In this episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle chat about:
- Charlie Munger’s $BABA Position
- Investing Lessons From RATM’s Tom Morello
- Tailwinds For China Getting Stronger
- Algos Will Never Totally Solve The Market
- Taking Notes: The Pen-to-Paper Advantage
- The Advantage Of Going Public With Your Investment Thesis
- View Short Reports With Cynicism
- Murray Gell-Mann
- Embrace An Outside View
- Wirecard: Jamie Powell
- Taking On Water In Your Portfolio Builds Character
- Listen To Investors With Skin In The Game
- CAPE Makes No Sense On FAANG
- The Slaughter Under The Market
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:
Bill: Press it.
Tobias: This meeting is being live streamed. I got it.
Jake: Do I consent?
Tobias: I’m only a minute late, today. It’s 10:31 AM on the West Coast.
Bill: One minute.
Tobias: 1:30 PM on the East Coast. What’s up, fellas? It’s good to see you again.
Bill: It’s good seeing you. I was saying the other day on the Twitter machine that I wish that I had a hype man. Sometimes, I’ll listen to me Migos, the rap group, and I’m really jealous of their hype man. So, maybe, I’ll just hype you guys on this podcast.
Tobias: Pa, pa, pa, pa, paa. Yeah.
Bill: When you’re like, “I’m only one minute late,” I’ll be like, “Only one minute.”
Bill: Anyway, that’s all I got going on.
Jake: [crosstalk] I like that.
Bill: Other than a car accident and my wife’s birthday.
Jake: Damn. That’s heavy.
Tobias: There’s some wild stuff going on in this market. There’s some wild stuff going on in your personal life, BB, getting into car accidents, getting rear-ended.
Jake: Rear ended [crosstalk]
Bill: Yeah, it was not cool, man.
Jake: Plus getting rear ended in the car.[laughter]
Tobias: Oh, we’ve lost Bill.
Jake: Ah, Jesus.
Tobias: He’s so offended. He’s jumped out. [laughs]
Jake: It’s our crack technology.
Tobias: While we’re waiting for him to rejoin, you want to tell us what your topic is today?
Tobias: There you, guys. He’s back.
Jake: He’s back. Yeah, I don’t know if you guys are fans of Rage Against the Machine, but-
Tobias: Of course.
Jake: -I’ve got little–
Tobias: Killing in the Name, hits of 1994 or something like that?
Jake: Yeah, it’s legit. I’ve got a little segment based on Tom Morello, who’s the lead guitarist of Rage, and Audioslave.
Jake: And Prophets of Rage and the Watchmen, but anyway, it might be fun. We’ll see.
Bill: Bill’s so offended that he completely shut down and now, he’s back. You cooled off, mate. What’s happened?
Bill: I don’t know what happened. I think the innerwebs knocked me off, but now, I’m good.
Jake: Can’t catch a break.
The Slaughter Under The Market
Bill: No, not really. I’m going to talk about just what’s going on in the portfolio, the slaughter under the market, under the big names. Seems like a lot of different things have gotten taken to the woodshed. Some really crappy companies, some less crappy companies, some things that I just don’t frankly understand at all.
Tobias: Let’s talk about that a little bit, because I’ve have noticed that too. But for me, fortunately, for the first time in recorded history, it’s actually showing up in my shorts. I’ve just been looking at the shorts every day, and what is going on here. They’re going in the right direction. For me, they’re going down. What’s the theme, what’s the thesis, what’s happening?
Bill: I think there’s a couple buckets I would put things into. You have things like IAC, which is clearly a quality company based on its historical record. Probably got a little bit ahead of itself, and then reported– I saw the funny quote. They said, “At Angie’s everybody’s trying to–” What did they say? They said, “With home repair, people say that it takes twice as long and cost twice as much, and ironically, at Angie’s List, we’re finding that it’s taking us twice as long and costing twice as much to create this transition.” I thought that was funny. Vimeo, when it spun, I never really understood why it spun, where it spun? So, I think there’s some of that stuff that’s valuation burnoff, which I think is healthy. Then there’s some other things that– I can’t stop looking at media right now, because I’m trying to figure out if there’s some huge blind spot that I have on Qurate specifically, but whether or not it’s the whole group that I’m missing or whatever. Qurate can catch a bid right now, and it’s ironic because the lower it goes, the more I like it, long-term. It’s part of the thesis.
But then, there’s just a lot of things that are small. I think some of the SPACs that came out and missed. They guided and then all of a sudden they miss whether it’s Catapult or OPFI missed, but I think OPFI misses quite a bit less catastrophic than Catapult’s but I don’t know. I think liquidity is confidence and liquidity is gone in some of these names, now, with that valuations decline.
Tobias: Yeah, after value found its feet 6 or 12 months ago, and then it made it pretty strong into Q2, and then Q2 was no bueno. For value is one of the worst little short-term reversals in whatever like 10 or 20 years or something like that. That hurt me, and since then, I don’t know when it happened. About a month ago, it seemed to start rallying again, but it didn’t really seem to help the smalls much. So, I don’t know. I’m a little bit baffled by what’s going on. Well, I’m not used to seeing my shorts work so well. That’s one thing.
Bill: Yeah, I think some of it is that stuff just got nutty. I’m looking at Fastly right now, and that’s it, 40 bucks a share, it topped out at $120. I think that that was a pretty insane valuation according to most people that know anything about that business. But I don’t know, man. It’s weird.
Tobias: What do you think, JT? What have you got?
Jake: I don’t really have much intelligence to say about this. With the way I do things, this still feels a little bit just like short-term noise. But who knows? We’ll see.
Tobias: Does your portfolio feel better or worse over the last month?
Jake: I haven’t really noticed it, to tell you the truth.
Tobias: One way or the other. Yeah, fair enough.
Bill: Actually, I was saying to my buddies I’ve gotten a shit kicked out of me this month, and it’s probably the most comfortable I’ve ever been as an investor, which is probably either — [crosstalk]
Jake: Either terrific or totally dangerous, what are the–? [crosstalk]
Bill: Yeah, that’s right. I am either about to get completely waxed, and in 12 months be like, “Well, folks, that was the sign-
Bill: -and there goes my record or-
Jake: Here’s my resume.
Bill: I actually know what I’m doing finally.” I don’t know which one it is. We’ll all find out together.
Jake: Perfect story arc.
Tobias: What’s going on, Billy?
Bill: [crosstalk] I went back to value, maybe I get my ass kicked for it.
Tobias: Yeah. It’s a dangerous place to be.
Bill: [crosstalk] Sorry, I’m really hung up on this hype man thing.
Tailwinds For China Getting Stronger
Tobias: What about China stocks? They’ve been absolutely destroyed since that change in the regulatory regime. Have you followed that closely enough? Do you know what’s going on there?
Jake: I’ll defer to your wisdom.
Bill: I don’t know. All I want to do is make smartass comments like “China, China, China.”[laughs]
Bill: No, I don’t know.
Tobias: You need a button.
Bill: No. Yeah, I do. That’s exactly what I need. Hey, Jake, if you can turn your volume up, I have noticed it’s a little quiet too. Somebody just said that. Baba is going to be really interesting to watch, because it’s basically the Munger rights, and everyone that’s followed them into it, and it’s going to be fun to watch how that all plays out. Gun to my head, I’d be long them. I really would.
Tobias: Yeah, I think Baba is cheap. Not cheap, I think that if you look at Baba over the last five years, this is the best opportunity, if he had to buy it five something years in terms of– I think it’s where it was five years ago, and on a valuation basis, it’s considerably cheaper.
Bill: Everybody’s just going to say to you, “How do you say it’s cheap? You can’t trust the numbers. You can’t trust China. They don’t value property rights.” That’s what people are going to say back to you, right?
Tobias: I understand, but I’m going to get to that in a moment. I was just saying that the business to me, the company to me looks cheap given that the rate at which it’s growing, the scale that it’s got to, the businesses that it’s got in there, the returns on equity that’s generating, if you can trust those numbers, it looks pretty impressive. The wrinkle to it is just you’ve got to get comfortable with the political atmosphere there. I don’t know, how you can– [crosstalk]
Bill: [crosstalk] 10 cents. Just from a high level, I’d rather have 10 cents business in Alibaba’s.
Tobias: I’d be more inclined to take a basket approach and buy a few of those things, but you’re either going to be– It’s so beaten up that on a valuation basis, it makes complete sense. The question is, does it fall apart for political reasons? I don’t know. I think you’re almost getting the odds to take the bet here, aren’t you?
Bill: I don’t know. Bears smarter than me say, “Don’t do it,” but my body says it probably makes sense. Because-
Bill: – I think you probably —
Tobias: What part of your body?
Bill: All of it. The parts that matter. I don’t own it, because I don’t know it very well, but I do think that a basket tech approach on Chinese tech over the next 10 years does pretty damn well. It’s exactly the type of thing that I tend to look for. But I don’t know. Maybe they’re all frauds and the Chinese government fucks everybody.
Tobias: I don’t think they’re frauds.
Bill: Yeah, there’s some people that have said that have been wrong for a long time.
Jake: I feel a lot of the conversations are very reductionist thinking and then there’s much more nuance to all of this and it’s more complicated. I think painting in broad strokes like you see most of the conversations, I don’t think it’s very helpful, actually. So, I think transitioning any society from agrarian to the modern world is going to be messy. There’s going to be a lot of omelets made and eggs broken. It’s a lot like the US, if you looked at us from 1800 to 1900 which might be somewhat of a comparable, overlapping timeframe. I don’t know. I think they’re much more compressed now but [crosstalk] we have property rights issues, we had–
Bill: Do you mean to tell me that if somebody had said they actually have slaves, it’s uninvestable, that it would have been a bad decision not to buy US stocks at that time?
Jake: I just mean that the process of organizing an economy can be very messy and take a long time to really for us to all agree to the stories that this is how we’re going to operate going forward, which creates this web of trust, it can take a lot of time. It can be messy to get there, and maybe China is getting there faster in some ways, and maybe, they’re not going exactly the same place the US ended up. I don’t know, but I think there’s a lot more to this, and it’s much more multifaceted than just purely \can’t trust Chinese government, fraud at these companies, or Chinese government whacking tech companies. I don’t know.
When you think about the US, if you have stayed up on it, which I think most citizens have largely or at least the people probably listening to this, they would say, “Wow, the news headlines are so dumbed down, and so one sided,” and don’t really show any nuance about the situations that you know something about. I think the same thing is happening there as well, where there’s a lot more nuanced happening, and you get a headline, it’s like, “Oh,–” you would just make it this blanket kind of statement, and then I think you lose touch with reality a little bit when you do that. Just like if you were to only read the headlines of the newspapers here, I think you might be a little divorced from reality.
Tobias: What’s the Michael Crichton line where he says, “You read the newspaper and they get the cause and effect inverted, like wet streets cause rain” is his example of it, I think, and then, what’s the name for it? I want to say Dunning–Kruger, but that’s not right.
Bill: I can’t help you.
Jake: Ah, Murray Gell-Mann, I think it’s the–
Tobias: That’s it. Yes.
Bill: He’s smart. He’s smart.[laughter]
Jake: Yeah, Murray Gell-Mann– [crosstalk]
Bill: I’m done with that. That’s the last one.
Jake: I like them. I think they’re fun.
Tobias: I like JT’s take. We’ve talked about this a little bit before too. So, I knew where he was going to go with it, but one of the problems with investing is that all the nuance and so on gets to this point where ultimately you get to decide whether you buy it or not. So, it’s not particularly nuanced. So yes, you can size it differently. You just decide.
That’s probably the answer. Just take a little bit. But I do think that if the numbers are real, I don’t know what they’re not– there’s some red flags in it. There’s lots of websites that you can go to that do a pretty good job of picking apart Baba. But if you can trust those numbers, then it’s a spectacular company. There are analogs for it in the West as well. So, that it’s not entirely impossible of what they’re doing isn’t real. I think I’m leaning more towards it being a reasonably accurate reflection of what’s going on in that business, and then the question is, it’s a regulatory risk question. You’ve got regulatory risk everywhere in the world, you got regulatory risk in the States.
Jake: Yeah, you have economic reality and accounting numbers that often diverge in any system. The measurement can be just off. We’re just using conventions to try to approximate reality. Now, how accurate it is or not is a nuanced question which if you– Eventually, there’s a price where I think you’re compensated for the potential risk, no matter what it is.
Bill: To be fair, I do think like the documentary, The China Hustle, or whatever, that’s worth somebody watching. There were a lot of actual true frauds, but the probability that Tencent is a fraud, I think when you talk to anybody that’s been over there and talks about how often WeChat is used and how it’s a super app, and then you think about what the economics of apps here are, I don’t know that it’s a fraud. It may not be quite as profitable as people think nut to Toby’s point, you’re not quite painting the rosiest outlook for it either.
Bill: But I don’t know. It may not work, I’m sure if it doesn’t, the people that are bearish right now will be too certain that they were right, and if it does work, they’ll add it back and say, “Well, it’s a fraud for the next five years.”
Jake: I would say that, if we’re going to be counting macro concerns, and trends, and things like that, just as much in the positive column for China is 400ish million people live in cities today that resemble a western lifestyle. There’s another billionish behind them that may be coming and want to do something similar. That’s a pretty big ass tailwind potentially for an economy. You could almost say that the regulatory risks and all these other fraud things could be theoretically macrobalanced out a little bit with just demographics.
Bill: Jeff Nolan is saying that we’re being blasé about the risks in China and other EMs. I think the market is insanely blasé about the risks at home. I think political risk everywhere is mispriced.
Tobias: What are you going to do?
Bill: I don’t know. That’s the thing. you live one– These are the cards. So, I can run around and stick my head in every single sand pile that there is, or we can talk about what we– [crosstalk]
Tobias: You’ve got a handicap on, right?
Tobias: It’s the whole thing is a handicapping job. We got imperfect information. We don’t know what’s going to happen in the future. We’re looking at different regulatory regimes. We’ve got a regulatory regime here. Google is currently under– I don’t know what the exact word is, I don’t want to say indictment but Google, its search is confronting antitrust. It’s going to go through that process. Next year, I think it all kicks off, they filed last year. I don’t know what the outcome of that is. I think that if you look at Microsoft, the outcome’s not going to be too bad, but the US has had antitrust action against Microsoft too in the early 2000s, and there was antitrust action against Ma Bell in the 80s.
Jake: Standard oils, the classic.
Tobias: Standard Oil was the original, but still– [crosstalk]
Bill: I’m talking about even at a systemic issue– Forget about an individual company. I don’t know. This is why I’m crypto curious. I understand those guys saying that they want to hedge from the system. I really do get it. Whether or not bitcoin’s the answer or whether or not gold is the answer, I’m fine debating that. But I do understand the role in the portfolio. I get that.
Wirecard: Jamie Powell
Tobias: I’ve got a podcast up at the moment where I chatted with Jamie Powell, who is the FT Alphaville reporter.
Tobias: He was close to the Wirecard fraud when that unraveled in– I saw somebody mention that in the notes. That was pretty scary. The German regulator, when they’re reporting– it’s the FT. It’s not like it’s some little pump and dump or activist short somewhere. It’s the FT, and they’re reporting on these problems, and the German financial regulator opens a criminal investigation, not into Wirecard, but into the FT. How do you figure that one? You don’t want to have a look?
Bill: Don’t have to look at power.
Tobias: Yeah, well, that’s it. [sighs]
View Short Reports With Cynicism
Bill: Yeah. It’s wild. I have a lot of conflicting feelings about some of the short reports that come out and what I see, but ultimately, I think where I have settled on it is, long reports can say whatever the hell they want and no one complains. Then, you get some legitimate complaint about a short report and you get regulators looking at you. There’s a place in the world for quality short information.
Tobias: Having said that though, I have seen over the years now enough– I’ve made this argument before that short are often, they got the smartest position because they got the most to lose at risk. It’s a levered position. You need some catalyst to occur, and they’re trying to be that catalyst often by releasing these reports. But I’ve seen enough short reports now where I know the company pretty well and the short report is spectacular, and it’s from a very big hedge fund. I just think it’s wrong.
So, I’m a little bit more cynical about some of the short reports now that I do think they use it as a– But then again, having said that, this is not the ones where they’re uncovering fraud. This is ones where they’re commenting on the nature of the business being overvalued, or something like that. When they uncover fraud, that’s a very serious allegation and it’s worth having a close look at it when they say that. They were dead right on Nikola.
Listen To Investors With Skin In The Game
Bill: Yeah. I think same with longs. I think it would really benefit everybody if he said, this is the percentage of my portfolio that I’m long or short. I know that people don’t want to do it, but I debate Twitter back and forth with people all the time. It’s a super tiny position for me at this point. It doesn’t fucking matter. I just enjoy talking about it because it’s controversial.
Tobias: Those disclosures are funny that they make people on CNBC [unintelligible 00:21:32] and my family owns it. But I often like to establish independence, I don’t own it, but I’m advising everybody else to go buy it. I get it.
Bill: Yeah, I guess I’m just not sure that I– I’m not sure the incentives are as aligned if you don’t own something, or if you’re not actually short something. I just think we got to talk about what the real businesses here.
Tobias: Having said that, if somebody’s got of their 70% portfolio in it, and they’re telling everybody why they are long, I get a little bit nervous about that too.
Bill: Well, that’s fine, though. At least, it’s honest. No one’s saying that you need to trust the words that are coming out of people’s mouth. But at least the guy that’s 70% long, if it’s truly long and he doesn’t have a lot of other income coming in from other sources, if he’s wrong, he’s fucked. It’s like Mike on the lumber thing, when people accused him of a pump and dump, this one idiot commenter in our comments like–
Tobias: Just one.
Bill: Yeah. That dude stands to lose the most. It’s not a pump and dump. He’s in it.
Tobias: You can listen to his reasoning there. His reasoning is sound.
Bill: Yeah, but I know you agree with it. It’s fine.
Tobias: The reasoning is sound. You can disagree.
Bill: [crosstalk] bet it because he’s betting it. That’s crazy. He’s just sharing how he looks at something but to me, that’s a real position. That’s not someone that sells halfway crook stuff. That’s like his chips are down.
Tobias: NonGaap’s in the house. What’s up, NonGaap? What’s up, Mike?
Bill: Hey, what’s up, NonGaap?
Jake: There’s no opinion that you can read that as a substitute for doing your own work.
Bill: Yeah, that’s right. Your work should include the NonGaap Substack because that dude writes some really cool stuff.
Tobias: Yeah, I’ve learnt some stuff from Mike. Thanks for that. The proxies are a little bit easier to read now.
Tobias: JT, you want have a go with your veg– I saw somebody in the comments said, “What’s veggies?” So, veggies, I don’t know if that– Is that only an Australian thing, to call vegetables veggies, or is that a–?
Jake: No, that’s US.
Bill: No, that’s a human thing, Toby.
Tobias: I never know, man. I’ve been here for so long. I forget which things are local and which things are imported, domestic, foreign. Yeah, so, veggies. You’ve got to eat your veggies if you’re going to get some dessert. So, JT’s veggies.
Jake: Well, this is more dessert because we’re are talking about music today. So, this isn’t going to be sperm whales, or mathematics, or anything.
Investing Lessons From RATM’s Tom Morello
Jake: Maybe it’s more fun, but you’re probably going to learn less also. So, fair warning. Shoutout to one of my main homies, Kyle, who bought me a subscription to Masterclass for my birthday. I’m in there in the Masterclass and Tom Morello has a whole thing about guitar in Masterclass, and it’s really good because he’s got all these interesting stories of how he came up, and stories from the road and talking– He goes through every single piece of equipment that he uses and how he plays it. Anyway, if you don’t know, Tom Morello, he is the lead guitarist of Rage Against Machine and Audio Slave primarily. It is what he’d been known for. Just to rewind a little bit on him. His father was actually Kenya’s first UN ambassador, and I think his great uncle or something was the first President of Kenya. But he graduated from Harvard with a BA in social studies, and while he was– Then, he moved to LA.
Tobias: Pre the band? Pre the band?
Jake: Pre the band, yeah. Interestingly enough, in high school, he had a friend, this guy named Adam Jones, and Adam came out to LA with him, and Tom introduced Adam Jones to Danny Carey, and Maynard James Keenan. I don’t know if what band they went on to form these three guys. Somebody in this, I’m sure in the comments will get it but it’s Tool., pretty legit band. Anyway, so, this is like one of Tom’s best friends basically is the lead guitarist in Tool.
All right, so, let’s rewind a little bit. It’s 1988, pre-Rage Against the Machine, he’s in LA, and he’s about to record a demo with one of his first bands, and all his gear gets stolen out of the back of his van. He’s like, “Ah, shit. What am I going to do now?” He only had a couple days and basically, no money to replace it. He goes into a local little music shop and they only have a PV cabinet, which is like an amp and then a Marshall head, which isn’t a bad piece of equipment.
But he was so embarrassed by the PV part because no one should be caught dead playing one of these is a real musician. He tears off the little nameplate on the PV amp, and then he ended up liking the sound so much that even after he could afford to get all this other stuff, he kept playing this stack. All the recordings of Audioslave, Rage Against Machine for the most part are through this very, very cheap setup. All of his guitars are most of them are really cheap ones that he’s just bought and tinkered around with and replaced a lot of the guts of them.
All of which is to say that, you don’t have to have all of the most trick shit to get the best sound. His setup is actually relatively straightforward, the amount of equipment that he uses. Yet, somehow, he’s able to get some of the craziest sounds. His creativity is just off the charts when it comes to getting random sounds out of a guitar setup. He actually has a little noise chart that he shows you in this masterclass. He has, what is called the feedback toggle. He figured out that if he moves the toggle on the guitar turning it on and off while messing around with it, he can get this almost a rhythmic drumming sound out of it.
Then, he takes the guitar jack out, it’s not even plugged in, and he’s banging the guitar jack to get a rhythm with that. He’s pretty famous for scratching, he’s figured out how to scratch using the strings to sound like a guy, [sound] that kind of sound with the record. He can make it sound like a helicopter, like a monkey at a zoo, or bagpipes, air raid siren, all kinds of crazy stuff that he’s able to get out of this super cheap, nothing special stack.
Perhaps, what is I think the most helpful for maybe trying to land this back to an investment context is that, he goes into a bunch about his practice regime, and what does he do, what does he work on. He breaks it up into four blocks. The way that he first started getting good– he says that he came to the guitar relatively late like I think he was 17 years old before he even really picked up a guitar.
He has zero natural ability when it comes to it. It was all just pure hard work, grinding practice that got him to where he was, which is a little encouraging, I guess for us schlubs that are trying to play things or learn things. The first block is, he just works purely on technique. Oh, I should say like how much time did he spend. He had a friend tell him when he was 17, if you spend one hour a day really dedicated working on this and never miss a day that you will be capable of great things. He took that really to heart and instead of– it’s very common, and I’m guilty of this as well where it’s like you don’t play at all for a week and then you try to play for three hours on the weekend because you have some time, and then you go back, and it’s another week before you play, it’s really hard to make progress like that. It doesn’t match very well probably with how your brain wires learning things.
This just consistent never miss a day practice which– Block one of the time that he spends is on technique. What that means is actually playing scales just over and over again. Just getting your fingers to move where you want them to go. Translating what you have in your mind and making your fingers do it. It’s boring, it’s solitary– The other thing he says is move very slowly and perfectly, and then eventually speed comes. Everybody wants to be a shredder and just hop in there and look like Eddie Van Halen, but the trick is you have to move slowly and perfectly, and then eventually the speed will come, and it’ll be actually clean instead of very sloppy.
Block two of time, he spent on musical theory. He’d read books on the mathematics of music. Why does a certain scale sound right to us? What’s the progression of chords? So, it’s all musical theory. That really tells you where you can go with the guitar and why would you want to go play that next note? It really serves to broaden your horizons of what’s capable from a theoretical standpoint.
Block three is songwriting, he calls it, which is bringing the technique and the theory together, and actually doing the real work at that point. Practicing songs, a little bit of experimentation, and really honing your craft in a little bit more holistic way than just purely scales and theory.
Then, the last block is he calls improvisation, and that should be the most fun part, which is you’re jamming, you’re maybe jamming with a friend– or he said he would just put the radio on, and they would randomly change the channel, and then try to play along with that song and just get into that song, and then move to the next one, which has helped him to integrate.
All right, from an investing standpoint, let’s see if we can back into some of his practice routines that will maybe be helpful for us if we’re trying to get mastery of the investment process. The first one is that working on your technique, and to me, it’s the boring stuff. It’s the blocking and tackling. Studying accounting, learning business models, maybe, reading financial history, it’s the little stuff like that. Theory part block would be investment philosophy.
Maybe some stoicism might fit in there. Really trying to work on the head game part of it, and being theoretically sound. I think probably Howard Marks type of writing is some of the best when it comes to investment theory and just how to think about it in a bigger context. Block three is the songwriting part, actually doing the work. This is being in the 10Ks and 10Qs and working on the– Actually, not just sharpening the saw, but actually cutting some wood there.
Block four is the fun part, the improvisation, the jamming. That’s maybe talking to your friends about investment ideas, or reading more widely to see if you could pull in random shit and turn it into an investment context. Really opening up the aperture wide so that you have a lot– maybe you’re able to make connections that you previously couldn’t because you’re really– or maybe even reversing to use the playing along with the radio. Maybe looking at 13F and trying to reverse engineer, why do they own something? That’s almost like joining someone else’s band while they’re playing on the radio, and you try to figure out if you can play along with that song. So, maybe not all that helpful in the investment context, but just fun to talk about Tom and his practice routine and some of his stories.
Tobias: How much of that do you do explicitly? How much of that four quadrants do you do or would you do from now?
Jake: I’m pretty cognizant of it. I didn’t break it up exactly like that, but I did break it up in accounting, doing the actual work, history, less and less actually investment looks because they’ve all started saying the same things over and over again. But I think I’ve done a pretty good job on that front. I was pretty mindful of it for a long time. So, I don’t know. How about you guys.
Tobias: Are you purposefully abstracting beyond investment books now? The veggies as a result of reading outside of?
Jake: Yeah, it’s on purpose, but it’s also fun, and it may or may not be as helpful as I hope it would be. But it’s [laughs] I don’t know at some point you have to enjoy what you’re doing also to keep coming back.
Tobias: I got my piano just below us here– not piano, whatever. We’ll jam next time for everybody. I can’t sing. We’ll have to be– Bill’s going to be the hype man.
Taking Notes: The Pen-to-Paper Advantage
Bill: No, I’ll make some hype sounds, but I won’t sing. I do a lot of that. Actually, I was taking notes as you were saying this. Jim O’Shaughnessy has been encouraging me to do things by hand. Since I have started, I actually think that I’m getting a lot better results.
Tobias: What do you mean by hand?
Tobias: With a pen and with paper by hand.
Tobias: Rather than typing it into a computer.
Jake: Yeah. I use still [unintelligible 00:35:21], and I really like them. But there’s something about having to write stuff that I think I’m paying closer attention to the details, it’s objectively much slower but I think that the quality of my looks is improving a fair amount. I agree that some of the theory would be reading history or whatever. For the improv, actually I got to the place of maybe it’s looking at somebody else’s– I like Jake’s 13F, but I was thinking almost using what I would like to study and then applying it to some of these businesses that I think are insane, and just trying to figure out what people might be thinking there. I think that’s the fun exercise to do to decode how that’s all working. But I liked that segment.
Tobias: What have you learned from decoding? Have you decoded and found the cipher and said, “Oh, yeah, this is actually really cheap even though it’s optically expensive?”
Jake: It’s the reason that I’ve owned FAANG for the last three years, was getting [crosstalk] about it. Rather than saying, this is absurd, I just started to pay attention. I think TransDigm, the only reason that I was able to get comfortable with that was– I was in the airlines, but I paid attention to the stuff around it. I paid attention to people that talked about quality businesses, and I paid attention to why they were able to lever it like it was. I just needed the chance to shoot the shot. Yeah, I think my entire 2020 is attributable to trying to decode what people have been saying to me for three years, and it just worked out at the right time. But I don’t know. I might just be a one-trick pony.
Jake: Well, that’s what Tom was saying actually, was that he felt he was just working and working and not really getting any better, or he was getting better, but he couldn’t see it himself, because it was such small incremental progress. But then, he actually went back I think after his sophomore year in college, and at that point, he was playing four hours a day every single day. He wouldn’t miss it. Like he said, “I’d be sick, and I had a test the next day, and I would play from midnight to 4 AM.”
Jake: “Not 3:58 AM. 4 AM. I’m getting my four hours in.” Anyway, but he said he went back home from college, and everyone was blown away at how good he had gotten, and he just couldn’t see it because he was in the middle of it.
Bill: Well, I don’t think I’m that good, but I appreciate somehow being connected to that story.
Tobias: It’s harder with investing, because you don’t get the immediate feedback. You get feedback over years later. That’s why I’m an advocate for writing down what you do, so you can go back and look at what you didn’t see how you were thinking at the time and see what thought processes were right, and what thought processes were wrong, which you’re focusing on, what was right, what was wrong.
Jake: Well, Jim also has been talking to me about journaling. I think there’s something to me about a pen and paper that’s different than just typing. I think there’s some connection that I have with, I don’t know, the feeling or whatever. When I read my own handwriting, it’s like, “Well, somebody else definitely didn’t write that. That’s me.”
Jake: Who is this idiot that wrote that? [chuckles]
Bill: I don’t know. I like that stuff. Yeah, I need to do it more frequently, but I’m doing it more frequently than I ever have.
Tobias: I always handwrite notes if I have to speak from them, because otherwise it just doesn’t go in.
Bill: Ha. Yeah, so why not do work that way too, because I think it does go deeper into your head. It’s obviously not fast and fast is what everybody covets these days. So, there’s that.
Tobias: I want to be able to capture them and search them properly. Has anybody got any good solutions for that?
Bill: What, your notes?
Bill: I use Roam. That’s what I was just taking notes in. It’s pretty good. I don’t know that it’s like as good as people. Maybe I don’t use it right.
Tobias: Can you hand write in Roam or is it that you type it in?
Bill: No. Yeah, you’ve got to type it. You could probably write on an iPad and then put it into Roam, but I don’t think that’s the same.
Tobias: Kind of recognize– I can barely read my own writing. My writing is indecipherable to anybody else. It can be–
Jake: I don’t think we’re that far off from having that OCR as a very easy plugin for any program. I think the handwriting to digital translation will be solved pretty easily.
Tobias: OneNote. Thanks, SC358.
Bill: Ah, good old SC.
Tobias: Notepad+. Private Twitter.
Tobias: NonGAAP’s got a private Twitter.
Bill: I need in his private Twitter. That’s a shame. Now, I feel like I’m left out. We’re out here plugging him and we’re not even in his private Twitter.
Tobias: I think it’s for Mike only. I think he might be the only one in there.
Bill: Oh, I don’t know I want to see inside that one. Anyway, I digress.
Bill: That dumpster fire.
Tobias: Throw your questions in folks and–
Taking On Water In Your Portfolio Builds Character
Bill: I do think the process of taking on water in the portfolio and how you react, I wrote yesterday that I thought it builds character. I really do mean it. It’s very easy to do well when you’re doing well. It’s much harder to be mentally sane when you’re not.
Tobias: Your position in Qurate, does that bother you going against you?
Bill: No, I want it to.
Bill: If this thing goes down 20 more percent, this is just going to get stupid. So, do it. I don’t care. All the shorts. Who’s that guy? Melvin Capital, short the shit out of this thing, man. Go ham. You can get paid this quarter. I’ll get paid later.
Jake: Yeah, different time horizons.
Bill: If I’m right, that’s the big if– and I would be lying if I didn’t say that. Some of the stock reaction has got me questioning whether or not I’m right. I spent a lot of time thinking about that, and we’ll see. But when I laid the bet with Austin, my dream scenario was that it stayed cheap enough for Greg Maffei to do something. This is it.
The Advantage Of Going Public With Your Investment Thesis
Tobias: There’s a couple of good questions in here. First one, this is something we’ve talked about a little bit, the dangers of posting small cap stock ideas on FinTwit. What are the advantages of putting stuff out there?
Bill: Well, my two cents is, I don’t think there is much of a danger unless– look, if you found this small cap that is insanely liquid and your writeup is really good, then I hope you’ve built your position before you put your writeup out, because you may never get a shot to buy it at the valuation it’s at now. As far as people reading it and buying it, I feel a lot of pressure to not have people listen to me, but I think at this point, if you’re listening to me, you’re the idiot, because I am pretty clearly honest about maybe not knowing anything, and I constantly say, “It’s not investment advice,” and I don’t run any outside capital. So, it’s on you. I get the benefit of being able to talk about things and I get a lot of inbounds.
There was a dude the other day that posted crazy insightful stuff on a TransDigm acquisition target. I never would have had that. If I didn’t talk about TransDigm ever, that guy wouldn’t have tagged me, and I’m really glad that I got that information that came back to me. I operate from a ‘put good stuff into the world and hope it comes back to you,’ and I have not had that assumption negated since I started to go positive and go first, to go back to last week.
Jake: Call back.
Tobias: Yeah, that was a good one.
Bill: Oh, shit. He’s pretty good. He’s on fire today.
Embrace An Outside View
Jake: I think it’s a bigger question of– You want to engender an outside view, because it’s very easy to fool yourself. So, you need to have outside view in base rates and things like that to help you. However, it’s also easy to get too much outside view which turns into cacophony at maybe best, and at worst, just like an avalanche of groupthink that would scare you off of your perhaps variant perception that might actually be right. So, it’s really hard to open up the floodgate just enough to get the right amount of outside view and not potentially get an injurious amount of outside view.
Tobias: Yeah, I think you need to be careful about curating who you listen to, because you run the risk that FinTwit–
Tobias: FinTwit can be the market, but there are clearly some people in FinTwit who are thinking, who are generating varying perceptions, and you want to be able to follow those guys and ignore the market for the most part.
Jake: [crosstalk] guys, how do you tell those apart? Is it some of them have laser eyes or not? Is that–
Tobias: I just think you look at accounts over a long period of time and look at what their process is for examining positions. I like the accounts that are like, “Why don’t you own x because they own it, and they just want to know what’s the worst-case scenario? What am I missing?” You’ve reached the pinnacle of analysis, I think, when you’re just like, “Why don’t you own x? Just explain it to me. I’m not going to change my mind, but maybe I’m missing something. Tell me what I’m missing.”
Bill: Yeah, I think you can learn a lot from watching people over time and how they run their strategy. There’s a number of accounts that do stuff that I admire, and you just watch how they behave over time. I’ve separate lists. I wish that I could have burners, but I’m not trying to segregate everything in that way. But a lot of the best stuff that I have received is not from people in finance. It’s from people that work in industries or customers of companies that have contacted me. Mike and I, when he was diligent saying lumber, like, we’re on the phone with a guy that operates a mill, the only reason that guy reaches out is because we’re talking publicly about an idea. Then, he reached out to me, and then I said, “Can Mike join?” Then, we’re on a call. That’s real diligence. That’s not listening to what somebody says about being long lumber. I don’t really give a shit.
Tobias: What’s the most important lesson you’ve learned over the last two years?
Bill: That I don’t know anything. I don’t say that joking, I really don’t. I don’t see how anyone can have any confidence after the pandemic. You underwrote that? Okay.
Jake: I guess my answer would be a more healthy appreciation for the phrase that “this too shall pass.”
Tobias: Yeah. I haven’t really had a chance to reflect on the last two years yet, but I think that the cycles are much, much longer than I had appreciated. It just takes a long time. You’ve just got to be more patient than you can possibly imagine, and eventually, I think–
Jake: Its own reward, Toby?
Tobias: Say it again.
Jake: Is patience its own reward?
Tobias: I don’t think so. I’d like to get paid. [laughs]
Tobias: Thoughts on some processes, potential exposure to Tencent. You do get a discount if you buy through the South African entities. But you know you’re buying through another entity too which has got another layer of management, which is going to make other decisions, and you’re going through another stock exchange. As I have progressed as an investor, I’ve become less and less interested in really funky expressions of investments, and probably just– If you want the exposure, just get the exposure directly. It’s my two cents. But maybe a little bit of both, if you feel strongly about it.
Bill: Yeah, I’m sort of the same way.
Jake: It is hard to imagine you could get much more disintermediated. This Chinese company, looked through, owns a bunch of other companies inside of it that you’re betting on, looked like all filtered through the CCP, look through a South African company, Jesus, how much more can we get away from the actual transaction that’s happening on the ground of a merchant using WeChat?
Tobias: It probably always trades at a little discount. That’s been my observation of these things, that there’s a discount for costs, there’s a discount for management’s arbitrariness. You probably do get a discount when you buy. You probably always have that discount in it.
Jake: Sure, it’s reverse control premium.
Tobias: What inning are we in?
Jake: Inning update, Bill.
Tobias: We haven’t done that for a little while.
Bill: I don’t know. A lot of stuff has gotten slaughtered. I don’t think–
Tobias: Do you think that makes us go backwards a little bit? Are we kind of–?
Bill: Yeah, a lot of prices have corrected.
Tobias: There’s some interesting stuff out there, I agree.
Jake: So, that moves us back to further in the game or on the next game?
Bill: Maybe, the game ended and maybe another game starts.
CAPE Makes No Sense On FAANG
Tobias: It’s weird that the market is optically expensive, all those long-term measures are expensive, but I can find plenty of stuff to do. And then, when I look at that, there’s a lot of that index is going to be FAANG, which is growing rapidly. I think– I’m going blank on who said it, but if you do CAPE on– CAPE doesn’t make any sense on FAANG, because they’ve all grown so much over the last 10 years, and FAANG’s a big part of the index. It’s possible at the index has changed in composition so much that CAPE doesn’t really make much sense for it. I don’t know. CAPE has only been around since 1996 too, and it’s been expensive since it’s been around. I don’t know.
Jake: I was being a little glib actually when I said that a new game started. We revealed the flaw in this analogy and that is that the game doesn’t ever end here. So, that’s why talk of innings is actually probably not that helpful.
Bill: Yeah, I think a couple months ago, you can feel how much energy was in the market. Certainly, when lumber was going nuts and stuff like that, there was a lot of speculative shit. I think a lot of that’s come down. I don’t know.
Tobias: We had speculative tech out of the bottom of 2020 run.
Bill: [crosstalk] top, SPACs are decimated. A lot of the speculative stuff is decimated.
Tobias: Well, here’s one possibility. It’s like a 2000-type scenario where tech and SPACs– This is the egregious. I’m not talking about FAANG. I’m talking about the stuff that is priced like it’s going to be FAANG without demonstrating that can get there yet. A lot of that stuff has come back a lot.
Bill: But what is that? That’s what I’m saying. A lot of those companies have gotten hurt.
Bill: Yeah, but I don’t know. I don’t know enough to–
Tobias: There’s a few enough to– not to call out names here, there are some smart guys who are long that too. It’s hard. But there is something going on underneath the hood of the market at the moment as there always is. But it just feels to me like that, there has been some carnage in some stocks, and I’m surprised I just haven’t seen as many people talking about. Maybe everybody’s just quietly licking their wounds if that happens.
Jake: Yeah. It could be.
Algos Will Never Completely Solve The Market
Tobias: I like that. How long till machine learning solves investing and all the money goes to one algorithm?
Bill: It will never happen.
Tobias: Yeah, that El Farol Bar problem that JT, another callback raised a few weeks ago, two or three weeks ago, you can have a look at what that implies for machine learning. Everybody’s machine learning through the same data set for one thing. So, everybody’s coming up with essentially the same conclusions. Then, they’re all going to be handicapping based on those conclusions. They’re all going to go in the same direction. Maybe it’s time to be better to be discretionary in that market. I don’t know. [crosstalk]
Jake: There’s actually a good physics analogy here, which actually– I was thinking about doing a whole segment on. Maybe I will next time, but I’ll just give the quick version. But it’s called the third body problem in physics. If you have two bodies, we can calculate exactly where they’re going to go-
Tobias: The gravitational pull of those– yeah.
Jake: -gravitationally. But you add a third body, and literally, we can’t calculate it even if we know everything about it, there’s a chaos and randomness to it. To think that we can have three– What the analogy that they use is, take two billiard balls and they’re next to each other, and you have a billiard ball hit, and it hits perfectly at the exact same time both balls, we can’t really say how much energy is transferred to each ball at that point. If that is the case, why would you think that machine learning could know basically where every electron is in the business universe and be able to then calculate where’s it gravitationally going to go? I just don’t think it’s reasonable.
Bill: I agree. Until humans stop participating, I think there’s always going to be stuff to exploit.
Lessons From Charlie Munger’s $BABA Position
Tobias: What do you think about Munger’s position in Baba? What do you think about that?
Bill: We’ve talked about this. I think Munger wanted to teach everybody that was–
Tobias: A lesson?
Bill: Yeah, I think he did. I think he wanted to say, “I’ve been saying forever that China had better companies than over here does and this got cheap enough, and I talked to Li Lu and I’m comfortable and I’m buying this thing. If you still have your head in the sand after this, then I can’t teach you anymore.” That’s what I think Munger was saying when he bought it.
Jake: Yeah, I think he said it publicly that you should be fishing where the fish are, and where there’s not a lot of really good fishermen all standing shoulder to shoulder trying to fish, which says, look outside the US, and perhaps China is an interesting place to be fishing.
Tobias: It feels like they got the timing on that wrong though. Maybe it was just unforeseeable that the Chinese government was going to move like that on it, but Li Lu’s got his ear pretty close to the ground. It was at that– unforeseeable? Yeah, it was just unforeseeable.
Jake: Who knows?
Bill: They got IBM wrong too. They swing and miss.
Jake: This is a probabilistic game.
Tobias: That’s fair.
Bill: An I think it’s way too early to say that Charlie’s wrong on Baba.
Tobias: I don’t think that he’s wrong. I think he’s probably right.
Bill: He did not bottom ticket like he did the banks in 2008.
Tobias: Yeah, and he doesn’t have very many positions.
Jake: If he’s right, then you can be more right than him, today.
Bill: But also it’s in The Daily Journal. What’s that really mattered to him? What is The Daily Journal and his look through net worth? Zero. That’s the answer. It’s a little–
Tobias: Those guys don’t play that game this way. They don’t play that game this way.
Bill: It’s more of a statement.
Tobias: Ah, nah. He’s just saying good value, and he’s gone for it.
Tobias: Where’s a pocket? There’s a pocket. [crosstalk]
Bill: I don’t think he thinks he’s going to lose. That’s not my comment. I just think it’s not that big of a bet, and it’s just kind of a bet. I bet if he was in a fund– I don’t know. I guess I wonder how big he would have gone in out of the gate if he was in an LP. Certainly, he’d be buying more today, if he had dry powder —
Jake: [crosstalk] You have a little bit. There actually margin in that account some.
Bill: Don’t use leverage. Do as I say, not as I do.
Jake: It’s cheap leverage.
Tobias: Be very concentrated except in Berkshire, which is very diversified. Although it is concentrated, its big positions, I guess.
Bill: I guess. I’ve decided I have a problem with the way he markets his positions.
Bill: Yeah. I always have.
Jake: Do tell.
Bill: He doesn’t have three positions. He’s got [crosstalk] exposure in a massive conglomerate. Li Lu’s got more than one position, and Costco is a true one position. I think that I understand what he said or what he’s saying when he says it. I think that if the uneducated or new to investing people hear that, and they truly think that’s three positions, then they’re not actually paying attention to what’s going on.
Jake: Perhaps, it reveals how he thinks about this, which is, “I have a bet on Warren. I have a bet on Li Lu. ”
Tobias: It’s good point.
Jake: It’s not the business necessarily.
Bill: Yeah, I think that’s fair. But that’s different than how most people associate a position.
Tobias: That’s their fault though. That’s their fault for making that mistake. He’s pretty clear. He’s demonstrating what he’s doing. He’s been doing it in public for a really long time.
Bill: Yeah, I know. That’s why he’s smarter than Warren. He just found a genius and was like, “I’m going to go chill, and you can call me whenever you want.”
Jake: Been on that.
Bill: [crosstalk] want that’s working.
Jake: [unintelligible [00:59:02] catamaran.
Bill: That’s right. PS: Call up the Bentley dealership because I’m trying to roll deep.
Tobias: [laughs] And on that note, that’s it, folks. That was fun.
Bill: Warren’s out there buying hell-damaged Lincolns and Charlie’s got the Bentley.
Bill: My man.
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