VALUE: After Hours (S02 E34): Dan Loeb On Strategy, Buy Now Pay Later $QVC, Cocker Spandrels

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

  • Dan Loeb On Strategy
  • Buy Now, Pay Later QVC & HSN
  • Cocker Spandrels
  • The Impact Of Protecting Your Downside
  • Should Telsa Buy $FCAU
  • Greenblatt’s Top Holdings
  • Discovery, Shark Week, And Deadliest Catch
  • Which Discount Rate To Use
  • Philip Tetlock And Forecasting

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

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Full Transcript

Toby: And we’re live. Tuesday at 1:30 PM on the East Coast, 10:30 AM on the West Coast. If you’d like to listen to it live, if you’re hearing this on the podcast, you can go to the YouTube channel, and if you sign up to the site, you get a notification. Other housekeeping matters, sorry for all the ads. We’re not putting them in there. I’m not jamming them in there. YouTube says they’re mandatory now. So, mid-roll ads. I think they’re trying to force everybody to pay for YouTube. If anybody’s got a good suggestion for something else we can do, I’ll happily take that suggestion, but at the moment–

Jake: Write your Congressman.

Toby: [chuckles] Write your Congressman. Remember to vote.

Bill: I’m not sure that that’s what they’re working on right now.

Toby: But it should be.

Bill: It’s true.

Toby: Big tech monopolies.

Jake: Fucking tech.

Toby: What’s happening, fellas?

Bill: Not much. What’s good with you guys?

Toby: Just looking at where we’re coming in.

Jake: Living the dream.

Toby: Calgary, Vegas, Spain, Madrid, Winton, Dublin, Auburn, London.

Jake: Currently, we’ve had the air quality here–

Toby: India.

Jake: –where I live for the last week, it’s like equivalent of Venus, I think.

Toby: Yeah, you can see it here. We’ve been getting this red sun, it’s spooky as hell.

Jake: Yeah, it’s rough. I didn’t love feeling quarantined with COVID, but not even be able to go outside now [crosstalk] feeling like you’re–

Toby: The good ol’ days. [laughs]

Jake: Yeah. I mean, it’s actually harder, not only not around people, but you can’t even go outside.

Toby: I’ve got to say, with this bubonic plague in California, there’s like quarantine because of this disease. All of these businesses are shut down, there’s riots in the streets, stock market at all-time highs. How do you feel about that?

Bill: I think stock splits are happening and math, so yeah.

Toby: That explains it then.

Bill: Two is better than one is what I learned today. And can’t say I disagree with that in almost every case.

Toby: That is true. Special guest today, we got Detective Jake Taylor from the Sacramento PD.

[laughter]

Bill: Who’s doing the intro?

Toby: It’s probably me.

Jake: I went last week, so yeah, I think it’s–

Toby: I’m assuming you want to go, Bill?

Bill: Not really, why don’t you go?

Jake: [laughs]

Bill: I did the terrible one we came back, and mine, it was awful. [laughs]

Toby: They’re all terrible. Welcome to Value After Hours. I’m Tobias Carlisle, joined as always by my cohosts, Jake Taylor, and Bill Brewster. Jake, what’s your topic this week?

Jake: We are going to be talking about investment spandrels. Maybe a new word for everybody.

Toby: A spandrel, yeah. I thought that was a kind of dog. But it turns out that’s not a dog.

Jake: Cocker spandrel.

[laughter]

Toby: What’s your topic, Bill?

Bill: I’ll tell you what, if people didn’t think that Wells Fargo was a quality business, Imma hit him with QVC this week, so don’t come at me thinking that I don’t look at some dog-doodoo [crosstalk] value.

Toby: You’re such a [crosstalk] you’re a compounder, bro. You’ve changed.

Bill: It compounds. Compounds the stress.

Jake: You’re going to pull your compounder card.

Bill: That’s right.

Toby: I’ll be talking about Dan Loeb. I got his most recent letter. The Q2 letter came out in August, had a read through, really great letter. Looking forward to chatting about that. Who wants to go first? Who wants to take the pain today?

Bill: Look, I’m just going to take a question real quick. Thoughts on Mohnish Pabrai’s investment in Seritage. I have no idea what Pabrai is thinking. I don’t talk to him. He doesn’t know me. I would just tell you that I’ve watched Eddie Lampert destroy a ton of value in those boxes. Yes, it was an operating business. If you want to take a swing, take it because you want it, don’t do it because Pabrai did it. That’s my advice. You got a tough real estate environment and a lot of people that know how to operate real estate have the same problem. So, I’m not sure that I’d bet on Lampert to pull that one off. It can work though.

Toby: I’ve got people tuning in from Guantanamo Bay.

Bill: Oh, shoutout to you guys.

Toby: Yeah.

Jake: Hopefully on the right side of the bars.

Toby: Thank you for your service. Aberdeen, Chicago, Melbourne, Bellevue. Thanks, guys. Boston. Good to see you all. Did anybody decide that they’re going to throw themselves– I don’t mind. I’ll go first. I’ll take the pain.

Jake: Yeah, let’s hear about Loeb.

Dan Loeb On Strategy

Toby: I’m excited about Loeb. I haven’t really followed him that closely for a while, but I’m a huge fan because Dan used to write the wonderful poison pen letters. When I first started concentrating on this stuff, these were the guys– Loeb wrote the best letters, and he got the idea from Bob Chapman who is an LA-based activist, I don’t know where Bob is these days. But he came up with the idea of sending the nasty grams to embarrass managers into doing things. Then to move to a long way on from there, he doesn’t do that stuff anymore. Still sort of does a little bit of activism though. It’s kind of an interesting– so I got his most recent letter, he makes some interesting points. And he’s just talking about his own strategy here, and I thought it was interesting. Sorry to keep saying that.

Jake: Was it interesting?

Toby: It was interesting. He says, “When investing in a quality or compounder company, it’s critical to find an entry point at which an investment is attractive, since most of these businesses trade at relatively high multiples.” So, he says, “Most successful activist investments have had these characteristics, but were able to find appealing entry points when they were changing positively in terms of quality.” And so what they were doing was he’d look for, “Basically, they’re looking for these activist event-driven situations that are quality companies where they can– because they have this event-driven focus, they have this unique window into the creation or evolution of a quality company since they’re often born out of corporate events or management changes.”

As I was reading, it reminds me a little bit of the way Buffett goes about these things. He’s looking for– and that’s his big aim exposition was basically it was a very good company, but it was in a crisis. And he thought, “If I can get this thing at a huge discount, I’ve got two ways that I can win here. If this thing recovers–” Sorry, this is what he learned from it. He didn’t think it prospectively. “When this thing closes that huge gap between the discount to what it’s worth and where it’s trading,” assuming that it survives this period, “Then you own it, and it continues to grow and compound after that.” So, it seems to me that that’s what Loeb’s doing.

I sort of slightly misspoke last week when I said he clearly crushed in the first decade of the millennium. He did crush it in the first five years of this decade. Second decade of the millennium, the last five years, he’s like every value guy, just been caught a little bit. When I read that first line of his, where he said– sorry, let me just pull it up. Sorry for the dead air. Folks are going to try and find us.

When investing in a quality or compounder company, it’s critical to find an entry point at which an investment is attractive. I thought, “Ah, there’s his problem. That’s why he struggled so much over the last five years,” because everybody knows stocks never go down. Stocks only go up.

Bill: He just needs to redefine attractive. I do think something that’s interesting is, a lot of people that I really respect will hold through periods of overvaluation, but they’re not interested in buying. It’s an interesting comment. Your Bears interview that just dropped, he mentions the same thing where if it gets a little stretched, they’re willing to hold on. I think Akre has said, “The problem with selling when you get to overvaluation is you don’t know that you’re going to be able to get back in,” so the pain of maybe a little bit of underperformance due to overvaluation is not the end of the world. [sneezes]

Toby: Yeah, I’m slightly coming around to that– [crosstalk]

Jake: Does that apply to Buffett and Apple today?

Bill: Yeah, I think it applied did Coke.

Toby: The funny thing is that they still get no credit for it. He’s getting a little bit– there are a few articles around now like what a great position, but Berkshire gets no credit for it.

Bill: Dude, people are starting to say what you’ve been saying. And it’s funny how now, this is the greatest trade ever is starting to come out. I’m like, “Yeah, Toby’s been saying this for like months.”

Toby: It’s been stagging, it’s gone vertical.

Bill: Yeah. I’m not calling the top until it hits $5 trillion.

[laughter]

Bill: I’m not. It’s a 1% per cash flow yield.

Toby: Is that what it is now? Or it is at $1 trillion?

Bill: No, now it’s super reasonable. It’s like 2.5%. You’ve got a long way to go, buddy.

Toby: Well, that’s two and a half times. Paul says he’s going to come out with something profound, which scares the living hell out of me. What do you mean? What are you going to change? Is he going to come out and say, “Guess what? I’m Austrian, and we’re going to try some higher interest rates for the [unintelligible [00:09:29].” That would be profound. What he’s going to come out and say is, “We haven’t been going at the inflation hard enough, we’ve got to print more.” How’s that different?

Bill: That’s not.

Jake: By the way, a listener pointed out to me about– there’s different scales apparently between trillion and billion. There’s like a long scale or a big scale, long scale, small scale. And I guess it’s a British versus American, whatever, but in there, a billion I think, could have been giga. We could have had giga dollars this whole time. And nobody’s been saying it. And now, we’re going to get into like peta dollars. Jay Paul really wanted to be revolutionary, he needs to start using those kind of terms.

Toby: Bigger words, yeah.

Jake: We need giga dollars. [chuckles]

Toby: That’s a scary thought.

Bill: I was listening to Peter Schiff the other day, and I noticed that every time I listened to him, I just get intense anxiety. And part of the problem is, I think he’s sort of on to something here. Now God forbid, I say that people are going to be like, “Oh, broken clocks are right twice,” but the problem is, if he’s right, we’re fucked.

Toby: I think he’s right over long term, and in the short term, who knows. It clearly can be pushed away from value. The divergence between price and value can take a long time to resolve. It’s for your grandkids to worry about, mate, but don’t worry about it.

Bill: I don’t know. I’ll tell you where it’s not. Where it’s objectively not is, and I’m in– It gets into politics. But what I find interesting is the data right now seems to support the idea that Biden has a pretty strong probability of winning now, whether or not you want to believe the polls is a different issue. So, you think tax rates are going to go up in that scenario, and then on top of that, further disparity in the wealth gap seems to increase political risk. Yet again, stocks go up. I know just get long for the win. But also, yikes.

Toby: In the Mad Max hellscape that follows on from all of this, at least you know that stocks are going to be up a lot, so you can’t lose.

Bill: That’s right.

Toby: Yeah, a new warlord Davey Day Trader, whatever he’s buying is going to work. Don’t worry about it. Make sure you’ve got internet connectivity so you can trade from your phone.

Bill: Yeah, that’s a good point.

Jake: Davey, he’ll be the one shareholder and then everyone else will be indexed. And they’ll just go off of what he’s doing.

Toby: Davey Day Trader runs Trader Town.

Bill: He’ll set the price.

Jake: He’ll set the price, yeah, for everything. And it’s always an uptick. So, back to Loeb.

Bill: Oh, yeah, that guy.

Jake: He’s had five years, is that accurate?

Toby: Yeah, I thought that of everybody, he avoided it, but I probably haven’t looked that closely over the last four years. So, he’s struggled– I think he topped out around 2016 and has drifted sideways since then. And you can see they’ve got a publicly traded vehicle. It’s just changed its name, but third point something traded on the LSE. They’ve done a little buyback. I guess they’re upset about the discount to NAV. Kind of Interesting.

Jake: The reinsurance, is that what’s publicly traded, like Green Lights? I might be wrong on that.

Toby: I don’t know. I want to say that it is, but they’ve changed the name. So, I don’t know exactly what it is now. It could just be a closed-end fund. It might just be funneling money back into the partnership. I guess there’s no– actually, I don’t know, people should look at that themselves. But it is publicly traded, so you can buy it and there’s an OTC ticker over here as well that I found when I was looking, which is why the letters are publicly available because the letters are posted on Seeking Alpha, which is unusual for a lot of these guys that letters don’t get out into the wild, but his do. Very clearly written– I think, like Ackman’s closed-end fund, it’s probably one of the better at the time when it was trading at a big discount to NAV and he was kind of at his low. That was probably a good trade. I think Loeb is at his low ebb and big discount to NAV and they’re doing something about it. So, it’s an interesting position to look at.

The problem is that I just think there’s so much stuff out there right now that it’s hard to pick any one thing over anything else and I’d rather just stick to my own process at the moment.

Jake: Yeah. It’s fair. You know what the biggest position is in there? What kind of stuff is he even in?

Toby: Damn, that’s a good question. He’s talking about some of his older positions.

Jake: I’m giving you an F on your homework for this.

Toby: I’m not trying to replicate.

Bill: [crosstalk] I like that Loeb guy.

***

Jake: Yeah, exactly.

Toby: I’m not trying to follow him into this stuff. I’m just interested in what his strategy is.

Jake: I’m just curious what he thinks is a quality that’s turning point for some corporate action. Is that a stock split, that’s the corporate action he’s talking about? [laughs]

Toby: Well, if he’s not, that should be on the list.

Jake: Yeah.

Toby: All right. I think we’ve flogged him to death.

Bill: The thing that stinks about Apple up here is the buybacks just don’t juice it like they used to.

Jake: Yeah. It’s tough.

Bill: It’s like, man, that’s not the most exciting. Now, I’ll tell you what, if they did a special dividend, I’d get super amped. I’d have mad respect for Tim Cook if he did something like that.

Jake: That’d be outsiders.

Bill: Yeah. If they’re like, “Yeah, it’s a little stretched now,” that would take some sort of acknowledgement that maybe your stocking can get stretched, that probably will never happen. And maybe it’s not. Maybe there are people out there that– I just said $5 trillion when I call the top, so buy it in now.

***

Should Telsa Buy $FCAU

Toby: Let’s talk about a stretched stock very quickly. Tesla, I think it’s like bananas stretched in this market.

Jake: Never heard of it.

Toby: And I think that when–

Bill: What do they do? Do they mine gold off asteroids is that what they do?

Toby: They sell carbon credits–

Jake: Equity.

Toby: –that they get from other car companies, that’s where all their profit comes from. But at some point, when that company cracks this whole thing, by the way, that’s the end game for– [crosstalk]

Bill: Oh, these are famous last words.

Toby: It hasn’t cracked yet, but when it does, the whole thing is over.

Bill: This just in, value guy gets pissed off, says Tesla is the key.

Toby: I’m not pissed. Do I look unhappy?

Bill: [crosstalk] I’m kidding.

Jake: Ultimate short.

Toby: I don’t understand from their perspective, an interesting trade, why don’t they go and just issue stock and buy Fiat for stock? Then, you get massive– lots more production, lots of brands. Turn all that stuff electric, that’s game over for everybody else if that happens.

Bill: Maybe they just don’t want a shitty car company.

Toby: Well, I’ve got one, so.

Bill: That’s true.

Jake: Yeah, take a look at that balance sheet. And imagine what you could turn all of that equity into from someone else’s balance sheet. I question all these like– Elon is a genius, 4D chess comments if he’s not doing something like that, honestly.

Bill: But dude, we’ve been wrong forever on that stock. So, I don’t know why anyone would actually listen to us. What I would tell you is forget about Fiat, they should go out and buy Volkswagen because that has some dope brands, and if you could do like Bugatti and Bentley in electric, that would be pretty sweet.

Toby: Get yourself a– [crosstalk]

Jake: You’ve already got the brand in Tesla at this point. What you need is like actual productive capacity.

Toby: Yeah, that’s what I’m saying. Get the capacity, turn them all electric. Stick those brands on co-brand or powered by Tesla, something like that. Put a little ‘powered by’ sticker on the car.

Jake: Ram Truck by Tesla.

[laughter]

Bill: Maserati is pretty good looking.

Toby: Yeah, the Ghibli, those are nice cars.

Bill: Yeah, that grill is mean. The problem is the engine sounds so awesome. You turn it electric, it’s like you lose something out of that.

Jake: But we can make that with a microphone or a bullhorn that’s inside the car and have it make noises.

Bill: I’ll tell you what, my dad’s like a big car guy. He sends me all these reviews. All of the reviews on the Fiat portfolio of cars are just atrocious.

Toby: Are they really?

Bill: Yeah, just horrible.

Toby: What they need is someone who knows how to make pretty cars then. Tesla’s swoops in, tells them how to do it, fix up that– use that production line. Tesla’s still got to build factories. They’ve got to build factories [crosstalk] they got factories.

Bill: China’s doing for them. At least according to Montana Skeptic, shoutout to you. [crosstalk]

Jake: A simple [crosstalk] would tell you that, do you buy it right now or you build it. Maybe Fiat, that’s a buy-it situation.

Toby: That’s a good point. Maybe China builds them for free. Every time I talk about Tesla, we get a downvote.

Bill: Yeah. Well, we admit that we don’t know what’s going on with the stock. You don’t have to downvote us.

Toby: I’m a fundamental guy. That’s what’s been holding me back. It’s the blue sky that I don’t understand. I freely admit that. The asteroid mining is just a little bit behind me. I always think if you go mine an asteroid, you’ve got to work out how you get the mining equipment up there. I guess that kind of answered that question a little bit in the Bruce Willis movie. You don’t send astronauts up and teach them how to mine, that would be too hard. You send miners up and teach them how to be astronauts, that’s the easy way around that. So, I’m glad we solved that problem.

Bill: That’s smart.

Toby: Michael Bay doing God’s work.

Jake: And what happens to the price of something when you introduce a huge quantity of supply?

Toby: When you split the shares, they go up. So, I imagine it goes up.

Bill: Yeah, I think that’s generally correct.

Toby: If you’re feeling particularly hungry, you get the pizza cut into a few more pieces.

Jake: That’s fair. I mean it works on my kids.

Bill: Oh, peep this. On a five-year basis, Tesla’s enterprise value forward, according to Bloomberg estimates, their forward EV to revenue is 5.5 standard deviations outside of the historical norm against their own valuation. Now obviously, it’s because people realized what they can actually be now and– [crosstalk]

Jake: So, you’re telling me there’s a chance.

Bill: 5.5 is a big number.

Toby: Everything’s a little stretched now though. Even Apple is at peak multiples.

Bill: 5.5, sir. That’s a lot of standard deviations last time I checked.

Toby: That’s assuming normal distribution.

Bill: I heard once you get to 3, you’re pretty outside of the norm. But what do I know? Anyway.

***

Buy Now, Pay Later QVC And HSN

Jake: All right. Let’s do Bill’s topic.

Bill: Why do you want to go there? Yeah, Apple’s 4.2 on EV to revenue basis. Anyway, yes. The beautiful QVC, the one that your grandmother loves. A John Malone spesh. We’ve got a little bit of Greenblatt special situation potential here. Let me bring up the–

Jake: Just checking all the boxes.

Bill: Yeah. So, in case you don’t think QVC is bad enough to own, why don’t we heap leverage on it. So, you’re looking at a $10 billion EV with $6.7 billion of debt, $1 billion of cash, 4.5 of market cap. You got $1.6 billion of free cash flow to equity. So, you’re paying $1059 a share today. For that, not only do you get all that debt, you’re going to get a $3 per share distribution of preferred stock yielding 8% for the next 10 years, and $1.50 in cash that should come back to you by the end of the year. The stub is going to be a super levered equity that I suspect they turned the buyback machine on once they proved out that the entity actually can survive.

Normal thing that people would say is, “Isn’t QVC a dying brand?” I would say that I have thought the same thing. I went to an Investor Day, two investor days ago, and found myself looking at all the men in the room when QVC– it’s curate retail group. When they were presenting every cable bro in the room was looking at their phone and not paying any attention. The only people in the room that were actually listening to the presentation was my dumbass because I thought it was actually kind of interesting and two women. So, I think it’s a little bit of an orphaned investor base.

And then, the stock has crushed people souls. 2017, it was an $11.7 billion company, today $4.4 billion. It prints a billion bucks of cash flow almost– I mean, not like clockwork by any stretch. But I mean, a billion is sort of where it’s been for a long time. It doesn’t grow. It’s really, really hard to get excited about. It’s QVC and HSN. You really want to get fired for owning that? There’s a lot of reasons to avoid it. I also think it could be–

Toby: Can you just run those numbers again? What’s the EV?

Bill: $10.2 billion.

Toby: You get one free cash flow for that?

Bill: Yeah, but COVID has been a major bump to them. They printed a billion in free cash flow in the first six months. So, if we’re locked inside for another six months, you do have a super levered consumer discretionary staring down what could be a pretty bad recession and is likely to be. If I was going to say–

Jake: How bad does granny’s wallet lighten up here over the next three years?

Bill: I don’t know. It totally shocked me though. I’ll tell you what was like pretty surprising–

Jake: I mean cash sweaters are not going out of style. So, you have that going for you. [laughs]

Bill: Obviously not.

Toby: It can’t be disrupted.

Jake: Undisruptable.

Bill: I think that’s crazy. So, according to Bloomberg, sales in 2006 are $7.3 billion, sales in 2009, $8.3 billion. The sister entity that they– I’m going to try to do this without covering up the camera.

Toby: No, do it, it’s funny.

Bill: [crosstalk] I learned last time. And here we go.

[laughter]

Bill: I was looking up HSN because they acquired that in an effort to do synergies. You’ve got revenue of Home Shopping Network in 2007 was $2.9 billion, in ’09 was $2.7 billion, ’10 back to $3 billion. I don’t know, man. It’s a screen-based shopping network. They’re going to have to buy stuff on Facebook so that they can get traffic. But it’s a lot more resilient than I think people give it credit for, and I wouldn’t be totally shocked to see this stock a whole lot higher down the road.

Jake: Does cord cutting cut into that idea?

Bill: Well, so you don’t have the embedded– the part of the Xfinity platform that has apps. QVC actually has a very good product placement and I just got a Roku box. They actually feature QVC relatively prominently. I don’t really see why they couldn’t buy Facebook ads. Facebook’s the taxman of the internet, but I think that really your core competence that you’re betting on is some sort of screen-based curation factory. And they have like super fans, which I know sounds really fucking weird, but it’s objectively true. There are niches in the world that you can make money in. The biggest knock from my perspective is how are they’re going to grow. They don’t grow. They think they could get $400 million of synergies in the next two years out of this HSN integration. We’ll see. But if they do that, then they can buy back shares. It could be interesting.

Jake: [crosstalk] –that do? How much time do we have on this? We got a while?

Bill: Oh, it’s pretty laddered. Some of the weird stuff that you got to get your head around is like, you got maturities in ’22, $500 million of maturities. They’re going to need to refi some maturities here, but I don’t think the debt market has demonstrated that it’s closed to anyone. So, I think they should be able to push them out. The weird thing though, is Malone called–

Jake: CC 2007.

Bill: Well, Malone called the top in 2000 and 2001, and they issued a bunch of these convertible, exchangeable debentures, and they could be settled with Sprint and Motorola shares. When you’re going through and doing the research, you’re going to see these wonky debt things that are tied to curate and you’re going to say, “Why does this exist?” His 2001 shareholder letter actually tells you exactly why. They just straight up called the top and TMT, and issued a bunch of debt and got 30-year paper and eventually that stuff comes due. These guys are smart. They may overengineer things for a lot of people but they’re pretty intelligent.

Toby: Got the comment of the week here from James West. Can I buy it in seven easy payments of $9.99?

Jake: [laughs]

Bill: You only need one easy payment, dude. It’s $10.50 cents a share. Plus, maybe they’ll split the stock. Boom.

Toby: Wolfflow says, “Just pick up your phone and call your broker now.”

Bill: Look, I’m telling you it stinks. But you came to a value podcast.

Toby: Yeah, we’re still talking mispricing series, unpopular as that is. [chuckles]

Bill: I am saying that it’s mispriced. I understand– Look, it’s not ever going to trade at a 5% free cash flow yield. I get that, but I mean, it’s pretty deep. And the more it’s doubted, if they can continue to perform, they’re going to buy in a ton of shares, there are ways that you end up with a pretty good outcome on this.

Toby: I’m not disputing it. I think we should–

Bill: I [crosstalk] it. I own a tiny amount, that’s the disclosure. I’m pumping my book a little.

[laughter]

Toby: I think there should be more discussion of mispricings. Everybody’s talking about it. What’s the best business? That’s not the game. The game is what’s the most mispriced business?

Bill: Well, the interesting thing– [crosstalk] I mean, I get why it’s hated. And I’ve tried to figure out why does this thing trade where it does, and I just keep coming back to and maybe it’s a story that I tell myself, but like in the Momo world, you really want to call your clients and say, “I own QVC and HSN on your behalf.” You’re a manager that’s getting the shit kicked out of you and you’re going to be like, “Alright, I’m going down with the QVC ship.” I don’t know. That’s tough.

Jake: Wait, you didn’t buy FANG, but you bought this?

Bill: That’s right. Yeah. And then you’ve got to be like, “Well, Malone’s genius.” And then the client’s like, “Well, who the hell is Malone? I’m talking about Zuckerberg.”

Toby: “Can I meet that guy? I want to invest with him.”

[laughter]

Toby: [crosstalk] –with you.

Bill: That’s the point, here it is. [laughs] If they don’t grow and the multiple doesn’t grow, how do you earn? They’re giving you 45% of your cashback. This is the point. It’s not a cigar butt that you’re just waiting for [unintelligible [00:29:19]. These guys understand getting tax advantage distributions back to shareholders. They even said– I’m not going to pump and dump, shut up. Anyway.

They said we’re doing this also because it’s tax advantage probably to do it this year. This is a management team that understands extracting capital, which is not a typical, I think, pitch. And then the other thing is, they’re going to buy in shares. So, on a per-share basis– which I agree is not as valuable as growing the top line. You might have to sell it. It’s not one of these one-decision stocks. But you want to [crosstalk] or do you want to make money, you nerd?

Toby: Can you just clarify, is it Carl Malone or Post Malone that you’re talking about there?

Bill: All the Malones. They’re all together.

Jake: [laughs]

Bill: Funny enough, Post Malone helps LSXMA. So, anyway, all part of the Liberty family, folks. Keep it in there. Look, I’m not trying to die on the QVC sword. I’m just telling you. I think it’s an interesting special situation. If you like Greenblatt, it’s something I think you should look at. If you like good management teams, this is a good management team. If you like stable cash flows, I’d argue that they’re so much stable. I get it’s not sexy, go elsewhere for that.

Jake: Is that the quilting needle that you want to die on?

Toby: [laughs]

Bill: Yeah, dude. I just ordered my stuff. I do think it’s sort of funny. I found myself I need a new toothbrush and I was like, “I wonder if QVC has it.” So stupid.

Jake: Oh gosh.

Bill: I would never do that– [crosstalk]

Jake: Is that where you got that shirt from last week? [laughs]

Toby: With QVC, do you have to–? [crosstalk]

Bill: Don’t come at Tommy Bahama like that.

Jake: [laughs]

Toby: Do you have to sit there until the toothbrush comes on? How does that work?

Bill: No, you go on the website, you can buy it on the website.

Toby: Why would you do that? Rather than just looking through Amazon or something like that? Serious question.

Bill: I don’t know why anyone uses QVC., But I’ll tell you why because there are people that like their product. Why do people do anything with anything I like?

Jake: Yeah, it’s a curation.

Bill: It’s got [unintelligible [00:31:31] share. I think people like sitting there and watching screens. I don’t understand why people do half the shit that they do. But the fact of the matter is people do it.

Toby: Is this true? Brad Schultz says, “Tell your investors it’s the Malone guy who owns the most US land of any private investor.” Is that true?

Bill: He might. Yeah, I mean he’s up there for sure. I don’t know [crosstalk] Ted Turner. Yeah. Malone’s a monster. People who don’t know about John Malone are idiots.

Jake: [crosstalk] so maybe.

Bill: I mean, not that they’re idiots but they just haven’t studied it enough. Malone is a monster.

Toby: Malone is well known in the value community but most people who aren’t investors would be like, “Name an investor,” they’d probably say Buffett, they might say Buffett. I don’t think that they’d be able to name anybody else.

Bill: You watch Malone talk– [crosstalk]

Toby: He’s gone past Turner. There we go.

Bill: –how he starts to talk about how he views scale and how he thinks about strategy, that guy, I’ve learned probably as much from him as I have Buffett, but he’s not as well known. [crosstalk]

Toby: Where do you got to learn more? What’s the best source?

Bill: He’s got this talk on YouTube, that’s about two hours. I’d watch that.

Jake: Cable Cowboy.

Bill: Yeah, the book, Cable Cowboy, is really good. The old TCI annual reports are pretty good. There’s some Liberty Media letters that are floating around. It’s all good stuff.

Toby: Should Amazon buy it?

Bill: Sure, if they’re going to pay it higher than the current share price. What do I care?

Toby: All right, let’s [crosstalk] do cocker spandrels.

***

Cocker Spandrels

Jake: All right, veggie time. In architecture, imagine a doorway and imagine then an arch that sort of connects that doorway. And it creates two little triangles basically. And those triangles don’t exist for any real good reason other than the fact that the things around them create them. It’s almost via negativa. That is called a spandrel, that little area. Architects have taken that and done little designs in there, just to dress up a doorway or cathedrals, things like that.

Well, that term was borrowed then by Stephen Jay Gould and Richard Lowenstein in this 1979 paper, it’s actually about biology, and what they’re explaining there, and I’ll give you the definition their version of spandrel is. “It’s a phenotypic characteristic that’s a byproduct of the evolution of some other characteristic, rather than a direct product of adaptive selection.” So, it’s basically some characteristic about an animal or a plant that has come about as a byproduct of other adaptive pressures.

For instance, we have one– actually, the human chin is a spandrel, in that our faces push back in somewhat based on dietary changes, and it left this little chunk of bone that’s sticking out down at the bottom and now that’s why we have chins. There’s no adaptive reason to have a chin, you’re not using it to defend yourself or like scoop up ants out of a colony [crosstalk] or something right. It doesn’t convey any advantage.

Bill: We’d all look weird without a chin. It’d be weird to– how would you mate without chins? I think it’s a sexual thing. I think it matters. You don’t want a no-chin person to have sex with. Well, that’s my theory.

Toby: There’s a relationship to the chin and hormone that humans are very good at identifying. Excess hormone, not enough hormone.

Bill: Long chin, no chin.

Toby: Yeah, more chin is more dominant, more hormone, which you would know. If you look at big dominant guys who’s got big square head, that’s the characteristic– that’s one of the things that people are looking at. They tend to be in leadership positions. I like the idea of the spandrel, and I like Stephen Jay Gould. I always get a little bit nervous though when people say there’s this thing that we’ve identified and it has no use. What that says to me is, we just haven’t figured out yet what the use is. And so, I get a little bit nervous when I hear them saying, “There’s no reason why we have this thing.” Let’s just pull it out and then you discover a few years later, oh, no, wait, that thing controlled this part of your biology, which was this part of your physiology, which is really important.

Jake: Right, your appendix being a good example of that, where I’ll take that out, it doesn’t matter. Well, it turns out it was a bacteria breeding trap that was helpful for digestion.

Bill: Is that so?

Jake: I believe so. Another related term to this is called exaptation. And what that is, it’s a characteristic that enhances fitness, but it wasn’t built for that originally by natural selection. So, the classic example that Gould uses is a panda’s thumb. And you may not know this, but a panda’s thumb is actually an outgrowth of their wrist bone and their thumb actually slid into become like a finger. And the reason that we know that is the genes that coded for that wrist bone to then become an opposable thumb, also show up in an oversized ankle bone on the panda, because that limb growing that bone worked on all four limbs.

By the way, where I got all of this– some of these things are, there’s this fantastic series– and this is what’s so amazing about the internet. On YouTube– and so far, for whatever reason, I haven’t been murdered by ads on this one for whatever reason, but Robert Sapolsky, who’s a biologist, geneticist, I think, he has these lectures that are from his Stanford class that he teaches that’s called Human Behavioral Biology. And so, you get in there, evolution, genetics, ethology, natural selection, neuroscience, endocrinology, sexual behavior, aggression, language. All of these things explained by somebody who’s a fantastic lecturer. I would encourage you to go check it out if you have time. I’ve been working through the courses because there’s a lot of them. I’m taking Stanford classes, it’s actually from 2010, is when they were recorded, but probably not too much has changed.

Bill: Can I piggyback you real quick while you’re checking that stuff out?

Jake: Buy me dinner first.

Bill: Michael Sandel, I’m pretty sure on– No, Justice is a Harvard course that is on iTunes, I’m pretty sure. That thing is incredible. I think it’s one of the most popular courses at Harvard. So, there you go. You’re welcome, folks. Next.

Jake: There’s some legit great content out there that is free, and you can take it whenever you want. It’s amazing.

Bill: Dude, we’re producing it right now.

Jake: In real-time. [crosstalk] All right. To bring this back to our little world, our little man with a hammer investing, what are the spandrels of your investment process? What are the things almost unintended consequences, byproducts of your investment process? Now, I’m actually going to punt a little bit this week. I’m going to give a couple of them, but I kind of, one, had been doing an experiment anyway to see– I know how smart we have as a listener base. I want to see what things they come up with from their own processes and please tag me on Twitter and tell me what your ideas came out from this. But for me, let’s say, if you were a pure quant, just price to book, Fama-French type of investor, which I think all of those–

Toby: You’re going extinct.

Jake: [crosstalk] Yeah. But what would be a possible spandrel of that? My mind went to– it’s quite possible that you ended up with industry concentrations, probably more cyclical–

Toby: You end up with a little leverage.

Jake: Yeah, debt-laden, all these unintended byproducts that maybe– you originally are just like, I’m looking for the biggest margin of safety of accounting value assets versus the price that I’m paying. And you end up with all of these other little spandrels that you may or may not be aware of. Another one, let’s say that you were a pure momentum trader, what would be a spandrel for that? You may be without realizing it, involved in, like carry-trade type of situations. These self-reinforcing phenomena.

Another one would be, if you were purely a qualitative, pure quality investor, like you’re just looking for the best businesses, it’s quite possible that you would maybe falling prey to some halo effect of management. You just love this guy or this management team, price doesn’t really matter. Or even you might also get some industry concentration as well. If you were looking at, who’s got the most persistent returns on capital over long periods of time, CPG tended to be those type of businesses.

So, without even trying to end up as a consumer products good investor, because of what your process was, you sort of end up getting there anyway. So, anyway, I want to throw that out there for– you guys can start if you have any spandrels in your own process, but I want to see what our crowdsourcing could produce for this one.

Toby: The most obvious one for value guys like me, for deeper value guys, is you end up being short growth a little bit. You tend to be– I can just look at my own portfolio, I can tell you that the top line in the portfolio grows about 6% across all of the companies on average. The bottom line grows a lot faster than that because I do a lot of buybacks. But then, that’s the problem.

Jake: That’s good.

Toby: That’s a bet that I take eyes wide open, mind calm and relaxed. I’m doing it on purpose. Most of the time, that’s a good bit, hasn’t been a good bit recently, goes through long periods of time where it’s not a good bit. But what most investors tend to do is overpay for growth. So, I’m always tending to underpay for growth, is what I’m doing. But I’m short growth, [crosstalk] yeah, trying to pay less than growth.

Jake: 6% though. That’s like two times GDP. That’s not bad.

Toby: Yeah, but what’s real inflation? I would guess it’s probably a little south of real inflation, which is probably why it’s getting punished at the moment.

Jake: Could be. Wearing a tinfoil hat to make that claim?

Toby: Yeah, a little bit but that’s true. That’s exactly right. That’s one of the things I’ve been think about a little bit.

Jake: [crosstalk] cocker spandrel.

Bill: I don’t know, the stuff that probably keeps me up at night a little bit is the amount of leverage that I have in my portfolio. But I’ve outsourced a lot of that to Liberty, and I think they’re pretty good at managing it. So, that’s probably my spandrel.

Jake: Could you say that maybe that unintended spandrel of that might be that interest rates going from 15% in early 1980s to 0 today is a big– you’re just betting that the same trend has gone– You’re making an implicit interest rate bet often in that situation, especially if you’re worried about rolling over that debt.

Bill: Yeah, I think that’s a reasonable question to ask. I think that’s what they’ve done. But yes.

Jake: Let me rephrase it in a different way. How many guys have gotten incredibly rich based on borrowing money that kept getting cheaper over the last 40 years?

Toby: That’s been a good strategy. Almost everyone.

Bill: Yeah. I guess that when you look at what they do though, that’s not– the reason that I believe– this is my thesis and I think it’s supported by facts, but I don’t want to hold it out as a fact. I think the reason that they’re so comfortable with leverage and what they do is when Liberty Media was spun out of AT&T, it was basically just like a hedge fund. It didn’t really have a lot of operating businesses. So, in order to get cash in the door to make other acquisitions, they needed to do things like use collars and issue debt against stock, and I just think it became part of the ethos of how they operate their business. It’s so different than how Buffett looks at the world. I think that somebody like TransDigm, you could maybe say– their leverage target has crept up over time as rates have gone down, so it’s super hard to argue that they haven’t been helped. I don’t know what the answer is. I think Liberty is more than just benefiting from rates. I think they are exceptionally sharp at debt. As do I think 3G is good at debt, not necessarily managing a brand. Don’t come at me, folks.

Toby: Got a good one here from Jerry Maitland just reminding of something from last week. Value has too much left tail protection and shorts the right side. I do agree that value guys just tend to be a little bit too conservative. I don’t know necessarily that that’s– maybe it’s a spandrel, I don’t know. But I think about guys like Tony Deden, Edelweiss. They’re explicitly acknowledging the fact that a lot of the capital that they get is some families, the bulk of their capital and they don’t have any capacity to make more. And so, their idea is, we’re just not going to blow up the capital. We’re going to try to get you like a small real return on top of that. And that’s where I am. My main focus is just don’t blow it up, and then try and get a good return on top of that. So, yeah, I’m guilty of that. That’s fair.

Jake: Yeah, I would say that there’s a little bit of– that’s 10 years bull market talking a little bit too. All of that protecting the downside, that message gets watered down every tick up that we’ve experienced. But on the other side of that, there will be a day where that is an important characteristic as well. Maybe not in our lifetime.

[laughter]

Toby: That’s what I was going to [laughs]

Jake: Our kids, someday [crosstalk]

Toby: For my grandkids.

Jake: –the downside.

Toby: No child can understand that. Child’s like, “This is old stuff, you’ve got to swing for the fences.”

Jake: YOLO.

Toby: That’s it. You’ve held us back. All right, throw your questions in, we’ve got 15 roughly to go.

Bill: That would be my one beef with Berkshire, and I’m not trying to go with the King. I get it. But I don’t know why he hasn’t owned more Costco. I don’t know why he hasn’t owned something like Google. I get Microsoft, he was sort of conflicted out of. Some of it’s underappreciating the right tail in something like Google, but Costco was directly in his wheelhouse. And with that much cash, it’s kind of hard for me to understand– I don’t understand the precision of really–

Jake: Charlie– [crosstalk]

Bill: I know he didn’t, but that’s my point. Once you’re at that size, I don’t know that it makes a ton of sense to me to wait for the cinch. Now, obviously, this is somewhat resulting. I get that. He’s dealt with these questions for a long time. I think that it’s a pretty sophisticated shareholder base, at least the people that aren’t asking the life questions. People have been asking him for a while, like, “Why don’t you do more levered S&P strategy?” Or something like that, at least with a portion of the capital, I think it would have been a better idea, but– [crosstalk]

Toby: If he’s doing S&P, just give it back, he’s not going to do that. There’s enough good stuff out there. He’s shown it with Apple. What have you done for me lately, Warren? Like today, this morning?

Bill: No, but that’s not it.

Jake: [crosstalk] 40% of our portfolio.

Bill: I guess the other way to flip that on its head is, it took Apple to have him keeping up right now. And if you’re going to run a strategy that depends on finding the biggest company in the world, then swinging as big as you can, I’m not sure that’s actually a viable strategy.

Toby: That’s fair.

Bill: I get that it works. But how many times does that work? By definition, it’s only been once. And he did it with Coke too, but you’re just going to capital accumulate waiting for a 25-year swing? I don’t know that makes sense. Dude, I get it. I’ve got a kid down there that screaming like he got murdered, I named him after Buffett. I’m all in on Buffett. I’m not trying to like take shots at him, but I do think that you need to– things need to more–

Jake: Swing– [crosstalk]

Bill: Yeah, well–

Toby: There’s lots of good questions here, guys.

Bill: He beat himself. Keeps swinging on Berkshire. There is a chance right now to buy in shares. I’m sure he’s doing it, but there’s deals out there.

***

Greenblatt’s Top Holdings

Toby: This came out of Acquirers Multiple Twitter account, tweeted this out last week, but Greenblatt’s top holdings, Apple, Google, Microsoft, Amazon, Facebook, more worried about the valuations of smaller tech companies. Any comments?

Bill: Yeah, it makes perfect sense to me.

Jake: That’s Greenblatt’s portfolio right now?

Toby: Yeah. He had 2% in Apple because I think– it’s quite a diversified portfolio, and I guess it’s gone up a lot. I remember it. That makes sense. I don’t know when the rebalance was, but it’s still a magic formula star portfolio if he’s creating at slightly different way.

Jake: That 2.5% earnings yield qualified into the top of the heap?

Toby: Well, he’s always holding them– because he’s got such a diverse– we don’t know what portfolio we’re talking about here.

Jake: It’s a S&P 500 I think but it’s weighted differently. [crosstalk]

Toby: He’s got a few. He’s got ones that are 1000, might be 500 positions long, 500 positions short, and he’s got some that are a little bit more concentrated. I assume, if it’s a 2% position, then it might be in this. It could be in 100 long-short, something like that. It’s a good list of names. I looked at them and I thought these are high-quality companies, I don’t know how. But that’s the magic formula element that pays up for the high return on invested capital is going to capture some of these things.

Bill: I don’t think that you can look at FANG and say this is patently crazy. I do think that some of these smaller names are — I’m wrong on this every time I say, so I should just shut up, but we’ll see how they do over time.

Toby: But this isn’t FANG. I don’t know how Netflix– It’s lucky that the acronym means that–

Bill: Okay, that’s fair.

Toby: I think that the FAAAVM is probably the– Facebook, Apple, Amazon, Alphabet, and then like Visa and MasterCard probably. And there’s some other ones in there too. If you were to list the best kind of businesses out there and not worry so much about the valuation, that’s probably what you come up with something like that.

Discovery, Shark Week, And Deadliest Catch

You got any thoughts on Discovery? I know it’s an Acquirers Multiple stock at the moment. DISCA.

Bill: Yeah, I don’t know. I made some money off that stock, but I don’t know that I want– I am not comfortable owning it, but I can understand why people would. It’s decent filler product. If you’re going to get a bundle built out whoever you are, I can understand why you would use their content as filler. But in a world where people get to choose whatever they watch all the time, it’s harder for me to understand why Discovery really is the one that I want to bet on. And I like Zaslav, but I think he’s fully derailed from my version of reality over the past two years.

Toby: What’s in Discovery?

Bill: It’s Discovery and then they did scripts, so you got basically HDTV, food network, you got the Discovery Channel. You got Greatest Catch– that gold mining show. I mean, it’s actually pretty addictive content if you get into it.

Toby: That’s good content.

Bill: Yeah, it’s not bad, and it’s super cheap.

Jake: Shark Week.

Toby: Shark Week. There you go, some of the parts, Shark Week gets you there.

Bill: That’s right. They built out a DTC product because they got some– I sort of forget where the geographies are now, but they have the rights to the Olympics in certain years. It could work. I don’t know.

Toby: What’s your concern?

Bill: I just don’t see how– the whole ecosystem is eroding under their feet and I’m not sure how they pivot. They have super fans. So, maybe what I’m saying about QVC applies to them. It’s just a little bit harder for me to understand how it does apply and how it can’t be replicated.

Toby: You think it tends to be more filler content that goes in with a bundle rather than something that someone’s going to actively seek out. Shark Week maybe but people aren’t seeking out Deadliest Catch or whatever.

Bill: Yeah, I think people just boob out on. And now when you have podcasts like this, I just think that there’s a lot more share of time to boob out. I don’t know that I believe fundamentally that wins. And if I don’t believe that personally, then even if the stock does well, I’m not going to realize the return because I would sell if there’s a hiccup, so it’s just not the entity for me to own.

Jake: All right. Next question.

***

The Impact Of Protecting Your Downside

Toby: I’ve got a good question here. This is sort of a little bit about what we’ve been talking about, but hasn’t protecting the downside tilted toward owning durable growth assets, given the precedent has been set that the US government and Fed is willing to pump $6 trillion into the economy during any economic event? I think that’s a million-dollar question.

Bill: Yeah, I tweeted that out. I said the equity risk premium should have been– has now decreased because we know that the Fed will bail out equity. But I don’t know. I’ll tell you what, it’s going to be an ugly, ugly, ugly scenario, if that’s the assumption and it’s wrong.

Jake: To just play that out a little bit further though, and let’s say, we actually got inflation, which I don’t know, one way or the other. But let’s just imagine we got 5%, 7%, 8% inflation, actually measured CPI. So, real life 2X that or something. Let’s say that happens, where do bond yields go? So, all of this talk about rates, bro, like if that has to come up at all. And now, how does that crush your whole thesis about like, “Well, I can pay 2.5% yield for Apple, but now rates are at 5%.” That 2.5% all of a sudden doesn’t make much sense.

Bill: Yeah, but they’re not going to go to 5. That’s the whole bet implicit in what I think that this question–

Jake: What if they have to though? What if inflation is 10%? You stay at 0?

Bill: Yeah.

Jake: Who’s buying that? Who’s buying negative 10% real bond–?

Bill: But, Jake, if they raise, everything is done, the entire game ends.

Toby: Is there any way that they lose control?

Bill: Run the debt service with interest rates at 5%, the Fed will do absolutely everything that they possibly can to not let that happen. So, the question is are you the one that can time when the Fed breaks? And I think that a lot of people have tried to do that unsuccessfully. So, this is sort of the treadmill we’re all on. And it’s why Peter Schiff scares the shit out of me when I listen to him because I honestly do believe logically it makes sense. I also agree that he’s been saying this for 10 years and he’s been wrong, and optimism pays and pessimism doesn’t, and I get all that shit. But I’m telling you, I just don’t think rates can go up because I think the whole system breaks.

Toby: In the grand scheme of the whole cycle, these cycles tend to be quite long, like 10 years really isn’t that much. That’s the only– But then equally that applies on the other side. I always think of James Montier’s paper about the era of financial repression where he said they tend to last like 30 years.

I think he wrote that, could be like a 2010, ’11, ’12 piece. And at the time, I thought, “Well, we’re probably 10 years into it now, we’ve got another 10 years.” I can easily see it going for another 10 years and then it doesn’t have to be 30. It could be another 10 after that. At some stage, you lose control of it though. It’s never going to be a Fed governor who comes in like– this is what every Fed governor comes in– Fed chairman comes in. Come in, stick the interest rates up, market falls over, learn their lesson. Never do that again. Interest rates back to zero to real rates and negative. They’ve all tried it.

Bill: Yeah, I don’t know. I guess the other thing is rates to me are a reflection of what people want to pay for something and there’s so much liquidity out there funding so much stuff that like– people’s hurdle rates are not very high right now and maybe that’s because of what the Fed has accomplished. But maybe it’s all a reflexive cycle, but I’ve said it before, I have this theory that like low rates and what we’re doing actually beget low rates. And Lacy Hunt says it much more eloquently than I do. But I don’t–

Toby: Does Lacy see an end to it? What’s his view?

Jake: There’s some, the End Game podcast that Fleckenstein and Grant Williams do. They interviewed him. He has something that he says if the Fed– if something changes in the Fed charter, then he thinks inflation could really come, but I don’t know enough to articulate what he says. People should listen that episode. He’s not betting on rates going up anytime soon though.

Toby: Well, Hoisington has made that bet. The Hoisington has been on that bet for 30 years, and they’ve been just consistently– rates are going lower. I just don’t know how much information is in it. But if he changes his mind, that’s probably significant. But if he just [crosstalk] is going where it’s going, then–

Bill: He said like, I don’t think he’s going to change it.

Toby: What was [unintelligible [00:59:20]?

Jake: He’s been lower rates for longer for a long time and then recently changed to he thinks inflation is coming, because it’s going to be taken out of the hands of the Fed because the government now is going to be the one– it’s going to be fiscal instead of monetary policy that drives it. I don’t know what any of those words mean, but it sure sounds good when he’s saying it.

Bill: No, I somewhat buy that. If you can get the money directly into people’s hands that start to spend it, then maybe you could start to see velocity change. Right now, the biggest problem that I see is, all the policy just inflates asset prices. The rich get richer and it never trickles down. The whole theory is broken in my opinion from a velocity standpoint. It’s just creating uber, uber wealthy people. So, that doesn’t really accomplish velocity.

Toby: There’s lots of great questions in here. I’m sorry we didn’t get to them. But I think we’ve run out of time, amigos.

Jake: We’ve got to do one more.

Bill: [crosstalk] macro too, as any financial pod must eventually.

Jake: It always happens.

Bill: We started out at QVC and ended up at macro.

***

Which Discount Rate To Use

Toby: But we’re talking discount rates and we’re talking duration. It’s one of the– when I had the conversation with Cliff Asness, that was the one thing that I was interested in because they just on the paper on the interest rates– I think it’s Tobias Moskowitz or somebody else, sorry for forgetting that, but they tested everything that they I could think of. That duration argument makes a lot of sense to me, but it just doesn’t seem to– you just can’t test it and show it. But I think it’s the question at the moment. What discount rate do you use?

Bill: I thought Bares was pretty interesting when he said that he used 10 and the reason that he did it was you try to see if you’re hitting the market average hurdle rate and then even acknowledged that might be a little bit high. But that was an interesting way to think about it.

Jake: What pencils out at a 10% discount rate right now?

Bill: [crosstalk]

Toby: I really enjoyed speaking to Brian Bares. He’s just really polite, humble, nice, easygoing guy. Super, super smart. When he said that 10%, and when I looked at some of the holdings, I was like, “I don’t know exactly how you get there.” But he’s running $4.6 billion and he’s been doing it for 20 years. So, I take my hat off to him.

Bill: Well, I think what he would say right is his analysis probably weights the back end of that cash flow stream more than you and I would be comfortable without doing his analysis. That’s pretty much what he says.

Toby: I think I talked to him a little bit about that, though. I said, “How far out he–” I think even at 20 years, it’s more impressive–

Jake: [crosstalk]

Toby: I could get there. But you’re assuming these growth rates that get to– I think I got a 37% growth rate for– I just forget which one it was now because it was the first one I pulled up. Could have been Workday or something like that. That’s probably not right, but it was something like that.

Jake: For 20 years, 37%?

Toby: Yeah, fair value.

Jake: That violates a lot of base rate.

Toby: That’s why he’s running the big bucks and [laughs] we’re doing a free podcast.

Bill: Yeah, they’re good at what they do. I’m not taking any shots with anything that they’ve done.

Toby: I’m certainly not.

Bill: I love listening to him.

Toby: I was learning a lot. I love talking to him. It’s funny, I think that he and Chris Bloomstran are very similar. And Chris is more of a value guy. It’s just interesting to contrast the two.

Bill: Yeah, they are.

Toby: Unfortunately, that’s all it’s–

Philip Tetlock And Forecasting

Jake: One more, what do you make of the– Phil Tetlock says– by the way, forecasting guru, has been in the science of forecasting for decades researching, says that anything past five years, you can safely dismiss as being completely worthless in the forecasting world and ignore anyone who says that anything about five years from now. I think about that a lot actually.

Toby: But you’re kind of compelled– you kind of have to have a view, don’t you? I don’t know. I don’t do it.

Bill: Well, what is it–?

Jake: [crosstalk] big bucks, Toby.

Toby: Yeah, that’s true.

Bill: Why can’t I think of it? Is it waste collections? What the hell’s that company name? Anyway, it’s like a local monopoly trash collection. I think you can reasonably forecast that for five years now. Yeah, it might be wrong. But if you’re wrong on that, you’re probably going to be wrong on everything. I don’t know. Life happens, so your model gets fucked up.

Toby: That’s time, folks.

Jake: Thanks, everybody.

Toby: Thanks very much. We’ll see you next week.

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