In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- $TSLA And $ARKK – The Catalysts That Break The Market
- $Bitcoin Bulls
- Bloomstran And $BRK.A
- Bloomstran And Lordficiation Of The Economy
- What Drives Valuation?
- The Speed Of Technological Change
- The Freeroll Argument
- How Much Cash Should You Hold?
- Bloomstran And $TSLA
- Biden’s Infrastructure Package
- Dan Loeb Trolling Tech Investors
- Tom Brady & Nightshades
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 the in– Bro, what podcast is this?
Bill: What podcast is this?
Jake: [crosstalk] [chuckles] -already.
Tobias: It’s Value: After Hours.
Bill: It’s Value: After Hours.
Tobias: It’s 10:30 AM on the West Coast, 1:30 PM on the East Coast, I think it’s 6:30 PM UTC, it’s 6:30 AM Australian Eastern Standard Time. Australian maybe daylight savings time. I’m joined as always– [crosstalk]
Jake: For both of you Australian listeners.
Tobias: [laughs] 8% of the listeners are from Australia. I don’t know how many of them catch it live, but joined us always by my cohosts, Jake Taylor and Bill Brewster. What’s happening, fellas?
Bill: Not much.
Jake: Well, Bill said it was going to be lit. Let’s get it lit.
Bill: It’s going to be lit. I think we’re probably going to disagree a lot. We may go more macro than we normally do, but whatever. We got REITs, bro. Jake, what are you going to talk about today?
Jake: I’m going to go into hit the highlights of Chris Bloomstran’s Semper Augustus letter, something good to talk about.
Bill: There we go. Toby, what about you?
Tobias: There’s a lot going on in the market at the moment. There’s a little baby sell-off just starting, just touching tech. I just thought I might talk a little bit about Tesla, ARK, tech, and Janus 1.0. Just to see what ARK’s going to do this time around. I’m just interested to know, there’s some suggestion that there a little bit illiquid in some of these names, so we’ll see. What do you– [crosstalk]
Bill: Do you mean to tell me that this much money flowing into one entity could cause an issue down the road? Is that what you dare suggest, sir?
Tobias: I think the road might be– It’s possibly a little bit closer than we think.
Bill: It’s fair. I’m going to rant and I’m going to start it right now, after this. [imitating intro music]
Bill: Folks, here’s the thing. I complimented Preston Pysh, okay.
Tobias: Who is Preston Pysh? He’s one of the founders and cohosts of The Investor’s Podcast, massive podcast. He’s been a value guy and a bearish macro guy. Preston and I see the world pretty similarly. He’s more recently he’s become a bitcoin maximalist to the chagrin of some of the people who follow the podcast, but it’s probably gotten him a lot of followers too. Just so everybody knows who is he. Good dude, I know him well.
Bill: Yeah. Well, I was going to go there a different route.
Tobias: Okay, sorry.
Bill: No, it’s okay. I appreciate you setting it up. Sometimes ,my mind is very vague, and people are lost when I speak. Anyway, if you just take a step back and think about what that guy did. He was on arguably the biggest financial podcast at the time. He got an idea in his head through thorough research that he wants to bet on. He put his reputation on the line to bet on something that his heroes have referred to as rat poison, and he fucking crushed the call. People are mad that I gave him props, that is really hard to be public. He’s not a hedge fund manager. He was a guy who was on a podcast that’s running, I perceive, his own money. I may be wrong on that. It’s not like he’s Dan Loeb out there making public calls at Sohn, and he crushed the call. If you’re mad at that, you need to look in the mirror and figure out what you’re mad at and tip your hat to a guy that has some balls and has some success.
Now, secondly, if you are someone that’s listening to podcasts, such as ours or theirs, for any type of learning purposes, and you have found yourself in some huge winner, such as bitcoin, I would just encourage you to be really honest with yourself about how much you know and understand that right now, some of the sharpest money in the trading world is trading bitcoin against you. I don’t know if it’s the right thing to own or not. I haven’t done the work to have a strong opinion. I will tell you that I am far, far further away from this as Hocus Pocus than I ever was. Part of me thinks an idea has– I think that it has merit as an idea so long as it has merit as an idea if that makes any sense. It’s a bit circular. But the more it continues, the more I sort of buy that. Bill Miller has articulated that thought in the past. I’m not the only person that’s thought it. I sort of get it. I just think if you’re up this much– The way I put it last night is I said, “Classic cars are ripping, baseball cards are ripping, bitcoin’s ripping harder. Are you right? Are you trading some super juice trading vehicle?” I don’t know, I could be wrong. I would just hope that if you’re up big, risk mitigation and risk management matters at some point and consider your own personal equation and maybe it’s time to take something off the table.
But if you’re mad at Preston or me for complimenting Preston, you really should take a real long think about why, because that’s not about us. That’s about whatever you see in the mirror.
Tobias: Why do you say that the smartest folks in the room are trading against bitcoin at the moment?
Bill: Oh, well, I don’t think they’re trading against. I think they’re trading it. Those guys are sharp, as far as traders. I don’t know what their returns are. I don’t think traders in general have the greatest returns. I happen to not understand macro in the way that I think I would need to trade that vehicle very well. I think anytime you get that volatility in a vehicle, you’re going to get really good traders into the picture because it’s just too enticing not to trade it, I would think. Do you agree?
Tobias: I’m not a trader. I don’t know. [chuckles] I have no idea. That kind of volatility scares me honestly.
Bill: Well, I think you’re looking for moves. Yeah.
Jake: I think it lays out one of the real problems with any asset that you can’t fix some kind of fundamental to very easily. It’s, one, if it goes down, how do you know you’re still if you’re getting an even better deal? There’s no anchor for you. Then, two, if it goes crazy high, how do you know when it’s gone too far? What would be the price then– I would ask everyone who owns Bitcoin, is there a price at which you would sell? Have you determined what that is? Did you determine that before you bought it? That’s really probably the best practice. You don’t wait until you’re up 5X and you’re drunk with return and thinking that you’re a God. It gets really tough then to decide what the right time to punch out is because you’re high, you’ve got to keep pressing your bet.
Tobias: Well, let me flip that around on you a little bit. Let’s say you’re in Berkshire. When you buy Berkshire, are you thinking, here’s the price at which I’m going to sell? Or, are you thinking I’m going to hold this for– I’m grateful that I’ve got this opportunity to purchase it at a discount. My plan is to hold it until the day I die.
Jake: No. There’s a price at which I would sell Berkshire. There’s a price I would sell anything.
Bill: Oh, speaking of which, real quick, shoutout to Charlie. Thanks for tuning in, man. Sorry, we don’t shout you out enough.
Tobias: [laughs] Yeah, there’s a price at which you would sell, fair enough. That’s very disciplined of you, JT. I’ve identified the reason why we’ve both underperformed for the last 15 years. [laughs]
Jake: Yeah, I reached too many of those disciplined price targets over the last five years and then couldn’t find enough to replace that made sense where I thought I was getting offered good odds.
Tobias: I’ve been thinking. There are some things that you could potentially never sell. I would almost put– Berkshire’s probably an almost never sell in there because the idea of the never sell is, something that it does keep on compounding, so you can have a long period of time where it’s dead money, but you don’t catch the tax trading in and out of it. There’s no guarantee that if you eat the tax that you’re going to get an opportunity to get back in at some reasonable valuation down the road. If you think it’s such an outstanding business, sometimes you only get one or two bites at the cherry maybe in a decade, and so you buy them and then you hold them and then you just know sometimes you’re going to make mistakes, and sometimes you’re going to get lucky and it’s going to keep on going. I’m thinking out loud here.
Jake: I think there’s always something that’s going to be mispriced though, where you’re going to have a better risk-reward profile and you can trade up to it if the price has gotten too crazy on whatever you own. I don’t know. I like to keep that edge on if I can, without obviously incurring crazy tax consequences. It’s really easy to be dead money for a really long time if the price gets too far ahead of itself. That’s one of the only true things that you can say about markets. It’s the higher the price you pay, the lower you should expect your return to be.
Tobias: That’s fair, but is there a difference between buying and holding? Buying is a different decision to holding– I know there’s some people who view holding as sort of every day you wake up and you got to rebuy the whole portfolio at this price, would you do it or you can tip it all out and start again. I’m just thinking out loud. I don’t have the answer to this. I don’t think that holding and buying are the same thing. You buy at a big discount, you hold at very broad range that’s not egregiously overvalued. If you were Buffett, you’re still in Coke, whatever top out, that sort of 1998 or 2000, whatever, do you punch out there?
Bill: I do think he would have if he wasn’t in Berkshire. In a personal way-
Jake: If he was running public partnership.
Bill: -vehicle I think he probably would have, but that was egregious. It would require a price. Berkshire is so big that it can’t really grow into a massive overvaluation quite as easily as some of these smaller things that are growing in the hyper-growth space. I would be more– [crosstalk]
Jake: [crosstalk] -was three times price to book is the most that’s ever traded at. It’s never been crazy egregious.
The Freeroll Argument
Tobias: I get a question here. I like it. It’s worth throwing it to you guys. What do you think about selling half of the position once it’s gone up 100%, and then actually never selling? You get your cost back up and then you just freerolling what you’ve got left in there.
Jake: Yeah, the freeroll argument, I understand the appeal of it. I find that to be a little bit under– I want to say under-optimized but under-disciplined. I think each dollar should be treated with the respect it deserves and not necessarily like, “Oh, well, this one is compartmentalized into my freeroll bucket.”
Bill: I don’t know, I kind of like it.
Jake: You would? [laughs]
Bill: I’ve sort of done it on Qurate. I took a lot of my cost basis off. I think that the bet is a lot different here. I think that they could execute it and they also could not. I don’t really need to have it be a 15% position because I need to prove something to myself, so it’s lower than that. It’s still meaningful if they execute. I’ll continue to earn or a good amount of money. I asked my wife, “How much can I lose before you’ll resent me?” I’m not trying to keep that on. If I could have lost that much, making that much would deliver the upside. I don’t know, there’s a part of me that just isn’t trying to be greedy.
Jake: Let me ask you this then, the freeroll implies that you wouldn’t sell it at any price really.
Jake: When I hear people say, “I’m on a freeroll,” that means they’re not planning on selling that at all. They got their cost basis out and now that can go–
Bill: Oh, I sell that thing in a second. I’m just not selling it here. I think it’s pretty fair. But I think that there’s a number of iterations of the world where it looks like– it’s not screamingly cheap to me here. I think there’s a version of the world where it could be quite a bit higher. There’s a version of the world where it could be 20% to 30% lower. I’m not going to have it be like this massive position in my portfolio, but I don’t need to take it all off.
Tobias: How about the fact that Buffett’s been getting– he gets dividends now– This might not be exactly right, but I thought I saw something where he gets half his cost basis back in dividends every year now out of Coke.
Bill: Dude, my grandma 31Xed her investment on Coke.
Tobias: She must be the– [crosstalk]
Bill: That’s not even the best thing– What?
Tobias: She must get her principal out in dividends every year. I don’t know what the yield is. It’s close.
Tom Brady & Nightshades
Bill: Yeah, it’s crazy. That’s not even the most crazy thing she did. There’s an argument to be made for never sell. I’d love to go back and look at when she bought and whether or not she outperformed. But at the end of the day, if you’re running a personal finance strategy, I think it’s hard to argue she failed even if she underperformed. I think some stuff is just what can you execute? If you can get yourself to retirement, who cares if it’s under-optimized? I don’t know, Tom Brady lives a much more optimal life than I do. I’m not living Tom Brady’s life, I’m living my own. Some of my stuff has to be–[crosstalk]
Tobias: You’re eating too many nightshades.
Bill: What about nightshades?
Tobias: Tomatoes, you know [unintelligible [00:14:00] tomatoes, tomatoes.
Bill: Oh. Why the hell are they called nightshades?
Tobias: I don’t know. That’s why I’m not playing in a Super Bowl.
Bill: This makes no sense.
Tobias: He’s very handsome man for 55 or however old he is, he’s in great shape. He’s still winning Super Bowl, it’s phenomenal.
Bill: Yes, it’s true.
Tobias: Be the first quarterback on AARP card. It’s amazing, and that’s because he doesn’t need tomatoes. That’s all it comes down to. That’s the TV 12 diet [unintelligible [00:14:30].
Bill: That’s the only difference between him and me? It’s just the tomato ingestion?
Tobias: Where’s your wife from?
Bill: I wish somebody had told me that. Fuck.
Jake: Oh, that Caprese salad’s been killing me.
Tobias: It’s all that spicy salsa you’re eating.
Bill: Huh. I was doing other things to me, but I didn’t realize it was preventing me from being Tom Brady.
Tobias: Let’s get back to the bitcoin a little bit. There have been a series of these little bubbles, little boom. We’ve had GameStop. Since GameStop, there’s been the marijuana companies, that’s all come off. Since then, it looks like it’s run into bitcoin, and that looks like it’s coming off a little bit– it’s back to where it was two weeks ago. I don’t think anybody’s complaining too much. I don’t literally know where it is. It’s ripped a lot and then it’s come back a little bit. I’m not saying it’s crashing or anything. There does seem to have been quite a few of these. At what point do any of these become dangerous to the rest of the market? Is there any sort of– what’s driving them and is it dangerous to the rest of the market?
Jake: I think they’re hugely dangerous because if they question the faith of all of these apparatuses that we are dependent upon to have prices up where they are now, that’s the landslide. You don’t know which little tremor it’s going to be that that tips it over, but you just know that there’s a lot of pressure built up at the plates. Who knows when what’s– I think markets tend to top and there’s no one tells you, it’s just some random Tuesday that it topped. Then before you know, it is like, oh, we’re not going to be back here for a decade.
Tobias: Well, what I’ve seen is that markets top and then they go sideways for a year. You don’t even know that they’ve topped. I’ve said to a few people that the last top was in 2007 was June, but then the crash didn’t happen till Q4 2008. The crash was more than a year later and you just didn’t know that you’re in the drawdown until it finally showed up. That’s not this market. The all-time high was two weeks ago, I think.
So, we’re a long way from having some sort of crash. There’s no guarantee. 1987 was a big crash, but then the year ended up. 1987 was much more like March last year. The real bear markets are the things where it’s like the 18th rally that gets sold 18 months after the top, or the big selloff. It’s hard to keep on going at the– Q4 2008, Q1 2009, another selloff after having a big selloff in late 2008, that’s the thing that really breaks your heart like every time you buy something and it gets sold off. It feels like it’ll never end. March 2020 last year was not that, it was violent. It sucked while it was happening, but it was over quickly, even though it felt like it lasted for about a year.
Bill: Does it make sense if I said that total market cap is like $51 trillion in the US stock market?
Jake: Total market cap of all stocks, I think, is in the $39 trillion range.
Bill: Okay. Yeah. I just put it into the Google machine. I guess it said like 12/31/20 was $51 trillion. I don’t know, if bitcoin’s a trillion, it’s like 2% of what matters. Here’s a hot take, GameStop doesn’t matter. Who gives a shit about GameStop? It’s some crappy little retailer that was over-shorted and had a short squeeze. Okay, great. Next.
Tobias: What about the marijuana companies?
Jake: I agree with that.
Bill: You know what? Heap high valuations on them.
Tobias: I don’t think that they’re directly–
Tobias: They’re going to top the market. I just think that they’re kind of, yeah, high valuations, better observe that, it’s very good. I don’t think they’re going to knock the market over. I just think there’s this risk-seeking mentality in the market, you don’t really see that at the bottom, you see that close to the end. There’s a lot of retail participation and call options. That’s off the charts. We haven’t seen anything like that as far back as I can get the [crosstalk] to go.
Bill: Yeah, man. I guess what I’d say is, lots of people need yield. Sometimes, you just got to trade that. [phone ringing] Huh, who’s calling? God. I’m [crosstalk] over here.
Tobias: This was my segment that just– Bill’s going to take a very important call.
Jake: Yeah. [laughs]
Tobias: Hello, mate.
Bill: It’s the homie Elliot Turner, he should be listening.
Tobias: He had a very important point he needed to make.
Tobias: He’s furiously typing in the notes and you’re not seeing it, so he had to call through.
Jake: That’s fair.
$TSLA And $ARKK – The Catalysts For Cracking The Market
Tobias: My topic is I think that there’s some risk because of the scale of ARK in the market and the size of Tesla. I haven’t talked about Tesla, because it’s been running up a lot, but it’s come off a little bit recently, there’s nothing much. It’s had lots of these little turndowns. I’m not calling the top or anything like that.
Bill: This is a bigger deal than Bitcoin.
Tobias: Tesla is an enormous company now. I don’t know anybody outside of financial markets, who doesn’t own it, everybody who I talked to has a gigantic slab of it. I know people who’ve sold half-million-dollar retirement accounts to go all in on bitcoin– Sorry, all in on Tesla, and it’s up and they’ve doubled it.
Jake: Freudian slip.
Tobias: Yeah, they’ve doubled over the last like 12 months or something like that, so they’re ecstatic. I just wonder if there’s some risk. If Tesla cracks, that’s a lot of people who may panic and may come out, and ARK has a big concentration in that, so ARK gets stung a little bit. Then one of the problems with ARK is that they have a lot of– they’re very big holder in very illiquid names. There’s some tweets around today by Edwin Dorsey who’s StockJabber, he does some great short-focused work and he’s written an article on ARK. He’s just identified how big ARK is in a lot of these names. They’re 20% plus in a lot of these names. There hasn’t been a problem while the money has been rolling in, which it has been, they absorb most of the money, but when it reverses, what happens?
Bill: May I speak?
Tobias: Please do.
Bill: I was raising my hand. Just out of curiosity, and I don’t know them, I don’t know you, Cathie. I’m sorry about what I’m about to say. If you ran a strategy that had a bunch of illiquid holdings, would you post your positions daily?
Tobias: The trades, yeah. I mean, an ETF has to run, but you don’t have to post the trades.
Bill: That’s what’s going on? Okay. I don’t know.
Tobias: You don’t have to post the trades, she posts the trades. A lot of people follow along.
Bill: Yeah, because I see people saying that, like, this is what they bought today. It’s like, “Man, this has got a lot of reflexivity to it here.” If it’s thinly traded, woo, that stuff makes me more nervous than what’s going on in GameStop.
Tobias: They’re not the most concentrated in Tesla. There are three or four ETFs that have a bigger concentration in Tesla. They are 10% in Tesla, so it’s not necessarily fatal to them what Tesla does, but there seems to be a lot of peripheral stuff that they do hold this down quite a lot.
Jake: Is that S&P 500 ETF I’ve heard so much about?
Tobias: [laughs] Yes. [crosstalk]
Jake: That was pretty heavily concentrated, isn’t it?
Tobias: How much? I don’t know what the waiting is, I probably should have looked it up. The waiting of Tesla and the SPY, does the crowd have a view on that? What’s the waiting of Tesla and SPY? It can’t be too big.
Bill: Yeah, I don’t know. This story makes me much more nervous than like– I don’t know. Even the retail participation to be– and I do think that they’re a little bit tied together because I do think retail is maybe following her right now. This, I think could be a real deal. It’s a lot of flows.
Tobias: I almost tweeted this up, but I already get enough hate mail on Twitter, so I didn’t do it. I thought, if Tesla cracks, probably ARK cracks, if ARKs, probably software and tech go, and if that happens, then the whole market goes. I don’t know if that’s going to happen or not. That sounds like a macro thesis where you get four things in series, and any one of them doesn’t happen, it doesn’t happen. That’s what I think is probably going to happen to this market eventually, and maybe happening now. I don’t know.
Jake: Well, the tough thing about that is that– Well, Chris Bloomstran, which we’ll get to eventually, walks through a nice little piece of math on Tesla. This is the problem is you’re now racing math, and that’s usually not where you want to be. If you’re the bellwether for the whole market, and it’s going to go where Tesla goes, you’re trying to outrun gravity or physics or something. I don’t know, it is questionable.
Bill: To be fair, though, we would have said this, how many times?
Jake: We have already.
Tobias: [crosstalk] -said many times.
Bill: We basically have how much standing to say this?
Tobias: Not a lot.
Bill: Arguably less than none?
Tobias: Yeah. Not a lot.
Bill: That said, it doesn’t mean we’re wrong.
Tobias: Here’s the thing, as a value guy, you don’t get to pick the turn in the market for the most part. You don’t get to pick the turn on your stocks. Nobody knows when it turns, you just know that you’re getting a good value for what you’re buying, and you think that the market will figure it out eventually. It’s never really concerned me necessarily that it hasn’t happened yet because I think that math, it acts like gravity, it does eventually catch up to you, it gets you. If the underlying is growing at some rapid rate and the stock price gets away from it, that’s okay, because eventually the underlying catches up to you. You might have dead money for a long time, but you’re not in any sort of great danger. But if your company that needs continued access to the markets– maybe Tesla doesn’t anymore. Maybe it’s not a good example, because they seem to have–
Jake: Oh, yeah, it does.
Tobias: Well, the net cash–
Jake: We’ll walk through some numbers. [crosstalk]
Tobias: All right, that’s a good segue then.
Bill: Tesla appears to be 1.65% of the S&P.
Bill: It’s not like a ton. If I told you, you needed to lose 2% of your body, you wouldn’t be like, “Oh, my God, that’s so much.”
Tobias: Can I pick the 2%? [laughs]
Bloomstran And $TSLA
Jake: It depends on what 2%. Okay. Chris goes through some math that I’ll just try to walk through real quick that I find to be pretty compelling. The current revenue of Tesla is roughly $31 billion, and then they’re at around sub $1 billion in profit. This is on selling 500,000 cars in 2020, which is about a half of a percent of the market share of global auto. Now, he asked us to imagine that they have a 20% market share of global auto. That’s selling 20 million vehicles, which is more than Toyota and VW combined right now, who are the number one and two players on earth. He allows for a 6.5% profit margin, which is 0.5% better than Toyota’s industry best 6%. He assumes an average selling price of $50,000 per car, which is $20,000 more than the global average. Okay, so we’re ramping up some pretty serious assumptions about global auto domination. That would imply that Tesla would have $1 trillion in revenue and be earning $65 billion in profit on a 15 times P/E, that puts you at a one times price to sales, which is a pretty reasonable, probably what autos would trade for.
Tesla’s currently doing 3% of that $1 trillion of revenue. They need to 32X this entire operation to get to a $1 trillion normal valuation. I mean 32X, what you’re doing now already, I think, requires tremendous capital to get to that size. There has to be factories all over the place to 32X to what they’re doing right now. Okay, I mean, I just find that to be– if you’re 3% of what the market is implying that you have to be, boy, a lot of things really have to go right for this to turn out.
Tobias: What credit are you giving them for bitcoin? For the solar panel?
Tobias: Roadsters for the truck.
Jake: There’s a lot of credit in $1 trillion worth of revenue.
Tobias: They’re building the factory that builds the factories. It’s machines building machines building machines.
Jake: Oh– [crosstalk]
Bill: Well, no, for real. If you think that they have the software to be an automated taxi service or whatever, then maybe you don’t get there through all the auto sales. Maybe it’s high-margin software sales. That’s what you must be betting on. No one is buying this stock thinking it’s a car company right now. It’s impossible. If they are, they’re crazy.
Tobias: Well, in ARK’s presentation that Jake talked about a few weeks ago, he said that they were estimating the global TAM for the autos, for ride-share hailing, I think that was like $6.5 trillion?
Jake: $5 to $6 trillion, I think if I remember, and a trillion dollars of profit available in that pool.
Tobias: I think that that’s currently what we spend on cars annually. That’s the global sales on cars, is about $5 or $6 trillion.
Jake: Is that right? It sounds high to me.
Tobias: It does sound high, doesn’t it? I think someone sent me that– maybe I’ve got that wrong. What do we spend on cars globally, amigos? [crosstalk]
Jake: Glad we do a lot of homework before we get here.
Tobias: You never know where the conversation’s going to go.
Jake: That’s true.
Tobias: I’ve got the greatest minds on the planet tuning in, why would you?
Jake: That’s true.
Tobias: Pre-search it. Maybe it’s possible. I don’t want to really own a car. I much rather have my robot driver show up and take me where I want to go. Then it gives me a fleet of different cars to choose from, sometimes they just need a little one, sometimes I want to haul some stuff from IKEA. That’s appealing.
Bill: It looks like we sell what 16.7 million units a year, it looks like, so what’s the ASP?
Jake: 30,000, I think, roughly.
Tobias: Two trillion. Harry Brown says 2 trillion.
Bill: There you go, Harry Brown. Shoutout to you. You’re the MVP, bro.
Tobias: Harrison, thanks so much. He did send it through me 2 trillion, I forgot. Yeah. We spend 3X what we spend on cars, except you’re not going to own it, you’re just going to-
Bill: Rent it.
Tobias: -rent it. Yeah.
Bill: It’s going to show up at your door.
Jake: That sounds more expensive than to get around, which is not the whole point of that, right?
Tobias: Yeah. You probably prefer saving that. Yeah.
Bill: Well, in aggregate, it’s less, and then you got more variable cost in your life, I guess. I don’t really see this world happening. [chuckles] I see some of it happening. I think it makes sense in cities.
Jake: Yeah, that’s fair. Yeah, network density, it’s got to be a big part of it.
Jake: Shall we move on to the rest of Chris’?
Bloomstran And Lordficiation Of The Economy
Jake: 115-ish pages– I made the joke that I think we can throw away the CFA program, and then just have a test on this letter, and if depending on what your score is, that puts you at whatever level– your understanding of the letter.
Tobias: Reading Chris’ letter?
Jake: Reading Chris’ letter, yeah. Especially, the Berkshire-like adjustment part. Talk about just a facility with accounting versus reality, and normalization, it’s really terrific work. I have mad respect for Chris’ process. Couple of interesting things. The beginning of it is sort of more macro-based, which for better or worse, is like catnip for me sometimes. It’s just so it just feels at some point, it has to matter. One of the things he shows is this chart that is, to me, what I would say looks like sort of the financialization of our economy and maybe even I would call the lordification of our economy. If you look from 1981 to 2020– and I’m glad that he picked these dates, because I was born in 1981, this is my lifetime, here’s what we’ve done. Nominal GDP went from $3 trillion to $21 trillion. That’s a 5.1% compound annual growth rate over 39 years.
Tobias: Was that global? Or, is that US? Sorry, I just missed that.
Jake: US. Credit market debt went from $5 trillion to $82 trillion, that’s 7.4% growth rate. Okay, so we grew sort of all the goods and services, but we grew the debt at a quite a bit faster clip. Market cap of all stocks went from $1 trillion to $39 trillion. Now, that’s a 9.9% growth rate. The price that we’re paying for ownership of all of these businesses that provide the goods and services that we want has gone up a lot, at a much faster clip than the actual productive capacity has grown. Then, Federal Reserve assets, which might explain some of this, went from $200 billion to $7.4 trillion, and that’s a 9.7% growth rate. Here we have, we’ve basically pulled through a bunch of debt, a bunch of Federal Reserve interaction, to push up the price of everything, and it’s like, “Yeah, no, duh,” but when you see it over my lifetime, you can see this can’t really be sustainable. You can’t grow the GDP at such a low rate and keep growing the debt at a faster rate, and not run into some problems eventually.
Tobias: The only quibble I had with that is the starting date, ’81, that was the bear market low for the stock market from– The cyclical peak was ‘66, and it was for the last– we had an electronics boom, everything was tronics, lots of conglomerates, all that sort of stuff was going on. Then, we went through this very protracted– Vitaly Katsnelson would say it was a sideways market from ‘66 to ‘81, where we just worked off the valuation, and through that, there are a number of very nasty bear markets, including the ‘73/’74 one. ‘73 was a disaster–
Jake: Especially if you look at real return right through that time period.
Tobias: Well, on a real basis, ‘73/’74 was worse than ‘29 because the inflation ticked up so much that your purchasing power was hurt more badly than ‘29. ‘81 was the bottom of a disastrous run. I think Jim O’Shaughnessy talked about– I think that’s about when he may have started his career, sort of around about that era. People just used to laugh at him because he was going to stocks, like everybody knew that where he wanted to be was commodities and different places like that stocks, stocks were a joke. He was at the other end of that, 30 years, the best-performed asset over that 30 years is the long bond. Lacy Hunt and Hoisington have crushed it through that whole period, just being long, the long bond, you didn’t need to do anything else. You could have just done that. Doing stock picking has given you some sort of proxy to the long bond. Stocks have done really well, but stocks have gone from being egregiously undervalued to being egregiously overvalued. What comes next–
Jake: Well, rates went totally down.
Bill: Highly valued, dawg.
Jake: Profit margins are way higher than they were in 81. All of the–
Bill: The businesses are better. You don’t have shitcos all over the place, you got software companies, that’s real. Those are worth more than some metal vendor that another one can just enter the picture. [crosstalk]
What Drives Valuation?
Tobias: Here’s my question. What drives valuation? It is how good the company is? Or is it competition? Is it return on equity by itself? Or, is that a function of what competition allows you to earn? Back in 1981, there were a lot more– It was a heavy industry, a lot more assets to generate those returns, but it was also at the bottom of a really long bear market where there just wasn’t a lot of capital around. Here we are, there’s a lot of consumer capital around this, there’s a lot of money for spending on consumer goods and services and lots of other things like that. That flatters the profit margins a little bit. We say, “Well, all of these got high returns on equity, of course, it’d be worth more,” but we’re double-counting. Shouldn’t competition compete away those high margins? If you’re making your margin, just cut it in half, and you’re still making a whole lot of margin.
Bill: Yeah, but one, is you can’t just compete with Google because no one is going to go to Bing, even if Bing exists. That’s real. I do think that it’s objectively true that there are at least parts in tech that trend towards one winner. I think that that’s pretty settled today. Can that change? Sure, that can change, I guess, over time.
Tobias: Would you have said Microsoft operating system was dominant in 2000?
Bill: I don’t know. I was a little nerd that was trying to get laid in 2000.
Bill: I was. I was a freshman in college. Actually, I guess I wasn’t really trying to get laid because I was in a fairly committed relationship.
Tobias: You can read stuff that preexisted your life.
Bill: After that ended, then I started to get on the prowl.
Tobias: You can read about things that happen prior to your own existence and read that stuff.
Bill: I don’t have a sense of whether or not Microsoft’s operating system is clearly dominant.
Tobias: It was the dominant.
Bill: I do know that– [crosstalk]
Tobias: That when they try to split it up.
Bill: Yeah. That’s right. They had bundled– Look, my whole life, I’ve used Microsoft, I’m not going off Microsoft, I have Excel open right now. Good luck. Enter the market and give me a spreadsheet competitor. We’ll see how far it goes.
Tobias: Google has one. Google’s working on one. I use it for a lot of things. It’s more useful for some things. It’s not as good as Excel. It’s not as powerful, but it’s more useful for some things because it’s online.
Bill: Yeah. Well, when you go to a bank, and you’ve got to circulate stuff all through the bank, you’re not circulating a Google Doc.
Tobias: That’s fair.
The Speed Of Technological Change
Jake: Let me ask you, is the rate of technological change faster in 1981 or 2020?
Bill: Probably always feels fast.
Tobias: Yeah, that’s what I think. I think it’s always accelerating. I think it’s always faster than it was until we hit the singularity.
Jake: If that is the case, if we will posit that 2020 has a faster rate of change, wouldn’t you then capitalize the earnings of a company in a rapidly changing industry at a lower rate, because of the risk of change that would disrupt its business model?
Tobias: Well, that was the argument against tech. It always used to trade at a discount because it could be disrupted. You weren’t necessarily going to earn the earning stream into the future. You couldn’t foresee where it was going to go. That’s why Buffett avoided it. Tech has a monolith–
Bill: He was pretty wrong. We can clearly point out that Buffett was wrong on tech, that actually happened.
Tobias: It’s something changed.
Jake: Which timeline?
Bill: What timeline do you want to argue? You can be a permabear and be right once in your entire life, but at the end of the day, the guy was wrong. Look at how the businesses have performed.
Tobias: I think he said that about Google too, right?
Bill: Of course, he did.
Tobias: He saw the clicks coming through.
Bill: You have to be an idiot not to think he was wrong on tech.
Tobias: I’m just saying that there was a transition from– the point is that it was a transition from whether the earnings streams weren’t guaranteed– because I think that the hard drive manufacturers were the example, where they just kept on getting– you had some great tech, and you’d made a lot of money for a little while, and somebody came along with better tech, and you just went away, and uninvested. It got to this point– these are different tech companies. I don’t know what the network effect is or something like that.
Bill: Well, this is what people would say, why they deserve a higher multiple today? When you’re a hardware company, and you’re basically GM and Ford, and someone can come in and displace you, that’s one thing. When you’re Microsoft, with all these network effects that, that business, at least the perception, I mean, maybe there’s something wrong with the perception, but that business has survived based on its products. A pretty abysmal management team and a pretty bad cycle, and it’s come out on the other side, way, way stronger. By the way, there’s three companies that are basically laying the infrastructure, the Internet, and if you like railroads, and you think that those are going to be hard to displace. Then, I don’t see how you don’t like AWS, Azure, and Google Cloud. Now we can argue till the cows come home, well, how do you know the terminal economics are going to be good? I don’t fucking know.
The onus is on the person making the argument to prove to me that a rational oligopoly or duopoly is something that they don’t want to own when it’s the backbone of the infrastructure or the internet, because to me, it feels someone that missed a trend and just wants to convince themselves that they’re still right.
Tobias: The only point that I was making on Microsoft, the reason I raise Microsoft is because– and Microsoft has come again, and Microsoft is a new beast now because of AWS– not AWS. Azure, and all of its Office Suite, and so on. The market just shifts in such a way that you can’t necessarily see where your competitor is really coming from. Would Microsoft have said Google was their main competitor, would they have said Amazon is their main competitor 20 years ago? Probably not. Here we are, that’s probably who their competitors are. You fast forward another 20 years, the lines of attack are oblique. You don’t know where they’re coming from. It’s not what your cozy monopoly or duopoly may not matter if something else supersedes– Who knows, maybe it’s VR. Now we got VR, we don’t need spreadsheets, we’re free. We’ve got AI. You don’t need a spreadsheet, just explain the problem to AI and it goes away and figures it out. Quantum computing. I don’t know. What I’m just saying is that it’s harder than it looks in the rear vision mirror.
Bill: Yeah. I don’t think anybody’s– some people are saying it, but I don’t think too many thoughtful people are saying like, “Oh, you just buy these things, and never ever watch anything in the business, and you’re going to be fine in perpetuity.” That’s not the comment. Yes, you have to watch for shifts. Buying Ford, because it’s a 5 P/E at the top of a cycle is absolutely no safer than some of these other things. There’s a lot of cheap businesses that go under all the time because they’re subject to competition. If you’re looking at the results of a lot of tech companies, and I’m not talking about the smaller ones because those do give me a little bit of a tough stomach to– but the big ones, we just lived through a pandemic. There was no travel advertising. Look at the results of Facebook and Google, look at how quickly those businesses shifted and how they still made money. If you don’t think that’s one of the most resilient businesses in history, then we’re having different conversations.
Tobias: Well, Facebook is cheaper.
Bill: Then, you can say, “Well, today it is. What’s going to happen in 20 years?” I don’t know, neither do you.
Tobias: What I’m saying, and I think this is what Jake was saying too, that makes me want to play a slightly lower multiple for them rather than trying to pick the absolute out of limit of what– just saying you can spend just about anything on these things. Facebook might be a good example, Facebook is cheap.
Bill: They were on [crosstalk] March.
Tobias: Yeah, I’m not disputing that. That was a year ago. What have you done for me lately?
Bill: [laughs] That’s fair. Look, I don’t know, I just think– open up those results of big tech–
Tobias: No, they’re great.
Bill: The last [crosstalk] was absolutely crazy.
Tobias: We’re slowly talking past each other here because Facebook, Microsoft, and Google, I think they’re expensive, but I think they’re egregiously expensive. You could argue that they’re within– If I was confident that interest rates were going to remain where they are for an extended period of time, and I don’t know where they’re going to go, you almost have to own them around this. Amazon harder. But Amazon at some point– I don’t know where the fair value is, but at some point that’s Bible to– it’s other stuff–
Bill: [crosstalk] -rates go on lower before they go higher.
Tobias: That’s entirely possible too. They’re talking about the digital dollar and the significance of the digital dollar is that you can force through negative interest rates. You’ve got nowhere else to go. [crosstalk] bitcoin, bro.
Bill: Well, look, I get why people are freaked out. I don’t think inflation is nearly is on the calm as people think it is, but famous last words.
Tobias: Well, the market seems to think so.
Bill: It doesn’t matter to me, cigarette companies will raise their prices.
Tobias: [laughs] The market seems to think so.
Jake: Let me get some more–[crosstalk]
Bill: [crosstalk] -hasn’t been true.
Tobias: Have you got some more Chris Bloomstran?
Bloomstran And $BRK.A
Jake: Oh, yeah. Another observation was something that I would call the man behind the curtain index in a Wizard of Oz sort of way. The Fed’s assets divided by the debt plus market cap, so kind of EV, how big are the assets that we’re talking for the Fed versus how much are they controlling through their shifting their weight around? 1981, it was 3%, 2000 1.8%, 2007 1.2%. Now, 2020, it’s 6.1%. So, compared to history, a pretty big movement. Although is it surprising to anyone else that 2007 and 2000 were half as much as what 1981 looked like?
Tobias: Yeah, really, half as much, that is surprising.
Jake: Yeah. Then the last thing I want to hit was, Chris has this incredible understanding of Berkshire that he walks through, lays out all this nuance. He’s owned it for 20 plus years, and he’s done really well on it, deservedly so. I know this guy who manages money, and he bought Berkshire in the early 90s and, to be charitable, I would say that this guy doesn’t seem to be the exact highest wattage bulb of all the bulbs available. No disrespect, but he has owned Berkshire since the early 90s in a huge way. He just basically outsourced a bunch of his portfolio to Berkshire-
Jake: -and he’s crushed it, and he’s gotten great returns. I was trying to think about, is there any other game, is there any other situation, any other environment where the person who does all the work and has crazy nuance gets the exact same result as the guy who’s just like, “I like this Buffett guy. I’m just going to go with that.’” Those two end up in the exact same place by riding the same train. I can’t think of anything that has that.
Tobias: Buffett’s got a 100 grand a year on top of that, don’t forget that.
Jake: Yeah. Well, so to push it even further, so this guy, I’m being a little disparaging about. There was another guy who we all agree is very, very smart, and he did this exact same thing, but he pushed basically all of his net worth in on this guy, and his name’s Charlie Munger.
Tobias: That’s good, that was smart.
Jake: He was managing a fund and he realized, “Oh my God, this guy’s probably– if he’s not better than me at this, he’s at least more motivated to get up and do it every single day than I am. He’s just a deal junkie. He can’t get enough of it. I’m going to let this guy do it for me, even though I could probably do it myself.” That turned him into a billionaire. He got to just have a front-row seat to watching his wealth turning into a billion. He helped nudge along the way obviously, but what a genius. Here we have geniuses and maybe not so much genius all ending up in the same place. I don’t know what to do with that. I don’t know where that leads me. I don’t know what the takeaway is, honestly, but I find it to be very fascinating.
Bill: Buy good businesses with good managers and let them run?
Jake: Yes, right.
Bill: I mean, compounders?
Tobias: At the right price, yeah.
Bill: Okay. I’m just saying.
Tobias: You got Li Lu to– I think Li Lu’s six or seven baggers for whatever he gave him, 500 or a billion. He did all right there, too.
Bill: Munger’s smart. If I could be anyone, I’d be Munger.
Tobias: Yeah. Don’t have to do the work.
Bill: He drives around in a Bentley and he’s got this big ass community for he and his friends and he’s always enjoyed his money. That guy’s smart. You can’t take it with you. It’s a sucker’s game to try to make the most.
Tobias: Can’t argue with that. Should we take some questions?
Bill: Not to mention, think about real quick, think about Buffett, and I love you, Buff Dog.
Jake: Thanks for listening.
Bill: All he wanted to be probably was the richest man in the world at one point. Then, what happens? Bezos comes up, and then Elon Musk. Imagine how much it must grind Buffett’s gears in private [crosstalk] to have Elon Musk [crosstalk] Oh, I think I would be very upset. You think somebody that takes that much pride in their craft doesn’t get a little pissed off that Elon Musk just passed them?
Tobias: To give you on credit though, the only way you get there is you leave it all on the table, and you’ll let it ride for a really, really long period of time.
Jake: You borrow against it to buy jets and mansions.
Bill: Yeah. Well, he let it ride.
Tobias: Well, fair enough. That’s how you do it. I don’t think there’s much chance of him get– I don’t know where how much margin he’s got against this stock, but I don’t think there’s much chance of him getting a margin call against it.
Bill: Not anymore.
Tobias: If it goes down to fair value, I’d be in trouble.
Bill: Got the S&P buy, dawg.
Tobias: Yeah, that’s true.
Jake: Yeah, I’m the bigger bag holder.
Tobias: [chuckles] Hit us with some questions, we’ll–
Jake: We’ll flail away at them.
Tobias: Yeah, we’ll mumble quietly to ourselves. If Buffett held on to all of his stock, does he remain the richest? Anybody know the answer to that?
Bill: I don’t. I don’t know how much he gave away. I’ve got to think Bezos would be worth more.
Tobias: You got a question from the brewdawg.
Bill: I do?
Tobias: We all do. I guess, it’s not you, Bill, you didn’t put that in. With a CAPE ratio where it is, how much dry powder do you set aside before worrying about cash drag?
Jake: That’s not a Bill question. [laughs]
Bill: The answer is none.
Tobias: Yeah. I don’t think you want to use the CAPE for much really, honestly. It’s not particularly useful.
Jake: It’s not useful for timing.
Tobias: No, it’s not useful for timing. That’s it.
Bill: Yeah. You want to sit in cash right now? Okay.
How Much Cash Should You Hold?
Tobias: I think you want to have some, you always want to have some. I’m trying to just build a system that just buys and then just holds forever. That’s kind of what my little project is at the moment. I’m trying to find what are the factors that help you there, and I might be missing something in what I’m doing at the moment. The answer is that I don’t think that the factors are any different. The short answer, I don’t think the factors are any different. One of the things that I find interesting is, if you go back five years plus, around about a third of the companies get bought out, putting the other 30 stock portfolios around, about a third of the companies get bought out at some stage. Going back earlier than five years, it’s pretty consistently about a third. That’s one way of getting cash recycled too pretty consistently. If you’re getting a third of your cash back over a period of five years, you need to have a way to redeploy outside of that never sell, so that’s one argument. That’s how you get some cash back through never. Anyway, a little bit off-topic.
Jake: You don’t think that there’s a– [crosstalk]
Bill: I just think cash is hard with the printing. As much as I’m not all that worried about inflation, I also don’t hold much cash because I do think it’s a real possibility.
Jake: You don’t think that there are ping pong balls in the hopper right now that are incredibly deflationary and that are a debt-driven crack-up where your cash is going to be very valuable?
Bill: I don’t think you’re going to get the opportunity to have some meltdown. No. I think that the policy apparatus is going to do everything it can to stop it. All you got to do is look back to March. Now, if you argue to me that the entire system is going to crack, then okay, you can make that bet. You’d probably be right once, and you’ll probably be really rich at the end of it.
Jake: Permanently high plateau is what I’m hearing you say?
Bill: No, I don’t know about a permanently high plateau. It can go lower. I mean, like waiting for something to– I mean, I don’t know how much lower, 75%? No, I’m not going to wait on that. 30%? No, I’m not going to wait on that. 20%? Maybe you could get a 20% correction, but when everything was down, people were waiting for it to be more down. I don’t know. You either buy when it’s down or you don’t.
Tobias: Yeah. [crosstalk]
Bill: Then, one time it will crash–
Jake: [crosstalk] -there’s nothing to buy with though.
Bill: Well, that’s why I happen to like an 8% dividend yield off of a cigarette company.
Jake: That’s fair.
Biden’s Infrastructure Package
Tobias: Yeah, do you guys know anything about the incoming infrastructure package from Biden, impact it will have on inflation, we will see wages increase? I don’t know anything.
Bill: As somebody that liked Ron Paul, the argument that I always liked about why he didn’t like money being sort of given out is, it tended to be historically from a top-down perspective. If you’re actually distributing it to people, then at least the first people that touch it are the people that get to spend it first That said, if you telegraph it, then prices may go up before the money comes out, so you may really do nothing. I do think that if you give it directly to people, and you create jobs and stuff like infrastructure, there is a reasonable possibility that velocity does pick up eventually. What has been holding back inflation, as far as I can understand it, is velocity. If that increases, 2023-2024, I could see inflation. I don’t think that citing today’s prices is sufficient evidence for inflation. I think that’s more of a temporary supply shock than anything.
Tobias: Is that lumber and copper and those sorts of things? Do you think that that’s also a supply shock?
Jake: Yeah, I do. I think a lot of this is the result of tariffs and COVID coming together in a perfect storm, and speculation because I think everybody’s worried about inflation because everybody’s worried about how much money the government’s spending. So, I think it’s a confluence of factors.
Tobias: I think that Jake said something last year when inflation is going to look like a gigantic supply shock with a whole lot of money printing over the top of it. I was like, yeah, that makes sense to me, fuel products, more money that’s what inflation looks like, right? Everything goes up, denominated in the little bits of paper.
Jake: That made sense. I don’t know what happened exactly.
Tobias: [unintelligible [00:57:10].
Jake: I guess it has in some places. This is the thing that’s hard about inflation is, it’s very insidious and very difficult to tease out where the fault lines are and what businesses are helped, what are hurt. It’s not obvious to me. The narrative that equities will do well in inflation is, I find it to be a little unnuanced.
Tobias: When’s DJCO?
Tobias: What time?
Bill: I don’t know.
Jake: 10, I think. 10 AM Pacific.
Bill: I would like to say one thing to the person that tunes in and downvotes us, no one cares what you think.
Tobias: You just told them that you cared.
Bill: No, I don’t. I think that they have too high of an opinion of themselves. In fact, I hope that they go find another show that they enjoy because if we’re not worth your time, then I don’t care about you.
Tobias: It’s all engagement. It’s all good engagement.
Bill: A downvote? I think it’s very self-congratulatory, is if you’re the one person that matters. You’re not. There’s 30 people bigger than you. Next.[laughter]
Jake: We have time for one more question.
Tobias: Yeah, I’m trying to find one. [laughs] We’ve got another one.
Bill: Well, then that’s fine. That’s just social proof.
Tobias: Sorry, I’m struggling for a good question here. I just can’t see any. Not that there aren’t questions– I can’t see any questions, not that I can’t see any good questions. All right. I got nothing. [crosstalk]
Bill: I don’t know. Thank you to all the fans. Listen, for real, thank you to the people– I like all the upvotes. Oh, there’s three downvotes. Anyway. Thank you to all the fans. Oh, six, you bastards.[laughter]
Jake: We’re getting demonetized again, piling on.
Bill: I did it. No, for real, thank you to y’all. It’s been fun. It’s been fun interacting. We appreciate the comments offline. Keep them coming. That’s all I got.
Dan Loeb Trolling Tech Investors
Jake: Oh, guess one real quick then, we could talk about– Did you see Dan Loeb trolling of tech investors?
Tobias: No, what did he say?
Bill: Yeah, that was fun.
Tobias: I missed it.
Jake: He just posted a video of Biden talking about how we can get through this together, I feel your pain. We’ll mourn for the people who we lost.[laughter]
Jake: It’s pretty funny. You [crosstalk] watch.
Tobias: It’s already over. It’s sold off this morning and it bounced.
Jake: Sold off and now it’s like probably all green already. I don’t know.
Tobias: You’ve got to wake up early to buy the dip if you’re on the West Coast. The dip’s at like 6:30 in the morning, right in the open.
Jake: They’re only for like an hour.
Tobias: It’s bought hard for the rest of the day. That’s time. Thanks, amigos. We’ll see you next week, somebody who have a DJCO hot take for next week. I think it’s going to be JT.
Bill: [crosstalk] -trade options.
Jake: Probably me, yeah. Cheers.
Tobias: See you, guys. Ciao.
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