During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Pabrai And Marks Abandon Deep Value. Here’s an excerpt from the episode:
Tobias: I think that there’s some names in there. I look at Microsoft in my list of the little quality string that I was describing before. Microsoft comes in there. I don’t think Microsoft is egregiously overvalued. I think it’s a little bit expensive here, but I don’t think it’s egregious. You can do fairly well in some of those names. I think that there’s some undervalued stuff around. I’m responding a little bit to Marks and Pabrai, where these guys have said we’ve spent basically our entire careers doing cheapest stuff, and now we think that it’s time to go to compound town.
Well, I think the time to get to compound town was like 2015 when JT wrote his piece about the value opportunity being worse because the spread was so tight, because when the best stuff is priced, like the garbage stuff, which is what happened around that kind of time, then you want to be buying a high-quality stuff. Most of the time you get enough of a discount in the cheapest stuff that you’re still better off buying the cheapest stuff.
I think right now, it’s difficult to see because the expensive– there’s such a very broad spectrum of opportunities out there. It’s a question of pricing the growth properly, but I do think that the expensive stuff is, objectively on the numbers that you can pull off the French data website, it’s as expensive as it’s ever been.
The cheap stuff is not screamingly cheap. It’s basically a little bit rich to its long-run average, or maybe a little bit expensive to its long-run average. But I still think that’s a better opportunity set than the expensive stuff. The best opportunities are spread, long, short, and in the cheapest stuff. I think everybody piling into the compounders, they’re going to regret it over the next five years or so.
Bill: Well, I think to make a bond analogy, you’re basically saying, the spread between investment grade in junk is wider than it’s ever been and now’s the time to buy investment grade. That could be right– [crosstalk]
Tobias: In 2015– [crosstalk]
Bill: Well, [unintelligible [00:22:40] today. If you just think of compounders as investment-grade stocks, and value as junk stocks for this analogy, that spread is as wide as it’s been in a long, long time. It’s kind of interesting that people are saying, “Oh, well, now it’s time to buy the investment-grade stocks.”
Tobias: What do you think has driven Pabrai and Marks to write those letters at the same time? All of the guys out there who have been– the high-quality guys have been writing quite high for a long time, you just give up– it’s just too painful to hang out being a deep value guy?
Bill: I think that there’s a real shot that Marks has been sitting around with his son, like he said, and his son has had a lot of success in a different strategy. Maybe it’s made him to contemplate something. I believe that letter on face value, I don’t see why he would lie about it.
Tobias: I guess good for him for having an open mind about that sort of stuff. Experience does count for something as an investor. Seeing a few cycles should make us pretty wary about what you do at the top of a cycle. The two times when you really want to be careful are when you’re underperforming and the cycle is long in the tooth, and it looks easy to everybody else.
I really think you need to second guess your second guesses there. If you’re at the bottom and you’ve come off a big crash, and you’re in total devastation, maybe this is March 2020, think about it then, but I don’t know. I’m not changing style at this point in the cycle. I think the opportunity set looks as good as it’s ever looked.
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