VALUE: After Hours (S03 E04): Gored Bullfighters, $GME And Wall Street Bets, Value Is The Driver

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

  • Gored Bullfighters
  • $GME And Wall Street Bets
  • Value Is The Driver
  • How Big To Swing At The Right Pitch
  • Pabrai’s Transformation
  • Phil Fisher’s 800 Positions
  • Hitting Monster Compounders
  • Chewy Founder Ryan Cohen
  • Robert Chapman’s Nastygrams
  • The Impact Of Early IPOs On #neversell
  • Invincible Companies
  • Conchita Cintrón
  • Stocks Mentioned: $TPB, $OLLI, $CMG, $QRTEA, $AZO, $ORLY, $TXN

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’re live. It is 10:30 AM on the West Coast, it’s 1:30 PM on the East Coast, 6:30 AM Australian Eastern Standard Time. Happy Australia Day for yesterday. It always creeps up on me a day early over here, but I managed to get the tweet out, so I feel a bit better this year, and it’s 6:30 UTC. If you want to hear it live, go to the YouTube channel, sign up. Hear this inanity live, join in, leave a comment. We’ll ignore most of them and cherry-pick the ones that back up our case. [laughs] How are you, fellas?

Jake: Yeah. Confirmation bias. What’s Australia Day, by the way?

Tobias: It’s like July 4th.

Jake: Fourth of July?

Tobias: Yeah. It’s January 26, just so you can stick it in your calendar and celebrate with a meatpie and a Lamington.

Jake: That’s when all that they let all the convicts into the Australia.

Tobias: I think that it might have been the day that James Cook stubbed his toe on the beach, but I’m not Captain Cook. I don’t know. I had to pass the citizenship test over here, so I had to jam my head full of all the other useless stuff, so some of the other stuff fell out.

Jake: Yeah, that’s going to happen.

Bill: That citizenship test is tough from what I’ve heard, [crosstalk] I’m sure I couldn’t pass it.

Tobias: It’s like 100 questions, and you got to get 6 out of 10 right, or something like that. It wasn’t that hard to pass.

Bill: That math doesn’t add up.

Jake: I’m taking [crosstalk] for great US citizens.

Tobias: And you get to study beforehand.

Bill: Well, yeah.

Tobias: What are we talking about today, fellas?

Bill: That’s what we need to change. We should just make people take it sight unseen. Really pull the ladder up behind us.

Tobias: The questions are like what ocean is to the West? What ocean is to the East? It’s not super [crosstalk] What country is to the South? What country is to the North?

Jake: They’re not like, who authored the Federalist Papers?

Tobias: There may have been something like that in there. I can’t remember, it’s a little while now.

Bill: Who cares if you don’t know that the Indian Ocean’s next us?

Tobias: That’s it.

Jake: That sounds right.

Bill: Checks out. I don’t know what I’m going to talk about. I was going to talk about, I guess, Pabrai’s shift to compounders, but maybe…

$GME And Wall Street Bets

Bill: I’ll talk about Game because that’s what people want to hear about.

Tobias: GameStop?

Bill: Yeah.

Jake: Getting GameStopped.

Tobias: That’s the big news at the moment. That’s the thing that’s–

Jake: Is that a verb yet?

Tobias: Yeah. I think someone suggested it to the Urban Dictionary, GameStopped when your shorts get taken over by WallStreetBets and ramped to the moon or ramped to Mars. That’s game over. Some big hedge fund comes in and says–

Jake: Did you see yesterday? [crosstalk] It was wild. Based on the price action, you could have been down 50% yesterday if you top ticked it. Well, on the day, the whole thing is still up 50%.

Tobias: [laughs]

Jake: Wow.

Tobias: Nobody’s just in the equity though, everybody’s in the options. The moves are bigger than that.

Jake: Yeah, I don’t even know what the options look like. What are you, like 3X all those numbers?

Tobias: Maybe more, I don’t know. I think some guys are really blown themselves up. I think some guys have made some real money, too.

Jake: Jesus.

Tobias: We’ve got a shoutout to Scotty who called it back on the podcast with me in August, he said WallStreetBets are all over GameStop. There’s 100% of shares short, so they’re trying to engineer a short squeeze. I think I laughed and thought there’s no way that’s going to happen, but he was right. Full credit. Well done. I think you’re on [unintelligible [00:03:55] at the top. Give me a shoutout– [crosstalk]

Bill: Yeah, he’s one of the guys that I actually count as like truly correct.

Tobias: Yeah. Right for the right season. [crosstalk]

Bill: Some people are like, “Oh, I held Game, too.” It’s like, “All right.” Look, I get it. If you’re down, put yourself in good situations, and good things can happen if you define it as a good situation. I still never got there with that, but whatever. Fine, if you want to take your little lap now, but Scotty’s one of the only ones that I actually saw articulate that WallStreetBets might put a crazy short squeeze on this thing, and it’s worth it for that reason. That’s called actually being right.

Tobias: Yeah. He said– a little clip that he put out that I retweeted that it was a melting ice cube, but you got Burry in there and WallStreetBets and 100% short, so there could be a nuclear explosion at some point, which was his words and that’s exactly what happened. Good job.

Bill: That’s right. I’m not taking a shot at Burry here, but I don’t consider this Burry being proven correct. This is closer to Scotty being right and Burry just being in the right pond and getting lucky, which I would rather be lucky and rich than good and poor. I’m not trying to be–

Tobias: You don’t know [crosstalk] Burry was in there, though.

Bill: Okay, that’s fair. I guess if Mike Burry was there in the WallStreetBets thesis, then I will chalk it up to a win for him.

Tobias: I mean, if someone like Burry gets right again and again and again, you got to stop thinking this is enemy action, this isn’t happenstance or coincidence, this is the real thing.

Bill: Yeah. I don’t know, maybe Mike Burry was in there for the WallStreetBets squeeze. I tend to think that he probably wasn’t, but that something really good happened and he was in the right pond. Again, I’d rather–

Tobias: If you go back and read Burry’s letters, those early letters, he talks about– he’s explicit about the three types of investments that he looks at. He wants to fill the portfolio with compounders, but if he can’t find compounders, then he will do earnings plays. If he can’t find earnings plays, he will do asset plays.

Bill: If this was none of it, this is a speculation play driven by the options market.

Tobias: It’s an asset play.

Bill: No, it’s not an asset play. It’s a betting play.

Chewy Founder Ryan Cohen

Tobias: Who’s the gentleman who punched out of Chewy and then, he’s put it into three stocks. It’s Apple, that’s gone up. 300%. Then GameStop, which is up some ridiculous amounts of–

Jake: Ryan Cohen.

Tobias: Ryan Cohen. Yeah. Who is this legendary investor who none of us have heard of before?

Jake: Ryan Cohen?

Tobias: Yeah.

Bill: Yeah. I agree.

Tobias: Entrepreneur turned investor. As far as I can see, he’s done three or four things and he’s absolutely shot the moon with all of them.

Bill: Yeah, I mean, GameStop isn’t shooting the moon.

Tobias: Have you looked at the shot, bro?

Bill: Yeah, I’m just saying there’s a difference between what is going on and being right. I don’t even care. It’s like if somebody is on a golf course and they shank the ball– My friend, we went on a family vacation. My family paid for him. You’re welcome, Jimmy [unintelligible [00:07:10]. Anyway, he breaks his four iron because he’s pissed off at some shot on a different hole. He takes out this three iron on the ninth hole of Pinehurst number two, I’m pretty sure it’s nine. It’s a par three. I don’t care what he says, he bladed this shot. It was a shit shot. I know it was a shit shot and he knows it was a shit shot. End of the day, one in the hole. The caddy said it was good off the face. He didn’t hit it pure, but he got the hole in one and I didn’t, and I still never have had one. Who really cares if it was the right shot or not? The guy got the hole in one. It’s the same thing in the–

Tobias: Just write it in the part of scorecard where you record how the hole went, your feelings about each part of the shot.

Bill: That’s right. Yeah. It doesn’t matter. Please let them squeeze Qurate, I will not care at all if I’m right for the wrong reason or wrong and right or whatever. Just richer, but wrong, I’ll take it. Squeeze it. It’s a dying asset. No one likes it. Please go nuts on it, WallStreetBets.

Tobias: Scotty says Ryan Cohen took three GMV board seats and a 12% stake, and his other position was Wells Fargo.

Bill: Boom, dude knows his shit.


Tobias: And Apple.

Jake: Do you think he tax lost harvest?

Tobias: In the Wells Fargo?

Jake: Right out of the Game?

Value Is The Driver

Bill: I was talking about Wells Fargo the other day. This actually loops into Pabrai’s transformation. The reason that I have not gotten back into Wells is, I’ve been spending time on, one, different names. Two, thinking more along the lines of, would it just make more sense to pay up for something Ally, where I have a pretty high degree of confidence that business will be bigger in 10 years than it is today versus Wells, which I think– I believe in Scharf, I believe in what they’re doing over there.

But I do think that objectively, if nothing else, the business is so much bigger than ally that it’s harder to grow, just as a function of the law of large numbers. Does it make sense to make a more expensive bet today, if you think that the business that you’re betting on is going to grow in the future? That’s sort of what kept me out of it.

I was just listening to Pabrai’s Manual of Ideas presentation, and I think that’s basically where he’s gotten to. That’s where I think is a reasonable place to play. Now, I understand it’s hard, but I don’t think value investing in the traditional sense is particularly easy either.

Tobias: No, I was telling you guys before we came on, but I ran that– I’ve been looking at what if we only limited ourselves explicitly to very good companies, and what happens over the last two decades. The same definition applies last time, it’s like a 20% return on equity or better, gross margin of 35% or better. Then, form a portfolio, and then try and determine the drivers of performance of that portfolio by holding from the beginning of 2000-1999 to date.

Then, every year buying a crop of companies and seeing what– just running a simple regression to see what characteristics of that basket of companies led to the meaning of outperformance. Better return on equity gives you a negative slope, which means that the higher the return on equity in that portfolio, the lower the returns. The thing that worked best was just price to free cash flow, which is the value metric. The higher the price free cash flow, even 20 years ago, the better the performance through to today.

So, I’m not ready to throw in value yet. I’m not going to throw a deep value at that door, but the other observation was that when I look at the companies that it identified because I’ve gone through it with a fine-tooth comb just to see if I can figure out. If I looked at the names that I’ve been able to buy and hold these names for the whole period, it’s very hard to tell what’s going to win. The few things that I observed, it wanted to buy– you remember when all the for-profit colleges got shut down?

Bill: Yeah.

Tobias: It wanted to buy the for-profit colleges all the way through that. I bought a Polo and I bought ESIN, which is now ESIQ. What was that? I actually did own it, but I can’t think what it’s called now. Yeah, I just can’t think what it is. I wanted to buy those things, so I don’t know if you could have sidestepped them at the time by thinking there’s a lot of government regulation in these things, and maybe some of those old ideas are good, you want to avoid things that are overregulated or surviving, thanks to government regulation.

Bill: Like cable? No.

Tobias: I don’t know. The problem is that if you approach it that way, there’s not a lot of stuff that gets through the screen.

Bill: Yeah.

Jake: It’s going to say what isn’t surviving on little government help at the moment?

Bill: Well, the Buff Dog, he’s never been afraid to take advantage of regulatory capture.

Tobias: Yeah, that’s interesting.

Jake: Didn’t take any PPP though.

Bill: Yeah, that’s true. But all of his bank holdings got indirect bailouts.

Tobias: Also, more direct bailouts in 2008, 2009.

Bill: Yeah.

Tobias: I think he’s said as much too. He said, “I’d been working at McDonald’s, rather than buying at the drive-thru if I hadn’t been bailed out in 2008-2009.”

Bill: He said that?

Tobias: Something like that? Yeah.

Jake: Really?

Bill: I don’t think he said that.

Tobias: I’ll find the quote, if anybody can find the quote–

Bill: Fake news. You are wrong.

Jake: [chuckles]

$TPB Chewing Tobacco

Bill: Anyway, I don’t know. I’ve been looking more for businesses that will grow than I have been looking at valuation, which, unfortunately, once you then look at the valuation, eliminates a lot of stuff, but at least I’ll be ready when it comes back.

Tobias: Yeah, so what are you looking at? What’s interesting in there?

Bill: I can tell you the things that I like, it’s easy for me to understand ideas that involve stores opening up. Turning Point Brands is a growth story that I understand because it’s chewing tobacco and it involves getting into more doors, so they have a natural share in the geography that they’re sold in. They under-index in other geographies. They need to get their salespeople out to get their product into those markets.


Their main chewing tobacco is a low-cost good that if you look at the reviews online, is well received. That’s growth that I get comfortable with. Once you start to get– like Ollie’s, I talked about that in the past. That’s a very similar story. Once you get into pretty saturated names and you’re relying on same store sales and pushing price, not everyone can increase price in perpetuity. I get a little more nervous about that, especially when it’s on the retail side.

Tobias: You prefer rolling out stores to increasing prices? That’s a simpler growth story?

Bill: Yeah, I think so. Then, organic volume growth would be another thing that I would prefer to price increases, all else equal. That’s sort of the stuff that I look for, or the stuff that I am looking for.


Tobias: Does Chipotle fall into that bucket, price aside?

Bill: I think that I would–

Jake: [crosstalk] -extra.

Bill: Yeah. Chipotle would. I never got back into Chipotle because they had that Listeria scare and I really thought that would go to the core of the consumer habit that led people to consistently go to Chipotle, I thought that it would break it. If you look at same-store sales, it did do damage. [crosstalk]

Tobias: Wasn’t it the norovirus rather than Listeria?

Bill: Yeah, whatever it was. [crosstalk]

Tobias: Well, the difference is that norovirus is just, it’s the thing that takes down cruise ships, because one person gets sick, it spreads really easily. Whereas Listeria is something that’s it’s foodborne, it comes from melon. If you cut through the melon, it can be on the outside because of the soil. One is just really bad luck. Anybody can get norovirus breakout, can happen anywhere, and it’s not because your food preparation is– there’s anything wrong with your food preparation. It’s just somebody in the store is sick, and everybody gets sick.

That was always the challenge for them because they’re all fresh, everything was fresh to them. If this is Listeria, then that could be– if it gets on a knife, it goes into every single thing they prepare and can make a whole lot of people sick. I was a little bit unlucky. I just looked at it and thought it was too expensive at the time by the time I looked at it. You held it then, JT, didn’t you? You hold it at one stage.

Jake: No. I didn’t. [crosstalk] I wanted to buy it. That scare, and just never quite got down cheap enough where I liked it to my detriment probably.

Tobias: Yeah, Bill figured out what the right– Bill Ackman, sorry. Other Bill.

Bill: Yeah, not this Bill.

Tobias: The little Bill, not the big Bill. I’ve got the quote here, “If the government hadn’t acted, I would be eating Thanksgiving dinner at McDonald’s,” that’s a little bit different to working [laughs] I take it back.

Bill: Wow. Huh.

Jake: All right.

Bill: There you have it.

Jake: That’s pretty good.

Bill: Huh. The Buff Dog, he’s the best.

Pabrai’s Transformation

Tobias: Bill, are you going to talk about Pabrai’s letter? Again, we’re going to talk about– [crosstalk]

Bill: Oh, no, I mean, that’s the whole takeaway, is he’s basically hunting for businesses that he thinks are going to compound. That is what I have been doing, and then it’s what I think I’m going to do–[crosstalk]

Jake: Pretty contrarian idea right now.

Bill: Well, I think it’s the right idea. What’s the alternative? I can search around for some 50-cent shitco so I can sell it and pay taxes and go do it again. That doesn’t appeal to me anymore. I do think if I had an ETF that could churn out of these things, and I didn’t have to spend the time digging through it, I didn’t have to pay taxes, then all of a sudden, things get a little bit more intriguing in the structure. But the idea of finding some fucking business like Graphtec, that I’m going to get screwed on because the agency costs and somebody pitch it as cheap, no, it’s not worth my time to do that anymore. I’d rather go walk, like on an actual walk.

Tobias: Yeah, that’s fair. If you’re going to do the buy and sell you need a tax-advantaged structure. If you’re going to hold, then I think you need to do some more work on stuff that’s going to do better over years and years and years. Which is what I’ve been trying to do to figure out what is the driver of that. It’s been an unsatisfactory exercise so far, honestly, because the two things that really stand out. One is it still sort of driven by value. The other thing is that there’s a lot of luck in there. I just eyeball those names and think I probably would have bought that. Then, I look at the percentage return and it’s negative 99%. I’m like, “Oh, there you go.”


Bill: I mean, we’ll circle back to my beloved Qurate. I understand why people think it’s cheap. I don’t think it’s like screamingly cheap or anything. I think it’s pretty fair now. I don’t know, I’ve just been thinking about that bet, I think was a good bet. I think it was right for the right reasons. I put 15% of my book in it, and that changed my whole year or whatever. I like that, mostly because the outcome.

Jake: I like money.

Bill: No, but I don’t know. What’s more doable on a go-forward basis and repeatable, I’m obviously open to those kind of ideas, and I want to do that kind of thing when it’s blaringly obvious or glaringly obvious, or whatever. That was a setup where I understood all the players and I saw something different in the cash return. It’s going to take a really unique situation to get me to say– I’m in this group, and we’re reading all the hedge fund letters that were written, and we’re discussing what do we like about these guys how they think?

What do we like about how they don’t think? Who would we want to emulate ourselves after? Stuff like that. There’s so many pitches, like this is a 50-cent dollar, and it doesn’t address agency costs, it doesn’t address what’s going to make it rerate, it doesn’t address why no one has ever bought it over the last three years. I just think that those pitches are a dime a dozen, and you can find them wherever you want to. I’m trying to find the really scarce idea.

Invincible Companies

Tobias: Yeah, 100%. That’s what I regard. That’s what I was trying to articulate to you on the podcast, what I describe as being invincible. Those ideas that you just– with the information that you have to hand at the time that you’re constructing the portfolio, there’s no downside. Not to say there’s no downside. There’s black swans, and there’s all that sort of risk out there, but things where– and you’ve got to ask those questions, like that’s a good question. Why hasn’t someone bought this over the last three years? It’s not like we’re all not out there hunting for them. Somebody big and smart had to look at that and not taking a bite of it, you want to know why, right?

Bill: Yeah. Ian Castle, I think he’s my top of mind small-cap guy. There’s a lot of good ones. Connor Haley is somebody that I’ve been studying a little bit too. Those guys, I think, are playing in a pond that– I’ve been saying it now for almost a year, I should definitely dedicate more time to. The way my head works is I would be looking for small-cap management teams with momentum because some of these smaller left-behind small caps, I’d wonder why hasn’t private equity come over the top and bottom out? It’s probably– my guess just statistically speaking is they probably have some agreement that entrenches management and muddle around and make a decent living [crosstalk] stuff doesn’t interest me.

Tobias: They all have that. It’s infuriating going through that list and just seeing how many of them are making money off their shareholders rather than trying to do a little bit better and help the shareholders make some money.

Bill: Yeah. Look, I’m down, if WallStreetBets want to say, “Fuck this, let’s run an activist campaign.” I will team up and oust management teams. I am about activism. I want a catalyst though.

Tobias: Aren’t they entrenched though. I think that they will have the poison puts– [crosstalk]

Bill: Wall Street bets a whole different animal, man. They might go at them in the political realm.

Robert Chapman’s Nastygrams

Tobias: Well, that was what the early 2000s was all about. That was what Robert Chapman and– [crosstalk]

Bill: Yo, Loeb, right? [crosstalk]

Tobias: Loeb [unintelligible [00:23:11] from Chapman. Chapman says that he wrote the first 13D letter– no, the first nastygram attached to a 13D filing and then Loeb saw it and Loeb says this as well, he saw Chapman do it, and then that was what kicked it off for a period of time, that mid-2000s, early 2000s. I thought it was fascinating.

Jake: Read Jeff Gramm’s great book about that, Dear Chairman.

Bill: I should read that book.

Tobias: Yeah.

Bill: I just got all my books back.

Tobias: I do in Deep Value.

Bill: Bang. Deep Value [crosstalk] textbook.

Jake: Lot of smart people.

Bill: Yeah, I don’t know.

Tobias: JT, do you want to do your topic?

Gored Bullfighters

Jake: Yeah, I’ve got kind of a fun one today, maybe. My topic today is about bullfighting. I don’t know if you guys know but Ernest Hemingway was a huge bullfighting fan. He has this great quote, he says, “There are only three sports, bullfighting, motor racing, and mountaineering. All the rest are merely games.” I think sports where your life was on the line, otherwise, you’re just playing a game.

Tobias: Not boxing? Boxing didn’t qualify?

Jake: Not according to-

Tobias: Not according to Hemingway.

Jake: -Hemingway, yeah. The Sun Also Rises, which is one of his books. He turned the running of the bulls in Pamplona from this obscure regional event into a worldwide phenomenon. He wrote this book called Death in the Afternoon, and it’s a 517-page nonfiction book that explains all about bullfighting and the process of it. He was a huge fan of it. It’s a very controversial subject because there’s obviously some ethical dilemmas about how the bulls are treated and what happens to them, the glorification of violence. But Hemingway encouraged people to look at it as this art. The matadors’ lines and the shapes that they would take were very artistic. There was a style to it. It wasn’t just you get in there and chop at a bull with your sword or something. It was this whole procedure.

A really proper final stroke was, the Matador to do it properly, had to put themselves in harm’s way as close as possible to do the one that the crowd would celebrate. They had to take it to the edge. There was an aesthetic pleasure and a pride in a very clean kill, which I think it’s an interesting thing. I think what’s really very interesting is at the highest level of esteem for Spanish bullfighter is the crowd wants to see how they react after they’ve been gored. Everybody can come in there when they’re fresh, but you don’t win the crowd over until you’ve actually been gored, and how do you respond to that.

I have to tell another story here about this woman named Conchita Cintrón. Born in 1922 in Chile, her father was a Puerto Rican and American mother. Her father was actually a West Point grad, but she grew up in Peru riding horses and became a bullfighter on horseback, which is one version of bullfighting that they have. In 1938, she made a splash in Mexico City, where she was a regular bullfighter on her feet. The crowd went crazy for her and just her lines and her style, were just so graceful.

In 1940, she’s gored in Mexico City. She’s… she’s taken to an infirmary. She refuses surgery, returns to the arena. With one quick thrust, she dispatches the bull, and then she collapses, and the crowd goes insane.

Tobias: [chuckles]

Bill: Oh, dang. Yeah, that’s gangster.

Jake: This is how she responded after being gored. She became a huge draw all over the world, traveled, did bullfighting. Next great story of her. 1949, in Spain, women aren’t allowed to fight bulls on foot in 1949. After performing her horseback routine with the bull, she rides past the Presidente’s cube or box, and asks Franco if she can dismount and finish the bull. She gets denied. She ignores the order, gets the sword away from the man who was supposed to take care of it, goes in for the kill and drops her sword just as the bull’s charging, and she simulated the kill by lightly touching with her fingertips the shoulder of the bull as it charges past her.

Tobias: [laughs]

Conchita Cintrón

Jake: Right. Crowd goes crazy. She walks off calmly and gets arrested for it. Then, there were riots in Spain, and they released her. Orson Welles wrote the intro of her memoirs, and he said that her career ended in a single burst of glorious criminality. She had killed 750 bulls over her career. Anyway, where can we torture this back into an analogy for us? This idea of how do you respond when you’ve been gored? Do you handle it with aplomb? Or, do you pout or are you a baby about it? There’s a lot for us to learn as well, and you’re never going to be respected by the unwashed masses or the crowd if you don’t handle your defeats with a certain stiff lip, and how do you bounce back. That’s the highest level that you can kind of attain. I just thought that was cool thing for if you’ve maybe taken some licks lately, how do you handle it?

Tobias: Her name was Conchita Cintrón?

Jake: Yeah.

Tobias: What’s the book? Is the Hemingway book about her?

Jake: No, it’s just more general about the process of a bullfight, a bunch of facts about it.

Tobias: What’s her book called?

Jake: I’m not sure.

Tobias: Don’t have it there.

Jake: Yeah, I don’t have it.

Tobias: Yeah, that’s fascinating. What a beast. In the last– just pre-COVID, I went to Spain and to Mexico City and didn’t get to see a bullfighter in either. I was trying to track one down in Madrid and Mexico. Neither was sort of- I don’t know why, they weren’t eager to let me out there and have a look at them. Probably that’s a good thing. I wanted to just go and see the spectacle, just to see what it was like.

Jake: Yeah.

Bill: I have a friend–

Bill: I went to Mexico once. I was kind of sad that they hurt the bull before the bull came out.

Tobias: Really?

Bill: Yeah.

Tobias: That’s not very sporting.

Bill: No, it wasn’t. At least, let the bull have a good shot at goring the guy. I probably went to some janky bullfight.

Tobias: Yeah.

Jake: That was the donkey show, Bill.


Tobias: I have a friend who’s a Harvard-trained lawyer who went to fight bulls. She’s from Singapore.

Jake: Jesus. Okay.

Tobias: Yeah. I don’t want to say her name on this because she’s very publicity shy. She’s not very tall woman either. I take my hat off to her, it takes some tiga to get in there and do that.

Jake: Oh, my God, can you imagine? These things are huge.

Bill: Bullfighting? It’s no scarier than value investing.

Jake: [laughs]

Tobias: When I was a kid, I used to get in the crusher with a Brahman, and they’re pretty scary, they’re pretty tall, angry animals with horns. You have to be pretty tall to get a blade in between their shoulders.

Bill: Wait, with what?

Tobias: The Brahmans. Yeah, they’re the ones with the hump and the horns, and no fur.

Bill: They’re like a wild pig?

Tobias: No, it’s a breed of cattle. There are two broad breeds. They’re drought resistant, tick resistant. If you come from a dry area with lots of ticks, you want Brahman type.

Bill: Oh, I see this. That’s a weird hump.

Tobias: Yeah. They’re kind of smart. They’re smart when they’re angry. I don’t know where they’re originally. They’re African or Indian or something like that, but they’re used to being chased by predators, so they’re pretty ornery.

Bill: At my bachelor party–


Bill: -we were a little intoxicated. This dude comes over, he’s like– we’re in Austin, out at a–

Tobias: This is a family podcast– [crosstalk]

Bill: Yeah. No, I’m not going to get crazy, but out at the lake in Austin. The dude’s like, “You guys want to go see a longhorn?” It was the landlord. I was like, “Yeah, I want to go see a longhorn.” It was like 10 at night. I hop into the back of this guy’s pickup, bad idea. He drives me into this field. It’s pitch black, and he starts backing up the truck at this cow. This longhorn with these huge freakin’ horns, was grunting and charging at the car. I was very nervous, but nothing happened, but I could see how you could get gored by a cow pretty easily. Those horns are serious. I didn’t like being in the back of the car without protection with this crazy idiot driving me, but I had already made my bad decision. It was time to just go along with it.

Tobias: That would not be a very glorious story if you told somebody that– Gored by a bull is pretty real. I think we’ve sidetracked a little bit. I like the thesis of JT’s idea that until you gored by the bull– Clearly, the example in the market is — I think anybody who made it through March last year, that was a goring. I said at the time everybody’s got their stripes now, same idea.

Bill: Yeah, I don’t know. I think that a closer analogy would be like– for those seeing people that are touting returns, God forbid your returns aren’t triple digits or something like that last year, sticking to process and whatnot would be a better analogy. I’d rather be respected by my peers than the crowd also.

Tobias: That’s a good point. There’s a little research note on the Alpha Architect website where just for fun, I think, just did this research to see what’s the best returns over five-year periods in terms of compound per year mid-cap and above kind of universe? If you’re doing 35% compound for five years, that’s right on the outer limit of what you can achieve, following a value momentum strategy.

Bill: 35%?

Tobias: Compound.

Jake: That’s like perfect foresight.

Tobias: Yeah, that was the perfect foresight one.

Bill: Well, Buffett could do 50%, so what’s he got? That’s a– [crosstalk]

Tobias: He might have been in a smaller universe. There’s some luck in it, too. That’s the one thing that I really have noticed doing this fine-tooth comb through these portfolios over the last few weeks, is that it’s really, really tough. Even with all of this– I’ve got all of the hindsight bias, so I’ve got all the hindsight knowledge of what happened over that period. I try not to think about it, try to just look at these names and think. I bought ESI– INQ, I can’t even remember what the name of it is now, but it was hard to know at the time that those things weren’t going to come back. Apollo looked like a pretty good stock. Morningstar had it as a wide moat, deeply undervalued stock.

Bill: Dude, I mean, ValueStock, he called GameStop and sold it last year. Things could be different today. I’m only saying it because he tweeted it out. The other thing that I think is really underdiscussed with this move to compounders and whatnot, that people are wanting, myself included. Todd Wenning replied to me on Twitter when I talked about David Gardner. He said, “I joined the Motley Fool in 2006 and had the pleasure of working with DG on a number of projects. What’s amazing to me is his ability to handle massive losses in stride, knowing his big wins will make those mistakes look tiny in the long run.” That I think is a very interesting insight.

Tobias: How does he size?

Bill: I don’t think big at all because he’s recommended hundreds and hundreds of stocks. He gave a presentation at Micro-Cap Club where I think he said he had over 200 stocks or something in the portfolio. To have a six bagger, get cut in half, and then get cut in half again, and to have the conviction to be like, “I’ll find the next one.” That’s not so easy to do in real life, it’s a lot easier to read about and say, “Oh, I could do that.” It’s like Jake says, “No matter what your strategy is, the market’s going to end up bending your will at some point, you just got to make sure it doesn’t break you.”

Phil Fisher’s 800 Positions

Tobias: There’s a good intro to Common Stocks and Uncommon Profits, where the son is talking about Phil. He says, when his father passed away, and he had Alzheimer’s near the end– I’m not sure how this plays into it, but he said, when he went to look at the portfolio, like he had something like. I think I’m going to get this wrong, but he might have had, like, 800 positions in the portfolio.

Bill: Yeah.

Tobias: That’s clearly because the way he thought about it was like, I’m going to buy this, and then I’m just going to coffee can it and keep on hunting for the next thing. I think if that’s your approach, and you’re investing what you make this year, then I think it makes some of those loses a little bit easier to take. If you’re running it like Buffett where my best idea right now is going to be 30% of my capital, then you’ve really, really got to know what you’re doing.

Bill: Yes. This is what I’ve been thinking about a lot lately, is what is better for me to do? I still think it’s more of the Buffett style. I think I’ve proven to myself that it resonates better with me, and I am better suited for it. But if my kids were starting out, I think there’s a lot of merit to the David Gardner strategy. I do think one thing that he does is he’s like, “I’m looking for dominant companies in the next huge industry.” I do think that you’ve got to go like really galaxy brain on how big something could be.

For instance, Naked Wines is starting to get out there as an idea, but that TAM isn’t really that big. I don’t know if that would actually count. I think that probably wouldn’t get in his bucket as to what could get big enough. I’d love to talk to him. So come on my pod, David, stop this rule. He won’t come on because my podcast isn’t a year old, which is bullshit–

Tobias: Because his is not a year old?

Bill: Yeah, dude. He’s the guy that created the rule breaker strategy. So, break your rule, bro, I’m worth it.

Jake: [laughs]

Tobias: I think the average podcast, there are nine episodes of the average podcast. How many episodes are you up to now?

Bill: I don’t know. I’m going to write his assistant again and be like, “Just listen to this crap. I’m not trying to get him on some crappy little podcast here.” I want to interview this guy. I’ve got good questions for him. I think he’d show well. Anyway, people put some pressure on DG, tell him I love him.

Jake: I liked your Jen interview. That was fun.

Bill: Yeah, it was wild to talk to her. She’s got to get clearance to come back on. She talks crazy stuff she does, but she couldn’t talk about it

Jake: Yeah.

How Big To Swing At The Right Pitch

Tobias: For yourself, you want to do a more Buffett style where you basically take the best idea every year or so, and take a 15% swing at it is like–

Bill: Yeah, I think five or so. The best thing that I can tell you is Naked I have bet on because I do believe in where that company can go. I’m not nearly as optimistic on their onboarding experience as some people. I think it’s actually pretty atrocious. I think that could be the hiccup in the whole model. That’s a smaller bet for me because I do think there’s execution risk. Now, why is it in the portfolio? I don’t know, that’s maybe a legitimate question. But I do think it’s pretty cheap as to where it could be 5 or 10 years away from here.

So, I think it’s like worthy of a bet, considering the management team and whatnot. Like Qurate was huge, but the reason was, I thought the downside was so much lower. I could really articulate why, and it was near duration cash flow. I don’t know that I have that kind of appetite in me all the time. I think that’s a unique bet, but 5% to 10%, yeah, I do think I want to have a hurdle as to what can get in the portfolio.

Tobias: I was just trying to draw the distinction between what you want to do and what you would encourage your kids to do. You’d encourage your boys to do a slightly different strategy.

Bill: Oh. You froze up.

Tobias: You’re still there. There you go.

Bill: Oh, all right. Yeah, I think that I would probably encourage them to come out of the gate less concentrated, and then let it grow. I sort of do like that strategy, but you’ve got to hunt. It’s very possible that we’re living in like one of the crazy times of change. It’s also possible this is all just a big bubble that makes that whole strategy look better than it really is. I don’t know. The other thing that I do think objectively, it’s very hard to look at Gardner’s track record and dismiss it as a function of the time. That guy has outperformed for a very long time, so there’s something there.

Tobias: What about you, JT? What about the difference between what you do and what you would tell your boys to do? Or even just would you tell them to do the same thing? I don’t want to suggest that you tell him something else.

Jake: Yeah, it’s a good question.

Tobias: What’s a big position for you?

Jake: Size-wise?

Tobias: Yeah. At inception.

Jake: Oof. Yeah, I mean, at cost, never more than 10%.

Tobias: That’s pretty big.

Jake: Yeah, that’s a lot. It has to be a pretty, pretty low range of outcomes, pretty tight and pretty reasonably positive expectation. I prefer a little bit more diversification than I often feel like I see. I understand the arguments for– there’s kind of an argument to be made from a career standpoint of– especially if you’re early on, swing for the fences, try to hit a home run and get some kind of AUM escape velocity.

Don’t grind it out in the minor leagues, like working on a really reasonable conservative portfolio that will survive a lot of different outcomes. That’s just how I’m wired, and since I’ve managed money identical to how I have my own money situated, then that’s how it ends up happening. I have smaller position sizes, I take way less risk than I think probably career-wise would be optimal. I’m about survival, not necessarily optimization. I want to survive across a lot of different things.

I still want to be around doing this a long time from now. I know that you can go and blow up a portfolio and still come back into the game. I’ve seen that happen enough times, but I couldn’t sit well with me if I like trashed an entire cohort of clients and then, just like, “Sorry, guys, I’m going to go find some new ones and start over.” That is very distasteful to me.

Bill: You’re also betting your own money on it. In my situation too, it’s not that easy to just blow up and be like, “Oh, well, now I have to sell everything and start over again.” No, I’m not into that.

Tobias: Yeah, I don’t know if I would advocate for people doing the higher– I’ve heard that argument lots of times. Do the high volatility stuff when you’re younger, have a few swings for the fences, which I think you can do still within the context of– just do it within the context of Kelly.

Don’t try to do it with your entire portfolio because I think that there’s something to be said for the longer your track record, the more marketable it is if that’s what you’re trying to do with it, because you can say, “Look, I’ve survived. I’ve been here doing this for 10 years.” Lindy, my portfolio like is probably another 10 years. I think you should be rightfully nervous about people who’ve blown up a few times. John Meriwether famously blew up long-term capital management, and I think the next one blew up as well. He was also on the trading floor when– I’m just blanking on the name of that bank that Buffett had to bail out.

Bill: What, Solomon?

Tobias: Solomon, yeah.

Jake: Solomon. Yeah. Well, fourth time was a charm.

Bill: But that was a different issue, right?

Tobias: Yeah. Gaming the bidding for the–

Jake: Treasuries.

Bill: Yeah. [crosstalk] Some illegal Treasury fixing, don’t worry about that. We can add that one back. That’s an adjustment to the career.

Tobias: If you’re running your portfolio, and you’re getting flows to it, you can always reset the portfolio at any stage. You can always put a third of the portfolio into something that’s a little bit more– if you’re trying to hit it out of the park. I think that you’re just better off not doing that because that’s the problem that everybody has. Everybody buys lottery tickets. Whereas, what they’d be better off doing is just focusing on getting sufficient return. I don’t know. That’s my bias too, though.

Bill: No, I think that’s right. I guess it matters how you think you’re going to achieve the return and whether or not the strategy matches your personality, I think. Matt Cochran is a guy that’s helped me understand the way that the rule-breaker philosophy thinks a lot. I think he’s a guy that is interesting because he came from the Fool, but he’s obviously got some value leaning. He’s on the fence in the opposite way that I’m on the fence and let– you know what I mean? Dips his toe in value occasionally.

Tobias: Yeah. I like Matt. He’s struggled some but yeah, he does well.

Bill: Yeah. He’s just been really helpful to contextualize what I used to look at and not understand. He’s really helped me get. I think it’s a rational strategy.

Tobias: Got a good question here. How did Peter Lynch do so well with an average of 150 stocks? [crosstalk]

Bill: I think I like this.

Jake: Interest rates went from 20 to 5.

Tobias: Yeah, the period of time was very helpful. It was ‘85 to ‘96, or something like that.

Bill: Yeah. He also caught some real winners, man. Didn’t he get Comfort Inn? Wasn’t it super small, and it was just a couple hotels or something, and he rode it to become a national chain?

Tobias: If it’s 150 stocks, it’s like 0.66% of the portfolio.

Bill: When it starts. Even if it just runs and runs and runs and runs, it could end up 10%, 12%, 15%.

Tobias: That’s right. That’s one of the things that I’ve noticed.

Jake: If that’s what you’re doing though, just buy the index and go play golf instead, don’t bother doing any research.

Bill: Well, maybe you like doing it.

Tobias: He used to travel around, meet all of the managers of these 150 stocks.

Bill: Yeah. He lived a pretty awesome life. He was super-connected. He got to have interesting conversations all the time. His clients were happy with what he was doing. I think that that’s a worthwhile life pursuit. I don’t know that I just outsource all that to an index.

Tobias: You can narrow down your universe to undervalued, reasonably good growers, 150 out of whatever your universe is, 3000 or 1000, or 500, or whatever, or 150. I think you should–[crosstalk]

Bill: You just got to avoid the showers. You got to find the growers.

Tobias: You can have a little bit of both, why not?

Bill: [laughs] I hate the showers. They’re all value traps.

Tobias: I’ve got no idea what we’re talking about right now.


Bill: I think I just derailed and Freudian slipped. Anyway.

Tobias: That’s one of the things– in this little bit of testing that I’ve been doing, that’s one of the things that I’ve noticed. At inception, your portfolio becomes increasingly concentrated into a handful. It depends, the big winners of the stuff that I’ve been looking at. Sherwin-Williams is one. Ross Stores, ROST, Microsoft. I think Adobe was a reasonably big winner. All those things got cheap, but good at one stage. If you’ve got them when they’re cheap and good, and then you just held on for dear life. You did end up with heavy concentration in the portfolio, 12% or 15% at the biggest position.

The Impact Of Early IPOs On #neversell

Jake: Let me ask you guys this question. I think some of the really lopsided returns that make never sell look so attractive might have been an artifact of earlier IPOs, earlier in the life cycle of a business. There’s more growth there, there’s more meat on the bones at the IPO time. Now, if we change that to more today, where things are IPOing at much bigger valuations, maybe there’s not as much meat on the bones there to you buy it and get a very, very dream– that 4000-run Grand Slam as opposed to–

Tobias: Well, I think you can still get. Doing what I’m describing, the way you get a 4000%, 5000%, 6000% return is you’ve got to hold for 20 years, and that’s the first criteria. If you’re thinking in those terms, and you’re like, “What is something that can last for the next 20 years?”, that narrows down the universe of investable products. I don’t know necessarily whether– because I’ve been trying to do this–I’ve been trying to look at these portfolios, these crops of names that come out and see if I can cherry-pick out the ones that are the better options, and it’s hard. It’s really, really hard.

Jake: What if we took it to an illogical extreme and we said, okay– we’re looking for kind of very high variance outcomes here, very large right tail. Why is there not a never sell VC portfolio? Let’s go all the way to the beginning or towards the beginning, and we’re going to get the entire right tail outcome, and it’s a never sell also.

Bill: Dude, that’s kind of what I think Austin Lieberman does.

Tobias: Well, he sold Zoom.

Bill: Yeah, well, he said that it got bigger than his TAM or something like that. I guess there’s got to be a point that you eventually sell. He and I have bet back and forth– and by the way, I’m crushing you right now, dog.


Bill: I do think he’s pretty good at looking for assets that– I guess the only thing that I can say currently is at least that the market will buy that the TAM is huge later. Now, the fundamentals have to justify the valuation to sort of play out to see what’s what. I think that’s what a lot of that that Motley Fool’s Investing like a way of looking at the world does, that’s exactly what they’re trying to capture.

I agree with you though that you would think that starting from higher valuations would make the compounding harder. By definition, the math should be harder to compound on big bases. I like big basis, and I cannot lie.

Tobias: Well, you’ve talked about this before that– No, sorry, it was Eric Cinnamond a few weeks ago. I’m sorry I got confused– I’m not trying to be mean, I’m just–

Bill: All right. I don’t know either, but I will take it.

Tobias: I just thought you said it. He was talking about if you’re buying something at a 10% free cash flow yield, and you’re comparing it to someone else that’s got like a 3% free cash flow yield, the 3% free cash flow yield really has to do a lot for a long time to catch up to the 10% free cash flow yield.

Bill: I actually had said something similar.

Tobias: You probably have, that’s probably why I just couldn’t–

Jake: [crosstalk] -that as well.


Tobias: Well, I remember Eric saying. I’m sure you did too. I’m sure I remember you saying it too. I’m not trying to be rude.

Bill: I know. We’re boys, I get it.

Hitting Monster Compounders

Tobias: [laughs] I’m just trying to remember the quote. That’s what I think really turns up from– I’m not quantitative in the sense that– I want to reconstruct what I would do in the moment and go back in time and use that as the way that I can get lots and lots of reps in so I can recognize it now. That’s what I’m trying to get to the point where in a discretionary portfolio where I’d be like this is something that has all of those criteria, all those qualitative criteria that would help it go on.

Really, the thing that stands out to me is, your chances are so much better of hitting a monster compounder over 20 years or 15 years or 10 years or whatever. If your starting price is a bit cheaper, if you’ve got a reasonable free cash flow yield at the start, and it’s a good company, you’re probably going to– there’s still plenty of those are going to be doughnuts, too, but the ones that work and get big if you never sell, they do come to dominate the portfolio.

Bill: Yeah, I think that’s right. I guess how I’ve come to think about it is, you just need to make sure that– sorry. [coughs] That free cash flow yield that– Speaking of which, man, how’s your rona? You okay? You better?

Tobias: Yeah, I haven’t told anybody. By the way, I’ve had the virus for the last few weeks, but I’m okay now, back in the gym.

Bill: All right, good. This is just coughing.

Tobias: I don’t think you can transmit it down the internet. I’m pretty, pretty sure you’re all right.

Bill: I’d have to have mouth really around the mic.


Tobias: We’re getting demonetized this time for sure.

Bill: [laughs]

Jake: Yeah. It’s over.

Bill: I guess on the low free cash flow yield, if it’s a 3% free cash flow yield, the thing that does worry me about that game is, if it goes to 5%, that’s a big drawdown. Whereas 10% to 11%, or 10% to 12% is a lot lower drawdown. Now, that said, you’ve got to make sure that you’re not– the business quality between the two free cash flow yields usually is quite a bit different. That’s basically what you’re making sure you’re not on the wrong side of, but–

Jake: Now do treasuries.

Bill: Yeah, no, that’s right. I mean, 1% to 2% is a big deal.

Tobias: There’s no dispute for me that you can– like a 10% free cash flow can– I may have misunderstood what you said here, but 10% free cash flow, are you saying going to a 5% free cash flow or just being chopped in half?

Bill: No, I’m saying 10 to 11, there’s only a 9% decline. But 2 to 4 is 50%. It’s a big drawdown. the numbers are that compressed, small [crosstalk] percentages.

Tobias: That’s right. The way I think about it, you want to be comparing to your alternatives all the time. Your alternative is probably the 10 year, that’s kind of how I think about it, you could stick it into the 10 year to get the yield, approximately similar duration. That might not be right, but just a rough rule of thumb. I think if you do that, that’s one big thing that’s changed over the last 20 years that you went from 6% or 7% in the 10 year to like 1. Something that was 9% back in 2000, 9% free cash flow yield. 9% for a really good company? Yeah, I’d do that. Now, the equivalent is 1.8%.

Bill: Yeah, it’s tough.

Tobias: Or 0.9%. You’ve got to be right at that level.

Bill: Well, and that’s why I like a 4% or 5% free cash flow yield now for– S&P makes a fair amount of sense. Also, I do think it’s inherently tenuous the situation– that makes me nervous, I guess is probably the best way to say it. There’s a lot more actual risk I think out there than is perceived right now.

Jake: You’ve pulled all your returns into the present.

Bill: Certainly feels that way. Or you’re really relying on terminal value. If you can sell it at a 3% free cash flow yield down the road, then you do harvest your IRR. But if your terminal value starts to fluctuate, the math can get pretty shitty pretty quick.

Tobias: We’ve been taking questions all through this one. I’ve got one question on the screen, we’re probably going to run out of time. This is something we’ve talked about before. We talked about it in a different context in ROE. Is the market underpricing companies that can grow revenue at 5% to 10% for a long time at the altar of 25%+ percent growers that might not be able to sustain it? I think we talked about that, JT. The equivalence that the average ROE in the S&P 500 is 13.3%. I’m explicitly screening for stuff that’s 20% plus, so is anybody looking in that region of like, it’s a 15% ROE? It’s very stable. It’s been doing that forever. It’s the equivalent, maybe that’s where the undervaluation is.

Bill: Yeah, I think that’s right. I think boring compounders probably like trash companies– My perception of what Texas Instruments is do your own work. I don’t own it, that’s how confident I am in my perception. Businesses like that, I would take to the index all day long. Now, whether or not the index provides a satisfactory return is a debatable question. But I do think that some of those lower– not low growth, but 6% to 9%, growers that are compounder types, I bet they do pretty well relative to the index.

Tobias: Yeah, there’s a couple of tickers up here. AZO, that’s one. O’Reilly, I think, is another one, that kind of thing. They’re just basically listed leveraged buyouts where they are just slowly buying back their stock. Although O’Reilly’s growing revenues, I don’t know. It’s hard to– It’s the thesis for all of those things that electric cars just don’t require as much servicing and so [crosstalk] –going to be going in and–

Bill: I think that’s the terminal value thing that people are worried about.

Tobias: You still going to get your fluffy dice and your foxtail though, right?

Bill: Have to.

Tobias: I mean, that’s a billion-dollar industry right there.

Bill: Unless they’re all pods. Electric pods that link up like a centipede, that’s a potential.

Jake: Yeah.

Tobias: That’s the time, amigos.

Bill: I’ve heard a pitch. I don’t think it’s that crazy.

Tobias: If folks want to get in contact with you guys or follow up, JT, how do they follow you?

Jake: Twitter’s probably the best for me, @farnhamjake1. We have is my investing world website.

Tobias: Bill’s got a brand-new podcast. There’s a few episodes out now. It’s very, very good. I love that longform.

Bill: Thank you.

Tobias: How do people follow along–[crosstalk]

Bill: Episode Three is particularly good.

Jake: I didn’t catch that one.

Tobias: [chuckles]

Bill: I’m @BillBrewsterSCG and the podcast is The Business Brew. There’s two of them, pick the one with my face on it.

Jake: There’s another one? Oh, come on.

Tobias: [chuckles]

Bill: Yeah, but I got mine trademarked and everything, so I think I’m pretty okay. Yeah, I don’t think that we’re going to have beef. She doesn’t want any of that.

Tobias: That’s time. Thanks, amigos. We’ll see you next week.

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