In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:
- Charlie Munger Buys $BABA
- Insect Groupthink
- Finding One Foot Hurdles
- Buffett Consults The Best On Important Decisions
- Has Business Travel Changed Forever?
- Carnage Underneath The Market
- Finding Exposure To China
- Does Market Cap Matter?
- Value’s Comeback
- $BYD Up 600%
- Management Integrity Matters
- Musk Tweets Wood
- Bill’s Rant
- Hug Your Kids
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Full Transcript
Toby: Hang on, preparing to livestream the meeting here.
Jake: [crosstalk] -it’s now streaming live on Yahoo.
Toby: This is slow.
Bill: Really? Well–
Toby: Did it tell you?
Bill: Yeah, man, I’ve got it. [crosstalk] we’re up. We’re live.
Toby: That’s it. [crosstalk] -online. Redirecting to YouTube. Here we go. Interesting. Oop.
Bill: Oh, woo. Welcome to the best technical podcast in finance.
Toby: Basically, I have no control over there.
Bill: It is what it is.
Toby: Folks, we are live. We’re on Zoom instead of Skype, so this is all– We’re trying something new today.
Jake: Keepin’ it fresh. [laughs]
Toby: I don’t have any control over the comments which I used to have. I don’t know how that all works, but it’s Value: After Hours. It’s 10:30 on the West Coast, 1:30 PM on the East Coast. It’s like, sometime UTC 5:30 something like that. I’ve forgotten.
Bill: I only see myself. I don’t see the three of us.
Toby: [crosstalk]
Jake: Because your shirt is so loud. [laughs]
Bill: That’s true. No, I think it highlights who’s speaking. I don’t know that it’s got our faces as we’re listening.
Toby: Yeah, so this is a new kind. It’s going to be like as if we’ve got a producer or someone back there cutting from face to face.
Bill: Ooh, we big time, folks.
Toby: [laughs] We’ve got some plenty of folks in the room. That’s cool. We got a new format today. We got some– big Bill’s got– We’re doing something. I didn’t actually know we’re doing, but what’s happening, Bill?
Bill: No, man. Look, I don’t want to make it the Bill show, but I do want to clear up some stuff if it’s okay with you guys, and then I do think that we should probably touch on Charlie buying Alibaba.
Toby: Damn. That was my topic.
Bill: Yeah. Well, we have to, right?
Jake: Yeah. On a very special episode of Value: After Hours.
Bill: No, Well, look, I figured that part of this is selfish. Most of it is real. I don’t know how to break up the percentages here. Bear with me, and let’s see if we can provide some good entertainment. If not, we’ll go back to– Jake says things should be cheaper, I say quality is fine, Toby says the [unintelligible [00:02:10].
Jake: Rates, bro.
[laughter]Bill’s Rant
Bill: That’s right. We could do the show. We’ll do it next week, and I’ll do it without the shirt. Anyway, I think that a fair criticism of me on this show over the past two weeks or three weeks is that some of my A game hasn’t quite been coming to the show. I guess that some of it is, I was not prepared for the show to be this big. Not that it’s like some super big show or whatever, but really, I love you, guys, I love the fans. The fans love the show. I thought that we’d be doing five shows, and here we are– How many have we done?
Jake: I think this is our 67th, I went and looked a couple days ago.
Bill: Yeah.
Toby: JT got the tickets, man.
Bill: I was nobody before Toby put me on the first podcast that we did. Jake and I were going to Fairfax, and no one knew shit about me. We all met at Berkshire. We chopped it up one night at a happy hour. I see some comments like now that he’s got his own podcast, he thinks he’s big time or something and it really pisses me off. I haven’t had to handle trolls at all yet. I’m not Toby big by any stretch, and I can’t imagine how Toby deals with it. I’d like to talk to him about it today.
Toby: Mute baby, the mute button is your friend.
Bill: Yeah, no doubt. I guess I get why Rogan says like, he doesn’t even look at the comments and stuff. It’s impossible for me to convey to the fans how much these two guys mean to me as people and for my profession. I don’t take jokes about that very well. I have brought that to the show, and I guess that a fair criticism of me is maybe, I’ve been a little bit more confident or arrogant or whatever.
Whatever you think you don’t like about me, I don’t like it about me either, so I get it. Some of what you all have witnessed is like a guy that had no confidence 18 months ago turning into a man. I did some of it in front of people, and I guess that the one thing that I do want to say is, I did a podcast with Jim O’Shaughnessy. I really, really appreciate Jim for doing that episode. I think it took a lot of courage for him to run.
There were some things, it was a longer podcast than the one that ran, and it cause some family issues within my family that have really affected my mental state since it ran. I just want to convey that when I talk about my dad, and what he and I went through, the reason I am comfortable talking about it is it’s a very happy ending to the story. He and I worked to– and his mom, worked to rebuild him, and he is an incredible person. I love him more than anything. He’s always been my hero, and always will be. We just went through some shit together.
The other side of me is, I grew up, my mom had a lot of alcohol problems. It’s hard for me to do the shows that I’m doing, because it requires being somewhat open. With that, comes sort of some family blowback that I’m struggling whether or not I want to continue doing this stuff, and there’s the part of me that really does and I love it. Then, there’s the part that’s afraid that it’s going to cost me so much. I guess to the extent that if I haven’t showed up for the show or I haven’t showed up with ideas or whatever, I apologize to the fans, and to Toby and Jake. I’m just trying to provide entertainment in the best way that I know how to.
Also, man, some of the shit’s therapeutic. I guess I really appreciate what you guys have done for me. And to the people that make the comments, even if it’s a joke, I’m going to ask you to stop. If you don’t, I’m going to think you’re an asshole. This stuff matters to me, and these guys really matter to me, and the idea that I would disrespect Toby in any way, shape or form is just like not cool with me. I guess, part of my question is, how the hell do you deal with being so big, Toby?
Dealing With Semi-Fame
Toby: Well, I do a lot of muting and I don’t read a lot of the comments. I don’t think that I’m that big either, so it’s not that hard, mate. I never thought anything other than you’re going through a little something. I like talking to you guys too. This is good therapy for me, too. Mostly, I used to complain about how badly values doing, but values done okay last quarter, so I don’t have to complain about that anymore.
Bill: Yeah, well, I remember when Jake dropped his book, and this dude comes in like it’s a fucking hedge fund book. Bro, he wrote a book for people to understand the ideas of investing, the notion that it’s not some advanced textbook, hedge fund book, no shit, man.
Toby: It’s pretty advanced.
Bill: I know. Well, part of the genius in it is how smart it is at communicating the concepts. May not be valuation by– [crosstalk]
Toby: It’s got that spoonful of sugar to get the medicine to go down. I like the format. I thought it was a fun format. Charlie Munger liked it too, and now it’s going to be a movie. I think that worked out okay.
Bill: Jake, you pour your soul into something like that, and I know that it doesn’t really impact your life. What do you do when somebody comes at you in that way?
Jake: Yeah, first reading it, that type of comment was like, “Oh,” I mean, it’s just cuts you deep. It’s hard. After a little bit of time, there’s just going to be people who don’t get it and don’t like it, and that’s okay. If everyone liked it, then I think sometimes that would tell you that they don’t actually care that much. For you, you never have to apologize to me for that kind of thing. I think your brand and what makes you popular and likeable and successful is that you’re very authentic, and you put yourself out there, and you’re not afraid to raise issues that are some people don’t want to necessarily talk about, but probably needs to be talked about more, like mental health things. I think it’s a beautiful service that you’re doing by taking the slings and arrows like that. Just don’t let it get you down, man. There’s way more good being done by the conversations that you’re having than any negative things. I’m cheering for you.
Toby: Just reading the comments, some folks are only just now learning that JT has a book, so it’s called The Rebel Allocator.
Jake: Pretty good at promotions, apparently. [laughs]
Toby: It came out 18 months ago, two years ago?
Jake: Yeah, 2019.
Toby: 2019, and Charlie Munger read it and gave JT a call. It’s one of the best stories that I’ve ever heard. That’s the entire reason that JT is on the podcast so I can walk the red carpet with him when Wall Street III: Money, whatever they–[crosstalk]
Jake: Money Takes A Nap?
Toby: Money Takes A Nap.
[laughter]Bill: I’ll tell you what, man, I liked that book. I read that thing quick. I didn’t even know when I opened it. I was like, “Fuck, am I going to be committed to tell Jake that I don’t like, or I like his book,” but I don’t really like it.
Jake: Yeah, to pretend.
Bill: Yeah, and I didn’t have to pretend at all, man. I really liked that. Hit the buy button. I guess the thing that sucks that, my dad and I went through after Jim’s episode is, our realities are just different. He thinks that I’ve spoken negatively on the Brewster side of the family, and that’s not my intent. His grandfather built a massive construction company. It was huge. They built a lot of New Jersey. I don’t cite the specific assets, because I don’t know them, and I don’t want to be wrong. He watched that go away. By the time that I was born, a lot of it had been drinking away by his dad, and that really sucks. I guess it’s just hard that there’s been a lot of real serious issues in my family, and I’ve always been encouraged to give back.
One of the ways that I can actually give back is by having these discussions, because the amount of people that have reached out to me and they’re like, “Dude, I live with deep depression, or huge resentment, or alcoholism runs through my family.” I don’t know what else to do. I can’t have my brand and not talk about that stuff. More than my brand, I don’t want to do it. I like the part of life that comes into investing and trying to figure out where is your mind taking you and what are your historical contexts for why you see the world the way you do. I don’t see how you can decouple investing from that.
Jake: 100%. You have to know yourself, and that means knowing the good, the bad, the ugly, and facing it, and not just trying to put it in a corner or pretend that it doesn’t exist. It’ll come back to get you, right?
Bill: Yeah. I think one of the things that I love so much about Buffett and Munger– this is more Munger than Buffett, I’m sorry, Buff Dawg, I love you too. Munger, his focus on psychology has been life changing for me. If you listen to those guys, and you implement what they say, I will tell you, they’ll change your life. They changed mine.
Toby: Yeah, I agree with that.
Bill: I don’t want to make the whole show about it. It’s been bothering me. I haven’t been able to think the whole weekend. I’ve been nervous that I’m going to lose everything that matters to me, because I’m like whatever. I don’t have any great ideas today. I did sell Naked Wines. I’m sorry to my Naked Wines friends. I’ve had some issues with the platform, and I think that retention is super important in that, and I think it’s not the cheapest thing if some of this turn happens. I’ve got an idea that I’m working on that I think is probably a better use of capital for me.
Toby: Is it Alibaba?
Bill: No.
Jake: Oh.
Kyle Cerminara
Bill: I’ll tell you what, people will hear Thursday what I think is a pretty decent idea. They’re going to have to figure out if they like the idea also. I’m looking forward to both the reception of the podcast that drops on Thursday on the bull and bear side, and I’ll tell you another thing that’s tough, man, is you get some figures– people don’t like Kyle in my view, because his stocks haven’t worked. I think Kyle’s fucking legit. Now–
Toby: Kyle, who are we talking about?
Bill: This guy, Cerminara. You’ll hear him on Thursday.
Toby: Okay.
Bill: This guy is ex-Ack, worked for a tiger cub, was part of shorting the housing crisis, testified to the Senate, and he’s doing things in financials. Do your own work. Is he the guy that you want to bet on to run a controlled entity? Maybe not. That’s where you got to figure out, is Steven A. Cohen the guy, who’s the guy that’s making the bet? Is Kyle the guy that’s making the bet? How much do you want to weight that stuff? How much is a hedge fund running a company? All very different skill sets. I’ve got to know him, and I’m throwing a little bit of my reputation behind them, and a lot of it’s because of Mike Mitchell, and a lot of it’s because of who I know Kyle is after talking to him. We’ll see if people like what they hear, and if they don’t, good, because you’re not supposed to be following me in investments.
Toby: It’s a SPAC, right?
Bill: It’s a lot of stuff, man. I think that’s part of the issue that they’re going to have to clean up, and there’s intercompany holdings, and there’s a lot of reasons not to like them, and there’s– I’m sorry, Kyle, for saying this, but I’ve got to be honest with people. There’s this guy, Larry Swets that’s involved, and I’ve gotten people that have pinged me that have been like, when he was the CEO of Kingsway that stocked didn’t work very well. People think there’s some self-dealing there. There’s some stuff that you got to figure out, you’ve got to research it. For me, this game is about judgment. I think some of those entities are too cheap and I think I may have an edge.
—
Charlie Munger Buys $BABA
Toby: Well, should we talk about Alibaba a little bit?
Bill: For sure.
Toby: Does anybody know anything about Alibaba?
Bill: No, it’s Chinese and big.
Jake: Never heard of it.
[laughter]Toby: JT, do you know something about it? What’s happened? Charlie Munger, there’s has a filing from DJCO, Daily Journal. Charlie Munger never buys anything ever. All of a sudden, there’s a big holding in Alibaba. Presumably, it’s come through his relationship with Li Lu because Li Lu has owned it in the past. Li Lu sold it pretty quickly too. He punched out to go on by Google, and–[crosstalk]
Jake: Micron.
Toby: Was it Micron? Do you know the stock at all?
Bill: I haven’t done enough work at all. I’ve got some issues with some of the Chinese ADR stuff that I haven’t fully been able to get over, and maybe that’s because I was born in America and I’m fine to admit some home country bias there. Jake, do you want to take this, or do you want me to go and then follow on?
Jake: Oh, you can follow on the grenade.
Bill: Okay. Fantastic. Thank you for that.
Jake: You’re welcome.
Bill: Look, I have some problems with the way that Charlie talks about China and my perception of authoritarian regimes. But I think that Charlie also has been very open about the fact that he thinks that China has a very bright future. I saw one person on the Twitter machine didn’t love that Charlie had gone into tech, because he felt he was getting outside of his circle of competence. One, he’s Charlie Munger, so I’m going to defer to him. And two, that dude’s talking to Li Lu all the time. If you think Li Lu is a good investor, maybe Charlie doesn’t have the best pulse on where that company is going forever. Charlie’s also like, what, 92?
Jake: Seven.
Bill: Okay, seven. Okay, my bad. My bad, Charlie. I didn’t mean to disrespect your age. What’s his lifetime frame?
Jake: Doesn’t look a day over 92, though.
Bill: This guy is making a purchase that’s almost certainly going to go longer than his life. I don’t know how you can have an informed opinion on why he did this unless you know about the succession planning at DJCO, who’s going to be advising them, how he’s told them to run that position, what he’s told them to look at. My two cents is if it’s just simply I’m going to clone Li Lu on this idea, because I think this guy’s that smart and I think this asset base in that country is that good, and it’s trading at a pretty reasonable multiple, what I’m going to go with, Charlie for that?
That’s fucking awesome. That’s what I’ve gotten at these guys forever about not morphing, and now he morphed. If he pissed some people off, because they think he got outside of his competence, or people don’t understand it, Charlie’s never done anything to make anybody else understand what he’s doing. I have mad respect for it.
Toby: JT, do you have a view [crosstalk] itself?
Jake: No. A few things there, probably more general to China. The me of 10 years ago would say that this can’t work, because they don’t allow the little fault lines to clear through so much authoritarian overriding, so much government involvement with what gets funded, where the money goes. From a capital allocation, societal standpoint, there has to be a misallocation of capital that’s happening that eventually will be have to shake out. You have to write down all this debt. Because if you build a bunch of cities that no one’s living in, like he did it with debt, eventually something has to give there. Debt only goes away when you grow into it or cashflow it enough to pay it off. If you don’t have the cash flow, because no one’s living there, then you have a problem. Well–
Bill: Those zombie cities were crazy.
Toby: Don’t they owe that debt to themselves? Isn’t that what Krugman always says about the US debts?
Bill: MMT, spend it and owe it to yourself, it doesn’t matter.
Jake: Well, that’s where 10 years ago, I would have said like, “That’s crazy,” and, of course, it matters eventually. Maybe it’s just not the right. The timeline hasn’t happened yet. Today, I’m not so sure anymore. I’m much less ideological when it comes to that, even the authoritarian part. I have my biases towards capitalism.
Bill: Oh, poor Jake, you are about to upset some people.
Jake: I know.
Bill: Can I ask you a follow-up? Wait, let me ask you a follow-up on how you’re thinking about that. If you’re thinking through all of the spending coming from the government down, would you maybe think that the earnings base like, the velocity of money that’s going through Alibaba is artificially propped up, and if that spending declines, then you’re actually underwriting your perception of what normalized earnings are is artificially boosted? Is that kind of what you’re thinking?
Jake: Sure. If you’re growing GDP at 6% and Alibaba is levered at that plus something, and that GDP number is a misallocation for half of it, well then, eventually it has to be liquidated, and that half has to be written down in Alibaba as well. It’s not a real tangible as much tangible, not in a tangible like physical, but a true earnings power. I think it’s a little bit more complicated than that now. My thinking is maybe a little bit more nuanced to the point where I have much less certainty about it.
Jack Ma Steps Back
Toby: What about the fact that they’ve got rid of Jack Ma, would Jack Ma step back? Does that make anybody–? It’s like Bezos stepping back from Amazon, I’m just saying, I’m not going to be involved anymore.
Bill: Yeah, I guess that’s the thing that’s really tough. One, it’s just outside of my circle of competence. I guess that’s why if you’re Charlie and you’re talking to Li Lu, it may get inside your circle of competence to understand what the culture is. I don’t have a really close friend.
Toby: I just want to get it into my own head too.
Bill: Yeah, honestly, somebody asked me what I thought. I said, “You want my thought? I think you got to figure out whether or not you want to piggyback Charlie and the Chinese tech company.”
Toby: That’s probably where you got to get to.
Bill: Like that’s–[crosstalk]
$BYD Up 600%
Toby: BYD was dead money for a long time, because people pile into BYD and it took off, but BYD, I haven’t looked at it for a while, but it does seem to have been working better recently, so grew into its valuation, now it’s run like an EV.
Jake: That’s an understatement. I think it was up 600% last year.
Toby: That’s a good year.
Jake: I think it’s off-
Bill: Used to be, Toby.
Jake: -30% from there.
Toby: We need 20 baggers, or go get the fuck out.
Bill: We’re all searching for 100 baggers now.
Toby: In a year?
Jake: Yeah.
Bill: That’s right.
Jake: Or, less.
Bill: Dude, he’s 97. This dude is still learning. How is that not inspirational? Even if it doesn’t work, what a signal to send to the people that he has taught so much to. He’s the fucking man.
Toby: It’s bad news if it doesn’t work though.
Bill: Yeah, what’s it matter to him? It’s in Daily Journal. He’s got so much wealth outside of Daily Journal. He cares about his shareholders. I don’t think he’s taking this decision lightly. These guys are serious about what they do. I do think that there’s some signal in it. I don’t think Charlie ever does anything without thinking. [crosstalk]
Toby: I think Alibaba is cheap. Alibaba is cheap. That’s not the issue. It looks like it’s undervalued on– I pulled it up before we came on just really quickly, had a quick look at it. Optically, at first pass, it looks cheap. It’s worth digging into. The concerns that I have, Jack Ma drove it to this point and you have a look at it, it’s a pretty volatile for something that’s a compounder secular growth story. Then, Jack Ma stepped back, he might be the genius that’s got it to this point. Then, it’s also the accounting, I have looked at it a long time ago now, but I looked at the accounting maybe five years ago and just quarter to quarter, period to period, I couldn’t figure it out. They just have so many subs like this– their business looks like it’s forming subs. They must have like a roomful of lawyers just pumping out subsidiaries all day long, and that makes me nervous. Why do you need all the subs?
Bill: You may not, but maybe Munger, Tolles & Olson or whatever, maybe they figured out why you need all the subs.
Toby: That’s a legal question.
—
Finding Exposure To China
Bill: Look, I don’t know. I really don’t. That’s what I’m saying like, I’m not talking to Li Lu, and I don’t have Charlie’s army behind me. I don’t think Charlie just bought that thing because it’s cheap. Maybe I’m wrong, but I suspect there was some due diligence in there.
Jake: I’m going to guess it was an optionality mindset. I don’t know exactly where this is going, but it’s okay price to get a bunch of Chinese optionality.
Toby: I’ve been looking for something like that too. I want some China exposure somehow. When we talk about the macro with China, there’s two ways that this can go wrong. It’s only very, very early in its road to industrialization. If you ride that wave, then you get 100 years of American growth. When America took off from 1825 onwards, it was a spectacular run. Maybe, China’s 10 or 20 years into that run, you’ve got 80 to go.
The other thing that I think about those that have that big demographic cliff coming up, where that one child policy is created, an unusual shape in their demographics, you can see the baby boomers move through the demographic… in the western world. China has got a different problem where the base is quite small because that generation just there aren’t enough girls in that generation, so there’s just not enough population coming through underneath that. When they hit that demographic cliff, I think it’s now over the next 15 years, I don’t know what that does to the economy. That makes me a little bit nervous though.
Bill: I don’t know. [crosstalk]
Jake: Well, you do. It’s not good. The question is, does productivity per worker grow at a rate that kind of bails you out? That’s a technology question.
Toby: Yeah.
Adam Robinson’s Population Thesis
Bill: Did you listen to the Adam Robinson episode that I did?
Toby: With you? Yeah.
Bill: What did you guys think about his population thesis? Because that’s what people were saying. They were like, “Yeah, well, it ignores total factor productivity and–”
Toby: Just run it back… folks can– [crosstalk]
Bill: Oh, yeah. The blog that he recommends reading is Economica. Economica.
Toby: Economica.
Bill: Economica.
Toby: Economica.
Bill: Okay, whatever. I’m just trying to sound it out for people. I think they’ve got it now. The guy’s thesis that writes the blog is how almost all of the developed markets are coming to population cliffs, or if not cliffs, you’re fighting a headwind in demographics, so I think if you consider total potential money supply growth, I think a reasonable– and I may mess this up, because I’m on the fly. Total number of people, times total personal debt, plus total number of corporations, times total corporate debt times government debt. If you look at all of those things, corporate debt has gone up a lot. Population growth is now behind us.
Generally, personal debt is probably higher than it was in the past, though it’s probably lower than its peak. [crosstalk] The government debt is higher. When you start to think about going forward, what is all this– can you grow your way through this, or are you fighting a headwind? Adam, his position is the world as it’s constructed is, it doesn’t work. I’m not sure how to think about it.
Toby: I saw there’s a comment just in the comments that I haven’t figured out how to throw them up on the screen. I figured that at some stage–
Bill: Unless. it’s a Super Chat. We’ll find that out right now.
[laughter]—
Does Market Cap Matter?
Toby: The comment was, it’s a $600 billion company,… that. My view on that stuff is, I’m largely agnostic to market capitalization. If it’s a $60 billion company or a $600 billion company, you just have no idea how big anything is going to be in the future. These businesses, particularly these internet scale businesses, when they get set, it’s not so much the rate of growth, it’s the amount of money that they earn for what they’ve got invested in that business.
Again, they could throw off enormous amounts of cash, if that $600 billion trades cheaply enough and they institute some sort of buyback, you’re going to make a lot of money. You want access to that incredibly profitable machine. This is how you do it. I feel the same way about Google. Google’s a gigantic company, but it’s a very, very good company. At that kind of scale, you’re not going to lose money in it. You’re probably going to make money over the long term. I wouldn’t worry about too much about where the market cap is right now.
Bill: I may trigger some people with this statement, but bear with me and go back 10 years when per share actually mattered, like free cash flow per share. Per share was a thing once upon a time, and Charlie used to live in that time. Maybe, he thinks it’ll matter again. Maybe, he thinks it can probably be a $3 trillion company on a per share basis, you’re going to get even more growth out of that. I don’t know why he’s doing it. But I do think, if you’re making a market cap argument, John Huber is one of the better writers on the subject. Greenblatt says it too like, “You don’t need to be small to find great investments.” I do think Ian Cassel has a reasonable point to be said that like, “If you’re really looking for the really long tail–” and Connor Haley did great work on this stuff. You should go to Alta Fox to check out his presentation but– [crosstalk]
Toby: [crosstalk] -he shows all the ones that have run for a long way.
Bill: Yeah.
Toby: They just reverse engineered or did a sort of factor analysis– not factor like in financial sense, they just looked at what, all commonalities–
Bill: Yeah, they looked [crosstalk] company that was a major winner, and they put together a deck– [crosstalk]
Toby: That’s a good presentation. I shared it when it came out a long time ago. We’ll dig it up again.
Bill: That was when value mattered. Nobody’s paying attention to that.
—
Value’s Comeback
Toby: Value might be back, baby.
Bill: Maybe. I hope.
Toby: I’m trying not to say too much just in case I kill it for Q2, but Q1 was better than ordinary. [laughs]
Bill: The cyclicals are out of value now. When you talk about the airlines, and the cruise lines and all that stuff. They can’t still be value.
Toby: Yeah, they might be on the other side of the book.
Bill: I’d hope so, because right now those look a little stretched.
Toby: There was this period of time where that value portfolio got incredibly high quality. I just looked at it more recently. I think it’s drifted back a little bit more. It looks to me more there’s a few gold miners and some forestry–
Jake: -financials.
Toby: Yeah, it might be just coming back a little bit which is, it’s run a little bit for a quarter so that’s not unexpected.
Bill: I mean, one of this guy, Kyle Cerminara’s entities is Itasca or GreenFirst building products or whatever. I’m sorry if I’d said it wrong, but right now it’s a lumber mill. That’s something that’s so hard for me to even understand how to underwrite, because lumber prices are just exploding. Whenever I see a commodity company show up on a value screen, I just want to run as far away as possible from it. I’d rather see it show up on the really, really rich screen, at least on a cash flow basis.
Toby: Yeah. There’s a pretty strong argument for some of the gold miners though. They’re throwing off cash, gold price is pretty beaten up and they’re still working here. Do you want to get a little bit of– if inflation really takes off, they’re going to go well.
Bill: Has gold sold off?
Toby: Yeah, it’s come off a bit. That’s one of the stories, it’s more macro than it is us, but gold seems to be getting pretty beaten up while bitcoin is running. So, has gold handed the baton over to Bitcoin? That’s [crosstalk] baton, I don’t know how you say it. Don’t [crosstalk] too much.
Preston Pysh On Bitcoin
Bill: You guys told me, but I interviewed Preston Pysh. That guy is a nice guy.
Toby: He is good dude.
Bill: He really is like a great guy. Oh, man, I hope people, I can’t wait for people to hear that one. They’re going to get so triggered. It’s going to be great.
Jake: [crosstalk] you got hate mail before. [laughs]
Bill: Hey, I’ll tell you what, you can think that he’s wrong, but that dude has done work. You can’t say that he hasn’t done the work. You can say that he has a flawed conclusion, but he’s done as much in that thesis as anybody.
Toby: Yeah, it’s had a good run, well.
Jake: Good.
Toby: It’s had a good run over the 12 months.
Bill: Yeah, but dude, he’s been in it for a long time.
Toby: Oh, yeah. No, I’m saying but– when it was picking up, he did keep on pushing pretty hard through that whole period. Hats off to Preston. Good work, mate.
Jake: Do we have time for some veggies?
Toby: Yeah, let’s do some veggies.
Bill: Yeah, man. Let’s do it.
—
Insect Groupthink
Jake: Okay, I’ve got a little bit of a shorter piece today that I’m calling Insect Decision Making. Sorry, not a sperm whale related, but we’re in the ballpark. [laughs]
Toby: Some people just left.
Jake: That’s fine.
Bill: [laughs] Everybody comes for the sperm whales.
Jake: Yeah. This is from actually a 2014 Wall Street Journal article by Robert Sapolsky, who is a researcher and a professor at Stanford, and he’s one of my favorites honestly. I’ve been watching, working through– He has a genetics behavior, sexual reproduction course that he taught at Stanford that’s online on YouTube. I think I’ve talked about t on the show before, but I love it. I’m about three quarters of the way through it, and each class is two hours long, so you’re watching a whole class. He’s such a good lecturer, he’s so funny if you’re, I guess, nerdy like me, and like jokes about DNA and stuff. [laughs]
Anyway, he wrote this article. It’s actually from one of our friends of the show, Bakul. Thank you, Bakul, for sending that over. Bees, as you guys know, do this dance to signal where resources are. They’ll communicate the direction and the distance based on how they dance. What it ends up happening is that, if they really like it, they will dance for even longer than normal, and that odds of when a bee comes into the hive, they will see that bee increase which then they’ll go check it out and come back. So now, you have two bees, and then two bees, more will go and now you have four and then eight and before you go at–[crosstalk]
Toby: They are doing the happy dance.
Jake: They’re doing the happy dance, and they’re exploiting the environment through that way and are able to communicate. This is wisdom of the crowds playing out, because the signal gets amplified. No bee actually investigates both sites, and yet, somehow the hive is able to arrive at what is the best one to exploit. They did this other study of ants. They gave them two nests, and they had a group of ants go and look at the two nests. The ants had to choose which one they were going to take as a nest. The difference was that one of them was well lit, and the other one wasn’t. The ants prefer a dark interior for their nest. They had both groups of ants go and they would decide which nest to take, and then they had individual ants who would go and decide where to set up shop.
What’s interesting is that when the choice was difficult, the comparison, like a very, very minute difference between the darkness of nests, the group of ants actually came up with a better answer. This is probably due to, like I said, that amplification of choosing the best one, the iterative decision making that happens as the group decides, as well as the cancelling out of errors, like somebody makes an error in one direction, another one makes it on the bottom, and they cancel each other out.
Well, this is the most critical part of the whole piece is that, when it was an easy task, when there was high difference between the lights inside of the nest, the individual ants actually make better choices than the group. Sometimes, the group would take– the feedback would get out of control and push it into a direction that wasn’t the right way to go. The individual rarely made that mistake, because it was so obvious. Think about that for a second from an investment context and how much time do you spend in groups sort of working through your investments and coming up with ideas versus by yourself. I can’t help but think about this guy in Omaha that is looking for the one-foot bar, the very large discrepancy in the lighting and he’s not asking the group for opinions about it. He’s looking for the most simple explanation. He’s very comfortable to do it by himself. Thoughts?
—
Buffett Consults The Best On Important Decisions
Bill: Do you think he is? Look, I think he’s comfortable coming to a conclusion without other people agreeing with him. I do not agree that Buffett does– I don’t think Buffett’s a guy on an island at all. I think that is a misunderstood myth of who he is.
Toby: Yeah.
Jake: I don’t think he is on an island.
Toby: You just think he’s getting an idea all the time from lots of different people who are throwing him ideas. Is that what you are saying?
Bill: Yeah, not just that. I think he’s probably saying, “Hey, this is what I’m thinking. Who do I know that may know more than me, and can help me get to a more right conclusion? Who do I know that can help me understand the players of this?” Maybe this just because it’s what I become, but I’m just saying like– since we started on this podcast, and since my network has really expanded, I’ve seen the power in saying like, “I’m not the one that has to figure all this out, and can somebody help me?” and then you get like real actual experts that come in. The idea that Buffett’s not out there, interviewing experts and trying to find out who’s behind– This Kyle idea, part of it is because I’ve been trying to figure out the players. If somebody wants to say to me you’re wrong on the players, I’ve done my work to bet on the players. You can have a different view, and that’s okay. Buffett was maniacal about that stuff. I don’t think people talk about that enough, but I might be wrong.
Toby: No, I agree. I think that’s a big part of it. I can see how it’s worked for you. I think it definitely– he’d be mad enough not to be doing it right, but I think that ultimately you have to make the decision yourself. You have to get comfortable to make a decision yourself.
Bill: No, 100%. I do not think that Buffett made a decision and asked anybody for approval at all, ever.
Toby: We’ve got a pretty good example here with Munger and Baba. That’s a very strong signal. When you look at it and it’s optically cheap, those are two pretty strong signals together. I’d be inclined to dig into Alibaba and see if I can understand it.
Bill: Yeah, and I guess I might be misunderstanding what Jake said. But I guess for a long time, I had read about Buffett and I thought he was the guy with the 10-Ks. I think he curated much more of an idea machine and much more of a network than–[crosstalk]
Finding One Foot Hurdles
Toby: It doesn’t take away from what JT is saying. He’s saying rather than looking forward to hives, what are they called? Was it an ant colony?
Bill: Just look for the easy one and jump over that?
Toby: Don’t try and like eyeball, which one’s darker? Just look for that– If there’s one that’s brightly lit, and there’s one that’s dark, there you go. Now, there’s one foot hurdle.
Bill: How many one-foot hurdles do you see?
Toby: Not many, but you do get them occasionally.
Jake: March 2020, there was a few.
Toby: Yeah, I’ve been talking about this a little bit in the context of what I’m trying to do. I do think that if you are attuned to it, and you know what you’re looking for, and you’re prepared to be extremely patient, and this is probably you’ve just got to resign yourself to the fact that you’re going to get one or two a year, and then you just make your– you have to get your taste to the point that you really can recognize the one or two when they come through, I think that’s entirely– [crosstalk]
Jake: That’s our quick segue for the next part of the story.
Toby: Oh, good. Here we go.
Bill: Wait, JT, before you move on. Can I just ask you something? When you buy something at a one-foot hurdle price, and then it rerates on you to a price it you wouldn’t buy it at, then how do you approach that?
Jake: Well, that’s when the game gets hard.
Bill: Yeah, no doubt. [crosstalk] Even Charlie and Warren say, “We’re better buyers than sellers.”
Jake: Let me just say that I’m still figuring that out.
Bill: Okay.
Jake: That’s what my hero said at 97.
Toby: Yeah, wasn’t that a great line?
Bill: Yeah.
—
Jake: All right, so to tie back in with what you were just saying, Toby, they did another bee study, and they took two vials, each of them had water in them, and one, they added sugar and the other they added quinine, which is– It doesn’t taste very good.
Toby: It stops you from getting malaria.
Jake: Yeah, exactly. Keep the bees from getting malaria. They attach to the vials little symbols that the bees can actually read and interpret. They would put a circle on one, and a triangle on the other. The bees actually could discern like, “Oh, I figured out that the circle is the sugar water one, and that’s the one I go to.” They were pretty good about picking that, like they wouldn’t go to the quinine one.
Toby: [crosstalk] -this seems like a bad idea.
Jake: As long as they’re not the Africanized ones. This is where it gets interesting. They changed the symbols, and they put a circle on one and more like an oval on the other, so it’s much harder to discern which is which. The bees end up then actually not choosing either one. So, the bees know risk management in a way, they understand like, “This is too close together. I know when to hold them and know when to fold them.” It’s pretty amazing because these little animals that we’re talking about right now, these insects, we have 100,000 neurons for every one neuron that they have in their brains. Yet, they’re doing this fairly complicated and smart behavior.
It goes back to what you were saying, Toby, about, the being patient, and it has to be the circle instead of the triangle as opposed to like, “Oh, shit, that kind of looks like an oval or is that a circle? I don’t know. This is hard.”
Toby: It’s a triangle with round edges, what’s that mean? Too much?
Jake: That means you wait until you get the very firm triangle.
Bill: Going back to waiting until you get the very firm triangle, because I was talking to the firm triangles, the best triangle. I was talking about– [crosstalk]
Toby: [unintelligible [00:44:40] investment advice.
Bill: No, that’s true. I would say that, oh, boy, now I don’t know what I just said. Now, I feel embarrassed.
Toby: I’m sorry, dude, I derailed you.
Bill: I should just take a Davey Day Trader. Yeah, I like firm triangles. So what? See a firm triangle, you hmm. What was I saying? Jesus, I’ve derailed this conversation. Oh, so with the holding, I think the answer that I’m getting to is, if I say something like I don’t understand how somebody is buying X here, but it’s something that I own, rather than saying, well, that means that I have to sell it, it just means that if I have a better idea, that’s probably the first thing that’s going out of the portfolio before. Do I have a mark to market risk in that? Yes, I do. Am I comfortable with the underlying asset, because the asset quality? Yes. I think it’s better than my opportunity cost. I think that’s closer to for me the way that I have to think about it. If I ran a hedge fund, I’d probably need to optimize every single decision, but I would lose that game. I know it. That’s why I try not to play it.
—
Toby: I’ve got to give a shoutout to somebody’s mom. Happy birthday to Mr. Finn’s mom. [chuckles]
Bill: All right, happy birthday to Mr. Finn’s mom. Wait, what? Did I just say something wrong?
Toby: No, it was in the comments.
Bill: Hey, somebody’s mom? Jeez, Jake.
Jake: Okay.
Toby: Anyway, we cut you off last week, JT, so I just want to make sure that you don’t have any– Do you have anything else to add?
Jake: I have nothing to add.
Toby: Nothing further to add. Throw your questions in, amigos, we’ll take a run of them. I don’t know how to put them on the screen, but I can read them off. I saw a comment before about, how do you handicap the risk of the head of Alibaba being sent to some sort of reeducation camp? Yeah, I don’t know. That’s a little scary.
Bill: That’s why I live in the States. [crosstalk]
Jake: Okay, this is the same– to get back to that nuanced part of what we’re talking about. The US wasn’t perfect from 1820 to 2000, or whatever you want to cut it off. We pillared our guys like that, like Rockefeller and Carnegie. I think we should be a little bit careful in judging from today’s view when they’re going through some things that we had– it took us a long time to figure out, and to get straightened out, and to arrive at a reasonable place where humans could interact, and if they’re working towards it, I want to give them a benefit of the doubt there.
Toby: Yeah, no, I agree with that, for sure. That’s a good point.
Bill: I have nothing to add. I don’t know. I’m not the one that did it. Charlie did it. But I think Charlie is handicapped somehow.
Toby: I still want to understand the process. I still want to get there myself.
Bill: Yeah, I think he had to talk to experts, man. Charlie has been thinking about China. How long has he been invested with Li Lu?
Toby: I don’t know. A long time, 10 plus years.
Bill: That’s how long this guy has been thinking about this idea. This isn’t something that just popped into his idea funnel two weeks ago, and he was like, “Oh, [unintelligible [00:48:13] the whole thing.
Toby: It’s in the screenbot [unintelligible [00:48:14].
Jake: Yeah.
[laughter]Bill: Well, he’s not running that strategy. He has been thinking, I think, fairly nonstop. If you listen to the last five years of Daily Journal conversations, all he does is talk about China. Yes, would I love to have dinner and be able to ask the question? Yeah, that’d be sick. I think the answer is, he’s done a lot of work to try to handicap that stuff.
Management Integrity Matters
Toby: JT made a good point to me once that sticks to me a little bit when he talked about– he wants to invest behind a management team who’s so good that he doesn’t have to read every note of the financial statements. I was like that’s a simple but profound insight into assessing a management team. Management teams are all self-promotional, they’re all super charismatic. You don’t get to be CEO if you don’t have a world-class handshake and look guys in the eye when you– all of those things are important to becoming a CEO. When you go and meet these people, they’re really nice, charismatic, friendly, fun guys, women for the most part. Do you trust them? That’s a different kind of matter to how friendly or engaging they seem when you’re discussing something with them.
Jake: I think my point was that if they want to hide something, they can.
Toby: They can, yeah, for sure.
Jake: It’s not going to show up in the footnotes, necessarily. That’s like just reading the footnotes doesn’t necessarily protect you from the problems that may arise. That was, I think, what I was trying to say.
Toby: I thought it was a great line because for many of these investments, you’re looking at the management team, you’re like, “Are these guys a plus or minus here?” but if you clarify it– I’m looking for things that are bright line clarifications where it’s just, it is or it isn’t, and it’s an easy assessment to make. People can fool you. I’m not saying it’s foolproof. I’m not saying that at all. I’m just saying that if that’s your mindset, then you’re looking for a slightly different set of behaviors in the notes. In relation to Alibaba, I just don’t know well enough, but that’s what I would be looking at when I started looking at it, even though the financial statements are horrific.
Bill: Yeah.
Toby: Nothing to add.
Jake: I forget who told me this line, but it was something like a 300-page proxy and 600 pages of footnotes doesn’t tell you anything, but it tells you everything that you need to know. [laughs]
—
Has Business Travel Changed Forever?
Toby: Yeah, that’s another good point. Do you guys have any thoughts on the airlines? I’ve got to tell you, I’m short a few of them. That’s my thoughts on them.
Bill: I haven’t followed them in long enough.
Toby: I saw somebody said that they’re uber bullish airlines– one of JP Morgan’s uber bullish airlines, that just tells me they’ve got some airlines that they’re trying to shift. They got some inventory they need to get rid of.
Bill: [crosstalk] I don’t know, man. I mean, I go–
Toby: Ah, We lost Bill. [crosstalk]
Bill: Did you lose me?
Toby: No, it’s all right. You’re back in second. You were frozen in the Billtrix for a moment.
Bill: Oh, I got something that said my internet is unstable. Come on Comcast, Jeez.
Jake: Sure. It’s unstable. [laughs]
Bill: That’s true. I would start out if I was going to start to think about the airlines. I would say to myself, what do I think the most stable travel bet is? My personal opinion is that I have a high degree of confidence that leisure travel will come back. I have a lower degree of confidence that business travel will come back. Given that, I would start to look at anything that had a point-to-point route system. Typically, if you look at Allegiant, Spirit, Frontier, Volaris, Wizz, Ryanair, those are all like non-hub-based, price driven– Southwest is sort of a hybrid now. They’re point-to-point and they can move a lot of the network around to fulfill demand as the seat demand comes into the system.
Delta, United, American, the hub requires efficiency. The reason that I have been uncomfortable getting back involved in that thesis is, I am not convinced that business travel has not taken a pretty sustained structural impairment here, because I was talking to my buddy from consulting and he said, “When we used to go into engagements, we would fly a team in and out every single week, Monday and Friday, Monday and Friday, Monday and Friday–”
Toby: Monday and Thursday. We got home for Thursday.
Bill: Yeah, and his comment was like, “Are we going to have to still do that?” Yes. “Are we going to have to do it four times?” Probably not. Might it only be one week to have the whole team there? That’s a lot of seats. I don’t know how to handicap whether or not it comes back. Did I arguably miss getting back in at the bottom? Yeah, but I own some pretty good shit, and I knew that I’d make it through, and I didn’t know that selling that to go into airlines was a great bet. Here, I think you got to have a pretty accurate view of the future and I’m just not confident enough to have that.
Toby: I think a lot of stuff is going to back to normal.
Jake: [crosstalk] -basis.
Bill: That’s what I’m saying.
Toby: That’s the risk. I mean, I don’t think you’re getting the handicap to take the bet. I think the offered odds are all wrong here for that kind of bet. Just for my own two cents, I think everybody overestimates how much everything’s going to change. I think everything’s going to go back to normal. People fly for work, because you can make money. There’s literally no other reason to do it. Flying sucks. If you’ve got enough of an incentive on the other end of that flight, you’re going to get on the flight and go there.
Bill: I don’t mind flying. I actually quite like flying. I guess that the only comment on the EV is, and I haven’t done the work in a long time. If I was doing it, I would consider there’s some dilution that came with the government terms, so you’ve got some equity dilution, I think, that’s on the comp, and some of that debt is probably going to be forgivable. I think you got to be careful about trusting a screen on the EV if you’re doing discretionary stuff.
Jake: That’s fair. That’s good. Good nuance. Free money, huh?
Bill: I do like Scott Kirby, man. That guy managed his ass off from United. He was incredibly ahead of the curve. I didn’t know if I believe the narrative around him. That guy is legit. Doesn’t mean I want to own his equity though.
—
Carnage Underneath The Market
Toby: What else is happening in this wild market? It feels to me like it’s pretty smooth sailing on the top, but there’s still a whole lot of carnage underneath. I think that I look at ARKK, A-R-K-K every now and again, just to take the pulse of the tech, it looked like it was up today, it looked like it’s doing okay. Tesla’s come back to life.
Jake: Yeah, I don’t know. It seems like others– underneath there is more carnage than you would tell by just if you’re just only watching the index.
Bill: Yeah, I think that’s probably right.
Jake: What that means, I don’t know, breadth, they call that.
Toby: I mean, the index has been remarkably strong through every single iteration of this market. It’s mind boggling really. It’s basically FAANG these days, FAMG, whatever.
Bill: Yeah.
Toby: They’re strong. They’re doing well. They’re posting big numbers every quarter.
Bill: Yeah, and I think, as tech becomes a bigger and bigger percentage, I know it had that big selloff. It’s up quite a bit.
Toby: FAMG treaded water for a little bit, but I don’t think the FAMG really participated in the selloff. It definitely caught the recovery, though. Some big moves. Yes– [crosstalk]
Bill: Yeah, people seem to like Facebook again. Yeah, I don’t know. I really haven’t watched much. It’s been very liberating, except for the fact that I’m dealing with all this personal stuff.
Jake: It was that pretty good-
Bill: [laughs] Hasn’t been liberating at all.
Jake: -that white paper from DoubleLine that was talking about– It was kind of debunking a lot of the like, value criticisms, I don’t know if you saw that one, but they did one little study part in there where they took– there’s this narrative that it was tech and communications that were overly expensive, which were pushing everything else up and making it look weird. They took those out and then ran the same– I think they did different like, price to book, price to sales, and then so they took those out, and then looked at it and it was still the value growth spread was still really big, more than I think people would probably have guessed. It’s not just probably one little segment or one big segment of the market that is pushing the averages in weird ways.
Musk Tweets Wood
Toby: I’ll tell you something funny. We should have been able to grab it before it came on. Elon Musk left a comment under a Cathie Wood–[crosstalk]
Bill: I saw that.
Toby: Have you seen that? S&P 500 market capitalization is at some extreme share of GDP. What do you make of that?
Jake: That’s what he said to her.
Toby: Yes, what is going on?
Bill: Somebody wrote me they were like, “You think, he’s trolling her?”
Jake: His account got hacked.
Toby: I think that to be fair, I think Elon is just what is in his mind is on Twitter.
Bill: Yeah.
Toby: I don’t think he’s got any filter in that respect.
Jake: Funding is secured.
Toby: Funding is secured, yeah. [laughs] Might take a private, funding secured, yeah.
Jake: Might take it private. I don’t know. Feeling cute.
[laughter]Toby: Might delete later.
Hug Your Kids
Bill: You guys want to hear a crazy story before we shut it down?
Toby: Yeah, for sure.
Bill: I played tennis last night, old man tennis. I lost. It’s so depressing, but whatever. The dude that I played, I played with him and against him, and yes, I did lose to him. This dude died. He actually flatlined his heart. Now, I think he said–
Toby: During the game?
Bill: No, no, no, no.
Toby: Three weeks ago?
Bill: I think, he said three weeks ago. Let’s call it three months. I don’t really care. I do think it was three weeks. He said he was dead for five minutes. They were pumping on his chest, and they brought him back with a defibrillator, such as https://aedadvantage.ca/shop/batteries.
Toby: What did he report?
Bill: What?
Toby: What did he have to really report?
Jake: Yeah, what’s on the other side?
Toby: What’s on the other side? [laughs]
Bill: Well, this is what’s interesting. He said it was very calm. He said that he was getting wheeled into the hospital and he looked out, he remembered everybody, he had like the Widowmaker whatever it is in your heart, like the heart attack, and now he’s got two stents.
Toby: Now he’s playing tennis?
Bill: Yeah, man.
Jake: Kicking your ass? [laughs]
Bill: Yeah, well, he had a good serve. Shut up.
Jake: [laughs]
Bill: He’s an older gentleman too. No, he said that he was with his personal trainer, and he had it happen. The personal trainer got him to the hospital in four minutes, and he said that he remembered people touching him and he went into the wheelchair, and then he said, I remember looking up and he said, “I’m leaving now.” Then, he was told that he just said that and then fell out of the chair. Then, he flatlined. They started pumping on his chest, and then they brought him back.
Toby: How old?
Bill: Ah, maybe like 60. He also spent five weeks in the ICU earlier in the year, because of COVID. This dude has not had a great past 12 months, and yet he’s smoking me on the tennis court. If you want to know how good I am at tennis, that’s that. Puts some shit into perspective, man. I came home and hugged my kids.
Jake: Yeah.
Bill: [crosstalk] -also lose some weight.
Jake: [crosstalk]
Bill: You guys are all skinny. You’re going to be inspiring my fat ass. I’m not trying to get [crosstalk] out by the next pandemic.
Toby: That’s time, amigos. I actually don’t know how to shut this one down. I’m going to mash a few buttons here.
Bill: Well, my mom might be listening. I love you, mom. I hope I didn’t put you on blast. [laughs]
Toby: Shoutout to everybody. I’m going to have to end it.
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