VALUE: After Hours (S03 E16): Francois Rochon And Valuation; Dutch Famine Of 44-45; $DIS and $MO

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In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle chat about:

  • Francois Rochon – Flexible Valuations
  • Fading To Average
  • Dutch Famine Of 1944-45
  • Are Equity Investors Missing On Other Asset Classes
  • Technological Obsolescence Or Momentum
  • Early Life Affects Your Investing Style
  • The Impact Of Tobacco Regulations
  • $DIS Is Maximizing It’s Assets
  • Online Shopping $SHOP, $AMZN, $WMT
  • Eventually We’ll All Work For $FB, $AMZN, $GOOGL
  • The $KHC Failure
  • The Century Of Value
  • Do Hard Investing Rules Help Or Hurt You?

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

Jake: I was about to play Stairway.

Tobias: Play it.

Bill: Yeah, dude. This is live entertainment.

Tobias: Now, we’re live. It’s says we’re live anyway. This is the part where I’m always talking, saying, “Is this live, is this live?” Then, I get to watch it back, and yeah, it was live then. What’s up, folks?

Bill: I still don’t see it on the YouTube machine.

Tobias: I think it’s delayed a little bit.

Bill: Okay.

Jake: Hello.

Tobias: It’s 10:35 on the West Coast, we’re a little bit late. Sorry, folks. It’s 1:30 PM East Coast.

Bill: It’s actually 1:35. We didn’t–

Tobias: 1:35 or so. [crosstalk]

Bill: We are also on the same timeframe.

Tobias: It’s strange. Is that how that works? I always wondered.

Bill: It is.

Tobias: How did California get so far behind?

Bill: I don’t know. It was a long series of regulations.

Tobias: What’s up, folks? I’ve got a brand-new background. Unfortunately, the light is coming from the opposite side. It doesn’t quite work. Maybe I’ll figure that out. Maybe not– [laughs] I don’t know.

Bill: I don’t think anybody would know- [crosstalk]

Jake: That’s as good as it’s getting.

Bill: – if you didn’t say that. It’s not the lights hitting one half your face.

Tobias: It’s the aesthete in me that wants it all attractive, the artist. What are we talking about today, gents? What’s happening?

Bill: I’m going to talk a little bit about Disney+.

Tobias: JT?

Jake: I was hoping for some cigarette talk, Bill.

Bill: I could do that.

Jake: Okay, good. I’ve got a little veggie segment on the Dutch winter famine, that should be real uplifting.


Tobias: I’ll be talking about François Rochon. Had a great tweet today that– he had a great line that I tweeted out when he said, “There’s not much difference between 20 and 25 times earnings. There is between 20 and 60 but between 20 and 25, I’m trying to be too prudent.” I want to discuss that is, is that bull market special, or is this the brave new world?

Bill: Ooh, let’s start with that. I like that.

Tobias: You want to go with that?

Bill: Yeah.

Francois Rochon Raising Your Hurdle Rate

Tobias: Let me read it out. François Giverny, I love the name of that firm. “There’s not much difference between 20 and 25 times earnings. There is between 20 and 60 but between 20 and 25, I’m trying to be too prudent and miss the big picture. If you find a great company and it doubles its earnings every five years, valuation should be flexible.” That’s me paraphrasing, but that’s what he said.

Bill: Yeah, that makes sense to me, because 25 to 20, you’re giving up roughly like 20% in the valuation bleed. What, if you’re doubling your earnings, so you’re up 100, down 20, you are up 80 over what, five years? You’re still doing pretty well. I mean, you’re compounding north of 15%, but from 60 to 20, you’re fucked. That’s a technical term.

Tobias: Here’s the thing. I get no problem with mathematics of it. It’s the likelihood of something doubling every five years. In addition to that, we’re talking about earnings. We’re talking 20 or 25 times earnings. Out of that, you got some reinvestment and you’ve got some dividends, that’s not 20, 25 times free cash flow.

Bill: Yeah, I think he would probably say that he’s using earnings as a rough proxy. That dude knows his stuff. I’m not going to go at him for not knowing his stuff. I’m going to give him the benefit of doubt and think he’s maybe talking about free cash flow.

Tobias: I’m not disputing, I’m trying to understand.

Bill: Yeah, I’m not saying you are. I’m just saying I think he would probably agree with your comment.

Jake: Well, let me do a little inversion here. What you’re really trying to do is protect against compression by not overpaying. Not paying 60 means that if there is compression in the earnings, and even if it was to grow a lot, you get multiple fade like that, you’re going to get hurt. You don’t want to overpay, all right. Well, what’s the difference then between– why not 30 then instead of 25? Well, going back to 15 times, which is the long run normal for an average business, that’s a 50% fade. I don’t see a big difference between 25 and 30 on the fade, so going the other direction, what’s the difference between 30 and 25?

Bill: What do you mean? You’re saying why not take this–

Jake: Why not pay up to 30 then? If what you’re worried about is fade, then the difference between 25 and 30 fading back to 15, is not really that big a deal.

Bill: Well, I think that you can pay a lot if you’re that confident that the earnings are going to grow over time. I do think this is where some of the growth guys, on these smaller businesses– like small and rich, I still think can deliver you really good returns, but I do understand the base rates are not in your favor. But I think that these guys that are doing really, really deep work, would argue that you’re right, the base rates aren’t in your favor, and that’s what we get paid to figure out is the difference between the base rate and the outlier. That’s why we make our money.

Jake: Agreed 100% but the base rate of you thinking that you have some special talent might be less than what is currently self-assessed in today’s market.

Bill: Yeah, well, look, I think in anything, most people fail. I don’t care if it’s business, I don’t care if it’s most customer relationships, I don’t care what it is, almost everything that I’ve seen follows a power law, or I hate to be one of these winners win guys, but the average person that plays football sucks at football relative to the best. I do agree that if you’re the average investor, this is the case for indexing or using some computer-assisted tool or becoming a quant. I think that makes a ton of sense. But a guy like him, he’s made his career by proving that he’s pretty close to the outlier.

Do Hard Investing Rules Help Or Hurt You?

Jake: It’s a good bigger topic though of outliers versus base rates, and knowing which game that you’re trying to play.

Bill: Yeah, I think that’s fair.

Tobias: This is something that you hear at the end of– or not necessarily the end, but well into a very long bull market. I don’t know–[crosstalk] [laughs]

Jake: Middle of it. [laughs]

Tobias: [laughs] The middle of it. It just seems to me that it’s pervasive. Everybody says, “Well, you don’t buy cyclicals, you buy compounders,” and really, the only mistake you can make is not paying up.

Jake: Yeah. [crosstalk] -tell quality.

Bill: I don’t think that’s what he saying. He said, don’t pay 60% or 60 times earnings. He’s not saying don’t pay up. What he’s saying is, if you think you have a really good business, and you have some mental thing in your head where 20 is your maximum, there is a level to stretch to that is not– You should probably stretch. Now, where you should stretch to is a very, very reasonable argument to be had.

Jake: Let’s reframe that question. Do you think that having hard rules, like I will never pay more than 20 times, or 25, or 30, or whatever it is that your cutoff is, helps you or hurts you in general?

Bill: I think it depends what game you’re playing.

Jake: Toby, what do you think?

Tobias: Well, why not pay 60 times earnings?

Bill: Well, it depends how big the earnings stream is. If you go back to when Buffett bought Coke, if you could foresee the growth, and you actually thought you could see it, then I almost don’t even view it as who gives a shit on current multiple earnings? How big can your earnings base get, how much reinvestment do you need to get to that rate, how levered is your current balance sheet, how levered could it be, how much return could you get, and what are you paying as a grossed-up number, I wouldn’t even view it on a multiple basis, I’d be like, “I’m buying this for $4 billion. I think it’s going to return this much money over time.” That’s how I would think about it. I wouldn’t even think about multiples, especially small.

Tobias: But if you’re so confident that it’s going to double every five years, that’s a 15% underlying growth in that, is that right? It’s probably roughly around that kind of number. [crosstalk]

Bill: Yeah, 75 [crosstalk] divided by 5, or 72 divided by 5.

Fading To Average

Tobias: 14 or 15. If you’re confident that it’s going to do that, so that means in five years’ time, it’s on 30 times earnings, five years after that it’s on 15. So, 10 years’ time you have a company that’s on 15 times earnings, which is the average. You’re saying the fade is average to– That’s right, isn’t it?

Jake: That’s probably on a relatively appropriate price. It’s not really discounted at 60 then.

Tobias: No, but it’s the fair value.

Jake: Fair value.

Tobias: That’s getting no return. You’re getting no returns 60 times earnings, if you fade to 15 multiple after 10 years.

Jake: Yep.

Tobias: [crosstalk] Little bit more than no return.

Bill: Well, but it like, what is–

Tobias: That’s my bold statement today, I want more than no return for the next decade.

Bill: It’s a good one. That’s the takeaway.

Jake: You’re not going to be a central banker anytime soon.

Tobias: That’s going to be tough to do in this market. That’s genuinely tough to do. That sounds insane, but I look at the implied returns on the market at the moment are going to be excluding the dividends are negative.

Jake: Strong, but quite strong.

Tobias: [laughs] Excluding the dividends for negative point 7% plus 1.4%, or 1.5% dividends gets you to plus 0.7 to 0.8 [crosstalk] return.

Bill: What are you assuming that things fade to?

Tobias: Yeah, the long run average like 16 times. I think 16 times on the CAPE basis.

Bill: I just don’t know that I can get down with that argument, because even Google growing at 3% a year, let’s assume that everybody’s growing top line at 3%, which is not an accurate — [crosstalk]

Tobias: Let’s say that’s inflation.

Bill: Yeah.

Jake: GDP.

Tobias: Yeah, GDP.

Bill: Well, how I’m framing this is really stupid. All businesses aren’t going to trade, at the average. This is actually something that I’d love to talk to Nygren about, because they fade their exit multiple to market average. It just doesn’t make any sense to me, because let’s think of real estate for a second, and then it’s like okay, well, you’re paying a three cap in for Chicago class A real estate, but isn’t it just going to fade to the average? It’s like, no, it’s Chicago class A real estate, you got to fade it to the average of the comp set that you’re comparing it to. I don’t think that thinking that all businesses will fade to average or revert to average is, I’ve never been comfortable with that idea.

Tobias: Yeah, I understand that.

Jake: I’m very comfortable with that idea in that timeline.

Bill: Yeah, I guess.

Tobias: I have been thinking about that too, because I built these little models that fade over 10 years, and I’m like, why do you fade something that’s 60% return on invested capital? Fade that to average versus something to 30% return on invested capital, fade it to average over 10 years. It’s not fair to the 30% return on invested capital. Assuming everything else is the same, because the one that’s earning 60– [unintelligible [00:13:10]. That, everything else being equal, is twice as good. It’s not fair to fade at that quickly, whereas it should have– I don’t know exactly how you build it out, but you say it fades at a fixed rate, and therefore the 60 should fade slower than 30. We should get back to average slow, like should take twice as long maybe to get back to average.

Bill: Yeah, I guess one of the things that I’m thinking of is Air-Maze. Air-Maze has been Air-Maze, since my grandma was a little girl. It has never, everyone that has ever said this brand is going to fade has been completely fucking wrong. Is that the outlier? Yes. Ferrari, too, I think that you can look at what that brand has done. Disney has gone through some really bad spots. Maybe media assets are slightly less durable. Maybe luxury is just this version of CPG, and maybe luxury is all of a sudden going to get hammered. I don’t know, but what I do know is, I just don’t think Air-Maze is an 18 times business. It’s very, very hard for me to get my head around why that would be a valid assumption under any type of reasonable circumstance, like it’s actually foreseeable. Other than, well, it must happen, but that’s not really valid to me.

Tobias: It’s fashion. It’s hard. For every Air-Maze, there’s dozens of others that have completely disappeared or ruined their brand.

Bill: That’s the point. There’s only one. That’s not an average business. Yes, I agree. Michael Kors and Air-Maze are way different. Michael Kors, Polo Coach, all that shit’s the same. Air-Maze is different. Those should trade at a multiple. That is what that multiple is. Air-Maze is a completely different animal.

Tobias: Why?

Bill: Because it is, because they treat that brand with the respect that it needs, because they control distribution, because it’s not a mass market thing that’s got 10,000 stores all over Michigan Avenue, and they can’t wait to expand, because they restrict the supply.

Tobias: Wait till you get a CEO comes in and says, “You know what we need to do? We need masstige, because we’re being left behind by all these other guys who are selling–[crosstalk].”

Bill: Okay, well, then you sell. Then you don’t even fucking wait for the fade. You just sell.

Tobias: But for a period of time, they’re going to make a lot of money.

Bill: No, you sell, you’re out. It’s a fundamental strategy shift that makes no sense. I wouldn’t sit around and wait for the numbers to prove that at all. I think then you get waxed. That’s the game I play. I don’t know what other people do. If I don’t agree with the straight, that’s why I sold Comcast. I don’t agree with their strategy in their media assets at all, and I don’t know how to handicap how much money they’re going to burn. Brian Roberts is a great CEO. I hope that people that are long in it make a lot of money. I know the stocks cheap relative to other cable assets. I don’t agree with their strategy, so I’m out. That’s how I invest.

Technological Obsolescence Or Momentum

Tobias: Your topic is going to be Disney. I’m just going to front run it a little bit, but there was a– I missed the name of that. There was a guy talking today on one of the networks about that they have an ETF that gets rid of the companies that they think they’re going to be– I guess they’re giving you the index, but they’re taking out of that index. The stuff that they don’t think deserves to be an index. One of the companies that they took out was Disney.

Bill: For what? What index?

Tobias: Say it’s the S&P 500, but then you got to take out certain names that they think are going to be. I think they were talking about technological obsolescence. I think that was kind of their idea.

Jake: That’s called the Nasdaq.

Bill: Do you think Disney is going to be technologically obsolete?

Tobias: I was surprised. I was like–

Bill: They are out of their minds.

Tobias: If anything, Disney’s trying to make the leap, or Disney’s made the leap, like Disney’s probably biggest threat to-

Bill: Those people are crazy.

Tobias: -to Netflix.

Bill: They’re free to sell whatever product they want, they’re wrong.

Jake: How would you discern what is technologically obsolescent, or at risk there? Everything is–

Tobias: I wish I’d paid a little more attention. There’s some stuff in there like Visa. Hit the road, Visa.

Bill: Here’s some things that I would be really uncomfortable with. I don’t like the idea of shitty brands thinking they’re going to become luxury. Restoration Hardware is probably the only one that I’ve seen any evidence of being able to pull it off. When Volkswagen tried to go up market with the Phaeton or whatever that was garbage, if anybody thinks that Coach can actually become a real luxury brand, their leather goods are fine, but they diluted their brand with all those damn see bags and stuff. Once you do that, and it’s that visual– I guess Gucci came back, but they never really sold out. One that may be in the process that somebody has been hit me up about is Harley Davidson. That may be worth looking at. The person that’s been hitting me up pretty much bottom ticked that, so shoutout to you. I don’t like brands turning around, but luxury, that’s remaining luxury and executing, I can get comfortable with that.

Tobias: I found some of the other names that they’re kicking out. I don’t know what the underlying pattern is here, but they’ve kicked out Walmart, Disney, Berkshire, Exxon, Chevron, Bank of America, Wells Fargo, Verizon, AT&T.

Jake: Is there anything that hasn’t been doing very well lately? [laughs]

Tobias: Yeah, it feels a little bit that way, doesn’t it?

Jake: Yeah. Okay.

Tobias: It’s just a momentum, keeping up the momentum. [crosstalk]

Jake: Yeah. That’s just a momentum over– [crosstalk] [laughs]

Tobias: Maybe that’s what it is.

Bill: There’s one comment that says, I think it’s harder than it seems. I guess that the thing that I don’t like about the comment of it’s harder than it seems, I don’t understand why anyone should think that anything in the market is going to be easy. If you were trying to make money in the stock market, it’s going to be really, really hard. Otherwise, just index and then you don’t have to worry about it. Buying value stocks is not easy. There’s nothing easy about underperforming year after year after year waiting for some cyclical to rerate and hoping that you sell it and go find another. In the same way that there’s nothing easy about playing a game where you’re paying up and waiting for asset quality to change. All of these games are really, really hard. The question is, what risk are you comfortable living with, and what can you execute in my opinion? I think where value has a little bit of an edge in that argument is historically the odds are better on your side.

The Century Of Value

Tobias: Yeah, so somebody said the other day that the– some firm said that the last century was the century of value, and so this century is the century of growth or momentum.

Bill: Yeah.

Jake: Okay. What’s the-

Bill: Word, decade.

Jake: -end on that data set of centuries?


Tobias: 1920– [crosstalk]

Jake: Yeah, we’ve got two centuries worth of data.

Tobias: Not enough ends.

Jake: Not enough ends.

The $KHC Failure

Bill: The really tough thing is some of these– I’m talking about luxury. Well, CPG is what I keep coming back to, but back in the day, look at what happened to Buffett on Kraft Heinz. It was monitoring when the shift happens and how the shift happens. That’s really, really tough, and if you’re paying a rich multiple and the shift happens, you’re going to take a write-down on that asset. You don’t run a portfolio of N=1 assets. A lot of the big money and a lot of the guys that I really respect have been made holding the assets for really long times, even when they’ve been rich. That’s the thing that’s really hard for me to get my head around, because Ben Graham, the God of value investing, made most of his money in Geico. How do you square that circle?

Tobias: What’s the similarities between IBM and Kraft Heinz, which are both sort of notable Buffett missteps? No growth, lack of growth?

Bill: I don’t know that much about IBM. Kraft was just– I think they levered up to buy a set of assets at the wrong time. Sometimes, you just do deals and stuff doesn’t work out. I don’t know but that’s [crosstalk] life.

Tobias: He comes from a world where, you had that three channels or two channels, and you had the supermarket end cap, and basically, you could dominate by shoving advertising down the tube, and then you could spend enough money to control the grocery aisle. That was the way that you exercised your pricing power.

Bill: Yeah. I think the grain of truth, or what opened the door for Kraft Heinz failure, and this is not scientific. Don’t assume it’s right. When we went through the Great Recession, people really got comfortable with private label brands. Then, once I think people got comfortable with private label brands, the grocery stores started to feature them a little bit more. As they started to feature them a little bit more that shelf space and mindshare, that Kraft Heinz [unintelligible [00:22:57] brand image and how people used to buy shifted. All of a sudden, 365 was as good as mac and cheese. All of a sudden, Kirkland became this real brand that people really cared about, and now all of a sudden, you get some stuff on the internet, and where I think that’s similar.

One of the reasons that I’m still nervous about watching how TransDigm trades from here, is I think that this, what we just lived through, could be the thing that changed– I think people are going to fucking rage, don’t get me wrong. I live in Florida, people are raging, I assure you of that. If anyone that thinks that life’s not getting back to normal is out of their mind.

Tobias: [giggles]

Bill: But I do think that business travel may seriously be impaired, because I do think a lot of companies have figured out we can cut a lot of costs and not lose that much, and that’s not to say that people aren’t going to get on airplanes anymore. There’s nuance in this discussion. But little changes in utilization can have big impacts.

Jake: Especially on high operational leveraged businesses like airlines and hotels–

Bill: Yeah, and TransDigm is better. They have a lot of variable costs. Yeah, they got a big debt stack. That’s what I wonder 10 years forward, if we look back, and we say, “Boy, travel really was the kink in travels armor that that private label was to CPG.” Maybe not, I don’t know. I’m going to get on plane, but–[crosstalk]

Tobias: I’m always astonished at how small the airlines are relative– I don’t know exactly where these are. The last time I looked at the numbers, the airlines were like $30 billion market caps, I think. Google, they’re at $1.7 trillion that. Google could buy an airline just to fly its people around.

Bill: It could, but it would deteriorate the business. [laughs]

Tobias: It wouldn’t be great for the business, but they probably earn enough in a quarter to buy an airline outright and they just use it for Google employees.

Bill: Yeah, as they should.

Eventually We’ll All Work For $FB, $AMZN, $GOOGL

Tobias: In the future, we’re all going to be either Facebook, Amazon, Google employees like that, and it’s going to be a tribe, we’re going to go to war as Amazon–

Jake: Blue paint smeared on your face.


Tobias: The logo.


Tobias: [crosstalk] -on our face.

Bill: We are all going to end up working for Facebook, because they’re going to own all of the actual underlying, just some of us will be on different teams, we will have the WhatsApp team, the Instagram team, all the olds would be crippling around there with their Facebook paint on, buying Viagra.

Tobias: You’ll be on the internet. You’ll never leave the ecosystem of Google. Google owns a whole lot of servers, you’ll just never leave the Google ecosystem.

Jake: Yeah, it would be internet fiefdoms that you’re a part of.

Bill: Yeah.

Tobias: Yeah, Apple too.

Jake: Geez.

Bill: The young kids will be all Discorded out, Snapchat, and I will be trying to figure out what this color is that’s attacking me.

Tobias: SPACing their NFTs.

Bill: SPACing NFT, that is sexy. I like that.

Tobias: Let’s move on. Let’s do another topic.

$DIS Is Maximizing It’s Assets

Bill: Well, I was just going to talk about Disney. I can talk about cigarettes real quick too. I was watching Disney, and it’s just amazing to me what Disney+ is doing for that franchise. The thought that I had was, the WandaVision show, I didn’t personally care for, but the numbers you can’t really lie with or argue with. Then, when I was watching Falcon and Winter Soldier, they’re going to get six hours of content out of something that would probably be a two and a half hour, maybe three-hour movie.

So, you’re like doubling your potential time that you can view people and then all of a sudden, shoutout to Francisco for this idea. I don’t want you to say it and cite you for it. It elevates those characters. Now, maybe somebody didn’t care about Winter Soldier as a figurine, now they really do, and the way that they’re going to be able to introduce characters, it’s wild to watch and to think about.

When I saw the Disney+ announcement, I knew it was big, but now actually seeing how big it was is wild. It’s really cool to see how those assets are going to be able to be flexed. I guess that where I think it’s relatable, or why I think it’s maybe an important lesson is when I listened to Ron Baron talk about Vail, the way that he saw that investment and the way that he thought through the location of the assets and what they might be able to do with hotels and how they might be able to invest, I think that’s the key for figuring out like where growth can go, and then updating priors, and thinking through like, “Okay, well, how does this change how I’m going to think about this, this, and this?” It’s a fascinating game to play. I don’t know that you can do it with precision, but it’s been interesting to watch.

I talked to Sanjay on the other part about it a little bit with Shopify. How do you think through holding something like that? I think what people do, not necessarily him or WCM, but just generally, is some people that I respect have told me that they try to think five years out, how could this double, earnings? They keep asking that question and they try to focus on that. Then, once they can’t answer that, then maybe it’s a sell, but as long as they see a path, they hold. It’s an interesting thought. I don’t know what to do with it. You’re all along–[crosstalk]

Online Shopping $SHOP, $AMZN, $WMT

Tobias: I like the approach. I like the idea. I love Shopify– if valuation was no obstacle, I think Shopify is my favorite.

Bill: Yeah, it’s pretty cool.

Tobias: My favorite business. [crosstalk]

Bill: [crosstalk] -behind it too.

Tobias: Yeah.

Bill: It’s like attacking Goliath.

Tobias: It’s got everything, it’s distributed. It’s not like you can hate– if you have a bad experience, it’s unlikely that you blame Shopify, you blame– as opposed to Amazon where you get some scammy item from Amazon, which happens more and more frequently. Now, I’m a little bit suspicious of the stuff that’s on Amazon. That doesn’t happen with Shopify.

Bill: Dude, you know what’s wild about that is, I don’t even trust Amazon reviews and I still go to Amazon to order.

Tobias: It’s very convenient.

Bill: Yeah, so what actually matters? It’s convenience. It’s not actually trust.

Jake: Saving time.

Bill: Yeah, right?

Tobias: We bought a truck for my three-year-old, because he likes the truck that the older kids have got. We thought we were buying the name brand thing, and it turns out we were buying a knockoff, and it fell apart pretty quickly, because he thrashes it pretty hard. We had to go back in, and this time, I was much more careful to make sure I’m getting the– because even in the description, they said it was, this car, and then I realized it was not, it was a cheap and knockoff.

Jake: Inspired by this– [laughs]

Tobias: Yeah, inspired by, clever.

Bill: [laughs]

Tobias: I don’t know how but I didn’t even think about the fact that something there’d be identical, there’d be a knockoff in there, and it’s clearly nowhere near as good.

Bill: Where’d you buy your next?

Tobias: Ah, Walmart.

Bill: We just bought a bike from Walmart.

Jake: Obsolete, sorry. Cancel it.


Bill: Yeah, that’s bizarre.

Tobias: It’s got to be a momentum run.

Jake: What is it, 99% of the population lives within a half a mile of a Walmart or something craziness like that? It’s not that, but–

Bill: Is it that so?

Jake: No, that’s like–

Bill: Yeah, but I’m saying to call it 70, you think– it’s one of those stats is that shocking?

Jake: Yeah.

Bill: Huh.

Tobias: I went online. We did it online.

Bill: Walmart has that. It’s called

Tobias: Yeah.

Bill: [laughs]

Jake: No way they’re going obsolete. They’re on the internet.


Bill: Well, they made that acquisition, and that changed–

Tobias: [crosstalk] -billion dollars for nothing.

Jake: They brought that one to zero, didn’t they?

Tobias: Yeah, but how are they doing that? They’re fulfilling it somehow.

Bill: Yeah, and I don’t know. Even though it’s directly not– there’s knowledge that they took out of that that’s clearly helping them now.

Jake: Like, put a website up?

Bill: No, it’s QVC and Zulily. Zulily, I don’t think is this asset that they thought they would get. Clearly, the acquisition has had problems, but there’s a lot of retargeting ad tech that they got out of it. I do think that there’s some cultural stuff that Zulily probably helps them with. I don’t know if they should sell it or not. I don’t know what the hell they should do. Greg Maffei hopefully can do this. [crosstalk]. Yeah, that’s the bet.

Jake: That is the bet.

Bill: [crosstalk] -smart.

The Impact Of Tobacco Regulations

Tobias: Given that the cigarette stocks have taken a whack, what’s going on there?

Bill: I guess the Biden administration is considering lowering the amount of nicotine– [crosstalk]

Tobias: The smoking hedge.


Bill: Yeah, that’s right. Lowering the nicotine percentage per stick.

Tobias: Isn’t that good for them? Doesn’t mean you got to buy more?

Bill: Dude, that’s what I thought. Somebody said that there’s some study out there that says that after you reduce the amount of nicotine in cigarettes, smoking– I’ve seen a couple things. One, I’ve seen that smoking amount remains unchanged. Some people have said that it goes to a lower adoption cycle or something like that.

Jake: Less addictive.

Bill: All I can tell you is, I think, finance– I love you all, whoever’s listening, but sometimes I think that people nerd out way too much and don’t know people that are addicted to shit. My sense is that, if people knew how much people fiend for nicotine, they’d probably throw away the studies and just watch how people huff cigs. I’m with you, Toby. I think pack sales are going up. If pack sales aren’t going up, I think those nicotine pouches are going to go up, so it’s [crosstalk] probably a win.

Jake: Isn’t that why they put nicotine in it to begin with?

Tobias: I think that’s why it works. They’ll have to put in there, do they?

Bill: Okay. Just watch a light beer drinker. I people in my experience that are heavy drinkers, if you watch them drink light beer, they don’t get less drunk. They just drink a lot more beer.

Jake: [laughs] Yeah. It’s 12 pack, instead of–

Bill: They just crush 12 of them, and then instead of 4. Maybe that’s not right. But the other comment that I thought was pretty smart as they were like, “Oh, there’s going to be a run on full nicotine cartons in the next year and half.”

Jake: “Ooh, give me the hard stuff.” [laughs]

Bill: Yeah.

Tobias: What about the vaping? You must be able to get different levels of nicotine in vapes.

Bill: My vape knowledge is lower than it probably could be. One of the things that’s going to be interesting to watch is Juul was the subject of all that regulatory stuff back in the day, and by back in the day, I mean within a couple of years.

Tobias: [crosstalk] -last presidency.

Bill: Yeah.

Jake: Yeah.

Tobias: Which feels like 1000 years ago at this point.

Bill: Yes, it does. Then they just had this PMTA process that required a lot of money to get through which basically, you had to certify that you knew that your products weren’t getting sold to children. The irony in that is, many of these smaller producers didn’t have the money to get through the PMTA process.

Jake: Regulatory [crosstalk] capture, baby.

Tobias: Regulatory– [crosstalk] There we go.

Bill: Yeah, I understand why people want to say like, “Oh, this is going to hurt the cigarette companies and stuff,” but I just haven’t ever seen anything that does.

Tobias: Nothing hurts the cigarette companies. [laughs]

Bill: I just don’t believe it. The only thing that hurts them is people dying and that hasn’t even stopped the cash flows.

Tobias: It’s crazy that there have been studies out since the 60s saying, “These things kill you.” People like, “Well, probably not me. Base rates don’t apply to me.”

Bill: Yeah. People like drugs.

Tobias: Yeah, it kills you at the end your life, not the beginning. So, don’t worry about it. [crosstalk] -get to the end.

Bill: You’re just cutting off the crappy years. I don’t actually think that’s how it works.

Tobias: You’re pulling forward the crappy years, you’re cutting off the good years.

Bill: That’s right.

Tobias: [crosstalk]

Bill: That’s real talk. No, that’s real. Don’t demonetize us, YouTube.

Tobias: Oh, we’re probably going for this one. There’s a $1.38 out of the window.

Bill: Yeah, sure. Is it $1.38 now? That’s been a lot of hard work to get to that.

Tobias: That’s probably a bit higher than that at this point.

Jake: All right, since we’re in the negative deaths and everything, should we do some veggies on the Dutch winter famine?

Tobias: Yes.

Bill: Sure.

Jake: All right.

Tobias: Give the people what they want.

Dutch Famine Of 1944-45

Jake: Yeah. [laughs] All right. Let’s transport ourselves back to towards the end of World War II. Food supplies are really scarce in the Netherlands. Currently, most of it is being occupied by Germany, and the Dutch government that existed at that time organized a railway strike that pissed the Germans off, because they couldn’t move their stuff around inside of Germany, because they were occupying it– or inside of the Netherlands, because they were occupying it. The Germans put up a food embargo. It was really hard also for the Allied to get supplies and food to the to the Dutch, because all the ports were all bombed out, and the place was just in shambles. So, food stocks rapidly declined for about four and a half million people who were living there. Adult rations in Amsterdam dropped to below thousand calories per day in November of 1944 and then, below 580 calories per day in February 1945. Have you guys done much playing around with fasting at all ever?

Tobias: Yeah, but that’s very, very little.

Jake: Not probably for months on end at all?

Tobias: Oh, no.

Jake: Well below basal metabolic rate?

Tobias: No. Nothing like that.

Bill: I think if you look at my body, no, I don’t fast.


Jake: That was a rhetorical question. It’s obviously pretty rough, and people– also happening at that same time, like gas and electricity, and the heat were all shut off with this in the middle of the war. Young people who are relatively healthy would walk 10 to 20 kilometers out into the farm to trade their valuables for food and bring it back and try to feed the family. People resorted to actually eating like tulip bulbs and beets, and anything that they could gnaw on and they started burning all their furniture to stay warm. It’s pretty bleak. About 18,000 roughly people died directly from the famine, and probably many more from health-related things.

All of this is very bleak and grave, but it did produce some interesting data, if you will, in a scientific experiment, because you took a developed, relatively advanced nation, and you basically cut the food off for a period of time. It gave us all kinds of really interesting control group basically that we’d never really had before. Children of women who were exposed to the famine, and especially if you were in the third trimester during that winter, created these incredible long-run problems. The kids who were born during that time are much more susceptible to diabetes, cardiovascular disease, schizophrenia, and they looked at it and actually, it looks like possibly this PYM3 gene was downregulated during that time period. What ended up happening was then is it, it slowed their metabolism down. Their bodies will store every calorie that it can get its hands on, because of the lean conditions of this very, very important time period, when sort of the printing was happening within the body. It lasted not only through their lives– and obviously those kids were smaller than average, the ones who came out of that cohort, but what’s interesting is that their kids were also smaller than average. Environment can silence or boost DNA. The study of that long-run control of DNA is called epigenetics. What you end up was that surprisingly the children, it echoed for a couple generations after this time period where they had this shortage.

Another interesting thing was they discovered that actually there was a connection between wheat and celiac disease, so you had all these kids in a ward for a hospital that had celiac. When the wheat got cut off due to the famine, all these kids miraculously recovered, and then when the foods came back, like wheat came back, they all immediately relapsed. That’s how we figured out the connection between wheat and celiac disease.

Tobias: How did celiac disease manifest? What was the–

Jake: I think it looks a lot like-

Tobias: IBS, something like that?

Jake: -IBS, yeah. Interestingly enough, Audrey Hepburn was actually a child during that time period in Netherlands, and even though she was obviously very wealthy, she had really poor health through the later part of her life where she had anemia and respiratory illnesses and was just generally unhealthy and couldn’t really fix it. That’s some interesting background there of like, “Wow, we have this control group.”

Early Life Affects Your Investing Style

Jake: Where I’ve tried to tie this back into finance and investing would be, I think– and part of actually is like, reading some of these vignettes in William Green’s new book about these different investors, but I think the time period of when you were printed on by what was happening has a huge impact, and maybe even reverberates through your family potentially, culturally, sort of an epigenetics of culture within a family.

I think about for me, personally, when I was really young, I had a great-grandmother who was a really big influence on me. She was in her late 20s and early 30s during the Great Depression. I think that kind of being frugal, and I’m going to say miserly for lack of a better term, but I feel that. I like saving, I get psychic benefit actually from depriving myself of things often. I think some of it’s related to that mentality like a Depression-era mentality that’s imprinted upon me epigenetically in a way and I’ve tried to put it on my kids as well. I’ve heard Druckenmiller talk about how if you’re in a bull market, you do not want the old guys around, you want to get the young bucks in there who have never seen damage, have never taken one on the chin, because they’re going to be the ones that can push the hardest in that time period.

Tobias: Is that a good thing?

Jake: Well, during the time period it is, I think. I don’t know.

Tobias: Until the end of it. That’s literally the thing that got him in trouble, wasn’t that– he got two guys in right at the very top, they tore up a billion dollars or so. What did you learn? Nothing.

Jake: Did you guys think you have any– Do you think that your value bent, Toby at all, or Bill, is from something in your youth that was an imprint.

Tobias: Oh, for sure. I was a more traditional value investor until 2008, 2009, and everything, the growthy stuff just got absolutely sliced, cut to smithereens, smashed to smithereens, cut to slivers.

Jake: What about when you’re younger, though? I think it happens sooner than that.

Tobias: I don’t know, because there was no investing in my family. It wasn’t like it was a thing. My grandparents were similarly Great Depression, and just never trusted the stock market. When my grandfather retired, he put all of his money in cash, because cash was yielding 16% at the time, but he never moved out of cash through his entire life, and just gave me a few lectures on the dangers of the stock market.

Jake: Yeah. What do you think, Bill?

Bill: Ah, I don’t really know, I don’t have anything like that. I guess the one thing that I do wonder if– sometimes I don’t mind running into fire is I have heard stories of my grandma’s grandfather, what was really lighter fluid on his business was the Great Depression. He was one of the few guys that was willing to write insurance during that, because he had the capital to do so. When everybody else was really down on their luck, he just grew market share like crazy. At least that’s how the story has been told to me. Actually, A. P. Giannini, Bank of America did something similar when I think it was the San Francisco fires or something like that. I’ve always like identified with– Maybe that was the reason that I was willing to buy some levered shit in March. When I say shit, I don’t mean shit. TransDigm is a good company, but maybe that’s why I was slightly more willing to just be like, “No, this is nuts,” and swing a little bit, but I do think that I would be lying if I said that I didn’t live a pretty nice life monetarily, and maybe that’s why I’m able to identify with some of these luxury goods a little bit better.

Jake: All right. Well, I think we’ve killed this one. We got time for some questions?

Tobias: Yeah, throw some questions. That was a good one.

Bill: I definitely think that the time that– I do worry that the time that I’ve become professional has coincided with a real rerating of growth, and how much of that is colored how I see the world, and how much of that is real and how much is not, that I do try to be cognizant of.

Tobias: That’s the main argument for any kind of investor, you don’t have to be a value investor, but is this change that we have seen? Is this secular? Or is this cyclical? Which group you fall into dictates how you invest for this period. I just can’t get away from the fact that I think that there have been cycles like this before and this is unusual, and we’re going to down cycle, but that’s by no means the only view that’s out there, and might even be the minority view out there.

Bill: Well, I think the other thing that’s tough is after 10 years– it’s the old, it’s the Meb Faber God portfolio, like, how many people are still-

Tobias: [crosstalk] -yeah.

Bill: -in business that are able to make that argument, because at some point, it’s like, “All right, but you’re going to go out of business.” There’s still a lot of–[crosstalk]

Tobias: It’s more than 10 years now. It’s March 2009 through April 2021. So, we’re 12 years in. Is there anything that’s even remotely close?

Bill: We did have a pretty big panic in March, to be fair.

Jake: Well, I was going to say, do you think that that little blip is going to be thrown out in history? Let’s say we have another five-year run, is this 2009 to 2026 going to be considered one bull market with just a little– sort of like ‘87 was a blip in the middle of a 1982 to 1999 run.

Tobias: Yeah.

Bill: Yeah, I could see that.

Tobias: There have been others too, which we now don’t think about or talk about. There was the late 2015 one. We had a good run in 2016, and there was also late 2018, which those just completely passed by, just because I guess 2020 was a bigger drawdown, but it’s also very sharp. It’s over very quickly, and we’re now like 30% or 40% above where we were at the top of what was already a pretty stretched market, I would have thought at the time.

Bill: I guess that the one thing that I really have been thinking about and need to think a lot more about is we all sit around and look at stock prices all day, or not.

Tobias: I try not to.

Equity Investors Missing On Other Asset Classes

Bill: Yeah, I shouldn’t frame it that way, but the discussions that we have are about stock prices and dislocations within the stock market. One thing that Jason Buck said to me this Friday when we sat down, he’s like, “Sometimes, I look at you guys, and you’re living in this little hovel, and you’re arguing over just the hovel and you’re not paying attention to all of the other asset classes out there.”

Tobias: That’s fair.

Bill: Maybe what we’re talking about is actually just completely missing the real game, and we just happen to be in this little hovel, and we can’t see anything else.

Jake: NFTs, all in.

Tobias: [laughs]

Bill: Well, no. Dude, I said it last week. The currency debasement theory, I think, is something that I need to spend more time thinking about now. I don’t know what I’d do with it. I don’t know if I implement– [crosstalk]

Tobias: What’s the currency debasement theory?

Bill: Well, just price these assets in hard assets and see how whether or not we’re actually at highs.

Tobias: Bitcoin.

Bill: It just like the Peter Schiff thing.

Jake: Dividing everything by some denominator that’s run-up?

Bill: Well, but if gold has run up because it is argument that the dollar is going down, I don’t know how to figure out when you’re matching the right time series. I don’t know how to figure out how you’re measuring it when you start, when you end, but I do think that somebody like Schiff would say, “Well, the reason stocks are going up is the dollar is going down.” I just haven’t spent a whole lot of time thinking about that because I study to a church that doesn’t talk about that at all and says that those kinds of thoughts are stupid. I’m just not sure that I’ve spent enough time questioning that assumption.

Tobias: Well, part of referring to the Shiller PE and other things like that and looking at the level of the market is to try to get an idea of where the asset class is, relative to other asset class is, so I use it relative to international markets. I guess you could look at it relative to other– I had an econometrics professor, when I was in uni, who used to like looking at gold, oil, and equities, that’s three different groups. He said, when you price each in the other, you see that they get these dislocations. There’s a chart that goes around every now and again that shows some sort of commodities basket is extremely– is unusually cheap now relative to the S&P 500, because commodities have been beaten up and the S&P 500 is very, very expensive. That would suggest that you want to be more commodity focused than equities focused.

Bill: Is that on current earnings because commodities have exploded higher. That would be [crosstalk] terrify me about that.

Tobias: I haven’t seen it for a little while. I haven’t seen it for a few months, but it was something that went around quite a while. It’s always criticized, in the same way that the Shiller PE is always criticized. I think the criticism of the Shiller PE is legitimate. It’s really only been around since 1996. Basically, hasn’t worked since 1996. I think that’s a fair–

Bill: It hasn’t worked since it’s been around. I like it.

Tobias: Well, if like you look at when the market diverges from the long run average, it’s 1996. It just hasn’t touched it since then. Is it useless? I don’t know. I like the theory of it that you take an inflation-adjusted average of 10 years of earnings. It’s better than a single-year PE, which can be– you get a 2008-type scenario where the banks wipe out all the earnings.

Jake: Yeah– [crosstalk]

Tobias: Then you look at the single-year PE, the single year PE is a contrarian indicator. When it’s high, it’s actually probably a pretty good time to buy, when it’s low, that’s because earnings are very high.

Bill: You actually perversely want to buy cyclicals in the market when the single-year PE is screamingly high.

Tobias: Or, you want to use a different metric. You want to use assets replacement, assets that like, Tobin’s Q would be a better metric than the– [crosstalk]

Jake: Yeah, price to sales even.

Tobias and Bill: Yeah.

Bill: This is Ken Fisher stuff right here.

Tobias: [laughs] That name is cursed.

Bill: I know, it’s such a shame, because he did write some good stuff. You know what’s tough about him for me, is a lot of how I learned markets was through– there’s this Forbes book about him 25 years of a market guru and I really enjoyed that book, and I really enjoyed a lot of what he wrote. Sometimes, I just wonder if these guys that are super smart just don’t understand what they’re allowed to think and say– he’s got major social problem– and look, I’m not defending what he said and he’s clearly got some issues, but I don’t even know if he knows he’s got issues.

Jake: Yeah.

Bill: William Green’s book touched on it. Some investors, they got this touch of– they just don’t even understand that it’s not right to think.

Tobias: Yeah, that’s right. [crosstalk]

Bill: That doesn’t make it right. It doesn’t make it okay to go out and say it, but it’s just hard for me because he did frame so much of how I think about things and to just not even be able to speak his name, it doesn’t feel right.

Jake: It’s okay to separate the message from the messenger too.

Bill: Yeah, that’s right.

Tobias: Low self-awareness or low–[crosstalk]

Bill: No EQ.

Tobias: Yeah, that’s right.

Bill: It’s crazy to build a multibillion-dollar business and have that low of EQ though. That’s crazy.

Jake: Only in finance can you do that.

Bill: Yeah, through book.

Tobias: No, that’s not true. I think you can do that in tech, too.

Jake: Oh, yeah.

Tobias: It might be an asset in tech too.

Bill: That’s true.

Tobias: In some ways you need to be able to hack the whatever little limbic system drive that you try to target, but then not care at all about the consequences.

Bill: Yeah, being a little bit of a sociopath might help a lot.

Tobias: [sighs] There’s a cheery note to end the podcast on. [laughs]

Jake: We’ve got five more minutes, don’t we? We started [unintelligible [00:55:27].

Bill: Yeah, I think we might.

Jake: Do we have no questions?

Bill: I’m sure we have plenty of questions now, Jake.

Jake: No answers though.

Tobias: Yeah, lots of questions, no answers. I’ve got to hit on the half hour.

Bill: All right.

Tobias: Thanks, folks. Next week, we get a little change in the lineup. Bill’s taking a break for a couple of weeks. We’re going to have Ian Cassel in loco parentis or as a locum or one of those things.

Bill: Makes me very happy.

Jake: Who’s going to run all the bots while he’s on the show?

Bill: No fans. I’ll tune in. You’ll have a fan.

Jake: [laughs]

Bill: I need some time to clear my mind a little bit.

Tobias: Happy 420 everybody. See you next time.

Bill: Yeah, happy holiday.

Tobias: Ciao.

Bill: Shoutout to the–

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