In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- James Montier’s Reasons (NOT) To Be Cheerful
- Buffett Buys GOLD
- Buffett’s Pass On Microsoft In 1997
- Investing With OPM Is So Hard!
- Low-Key Superinvestor – Sardar Biglari
- Investors Should Be Studying Dan Loeb
- Tesla’s Universal Scale Advantage
- The S&P 500 Is A Huge Carry Trade
- History Shows Us That The Market Is A Master At Double-Counting
- Einhorn Buys GDX
- OIl – The New Tobacco
- ESG Investing
- The Best Fee Structure
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 Tuesday 10:30 AM Pacific, 1:30 PM on the East Coast. Bill is livin’ La Vida Loca.
Tobias: The rest of us who live in COVIDa loca.
Tobias: The stock market just hit an all-time high. [crosstalk] It’s the reverse mullet market. It’s a party on top and it’s depression underneath.
Bill: Good for the market. The market needs a break.
Tobias: What’s happening, fellas?
Jake: I think you just summed it up right there. I think we can just close the show.
Bill: I’ll tell you what, for all these people pooping all over Florida, my morning was spent going to my kids’ school, I had the first day of school, I’m not allowed back on campus and I realized this isn’t everybody’s–
Bill: No, it’s just they’re just letting us on once. Not me personally, it’s all the parents, guys. But they’re checking temperatures and they’re doing stuff and I felt really comfortable. Now, I know that’s not everybody’s experience, but that’s why I moved here and so far, so good. So, fuck all the haters.
Jake: [laughs] Yeah, it’s only going to get better as it gets colder and more second wavy in the rest of US and you’re hiding out in Florida.
Tobias: Haven’t we had it? Haven’t we seen it?
Jake: I don’t know. [crosstalk]
Tobias: If you look at the numbers, there’s a second wave. I think 1918 flu had a third wave which was relegated to the back of the paper. So, I’m hoping that’s where we get to. Got a good list of folks from all over the world. Nassau-
Jake: Let’s hear them, Toby.
Bill: Yeah. [crosstalk]
Tobias: Apopka, Florida. Hillside, New Brunswick, Canada. Chapel Hill, Montreal, Quebec.
Bill: Where in Florida? Where you at?
Tobias: Tampa, Sweden, Portland.
Bill: There you go. RH has a Tampa thing.
Tobias: San Antonio, Evanston, Indonesia, Abu Dhabi, Papua New Guinea, it’s awesome. All over the world.
Bill: It’s a lot of places for 10 people to be.
Tobias: Sure is.
Bill: I always admire–
Tobias: What’s the VPNs.
Bill: –our listeners and how they try to– Yeah, make it look like we have more listeners than we do. I appreciate you.
Tobias: Got to pump up those numbers.
Bill: That’s right.
Jake: Those are rookie numbers– [crosstalk]
Tobias: Pump those rookie numbers. [crosstalk]
Bill: Hey Toby, can I stop typing all the places that I am right now.
Tobias: [laughs] You can stop now. You just making some of these up.
Bill: I’ll just do the show now. All right, that’s–
Bill: Who’s doing the intro? Let’s get it.
Jake: I will do the intro today. Welcome to Value After Hours, with my esteemed cohosts, Bill Brewster and Toby Carlisle. Bill, what you got for us on tap today?
Bill: Oh, what do I have on tap? I was going to talk about this John Huber thread and Buffett passing on Microsoft.
Jake: Hmm. Tobias?
Tobias: Berkshire has a new 13F out. The big fella has bought Barrick Gold. He’s bought the shiny, yellow metal. He’s bought the pet rock. He’s learned his lesson from the 1979 letter and he’s getting it early in the run or not. I don’t know. Maybe it’s Ted and Todd, we’re going to talk about.
Jake: Okay. And then, I have a veggie segment that’s going to be on James Montier’s latest piece that came out late last week titled, Reasons (NOT) To Be Cheerful.
Tobias: [laughs] Thanks, James.
Jake: I’m going Debbie Downer.
Tobias: That’s what we need.
Jake: Which is very out of character.
Tobias: That’s what we need right now. Reasons not to be cheerful.
Jake: Yeah, I apologize upfront.
Bill: Also, I’m sorry about my camera. I’ve had bigger things to do. I’ve got like real family stuff, so y’all can deal with one more bad week. My apologies.
Tobias: As long as the microphone’s working with that shirt.
Jake: I don’t think I could handle that shirt in HD anyway, so.
Bill: Dude, this thing is sick. I bought it as a joke and I like it.
Jake: Did it come with a bowl of soup? Or was that–? [chuckles]
Bill: Yeah, Froot Loops.
Tobias: How does your wife feel about that?
Bill: Jake, why don’t you start off? Why don’t we go directly into depression?
Jake: All right, let’s get it out of the way.
Bill: Nice. I’ve been a little too happy today. I’m looking forward to this.
James Montier’s Reasons (NOT) To Be Cheerful
Jake: So, one of the things that I really like about James Montier is that all of his work is based on the idea that he just doesn’t know necessarily what the future looks like. He talks about Howard Marks has this idea that there are two types of investors in the world. There are the ones that I know, and then there’s the, I don’t know. The I-knows are talking about all the things that are going to happen, all the disruption.
They’re great at parties because they have interesting anecdotes about companies. By the way, valuation is not really primarily a driving factor there. And then, there’s the I-don’t-know investors, and they’re the ones who can’t tell you what the future is going to hold. They just look for a margin of safety and the price that they pay, and that’s how they structure their affairs. Well, I like that Montier tends to be in that ‘I don’t know what things are going to look like’ camp, I find that to be compelling.
Here’s all the things he admits that he doesn’t know. He doesn’t know if there’s going to be a second wave. He doesn’t know what shape, whether it’s a K or a V or checkmark or a Nike swoosh, or a Cyrillic alphabet shape. He doesn’t know what that’s going to look like. He doesn’t know how quickly unemployment is going to get fixed when we went from like 6 million or something to 30 million unemployed in two months. But he does know that all of those questions exist and no one really probably knows the answer to them. And therefore, if you have all of these questions, that’s uncertainty. And anytime you’re dealing with uncertainty, you should be demanding a bigger margin of safety, whenever there’s more uncertainty about what the future looks like.
He says that the reason that things have gotten so out of whack is that it’s probably some narrative to do with either the Fed or liquidity creation, that’s what everyone’s saying. Then, he breaks that apart. He looks at– that in the valuation, we’re in the 95th percentile right now of Shiller P/E. And that’s probably on an E that’s a little inflated relative to what it’s going to put up over the next year at least. And then, economic growth is in the fourth percentile. He was looking at like a minus 6% print for 2020. So, we have 95th percentile most expensive and 4th percentile worst sort of economy. How do you square those two things other than just purely the narrative that the Fed is going to fix everything?
What’s interesting about this whole narrative idea and how attractive we are to stories, he cites in the footnotes this– they did this mock trial where they took prosecutors, the prosecutors delivered their case in the order of the story of how it played out. And the defense went based on just the order of the witnesses. And they found a 78% of the time in that case, it was found guilty. So, then they reversed it, and they did the prosecutors had to just deliver what the witnesses said, and then the defense got to do the story order, and that dropped it down to 31% guilty rate. All the same facts, but just the presentation of whether it was in a story or not completely changed the outcomes. That’s how hungry we are for stories.
Montier then goes into talking about how– so QE, he’s not sure that is actually something that is good for the market necessarily. He’s trying to say, really all it is, is a maturity transformation which is basically swapping long-term debt for near-term debt. This whole argument that yields are so low on government debt, and therefore everything else should be more expensive, he says, which a lot of people have said, but like, “Okay, what about Japan or Europe where yields have been low? Their equity markets are not completely unhinged from reality.” So, if that is some grand thing in the universe that low rates equal expensive markets, why not Japan and Europe today? Why don’t you guys talk a little bit about this and then I’ll get to the next point.
Tobias: Yeah, that’s something that makes me a little bit nervous that we’ve already run this experiment, at least in one form in Japan, and still below the 1990s stock market high, and that’s a long time. What are we now, 30 years into that drawdown? That doesn’t backtest very well, I can tell you. It looks alright from a value perspective.
Bill: After this, I’m going to have to go close the door because I can hear a critter in my audio. But what I would say is, I guess that I don’t know that I draw the conclusion that things are necessarily insane. I agree that they’re uncomfortable. It’s possible that a lot of these companies that are growing are like the next iteration of the backbone of society. I think you have to at least entertain that possibility. But I’m not comfortable playing in that space. I do think as a lot of these SAS names make up a bigger and bigger component of the index, I don’t know what Japan looked like back then but I don’t think the returns on capital of the businesses were quite as good or that the global scale of those businesses were similar. I do think that there’s important distinctions, but I don’t disagree that there’s a lot of unknowns and– [crosstalk]
Tobias: It was also more expensive.
Tobias: Japan go to 100 times on the CAPE–the US still peaked in 2000 at 44 times, I don’t know where we are now, but it’s only 30 something, it’s low 30s, I think.
Bill: All right, I’m going to return– I was trying to keep the door open, so I didn’t sweat through my shirt again.
Bill: So speaking of Japan, people forget that in ’92 and ’93, right as it was bursting, the Bank of Japan had this thing they called price keeping operations where they targeted the Nikkei to try to keep it at a certain level. It obviously failed tremendously. So, everyone who’s like, “Oh, the Fed can just make the market–” The people joke on Twitter like, “Fed, why don’t you tell us what’s the right price for the market?”
Tobias: Give us the close.
Jake: Yeah, give us the close so we can just take it there for you. That historically, when it’s been tried other places, hasn’t worked.
Tobias: That was 30 something years ago. We’ve got much more sophisticated tools now.
Jake: Control P.[laughter]
History Shows Us That The Market Is A Master At Double-Counting
Jake: That’s the tool. I guess to wrap up a little bit of what Montier is saying is that– well, another point is that he says that history shows us that the market is really a master at double-counting and what he means that is that they always attach a peak multiple to peak earnings, and a trough multiple to trough earnings. So, when you do that, you’re automatically going to end up overinflating potentially.
Bill: The only problem with that comment is right now are saying it’s a peak multiple on trough earnings. So, it doesn’t really make sense. You know what I’m saying? Everybody’s saying, “Oh, it’s so expensive, look at what earnings are going to be next year.” but that’s the whole point. When earnings are super depressed, the multiples should be really, really high theoretically.
Tobias: Which is what happened in 2009, because you got the zero earnings. So, if you have a look at the single-year P/E through 2008 or 2009, I forget exactly, which because the bank earnings was– the [unintelligible [00:12:48] was so big, it wiped out the earnings for the entire S&P 500. And so, you get the infinite P/E. That was a buy signal, obviously, as surprising as that is, which is why the CAPE is a little bit more useful in that scenario. It only got down to the long-term average, but at least it showed that it was lower. You’re better off buying lower than you are higher. That’s typically been the case although I’ve seen some arguments the other way.
Bill: Yeah, because counterintuitively, I would think that you actually really want to buy when multiples are insanely high, because to your point that implies super depressed E, which is not 27, 28, 29.
Tobias: Yeah, assuming that’s what implies, right?
Bill: We’re talking like 50, 70, 100 and you got to look at the denominator too.
Tobias: But the CAPE corrects for that a little bit. The single-year P/E– I thought all that really demonstrates is that a single-year P/E is virtually useless. And so, lots of people are pointing to the fact we’ve got this extremely high single-year P/E up at the moment, and that’s because the underlying [unintelligible [00:13:52]. There are two ways that corrects. The multiple comes down, well, the E goes up, and it’s probably going to be a little bit of both. E is probably going to recover a little bit from here. Although we still haven’t seen, we only had– Early on in this, I said the problem is you get Q1 earnings in Q2, you get Q2 earnings in Q3, and you get Q4 earnings in– Q3 earnings in Q4. That’s the problem. You’re always lagged. We haven’t really even seen the full impact of the shutdown yet. We’ve seen one or two quarters.
Bill: Yeah, I think that’s right. I think it’s really easy in the first couple quarters to add it back but after consistent punches come, you start saying like, “Oh, God, what’s really going on here?” And that’ll be interesting to watch, I guess.
Jake: Well, they’ve kept the existential crisis part of it in check somewhat through just crazy amounts of borrowing money. We added more corporate debt in the last six months than– I don’t know of any other time period. All of that liquidity raising makes it seem like, “Okay, yeah, you can get through this.” Yeah, you may be able to get through it, but you still have to pay all that money back, and it’s going to be a big-time drag on your future earnings.
Tobias: But that’s old school thinking, that’s old school thinking. You’d have to pay it back. You just let it get inflated away.
Jake: Just roll it. Yeah, that’s fair.
Tobias: Roll it forward.
Bill: I guess the only thing that I would caution people against if you’re listening to this is, it’s really easy to then say, well, the market’s coming down. And that’s not necessarily a correct assumption. You could go through 20 years of flat.
Tobias: It’s never happened before, but it’s possible.
Bill: It’s within the range of outcomes. What I think we’re all saying is, it’s likely that forward return has been pulled forward a bit. I think that’s certainly the most accurate description. Now, whether or not you have a huge drawdown in between now and then is sort of a different thing. There are many times over the last decade that I would have told you a drawdown is coming, I would have been wrong every single time. Really– I mean a sustained one. I have no idea how this stuff plays out at all.
Tobias: Nobody can predict stock market crashes, but the forward returns, they seem to be a little bit more predictable over longer periods of time. So, you can use the CAPE to predict 10 years, it’s got some pretty close association. At 20 years, it becomes more predictive. And at 30 years, it’s quite predictive. So, we’re at this point now where it’s so expensive, it’s very unlikely that we have– there’s not much return left in the market. We’ve squeezed all the return out. That’s not to say it can’t keep on going up in the short term. It’s hard to see how it maintains this trajectory over 10, 20 years. There’s got to be a reckoning at some point.
Jake: So, DMO just came out with their seven-year as of 731. These are all real numbers. And they’re assuming a 2.2% inflation rate. US large over the next seven years– by the way, this is annual returns, so compound this out. Any guesses at what they say?
Bill: I don’t know. I’d like to see their past predictions and how accurate they’ve been though. These guys have been wrong for a long time. I’m just saying.
Jake: Yeah, but they’ve been right lots of other times too.
Bill: Okay, I get how you can cherry-pick what you want to see. I’m just taking the other side of this.
Bill: I’m sure that they say negative 4 or something like that.
Tobias: I don’t think it’d be as negative as that, but I’d say it could be negative 2.
Jake: Negative 5.6.
Jake: US small-cap, negative 3.9. International large, basically zero. International small, 2%. US bonds minus 3.5.
Tobias: This is real?
Tobias: Yeah, okay.
Bill: Yeah, so what are they going to say, like buy a bunch of mining companies?
Jake: Emerging value, 9.2%.
Tobias: Real? Come on. Where have you got to go for emerging value?
Jake: Mars. Asteroids.
Tesla’s Universal Scale Advantage
Tobias: [laughs] Tesla. Tesla’s going to get us there.
Jake: I don’t know. Emerging value, it’s anything other than the US at this point it seems like.
Tobias: If Musk can mine a trillion-dollar meteor or whatever it is–
Bill: That would be dope.
Tobias: It’s all gold and platinum. Bring it back to Earth. Right there. There you go. That’s fair value.
Bill: Dude, I just want to throw this out here as a concept. I know we’re laughing about it, but you’ve got an outsider CEO. You’ve got universal scale. Okay, it’s one thing to be global. I’m talking like the fucking universe, man.
Jake: Yeah, that’s a bit– [crosstalk]
Bill: Yeah, you’re going to have electric rockets, clearly reusable. You’re going to have a cost advantage on a universal scale.
Jake: AI, neural net. It’s all happening.
Bill: Yeah, there’s probably going to be some AI in that and you got some supreme– [crosstalk]
Tobias: And the boring company.
Bill: –that’s investing for the future. They’re investing through the income statement. So, I’m just saying, you want to tell me it’s not worth a trillion? I’ll tell you it could be worth five.
Tobias: What’s the boring company worth? That’s probably a trillion dollars right there.
Bill: You can’t say it’s not. Prove to me it’s not.
Tobias: That’s impossible.
Jake: Let me close up my segment with what Montier’s– his basic takeaway is that value investors demand a margin of safety for uncertainty. These are like crazy uncertain times. There’s no margin of safety in US stocks currently. Then, he pulls out the trusty Voltaire quote, “Doubt is not a pleasant condition, but certainty is absurd.” US stock market is absurd. So, there you go.
Bill: I like the way he writes. I like him a lot. I mean, I was reading his book– [crosstalk]
Tobias: Well, you dress like he dresses.
Bill: That’s right. Yeah. What’s up, James? Holler at your boy, even though I’m coming at you. I don’t know. I mean, look, I just think that you have to acknowledge in these conversations that there are really, really, really powerful dynamics at hand. Like Google owning most of the television operating system outside of the US, and Roku owning a lot of the software inside the US, I don’t think that it’s patently absurd where Roku trades, for example. I think it’s probably arguably pretty reasonable. I just think that there’s a lot of these names that I look at that people smarter than me have done a lot of work on, a lot of them had pitched them early. It’s really benefited their career. I think people get caught up in narrative arcs. And if you’re paying these prices, you better be really precise on growth.
I was early to see it and I understood what platforms were, and these things are reasonably priced and should have been like overpriced. Now, you’ve sort of flipped it where everybody in the world is looking for the next platform and it’s like all you got to do is have a well package sales pitch. I was thinking, I was like I wonder if I could just go to an IR department and talk about scale economy shared, internal capital allocation, returning excess capital to shareholders, and like one other buzzword, I don’t know–
Bill: Yeah, like some sort of platform or whatever. It just seems like people are really quick to buy into that stuff right now. And I get why. If I ran a hedge fund or something, and I was a young person, and I was trying to make a name for myself, I’d probably pitch the same thing. You’ve got a limited liability structure. You got huge upside, your reputational risk, if you take it. And if you fold up, people have shut down and opened new shops all the time. I want to listen to people that are betting their money, with their families’ capital, with the same incentives. That’s all I’m saying.
Jake: Yeah, I might talk about it next week, but I’m reading this book right now called The Rise of Carry. You guys heard of that one?
The S&P 500 Is A Huge Carry Trade
Jake: It’s about all the different carry trades in the world that are huge amounts of money. It’s not just currency. They make the argument that selling [unintelligible [00:22:38] the S&P 500 is a giant carry trade– the Fed is a giant carry trade. I’m not going to step on it too much because I’m still digesting but–
Tobias: Carry is where you’re getting paid to hold the trade.
Jake: Right. You’re absorbing some risk. Insurance is a good classic example of a carry trade where you are getting some kind of a premium to take risk off someone else’s plate. Another, like a currency carry trade would be, I’m going to borrow in yen because it’s zero percent, and I’m going to go buy Australian dollar because they’re at 3% or 4%, and I’m going to pocket the difference. And then, pray that nothing happens in the world that changes that relationship.
Tobias: Right. Yeah, that’s interesting.
Bill: I want to be careful about what I’m saying about like managers and stuff. But I do think this is objectively true. You benefit in certain circumstances from pitching these really, really big right tail events. And if the dispersion is not that positive, let’s say that the left tail is super big too, but you have a limited liability structure or you’re not actually all that wealthy. So, if you hit a home run, you have massive outsized returns to your right tail. And your left tail, you’re not actually losing all that much. The skew is just– it’s not the true pitch. You’ve got to understand who’s saying it, why they’re saying it, what their incentives are.
Tobias: Yeah, the incentive structure for the person making the pitch is different from the person investing their own money into the pitch because that truncated their own left tail.
Bill: That’s exactly right. So, their pitch may actually have a better skew than the one that you’re reading and internalizing.
Tobias: Yeah. Well, it’s something that Jake and I have talked about a little bit that we don’t get enough right tail. That’s probably something that value investors do, is they ignore the right tail or discount the right tail a little bit. I don’t know why that is. Just so we can clarify, the right tail is like unexpectedly huge wins.
Jake: Good surprises.
Tobias: Good surprises. And so, you spend a lot of your life like trying to hedge the left tail because that’s the thing that takes you out of the game. Spend a lot of your life trying to find things that are mispriced where they’re going to give a little bit more, that they’re priced as if they’re left tail. There’s more left tail than there actually is. But there’s not that much right tail either. So, you’re taking like little singles all the time and trying to grind your way up taking little singles. And ignoring some things that could be monster winners because the likelihood of them being a monster winner is small. They’re very remote.
Buffett’s Pass On Microsoft In 1997
Bill: John Huber posted on December 19th of 2019. He recently tweeted about it, about Warren Buffett’s 1997 email exchange on Microsoft. Notice how I’m on my phone now and not like this, folks. I’ve learned and the iPad is down.[laughter]
Tobias: Yeah, that was funny.
Bill: That was actually funny.
Jake: How are you going to eat that meatball sub though? [chuckles]
Bill: I don’t know. I won’t be able to hide it, although the shirt will if I dropped anything on it. Anyway, like Buffett said– basically he goes through like why he’s so certain about Coke winning, going forward. And he says your analysis of Microsoft, why I should invest in it and why I don’t could not be more on the money. In effect, the company has a royalty on a communication stream that can do nothing but grow, dot-dot-dot, whatever. He said– but forced to make– sorry, something about like, if I were to calculate the probability with a degree of certainty of 80% or 55% for a 20-year run would be folly. If I had to make such decisions, I would do my best. But I’d prefer to structure investing as a n called strikes game.
To me, where I do think that there is a legit knock on Buffett’s strategy for a certain personality, not for Buffett, because he has his lens that he sees the world through. But if you have a 55% shot at being right on Microsoft, and you think that it’s that nascent in the game, in my opinion, you swing. You maybe don’t need to take a 10% position. But if you really think the right tail is that long, the right tail makes that probability set reasonably– like a decent bet. I guess that where I think you can get yourself into a lot of trouble is you can convince yourself that everything is a right tail event. I do think you’ve got to be really, really specific about what you’re looking for in the right tail. But what I think– I mean he has admitted. He was early advised into Microsoft. He saw Google early, and I think he needs to be more certain than at least my personality wants to invest in the way that I think that I can invest. Now, he’s the greatest of all time and I’m some schmuck, so take it with a huge grain of salt.
OPM Investing Is So Hard!
Jake: The Microsoft one is a perfect example of what makes this game hard, especially if you were managing other people’s money at that point and you bought Microsoft maybe a couple years later, let’s say–
Tobias: What vintage was it? Can you just remind us of the date?
Jake: He said 1996.
Bill: Well, that was ’97 when that was first described him.
Jake: So, two years later, let’s just use that as a jumping-off point, and you were to buy Microsoft then, you didn’t go anywhere for what 12, 14 years, I think.
Tobias: That’s right.
Bill: The business went a long way.
Jake: The business went a long way but the other people’s money you’re managing, they don’t give a shit about the business changing. Their account value hasn’t changed in a decade. What are you doing here? I’m trying to point out how much patience is required, and you have to be right about the business analysis too that Microsoft is going to be so good for so long. That’s a really hard game to play.
Bill: Yeah, well, this is my buddy, The Science of Hitting Investing, and I joke about this a lot. People will shit-post on banks, and he’ll like send, “Well, this is book value per share,” but nobody wants to hear it right because the multiple fade has destroyed the growth in book value per share. But it’s if you actually look at the business, no, it’s not some software compounder, no one agrees that. We all get it, but they’re not nearly as bad as the stock price drives narrative story.
Tobias: Well, I’ve got this up on the screen now, but I was at Value Investing Congress. I forget the exact date, but it could be years ’11, ’12, ’13 something like that where Microsoft got very popular in the value community, guys were pitching it all the time. Whitney Tilson pitched it like ’11, ’12, ’13, sometime around then, very comprehensive, compelling pitch. At the time, I just thought it’s such a big company, what’s the–
Jake: How can it grow from here?
Tobias: But also, what insight does a [unintelligible [00:29:50] like me having something like that. I’d rather just hunt around little things and see if I can find some of those cheap things. As it turns out, would have been a good position. Would have been better than all of this stuff that I was buying.
Jake: Who needs those 10 [unintelligible [00:30:01] like the easy way?
Bill: I’m looking right now, Microsoft in ’97, you’re at $144 billion EV on $4.2 billion of free cash flow. Given where rates were, I could totally see– Jesus, Lord, ’99, it was 460 billion. Yeah, you went nowhere for a long, long time. You went real high and then down and whatever.
Tobias: I don’t know if there are any well-known value guys who actually bought it ’10, ’11, ’12, ’13 that kind of vintage, whatever the low point was, who held it through this entire run. My hat’s off to anybody who did that, because you’ve bought that cheaply, and then held it as it got increasing, as it became a very good company and a compounder. That’s real value investing as far as I’m concerned. But I don’t know of anybody who actually did that. Anybody remind me or let me know, I’m happy to hear and happy to give them a shoutout. ValueAct, there you go. Good call. Thank you.
Bill: Jake, to your point, EV was $460 billion and free cash flow is $12.6 billion in ’99. Now, you’re at 2006, and you’re telling your clients that you’re right on the business because free cash flow is now $12.9 billion but your EV is $200.4 billion. Good luck keeping the clients, sir. I hope you enjoy [crosstalk] home being correct.
Jake: Yeah. So, we 3x cash flow but cut the stock price in half. Is that what you’re telling me?
Bill: I’m not sure that it was 3x cash. No, it wasn’t that. I mean it was–
Jake: [crosstalk] 12?
Bill: Yeah, it was like 12. Basically, man, it stayed pretty flat to be perfectly honest. Your revenues grew a lot. So, you’ve got to write your clients a letter that talks about investing through the income statement as they’re looking at a 50% drawdown.[laughter]
Bill: It’s not so easy.
Tobias: Somebody tweeted out a series of articles last week. I think it was Modest Proposal tweeted out a series of articles from 2002, 2004, and 2006. The 2002 article was like, all of these people who are by buying large growth in 2000, what were they thinking? These things were obviously way too expensive. And the 2004 article was about how value was ripping. And 2006, which was close to the value [unintelligible [00:32:30], was how now value was the obvious trade. And I just thought, “Dude, that’s funny.” If you read those articles, I think that’s like a vision of what– I’d love to see value get so expensive– I’d love to see– [crosstalk] But 2002 and 2004, I think it’s easy to see a few years in the future saying, “What were you thinking paying these multiples for these stocks?” They’re very, very good businesses, no question there. The game is for the most part finding mispricings and that means pay less than it’s worth rather than sort of just looking purely at the business and buying at any price.
Bill: I can’t say that I disagree with anything you said. [crosstalk] No, I mean, I totally agree with you. I just talked to The Science of Hitting on his pod last night. We were talking about, did the opportunity set drive me into something like AB InBev?
Jake: Are you cheating on us, Bill?
Bill: I was asked to go on a friend’s pod. I would never cheat on you. I’m exclusive to this– [crosstalk]
Tobias: On his [unintelligible [00:33:34].[laughter]
Bill: Yeah. [laughs] It’s interesting. Why am I doing what I’m doing? Here I am like a moron pitching Wells Fargo. You’ve got to be a true idiot to do that. Is that because things are rich or is that because I like the bet? I tell myself it’s because I like the bet. I don’t know– if SAS were cheaper, I’d obviously prefer to own them. But that’s not the game in my opinion. Watch me get waxed.
Tobias: We got it down. [laughs]
Bill: [crosstalk] down. Get out of here.
Tobias: That was me. [chuckles]
Bill: We can make it with nine listeners.
Buffett Buys GOLD
Jake: Toby, why don’t we–
Tobias: Yeah, let’s segue. I’m reading Chris Bloomstran’s because Chris follows Berkshire close than anybody else. It’s interesting, Berkshire up their buyback but sold a whole lot of stocks. So, Buffett’s still not done selling. They’ve tipped out of Oxy. That’s completely gone. It looks like JPM is gone. All the [unintelligible [00:34:43] are gone. He’s bought some Bank of America which warms the cockles of my heart. I’m slightly burying the lede here, but the big headline was that he bought Barrick Gold or somebody, the Ted or Todd, somebody bought Barrick Gold, I think it’s G-O-L-D. They’re a gold mine. You might be surprised, they’re the biggest in the world, I think. He’s tipped a lot of scorn on gold over the years. Do you think that means that this is much more likely that it’s one of boys?
Bill: I’ll tell you what I think is likely. I think that discussing Buffett and Gold is likely to get our clicks up.
Tobias: This is social media engagement gold right here.
Bill: Yeah, people can’t resist.
Jake: Value catnip.
Tobias: I think it was Friday that came out. I got Buffett and Gold into a tweet, slightly underperformed. Was a little bit disappointed. Everybody was in there at the same time, I guess.
Bill: Yeah, let me do my line of Buffett and Gold real quick. [snorts] Okay, that’s awesome.[laughter]
Bill: I have no idea what it means. It’s so tiny. It doesn’t matter.
Tobias: That’s funny thing. All of these things are just rounding errors now.
Bill: Yeah. [crosstalk]
Jake: [crosstalk] –it’s a lieutenant position myself. It’s a good signal, but not for the reason that people think. That tells me that those guys really can do whatever they want. And that Buffett’s not– he’s not riding shotgun with them.
Bill: I would not be shocked if they have a burner on Twitter and they just wanted to see Twitter explode. They were like, “Who gives a shit? This is nothing position, watch people freak out.”
Tobias: How much did they stick in? How much is in it?
Bill: I don’t know. It’s like a 0.27% position or something like that.
Bill: It’s super tiny.
Jake: That’s a lot of money though for [chuckles] because they have a pretty big book.
Bill: Well, like Huber pointed out, it’s like 1% with Apple is more notional than the entire value of this position. And people can’t help it. They’re like, “Oh my God.”
Tobias: So, why would you bother? What would be the point?
Bill: I don’t know. But I don’t need to.
Tobias: The gold has moved. Gold started moving for whatever reason. The yellow metal has started moving. I had a look at– all of the gold miners are pretty depressed. Berrick is on like seven times’ acquirers multiple. It’s pretty cheap. This is the problem. When gold gets moving, it probably does quite well. If gold gets really, really hot, then the margins stay pretty flat the whole way through because all of the inputs get more expensive too. But the miners will do very well, there’s no question about that. The miners are just like a leverage bet on the metal.
Bill: That’s what [unintelligible [00:37:36] told me. I don’t know.
Tobias: That’s what’s Spot says?
Bill: I guess. Yeah. But they have a huge incentive to tell you that. That’s what they sell.
Tobias: They’ve got the fizz and they’ve got the– Yeah, that’s a funny thing. I feel bad because I’m a value guy and I’m always like, get long value. But the gold guys are always like, when gold goes down, that means gold’s going back up again. When gold goes up, it’s working. They can’t lose.
Bill: It’s like uranium.
Tobias: Silver is down, it’s getting ready to run. That’s what you’d expect to see at the start of a bull market. A little pullback.
Jake: Just a little pullback to catch its breath and then–
Tobias: Buying opportunity.
Jake: –get going again.
Bill: “What do you do, sir?” “Oh, I run a gold fund. Don’t worry about it. I’m the one you need to give the money to. You can’t do this on your own.” I get it. [crosstalk]
Jake: The guy running a gold fund would wear that shirt. [laughs]
Bill: That’s arguably true. It looks like Montier.
Einhorn Buys GDX
Tobias: Einhorn bought some GDX, so there’s the kiss of death. Poor old Einhorn.
Jake: He’s been in gold for a while though.
Tobias: That’s right. Yeah.
Jake: He was in-gold for quite a while. I don’t know how he was expressing it. I think maybe just GLD but–
Tobias: He had the [unintelligible [00:38:52]
Tobias: Yeah, that was the first time he sort of came out as being more Austrian, which is why he can’t make money.
Jake: [unintelligible [00:39:01]
Tobias: I think it’s interesting that, of all of that group– so Ackman is still doing very well, but I don’t think Ackman– Maybe he wasn’t around as early. I just remember Einhorn and Loeb from the early 2000s.
Bill: Ackman was around. He was asking questions at Berkshire in the late 90s [crosstalk] Ack Attack for sure.
Tobias: No, sorry. I know he was around. I just mean, he wasn’t as well — from my recollection of the early 2000s, it was Einhorn and Loeb, were the kind of the guys who were–
Jake: Well, Ackman, he had to crash that first fund and wipe out all those– [crosstalk]
Bill: How dare you speak badly of Bill Ackman?
Bill: Jake, come on.
Investors Should Be Studying Dan Loeb
Tobias: But Loeb had a spectacular first decade of the millennium. But then, he’s had a spectacular second decade of the millennium too. Loeb is the one that everybody should be studying. But I don’t know if there’s– I don’t really know what he’s doing. I don’t know what he’s doing that’s so distinct from what everybody else is doing.
Jake: Yeah. Where’s Loeb on the whole– if you have to buy three managers or whatever, you never see Loeb in the conversation.
Tobias: He’d be close to the top of my list, I think, unless he’s just about to have a big reversal but it looks like if we go into an environment like the first decade of the 2000s, he’ll probably do very well. If you go into an environment like the second decade, he’s still going to do okay. I don’t know what environment he doesn’t do well.
Jake: If he’s still maintains activists and you have all this debt on all these companies that threatens their survival, he’s going to have a pretty target-rich environment maybe over the next 10 years.
Tobias: He’s more of a lazy balance sheet guy, rather than an operations guy. I don’t know.
Jake: I thought he’d just write a bunch of nasty letters, threaten the management and talk shit about their moms.
Tobias: I think he’s sworn that off. I think that he swore that off about a decade ago.
Bill: Talking shit about people’s moms, that’s like an old school thing. You can’t just swear that off. He might need that someday.
Tobias: I think he said he’s not going to do that. I think he said a long time– He started practicing yoga, and it’s not doing that anymore.
Bill: It’s not worth the return on brain drain. What do you get out of making fun of somebody’s mother?
Tobias: Well, the argument was like that these boards are so entrenched, and you can’t get a big enough position to kick them out. With all the poison pills, the only thing you can do is embarrass them into doing the right thing.
Jake: Embarrass them publicly. Yeah.
Tobias: And so, they were prepared to do that, and it worked. When they were younger, in their late 20s, they were doing that thing that you were talking about before where the left tail was truncated, and the right tail was pretty big. And the [unintelligible [00:41:30] take a swing.
Bill: It makes sense. Who is it? Is it–? Why am I blanking? Who wrote Dear Shareholder?
Tobias: Jeff Graham?
Bill: Yeah, that’s right. I wouldn’t totally follow him into something. But I like how that guy goes about his business. Last time I looked at Tandy, it wasn’t like working as a stock, but I think he’s– [crosstalk]
Tobias: It’s a net-net.
Bill: Yeah, I think he’s a smart guy and I think how he structured from what I understand– look at who he put on the board of that company. That’s pretty impressive.
Jake: That board way out-kicks its coverage, it seems, relative to the business. [crosstalk]
Bill: Why would you do that? You do it to get the right conversations going in the boardroom. He’s an interesting dude to follow.
Tobias: It’s an interesting board. I held Tandy before I launched my current project, so I don’t hold anything outside what I currently do but I do like Tandy. I think there’s– [crosstalk]
Bill: [crosstalk] –that inventory is money good. I shouldn’t say that because that’s like actually be like, “Oh my God, I don’t have to do any work.” You do. Do your own work, but that’s a good inventory base.
Tobias: Be sure– [crosstalk]
Jake: I’d join that board. What about you?
Bill: Yeah, if I could add anything.
Tobias: You don’t want to be on any boards. We’re getting to the time. Do you want to throw some–
Bill: Yeah, you can buy Tandy for, looks like one time– Oh my, whoa, dang that thing’s not expensive appearing optically. Wow. You’re buying it for a third gross profit which is quite a bit different than Peloton which is now 27 times gross profit but that’s old school thought. I don’t know, they probably got some fixed cost structure and they can’t open their stores and it’s uncertain. So, no one wants to touch it. Do your own work. I don’t know what I’m talking about.
Tobias: If you’ve got a question, throw them in. It’s quarter past the hour.
Jake: Let’s do it.
Tobias: One of the interesting things, that Oxy sale was interesting for Buffett, because that’s–
Bill: He still got the….
Tobias: Is that always sold– He’s just sold the common. Still at the press.
Bill: I’m almost certain, unless I my reading comprehension is garbage or I completely agree skipped over it, but I’m almost certain that he was just getting rid of the common.
Tobias: Do you guys have any strong views on tobacco?
Bill: Yeah, it’s super addictive and a great business.
Jake: Yeah, That’s like one of those holy grails if you had a time machine and you could just throw some money into one industry, that’s probably the one, might be the one you want.
Bill: If you’re running a fund right now and you’re trying to own ESG money, you can’t own tobacco. If you want to pitch your clients right now and tobacco stocks are getting killed and you’re saying, “I’m going down on a tobacco ship,” they’re going to rail you. Unless you’re like, what Lawrence Hamtil or whatever, who like actually has a well-thought-out communication strategy for why he owns that stuff and has probably prepped his clients appropriately. I can’t see any reason from a professional standpoint to buy tobacco other than you want to make money, which I think is a pretty good reason.
Jake: What do you guys think about ESG in general?
Bill: It’s total nonsense. It’s a fantastic marketing ploy. And I think that we should, as a society work towards a more collective ESG society. But the notion that finance is going to package up a marketing concept and do a good job with it that’s good for society is fucking laughable, in my opinion. When has finance ever not taken something too far and used it to sell fees?
Jake: I agree. If you have the management and the board thinking long term enough, all of that ESG stuff gets taken care of. You should be thinking about all stakeholders over longer periods of time anyway. So, it’s totally redundant to call it in some– right, to put it into some kind of package and then market it.
Bill: Yeah. [crosstalk] you go into some pension fund. They need to give money out the door. You’re saying you’re making the world a better place. They’re saying we’re making a world a better place. I saw some stupid ESG fund had tobacco in it. Get out of here. It’s nonsense.
Tobias: It could be a governance fund.
Jake: Just make a contribution to the human fund and move on.
Tobias: That’s the problem. The definition is just so wide. The [unintelligible [00:46:19] tough. The governance probably makes sense. Good governance probably does lead over time to better returns, but in the short term, who knows?
Bill: Well, like Schwab ESG.
Jake: That’s just your job as an investor. That’s not a special thing. Be a good owner.
Tobias: That’s an activist fund. An activist fund is a governance fund.
Tobias: What do you think about Buffett’s decision to sell WFC? Valuation based, managerial based?
Bill: Definitely wasn’t valuation based.
Bill: He has publicly supported that company for a very long time. That company institutionally let him down for like four years. The idea that he wants to still ride with them, it doesn’t shock me that he’s out. And Bank of America, I do think is going to be relatively stronger coming out of this crisis than they are. So, if he and Charlie are sitting there talking, I get why they’d sell it. I’m pretty sure Charlie didn’t because Charlie’s an OG of holding, but I get it.
Jake: Do you feel a little bit better about it now that you’re– you can be long as much as you want on your own with Wells Fargo and you don’t have to eat as much by owning Berkshire as well?
Bill: No, I don’t feel great about owning any Wells Fargo. Thank you very much. And I certainly don’t feel great about being on the other side of the Buffett trade. The other way I’d argue that is Russo and Buffett both capitulated out of that right now and they definitely–
Jake: Whose left to sell?
Bill: –didn’t sell at the top. I’m sorry if either of you listens to this in the off chance, I respect the hell out of both of you, but they both missed that thing hugely for four years. So, the idea that they’re right now is sort of– I can’t see how you can be that wrong and then when your sell decision is defaulted to be right based on reputation. Even the greatest miss stories. This is famous last words, I’m going to get waxed on this position. I fucking deserve it.
Jake: You mean the best bank analyst in history? [chuckles]
Bill: Yeah. Well, but look, he objectively missed it. That happened. I think something that’s interesting about it is, when it’s growing, it’s this compounder darling. And now that the scabs are actually out, no one can own it. Oh, it’s decentralized and an outsider CEO and promote from within and look at how they do everything different. That story with a buyback attached to it while it’s growing, is like you could sell that story to everybody. Now–
Jake: Remember [crosstalk] selling was a good thing?
Bill: Yeah, that’s the thing. It’s all, are we going up or are we going down? I think it’s a very good– and I don’t mean to be flippant about it because they have real problems in that organization and had, and they have to fire a lot of people that were at least complicit. And they have fired a lot of people that were complicit. And it’s not something to joke about because people did get hurt. But in the grand scheme of corporate scams, I’m not sure how bad it actually was. So, I don’t know. It’s just a good example of how people that come from the outside, even people that you think are super informed, don’t actually know what’s going on.
Jake: That black hole of information.
Bill: Yeah, and to think it’s not going on in other companies, that black hole of information is not elsewhere, is like asinine. Nobody knows what’s going on unless you’re in the room.
Jake: That’s what always shocks me about the certainty of all the I-know investors as if they are sitting inside of these companies and know what’s happening inside of them.
Bill: Even the board didn’t know.
Tobias: Even sitting inside the companies, you don’t know.
Jake: You don’t know.
Bill: The board didn’t even know the right questions to ask. There was like two board members that were raising the right issues and the rest were complicit. Why? Because they’re all paid and they’re yes men, and whatever. I think it’s classic, in a bad way.
Is OIl The New Tobacco?
Tobias: I’ve got a question here. Is oil the new tobacco? This is from Samson. He loves Tesla. So, I’m guessing that’s the source of this question. Is oil the new tobacco?
Bill: Well, it doesn’t have pricing power, so that’s going against it. It also doesn’t have a market structure, that’s basically lockstep. So, that’s going against it. And I don’t think it generates as much cash flow. So, that’s going against it. And it’s run by national governments. So, that’s going against it. I’m going to go with no.
Tobias: Jake and I talked about this a little bit last week. It’s funny though, oil was– we’ve only been using oil for like 150, 200 years max. We were pulling up dead dinosaurs out of the ground. So, there’s a finite amount of oil. Clearly, there is because we’re having to do increasingly heroic things to pull it out of the ground. So, at some stage, we have to transition across to more renewable stuff on nuclear or something else. I tend to think that you can’t let the market dictate those things. Oil just got very, very expensive and that’s the point that you transition across to the renewables. California at the moment is–there’s a big problem in California, we don’t have enough electricity because we’ve transitioned across to renewables. So, that’s a disaster.
Bill: Yeah, well, the idea that a low oil price is good for renewable energy is laughable. It reduces a lot of incentives for people to trade into an electric car.
Jake: Yeah, that whole idea that like, “Oh, that’s the market telling you that oil is dead.”
Jake: I don’t know about that one.
Bill: Yeah, we’ve been through these cycles before.
Jake: It’s going to take– well, I think I’m very optimistic that we’ll transition to probably solar, mostly. Solar and batteries and any EVs even, but it’s just probably going to take quite a while. And that’s okay. And I think we have enough reserves on the planet to get there. Hopefully, we get there sooner than later because it is asinine to take all of our old store sunshine, which is what oil is and then burn it to go get groceries or something. That’s relatively stupid. We need that for chemical feedstock. We need it for plastics. We need it for a lot of other higher uses eventually. But I think we’ll get there. If solar panels keep getting cheaper like they have on that kind of exponential curve, that’s going to be a great thing for humanity because it solves so many problems. Water is a huge problem. But it’s not if you have nearly free electricity. You just desalinate, which then allows you to grow crops in all kinds of places that you couldn’t before. So, I’m very bullish long term on that idea. But I think oil still is a reasonable thing for probably most of our lifetimes I would imagine.
Bill: Somewhere, the Phantom is pulling his hair out like these guys don’t know what they’re talking about with oil.
Jake: Could be.
Low-Key Superinvestor – Sardar Biglari
Tobias: Sardar Biglari, low-key the best super investor around.
Jake: Fact or fiction, is that what we’re playing?
Tobias: You’re the guy that can answer that question.
Jake: I’m going to punt on that one.
Bill: What? Come on, dude. You’ve got to have an opinion.
Tobias: Sardar is a very good investor. There’s no question about that.
Jake: I’ve studied him quite a bit and I’ve yet to find an investment mistake that he’s ever made.
Tobias: That’s high praise.
Jake: Not everything has worked out. But I’ve yet to find what I would say was like, “Yeah, that was just a clear-cut mistake.”
Tobias: Is the issue with BH that– it’s like a corporate governance incentive issue with the way that he’s paid. The apparent kind of– just complete dismissal of shareholders and shareholder concerns.
Bill: Tell you what, I think that that’s somewhat and I do not like going to bat for this guy, because I really don’t know him. But that one meeting note that I was at, he did something, and I don’t remember what the specifics were, but he did something really right for a shareholder that wanted to get out of his fund, and it wasn’t something that he had to do at all. I don’t know that he’ll treat his public shareholders in the same way, but he did not screw that person. So, if the thesis is he’s there to screw you, I’m not sure that thesis has a lot of merit other than feeling. That said, I don’t own it because I don’t really like the structure. But I do think that concluding that you know it is incorrect conclusion.
Jake: There’s a lot happening there because it’s a very complex structure and it takes a fair amount of time to wrap your mind around it. However, if you are a big Buffett fan and you believe in the 0/6/25 model, which a lot of guys profess to believe in, that’s really what Sardar has built inside of BH it’s a 0/6/25. So, I find it a little ironic when people who actually are running 0/6/25 model portfolios, bitch about that he’s getting paid too much as the CEO of Steak ‘n Shake. When it is all paid for performance, for the most part. [crosstalk]
What Is The Best Fee Structure?
Tobias: What’s your view on the 0/6/25? Is that a fair fee structure?
Jake: It’s unfair to the manager. That six is too high, probably.
Tobias: In the current market. Over the long run, that’s probably right though, if you can’t move it around.
Jake: Maybe. When Buffett started that, that was like the late 50s, and I think interest rates were like– that was the risk-free rate was 6%. Using that as your hurdle, it should be zero now, 0/0/25.
Tobias: How would you do it, the 10 year?
Bill: [laughs] If I give you anything more than your money back, I would like to take a quarter of that. Thank you very much.
Jake: Well, I mean, that’s like 2 and 20. That’s what that is. That’s even worse. It’s more egregious. Yeah, I don’t know what the right answer is there. Six is seems high for today’s world. Getting over 6% hurdle, if you believe Grantham and we’re looking at negative 5.6, as the headwind and you want to try to get over 6% in the other direction before you get paid, shit, that might be a tough road to hoe.
Bill: How do they build to their projected return? Is it multiple fade? Is it earnings declines? I need to pick this paper up. I like how they write. I like those types.
Jake: Yeah, it’s mostly [crosstalk] starting valuation relative to other time periods. How does that then project out if you have some reversion of the mean– a bunch of different parameters that tune the model.
Tobias: Another way Hussman does it, he assumes an underlying growth rate in the earnings, and he assumes that there’s mean reversion to average valuation multiples over about a decade. Plus, you get dividends on top of that. And so, you put all those together and it gives you an expected return.
Jake: It gives you a negative 40% expected return?
Tobias: I think it’s negative now, but it has been– it’s pretty easy to reconstruct that projection and run it through freely available data. I’ve done it many times, and look at how predictive it is. It’s pretty good and the times when it diverges are notable stock market bubbles, notable stock market top. So underpredicted 2000, the returns were better to the peak of 2000 and it’s underpredicted to today, but otherwise– you lag it 10 years, you have a look at, it’s pretty predictive.
Jake: Yeah, it’s unfortunately pretty accurate. [chuckles] It’s a bit of a Cassandra though I think because it’s always probably a little early, which makes it seem wrong for a long time, which then makes everyone dismiss it, even though eventually it catches back up with reality.
Tobias: That’s the view over the last 30 years because it’s been too– well, maybe not 30, maybe 25. I think it diverges in ’96 to date. Before then, Hussman points out a few times that he was quite bullish in the early 90s. And that was an unpopular view at that point in time because the market hadn’t done anything for a long time.
Bill: 25 years is a long time to be wrong.
Tobias: Not necessarily wrong though. The margins get stretched. He hasn’t been wrong the whole time. He’s wrong right now. He got 2000 right. He got 2008-2009 right.
Bill: Yeah, we’ll see. I don’t know. I wouldn’t be happy if I invested with them, which is probably exactly why I’m about to get my face ripped off.
Tobias: There’s two aspects. There’s how you express the view, and there’s the view. And the view is data driven. How you express the view is a different matter. You could just take the view that you’re not going to hedge it, you just say, well, we’re going to have ups and downs, it’s going to be nasty, brace for that. Lower forward returns, and you’d probably do quite well. Or you try and hedge it and you pay a price for that. There’s no–
Jake: There’s no free lunches.
Tobias: All investing is trade-offs, that’s just the trade-off that they’ve made. Folks, that’s it.
Bill: Well, if he’s going to be super right, then he’ll just like dunk on everyone that’s been dunking on him. He will have been right for the right reasons. They’ll have the standing to do such.
Tobias: I think he’s a pretty classy guy. I don’t foresee him doing that.
Bill: After all this hate, he should do at least one dunk round.[laughter]
Tobias: He might just point out that he’s right. He’d be alright doing that. That’s it. That’s time. Thanks, folks.
Jake: See everybody next week.
Tobias: See you then.
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