In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- HeLa Cells
- Morality In Investing
- Buffett’s Energy Bets
- Inflation Fears
- Is $MO Worse Than $FB?
- $CSU Suspends Dividends
- Value Investing & Inflation
- How To Assess Corporate Culture
- Invincible Industrialists
- T. Rowe Price – New Hedge Is A Long/Short Book
- Buying Companies That You Just Like
- Gross Margins – Business Quality & Management Quality
- Berkshire’s Incentive System
- Sin Stocks
- Can Buffett Change Corporate Culture?
- Home Furnishing Companies
- Cuba’s Bacardi Rum Distillery
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:
Tobias: Hello, folks. It is Value: After Hours. It’s 10:30 AM on the West Coast, 1:30 PM East Coast. It turns out 6:30 PM UTC, 6:30 AM Australian Eastern Standard Time. How are you, fellas?
Jake: Living in the dream.
Bill: I’m fantastic.
Tobias: Does it feel the markets are a little bit quiet at the moment? Is that just me?
Bill: I think it’s just you.
Jake: It does seem there’s actually a fair amount– a little bit more dispersion in price movements, at least the stuff that I keep an eye on. I don’t know, maybe a little bit bigger moves than the last few years. Not like anything going in one direction particularly, but maybe a little bit bigger moves. Very anecdotal.
Tobias: Looks like the 10-year keeps on creeping up. It was coming up on 1.3%, which is lower than where it was 12 months ago, but more than double where it was at the bottom last year. It’s up a lot.
Jake: Is that good or bad?
Tobias: I have no idea honestly. [chuckles] I think that there’s one argument that higher interest rates are better for value, and so when the 10-year creeps up a bit, value looks a little bit perkier.
Bill: I like perky.
Tobias: Yeah. But I don’t know, Cliff Asness, that article that his colleagues wrote, they couldn’t find any relationship between the two, so I don’t know if it’s meaningful or not. Watching it though, it does seem to be creeping up a lot at an accelerating rate, whatever that means.
Jake: Does that mean refinance your house now if you can?
Tobias: Yeah, look in those low, low rates. I don’t know. We are about to get negative rates, so don’t do that.
Jake: I was waiting for negative.[laughter]
Tobias: What are we talking about today, gents? There’s a lot going on. I just said it was quiet. Now, I’m saying there’s a lot going on.
Bill: Well, you need to market the podcast. You can’t say, “Hey, everybody should just go away.” It makes no sense.
Jake: Slow– [crosstalk]
Tobias: Looks like energy might be sort of slowly rotating back into primetime.
Bill: Yeah, I don’t know. I think I’m going to talk about morality in investing. That’s what I’m going to talk about, that’s what I’ve been thinking about a little bit.
Tobias: Should be able to just sneak that went into a quick 15-minute segment. [laughs]
Bill: No, it’s not that tough.
Jake: Five minutes. I have for veggies given that it’s February and Black History Month, I have a little thing prepared on Henrietta Lacks, I don’t know if you guys know who that is. It’ll be a fun conversation maybe.
Tobias: It sounds good.
Bill: I don’t know her.
Jake: You will.
Tobias: I’m going to be talking about a few things. There’s a little energy crisis going on in– or a little heating crisis going on in Texas. I mentioned that to Jake and he sent me through this huge document on energy, which I’ve read. Now, I’m a tourist. I don’t really know what I think about it. There’s a reasonable case to be made for getting long some energy, as it’s in probably from like a year ago, but we’ll see.
Bill: Oh. Just lost all 10 of the listeners, we’re down to three.
Tobias: Oh, let’s do this one last just so we can back at if we get there.
Bill: Shoutout to the 10. What’s up to the 10. It’s been a long time since we’ve given them a shoutout.
Tobias: The baker’s dozen.
Bill: The OG 10. Which is basically Ian Cassels and nine bots.[laughter]
Tobias: Who wants to take it away?
Bill: Who is going?
Tobias: Let’s go, JT.
Bill: [crosstalk] -exhilarating podcast. [crosstalk]
Jake: Yeah, I’ll go first because actually, the end of mine will dovetail in with, Bill’s. This will be good. It’s like we planned it even though there was zero planning, maybe a surprise.
Bill: It’s a lot.
Jake: [chuckles] All right, so 1951, this black woman, mother of five, named Henrietta Lacks visits John Hopkins Hospital. At that time, Johns Hopkins was one of the only places that would do pro bono work for undermoneyed population. She presents with vaginal bleeding and turns out she has a large malignant tumor on her cervix, and they take some samples of her cells and take them to the laboratory. At that time, you didn’t really have to consent to that at all. They just took your cells and did whatever they wanted with them in a scientific purpose. There were doctors that are working at the time who are trying to figure cells out really, like how do they work?
Typically, up until that point, all the cells that they would take would die within a day or two. This woman had something magical about her cells, in that they doubled every 20 to 24 hours. They were just this incredibly fertile, fecund sampling. They ended up taking it and culturing her cells. They’re now called HeLa cells. H-E-L-A, to be for Henrietta Lacks the first two letters of her name. All HeLa cells came from this woman from 1951, and they’ve used them to study– it was a launchpad for cellular research.
1952, they developed the polio vaccine using her cells. 1954, the first cells were cloned were her cells. 1960, they went up in a Soviet satellite. 1984, they used to study HIV. 1989, the telomeres were discovered using her cells. 1993, they studied tuberculosis using her cells. 2005, nanotechnology is used, using these HeLa cells. There’s 11,000 patents that are based on technologies, and medical research that really pivots off of the HeLa cell. Incredibly, her family didn’t know anything about it until much, much later, because they just took these cells, you didn’t need consent, never financially compensated for taking these cells. It ends up into a weird bioethics question about, if they just scrape cells off of you, are those still yours? Are they your property?
Or, is that the property of science or the state? How’s that work? There’ve been different court cases that have tried to make rulings on that. Anyway, 2017, Oprah actually did a movie about Henrietta Lacks. Actually, she played her daughter, who was trying to get some recognition for this huge scientific contribution that this poor black woman made to science and it was never really talked about.
To get into the tortured analogy, part of this that everyone is so fond of. I think we studied her cells, because they were such an outlier. All the other cells that they took from people ended up dying. I think looking at that kind of DNA, it doesn’t mean that you can replicate it. If you injected it into somebody, it doesn’t mean that those cells then would take over, the body would mount some kind of defense against it. I think the similar thing can be said about corporate culture.
We look at these corporate cultures that are incredibly fertile and have these very, very rare properties to them. Then, we think that, “Oh, well, let’s just inject the slide deck from that company into this company. Now, we’re going to have a whole new culture.” I think it’s very misguided. I think, actually, culture is very, very hard to change. Guys, care to chime in there before I keep going?
Bill: Yeah. I do. I’m not sure that that’s underappreciated by the market, because a lot of the companies that have a really good culture trade at a premium, and I argue for a good reason.
Tobias: Or do they trade at a premium because the returns are good, after the fact say that’s because they’ve got a good culture?
Bill: I know, you’re saying it’s double counting.
Tobias: I’m wondering, asking.
Jake: No, he’s wondering– [crosstalk]
Bill: Well, I think one’s an output of the other. I don’t think that Berkshire is not endowed with good returns. That’s actually a pretty hard business to run. Insurance underwriting is nothing that’s inherently great. Then using the float to then recycle that capital into other businesses. I would say that they’re pretty complex entity.
Tobias: See’s Candy.
Jake: [crosstalk] -value growth– [crosstalk]
Bill: Yeah, but dude, that’s just one.
Tobias: You take See’s Candy. See’s Candy, you buy for $27 million, by 2011, it’s thrown off $1 billion, which even if you’re sticking that back into the spy, you look pretty smart.
Bill: I agree that there are some good businesses out there that are so good that anyone can run them. Even Coke was destroyed through bad capital allocation at one point. I don’t think that you can decouple a business from the culture and people running it. I think it’s really hard.
How To Assess Corporate Culture
Jake: Where do you guys look for assessing corporate culture?
Tobias: The answer is, I look in the financial statements.
Jake: Okay. Any particular part of it that’s–[crosstalk]
Tobias: Well, I want to see what they’re earning on their assets, how conservatively they’re good. Look in the proxy, see how they’re incentivizing themselves. See what they’re doing if the stock gets cheap, do they buy it back? See how they spend their stock. What’s the attitude of management to the shareholders? Are they trying to concentrate intrinsic value further in each share or are they doing something else? Is it like a General Electric type situation where they’re managing [crosstalk] quarter.
Yeah. The return on equities falling away all the time. Just overleveraging, that tells you just about everything you need to know. Sometimes when you listen to what management says, they don’t get to those positions, unless they’re pretty charismatic. They’re very, very persuasive. I’ve never really met one what I haven’t liked it, I think.
Bill: Yeah, I think that there’s some argument to be made there. The one that I’m looking at right now, I’m looking at the proxy statements. I like that they’re heavily incentivized by stock. I like that they’re not getting paid through options. I like that they don’t get stock. They basically have a negligible salary. That stuff, I like. I prefer to look at where the money is and the incentives are than like some of the other stuff. I do read a lot of earnings calls. I do try to decode how people think about things.
TransDigm– whenever somebody pulled in front of the government, I like to watch what they say and do. I feel that’s sort of a unique position. Unfortunately, the government blows it sometimes with big tech, but when it’s not a political stunt, and it’s just actually truly digging into what the business is and how people think about that, I like that. Like AB InBev, I like the antitrust stuff. I thought there were some clues there. I don’t know. It’s kind of a mosaic, but I would say how they’re paid is number one.
Jake: Great answers. Both of you, you both get gold stars for today. Yeah, I think you’re exactly right. I think the incentives, especially in the definitive proxy 14A, tells you so much. If you have a CEO, especially like an insurance or a bank or something, where if they are compensated on revenue, expect to have stupid underwriting. Andy Grove, the former CEO of Intel, talked in High Output Management, which is a great read, by the way, if you ever get a chance. He talked about how every single indicator is what he called them, that’s basically like incentive comp structure. Every indicator has to have a counter indicator, like a countermeasure, because none of them can exist on their own and be unalloyed good. There’s always some negative way that it can be taken and you have to have-
Tobias: It’s a tradeoff.
Jake: -a balancing. Yeah, exactly. There’s a tradeoff that you have to recognize by having a countermeasure. I would say too the board of directors, if it is a– you have a board that has, they’re paying them $200,000 a year and that is a material amount of income and lifestyle for that board member, don’t expect them to push back on anything. They’re basically indentured servants at that point.
Gross Margins – Business Quality & Management Quality
Then last thing, we’ve talked about this a little bit before would be, I liked– and this is a very, very broad generalization, but in general, I think about anything above gross margin talks, about business quality and below gross margin and the income statement gets at a little bit more management quality. Management has influence over the entire income statement, but in general if you want to be known as a good businessperson, get into a good business, like that argument. Then, on the other side of that 3G mentality of costs are like fingernails and have to– then always need to be looked to be trimmed. They always want to keep growing.
Tobias: I thought you were going to say you need to rip them out, something like that. [chuckles]
Jake: [laughs] No, Toby, come on.
Tobias: Trimmed is much better.
Jake: [crosstalk] -family friendly. Anyway, looking for the DNA and not expecting extreme outlier DNA in all of the businesses that you’re looking at, or that there can pull some like culture miracle out of the hat if they’re a regular cell, regular DNA, that’s maybe something we can learn from Henrietta Lacks in that scientific situation.
Can Buffett Change Corporate Culture?
Tobias: Is there any way that someone like Buffett can come in and change the corporate culture by emphasizing incentives and trying to change that direction?
Jake: Buffett is the last guy to ever want to do that.
Bill: Yeah. Look, like TransDigm, that’s what they do. They take over companies that are under-optimized by their standards, and they come in and they optimize them. I think that a lot of the serial acquirers sort of implement cultural changes. I think it’d be hard not to. There’s obviously a level of decentralization also, but I think there’s got to be some cultural implementation. It’s hard, man.
When when I was at the bank, we took over M&I. We were BMO Harris, we took over M&I. What a pain in the ass that was. I bet it’s not going on now. I bet it was still going on two years ago. I bet it took five years to get those organizations going, sort of swimming in the same stream. I’m sure somebody in a model said, “Oh, two years, we’ll have all the synergies done and everything will be great.”
Tobias: The P/E associate.
Bill: Two years, you don’t even have the systems tied up yet. Especially in a bank. What a pain.
Jake: Oof. I can only imagine.
Tobias: What about when Buffett comes into Geico? Comes back to Geico?
Bill: I don’t know. I don’t know what he actually did there. Some of the activist stuff, he made people cut some fat. Buffalo News, I think he gave people the leeway to be them and said, like, “We’re going to go win this.” I’m sure every situation is different. Now that he focuses on businesses that are running well, I don’t know that that’s really what you need to do. You just need to preserve the incentive system, more than anything, which I think is really hard.
Berkshire’s Incentive System
Jake: I bet he’s [crosstalk] incentive systems a little bit because he talks about– I would love to see the entire Berkshire incentive system book across all the different companies and what he picks for each– what metrics he uses to incentivize all of his CEOs. That would be endlessly fascinating. Unfortunately, I’ve never seen much about that. He’s talked a little bit here and there, but never in details.
Tobias: Talks about charging them an appropriate [crosstalk] Yeah, that’s what I was thinking, a little bit of a state secret, but he talks about charging the different businesses get different rights on the– they have different hurdle rates. That’s not one size fits all.
Bill: Yeah, I mean, I think it’s hard to argue that he didn’t at least turn around the perception of the culture at Salomon Brothers. I’m sure some of that was true. It can’t all just be like perception and a bunch of people got fired. Hard to decouple the marketing myth from reality, but I suspect he’s done a lot in his day.
Buffett’s Energy Bets
Tobias: One of our listeners pointed out that, the Japanese trading houses that he’s bought, are all-natural gas trading and they have big natural gas trading enterprises and in addition to Dominion Energy, so he’s got this big natural gas bet on at the moment which– this is slightly my topic, but the natural gas has rocketed over the last short period of time here but also since the Q3 last year, it’s taken off.
I think was at its highest ever. It’s on a tiny little demand spike like 3.5%. Did he get in there just because he thought it was cheap? Is that one of the reasons why he’s gone off to these Japanese trading houses? Are they slowly fixing the– they’ve had terrible returns in equity for a long time, but is that all slowly being fixed?
Jake: I don’t know. I think a lot of those are very heavy industry as well, with big fixed costs that may or may not do well with inflation. I don’t know if that’s a little bit of the bet there. I don’t know. Japan, in general, has been cheap off and on for the last 30 years, probably more on.
Bill: When did you say that natural gas has been rallying since?
Tobias: Last year. The article that Jake sent me through was like Q3 2020. I think they had a– it was like all-time highs at Q3 2020.
Jake: No, that can’t be all-time highs.
Jake: It was at like $8, $10 dollars MMCF [crosstalk] 2004.
Bill: I’m looking at or looking at the front month commodity contract now, and in 2016, it looks like it was $3.36 per whatever unit this is quoted in. Now, it’s at $307. I mean, for a while, I don’t know, with all the fracking and stuff, there was just so much damn gas coming out of the ground that they just couldn’t get the price up. Now that some of that fracking has sort of gotten shut off, I think that the price can sort of go up. I don’t know what I’m talking about. I do know that I see a Head & Shoulders, so shout out to the [unintelligible [00:21:04].[laughter]
Tobias: Bull flag. [crosstalk]
Bill: Yeah, dude, it looks like it’s a Head & Shoulders that turned into a bull flag and a breakout. Woo. That is some sexy-looking stuff.
Jake: You can’t miss.
Bill: It’s going to rip. You want to pull back to support here though, folks.
Tobias: Healthy pullbacks.
Bill: Anyway. That’s right. Some consolidation. I have no idea about natural gas at all. I think that what he saw in the old Dominion stuff is, I think that the– Shoutout to Brad, one of our listeners. There just is not much appetite, I think, to put into pipeline assets anymore. I think that he probably saw roughly a 10% yield on what is probably a pretty stable asset and isn’t going to require a whole lot of cash. Maintenance capex, he’s probably got some amortization tax benefit, put it in the energy company and get some more tax advantages out of that. I think the math worked and he doesn’t think that there’s huge risk of new capital flooding the industry, is how I would assess it, but I don’t know what the hell that guy’s thinking. He’s a savant on me.
Tobias: Huge amounts of capital flowing into the industry. Not right now.
Bill: No, I said there aren’t–[crosstalk]
Tobias: Yeah, that’s what I mean. I’m agreeing.
Bill: Yeah– [crosstalk]
Jake: I think especially if ESG continues. Are we building another pipeline in our lifetimes?
Bill: I don’t know. Shoutout to MMP and EPD.
Tobias: You want to take it away, Bill?
Morality In Investing
Bill: Yeah, I don’t know. I mean, I guess you could– it can all go into morality. I tweeted out about Altria, and I’m not like pumping the stock. It’s interesting, I look at that entity and as a security, I just think it’s cheap. If I had a– Nice cup, Jake. I was at that summit. Yeah, what up? I guess, for me, I’m just looking at it from a financial standpoint. I guess that if I took a complete doughnut on that and could remove cigarettes from society, that would be a fine trade. I could sell that thing tomorrow and not care.
This is not some security that I care about or some products that I feel beholden to. In fact, I’d like to lose money on it because that outcome would be better for society. I don’t really know where you draw the line on this kind of thing. I think it’s really easy for me to say cigarettes. I’ve gone through this before on this podcast. One, my mom has smoked her whole life. I have hated cigarettes my whole life. I have tried to get her to stop smoking, I will probably lose her to lung cancer. There’s a part of me that says, like, “Fuck it, I’m going to make some money on this stuff because it’s cost me enough as it is.”
The other side is, somebody came into the chat today and he’s like, “I wouldn’t buy pot stocks.” Guess what? I like pot a lot. I think it’s better for people than alcohol. I think it does really interesting things for me. It helps me be present. Some of that’s because I’m got a mic on a book that says Taking Charge of Adult ADHD.[laughter]
Bill: I might be self-medicating a little bit. I don’t think pot is what some people [unintelligible [00:24:45]. Then, you get the booze, and I’ve seen booze destroy more lives around me than anything. Some of the greatest investors in the world that are out there heralded and they own Diageo and they own all this other stuff. They’re great businesses. Jack Daniels is a great brand. Rousseau talks about it all the time. Wild Turkey killed my grandfather. I mean, he killed himself with it, but that dude was drunk all the time. I just don’t know how you– the guy that got up and said, like, “How can Berkshire own Coke?”
Sugar is some pretty bad shit. I don’t know where you want to draw the lines. I guess there’s a part of me that’s like, how can you even make this argument because it’s so clear that cigarettes are not a good thing for society? The other part is like, well, if you take that to like its logical conclusion, let’s assume everybody just avoided it and the price was like $1 a share, the one guy that went in and bought the security would be super-rich. I don’t want that outcome either. I don’t– [crosstalk]
Jake: Tobacco– [crosstalk]
Bill: Yeah, I just don’t know. What has social media done to politics? Where do you draw this line? I really don’t have the answer, and I’m more having the conversation to think about it out loud rather than say I know the answer. I really honestly don’t know the answer.
Unalloyed Good Businesses
Jake: Are there any businesses that are just unalloyed good?
Bill: I don’t know. Here’s one that I thought of. Let’s say that, what’s the fucking– OnlyFans. Let’s say OnlyFans goes public. I guarantee you whoever buys that, that SPAC, if they have some warrants, those warrants are going to be worth a lot, that business is worth a lot. I don’t know that somebody at ESG say, “Hey, these people are now in charge of their own porn careers?” or “Do somebody that’s looking about it say, ‘No, porn is inherently bad.’” I don’t know.
Jake: Do we have any businesses? Any takers on that are just pure–?
Tobias: Yeah, that’s hard, isn’t it?
Jake: No questions asked.
Bill: I mean, obviously, Berkshire is.
Tobias: Tesla, naturally.
Jake: Tesla. Yeah. There you go.
Bill: The children that are mining the materials somewhere, don’t count because you can’t see them.
Tobias: Disney? How does Disney sneak through there? No way. Disney’s gross.
Bill: Dude, I’ll tell you what’s gross. You walk around Disney World and you cannot–
Tobias: That’s what I mean, Disney is gross.
Bill: Yeah. You can’t tell me that it doesn’t promote obesity or something. Those buffets are nasty.
Jake: What about gender conformity? I mean, there’s all kinds of–
Tobias: Yeah, they’re trying to do–
Jake: You have to be a princess.
Tobias: They’re trying think that is–
Bill: Personally, where I’m at with it is I will not put private market– if somebody is trying to raise funds, and I’m not for the business, I will not participate in giving a business capital. Some of these more mature businesses, I just think you’re buying a piece of paper and a cash flow stream.
Tobias: I think about it in terms of– [crosstalk]
Bill: [unintelligible [00:28:00]
Tobias: I think about it in terms of invincibility. What is going to encourage people to attack you? Doing things that harm people is going to encourage people to attack you. Smoking company certainly have been attacked along that avenue by two different parties in the past. They’ve been successfully attacked by governments and they’ve been successfully attacked by individuals who’ve been injured. It would be hard to make the argument now that you don’t know that you’re being injured. I think that governments are getting so much tax revenue out, they’re heavily incentivized to continue that, so you may have solved those two constituencies, you might have found a way to live with them. You’re not going to be attacked anymore. In the world as it is at the moment with people sort of being cancelled for a lot less, you’ve got to think that that’s a pretty– it’s an out there kind of thing to be literally handing out the cancer sticks to people. You think that they’re not going to take another run at them?
Bill: I was going to say like Buffett is in the past. I’m not going to shout this out because I don’t think the person wants attribution. If they want it, I’ll give it to them later. Buffett in the past has said like, “We’ll own a cigarette distributor. We don’t want to own the cigarette place.” Buffett has owned Walmart. Walmart sells a ton of cigarettes. I don’t know, where’s the distinction? I have no idea.
Tobias: Well, the cigarettes could go away.
Jake: Where does personal choice and responsibility fit into this conversation?
Tobias: It fits into the 1980s.
Bill: I don’t know– [crosstalk] Altria.
Jake: That’s where I keep going.
Tobias: It’s gone away now.
Jake: Or, is it the 1880s or the 1780s?
Tobias: The thing is the difference between Walmart and cigarette makers is that Walmart can stop selling cigarettes and it’s going to be okay. Cigarette makers stop selling cigarettes, I don’t know, it’s tougher– I don’t know how they get out of it. You got to make the [crosstalk] sell the patches or sell some other form.
Bill: Here, I’ll go to law school with you, so they could choose to not sell them and everything would be okay. Why do they choose to sell them? Why choose to willingly harm society? The answer‘s because you want profit.
Tobias: I’m not talking about the choice that they’re currently making as being good or bad. I’m saying that if cigarettes, if they’re prevented from selling them, the business is still going to be okay. Whereas if cigarettes prevented from selling, they’re gone away.
Bill: Yeah, so then you lose your money, but then society is better off. It’s not a big position, for me. It’s just like a small bond slug replacement. I blame the Fed.
Tobias: Then booze companies that got to be like, [unintelligible [00:30:42].
Bill: You like that? [chuckles] It’s actually–[crosstalk]
Jake: I wouldn’t have to own.
Tobias: If cigarettes go away, booze companies got the next run because–
Bill: It’s never going to happen.
Tobias: In that stream, in little Twitter exchange that you had, somebody said some tiny percentage of people buy like half of all alcohol or consume half of the alcohol. [crosstalk]
Bill: [crosstalk] -decile, dude, the average is 72 drinks a week of the top decile. Then, the ninth decile I think is 15 drinks a week. Surprising amount of people to me don’t even drink, but I don’t tend to interact with them. But for alcohol, this podcast wouldn’t exist. We don’t get drunk together, I’m not here right now.
Tobias: That’s true.
Tobias: I’m a laissez-faire kind of human being. I’m not saying don’t do it– I’m just trying to think about the impact on the portfolio. I’m trying to be, like, where does the attack come from? That’s what makes me nervous.
Bill: I’m more thinking about it just from a morality standpoint. The portfolio risk I get, but it’s tiny. I really could care less if it goes to zero. It doesn’t [crosstalk] couldn’t. I always say could care less, but that doesn’t make sense. It’s couldn’t care less.
Tobias: The problem with all ESG is that we all have different definitions of what’s important. There’ll be people who will say that climate change is the single most important cause that we need to deal with right now. Then, there’ll be other people who say, “Well, if you make energy too expensive, the knock-on effects to the people who are hurt worst are the poorest.” Not just in this country, in other countries around the world. You have a very delicate tradeoff when you’re dealing with those problems. That’s what makes ESG so complicated.
Bill: I’ll tell you, for me, my integrity, my line is– I’m considering interviewing a guy that has a small-cap company. I had tracker positions in that company. I sold everything because I was like I don’t even want to fuck with disclosure. I don’t want to act like I could be pumping something not at small numbers, it’s just not what I want to get involved in. In that instance, I think I’m actually controlling an outcome to a certain extent, and if there’s any perception that I’m controlling an outcome, I don’t want to have anything to do with it, and I will avoid it. But when it’s a $40 billion market cap, or not 40, I’m sorry, it’s a 70x –What am I thinking? I don’t know my math’s off anyway.
Jake: It’s pretty tough when you have Buffett on the Business Brew, what are you going to do–? [crosstalk]
Bill: Dude, the Buff Dog could run– well, this leads to something else that I want to say because I’m not great with numbers off the top of my head at all. I do know the dividend yield, but I don’t know what the market cap is off the top of my head.
Tobias: The dividend yield is 9%.
Bill: Yeah, well, Buds almost a $10 billion stake. Yeah, it’s an $80 billion company. I apologize for sounding stupid. Anyway.
Buying Companies That You Just Like
Jake: Can you push this conversation even further to– I feel like there are some people who they just buy companies that they like. They like the product, they like whatever it is. That’s the number one sort of controlling part of the equation for them. It’s not about, am I being compensated for taking this bet? That’s actually probably done better than anybody who’s actually thought about like, “Well, what’s my risk and reward?” “No, I just love this product. I’m just going to buy it because I love this product.”
Tobias: Any risk calculation.
Jake: What do you [crosstalk] think about that?
Tobias: Yeah, any risk calculations been a waste of time, but it doesn’t sound like Peter Lynch. What’s the difference between saying, “I like this company, I’m going to go buy the stock,” and then you turn around you find support for it in Peter Lynch. He says, “Yeah, do that. Find the thing you like and can buy it.” I think he says do some evaluation, but he’s not–
Jake: That’s passe.
Tobias: That’s been a waste of time.
Jake: Where we’re going, we don’t need valuation.
Bill: I think that is some of the Motley Fool’s what they preach? I think you could do that if you don’t do it in a concentrated portfolio out of the gate and you dollar cost average over time and you’re willing to underperform potentially. I don’t know. I really don’t. I don’t have a great answer for any of those stuff. It’s just something that I’ve been kicking around. Since I’m so vocal against Robinhood, somebody posed the question to me, and I thought that was a fair question to ask.
Jake: That’s a good question.
Bill: Yeah. what’s the difference?
Jake: Where can you sleep at night? That’s the–
Bill: Yeah, I guess where I draw the distinction is, one is sort of couching itself as helping the poor and giving to the rich by its name. It’s so clearly not. One is like a wolf in sheep’s clothing and one you know is a wolf. I guess that that’s like, at the end of the day, what I think I draw the distinction, but that can be motivated reasoning. I’m really not sure.
Tobias: You respect that they’re telling the truth about how evil they are rather than discussing how evil they are.
Bill: Well, yeah, because the game, there’s no pretense to the game. It’s like, this is what it is. There’s always going to be evil in the world. Let’s just call it evil and move on.
Is $MO Worse Than $FB?
Tobias: I got a question up on the board. Is Altria worse than Facebook?
Bill: This is something that I said today to Postmarket, because they came on, and they were like I think sugary drinks could potentially be a lot closer cousin to tobacco than you want. I think that they said, I’m trying to be somewhat inflammatory. Costco distributes a bunch of sugary drinks. Isn’t that like– I don’t remember their exact tweet, but that’s what I said. I said if you really want to be inflammatory, look at what social media has done to political views. How the polls are huge, and the middle is completely eroded. Is that good for society? I’d argue that’s a whole lot more harmful than cigarettes at this point if that causation is really true. It’s hard to argue it’s not a contributing factor.
Jake: We have political diabetes right now.
Bill: Yes, Idiocracy is truly only a couple of steps away.
Tobias: VSG points out that cigarette companies are low fat and vegan.[chuckles]
Bill: I don’t want to make a joke of it, but I do appreciate that joke. Can I say something unrelated, but it’s somewhat similar, I view this audience as my home, I think that I got to say here.
Jake: As long as it’s inflammatory, then yes.
Bill: No, it’s not, man.
Bill: I did Jim O’Shaughnessy’s podcast, and he asked me something about what’s next. I had cited my returns, and I somewhat misspoke. I just want to get the record clear, because I don’t know how they’re going to edit it. I don’t have any problem with them or anything like that. I just want to get out in front of this. I had posted on the internet that I’ve done 19% from my three-year and 20% from my five-year. Last year was 38% in that account. The other account was up 56%. I don’t know if I’m a schmuck that got lucky. I’m not trying to stomp on anyone with returns. I know a lot of people–[crosstalk]
Jake: [crosstalk] -PA?
Bill: No, no, these are the real accounts. The slutty account sheet, I don’t know what– that account had a volatile year, but I put like 45% of it into Qurate, so it ended up pretty okay.
Bill: I just want to be honest about how little confidence I have right now that what I did is repeatable. I don’t want it to be one of these promoters and I’m not trying to talk returns after a good year. It just happened to coincide with my account blowing up and me getting a little bit more recognition for things that are somewhat in and somewhat out of my control. I’m just not trying to be one of these fucking people that I hate. I wanted to say that to everybody. As I demonstrated with my knowledge of quoting Altria’s market cap, I’m not exactly the best with numbers off the top of my head. Anyway, it’s my little come clean.
Jake: Should we hit the Q&As?
Tobias: Yeah, hit us with some questions. We got about 20 minutes to go.
Bill: No, 20 minutes is good.
Tobias: We normally get there a little bit late, but Colm Moore says dental disease is the biggest disease in the world.
Tobias: Maybe Coke and the other purveyors of sugary water, they’re in trouble.
Bill: Yeah, it’s tough. When they asked Buffett about that, I was like, “Oh, this is a stupid question.” I understand why somebody asked it.
Tobias: Wayne Hylarides wants you to show the world your abs, Bill.
Bill: No, you don’t want to see that. It’s very fat.[laughter]
Bill: I showed it. I put a finger in my belly button and put it on Twitter. It’s a disgusting sight.
Tobias: Someone just asked me if I’m losing faith in value. No, not losing faith in value. Have I given that impression? I’m sorry, no, I’m doubling down to the extent that I can.
Jake: Last man standing.
Tobias: If it comes to that.
Inflation Fears Could Be Completely Wrong
Bill: Here’s a question for you guys. What if all the inflation fears are just completely wrong?
Tobias: In the sense that– what are the inflation fears? That inflation is coming?
Bill: Yeah, I mean, I think if you look at bitcoin, and you look at all the commodities ripping and all that, I had a conversation with this dude, [unintelligible [00:41:12] this weekend, and he’s pretty far left. I mean, he admits it, and he’s advised AOC and stuff like that. I mean, he’s on the left, but he had me really wondering how much of this is a short-term supply shock, versus– in the middle of structural deflation versus not, and I know this is macro and if you’d spend a minute on it, it’s a minute too much but I just wonder if this is one big fake out by the market because I feel a lot of people are expecting inflation. Now, obviously, healthcare, education, all the stuff that matters has been inflated, but he would argue those are supply constricted.
Tobias: We’ve had a little bit of both, haven’t we? We’ve had some supply destruction because of COVID and all the shutdowns and we’ve had a whole lot of money printed and tipped out and if you have less than one thing and denominated in more of the other thing, sometimes that winds up as inflation. Sometimes, they just don’t count, so it doesn’t– they don’t count, it doesn’t happen.
Bill: No. Well, I guess the answer would be if it’s because of COVID and your shortage is COVID related, lumber tripling in Q3, that should have a natural– lumber is something that you should be able to bring supply on, so it should fix itself.
Tobias: There’s also– [crosstalk]
Bill: Yeah, if enough of the velocity picks up but so far, it’s all just gone into the pockets of the rich for the most part because I don’t know that results in inflation, you need velocity.
Tobias: Investorblog has bought an ad around– [chuckles] He goes five largest positions, are they undervalued? You can click through it and see him talking about it. I’m just impressed by the fact that someone did it.
Bill: He bought an ad?
Tobias: Yeah. [crosstalk]
Bill: We actually get money from this?
Tobias: 10 pounds.
Bill: That’s sick.
Tobias: If it ever breaks even.
Bill: I’m not going to lie, I’d rather hear your best idea, but I do appreciate the ads, in my opinion.
$CSU Suspends Dividends
Tobias: You want to talk about CSU, that seems interesting. They’re suspending the dividend. They’re going to invest outside software.
Bill: Well, they said that their–
Jake: Not outside the software, but outside of that small VMS.
Tobias: Okay, I slightly misunderstood then.
Jake: I don’t know. Everyone seems to like this idea and think it’s this pivot is a big deal and good for them. I’m not so sure. What they were doing was working really well and I think they’ve run up against, a supply of acquires ease. I don’t know if that’s right or not, because I don’t really keep track of that market. Certainly, probably the prices had to have gone up that they’ve paid. Now, he’s talking about having to participate in auctions for these bigger VMS. I’m like, “Huh, last time I checked, that’s not really where you get great deals in an auction format.” I don’t know. It doesn’t seem as great news to me. I don’t know.
Bill: I think it’s fair to say we’re not the most educated on this name. What I would say is when I said that tweet about if Mark Leonard wants better shareholders, he can do things like his podcast, the comment that I think was the best back to me is he’s not optimizing for external shareholders. He’s optimizing for employees given how candid he was on that podcast, how candid I think he is in his letters, even though I have said they’re not my favorite, they’re great letters. When I have dialed in to the annual meeting that I dialed in to, I wish I didn’t miss one of them, I think this guy, he’s thinking this is the way to maximize value.
In that letter, what I heard him say is, “I used to be opposed to this, and I think that I was wrong. Now that I’m wrong, we’re going to lean in heavily to this strategy.” I think if you believe in Mark Leonard, then you want to see him chase the highest return for his capital. I don’t think dividending it out to shareholders with equities at peak valuations relative to history makes the most sense if you think that you can do something better with it. I think it was a phenomenal letter.
Home Furnishing Companies
Tobias: Any growing branded Home Goods furnishing companies running with low leverage coming up with good products and buying back shares?
Tobias: Other than Restoration Hardware, looking for other ways to play home/wellness?
Bill: That’s hilarious, that’s a funny question. Restoration Hardware doesn’t have [crosstalk] leverage.
Jake: Oddly specific.
Bill: There might be one. If you know one, send it to me.
Tobias: I think there’s an interesting one, but I’m going to be buying it. I’ll talk about it in about a month.
Bill: There you go.
The Link Between Value Investing & Inflation
Tobias: How does value investing perform in stagflation? That’s a good question.
Bill: Why are we going to stag? What’s the underlying thought of no growth? Housing is ripping everywhere. If you believe that high housing prices will stimulate homebuilding, housing is one of the highest multiplier effect sectors out there. There’s a lot of incentive to build and there’s a huge backlog. I think the economy is going to be fine after this. I don’t know what’s going to happen to the dollar. I don’t know what’s going to happen to the US over the long term or whatever. The spending makes me nervous but the actual economy, I think, is pretty primed. Savings rates are through the roof, people are itching to get out. I don’t know, I think people are waiting for a shoe to drop that may not drop. It feels like it should.
Tobias: Isn’t the inflation argument just that we’re not positioned at all for inflation? That if you get any inflation, then that has this violent reordering of where everything is in the market. Well, we were talking about this before we came on, but what do you do if you get inflation? The old Buffett answer is if you want to buy the companies that have the highest return on invested capital, because they’re the ones that can reinvest in the business, and actually outpace the growing cost of running the business. In real time, they can actually grow. JT, you had a different perspective on that.
Jake: Well, I don’t– I’m not sure I agree with your characterization, actually—
Tobias: I’ll reject the premise of the question.[laughter]
Jake: Well, no, I’m probably due for a reread of how inflation swindles the equity investor from– [crosstalk]
Tobias: I was talking about one of his letters.
Jake: [crosstalk] -article from 1977.
Tobias: It’s ‘79 letter when he says, he talks about trying to outpace gold, isn’t it?
Jake: He does say something, I think in the 1980 letter about– from 1964 to 1979, Berkshire did 20% book value growth, something like that, and was quite pleased, like they outperformed the broad market pretty handily, but he could have purchased– I think one share of Berkshire purchased a half an ounce of gold in 1964. One share of Berkshire purchased half an ounce of gold in 1979.
Bill: Huh, it’s interesting.
Jake: Yeah, I think that was what he talked about. He said, like, “Save your patting on the back of us because we basically we’re flat with gold.”
Tobias: You just pick the thing that’s performed the best, and if you float with that, then you haven’t done anything?
Jake: Well, he holds himself to a higher standard [crosstalk] on average.
Tobias: Yeah, evidently. Good for him. What were your thoughts? You don’t like my characterization of what Buffett said might be the most offensive thing that anybody’s ever said to me.[laughter]
Jake: [crosstalk] -words.
Bill: Jake had said earlier, he said that he thought that some of the– or, well, Jake, talk about Napier’s argument.
Jake: Yeah. I think it has to do with high fixed costs. If you are in a business that has high fixed costs and doesn’t have to replace those assets with new assets, new capital, then your returns on invested capital can explode. We traditionally think of high ROIC businesses as capital light, can’t really absorb more capital generally. Otherwise, you run into some laws of large numbers that don’t make sense.
But if the components of what creates that return on capital have to be reinvested continually– you’re earning those high returns on capital, the cost may push up just as much. If you have the fixed cost that is not moving up, your total return then can look quite a bit. I think we saw this in the 70s where companies with really high fixed costs, they showed blowout earnings because– and granted, this is all nominal, by the way. This is something to keep– it’s important, is that really– there’s more losers than winners in this inflation world. It’s not generally good for equities. I think everyone thinks like, “Oh, I’m just going to park in great businesses, and I’m protected from inflation.” I’m not convinced that’s necessarily the case.
Bill: Oh, I don’t think it is because your discount rate is going to have to move and your duration is super long in those assets, you’re going to get a nice little wake up call, for lack of a better term.
Tobias: Here’s the thing, there’s two aspects. There’s what the price is going to do relative to the business, then there’s what the business is going to do over that period of time, even though we’re not even talking in real terms, just talking nominal terms. I would have thought that Microsoft, in an inflationary world is fine. They just keep on putting up the price of the products and nobody even notice, it’s like it goes from whatever you’re paying out, I paid $8.75 a month or something. I guess it’s $9.50 this month?
Bill: Well, not to mention, if you believe that sort of the Zoom culture has enabled a more distributed workforce, there might be an argument to be made that Microsoft’s total labor pool is higher, or there is more total supply than maybe or what quantity supplied is–
Tobias: They can sell more is that what he’s saying?
Bill: Well, there’s more people that did the job out to.
Jake: No, more–[crosstalk] Yeah.
Bill: They, I think, have suffered from wage inflation in an outsized way, because they’re a tech company, and tech companies are paying people a lot of money. If you can somehow outsource some of that and work remotely, you might actually have a scenario where their costs could– [crosstalk]
Tobias: Come in.
Bill: Yeah, that’s right. Whereas, if you [crosstalk] piece of machinery, you’re going to pay more [crosstalk] steel.
Tobias: Jake, what’s an example of a business that’s not going to need to replace its assets, that’s got the high fixed costs?
Cuba’s Bacardi Rum Distillery
Jake: Well, Napier gave the example of– there’s a Bacardi plant in Cuba, that was built when Cuba– 1950s, the heyday, still making Bacardi there and pretty sure they haven’t reinvested much money back in that Bacardi plant in Cuba when there’s not a lot of capital flowing into Cuba historically. It totally depends on the asset, and what’s the durability of the value created by that asset? Like in technical disruption. We could even go back to– we’ve talked before about the five sacks of flour, if you remember, like, each level of value that’s created by something. It’s not clear to me– it really takes a lot of teasing apart every little moving part piece of a business to figure out, is this going to be benefited or harmed by inflation?
Tobias: Complex adaptive system. No idea what changing those inputs is going to do to the outputs.
Jake: Yeah. Well, I was going to say another interesting point they had was, a lot of people have blamed high labor costs on unions historically, like, especially in the 70s. However, the arrow might go the other direction, in that when you are falling behind in your ability to raise the price of your labor to keep up with the costs of food and room and board, that’s an impetus to then organize with others who are also falling behind and create a union. So, I wouldn’t be surprised if we saw more union activity pickup if we actually saw increased inflation.
Bill: That’s an interesting thought.
Tobias: Labor couldn’t be any further behind capital now, this is about as stretched as it gets.
Jake: Yeah, run that a little bit further and now what does that do to these record margins when you have interest rate expense perhaps tick up? You have labor costs tick up. You have cost of goods sold potentially tick up. You have taxes potentially tick up. All of those things are coming for margins, I would say, potentially.
Bill: But when would you not have said that over the last six years?
Jake: Well, these things take long. These are like glacial changes. They’re not–
Bill: I’m just asking.
Tobias: That’s a fair question. I’ve said the same thing. I think Skeletor had a shot at me on Twitter about it saying that I’m making all these assumptions. It just seems to be that when you have every single one of those things lined up as Goldilocks for capital, and then you just start– I can see tax is probably going to go up, interest rates over time probably going to go up. Labor’s probably going up. The inputs are going up. It doesn’t seem to me that it’s that much of a stretch to say, I don’t really know how it happens, but probably margin is going to get compressed here. There’s any number of ways that it can happen.
T. Rowe Price – New Hedge Is A Long/Short Book
Bill: Yeah. I have two thoughts. One, I think it’s somewhat interesting that this week on WealthTrack, they had somebody from T. Rowe Price, and they were talking about the new hedge is a long short book. Historically, maybe it was a 60/40 allocation, but now you almost need a short book to protect you in a downside, because all correlations go to one. I don’t know if that same thought happens for inflation, sort of like moving rates up, rates go up, bond should go down, equity should go down with it, I think, obviously, assuming all else equal.
Jake: Well, do you know anyone interesting running long short–[crosstalk]
Bill: No, I don’t have a clue. I have no clue. I don’t know anybody that does anything of the sort. The other thing is that conversation that I was having, there’s a moment where I was like, “Oh, okay, so if you have inflation, the equity market could take a hit. But if you’re actually sending the dollars directly to the people that can spend it, arguably, the economy could get going and they could get jobs.” I almost think that the left may see that as an outcome and a way to close the wealth gap more than maybe I’ve appreciated in the past, whether or not that’s misguided, I know it’s politics. I get it, but it’s just a thought that I had as I was having the conversation.
Jake: $25 loaf of bread does not close the wealth gap.
Bill: Well, I had some pushbacks too. I agree with what you’re saying. I almost think that may be part of the thought. I may not be– I may not understand the conversation as well as I’d like to. I was just looking at gold, it’s done 8% since 2004, at least the GLD ticker has, it’s wild.
Tobias: Was it particularly depressed in 2004? Is that like a local low?
Bill: No, it’s just as far back as I can get my data right now. 2011, it’s basically flat since ‘11.
Bill: That’s why I’m having the thought. I remember in ‘11, when people were clamoring for gold. The reason I remember it is I was gifted some physical Krugerrands and I fuckin top ticked that, shoutout to me.[laughter]
Bill: Because these people that I didn’t even know were calling me about gold. I was like, “Alright, I’ll sell you these things. This is crazy.” I think I put the proceeds in Caterpillar, which maybe wasn’t a great idea, but I don’t know. It’s better than holding gold. Peter Schiff.[laughter]
Bill: I’m just playing with you, Peter. I’m glad you listen.
Tobias: Not anymore. Just got a downvote.
Jake: We’re always [crosstalk] one more?
Tobias: Yeah, I can’t see when [unintelligible [00:58:47] my head. I think that the argument for inflation is not so much– it looks like there might be– there are some indications that it’s coming. It’s more that we’re just not at all positioned for it that if it comes, there’s a violent redistribution of the current natural world order and then maybe value wins, and then I don’t know, maybe value is going to suck for another decade, we all get to learn brand-new lessons.
Bill: Eventually, it can’t. Eventually, the jaws must collapse. I’m just not sure when. That’s the hardest part. If anyone figures it out, write us.
Tobias: There’s a lot of speculation in the market right at the moment. There’s a little call buying, there’s a lot of leverage. There’s a lot of long tail, that leverage is coincidental, so that’s not an indicator, but there’s a lot of– I mean, we’re closing on 36 on the CAPE, which is pretty high. That’s well above 29, we’re closing in on, 44 is the all-time peak here. They’ve got to 100, and China get to 100 in Japan, so sky’s the limit really. There’s no reason why it has to stop there.
Jake: Well, stick some crappy earnings numbers into there, if you have any margin collapse and watch your CAPE explode higher.
Tobias: Well, we’ve got a little bit of that over the last year, so that started to permeate, which is probably what’s pushed it up a little bit.
Jake: Less than I would have guessed though, if I were being honest. I was more concerned about that. I feel like we could probably go back and watch shows from March-
Tobias: 20% off, yeah.
Jake: -and been way off on some of those worries.
Jake: Seems hard. [laughs]
Tobias: It is super tough. All right, folks, that’s time. It’s been fun chatting.
Jake: Thanks, everyone.
Tobias: See you all next week.
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