VALUE: After Hours (S02 E44): Value: After Hours S02 E44 Hull Speed, Small and Micro Value Renaissance, #neversell

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

  • Hull Speed
  • #neversell
  • Buffett’s Next Op-Ed
  • Facebook’s VR Push
  • Can Openers And Subscription Models
  • Melting Ice Cube Alphabet
  • Small and Micro Value Renaissance
  • Making Sense Of AMD, Nvidia And Intel
  • Josh Wolfe Futuristic Tech
  • Company Longevity
  • Online Pet Food
  • Energy At What Price
  • Homogeneity And Price Action
  • Imposter Syndrome
  • Julius Caesar Captured By Pirates
  • Buffett Gets Mad People Riding His Coattails

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

Tobias: Ladies and gentlemen, it is 10:30 AM on the West Coast, 1:30 PM on the East Coast, and it’s 6:30 UTC because daylight saving time is over. We’ve lost that hour of sunlight. It’s an extra hour of darkness every day until we go back in three months’ time. How are you doing gentleman?

Bill: I’m Good. Is something going on today that I don’t know about?

Tobias: Don’t mention the war.

Bill: Seems like there’s a lot of people that are panicking over something. I don’t know what’s happening.

Tobias: There we go.

Jake: Market likes it.

Bill: Market does like it.

Jake: It’s all that matters.

Bill: Stonks up!

Jake: [chuckles]

Tobias: 6:30 in Scotland. Good, 6:30 PM UTC. That’s what I was saying.

Bill: Toby knows his times, folks, don’t come at him over time– [crosstalk]

Jake: You drink a little cranberry juice and that UTC will go right away.


Bill: Alrighty, should we start the show, folks?

Jake: Yeah, we’re on fire today.

Tobias: We got 10 fellas in Dubai, San Diego, Philly, Omaha, Germany, Melbourne, Sactown. What’s up everybody?

Bill: Huge shoutout to the 10. What’s up, Charlie? How you doing?

Tobias: Warren Charlie.

Jake: My boys.

Bill: I feel they’re just sitting around waiting for this thing to start, which is kind of rude of us to have them, they’re tuned in, and then they’ve got to listen to us go around the globe.

Tobias: 5:30 AM in Melbourne.

Bill: But if they don’t know it by now, that’s on them.

Jake: [giggles]

Bill: Who’s doing the thing today? What do we call that, the intro?

Tobias: The intro. Probably JT.

Jake: I think it’s my turn.

Tobias: Hasn’t been JT for a while.

Jake: It feels like I’ve been hiding out from it for a while. Welcome to Value: After Hours, with your hosts, Jake Taylor, and Bill Brewster, and Toby Carlisle. Bill, what do you got on tap for today?

Bill: I don’t know. But I think I’m going to talk “never sell.”

Jake: Okay, timely. Toby?


Tobias: Yeah, I feel I’ve addressed this topic a few times, but value’s outperformed for two months in a row and that follows on 11 months of underperformance plus the five years before that. So, you’ve got to do a victory lap when you get two in a row. So, that’s my topic.

Jake: So, you’re telling me there’s a chance. All right. Then, my topic is going to be the hull speed calculation of life. We’ll see how that turns out.

Tobias: I love it.

Jake: Right after this.

Tobias: I feel like never sell and hull speed calculations are in the same philosophical vein.

Jake: Like masturbatory?


Jake: Okay.

Tobias: Let’s dispatch with mine really quickly because mine’s a short one and you guys have got good chunky ones that we can get at to– [crosstalk] Yeah, well, hull speed is great. And I got lots of thoughts on never sell.

Bill: Okay.

Small and Micro Value Renaissance

Tobias: Mine is really just to say, literally what I just said. According to Sarah Ponczek, Bloomberg, value has now outperformed for two straight months after losing it for 11 straight. So, that’s good. We’re back after five years. I’ve got no idea but if Einhorn is right, September was the top of the bottom, we’re back.

Jake: September 2nd.

Tobias: Yeah, it’s very specific.

Bill: That might be a day that lives in infamy.

Tobias: 9/2/20. Nothing particularly interesting about, is there?

Jake: No.

Bill: No. I don’t think so.

Tobias: And smaller micro’s done very well, too.

Bill: Jake, you’re going to have to close down your private tabs there. I can see what’s on your computer screen through your glasses.

Tobias: [laughs]

Jake: Oh. Uh-oh.

Bill: Maybe you want to close down some of those chats there, Sir.

Jake: Hmm. Indeed.

Bill: [laughs]

Jake: Did you just curse us, Toby, to four more years of underperformance?

Tobias: I’m sending us back to underperformance.

Jake: Okay, good.

Bill: Yes, cyclicals have done really well lately, haven’t they? I’m just thinking and–

Tobias: Small and micros cyclicals, I don’t know what that means.

Bill: I don’t know either. Probably the next president is going to spend a shit ton of money.

Tobias: I think we’re confident that’s going to happen.

Bill: [crosstalk]

Jake: The great rotation. Is that what everyone’s calling for? I don’t know.

Tobias: Last time, the market rallied on the Thursday before Trump got in, and it was a good value rally. I remember pretty distinctly they had just rocketed, like after drifting right into it, it took off. So, we’re recording this pre-decision. This may come out pre-decision for all I know. [chuckles] But I don’t know if there’s anything that can be drawn from– It’d be interesting, it’s up a little bit, it’s been up in the last few days a little bit, probably more of a value market than a growth market. So, we’ll see. See what that means. All right, that’s all I got. Let’s do hull speed.

Jake: All right.

Tobias: Let’s give the folks what they want.

Hull Speed

Jake: So, this one is a shoutout to Brian Bryson, 1 of the 10 who put me on to this. Now, I don’t know if you guys know this, and I didn’t really know much about this even though I like sailing and boats and stuff, but there’s this idea called hull speed. It’s this theoretical upper limit of how fast a boat can go. It’s this interesting calculation that is the length of the waterline, which is actually on the boat where it’s in the water from tip to tail.

So, the square root of the length of the waterline times this constant 1.34, I have no idea why that is, equals the hull speed in knots. So, like a 35-foot boat with a 28-foot length of the waterline, theoretically has an upper speed of 7 knots. And the reason why that is, is that any boat that is moving in the water has to shoulder that water away and because water doesn’t compress, the only place that it can really go is up. So, it creates what’s called a bow wave. You’ve seen this, any boat that’s got chugging along like it’s pushing water, and it’s creating this wave out to the sides of it.

Well, the faster that you go, the bigger the bow wave gets. Eventually, you are pushing so much water and it’s actually there’s some math in there with a sinusoidal of the wave and how far it is along the length of the boat. I’m not going to get into that because it’s boring– not that boring is not one of my criteria for this segment.


Jake: But eventually, the boat starts to tip backwards, and the more energy you put in, the faster it goes, the steeper the bow wave becomes. And so, you get diminishing returns. Eventually, you’re adding more, but it’s climbing a steeper wave and it’s not as efficient. So, that’s why that length of the waterline– when you see those really professional rowboats, they’re really long and really skinny. And that is to keep the bow wave to have a higher hull speed because of that length of the waterline. So, all right, interesting enough, but let’s get into some real practical application, maybe.

One of the things about boats is that that drag of any kind really slows you down in the water. Anytime the water has to go around something, it’s very noticeable for a boat. So, things like– if you have weeds hanging off the back of your propeller, if you have barnacles, that’s just more water has to move around and that drag really adds up. I got to thinking, what if sort of your regrets in life or sort of these mental barnacles that make it harder to push through the water of life if you really loaded up with a bunch of barnacles on your whole? That’s number one.

Number two, hard edges of any kind create turbulence in the water. So, there’s these little corners that run along on– some boats, they’ll run along the length of it, they’re called chines. And what it is, most boats have very rounded hulls, and that’s so there are no corners that will create more turbulence. But some boats have these little corners just if they use different kinds of metal. It has me thinking maybe there are behavioral chines and these things, like personality quirks that create turbulence and make it harder for you to go through life and lower your hull speed.

Now, let’s see, next number three. I didn’t realize this, but many times the function of a lot of the sails, especially on the front part of the boat, like the headsail and the spinnaker, the function of it is not actually to catch the wind and create forward propulsion. It’s actually to create upward lift on the boat and reduce the displacement of the boat so it has less water that’s trying to move around.

So, being lighter in the water, it allows it to slip through it easier. And the less water that you have to move out of the way, the smaller the bow wave to slow your hull speed down. So, maybe something different life philosophies, whatever you ascribe to, we’ve talked about stoicism on the show before, Buddhism, Christianity, whatever it is that you’re into, perhaps those kind of mindsets and practices are somewhat like that front sail, setting it in the right way so that you catch the wind and lift your boat a little bit out of the water, having that sort of operating system and help.

Especially things like unattachment, which is a very popular thing in Buddhism. You have much less attachment. It’s sort of like raising your boat out of the water a little bit, it’s not loaded down too much with emotions, and all the negative feelings that can come from when we’re barraged, which is probably a good thing to think about today if you’re worried about election results and feeling triggered.

The last thing is that length of the waterline of the boat, what if that is sort of like the resources that you have at your disposal. The longer the better. Things like knowledge or money or time or your focus or your effort, all of those things, resources, creating that longer waterline allow you to either move more efficiently through life or faster. With less drag and making less bow waves, potentially. So, that’s all I could come up with using a little bit of tortured analogy of hull displacement and how does that relate to life.

Tobias: I liked it. I wasn’t sure what the analogy was going to be for. But I think it’s a good one, it’s an appropriate one for today, taking the barnacles off the hull, great idea. Lifting up out of the water, another great idea. One of the ways that I do that is I go back and I look at what historical figures have done, have dealt with much more thorny problems that most of us will deal with in our lives.

Julius Caesar Captured By Pirates

Particularly, I love– there’s one story about Caesar that I love where I think everybody knows it pretty well. But he was young and he gets captured by pirates. He basically jokes around with them, they like him to the point that– there’s like 30 of these pirates, something like that. They like him so much. Eventually they release him. So, he goes home, gets together a fleet of whatever the opposite of a pirate is, and he goes back and he kills them all.

Bill: Dang! That’s gangster!

Tobias: You think about the effort, you get home, and you’ve just escaped from pirates and you just think, “Well, thank God for that. That was very lucky.” And you’ve bonded with these guys to the point where they like you enough to release you. And what you do is you get a gang together and go back and kill them all. So, that’s something to think about.

Bill: How would I apply this?

Jake: [crosstalk] –in this story?

Tobias: [laughs]

Bill: Yeah, fuck.

Tobias: Well, if you get home and you turn back around, and you go back and kill them all, then you’re Cesar. If you get home and you don’t, then you’re normal human being, and you don’t go on to become Caesar. Very long bow, I get it.

Jake: I mean, that didn’t turn out so well for him in the long run, right? Being Caesar?

Tobias: I mean, he was Caesar. And that became the name for the hereditary emperor of Rome. And it still exists today in the form of Tsar.

Jake: And salad dressing.

Tobias: [chuckles] And salad dressing. There’s another king name, that sounds like Caesar as well, anyway, I forget it.

Buffett Gets Mad People Riding His Coattails

Bill: I’ve been working my way through the snowball. One of the things that I read that bothered me more than I thought that it would was how mad Buffett used to get people riding his idea coattails. I thought that was a very unsportsmanlike. He was willing to take but not give according to the book. Or at least my perception of what I’m seeing or hearing in the book because I’m listening also.

Tobias: It’s very thinly traded positions though. If you’re the only one in there buying.

Bill: I guess, dude. If I have a network of people that I share stuff with, I’m not going to not let them trade my shit and I’m going to trade theirs. That’s not how I operate.

Tobias: What about the one we were discussing on Thursday?

Bill: Don’t touch it.


Bill: I mean I don’t know enough about that. If you were like, “Yo, I bought this.” I wouldn’t care. I really wouldn’t. I think it’s rude to care. Now, I’m not dealing with a whole lot of money. I mean, if I said to you like, I am looking to establish a control position in this and you front ran me, I’d be like, “Dude, that’s a dick move.” But I’m not sure.

Tobias: And if you’re Buffett, you get to the point that when you’re buying something, everybody’s like, “Well, this is going to be good. So, I want some too.”

Bill: Yeah. My perception of the framing was not that way. But maybe I need to change my perception more than the framing.

Jake: I wonder if us mere mortals, we get a little bit of satisfaction knowing that people that we like or think are smart, go into the same idea as we had. It’s sort of some confirmation for us.

Tobias: Confirmation bias.

Jake: Yeah. Whereas Buffett just being a stone-cold killer, he is not going to– he doesn’t care. Intellectually, he doesn’t care that you agree with him. So, he’s not getting any of that little bit of warmth of the confirmation bias.

Bill: Yeah, I mean I don’t really care if people agree with me, as long as it’s an honest conversation. I guess– I don’t know. Look, I think that he lived a life where he took a lot in my perception and I think as he’s aged, he’s maybe realized that there’s some errors in that ways, and that’s what I think he’s trying to say to some people sometimes when he says, like maybe overweight the other stuff that matters relative to the decisions I made? I don’t know. But it just rubbed me a little bit off.

Tobias: Then again, he’s also– you built in a particular way, you’re a captive of kind of your personality, too if you’re spectrum-ish, and you’ve got a thing that you love doing.

Bill: Yeah. No, I mean I ain’t him, that’s for sure. You’re welcome, folks. That’s the news of the day.

Tobias: That’s the headline.


Jake: Area Florida Man, not Buffett.

Bill: Turns out Brewster’s very average. Alrighty, then. Oh, well. Anyway, I don’t know. I got more barnacles than he had. Not my personal life, though. I’m pretty good at that.

Tobias: This is a deeply introspective podcast now.


Bill: No worries, man. I’ve been struggling with a lot of that stuff lately.

Tobias: Which part?

Imposter Syndrome

Bill: I don’t know. I mean, I’ve sent out a couple tweets about it like this imposter syndrome type thing. I have had a fair amount of success in a lot of different places this year. I would argue this is probably my most successful year ever. I feel very conflicted about a lot of that. I don’t particularly like that I had some success, however you want to define it against Robinhood, given the circumstances that it came in.

I don’t particularly like that. I feel like I’m financially successful when a bunch of people are being hurt economically. I don’t particularly like that. I moved my family to Florida. My kids are doing like they’re thriving and I have friends that can’t put their kids in school and stuff. I don’t know I feel very conflicted about a lot of shit, but I am proud of what I’ve done as a man, but I feel like it’s all– I don’t know, very close to crumbling or I don’t deserve it or something. It’s a weird feeling.

Tobias: Imposter syndrome.

Bill: Yeah.

Tobias: Got to recognize it for what it is. Put it outside yourself.

Bill: I know. But I’m like, “Motherfucker, you did it. Those are three big decisions and you did it. So, enjoy it.” But I can’t. I don’t know, it’s weird.

Tobias: You’ve got one of the great modern-day philosophers, right here. I’m talking about Jake, not me, just by the way.


Bill: Dude, [crosstalk] on the fence, and he’s got his shades on and I can see it.


Tobias: I like that analogy, Jake. I think we need to get on a new topic.

Jake: Please.


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.

Homogeneity And Price Action

Jake: Something you said kind of sprung a thought for me. Is it possible that price action by itself can create homogeneity where everyone stops thinking for themselves, and they all start to act very similar to each other and therefore, the whole Wisdom of Crowds, heterogeneity breaks down?

Bill: Yeah, I do think that’s possible. I think that’s what goes on. I think that’s why momentum as a factor works though I understand that that’s probably overly broad and I’m probably attributing too much there. But, yes, I do think so. I think if you look at any stock right now, that has gone down– like energy is a great example of like, people– I mean, look, there’s somebody out there that knows how to make money in energy,

I am certain that it’s a good pond for someone efficient. If you mentioned like at all that you think energy might be a good pond, people just dunk on you. Like, you’re an idiot. Yeah, I mean, I’m not saying that I’m the one. I just know that there’s some value there. That is bizarre.

Tobias: There’s two issues. [crosstalk] It’s got regulatory issues. And then, it’s got just the price– the underlying commodity issue. I think it’s a really, really tough sector at the moment because– Jake can tell us how important it is to the economy and so I don’t think it’s going away anytime soon. But it does have some very significant political risk in it.

Bill: Yeah, no doubt. But you make money where there’s a divergence of opinion generally, although not lately. So, maybe I have a misapplied framework, that’s very possible.

Energy At What Price

Jake: I would say that there’s a price for everything, especially if you’re more of a generalist. And eventually, there is some level of cheapness that is attractive, even to a generalist investor. And you don’t really necessarily have to know all the moving pieces of the energy sector, at some price.

Tobias: That’s true.

Jake: Now, whether we’re there now or not, I don’t know. I mean, there’s obviously you keep going down and then there’s some price where pretty hard to go wrong.

Tobias: The deep value guy in me wants to buy the stuff, bidding up down where it is. But I’ve also been around long enough now to see some of these commodity cycles. I would have said that– I’ve bought ConocoPhillips in the last two years, and that was not the bottom, and that looked like a long way down to me.


Tobias: And who knows where the bottom is? The bottom seems to be a long, long way down here.

Bill: Yeah, I guess I’m not saying like, “Go buy energy.” That’s not what I’m saying. I guess what I’m saying is, and perhaps it’s because I used to be on Twitter much more, and maybe Twitter’s just a microcosm and it’s not. I mean that’s probably reality. But just seems like, when prices go up or prices go down a lot, the nuance and the discussion just completely get eroded. And it almost becomes like stock price, bro. It’s like, all right. I mean, I get it.

Tobias: There’s a few things going on in energy. The shale seems to have changed the economics of it. I don’t know if that’s because there was so much capital put into shale. I don’t know if it’s economic or not, but it just seems to have completely shifted the shape of energy supply. So, anytime energy– It looks like it’s getting a little bit more expensive. People start drilling again, and it seems to keep it down.

Bill: Yeah, well, I’m going to ask something that’s bound to piss off everybody, does it matter that it’s economic? Or does it really just matter that more money will fund more limited liability companies that think that they can flip it at a levered return? Eventually, that game stops but that’s the game. Nobody’s actually drilling these things for cash flow. That’s what I think a lot of fundamental guys miss about it, is like, that’s what my buddy that retired on the fucking beach says about it.

He’s like, a lot of guys look at this as a cash flow play and it’s just not the game we play. And he’s like, I made a lot of money playing that game and people that look at it don’t understand the game that’s being played. That’s their problem. They’re just misapplying a mental framework. Now, whether or not that can continue forever, I have no idea, but the fact of the matter is that could retire.

Jake: Where’s Greenpeace protesting all our central banks for creating this?


Bill: It’s actually not a bad question.

Buffett’s Next Op-Ed

Tobias: Buffett wrote the article sort of semi-protesting about the Greenbackd emissions.

Jake: Turned into real emissions.

Tobias: It just disappeared that article, like he wrote that and then it just never got– there’s just no kind of follow-up on it. It was funny.

Jake: Yeah, that was a good one, that was worth rereading.

Tobias: Do you remember the name of it?

Jake: Wasn’t it Greenback Emissions, something like that?

Tobias: Could have been.

Jake: That was in the title at least.

Tobias: It must be old now. It must be 10 years old. Something like that. More than that, maybe.

Jake: I feel like we’re long overdue for a Buffett op-ed of some kind.

Tobias: Yeah, he seems to like– one every 10 years. He had one in 2000, calling The Top of the Dotcom Boom. And he had one in, whenever that came out, 2010, something like that. Greenbackd Emissions just seemed to like– I don’t see that quoted a lot. I don’t see that quoted ever.

Jake: Yeah, I want to say that one was ’11 or ’12, maybe. Could be misremembering.

Tobias: That feels a bit right.

Jake: Yeah, we need an update.

Tobias: So, what’s the 2020 version or the 2021 version? What’s on his mind?

Bill: If I were him, I’d just be like, I was sitting there in cash for like five years and then, my opportunity came and then the government just ripped it out from my hands. And now, I’ve got nothing to do.

Tobias: That’s every value guy.

Bill: That will be my op-ed.

Tobias: Is that the Fed front running? Literally not the bailouts?

Bill: Yeah, I mean, everything that he had– maybe his op-ed would be the end of prudence. Why prudence is no longer prudent.

Jake: Junk bonds at 2% yield. That’s hard for him to make money in that world.

Tobias: Did work with Apple.

Bill: Yeah, but you can’t wait for that. I mean, that’s the problem– [crosstalk]

Tobias: What do you mean? That’s literally what he does. Just think about what he’s done.

Bill: He’s underperformed for a while though.

Jake: You can’t not wait for that.

Bill: I don’t think that you can make a go-forward investment strategy waiting for something like Apple and then swinging up big. I don’t think that that’s the smartest decision. I think there’s too much opportunity cost as things run away from you.

Tobias: He sat there for– I don’t know how long since the last acquisition. Is it BNSF, is that the last big one before Apple? Is it as long as that?

Bill: No, he had Precision Castparts, right? Was after BNSF. That was big–

Tobias: Pretty close and it’s still there– [crosstalk]

Bill: It wasn’t that–

Jake: [crosstalk] –recently, that was– But not as big as BNSF, though.

Tobias: It’s literally– he said he regards it as Berkshire’s third big business.

Bill: Yeah.

Tobias: So, every 10 years or so, you get an opportunity to buy a third big business. I don’t know [unintelligible [00:33:25].

Bill: That’s fine. But how much cash is still on the balance sheet?

Tobias: Cycle’s not over yet, brother.

Bill: But my point is he had the shot in March, and it was taken from him. A lot of cash could have come out off the balance sheet, and everybody got bailed out. Maybe I still think that was the right thing to do for society, but I don’t think it was the best thing for him. I mean, if you can no longer be the lender of last resort, why carry all this cash?

Jake: That’s a short-term win for society, but probably long-term loss. We’ve learned nothing, and we’re going to get bigger problems down the line because of it.

Bill: Oh, I think we learned something. I think we learned lever up.

Jake: Well, that’s what I mean.

Tobias: The wrong lesson.

Jake: It’s the wrong lesson.

Bill: But because everybody’s pushed to do it, I think it increases the probability that they try to bail it out again. And then maybe you get a situation where the whole system cracks, that’s possible. But then what good’s your cash?

Tobias: I think what it illustrates– when you look through history, and you see there are all of these dotcom boom, it was pretty all-encompassing. All these other sort of periods of speculation in the market, it’s easy to read about them when you’re reading a paragraph in a book or you’re reading a chapter in a book and that takes half an hour to read and then the thing lasted a year and a half or however long it lasted. Being in it is a completely different thing. I think it’s pretty clear in some kind of speculative boomlet bubble driven by very low interest rates and lots of things going on.

Bill: Inning two.

Tobias: Yeah, there are lots of people out there who’ve got an opposing view, and that’s what makes it so hard. In the dotcom boom, there are lots of people who were just like, “Yeah, this is the way the world is going to be from now on. And if you don’t swing and you miss–

Jake: They were pretty much right.

Tobias: Yeah.

Jake: It took much longer.

Tobias: Yeah.

Pet Food Over The Internet

Jake: I mean, what’s the difference between and Chewy? Just time.

Tobias: It could be better business.

Jake: [crosstalk] –time.

Bill: Chewy is a better business.

Jake: How’s it better business? It’s pet food over the internet. It’s the same exact thing. What’s better about it?


Bill: You’ve got consumer behaviors, is actually–

Jake: Okay, so the timing wasn’t right for it. That’s what I’m saying.

Bill: It’s not a great business if you’re just setting up a speculation. Once there’s like actually a business, it’s a better business, you dig? That said, they do not have a lot of free cash flow. Ooh. [crosstalk] $9 billion in sales.

Tobias: That’s a lot of sales.

Bill: [crosstalk] — $67 million of cash flow from operations, there’s a lot of consumer surplus.

Tobias: At least they’re positive. [crosstalk] -game.

Bill: Yeah. Well, I mean, the thing is, you got gross profit. I mean, the important thing is you’ve got gross profit growing from $367 million to $1.4 billion LTM over two and a half years. That’s a lot of growth. So, you just hope you’ve got a lot more fixed costs and variable, then you could have a business in five years.

Jake: We could stock base compensate all that away real quick for you, too.

Bill: I mean, this thing is $26.5 billion. That’s absurd. I guess, if you tell yourself, “Well, I’m just going to own it for 10 years and nothing’s going to happen because–”

Tobias: Nobody’s buying it here if they can own it for 10 years.

Bill: I know, right?

Jake: They’re looking for the buyout like Amazon or whoever to come and be like, “Well, let’s just vacuum these guys up.”

Bill: Yeah, I mean, look at this. Jesus, Lord. $68 million of free cash flow– or cash flow from operations. My apologies. $159 million of which is stock-based comp. What are you doing? $25 billion. Meanwhile, I’m sure there’s some decent business out there selling for like– oh, Qurate. There’s one. Boom!

Jake: [laughs] Never heard of it.

Bill: Yeah. It’s funny that I didn’t even think of it at first, but I don’t know. This is crazy.

Jake: Whatever.

Bill: Good luck to the people playing the game. May you be right. I’ll continue to play my own.

Making Sense Of AMD, Nvidia And Intel

Tobias: It is a tough market when– I’ve got this up on the screen here, Intel, AMD, Nvidia, triumvirate of things competing with. AMD and Nvidia are just ski jumps to the moon. And then, Intel looks like a pretty classic value stock to me. But Intel can’t get out of bed in the morning, and AMD and Nvidia are partying like it’s 1999.

Jake: Wild.

Tobias: And I can keep on hearing how everybody understand– yeah, AMD and Nvidia have got the next generation and Taiwan Semiconductor I think in there as well. Intel is being left behind, but Intel’s bigger spends more money on R&D, I figured they solve a problem at some stage.

Jake: It’s of order of magnitude difference R&D spend. Their 10X.

Bill: Where’s my boy, Mystery Capital? He listens to this. Hit us up. Tell us why.

Tobias: But then, the answer could be tech is hard and this is what happens in tech. You miss the next generation and you Gonski.

Jake: Maybe.

Bill: Yeah, I mean, I don’t know at all what I’m talking about here. So, it’s worth what I’m about to say. But it seems to me that AMD forever trailed and then leapfrogged, and now Intel will forever trail. I’m sure there’s some reason–

Tobias: They’re still making lots of money, still growing.

Bill: Dude, I’m not the guy to have this– [crosstalk]

Tobias: [crosstalk] I’m not arguing with anybody. I’m not arguing, I’m explaining what I’m doing. I own it. Full disclosure. Could be wrong. Been wrong lots of times, I’m good at that these days. [laughs]

Jake: It’s still remarkably profitable business. Just one of the truly iconic American success story businesses.

Tobias: Yeah.

Bill: Yeah. This is actually the example, forget about Qurate, but you’re looking at what– I mean, they think– All right, so in 2023, this is all consensus, folks, I’m not doing my own work. 2024, 26 billion in free cash flow $184 million market cap. So that’s 2024. Now let’s check out this Chewy. This Chewy game. People like to play.

I’m pretty sure I’m not that great at math, but I think that’s north of 10% that I just quoted. Chewy got 25.4 billion. I didn’t mean to shortchange it on valuation. And we’re looking at 672 million of free cash flow, which carry the one. Yeah, you’re under 10%. It’s crazy. But I guess on a forward-looking basis, some people are saying that one is safer to own than the other. I feel one’s just easier to sleep at night than the other. I don’t think it’s safer.

I think it’s only easier to sleep at night when the stocks going up because when the stock goes against you, and you got that much air underneath you, that is not easy.

Tobias: We’ve got a good question.

Bill: [crosstalk] –actually believe 10 years out.

Melting Ice Cube Alphabet

Tobias: Throw your questions in, folks. But let’s kick it off for this one. Is Alphabet a melting ice cube?

Bill: I don’t think so.

Tobias: JT, you don’t want anybody front running you enough of it?

Jake: I think it’s a little late for that one. [laughs]

Tobias: Yeah. It took off, didn’t– [crosstalk]

Jake: I think everyone got in already.

Tobias: That was so funny. It traded like value for a while. I read somebody said it stunk the joint up. [laughs] And then it started trading like value which meant that it just went down every day when FANG went up. And then like a week or two ago, there was that when they all announced their earnings, the other FAMG stocks announce their earnings and they’re all up big, in terms of their earnings, all big beats, but the stock was pretty much beaten up in after hours. And Google was the only one that started outperforming and it’s held it since then. I didn’t quite get back to where I want– [crosstalk]

Jake: I don’t like [crosstalk] melting ice cube, I will say, I’d be a little bit concerned as if I was an index hold her of how much of your perceived wealth is tied to digital advertising. And coupled with the fact that there are multiple studies out there that say that digital advertising may not be as effective as it’s quoted to be and that there’s more money. It’s traditional advertising, where there’s a lot of money wasted, but we don’t know which half is wasted. I think there’s some false precision into some of these digital advertising. That makes people think that it’s more effective than maybe it really is, from a psychophysics standpoint.

Bill: I just don’t know how you can look at a business that has grown advertising revenue from 78 billion in 2016 to 135 billion in 2019. And say, is it a melting ice cube? Like that’s one hell of an ice cube. It’s getting further and further away from the fire now. Could this Apple Search maybe take some of it? Yeah, I guess it could Liberty wrote something decent about that. I don’t know. I mean, Kleenex, I guess other tissues entered. But, I mean, cloud, they’re really focused on cloud. I don’t think that that’s not some other bets nonsense.

That’s like a legit team that’s going out to compete and they’re winning. So, what are the terminal economics? What kind of market share do they get? Would you do it if you were them? I mean, those are all fine questions, but I don’t know that you can call it a melting ice cube. AMC is a melting ice cube.

Jake: That’s puddle of water already, isn’t it?

Bill: Yeah, I guess, when I answer that way, that’s how I associate the things. I don’t doubt that it’s best days maybe behind it or something like that. If you want to have that argument, that’s fine.

Facebook’s VR Push

Tobias: I got a Superchat. We got a few today. And I haven’t been calling them out. Sorry, but I have been putting them up on the screen. Facebook is relative value compared to Snap, Google, Twitter pins. Doth thy concur?

Bill: Agree. I’m actually super bold up on Facebook.

Tobias: Why so?

Bill: Dude, I think the amount of money that Zuckerberg is pouring into VR and AR right now. I mean, I played with an Oculus, that thing blew my mind and I wanted to hate it. I was like, “This is pretty nuts.” And you got a founder that’s pissed off that he missed the phone. And he’s got a ton of discretionary cash flow and I think he’s got a pretty big lead.

You can read the reviews of Oculus are all through the roof. I’m probably going to get an Oculus, too, because I want one. I think it could be big. And he also really understands the game of getting it in front of people because of the merits of getting the developer ecosystem going. I mean, that thing’s only priced at 300 bucks. That’s crazy. That’s just a loss leader. That’s the razor to get into your house. I think they could do big things there. In fact, I wonder if I was an Apple shareholder if I would be worried about them. It could be the next screen somehow.

Tobias: 100%. That’s what I think. Here’s the thing, I think it’s potentially the next screen. And whoever owns that dominates the next generation of whatever connection we have. But that’s not what Facebook’s business is. You’re playing a slightly different game to valuing Facebook versus guessing what happens with VR, and whether Facebook dominate VR, but I will say that you’re getting paid probably to take that bet with Facebook is, it’s probably reasonably good value. And then they look like they’re out in front. I mean, that’s the first consumer VR headset I’ve seen that looked like it was reasonably good value. I saw that same ad and thought that looks really cool. I want that for Christmas.

Bill: Yeah, I mean, last I checked the screens worth a lot. So, the next one is going to be, too.

Tobias: JT?

Jake: I find relative value comparisons to be intellectually lazy myself.

Bill: Woo.

Jake: I don’t really like them.

Tobias: Why so? Because you can just put some comps in that that don’t make–

Jake: Just because something is stupidly priced, does not therefore mean that something cheaper is intelligently priced.

Tobias: Just ignoring the Snap, Twitter pins. I mean, maybe not ignoring Twitter, but you’ve got Google in there as well as–

Jake: Yeah, that’s a– I mean, I don’t know. It’s not really how I like to play the game. That’s fine. That’s what people like to do.

Tobias: Fair enough, but at some point, you’re comparing it to the opportunity cost of something else. And so, it’s either the 10 year 80 bips or another business, I guess, because that’s your opportunity. So, how do make the decision?

Bill: He’s like, you look at their free cash flow, not only is he investing all that money in Oculus but then they’re basically building out their own content delivery network with all these damn servers. I think he’s really trying to future proof that business as much as he can, and not relying on people outside.

Tobias: I think they’ve all done that, to some extent. Like Google does that. If you’re on Google, you’re probably not leaving Google very much. If you’re using the search, you’re probably staying on Google for a lot more than you realize.

Bill: Yeah, I think it’s going to be interesting to see how many of these guys can sort of capture people into their ecosystem for that exact reason.

Jake: Do you think that there’s a day coming for Apple shareholders where they go, “Why weren’t you spending more money on creating that next screen, rather than doing all these buybacks and hollowing out your–”

Tobias: Do we need 12 iPhones? Make one of the iPhones, a screen that goes in your headset. I mean, maybe they can already do it. My pixel has that functionality sort of built into it. It sucks, but it has it in it. I found– [crosstalk]

Bill: Someone [crosstalk] that’s long Apple is screaming at the screen right now, saying, “They are you, dumb ass.”

Jake: Could be.

Tobias: It’s Buffett.

Jake: I would hope so if I was– I mean, I do like Josh Wolf’s theory about the screen or whatever the interface is getting closer and closer to the human.

Tobias: Yeah.

Bill: The other thing that I thought was sort of interesting about Facebook’s call is they’re partnering with Luxottica to lease their version of whatever Google Glass tried. Google Glass is the exact type of product that Google would fail at because I just don’t think that their ethos is like fashionable enough to really figure out a consumer product. I think Facebook’s, not Zuckerberg, that dude’s a cyborg, but I think he’s probably got people that understand around him. They seem they’re thinking of fashion and how things look because that’s going to be table stakes to win that game.

Tobias: Maybe he does understand it really well. He just doesn’t wanna play. I don’t know. I’ve heard that he’s pretty charismatic.

Bill: Zuck?

Tobias: That’s what I’ve heard.

Bill: I guess from people that want him to do something for him.

Jake: [laughs]

Tobias: [laughs] That can be true.

Jake: [crosstalk] –billion dollars.

Bill: Yeah. No, I promise. Zuck’s a cool dude, okay. Sure.

Tobias: What about self-driving cars? Who’s going to win that one? [crosstalk]

Bill: [crosstalk] –worth listening to called Tesla, just to make everybody mad.

Josh Wolfe Futuristic Tech

Tobias: Let’s get back to Josh Wolf’s. I don’t know what he calls it but it is super interesting that idea that we used to walk into a room that had a computer and then we put the computer on the desk, then the computer sit on our lap, then the computer went into our hand. Then, it went on to our wrist, and like the final frontier is sticking it on your face. And then, Musk wants to stick it into your brain, which that’s going to be too far for me, but I’m prepared to wear the glasses.

Jake: I think that’s right.

Bill: I don’t know, man. I don’t think I’m ready for that.

Jake: Toby, would you go contact lenses that had a computer?

Tobias: No. I mean, I don’t wear glasses. I don’t wear contact lenses. So, I don’t really know. But I don’t really like the idea of sticking contact lenses in my eyes. Would you?

Jake: I can’t touch my eye either. [laughs]

Tobias: I’ll wear the glasses.

Jake: Maybe.

Tobias: Josh Wolf has demonstrated this. I know demonstrate might be the wrong word. But the idea, I don’t know if they’ve got a working prototype or not. But they had this idea where you’re not going to need something stuck into your brain because you can stick it on your wrist.

Jake: That armband thing.

Tobias: Yeah. And it can understand your intention. So, you can learn to type, you and I can have different typing mechanisms. And it turns out that you can teach the computer to understand because it recognizes when you’re frustrated and adjust. And pretty quickly you have your own personalized–

Jake: [crosstalk] [laughter]

Tobias: Yeah. Send me back to the home screen. Operator, operator because voice sucks, right?

Company Longevity

Jake: Yeah, there’s a lot of cool stuff out there. Here’s an interesting, we’re talking about terminal values a little bit. I saw some stat that the average age or longevity of a company in the Fortune 500 in like 1950 was 61 years. What do you think that it is today? The longevity.

Bill: Oh, it’s going to be short.

Tobias: The average age of those ones that are currently in there? Or the average longevity on exit?

Jake: Exit.

Bill: From inception to exit?

Jake: Yeah, I think so.

Tobias: That’s hard, but 25 years?

Bill: I was going to go a little shorter. I was going to go like somewhere in the high teens, maybe 18?

Tobias: What’s the answer?

Jake: Oh, Bill. You’re good.

Tobias: Is it 18?

Jake: Bill’s the winner.

Bill: Boom!

Jake: Everyone who’s putting these 20/60 estimates for your terminal value on these companies, you’re going dramatically against base rates.

Bill: It’s a new world, dog.

Tobias: Is that a cyclical phenomenon? Or is that a secular phenomenon? It looks pretty secular, because of the way it’s been going. But it’s that just like, every time you get a boom, everything looks secular too. So, we’re spending lots of money. There’s a lot of turnover.

Jake: No, I think that that’s a pretty straight secular line downward. And it’s like going down one year per year or something like that. Obviously, it’s got to get asymptotic at some point. I mean, turnover just has to be higher. That’s what I found funny too, about, Bill Gates is talking in the late 90s about tech companies should trade at a discount because there’s so much uncertainty about the future. Inherent in a tech business model.

Tobias: That’s why Buffett doesn’t invest– Well, that’s what Buffett avoided them for a long time just because the obsolescence. It’s paradoxical, but the obsolescence in high technology is higher than it is in low technology, because no one’s trying to compete there.

Jake: And yet, we find ourselves in today’s world of– basically everyone betting the opposite of that.

Can Openers And Subscription Models

Tobias: The business model has changed pretty material. I saw a tweet this morning. The can opener was invented 40 years after the can. So, we just had 40 years of cans stacked up around us. And then, somebody was like, “We need to get whatever’s inside these things out,” and invented the can opener. Then, people were like, “There’s food in the cans.” So, that was a huge leap forward.

Jake: But how are they doing, chewing them open before?

Tobias: You had like a chisel and a hammer, I think, or something like that. But if the can and the can opener were invented today, I think that would be like a razor, razor blade model. We’re going to give away the can openers, and then we’re going to jack up the price of the cans and that’d be– there’s certainly been advances in technology and products, but there’s also been advances in business processes. Everybody understands now that you want to get on that subscription revenue. So, that’s why every single thing, every single business you have a relationship with now wants a subscription with you.

You can’t just go in and buy it in the store anymore. They want to send it to you on the regular because they’ve worked out that same thing that the razor blade dude who had the funny ad, like– Dollar Shave Club. So, they worked out that– the razor is basically way too over-engineered for what everybody needs. But also that they could make you buy more razorblades and spend more money if they just sent it to you on the regular because it’s a pain in the ass going in and trying to buy a razorblade, you’ve got to get the lady to get the key and unlock it from the shelf like you’re going to run away and steal, and then she’s going to carry it up to the front desk just so you can’t break for it at the door with your razor– like $50 worth of razorblades, which is like four razorblades. I digress.

Bill: This is what Zuora was pitching. Zuora, that company was built to transition people to the subscription economy. See, it had a nice run here in September when everybody was thinking never sell at $16. And then they sold, now it’s at 977. Yeah, I think that’s right. I guess the thing that Jake has alluded to in the past that I’m not quite sure of is the next guy is going to have the same thought. I guess that part of me, says, “Okay, well, if you say you’re an enterprise software company, and you get in the distribution chain, if you can keep your technical debt at a minimum or be maniacal and never have it, then maybe there’s like this permanent relationship.”

On the other hand, Zoom was able to take so much market share, because it just works. I mean, are we just going to have tech that just works? And if so, what prevents the next thing from just working? And then why is your asset life going to be what it is? I get it, I do think that Zoomtopia was a very cool thing to watch. I mean, the idea of, “Okay, I can take any phone and beyond my enterprise call,” or phone network rather. I don’t have to go in and have an installed phone and then a Blackberry. And it’s all seamless, like, “Okay, cool.” But I don’t know, is the next guy going to look at $140 billion company and say, “I can do that, too.”

Tobias: I’ll send you a link. You don’t have to know my address. I’m just going to send you a link, you click the link, we’ll get in the same room at the same time.

Bill: Yeah.

Tobias: That’s innovation.

Bill: I mean, maybe not. Maybe this is the next infrastructure and it never goes away.

Jake: Five-minute abs.


Bill: Yeah. It’s just hard. It’s hard to believe. I have conflicting thoughts of like, tech has gotten so seamless and so good. And yet also somehow, it’s super defensible. It seems like high valuations would throw a wrench in all that.

Tobias: Number one theft item from drugstores is Monostat. Number two is pregnancy tests. Razors are way down the list. That’s because they lock them up. It’s because you got to go in with a note from your bank saying that you’re solid for the job, and you can pay it in installments. [laughs]

Bill: Yeah, I mean, also, how do you know that whoever you are? That’s an odd thing to know.

Tobias: Eric Nielsen.

Jake: Dude, [crosstalk] powerful.

Bill: Well, I guess if you’re an investor, but if you just have random yeast infections, that’s off the top of your head, I question who you are.

Jake: I applaud you.

Bill: [laughs] That’s fair. America.

Jake: We solve UTIs at the beginning, and now we’ve got [chuckles] Monostat at the end.

Bill: That’s true.

Tobias: We’re going to be ruining everybody’s advertising.

Jake: We’ve been demonetized– [crosstalk]

Tobias: We’re going to ruin relationships over this. People going to wonder why they’re getting so many ads for–?

Jake: Oh, yeah.

Bill: [crosstalk] -ads. It’s not our fault.

Jake: We’re sorry.

Bill: Blame Google.

Tobias: Blame YouTube. They want you to subscribe. They want that subscription revenue. They can’t survive on advertising alone.

Jake: I think that there is a kind of bigger point to this, though, that we may see the world get a little bit more expensive on us. And all this free stuff that we’ve sort of grown accustomed to might start to disappear a little bit, and maybe even we do it on purpose. And we’d rather have a relationship with a company that we pay for the service rather than getting backdoored with ads and all kinds of other stuff. I think this whole free utopia, maybe this is just a time period that we’re going through and eventually, it’s going to cost a little bit more for this stuff.

Bill: You just buy Apple stock before you made that pitch?

Tobias: Apple for the privacy.

Bill: Yeah.

Jake: Yeah. And the 30% rake on the App Store.

Bill: It’s funny is I used to love Apple and hate Facebook. And now, I look at it like Apple’s taxing small business and Facebook’s enabling it and it’s just weird how a little bit of time can change my perception on two pretty big companies. Now, they would say, well, we’re giving them the distribution and whatever. Okay, I get it, but I don’t know.

Tobias: I’m going to get this wrong, but what’s the live long enough to see yourself become the– May you live longer–

Bill: My father?

Tobias: No, I can’t remember the quote, but it’s basically, “May you live long enough to see yourself become a dominant power and then–” If you’re the rebel, if you survive long enough, you become what you hope, you become what you’re fighting against. Apple’s the dominant power, now they’re about to get unseated.

Bill: It wouldn’t be very Munger of me if I didn’t rethink my thoughts, if I just sat there and thought about it. Munger would be disappointed in me. Charlie, I’m trying.

Tobias: Amigos, that’s time. That was fun.

Bill: Have a good one, folks.

Jake: [crosstalk] –everybody

Tobias: If the world’s still standing next week, we’ll be back probably under President [unintelligible [01:01:01]. So, we’ll see you then.

Bill: It’ll be standing, but if you don’t vote, you can’t bitch.

Tobias: Yes, you can. There is no rule that you have to vote to bitch.

Bill: [crosstalk] No. I don’t like it.

Tobias: Peace.

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