VALUE: After Hours (S03 E26): Fighter Pilots, Animal Spirits, Lean Into The Pain

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

  • Fighter Pilots & Investing
  • The Evolution Of Berkshire’s Hurdle Rate
  • Animal Spirits
  • Lean Into The Pain Framework
  • Calculating Return Rates
  • Listen To Dan McMurtrie
  • What Will Happen During The Next ‘Normal’ Recession?
  • We’ve All Made Dumb Investments
  • Not Catching The Right Tail
  • A Number OF Ways To Build A Margin Of Safety
  • Capitalism Fixes Everything
  • Bond Market Sell Off
  • Help Wanted Signs Are Everywhere

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

Mike: From the bat cave.

Jake: Hey, we’ve had closets. We’ve had cellar [crosstalk] everything.

Mike: Jake, I’m out of the closet just for record.

Jake: That’s true.

Tobias: Mike’s in the attic now.

Bill: Yeah, I was. My bedroom is in the attics. I ran away from my kids.

Jake: [crosstalk] [laughs]

Tobias: And we are live. It happened surprisingly quickly that time. Its Value: After Hours, joined by Mike Mitchell, Bill Brewster, Jake Taylor. What’s happening, fellas?

Jake: Life is good.

Mike: Back in New York.

Bill: Mike, tell us a little bit about the lumber market, please.

Mike: Yeah, I could go on and on about the lumber market. Today’s news is– [crosstalk]

Jake: [laughs] It’s only an hour’s show, I think.

Tobias: What’s happening?

Mike: Yeah, I know. Okay. You really got to go back to the 60s. It’s a [crosstalk] [laughter]

Mike: No, I’m kidding. We’re not going to the 60s. Now, the lumber market, there’s rumors out there that there’s some stabilization, which would just be– For me, if we found some price stability in the 700s, this will be the last show I do that’s not on net jets. [crosstalk] [laughter]

Bill: I called Mike this morning to say, hello, and he’s like, “Oh, you’re calling me to tell me that the weather is really, really hot, and as a consequence, some of the mills have shut down.” I really appreciate you looking out. Thank you. Oh, Mike. [laughs]

Mike: Yeah. You’ve seen some price stability today, because the beast MPC temperatures are North of 100, which makes it really hard to produce. There’s some scrambling going on. Actually, that topic– We want to talk about lumber, but that was my observation from the weekend. I was in Colorado on the weekend. I don’t know how much traveling you guys have done, but in the town that I go to, Salida, it’s busier by 50% than I’ve ever seen it. I’ve been going there for 10 years. It’s out of control.

So many people around, it blew my mind, which was the topic I was more interested in. But if you’re a mill, or a supplier, or a homebuilder, I think the question you’re asking yourself right now is everybody’s on vacation, what happens in September? School comes back, does the job market come back? Does housing pick up again, what does that do? Now, imagine you’re a supplier and you’re trying to decide– If you buy into that, and if the mills shut down, then you want to get your supply locked up now, in case that comes back. You don’t know when you’re going to get the woods. I appreciate you calling me to talk about that this morning, Bill. That was very helpful.

Bill: [crosstalk] Top of mind for me.

Bill: My wife tried to [crosstalk] about it.

Bill: Top of mind for me for sure.

Jake: [laughs]

Help Wanted Signs Are Everywhere

Bill: Dude, I’ll tell you what. I have been around, I’ve been raging in Chicago. So, I have a pretty good sample size what this city is like. The service is just atrocious, because nobody’s working. My boy, who has run a restaurant now for close to 20 years, shoutout to Carson’s, he’s making salads. He can’t get people to make salads. He’s the salad line. He’s working like a dog. He’s seven days a week. I go into see him, I can’t even see him. He’s like, “Dude, I don’t know what to tell you. We’ve got to make the food and no one is here.”

Mike: Right. Well, in Colorado, the service was good. They were meeting the demand. But what I noticed was everywhere had a help wanted sign. Everywhere, everywhere. The wages that they were offering for mundane jobs blew me away. The first one I saw when I got to town to go to Safeway, and they were looking for an overnight stocker, a grocery shelf stocker which means no education at all required, like just put this here, put this here, that was $20 an hour. They’re looking for a butcher at $21 an hour. The pizza place, which had excellent service, shoutout to Moonlight Pizza in Salida, you guys are amazing. Pizza place in Salida had great service, but they had help wanted offering no joke, only time I’ve ever seen this post in a restaurant, 401k and healthcare benefits to their employees for a pizza place. One-unit pizza place in Salida were offering that. Blew me away.

But I think in Colorado, what’s happening is the people who have the jobs, they’re working seven days a week. They’re working all the shifts. I saw the same people, I went to the same places. I think people are just working there– Sorry, working their nuts off, including the ladies, metaphorically, obviously.

Bill: Asses. They can work their asses off. [crosstalk]

Mike: But that there is just– [crosstalk] asses off [crosstalk]

Jake: We all have asses.

Bill: Yeah.

Mike: We all do.

Bill: I used to. I should do more squats.

Mike: They’re just working very hard, and you got to think that. For them, they’re probably cleaning up. You’re making 20 bucks an hour, and you take your shifts from 40 to 60 hours, it’s a boon. It’ll be interesting to me to see– When I left, I was thinking, one, there are jobs everywhere, and there are relatively high-paying jobs with little barrier. You don’t need an education to get these jobs. I also started wondering how many people are staring at that job going. You know what? I’m just going to keep hanging out with my kids. Even the national park, so I normally see two, three tents, one or two campers. There’s 100 people. It was insane. It was crazy. I wonder how many people are like, “Look, I haven’t been on vacation 18 months, I’m out. My kids are out of school. They’re going back to school in the fall. Let’s just go vacation, take a break, and then, in September when kids go back to school, how many of those jobs are get filled?” I’ll be interesting to see. My guess is probably a lot. 20 bucks an hour, if you don’t have any money, it’s the easiest job in the world to take.

Tobias: Do you think it’s a product of the last 18 months being just incredibly stressful with COVID and quarantine, and then, in addition to that, if you can work from home, which many of us can, you just probably had longer hours than you’ve ever had before? Because getting rid of the commute just got rid of the time spent in the car, you just worked during that time.

Mike: Yeah, for me, this was the first time. I had been out since prior to the COVID lockdowns, and so I was just happy to be away. Just be away from my kids for a little bit. I love them. They’re wonderful children. My wife is watching the best kids on the planet. But being away from them is exciting, and seeing my friends, I hadn’t seen them in two years. So, I imagine there’s this, I think, that pent-up demand conversation is very real. Question for me is, what happens when that pent-up demand blows through the system which it will, for families anyway, it’s going to when school starts again, and it’s very fixed. You can’t go on forever if your kids are going to have to go to school. A lot of the schools, I know in some places they haven’t opened, but in Texas, they’re going to be fully open, Florida for Bill, they’re going to be fully open– [crosstalk]

Jake: Never closed.

Mike: Yeah.

Bill: That’s right.

Mike: Yeah.

Bill: I’m a little worried about this delta variant, though. I could throw– [crosstalk]

Mike: Yeah, I’ve heard some concerning. I’ve heard some concerning things in physician circles– [crosstalk]

Bill: Seems like you don’t get that sick. But now, Google’s going to demonetize us for disinformation campaigns.

Jake: Just a matter of time.

Bill: Sorry. Sorry, YouTube.

Mike: Yeah, I’ve heard. I’ll take my knowledge of delta variant offline, so I don’t get backlash from YouTube.

Bill: That’s a good idea.

Tobias: Do you think that the money that’s going to be spent during this period combined with the fact that– I still see shortages everywhere I go. I was trying to buy some beverages, and just about every single color and every single size is sold out. [crosstalk]

Bill: What were you try to buying to buy?

Tobias: You know those barefoot shoes that are very thin? The idea is that it’s better for your feet rather than wearing all the [crosstalk].

Bill: You’re going to rock the ones they got toes and stuff on them?

Tobias: No. Not the toe ones. This one’s a pretty good-looking shoes, and so, I contact them I said when are they going to be back in stock, and they said, October.

Bill: Yeah.

Tobias: [crosstalk] October. It’s like this is bullshit. This thing will be over in five minutes. [laughs] I’m not going to want to buy them in about six minutes. You need to fulfill that now.

Bill: That just reminded me of Top Gun when they asked for back–

Tobias: That’s what I’m saying.

Bill: Yeah, that’s right. Yeah. Well done. I’ve said it before. I think this is what McMurtrie was tweeting about last March about supply chains getting all screwed up. I think now we’re actually living it. I don’t know that he would have thought this necessarily when he sent that, but this is a problem with just in time when just in time just gets stopped. Getting back to in time is really, really difficult, I think.

Mike: That’s right. Especially when you have labor issues. A lot of this is, I got to hire a guy to go unload the port, and then loaded onto a truck, and then to drive the truck. You need people. You need enough people to work.

Bill: Not to mention, dude, there are countries that are still locked down.

Mike: Yeah, that’s right.

Tobias: Yeah.

Mike: Yeah.

Jake: And need those little fingers to make Toby’s ballerina slippers.

Tobias: [laughs] But they look great.

Capitalism Fixes Everything

Mike: They do. Yeah, they do. I have this deep-seated belief– and it’s like, I’m the ignorance’s bliss guy. So, when somebody poses this supply chains are an issue and that’s going to cause all kinds of disruptions. I just sit back and say, capitalism fixes this.

Tobias: I think that’s– [crosstalk]

Mike: Capitalism solves this. It’s been solving it for hundreds of years.

Tobias: That’s true.

Mike: It’ll keep solving it.

Tobias: But I had I had Bernard Horn of Polaris on my podcast. It’s the one that’s out now. I spoke to him. He had this interesting point where he said that we’ve never had this circumstance in the world before where every single manufacturer just stopped what they were doing, paid all their payables, collected all their receivables, and then just sat there for three months. Then, three months later, they said, okay, now, I need to get back to work, and everybody pressed the button at the same time. It’s created this funny thing in the system where there is a lot of demand for some things like lumber, and there’s not a lot of supply of other things. There’s lots of things– lots of odd stuff just isn’t available. I don’t know how that all plays out, but if anything is required in the series and it’s not there, it just means it’s not there available at the end. I guess that’s an argument for the transitory inflation. But what then happens beyond that is the more interesting question, I think.

Jake: I wouldn’t be surprised to see us bounce off the other way too, like overproduction of a lot of things that we’re going to have glut of things that will– It’s just–

Tobias: Masks.

Jake: Well, masks.

Tobias: Hand sanitizer.

Jake: Sure. All of those. It’s just a common– anytime like a system is trying to find equilibrium, it’s going to probably swing back and forth across where it should be, but I don’t know. It’ll be– [crosstalk]

Tobias: It just the function of capitalism to overproduce and underproduce, and try and find that, and it does it more efficiently than any kind of top-down system. But there’s still waste in there, and there’s still overshooting and undershooting, and we don’t really know how long this one will take to correct.

Mike: Yeah, you’re not wrong. A concept of average is just that. It’s a concept. We don’t live at average. We live at extremes. The markets live that way, capitalism is that way, supply chains are that way. We either have not enough or too much, and we normalize it out, but we never live it normal. It’s always too much or too little.

Bond Market Sell Off

Bill: The thing that’s wild is the 10 year selling off. I don’t know. I don’t know. The bottom market doesn’t seem to think that there’s a whole lot.

Tobias: There’s a finger on that scale, though.

Bill: Not the 10 year.

Tobias: You don’t think they’re playing in 10 year, are they not?

Bill: No, I don’t know enough to have an intelligent conversation about this, but I think that the Fed messes around on the short end of the curve and the 10 year in such a deep market that I don’t know that they can really repress that. I don’t know why we would go to like– I guess the thing that’s hard for me to understand is why we would go from a slow growth, no growth world to all of a sudden, this hyperinflation, growthy-type world. I could see a scenario where you have a step change up in price coming out of this because of the stimulus, but then I just think we go right back to growth. I don’t see why– Unless we then say, well, this is going to be perpetual government spending which is very possible, but I also think that there’s some signals that the appetite’s not there for that. But maybe, who knows? I don’t know. Just on equities.

Mike: The part of the 10-year issue is–

Bill: Oh, man. More money will flow to Disney.

Mike: Yeah, no, part of the issue is when you put a lot of money out there, and you keep the short end really low, everything pegs off the short end. When you throw money into the system, and you keep the short end really low, everybody starts chasing yields. You get a lot of dollars running after everything, and that’s what keeps the rates down. The only time you really see– You’re literally witnessing me get over my skis.


Mike: As I keep talking, you’re seeing my head go right over the skis. But when you see that flip, where rates start to get funky, so if you remember, March of 2020, you would see the 10 year just like bombed. It just bombed and everybody wanted US dollars, this time is a real stress. That’s why I look around, and it really, I see real stress. Stress in the system, but it was a lot of lack of confidence. I look around and I’m like, “Well, there are a lot of things that could make people not confident, but right now there are none of those things.

So, what are they doing?” They’re like, “You’re trying to balance, you’re stretching on the curve a little bit, you’re buying a little bit more risk, and you just have a lot of dollars to put to work,” and by the way, there’s more dollars being created every day. Anyway, again, that’s where it gets back to prior conversation we’ve had about I’m bullish, and it’s why is because I can’t find a reason to be there. It’s not because I’m so excited, it’s just because I can’t find a reason to be bearish. This is just so much money and so much– Everybody wants to be involved, everybody wants to put capital to work, and everybody’s very competent. You add that together, and it’s like, well, that’s why prices are probably going higher.

Tobias: In some ways, that’s the underlying performance of the economy, but that can be divorced from what asset prices do through that. The thing that I keep on saying, you guys have predicted this before we went on, but if I look at the forward returns now, they’re 0.5%, and that assumes the mean reversion over a decade. If you don’t get the mean reversion, then you get the underlying growth in earnings, and that assumes we’re at the same valuation in a decade from now which, who knows that’s as possible as going back to the mean. But if we’re at the same level, then the forward returns here like 5% a year, which are pretty modest.

Mike: Yeah. [crosstalk]

Jake: It’s 10% below, I think, individual investor surveys I saw recently.

Tobias: It was 17%, wasn’t it?

Jake: [laughs] 17%.

Tobias: 17.5% was the number that I saw. That’s what everybody’s expecting Ford from here.

Jake: We can get that just loaning your bitcoin. Can’t you for–

Tobias: [laughs]

Jake: No risk.

Bill: No, that one is going to be tough. [crosstalk]

Jake: No risk.

Mike: [crosstalk]

Bill: [crosstalk] no risk on the bitcoin I never really understood. My mind always thinks– if somebody is telling me that I can buy something and loan it out at 17%, my mind just immediately says, okay, well, then the markets telling you this currency is going to go down 17% over that term. I just don’t believe in these free lunches.

Mike: Oh, they’re everywhere. Free lunches are everywhere, Bill.

Jake: [laughs]

Mike: You’re just not looking hard enough.

Bill: That’s fair. Didn’t Corey mess around with that stuff? He got into doing that, didn’t he, as a project for pirates? We’ve got to check in with him and see how that’s going for him. [laughs]

Mike: If somebody is promising you in this environment with a 10 year at 1.5 or 1.4, 1.6, I don’t know where it is today, but if somebody’s promising you 10% to 12%, I assure you, I haven’t read any document. I assure you you’re taking a lot of risk. That I absolutely am certain of. What the risk is I don’t know, but I know you’re taking a lot of risk if you’re getting that kind of return in this environment.


Tobias: ARK funds are like 20%, 25%, aren’t they?

Bill: For what?

Tobias: That’s the expected return from here.

Bill: Oh.

Mike: Well, I’m at 23%–

Bill: Yes.

Mike: But yeah, sure. I’m kidding [crosstalk]

Tobias: Not enough. I need more.

Bill: Yeah, it’s going to seems tough to get double digits from here. That even I will say.

Mike: Yeah, I’m backing off on my personal target of 10% annual returns. I don’t know if I’m going to be able to hit that going forward. That’s a big number.

Jake: Depends on how far you want to look out, I think. This too shall pass, but it may take a while to get to a reasonable return level again.

Calculating Return Rates

Tobias: How do you set your personal return requirements? What are you basing that on?

Mike: For me?

Tobias: Yeah, or anybody but you raised it. So, I’m interested in you first.

Mike: Oh, yeah. It’s not more complicated. I just picked a number almost out of thin air. There wasn’t any science to it. I just thought, as I looked at the world and what I’ve done in the past, and when I retired in the end of 2018, early 2019, I just said, well, “What’s a very reasonable stretch target that’s very, but also very reasonable? If you’re into the game, you like security selection, what is the number at which you wouldn’t underwrite below?” For me, the number I wouldn’t underwrite below is 10%. If you do the math, and I’m not charging myself any fees– By the way, the 10% I have to– If I’m underwriting to 10%, I’ve got to feel extreme confidence in that 10%, because I don’t even think you get a ton of margin safety at 10%. When you start talking 20% IRR, and now, I’m like, “Okay, if it really doesn’t go well, I’ll probably still– even if the arrow lands, well, south of the bullseye, I’ll still hit a pretty good number.” That’s how I got there. As I said, “Well, I’m not underwriting anything under 10%. If it’s under 10%, I’m just going to hold cash.”

That how I got to 10%, and I’ve always felt very strongly that, I don’t want to compare my own returns to a benchmark like the S&P for example. As I watched other funds do that, and LPs of the funds more importantly do that, what I noticed was the portfolio managers and the analysts, everybody was complicit in this. They start managing to the benchmark, and that is not how I personally operate, not how I wanted to operate. The benchmark to me is irrelevant. If you want the benchmark, just go buy the benchmark. It’s not–

Tobias: When you say they manage to the benchmark, do you mean the portfolio starts looking like the benchmark, or do you mean that when the market gets very expensive, the hurdle rate goes way down?

Mike: No.

Tobias: -which all things being equal, you probably want it the other way around.

Mike: Yeah, it’s more of the former– The portfolio construction is discussed in context of the S&P 500. The issue that I– I’m not saying that’s wrong, in many cases, especially if you’re selling yourself as like, “Look, don’t give your money to the S&P 500. Give it to me, because I’m going to give you lower beta, or I’m going to give you less market risk, and I’ll give you the same, whatever.” You can come up with better Sharpe ratio. I’m not saying that’s bad. I’m just saying for me, if you look at the top components of the S&P 500, I have no view on them. That’s 25% of the index. 25% or some huge number, I don’t know if it’s that today or more or a little bit less, but it’s the vast majority of your money is wrapped up in five securities that I have no view on. You’re asking me to compare the next investment opportunity I get to those five companies when I don’t really know those companies, and by the way, not a knock on them, I’m sure they’re phenomenal. I don’t want to spend the time to learn those companies. It’s just not something I want to do with my time.

That to me, when we would get into meetings with portfolio managers, co-portfolio managers, they’d say, “Well, the index makeup now is, I don’t know, 40%, the 10% tech and 5% energy and 3% mining, and I’m like, “Guys, to be honest, I don’t give a flying fuck what the index is made up of. Who cares? What idea do you have? Walk me through a stock pitch that you like and why you think it’s going to work, and why you think we’re going to make good money on a risk adjusted basis. In my mind, it just got very cloudy. I’m a stock picker, I’m a business analyst, I’m not an index analyst. That’s not what I do.” I think if I really compared on a day-to-day basis, I looked at the S&P and I said, well, boy, the S&P is up 30% and I’m up 10%. That’s a disaster.” Actually, for my family being up 10% is pretty good. If I don’t outperform the S&P over time the conversation, we were having last week, if I’m not matching the S&P over five years, I’ll just go to the movies. Seriously, I’d rather play video games. I like picking stocks, but if I suck at it, it’s not a problem, I’ll just give my money to the S&P, pay 10 basis points or whatever the ETF charges.

Anyway, like I said, I’m getting over skis here pretty quick. I think that’s what most people should do candidly, and if I underperform for long enough, that’s exactly what I will do. But the comparison to the S&P, it makes no sense to me. What’s a good outcome? If I double my money every seven years, that’s a pretty good outcome. That’s not a terrible– If that happens, I’m going to die on a net jets that I will not have left for five years, I’ll just be in the air like that. What’s that movie contact, where the guy just lives in the air? That’ll be me. I’ll just be traveling between Tobias, and Jake, and Bill. I’ll just be in this constant loop of–

Tobias: I’ll come and get in that jet with you.

Mike: [crosstalk] coffee. [laughs] It’s not a bad outcome. But that’s how I got to 10%.

The Evolution Of Berkshire’s Hurdle Rate

Jake: Now, you raised some really good points with that. I think it’s been interesting to watch the evolution of Berkshire and Buffett’s hurdle rate over time. When they were smaller, and it was earlier, and maybe you could say, better opportunity set just due to even just size constraints, they compounded it, I don’t know, 23%-ish book value for a long stretch, and then, as you’ve watched it go down over time, now he’s willing to take a 8% to 10% regulatory return from huge deployments of capital into Mid America or Berkshire Energy, and the railroad. But then also, the other thing that’s interesting– I’ve been thinking a lot lately, I think I’m going to write about it for the next quarterly letter about how–

Actually, there’s a saying that says that he’s a better investor, because he’s a businessman, and he’s a better businessman, because it’s an investor. I think you could also say that the insurance side of things has actually made him a much better investor, and that the links between insurance assessment and investing are actually quite strong. To tie this back together, he says that they’re looking to aim for a 90% underwriting basically, especially for the super cap part of the business where it can be very difficult to match the premium today versus a really long tail of liability over time. They’re aiming for 90%, which is implied 10% hurdle. It all fits together in his mind, I think, in a similar way, where he has this 10% hurdle now for any dollar that’s in their deployment, whether it’s putting it into solar panels in Nevada, or whether it’s insurance against an earthquake in LA. It all fits together into that same 10% hurdle for him now.

Tobias: 10% feels about right, but I think that he’s always said he would buy a business at about roughly 10 times on earnings. That’s always been a private business, and then, I think he’s getting the return by assuming that they’re better businesses than what he’s paying for them at 10 times, they’re worth a little bit more than that and are likely to grow a little bit faster than that.

Mike: In fairness, if you’re putting the checks to work that he’s putting the work in and you get much more than 10%, you stole it from somebody. That’s not his MO. He does not because he wants-

Jake: Yeah, quite good then.

Mike: [crosstalk] good around. Yeah, exactly. He wants people to stick around, he wants to have minority owners, the people who sell him his business, he likes it when they keep a stake in things. Underwriting 10% and getting growth on top of that is that’s a pretty good– That’s not a bad outcome for Berkshire shareholders. But my guess is, the bigger he gets, the smaller that number is going to get over time. It certainly has been the case historically.

Tobias: It’s a difficult task in this market though. I’ve just been playing around with a little bit. I found you’ve got to creep it down to about 8% to get the answers that you want in this market.

Jake: [laughs]

Mike: Or lower, or lower.

Jake: Yeah.

Mike: 8% is a big number. I had 8% on those [unintelligible [00:24:47] and I was happy as a pig in slop. I was so happy. I was buying those things at par. Even those are six and change now, and they rerated just like that, that’s the market we’re in. In 6%, I’m like, “It’s good. Yeah, the money’s good, but that’s not 8%.”

A Number OF Ways To Build A Margin Of Safety

Tobias: The discount rate that you apply when you’re looking at like this, I think about the discount rate is the time value of money. You could be putting it into something else, even that’s– I thought 8% was getting a little bit extreme, but I guess that in this market, you’re not going to find 8% anywhere else. Anywhere, and then to get a discount to that, which is tough in this market again.

Jake: Yeah, I think you can build a margin of safety in different ways. You can build it into your growth assumption, you can build it into your discount rate, or you can build it into the margin of safety of the price that you pay once you make the assessment of what you think it’s worth. Now, I think it’s probably better to use a consistent discount rate for any security that you’re looking at, and then get your discount on the price after that. That’s personally what I tend to– that’s how my mind works. That way, at least you’re comparing apples to apples.

Tobias: Yeah.

Jake: Whereas, if you start to monkey around with like, “Well, this seems riskier. So, I’m going to use a higher discount rate for this stream of cash flow,” that could be okay, but I think you’re starting to introduce more bias then, and maybe you’re not comparing apples to oranges as much at that point. I’d rather make it up somewhere else in the price.

Tobias: Has Buffett said the 10 year– Have I imagined that was a 10-year plus whatever is appropriate for the risk of the business? Am I imagining that part?

Jake: No, he said that before. He used it a 10-year plus equity risk premium for lack of a– He would never use that term, because it’s too academic but it’s effectively what I think he’s talking about.

Tobias: Do you think that the whatever the 10 year, or whatever the appropriate, whatever your risk free rate, whatever you use in your mind as the risk-free rate, 10 year or 30 year, or whatever you use. Do you think that’s an accurate reflection of what the actual risk-free rate of return is in this market? Whatever you need to get above inflation, I guess, is the question.

Jake: Yeah, are you willing to take a 1.5 for the 10 year when inflation is at four or whatever right now? Do you have a negative–

Tobias: That’s transitory.

Jake: Negative real [crosstalk]

Tobias: It’s transitory, Jake.

Jake: Yeah, okay, sorry.

Mike: For me on that, it’s a duration conversation. If you’re saying 1.5% for a year, that sucks, but it’s not the end of the world. If everything rerates– But if you’re telling me one and a half percent for 10-years, the answer’s no. I’d rather just don’t cash. That, to me, seems crazy, but if you’re taking a swing for a year, okay. If you’ve got the chance where you can buy it higher, that’s fine. There’s no–

Tobias: Because over a year, you’re not worried so much about the return, you just want it to be fair, and the ball has to be mostly there at the end of the year. You’re not going to make any money, you just don’t want it to go away.

Mike: That’s right.

Bill: Yeah.

Mike: You’re not taking the risk.

Bill: And you’re not going to trade down. You’re not going to have any fucking weird thing happened with the bond. So, if you need the money, you’re probably going to be able to sell it at 99 cents on the dollar. It’s not like you got to liquidate it for 60 or something, because you’re caught in the middle of the duration.

Mike: It actually makes you wonder too if that’s not the game everybody’s playing buying at 1.5, they’re just like, “Yeah, I realized this is a 10-year credit, but I’m trading it for three months.” You wonder if people hit the exit, they’d all hit the exit at the same time.

Bill: Oh, dude, then you lever it, right?

Mike: No. Oh, yeah. Of course.

Bill: And that’s how you get your return.

Mike: Sweet.

Tobias: Maybe not the risk free, but you do it in a corporate or something where you think that you can get some spread. Seems to be how markets work these days.

Mike: Yeah, could be.

Jake: Isn’t that what kind of people do with their home mortgage where they’re like, “I’m going to refinance this within seven years,” but the average is under seven years for a mortgage being refinance. It doesn’t matter, what the rate is that much? It doesn’t matter, if there’s some big balloon payment. This is just a rental of a mortgage. [laughs]

Bill: Yeah, well, everybody buys on debt service coverage, right?

Mike: That’s right.

Bill: Nobody’s buying a number anymore. It’s the same with the government. We’re never going to pay down the debt. You just got to make sure you grow the debt slower than you do GDP. It’s just one big levered equity strategy.

Tobias: [crosstalk] on that front.

Jake: [laughs] It is sustainable.

Bill: I don’t know, man. I don’t know. I think TBD. It’ll either work or it won’t.

Tobias: The only thing it can happen is just– [crosstalk]

Bill: [crosstalk] the world only ends once.

Tobias: Yeah, that’s it. You can only blow it up, and then you’ll figure it out after that.

Bill: Yeah, bitcoin solves some of this.

Mike: Probably all of it.

Tobias: Crypto definitely solves this.

Bill: It’s why I am sympathetic to the people that, like bitcoin I get it. I have an Austrian– there’s a part of me that identifies with that method of thinking, and bitcoin does align with that. I get that. Now, somebody’s like, “Ah, that’s all hocus pocus. This is garbage.” Okay. Fine. That’s your interpretation.

Jake: You have a little Austrian in you?

Tobias: [laughs]

Bill: Yeah, I do.

Jake: Okay.

Bill: If I’m lucky.

Jake: Buy dinner first?

Bill: [chuckles] No.

Tobias: It’s more portable than gold anyway. You can get it across the border where it’s hard to get gold or cash out of the country.

Mike: Just don’t forget the password. Whatever you do, do not forget that password.

Tobias: Don’t throw away the key.

Mike: Don’t throw away the drive.

Tobias: Yeah, that’s right. Don’t throw away the drive in the trash.

Jake: What were those guys that stole like $2 billion of crypto out of South Africa or something here recently? They just walked across the border with that in their heads, right?

Bill: Yeah.

Jake: That’s wow.

Bill: Somebody was telling me about a fine watch being a good way to get money across the border. I was like, “Oh, that makes him sense,” because–

Jake: Well, where do you have to put it?

Bill: Well, customs don’t check your wrist, right?

Jake: Oh.

Mike: You died of dysentery.


Bill: Yeah.

Tobias: Now, little man, I give the watch to you.

Mike: Take this watch.

Bill: Yeah, but that makes some sense.

Mike: Oh, that’s funny.

Bill: Get an expensive watch and go across the country, or border.

What Will Happen During The Next ‘Normal’ Recession?

Mike: The other thing I’ve been noodling on, this has just been in my brain for– We keep having this conversation about what derails– or at least I’m having this conversation in my head. If you guys don’t want to hear it, just please stop me. When Powell spoke, was it last week or two weeks ago? When he is speaking in Congress and I was watching him on YouTube is much as I could take.

The Congress grandstanding just kills me. I’m like, “We’re not here to hear you talk about China. We’re here to hear from Chairman Powell.” He’s speaking and he’s talking about the unprecedented Fed actions around coronavirus. It got me thinking the last two times that we’ve had a very serious market crash and a very serious economic instability, they were some of the most unprecedented things that have happened economically. The housing crisis, and all the derivatives, and everything just finally blowing up and killing the system. Then, after that coronavirus. In both of those instances, it was so extreme what was happening, that the government felt the need to come in with money. Come in and buy our way out of it, which, I don’t knock them for that. I would have done the same thing, because in both instances, I was worried. I would have taken extreme action.

I wonder if we have a normal recession again– that’s an open question. We might not ever have one, but I’m pretty sure at some point, we probably will. Is the expectation people have in the market that in a normal recession that the Fed is going to step in and start buying MBS, and start buying high-yield credit? I’m not sure that’s the right expectation to have.

Tobias: Equity ETFs. I want them to buy some equity ETFs. [crosstalk]

Jake: Yes, [crosstalk].

Mike: It got me thinking about Galbraith’s book, The Great Crash. There was this belief. I think I brought this up before. There was a belief out there in the 20s that, the banks had stepped in under JPMorgan, 20 years prior, when there was a lot of economic instability, and that famously Morgan’s playing Solitaire, well, he tells the bankers to work out in the other room, and they do. Everybody thinks, “Oh, there’s a bailout, there’s bail-in,” and in 29, unfortunately, what happened is, everybody expected there would be one, and then when it became reality, there was not going to be a bailout. It just was a complete meltdown. I wonder if is the expectation that that’s always going to– I certainly don’t have that expectation. I wonder if the average market participant just thinks, “It’s not a big deal. Market goes down 30%. Credit dries up, Fed’s going to come in and start buying.”

Tobias: But remember the Greenspan put. There’s always– [crosstalk] Not always, but for a very long period of time as the Feds got increasingly intervention, it’s become– I think that there’s a widespread expectation that the Fed will intervene on every single wobble. If we’re down 10%, Twitter is full of people saying, “Let’s do it. Let’s get out there. 10% is nothing.”

Mike: Then you have things like– That’s what starts things like bitcoins. People say, “Well, that’s all a scam. We’re just going to create our own currency.”

Moral Hazard

Jake: Congratulations. We just rediscovered moral hazard.

Mike: I’ve just wonder if that’s– My thinking is that, I get the moral hazard. I’m just wondering like, “Are they going to do it every time– Is it smart to bet they’re going to do it every time?” Because what if we have– Again, I say normal recession, where we can track 2% or 3% on GDP. As I look in the world right now, I don’t see it. All I see are job openings at very high-income levels that in a lot of money everywhere. That’s the opposite of what you see in a recession. In a recession, you see very few job openings and the wages stink, nobody has any money, and nobody wants to put it to work. Right now, it’s the opposite of that. I just wonder when that does eventually happen. See, I was born 1979. How many recessions have I lived through? I lived through the 80s, early 90s, and of course, 2000. [crosstalk]

Bill: Late 90s, yeah.

Mike: Yeah, late 90s. 2000, yeah.

Bill: Well, yeah, 2000. Yeah.

Mike: Yeah, then the recession going in September 11th caused– there was some instability anyway, and then that caused more, and then financial crisis, and then now COVID. They do happen. That was just I was noodling on. I was like, “Does everybody expect that?” If that doesn’t happen, what does that mean? [crosstalk] me.

Tobias: The definition of recessions is two quarters of negative growth or something like that. It’s very modest– You would expect in an economy that has a lot going on, it’s entirely possible that just through normal fluctuations, you could have two quarters of negative growth. Does that necessitate a Fed response? Do we need a Fed response to every single thing that goes on in the market?

Bill: No, I think we would arguably need a fiscal response but that all depends on what you believe.

Mike: Yeah.

Jake: Well, it goes back to do you want to allow prices to send the signals to the economy of what we what we value, or we don’t value?

Tobias: Absolutely not.

Mike: No.

Jake: Right.

Tobias: I want somebody making those decisions up in the high tower.

Mike: Smarter people than me have pointed out– There’s a guy who pointed out on Twitter that when the Fed came out and said, “Well, now, our dots have us raising rates by 25 basis points in 18 months.” Everybody’s like, “Oh, my God.” A guy pointed out, “Well, the reason you do that, and you do it so small and so far out, it gives you two options in the Fed.

One, you get to test the market and see how the market responds,” which is absolutely accurate. You haven’t done anything. You’re just saying you might do something, and then it also gives you room if you need it later, you can actually ease by doing nothing other than walking back your 25 basis points. You get yourself some room. I do buy the argument that the Fed is paying very close attention to the market’s reactions to what they’re saying. I think that’s absolutely accurate. It seems that’s been getting more and more and more. The Fed is like, well, there is the [unintelligible [00:36:44], but maybe that’s right. I was thinking about this– Do people really expect that’s the case? Because it seems a really stupid way to underwrite, because the one time it doesn’t happen, you’re going to blow up like you’re just–

Not Catching The Right Tail

Tobias: The problem though is it creates that moral hazard argument that reflexivity in the market, that participants are just sitting here, “If we fall over, gee, I hope you’ve got a put there.” Well, now there’s a put,” that changes how I behave in this market.

Jake: Yeah.

Tobias: I don’t need some downside protection.

Jake: Left tail’s cut off. Let’s go.

Tobias: Yeah. Now, your risk is not catching the right tail.

Mike: Right. Yeah, no, that was the risk mid-2020 when the Fed stepped in with the put and the left tail was cut. The bigger thing that worked against you was just not catching the right tail. That’s exactly right.

Tobias: That’s what creates the speculative mania. That FOMO, that need to be fully invested, that need to be in all of the stuff that’s going up.

Jake: This is the Minsky’s argument. The stability creates its own eventual chaos and vice versa.

Tobias: Which just seems to me to be– that’s the case, isn’t it? That’s exactly what happens.

Jake: It’s hard to look at it and not feel that it’s a pretty accurate description of how these systems behave.

Tobias: But then, you have that fit in there. Maybe they can just keep on catching it every time it rolls over.

Jake: It is kind of a sad thought to think we could spend our whole lives worrying about this [laughs] that they won’t do it and we bitch about it for until we’re old men and [laughs] eventually, when we’re all gone, then, it does finally fall over– [crosstalk]

Tobias: There won’t be anybody in the market who’s seen a crash.

Jake: No.

Mike: Yeah. For the record, I am not pitching about it. It just made me an enormous amount of money, so I am not complaining. Thank you, Chairman Powell. I’m not complaining about the Fed stance. I was fortunate and flipped at the right time. It worked really well. I’m not complaining. I’m just wondering–

Tobias: What was the signal that you got that caused you to flip?

Listen To Dan McMurtrie

Mike: This is a very good story. I got incredibly bearish, thank you to Dan McMurtrie. I know you’re not watching, I wish you were. You are the man.

Bill: That’s not necessarily true.

Mike: He might be watching.

Bill: McMurtrie does watch sometimes.

Mike: Okay, well. In the off chance that you’re watching this one. Daniel McMurtrie is the reason I got really bearish. When we saw the cruise ships disembark, I think it was in March, and it clearly was spread, and then it hit Westchester. My wife was like, “This is pandemic. It’s community spread. This is now real. It’s not SARS anymore. This is something totally different.” My wife gives me that, and I’m sitting there thinking about it, and then just reading Twitter, and Daniel McMurtrie says, well– I think it was South Korea, but it might have been Taiwan. One of those economies completely shut down. Like shut down. Dan just tweets out. He said, “What does your economic model say when you put total shutdown, nobody leave your house into it? What does it say? Just out of curiosity.” The answer is nobody had a model for that. For the first time in my investing career, you started looking at scenarios and it wasn’t maybe your base case, but it was a scenario where revenue was zero. Formula One, revenue zero. What does that look like? That’s a scenario that was–

The market I think at that point was down, I don’t know 1%, or 2%, or maybe 3% off the highs. I started getting really bearish. I remember, I was actually traveling going to Salida last time I traveled. I was with a couple of my friends, and we were all just having this conversation like we are right now and someone saying like, “Look, the market isn’t ready for this. We’re going to sell as much as we can. Everything’s not nailed down,” and we bought some puts. I bought some market puts for the first time.

Jake: Went on CNBC and cried.

Mike: That was– [crosstalk]

Bill: Don’t go at Ackman. [crosstalk]

Mike: Don’t go at Ackman

Bill: I still think Ackman is doing the right thing.

Jake: Sorry.

Mike: We can go at Ackman over a lot, but not that one.

Bill: Said it when…

Mike: There’s plenty of stuff to go after Ackman but not that one. That was good. I actually– [crosstalk]

Jake: I don’t know who you’re talking about. I was just making [crosstalk]

Mike: [laughs] Anyway, the guy was sitting next to Brian Lombardi, he’s one of my best friends. He’s one of the permabear. He’s one of those guys who’s, “It’s always going to end.” He looks at me and he says, “Mike, you’re the most optimistic guy I know,” which is true. I’m a permabull, he’s a permabear, and he said, “If that happens, if Federal Reserve is going to come out, and they’re going to pump so much money into the system, it’ll make your eyes bleed.” When they announced that first purchase, we’re covering every short and we’re getting long, and he said, “I will not do it. I will give you 50 reasons why we’re not going to do it at the time.” He’s like, “You need to slap me in the face, punch me in the nuts, and tell me to buy stocks.” When he said that I was like, “You are dead right.” Once Powell comes out and says, we’re buying assets, it doesn’t even matter what the asset is. It makes no difference. Whatever the asset is that they’re buying, just get long.

That’s what we did. We did okay on the down, but then when he said we’re buying– there was a couple months where it was looking shaky, but even it didn’t matter. That was the time to make a lot of money. I didn’t put a ton of money to work really until Qurate, until Bill Brewster. So, Dan McMurtrie gets the big shoutout for calling the bottom, but Bill Brewster gets the distinction of making me the most money anybody’s made me outside of a job. That was that Qurate call is the one where we got really big. [crosstalk]

Tobias: The only wrinkle to that I think– I saw Tepper do his Balls to the Wall talk in 2009, and at the time, I didn’t believe it because I had seen through 2000, 2002, the Fed was firing the canon all the way down there, and it didn’t do a thing. When he said it in 2009, I was like, “Well, maybe somebody is going to be right around here, eventually. It could be this call.” In 2020, I feel the same way. I don’t think that Fed intervention necessarily means that the markets then just take off again.

Bill: Yeah, well, the markets follow earnings growth over time. Earnings have grown, and then you’ve gotten multiple expansion too. Well, I don’t know. I’m one of these people that skeptical that the Fed is The Wizard of Oz, and I tend to think that people probably pay way too much attention to it.

Mike: My bet was– my base case last year always was– [crosstalk]

Bill: That said, it did matter a lot in March. I will tell give you that.

Mike: I think there were two big drivers. There’s the Fed, I think was part of it. Really the Fed, it’s not really about the money– This is my personal opinion here and again, over skis. So, please understand that somebody will tweet at me and say, “You’re an idiot.” Again, I’ll say, “I’m–”

Tobias: That’s going to happen anyway. Don’t worry about it.

Mike: Well, it’s definitely coming. I don’t think it’s so much about, “Oh, there’s a big buyer for my assets right now.” The two things you needed to get really, really bullish, you needed somebody to come in and say, “It’s fine.” That’s the number one thing. Then, you really needed the numbers not to be terrible. I would have been wrong if the COVID numbers that we were seeing in Italy, came back in the United States, and they were that bad.

I definitely would have been wrong. My base case always was that we would be fine, because it’s weird for me when people are like, “This is going to be a nuclear meltdown.” I’m like, “Play that out.” If it’s a nuclear meltdown, do you have a bunker? Do you have shotguns and canned food? Because I promise you bitcoin is worthless if it’s a nuclear disaster. It’s worthless. That doesn’t do anything– Gold? It does nothing for you in a nuclear disaster. You can’t eat it, it’s heavy. What you want is penicillin. That’s what you want. You want gasoline and penicillin. You don’t want gold.

I was always in this camp that we have to underwrite, that it’s going to be fine. I just don’t know exactly how we get there, but I’m sure at the end, we’re going to figure it out. I got luck because we did figure–We all got lucky in my opinion, because we did figure it out. But you needed those two things, and it wasn’t for the Fed buying it. The important part was that it’s confidence. That’s why house prices go up, and why people want a home. That’s why they remodel. That’s why we buy assets. It’s all confidence and if your– [crosstalk]

Animal Spirits

Tobias: Animal spirits.

Mike: That’s right. That was the Fed coming in and saying, “I will not let this blow up.” It’s the liquidity. That’s what would have taken it completely– When Buffett said two years ago in the 2020 annual meeting, “There’s about a week where credit markets froze, and my phone was about to ring.” That’s what he waits on. That’s what he waits decades for. He wants to call, because he knows, when you call him, he gets whatever terms he wants, because he’s the lender of last resort. He’s got the most money, and he’s going to be the last one to go bankrupt in all of us. When Powell came out and said that’s not going to happen, McDonald’s put out a paper, so senior debt– This is McDonald’s, senior debt, they got it done, and it was 500 or 600 basis points spread for McDonald’s, which is insane. They got that done in March. That’s what it cost.

Two weeks later, they wouldn’t been able to do it. Fed comes out and says, “Boom, it’s no problem. We’re going to be buying all the stuff.” All of a sudden, their spread drops, whatever, 100 basis points or something. Then, they go out and what do you see? Everybody goes out and issues debt. Then, what does management do? Well, we can survive, because now we’ve issued all this debt. Then, everybody’s like, “Oh, my God, the Fed’s standing there. Now, we got to go nuts.” Then, that’s when you see people chasing these crazy assets up. It’s just confidence. It’s the animal spirits. That was why I got bullish. Could have been pure luck on my part probably was, but that’s what got me bullish last year.

Tobias: I think animal spirits has something to say in the short term, but it’s very hard to predict. I think longer term is some other factor. But maybe tops and bottoms, it becomes animal spirits. I have no idea where we are at the moment, but there are lots of little indicators that I like to look at. I like that fear and greed index to tell you. Fear and greed index did drop down under 20, that’s a Value Stock Geek idea by the way. I thought that was a good one. Just because when you’re in these events like March 2020 or other bottoms– not that you necessarily know it’s the bottom, everything’s in freefall, and you’re terrified, and that’s a good countersignal that you probably should be out there doing some buying. But it is also nice to have something that’s just a little bit more quantitative that says, “This really is an extreme moment in the market.”

The only problem with something like that is as far as I can see, it only goes back to about 2010, and I really want to see what that looked like from December 2008 to March 2009, because that was just all extreme freefall through there and I’ll bet it was under 20 the entire period. Maybe you bought a quarter or two too early, but even then, I think that’s okay to buy a quarter or two too early in that. I actually think you could have bought a quarter or two too late, and you’d have been close enough to the bottom that your returns are pretty good.

We’ve All Made Dumb Investments

Mike: My problem with all these is, I’ve had a couple of bites at that apple, and I do the stupidest thing, and I’m so consistent at it, I start buying the easy, safe stuff. That’s what I did. That’s the dumbest thing to do. My business partner, Brian Jacoby — [crosstalk]

Tobias: Maybe ground zero.

Mike: Yeah, he’s buying [unintelligible [00:47:46]. He’s like Taste, the Burger King franchisee. By the way, this is a five bagger in six months, it is crazy. The guy’s a lot smarter than me. I’m like, “Oh, look at these preferred shares down 8%.” [crosstalk]

Jake: [laughs] Yeah

Mike: Good job. Good job. Cool.

Tobias: Yeah, I learned that when BP had the spill. I went and bought all of that stuff that was surrounding all of the jack-up rigs, and everything was out servicing at not BP, and what you should have done, and what I should have done is gone in and bought BP as it was the crescendo of the news, when it was peak fear, that was the time to go right to ground zero and buy it. Having said that, the counterfactual might be well, the fine was so big, it put them out of business, and that didn’t happen.

Mike: Well, but there’s an asymmetry. I don’t so much mind in that scenario, where they’re going to go out of business. That’s not an outcome that I would prefer, but if it’s incredibly asymmetric, and you say, well, the odds are 50-50, but it’s 10 to 1 payout-

Tobias: Yeah.

Mike: -okay, great, then, you just size it the right way.

Tobias: Yeah, that’s right.

Mike: That’s fine. You don’t have to swing it with 100% your capital. Swing to 5%. Anyway, I think it’s the asymmetry of it, and that’s what I– Focusing on the downside is how I grew up. Always thinking about how much can I lose and try to lose nothing, because the only thing you don’t want in investing, the only thing that as best I can tell that you really don’t want to do is get knocked out of the game. If you get knocked out of the game, it is game over. If you survive, you’re going to do very, very well. It’s all survival. The guys who I appreciate how they think about the world is they always look at it as asymmetry, and they’re just looking for that asymmetry. Losing everything isn’t a problem. It’s not a big deal to lose everything on one bet.

Jake: Yeah.

Mike: You want to lose everything, like everything, but losing everything on one that is not a big deal. You just have to size the bet right, and if the asymmetry is there, who cares?

Tobias: Yeah, it’s a bankroll Kelly betting approach-

Mike: Yeah, exactly.

Tobias: -to the world where– You’re always just putting up some portion of your bankroll rather than the whole bankroll.

Mike: I feel Mr. Brewster is disagreeing with me. He’s got this very [crosstalk] look on his face.

Bill: Oh, dude. I’m just pissed off myself, because I didn’t fucking bet Eldorado resorts and Restoration Hardware. I was too stupid. I held myself to this standard of you need at least 5% of your portfolio, and both of those would have made me a lot of money.

Tobias: 5% big or small– No smaller than 5%, otherwise– [crosstalk]

Bill: Yeah, I didn’t want to get cute, and– I’m pretty proud of what I did last year. But those are two errors that will probably grind at me for the rest of my life.

Tobias: Ah, you’ll get another go at it. Don’t worry.

Jake: You’ll make new– You’ll make bigger ones than that.


Bill: I don’t know. Eldorado would have been a 10x.

Tobias: Is that [crosstalk]

Bill: You can make money on 10x, even if it’s only 1% of your portfolio.

Tobias: Mike doesn’t get out of bed for less than 11.

Mike: Yeah, I don’t. Yeah, that sounds weak. Sorry.

Bill: That’s fair. It was scary, though. No doubt. The only reason that it was there is that it was a casino that had bankruptcy risk, and I didn’t feel taking that shot. But in retrospect, I think I underestimated the amount of policy response. Next time, if they come out with some bazooka, I may take a little total risk off, but put a little more risk on some of the scarier stuff.

Lean Into The Pain Framework

Mike: I think the thing that investors should– if you’re a single stock picker, if you’re not a single stock picker or business analyst, I think the plan is very simple. You just invest every month. Every month. You just invest in an index. You don’t pick a stock. But if you’re a stock picker, and you fancy yourself really good at least very thoughtful about underwriting risk, I think you have to have a framework going into crisis. Steve Cohen said in an interview, “Well, I lean into pain. It’s just framework. Pain is where I want to go. So, show me the pain, I’m going to lean into the pain. It doesn’t bother me, it focuses me. I’m more excited when things are tough.”

I think in 2020, the key was, if you fancy yourself an investor and you really want to try to make money in times of stress, you really want to underwrite credits when you’re a lender of last resort, you have to have a mental framework, because I’m not convinced– Maybe one or two people in the world are able to emotionally divorce themselves from that kind of pain, I am not one of those people. For me, it has to be a, “I’m waiting for this, and when I see it, I’m going to do that. I’m going to do this, then I’m going to do that.” It’s almost, you just got to go on autopilot, because do not give me the– I’m open to new information, but do not change my plan. This is the plan. This is what I’m going to do. It keeps you focused like what are you waiting on? When it happens–

My uncle, I love the guy. Uncle Mark, I love you. I know you’re not watching. The guy sat on cash from the dotcom bursting, he sat on $750,000 in cash, because he was convinced that the world was going to explode post the dotcom burst. When the great financial crisis hit, the guy was like, “I told y’all. I knew it. I told you it was coming.”

Bill: Yeah, you forewent nine years and probably didn’t even get them.

Mike: Correct.

Bill: Yeah.

Mike: Guess what? 2020 rolls around, and COVID happens, and then he’s still got $750,000 of cash. COVID hits, and he calls me, and he’s like, “This is the end of the world scenario.” I’m like, “No, this is when you finally get your shot. This is what you’ve been waiting on.”

Bill: [laughs]

Mike: He didn’t invest. He calls me in April 2021, he’s like, “You take my money. You buy whatever you want to buy. You go take my money. I’m not doing this. I clearly don’t know what I’m talking about.” In my mind, it’s totally okay if that’s the game you want to play, but you’ve got to have that framework going in, because you’ll always talk yourself out of making the decision to buy.

Tobias: Fear is real. The fear that everybody else has.

Mike: Yeah, exactly.

Tobias: You’re a sentient being. You can look out there and see– I didn’t experience the dotcom other than as an employee, but 2007, 2009, there’s some suggestion that was going to bring down the financial system. Buffett was out there saying that too. So, it wasn’t [crosstalk]

Mike: Not some suggestion [crosstalk]

Bill: Meanwhile, if he had, even in 2000, put his money in the Qs, he’d be up 3.5x. He’s been wrong on the end of the world, and lost a shit ton of relative wealth. That’s a hell of a way to be right.

Mike: I think that cost $2 million. That’s what at least– it might have cost more four or five– [crosstalk]

Bill: In today’s world now, that lumbers through the roof, it costs more. Your relative wealth is screwed. Who cares about what your scorecard tells you, it’s your purchasing power is all that matters in life?

Mike: I’m so happy. You brought up lumber. That’s a perfect segue. It’s like we have a few more hours, we can get into that.

Tobias: [laughs]

Jake: I do you have a little veggie– [crosstalk]

Tobias: Yeah, JT. Go on.

Mike: Oh, we need Jake veggies.

Fighter Pilots & Investing

Tobias: Yeah, it dovetails nicely even though we did no planning on this. This is another little segment from that Deep Survival book that I’ve been reading. This is the Part 2. I don’t know if you guys know much about aircraft carriers, but to call it a boat is almost a misnomer, because imagine taking the Empire State Building, and tipping it over on its side, and you have 6000 people who live on it full time, and you displace 95,000 tons of water, and this thing can go 30 miles an hour over the ocean. Exact speed not disclosed, because that’s classified information apparently.

Bill: I like that’s what they’ll classify.

Jake: Right. How fast this thing can go?

Bill: Yeah, as if it matters.

Jake: [crosstalk]

Tobias: It’s going to [unintelligible [00:55:42] a little bit less or more.

Jake: You use steam from a nuclear reactor to basically catapult a jet off of it, and then, you come in and land on the same little thing, this little hook, basically, on your airplane catches a wire and just stops you, like 4 Gs like that. One night, they’re running operations. The pilots are practicing. They’re taking off and landing on the carrier. There’s this pilot who’s coming in on approach, and he’s heading in towards the deck, and he lets his descent rate get too low and too slow. Sitting on the deck is this guy who’s called the landing signal officer, and he has one of those big phones that looks an old cell phone, and he’s got this thing called a pickle switch in his other hand, and what that is, is because it looks like a pickle, but he pushes the button on it, and it will basically turn on these red lights flashing on the carrier that says, “Do not land. Power up, take off, let’s try again. Don’t come in.”

Well, this guy’s coming in, this pilot, and they’re telling him, “Hey, you’re too low. Add power. Abort.” He turns on the pickle switch, and this guy comes in, and he’s just frozen. He comes in and he smashes into the back of the aircraft carrier, and it shears the plane in half. He goes tumbling across the deck still strapped into his seat, sparks are flying everywhere.

Fortunately, his copilot, not as lucky, he’s just basically smeared into the back of this aircraft carrier. They talked to the guy after, and like, “What happened? We’re telling you pull up, you’re too low, you’re going too slow, the lights are flashing, everything in your plane is going off.” He says, “Literally I couldn’t hear anything. All I just had this overwhelming sense that I had to get this airplane down.” He had all of his senses, tunnel vision, contraction of all of his senses, and what’s happening there is that actually his amygdala, this fear response is limiting the bandwidth of what he can see. He literally could not hear this landing signal officer telling him to pull up, don’t land.

I think that we can get into some of the same problems when we get gripped with fear. It’s a survival thing. We evolved to survive on the savanna where your reptilian brain would just say, “Okay, run away and find somewhere to hide, or get down off of this rock. This lion’s chasing you.” The fact that we’re all here meant that that was a successful strategy, but it doesn’t fit our more modern world now where you need that executive function, you need that neocortex to tell you, actually you don’t want to just get down on the plane, that’s going to be very dangerous. You need to accelerate and takeoff. We’re at a mismatch with our environment from our evolution.

That same thing I think is true in markets where if prices crashing cause of fear in you, you’re going to be going back to your reptilian brain. It’s going to be taking over. Your input of what you can see is going to be constricted. The Navy has a saying that, “Once you get up there, and you get afraid, basically your IQ rolls back to that of an ape.” These guys are all– they’re well trained, and they’re well prepared, but yet, that old part of your brain takes over in a fear situation.

Going back to what you said, Mike, about having a plan before it happens and holding your feet to the fire, the execution of the plan, even when you can’t see very far more than two feet in front of your face in that fog of war, I think it’s extra important. If you’re waiting to come up with a plan until you’re actually in the firefight, it’s too late. You’re not going to make the right decision. Your uncle probably was waiting to make a plan in real time. He didn’t have it set aside ahead of time. What he had is the function of his neocortex to work with, and he’s waiting till his ape brain is the only thing running the show, and by then, it’s too late.

Mike: Yeah.

Tobias: Great veggies, JT.

Mike: Very good veggies.

Jake: Just try not to crash into the back of the carrier. [laughs]

Mike: Yeah, well. It’s worked out worse for the copilot. So, I know now be careful who you choose to fly with.

Tobias: I know that feeling that just trying to concentrate. You just need to shut everybody else out, so you can get the thing done even though everybody else is trying to help you, and you would have been better off listening. I definitely I know that feeling.

Tobias: Folks, that’s coming up on time. I only contracted Mike for June 2021.

Jake: Check’s in the mail, Mike.

Tobias: Mike has a standing invitation to come back on anytime that he wants to. So, folks, if you want him back on, send a note to Mike, because he’s always welcome.

Mike: Well, we’re taking next week off. I’m going to be in Montana. I will not be receiving wonderful messages. It’s the best vacation. There’s no Wi-Fi, there’s no computers. You have to drive two hours to town to be able to use a computer to check email. No one can call me. You have to call my– I’m going to leave my–

Bill: Bro, you can have satellite checking lumber. Don’t lie.

Jake: [laughs]

Bill: I know you.

Mike: I’m going to give two people the number of where I’m staying. One is Bill Brewster, and one is Kyle Cerminara. So, if you want to talk to me, you’ve got to talk to one of those two guys.

Bill: I bet Stinson gets it, too.

Mike: Yeah, Stinson Dean is definitely getting it. But it’s been fun, man. When I’m gone for a week and unplugged, if I can muster up some interesting things to say, I’ll definitely come back. I’ve had a lot of fun.

Tobias: Perfect.

Mike: I feel I’m crowding you guys out, but I’ve had a lot of fun.

Bill: I enjoy it.

Tobias: Folks here, we’re all off next week. We’re going to celebrate July 4th, and then, we’ll be back after that as three or four. We’ll wait to see.

Jake: [laughs]

Bill: Watch Class Action Park on HBO. It’s fucking crazy. It’s a great, great documentary. Until then, take care.

Tobias: Thanks, guys. We’ll see you.

Mike: Bye, guys.

Tobias: Oops, hang on. I always do this.

Bill: Always. Always happens.

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