VALUE: After Hours (S02 E50): Treasure Hunting, Invincible Industrialists, And Stock Market Operators

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

  • Treasure Hunting
  • Invincible Industrialists
  • Stock Market Operators
  • Valuing $SHOP
  • $LSYN’s Share Count Reduction
  • Looking For Vulnerabilities
  • Asking Munger A Question
  • Buying LEAPS
  • Sun Tzu, Buffett & Boyd
  • Buying Into Fast Growth
  • Retrospective Valuation
  • No Man Is An Island
  • Chanos: Peeling The Onion
  • Special Offer For VAH Faithful
  • The Business Brew

References In This Podcast:

Patterns of Conflict (John Boyd)

Patterns of Conflict Part 1 – Presentation (YouTube)

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: We are live. It’s 10:30 AM on the West Coast. 1:30 PM on the East Coast. 6:30 Australian Eastern Standard Time, probably it’s 3:00 AM in Perth. 5:30 UTC, 6:30 UTC?

Jake: 30 minutes off.

Tobias: I forget whether it’s two or three hours, it might only be two hours. What’s happening, fellas? Anything exciting in value world?

Bill: I have no idea. Some podcast I heard about. Lot of people liked it.

Jake: Yeah, that was good.

Bill: Couple haters.

Tobias: [laughs] It’s not for everybody.

Jake: Are you talking about O’Shaughnessy’s?

Tobias: It’s not explicitly not for everybody. That’s the whole point of it to narrow down the universe.

Bill: This is a fact. The thing I don’t understand about people complaining about the length, you don’t have to stay.

Tobias: [laughs]

Bill: That’s the beauty of it.

Tobias: You never know.

Bill: The attention on that thing is pretty impressive.

Tobias: That’s true. We’ll talk about that in a little bit, just for the people who are confused.

Bill: Had a good guest.

Jake: Yeah, Mike Mitchell is great.


Tobias: He was, wasn’t he? Ignore the narrative. What’s happening, Jake? What’s your topic today?

Jake: I have a little segment on treasure hunting that might be fun for a holiday.

Tobias: You’ve got an absolutely banging Christmas sweater on there. You’ve got to show everybody your Christmas sweater.

Jake: Oh, yeah. My T-Rex sweater.

Bill: Look at that thing.

Tobias: [laughs]

Jake: Yeah.

Bill: Poor guy’s got those long sleeves on now in those short little hands or arms.

Jake: Yeah. That’s the joke.

Bill: I mean, I get it. I’m just saying I feel bad for him.

Jake: [laughs]

Tobias: What are we going to discuss, Bill? We’re going to discuss the podcast.

Bill: Yeah, I think we’re going to talk about the invincible industrialist idea. The thing that I’ve been thinking about is the idea of, as you’ve been in the markets for long enough, you become more of a market’s person. Do you want to be more of an industrialist investor or a market’s person? Then also, whether or not those two things can coincide. So, that’s sort of what I was going to talk about a bit.

Tobias: Very meta, podcast about a podcast.

Bill: Yes.

Jake: [crosstalk]

Tobias: This is Value: After Hours. I’m Tobias Carlisle. I’m joined as always by my cohosts, Bill Brewster in Florida, and Jake Taylor in California. How are you, gents?

Bill: And Ian Castle all over the world via ISPs and VPNs and everything else. Shoutout to him.

Jake: Is he still doing that?

Bill: Yeah, man. He’s all the comments. Except for Corporate Raider might be a real person. And Lima Rossi, right? He might also be real.

Jake: He’s our graphics department. Yeah.

Tobias: I met Samson in Omaha. I can confirm he’s real too.

Bill: All right. Well, maybe we’re up to five real people.

Tobias: Thomas Crown likely a real person too.

Bill: You think? I don’t think so.

Tobias: The Thomas Crown.

Bill: Yeah. Didn’t he have an affair?

Jake: [laughs] No, that was Pierce Brosnan.

Bill: [crosstalk] Oh, I don’t know. What do I know?

Tobias: The original is pretty great, too with the King of Cool.

Bill: This podcast is off to a strong start.

Tobias: Eclectic start. All right, let’s eat some veggies.

Bill: This is what people have come here for.

Tobias: First 15 minutes is the most important time and they’re here for the veggies. Let’s go, JT. [crosstalk] Teach us about treasure hunting.

Jake: All right. I’m going to put on my Christmas hat.

Tobias: [laughs] I think you’ve a week early.

Bill: Is this our Christmas episode? Don’t we have one more before Christmas?

Tobias: Yes. I think you– [crosstalk]

Jake: I don’t know, are we? I wasn’t planning on showing up. I’m just kidding. Maybe we will. I’ll wear it twice. I don’t care.

Bill: I think this one will come out before Christmas.

Tobias: Yeah, before Christmas– [crosstalk]

Treasure Hunting

Jake: Anyway, all right. Our story starts with a Silver Star Vietnam air combat veteran. Retires from the Air Force, moves to New Mexico and starts this art and artifact gallery. In 1988, he’s diagnosed with a terminal cancer and decides he’s going to go hide this treasure somewhere in the Rocky Mountains. This treasure box is full of gold and jewels and some rare artifacts, probably valued roughly $2 million worth of stuff in it. He wants to hide it somewhere in the Rockies and his intention is that that’s going to be his final resting place as well.

He writes a memoir, and inside the memoir are clues to where the treasure is going to be hidden. Thousands of people start searching for this thing. It turns out that maybe his cancer wasn’t as bad as they originally thought, because he ends up living until actually just a few months ago. This treasure hunt becomes like a phenomenon. There’s TV shows about it. There’s thousands of people. There’s message boards. It’s like a craze. Even five people died looking for it, falling or getting swept down rivers, things like that.

I actually had a friend who caught a bit of this treasure fever bug and he drove out to Colorado and looked for a couple days. He thought he had it solved maybe based on some Google Earth searches. Looks for it, obviously doesn’t find it. Then, him and I, and another friend, we’re planning a trip out to Colorado to go look. We’d already bought the airfare, had the rental car rented. We were going to go find the treasure. Then, my friend’s wife got pregnant and it overlapped with when the trip was, sort of late in the pregnancy and it seemed maybe that’s not a very good idea for him to be off treasure hunting while [chuckles] his wife due to give birth. So, we put it on hold.

On June 6 of this year, someone found the treasure finally after 20 years. It was actually in Wyoming. Colorado, our trip would have been a waste of time, but–

Tobias: The friends you make along the way.

Jake: When you’re treasure hunting, a lot of it is the friends you make along the way. The guy who did this, the original treasure hider was this guy named Forrest Fenn. His original intention was that he just wanted people to get outside and have some adventure. It wasn’t really about someone getting $2 million, or whatever it was. Who found this? The guy who found it actually tried to stay anonymous because he knew that everyone was going to hate him for finding it. I think he’s already embroiled in multiple lawsuits.

Tobias: Oh, no.

Jake: Well, Fenn had been sued multiple times already for this, had people try to break into his house to try to find clues. It’s a bit of a curse in itself. The guy who found this was this 32-year-old med student. His name is Jack Stuef, I think it’s how it said. A little background on him. He went to Georgetown for undergrad, and he was an editor in chief of the Lampoon magazine there. He actually worked at The Onion for a while, which is interesting. But then left, decided to grow up and went to med school. He first learned about it in early 2018, and after he learned about it and did just a little bit of digging, he became obsessed with it. He said he would spend multiple hours a day, just thinking about it every single day. He’s hiding his addiction from his friends and family.

Tobias: That’s sounds healthy.

Jake: Yeah, I know, right. My friend who also, when he went out into Colorado, he told me the story about how he said, he got like treasure fever, like he couldn’t– it was almost hard to concentrate on the road. He left his cell phone behind somewhere on a stop because he had this tunnel vision. I have to imagine that the dopamine in your brain is just going insane, with that excitement and what you might discover.

Anyway, a lot of people in their search for this treasure had used things. They thought maybe there’s GPS coordinates buried inside of the book and the poem that was the primary clue. People all had their own different, what they call solves. A solve, I’m taking all these clues and putting it together. So, it has its own term, which I thought was funny.

But this guy, Stuef’s method was actually he wanted to devour every single Fenn interview and read as much of the original content, the original source materials as he could, and really put himself into Fenn’s mind as much as he could.

He wanted to understand his personality and his motivations. He said that he became so obsessed with it that he spent 25 days over the course of two years in the area looking for it before he found it. He said, when he found it, it wasn’t even a sense of joy. It was more like a sense of like that he escaped something sinister himself. “I’ve got this monkey off of my back,” kind of a feeling, which is pretty amazing.

What’s interesting is that he hunted solo completely. He didn’t talk to anyone else about it. He stayed away from all the blogs and the TV shows that were about this. He wanted to avoid really groupthink of everyone else’s solves. He wanted to approach it from his own first principles, get inside of Fenn’s mind and see if he could then reverse engineer where it might be.

I think it’s a really interesting idea in the investment context when we’re out there searching for our treasures. Do you go looking for everyone else’s solve? Or, do you try to avoid the groupthink, do your own primary research? Even the idea of using empathy as a way of reducing your blind spots. If you’re putting yourself in management shoes and the incentives and how those align, that can remove the blind spots of why are they doing what they’re doing and what might they do next?

Jim Chanos: Peeling The Onion

We’ve talked about this before, but Jim Chanos has this interesting idea of what he calls the information onion. On the very inside core are the SEC filings. Then, the layer outside of that are the corporate reporting, which is the IR slide decks and the conference calls.

Then, you have sell-side research on the next layer out. Then, finally rumors and Twitter and whatever as the outer layer. Stuef was able to use the really the inside part of the onion. It’s the closest to the SEC filings. This is Fenn’s actual words, as his way of solving it and avoiding the outer onion layer of everyone else’s thoughts. I thought it was an interesting different application of taking a problem, looking for treasure, how do you solve for that.

Tobias: So, it was a poem that you had to decode to figure out where it was hidden?

Jake: There were clues all over the place in Fenn’s work. There was a poem in particular that was supposedly had lot of the content.

Tobias: Had you done some research to narrow it down to Colorado?

Jake: Zero.

Tobias: Just your friend?

Jake: I was just going purely off of my friend’s. He had his solve. As the trip got closer, my plan was to ask him to walk me through what he was doing, but I didn’t really care. He could have told me it was in Mexico, and I’d be like, “All right, well, let’s go there and look for it.”

Tobias: I wonder if that would have helped you. It’s funny, because if someone explains to you from the outside in, you probably end up agreeing with their description of how it works, which is probably why it was a good idea to avoid everybody else’s commentary on it.

Jake: Yeah, so what’s the implication for that then of your investment process? If your first thing is to ask all your friends what do they think about it before you do any of your own work, I have to wonder if you’re not tainting your interpretation of the primary data when you get a hold of it.

Tobias: Yeah, the application of it to investing is easy to see, it’s clear to see, but it’s one of the things– I think about that a little bit. I think when ideas get popular, and this is for good ideas, too, I see everybody talk about them. Everybody of the same investment style will discuss them. That’s how you end up with Valiant so.

Jake: Or Qurate.

Tobias: [laughs]

No Man Is An Island

Bill: Yeah, Qurate. Well, that is how negative cycles of momentum get started too. People say, yeah, this thing sucks, and then no one wants to buy it. I do think, just who I am, I’m not good on my own and I’ve realized that. But I do also really try to keep in mind when I’m talking to somebody like, how does this person see it? What’s their incentive to tell me what they’re going to see? I try to be mindful of the biases that people are carrying to the conversation as opposed to avoiding the conversations because– I don’t know. Even Buffett, I don’t buy that Buffett did it alone.

I don’t think he ever looked at anybody to validate his conclusion, but people that know about him say he was talking to investors all the time and bouncing ideas off people. I just think the most important thing for me is to have a group of people that’s not afraid to tell me I’m an idiot or that I’m on the wrong track, or not to– somebody tells me an idea, and I’m like, “I’ve got to go buy this thing,” because everybody thinks their idea is great. So, internalizing it and figuring it out.

Tobias: Internalizing is key. It doesn’t really matter where the idea comes from. Once you’ve internalized that, once you think that it’s your own idea, because there’s– it’s not like when you’re producing some copyright material or something like that, the idea itself is free. But then, once it’s inside you, it’s your own idea. I think I said that’s not intellectual property advice, but it’s not bad investment advice, I don’t think.

Bill: Yeah, that’s right.

Jake: So, you’re saying get your ego really tied up into that idea as much as you can?

Tobias: [laughs] Not so much ego, like you should just– until you’ve decided that it’s a good idea, you’re not relying on somebody else. You’ve verified everything that they’ve said to your satisfaction, whatever you need verified.

Bill: I have a real struggle with the be mindful of your biases thing, because on one hand, I do agree that you don’t want to tell your thesis out to the world and open yourself up to the commitment biases, and the consistency and all that stuff. On the other hand, I have really benefited from putting my work out into public. I pivoted on airlines when it was the right time to pivot. I didn’t really care that I had been consistently telling people that I thought it was a good idea. The facts changed.

For me, I don’t really give a shit if people think that I’m smarter. I’d rather they don’t think I’m an idiot, but I don’t care if they think that I’m right on something. For me, sharing things is a net benefit and squarely in the net positive category. But I also don’t disagree with what you’re saying. I think if you’re relying on everybody to give you your answer, you’re probably not going to get to the answer that you need.

To Clone Or Not To Clone

Tobias: There’s also a finite amount of time you have for search. There’s only so many rocks you can turn over, so it is helpful. I look at not in the current iteration of what I’m doing, but I would look at 13Fs, but there’s a question on the screen and I’m shamelessly cloning them. I wouldn’t clone what anybody does, but if there’s a whole lot of investors who you respect who start buying into something, then you probably paid to go and have a look at it at least.

Bill: Yeah, I don’t buy the cloning thing at all.

Tobias: It’s almost got that data mining effect where you’ve got to knock off the most heavily concentrated position because that’s the one that– or the biggest position because, that’s the one that’s gone up. You need to be careful of concentration if there’s a whole lot of other hedge funds in it. Then, I don’t know. They seem to underperform anyway, more heavily concentrated underperforms, less heavily concentrated.

Jake: My friend, Casey Hammond, has done some interesting work on this where he’s looked at taking the 13Fs and the hedge fund, there will be an idea in there that is either illiquid and too small to really even justify being in it. Structurally from a decision-making standpoint, what had to happen for that hedge fund to decide to put this oddball position in there? Someone probably had to really pound the table for it because it doesn’t fit otherwise. Those are the things that he looks for, and I find that to be an interesting way of parsing the 13F world.

Bill: Yeah, I like that. I like that a lot. I do think that there is merit in looking at the 13Fs. Like you said in the past, Jake, seek what they sought not what they see or whatever it is. I do think that trying to work backwards into an idea is super helpful. But I don’t know that I like the phrasing of cloning, it seems to–

Jake: Imply turning your brain off?

Bill: Yeah, and potentially opening up yourself to some really bad behavioral issues. I’m not sure that when I’ve heard the word clone, I’ve internalized it maybe as the speaker has meant.

Tobias: Good topic, Jake. I enjoyed that one. Should we do next topic?

Bill: Yeah. You started, it’s yours.

Invincible Industrialists

Tobias: Bill and I recorded a long-form podcast on Bill’s new podcast called The Business Brew, which is a really fun format where it’s like– a long is like two and a half hours, you’re going to need bathroom breaks and fluids to get through it. I certainly did. [laughs]

Bill: Sorry.

Tobias: It was really fun. I tried to do it in the spirit that it’s intended, which is a pretty, pretty relaxed, so if you don’t like swearing, and probably don’t listen to it. I try not to swear so much on this, but I do swear in real life. One of the topics that we talked about, which is something that I’ve been starting to write a new book on this basis, it’s probably why my topics have been a little bit weaker on the podcast, because I spend all my time thinking about this stuff. I’m just really not interested in anything outside at the moment, so I’m digging on it pretty hard. We discussed this idea on the podcast.

I’ve tried to read Sun Tzu’s Art of War, I don’t know how many times. Probably, I have a go at it every five years and have done since high school. I’ve had five or six go’s at it now, and it’s impenetrable. It’s really hard to read. It’s never made any sense to me. But sometime in September or October, I read it. It spoke to me for the first time, which is really weird, because I think it’s one of those things that people like to say– I think there are works out there, there are texts out there that people like to say, “Oh, this really resonated with me.”

I think it’s one of those things you say just so that everybody’s, “Oh, he’s really deep and smart this guy, because it resonated with him,” but genuinely did for the first time, read it and understood it. I thought as I was reading through, it’s uncanny how much this philosophy that Sun Tzu speaks about, and he’s writing in somewhere 430 BC, 500 BC, which is 2500 years ago. I thought It’s uncanny how much what he describes the way he describes going about it matches up with Buffett’s process. Not so much Buffett’s process, but Buffett’s end goal.

The way I interpret what Buffett is doing, is he does everything that will make him more invincible. This is the idea of Sun Tzu, to try and find invincibility. The way that you do that is a variety of things. You have to think about what you do a lot before you do it, which is one of the things that Sun Tzu advocates and then you’ve sort of figured out what is the inevitable outcome or what must happen. You figure out how this thing wins before you engage in it. You figure out all the things that can go wrong. If those things are present, you just don’t do it. Really, that’s what stands out most about Buffett is not what he does, but what he doesn’t do.

As I’ve read through it, and I’m trying to write this down in a book, I’m at that point where I’m really tangled up and confused, honestly. I’m about 40% of the way through and it’s misery writing at the moment. I still think the idea is right, it might not be the best book I’ve ever written, but I still think the idea is pretty strong. It’s little hard to articulate, but the thing that…

Sun Tzu, Buffett & Boyd

Tobias: Sun Tzu by itself is very difficult to read I think. I’ve read lots of different translations of it, they vary materially in important ways. I’m justified in combining a few of them together, which is what I’ve ultimately ended up doing. I found it harder to understand until I read John Boyd.

I think he is the basis for Maverick in Top Gun when he was a younger fighter pilot and he was sent to Korea, didn’t see combat, but did some interesting things like the pancake maneuver, going to slam on the brakes and then fly right by which they do in, Maverick. He was regarded as a maverick, which I think is where the name comes from, was about to be deployed to Vietnam, was called back to the Pentagon to advise on a new plane and he developed this theory as he was developing the plan.

He gives this presentation called Patterns of Conflict, which you can find online as a PDF. You can also find him delivering the presentation in four parts on YouTube. It’s hard to hear, but it’s definitely worth going through it because he illuminates some of the things about Sun Tzu that are a little bit more subtle that I certainly missed when I first went through, but when I went back having read Boyd, it did make a lot more sense to me. I think that Buffett makes a lot more sense.

I think you can understand Buffett without value if you understand Sun Tzu and Boyd. The theory is basically, it sounds aggressive and it sounds warlike, but it’s not at all because what Boyd emphasizes at the first, at the outset, is you need to have– to succeed as a nation, to succeed as a company, as a business, to succeed as an organic entity, as an individual, you need this idea of harmony, which is everything working together and doing things that are noble and good.

The reason that you do those things, draws the uncommitted to you draws enemies away from the other side, adversaries towards it, does all these things that make you– put you on the path to invincibility. At the same time, you’re trying to avoid things that risk ruin, which– that’s what Buffett does. That’s Buffett all the time. You think about what Buffett does when he talks about– when he’s liquidating Berkshire Hathaway, which he did, he sold– He slowly liquidated– he didn’t like the response when he liquidated Dempster Mill. When it came to liquidate Berkshire Hathaway, did it in a slightly different way.

He writes in those letters that it wouldn’t have made Karl Marx or Adam Smith happy. He’s clearly thinking about making– He’s clearly pursuing harmony, I think. He’s doing it in the people who he wants to associate with and he writes– I think He writes all this explicitly.

When I go back, having read Boyd and Sun Tzu, and I go back now on a read Buffett, it’s clear to me that he’s been articulating these same principles for 30 something years longer, probably, if you could go back further. That’s the thesis of the book. It doesn’t mention value, and it doesn’t mention Buffett. I’m trying to write it without those things in there, but it’s pretty clear who I’m modeling the book on. And it’s called Invincible Industrialists. It’s a working title at the moment, it’s going to take me months to get this thing out. So, it’s not coming out anytime soon, but we discussed it on the podcast in some depth, and at some length. So, that’s my topic for today.

Jake: If I remember the biography right, Boyd was instrumental in the design of both the F-16 Fighting Falcon and the A-10 Warthog.

Tobias: That’s it.

Jake: Those are both pretty badass planes.

The OODA Loop

Tobias: The Warthog is a bathtub, strapped to the top of a gigantic gun that flies very slowly, but is quite maneuverable. He fights the whole way through to keep them fit for the purposes that they’re designed because everybody wants to add all this other stuff in, make them heavier and less maneuverable, and he keeps on pushing this idea of maneuverability, which is– Boyd is famous for the OODA loop, O-O-D-A. Observe, orient, decide, act.

He uses that in the context of a dogfight in the air, so if you can get inside the turning circle of another plane of your adversary, then you can hose them is the term that he uses, which is shooting them because the bullets come out delayed, and it creates this water effect, like a hose, water coming out of a hose. But then, he applies it to warfare more generally.

If you can get inside the decision-making loop of the enemy, of the adversary, whoever’s making the decision to whoever’s undertaking the act, if you can get that process going faster than them, then you’ll defeat them because you’re acting on more recent information, you’re implementing it. He looks at the blitzkrieg, which was the German method for attacking in World War II, which grew out of the losses that they sustained to Napoleon, funnily enough, and he says why Clausewitz is wrong. It’s fascinating stuff, but basically, he takes that OODA loop and he expands on it even further in the presentation, which is how I’ve come to understand how he thinks about–

The presentation in and of itself is fascinating, but also the way that he does the presentation because he starts out saying this is what it looks like in a dogfight. This is what it looks like in various different battles. Then, he keeps on abstracting back until–

Jake: Kind of fractal.

Tobias: Yeah, until he gets to this point where it’s like at the– fractal’s good word. Yeah, that’s exactly right. He gets back to the grand strategy, national goal. And he says, this is why you need harmony at the grand strategy national level. Then he proceeds back from that sort of grand strategy all the way back down to tactics and so he uses it, he applies the idea for a counter blitzkrieg and how you could counter the blitzkrieg. It’s incredibly clever stuff. I’ve been immersing myself in it and learning a lot. I haven’t had any really great insights from it yet, but it’s certainly fascinating stuff.

Jake: Some day.

Stock Market Operators

Bill: I don’t know. Something that you said that when we talked that, you wanted to be more of like an industrialist investor and not as much of a market prognosticator or operator type. I do think that some of the Sun Tzu type messages, I think that there’s room to understand the structural reasons that people are either not buying or willing to buy the shares in the company that you are analyzing as an industrialist, and that would probably be the closest to what– I think, theoretically, I like being purely industrialist guy, but I do think that there’s a lot of value in being able to identify who are the sellers right now.

Some of my best buys have been really in the middle of a lot of price action downward, or– I mean, before an announcement of a transaction or something like that, or with Qurate as one was coming up. So, I just think that there’s the marrying of the two concepts makes sense, because when some of the small-cap advantage is some of these bigger funds can’t buy it.

That to me is saying, “Okay, well, if I’m an industrialist, and I like this, and I think it can grow into when these bigger funds can start to buy it, maybe I’m going to have to be prepared to hold it at a valuation that I wouldn’t otherwise be willing to buy it because there’s this giant sucking sound of people buying.”

There are real reasons that funds won’t buy stuff for non-industrialist reasons, and as the market cap or the turnover increases, they’ll enter it. I just think being aware of that is interesting. I don’t think it’s the basis of making an investment decision. I think that knowing from an industrialist standpoint, I’m comfortable with this. Then, by the way, I may get this kicker or something like that is an interesting way to think about it.

That’s probably the closest– because I’ve been thinking about what you said a lot. I think that– like Buffett’s got this real rare ability to read both the market and the business. I don’t think that he’s making market calls. That’s not what I think he’s doing right. I do think he has one of the better senses of when something is truly bombed out versus when it’s like just trading in this value trappy type range. I’m not sure that it’s purely because of an industrialist mindset or purely because of another, but I do know that if he believes in the business, he’s not going to let some market structure BS be the reason he doesn’t buy.

The other thing that’s cool is when you’re him, you can create the market structure change. That’s the thing that’s crazy.

Jake: [crosstalk] [chuckles]

The Buffett Blessing

Bill: Yeah. Or, he’s the guy that blesses the entity that enables the other people to say, “Oh, well, Buffett’s in this.” Think about what people say about Bank of America versus Wells right now. When Buffett did the pref deal on Bank of America, they weren’t exactly like the best bank in the world. Now, it’s the one that he’s in, and all of a sudden, all the generalists are willing to be in that entity and not Wells Fargo. And it’s like, okay, I’m just not sure– It’s interesting how he’ll own something. I’ve done it myself, so it’s not like I don’t understand it. He blesses an entity and it becomes a self-fulfilling prophecy at times.

Jake: Wasn’t it Sun Tzu that said that CAPE ratios–[crosstalk]

Tobias: [laughs] I had a feeling you’re– [crosstalk]

Bill: I think it was.

Tobias: I don’t think there’s anything wrong with understanding the movements in the market. I’m not I’m not saying that. It’s more for my own development, saying, do I want to go and investigate the 200-day moving average and what that means for stocks? Or, is my time better spent thinking deeply about the competitive dynamics of a business, and management’s incentives, and the likely reinvestment runway for this business? I think because that takes a lot more effort, it’s very unlikely that there’s any– nobody’s going to build a computer that can do that stuff.

I mean, nobody– who knows, but I think it’s unlikely that– computers just don’t work in that kind of way to see this way. I do think that it’s one of those rare areas where you can just keep on getting better and better and better. It’s hard for anybody to compete who hasn’t immersed themselves in it. Whereas, there’s a lot of market structure stuff that I think is that computers can yield up and get fast. I just saw today they’re looking at building hollow fiberoptic because the light travels faster through air, about a third of the speed than it does through glass.

The HFT guys are like light through glass is too slow, light through air is faster. That’s where they’re getting to. I’m not going to bother trying to compete at that level, but there’s probably another level, and the slow-cooked artisanal level where probably you can compete there and just keep on getting better, like you’d be better in 25 years, better in 10 years, better in 15 years, better in 20, better in 25 years. Just keep on getting better. That’s why I want to look more at that side than at the market structure stuff. That’s what I’m thinking.

Bill: Yeah, I’d agree with that. And then I’d say too, I would say that your natural fishing pond being having a bias towards value is in a way exploiting what you perceive to be like a structural-

Tobias: Yeah, that’s right.

Bill: -inefficiency as it is. I’m not sure that– I think there is a blend there. I think that I agree with you. The overwhelming amount of energy should be spent on the competitive stuff when you start to play that game rather than the market structure stuff. I just think that being able to articulate some of the market structure, if nothing else, why is no one else willing to buy this? I think is a useful exercise.

Tobias: That would be the thing that would worry me more. If you’re busily buying something, and there’s like a group of people who are standing back, like no, this is a dumb thing. People, who if you spoke to them, and they articulated the reason why you shouldn’t do it, you’d be like, “Ah, yeah, no, that’s a good point.” Which is one of the things that makes me a little bit nervous about– just to go back to your topic, Jake, just doing the work on your own because–

Jake: Solo treasure hunt.

Looking For Vulnerabilities

Tobias: Yeah, it worked in that instance. Luckily, it does work. Maybe it works more often than it doesn’t, and maybe that allows you the insight for this is why it’s trading cheaply, and everybody else is wrong on this particular thing. But it does make me wonder sometimes, so I can look at some positions and say– one of the ideas that I have in the book is to look for vulnerabilities because I think that’s what Buffett’s doing.

Vulnerability is just, does this thing have tail risk in it? Is this something that you go 7 or 10 years getting pretty good returns, and then you get Nassim Taleb’s Black Swan turkey treatment in the 10th year. Sometimes something looks cheap, and you buy it for that reason because you don’t realize how much tail risk taking on. Not to say you can’t do those things.

Bill: Yeah.

Jake: You say that maybe value in that context would be actually the patience of waiting until that thing that you’re looking for becomes appropriately priced.

Tobias: Yeah. That’s a big part of it.

Jake: That’s the difference, it become the valuation and the staying in the game long enough until it gets served up at a price that is just so obvious to you.

Tobias: There’s two elements to it. I think everybody knows what the good companies are. I mean, I don’t really think that there’s much advantage– maybe not, I’m not entirely sure. I read some of the write ups, and I think that some folks have missed how much better some companies are than other companies.

But I do think that among the better investors that– it’s pretty well accepted that we all roughly know what the 200 or 300 companies are. You know what you’re looking for anyway, when you see them. The thing is that when you find them, they typically 50% to 60% to 100% too expensive. What you’re really doing is waiting for your opportunity to buy them. That may come once a year and the kind of once a year so, often it might be once every seven years and once in seven years sort of so.

Jake: Or never.

Tobias: Or never, that’s right. Having the capital there to deploy, that’s the trick.

Bill: Just circling back real quick to Jake’s discussion. I’m just starting on the semi space, but without talking to some other people, I wouldn’t appreciate maybe some of the competitive disadvantage that Intel is currently at. Now, whether or not that’s appropriately priced, I don’t really know, but I do think that listening to that and actually sitting there and thinking about it, at least would force me to come up with a cogent argument as to why I think they’re overstating the risk, and maybe it’s like this is structurally important to the US, and I think the US is going to bail them out in some way, shape, or form or whatever the answer is there.

Or, maybe I don’t think that this is as big of a deal as the market does, because I’ve done my research. But if I was just sitting there in my own desk, I don’t even know that I would know the question to get to asking. That’s where I fear myself being on an island. I just said, I don’t think Buffett actually was an island, but I know even the myth of him as an island, I just don’t have the brain that guy has. That guy is a true savant, so I need help.

Tobias: Dude, that’s weird. I’ve got No Man is an Island, the original translation– Oh, in the original English.

Jake: Oh, yeah?

Tobias: It’s great. No Man is an Island, I can’t quote it off my head, but it’s such a great poem. The great John Donne.

Bill: Law school did so much for me in that area because it was always study groups and it was always trying to get to not arguing about people’s answers, but trying to really drill down in a helpful way, like a cooperative way to get to the answer that the three of us either agreed or disagreed on or whatever it was, that I just don’t know any other way. I don’t know how to be alone.

Tobias: At least you can resolve the point that you disagree on, that’s helpful, and then you can go on figure that out.

Bill: We’re identifying.

Tobias: Yeah, that’s what I mean.

Bill: Like, “Okay, this is where we disagree. I’m cool taking this bet. You’re cool taking that bet,” that’s fine. But this is the area., and that’s where the bet hinges, that I think is beneficial.

Fear & Greed

Tobias: The toughest thing about doing this stuff, and then reading Buffett is going back and finding all that– so I found something new and I go back and I read Buffett and I find where Buffett is talking about already he’s dismissed part of this idea. I’ve been thinking about a little bit of that. You really do get about one opportunity a year, where fear and greed is below 20– I’m just saying, when fear and greed is above 80, you’re probably chasing at that point. When it’s below 20, you’re probably looking at a real opportunity at that point. If you read the snowball– if you read there’s a part in there where it talks about Buffett doesn’t do it because it’s market timing. Goddamnit.

Bill: Well, the only thing that I would push back on you with fear and greed is, it seems to me to be a very short-term measurement. If you had a long-term fear and greed index, I don’t know if relative strength or whatever is the answer on a longer term. I would not be opposed to using that as– at a minimum, I think what you’re saying, and I think it’s true is if fear and greed is at 80, and you think you’re looking at something that’s screamingly cheap, you may want to be a little bit more careful about how quickly you are to pull the trigger.

Tobias: Yeah, that’s it.

Bill: Because chances are, it’s not just this crazy orphaned asset that no one knows about when greed is super high. It’s possible.

Jake: Might want to average down– [crosstalk]

Tobias: [laughs]

Bill: Yeah. There’s a tension, you’ve got to take an opportunity when you see it. But at the same time, like, if everybody’s all bulled up, it’s probably aren’t too many assets that are just trading there for no reason. So, be able to articulate it.

Buying In To Fast Growth

Tobias: Yeah. The other stuff, which is the hardest stuff for me is where it’s growing very, very quickly. It really doesn’t ever get cheap on any of the traditional metrics, where you’re really looking at where is this thing going to get to in three to five years’ time? Then, I don’t really know what the correct answer to this is. I’m still trying to work through this, but if you are pretty confident about the business and the management team, and the only thing that’s holding you back is valuation.

We’re talking about those sort of situations where it’s not egregious, but it’s more expensive than you would like. I sometimes wonder if you put a little starter position on, and then you wait for your opportunity, you won’t see your opportunity, but you never fully invested in it until you get the seven-year, the 1000-year storm that used to roll around every seven years, looks like they’ve pushed it off forever at this point in the cycle. I’m sure it’s going to be back again at some stage.

So, you’re looking to fill up in the 1000-year storm. I wonder, too, if in doing that, when you put the starter position on, is that the cheapest you ever buy it in absolute terms and you end up– even though it’s cheaper in whenever it happens, three to five years later, you’re paying more for it and therefore would you have been better off just filling up initially? That may be the question that you only ask after 12 years of bull market, but I’m asking it.

Bill: Yeah.

Buying LEAPS

Jake: What about buying some leaps or something on it when you first, that way you’re– it’s a smaller starter, but you get a little bit more bang for your buck if it does work out.

Bill: I hate the premium and leaps. That’s the only thing.

Tobias: There’s not always premium, you’ve just got to look at it that separately.

Bill: Yeah, that’s fair.

Jake: March probably had decent–

Tobias: Yeah, that’s right. You’re just looking at the IRR calc because it’s an alternative to putting– the way I think about a leap or selling a put, buying a leap, whatever the case may be, buying a leap in this instance, it’s the equivalent of having leverage in a position. If you think about the nominal sizing, you’ve got leverage, and you can just calculate what’s the interest rate on the margin line that I’m getting to put this thing on, and where it’s lower than your margin line would otherwise be then and you’ve got no recourse, now it’s an interesting position to put on.

Bill: That makes sense. So, you figure out how many deltas you’re long, and then what the margin would take to get that delta exposure. And then, you figure out– you basically say, “Okay, where am I at in this equation?”

Tobias: Strike plus is the premium in the future.

Bill: [crosstalk] how you could do it.

Tobias: Yeah, just looking at strike plus the premium in the future, and then you’re saying, “This is where I’m in the money. Above that number, what is it costing me to hold it where I’m buying now?” Over a period, as long as you can possibly get it. You do run the risk of the zeros. Then, you can allocate nominally, you can allocate in premium. And if you’re allocating nominally, and you have over 50% reversal, and then you’ve lost that 50%, but if you can put a smaller option position on, then possibly you lose all the option position, but it could be less than the 50%. That’s the way I’m thinking about it.

Jake: Right, you get longer, but with maybe less potential–

Tobias: Exposure. Yeah.

Jake: Yeah.

Tobias: Could be a zero though, there’s always that risk with the leaps.

Bill: Yeah, time can’t bail you out there.

Jake: Nope. Stocks only go up.

Tobias: It certainly seems that way, not the stuff I hold but certainly seems that way.

Jake: [chuckles] Somebody’s stocks.

Tobias: I got to explain to my wife what a skill it is to just avoid all the stuff that goes up. It’s just through random chance you think you buy, a few that really go up a lot.

Jake: Unlikely, but somehow able to consistently pull it off. It’s amazing.

Tobias: It’s amazing. Hit us with your questions, fellas.

Jake: Or girls.

Tobias: Fellas is a non-gender specific term. Guys, fellas.

Bill: It certainly feels gender-specific.

Tobias: Really, not the way I use it.

Bill: Yeah, dude, it’s–

Jake: Maybe it’s– [crosstalk]

Tobias: No, that’s cultural. That’s Australian cultural. Sorry.

Bill: Yeah.

Jake: Yeah.

Bill: According to Below Deck, Australia has a lot of interesting cultural things that are different.

Tobias: What’s Below Deck? The TV show?

Bill: Yeah, man. She was actually from New Zealand, though, but she was playing some grab ass with another girl’s boyfriend. The American girl didn’t like that very much. That said, it was overstated. Anyway, I digress.

Tobias: Here’s one, is the business cycle dead due to Fed and money printing? Permanently high plateau.

Jake: Yes, next.

The Current Business Cycle

Bill: I mean, aren’t we sort of in a business cycle right now? Because I think you could ask a fair amount of restaurant tours if the business cycle’s dead and they’d say, “No.”

Tobias: Yeah, it’s that K-Shaped Recovery. If you’re on the top half of the K, everything looks pretty good. On the bottom half, the curve looks pretty– It’s the 1920 somewhere for everybody on that curve. It’s just some people think it’s the roaring 20s and some people think– [crosstalk] I couldn’t get through it. I wanted to hear Munger.

Bill: I know. I don’t mean to be all, I could have done a better job, but I definitely could have done a better job.

Tobias: I think you could have done a better job.

Asking Munger A Question

Jake: I don’t know. He smoked you on your question at Daily Journal.

Bill: Yeah, well, [crosstalk] my man, because if you do give him an out, he’ll take it. When I asked him about the airlines, he answered that one pretty well.

Jake: I was just kidding. I didn’t think you’d get smoked.

Bill: I did get smoked. He owned me on it. The thing is, I would just ask him open-ended questions, and then you just let a genius talk. Like, who gives a fuck what questions people have submitted. They’re idiots. This guy is a genius. Just let the man go. Sorry for cursing on your podcast, Toby.

Jake: Don try to [crosstalk] questions as you can. That’s not the goal here.

Tobias: I always think when you get someone like Munger, you ask them questions about grand strategy. You don’t ask them questions about tactics because the tactics are–

Jake: What’d you have for breakfast this morning?

Tobias: Yeah. How do you define free cash flow?

Bill: Well, I did think that he was like, the follow-up that would have been nice, is he said that he thought forward returns would be lower going forward. The easy conclusion for somebody to think is well, the market’s gone up, why not just ask him a follow-up on that and let him go because he may not even be thinking what the average audience member is thinking. I think I know what he’s saying, but why not just let him say it? Because he may go somewhere that you don’t even think about.

Jake: Did you notice he said– he added a little addendum to that. He said, in real terms.

Bill: He did say that.

Jake: That was like a little hint. To me, that means inflation is on his mind.

Bill: Yeah, I did notice that. I also noticed that he was asked about the NASDAQ. He said that basically– I would need to listen to it again. It’s possible I was hearing what I wanted to hear, but I thought that his answer was like the froth is not necessarily just limited to the NASDAQ. I don’t think he’s like uber bearish or anything like that for the reason that I think you just articulated, Jake.

Tobias: December 2018, March 2020, generational buying opportunity or not?

Bill: Two generational buying opportunities in year? No, I’m going to go with no.

Tobias: [laughs]

Holding Cash

Bill: Somebody else asked, has anybody outperformed the S&P over five years holding a lot of cash and not having exposure to tech? I have some exposure to tech. I have outperformed. A lot of the reason is I have had cash and I deployed it in both December and March. What I’m trying to separate is how much of what’s gone on is just taking beta exposure at the right time versus how much is alpha? That I’m working through, and I probably should have worked through it a while ago. I don’t know that that’s the right lesson. I don’t know that you want to hold a lot of cash. I don’t know that you don’t. That’s confusing me.

Jake: The other question on that, too, is that that assumes that you want the S&P’s return. You may not want it over the next 10 years, potentially.

Valuing $SHOP

Tobias: The answer to that question changes if it’s 2009, or if it’s 2020. It might change if it’s 2030 as well. It’s a specific question, I’ve had a look so I can have a go at it. But how do you value a Shopify or FinTech companies? I’ll tell you one thing about Shopify. I love Tobi Lütke, I think he’s super, super smart. I love the way they built that business. It’s like a distributed Amazon. The cool thing is, if you buy stuff on multiple sites, you start seeing Shopify back end recognizes who you are. That is an absolute beast. I love it. Massive return on invested capital when you dig into what it does.

Two things that concern me. One, it’s so expensive. That’s one of those really– it would be a good challenge. Do you want to buy a little bit now or do you want to buy a little later? I honestly, I don’t know Shopify is the one I’m actually thinking about when I’m discussing this stuff because it’s just so, so expensive. It issues a lot of stock, too. I don’t know with Shopify. It’s a really hard one to figure out. Anybody who has any clue at all, I’m happy to hear from them.

Bill: Well, I think the answer is– I thought Elliott Turner’s podcast with you on Monday was awesome. Listen to how he thinks about Twitter, listen to how he thinks about PayPal, and figure out where you think you can do that. Maybe there’s a couple that you can do it in. I have no idea how people are valuing Shopify at all. What I can tell you that I do understand about that company is there’s a lot of different ways that it can make a lot more money tomorrow than it does today. There’s a lot of different lines and there’s a lot of different product extensions, and it’s probably way too far in my too hard pile.

Jake: The price implies that they’re going to have to figure out lots of those ways.

Tobias: They’ve already done it. The price implies they’ve done it.

Jake: They’ve already nailed it.

Retrospective Valuation

Bill: Yeah. In my view, what you do, and this is where Toby’s industrialist idea I think is really powerful is, you think about– someone like Charter, they’re taking shares. So, you got to figure out do I think that they can continue to take share? But you can build yourself into sub number five years out that you think that they can get to. Then, you can build yourself to what you think they can get per sub, and then you can build yourself into what you think it’s going to cost to service those people. That’s how I think you value growth companies. Then, you try to be really conservative in how you’re doing it because you recognize that five years out is a lot harder to see than last year. Or, next year for that matter. Then you try not to pay too much.

Tobias: I think that’s a good trick.

Jake: I think that’s where the problem is.

Bill: Yeah, [crosstalk] again.

Tobias: To go back five years and do a valuation on five-year old data. I do this a lot. This is one of the things that I do and see if I can guess where it is today. I’ll tell you what, I’ve been a little bit too conservative pretty consistently through it. [laughs]

Bill: What I’m thinking about sometimes is how much of the reflexivity is real, and as these bull markets go up, how much growth actually does increase because of the wealth effect? I don’t know that I’m going to use any of that stuff. When I hear people that have been too conservative consistently through the market cycle, I sometimes wonder, maybe there’s an element of something that’s going on out here that we’re not picking up when we say like, “Oh, we wouldn’t have gotten that growth rate.” I don’t know how you change that.

Jake: Well, you can use too high of a discount rate too in your head. And that can make everything look way too expensive. That would have been a wrong for the last five years, even though–

The Right Discount Rate

Tobias: What’s the right discount rate?

Jake: Lower than what I do, apparently.

Tobias: Yeah. That’s a hard question to answer. I don’t know.

Bill: Right now, it feels like nothing.

Jake: Negative two–[crosstalk]

Bill: In March, people realize what equity risk is and they say, “Oh, boy, maybe we do need to be compensated for this risk.”

Tobias: But do you reckon that they felt that same way in June, that was just a blip?

Bill: No, I think that nothing changes narrative like price.

Tobias: Yeah.

Bill: Off the ting, it’s basically a layer cake.

Jake: But it’s so smashed.

Bill: Yeah, but that’s the world you live in. You can bet that that world is–

Jake: Is that the world the way it really is, or is that how it’s sort of been manipulated?

Bill: No, that’s the world that is, you’re living in the world that you want to be.

Jake: [laughs] Could be.

Bill: The question is, is the world that is ever going to marry up with your theory, and if it is, you’re going to make a lot of money. If your theory is too dogmatic, and the world continues this way, you’ll be left behind. I mean, that’s the risk. That’s the financial repression argument. It’s really freakin’ hard right now.

Tobias: Yeah.

Jake: Amen.

Tobias: And that’s been– I mean, I don’t know how long ago. I don’t know how long ago Montier wrote that, but it was an old idea when Montier wrote it and we’re living through it now. It’s probably 10 or so years. More than that now. I mean, not for the article, the article is probably not as old. There’s a good question–

Jake: –2012 or something. That might be–

Bill: I’m not trying to be– [crosstalk] This is going to sound hilarious. I’ve started to do more digging on bitcoin because people have asked about it. I do get it, I get it. You like the idea of a fixed supply of something and you see everything that’s going on around you can make a lot of sense why the fixed supply should go higher. You sort of have to believe that the dream will always exist because it is sort of just an idea. But then again, what isn’t?

$LSYN’s Share Count Reduction

Tobias: I got an interesting one on the screen. I saw Thomas Brazell tweeted this out just before I came on about Libsyn, LSYN. They’ve got a lawsuit against some of the holders of their stock. Apparently, they could be reducing the share count by a third which is a very material event for Libsyn. It’s a good little growthy business that holds a– it’s a podcast platform. It’s been around forever.

Bill: [crosstalk] –growthy business inside it [crosstalk] meh. Libsyn is who I host with. I like it.

Jake: Who do you sue to make one-third of your shareholders go away?


Bill: There is a lot of weirdness.

Jake: How could no one’s [crosstalk] doing this more?

Tobias: Yeah, more companies should do this.

Jake: Yeah.

Bill: Yeah, I’ve been looking at that idea. I don’t have strong opinions either way. Sometimes, I wonder, they’ve had a lot of stuff that looks like corporate governance chicanery or whatever from, I don’t know that that’s the right word. I was going to use the F word, but I decided not to on your podcast.

Tobias: There’s no restriction on swearing on this podcast. I just personally try not do it.

Bill: I’m aware, I should try not to do it myself. I’m trying not to do it because I think Libsyn is an interesting idea. I also think when you’re looking at that market cap, it’s not that hard to buy. For somebody like Spotify. Spotify bought Anchor. What’s 300 million, what’s 400 million to Spotify at this point?

Jake: Couch cushion money.

Tobias: Pocket change.

Bill: It’s sort of is. You’re talking about no delusion, you might as well– and then they would get that hosting into their ecosystem, and they’re trying to own all of the audio–

Tobias: The ecosystem.

Bill: –distribution. It makes sense.

Tobias: You buy Libsyn, you get script in the takeover, and now you’re Spotify shareholder, that’s perfect because I think Spotify is interesting too.

Bill: Yeah, I mean, the thing that that’s interesting is Anchor is marketing that they have 75% of all new podcasts, but how I got to Libsyn was I hired this guy, Matthew Passy, to help me. Matthew was pretty adamant about going with Libsyn because he thought that I controlled more of my own destiny, like if this thing got successful. Now that I’m on it, what’s the probability that I switch? There’s almost none, and I’m already bumping up against my storage, so I’m probably going to have to upgrade my plan. I’m starting to see how that thing is a real pure play on podcasts, or at least close to. I don’t understand the peer part of the business, though. I need to understand that better.

Tobias: That’s The Business Brew. That’s all we have time for folks. I’ve been neglecting to do this, if folks want to get in contact with you guys, why don’t you tell everybody what you do? You’ve got an offer, Jake, I put this in the notes every week.

Special Offer For VAH Faithful

Jake: Oh, yeah, for orphaned IRAs and things like that. IRAs that aren’t doing what they’re supposed to be doing. They’re just sitting there, old 401(K)s, that’s the specialty of what my firm manages. I put together a little Value: After Hours special that you can check out. I think it’s, like Value After Hours.

The Business Brew

Tobias: Bill’s other podcast is Brew’s Willis. [laughs] Thanks, BohdieLotion, that’s not my gag, BohdieLotion, shoutout.

Bill: Maybe that’s what I should go with. Just search The Business Brew on Apple Pods or I think on Spotify, they both kick it up.

Tobias: We’ll link it up. Thanks, folks. I think we’re going to try and see you next week, but I’ll negotiate with Jake offline.

Jake: [laughs] Cheers.

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