In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- Buffett Bonanza
- Archery vs Darts
- Combining Fundamental With Technical Analysis
- Gardner & Fisher Investing Strategies
- Value’s Recent Outperformance
- What To Do With Small Portfolio Positions
- Buffett’s BuyBacks
- Investor Ulysses Contracts
- Zoom vs Qurate (Update)
- Tax Implications Of Selling Shares
- Happy 50th Episode VAH
- Rolling Funds
- International Investing
- Star Wars Parenting
- If Telsa Takes Off Should Geico Be Worried?
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
Tobias: What’s up, folks? Technical difficulties, no internet at my end. Apologies for that. It’s 10:33 on the West Coast, 1:33 on the East Coast. I think it’s now 6:30 UTC. You might want to check that, but I think that’s right. No idea what time it is in Australia. Sorry. You move daylight saving, we move daylight savings. Now, it’s probably two hours different earlier or later. No idea. What’s happening, fellas?
Bill: Just enjoying the beginning of the melt-up.
Tobias: The value melt-up.
Bill: That’s right. That’s what I’ve been saying. There’s a lot of heat other places. There’s a lot of reasonable stuff elsewhere. Once everything gets unreasonable, that’s when we will have melted. So, get ready for the party.
Jake: I like the thesis. How do you surf that wave?
Bill: I think that most of our listeners are in the beginning of paddling on the crest.
Jake: I think they have already been wiped out [crosstalk] ago.
Bill: That’s the problem.
Tobias: They’ve been stranded on some coral reef at the middle of the ocean, waiting for the wave. Here it is.
Jake: Yeah, no doubt.
Tobias: Townsville, right on! Got some Queenslanders in the house. So, what’s everybody talking about today? JT?
Jake: It should be a fun little segment on archery versus darts in investing.
Tobias: Oh yeah. Nice. What about you, Billy?
Bill: I think I’m going to talk about the part of myself that I hate. I think that’s what I’m going to talk about.[laughter]
Tobias: Didn’t we do that last week?
Bill: No, no.
Jake: It’s every week!
Bill: I think we’re going to do it again. I think we’re going back there, and then we got to touch on Berkshire because the Buff Dog crushed it.
Jake: Wow. How about you, Toby? What do you have?
Tobias: Look, I’m to give my segment over to Bill to talk about Berkshire because I want to talk about that. But I haven’t had a look at the filing yet, so I’m going to need some guidance.
Happy 50th Episode VAH
Jake: [crosstalk] Saturday morning first thing I did. Hey, by the way, gents, Happy 50th Episode of Value: After Hours.
Tobias: I’m glad you pointed that out. I can’t believe we made 50!
Jake: And as special little thing, I had my team at Farnam Street put together a little something for the 1 of the 10. If you go to farnam-street.com/vah, like Value: After Hours, we’ve put a little something together for you so. Anyway, let’s move on.
Bill: Oh, snap! I did not know this.
Tobias: I’ll put that in the show notes.
Jake: Full of surprises.
Tobias: JT alerted us just a little bit earlier today.
Bill: I’ve been on the Peloton.[laughter]
Bill: Then, I got naked and swam in the pool. So, that’s been my afternoon. It might be a little bit much, but I got my clothes on now.
Tobias: Let’s start with Berkshire. It’s normally my topic, but I’m going to hand it off to Bill to give us– Both of you guys have read the filing, so let’s talk about Berkshire. What happened? What’s the big news?
Bill: I mean, I don’t know that I can do it off the top of my head. I can pull it up here. But I mean the 9 billion of buybacks in the last quarter, I think is impressive for a guy that lost it. He hasn’t totally lost it. I thought it was interesting that he ramped the buybacks into September. I don’t know what that tells you sort of about how he’s thinking of the world– [crosstalk]
Tobias: At higher prices. That was interesting. I noticed that the buybacks went up as the price went up.
Bill: Right around here.
Tobias: He’s just pinning it up. Market manipulation.
Bill: [chuckles] Yeah, I’m sure that’s what he cares about it. I was wondering though, I mean, it’s a huge market cap, but I wonder what kind of constraints you even run into if you’re him. When you call your broker and you say, “Let’s do 9 billion of buybacks–.”[laughs]
Bill: I wonder if somebody’s like, “Okay, how are we going to do that?” Some trader’s got a tall order. But generally, I mean, to look at how that entity has performed through a pandemic, and for it to be an industrial company, and to just see the way that the pieces within the business move, whether it was the first quarter or the second quarter or now the third quarter– Earlier in the year, Geico gave you a little something, now you’re giving back on Geico and maybe you’re giving a little bit up in reinsurance, but they’re underwriting new reinsurance at higher premiums. You’ve got– BNSF is coming back. It’s a beautiful collection of businesses where you have an industrial that free cash flow has increased this year through a pandemic, that’s incredible to me.
Jake: What a life’s work, right?
Jake: So good. Did you see I talked a little bit about a– if you did a long Berkshire short/Apple stub?
Tobias: Yeah, how’d work out?
Jake: Well, I mean, just the math of it is roughly– that leaves call it like 400 billion left over once you back the Apple out and then take another, call it 300 out for cash and securities. That’s probably a little overly aggressive because there’s, call it 20 billion that you need sort of working capital for insurance, but whatever. This is just rough. But that leaves you with like $100 billion to buy basically like the railroad, the energy company, See’s Candy, Geico, like everything. Probably, the railroad’s worth that hundred billion and everything else is free. I mean, that’s a pretty good– That’s not a bad stub there.
Tobias: Good stub. How has that performed? I’m guessing Apple kind of topped out around 1 September or something like that with everything else?
Jake: Well, I think I posted that on Friday. I think it’s up almost 10% as a trade in like two days. But that doesn’t mean anything.
Tobias: What about selling the Apple? Sold $5 billion of Apple like– not material really to its holding, but still that’s $5 billion.
Jake: Yeah, we’ll see.
Bill: And I get it. [laughs] What about it? Maybe Coke taught him something, I don’t know.
Tobias: It hasn’t sold a lot of it though, just 5 billion. What’s the size of the holding there?
Tobias: 111. Yeah, 5%. Not much. But I guess it’s not all in or all out, right?
Jake: Never sell to sometimes trim? I don’t know. [crosstalk]
Tobias: I guess, if you get enough of a price, you can sell a little bit.
Bill: It’ll be interesting to see how Apple works from here. I can make an argument that it’s going to be just fine, just given the amount of take that they’re going to have on the App Store. But it’s interesting.
Tobias: We’re talking business or stock price there?
Bill: I mean, dude, the stock price might be okay. I mean, you really might. I don’t know that it’s objectively too high to me. I really don’t. If I was him, I’d probably sell some calls or issue some convertible exchangeables or something like that, for sure.
Jake: Hedge it a little.
Bill: Yeah. But I don’t think it’s got to be all or nothing. But, yeah, I don’t know, man.
Jake: In fairness, I would have hedged like–
Tobias: Too far ago.
Jake: [crosstalk] –ago or something. Yeah.
Bill: Yeah, and somebody in the comments is saying Apple 5 trillion. I mean, that’s where I think it would get a little rich, subjectively.
Jake: Well, way to go out on a limb there, guy!
Bill: I’ve said that in the past.
Jake: You’re really melting up.
Bill: Yes. I fully think that we could get stupid here in the next couple years. I don’t see why not.
Tobias: What about the last few days? Do the last few days give you any pause on that?
Bill: I don’t know. I don’t think so. I’m mean not really.
Tobias: Because we’ve had the 15 Sigma move against this in momentum and 12 and a half Sigma move for value. Which like last year, it was only six Sigma event. So, the Sigmas are– I don’t even know how bigger this.
Bill: [crosstalk] –just keep adding them.
Jake: If you get that many Sigmas, that tells me that something’s wrong with your scoring system.
Tobias: Well as anybody who’s read one, read any Taleb will say, it’s not normally distributed, the tails are fatter than that, that’s why it’s not that many Sigmas but it’s still a big move.
Jake: Big move.
Bill: I need to read some Taleb. A lot of people have told me that I should.
Tobias: Have you read Fooled by Randomness?
Bill: I don’t think so.
Tobias: That’s the only one you’ve got to read. That’s a really easy read. That’s his first one. That’s a great book.
Jake: I probably liked Antifragile the best of them.
Tobias: I couldn’t get through anything else, honestly.
Tobias: I own them all and I’ve read like the first part, but I was like, “You know what, I get it. Do I need to read another book about it?”
Jake: That’s fair.
Bill: Somewhere he’s just ranting because he’s listening to this and he’s on Twitter just going ham.
Tobias: He’s one of the [crosstalk] imbeciles! Imbeciles!
Bill: Blocking you, he’s already blocked you and he liked you and then he just blocked you.
Jake: [crosstalk] –idiot, right here.
Tobias: Preemptively blocked. Well, I make no claims to being an intellectual. I claim the second part, yeah, idiot. Still an idiot after all these years.
Bill: What are some other things that I sort of liked about Berkshire? The Auto Group, I thought did slightly better than I– I mean, I don’t underwrite these estimates on the Auto Group. I mean, at a certain point, I just outsource a lot of this shit to Buffett. But when I saw how it performed, I was pretty impressed with it. What I don’t understand is why he bought The McLean Group. He bought that from Pritzker. And that business doesn’t seem to make a ton of sense to me within his buy high quality, buy these businesses– I mean, even in the queue, he is like this is an extremely competitive business. It’s sort of an odd– I mean, I know its distribution. So, you probably see some physical moat there, but that one, I don’t fully understand. Berkshire Hathaway Energy’s a monster.
Jake: If I remember the– I might be wrong on this, but the returns on capital on it aren’t that bad. The margin is incredibly low, but the turnover is very high.
Bill: Yeah, Amazon.
Jake: So, it’s a little better than it looks.
Bill: Yeah, that makes sense. But I mean, you think about what precision’s gone through this year? I am a freakin’ Buffett fanboy at the end of the day. So, to see him be able to have his business do this in a pandemic is pretty awesome.
Jake: Dude, cash flow from operations first nine months of this year versus last year, 10% increase.
Bill: Now do per share!
Jake: Yeah, fair enough.
Bill: Now lever it, just a little!
Jake: Yeah, he did that too, little bit.
Tobias: The funny thing about Buffett, I’ve said this to you guys before, I don’t know if I’ve ever said it here. But the more experience I get, the more I appreciate what a good investor Buffett is. I kind of knew at the start what a great investor he is. But the more I understand, the more I realize what he’s doing is really something kind of unbelievable. It probably won’t be replicated for generations. He’s probably like at that– I mean, everybody already knows this, but he’s the industrialist of our age anyway.
If Telsa Takes Off Should Geico Be Worried
Bill: There’s a question here in the comments about Geico. If Tesla takes off, should Geico be worried? Or let’s just call it self-driving in general? I think, yes, probably on a long enough time horizon. But the other side of that, man, is these cars these days are so easy to total that insurance rates are going to go up like crazy. Copart is the winner. I think that Progressive and Geico will probably push rates. I wouldn’t be shocked to see margin build into whatever inevitable cliff that people worry about that I’m not even convinced is all that close. Tesla, my grandma totaled backing out of a garage, that was absurd. That was just bodywork. And the more computers, the harder it’s going to be to fix.
Jake: It is an interesting thing that it might become more like CAT where it’s not as often that you get– but the damage is bigger and more expensive. Maybe the premiums don’t really come down that much, as much as you would think. I don’t know, it’ll be interesting to see how that evolves.
Jake: By the way, I was going through– I’ve probably read it a dozen times now, but the essays of Warren Buffett and– maybe more than that, maybe 20 times, but I was going through and reading it again. I find it very funny to look at the old things that I highlighted and what was I sort of thinking at the time. It’s amazing how much nuance there still is for me to pick up even after reading it so many times. There’s not a word that’s out of place in that, and every word is carefully chosen and has a very specific nuanced meaning to it. I mean, it’s about as good as it gets.
Tobias: It’s so true. Every time I think I’ve learned something new, I go back and read it and I realize that that was what Buffett was talking about, I’m like, “Ah, now I get it.” I didn’t get it the first time.
Jake: He already knew all of that.[laughter]
Bill: Yeah, he’s much smarter than I’ll ever hope to be. Oh, I have been issued a live in-podcast correction. I got Marmon Group and McLean mixed up. McLean came from Walmart, apparently, so my stupidity was exposed. So, it won’t be the last time.
Tobias: [crosstalk] we’re multitudes, we’re getting stuff right, correcting stuff on the fly.
Bill: I’ll tell you what, man, the 10 are getting sort of like nippy.
Tobias: I didn’t get to acknowledge it last week, but I did see the comment that somebody finally figured out, you either die a hero or you live long enough to see yourself become the villain, which is the line I was trying to remember.
Jake: But you thought it was Seneca, but it was actually Batman.
Tobias: [laughs] Yeah, I was thinking Kierkegaard. Yeah, it was the Joker, or it was Marvel or something like that.
Jake: Yeah, it was Harvey Dent.
Tobias: To be fair, I couldn’t remember properly. So, that’s my excuse. There’s some philosophy in Marvel, I guess. I haven’t– [crosstalk]
Bill: There’s a ton of philosophy in Marvel.
Jake: It’s DC, not Marvel. Come on, guys.
Tobias: I’m sorry, DC. Oh, it’s going to get me–
Bill: That is true.
Tobias: –crucified for that one.
Star Wars Parenting
Bill: I’ll tell you what, my kids want to watch Star Wars. I’ve realized five years old is probably not the time to watch Star Wars. From watching it with my five-year old, I realized that was maybe a bit too far. But there’s–
Jake: Too early or too late?
Bill: I don’t know, it seems there’s a lot of violence that I’m not totally comfortable with him seeing. My six-year-old’s a little bitch, that kid will run out of the room if anything happens. He gets so fucking anxious, so I can’t watch it with him. The five-year-old could take it, but I don’t know if I’m giving him nightmares behind the scenes. Anyway, there’s a lot of stuff in Star Wars that really good that I under-appreciated as a kid and now to be able to rewatch it. I know there’s Star Wars fans out there that are like, “Yeah, Bill, we fucking get it.” But I’m just telling you it’s worth watching.
Tobias: Did you watch Episodes 1, 2, 3?
Jake: That’s a hot take right there. [laughs] –billion-dollar franchise. Okay.
Tobias: You have to watch the Red Letter Media analysis of 1, 2, 3. It’s hilarious.
Bill: This is how I feel about Marvel too. I think it’s great. And some people are like, “Oh, Marvel’s pretty good.” And I say, “Yes, that’s why I’m somewhat obsessed with it.” Just got introduced. Sorry. I don’t know everything that’s great in the world. Anyway.
Tobias: Let’s do JT’s topic.
Bill: Except for The Queen’s Gambit. That was awesome. Ripped that out in a week. Ooh, it’s worth watching.
Archery vs Darts
Jake: Yeah, I’ve got to get on that one. Okay, so Annie Duke’s new book that just came out. It’s called How to Decide. And in there, she’s talking about having an archer’s mindset. And what she’s getting at is that it really pays to focus on aiming for that bullseye because even if you miss a little bit, you’re going to hit a decent score. And so, she says, “Just like in decision-making, archery is not all or nothing, where you get points only for hitting the bullseye and everything else is a miss. An archer gets points for hitting the target at all.”
Okay, so if I think about that mindset kind of applied to investing, you might end up saying, “Gosh, if I can just find the next Amazon or Google and it’s even one-tenth as good as those turned out, it’s going to be a monster home run for me.” So, I’m aiming for that bullseye of the monster compounder, super compounder. And even if I’m close, I’m going to get a really good outcome. Now, something like Snowflake comes to mind a little bit where it’s like, you ask, “Is it going to be bigger in 10 years from now?” Yeah, I probably, but it better be at a $68 billion valuation, it needs to be incredibly bigger.
I think what’s interesting is asking yourself is investing like archery, like Annie’s talking, or is it more like darts. In Rory Sutherland’s book, Alchemy, he talks about different scoring systems. One of them is darts where it doesn’t always pay to go for the single highest score. So, in this instance, if you look at a dartboard, the 20 at the top is what the pros aim for. They’re trying to hit the triple 20 most of the time, but on either side of that is 1 and 5. And if you miss, you’re going to end up hitting a relatively low score. The average of those three slices on a dartboard is 8.7.
Now, if you look at the southwest quadrant of a dartboard, you get the numbers 16, 7, and 19 together, and the average of those three is actually 14. So, not quite double, but almost double. If you were to miss it all, you end up potentially with not a bad outcome. So, ironically, you almost want to aim for the 7 and hope to hit either a 16 or a 19.
Now, Patrick O’Shaughnessy in 2014 wrote this pretty good piece about lottery stocks. These were typically some new innovation or technology or something revolutionary that captures the imagination, and they tend to be in the 10% highest price to sales, price to cash flow, price to earnings. They tend to skew towards biotech and pharma and technology software. And you have these very, very big outcomes out of that group.
Tobias: That’s what keeps people hunting in the expensive stuff.
Jake: That’s what keeps them going is these lottery type of outcomes. He updated the piece in 2015 with a really nice note called Lessons from Market Extremes. What he found was that when you look at that basket of the glamour stocks, they contain the highest outcome, like outcome stocks, they’re these giant winners. They’re hitting that 20 on the dartboard. The best performing of those glamour stocks, put up a, let’s see, plus 112% on average. However, the median of them underperformed by 11%. So, if we’re throwing the dart, we’re likely to get that 11% underperformance and not necessarily that huge 118% outperformance winner.
Bill: I don’t know that I agree with this, I’m just going to pin that. Continue.
Jake: Thank you for that.
Tobias: Well, just before you go on, isn’t that Partha Mohanram who I talked to on the podcast, he’s the guy who had– I’m now blanking a little bit on what his score is, but he was like– he saw the F-score and said–
Jake: G-score or something?
Tobias: That’s right. Growth score, that’s right. And so, his idea was apply the F-score in the really expensive stocks and then– he told me in the podcast that it’s a pretty good performer, it outperforms, it outperforms the market, outperforms that cohort of stocks. But the way that it does it, for the most part, is it shorts the stuff that falls– so it’s the short side that generates the returns rather than the long side. But then, you also have the nice benefit over the last few years, of course, that it’s been the long side that’s generated the return. So, I was alerted to that strategy by the Validea guys and they pointed out that it had been the best performance strategy of all the strategies that they tracked for the last few years. So, it’s a good strategy, anti-value.
Jake: Yeah. So, if you look at the value segment, which to me, represents the southwest quadrant of the dartboard, the best performing of that group was a plus 76%, which is pretty good, but not nearly as good as the 112% of the other. But the median was an outperformance of 5.4%. So, that’s sort of like missing on the dartboard but getting a decent outcome. Something to think about, if you are an incredible dart thrower, a professional, maybe you have a shot at just ringing up the triple 20s, but I’m a little bit pessimistic that there are as many good dart throwers out there as maybe think that they are at this point. So, maybe be a little bit more intellectually humble, realize that you’re going to miss on the dartboard, and aim for places that can lead to maybe tighter dispersion of outcomes, but a more positive expected value.
Tobias: Yeah, I like that.
Bill: I don’t know that I agree. Here’s the thing. I’ve sort of talked about it with the David Gardner thing. If your definition of value is a stock that could rerate and double– this sort of goes into what I hate about myself, so I’ll just use this example. Spirit AeroSystems is a good example of something that I wrote on my blog recently. And the thing about owning that company is it’s not a compounder in the sense that you could just own it forever. Eventually, I would need to sell it. I truly believe it was too cheap. I don’t know what exactly the right price target is. I mean, I don’t actually believe in myself to have that kind of precision. I think I’m reasonably good at knowing when things are cheap. I don’t think I’m very good at knowing when things should be sold.
In that game, I’m basically betting on a rerating where I think I have to use what I perceive myself to be weakest at to exploit the advantage because I don’t want to own the company forever. So I’m selling and then paying tax, where I think that there’s some genius in what the David Gardner philosophy is, yeah, maybe my probability of zero is higher or probability of a bad outcome is higher in some of these traditionally higher-valued stocks. But if I spray enough of these bullets, the right tail is going to take me out of that. I can overcome that hurdle if I truly can hold it. And I just think it’s a matter of personality–
Jake: The analogy would be that it’s not a 20, it’s a 200 on the dartboard.
Bill: Yeah, because I think some of these value stocks that people– I shouldn’t say people– that I used to look at, have a truncated upside, and that I think can skew the set of probabilities quite a bit. Whereas– like I was reading CrowdStrike’s 10K today and back in the day, I was talking to somebody who has like employed 9 to 11 or something like that. He doesn’t work anymore. But he said– he was like, “They’re going to win. It’s inevitable.” And today, when I was reading the 10K, I was just sort of processing what he was saying while I was reading it– I think people should read that 10K. And is it buying today? I don’t have any clue. I don’t have any view on that. What I do know is, I don’t think that that valuation is patently absurd if you have the view that it’s inevitable, and you believe what the 10K says. So, those questions have to be answered. And I don’t know how many of these companies are that way or whatever.
To your point, the valuation’s imply inevitability on a lot of these things. But I used to think that bucket was really stupid deficient. I think it’s probably stupid for the average person to make concentrated bets in, but I don’t know that I agree that it’s a bad place to fish forever. These valuations are really demanding.
Gardner & Fisher Investing Strategies
Tobias: Do you want to just talk about the Gardner– What is Gardner’s strategy for those who don’t know?
Bill: I mean, it’s all my perception of it. I’m not him, but I believe what he tries to do is to look for disruptive technologies, pick them early, and hold them until the very– he wants to be the last person holding. So, he is truly never sell, he’ll hold it through 6X and then back down to zero, in theory. But he also picked Amazon at three bucks. Now, if he and I are chatting, David, thank you for listening, but I would say some of this– we recommended Amazon at three bucks. Well, dude, if you’re recommending 2000 stocks, I don’t know that you can really tout that, but I do see the– [crosstalk]
Jake: So, did the index, recommended Amazon.
Tobias: Russell 2000. High five.
Bill: That’s sort of the business. So, I understand the clickbait part of it, but I do think the way he talks and the way he thinks, it’s hard to look at his returns and discount the strategy, it could be a function of where we are in the market. If I were to take the devil’s advocate approach to it, that’s what I would say. I don’t think that that’s that crazy.
Tobias: What is the difference between what he does and what Phil Fisher advocated?
Bill: I think they’re pretty darn similar.
Tobias: It’s a Phil Fisher application.
Bill: I’m really talking out of school on this and maybe–
Tobias: Well, talk Phil Fisher.
Bill: Okay. My perception is maybe Phil was a little bit deeper in the weeds on stuff or at least wrote in a way– [crosstalk] Yeah, wrote in a way that I perceived him to be a little bit more fundamental and less sort of trend writing. But I really apologize if that’s wrong, I have not read enough of Gardner to really know that.
Tobias: Do you get an understanding of what Gardner’s process is or you only ever get to see the picks?
Bill: I’m sure if I subbed I would– [crosstalk]
Tobias: In broad terms.
Tobias: Like you get it in broad terms, like just we’re going to pick Amazon $3.
Jake: He [crosstalk] pretty well in that Consuelo Mack interview.
Jake: He talks about it. I don’t think it’s unreasonable. It’s just not really– that style of game doesn’t appeal to me as much as trying to make– I guess we’re all making positive expected outcome bets. I just am not sure about catching the winners as readily.
Bill: Yeah, I think he has more of a tolerance for catching a loser and allowing the winner to bail him out of that. Whereas I think people that more identify with value are more focused on waiting for this fat pitch. I think he’s like Vladimir Guerrero in baseball terms where he’d just swing it any pitch and he connects with some. And the Buffett is closer to like, just wait for your strike and then swing. If I was him, I’d probably say that my strategy carried less risk because you’re more diversified out of the gate. So, if you’re wrong on one, your risk of ruin is actually quite a bit lower than the Buffett strategy because the Buffett strategy when you swing big against the market and you’re wrong, it could really screw you.
Tobias: It’s hard though. There’s still a requirement that you hit in the spray-and-pray strategies. Spray and pray might be a little bit rude. Let’s talk Fisher rather than Gardner. Fisher is doing pretty rigorous analysis.
Bill: I don’t think we’re saying anything rude, are we?
Tobias: I’m not trying to–
Bill: I want to be very careful. I really do like him and I think people should read his stuff.
Tobias: Anytime you comment on anybody’s strategy, the misunderstanding it’s going to be.
Bill: Well, that’s why I try to–
Tobias: No, you’ve been fine, it’d be fine.
Bill: [crosstalk] I don’t know what I’m talking about here. This is all my perception, but I do think people should read that because I think it’s important to understand even though I said I don’t understand it. So, there’s some hypocrisy there, guilty. [laughs]
Tobias: It’s the difference between a VC approach to investing where we’re going to have a portfolio where there’s one or two monster winners, there’s another two or three that break even, and there’s probably five that are busted. I can’t believe, do VCs really run– like that used to be the– They say VCs that have 10 positions, but then I think that’s–
Jake: It was 100.
Tobias: I thought that was what Y Combinator or whoever– I might be mixing two ideas together. But I thought that they had taken the approach, we’re going to have 100 positions because it’s going to be a– that’s such a right tail distribution, we just need to make sure we’ve got enough granularity in that right tail to get. We want to get as close to the distribution as we can.
Bill: Yeah, I would give money to somebody that did that. I would not give money to a VC that had 10 positions. That seems– [crosstalk]
Tobias: There are lots of lots of rolling funds being advertised on Twitter.
Bill: Yeah, well, lots of shit and finance, generally.
Jake: Let me ask you this. You’re looking for these extreme power law outcomes. Would you think that the trend towards later IPOs, which means bigger IPOs, which means less growth available for you as the public equity holder of it might pinch that strategy somewhat?
Bill: I don’t think it might. I think you are identifying a very real issue. I think that could be the strategy’s Achilles heel going forward, potentially.
Tobias: The answer might be to set up a rolling fund or to invest in these rolling funds or to look on– what’s Naval’s site called?
Tobias: AngelList, yeah. [crosstalk]
Bill: Yeah, I think if you were to get into the private markets, that’s probably the way that maybe you could do it a little bit, I guess, in a reduced risk fashion, although then you’re in the private markets. So, know that it’s really reduced risk.
Jake: [crosstalk] –everything investment.
Tobias: Do you think that that’s lower risk than Buffett’s strategy really?
Bill: Not for Buffett.
Tobias: Not for Buffett. Yeah, that’s fair.
Bill: For the average person? Yeah. I think maybe. I mean, Buffett’s a savant. For me, to run Buffett’s strategy, I just don’t believe in myself that much. I’m not going to be 50% in a position, you won’t see it. I said the other day that I’d take enough risk to get on a private jet. I don’t have that kind of money that a payoff would make it. If I lose big, I’ve got to move out of my house, my kids would suffer. I’m not taking that risk. Buffett [crosstalk] care.
Tobias: Still the best sizing discussion. Still the most honest sizing discussion ever.
Bill: Well, it’s true. So, no, I think for Buffett, that’s the right strategy. But I do think it’s a very personal game.
Tobias: That’s true. But whatever you do, you just have to be able to hold through the part where it’s not working.
Bill: Yeah. Or the part that I hate about myself, is the Spirit idea. I will buy into things that I understand. I get it, but then owning it is so freakin’ different to me than researching it and understanding it. And there are certain scenarios, I don’t do it with my bigger positions, but some of the smaller ones, I run my fantasy football team in a very similar way. I have these core positions, and then the role players. I’ll churn them out, and I probably just shouldn’t even do it. It’s definitely helped me recently, but I don’t know. I feel that’s probably a weakness of mine.
Jake: Just working the waiver wire too much?
Bill: Yeah, I think so.
Combining Fundamental And Technical Analysis
Tobias: We got a question here. We’re going to go little bit early on the questions because apparently, we didn’t spend enough time on it last week. So, here’s a philosophical question. What is your disagreement to creating a dumbbell portfolio value and growth with? I’m guessing fundamental analysis for value and technical analysis for growth or growth indices, assuming it’s not reading chicken gizzards.
Jake: I don’t know enough about technical to say one way or the other about its merits. I think there is something to the crowd’s psychology of it and it’s picking up and probably capitalizing on other human biases. They’re just not as readily obvious to me. And I find it harder to– and listen, you have to be very a deep believer in whatever strategy that you’re running because you will get tested. And so, if it makes sense to you, the market will push you out of that approach by testing you. If I’m half-assed on technicals, I’m just going to– I will quit readily, so I’m not even going to start. That’s kind of my logic.
Tobias: If you want to do it, I think that you want to use– like this momentum is a pretty well– I guess that’s momentum is technically technical. [chuckles] But I think that the research on it is pretty robust. From what I understand talking to the guys who implement momentum, they think that it’s a better way of identifying fundamental income growth, fundamental earnings growth, or fundamental revenue growth, they just use– And I think that they include earnings momentum as well in their analysis, it’s not purely price momentum. So, I think that’s a very common construction to have some portion of the book in momentum and some portion of the book in value. It’s not the way I want to do it, though, but I think it’s perfectly fine for anybody who wants to do it.
Bill: I guess the thing that I don’t like about this strategy is to Jake’s point earlier about, like how the probability of loss, I think, is objectively higher from a frequency standpoint when you’re fishing in a really expensive pond. And I guess that on one hand, you could cut your losses quicker with technical analysis. But on the other, I think that you’re probably going to see more volatility when you’re playing that game. I mean, I would need to see statistically whether or not I’m right, but–
Jake: My hunch is also that it’s probably the wrong time to be thinking about that one if you’re long only momentum.
Bill: Yeah, well, if you’re going to buy Snowflake and you’re fundamental, I wouldn’t sell that based on technical reasons. That doesn’t make a whole lot– I would buy that knowing I could take a 50% drawdown in this tomorrow because people just change their mind in the future. So, I just don’t know that I understand about selling because the technical is there. The barbell strategy makes sense to me.
Tobias: One of the things that Jim O’Shaughnessy points out on his– I think it’s in What Works on Wall Street, is that momentum is not necessarily buying the most expensive stocks. I think the stuff that it’s buying stuff, it’s largely unknown started to move.
Jake: Value is going to be momentum soon.
Tobias: Well, please, wouldn’t that be great?
Bill: Well, that’s actually where I would be most inclined to use technicals, is looking in deep value and looking for breakouts. That would be where I would be like, “Okay, is momentum starting to go into this name?” because then you start to get like fun flows going in your favor and stuff like that. Once you’re messing around like $60 billion evaluations, who’s the incremental buyer and how quick do they–? I know that that’s trader talk, but it’s also real, unless you’re going to hold it until the cash flows develop, which– y’all lock up capital for a long, long time if you’re going to play that game and you’ve got to be right, not the easiest thing.
Tobias: Folks, I can’t ever comment on any of– for compliance reasons, I can’t comment on any of the things that I run. If you want to chat to me about things that are running, you’re going to shoot me a note directly.
Jake: I’ll comment on them. [laughs]
Tobias: I appreciate the questions. But I can’t answer otherwise, it just makes everything a compliance nightmare. So, I just keep– this is just general sort of value chat here.
Value’s Recent Outperformance
Tobias: I will say that I’ve been very pleased with what value has done recently. That’s been a nice few days. Looks like we might be getting underway.
Bill: That was crazy open yesterday.
Tobias: Yeah. What changed? The vaccine?
Bill: Yeah. The vaccine indeed.
Tobias: I think people wanted it more than anything else. I thought I saw that the vaccine’s only effective if you store id at negative 100 degrees Fahrenheit.
Bill: Well, you just got to figure that out.
Jake: That’s a technicality.
Tobias: How are we going to roll that?
Bill: I don’t know.
Tobias: In practical terms, it sounds like it’s pretty hard. I don’t know.
Bill: Capitalism will solve that.
Tobias: That’s true. We’ve already solved that problem in the future. So, don’t worry about it.
Bill: That’s right.
Tobias: And it’s discounted back to the present at zero. So, we’ve already done that. On to the next problem.
Bill: I thought it was funny to watch some of the names that sold off. My favorite– I mean, you guys listen, so you got to hear about it but Qurate, my man, @IgnoreNarrative, was like, “I thought I owned value coming in today.”[laughter]
Bill: It was down like 8%. Damn you, market!
Jake: Yeah, that was a kind of a head-scratcher, huh?
Bill: Whatever. I mean, I sort of get it.
Tobias: Sorry, fellas.
Jake: What’s the next question?
What To Do With Small Portfolio Positions
Tobias: Yeah. If you have a small position in your portfolio because your income and portfolio man is growing, do you sell a small amount or wait for another buy opportunity? That’s very specific question.
Bill: That sounds like financial advice, which you should not come here for, but what was the question?
Tobias: If you have a small position in your portfolio because your income and portfolio– you buy something and you’re earning more money as you go along, do you sell a small amount or wait for another buy opportunity? I’ve been thinking about this a little bit recently. So, I’ve been thinking about indiscretion returns, how do you get exposure to?
If I was to run a discretionary account, I might run more of a Buffett style and you’ve got to acknowledge that most of the stuff you want to buy is going to be too expensive most of the time. So, the way that you start out is just by buying a small holding and all the things that you want to own, so you can track them. And then, I might do some other stuff with options as well to get a little bit more exposure to them and take away some of the market risk. But there’s no reason to not– If you like the business, and you plan on holding it for a very long time, never sell, then I think you’d want to keep on holding on to it and look for an opportunity to buy a little bit more.
Jake: Yeah, I don’t know, I think there’s an argument to be made and I’ve heard actually Mark Simpson talk about this, which I thought was really smart. He has a rule in the way he does things. If a position gets too small of a size, then it’s likely a sell. I think from a focus and potential distraction point, if you don’t want to add to it and it’s below whatever your threshold is, let’s say 1% or something, maybe it is more of a nuisance than it is– it’s immaterial, and yet, it’s probably taking up CPU cycles that might be better used on bigger positions. So, I kind of get some of the logic behind that.
Bill: Yeah, there’s a lot of return on brain damage that’s not worth the small positions because usually, from what I’ve realized, those are the ones that are the biggest pain in my ass. It’s usually small because something’s not going well. And then, it’s like, I got to figure out, “Ah, crap. Is this imperial? Do I have thesis creep? What’s going on here?”
Jake: Small and getting smaller?
Bill: Yeah. For the reasons that you’re worried about too, not like, “Oh, the market doesn’t like it.” I could care less about that. But the fundamental business reasons, and it’s like, “Ah, yuck.” I think I’m getting closer to just saying if it’s underperforming what I underwrote, I’m out. Bill Miller advocated that. He said that they went back, and they studied their mistakes or detractions from the portfolio. Where they found that they didn’t do well is when they held on to businesses that got cheaper than their perception of value eroded, but they were wrong on the underwriting. And it’s like, just be done, go to something you understand. [crosstalk]
Tobias: That’s my definition of a value trap. Keeps on– the price is still at a big discount to the intrinsic value, but the value keeps on melting away.
Investor Ulysses Contracts
Jake: I think it raises a good question as far as sort of a best practice. But wouldn’t it be smarter– and what do you think, what percentage of people managing money do this? But wouldn’t it be smart to create what they call a Ulysses contract? That’s a contract with yourself. The story is Ulysses tied himself to the mast while going past the sirens so that he wouldn’t steer the ship into the rocks. And you can create your own Ulysses contract with yourself where you say, boy, if the business deteriorates to X or if the price gets to above what I think the value is of Y, I will automatically take this action. I’m saying that right now before I even in it while I’m calm, the man has not fallen overboard yet. I think we could probably all do a lot better job of our hygiene if we thought like that ahead of time and created our own little contracts with ourselves to do that.
Bill: I think that makes sense.
Tobias: Yeah. I always think about– Julian Robertson had this comment about when they have an idea about a position and I think that’s exactly what he’s describing when– it turns out when the thesis drifts a little bit– I think he describes it like a, it’s a chair and you think it’s got four legs and you walk over and take a better look at it and it’s a stool with three legs. It’s like there’s a leg missing. It’s like the thesis is wrong, we’ve got to get out.
Bill: But [unintelligible [00:44:54] three-legged stools.
Tobias: You can still sit on it, so that– [crosstalk] [laughs]
Bill: You don’t want one with two legs. That’s what I know. Two legs, you dead.
Tobias: It’s the difficulty of mixing together all of these different ideas from different people.
Bill: Look, there was a comment that said, if you lost money, then you made a mistake when you bought it. I could not disagree more.
Jake: That’s [crosstalk]
Bill: Yeah, and I just think that you update your ideas as the world changes, and if you think that the thesis that you bought something with is what you must hold through ownership, then I think that’s crazy.
Tobias: And you learn too.
Bill: Yeah. Well, unlike the airline thing, I’m still not convinced that I didn’t make the right bet. But in a freakin’ pandemic, it becomes the wrong bet, like, what am I going to do? I’m going to hold it because of some rigid idea? That’s stupid. When I saw that coming, I sold it. I don’t think that’s because I bought it wrong. I just think probabilities came out.
Tax Implications Of Selling Shares
Tobias: I’ve got a question here. Do taxes affect your decision process realizing too much gain for those that manage money? Do taxes affect your decision process?
Bill: Yeah, I sold the Wells for a tax loss harvesting and then it ripped on me, which good for the Wells shareholders, man. Shout out to y’all.
Tobias: Did you sell it all?
Bill: But it sucked. Yeah, because I wanted the tax loss.
Tobias: Yeah. Fair enough.
Bill: I mean I’m not opposed to getting back in, although– [crosstalk]
Tobias: I think I recall you saying three weeks ago or maybe a month ago that you’ll be able to get right back in whatever price on the Wells–? [crosstalk]
Bill: Yeah, I did say that. Yeah. I said, tell me what makes people buy that after that earnings call. Well, the answer is a vaccine.[laughter]
Bill: So, there you go.
Jake: So much for that whole wash.
Tobias: The year is not over yet. I mean, there’s a chance that you’ll still see some tax-loss selling it to the end of the year. When do you have to get all your tax loss selling done by, you can wait till December 31, if the markets open?
Jake: I saw actually in Berkshire’s 10K, I don’t have the exact numbers in front of me. But it looks like unrealized gains are up and realized losses are up also.
Jake: So, I think Buffett was trimming some losers, I guess. I don’t know exactly what it was. But he’s leaning into it.
Bill: [crosstalk] –paying tax. There’s nobody that plays this game likes paying tax. That’s why the tax loss selling thing is real. I think, what is it the November effect or December? When do you want to actually take advantage of it?
Tobias: Well, it’s called the January effect, because that’s where the buying occurs. It’s real–
Bill: People wait.
Tobias: Yeah. Sell in December, buy in January. And it’s often–
Jake: Sell in May.
Jake: You’ve got to keep moving it forward.
Tobias: Never sell.
Bill: That’s true, then there’s that.
Tobias: Do you want to do a political one? There’s a Biden’s plan to boost long-term capital gains taxes to 40%. Do you think that would change the HF/PE world, hedge fund, PE world?
Bill: Good luck getting through the Senate.
Tobias: If it does go through, let’s just answer the question. I think everybody probably keeps on doing what they’ve already done. They just find a way around. Or they just– [crosstalk]
Bill: Yeah, I mean, hedge fund and PE managers, the GPs, they’re going to be just fine. And they’re going to figure out loopholes.
Jake: Yeah, does that count for the carried interest?
Tobias: Yeah, carried interest is that the sneaky one that everybody’s been trying to get. Nobody understands it because it’s too inside baseball, but it’s a good one.
Bill: Yeah. Or most of Congress actually knows people that benefit from it. So, the idea of closing it is like spitting in your friend’s face, which they’re never going to do. But that’s the cynic in me. So, we’ll see what comes out, gets passed. Maybe it matters, maybe it doesn’t.
Tobias: Here’s a good one. Do you ever look for value outside the US? I know that Jake does. Do you want to tell your Japan story? I like that one.
Jake: No, not really.
Bill: I bought the Japan ETF after the tsunami, feels kind of bad, but I thought it was good value.
Jake: Oh, it was tremendous value. Like 2011, we were teaching at the time and there was hardly any real value to be had in the US, I felt like. So, we actually turned the students towards digging into Japanese stocks. And so, they came up with this whole list of stocks and you could get a company that had been 10 years profitable, the last 10 years straight, and was trading for less than the cash on the balance sheet. And I know, okay, it’s like a larded-up balance sheet with there’s– it’s overly conservative, it’s low ROE, I get it. But these assets are very reasonable assets that are producing cash flow and very consistent, boring, unsexy business, and you could buy them for just the most ridiculous of prices.
We bought several different rounds of Japanese securities and eventually it ended up working out quite well. So, I wouldn’t say net-nets are dead. They’re dead in the US, but they’re not dead all over the world and they may come back again, there’s a season for everything.
Bill: I was looking at OMAB because of Ian Bezek. It’s a Mexican airport owner. That thing was screamingly cheap, and he was loud about it in April, and that’s doubled. It’s still probably pretty cheap. I mean, I don’t own it. But, yeah, I’m open to looking at assets like that, publicly traded airports. That seems like something that would fit in my wheelhouse. I just don’t have a good sense of– I mean, I’ve got to understand the language that I’m reading, and I worry sometimes about translation. But maybe that’s stupid. I don’t know that. But those are my concerns. Do I understand the local custom? Do I understand how people are communicating? Do I understand where people are grifting? I don’t. That makes me worried.
Jake: You eliminate some of that idiosyncratic risk that you can’t get at because of the language barrier by just more diversification, smaller position sizes, more of a basket bet.
Bill: Yeah, I think that’s right.
Tobias: What about taxes?
Bill: I’ve got no beef with the law or with the world.
Tobias: Because there’s some weird– there’s some places have some– you’ve got to be careful of stamps in some places, you got to be careful of withholding tax in other places. I might be a wanted man in certain countries because I haven’t paid withholding tax from PA trades from years ago. I don’t know.
Bill: I’ll tell you what sucks is owning an ADR. The fees on ADRs are brutal.
Bill: Yeah, man. They might not be material, but they piss me off every time. Like when I owned Bud, I used to get pinged for like– a fair amount of the dividend would be taken out in ADR fees. It’s frustrating.
Jake: I haven’t had that experience. I don’t know what– Or at least if they were taking it from me, I didn’t realize it.
Tobias: Yeah, I’m sad to say, I’m in the same boat as you. I didn’t realize. Was that a brokerage?
Bill: [crosstalk] –brokerage.
Tobias: Was that a broker that was charging you or was it the underlying ADR sponsor?
Bill: Just showed up on the Fidelity statement.[crosstalk]
Jake: [crosstalk] –juicing you?[laughter]
Tobias: Squeezing you.
Tobias: Any more questions, folks? Why is there not a net-net ETF? Because they’re very illiquid. They’re very illiquid. They’re hard to buy. There’s no guarantee that there’s going to be enough around it, it’d have to be international, that’s hard to implement because they–
Bill: It seems like ETF would be bigger than the underlying to your point on how illiquid they are, right? People will just pour money.
Tobias: It depends on the term of the market. It’s been a long time now since I’ve seen any net-net analysis, but I remember one that– maybe it was negative EV, so they’re reasonably big. There’s enough of them around, but not net-nets.
Jake: You had quite a few in 2008. You could load up on them.
Tobias: Mate, that was 12 years ago. There are people who were in high school here. 12 years ago is an eternity. It’s like a different era.
Jake: I know. I miss those simpler times.
Tobias: Yeah. Well, that was easy.
Jake: Back when I was smart enough to just do that and not dick around with all this other stuff.
Tobias: That’s the problem, you get smarter, and you just get worse at it.
Bill: So, Jake, what do you take from the Buff Dog buying in shares here? I’ve got to think that it’s positive for his view on the economy, right?
Jake: Yeah, I mean, I–
Bill: Or if he doesn’t like cash, one of the two.
Jake: No, I think my concern was always that– I think he wanted to make sure that they had liquidity for any insurance claims that they needed to fill. And there was a lot of unknown about that. And also, I think the insurance market hardening, I think they wanted to have cash available to be a part of that, which similar to what I think Markel has kind of been doing. So, I think there was a lot of the answer lies in insurance as to why the cash pile got so big and why he wasn’t buying back. But I mean, at the end of the day, like buying back at 1.1 versus 1.2, this is what were people are bitching about the difference. Like, “Why wasn’t he buying back more?” Okay, I mean, on the grand scheme of things, it it really materially different?
Tobias: But he also made the comment that he thought that it was the– even though it was down 30%, the values weren’t any better. So, he was thinking in terms of intrinsic value the whole way through there, too.
Bill: Yeah, and I think he believes the probabilities have firmed up a little bit. So, the value is back. Or, he just doesn’t want to have all those cash. I mean, it does get to a point where this thing is just going to be generating so much cash. We might be there. It’s an incredible life’s work, incredible.
Zoom vs Qurate (Update)
Tobias: Any update on Zoom versus QRTEA? Qurate.
Jake: Yes, I want to hear that.
Tobias: Where are we at?
Bill: I don’t know. But we’ve got to be pretty close, especially after yesterday. I’ll do one–
Jake: Okay, I think it’s been bad too.
Tobias: It’s a little bit hard to–
Bill: Oh, snap! I might be ahead on this.
Tobias: No way. Already?
Bill: Maybe. And I bet he’s up. Yeah.
Tobias: When you’re looking at the tickers, you’ve got to remember to adjust for the money that Qurate is paid up.
Bill: Sir, I’m remembering– [crosstalk]
Tobias: I’m not talking to you. I’m talking to the players at home. I know that you know.
Bill: Yeah. No, I think– [crosstalk]
Tobias: Is there a way we can create a spreadsheet that we can track that?
Bill: Yeah, I need to do it anyway. But I think he agreed to let me reinvest the cash dividend. I’ve gotta back out taxes from that distribution.
Tobias: Back in Qurate?
Bill: [crosstalk] –analyze myself. Yeah.
Tobias: All right. That’s a big position then.
Bill: The interesting thing is, I think that there’s a reasonable chance from their earnings call that they may be shell shocked from the buybacks, and they may not buy in the shares that I thought that they were going to. So, they may distribute your future cash, maybe distributed and preferred shares. And the reason that’s sort of interesting is if you get the preferred– I mean, I need to consult my tax advisor, but I’m pretty sure that if you get the preferred and your basis is close to 100 cents on the dollar, it may be a tax advantage dividend. And then, the buyback decision is sort of put to you as the common shareholder. So, it’s almost like they are not doing the buyback. You are. But that would that would skew sort of my perception of the bet that I was making when I made it, but I still think it’s reasonably good bet that I have laid, and two and a half years is a long time.
Tobias: Well, congrats. Folks, that’s all we have time for. Adobe tells me that they did need to do an update immediately. [laughs]
Bill: Oh, well, then [unintelligible [00:57:30] technicals, whatever. Anyway.
Tobias: See you next week.
Bill: Have a good one, folks.
Jake: See you next week.
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