During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Bonsais and Investing. Here’s an excerpt from the podcast:
Jake: All right, so shoutout to John Chu, who’s a listener who sent me a really nice writeup on this topic. I’m basically just going to steal all of his ideas and pretend that they’re my own. Thanks, John, I appreciate it.
Bill: Nice. That’s called cloning in value investing circles.
Jake: Yeah, exactly. [laughs] Hard cloning here. Bonsai– it’s funny to me, what analogies people use, because it’ll betray your mindset and sort of how you think about things. There’s often a hunter mentality in the investment world like, “I’ve got to land this whale.” “Buffett’s bringing out the elephant gun.” There’s a lot of hunter analogies, a lot of hunter metaphors. I think it’s probably maybe a disservice actually to go that route. I think this actually the bonsai is a little bit more of an interesting analogy and mindset to use. Gardening in a way, or farming, is somewhat similar in some of those analogies. Anyway, I never knew this but I thought bonsai was a type of tree, a species or something. Turns out, it’s not. It’s actually more of an aesthetic and an approach to managing the growth of a tree. It can be any kind of tree. There’s cedar bonsai, I don’t know– [crosstalk]
Tobias: You can bonsai anything.
Jake: Apparently, you can bonsai–
Bill: You bonsai me, Fokker.[laughter]
Jake: Yeah. I could. It’s an art form, the aim of it is to express this very efficient beauty that brings out the tree, and what you’re really going for is to create a miniaturized version of what a full-grown tree would look like. But what’s interesting is, you have to also keep this thing alive while you’re doing it. So, there’s a lot of tradeoffs as far as design aesthetic versus actually keeping it alive. Another thing that’s very interesting about it is that it’ll be a 50-year project to do one of those full really nice-looking bonsai trees. This is almost a life’s work to create one of these. I thought what would be fun to do that this way would be, I’m going to go through the higher points of bonsai and the process of it. Then, maybe we can tackle together some of the forced analogies after that.
Tobias: I like where this is going.
Jake: In that way, it’s more of a team effort, yeah. The first thing that they to figure out which seed to start your seedling is apparently you pour hot water over a bunch of seeds and the ones that float, you want to throw those away, because apparently, they don’t germinate. You tick the ones that sink, I have no idea what the physics is behind why the sunk ones, I’m sure our crack team of researchers around the world will tell us the answer eventually. Once you pick up the seeds, you plant them, and you have to keep it moist for a really long time. After about a year, you have this little sapling that’s three or four inches big, and you’ve done almost nothing, except for just keep some fertilizer and moisture. Really what you’re trying to do is encourage the roots to grow, because apparently the roots will only go as far as the moisture is. If you’re only watering the top and it never gets lower, the roots will not dig deep enough into your pot to really create a strong anchor for it. All right.
Then, next comes this phase where you do a lot of thickening of the trunk, and you’re letting it grow more and more until that sapling becomes much more of a branch that’s growing. In order to do that, you have to allow the branches that come off of it to– [crosstalk]
Bill: I just want to say real quick–
Jake: I know. There’s so many double entendres there.
Bill: I’m not mature enough to handle this conversation.
Bill: I just want to throw that out there that I have tried not to laugh, and between moisture and branches and thickening things, I don’t have it in me. I apologize that I am straight back to second grade. I can’t help myself right now. Okay, continue.
Jake: I knew I was teeing it up for you when I was doing this. There’s a long planning process that goes into the things that you do now today, and even the things that you do two years from now will dictate what you’ll be able to do with the tree five years from now. A lot of it has to do with– they use these wires to bend the tree and have it grow in a certain direction. I don’t know if you’ve seen a lot of the bonsais have these zig-zaggy growth patterns, that’s not a normal thing for a tree. It wants to just kind of get height as quickly as it can. They’ll use wire to bend it and it’ll grow for a year to the left. Then they’ll use wire to make it grow the other direction. You’re crafting it, how you want to do it, but you have to think about like, “Okay, well, that’s going to be the top of it in 10 years or 50 years, what do I need to do today to allow myself the optionality down the line?”
Then, there’s a whole thing around branch management because there’s a lot of temptation to do something today, and chop off the branch and make it look good. But when you’re doing that you can actually risk losing the tree because it’s getting a lot of the– like the photosynthesis is happening with the leaves that are there, or the pine needles. There’s this pressure that you want to do something today immediately. There’s a time for everything in this and your overreaction can end up killing your tree. So, you have to be very careful about taking actions when it’s the appropriate time to do it and being very patient with it. You have to work in harmony with the tree… -are really risk, but the small maintenance is continuous, like you have to water and fertilize it all the time.
Then, last thing will say is that you can actually let a branch grow for a lot longer than you would think and then you trim it off and you can start a new tree with that branch. Okay, so we’ve just laid out probably 10 different sort of actions, mental models, ideas that might be interesting to jump into now the business or investing tortured analogies. I don’t know what’s the first thing that jumps out at you guys.
Tobias: Let me just before we do that, what stops them from getting really big? How do you keep them small? Is it because they’re in a small pot?
Jake: I think it’s in a pot, yeah. I mean, there’s only so much, I think that it can be built when you have a small amount of foliage to absorb resources, nutrients. I think that limits why it can’t grow to be too big. The other thing too is there’s a lot of maintenance in shaving down the roots. One for aesthetic reasons, and two, I think, to maybe limit some of the– how big it gets.
Tobias: Do they grow miniature leaves, is that what happens?
Jake: Well, I think leaves always look the same when they first start out. Then, the branch gets bigger, everything just keeps getting bigger. There’s sort of a fractalness to it.
Tobias: I think it’s a good analogy. As you were saying, and I was like, “Yeah, this is a good analogy that I need to steal for something at some stage.” The fact that it takes 50 years and the fact that you have to nurture it and prune it every day and decisions impacting down the line, yeah, I think it’s a very useful analogy. It makes me want to go and get a bonsai, actually, makes me want to grow a bonsai.
Jake: Yeah, it’s a lot of responsibility. That’s a big commitment.
Tobias: That is a big commitment. [laughs]
Jake: [laughs] How about you, Bill, anything jump out to you other than a bunch of double entendres that were distracting?
Bill: Yeah, when I was mature enough to think about it. I’ve been struggling to hold on to Disney here a little bit, and I trimmed it a little bit today. Not a big trim, but a little trim. The idea of not touching something too much and letting it grow. That said, it’s grown a lot. It reminded me a lot of never sell what you were saying actually. All that I was thinking about was never sell.
Jake: [chuckles] Boy, we hear what we want to hear, don’t we?
Bill: Maybe. Yeah, I don’t know.
Jake: No, there is something to that though. Kind of letting your winners run in a way where letting the tree be a little bushy for the sake of the tree longer than maybe you would’ve think, so that then you can trim it to be more aesthetically pleasing later. I think that’s a big part of it. Another thing I thought was interesting was the–
Bill: [chuckles] Toby, what did you hear there, sir? Do you have a thought?
Tobias: We have to trim it down to another topic.[laughter]
Bill: This is been a winner. I just want to say this is one of my favorite veggie segments yet.
Jake: It’s a little– Yeah. All right. That’s good. To go back to the big decisions being rare, and a lot of it is just blocking and tackling of water and fertilizing, I’m reminded of your terrific conversation that you had with Ian that dropped last week. Something that struck me that I thought was interesting and that probably goes against the majority of how people practice this. He said he spends 80% of his time researching and learning more about the things he already owns, and 20% of the time on looking for new things. The argument was that if it’s not in the portfolio, it can’t kill you. I find that to be very interesting. To me, keeping up and being a good owner of these businesses is the watering and fertilizing that you need to do all the time. Occasionally, there’s big action called for. I thought that was a nice tie-in.
Tobias: I had another chat to Chris Bloomstran, and the same thought occurred to me while I was talking to him about Berkshire. He’s been in Berkshire since 2001, I think he said, I hope I haven’t– it might be it might be 1998. That’s coming up soon. He has such an intimate knowledge of Berkshire. He said he’s bought it regularly over the years because it’s one of those stocks– it has for the last sort of decade traded pretty cheap. As a result, he’s quite familiar with– when something happens, he understands it really well, whereas the market might not so. He’s able to buy some more, sell some more, do whatever is appropriate in the moment. I did think that would be a– if you have a handful of bonsai trees that you just keep your eye on, that makes life pretty simple.
Jake: Yeah, what a huge advantage. If you have a very solid scale of what to weigh something and you don’t have to– he’s sleeping like a baby when it comes to Berkshire. He understands exactly the price to value relationship. Probably makes the game a hell of a lot easier if you have a few of those.
Tobias: Yeah. Which is why he was able to buy it so aggressively last year, when it got super cheap around this time last year. I like the analogy because I like the idea of– we talked about this a little bit, but not just being in or out of something, scaling in and scaling out, iterating as you’re in it. If you have a handful of things that you know really well, you can do that easily. You scale in, scale out, never really want to get out of it because it’s hard to find really good businesses like that. If it’s a 50-year business, is what I’m talking about. Not everything’s a 50-year business, but for 50-year businesses.
Jake: Yeah. Mohnish had a talk that he gave recently to Peking University, and he’s talking about spawners, and that’s his new thing that he’s really into. It’s the idea of these companies that grow other businesses inside of them and spin them off, or not, and they keep them internal, but this idea of letting a branch really grow for a while and then cutting it off and starting a new tree, I find to be interesting. Allowing the tree to be aesthetically not pleasing for a long period of time in order to have that branch later be available to cut off and the patience required from the businessperson who’s trying to run a spawner kind of strategy, I find to be an interesting idea.[crosstalk]
Tobias: Did you say IAC?
Bill: Yeah. That’s what IAC is.
Tobias: Yeah, I thought about IAC, too. What’s the thesis for focusing on things that spin stuff off a lot rather than just keeping it in house? Why would that be an advantage over just holding it?
Jake: For the business?
Bill: Well, [crosstalk] management teams. One of the reasons that they want to spin Vimeo is, Vimeo is an asset that probably warrants given where things are trading, a little bit more specific attention, and you can start to compensate your employees based on that particular stock as opposed to the conglomerate stock. It just aligns more incentives. I do think that when you’re talking about something that’s trading, at least at a certainly not depressed multiples, I hope is not a controversial thing to say, you might want to argue that you want to recruit the best possible talent to that organization and allow them to be judged on their own merit, and not within what goes on at Angie or whatever like that. I think that’s what they would say.
Tobias: Can you compensate them out of the flows from the business rather than– we’ve lost Bill, rather than the performance of the stock?
Jake: Sure. Yeah. You can take cash.
Tobias: That’s not a popular thing to do, some businesses do that.
Jake: Yeah. Rising markets, nobody wants cash. They want stock.
Tobias: You can buy it. It’s freely traded.
Jake: Exactly. I think that is actually a pretty compelling argument for sometimes some of these stock option plans are maybe a little misguided.
Bill: I’d like to point out that it took, what, 19 minutes for my computer to update. That’s crazy.
Tobias: The camera has fixed your hair, it’s amazing.
Bill: Hey, there we go. Can you still see my boogers?[laughter]
Jake: Always. We have anything left on this carcass to pick off before we move on?
Tobias: I think we’ve bound it in wire and forced it into an unusual shape, it’s when we need to let go for a little while now.
Bill: I’m not a very good bonsai tree owner. I tinker too much to mess with bonsai trees. I’d kill them all.
Tobias: In the 80s, they always had– the executive would give it a little spray. That’s all you got to do. Just give it a little spray and then get those little scissors and cut off a leaf or something.
Bill: I bet I’d kill it.
Tobias: I kind of want to have a go. It sounds like fun. You want to do your topic, Bill, so I can mix.
Bill: I guess it actually dovetails with Jake’s.
Jake: It always does.
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