$SPR & Investor Behavior | The Acquirer's Multiple®

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed $SPR & Investor Behavior. Here’s an excerpt from the episode:

Bill: Yeah. I don’t know, I’ve been thinking about this Spirit AeroSystems thing and why I thought I saw it, I think I did see it, I didn’t profit from it. I guess the thing that I’ve realized is– I guess that I don’t have a tolerance to handle these CAPEX heavy businesses in the down cycles, is sort of like the thought that I came out of everything. I don’t know, I was sitting around thinking about it because I’ve been beating myself up for a couple of days about it. It wouldn’t have been like a big position, but every bit of money matters. I objectively saw it, and here I’d sit with none of the benefit. It sucks.

Tobias: It’s resulting a little bit though, isn’t it?

Bill: Yeah, I mean, when I think about it. I think that the problem with it is I didn’t know how to handicap what the actual downside was, but then again, I mean– I had a buddy from Boeing tell me like– it’s not like inside, I was talking to him. And he’s like, “We’ve supported them in the past. We’re going to support them again. I don’t see how we don’t, we need them. They’re integral to our manufacturing.” And I guess I just sort of got hung up on business quality and how long could this go, and who knows if it’s too cheap or too expensive now, but I think that’s something that is important is figuring out– for me. I mean, Dan McMurtrie said it when I talked to him. He said like, “It’s not just what you see, it’s what you’ll act on.”

I think that I’m learning a little bit more that– I’m starting to find the assets that I’m willing to bet on and hold more than I sort of knew in the past, which I guess is a function of experience. But it’s been a– cheap used to be enough, I think. I used to have a lot of like, sort of marginal businesses. I think going forward, I’ll probably have one or two at almost all times that are too cheap. I think I’ve got this bug that I’m never going to be able to kick.

I think Qurate’s probably as ugly as I want to get in the future if I can help it. I can’t buy some of these glamour-glamour things. But I’ve realized who I am a little bit through that. And it’s been a painful experience. But then I think, do I actually want to make those bets over and over again? I don’t think so in a discretionary portfolio for a lot of the reasons that I’ve articulated. I think that you sort of like saying– in that case, you’re almost saying, “I’m the one that can go in in front of the market, and I’m the one that’s willing to accept this risk.” And maybe in one individual scenario, I would be, but in five or whatever, probably not, and probably overestimates my emotional ability to handle pain.

Jake: I wonder if trading it more like that lower quadrant of the dartboard where pick a ETF– you might know someone who runs an ETF that specializes in really cheap companies, and letting them just own that– just own it as a little basket, and not try to take as much idiosyncratic risk with the assets.

Bill: Yeah. I guess, especially with Spirit, if you look at how it ripped, it definitely had– there’s correlation among those moves. It wasn’t simply that, like everything ripped. Now, that was really bombed out. I have these competing thoughts in my head of, that’s where you get the big moves from. The junky stuff that people don’t want to look at, that’s how value works, in my opinion. But then, you’ve also got this side of me that says, “Well, you also got to be able to execute it”. At the end of the day, I couldn’t have really owned it in any size, because I didn’t know how to underwrite the risks for real, but maybe I was requiring too much of myself. I’m not sure.

Tobias: But that’s a good thing. You don’t have to– whereof one cannot speak, thereof one must be silent. There are places where you just never going to be able to get safe with it in your own mind. So, just don’t worry about it and pass over in silence, let it go.

Bill: Yeah, this one pisses me off, man.

Jake: [laughs]

Bill: I’ve been watching and watching and watching and watching, and then it’s like the– I don’t know. It’s just annoying.

Tobias: You can’t beat up on yourself too much because there are reasons to be– there are lots of positions that you could have taken on that stock. You could have been short that stock too, which I was, which didn’t work out very well.

Bill: But we even talked about that offline. I was like I don’t know about that short, I think it’s pretty– I think I had that thing pegged, there’s something about it, I just couldn’t develop a view, and it upsets me now.

Tobias: There are any number of possible outcomes from where you were, and the one outcome that did occur, you can’t then say, well, that shows that I did the right thing or the wrong thing.

Bill: Yeah, no doubt.

Tobias: I had this up from Mauboussin today. He talks about being in a casino with somebody hitting on 17. And everybody sort of stops and looks at the guy, even the dealer says, “You sure you want to hit on 17?” And he says, “Yes, I do.” And then, a 4 comes down, ice-cold, 21 blackjack baby!

Jake: Genius.

Tobias: The dealer is like, “Congratulations, sir. Great,” all that sort of stuff. Everybody’s cheering this guy on. And he’s just done something utterly ridiculous and that makes everybody cheer because it worked out. That’s the definition of resulting. So, I’m always– you can’t worry too much in the near term about the outcome of the process, you’ve got to stick to the process. If you’re confident, that’s a good one, over the longer term.

Jake: How many hits on 17 are there right now?

Tobias: [laughs]

Bill: I think what I’m reasonably good at is looking at downside risk. I think what I really need to work on is portfolio management at this point, because I’m at the point where now I’m running a portfolio which is different than building a portfolio, and that requires different skill sets. To your point, I think passing on something because I don’t know how to quantify the downside probably is the right decision. But now I’ve got other things I’ve got to work on. I have plenty of weaknesses, folks, don’t worry. I’ll have many to talk about in the future. Personality and investing.

Tobias: [laughs]

Jake: Invert that. Would you ever say that betting on the risk that you didn’t understand was the right move? Ever?

Bill: Yeah, no, I don’t think so because you can’t price it, but still frustrating. I would like to talk to– I mean, obviously, “I would like to talk to Buffett.” Yeah, so would everybody, you idiot, but I’d be interested to–

Tobias: You know what he’d say.

Bill: Well, I just wonder how many of these he’s had in his career where he was like, “Yeah, I think it’s probably too cheap, but I’m going to let this ball pass because it’s not a fat pitch.”

Tobias: That’s the whole game. That’s entirely the game, not swinging at the dumb stuff. If you can fit–

Bill: But it was smart, it just wasn’t smart for me. But it’s frustrating.

Tobias: Well, sizing it properly, size it like an option position, you can do that too.

Bill: I think that where I’ve gotten on that, because I was thinking about that this morning, is I don’t want to get into that habit because then I think it’s easy. I’m the type of personality that if my wife has cookies around, I’ll just eat five, so I just better not eat one. And I think that’s the same thing with making option-size bets. I think if I started to do that regularly, I’ll do starter positions and I will churn the lower portion of my portfolio. But just having them to keep around, I don’t think is a very good habit for my personality type. I think I would run into the scenario.

Tobias: You want to eat all the cookies.

Bill: Yeah, I think I’d have too much just random stuff laying around, and I don’t think that that would help me much.

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