VALUE: After Hours (S03 E22): Lumber, Houses and Inflation; Healthcare Tapeworm; Value, Size and Quality

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In this episode of the VALUE: After Hours Podcast, Jake Taylor, Mike Mitchell, and Tobias Carlisle chat about:

  • Lumber & The White-Hot Housing Market
  • Value, Size & Quality
  • The Healthcare Tapeworm
  • High Yields In Small & Micro-Caps
  • Druckenmiller, Service Models & Infrastructure
  • Opportunities In Special Situations
  • Size Beaten Up As A Factor
  • When You Don’t Have Conviction You’re Better Off Waiting
  • What’s Driving The Shortfall In Housing?
  • Lumber Mills Shortage
  • Bezos, Buffett, Dimon Couldn’t Solve Healthcare
  • $AMZN Becoming The Stock To Underwrite
  • Growing A Forest For Lumber Production
  • Insurance Companies Find A Corporate Sweet-Spot
  • Adjusted Wages Have Gone Nowhere In 40 Years
  • Medicare Procedure Price Sheets
  • Singapore’s World Class Healthcare System
  • It’s Very Expensive To Be Poor
  • The One Stock Portfolio
  • $15 Botox Shots

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Full Transcript

Jake: And we’re live.

Tobias: Oh, yeah. [laughs]

Mike: We’re live.

Tobias: It still says its sharing. My computer is so slow. What’s happening, fellas? This is going to be an interesting one. Bill is going to take a little break for today. He’s going to be just in and out through June, because he’s moving house and he’s got a whole lot of stuffed in. So, as a locum, we’ve got Mike Mitchell. Welcome.

Mike: Happy to be here. I’m glad I am here. I’ve got to give a shoutout to my man, Kurt Martinson. Sorry, I bailed on lunch. Love you, bro. I’ll catch you next week.

Jake: [laughs]

Tobias: Sorry, that’s my fault. Bad calendar.

Jake: Calendars are hard.

Tobias: They are hard.

Jake: They are. That second-level stuff.

Tobias: Jake Taylor, as always, how are you doing?

Jake: Happy to be here and excited to have the lumber baron with us for today’s episode.

Mike: I hope you guys only want to talk about lumber, because that’s all I’m prepared to discuss.

Tobias: Well, we’ve got home shopping and lumber. Can you still discuss home shopping?

Mike: Yeah, no, still involved with– I can say anything you want to know about middle-aged women shopping patterns, and housing starts, and lumber prices, I’m happy to make an attempt.

Tobias: Well, let’s talk about what you’ve seen. I think in a broader conversation, there’s this ongoing discussion about whether we’ve got inflation here to stay or not. Is it transitory? Is it just by virtue of the fact we just had that restart a year ago? So, lumber is a commodity price that gets tracked pretty closely as it’s associated with– When lumber spikes it, that’s a good thing, right? That’s the beginning of the rebuilding for housing. Do you think there’s any broader story to draw from it, or what do you think? Is it an idiosyncratic thing for lumber? What are your thoughts?

Mike: Yeah, well, I’ve been inaccurately predicting changes in inflation for 10 years.

Tobias: [laughs]

Mike: So, I’m happy to make some new predictions if anybody really wants to jump in and talk inflation. I’ve been doing it badly for 10 years. I’m happy to keep going. My broad strokes take on inflation. I don’t really know. It seems logical– It’s so tough, especially when as much time as I spend on Twitter, since I’ve nothing else to do. Every 15 minutes, there’s another take with labor, wage inflation, everything else, and I’m following all of it, and it seems really logical that that’s happening, but to be honest, nothing really would surprise me if we found out a year from now that inflation was back down to 1.5%. That wouldn’t surprise me if we saw inflation spike to 4%, that wouldn’t surprise me. I am not an expert in inflation.

Lumber & The White-Hot Housing Market

But the lumber market, it’s a little different. It’s this weird, not super liquid, more like a dark market for commodities, and not really sure what it shows you about the broader economy. Where it really manifests is in housing. It’s almost like it’s at the point– or at least in the work that I’ve done, it’s almost like it’s at the point where if you tell me what housing starts are going to be, I can tell you likely where lumber is going to fall, and it really hinges on there. There’s one housing start number that you really pay attention to, and if it’s north of that number, then my guess is lumber is going to be strong, and if it’s south of that number, the lumbers going to be weak. So, it tells me a lot about housing. I’m not sure it really tells me about inflation in the broader economy.

Tobias: What does it tell you about housing? Housing is white hot?

Mike: Yeah, it’s white hot. Yeah, it’s white-hot. It’d be very tough to find a negative housing data point. Really, the negatives are, “Oh, this market isn’t quite as hot.” It was white hot, and now it’s slightly less bright shades of white hot, and it was a month ago.

Jake: Is that maybe, was it 11 million people not paying rent?

Mike: [laughs] Yeah, right.

Tobias: That they are building their dream house.

Mike: Yeah.

Jake: That is what exactly what’s happening.

Mike: Oh, that 12 months of rent savings, and now they can afford to build their dream home. Shoutout to Nick, who hasn’t paid rent, I don’t think in like 18 months. You are the man, Nick.

Jake: [laughs]

Mike: He’s a good account. Yeah, it really just, it shows you about housing. What I’m seeing, or at least what I’m hearing is that housing– and this is all public stuff, and I’m just laser focused on it, because it’s where all my money is, but the housing market’s very strong. What’s interesting about is housing demand is so strong, that pricing is running above materials inflation, and so people are looking for signs that this is going to cool, this is going to cool. So far, when the house gets listed it moves and houses are moving above ask, Toll Brothers said, I believe, last week, but the pricing above inflation. The demand is there.

What I’m particularly watching is housing starts which are bouncing around, but really the magic number for me is million and a half housing starts a year. It depends on who you ask, there’s some people who are very smart on this, but I believe it was early last year. So, February 2020, Freddie Mac released a study saying we’re two and a half million homes undersupplied in the country, but if you looked at migration patterns, it could be as many as three and a half million homes. So, if you look at population and household, it looks to me like we need to build at least 1.8 million homes a year over the next 10 years to catch up. If that’s the case, then I would guess lumber stays pretty strong. If you see housing starts go down below a million five, I would tell you lumber is likely to go back to where it’s been, which is around 400 or 450 bucks, which is as all commodities priced to the marginal producer. That’s what I would expect.

What’s Driving The Shortfall In Housing?

Tobias: What’s the driver of the shortfall in housing? There was some hangover from the big 2007 to 2009 boom, and it’s been undersupplied for the last 11 or 12 years.

Mike: Yeah, you can see it if– What’s really interesting about housing is there’s a lot of data, especially, census data, that gives housing starts going back to the 40s. So, you can see forever, post World War II, you can see this ramp and then in 1960, you can see a ramp on suburbanization. You see some low periods like the early 90s on recession, and then see these ramps again. And then, you’ll notice if you do this, I love working with spreadsheets. So, this stuff is fun for me.

But you’ll see leading up to the Great Recession, you’ll see the housing boom. You can see starts like– I think starts peaked at 2.4 annualized, and then the actual year, I think they got up 2 or something like that. So, you see, housing went way above trend, and then boom. Housing crisis and the big short everything, you see the numbers go down to sub a million starts, and it stayed there, and so there’s this big question at the time, I remember was working on housing at the time, and it’s a big question.

We’re just burning off the old inventory, and how long is that going to take, and then, but it stayed weak. I would have lost that I, shoutout to Ivy Zelman. I think she’s phenomenal. Her firms great. They’ve been predicting this recovery in housing starts for a long time and predicting home price appreciation in the absence of housing starts, and she’s been right about the home price appreciation. Housing starts, we just hadn’t seen. I predicted it would come.

So, now again, back to inflation. 10 years of being wrong on my prediction, I’m ready to make some new predictions about the housing market, but there’s no doubt we’re undersupplied. So, it’s just a question of, was COVID the trigger that’s going to get us to catch up in housing, or are we in fact just going to go back to where we were in 2018, 2019? My bet is it’s a different world. My bet is the next 10 years looks more like 20 years ago, less like 10 years ago. That’s the bet.

Tobias: Was that so that’s the early 2000s where it was boom-ish for an extended period of time?

Mike: Yeah, I’d say maybe 1993 to 2004.

Tobias: Okay. I’ve got some bad news, mate. That’s more than 20 years ago. [chuckles]

Mike: Yeah, oh, God, Jesus. Oh, I’m 41 years old, Toby. Okay.

Tobias: It feels I know. It feels like a– [crosstalk]

Mike: 30 years ago.

Tobias: Yeah, that’s the scary thing, right? Got to start thinking in those terms.

Mike: Yeah, my back feels in those terms.

Tobias: [laughs]

Mike: I guess my brain needs to catch up.

Tobias: You and George Soros.

Mike: Yeah. [laughs]

Tobias: That’s the thing about making predictions on a podcast as you never get mark to market. You can just keep on saying it’s just hasn’t happened yet.

Mike: That’s what it is. Just keep going. Just keep going. Be a talking head.

Jake: Don’t put an expiration date on it. It just hasn’t happened yet.

Mike: Oh, it’s fascinating, man. I’ve really enjoyed it. I’ve stumbled into this whole lumber thing, and it’s been a lot of fun. I can now tell you marginal shipping rates like the cost per thousand board foot of Eastern European lumber shipped to the East Coast, I got all this stuff. Any of these facts, these all that data points you need I’ve got them all for you.

Tobias: I bet your wife is just as well schooled in it too. We’ll probably have a conversation with her.

Jake: She can be happier.

Mike: She can. She’s a surgeon. So, she can speak to surgeries, and she can speak to lumber prices.

Tobias: No more lumber, Mike. I can’t hear– [crosstalk]

Mike: Yeah, that’s it. I don’t. [laughs] No more.

Jake: I do have much– [crosstalk]

Tobias: I’m being here. My poor wife, value and growth, she’s just like, “Can’t hear it anymore. Just tell somebody else. Tell the kids.”

Mike: Yeah. [laughs] I don’t care what the cheapest stock on the TSX is on an Acquirer’s Multiple basis. Just stop.

Tobias: But It’s small. It’s small and micro. So, it’s really illiquid.

Mike: [laughs]

Tobias: She likes a derivative.

Mike: That is funny. That’s funny.

Tobias: So, that’s one of the things that my topic is, just I’ve purposefully gone out of– [crosstalk]

Jake: I’ve got a question for Mike first, though on–

Tobias: Yeah, good.

Mike: Yeah.

Tobias: Good.

Mike: Sure.

Jake: Is it does lumber follow a– In economics, they have this term called cobweb effect, where there’s a lag period between when supply can ramp up to catch up with the demand, and then it tends to then overshoot, and then demand falls off, and you end up with where it’s really hard to find equilibrium in a market that has these effects. Does lumber fit in that mold?

Mike: So, lumber’s unique. There’s a lot of unique aspects to it. First of all, let me admit, I am not an expert on commodities in general. There are some really, really, really good, intelligent, thoughtful people on Twitter that can answer these questions, and I–

Jake: But I don’t know. I have right now. So, let’s get– [crosstalk]

Mike: Yeah. So, let’s just me.

Tobias: [laughs]

Mike: You get me. Let’s do this. For years, I’ve invested in Lyondell, I was invested in the crack spreads, ED crack spreads. So, there’s always these weird dynamics. Well, lumber is– and that was all because of fracking, your ethical costs were zero. So, lumber has weird dynamics. Dimensional lumber, think studs, two by fours, trusses, that kind of thing, it’s made mostly with soft wood. Soft wood is produced– or almost all of it’s made of soft wood. Softwood is produced in Canada primarily, and also the Pacific Northwest.

There are other components of dimensional lumber, and then other pieces of lumber that go into a home that can be made with southern yellow pine in the southeastern United States. So, if you look at how a home is built in the United States, or in North America, almost all the studs are spruce, fir, [unintelligible [00:11:01] where the wood actually meets the concrete and the base, the flooring, that can be southern yellow pine. What’s interesting about the lumber market is the Canadian spruce, the softwood that we have in this country, there isn’t a lot of it. So, Canada has for years been reducing their annual allowable cut, their AAC, for various reasons, and this goes back which I think you guys–

Lumber Mills Shortage

Forgetting all the detail, which I’m happy to go into, but forgetting all the detail. Think of it this way. You’re not going to build a mill in Canada. Canada is allowing to cut what they allow to cut, and that’s it. That has been on the decline for five years. That doesn’t show any signs of improving. There is however– and it’s declining and probably my guess would be, it keeps declining or maybe stabilizes.

So, in the southeast United States where they make– or, oh, sorry, they cut and produce boards from Southern yellow pine, that’s growing, I think the CAGR has been 5%. That produces a specific type of wood. I’m told that you can actually use that for dimensional stud-grade lumber, but it requires a lot of capex to dry it. If we solve the “lumber shortage,” and lumber shortage is only a thing if we produce more than a million five new homes in this country. If we do less than that, we don’t have a shortage. We do more than that, we do have a shortage.

Mike; So, the question is, can we build mills in the southeastern United States that can meet that shortage? My guess is that that’s exactly what will happen. It’s really not a question of whether that will happen, it’s a question of when that will happen, how long it will take. Right now for everything that’s been slotted Greenfield, Brownfield., we can catch up to about a third of how short we are, at least that’s what my math suggests that. We can catch up to about a third of how short we are with existing projects.

Interestingly, you’re hearing about all the supply chain problems, everybody’s really busy. So, if you and I decide– so, Jake, and I are going to go build a Greenfield mill in the southeastern United States, we’re going to cut some southern yellow pine, I think the construction can start in two years and will take at least two years. So, I really think we’re talking about maybe depending on how strong housing is, this could maybe resolve itself in three years. My guess is five years from now, when we do our recap call of how wrong all my predictions were, that will definitely be solved. That’d be my guess.

In the interim, if the demand is there to build homes, home builders want to build homes, and we’re building more than about a million five, think of it homes, that’s probably going to come from Europe. That’d be my guess. It’s going to come from Finland, it’s going to come from Sweden, Germany, maybe Austria. There’s a chance that comes from Russia, although, Putin has said by January of 2022, he’s not shipping any softwoods or hardwoods out of the country anymore. So, we’ll see what happens there, but it’s going to come from Europe. So, if I had to guess of where lumber prices are going to stabilize, my guess would be that the new marginal producer, if housing stays strong is coming from Europe.

It’s the cost to ship a thousand board foot from Eastern Europe to the United States to meet that demand. Right now, spot rates are– I believe the math I calculated, spot rates are about $800 per board foot to ship. Spot rates have doubled from Eastern Europe to the Eastern seaboard that used to be closer to $400. So, maybe it comes back down. Maybe it’s $400 to $800, but then you’ve got your cost to produce. So, my guess is much like Ethel– Sorry, Naphtha was to Ethel for Lyondell. My guess is that, if housing demands stays strong, that’s going to be the marginal producer. So, your cost will come down. I don’t know if they level off at $600, $800. If housing demand stays above one five, I’d be real surprised if they go back to $400.

Growing A Forest For Lumber Production

Tobias: So, the issue is mills. To create a new forest, that’s a 25-year endeavor presumably.

Mike: It depends on the forest. We have a ton of southern yellow pine in this country. If you build a mill, you can basically get free– What I mean is, there’s plenty of that stuff. It’s the stuff in the northwest United States, Pacific Northwest and then in Canada. The Canada trees, I’ve heard Stenson say it takes 80 years. I heard another analyst say, it takes 40 years, but those trees are– It’s going to take a while. That’s how I’m pretty confident we’re not getting more softwood trees out of Canada. What they’re allowing for cut is they consider to be sustainable, and so it’s almost like this investment that I made– If you look at what I think the real value there is, is the cut rights. I think the cut rights are really what has the value there. The mills themselves, you can optimize, and they’ll be quite profitable. But it’s really those cut rights are so valuable, because these trees take a generation. They take a long time to grow.

So, my guess is that, like I said, I really don’t think you’re going to see a lot of Greenfield in Canada. Somebody is probably on– not watching this on YouTube, somebody is probably in there, chiming in about how wrong I am about all this, and you’re going to see all these mills go up in Canada, but I’m pretty sure it’s very difficult to get the cut rates in Canada. It’s really all going to happen to southeastern United States. But this industry, these guys were burned for so long. These were like– Can I cuss on live–?

Tobias: You can.

Mike: Okay. These are really shitty businesses for 10 years. It’s starts below a million, these guys are going out of business left and right, and the returns have just been awful. They weren’t terrible in the 90s, in the early 2000s, but they did bad for 10 years. What’s fun is having a presence on Twitter and having some people follow you, you get these like, “Hey, man, I run a mill in Oregon. If you want to talk about it, let’s talk about.” I’m like, “Yes, I want to talk about that.” Get on the phone, it’s like nobody wants to build a mill. There’s so scarred. Everybody’s– [unintelligible [00:16:28] just paid a huge special onetime dividend, I’m happy for him too. I’m like, “Man, you guys had eaten it for 10 years, and now you finally have some money in your pocket.” It’s good to see. It’s been a tough industry for a long time. So, nobody’s really rushing out to build mills now, which is also part of the problem. They will, of course, they will, just a question of when.

Jake: It’ll be a bunch of finance guys to get into it–

Mike: Yeah.

Jake: who think it’s a good idea to–

Mike: Jake–

Tobias: You can stick to that.

Mike: Jake, how much cash do you have? [laughs]

Jake: Yeah.

Mike: Do want to build a mill?

Jake: We’re going to SPAC a mill.

Mike: Yeah. [laughs]

Jake: That’s a good follow-up question too, have we considered just trying to print more lumber? Is that–

Tobias: [laughs]

Mike: Oh, it’s a good idea. I don’t think that’s been considered. I’ll run it up the flagpole. See what comes out. [laughs] So, that’s lumber.

Tobias: Yeah. That’s a great take. That’s the most comprehensive take we’ve ever had on anything on this show. It’s a–

Jake: On anything by like a country mile.

Tobias: [laughs] Thanks, Mike. Don’t get used to this quality, because we can’t sustain it for the long run.

Mike: [laughs]

Tobias: Or even for the rest of the show. What’s your topic today, JT?

The Healthcare Tapeworm

Jake: I have a little segment on the tapeworm that might be of particular interest. [laughs] We’re not–

Tobias: Do you want to take it away?

Jake: Yeah, we can do it now. So, this came from, Buffett was talking about the healthcare industry and his failed venture with JPMorgan and Amazon. It’s called Haven. Him and Charlie were asked about it, and he said that, we learned a lot about the difficulty of changing around an industry that 17% of GDP. We were fighting a tapeworm in the American economy in the tapeworm one. Then, Munger laughed at that point and said, that’s a good analogy for it. As if maybe, they hadn’t even talked about it before, but so, I thought maybe we jump into a little bit of some tapeworm background-

Tobias: [laughs]

Jake: -and then maybe even a possible solution to our 18% GDP problem. So, we’re tackling the big movers here.

Tobias: Just tie some meat on a bit of string. That’s how you get it to come out.

Mike: [laughs]

Tobias: We will [crosstalk] out.

Jake: Well, if all the guys who are complaining about googling yarak and the pictures that showed.

Tobias: [laughs]

Jake: Don’t go for the tapeworm, either.

Tobias: Google yarak. [chuckles]

Jake: There’s some things that you won’t be able to unsee when you look at tapeworm pictures. I did it for you, so you don’t have to. So, little background on the tapeworm, lovable little guy. They’re caused by ingesting food or water that has either eggs or larvae in it. Once it’s inside, it can migrate outside of your intestines into almost anywhere in your body and form these little cysts.

Tobias: Horrifying.

Jake: Yeah. The symptoms of it are nausea, weakness, diarrhea, headaches, allergic reactions, seizures, which are basically all of the same symptoms that you have when you deal with the medical industry–

Tobias: [laughs]

Mike: Or stock market corrections, frankly and-

Tobias: Yeah.

Jake: Yeah.

Mike: They’re very similar.

Jake: Exactly. So, these things can grow up to 80 feet long, and live for 30 years, which is a miracle in that the alimentary canal of a tip of an average human is only about 30 feet. Somehow, they wind themselves all up inside of you to the point where they can cause blockages and all kinds of terrible things, and these cysts can build up to where they cause organ failure.

Tobias: A 30-year-old 80-foot tapeworm, like that’s part of the family, isn’t it?

Jake: Yeah, no, it should be named at that point, right? That’s not– That’s just called a kid.


Jake: To go back to the healthcare part of it, and maybe a little bit less joking around, I watched this talk by this economist from Scripps, who’s a professor. His name Sean Flynn, and friend of the show, Dan Sheehan, sent me this video, because him and I have talked about this topic a lot. He’s passionate about it. It’s about actually how Singapore delivers the same quality of care as the US, but at 80% of the cost– or sorry, well, spending 80% less than the US. So, it’s 20% of the cost.

To give a little bit of some background on some numbers, if you just think about a baseline of human health, and if you have no intervention, Haiti, which spends $15 per year per person, the life expectancy there is 62 years. This is basically like if you have no help at all, you might get to 62. Then, obviously, as you get more healthcare services, the US is up at 78%, Singapore’s at 83%. Now, the US healthcare system actually, it’s highly effective. If you’re going to be in an acute accident, it’s where you want to have it happen. Our ability to intervene in trauma situations is really unparalleled.

However, we’re just spending so much goddamn money to make that happen. Just unconscionable amounts of money. As a percentage of GDP, France, Sweden, they’re around like 9% to 10%. That’s a little bit more of a normal global average. The US at 18% which is almost 2x, and our GDP is obviously much bigger than theirs as well. But Singapore’s in at 3.9%. Now, that equates to then, it’s about $8,000 per person in the US that’s spent, whereas in Singapore, it’s $1300. Just to give a little bit of reference on some numbers of that 18% of GDP, how big that is, what do you think that we spend in total for the US GDP on defense? Like all these wars that we’ve been waging, missiles we launch it, all kinds of shit. What do you think that we spend?

Tobias: I don’t know. A trillion?

Jake: Well, percentage in GDP?

Mike: Yeah, I was going to say I thought it was 20%. I thought I’m thinking I’m wrong based on the way this question is going.

Tobias: I thought GDP was about, I thought it’s 17%, so, I guess it’s like, 6%.

Jake: 3.4%.

Tobias: Okay.

Mike: Wow.

Jake: Social security, how much do you think we spend on that? Everyone bitches about it. This is unsustainable. We spend too much money. How much do you think we spend on that?

Tobias: Well, it’s going to be the same or slightly less. I’ll go 3%.

Mike: Yeah. Mid singles, yeah.

Jake: 4.8.

Mike: Yeah.

Tobias: Damn. [chuckles]

Jake: Yeah. Now, just for another fun point of fact that 2020 federal deficit, how much did we spend versus bring in? 15%, ouch.

Tobias: Ooh.

Jake: [laughs] 2021’s deficit, looking like it might come in and about the 10% range.

Mike: Wow.

Tobias: Oof.

Jake: We’ve got that credit card out right now.

Tobias: [chuckles]

Adjusted Wages Have Gone Nowhere In 40 Years

Jake: So, in the last 40 years, there’s been this phenomenon where the middle-income person, the middle class, their real adjusted wages have gone nowhere in 40 years, and that’s probably a source of a lot of the social unrest that we see. People just feel like, “Shit. Everyone’s made all this money, but I’m left behind. Well, what’s been happening?” Well, the total comp actually has been rising at the same rate that it was before, before that 1980 when it ticked over, and what’s happening there is that it’s been going through insurance premiums. They’ve gone up at a 10% CAGR over that whole time. So, your total comp has actually gone up, but your take-home pay has not. It’s just been going to the medical–

Tobias and Jake: Insurance.

Tobias: Yeah.

Mike: Yeah.

Jake: So, healthcare really has been this vampire, this tapeworm on really not just corporations, but on the average person what they’re taking home. It’s a little disheartening in this video that I got a lot of these facts from, is from 2012. We’ve made no progress in the last decade on–

Mike: I’m sure it’s quite a bit worse today than it was in 2012, to be honest with you. I’m pretty sure that’s worse.

Jake: Probably, the worst. So, here’s what’s really going on and why our system is broken. It really it comes down to Economics 101. At the margin, the decision, the point of sale, where we decide what to consume as a person in a healthcare setup that we have, the prices are set so artificially low to us with this copay system, insurance policies are become this basically sort of all you-can-eat thing where you end up with basic tragedy of the commons, this is Econ 101.

So, a perfect example of that is the spending went from 64-year-old versus a 65-year-old, and you know what happens at that age, you kick over onto Medicare. All of a sudden, you’re on the all-you-can-eat buffet, like how much does spending go up from a 64-year-old to a 65-year-old? It’s 40% more. It’s not that the people are just like, “Oh, I’m waiting until I’m 65 to get that lifesaving surgery now,” all of a sudden. Health outcomes are no different between 64 and 65. It’s just now that it’s someone else’s paying for it, we over consume.

So, what about these other places that are heralded like Canada and the UK, different systems. They don’t use a pricing mechanism to solve this problem. They use rationing instead. You queue up, you get in line, and if you want a knee surgery, it’s going to take four years from now. I’m not sure that’s much of a better system, but people seem to tout that these other systems are better than what we have. I’m not so sure about that. And there’s also this denial of care thing where they figure out like, “Hey, if it’s going to cost $30,000 this year to save your life, well, that’s over what we have allocated for that budget.” So, sorry, we’re not going to be footing the bill for that.

Singapore’s World Class Healthcare System

What does Singapore do, that’s completely different. How did they solve this problem? Well, first of all, they forced citizens to save one-third of their income, and 6% goes into the healthcare savings account, which is it’s like an HSA in the US. 15% goes into retirement accounts. So, they have basically a forced IRA. Then, 10% goes into a pot that can either be used for your education or a housing and something like 80% of people own their own houses in Singapore. And then, the government pays, I think, 4% interest rate on the money that you put into here.

The thing is, especially with the medical, because you start so early, and you put money in there, and it grows, and you don’t tend to need it when you’re young and healthy, you get to the end of the line where most of the expenses are and you’ve actually saved enough money to take care of it. So, you don’t end up with this free-for-all system where we have a difference between the 64-year-old and the 65-year-old.

So now, in this system, they basically– the other thing too is that the government will buy an insurance policy for you that’s like a super catastrophe healthcare wise, and do you know how much of that ends up costing the government to pay for this? So, it’s a $2,000 deductible. You have to pay for everything out of pocket, out of your own HSA up to $2,000, and then the rest is on the government. So, everything above that $2,000, how much do you think that the average citizen pays for that? Knowing how much– I don’t know if you guys know how much you pay for your health care premiums, but what would you guess per month?

Tobias: They’ve got a reinsurance– like a catastrophe– so they’re reinsured above $2,000. Is that the idea? That’s what the government doing, it’s not actual reinsurance, and it’s an uncapped.

Jake: Uncapped.

Tobias: I mean, that could be like, I hate to hazard a guess here, but I’d say I don’t know. Let’s say $2,000 a month.

Jake: No.

Mike: No, with that deductible, it’s going to be low. I wouldn’t be surprised, you told me it’s $100 a month. That deductible is huge. What do you got, JT?

Jake: $14 a month. [laughs] What’s happening here, why the US is broken is that, because we have individual state commissioners who decide what gets included in plans or not. You have lobbyists then that can say, “Hey, you need to make sure that chiropractic is included. You need to make sure that Viagra is included. You need to make sure that-

Tobias: Ray-Bans.

Mike: Hey, don’t come after Viagra, Jake. Whoa.


Jake: Oh, yeah. It really does become a political thing where, what gets included is really pushed by lobbyists. They want to have their thing included so that they can jack the price up. When we think about why is healthcare so expensive, it is not this catastrophe, you need a liver transplant type of thing. Those things are very rare. It’s more just these bullshit visits because your kid has a cold, [crosstalk] it’s the everyday stuff that takes up all the doctor’s time that actually most of the money’s being wasted. With Singapore by making you decide, “Well, do I want to spend my own money on this?” You decide like, “Yeah, the kid, it’ll probably go away. This cold’s going to go away. We don’t need to bring in. I don’t want to pay for that.” All of a sudden, the medical system is freed up to handle the real important things, and it costs just way, way less money.

Now, the other thing they do that’s interesting is that they allow you to shop around for the services. The doctors are actually required to post a menu for services. So, you get to see what the price is when you go in, like, “Oh,” and then the other thing is they make the hospitals post for different surgeries, the complication rates. You can look and see like, “Oh, well, this one is considerably cheaper, but they have a lot higher complication rate. Maybe that’s not really the place that I want to go.” Now, the marketplace is discriminating against poor service, as opposed to the insurance company just deciding. Price and quality matter at that point. Yeah, there’s a great saying that, the Singapore government, they force you to save, but then they trust you to spend. I was like, “Damn, we just need a lot more of that, I think in the US than what we have.”

Now, what’s interesting is if you look at for counterexamples, other places that are adjacent to medical, like Lasik, cosmetic surgery, even pet care, all those things have seen dramatic decreases in price and improvement in quality over time. That’s what technology does. It wants to give you more for less.
But we’ve been forwarding that.

Tobias: That’s the thing I’m always amazed by particularly in this joint, when you drive around, there’s ads for Botox shots.

Jake: Yeah.

$15 Botox Shots

Tobias: Botox shots are just like– they’re basically, like 15 bucks a shot or something, I’ve got no idea how many you need, but you can probably tell that by looking at my head, but–


Jake: For you, it’s going to be a lot.

Tobias: You’re going to need 50. It’s expensive.

Jake: They’ve done a couple tests here in the US. Actually, Whole Foods, John Mackey, who is one of the founders and CEO there, he has this idea of conscious capitalism, and he is a pretty big free market guy, but they set up for all of their full-time employees, they will put money $1850 into an HSA for them, and then they will buy an additional high deductible plan up to $2700, and then anything above that is covered by the plan. They saw that their cost dropped 35% just putting this plan in. Just no other changes. They did another experiment in the state of Indiana government workers and found similar results, and no quality-of-care differences. People still went and got their mammograms, they got their tests did, no quality-of-care changes at all.

It’s little stuff, when given the option, 92% of people will pick the name brand drug when someone else is paying for it. But when it’s their bill, they pick the generic and it drops to 13% than taking the name brand. All of a sudden you like, “Well, name brand’s good. I don’t need name brand.” So, there’s just a million ways that you can save money in this.

It’s Very Expensive To Be Poor

Mike: It’s such an interesting topic that you bring up. There’s so many things swimming in my mind. It just cut me off, because I told Toby, a while ago, if you’d let me talk, I’ll just keep going, but there’s one thing that jumps in my brain is you start talking about deductibles. Tyrone V. Ross was on Brewster’s pod a while ago, and he said something that’s just stuck with me. I think about it once a week. He said it’s very expensive to be poor.

There’s a concept I never really considered, and then you start talking about high deductible insurance. The truth is, if you have a decent savings, you should have the highest deductible insurance. You really should only be insuring disasters. You should cover the day-to-day stuff. If you go to disaster insurance on your car, your house, it’s cheap. It costs you almost nothing. Nobody does it, but the reason it costs you nothing to your point is nobody sends in a bill, if you go in for $1,000 procedure and a $2500 deductible, you’re not going to talk to the insurance company, and the vast majority of stuff is 100, 200, 1000. So, if you have the high deductible, it’s just very cheap.

Again, it’s just remarkable to me, when I hear something like that. I’m like, “That’s right. It’s very, very expensive to be poor,” which is maybe something that country should think about. This reminds me very much of cable companies. So, the video bundle– When you put the intermediary in there, and they’re dealing with the content and aggregation of everything, think aggregation of services from doctors, to the customer, and you put in cable as an intermediary, in this case, the insurance companies, it changes the dynamic of how people think about pricing and bundling and aggregation.

In this case of cable companies, John Malone is vilified for this, and he’s like, “Well, prices are going up. You don’t understand, I’m pricing it a third of the rate of my content costs. By the way, I know you don’t want ESPN,” which he once called the great tax on the American people is, it’s not wrong. It’s the great tax on the American people, ESPN, thing is $8 a month, or $10 a month and only a third of watchers actually wanted it. But everybody had to have it,-

Jake: Had to buy. Yeah.

Mike: -because they had to. That’s very similar to how insurance companies operate to your point about how they intertwine with regulators and certain people want different services, and so they bundle it together, and then they have this opaque pricing mechanism. As a consumer, you don’t care because its employer sponsored, which is also I would, the point you’re making, I think part of the problem. Then, one last point I have on this–

So, my wife’s a doctor. We’re going to open a practice for her in Fort Collins, Colorado. So, I’ve done this very deep dive over a couple years on pediatric ophthalmology, and starting a practice of pediatric ophthalmology, and of course, the biggest issue is payers. Relationships with payers is the biggest issue. Commercial payers is the biggest for pediatrics. They have no relationship with Medicare. There’s some Medicaid but it’s mostly commercial payers. So, I was in [unintelligible [00:35:34], which is their industry group. I was in a panel with these people. Here’s how you start a practice. So, they put up a slide that was fascinating me.

Everybody thinks the doctors make all this money. They do find they cover their cost of capital for sure, and the cost capital is very high, but they cover it. There was this slide somebody put up shows like, “Here’s how much money on average all of our [unintelligible [00:35:56] members, private practices have made over 10 years.” The profit per visit, so I think profit per patient was unchanged in 10 years. Unchanged. If you wanted to make more money as a doctor for the last 10 years, you had to work harder. That was really the only way for you to make an additional dollar, is you had to see more patients.

Jake: [crosstalk] volume.

Insurance Companies Find A Corporate Sweet-Spot

Mike: There’s only so many hours in a day. It’s all volume. I was like, “I would have guessed that it would be up at least with inflation.” But on an absolute dollar basis, it was flat for 10 years. You know, it’d be a fun exercise? What if I went into UnitedHealth financials over that exact same time period and looked at profit per insured?” Guess what was not flat over the last 10 years? It’s tripled.

Tobias: [laughs]

Mike: Think about that. It tripled. Profit per insured, this is operating profit. So, I’m not looking at balance sheet. just operating profit per insured, and the retail lines tripled over 10 years. It blew me away. It was like, “How the fuck is this even possible?” From there, they don’t care, because it’s the employer who picks the plan, and so they only have to deal with the employers, and it’s the doctors who get the graph are like, “Well, I’m paying more an insurance.” So, the insurance companies have found this sweet little spot where nobody’s paying attention. Nobody cares. I should have just bought the insurance companies. When I did, I was like, “This is like, what a great business.” I can just [crosstalk]

Jake: Yeah. Don’t let you wife practice it. [crosstalk] insurance companies. [laughs]

Mike: Well, you see it. It’s a real tragedy in New York. A lot of the best doctors, they don’t take insurance, and I get it. Now, having gone through this process of setting up relationships with commercial insurers, seeing how they respond to doctors. It’s honestly, just the strangest, most bizarre relationship with doctors and payers. They won’t take your call, they’ll never tell you who they are. So, you can never get the same person twice. They often don’t pay just to not pay, just to see if you’re checking that they didn’t pay. It’s this whole bizarre– Anyway, I could go on, but the systems in [crosstalk] I agree with you.

Jake: Yeah, I [crosstalk]

Tobias: I’m with you. It’s odd coming from outside into the system, and then seeing that, when you go see the doctor or whoever you see that you don’t ever see a price. That just comes up later, and then the insurance company says, this is what they tried to charge us, and this is what we actually ended up, we negotiated some money down. I’m like, “Did you? How would I know that?” Then, it’s the employer who pays for the insurance costs. Nobody at any stage who is consuming the service pays for the service. It’s just everything’s going to run away.

Jake: We do, though. We all pay for it in the form of higher prices for everything. Misallocation of resources where, take 8% of GDP, which would put us back at Sweden or France or whatever, back down to 10%. What else could we do in the world and to make you happy with that other extra 8% of GDP wrapped into this bullshit system?

Tobias: That’s defense and may– [crosstalk]

Jake: Defense and Social Security would be–

Tobias: And Social Security.

Jake: -covered if we just even cleaned up this horribly incentivized system. The incentives are just all wrong.

Mike: But deficit. Get that deficit whittled down. I think you’re right. They’re paying– Well, I don’t work but people who do work are paying for it and–

Jake: Real productive citizens. [laughs]

Mike: People who have actual jobs to do actual things that help the world. Thank you to you people, I appreciate what you’re doing.

Tobias: Sorry, dude. Sorry to cut you off. Keep going.

Mike: I was just going to say they are paying for it in stagnant wages. That’s essentially– I think we just figured out all of the sources of inequality and social unrest are due to the commercial payers. So, I’m glad we highlighted this, Jake. Thank you very much. [laughs]

Bezos, Buffett, Dimon Couldn’t Solve Healthcare

Tobias: Well, here is the thing that concerns me. You’ve come up with the way we’re going to pitch to the VCs, Mike. We’re going to say we’re unbundling healthcare, so immediately, they’re all just going to get their checkbooks out. And then, the problem we’re going to have is that we’re going to turn around say, “Well, Buffett, Gates–” and who else is the third person that group?

Jake: Dimon.

Mike: Yeah, Jamie Dimon.

Tobias: Jamie Dimon, I’ve had a go at this thing. I know how this guy knows how to run business-

Mike: Can you remind me–

Tobias: -and they’ve said that this is too hard.

Mike: Can you remind me who those guys are?

Tobias: [laughs]

Mike: I’m kidding. You know what you need, well, if it was going to work in the way that it worked with Netflix or in the way it worked with Apple, when they essentially went around the labels when you were Apple on the music side, and when your video– it’s not the same business, but the way that it’s direct to consumer, it’s got to be direct to consumer.

Medicare Procedure Price Sheets

So, we have the consumers, and then we have the providers, it’s the people in the middle that are the problem. If you were going to come up with a real solution, this is what do I– I’m a guy with a physician wife who has done work on one specific part of this, but my mind, if you’re going to do it, you do it. I think Kaiser Permanente, something similar to this where we just hit– it’s all direct. You pick, you pay, the cost is very transparent. Actually, a lot of– I don’t know in New York, if they do it so much, but in Colorado, where we’re moving, a lot of physicians have pricing sheets. The formula is very simple on what they charge for, everything that a physician does has a code associated with it, and most commercial codes all differ, but they’re all based similarly around Medicare codes.

So, if you really want to know what stuff costs, you just go to Medicare, they publish sheets in every state, and the vast majority of these pricing sheets will be a multiple of Medicare, like one and a half times Medicare. But to your point, that’s not what the insurers pay. The commercial payers have their own relationship with each one of the physicians, and then your physician groups, and then they pay whatever negotiated rate that they’ve settled on. It’s a weird system, man. You’d have to cut out all of the middlemen.

By the way, I’m not even sure you could do that, because now you’re going to consumers and saying, you didn’t pay for this before, at least you didn’t think you were paying for it. Now, you have to pay for it, but we’re going to make it cheaper overall, and tell your employer you don’t want him to cover your insurance, but then our employer is going to give their employees a raise, because they’re not on the insurance plan. Reality is the employee already paying for the insurance, for at least themselves and possibly for other people.

Jake: [crosstalk]

Tobias: At least getting– overtime, that would correct itself. Salaries would start going up to correct for that even in any given instance, it might not. But on aggregate over time, it surely would just start growing again.

Mike: That’s what you’d think. You’d think that eventually the labor market would not allow profits to– The bottom line to the equity owners in the business would not expand just because expenses weren’t flowing out to the commercial payers– [crosstalk]

Jake: [crosstalk] productivity wouldn’t be skimmed off by the medical insurance companies basically. That’s really the dynamic that’s happened.

Mike: Yeah, no, totally.

Tobias: I think we’ve solved the problem. Someone shoot memo to–


Jake: Do that.

Mike: Well, I’ll just take a few notes here, and I’ll just shoot it off to Warren and see if you can put me in charge. Your other point was 100% right. If Warren, Jeffrey, and Jamie can’t figure this out, I’m not sure the problem is solvable.

Tobias: Yeah, that’s scary.

Mike: That’s the thing– [crosstalk]

Jake: I don’t know, though. I’m not sure they thought big enough. They’ve been in the system maybe a little too much. You have to get out of the matrix to really bring down the robots.

Mike: Can I write my phone number up and just hold it here, so Warren can call me if he wants to think bigger– [crosstalk]

Tobias: Text me.

Jake: I don’t know if he’s listening. Shoutout to Warren.

Mike: Hit me up on my DMs and Twitter, Warren. I’m around. I’ve got some thoughts. [laughs]

Value, Size & Quality

Tobias: I’m sorry to derail this and make it go in a less exciting way, but I need to talk about value a little bit. First day of the month, which means we’ve got a month of performance what’s been happening. So, value had this great run from September, and it ran really hot– I think value is still working based on what happened in May, but it looks to me like the two factors that have really broken down in May were the size factor.

Little companies got really beaten up through May, and quality too, which is a balance sheet, and an ability to throw off free cash flows has been weak since about May last year, and so my theory is that a lot of this is reopening trade type stuff that the value when it started running and caught all of these cruise lines, and it’s the airlines, all that stuff, which is asset intensive, but has been operating at anywhere near full capacity so, all that stuff fell into the value bucket, which has a great nine months or so. Now, three quarters have pretty good running, or three and a half quarters of pretty good running. Size is that really odd one. Size seemed to me to take off with value last year, and it had this really precipitous drop over the last– just caught three weeks, seems to have bottomed out.

Quality is the funny one. So, quality, which has struggled over the last 12 months, presumably because there’s been so much money washout there. It means things that are marginal, get a really good run, and quality which are companies that tend to be self-financed, they just don’t– They’re not as big a beneficiary, so they underperform a little bit.

Jake: When there’s less existential risk, then quality is not going to be– it never was in jeopardy of going bankrupt. So, when that comes off the table, there’s less juice there for–

Mike: Mm-hmm.

Tobias: When you look at how deep the drawdowns in a factor basis, when you look at the depth of the drawdown in value, that’s quite stunning. Something I’ve been talking about on the show for years now, but-

Jake: Decades.

Size Beaten Up As A Factor

Tobias: -it certainly feels that way, but Mikhail Samonov, who I always refer to his done that– He’s got the 200 years of data, and this is the worst drawdown in 200 years of data, which is something clearly– the old data is not as granular as the current data but it’s still an interesting thing. Similarly, size is so beaten up that as a factor, it’s no longer got any alpha in it. So, they just disregard size as a factor, which I can see some argument for that. It doesn’t necessarily appeal to me intuitively as a factor, but it has been regarded as one for a really long period of time.

Then, quality too. The quality, I don’t know where we are in the cycle, but it’s not unusual for value to explode out of the bottom, and then quality to start looking a little bit better from the early to the mid cycle through to the end. I realize you guys aren’t factor investors. I’m just curious. I don’t know, Mike, you’re very, very concentrated. You might be so idiosyncratic, you don’t really even consider it at all, but do you notice the impact on the portfolio? Do you notice the impact on your positions, or are they so tied to the–?

The One Stock Portfolio

Mike: I think for just for me, I own two stocks today really. Honestly, I really only own one, but I also have some QVC and– If we went back and looked at the factors, I would think that probably a good chunk of the beta in the move, especially in Qurate, but then also the lumber mill investment was driven by a rotation into value. Value caught a bid right around the time I did that which is– obviously that was the bet I was making was that value is going to catch a bid and that. I’m kidding. No, it’s not. I had no idea. I do think that had a lot to do with it is that all of a sudden, people were buying cheap stocks, decent businesses, nobody’s going to go out of business, and MOMO beta stuff, I think that helped.

Now, because one of my positions has become so big, my daily performance, it’s unbelievable what my overall portfolio can do on a day-to-day basis just based on the move in one stock, which is liquid, highly volatile stock. My portfolio can be up 25% a day, can be down 10% a day. It’s almost not even worth paying attention to, because it doesn’t really mean anything. I pay attention to mark, because I like it, but it doesn’t really– The market being up or down– even the peers, my lumber peers, they’ll be up a percent and I’ll be up 20%. There’ll be down a percent, and I’ll be down 15%. So, it doesn’t really move the needle for me. I’d say, my observation is that there’s just not–

If I were going to guess on what the next opportunity would be, I would say that the opportunity is likely to be some of the really big stuff that people passed on when it was super growthy, and it’s coming to the point where you actually might be able to put that into a bucket that can make sense from a guy who really cares about what they pay. So, that’s– [crosstalk]

Jake: Yeah. It’s like a 2014 rerun.

$AMZN Becoming The Stock To Underwrite

Mike: Amazon quickly is becoming a stock that you can actually start to really underwrite. If you’re very sensitive to valuation, and you’re not just looking at the business, you can start to underwrite it, and probably the same with Facebook and I think Microsoft. These are stocks that a lot of people passed on myself included, because I didn’t really understand the dynamics of Azure and growth and but now when those stocks stay flat in earnings this long enough, pretty soon they start to look interesting. So, my guess is that that’s probably where the next opportunity is going to be.

There’s also some interesting stuff in special sits land, and this doesn’t speak to factors that I just scratching my brain on last week thinking if there’s a way to make money off this TDISCA deal. Smarter people than me have probably already figured it out but seems like there’s got to be a way to make money on that. I don’t know what the play is yet, and one of these days when I stopped playing golf, and going and having drinks and stuff, I’ll sit, put a pencil and paper and figure out if what that opportunity is, I’ll come back Value: After Hours and talk about it then. There’s a lot of stuff going on, but it’s nothing that strikes me as crazy attractive. I’m just waiting.

High Yields In Small & Micro-Caps

Jake: Toby, do you feel with the recent run, that maybe the stuff that you would have had isn’t quite as attractive on a price to value relationship as it was, and therefore, it’s just a little bit harder to hold your nose and just hang in there?

Tobias: That’s absolutely true. The only thing that I would say is that I started– late last year, I was saying that I thought that the spreads were very, very wide, but in addition to that, particularly in small and micro land, the yield was so huge across the portfolio. I think the yield got to 6%, and then, they’re still their payout ratios are still like a third.

There’s still two-thirds being reinvested in those businesses, and I felt that aggregate pushing close to 20% likely performance out of these things, at some point, you don’t really care about them. You don’t need any multiple rerating to get really good performance out of these things, and so I said that a little bit, and it all took off, and so that the portfolio now, I think that the yield on the portfolio on the small and micro stuff is 4%, which I still think it’s really, really fat. But the full returns go from being closer to 20% to being closer to 12% or something like that. So, I still think that’s quite a high return. Historically, that’s quite a high return embedded in there. It’s so high than average, but it’s certainly come back.

Jake: That’s higher than, I don’t know, 40-year data set, average.

Tobias: I think it’s about 9% across the 40-year data set, even in the most recent kind of–

Jake: Hmm. Lower than I would have guessed for small and micro.

Tobias: Yeah, it might be just that starting point. I have to have to think a little bit more about the starting point, but over that full period, I don’t think you get the total return much more than 9%, total return much more than 9% and that includes dividends in the order of 2% plus, so that the nominal return in the market has been high 6% I think, something like that, which is a lot lower than people would think if they’d just started out for last few years. [laughs]

Jake: Some people, they don’t have that penciled into their long term [crosstalk]

Tobias: If you’re looking at from where we are, that’s a totally different story. If you look at the multiple being where it is, and you assume some mean reversion over the next decade, that may not be an appropriate assumption. I’m just saying that I do include that assumption in there that you get negative total returns to the tune of about 0.8% and that includes a dividend yield, could be 1.1% so you can– There’s quite a substantial negative return on the index over the next decade.

Jake: Profit margins come in at all from absolute historical anomaly level? [laughs]

Mike: No.

Tobias: It gets gnarly, but Mike, I’ve been saying this is all nuts for a really extended period of time.

Jake: Yeah. [crosstalk] been upside on that forever.

Mike: You think first of all, you guys should be denominating these numbers in bitcoin. That’s your first problem.

Tobias: [laughs]

Mike: That’s problem number one. Problem number two is based on the returns of the market in the last three years, I’ve actually increased my return expectation, was 10.

Tobias: Sensible.

Jake: [crosstalk]

Mike: Now my [crosstalk] expectation is 50. That’s exactly right. I’ve quadrupled it, doubled it. That’s the answer.

Tobias: I think its [crosstalk] fair.

Mike: You’re going about this the wrong way. [laughs]

Tobias: I don’t think that’s necessarily an unfair assumption either because you can approach it looking at the valuation, you can approach it looking at long run returns, and maybe there’s a momentum element in the market to where if you have a few good years, maybe you do continue to have good years. I don’t know.

Jake: Yeah.

Druckenmiller, Service Models & Infrastructure

Mike: Actually, Druckenmiller did a written interview that I read over the weekend, I should’ve retweet it. It was really good. This guy’s got some interesting– He’s seen a lot, and so the last big, big boom in the 90s, he was one of the key players in that and has some interesting war stories. His take is interesting. He says, look, the last time that this happened was this big, big boom. A lot of these companies that people were underwriting this growth to infinity, when in fact, they were infrastructure companies that were building out an infrastructure one time versus today, the companies are working, they actually are service models, and since the idea would be that the infrastructure is already built, so, now we’re just building out services on top of the infrastructure. It’s like they can actually last. Are they cheap? That’s a whole another question, whether they’re cheap, but they’re not– The idea of 90 plus percent drawdown for some of these companies is off the table.

That struck me as insightful. It’s not something that I had seen discussed before. It’s not a space, frankly, that I really play in. When I factor in my future returns, I look at like– I’m too busy thinking about what has happened, and that colors mean, it’s a bias that I have or I see, well, last year, what was the market of 20% in a global pandemic, and then the year before that, it was 30%. 2018, we had a correction, it was down a whopping 4%. So, I go back for the last 10 years and my God, this is just nuts. Reality is, well, yeah, it’s a lot, but that doesn’t necessarily mean that there’s a huge correction coming, and it really is, the facts are just– Every situation, the facts are just different. So, I try not to be too biased by that. But I’d say some of this stuff still makes me pretty queasy. I’m not rushing out to put a lot of money to work today. It’s just some of the stuff just seems hard to me.

Opportunities In Special Situations

Tobias: Well, it’s going to say in relation to the special situations comment that you made before that I think that special situations, if you read some of those classics and special situations, I’m not saying not that you necessarily have to do this, if you’re over the detail of the special situation, this broader approach isn’t helpful, but there’s still this idea in many special situations that you’re still looking for something that is undervalued. So, you can do a special situation in something that’s overvalued, you’ve got less certainty about the remainder that you get after the event. If they’re undervalued, at least you can find there’s going to be some part of it that’s going to have that–

Jake: There is a lot more meat on the bone of the special situation when things are cheap.

Tobias: Because Qurate and Discovery and all of those, those have all been floating around as they’re cheap on an ratio basis. I’m not necessarily saying that cheap otherwise, but Qurate had been a little bit disappointing for a while and Qurate’s one that’s been in my screens for a few years before the event.

Mike: Those events are funny. I think you said it best. When you find an event and you find a security, you’re certain is undervalued, for me, it’s the best feeling in the world. My God, here’s something that could actually change the way that people perceive the business. It usually is one single moment in time where you’re just like boom, and now the world is different. Sometimes, it’s bogus, but sometimes the case of Qurate, I actually thought what they did was smart. I thought they actually structurally were changing the cost of capital.

So, there’s other things like DISCA where DISCA looks very cheap. The problem that I have DISCA with Qurate, I actually believe in that. I understand and believe the business is stable. I can be wrong about that. But I think for DISCA, man, I have no idea what that business is going to earn, zero. Five years from now, it’s zero. By the way, that doesn’t mean it’s going to be bad. It could be beautiful. It could be a hundred bagger, but they’re changing their business model, or at least in part, their business model is being changed for them, so you’re losing this really lucrative linear business, and you’re picking up this direct-to-consumer business, and there are companies who’ve done a phenomenal job at that. I think Disney’s the new poster child for doing a really good job.

Again, you inject a tremendous amount of uncertainty, which makes it a lot harder to underwrite. We get back to that thing you and I talked about Toby months ago, this idea of getting all your capital back. Well, if I’m getting all my capital back, then I don’t really care. I was like, “Okay, if it’s great, it’s great. If it’s terrible, then that’s fine. I didn’t lose anything.” But a lot of these, you’re still not at those type of prices, you’re still making a bet that whatever on the other side is going to be better, and it’s part- [crosstalk]

Jake: You have to be right about something.

Mike: -have to be right. You have to be right. It’s not so cheap. You have to be right.

Tobias: It’s hard with Discovery. Disney is almost a special like– if you’ve got kids, you’ve obliged to get them Disney, whereas Discovery and those channels, they’re great if you’ve got– you’re already paying for the subscription, and you need something on the background, but actively going out and hunting for that subscription, I don’t know. Not sure.

Mike: Your kids don’t demand that you watch Deadliest Catch?

Tobias: [laughs]

Mike: That’s not something that they– That’s not what they want to watch before they go to bed?

Tobias: That’s for the grandparents.

Mike: [laughs]

Tobias: Save some stuff for the grandparents.

When You Don’t Have Conviction You’re Better Off Waiting

Mike: Oh, that’s funny. There’ll be something to do. I don’t know when, but there’ll be something with that or something else. Yeah, there’s always something. If I’ve learned anything over 15 years of doing this, something always pops up and when you don’t have a lot of conviction in something, you’re better off just waiting. There’s something– [crosstalk]

Tobias: The plan, is a wise man who likes to say that too.

Mike: I think that was Henry Singleton caught a lot of shit for that. He used to say, “How do you manage a business?” He’s like, “I just come in and take it day-to-day.” Well, it’s my style to it. Something will show up and give us something to do, and if you don’t feel it in your gut, then move on.

Tobias: If it doesn’t watch this drive.

Mike: I’ve got the–

Tobias: [laughs]

Jake: There you go.

Mike: Never far. Never far.

Jake: We’ve got to get a couple questions in now since we have — [crosstalk]

Tobias: Well, I don’t–

Mike: Oh, yeah.

Tobias: Put your questions in, folks.

Jake: [crosstalk] situation.

Tobias: Mike is going to be back. You can know–

Mike: How often am I doing this? Am I doing it also next week, or was that a bogus invite that [crosstalk]?

Tobias: You’re booked in for the month of June–

Mike: Every Tuesday.

Tobias: That’s not a joke.

Mike: Sorry, folks.

Jake: [Laughs] Yeah, look at his face. He’s like, “Oh, [crosstalk]”

Mike: Sorry, folks. [laughs]

Tobias: It may be a foursome and–

Mike: No, I’m good. I’m good. I have nothing going on. Every Tuesday is free. I remember telling you every Tuesday is free. I didn’t realize that every Tuesday was good. [laughs]

Jake: I didn’t actually think you’re going to actually call me on that.


Tobias: The only question I’ve got for you, Mike is, what does this got to do with a lumber market?

Mike: [laughs] Did somebody actually ask that, or is that my question?

Tobias: No, that’s a question. That’s a question.

Mike: I don’t know. Nothing, nothing. Let’s talk more about lumber. That’s all next week. All next week, I’ll share my model and go into lumber.

Tobias: Specific question on Nasper’s process. I don’t know it well enough, but I do have a recording with Adrian Sewell, who is a South African investor, who does discuss that. That’s a few weeks back.
What do you do with the capital while you’re waiting, Mike?

Jake: Mm, good question.

Mike: Right, now it’s being dumped into a house in Fort Collins, Colorado. So, hopefully, that’ll end up being a good investment. My portfolio, it’s bizarre now, because of this massive REITs offering. The REITs on the largest position I own are worth more than the security itself. Those rights expire, worthless if I don’t exercise them or sell them. I’ve raised a lot of cash in anticipation of exercising, and then of course, I’ve gotten personal backstops from people so I can exercise if I need to. Right now, that’s where all the money is.

Once that’s resolved, so once that transaction closes, the REITs are either exercised or sold, that I’m just going to reassess, and this position now is like, if you include the cash in the REITs offering, it’s 95% of my net worth. It will not be that at the end of the year, it just can’t. I’m going to have to sell something to pay for housing, move in everything, and then over time, I would expect that will get whittled down, and there’s an uplift coming in that, which my history tells me never to sell into an up list. You always wait until the up list comes, and then when it lists on the NYSE within six months, that’s likely to be–

If you look at the peers, they’re trading much better than [unintelligible [01:01:52]. So, it gives me a lot of comfort that, that’ll be good. Then, my guess is that when there’s some liquidity that shows up on the other side of that, and the deal’s closed, I’ll raise some cash and then I just wait. I would have put it in those QVC preferreds. That was my best idea for cash alternative. Those were trading at par just a month and a half ago, with the distribution, they’re now 109. So, they’ve had it for preferred– [crosstalk]

Jake: [crosstalk] nothing yields.

Mike: Yeah, that’s not crazy. There’s still seven, but it’s like buying them at par, there’s something mentally for me, I was like, “Well, I get eight, and it’s fine, if it’s a little bit volatile, a little squishy.” Now, it’s like, oh, my God, I thought it could go to 110 and it’s basically there, which just shows there’s not a lot going on in the world right now. There’s just not a lot of really exciting stuff. So, I’ll just sit in cash and wait.

Tobias: Yeah, we’re in no man’s land a little bit. We need to see something happen one way or the other.

Mike: Something will happen. [crosstalk]

Tobias: Something will blow out.

Jake: Need the next card out of the deck to see what. [laughs]

Mike: It’s coming. I just don’t know, but it’s coming.

Tobias: All right, folks. This is fun. We’ll be back next week. It might be a full foursome for this, not sure, but we’ll see. Thanks for filling in, Mike.

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