In this episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle chat about:
- Qurate Has A Big Decision To Make Right Now
- Warren Buffett’s Berkshire Hathaway Earnings
- The Game Theory of Greetings
- What’s Going On With The SEC Dark Stock Rule Change 15c2-11
- Chinese Stocks Are Stupid Cheap
- Craft Beer vs Mainstream Beer
- Go Positive & Go First
- Investing In Video Games
- PepsiCo And Boston Beer To Create Alcoholic Mountain Dew
- Progressive Taking Market Share From Berkshire In Private Auto
- U.S Manufactured Homes
- Prisoner’s Dilemma
- Berkshire’s Bond Book
- Spencer Cole: Vox Royalty
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Full Transcript
Jake: Say that one and we’re live.
Bill: Yay, we’re streaming.
Tobias: Yeah.
Bill: We are over the top. Over-
Tobias: What’s up everybody?
Bill: -the top. What time is it everywhere?
Tobias: I am back after week of vacation. It is 10:34 AM on the West Coast, means it’s 1:34 PM on the East Coast. It’s like 4:30, 3:30 AM in Australia, 5:30 UTC something like that. I don’t know. How’s everybody doing? What’s happening?
Jake: We’re good.
Bill: It’s actually 5:34 in 3:34 places. It’s not a 56 minute— [crosstalk]
Tobias: How does time work? Nobody knows.
Bill: No one does know. It’s all a construct.
Jake: [crosstalk] today. I think the break has got everyone pumped up, huh?
Bill: That’s right. I got–
Tobias: Yeah, I got a good break. I took the kids, went on the lake, went to Sonoma, went to San Fran. I am revived.
Bill: Ooh. Look at you.
Tobias: I’m back.
Bill: You sound good.
Jake: Yeah.
Tobias: Yeah. [crosstalk]
Bill: I’ve noticed that if I send you a Twitter message, I now have to wait maybe 7 to 10 days to get a response.
Tobias: [laughs]
Bill: So, that may have something to do with your clarity of mind also.
Tobias: Yeah, I’m not spending a lot of time on Twitter at the moment.
Bill: No, it doesn’t appear so.
Tobias: Yeah, I spent last week off and I had a look at the messages. The messages were an absolute disaster this time around. Apologies to everybody who sent me one of those messages.
Bill: You know what’s fun– [crosstalk]
Jake: You just burned it down and start over.
Tobias: [laughs] Yeah.
Bill: Dude, looking for old messages on that thing is just terrible.
Tobias: Nah, they haven’t figured that out.
Bill: Terrible.
Tobias: Even for someone who speaks to regularly, it’s not good. You’ve got to hunt for those messages. It’s hard.
Bill: It’s [crosstalk] worse.
Jake: How hard is to add search in the messages. It’s like–
Tobias: It’s Twitter, sir.
Bill: You’ve got to pay for that.
Jake: Jesus.
Bill: I don’t even know if they’re going to do that.
Jake: What is the crack team working on, if not just add search to the DMs?
Bill: I don’t know, not going to lie. The development of products has been a little slower than I’d like. Spaces, I think, is big.
Tobias: It’s a good platform.
Bill: I went on Greenhouse–
Jake: As long as you stay off it.
Bill: Yeah, that’s right. As long as you don’t get addicted. I went on Greenhouse Spotify’s thing, that sucks. Clubhouse seems to have some issues. So, the audio thing, I think, Twitter and Facebook probably end up winning, but they should be doing more. Anyway, I digress.
Tobias: What topics have we got today, fellas? We haven’t talked about this beforehand.
Bill: No.
Tobias: Let me get on in front of it. I got Berkshire’s earnings. So, what do you guys got?
Bill: Wow, there you have it. I might talk Qurate. I’ll talk Qurate. Fuck it.
Jake: [laughs]
Bill: Everybody loves that.
Jake: All right, it’s back to school. So, I’ve got a multidisciplinary piece put together on the Game Theory of Greetings that’s going to cover a bunch of different– [crosstalk]
Tobias: Game Theory of Greetings?
Jake: Yeah, we’re going to get-
Bill: We should start with that.
Jake: -animals in there. We’re going to get game theory. It’s going to cover a lot of [crosstalk]
Tobias: Let’s kick it off with Berkshire because I want people to hang around. Sorry. [laughs] Game Theory of Greetings.
Jake: Yeah, let’s do it.
Tobias: Is that like when you throw the baseball bat up in the air and you grab it, whoever grabs closest to the top has the conch or however that works. Not entirely sure.
Bill: I don’t think that’s what he’s going to talk about, Toby. Maybe.
Tobias: Let’s do Berkshire’s earnings because Buffett– [crosstalk]
Bill: Do it.
—
Warren Buffett’s Berkshire Hathaway Earnings
Tobias: People love Warren. The big takeaway, I think, is that they’re still net sellers. They’ve been punching out– They sold $2.1 billion of stock, bought $1.1 billion. They’ve sold out of a whole lot of stuff.
Bill: I think this is fake news, dude. They bought their own shares?
Tobias: Fake news? Well, I’m not talking about their shares. I’m talking about their holdings.
Bill: Okay, [crosstalk]
Jake: That’s on like $900ish billion of assets total, so don’t get too– [crosstalk]
Tobias: Just trimming around the edges. But selling rather than buying, that’s just– directionally, it’s interesting.
Jake: Yeah.
Tobias: Spent $6 billion on share repurchases, down from $6.6 in the first quarter. Down from $9 billion in the two quarters before that, but obviously, still thinks it’s cheap, because buying back– has said in the past that they wouldn’t sell below $20 billion in cash, has raised that to $30 billion. But he’s got $70 or $80 billion that he would love to put to work. Broad-based recovery. Just about everything is up including the railroad. The railroad revs, and I don’t know if this is because last year was a bad comp, but the railroad revenue was up 26%, pretax earnings up 33%. That’s extraordinary. It’s like some sort of SaaS tech stock the way that’s running.
Bill: Yeah, I think that’s a low base. What is it off 2019?
Tobias: I don’t know. I didn’t dig into it that much. Revenues in the real estate brokerages plus 48%, pretax earnings plus 129%. That’s not bad.
Bill: To give you a sense, UMP is up quarter 2, 29%, comped to 2020 quarter 2.
Tobias: Consumer products manufacturing, revs plus 68%, pretax earnings plus 197%. That’s Forest River RVs, Duracell, Brooke Sports, Fruit of the Loom. Building products, plus 29% in revs, pretax earnings plus 40%. That’s Clayton Homes, Shaw, Johns Manville, Acme Building Products, Benjamin Moore, [unintelligible 00:05:38] MiTek Construction and Engineering. Blockbuster return, not bad for Berkshire and Buffett again. Anybody surprised by any of that?
Bill: I think some of that’s a bounce off of a low [crosstalk]
Tobias: There’s a bounce.
Bill: Yeah.
Jake: I don’t know if I’d call it blockbuster. I think it was just very solid, very Berkshire like, just relentless forward progress, one foot in front of the other. Obviously, encouraging more from a general US economy state because it is a nice keyhole into the US economy. But yeah, I think it’s good. I think they’re just executing relentlessly.
Tobias: Yeah.
—
Progressive Taking Market Share From Berkshire In Private Auto
Bill: I’ll tell you what. Progressive’s kicking their ass in car insurance. There might be a problem there.
Tobias: Why do you say that?
Bill: And they just are. If you look at the results from Progressive, there’s something going on there. I don’t know how big of a deal it is, but–
Jake: It’s Flo.
Tobias: Yeah, better advertising than GEICO, Gecko’s just a little bit of old hat and Flo’s the new hotness, 10 years of new hotness.
Jake: I don’t think it’s sad. I think it could be years of– Progressive, they invested a lot in– I’m pretty sure it’s telematics is what they did, and their loss ratios are much, much better. I wouldn’t be shocked if GEICO’s got a little bit of a legacy. We competed on cost, and they underinvested in the business a bit. That would not shock me.
Tobias: Do you think it’s telling that he’s a net seller– Obviously, we’re talking minimal around the edges, but he hasn’t bagged an elephant in the last quarter. Obviously, we would have heard about that beforehand. But net seller of equities, Berkshire Hathaway stock net repurchaser, does that tell you about the state of value more broadly, like Berkshire Hathaway as a representative of value very cheap, underlying, doing very well, but can’t find any way to deploy?
Jake: Motivated reasoning here, huh, Toby? [laughs]
Bill: Yeah.
Tobias: Is that a leading question?
Bill: Yeah.
Tobias: Objection, leading.
Jake: Yeah, leading the witness. [laughs]
—
Berkshire’s Bond Book
Bill: I don’t know what they sold. I’m not reading too much into it. I do think something that’s interesting is their bond book is skewed more and more foreign, less and less corporate, which makes sense to me. Corporate is a percentage of the overall bonds, really took a dip down this past quarter, but their foreign bond holdings are substantial relative to the rest, which I thought is interesting.
Tobias: What do they own, foreign sovereigns or foreign corpus?
Bill: Yeah. Sovereigns, for the most part, as I understand it. It’s probably some asset liability matching, but then I looked at their debt stack and it’s predominantly US. But then, again, you got US cash flow. So, I don’t know how he’s thinking about it, but I just find it interesting.
Jake: Well, they certainly borrow cheap, foreign currencies, or money as well. So, it is probably some matching.
Tobias: They’ve got some zeros in it. Well, zero coupon bonds that they’ve been able to issue over time? [crosstalk]
Bill: Yeah, in Japan. I think it’s a pretty good result, but I am concerned a little bit about what’s going on at GEICO. I think that warrants attention if you own the stock [crosstalk].
Jake: Is that the Dairy Queenization of GEICO?
Bill: I don’t know. Somebody like Bloomstran probably has a much better idea than I do. But it just seems to me that Progressive is writing a lot more and losing a lot less, and that’s a pretty decent combination.
Tobias: Maybe they’ve got to steal away Flo, the way sprint stole away the– was it Verizon? The Verizon guy?
Jake: Oh, yeah.
Bill: Did they?
Jake: Can you hear me now, dude?
Tobias: Yeah, that guy. Do you remember that?
Bill: Ha.
Tobias: What are the same guys appear in all these different ads? Is there like a handful of actors who are able to do an ad?
Bill: Probably.
Jake: I guess. I always thought it was pretty smart to make it the gecko because then– it’s Flo–
Tobias: It sounds like GEICO?
Jake: Well, no. Not just that, but it’s the same thing with a lot of the cartoon royalties where the actor can get big enough to where they then want to demand more of the economic share of the value creation, whereas the gecko’s agent, he’s not working very hard, because he doesn’t exist.
Tobias: I’ve noticed that they’ve diversified the Flos. There’s quite a few other stars in those ads now.
Jake: Yeah. Jamie and whoever the other one.
Tobias: Yeah, just keep her on her toes, let her know she’s expendable.
Jake: Yeah.
Bill: That’s right. You don’t want to her to–
Jake: Don’t you get comfortable.
Bill: Yeah, don’t start negotiating for real money, Flo. It’s not the business.
Tobias: If you go to different countries, there are different Flos. There’s an Australian Flo.
Bill: Huh.
Jake: Really?
Bill: That makes sense.
Tobias: Yeah. They want her keep on her toes.
Bill: Yeah, she gets paid.
Jake: [crosstalk] Fracturing the marketplace for Flo.
Tobias: Yeah.
Bill: Hmm.
Jake: Yeah, they’re not dummy.
Tobias: Yeah, that’s a good point. Some someone said the most interesting man in the world, he got moved up. There’s a new most interesting man in the world. They went younger.
Bill: It’ll happen. It happens to everybody.
Tobias: All right. I think we’ve flogged this horse to death and beyond.
—
U.S Manufactured Homes
Bill: Oh, the other thing that I think is interesting about Berkshire when you look at it is how good of a lending business Clayton Homes is.
Jake: Mm, yeah. [crosstalk]
Bill: It’s like people want to look at interesting stuff. They get to charge a lot, and they don’t take a lot of charge loss. So, it’s a pretty good lending business.
Jake: Why don’t we have more manufactured homes in the US? It seems like we should be working towards some Jetsons-style, Lego building home. Instead, we’re like doing what we did 50 years ago.
Bill: NIMBYism, man.
Tobias: People care. Why would you care, if it’s put together? What are they called? Modular, in a modular way, then it’s– [crosstalk]
Bill: Yeah, well, no– [crosstalk]
Jake: It’s somewhat pretty good too. They’re not like eyesores or anything. It’s not a trailer park.
Bill: Yeah, I’ve seen more. I saw one the other day driving down. It was two trailers, and they had halves of a house. I think they were going to, I assume, just put it together.
Tobias: You don’t to put two halves of the house cut. You just put together the walls and just bolt the walls together? I don’t know how any of this stuff is done. Way out of my league.
Bill: I’m telling you, that’s what they’re going to do. They’re going to put the two halves together.
Tobias: [chuckles]
Jake: Oh. [chuckles]
Bill: No, I don’t know why you would think that there’s got to be something– logic would maybe dictate that there should be some way to build homes that are less expensive but our economy does not do it for some reason. I do think as far as manufactured housing, it’s got a real stigma in the US.
Tobias: Where I live, I think, if you knock the house down, the land is worth a little bit more for the most part.
Bill: Yeah.
Tobias: What [crosstalk]
Bill: I could see that.
Tobias: -on expensive land.
Bill: It’s kind of like where I am. Problem down here is you can’t improve them, because it’s all in a flood zone. So, FEMA won’t let you put over 50% of the value of your house into your house but the structure is worth so little that if you redo a kitchen, you usually hate your 50% allotment.
Tobias: [laughs]
Bill: So, you have to do that, and then, you’ve got to rezone it, and then, you’ve got to go in for more approvals. They’re really trying to incentivize people just bulldozing houses to build new ones. Because if you do that, then you have to build your house higher on the land.
Jake: [unintelligible 00:13:48] some broken window, Keynesian GDP expansion? [chuckles]
Bill: No, I think it’s a goal to minimize flood losses over time. Maybe, privatize more of it. I don’t know.
—
The Game Theory of Greetings
Tobias: Hit us with some veggies, JT.
Jake: All right. Let’s get into it. This is titled the Game Theory of Greetings. Some of the stuff we’re going to cover is out of this book called Wild Rituals by Dr. Caitlin O’Connell. She spent a ton of time in the African savanna studying elephants. Animals all have greeting rituals, social animals. Some of them are kind of funny. I know you guys like all the animal things. I don’t know why you come to investing podcast to learn about animals, but whatever. So, one of them is–
Tobias: What do the sperm whales do, JT?
Jake: I know. That’s what everybody wants, sperm whales, but I don’t have any sperm whale greetings.
Bill: Boo.
Jake: Hyenas will apparently present their erect genitalia to each other during a greeting ceremony, which is obviously a way of making themselves vulnerable. We’ll get into a little bit more of why they would want to do that.
Bill: That’s how Toby and I met.
Jake: [laughs] Exactly. Now, elephants will greet– [crosstalk]
Tobias: [crosstalk] do that anymore.
Bill: [laughs]
Jake: Yes.
Bill: Well, we got vulnerable together and then we got over it.
Jake: [laughs]
Bill: So, now it’s just flaccid introductions.
Jake: Yeah. Elephants will greet each other by placing their trunks in each other’s mouths, which is an interesting thing. Then, if it’s a very joyous reunion, they will both simultaneously evacuate their bowels and their bladder in unison. [laughs] So, elephants do things a little bit different. But there’s actually a biological reason why they will greet each other this way. It allows them to smell what the other elephant was eating, and then, presumably, what they’ve been eating is then safe, given that the elephant they’re meeting hasn’t died. So, it’s a way actually for them to gather information about their environment. That’s the same reason, actually, dogs will lick each other’s faces and try to lick your faces to figure out what you’ve been eating, so that they know that it’s more likely it’s safe to eat whatever that other entity has been eating.
Humans have a lot of different greeting rituals, and they’re always about being a signal of recognition of goodwill, of welcome. The Inuits, Eskimos have the Eskimo kiss, where they rub noses together. A lot of bowing, a lot of handshakes, which actually came from checking to see if the other person had a weapon on them like a dagger buried up their sleeve. Actually, the shaking motion might have been to like see if anything–
Tobias: Shake the dagger out.
Jake: Yeah, shook loose.
Tobias: [laughs]
Jake: “I’m going to shake your arm to make sure that whatever you have in there will fall out, and that way, I know you’re not trying to kill me.” Then, you have things like kissing the ring of the mafia don. Part of it is about hierarchical sorting, which can reduce tension, like when someone’s not sure who’s in charge. It strengthens the bonds. The other thing too is that it actually provides real-time psychological feedback, you can see what the state of the other person is, as well as actual exchange of hormonal feedback. The pheromones that we put off, we smell each other, and we are gathering information about that person. In fact, we’re often attracted to strangers, because it reduces the chances of potential inbreeding and creates more genetic diversity. So, they’ve done studies where they’ll have women smell shirts that a guy slept in, and they will be attracted to the scent the further they are genetically away from that person. It’s kind of interesting.
All of this ties back into going back to school. Yeah, a lot of us have kids and everybody’s going back to school now, and I thought that I’m going to try to land this back into something good, maybe, you can tell your kids when they’re going back to school.
But there’s a game theory when people are meeting each other where and really it’s a– Shoutout to my friend, Paul, in Ireland who first connected these dots for me on. There’s actually like a Nash equilibrium that’s taking place. If you know about prisoner’s dilemmas. This is John Nash from the movie, Beautiful Mind. That was about him. But this is the math that he was working on. A Nash equilibrium is defined as a stable state of a system then, involves several interacting participants in which no participant can gain by a change of strategy as long as other participants remain unchanged. So, this is classic prisoner’s dilemma, where it doesn’t behoove you to– You’d be better off if you defected, and the other person also has to defect as well. So, it’s sort of a question of like, “Who’s going to go first?”
—
Go Positive & Go First
Jake: I know someone who has this– He told his daughter this in particular, and actually, I’ve tried to make this like a Taylor family motto, because I think it’s such a smart thing. But he tells them to go positive and go first. Really, if you think about this prisoner’s dilemma, the world is really programmed for this sort of tit for tat, which is a famous strategy in game theory, that is actually evolutionarily stable strategy. It’s very robust actually to– and it shows up in human form, which is eye for an eye or the golden rule. It’s always returned what the other person is giving you. That’s tit for tat. If the world is programmed for tit for tat, the logical approach is actually to go positive and go first because you’re likely to get back what you put out there. So, it’s a logical opening gambit in a world that’s programmed for tit for tat.
Tell your kids, as they go back to school, go positive, smile, say, hi. Go first because the other person kind of wants you to do it, and they want to smile, but they don’t want to be the one to put themselves out there because of this prisoner’s dilemma, like who’s going to go first? Who’s going to be vulnerable? Who’s going to put their trunk into the mouth like the elephant first?
Bill: Don’t do that.
[laughter]Bill: Keep your trunk to yourself.
—
Prisoner’s Dilemma
Jake: Yeah, well, okay, don’t go too far with that. This is especially true in situations, and this is where prisoner’s dilemma– especially if there are multiple rounds of a prisoner’s dilemma, you see cooperation start to emerge. When it’s just a single interaction, then the actual better strategy is to defect, and it doesn’t matter. But if you’re going to be interacting with the person multiple times, you want to get on that forward momentum, good basis of both defecting, both smiling, both saying hi, which is what school is. It’s a multiple interaction prisoner’s dilemma. So, go positive, and go first, and get that going.
And then, really, I like to think that it increases your life’s serendipity coefficient. The more people that you meet and say hi to and who knows where it ends up leading. Bill and Toby meeting each other because somebody was willing to go first and say hi, and it leads to all kinds of crazy stuff. So, tell your kids as they’re going back to school to go positive, and go first, and teach them some game theory while you’re doing it if you can, but–
Tobias: That’s great advice, JT.
Jake: Yeah.
Bill: You were there, sir.
Tobias: I love that.
Bill: As well.
Jake: I was there, yeah.
Bill: Yes. You just kept your trunk in your own mouth.
Tobias: [laughs]
Jake: That’s what I– Yeah, as I like to do. [laughs]
Bill: [laughs] Well, I agree with that. I think being positive, and being kind, and going first is good. It has never served me wrong.
—
Bill: I think some of the financial industry could probably do a little more rooting for each other and a little less rooting against each other. I saw some people taking some Ls today. That’s okay. Keep the process, make it back.
Tobias: What blew up today? Something–
Bill: Catapult wasn’t good.
Tobias: What is it?
Bill: What is it or how far down was it?
Tobias: It was like 50% down, something like that.
Bill: Yeah.
Jake: What is that?
Bill: It’s subprime lending.
Jake: Oh, okay.
Bill: My understanding is that, it’s lease to own type stuff, partners with retailers. It’s not good when your velocity of sales slows down when you’re running at losses, and your loan loss reserves double. It’s the first quarter after you’re SPACed and you pull guidance. There’s some things that make people a little bit– But here’s the thing about the guidance pull that I don’t understand. After you increase your bad debt expense to the extent that they did, who cares what you guide to? In my mind, you lost some credibility there. So, what do I care what you have to say? Now, let’s just figure out how to put Humpty Dumpty back together again, I think. But I am an investor in OPFI and there was a short report about it. So, maybe the egg is coming to my face soon too. We shall see. It’s right here. The egg can hit me right in it.
—
Tobias: JT, you’ve got a good suggestion here from somebody, The Joy of Sweat: The Strange Science of Perspiration.
Jake: Mm. All right. I remember that.
Tobias: I wonder If they’ve got some sperm whale stuff in there. That’s probably right up your alley.
Jake: I’m guessing sperm whales don’t sweat a lot given that– [laughs] But who knows? Maybe, they do.
Tobias: I have no idea, but that’s a good question. It’s probably– [crosstalk]
Bill: They’re under the water. I don’t know that precludes sweating, but it seems like it would be difficult to sweat.
Tobias: Sweat a lot when you swim.
Bill: [crosstalk] swim.
Tobias: Humans sweat a lot when they swim.
Bill: Yeah, that’s correct. They’re just in the water.
Tobias: Just don’t notice.
Bill: That’s right.
Tobias: I like that as a philosophy. I like that idea of positive, and first, and kind. All that’s great. The world would be better if everybody did that in the first instance. It’s just hard when you’re shy, everybody’s shy. But it’s a good way to be. I endorse it.
Bill: Are you shy? You think you’re shy?
Tobias: Everybody is, dude. Everybody’s an introvert. Are you joking?
Bill: I don’t think I’m very shy.
Jake: I think it’s context specific.
Bill: Yeah, I’d buy that. I’d definitely buy that. Something that you guys said to me that I think is true, it’s fun to be on a podcast when people want to come up and say, “Hello,” it’s nice to not have to break ice when you’re in a room.
Tobias: Yeah.
Jake: Mm.
Bill: That’s very helpful. That’s nice.
Jake: That must have been Toby that said that. [laughs]
Bill: Could have been. Yeah.
Jake: It’s kind of a big deal. I don’t know if you– [laughs]
Bill: The people know you.
Jake: All right. What’s your topic today, Billy?
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Qurate Has A Big Decision To Make Right Now
Bill: Well, I’m going to talk Qurate, but it doesn’t have to be Qurate. I just think it’s a really interesting situation right now. Obviously, I own the shares, and some have asked me will I be able to pivot if the business hics up or hiccups. My history with this business is I’ve always been fascinated by the consumer psychology of it. Always. The valuation never fully made sense to me, and then, it never made sense to me, because it got too cheap last year. Here, my free cash flow number is lower than a lot of people that I [unintelligible 00:25:59] what their free cash flow number is. I think there’s dividends that they have to pay out to minority shareholder.
Jake: Is this prospective free cash flow or–?
Bill: Well, who the hell knows?
Jake: Okay. Well, I’m saying the numbers that you’re– These are what you have in your head of what you think they might be able to do.
Bill: Yeah, the business is in a really weird spot. It doesn’t really grow, but it also doesn’t really shrink. I don’t think anybody really trusts it, because everybody’s association, my own included, is that it’s a legacy distribution business. If you wanted to be a bull, I think you could argue, well, look at what 2020 was. It was the best year that that business has seen in a long time, and we’re further along and the cord-cutting narrative than we’ve ever been before. So, presumably, some of the shoppers have figured out another way to shop. On the other hand, I would be lying if I said, “Yeah, I’m super confident in the assets duration in perpetuity.” There’s clearly a legacy benefit that they get from the television.
There’s this really weird dynamic going on where I think– a large part of my bet was Greg Maffei and he’s got a really interesting decision to make right now. Because where the shares are trading, if they want to get aggressive with it, they could probably retire somewhere around 10% of the company if they wanted to do an opportunistic buyback. But if you go back and you read historical transcripts, he was doing buybacks and the market didn’t really react very well to it. So, I don’t know if he’s a little bit gun shy to do a buyback, and I think if you look at some of the historical shareholder base, they’re not exactly amped up about buybacks because they didn’t work. I think if you look at a retailer like Bed Bath & Beyond, they did a lot of buybacks and an entity that it didn’t work out. So, there’s an argument to be made that maybe cash back is a better decision.
I just think I can argue on one hand that the business is stronger than it’s ever been. I can argue on the other hand that margins have been declining, and best customer spend has been declining over the past three years. So, maybe it’s not as strong as I think it is. It’s one of those, I think this is an interesting point in the company’s history and capital allocation. We’ll see how– The books are always written when people are looking back at the story. If you’re interested in capital allocation, and you’re interested in Liberty, my buddy, Francisco, had a tweet and it showed the three different entities that Maffei was talking about and how his strategy and capital allocation is different in each. One is Liberty Broadband and that is in large part Charter. So, it’s basically a growth equity. So, he’s just going to keep buying in the shares. Got Liberty, Sirius, doesn’t really have a lot of cash flow. So, they’ve got to wait but one day will be a buyback story. And then, Qurate has a lot more perceived uncertainty and probably uncertainty. So, I just think if you’re interested in capital allocation, and you think he’s moderately good at it, watching those three entities over the next 12 months could be a good learning process in real time.
Tobias: They’ve done some interesting stuff there. Carving out some of those cash flows for the press was kind of brilliant– creating whatever that was, a billion dollars in– [crosstalk]
Bill: Yeah, it was 1.25 at 8%
Tobias: 1.25 from a $100 million in flows out of a billion, right? Like that–
Bill: Yeah.
Tobias: What was the equity on at that point? What was the multiple?
Bill: Well, [crosstalk]
Tobias: It’s like four or five, something like that, right?
Bill: Yeah, when they did it. So, pro forma, it was like two and a half. It was really cheap. It’s not as cheap now.
Tobias: He’s so smart. Both Malone and Maffei, jeez.
Bill: Yeah, well, that’s the thing. If people think that, and they want to learn, and they want to watch, I think this is an interesting situation to watch regardless of what the outcome is. I think it’s hard to argue that the range of outcomes is insanely tight. Although it’s one of those weird situations where you can retire so many shares that you could actually probably de-risk the equity quite a bit by retiring a bunch of shares. I used to think that I would want more preferreds in front of the common. Francisco got me thinking smarter about that.
Tobias: What are going to do with debt rather than–
Bill: Well, they’re going to have a billion dollars of cash on the balance sheet. They probably already do. So, I think it’s like $400ish million shares out at what, 11 bucks. So, call it a four and a half billion-dollar market cap or whatever.
Jake: EV?.
Bill: You could spend– well, the EV is a lot higher because you’ve got all the debt. But you could take $450 million in the cash and take out 10% of the company, and still leave yourself with $500 million in cash. It’s interesting. They’ve got a real decision here.
Jake: When you say that the market didn’t like the buyback before, you mean the price didn’t go up, because of it? Is that–?
Bill: Yeah, and I think that the market was probably right on that. I’m not sure that levered buyback strategy was the right strategy to run at that time.
Jake: If you’re a remaining shareholder, remaining partner in this business, and you think it’s reasonably priced, why would you want the price to go up if buybacks are part of the kind of going forward strategy?
Jake: Well, I don’t think that you do.
Tobias: We’re all on Twitter, sir.
Bill: No, I don’t think– [crosstalk]
Jake: Unless you have a very short-term mindset in which you just want to be punching out.
Bill: Yeah, well, I think what I appreciate about the way that Maffei looks at the world is, I think that there’s a lot of people that would say, “I’m right, the market’s wrong. We’re going to do this no matter what.” I think Maffei historically has said to himself, “The market actually is pretty smart, and I should at least look at what the market’s reaction is as some indication as to whether or not I need to re-jigger my thinking.” I think that’s created some very smart outcomes for them. I tend to agree with you. I think if I was confident in the business right now, I would do a big buyback. But I don’t know what they’re thinking. It’s one of those that I think you could– If it stays here for two years and they take out 20% of their shares, or three years and they take out 30%, that’s one of those things that the outsiders gets written about. But it’s in the moment, it’s kind of uncertain. So, I just think it’s a good learning experience for people to pay attention to. I’m certainly excited about it.
Tobias: Bill’s talking about Qurate, Q-R-T-E-A is the ticker.
Bill: It’s all I ever talk about.
—
Chinese Stocks Are Stupid Cheap
Tobias: Do you some view on Alibaba? The Chinese so often–
Bill: I think the Chinese stocks are stupid cheap.
Tobias: There’s interesting stuff that’s popped up.
Bill: Everyone that I’ve talked to that knows anything about China is like, “You westerners are idiots that don’t read the documents that come out that the CCP actually releases.” If you actually read the documents, you’d actually see that there’s logic behind some of this stuff. [crosstalk]
Tobias: What’s the CCP’s logic?
Bill: I don’t know. I don’t read the documents. I’m an idiot westerner.
[laughter]Bill: But I don’t pretend to. That’s why I said, I would have a 3% position if I had Chinese exposure right now. I think the VIE structure, people railing about that–
Tobias: What’s that?
Bill: Well, people say, what do you really own? You own a derivative. My argument on most common equity securities is you don’t actually own shit. No one is actually owning shares for the voting rights. If you’re in a situation where you’d need to rely on your voting rights, you’re close to zero. We’re not actually here owning a thousand common shares because we can vote on it. Let’s all be real about what we own. It’s all just derivatives on other people’s decision-making. Then, I go, “Okay, well, what’s different about the VIE structure?” I guess you could say, well, China could just take all of that capital away from anybody at any given time. To which I would ask, “Why?” According to, I believe, I pronounced her name, Ray. I talked to her last week. She’s in– I think it’s Tech Buzz China. The podcast is the one that she does. There’s an insufficient amount of capital within China to fund the businesses that they’re trying to grow. So, you’re going to screw all the foreign investors, now? It just doesn’t make sense to me. I think there’s probably deals to be had in China. I don’t know which ones they are. People smarter than me maybe do. But if I had to throw a dart, I’d probably pick Tencent and then JD probably makes sense too.
Tobias: Baba. You’ve got Munger in there, you got Li Lu in there.
Bill: Yeah.
Tobias: [crosstalk] better price than they got–
Bill: Yeah. I think if westerners generally go risk off on something like China and they wake up to this risk, I just think that’s fear fundamentally. I don’t actually think much changed even if there’s some education crackdown.
Tobias: There’s a lot of hair on it, but at some point, the valuation starts getting interesting enough that handicapping it with a hair on it, it’s probably still worth taking a look at Baba, Tencent, a handful of others in there.
Bill: Yeah, well, I think that there’s hair on tech too. It’s just nobody sees it right now, because it’s growing like crazy. So, nobody gives a shit about these dual class shares. It’s just what hair are you willing to accept and how comfortable are you? For some reason, because all– well, a lot of us, not all, but live on US soil, we think that San Fran is going to take care of us. I think that’s just as stupid as anything.
Jake: Yes. Ask Fannie and Freddie comment about property rights in the US.
Tobias: GM.
Jake: Sure.
Tobias: [crosstalk]
Bill: Yeah, look, my understanding of the education crackdown in China, and I’m going to get this wrong, but is that the education industry started really taking advantage of parents who wanted to give their kids a legitimate chance, and it got so expensive, and there’s such pressure over there that the government said, “We’re not okay with this, because you’re really taking away everybody’s level playing field.” Now, whether or not you want to be okay with that assumption, fine. But we’re dealing with China, so that’s the assumption they operate under.
Jake: Oh, I thought you’re talking about the US.
Tobias: Yeah, I thought you’re talking about us colleges too. I was like, “Well, we killed all the for-profit colleges and it completely solved that problem.” I know it didn’t.
Bill: Well, this is for kids. Now, they’re running kids into the ground, they’re studying tons of hours a day. I was able to listen to a couple conversations, and my only takeaway is that there are way more thoughtful people than most of the hot takes that I see that say that a lot of these regulations are actually pretty reasonable, and arguably even more forward looking than what we’re dealing with here, which is basically a Congress that can do nothing except for agree to spend.
Tobias: Well, that’s always been the case.
Bill: Yeah.
Tobias: That’s nothing new.
Bill: Maybe, you can argue good. Regulations that don’t work are better than regulations. That’s a fine argument. So, place your bet accordingly, but I just– [crosstalk]
Tobias: I don’t know, I guess the pitch for China is something like you do– You’ve got this political risk, but you’ve got that everywhere anyway. You’ve got this gigantic country that’s growing very, very quickly. You can get some derivative exposure to that through these tech companies that are reasonably valued at the moment or cheapish if they’re growing as fast as they are and everything remains the same. You can lose some money there too. So, just size them, but there’s probably some good exposure to be had there.
Bill: Yeah.
Jake: That’s a reasonable take.
—
Tobias: Well, good. I’m glad we’ve resolved everything. We’ve got 15 minutes to go. Let’s find something to argue about.
Jake: Let’s get some questions and if we– [crosstalk]
Tobias: Hit us with some questions.
Jake: We’ve been a little lacking on questions–
Tobias: We have been–
Bill: Paul Higgins is in the house. What’s up, Paul?
Jake: Your boy from Ireland.
Bill: That’s right. Who’s got questions? Throw it up. I do agree somebody in the comments says it appears that Li Lu– Munger’s cloning him, and Pabrai is cloning him, and guys cloning– I don’t know that I agree–
Tobias: That’s how value investing works.
Jake: Turtles all the way down. [laughs]
Bill: Yeah. well, I’m also not sure that they’re all cloning. They may all be on the same phone call and just kind of working together. I think it’s closer than cloning.
Jake: There’s a fine line between those things.
Tobias: That’s how FinTwit works. One person does the work, and 50 accounts pretend like they did.
Jake: [laughs] Is that the ratio? It’s 50 to 1?
Tobias: Ah, I don’t know. It’s probably more than that.
Jake: Oof.
Bill: Danny Beltran wants to know the bull case on OPFI. I don’t know, go read their S1. There’s a lot of people that need their products. Banks can’t give it to them. They have a better way of getting it to them, and they think that they’re going to grow, or they don’t, and it all implodes. That’s the bear case.
Investing In Video Games
Tobias: You guys got any thoughts on video game companies?
Bill: Well, Activision Blizzard’s going through a major employee problem. Video games, pretty good businesses. They’re very franchise driven. I haven’t done the work to have informed opinions, but I would be a buyer on temporary weakness, all else equal.
Tobias: Yeah, there’s some cheap stuff in there. I think some of it looks interesting but I don’t have any deeper views than that.
Bill: Yeah, they’re very good businesses. It’s gotten to the point where we’re going to be on Grand Theft Auto 57 at some point and people are still going to be buying them. The franchises are very important.
Tobias: They’ve got to get 7 out. How old’s 6? It’s like seven or eight years old. [crosstalk]
Bill: Yeah, people still play it. Now, you’re going direct, and I’m sure they’re going to have things that– Well, you already have things that you can buy in game. You’ve got community aspects. I get it.
Jake: Yeah, the margins on a game that’s working are rather amazing, but you’ve got to get it working.
Bill: Yeah. I think that’s right. Roblox is interesting because you have user-generated content. That’s a cool business and you got the Robux. But again, I don’t know enough.
—
Tobias: So, I’m having technical difficulties as always, but-
Jake: [laughs]
Tobias: -I’m on my second screen here.
Bill: Somebody asked if Qurate can go to other platforms, that’s the entire debate. If they can, I’ll tell you what, it’s not a four and a half billion dollar company. It’s going to be a whole lot higher.
Jake: Like go into your iPad or something? Is that the idea?
Bill: Well-
Jake: [crosstalk] iPad, I mean?
Bill: YouTube, Instagram, all that stuff. Just something that’s not a channel. I think the harder question is what are the economics look like in that? Because you have to nudge somebody to come to that channel, and then are you paying, and then how frequent. Maffei had said a little while ago, “When you’re going over the top, it’s a more targeted purchasing experience. It’s not as passive.” Part of what makes that business great is how passive it is. So, we’ll see.
Tobias: Thanks for the Berkshire Goodness kitty/fund contribution, Colm Moore, €20.00. That’s real money.
Bill: Yeah, that is real money. Come out next time that we’re there, you come have one of those beers with us.
Tobias: Yeah, we might have to get you more than one.
Bill: Big spender.
Tobias: I’m going to fill you up.
Bill: I got mad love for him. Thank you.
Tobias: He pretty probably smashed a few [unintelligible [00:43:25], too.
Bill: That’s right. We might not be able to afford it. We might be writing a big liability there.
—
What’s Going On With The SEC Dark Stock Rule Change 15c2-11
Bill: Jake, thoughts on SEC 152-11 about over the counter dark stocks. Is that what you’re talking about?
Jake: I’m somewhat familiar with that.
Bill: Do you have thoughts on it?
Jake: Do I have public thoughts? Maybe.
Bill: I think people are here for your public thoughts.
Jake: I know. It’s certainly interesting to– There’s like 6000 stocks. Let’s back up a little bit and explain it. The SEC came out with some ruling a while ago and it’s going to be finally coming into effect. The interpretation, I believe, by a fair number of the custodians is that they don’t want to allow trading of these stocks that are on this SEC list. They will then place these stocks into what they call liquidation mode, which means you can sell but you can’t buy. So, one wonders, given that for every sell, there is a buy, how you’re going to match up the liquidation of this? Who’s going to be able to buy it at that point?
So, if you are a short-term trader of stocks, then this list of 6000 mostly like over the counter– and how you get on that list is if you’re behind on filing with the SEC your financials. Most of the companies on that 6000 stock list appear to be shells, and pump and dump scheme companies, not real operations, probably. But there are some companies that might be legit. The opportunity may be there in a liquidation scenario where people are selling for structural reasons, and not necessarily for business reasons. Every company that’s on there is one SEC filing away from getting off the list and therefore back as a normal security. Could be something there structurally to take advantage of. But thus far, my personal digging into that list has not uncovered too many babies that were potentially thrown out with the regulatory bathwater. But if you do have something on that list, I don’t know, maybe we need a team effort on it. Team Value: After Hours, if we can find something good on there, potentially.
Bill: Team VAH SPAC.
Tobias: How did you found the list, JT?
Jake: It shouldn’t be too hard to find. All the custodians sent out a list to their customers. I know for sure Schwab and TD Ameritrade were on that list, but I imagine that there’s a lot more. So, I think it’s pretty easy to find if you just search liquidation mode or something in SEC in the recent– I don’t know if it’s been in the news or not, but it is a possible one of those– It’s not hard to imagine 25-year-old Buffett taking that list and then running the Geiger counter over it to try to find something that was being thrown away.
Tobias: Yes, somebody pointed out the Tandy Leather might be on that list. That might be true.
Jake: It was on the most recent list that I saw.
—
Tobias: Anybody got any views on KKR?
Bill: Yeah, they’ll probably do fine.
Tobias: [chuckles]
Bill: I think all those alt managers are decent bets. Until the world explodes, I just don’t see any stopping of the funds flowing to those guys. Whether or not the structure screws you somehow is something that everybody should analyze for themselves. But if we’re talking secular tailwinds, I think those alternative asset managers make a lot of sense.
Tobias: Why do you think there’s an issue with the structure?
Bill: I don’t know-
Tobias: What is the structure– [crosstalk]
Bill: -that there is or not. But it’s like betting with Goldman. Then, I would need to look at each one individually. I can’t speak whether or not you own the GP or how much of the GP is owned by the partners, where your LP interest really is, I just don’t know. But those would be the questions that I have.
Jake: I don’t love some of the– From a long-term duration standpoint, the way that the deals get structured often in private equity leave a bad taste in my mouth. What I mean by that is we go buy this company, maybe we lever it up, maybe we do a little bit of things operationally to spruce up the income statement. Then, maybe we sell it to another private equity company for a markup, and we take 20% rake off of that. And then, they do the same thing, they sell it, and then, maybe we buy it back again. Basically, we just take this business that’s supposed to be running and we move it around a bunch of times. Every time we move it, we mark it up and take our big 20% bite out of that, and I find it to be a little distasteful.
Tobias: But as a shareholder.
Jake: Well, as a shareholder, potentially, but I wouldn’t want to make that as a long-term bet that it will-
Tobias: No, I’m with you.
Jake: -be a sustainable thing when you– You can’t screw the customer over, and over, and over and over again, and not have it eventually be a problem.
Tobias: I’ve got a podcast that’s–
Bill: Can you? You could.
Jake: Yeah. [laughs]
—
Spencer Cole: Vox Royalty
Tobias: Slight diversion here but I’ve got a podcast up with Spencer Cole. He’s the CIO of a thing called Vox Royalty. I wasn’t really familiar with this stuff, but basically, they go around and they find mining royalties. Often, a prospector finds something and then they keep the royalty for themselves, and they sell it off to someone who is either an operator or has the capital to develop the mine and turn it into an operating mine. So, it’s like a capital-light mining-type business. They’ve done some interesting stuff where these guys, they came out of a mining company, and they wouldn’t use optical character recognition to scan all these different documents from all these different jurisdictions around the world to identify these mining royalties that often people didn’t know about. If you’re Australian or Canadian, you’d be more familiar with this. But the listed companies, there might be a goldminer this decade, and then for the next decade, there might be some sort of tech company, and they might go back into something, whatever else is hot in the market at that time.
After a series of–
Jake: Cannabis.
Tobias: [crosstalk] not joking, but after a series of these transitions, there’s no management in there and nobody like– All the institutional knowledge is gone, and they’re not aware that they have this royalty. So, these guys have tracked these things down and brought this to the attention two different mining listed companies that are in totally unrelated fields. They’ve got this, I think, unique database, and they’ve tracked all these things down and they’re investing, and collecting, and rolling them up, but it’s a really interesting model. The legendary story from the industry or the mining royalty type industry is Franco, Nevada, where these guys found in a local newspaper in some small town, an old mining prospector, who was selling one for 2 million bucks of gold royalty. That gold royalty has played out to them a billion dollars and the NPV on what they think is left is another billion dollars. It’s a good little cash flow business. You’re relying on their ability to identify these prospectively to the earnings coming in or to the royalties being delivered. But they’ve got a good database. They seem to know what they’re doing. It’s a really interesting podcast.
Bill: I saw the video for it. I will listen to it.
Tobias: If you like mining and you think there’s going to be some inflation, it’s a better way of getting exposure because it’s not as capital intensive as most mining companies are.
—
Craft Beer vs Mainstream Beer
Bill: My man, Paul Higgins, says that KKR, you’re pretty aligned with the GP. So, that would be a positive. Some people are asking about Sam Adams Tap. I don’t know. I think I like Dogfish. I like Sam Adams. They’re good brands, but man, seltzer is getting crowded. There’s more seltzers than there are beers now. That was hard.
Tobias: Is it easy to make? Is that the–
Bill: I just don’t think it’s very hard to make. Yeah, well, I think what happened is like White Claw invented the category, and they got a huge first mover advantage, and then Truly was pretty good. ABM Bev, ex-beloved really ruined their rollouts. For some reason, they thought Bud Light seltzer was a good idea, which maybe that’s why Carlos Brito got fired. They had Bon & Viv, that was garbage, too. But there’s just a ton. Just go to the grocery store and take a look at the seltzer aisle. [crosstalk] is just that’s wine.
Tobias: Do you think that this has become hit a lot more boom bust? It used to be beer companies were basically just a no brainer along through recessions, and depressions, and things like that, because nobody stops drinking when the world gets really bad. If anything, they increase the amount of booze that they drink, and so pretty low like safe as houses, those kind of beer companies. That seems like having a good brand, having a macro that everybody in the world recognizes, that’s not as useful as it used to be. I don’t think we’ve really tested through.
Bill: I think in the rest of the world, that’s maybe not true. I think in the US, that is true.
Tobias: [crosstalk] is less good?
Bill: Yeah, because I think craft really attacked the big beer companies in the US in a way that was somewhat indefensible. Even if they did become big craft brewing companies.
Jake: It’s strange how the consumer preferences for different products change where sometimes you want that same brand and you want a repeatable experience, you want certainty. And then, other times you want novelty, you want uncertainty in what you’re trying. You want to try different flavors and brands. It’s not totally clear to me why Coca-Cola would be something that you want to have that same experience again, and Budweiser used to be that, but it’s maybe not anymore. I don’t totally understand what the difference is, but it is a weird schism in human psychology.
Bill: I think some of it is that Coke is a duopoly no matter where you go. And beer, you have just– now it’s up to thousands of choices. Anywhere you are in the US has their own local brewery.
Tobias: Yeah.
Jake: Yeah, but that’s because people are demanding it.
Tobias: There was a regulatory change, wasn’t it? You’re allowed to do it.
Bill: I don’t know.
Tobias: Previously, I don’t think you were allowed to.
Bill: I think you could sell on premises, but I don’t know that there’s that much incentive to try to make your own cola.
Jake: Yeah, I don’t know.
Bill: Beer, you can charge a lot for. So, there might be more margin. I don’t know. [crosstalk]
PepsiCo And Boston Beer To Create Alcoholic Mountain Dew
Tobias: SAM and Pepsi are teaming for alcoholic Mountain Dew. Who’s in?
Bill: Labels like sweet.
Jake: Oh, God, that is the fast track to Idiocracy.
Tobias: They’ve managed to get the three, sugar, caffeine, and alcohol together into a single– That might be the thing that tipped us over the edge. It might be Mad Max Thunderdome from here on in.
Jake: Wash that down with a couple oxytocin and–
Tobias: [laughs] OxyContin.
Bill: Yeah, that too.
Jake: Yeah, sorry, is that what I said? What’d I say? Oxy–
Bill: Oxytocin.
Jake: Oh, Jesus, no. OxyContin.
Bill: Toby, the other thing is, with beer, I think that it’s starting to press up against the wine price point, and I think weed is going to really hurt beer. I used to argue the other side of this, but I’ve morphed my thoughts as I got more rational.
Tobias: Does beer have a gluten problem? Is that why people are avoiding beer or weight kind of thing?
Bill: I don’t know. I just think you get fat on it, and people don’t want to be fat.
Tobias: Same reason that people are avoiding pasta and bread. You don’t want to be at a noodle shop at the moment.
Bill: No.
Tobias: Yeah, we need to get the weed into the Mountain Dew. Weed-Mountain Dew alcohol. That’s the Four Horsemen of the Apocalypse. That’s when you get Mad Max Thunderdome.
Jake: [crosstalk] right now, we need to get on this.
Tobias: [laughs]
Bill: I don’t know that you put the alcohol in there too. [crosstalk]
Tobias: You don’t need the alcohol at that point.
Bill: Yeah.
Jake: No.
Bill: Let’s get faded Dew instead.
Jake: CBD Mountain Dew.
Tobias: Crazy. All right guys, well, we made it. On that on that appetizing note, that’s the week. We’ll be back again next week. This was fun though.
Jake: It’s good to be back. Missed you, guys.
Bill: Indeed.
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