(Ep.93) The Acquirers Podcast: Alex TSOH – Science Of Hitting: Buffett-Style Value And Never Sell With The Man Behind The TSOH Account

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In this episode of The Acquirers Podcast Tobias chats with Alex, he’s The Science of Hitting on Twitter. During the interview Alex provided some great insights into:

  • Long Term & Concentrated
  • Early Investor In $MSFT
  • Why Berkshire Remains A Great Investment
  • The Pros And Cons Of Investing In Bank Stocks
  • Invest In A Way That’ll Give You Decent Returns, Even If You’re Wrong
  • $DIS’s Competitive Advantage Is Its IP
  • Strengths And Weaknesses Of $CMCSA
  • 40 Hour Round Trip To See The Oracle Of Omaha
  • Schwab CEO Walt Bettinger
  • The Bull Case For $QRTEA
  • $BKNG’s Pfizer Bounce
  • What To Make Of $YELP’s New Business Model

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirer’s Podcast. My special guest today is Alex, he’s The Science of Hitting on Twitter. We’re going to have an in-depth discussion about his portfolio. He’s got a really interesting mix of more traditional names and some growthier names in there. He doesn’t sell very often. We’re going to talk to him after this and find out why.

[intro]

Tobias: Hinton’s got some interesting ideas around risk management. I thought the idea that he’s unwilling to lose 18% in a 7% position, I thought that was an interesting way of putting– I think Hinton has done some really good stuff on exactly this kind of thing. Like, when do you double down? When do you had to double down?

Alex: Right. And that’s a big part of my personal evolution as an investor, for sure, is learning how to try to do that. I mean, I don’t know if I have learned how to do that properly, but it’s definitely something that’s cost me in the past and something that I think is incredibly important to long-term concentrated investing.

Tobias: What are the guidelines that you use? How do you think about it?

Alex: I mean, the guidelines that he kind of lays out are as simple as giving himself a certain percentage of the portfolio that he’s willing to put in. As things go lower, he can average down, but he has restraints on that and it’s basically quantitative, from what I understand. He has a risk manager that helps him with that. I think, for me, it’s more recognizing the situations that he calls out that are particularly susceptible to that risk, whether it’s financial leverage, operating leverage in the business. And the other notable one would be which Nygren talks about, the idea that the stock goes down 20%, your estimate of intrinsic value goes down, it’s more attractive. But those are the situations where they historically have looked and said, “These haven’t worked out well for us.”

I think in my personal experience, I’ve probably seen something similar. I do much better averaging down into something that is probably less company specific and more macro or exogenous in whatever way.

Tobias: So, like a March-type crash, where it’s not [crosstalk] specific to the company, it’s just everything’s on sale?

Alex: It’s less of those really crappy earnings, but the stock’s really cheap now as opposed to just being kind of cheap. I’ve personally struggled with those situations for the most part.

Tobias: It’s hard. It’s such a trap. I’ve seen so many guys who are in– cyclicals, in particular, when cyclicals go against you, who knows where the floor is in cyclicals? You just want to show that you’re right and catch that bottom. And they just become black holes sucking far too much of the portfolio.

Alex: Exactly. I’ve become a lot more comfortable with not having to show my conviction or my confidence through additional purchases, just being comfortable with the fact, “Hey, this was a 5% position. Now, it’s a 3%. And if it works out, I’m still going to do okay, I don’t even make it 6% today.” Yeah, I just think that that’s something else that for me is has helped a bit [unintelligible [00:03:16] I think about that.

Tobias: The other thing that Hinton does– another article that he wrote where he talked about, you’ve got the Losers Average Losers, that’s Paul Tudor Jones where he has that pinned up behind him and he contrasts that with–a lot of value guys will say that they do get most of it, they get a lot of their return from buying something as the market just doesn’t understand and it’s going against them. How do you weigh something like that?

Alex: Yeah, it’s a catch-22. I mean, I want to make sure, as a concentrated investor, man, that’s a big part of how I think about investing is, I want my ideas that are right to work. And obviously, the other side of the coin is that things that you’re wrong on will most likely hurt you. And I guess it’s partly how do you think about limiting that damage. For me, again, it comes back to– is the business really living up to my thesis? Is it actually performing well? Or is it that idea if it’s down 20 and intrinsic value’s down 10. Those are really where I struggle.

Again, I stick with positions that– Wells Fargo is a good example. I’ve owned it for a long time, and I’ve not absolutely crushed on it. I have not bought aggressively into where it’s at today, because I certainly see how it could not work out long term. At the same time, I still think it’s very reasonable here. So, it’s a meaningful position. It’s a balance of the two, I guess.

The Pros And Cons Of Investing In Bank Stocks

Tobias: Talk us through the Wells Fargo position. How do you see the opportunity at this point?

Alex: Yeah, so I think at its core that the thesis for Wells and for big banks, generally my positioning has expanded a bit to include a Bank of America, Schwab, in certain ways, it’s the same idea. Wells, BAC, JPM, they’ve taken significant market share over the past 10 plus years, some of it through M&A during the financial crisis, but also because the big banks are in a relatively stronger position relative to their competitors. So, the idea of having a low-cost very large deposit base is the starting point.

Wells has certainly had their own company-specific issues, which I think they’re trying to address and some of the government reports that came out in the last year or two really showed that prior management was not doing a good job at that, and they just completely fumbled the situation. So, I think Sharpe recognizes that and I think he’s done things that are intelligent. Probably most important to me, he’s brought in a number of people that if you go look at their resumes, they seem like they’re doing very well in life. So, they’ve walked away from situations where they’re in a good position and they’re going to have something in Wells Fargo that is widely regarded as a shit show.

[laughter]

Alex: But there are people who have worked with him previously. And I think that probably aligns itself to them viewing him in a good light. So, I think that’s very encouraging.

The other part of it is margins, net interest margins, which have obviously been significantly contracted due to rates. But in the context of a portfolio, which is something I come back to a lot on these– if my bank thesis doesn’t work out over the long term because rates never go up, I do wonder what that means for the rest of my portfolio. If cash flows are discounted at a lower rate for much longer periods of time than anybody anticipates– I guess we’ll see what that actually means for prices, but I think in the context of a portfolio, I’m still comfortable with the banks that I own and the size that they’re in. And also something that– I don’t know how likely it is, but there is also the possibility that over time the economic model changes, doesn’t have to be entirely dependent upon [unintelligible [00:06:54], the industry could change. So, we’ll see. I don’t know how likely that is, but I certainly don’t think it’s possible.

Tobias: And that’s the challenge that every time you talk about having a bank in the portfolio, somebody says, “What about interest rates?” Do you have a view?

Alex: Any view that I had would have been washed away now by what’s happened in the subsequent five years that I’ve probably been involved with banks than any sort of way. The whole idea of a completely flat curve is something that makes absolutely no sense to me, I don’t understand it. So, I would think/hope over time you return to something where if you lend money for longer periods of time, you’re actually compensated for that. But I could be wrong on that. I really don’t have any intelligent thoughts on stuff like interest rates or really most macro stuff.

Tobias: It’s hard to know. I’ve watched the 10 year pretty closely, and as we record this today, it closed at about 98 and it’s slowly crept up towards a point. I think it’s a reasonable proxy for the more traditional value stocks, seems when the 10 year gets crushed, more traditional value gets crushed. And the other end of the growthier names do quite well in that environment, I don’t have any view either, I just watch it closely.

Alex: Yeah. What was Munger’s comment a few years ago, “Anybody who thinks they know what’s going to happen with this an idiot, basically.” I mean, something they’ve kind of voiced times in the past, but I don’t really have any thoughts on where it’s going to go. But it would make sense to me that it’s closer to something like it’s been over longer periods of time, but we’ll see.

Long Term & Concentrated

Tobias: You own investment strategy– You quote Munger, but how do you characterize what you do?

Alex: I’d say in general, more than anything else, my focus is long term as a starting point and concentrated. So, as an example, if you look at my portfolio, the two largest positions are Microsoft and Berkshire. I’ve owned both of them since 2011, I believe, and they’re about 30% of my portfolio. If you look down, the other names in the top five, Disney, Comcast, and Wells. I received my Disney shares from owning Fox previously, but I’ve owned that for years, I’ve owned Comcast for years, and owned Wells for years. So, that’s probably the starting point is long term time horizon, which I think lends itself to– not a complete disregard, obviously for valuation, but it lends itself to businesses that are presumably of high enough quality to generate some earnings growth or a management team that will intelligently allocate capital if the business– if the organic growth in the business has been diminished, for whatever reason.

I think that second part, management, is something that I’ve become increasingly focused on over time because it’s funny, I always thought of that Buffett quote, “Any business that’s terrible basically doesn’t matter if you have a good manager,” and vice versa is the idea. I think over time, it’s funny to think back was Berkshire a good business in the 60s or the 70s? Most of becoming a good business was from good management. Think about Amazon and first-party retailing, it’s not a particularly good business, e-commerce, but a third-party business is a really good business, and AWS became a very good business. So, I think part of the idea is that you really want managers who are focused on the long term, that can intelligently allocate capital. So, I think about things like that. And then obviously, part of being long term is owning companies where the balance sheet is conservative enough to deal with issues like the pandemic or the recession, or whatever it may be. So, those are probably the underlying things that I think about most.

Tobias: As you earn more money, are you continuing to buy these portfolios? Are you allocating across the portfolio in proportion to the way that it stands now, or do you allocate new capital to new positions? How do you handle them?

Alex: I add to my portfolio highest and best use at that point in time. And obviously, a lot of these names are in taxable accounts. So, that obviously lends itself to a higher bar in terms of trimming or selling and things like that. But, yeah, as I add new capital, I just look at the next best idea. Looking back, if I’d had more money in Microsoft, that probably been the better move, but I did not foresee what has happened over the past 10 years, there was certainly a good amount of luck in there.

Early Investor In $MSFT

Tobias: You deserve some credit for being one of the unicorns who actually went and bought it in 2011 because I went along to all of those value investing congresses and it was certainly a thing that people were talking about at the time as being a good value. I just remember thinking, I get it, but it’s not that interesting, I think there are other things around that are more interesting. Little did I know it’s going to turn into this monster SaaS compounder over the next 10 years.

Alex: No, Microsoft’s trajectory from 2000 being the greatest thing ever, needs to be broken up to 2010-2011, this is a dinosaur, it’s not worth anything, these businesses are going to implode, to today where it’s kind of back in that 2000 light, that to me is probably the biggest lesson I’ve learned in investing and this idea that these businesses today that are pegged as being great and will be great forever, that idea is very flawed, in my mind. That is a very rare bird that actually stays great for 10, 20, 50 years. So, if you’re paying prices that imply something like that, good luck, that’s not a game I have any interest in flying.

Tobias: I mean you need some credit too for holding through that full period. As a value guy, when some of these valuations creep up, you get the urge– well, I get the urge to punch out and put it into something cheaper.

Alex: It’s funny, I think about sometimes, like the idea that trading is free or very cheap now is probably something that’s been a net negative for investors. This is probably an example of being forced to pay taxes, being a net negative, it’s certainly impeded my decision making at certain points. Also, they hired Nadella in 2013, who’s widely regarded now as a very good CEO. At the time when they hired him, it was not perceived that way. I don’t know if you remember this at all, they were going to hire someone internally and people were very upset with that. They wanted them to hire Al Mulally who was the CEO of Ford, or the former CEO of Ford, an old white guy. Instead, they hired Satya Nadella, who in the subsequent seven years has proven to be a very good CEO.

Anyway, as time went on– and I’m certainly not a tech expert by any stretch of the imagination, but over time, listening to him and looking at the company’s results and seeing where they were trying to go, it became more and more apparent that this was less of– I wrote an article and I bought it early on, it was called Microsoft, Price for Failure. Well, that story was going away.

But there was reason to believe it was becoming a really good business and that there was a bright future ahead, it was just what’s the fair price for that. And that’s an idea I’ve certainly struggled with along the way. As it’s gotten closer and closer over time, a lot of times I’ve come back to the idea that with a truly great manager and a very strong competitive position, and still a very conservative balance sheet, if the price isn’t at a level, that’s almost hitting a level that’s almost absurd. It just makes it really hard for me to sell. I mean, I would consider trimming, but this is something I let go very slowly if I was going to sell it or more give it away, try donating shares or whatever else so I don’t have to pay taxes myself. It’s too painful.

Tobias: It’s been funny because the thesis in– I don’t remember exactly when– I think it was 2011, 2012, 2013, somewhere through that period. The thesis was not this is going to become a software as a service, subscription service compounder.

I think that the revenues– I forget exactly, but when at the time that people looking at it, the revenues had actually come off, it was one of the very rare periods in Microsoft’s whole history where revenues backed off. I think people might have thought, “Well, I guess that’s game over now. It’s not a growth company anymore. Maybe it’s transitioning to a value company.” I know that growth and value are joined at the hip, don’t have to remind me, but in thinking about what company it was becoming and then value guys pitching it, it just wasn’t clear that it had this monster growth embedded in it.

Alex: Yeah, I think at the time, I’m going to get some of this wrong, but a lot of the narrative was, iPad was really becoming popular around that time. There was a big question about what PCs would be if they were even a thing 5 or 10 years down the road. Microsoft still had not released an Office app on Android, maybe even on iOS as well. They were holding it hostage to support Windows Phone or Windows iOS, generally speaking, which didn’t work and was subsequently changed. They did the Nokia deal just before Balmer left, which was viewed as poor capital allocation, which I think we can fairly say that’s correct. [laughs] So, yeah, there was a lot going on. It’s a lot of value names, especially if the capital allocation is questionable, it can be really hard for people to buy into the story.

I remember Whitney Tilson bailed on it, and rightly so in some ways, saying, “The capital allocation here is just not very good. So, I’m going to look somewhere else to invest.” So, anyways, obviously, the story changed over time.

Tobias: Yeah, it was Whitney, I think, who was pitching the idea at the value investing congress. I didn’t know that it got up, but then I didn’t follow that closely, either. I’ve never actually encountered anybody else who bought it then and continues to hold it now. So, my hat’s off to you, sir, for that.

Alex: Every once in a while, I get something right.

Why Berkshire Remains A Great Investment

Tobias: Let’s contrast that with Berkshire because you’ve got a Berkshire holding you say from about the same period. What was the thesis then? I think you can make a very good case for Berkshire now, but what was the thesis then?

The thesis very early on, when I first became an investor was I needed a share to get into the shareholding. So that was when I first bought it. And then, a few years later, I can’t remember exactly what happened. Maybe it was the– I think the market might have got hit pretty good on the US debt downgrade. I think there was something that was relevant to the market as a whole, not relevant to Berkshire.

But Berkshire share price fell pretty significantly. So, there was something in that period where I bought a decent size position. And, yeah, I’ve held it ever since because you guys were talking about it in Value: After Hours the other day, the idea that Berkshire is a conglomerate with so many pieces that are– I mean, you look at a business like Geico, it’s just been a complete homerun over the last 20 years. If you look at the railroads, it’s been a homerun. If you look at their other insurance businesses– and there’s moving parts in this stuff and not everything’s a homerun. But I think more often than not, an IBM is more than offset by an Apple, or something like that.

And surely the balance sheet right now is very conservative, and I give other companies like Facebook, a lot of flak for their balance sheet. The difference is in my mind, Berkshire is a company that will act aggressively if given the chance to do so. And some people will point to March and say, “Well, they didn’t do anything then.” One, that was a very quick down and up, in a lot of ways, and we’ll see what happens in the next couple quarters or years. But I wouldn’t be surprised if the opportunity is– There’ll be other opportunities, let’s put it that way. And they’ll do things like repurchases now. I think they’re not so stubborn that they won’t change their mind, even if it– I mean, they sold Wells. They won’t change their mind, even if it makes them look stupid or people will give them crap for it. And you’ve got to respect them for that in my mind. So, I still greatly enjoy having it in possession.

Tobias: In March, the Federal Reserve acted very quickly, the federal government acted very quickly. I think that if you look at what happened through 2007, 2008, 2009, Berkshire in many ways was the lender of last resort. And Goldman Sachs was at risk, had to convert to a bank holding company, issued some very expensive prefs too to Berkshire at the time, and that was– they’re one of the better-managed investment banks out there and that was emblematic of what was going on across the entire spectrum of finance, the entire financial sector. There was nothing like that this time around, there’s no opportunity to do that.

Alex: Right. I think that’s spot on. They’ve done deals here and there as they’ve seen what they thought were good opportunities to do deals. They bought Apple, whatever it is now, what’s probably $90 billion, something like that, $100 billion somewhere around there?

Tobias: It’s the greatest trade of all time I’ve seen.

Alex: That was a pretty good winner. I mean, it’s hard to complain with that one.

Tobias: You’ve got to give the old man credit for actually deploying that enormous amount of capital in the most visible stock on the stock market pretty much and managing to get that kind of return out of it, and there’s some luck in that as well, but getting it in is no easy task.

Alex: You made the comment the other day that when you go back and read the letters, how you read something, you go, like, “I completely missed that last time.”

Tobias: Yeah.

Alex: Him talking about Apple, when I went back and listened to this idea of this being the most valuable real estate in the world, is more valuable than Fifth Avenue. And you see what has subsequently happened with Apple services business and just how valuable that screen is, it’s something that when he said it the first time just completely went over my head or didn’t have any impact. And I hear it now, and I’m like, that was incredibly smart what he thought about this business and he positioned it in a huge way. Again, people give him crap because they think he said he never would invest in tech. He’s never really said that, but that’s what they think he said. But he just does what he thinks, he’s intelligent, and it worked out fantastically. It has so far. This is one of my questions. Do you think that Buffett selling that supposedly $4 billion worth, do you think it’s [unintelligible [00:21:08] or no idea?

Tobias: Yes. I have gone back and forth with people on Twitter, not in — not right now, not prior to the selling. I went back and forth before there was any selling, saying that he had said– like, he’s pretty clear about the fact that this is their third business and he’s never going to sell a share. And then, when he sold, a few guys came around to collect the tickets. And I said, “Well, it’s not clear who’s done the selling there for that exact reason?” It’s 5 billion on a $109 or $110 or $111 billion position. It’s pretty modest selling really.

Alex: Right. Yeah, I wouldn’t be surprised if it’s not him. I put my money on it not being him, over it being him. I guess, we’ll see. If it is him, I think we’ll see that they’re going to continue to sell if that’s the case, because I don’t think he’s wanting to sell a little bit like that and then step away from the table unless the price changes very significantly, which I don’t– I’m not sure 135 to 120 counts as very significant enough, we’ll see.

Invest In A Way That Even If You’re Wrong You Still Get Decent Returns

Tobias: It’s one of the more difficult things to do as an investor, to sell, and I know that we started this conversation talking about selling. We’re talking about it in the context of– I guess we were talking about in the context of buying, but what’s your sell process to the extent that you have one? You just avoid taxes at all costs?

Alex: [chuckles] I mean, there are times I will pay taxes if I think it’s– again, if what I’m buying with the proceeds more than accounts for the cost of paying the tax, then I definitely will do that. I don’t want [unintelligible [00:22:36] tail like dog. Yeah, in general, I’ve been in a position where I’m at the point in my life where I’m adding money to my portfolio, so the capital needs are relatively rare. So, that’s limited a lot of my selling.

More often than not, I’ve been selling based on something being a mistake or just reached a price, where I just became uncomfortable with it. I’ve owned Yelp on and off at times, I sold it a few years ago just because I thought the price got ahead of itself. I owned Chipotle and they brought in the new CEO and the stock got a good jump and then they announced a good quarter, got another good jump, and I thought it looked pretty good at 400 or 500 wherever it was at, so I sold it. Now, it’s at 1300. So, that one didn’t turn out too well. But, yeah, something gets expensive, I’ll let it go.

Tobias: Chipotle is a tough one because I think that it’s got– it seems to have a little bit of that risk that– I don’t actually think they’ve ever done– I think that you said in your note that it was an E. coli breakout but one of the breakouts– I mean, as I followed it, they had– the name’s just escaping me, but the norovirus. Norovirus takes down cruise ships because it’s so infectious, but it’s not a foodborne illness. You’re just in the same room, cough on somebody, or however it passes, gets sick, and everybody gets sick in the vicinity. And I think at least one of the outbreaks was norovirus, and I thought that was, gee, that’s unlucky because that’s probably not anything wrong with their food preparation. I don’t think there’s anything wrong with their food preparation. They’ve now got a little bit of a reputation like that. So, anything that happens, there’s some risk in the stock, I thought.

Alex: Yeah, apparently Mr. Market does not agree right now.

Tobias: There’s no risk anywhere anymore.

Alex: [crosstalk] –happen again. Yeah, I mean, for me, that’s one of the stocks that’s epitome of this current cycle. And then, I’m probably better because I owned it, but it’s just story is very clean, they have a unit growth story, they have a comp story, they have a margin story. It’s a good business in terms of the cash it generates. As those have all come into sight as being positives, the valuation has just gone from something that I think most people would objectively say is at least reasonable to something that now they’re going to need to execute on everything. And even then, you will see what returns you get over 5 to 10 years, if they execute very well. You might get 10% a year, we’ll see.

It’s just one of those names for me, when I have to underwrite everything going great just to get pretty average returns, it’s hard to justify continuing down it. And on the other hand, if I can buy things where even if things don’t go very well at all, I can get decent returns. Well, I’m going to naturally be attracted to those, but the last year or two has made doing that a bit painful [unintelligible [00:25:32].

Tobias: I think in some ways, the market is a little bit like the market in the early 2000s, in the late 1990s in the sense that there’s no question that these businesses aren’t very, very good business and are probably going to grow at very high rates for a fairly long period of time. It’s just that the stock prices have, I think, got ahead of even that exceptional growth. And so, you can have this period like the first decade of the 2000s, we just drifted sideways with a lot of volatility in a lot of these names and it was only sort of 2013, 2014, 2015 that they really started to take off again. So, it’s a very long period of time where nothing much is happening, even though the business underneath is doing quite well.

Alex: Yeah, and I think for the bigger names, you can get to a point where the math– if you look at Microsoft in 2000 or something, you reach a point where the math becomes– it just gets illogical at a certain point. But for some of the smaller stuff, people are able to buy into stories that are a lot harder to disprove. I think history would show that massive TAMs lend themselves to a lot of competition, a lot of overlap.

You don’t know what steady-state economics look like. And for a lot of these businesses, to the extent they end up being good businesses, you’re going to have managers in there who are probably not the best to capital allocation. And that starts to become really important when you get to– if it works, that starts to become really important. You need someone in charge who is going to intelligently allocate that capital. And again, look at Microsoft in the late 90s or through the 2000s, they built up a huge balance sheet and whether or not it was intelligently used or just out there stranded with shareholders unable to get their hands on it for 10 or 15 years, that can be very costly.

Tobias: So, that’s where you get a Zune.

Alex: Right. [crosstalk]

Tobias: You remember the Zune?

Alex: Yes, I do. I never had one, but, yes, I do remember.

$DIS Disney’s Competitive Advantage Is Its IP

Tobias: Let’s talk about some of the other names you’ve got in there. Disney, you said you got that in the Fox spinoff?

Alex: Yeah, I got it. When doing Disney bought the majority of Fox’s assets, you had the option to to take stock, cash or some combo. I took shares as part of that deal. I think part of the thinking now in my mind is, obviously, they’ve released Disney+ and a couple of their other D2C assets they’ve had significant growth. It’s super early, but they’ve had significant growth so far in terms of signups.

For me, I keep coming back to the idea that having really great IP and a really great monetization engine is– I’d rather approach the direct to consumer video problem or figuring out the business there, I’d rather approach it from that angle than having really great technology, like Netflix unquestionably has. And granted, they have a huge user base and that will lend itself to stuff like Cobra Kai and You that they license or buy from others, and then they increase the audience 5X or 10X or 20X. So, those are certainly very real advantages. But as I keep coming back to it personally, I like the idea of owning the parks business, of owning just really great IP.

Now, with that said, Disney didn’t own Pixar 20 years ago, they didn’t own Marvel 20 years ago, they didn’t own Lucasfilm 20 years ago, so– and Berkshire did own in the late 90s and they sold, I think part of the reason is recognizing that reality that this business is, in my mind, definitely not foolproof, it requires continued nurturing of those key brands, that key IP, and potentially adding stuff over time. I think that people they have in charge of Marvel right now, my friend, Francisco Olivera, can talk about this a lot more than I can, but the people that haven in charge are the right people, and they’re nurturing those franchises and I think it continues showing the results.

Tobias: It was sort of a meme in the late 90s that a lot of the value migrates from the owners of the distribution to the content producers, because content tends to be unique, whereas distribution tends to be– there is a little bit more distribution, and I think that I couldn’t agree more. It’s a content game and they have been very good at producing it, but there was that notable period before they bought Pixar where they just hadn’t had a Disney Princess worthwhile for a little while. No criticism of the Disney Princesses they had, but that’s sort of the business where that they get a young– my daughter, she falls in love with the Princess of the day and that’s what gets her into that ecosystem. And if they miss, then she’s not part of that ecosystem. It’s hard to get them back in as they get older. But their purchases have been quite good, though, Star Wars, and, Pixar, Marvel, all great acquisitions.

Alex: Yeah. Former CEO, Bob Iger, said in his book, he went before the board– And this is very early after he became CEO, and he essentially told them, “If we don’t do this Pixar deal, this could be the end of this company.” Might not have been that drastic, but he said, “This a very important deal. We have to do this because we’ve lost that animation. We’ve lost that IP engine that we have to have for this company to work.” And him doing that deal and then subsequently, Lucasfilm and Marvel are obviously masterstrokes that– we’ll see how Fox turns out, but he certainly bought himself a bit of cover by doing those three deals at what turned out to be incredibly good prices.

Tobias: They looked expensive. I think they looked optically expensive at the time. Pixar looked expensive, I think.

Alex: Right. Yeah.

Tobias: But ultimately, worthwhile.

Alex: [crosstalk]

Strengths And Weaknesses Of $CMCSA

Tobias: Yeah. What about Comcast? Just to pivot perhaps a little bit more to distribution rather than content.

Alex: Yeah, Comcast has been, I think it’s kind of similar to Microsoft. I think it was pretty objectively cheap in the last few years when it got down in below 30s if you believe that the cable business has the staying power and the ability to keep adding customers. And as we’re seeing now, they’re adding customers and the capital intensity of the business is declining as they focus more on broadband and less on pay TV. So, the cash flows coming out of that segment are increasing around 10% a year double digit. So, they’re getting really good growth in the core business.

The knock on Comcast has been that their M&A track record, especially the last two big deals were NBCU, which they bought from General Electric, and it was two separate parts of the transaction, but around the financial crisis shortly thereafter. And then more recently, they bought Sky, which is a business in Europe.

So, the knock on them, I think, for most market participants perspective, or at least people on FinTwit spin that they should run the cable business and lever up and follow that strategy, as opposed to being more of a diversified media company. What you’re seeing now with NBCU is, they’re in this position where they’re trying to compete in direct to consumer with Peacock, which is something that they’re trying to use their distribution muscle to make it strong, and they have some good IPs, stuff like The Office and Fast and Furious and other things that they’ll put on there. But the big question is going to be, can this really compete or not?

I think inevitably, this will lend itself to a position where they’re either going to have to invest much more aggressively to stand up that business and try to really compete and win. Who knows if that will even happen if they do that, or they’ll need to find another route, whether that means licensing content to Hulu or Netflix or– obviously, it’s part of Disney. So, they’re going to have to make a decision there.

And at the same time, they have X1 is their pay tv distribution, essentially. It’s their set-top box there. So, it’d be like an iOS. The reporting now is they’re trying to work with Walmart to make X1 a standard on some of their smart TVs.

So, they’re essentially getting a position where they’re going to compete more directly with someone like Roku. And in my mind, it’s the same thing as NBCU. You’re going to be in a position where you need to invest more money, or you need to not play in the game. So, I think a lot of people don’t like the fact that the cash flows from the really good business are potentially being diverted to businesses with less clear future.

I’m a little more comfortable with it than some. I think the NBCU deal from a dollars’ perspective, has almost certainly been at least a decent one, and they paid somewhere around $30 billion for the business. It’s collectively generated north of $40 billion in EBIT since they bought it. And they still have the parks business, they still have the content businesses, but, granted, are certainly facing structural pressures to some extent. So, we’ll see. I think management thinks about the long term and I think in general, the track record is objectively pretty decent. But this Sky deal has certainly put that in question and depending how you think about NBCU, that’s also put it in question as well.

40 Hour Round Trip To See The Oracle Of Omaha

Tobias: Let’s just take a step back for a moment. Can you tell me a little bit about your background? How did you develop the strategy that you have now?

Alex: Going all the way back, I grew up in South Florida. When it was time to go to college, I went to the University of Florida and I really didn’t have any sense for what I was going to do. And my dad’s a plumber, so I decided I’d go to school for building construction. I did that for a couple semesters, and I realized, “Nope, this wasn’t it.” Around that time, I don’t honestly remember how, somehow, I stumbled across the Berkshire letters, or Warren Buffett. Then started reading the letters, and another buddy of mine did as well. So, fast forward like a year later, we drove from Gainesville to Omaha for one of the Berkshire meetings–

Tobias: How far is that?

Alex: It’s like 20 hours or something like that. So, we drove, yeah. I think we slept in Walmart parking lots along along the way. As I remember, we went to the meeting and just came home immediately after. We drove 40 hours– [crosstalk]

Tobias: Just for the quick– not to stay the night or anything to see any of the shenanigans?

Alex: Yeah. we’re in college, we had no money, so we couldn’t really stay the night. [chuckles] But anyways, I’ve been hooked ever since then.

Alex: Around that same time, a couple friends and I, we started a business in college that was– I don’t know if you’re familiar with StubHub, but it was the equivalent of StubHub like a ticket website, but it was specifically for student tickets to college football games because student tickets have certain restrictions in terms of only students can use them or someone with a student ID. We essentially paid somebody to build a website, because none of us knew how to do that and we tried to stay in this business. Long story short, it did not work out, but that’s when my business and finance interest started to bloom. I also started writing articles around that time as well. So, yeah, all those things together, that was 10 years ago now or 10 plus years ago now. But I’ve just continued to plug along and just really enjoyed. It’s fun.

Tobias: Without disclosing your employer, what do you do? What’s your day job?

Alex: I work for an investment advisor. I work as a research analyst. I basically spend all my– the stuff I write about, the stuff I talk about on Twitter are companies that I’m following at work and following on the weekends, following all the time. So, I research equities almost exclusively.

Tobias: I saw you write pretty regularly for GuruFocus and I read your articles when they come out. They’re great. I saw you wrote– it’s not in your holdings, but Schwab was one of your more recent articles in the last six months or so, 2020?

Alex: Yeah, that sounds about right.

Schwab & CEO Walt Bettinger

Tobias: Do you want to go through the thesis for Schwab?

Alex: Yeah. So, at a high level, I think the thesis on Schwab is that they built a platform that simply by looking at assets and flows has become very attractive for end customers, and end customers would be their individual retail customers or people like investment advisors, where they can custody their assets. So, they’ve grown their asset base very significantly over time. Also, over time, which you can see if you look at their investor decks, they’ll show revenues as a percentage of client assets has consistently trailed down over time. So, they’re sharing more of the economics with their customers, but still have expenses. So, they’ve held a pretty steady difference between those two.

It’s a business where as they grow, they’re passing on the benefits to their end customers, but they’re also obviously keeping some of the benefit for themselves. So, it’s a business where, as they scale, I think the moat is widening. At the same time, their CEO, Walt Bettinger, if you go listen to his conference calls and listen to him for a bit of time, which just plays into a lot of the investments I have. I listen to people for a while and get comfortable with them. I don’t just one day by a 5% or 10% position.

I’ll really follow people for a while and he’s the person that as I listen to him, and as I read what he wrote in the past or said in the past, he strikes me as someone who’s very honest, has a very good understanding of who they are and what they’re trying to do and why they deserve to win in certain places and spaces that they play in. So, I’ve built an appreciation for him.

Also Schwab has been building up Schwab Bank, which is, long story short, it’s the business where they can earn a spread on margin, just like a traditional bank down the street. Because of that transition, as they’ve been growing the business over the past 10 years– I forget the dates when rates have gone up and gone back down. The story started to work. You finally saw rates come higher.

This would be a handful years ago, you might remember, but then obviously that turned back again. When that happened, the stock had started to take off as the earnings power was going to start to finally flow through. Well, as that turned back, stock got– what I thought was cheap again. I started buying EBITDA, [unintelligible [00:40:06] at a high level.

The Bull Case For $QRTEA

Tobias: Let’s talk about one of Bill’s favorites, Qurate.

Alex: [chuckles] Yeah. Qurate is very different from most of my ideas, as I just told you. I typically follow stuff for a while and get a really good feel for management in the business. Qurate, I knew nothing about it, probably, I don’t know, two, three months ago. Bill and Francisco Olivera and I, we’d be talking constantly. We started talking about it amongst the three of us, and then Bill hooked me up with Mike Mitchell who’s @IgnoreNarrative on Twitter.

We got on a call with him, and he helped me understand even further the history of this business. I’m familiar with the Liberty guys at a high level. And it just became clear that the person in charge of the capital allocation is someone with the right incentives. As I looked at the results of the business over the past 5 to 10 years– I’ve seen something similar with Fox too, which I previously owned, and I own a very small stake in now. Fox News has sort of bucked the trend of pay TV declines in the United States. And that partly speaks to demographics and it partly speaks to the economics of their business, the ability to contract larger affiliate fees. The problem with that name, and why I’ve grown away from it is part of their costs in the remainder of the business, mainly sports, rights are not under their control. So, that that’s really pushed me away from the name.

But anyways, on Qurate, as you look at their results over the past five years, you go, well, the pay TV universe has declined by 20%, why are their revenues flat to up, or whatever the metric is? So, it gave me the idea that maybe that’s not the whole story. So, as I kept digging in, and I looked at this transaction they were getting ready to do, I understood some of the things that might impact supply and demand for the name in the short term.

As I thought about all those things, to me, it just made sense that this is a reasonable place to invest and made a reasonably large position, and they just reported that it was a really good quarter, which shouldn’t be too unexpected, given that they kind of benefit from pandemic in a certain way. Yeah, it’s definitely different than what I usually do, but it’s the thing I bought most recently in any size.

Tobias: Did you did you size it up knowing that you’re going to get a big capital return?

Alex: Yeah.

Tobias: [crosstalk] –take that into the calculation and then– Initially quite a big position because it’s 6%.

Alex: Getting closer, yeah, I guess, it was around 10, something like that. But, yeah, then they gave the preferred and then they paid the cash distribution.

Tobias: I mean to ask you about Schwab, just in– the value had this little– we’re recording this on November 11, value had this little bounce on Monday and a few of the platforms– And I think I saw some people complaining about Schwab, in particular, on Twitter. A few of them seem to have some difficulties trading through it. Do you have any idea what drove that? There’s no reason necessarily why you would, I just wondered if anybody else did.

Alex: Yeah, I saw people talking about it. I haven’t seen anything in particular. I use Fidelity, and I pulled up my account on whatever the crazy day was, Monday?

Tobias: Yeah.

Alex: I pulled up my account and flashed my balance at zero.

[laughter]

Alex: [crosstalk]

Tobias: That was a really bad day.

Alex: Exactly. Like the market’s up like 5%, how did I lose all my money?

Tobias: I don’t think it was unique to Schwab. It seemed to be something that was endemic to a lot of– It’s not uncommon that on these really big volatile days– Robinhood has had that problem a few times now where they weren’t able to trade. I don’t know what does it. Maybe they just get overwhelmed with people wanting to do stuff.

Alex: Yeah, it must be. It must just be too much activity or something along those lines. But I haven’t read anything about why it happens, but, yeah, I saw that it was happening.

$BKNG’s Pfizer Bounce

Tobias: More online names. You’ve got three here. If Facebook, Yelp, and Booking. From your tweets it’s actually, Bookings done really well despite the pandemic. Just very quickly, what’s the thesis there?

Alex: Yeah, on Booking, the thesis really boils down to structural shift, structural change towards OTAs, online travel agencies. And then, Booking is unique because their primary business is in Europe, which is a different hotel market than the United States. It is much less branded, much more independent hotels. Booking essentially becomes their marketing platform. It’s the way they get customers. Bookings business has– the number of room nights booked on the platform, as I tweeted today has gone up from 2010 to last year, it’s gone up like 9X, something like that. So, it’s grown significantly as they said on– based on the most recent call, they still have a single-digit share of the global market. And I think they said it’s around 10% in Europe, I believe they said. So, I think it’s a good business.

The pandemic, I mean, they’ve gotten absolutely crushed. So, it’s a name that I own, it’s not a huge position. I’ve always struggled with the idea that what the US hotel market looks like, and I’m obviously biased because of my lens as someone who lives in the United States, but I’ve always wondered if the hotel market in somewhere like Europe that’s more independent, is going to become more like the US where you have– [crosstalk]

Tobias: Free consolidation or something like that?

Alex: Yeah. The Marriotts and the Hiltons of the world would go out, either buy or sign deals with these independent chains. And could something like the pandemic potentially accelerate that development? I don’t think that’s out of the question. So, it’s a name that– I don’t think I added to it in March, it got down to probably 1200 or 1300. I think some of those fears kept me on the sidelines and just sitting with the position I already had. But it’s had a great run here in the last– It certainly got that Pfizer bounce or whatever we’re calling it.

[laughter]

What To Make Of $YELP’s New Business Model

Tobias: How about Yelp? Because that’s what I don’t know particularly well, but folks might not know. I know the business, I don’t know the– I know what it is, I just don’t know the business particularly well.

Alex: As you know, Yelp is a consumer review platform, it’s probably most well-known for restaurants. And for a long time, I’d argue that’s really all it was. It really wasn’t a business, or it was unclear what the business was. So, it came public, I think it was in the early 2010s. I want to say 2014 for some reason, I might be wrong. Anyway, so it had a huge run. It was a loved growth story, much like Groupon, a bunch of other names quite like this. And as that did not pan out, it fell from 90 to– it’s been in between 550 and 50– 15 and 50 over the past handful of years.

I think what’s interesting about Yelp outside of the valuation, because it goes through these swings, and they have about $8 to share in cash. And they got offers before they went public from Yahoo and Google for roughly a billion dollars. So, between those two components, you can get to a $15 or $20 stock price, assuming that’s even relevant today, who knows if it is. I think what’s interesting about Yelp is, for a long time, this was a call small businesses and try to sell them ads type business.

I think, if you look at the numbers, it’s probably pretty apparent that that was never going to be a very good business on its own. Unless they got really, really big, which I don’t know if that’s particularly realistic, either. So, what’s happened since then, is they’ve shifted in the self-serve ads for SMBs, and they’ve also focused a lot more on multilocation, regional and national companies for different types of advertising products, what you’d see in the list when you search for a coffee shop or something. But they’ve also added other things on top of that to try to make the product more useful.

An example might be if you’re a local carpenter or something like that, somebody who builds things, or architect, you can kind of have portfolio profiles that show a project that you did. So, you can call out things like that in a certain way that make your profile a little better or different. Another example in the home and local space would be request a quote, where you can say, “Hey, there’s something wrong with my sink,” you can take a picture of it, you can send it to a local plumber. When you do that, Yelp will ask you do you want to send this to these other highly rated plumbers in your area? So, that’s a new advertising product for them.

So, they’ve gotten away from the– what I would say is a not very good user experience in terms of just throwing to restaurants that paid for those top slots. It’s getting replaced with stuff that is helping the transaction be completed or highlights the business. And on some of the business stuff, people who own small businesses might not love to hear this, but I think it’s almost like the idea of you’re at a parade and you stand on your tippy-toes behind you, and now I need to stand on mine. In some ways that it is that kind of business. If people can stand out and you’re competing with them, you might need to stand out as well.

We’ll see if this works, but I think there are signs that this new idea of their business model may work in a way that the previous business model in my mind probably never would. A good example of this, the numbers is– there’s still obviously dealing with the pandemic, but last quarter revenues were down mid-teens, their sales force was down about 45%. So, they’re really seeing more sales productivity. And they don’t think that they’re going to add a meaningful number of people as they get through the [unintelligible [00:50:07].

Tobias: There was some controversy for a while in the sense that– a business would get a bad review and then they’d contact them and say, “Hey, we can take care of that bad review for you.”

Alex: Yeah, so this is something that company’s always said is not true. And I think my thoughts on it are probably, if you have a business that is relying upon hiring a bunch of recently graduated college kids and you tell them you’re going to pay them based on winning a certain amount of business, if you do not watch those people closely, you might have some behavior that is not what you hoped to encourage. So, who knows if it’s all real? I would assume obviously, some of it is, but, yeah. That’s one of those things where you need to make sure you have systems in place to encourage good behavior, or discourage bad behavior.

Tobias: Hey, Alex, this is coming up on time. It’s absolutely fascinating chatting to you about the portfolio. If folks want to follow along with what you’re doing or get in touch with you, what’s the best way to do that?

Alex: Best way to do it is Twitter. You can reach out to me at @TSOH_Investing. Yeah, that’s probably the easiest way to do it. And then, I write GuruFocus articles, 5 or 10 articles a month, you can always go there and read them.

Tobias: Under The Science of Hitting as well.

Alex: Yeah.

Tobias: Alex, Science of Hitting, thank you very much.

Alex: Thanks for having me. I’m glad we finally did this.

Tobias: Yeah, me too.

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