#neversell | The Acquirer's Multiple®

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed #neversell. Here’s an excerpt from the episode:

Bill: Oh, so I guess this works. I was journaling today with the introspection. So, this never sell thing. Tell me if you guys agree with these truths. I’ll just like rip through them and you guys can tell me and then we can deconstruct it. Truth one that I wrote is perception is influenced by recent history and desire. Desire of the future and your perception of recent history really influences your perception of what’s going on. You think people overweight recent history? That would be recency bias.

Tobias: 100%. I mean, that’s why we’re having a never sell discussion now and not in March 2009.

Jake: 2009, never sell– [crosstalk]

Bill: I got fucking six more– [crosstalk]

Tobias: We’re not commenting on this as we go. I thought that was a dramatic pause. I thought you were pausing for commentary.

Bill: So, you agree with that? Okay. Do you agree, is it truthful to say masses of people can act far less rationally than individuals would?

Tobias: I mean, if it’s self-reflexive, if they’re communicating with each other. If they’re acting individually, then probably that Wisdom of Crowds probably works, but when they’re not acting individually, yeah, I agree with it.

Bill: Yeah. And I think that prices sort of encouraged that collective behavior. Within some assets, those that have been skeptics look very, very dumb right now. I mean, do we think that’s accurate?

Tobias: That’s true.

Bill: Okay. People that buy those assets, regardless of how much work they’ve done, look very, very smart.

Tobias: That’s true.

Bill: Okay. If you’re right on the end state in time, it is potentially possible that you could overpay today, but end up okay.

Tobias: That’s true.

Bill: If you’re right on the terminal economics, it’s possible that you could overpay a little based on true fundamentals or whatever. So, I think that what’s going on in my head is like, if you accept those five things as truth, then I think that it’s become like, “Who cares, as long as you sort of right at the end, you’ll be fine and never sell.” And I think that’s somewhat of what’s going on right now. I just don’t think that there are that many assets that you can apply that logic to, because there are very, very few assets that are that good that you can be that right about the terminal value. That was what was going on in my head this morning.

Tobias: I think calculating a terminal value is almost impossible. But you can work out– if something is a super earner, and it has the traditional criteria of possessing some sort of competitive advantage, and it doesn’t have all of the ways that people have taken their portfolios apart in the past, like it doesn’t have a whole lot of debt, it doesn’t have a commodity input, that is material to the cost of the business.

There’s lots of ways– there’s lots of landmines, if you avoid all the landmines, and you and something does possess those characteristics, and it’s a super earner, then I think you can be as confident as you can be that over the next year two, three, four, five, it can sustain those. And if you assume that there’s going to be some mean reversion of that period time, it still looks like a good position to put on.

For me, that’s a much easier calculation than figuring out what the terminal value is going to be. I can look at something I can say, “This would be good for the next period.” And I’ll update in a year. And if in a year, I’m like, “Yeah, it’s still going to be good for another three to five years.” And you just keep on rolling that forward. So, you’re still considering it. I think that that’s a good way of– then you’re not looking at price for you to give you the pat on the back. You’re looking at is the business continuing to deliver the way that I think that it should? I think I can do that. I don’t think I can calculate terminal values. But I think I can do that.

Bill: Yeah, I think that’s right. I do think that there’s some merit to trying to figure out terminal economics, and how quickly will it go there? And is it so overpriced today? For instance, I was listening to Cliff [unintelligible [00:23:45], I’m almost certain he said this, if he didn’t say it, I’m sorry, Cliff. I know you listen, about Carvana. I think he said like, yeah, it probably is a little ahead of itself today, but given where I think it’s going to go, and I think he may have cited taxes, though, I’m not sure. He is like, “I don’t want to get off this train.”

I can see the logic in that. I just think that it’s being applied to many different places right now. I think that price is driving the bias to apply that, and prices are going up. So, the story gets bigger, and particularly in software is where I really feel like it’s going on it. The base that you’re paying for is so tiny. And if you think about it, like out of the money options, you’re buying options with so much implied volatility, for lack of a better term.

They’re out of the money. And I think that like some of these big businesses have become so much better than people fathom that they could that maybe they’re applying it to everywhere else, or conversely, I’m just like an idiot that can’t see what’s in front of me and that’s very possible. But I just know I don’t know enough to play that game and it makes me very nervous.

Tobias: We don’t have to play it.

Bill: I know, that’s why I don’t play it. Some people are like, “Why don’t we play the game?”

Tobias: No cold strikes in this game.

Bill: Yeah, it hurts when you watch it.

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