chance of being permanently impaired because it introduces the thought of there’s another option to people’s mind. If you look at Chipotle’s same store sales, they are not what they were at the peak. Now, there might be some cannibalization in boxes that they opened and whatever and sales have grown, but I don’t know, man, messing with habit and habit-based businesses makes me very nervous.
Jake: I’m going to say that there’s a chance that it gets more– what we have out here is this company called Dutch Bros, and it’s a drive-thru coffee place. You don’t go hang out there really. But these things are crazy. It’s a private company, so I don’t know the numbers but the returns on capital must be off the charts because it’s like, throw up a shed in a parking lot, and the thing is like 20 deep every single time you drive past it. I shit you not. These things are unbelievable. So, I could imagine Starbucks doing a lot more drive-thru, which actually probably is even more profitable for them.
The other thing too is, typically small indulgences, small luxuries during bad times do pretty well because people aren’t doing the bigger things but they want some little– it used to be movie theaters, during depressions would do well because people just want to escape a little bit. I still think like a $4 milkshake that is coffee flavored that people call going to Starbucks might do okay in a poor environment because of that. I do think you’re right though, [crosstalk] and are you paying the right price against all of those odds is an interesting question.
Bill: We’re not that far removed from, they can’t innovate, how are they going to fix the afternoon daypart and then they dropped ice coffee and now everybody thinks they can do no wrong. I’m old enough to remember when the afternoon daypart was stalling, which was approximately 18 months ago.
Tobias: Remember then they close down to– [crosstalk]
Jake: [crosstalk] -sandwiches for breakfast now, so it’s off to the races.
Tobias: Remember when Howard Schultz came back, and they closed down for like a day and a half, so they could retrain all the baristas? And then, the coffee was exactly the same. It’s drip coffee, that’s the problem. You need expresso, otherwise it’s going to take like dishwater.
Bill: I can hear people right now being like, they got drive-thru, they got the third place, people are going to work from home, so they’re going to go to Starbucks. Okay. I really do understand the arguments.
Tobias: But I’m with you, dude. I don’t want to pay top dollar for that. I’ll pay a bargain basement bin dollar for that– I’m betting that it’s going to come back, 100% I do that, but I’m not going to pay a top dollar right now. I also think it’s an interesting insight to say that it’s a habit-based business and we’re breaking the habit and so now you’ve got to get that habit back, and you’re right, I don’t know what people do post this.
Bill: It’s harder to acquire back than it is to create. It’s the old Buffett thing. The chains of habit are too light to be felt until they’re too heavy to be broken, but they are forced to be broken right now for all of the consumers. Now, I understand people are going to Starbucks, but it’s just a very different habitual experience in your day, and you’ve messed with people’s routine, it’s just not something I want to pay top dollar for. Meanwhile, you got Altria, who apparently people are smoking like crazy in the freakin’ coronavirus, creating addiction, growing top line, and they can’t give the stock away.
Tobias: It’s that kind of market.
Bill: The look-through dividend yield on that thing is like 9.5% once you back out the AB InBev investment. God forbid, Juul actually isn’t a total turd, you’re going to get yourself up over a 10% dividend yield on a highly addictive product growing top line. You just have to get over the fact that you’re going to make money off of people dying, which is not that easy to do. There’s some ick factor on that.
Kodak Shares Rise More Than 1,000% On Covid Drug Loan Deal
Tobias: It’s [unintelligible [00:44:36] three questions in. We should talk about Kodak. Kodak is mooned because that was a blockchain. What are they mooned for this time?
Tobias: It should get a little bit of a rep by now. They made the Kodak KashMiner when blockchain was hot. Now, they’re going to come out with some COVID pharmaceutical. They’re going to manufacture some COVID pharmaceuticals or something like that. Kodak, what are you doing?
Bill: I know nothing about the Kodak story nor–
Tobias: [crosstalk] stock price? It’s gone vertical.
Jake: Well apparently, we’re all as a society giving them $750 million or something to go try to figure this out.
Tobias: I’ll do it for half that.
Jake: Right. [chuckles]
Tobias: I’ll take a chop at it.
Bill: I haven’t even seen the news.
Jake: [crosstalk] -the worse, the three of us.
Bill: What’s going on?
Tobias: They managed to get a press release with a word Coronavirus or COVID in it. And so, now they’re going bananas.
Bill: No, they’re getting stimmy money for trying to have some pharmaceutical approach to COVID even though I don’t even know what they do anymore.
Tobias: It doesn’t matter.
Bill: We’re talking Kodak, right?
Bill: Kodak, as in like the camera company?
Tobias: Yeah, the headline was Buffett and gold, they went bananas.
Bill: As in like the camera company?
Jake: I don’t know if you saw the Robinhood avalanche behind that too, after they announced–
Tobias: It’s like 43,000 accounts, [unintelligible [00:46:00]
Jake: Bought it in an hour and ran it up to, I don’t know, whatever it was, like 60 and then it was back down to 30, like 20 minutes later or something, I don’t know.
Tobias: Still pretty good run, good performance.
Bill: I understand the industry has got some issues with driving behavior, but, man, I don’t know. I hope Robinhood cleans its act up. There’s some insidious shit that goes on in that, from my perspective. That is opinion based and not an official representation of The Acquirers Podcast.
Billy Beane of Moneyball Launches SPAC Blank-Check
Jake: Hey, how about this other one? Billy Beane apparently launching his own SPAC to may be go try to acquire the…
Tobias: Yeah, that’s the other thing that’s going on.
Bill: What’s he going to acquire?
Jake: Like a professional sports team, I guess is what the [crosstalk] is.
Bill: Why wouldn’t I just own the Liberty Braves, thank you very much. Partner with Malone to get myself a team that actually wins.
Tobias: He’d have to do it under tracking stock.
Jake: How much financialization can we do here? Jesus.
Bill: As much as possible. It’s America.
Jake: Does anybody want to just build something instead of just trying to get someone else’s money to go buy it?
Tobias: I’m always stunned at how short the memories are. Nobody remembers SPACs the last time around or the time before that. These things happen every 10 years or something, it’s not that long.
Jake: How did the results turn out on those?
Tobias: Well, you can buy a lot of them when they cash out. The only two times to buy SPAC in my humble opinion, when they haven’t been able to find a deal and they’re going to return the capital because they have to do that after a certain period of time. Or they’ve bought the deal and it’s traded down below what it’s worth, and then you go and buy. It’s just like any other stock. You don’t back them with the cash and then hang around to see what they get. That’s bush league.
Jake: Yeah, you’re on the wrong end of optionality there.
Tobias: All of these guys, if you’re famous and you’ve got PR, you’ve got a publicist, get yourself a SPAC, get a billion dollars in your SPAC and figure out what you’re going to do with it. For the manager, yeah, great idea. For the investor, dumb idea.
Jake: How much does it cost to get one of these launched? What are you doing on Friday?[laughter]
Tobias: I couldn’t do it. I just couldn’t. Next time around. It’s not going to be that long.
Jake: At the pace of change right now, 2022, we’ll be on to the next bubble.
Bill Brewster’s Business Insider Article On Warren Buffett’s $800 Million Bet On $BAC
Tobias: This is slightly off-topic, but every time I say that, Buffett’s got– Bill’s article came out with Buffett’s got the best–
Bill: That’s not mine.
Tobias: The Business Insider article, I’m not– this is not–
Bill: They just asked me some quotes, and I just parroted something you had said.
Tobias: I’m not criticizing at all. This is the only point that I make–
Bill: I [crosstalk] I stole it from you but it’s not.
Tobias: I don’t at all. Every time I say that someone comes and says Naspers with Tencent, that’s the best trade ever, just sit back and think about this for a moment. In the world, there are a dozen of these Chinese companies that have gone up some stupendous amount over a period of time and there is somebody out there who got into them 20 years ago. So, if you work it backwards, you’ve had to go look at every company in the world– so they found some South African company that’s got a little position in some Chinese company and that’s the best investment ever. The reason that’s not the best investment ever and the reason Buffett is the best investment ever–
Bill: What happened?
Tobias: That’s a bit wacky.
Bill: We flipped.
Tobias: The reason that Buffett is the best investment ever is that Buffett was a totally known quantity and had to put a huge amount of money into it and now it’s gone up three times in a very short period of time. Tencent doesn’t–
Bill: And it was something everyone could have seen. That was in front of the world.
Tobias: That’s it.
Bill: Everybody else was too scared and he had massive balls.
Jake: Fair. Questions?
Bill: There’s some Intel questions on there. I don’t really know about Intel versus AMD. I’ll tell you what pisses me off is that I miss Taiwan Semi because that I sort of understood and that from my understanding is a scale game and I look for scale games and I fuckin’ miss that and I’m disappointed in myself.
Perth Tolle – Investing in Freedom
Tobias: You know who’s got a big chunk of that? Perth Tolle and Freedom. Shoutout to Perth. That’s her biggest holding, I think, so good for her.
Jake: That’s a big win. Freedom.
Tobias: A SPAC is cheaper than an IPO. Yeah, because you’re just raising cash, so there’s nothing to disclose. There’s no DD, then you’re backing these guys to go and do the DD. It’s cheaper for the person listing the SPAC. It’s not cheaper for the investor.
Bill: Yeah. It’s just [crosstalk]
Jake: Eventually, it won’t be.
Tobias: I don’t care what it cost those dudes.
Bill: [crosstalk] –cheaper than assets.
Tobias: I don’t care what it costs the VCs to get something out the door. I don’t care what it costs the manager or the promoter to get it out the door. I care about what I pay.
Jake: That’s as good as money, sir.
Bill: It’s so hard for me to read the economics on SPACs and get amped up about funding them.
What Drives Forward Returns?
Tobias: Here’s a good one. What drives forward returns? Economic viability, rationale, or current percent of public’s involvement, catalysts? Sorry, I don’t understand the question, but nobody really knows. It’s a variety of factors. It’s whether Robinhood like it or not–
Bill: [crosstalk] right on the business.
Tobias: It’s whether Robinhood likes it or not.
Bill: Short term. If you’re a younger person or somebody that’s truly interested in investing, and you’re asking that question, I would really encourage you to think about how long you think the growth runway is and what the returns on incremental capital are, and how good you think the business is and then what you’re paying today? [crosstalk] Well, I’m just saying, I mean, that’s what drives forward returns. [crosstalk]
Jake: Robinhood is the ultimate voting machine.
Bill: I understand what you’re saying but I’m saying this is the honest answer to the question. You’ve got to think about the growth and what’s it going to cost the business and what are you paying today? That’s what drives forward returns.
Tobias: The Fed.
Bill: And the Fed.
Tobias: The Fed and Robinhood. I don’t know what drives returns. It used to be a variety of things. This is an interesting one. Nobody’s talking about the implosion of D2C consumer startups. Harry’s Shave Club, written off, Dollar Shave Club, Casper, Brandless, all dying. Evidence of brands moat? That is very interesting. Yeah, I’ve sort of seen that going on. That was all very popular for a little while. Software as a service is the hot thing at the moment. At the moment, it’s very bubbly. Software as a service, I could understand. This has all gone a bit bananas now.
Bill: This is sort of Gary Friedman from Restoration Hardware’s argument, that you need some combination of retail plus– he actually hasn’t really invested online, but if you’re direct to consumer and you’re online, I would think that the biggest risk is you’re basically trading your brand awareness to Amazon and Google for placement. And how do you stay in people’s heads if you’re just basically buying your customer acquisition all the time? Something like Casper, how often are people buying a mattress, that’s not super habit-forming. Dollar Shave Club and Harry’s are a little bit more shocking because that’s more of a subscription service, but I just think the real risk of not controlling your distribution is you’re just handing it to these behemoths.
Jake: Yeah, the other problem too is, because they all tried to get in at the same time. It’s just like when there’s a gold rush and people will overpay for picks and shovels. They probably overpaid for customer acquisition. Ads were more expensive. You saw the ad prices drop a lot in, whenever, like March, April, and I think a lot of it was because just everyone shut their ad spend-off because they’re scared. You probably were all competing in that same space too hard and it’s going to be hard to then get the customer lifetime value up high enough, especially for something like a mattress that’s like a once-a-decade purchase or longer, if you’re a cheapskate like me.
Tobias: Mattress as a service, that solves that problem. You don’t buy it. You just rent it from us for $19 a month.
Jake: That’s called a hotel.[laughter]
Bill: Oh, God, I wouldn’t want the used mattresses. Yeah, Jake, I think you’re right. And then the other thing is when everybody’s playing that game at the same time, I think you suffer on the CAC side and the LTV side. It’s not–
Jake: Low barriers to entry. It’s not–
Bill: Yeah, I think you’ve got to be sharp to really play that, like who’s winning? Who’s losing? I think the half-life on those businesses is much faster than people think.
Tobias: All of those things popped up because they just underestimated the customer acquisition cost when it actually got to scale, and they overestimated the lifetime value. Just because there was a period of time where– and you can lose money for– get some VC, lose some money for a period of time, people are like, “Look, these guys are selling a billion dollars’ worth of mattresses–”
Jake: Look how they’re growing.
Bill: Okay, this is a different one. I have no idea what I’m talking about right here, so feel free to skewer me. You look at Shopify’s growth, how much of Shopify is growth is people sitting at home, creating a business for some ancillary revenue stream? Maybe they don’t actually want to run a business, maybe they get into it. I just don’t know how it all turns out, but there’s so few barriers to entry. How much of that is like– I don’t know, money-losing businesses that come in, provide a temporary pop, and then disappear versus how much is a structural– I understand the whole market thinks it’s structural. I get it. This is a controversial opinion to suggest maybe it’s a temporary bump. I apologize for even articulating the concern–
Jake: Stock price.
Bill: Yeah, but it’s all that stuff, I think, is somewhat related.
Tobias: I got a good question here, it might be more you, Bill. So, take a chop at this one. But any thoughts handicapping credit risk going forward if the additional unemployment benefits either go away or reduced?
Bill: Yeah, shit could get bad. I think that everyone is long government stimulus right now and you’re lying to yourself if you think that you’re not. Look, I think if you support people at 70% and they get a $1200 check upfront, the credit risk is probably fine as it is. I don’t know that people are expecting the benefits to stay where they are. But, yeah. I think the single biggest risk to the economy is a Biden presidency with a Republican senate because I think the Republicans find Jesus again about spending and that could be a real problem for fiscal stimulus.
Jake: How many people right now are implicitly long government functionality?
Bill: Everyone, except for the people that don’t [unintelligible [00:57:34] cash.
Jake: Yeah, all of us with our tinfoil hats on.
Bill: Yeah, [crosstalk] equities for sure.
Tobias: We’re all going to get hurt. Everybody’s going to get impacted. Yeah, it’s a total mess. I’m guessing they’re going to get something done, July 31, they will run out. They’ve got two more days of three more days of grandstanding probably run it all the way up to midnight and then come to some compromise which is like 80% of the previous amount, something like that. Just enough so everybody hates it.
Bill: Yeah, that’s right.
Tobias: Is this the most dysfunctional time in history?
Bill: People are going to be like, “Well, you did have a civil war.” So, I’m going to go with no but–
Tobias: Well, that’s fair. Modern history then.
Bill: Yeah, it certainly feels–
Jake: It could be our lifetime potentially.
Bill: There’s a world watching this podcast or listening. So, this is sort of an American centric comment.
Tobias: I think it’s more global than that, to be fair. I think that a lot of the things that [unintelligible [00:58:34] States, [unintelligible [00:58:35] Europe, a lot of the world. Maybe not Asia, Africa. Maybe, I don’t know.
Bill: Yeah, I agree with you. I guess what I was going to say as far as the America-centric comment is, I have not been aware of a time since I paid attention where I thought that we hated each other more than we were afraid of outside enemies. I think that this is the first time that I really worry about us being able to function as a society because it feels like things are so polarized now that we can’t even talk to each other. That’s kind of scary. Then again, the north and south hated each other too.
Tobias: I do wonder if it’s the moment that stuff crescendos is the moment that the immune response is sort of kicking in. I just wonder if the fact that it’s everybody’s aware of the problem now, whereas probably everybody wasn’t even a few months ago, and so that you’re getting closer to there being a solution. Hopefully, everything calms down a little bit, whatever the outcome of the election is. I don’t know, I’m just hoping.
Jake: I think there’s probably, in my mind, only one way that we unify and that’s with a common enemy, unfortunately.
Tobias: Well, that’s not a good outcome.
Bill: No. Call me crazy, but let’s say Trump leaves, I don’t exactly see him getting off Twitter.
Tobias: He’s going to get his own cable station.
Bill: He’s not the type of guy that’s just going to go into the background and not criticize Biden.
Tobias: He will have a Fox News cable station. He’ll have his own cable station.
Bill: Yeah, on the One America News Network.
Tobias: That’s time, amigos.
Tobias: That’s 11:30 local time. Thanks, folks. It was really fun. Actually, next week we’re off. So, it’ll be the week after next week. I’m going on vacation.
Jake: See y’all in two weeks.
Tobias: See you then, guys. Bye.
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