In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- $GME And The WSB Short Squeeze
- Robinhood’s Trading Halt
- Sperm Whale Stoicism
- Pirating Together & The Wisdom Of Crowds
- Nobody Cares About Valuation Metrics
- Elon & Chamath’s Hatred Of Shortsellers
- Citadel Front-Running
- Forget About How Big A Business Will Be In Future
- Does WallStreetBets Change Anything In The Markets?
- Has The Shorting Left Tail Gotten Fatter?
- Gabe Plotkin Melvin Capital
- Andrew Left To Stop Publishing Short-Selling Research
- Wheels Up vs NetJets
- Jen Ross – You Shouldn’t Short Heavily Shorted Stocks
- Vale Hal Holbrook
- The Importance Of Multiple Expansion
- Index Funds Favor Momentum
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’s 10:30 on the West Coast, 1:30 on the East Coast. It’s 6:30 UTC. I did see the tweets, thanks for the heads-up. I think it’s 6:30 AM Australian Eastern Standard Time. It’s the Acquirer’s Podcast. What’s up, fellas? It’s Value: After Hours, I forgot where I am.
Bill: Whatever it is, it’s on the Acquirer’s Network, right?
Tobias: That’s it.
Bill: People have a network now.
Tobias: Omni channel.
Bill: Yeah. Not much. How’s everybody doing?
Tobias: There’s some wild speculation in this market. Wow.
Bill: No, I don’t see it anywhere.
Tobias: [laughs]
Jake: Everyone looks pretty buttoned-up.
Tobias: Getting text messages from everybody. Everybody’s punting AMC and GME.
Bill: Well, they were gambling anyway. Punting, that’s right. Yeah, that’s gambling.
Tobias: Same thing. Yeah.
Bill: That’s right. Yeah, I use English here.
Tobias: That’s English English. That’s old country English.
Bill: [laughs] No, sir, in America, we say that everything that we say is correct and proper English is not English.
Tobias: Do you think that punting’s standing up in a boat and pushing along with a stick?
Bill: That’s right.
Jake: That’s like dropkicking.
Tobias: The dropkick.
Jake: That’s our punting.
Bill: Doing all that with a Bud Light in your hand, that’s America. Anyway, what are the topics for today, gents?
Tobias: I think everybody wants to know what inning we’re in, Bill.
Bill: Ah, come on, man. GameStop’s down 50%, so we’re going back to the game.
Tobias: Back to one.
Bill: We’re back to inning two.
Jake: Oh gosh.
Bill: [laughs] Meme stocks, bro. Diamond hands.
Tobias: Yeah, crazy.
Jake: Those are not second inning terms.
Bill: Diamond hands?
Jake: Yeah.
Bill: You just don’t have enough galaxy brain in you.
Jake: I don’t.
Tobias: We’ve had a few speculative manias in this long bull market, and I don’t think that it’s ever kind of– you would think that it’s kind of tick the top. Like, Bitcoin, 2017, going bananas. Tesla last year.
Bill: Yeah.
Tobias: Tech stocks, it’s meaningless.
Bill: Tesla’s the only one that’s really got a lot of market cap to it. Then, I guess the SaaS stocks in aggregate. Those might not be manias, man. They may be justified. I don’t need to understand it. Just telling you.
Tobias: What topics are we talking about today?
Bill: Oh, I’m going to a rant a little bit.
Jake: Yes.
Tobias: Bill’s rant. [chuckles]
Jake: My favorite segments.
Tobias: What do you got, JT?
Jake: I’m going to start abdicating my time to Bill for ranting. I prepared a little piece that’s called Sperm Whale Stoicism. We’ll see how that goes.
Tobias: I like it. I don’t know how you can top ketchup physics.
Bill: I went to the zoo last week and I have a video of a zebra humping another one. It was hilarious. They let this male zebra in, and it just got rowdy in there. The female did not like it, but anyway, sperm whale reminded me. You’re welcome, folks.
[chuckles]Tobias: Family podcast.
Jake: Yeah, what about you, TC? What do you got?
Tobias: I’m going to be a downer again. Bill and I are going to have an argument about it in a little bit, but I think we’re bottom of the ninth. How many innings are there in baseball?
Bill: Ah. Dude, come on.
Tobias: Fourth inning.
Bill: Come on.
Tobias: Late on the fifth day in a cricket sense. Very dark shadows across the pitch. You guys [crosstalk] you can translate that for the baseball aficionados.
Bill: I think you’re saying the game’s almost over.
Tobias: I think there’s a lot of speculation, there’s a lot of overvaluation, and there’s a lot of margin debt packed in there, and I think that SPACs– and I think we’re It’s almost time to ring the bell.
Bill: Yeah, I mean, that’s a cute thing to say. Let’s talk about why.
Tobias: Do you want to do it?
Bill: Let’s do it. Let’s you start off. Come on, let’s roll.
Jake: Ding, ding, ding.
Nobody Cares About Valuation Metrics
Tobias: Nobody cares about valuation metrics anymore, but valuation metrics are all stretched.
Bill: Diamond hands.
Tobias: Cyclical P/E 35, exceeded now only by 2000 peak. Buffett measure market cap the GNP same thing. Now exceeds the market peak. If you just break all of the– by decile, Hussman had this great chart yesterday. Basically, every decile is now more expensive than it was in 2000. Which is a little bit concerning. Then, on the speculative front margin debt to GDP all-time highs. People are speculating wildly in call options and things like that. I just think there’s a collection of stuff that we’re speculating on margin at very stretched valuations, and that’s tail end bull market behavior. The prosecution rests.
Jake: Yeah, Bill, counterpoint?
Bill: [laughs] It’s hard to argue these stats that you use. I guess that when you see the margin debt stuff, do you guys know–? Are they talking about– Like Melvin Capital, the amount of leverage that they’re using, is that considered part of the margin debt calculations? My overall answer to this is, yeah, I think forward returns are quite a bit lower than they have been. I suspect that people are trying to goose those returns with leverage, is what I think is most likely going on. I just think that forward returns are going to suck. I think that the amount of leverage increases some of the probability of tail risk for selloffs and whatnot. I still think– look at Berkshire, look at Comcast. These things are not glaringly obviously overvalued to me. I agree with you that there are pockets. I’m just not sure that I think that we’re going back to some other valuation regime but for rates.
Tobias: Yeah. I think it’s the other way around. It’s very broad-based overvaluation with some specific pockets of undervaluation. I honestly don’t understand what drives the undervaluation in some of these stocks because I’ve tried to create portfolios at pretty high quality, and I didn’t have any trouble creating a portfolio that’s better return on equity than the market, faster growth than the market. All that lower multiples in the market, better free cash flow conversion from EBITDA, all of these things, I find that it’s that there are quite a few companies out there, I think that are reasonably valued, that are undervalued that are good quality companies. It’s difficult to hold the two concepts in your mind at the same time. When I look at the Hussman or Jesse Felder, or any of the GDP metrics, or any of that stuff, I know that those guys are going to be criticized because they’ve been bearish for a long time. I look at the data and the data is like, I don’t care how they interpret it. I look at the charts, I have color in the charts, they look pretty stretched to me.
Bill: Rear window, front window, buddy. You’re just looking at the rearview, and everybody else is looking at the windshield. That’s the answer.
Tobias: Well, what are they looking at? Tell me what everybody’s looking at.
Bill: Well, dude, in 15 years from now, you have no idea how big these companies are going to be, and you just can’t get your head around it. You’re going to miss the next great wealth generator. Diamond hands. [laughs]
Tobias: The two things, one of them is Ford returns here. I think Ford returns are about 9%, including 1.5% of dividends. That means that’s a negative 0.6%, no 0.9%.
Bill: 0.9%?
Tobias: Ford returns are a 0.9%. Assuming mean reversion over a decade, back to normalized ratios, which might be– that may not be a reasonable assumption, but that’s the assumption.
Bill: I don’t know… going to get it. I do think there’s something to be said for– in the past, a lot of the companies, you could build a replacement to the company that– if you’re like a metal bender or whatever, somebody else can just put up another one if they’re willing to have the capital. There are a lot of businesses now that are truly moaty that are protected by IP, so they do– I don’t know that margin reversion is an argument I buy. Just saying.
Tobias: The other thing is, when I look at the big return, the gigantic winners over the last decade have been things that started at undervaluation. Microsoft undervalued. Sherwin-Williams’ paint company undervalued. Ross Stores undervalued, retailer. The way that you get the really big returns is you’re not trying to pick the business quality alone. You’re trying to pick undervalued business quality. That’s how you get the monster returns over a decade. Apple, too.
Bill: Yeah. I don’t know. Look at David Gardner, though. He’s the counterexample that I always use, but I do–
Tobias: That’s a micro-cap universe. Small and micro.
Bill: No, David, he does mid-cap and stuff. He recommends stuff that’s big. It’s just a different way–Look, my bias tends to agree with you. Half the time that I say that we’re in an inning three, I’m joking. I also do think that there’s a lot of reasonable stuff out there right now. I just don’t–
Tobias: So do I.
Bill: Yeah. I guess part of my hesitancy to be like, “Yeah, this is super late,” is I think it does sort of turn my brain off from looking for stuff like that, because it makes me almost think about making a market call. I don’t think that that’s a very healthy habit for myself.
Tobias: Well, I don’t need to do that because I’m long short, but I can fill up a short book as easily as I can fill up a long book, I can– the shorts at the moment– To be fair, the shorts are going to catch me, but I have thought at each time that I’ve found them, gee, these junky companies with gigantic market capitalizations. At some stage, doesn’t the quality of the business have to show up in the financial statements? Or, is that just we’re not doing that anymore?
Jake: [crosstalk]
Bill: I don’t think you need– Well, yeah, I agree, actually. It is a supply and demand of shares. When you are pitching an idea, that’s 10 years away, who the fuck is to say that your idea’s wrong? This is all just pixie dust anyway, on a lot of this stuff.
Tobias: But I don’t have to pay up for it.
Bill: No, of course, you don’t. Well, that’s the bet that people that have a value bend or bent or whatever, are going to be making over the next five to 10 years, is like we’re going to be saying, “Alright. Well, this next five to 10 years is all yours.” We’ll see.
Tobias: As a microcosm of what’s happened, let’s look at your QRTEA, Qurate versus Zoom.
Bill: Yeah, buddy. Let’s talk about it. Let’s just wax poetic [crosstalk]
—
Forget About How Big A Business Will Be In Future
Tobias: It’s going to be the undervalue, like, Zoom was super, super hot, over the last 12 months, particularly like four quarters ago. Just when we all locked down, everybody was using Zoom. It’s still growing very fast. Still a great business. It’s just stalls out. Qurate, who would touch that with a 10-foot pole and then–
Bill: Idiots–
Tobias: Here it is.
Bill: -especially in size. I love when people come at me and they’re like, “Do you think it’d be a bigger business?” No, I don’t know. That’s not even the question you need to be asking at the valuation that I pitched at, dumbass.
Tobias: Yeah, it’s a capital structure. It’s capital structure more than anything else.
Bill: Yeah, not everything needs to be how big can this business be in the future. Some things in life are how much cash am I getting back, can I actually handicap what I need to believe in going forward. That does trigger me a bit, those conversations, because some people–
Jake: That’s every single one of these conversations, though, is it’s some cash far out in the future that may or may not show up, relative to cash today, cash in the pockets in the next year or two, because you feel you have some sense of what the business is going to do. You don’t have to have such herculean insights into what the world looks like 10 years from now.
Bill: Yeah, I guess that the only thing that I think that I wish that I had understood earlier is that the math of the right tail and how if you make a portfolio bets that you do think will be much bigger in the future– like Ron Baron is a pretty good example. I have been hesitant to look into his stuff because he benefited from Tesla, and I find that offensive, but his career is pretty freakin’ impressive. His podcast on Masters in Business is worth listening to. He’s had a lot of really big wins. So, that method of thinking matters. I’ve just always been so into, like, “Oh, well, how do you know?” Cost me a lot of money.
—
$GME And The WSB Short Squeeze
Tobias: Do you guys have any thoughts on GameStop?
Bill: Yeah, I do. Allow me to–
Tobias: Is that your rant?
Bill: Yes. First of all, who the fuck do some of these people think they are, pouring fuel on the fire? Fueling this populist narrative that it’s the little guy versus the big guy, Chamath or whatever the fuck his name is, I don’t care if I just said it wrong, should have shut his mouth and not announced that he bought those calls. Then, he acts like he’s donating it to charity out of the goodness of his heart. No. The reason is compliance called him and said, “You better figure out a way to weasel out of this thing because you got a ton of followers and you’re running people straight to the fire and you’re cheering them on Twitter, and you’re pontificating about a bunch of shit you don’t know anything about.”
That guy needs to treat the responsibility that he has with a lot more respect than jumping up on some WallStreetBets BS, saying, “I’m going YOLO on some calls.” Not to mention, the people that he’s leading to the fire could actually be hurt, where he could lose all that money and it doesn’t matter because he’s going to get it all in SPAC fees, because his lemmings are going to give it to him. That guy has not bothered me until pretty recently. I find him very offensive right now, very offensive.
Tobias: There are a few guys jumping on that bandwagon. Davey Day Trader did that as well.
Bill: But he’s a [crosstalk] whatever.
Jake: Mark Cuban.
Bill: I think introducing populism and populist narratives into the market is extremely dangerous. I think that when you have 100,000, or 200,000, or however many freakin’ followers, that guy has–
Jake: Chamath’s like 1.2 million.
Bill: Yes, so whatever he has, I don’t care. I did look at some of his replies, he buys a lot of bots, but anyway.
Jake: [laughs]
Bill: The idea that he is rooting on the small guy bitching about payment for order flow, and SoFi does the exact same thing. How about you actually know your portfolio company? Slow your roll, man, you don’t need to have an opinion on everything.
Citadel Front-Running
Tobias: How does Robinhood work? They don’t charge you a fee, so rather than front running you– so this is another way they could be doing. They just make a wide bid-ask spread every time you want to trade, they’re just in between but they don’t do that either. What they do is they sell that front running to Citadel and they get a fee for giving them that data. Is that correct? Is that how it works?
Bill: Yeah, I think how it is, is they route it and Citadel gets the first look and Citadel knows if they can skim something and then they send it back, a little check. I do think that they have to give best order execution though. I’m not 100% sure how all that works, the internals. At the end of the day, the guy that was always going to be hurt here was the small guy, at the end of it. I wanted to buy, like this, oh, let’s all jump on Robinhood thing. I’ve got motivated reasons to believe that. I’m happy that I talked to some smarter people than me and they said, like, “There’s no way. There’s way too much volume. It’s got to be the big guys.” I just think that jumping on this bandwagon– We’ll see how it all gets totaled out, but I really fundamentally think that what some big names did in this whole story is really irresponsible. I know that I sound like an old man, but I really feel people don’t treat the responsibility that they ask society to give them with enough respect. I think that this was a really good example of that in a couple instances, and it upsets me greatly.
Jake: Yeah, I agree. Pretty gross behavior on a lot of fronts. I was surprised at how quickly it unraveled. Usually, it seems like it would take at least a couple weeks or something, but this was started and ended within before our last podcast.
Bill: It did.
Tobias: That’s internet time, I guess. We knew it was going on. Jimmy was sort of–
Jake: Yeah.
Tobias: I had Mike Burry as the gift for the Twitter promo last week.
Jake: That’s true. All right, we got two weeks’ worth of fun in it.
[crosstalk]Tobias: I think it’s been going on for a little while. I think that retail really piled in between the podcast and now. Then, it broke down. It was right at the end of that parabola of whatever that shape is. What do you call a broken parabola?
Bill: Yeah, I don’t know.
Tobias: The South Sea Bubble formation. When the big move, the last stick is all the way up, and then it turns around, that does seem to happen very quickly.
Bill: The highest points the apogee, that I know.
Tobias: The apogee. There you go. The apex, the pinnacle.
Robinhood’s Trading Halt
Jake: Do you guys have any thoughts on the shutdown of trading and stopping order flow?
Bill: Oh, yeah, that I did. I am sympathetic. This is where I’m sympathetic to the degenerate gamblers. My buddy bought into Blackberry. I told him not to do it, but he was like, “I’m doing it.” Then when they stopped them, they did change the rules on them. He’s like, “Dude, what the heck? It can’t go up because people can’t buy enough of it.” All of a sudden, you have put circuit breakers into the potential of the gambling, which part of me gets upset that there’s gambling in the markets, but the other part’s like, well, it was going on anyway. Once the dance is going, cutting the music doesn’t seem very sportsman like.
Tobias: It was illiquid. It was a solvency liquidity issue for Robinhood, wasn’t it? That’s the thing that I find most amazing. That’s the most frightening part. That’s the scariest thing you can possibly hear that a broker rode the very peak of like, we’re basically at all-time highs and there’s a broker having trouble. What?
Bill: Yeah. It’s almost like they don’t plan for tail risk in certain instances.
Tobias: What happens if the market goes down a bit?
Jake: Yeah, it’s almost like they don’t pay attention to KYC at all.
Bill: Yeah, I don’t know, man. The other thing that really upsets me is like these people that are saying like, “Oh, it’s for the common man or some nonsense about democratizing investing.” You’re not democratizing investing in people’s options.
Jake: That’s offensive.
Bill: Get out of here. Then, these VCs saying, like, “Oh, it’s not our fault,” or whatever. “SoFi is just as bad.” You guys all make me sick.
Jake: Yeah. I mean, pimping your customers to Citadel and then pretending like you’re democratizing trading, that’s a little offensive. It’s gross.
Bill: Yeah. It’s [crosstalk] closed out any of your funds, good. I didn’t want them anyway for my rant.
Jake: Yeah. Send all the hate mail to Bill.
Bill: Man, I’m happy to have the conversation with some of these guys. I think it’s nonsense. I think these guys that sit behind this, we’re democratizing investment thing. It’d be one thing if they weren’t in finance and they just didn’t know better, but the fact that they know better, and they still make– how freaking greedy are you? You’ve really got to sell that? You don’t have a soul or any integrity.
Tobias: How are they getting paid otherwise?
Bill: I don’t know. Some of these guys– look at the VC backers in Robinhood. You can’t pass one dealer, like not one? You’ve got to go out, and you got to be loud about how you think you’re democratizing investing. I know you’re not,-
Tobias: But that’s the game, right?
Bill: -shut up.
Tobias: They’re all the rebels before-
Jake: The Empire.
Tobias: -the Empire. Yeah, that’s the oldest marketing trick in the book.
Bill: There’s a difference between quietly backing something and then going out and giving Wall Street Journal interviews, obviously pumping a false narrative. That’s fine. I’m a no one. I don’t respect them. They don’t need to care that I don’t respect them. Next. Our lives will both be fine, never crossing paths.
Tobias: Yeah, I never thought for one second– [crosstalk]
Bill: What do I care?
Tobias: -that they believe what those saying. It is pretty creepy [unintelligible [00:22:56] pretending that you are Robinhood on one hand and [unintelligible [00:22:59] for the Sheriff of Nottingham on the other or some bandit in the forest, not even the Sheriff of Nottingham.
Bill: Well, in this notion of a lot of our customers are buying hold, okay. Just look at the options flow through each platform. It’s pretty obvious what’s going on here.
Tobias: You don’t buy and hold in options.
Bill: No. Well, that’s my point. It’s not like they’re empowering any individuals for real. We’re turning people into degenerates or facilitating the process. I won’t assign the blame. I will say they are nudging people to the wrong place.
Jake: Yeah. Just a lot of gross things happening.
Bill: It’s just like, how much greed is enough greed? When is enough? Then, for some of these guys to– I don’t know, to just push this populist stuff, man. What are you doing? Do you realize the fire that you’re playing with? What scares me even more is that they might realize the fire that they’re playing with, and they may like it.
Tobias: What do you think happens? What are you worried about?
Bill: You’ve already got people in the country that don’t have faith in the election system. Now, you want to have no faith in the financial markets? What is America’s competitive advantage if it’s not rule of law and financial markets? So, what, we’re going to mess around and play with that? [crosstalk] emotion.
Tobias: Should you have faith in the financial markets?
Bill: Yes. I think that on average, America’s capital markets are something that people should be proud of as Americans. We might think that there are bad things that happen in it? Yeah, I do.
Tobias: We’ve had speculative. We’ve had lots of trading before. We’ve had booms and busts before. This is nothing new. What’s new? What’s different?
Bill: I’m not saying that there’s a boom and a bust. What I’m saying is if you have plenty of money, and you attach yourself to it, and you front run it for your own attention, I think you’re a sick human. That’s what I think. I don’t care about a short squeeze, I care about people of influence, running sheep to the slaughter. That’s what I care about. I don’t care about a short squeeze on a company that is meaningless in the grand scheme of things.
Jake: The other thing that concerns me is that there’s already a fair amount of populace. A lot of people felt like they have been left behind in the last 20, 30 years. If you gave them that little bit of hope like, “Oh, maybe I can get rich this way,” like all these other people have, and then you take it away– even if it was for true liquidity reasons, that they actually had to stop taking orders, that’s too nuanced for them to care. It feels like you stopped the clock in the third quarter when I was winning, and now you change the scoreboard and I’m losing. To use Chris Cole’s ideas about– risk doesn’t get destroyed, but it can be transmuted. I think you’re turning what was trying to squash financial risk of overspeculation and turning it maybe into pitchfork risk. It’s just one more thing for people to be upset about and feel the game is rigged.
Bill: Yeah, that’s right.
Tobias: Do you bear any responsibility as an individual investor piling into something like that, though. You can’t be that stupid that you think this is just free upside.
Bill: No, but, dude, that’s what I’m saying why I have some sympathy with the gamblers because my buddy that bought Blackberry, he knew exactly that he was gambling. It was already going on. Then once you restrict my ability to buy or other people’s ability to buy, well, now you sort of like screwed me in my gamble. You’ve changed the dynamics. The problem is, you’re not playing a game with the same power that everybody else is. I think people learned real quick, maybe their assumptions weren’t.
Tobias: What’s the reason Robinhood had to shut it down? Why are they taking any risk at all? Why aren’t they just facilitating the transaction?
Bill: I don’t know the answer. Jake, do you know?
Jake: I probably don’t know enough to say for sure. They have to have certain collateral requirements-
Bill: Yeah, that’s my understanding.
Jake: -with their broker.
Bill: With the with the clearing house and they have [crosstalk] post collateral-
Tobias: And it’s moving.
Bill: -given what was going on they needed to raise capital to stay within the regulator’s requirements is my understanding– [crosstalk]
Tobias: It happens all the time that the collateral requirements in your account move up and down, you get a notice regularly that you need to put more collateral up, that’s something they do in the PA.
Jake: Hopefully not too regularly.
Bill: Well, yeah [crosstalk] get that notice.
Tobias: They just changed the rules halfway through. That happens all the time. That’s not uncommon.
Jake: Yeah.
—
Elon & Chamath’s Hatred Of Shortsellers
Bill: Yeah. I don’t know, man. It’s people’s reaction, it’s not what like– I even tweeted, I thought it was humorous that Robinhood halted trading because the little guy when they’re– I’ve always known they’re not there for them. The way certain people behave, the way that Elon Musk turned it into about short sellers, like, dude, go fuck yourself. You haven’t won yet? Yeah, people were short your company. Guess what? They got their faces ripped off. Okay, short sellers are good for the market. You may not like them, I don’t like these hit jobs on stocks. I don’t like pump and dump guys. I don’t like frauds. I don’t like any of it. The fact of the matter is short selling to me is as important as free speech. Don’t turn this into shorts are evil. Chamath calling it unamerican. I find your SPAC sheet offensive. The whole discussion I thought was sick.
Jake: We need to CNBC Buffett. He needs to come out and give us some words. He’s been quiet.
Tobias: He’s in his 90s. He’s running a very big company.
Jake: We have Munger coming up for Daily Journal here next in this month, another couple weeks.
Bill: Dude, I wish I could ask Munger, “When’s the last time you set up IPO, A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P?” And see what he says about that.
Jake: Wasn’t it Munger who said get that money, bro?
Bill: I think he was. Yeah, get the money then change the world. I understand why people like him. I’m just saying I think he’s towing a very dangerous line. I even liked him on the Ted [unintelligible [00:30:00] interview to be fair, but I don’t like what I see right now.
Tobias: JT, you want to do your market philosophy, life philosophy, palate cleanser?
Jake: Yeah. [crosstalk]
Tobias: Little [unintelligible [00:30:17].
—
Sperm Whale Stoicism
Jake: [laughs] All right. This little segment is called Sperm Whale Stoicism. I don’t know if you guys know a whole lot about sperm whales, but they’re pretty incredible creatures. They breathe oxygen just like we do. But they’re able to hold their breath for up to 120 minutes. A typical dive for them will be a 35-minute hunt. They’d go crazy deep into the ocean. They’ll go down routinely 2000 or 3000 feet. The deepest measurements been 1.2 miles, which is over 6000 feet.
Tobias: 1.2 mile is deep.
Jake: They’re huge. Deep, yeah. [crosstalk] Well, they would for us.
Bill: Yes, they would. You’d get the bends coming up, for sure.
Jake: All right, we’ll get to that. Their average size is 16 meters, which is like 52 feet. The average weight is about 50 tons. They’ve measured some that are way 80 tons. They eat about 3% of their body weight every single day. It’s estimated that they eat about 91 million tons per year of seafood. It’s usually fish and squid.
Tobias: Lucky bastards.
Jake: Well, humans as a species, we eat 115 million tons, so they’re not that far off from what we eat. Obviously, their numbers are quite a bit smaller because that’s doing-
Tobias: I’m doing my part.
Jake: -3% of your body weight– Yeah, put on over that. That’s like 1200 pounds a day of food that you’re eating. What’s amazing too, is they have they use echolocation to hunt because when you’re down a mile deep, there’s no sunlight down there, it’s pitch black. They’re able to use this clicking inside of their head and it’s crazy loud. The loudest animal on earth. It’s 230 decibels, this clicking sound, louder than a jet engine. They can live for 70 years or more. If you want some facts on their gestation, it’s kind of funny. They gestate 14 to 16 months, then the females will give birth every 4 to 20 years. They’ll lactate for up to 42 months, but some have even been measured up to 13 years, like the baby’s still eating from the– [crosstalk] Those are the real Buster Bluths of the whale world.
Anyway, let’s get a little bit deeper and put ourselves, shrink ourselves and go inside of the whale when it starts to dive. Typically, they’ll hyperventilate up on the surface for about eight minutes between dives. What they’re doing is reoxygenating their system. If we shrink ourselves down and go inside and think about the pressure that’s happening. When you dive down, they use oxygen just we do to power their muscles. When they start diving, the pressure builds. For every 33 feet of water, there’s a column of water on top of you, that’s one atmosphere additionally, or about 15 psi. By the time you get down to half a mile below surface, you’re at 80 atmospheres, that’s like 1200 psi squishing you. If you imagine the little alveoli, the little folds in the lungs that we have than they have, if you have that much pressure, it crushes their body in such a way that their lungs collapse into 1% of their normal size when they’re up on the top side.
What the problem is, is that when you do that, that forces so much oxygen and nitrogen into your bloodstream through the tissue inside your lungs, when you come back up, that nitrogen then bubbles out of your blood and destroys all your cells. That’s what the bends are. It’s nitrogen coming up, dissolving out of your blood. Mother Nature came up with this evolution to solve this problem. What she did was the whales when they started diving, they shut off their alveoli completely, so they don’t– it’s not like they take a big gulp of air and then go under. Instead what they do is that they store all the oxygen locally inside of their body– or inside of their muscles. They have 2 times the haemoglobin density as humans and 10 times as much the myoglobin, which is the little protein inside your muscles that help oxygen move around. They store all the oxygen within their muscles before they go dive, so it’s not really a lung thing. They shut the lungs off. To really like torture this analogy, other than just it’s fun to learn–
Tobias: Find your way back, JT. Find your way back.
Bill: Yeah. Where are we going with this? I do like it. It’s very interesting.
Jake: I’m a mile under right now. If we go on our own little hunt a deep dive researching a company, if you have to have other people’s reassurances continually. That’s sort of like breathing air on the top side. Being able to shut that off and having enough internal mettle and an internal sense of your self-worth, like the oxygen of yourself worth, storing that internally, and not having to exchange it with the outside, I think, allows you to go places and do things that maybe someone would say seems impossible. There’s a stoicism to keeping your own mind in a way that they store oxygen locally and don’t have to get it– don’t have to get self-assurance externally from other people. Very tortured, barely got it back over the finish line.
Tobias: You need a lot of that as value guy in this market. Put on a strong self-image, stored likely in the muscles.
Jake: It’s okay to come back topside and interact with people and get recharged. But then, when you go back to hunting, shut off the lungs, get everyone else’s brain, everyone else’s voices out of your head and focus on the primary things for you.
Tobias: I like it.
Bill: That said, I want to thank everybody that listens to us that writes with their best idea. Shoutout to all you.
Jake: [laughs]
Bill: I am for sourcing ideas among others. Don’t take this as– we don’t listen when you write, we do. Yeah, I agree with you.
Jake: You want to do your own work, though.
Bill: Oh, 100%.
Jake: You don’t want to have the influence too much of other people when it comes to pre-assessing the facts for yourself.
Bill: Yeah, for sure. Except for on meme stocks, which you obviously buy based on the quality of the meme.
Jake: Correct.
Bill: You have to assess the meme through your own lens. You don’t ask other people how good the meme is.
Jake: That’s fair. That’s the new edge.
Bill: Yes, that is the new edge.
Jake: Meme analysis.
Bill: Yeah.
—
Does WallStreetBets Change Anything In The Markets?
Tobias: Does WallStreetBets change anything in the markets?
Bill: No. I don’t think this is much different. I do think that the swarm size could get bigger, though. Mike, I do hope that we can save this episode. We’ve been working on it for a while now, Non-Gaap. He had mentioned that if he was some of these founders, like, he would almost be concerned about the WallStreetBets, plus a visionary founder taking over one of these sort of embattled companies. Does it create a scenario where you almost see what GameStop did? Then, can they issue capital? All of a sudden, you’ve got this cult of– almost like a religion that’s empowering valuation and how can you attack that if you’re– somebody like Buffett, for instance, that’s focused on cash flow.
Wheels Up vs NetJets
You can get people messing up, Wheels Up, versus NetJets. You give me those two businesses sans a SPAC, NetJets will destroy Wheels Up over time. You get enough stupid money, there’s no guarantee that Wheels Up doesn’t just hurt the market for both businesses. I don’t think they can destroy NetJets, but they can take out a lot of value just from stupidity.
Tobias: How’s that different to what’s been happening in the past though? Icahn goes into a stock, it gets a little bit of a bump, Buffett buys a stock, it gets a little bit of a bump. If somebody charismatic goes into it, somebody goes into– I can’t really think of any examples of big turnarounds. I don’t see any reason why somebody couldn’t go and take over something moribund. Let everybody know about it, “Hey, we got a brand-new idea. We’re going to raise some money. We’re going to do some stuff.” Is that new?
Bill: No, I don’t think so.
Jake: Ron Johnson at JC Penney.
Bill: Ooh, yikes. Sorry, Ack Attack.
[crosstalk]Jake: Well, he did, right? Apple– [crosstalk]
Bill: Not to my girl, Jen Ross, it didn’t.
Tobias: Not to who?
Bill: Not to Jen Ross. She had shorted that. But I think you’re right. I guess that the interesting thing to think about for me is, like, does the internet enable a distributed scale that can– and the depth of the options market and leverage in general. I don’t have a good enough sense.
Has The Shorting Left Tail Gotten Fatter?
Jake: Two things. One, do you think that the left tail of shorting has gotten fatter and scarier with that?
Tobias: Is that the downside?
Jake: Yeah.
Bill: Yeah.
Tobias: I don’t think so. Haven’t you always tried to avoid? I thought it was like pretty common knowledge among shorts, you don’t short the most heavily shorted stocks. You don’t want to be long, the most heavily shorted stocks, either because they’re probably not going to work very well. If you’re short, then you’ve got borrow issues, and you’ve got other things, then you’re captive to what the other shorts are doing. You just want to avoid them as short as long on short. Why would you be short something like that in size, if you’re Melvin Capital? Why would you be short GameStop? There’s a pretty reasonable argument that it was undervalued until it got to like 20 bucks. Why would you be short that thing? Why would you make it a big short in GME? Why would you make it a big short in your fund?
Bill: I don’t know how big that short position was, because–
Tobias: I said they were down 50%.
Bill: Yeah, but I don’t know that it is–
Jake: It got big.
Bill: I don’t know where they were taking on water and what they had to liquidate. You could be using it as a funding short. You could be short GameStop to go long Pinterest 2X. Which looks like their book. They were also short Qurate. When they had to unwound or unwind, I trimmed a little, so shout out to Melvin Capital for giving me 10%. [unintelligible [00:42:17] [laughter]
Jen Ross – You Shouldn’t Short Heavily Shorted Stocks
Bill: I was like, “This is a little bit rich for me.” You should listen to my podcast with Jen Ross. She talks about this.
Tobias: All right. I’ll put that on.
Bill: It’s really interesting. She said exactly what you said. She’s like, “You shouldn’t short heavily shorted stocks.” She basically talked about how this whole situation can be set up. I agree.
[crosstalk]—
Pirating Together & The Wisdom Of Crowds
Jake: Another question for you. If one of the hallmarks of wisdom of the crowds is heterogeneous population, heterogeneous viewpoints, does the coalescing of viewpoints in a decentralized WallStreetBets, now everyone going the same direction, completely foul up wisdom of the crowds, and we should expect more market inefficiency, the more that we see pirating coming together.
Tobias: I mean, I’d be careful being in the stock that they’re pointing at. I don’t know. I think that the wisdom of the crowds breaks down when they’re pointing at something. In discovering it, probably there’s a period of time where they’re trying to work it out, that’s probably a good sorting process that probably does qualify as wisdom of the crowds. Once they find it, and they pumping it, manipulating it, then you’re a madman if you’re in there, madwoman, that’s not gender specific. You’re mad if you’re in there, you’re not, you’re bonkers. Get out of it. Long or short.
Bill: The thing that’s tough for me to understand about WallStreetBets, and it’s because I don’t have enough historical context. I just don’t know what’s that much different about it than Twitter or Seeking Alpha or like the old internet. [crosstalk] Yeah, message boards of the time. I don’t think this is actually about WallStreetBets. I think this is about some internal big hedge funds fighting and WallStreetBets is the beard.
Tobias: [laughs] [crosstalk] -small stock though. Before it got to a $15 billion capitalization, it was pretty small.
Bill: Yeah, I know. I think that there were pros that saw the whole setup and really leaned on it, and WallStreetBets made for a nice story for everyone to write about, but I am interested to see the facts when they come out. I just don’t buy the whole story that’s being sold. I think it’s wrong. I don’t know how though.
Tobias: In the call, so you could see that call volume option. I mean, we’ve seen that calls leading other big stocks that lead Tesla, and Tesla is a much bigger stock than GameStop.
Bill: Yeah. Who was buying the calls? I really don’t know, and the fact is–
Tobias: You’re saying it’s market manipulation of the person buying the call, so they’re trying to force up the underlying?
Bill: I’m saying it’s possible. I don’t buy that this is all WallStreetBets ganging up against the big bad hedge fund. There’s something that doesn’t add up to me about that story.
Tobias: I always think it’s funny when they’re sticking it to Wall Street. There’s not a single person on Wall Street who thinks they’re Wall Street. Everybody thinks that they’re rebels. Every single person is a contrarian.
Gabe Plotkin Melvin Capital
Bill: Well, and the other thing that I gather is unfortunate is I talked to one person that knows, what is it, Gabe Plotkin, is that his name, at Melvin pretty well and he said, like, he’s actually like a really good guy. He’s one of the few that really trains up the analysts and comes down and really takes the time, sucks, but they obviously had some risk problems.
Tobias: It was all pretty quick, I guess it went from being– GameStop was a pretty small stock until it was a $15 billion stock, even that’s small these days.
Bill: Your question on the call volume, how do we know that that’s not them hedging out their exposure via calls?
Tobias: Yeah, we don’t.
Bill: You couldn’t get shares. I don’t know who is doing what.
Tobias: Well, the fact it’s down 50% probably gives that away.
Bill: Well, yeah, I guess.
Tobias: They might [crosstalk] hedge there.
Bill: Yeah, no doubt, but maybe that was how they had to– didn’t he say like, I’m out or whatever. I don’t have the answer. I just don’t think that this is WallStreetBets taking it to Melvin Capital.
Jake: That shouldn’t stop you from telling everyone what happened.
Bill: Well, I did a pretty decent rant earlier. I don’t want to talk about things that I don’t have knowledge or strong opinions on. I know enough to know that I don’t know in this case.
Andrew Left To Stop Publishing Short-Selling Research
Tobias: Andrew Left has given up short selling as a result of this episode.
Bill: Not true. He has given up publishing short selling reports.
Tobias: Is that the distinction? Okay.
Bill: Yes.
Tobias: Oh, well, that makes sense.
Bill: That makes sense.
Tobias: That’s been a little bit of a game for a little while. Long and short for the activist, activist short selling, activist longs. I think that’s the thing that when Musk is complaining, when Chamath is complaining, that’s what they’re complaining about the shorts or whoever it was, it was Cuban who was complaining about the shorts. The shorts who put a big short position and then publish the research report which I don’t think there’s anything wrong with that. I don’t understand why that’s such a hot button issue.
Bill: It’s like what people do, it’s [crosstalk] in the other way.
Jake: It’s because you’re not an American.
Tobias: I am. [laughs]
Jake: Nobody likes the guy betting on the “don’t come” line at the craps table. He just quietly collects his chips.
Tobias: I don’t understand the antipathy. You go and do the work, it’s massively trading at where it should be trading. You tell everybody about it. How does that make you a bad guy?
Bill: It doesn’t. That’s why I’m more skeptical of the people that are painting short sellers as the bad guys. Those are the guys that I think might actually be the bad guys. I don’t care about some short seller. Easy it is to destroy a short seller if you’re a real company. Please, Lord, launch a short attack on Charter. Do it tomorrow, go insane. Tommy Rut will eat your ass for lunch and I will make money.
Tobias: [unintelligible [00:48:44]. That’s the thing I don’t get it either. When a CEO comes out and addresses the shorts, I’m like, “Why bother?” What do you care?
Bill: Yeah.
Tobias: It’s irrelevant how the shares are held by the public.
Bill: Look at what the guy from Ubiquiti Robert Pera did. Short sellers helped him gain a ton of money over time because he just did a buyback and you know what talks? Cash flow. So shut up and go execute. Don’t try to get short sellers banned.
Tobias: The issue is for the guys who are having to hit to the market all the time to raise capital. They don’t like it.
Bill: Yeah, like Tesla.
Tobias: There’s an argument that– I guess if they– I don’t know.
Bill: Look, this is tough, because if you’re Elon Musk, I can understand why you would be, like why you would feel like shorts are trying to truncate your vision. On the other hand, you didn’t have to say you had funding security at $420 a share.
Tobias: That used to be market manipulation. You can get away with a lot more these days.
Jake: That’s a little security fraud between friends.
Bill: Yeah. That’s what I find really offensive, is I find when a guy like him comes out and says like, “These guys are manipulating the markets, are they need to be shut down.” I look at what his actions were. It just doesn’t add up for me. I’m not into this.
Tobias: Why didn’t GameStop play some shares?
Bill: I don’t know.
Jake: [crosstalk] -doing there. You had one job. [laughs]
Bill: I thought that I read that Jefferies underwrote the offering.
Tobias: There was an offering to come?
Bill: I thought so, yeah. If I was Jefferies, and they tried to stick me with the underwriting, I’d be like, “We’re going to court before this. There’s no way I’m honoring this.”
Tobias: That’s hard, because you can see that move up and down like that. Where do you price it? They needed to do it earlier this year, or like last year?
Bill: Yeah, somebody’s commenting. AMC floated. I don’t know how they did. I honestly don’t understand how– If I was Jefferies, if I’m right that Jefferies did do the underwriting, I would 100% fight that in court before I’d honor my obligation.
Tobias: Do you have to underwrite it?
Bill: I think they had an underwriting.
Tobias: Does it have to be underwritten? Can you just say we’re just going to see how many we can get away?
Bill: I think in an underwriting Jefferies could have been– I think, I’m now talking about stuff. I don’t know, but I think they could have been forced to place the shares but my understanding is maybe GameStop’s in a quiet period or something.
Tobias: Yes, it had to be something else going on. Like Hertz[?] had one on the shelf already, so they were able to get theirs away.
Bill: Yeah. [crosstalk] -Robinhood. Shocker.
Jake: Didn’t the SEC stop that one though?
Tobias: Yeah, I think they did after the fact. Or, they had a second one that they’re going to get away? I don’t know.
Jake: Gosh. We’ll take some questions.
Tobias: Yeah, hit us with the questions.
Bill: All right. If I continued to bet on your divorce and told people you were cheating, is the solution you just smiling and showing how much you love each other? Look, I think this question is about short attacks from MD. I guess, the issue that I have is I have come across short reports on Ubiquiti and National Beverage. They forced me to work harder and I concluded that they were wrong, and I ended up making good money. I think that short report should force people to think about a position, and if the company is real and people have done the work, time will tell. The longs can promote the long story all day, every day through every single media channel everywhere. Why can’t the short say what they’re saying as long as it’s in good faith?
Tobias: Yeah.
Jake: Agree. [crosstalk]
Vale Hal Holbrook
Tobias: Hal Holbrook passed away today. We should [unintelligible [00:53:04] Hal Holbrook who was Lou Mannheim in Wall Street. “Too much money sloshing around,” you know that guy? I wish I had that [crosstalk] that I could do it.
Bill: [laughs]
Jake: Yeah, that would have been a better programming.
The Importance Of Multiple Expansion
Tobias: Yeah, it would have been. I didn’t think of it, until just then I saw somebody tweeted something about it. How important is multiple expansion? It’s nice to get. I don’t rely on it.
Bill: Over the last 10 years?
Tobias: Yeah, it’s been everything for everyone.
Bill: Really important.
Tobias: It’s like 150% of the gain. That’s not true. It’s like 125% of the gain.
Bill: If people do want a good conversation on the GameStop stuff, I would highly recommend This Week in Intelligent Investing with Phil Ordway, John Mihaljevic. an Elliot Turner. They did a really good episode, I thought. And I thought that they really laid out like the uses of short selling.
Tobias: Hopes it get a little bit longer, protects the book when it goes down. You still value, just turned around the other way. It’s missing some of the criteria of value long, so you can’t go to sleep on your shorts, where you can go to sleep on your longs, you could wake up in 10 years’ time and find it’s gone to zero or up a lot. It really doesn’t make much difference.
Bill: It seems like a lot of brain drain to me. It’s hard enough for me to figure out how to do the long game.
Tobias: If you’re nervous about where the market is, like I am, and have been for an extended period of time, I want to be able to pick my longs and not worry about what the market does. I can have the shorts on. I know that in the event the market gets smashed up, the shorts should get down more than the market. That’s why I do it.
Bill: That makes good sense.
Jake: I think with the jaws stretched like they are, you have that much dispersion.
Tobias: It turns out the jaws can keep on opening.
Jake: [crosstalk] -completely love the– Well, yeah, there’s no– [laughs] There’s no limit on the size of the jaws. At some point, there’s got to be a broken jaw or a torn ligament or something?
Tobias: Yeah. It goes the other way at some point.
Jake: Jesus.
Tobias: Very rough market.
Bill: I think there’s a lot of opportunity, man. I really do. I just think that there’s a lot of stuff going on that people– I’m really hesitant to say that the market is overvalued because I’m just really worried about how I will process that public statement. I probably err on the other side of it.
Tobias: It’s almost irrelevant. It doesn’t really make any difference. It can be a little bit of a distraction, because you can have a ‘99, 2000 to 2002 kind of period where market’s going backwards, value’s going up, so it’s not helpful. You should just be out there hunting for undervalued stuff. It’s just that when you get the big selloffs, correlation’s really do go to one. Everything will start trading basically the same way and we get some big dislocations.
That’s a good thing if you’re a value guy, it’s just painful to go through, I hate seeing people. I think that the GME thing– I thought it was an amusing sideshow. I think if you’re putting any real money into that, you’re crazy. Unless you’re Scotty Jackson, who got in way, way early, because it was undervalued and saw one way to get out of it. For most people, they just shouldn’t have been in it. I think the bigger issue is that there’s a lot of stuff out there that is crazy, crazy expensive that people are in or have seem to have no clue how expensive it is.
Bill: We’ve pretty big market caps. Compounding off $50 billion, if you think you’re going to do 15% a year, that’s got to be-
Jake: [crosstalk] -like 20 more years.
Bill: -really big company in 10 years, or a really low cap rate. If it always perpetually trades at a one and a half percent free cash flow yield, then I guess it’s justified. I hope you’ve got something else in your portfolio to offset the duration risk.
Jake: [blows] Oof.
Tobias: What’s that?
Bill: Yeah.
Tobias: No doubt.
Jake: Yeah, exactly. [chuckles] He doesn’t work here anymore.
Tobias: We had to let him go. Had let him go in about ‘95, 2000 maybe.
Jake: Bill, do you worry at all about the– I think, very easy to slip a little bit on your relative valuations to where it’s– you can talk yourself into things that if it was a different time period and other things weren’t as egregious, you wouldn’t be as interested in it.
Bill: Yeah. I don’t know what to do with that information. The way that I handle it, and I’m overly allocated to equity now, and I shouldn’t be. I find it hard to sell, it’s a problem.
Tobias: You’re a young man, you’ll be all right.
Bill: I’m not young anymore. Last year took some years off my life. Anyway, I guess, yeah, I do worry about it. I don’t know what the answer is other than to focus on business quality and businesses I think can be bigger in the future.
Tobias: I think that’s a pretty good bet.
Jake: Well, you have to probably follow Munger’s advice that if you can’t stomach a 50% drawdown, then you don’t deserve equity returns.
Bill: Yeah, it just sucks when the equity return is 3% out of the gate.
Tobias: I think it’s 0.9.
Bill: Yeah, but there’s some businesses that are– I mean, that’s why I don’t like to own the index.
Tobias: Yeah. In terms of 3%, okay, that’s fair. There’s plenty of that around.
Bill: Yeah.
Tobias: I got a last question because we’re just about to run out of time. Do you think–
Jake: [crosstalk] -percent? Fuck, that was like a half of a treasury 10 years ago.
Tobias: [laughs]
Bill: Yeah, it’s a different world.
Index Funds Favor Momentum
Tobias: Hard to justify. Now it’s three 10 years. It’s three times riskier than the 10 year? No, it’s not. Do you think index funds specifically their auto rebalancing towards better performing stocks creates a market structure dynamic in favor of momentum?
Bill: Yeah. [crosstalk]
Tobias: This is Michael Greene’s argument that the flows are dominating the market. I don’t know that that’s any different from what’s always happened because it seems to me that it’s always been the case. Everybody piles into this stuff that’s working. That’s just the way it goes.
Bill: Yeah, I buy that. Yeah, I mean, momentum is a persistent factor over time.
Tobias: It seems to have worked. If I talk to [unintelligible [00:59:51] Meb or Cory. Shoutout to Cory, is on the call from the Grand Caymans. They will tell me that it’s more robust than value.
Bill: Yeah. They’re doing historical back test, so it’s not as if their data set is just limited to when index funds got this big.
Tobias: Yeah, that’s been the case for a long time. Cliff Asness wrote his PhD dissertation on it. I think that that was like mid-1990s, so it’s been around for at least that long.
Bill: Yeah.
Tobias: That’s time, amigos. That was fun.
Bill: I don’t have hair gel on. I got product instead, whoever’s asking the question.
Tobias: Is there a hair gel question?
Bill: Yeah. They said, “Please answer this question. Are you wearing hair gel?”
[laughter]Jake: Like in the Something About Mary sense?
[laughter]Bill: No, that would be not hair gel, sir. On that note, have a good week, folks.
Jake: All right.
Tobias: All right. Peace. See you next week.
Jake: Cheers, everybody.
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