Average Up & Bet Hard

In their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Average Up & Bet Hard. Here’s an excerpt from the episode:

Bill: Yeah, this is the David Gardner philosophy, I think. Then you let it run, and then you add to the ones that are working.

Tobias: Yeah, I think that the–

Jake: Is that going for two to after the touchdown?

Bill: Well, I think, and I don’t want to speak for him, my interpretation of why I say that is if you think that the market someday can be 20x, let’s say that you think a stock 20x or whatever, when that thesis begins to get proven, forget about whether or not the stock works, but when the business starts to work and the stock works, if you’re already right, I think you want to average up into those situations and bet those hard because that’s probably the situation that you see clearly in that strategy.

Jake: I think I remember Peter Thiel talking about this quite a while ago, and he said that he’s almost always re-upped invested in an up round, because it meant something was working and you just keep backing what’s working.

Bill: Yeah.

Tobias: That’s slightly different to a public markets position that right where– let’s just say there’s a random walk, and you put on enough– Let’s say for argument’s sake, and you’ve done all of your work on 10 positions and half work and half done, why would you size up into the ones that are working given that we’re just talking randoms over the next two or three years?

Bill: Yeah, but I don’t buy that it’s actually random. That’s the problem. You were fundamentally–

Tobias: There’s a Nobel Prize in that if you can get that paper out.

Jake: Hey, Bert, what are you talking about? [laughs]

Bill: Well, I don’t. I think they’re wrong. I think that companies that have cultures that compound value over time generate huge returns. I think we’d all agree that a lot of the market’s returns are out of a very few amount of companies. So, if you’re identifying that company with that culture, I don’t think it’s that random over a long term.

Tobias: But you could find an x– I saw this lots of times from 2005 to 2015. There were lots of very, very good companies that had just traded so expensive. They can’t control their stock price. You’re looking at the underlying companies saying this is a spectacular company. This is a spectacular business growing and compounding all the time. Management’s executing, Stock just hasn’t done anything. You could hold that for a couple of years and be backwards 50%. I don’t think you’ve necessarily made a mistake other than you might have overpaid for it.

Bill: Yeah, I don’t think so either. But I do feel sometimes, when people talk about stocks, you’ve got– I’m trying to think of a good analogy that people would understand. It’s basically like, you’ve got a young Tom Brady and he’s winning Super Bowls, and people are like, “Well, how do you know he can continue to win, and how can you pay him more? Shouldn’t you just go sign some shitty quarterback because of mean reversion?” It’s like, “No, you dumb shit. You just continue to bet on the guy that’s really good.” I don’t think business is that different. I do fundamentally believe that there are teams of people that kick other people’s ass in competition. In business, it’s the same.

Now, I agree that there are competitive forces that in a perfect theoretical world are competed away. The problem is, we don’t live in theory and talent wants to join talent. That’s what I believe about the world. Then, I think that we’re at a point where we have entered an economy, whether it’s regulatory capture, or companies have gotten so big, or scale advantages, or whatever.

Tobias: The internet, probably.

Bill: Well, but maybe.

Tobias: Distribution network. Thanks for Modern Distressed Investing at Thomas [unintelligible [00:22:27] I can’t quite see the picture. But we just got a tip here, £20 tip. Thank, mate.

Bill: Nice, thanks for the tip. I do think that people underweight that, and then they’re like, “Well, theoretically, should this not be true?” It’s like, yeah, in theory, but the problem is, you don’t get paid on theory. [crosstalk]

Tobias: You’re missing my point. I’m with you that there are management teams and businesses that are superior, and that grow and compound over time. I think that the wrinkle is, though, that in the market, we’re all trying to handicap at the price that you’re offered, is this now fully accounting for how good these guys are or even overestimating how good those guys are?

Bill: I do understand you point. I do get it. I think what I’m saying is that, I think a lot of the times those companies are underestimated perpetually.

Jake: You’re trying to avoid that Bobby Bonilla contract. [chuckles]

Bill: Yeah, and yes, there are some times, obviously– look, I think if you look at my portfolio, it’s not like I’m making huge bets on these great companies. But how long has Google been undervalued for, and how long would people have said, “Well, it’s too expensive”? It’s like, you’re wrong.

Tobias: Google has been cheap on occasion.

Bill: I get it, but you probably could have bought it expensive and still outperformed if you bought it small enough is my point.

Tobias: I’m sure. Yeah. So, you’re just saying to put a starter position in when it goes backwards, buy a little bit more.

Bill: Yeah, I think that strategy is somewhat–

Tobias: [crosstalk] Isn’t that literally what I just said before? Isn’t that what I said?

Bill: [crosstalk] I don’t even know what we’re talking about.

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