VALUE: After Hours (S03 E34): Mass Extinctions, GMO’s Value vs Growth Letter, And Grantham’s Bubble Call

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

  • Mass Extinctions
  • Grantham’s Everything Bubble
  • GMO’s Value vs Growth Letter
  • Great Businesses No Longer Attract Competitors
  • Kraft Heinz $62 Million To Settle Improper Accounting Charges
  • The Real Cause Of The U.S Labor Shortage
  • You Can’t Pump & Dump Commodities
  • Scott Mcnealy Was Wrong
  • $GOOGL Looks Cheap
  • The Rivian Truck
  • Qurate Crushing Zoom
  • Things Take Longer Than We Would Ever Imagine
  • Gaia Punishing Supply Chains
  • In-App Purchases

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

Tobias: And we’re going live streaming. Maybe we’re going to be able to do it. Oh, this means being live streamed. Got it?

Jake: And we’re live.

Tobias: It’s Value: After Hours. We did it, on time. Crazy.

Bill: [unintelligible [00:00:12]

Tobias: Bill Brewster, Jake Taylor, and I’m Tobias Carlisle. This is Value: After Hours. Haven’t done a proper intro for a while. We do these stumbling intros. What are we talking about today, fellas?

Jake: Billy, what you got?

Bill: I think that we’re probably going to talk a little bit of bubble talk.

Jake: All right, that’s good. Grantham, I assume, is involved. I’ve got a piece that’s probably going to tie in nicely only through sheer coincidence and accident, which is going to be on mass extinctions.

Tobias: Oh.

Jake: Yeah.

Tobias: [laughs] That makes me little nervous.

Jake: Yeah, we’ll see.

Jake: It’s an ominous episode today.

Tobias: Well, I’ve got some good news. Well, I’ got some priors that need to be confirmed. So, I’ve got Grantham, GMO’s got their letter out defending value, even though, it had a pretty good run for a little while there. It’s all being beaten up and growth back, monsters back from the dead.

Jake: [laughs]

Tobias: Grantham, GMOs, I’ve got some thoughts. They say it’s okay. Just relax. Value’s money, good.

Jake: Phew.


Tobias: Who wants to go first? Who wants to take it away?

Bill: Let’s start with veggies.

Mass Extinctions

Jake: All right. It might be set the table for it. Mass extinctions, I’m going to start the episode off by saying– You guys know about the supposed 65ish million years ago whenever it was that the meteor hit Earth and killed off all the dinosaurs, right?

Bill: I know it, dude. The great bull market of 2016 to 2020, that mass extinct value [crosstalk]

Tobias: Killed all the dinosaurs.

Jake: Yeah, all right. Come on. [unintelligible [00:02:08] for that.

Bill: Sorry.

Jake: We’ll get to that in the end probably.

Bill: I couldn’t resist.

Tobias: When you started out with the allegedly 65 million years ago, is there any twist to this?

Jake: No, no. It’s more that I can’t remember the exact numbers. [laughs]

Tobias: Okay. Good.

Bill: Fair.

Jake: Without answering, and if people can chime in the comments if they want on what they think the answer is, but from the time that the meteor hit, how long do you think it was before there was the mass extinction? Don’t answer that. But let me now set the table a little bit more, and then we’ll follow up, and we’ll close the loop, and give you the answer on that.

Tobias: What you’re saying is, how long from whatever the event was, that the meteor striking Earth, did all of the dinosaurs die out?

Jake: Correct.

Tobias: And we can’t tell you. I happen to know the answer, because you told me last week but I won’t tell anybody else.

Jake: By the way, 70% of all of the species disappeared in this time period. So, that’s what we’re kind of measuring. Let’s rewind the clock a little bit further back, and for call it roughly 4 billion years, we basically only had invertebrates, single-celled organisms swimming around in the ocean. There’s nothing really that we would recognize as complex life today. What’s hard about that is that we didn’t really evolve anything at that point that would leave anything behind. It wasn’t until about 600ish million years ago that life started actually evolving things like shells and whatever that would last longer, and then be till today, when we could start to look at it. All of our evidence of life of what things actually look like is pinched a little bit on the evolutionary timescale, because nothing lasted that was before 600 million years ago.

It’s an interesting idea, but in that 600 million years ago, we had the Cambrian explosion, most people have heard of that. That actually is what starts the fossil record, because there’s nothing left behind before that. In this last 600 million years since the Cambrian explosion, there have been five distinct mass extinction events. That’s how they actually mark geological periods and create a calendar for mass geology, is from these five extreme events. The biggest one was actually 250 million years ago, and that ended the Permian era, and that actually wiped out between 80% and 95% of life on Earth in both on land and in the oceans. So, just an absolute killer.

Tobias: What caused it? Crypto or was it something like that? NFTs?

Jake: Yeah. Probably, it was NFTs. [laughs]

Bill: Clearly.

Jake: I’m not sure if we know the answer to that, actually.

Tobias: Okay.

Jake: One-third of all species that have ever existed have been wiped out by mass extinctions. Then, the other two thirds of species that have been wiped out, which actually represents almost all species, because 99% of species have expired that have ever existed. So, we’re in this lucky little 1% today. Two-thirds have been wiped out by lesser events. Actually, the lifetimes of genera, which is the plural word for genus, they follow a power law as you might expect like earthquakes. Most of the time, the lifetime of genera is relatively short. Lots of little earthquakes that happened, and then there are the occasional very long-lived ones. Likewise, the events that wipe out life follow similar power laws where most of the time it’s little things along the way that get wiped out, and then there’s the occasional mass extinction that does a pretty big swipe.

The one we’re going to talk about more specifically is called the K-T boundary, and that’s this meteorite that hit near the Yucatán Peninsula, Gulf of Mexico, and kind of funny story like that K-T boundary, actually, the time on before it was called the Cambrian, and then the Tertiary. So, you’re like, “Why isn’t it CT, but apparently, they’ve already had they use CT somewhere else. So, they use the German word for the K, which is kreide, something like that. So, that’s why it’s the K-T boundary, because it was spelled with a K there. So, imagine this 10-kilometer-wide rock smashing into Earth near Mexico, and what’s interesting is that, it shot up all of this dust and rock into the atmosphere, and we can actually see that–

Normally, in most of the Earth’s crust, iridium is pretty rare element. But it is found often in meteorites. What they found was that there’s a thin layer all around the globe of iridium that matches up the strata of the time period to match that 65ish whatever it was million years ago. That’s a pretty good indication of what happened like. The pieces fit together. So, imagine it shoots debris all over into space, and then all of that stuff just comes crashing down almost intercontinental ballistic missiles all over, and the heat that was created is just absolutely insane. It spread this worldwide heat that was roughly 10 kilowatts per square meter all over earth. It’s kind of been described as, if you had set the oven to broil for several hours, that’s what Earth was for a while. That’s pretty rough. Yeah, you probably don’t want to be a part of that.

And then, tiny dust particles are spread all around the earth, and they block out the sun, and then it kills off everything that had photosynthesis as its way of making a living. It actually then led into a temporary freeze of the Earth. You put the oven on broil, and then you set it to freeze. Back to our original question. How long did it take for this process to play out from setting to broil versus freezing the Earth and killing off 70% of life on planet Earth?

Tobias: How long did the broiling? Broiling —

Jake: Several hours supposedly for that part.

Tobias: I reckon you’re done after the broiling?

Jake: [laughs] Billy?

Bill: I’m not guessing. I’m not guessing on this. I will get it so far off. I’ve been reading Think Twice. I know that it probably– my guess has something to do with my fucking phone number, and I’m not going to do it.

Jake: [laughs] You’re anchored to some bad number.

Bill: Yes, I’m not doing it.

Things Take Longer Than We Would Ever Imagine

Jake: Okay, well, I’ll spoil it for everybody here, now that everybody’s had a chance to put their answer into the comments. The answer is between tens, and hundreds of thousands of years for it to play out. When I first read that, I was like, “Holy shit. My intuition was just so far off on that.” I would have thought, I don’t know, months maybe at the longest. I’m off by multiple orders of magnitude. All of which is to say and by the way– that’s a very, very short sliver of time in geological time, if you’re measuring it. That is a blink of an eye. All of which is to say, I think that time frames often– stuff takes longer than we would ever imagine it takes. I think about that with suffering through a value, wandering through the desert. I think about that with perhaps the internet changing business, and how life happens, and how commerce happens.

I think the meteor hitting in 1999, or whatever it was, or maybe a little sooner of the internet taking over. I think it might have been right like that. I think it’s obviously things are different now with that, but we’re 20 years into it now, and it’s only becoming clear that, “Oh, yeah, it actually really is totally different, and things are kind of like–” That 20 years seems like forever, but maybe in the grand sweep of humanity and commerce in general, that could go back probably tens of, if not hundreds of thousands of years. 20 years is, again, a blink of an eye. All of which just to say like our scale of how things quickly they should be moving, probably is off pretty often, and then therefore, we probably need to recalibrate and just really think about like, “Boy, there are things that happen on very slow timelines even though they’re very important and it’s hard for humans to–,” we’re not really wired and programmed to notice those glacial changes. We are more following a linear antelope across the savanna and that’s how we’ve been programmed to view things. Anyway, just be patient, I guess, is the bigger takeaway and try to think in the appropriate timescales.

Bill: Is Toby frozen? I think Toby’s gone.

Jake: I’m sure he had something incredibly insightful and pithy to say.

Bill: He definitely seems like he’s thinking hard.

Jake: [laughs]

Bill: I hope that our whole show does– Oh, there he is. He’s back.

Tobias: [laughs]

Jake: I’m sure you caught all those words of wisdom, huh?

Tobias: I just couldn’t respond. I had some nonsense to say. I felt my screen had frozen up. [laughs]

Jake: Okay. [laughs]


Tobias: Yeah, I guess Bill Gates has got a great line where he says, “We underestimate the impact of technology in the long run and overestimate it in the short run.” I think it’s Bill Gates.

Jake: Sounds right.

Bill: It does sound right.

Tobias: Think that’s true to the internet. 1.0 was overestimating what they were going to achieve, and then second go around, they’re all much better businesses than they were the first time around.

Bill: We’re already on 3.0, dude.

Jake: Web 3.0?

Bill: Yeah.

Tobias: Is that blockchain?

Bill: I believe so. I need to beef up on it.

Tobias: It sounds great to me. Let’s cut out these middlemen.

Bill: Yeah. I like the idea of Ethereum just owning the software, and that’s it. I heard that sales pitch, and I was like, “I like that.” Now, I just don’t do the work.

Tobias: How do they own the software?

Bill: Well, like you–

Tobias: Do you have to buy the coin?

Jake: It’s got gas involved. I don’t understand it yet. So, I don’t want to really talk about it. You’ll just expose my ignorance.

Jake: You know more about it than I do. So, that’s how far away we are from this.

Bill: I think there’s a base layer, and that’s what you can have pieces of. [crosstalk]

Jake: Don’t do it. Don’t do it, Bill. Stay away from the edge.

Bill: And they were [crosstalk] on top of it. Fair enough. Fair enough.


Tobias: What was it that eventually caused the dinosaurs to die out? It wasn’t the broiling, and then the freezing. It was 10,000 years later, what happened?

Jake: Well, I have to think that– If you imagine ecology as this web of energy transferring, survival of the fittest, it is a nonlinear system, where if you can take out a piece of it somewhere and you really don’t know the upstream or downstream effects of it, it’s very hard to tell, just like in a complex adaptive system, similar to let’s use the age-old analogy of the sand pouring onto a table. You never know exactly which sand granule is going to be the one that tips it over. Similarly, you really don’t know what– all of these systems, they live out right on the edge of chaos. Oh, by the way, this piece that I wrote or put together today actually came from a book called Deep Simplicity by John Gribbin. I think it was 2004 or 2005 it came out, and Munger actually recommended it during one of the meetings.

It’s quite good actually. I’ve read most of the concepts before in different books, but then the way that he ties it all together, and then the analogies that he uses, and how he explains it, maybe one of the best physics books I’ve ever read. Quite good. Anyway, yeah, I think just anything, you just really don’t know how this web is going to break down, and you put that stress on to a complex adaptive system, and you’re going to have huge, huge change.

Tobias: Is the introduction of the internet and the web, the sort of the analogy that you use for the difference between two years where there’s now there’s all of these dinosaurs– Well, is anything really not where web based anymore?

Jake: Yeah, I think there’s still plenty of service businesses that don’t have much of a web presence these days, but it’s almost table stakes anymore. I don’t know.

Bill: Their back ends better be somewhat technology focused. Otherwise, you’re screwed.

Jake: It’s hard to imagine the cost structure being competitive if you don’t have some of these tools, especially, if labor is getting more expensive, which seems like it’s kind of a reasonable expectation.

Bill: Yeah.

What’s Causing The U.S Labor Shortage

Tobias: Labor had its day, yesterday. That’s it. One day. [crosstalk] 364 capital, baby.

Bill: I don’t think so, man.

Jake: 364 capital.

Bill: I think it might have a couple of years here.

Tobias: Yeah, I think so too. I think the pendulum swung a long way in one direction, it seems to go back in the other direction historically.

Jake: One would hope maybe from a guillotine risk perspective that labor has a little bit more, has some time in the sun.

Bill: Yeah. Labor and supply chains, both in short supply right now.

Tobias: What is this about supply chain? So, why does it continue to be so jacked up in just random places for everything?

Bill: I think everything was run so efficiently that you can’t just stop it and then started again. I just don’t think there was enough slack. Then, you still have a ton of people that are quarantining, you’ve got countries that don’t have shots in arms, you’ve got bad outcomes, you can’t– this whole thing’s a mess. Dollar Tree doesn’t think it’s going to be solved until 2023. I’ve said it before, but drive by a car lot, go look at — I drove by a Mercedes dealer the other day and I looked in. They don’t even sell Mercedes. They will hock any car that they possibly can sell.

Jake: Really?

Bill: Yeah. The Northeast just got flooded. So, all those cars are taken out of the like– I don’t know. We’ll see. Mercedes came out with an announcement. They said no V8s for this year, because they can’t get the parts or the supply chains all messed up. So, 2022 is going to be a V8-less year. There’s a lot of things going on.

Jake: Power.

Bill: Yeah.

Tobias: What do you mean 2022 is V8 less?

Bill: Yeah, they’re not going to make any. They just can’t do it.

Tobias: Crazy.

Bill: Yeah. Housing, there’s huge shortages. I know that we talked about this yesterday or last week, but read D. R. Horton’s earnings call. They literally said the price is not the impediment right now. The impediment is getting the labor to build the houses and the supplies. There are very real shortages everywhere.

Jake: It is not good.

Tobias:… labor have to be?

Bill: Huh?

Tobias: How skilled does that labor have to be?

Bill: Well, I don’t think it has to be that skilled. One might ask like, “Is this the consequence of four years of saying people aren’t allowed keep people out of the country?” That was kind of the policy that Trump ran on, and he had a very anti-immigrant at least message. I don’t know enough about that policy to go in and know exactly how it all worked itself out. But they may have created a pretty big labor shortage. Maybe not. I don’t know.

Jake: I think we could also push some blame on the other side as well that we encourage people to pursue education that may or may not have a tremendous amount of economic value, and we might have been wise to encourage a little bit more of people going and do the trades, and learn actual skills, like how to weld, and probably, it would have been smart.

Bill: I think framing is in short supply, I don’t think that’s a big skilled labor. I definitely think somebody in the comments in there inevitably like, “Oh, what about stimulus payments?” Yes, I think that has something to do with it. Imagine that. It’s a complex system. There’s probably multi reasons.

Jake: Explanations.

Bill: Yeah. I don’t know. What I do know is that stuff is messed up. This is why and we go back to it a lot, but this why I didn’t want the airlines to have to fend for themselves because I think if you do this, if you ruin the aero supply chain even more than it was, I was really worried about what does that do for 56 to 10 years, and once labor atrophies, once your skills atrophy, how do you bring people back into the labor market? That gets really tough. I don’t think our system has enough slack in it to come back quickly from a huge shock. Especially not when people get a ton of stimulus payments, because demand, if anything, went up. If you look at retail comps, they’re crazy. Retail comps exploded. So, there’s a mismatch there.

Grantham’s Everything Bubble

Tobias: Bill, do you want to do your topic?

Bill: Yeah, we can. I guess it ties in nicely, Grantham’s everything bubble. I listened to the podcast that he did with Consuelo Mack three times.

Jake: Stay away from high places. [laughs]

Bill: Well, I tried to really think about what he was saying. He’s clearly out there on this bubble call, and he’s done it pretty successfully, I guess, in the past. I think that if I can boil it all down to one variable, his argument is– Shiller came out and he said the CAPE is higher than normal, but it’s priced reasonable when you compare it to interest rates. Grantham is like, well, that’s not really– I think what he said is that, that’s not really like a fair way to look at the world. I think if you really boil it down, his argument is that the wealth effect is what everything is a bet on right now, and when that bet goes away, we’re sitting on a bubble of epic proportion. He then advocates something like, I don’t know, 70% emerging market value and 30% cash if you have the stomach for it. I’m not quite sure how the emerging market value– Uh-oh, we’re still live. It works.

Jake: Wow.

Bill: This is amazing. Our tech on this podcast is like by far the best tech.

Jake: Strong. They’re quite strong.

Bill: Yes, our host is gone, but somehow, we continue to stream. That’s called a robust system.

Jake: That’s right.

Bill: Yeah. Anyway, I don’t know. I don’t know what to do with this information. And then, I listened to another podcast with Howard [unintelligible [00:22:37], which I thought was really interesting. He has interesting thoughts.

Jake: What was he saying?

Bill: Well, I think that the title of the podcast is fundamentals, fuck fundamentals, or something like that. Basically, listen to it for yourselves, but I think that his theory of the case is that there’s very rare assets and those assets accumulate value, and he’s just going to keep buying those assets without too much regard to fundamentals and price, because they’re going to grow, and they’re the future. I don’t know. Then, I listened to another– I had a big podcast week. This is what happens when you’re in quarantine.

Jake: Yeah.

$GOOGL Looks Cheap

Bill: Then, I was listening to Leon Cooperman, and he was talking about the NIFTY 50 which I need to go back and look, but I think this is right. That was like 60 P/Es with an interest rate of 6%. So, we’re definitely not there. So, I don’t know. I don’t know what you do with all this information. I do think that when the history books are written, if this is sort of a bubble or whatever, and you say, “Well, you’ve got crypto speculation, you got the NFT thing, you got valuations,” it’s obviously a top. I’m not so convinced it’s obviously a top, but–

Jake: It’ll look obvious in hindsight. It always does.

Bill: Yeah.

Jake: But that’s tough. It’s never obvious in the middle of the fight, right?

Bill: Yeah. Well and I just think there’s– I was looking at Google and I think Facebook, all these things seem to trade somewhere between a 3% and 4% free cash flow to common. Growing 20%, you grow 20% for five years, and you look five years out, all of a sudden, you’re at like 6% free cash flow yield the common. Probably, it’s actually probably too low. It’s probably closer to 8% or something. That’s not that inexpensive– or that’s not that crazy rich, but you need the growth to come.

Jake: Yeah, how big are you at that point after 20% for five more years? That’s a big number.

Bill: Yeah, I think my data sources are not good for consensus, but I think that Bloomberg, what I saw was $100 billion in free cash for Google for $1.8 trillion today or something like that. I don’t know. That’s not a crazy multiple to me. Google at terminal value is not going to trade at seven times cash flow or something like that. That’s a hard thing for me to process. But yeah, there’s some stuff out there that’s really got to grow into the multiples. I should say the valuations, forget the multiples. I was listening to our conversation, plug for The Business Brew. Jake Taylor, guest on it.

Jake: Yeah, that was a fun one.

Bill: It was a good one. I think I said multiples and I really meant valuation. So, I want to be more precise from here forward.

Jake: Yeah.

Bill: They’re connected but different. Anyway, I don’t know. I don’t know what you do with the information. I really don’t. The answer is head down, but if you’re dealing with the thesis of we’re all in a wealth effect, then your earnings are all artificially multiple– Your earnings are all way too high, because if the wealth effect implodes, no one’s spending money, either your underwriting is way off, and cash flows are way too high. So, what do you do? I don’t know. You go to cash? Maybe.

Jake: Yes. Well, we’re back to full circle of financial repression. This is real and powerful, and it hurts.

Bill: Yeah. Again, it’s not the NIFTY 50. Back then, you had things that were trading at one and a half times free cash flow multiple, and they weren’t great businesses. Like Sears, I know it was a great business back in the day, but it was kind of GE plus retail. So, had some good spinoffs, but I don’t think we’re there yet.

Tobias: I went into the matrix. What’s the single thing that Grantham relies on?

Bill: Everyone is too wealthy and it’s all going to implode.

Tobias: Hmm.

Jake: [laughs]

Tobias: What about valuations?

Jake: High.

Bill: Well, I think that has something to do with it for sure. Okay, housing. There was a chart on housing today about how it’s done higher than the previous cycle. Well, if you look at debt service coverage, housing is very affordable when you look at what the rates are. I think where Grantham and I could agree is there’s a version of the world where prices come down and everybody’s locked into their current house, because you can’t sell your house, because your equity is wiped out, but you can somehow afford your mortgage, I could buy that. But I don’t know that means– I don’t know that’s a catastrophic outcome. It’s definitely shitty for liquidity, though.

Tobias: That’s what happened in the last housing crash. A lot of people just couldn’t move, they were just stuck where they for until whenever, 2015, probably.

Bill: Yeah. But currently, when you look at the consumer balance sheets, they’re very good. So, you need his version of the bubble to implode for the whole thesis to play out, which is fundamentally the thesis. But my brain is too simple for these big thoughts.

Tobias: I don’t know if it’s helpful to speculate about them. I just don’t know. On one hand, you can see the index is pretty expensive, but then interest rates are really low. In the US, interest rates are really low.

Bill: It’s just the– [crosstalk]

Tobias: I’m [crosstalk] again. Damn.

Bill: Yeah. Well, I’m telling you. It’s going to be the Jake and Bill Show.

Jake: Yeah.

Tobias: That’s ideal. [crosstalk]

Jake: Ratings are going down.

Bill: Yeah. That’s right.

Jake: Ratings are going down like interest rates.

Bill: Yeah.

Jake: Negative.

Tobias: I’ll be positive. All right, fellas–

Bill: So, I don’t know.

GMO’s Value vs Growth Letter

Tobias: Let me take a shot at mine briefly while my internet’s working and then see what happens. GMO has their 2Q 2021 commentary out and the whole thing is dealing with the myths versus value growth debate. We’ve heard that a million times. I just thought they had some interesting statistics in here, because they said after two best quarters for value in at least a decade, the second quarter of 2021, sort of return of growth stock leadership, and that continued into July. But the interesting thing is just that the two greatest periods of value in his lifetime [unintelligible [00:29:47] 1973 to 1977, 2000 to 2002, in both of those, in the first one large, cap value had outperformed growth by 94%. In the second one, large cap value outperformed by 114%. But within those two astonishingly pro-value periods exists some of the best months for growth relative to value on record. Six of the best 10 months for US growth versus value in the period from 1971 to 2019 occurred in those two periods, which make up only about 13% of the total months.

So, I guess my question is, you see that phenomenon also in the market crashes. The best months for the market where the market crashes, and then in that very volatile period during the crash, you often see the best months for the market. Is that the same sort of phenomenon here? Do you think you’ve got a growth crash and you see growth do better in that period?

Jake: I think you can’t have capitulation without teasing, and some hope that it’s over before it hits you again on the head. I think this might be a similar phenomenon. There’s no full capitulation until you’ve just had your soul crushed.

Tobias: The second time.

Jake: Well, multiple times where you’re like, “Oh, this is over. I can breathe easy.” Argh, cut your head off.

Tobias: 2007. 2008, 2009 crash was just like that. It’s like 14 or something 17, lower lows, that’s the really– You get a bounce and then it resolves itself at a lower low and that goes on for 18 months till you don’t care anymore. 17, why would there be 18?

Jake: Yep.

Bill: I have no good thoughts on this topic.

Tobias: They’ve got some arguments for why value– We’ve heard this before, but value’s outperformance was due to an economic reopening, which is largely done or is going to reverse without that tailwind value should lead again– growth should wait again, rather. They’ve got some statistics that show this really doesn’t make any difference what sort of growth levels are in the world as to which value or growth outperforms, sort of randomness. They look at everything from less than 2% to above 4% in this kind of– There’s no real rhyme or reason to it.

Jake: That letter had, I thought, some interesting things. The fact that growth traps underperform value traps like I thought that was an interesting takeaway.

Jake: Yeah. Rates bro argument.

Bill: Yeah, like the fact that a lot of growth has been multiple expansion. Typically, with value on earnings expansion, I think that’s something people may want to read. But go a lot higher before you go lower.

Tobias: The prevalence of growth stocks– sorry, the prevalence of underperformance of growth and value traps is kind of interesting. It says 30% to 40% in any given year, which means that just by random chance, three years in a row, there’s a 3% chance that you’re just stuck in a growth trap or a value trap.

Jake: Yeah.

Bill: Yeah.

Was Scott Mcnealy Wrong?

Jake: About that, I thought that chart was pretty good on the price to sales over 10 which got famous from Scott McNealy when he was like, “What were you thinking?” So, they looked at the price to sales, and how does that perform. It was like if you bought anything over 10 price to sales, you basically got bond yields for a big data set.

Tobias: 4.4% real return, they say versus 8.7% for the S&P 500.

Jake: So, historically, it’s not been a great base rate to pay more than 10 times sales. But in this recent iteration of the market, that’s worked out okay.

Tobias: If you had done it for Amazon–

Bill: Worked out really well.

Tobias: He made 18% a year. I don’t know that this current iteration is over, though. I don’t think you can say that it’s done really well yet.

Bill: Yeah, well, it’s all a matter of timeframe.

Jake: Waiting for you to capitulate, Toby. That’s when I’ll know that we’re going to turn the corner. [laughs]

Tobias: I’ll be those animals that last 10,000 years post the [crosstalk] capitulate.

Jake: And then, the entire ride at the end.


Jake: Last man standing.

Bill: Yeah. The only thing that I don’t like and I don’t know enough about Sun Microsystems to really know, but I got to pull up their financials. That whole 10 times sales that would take me 10 years to pay you everything without cost, I think that’s a disingenuous statement. I also don’t know that corporate managers are very good evaluation, to be honest. A growth stock is not going to trade at 10 years liquidation value. It’s just not. So, to be like, I would have to pay you everything just seems like a very flawed argument to me.

Tobias: It’s a manufacturer, too. They’re making real stuff and selling it.

Bill: Yes.

Tobias: [crosstalk] some sort of software business.

Bill: Yeah, that’s what I need to look at is like, what were they actually doing?

Tobias: You’re taking a lot more out of the revs than you are for like Zoom or something like that, right?

Bill: Yeah, saying, it’s 100 times cash flow. That is something that I understand a little bit better. And we’re only growing at such percent. Therefore, what’s your terminal value– That would be a more nuanced conversation that I think would have been more helpful to cite.

Jake: No room for nuance, Bill. It’s not a good dare there if there’s nuance.

Bill: I just expect more out of them. I get what they were writing when they wrote that quote, but I think that quote leads to some stunted thinking.

Jake: Agreed.

Tobias: I saw somewhere in the world, there’s like 6% interest rates on the 10 year too.

Bill: Yeah.

Jake: Oh, imagine that juicy yield.

Tobias: Does it make any difference, do you think? Because isn’t that– that’s your alternative, so that the world is running at that kind of rate. You have to be running fast and that rate– We have to be yielding more than that over time to make it worthwhile. This is something I’ve just been thinking about, I’m just completely talking off the top of my head here. But the interest rate is at 1.5% or wherever we are at the moment, that just means that there’s and it seems like we’re going to stay in this place for a long time. Does that mean that maybe 10–? 10 times sales is meaningless in that world, that might be a reasonable valuation.

Bill: Well, it all depends what your margin structure is, and what your returns on capital are, and what your returns on incremental capital are. I don’t think anything special about 10 times sales.

Tobias: It’s just a [crosstalk]

Bill: Yeah, but if you’re doing 50% free cash flow margin growing at 20%, 10 times sales isn’t that expensive. That’s what, 20 times cash flow? That’s not crazy growing 20%, you’re paying a shit ton.

Jake: If you bought See’s Candy at 10 times sales in 1972, you did okay.

Bill: Yeah. These high ROI businesses, there’s a lot more theoretical cash flow to distribute every single year, and they don’t need as much. But it’s just, I think, parsing out which ones are really high ROI, and which ones are a lot of share-based comp is something that people probably could do a good job.

Great Businesses No Longer Attract Competitors

Jake: And there’s that, yes, there’s all this demand, and I think that will probably continue, but we’ll go back to that total eventual supply as well. I think, if they’re that great businesses historically that attracts competitors, and that’s I mean–

Bill: I don’t know that that’s true anymore, man.

Jake: Oh, come on.

Bill: The reason that I say–

Jake: We have not suspended the laws of economics [crosstalk]

Bill: I think you may be wrong. I really do. And I think that the reason that I say that is I think that there is a very real possibility that we’re building out global infrastructure and scale advantages have always been something that have won, and I think that the size that people are racing to may preclude competition in the future. That’s a pretty dystopian outcome, because I think it’s really bad for labor and people generally. I think it’s potential outcome.

Jake: So, do you mean Standard Oil, and AT&T, and all these [crosstalk] who has huge scale and network effects?

Bill: Well, what I would say is different about Standard Oil and something like Salesforce is switching costs. I don’t think that Standard Oil’s oil was any different than Saudi Arabia’s oil. I think that pulling out an entire enterprise resource system is really, really painful and to get somebody to do that, you better offer a way, way, way better product, especially since you’ve got all these people that are going to get fired if it goes wrong. These companies are racing to get install bases, and that could be really valuable for a very long time. I think you have to at least acknowledge the possibility. If you’re thinking in probabilities, I think saying no is not thinking.

Jake: I think where we differ is on timelines, I would imagine. I think you’re right over maybe– I’m not sure what the timeline would be, and based on our extinction conversation, the timeline might be longer than I should originally think. But eventually, I don’t believe that these are impenetrable moats.

Bill: Yeah. 200 years, fine.

Jake: [laughs] 200 years.

Bill: But we just determined that that’s not that long of a timeline. So, it’s not impossible that’s the outcome here.

Jake: That would be wild.

Bill: It’s a global game. If you get scale, it’s cost advantages.

Bill: I think there’s probably-

Bill: [crosstalk] Buffet looks for.

Jake: -there’s got to be too much tribalism to have total global scale.

Tobias: Yeah, that’s what I was going to say. It’s two poles. So, it’s going to be east and west.

Bill: Yeah.

Jake: Yes, it’s hard to imagine that there’s not some blowback there in some geopolitical way where you don’t actually have full global scale.

Bill: Well, this is what I worry about. If you talk about risk that’s completely underpriced, I think that this could lead to huge– If the theory that I just laid out is correct, I think you could lead to real bad political outcomes because you’re going to have so many people that are just left behind. I heard somebody quote Chris Sacca or whatever that, there’s going to be like 10 people that own everything and the rest of the world is going to rent. I don’t think that the populace is going to stand for that. But you know what? I can’t do anything about that. Those are big thoughts that are in my opinion.

Jake: I’m not sure I’d want to be one of those 10 at that point, would you?

Bill: Oh, no.

Tobias: [laughs]

Bill: Not really.

Tobias: You’re living on Mars?

Jake: Okay, that’s fair enough.

Imagine A COVID World With 1 in 10 Virality

Bill: Yeah, with Elon? No, thank you. You know something, I’ve been thinking that’s kind of funny is everybody wants to live forever, and COVID was just kind of like, “All right, well, try that.”

Jake: That’s extinction.

Bill: Yeah. Anyway, you’re welcome for the demonetization. Somebody did say–

Jake: I did see a funny tweet that said, I don’t know, the numbers of how many people won in– I don’t know. Is it a thousand or something of people who get COVID die? Maybe, somewhere around there, I guess, but imagine if we had had something that was a 1 in 10 type of virality, things are already so screwed up from– it’s such a mess just from 1 in 1000. Imagine if we had one in hundred, or one in ten, or something.

Bill: It might not spread as quick.

Jake: Well, that’s true.

Tobias: When those initial pictures were coming out of China with– I don’t know it was one of the conspiracy websites.

Jake: Yeah. It’s ZeroHedge.

Tobias: Was it ZeroHedge?

Jake: Oh, yeah.

Tobias: People falling over on the street and they were welding their doors shut, I thought this could be like a 1914 style Spanish Flu that decimates the planet. You know that’s 1 in 10, maybe more than that. I don’t think it’s been quite that bad.

Bill: Yeah.

Jake: That’ll cause some supply chain issues.

Bill: Yeah, that wouldn’t be good. Anyway, we’ve diverted–

Tobias: Might have [crosstalk] 20s, though.

Bill: I do think there’s an interesting question in the comments, if we want to get back on to–

Tobias: Yeah, let’s do it.

Jake: Okay, yeah.

Bill: [crosstalk] monetization back.

Jake: Yeah, re-monetize.


Tobias: I think that worked [crosstalk]

Kraft Heinz $62 Million To Settle Improper Accounting Charges

Bill: Somebody asked about Kraft Heinz. I think that if you think that Buffett and Munger are good at assessing incentives, then I think you also have to say, “Okay, well, how well will I do assessing incentives from the outside given what has happened at Wells and now Kraft Heinz?”

Jake: Can you give a little background about what Kraft Heinz and Wells?

Bill: Yeah, Kraft Heinz settled. I think it wasn’t a ton of money, but it was 70 million bucks, which is more than a lot of people pay for accounting fraud and whatnot. I just think generally more than this is just kind of the end of a story. But I think that 3G has underperformed certainly expectations, and there’s a lot of annual meetings that you can hear Charlie talk about 3G doing God’s work, and how it’s really great for capitalism that these guys do zero-based budgeting and stuff like that. There’s a reasonable argument to be made that they really miss that, and rather than go at them over it, I think it’s a more important question to think about, if they miss something like that, what might I miss? I think that’s more constructive than sort of Monday morning quarterbacking.

Jake: Yeah, that’s fair. I think if it was 3G that was sitting here and wanted to push back a little bit, they would say we cut the expenses that are nonstrategic, meaning that they don’t go towards delighting the customer, to allow the muscle in the reinvestment in things that do delight the customer. Now, whether operationally that has happened is maybe open for debate, and I don’t know the answer to that very well because it’s a lot of little decisions at the margin all along of where does money go inside the corporation? But theoretically–

Bill: I think Kraft, man, it’s pretty hard to argue that it didn’t backfire. They basically knew what anybody locked in to have a good quarter. Because they did well last year, when everybody had to cook. I don’t disagree with you. I don’t mean to cut you off. I do think in that entity, it’s hard to argue that they didn’t cut too far.

Jake: Yeah, I’m going to recuse myself from the conversation because I have some conflicts of interest with a family member that works at Kraft.

Bill: Okay. Well, I’m sure he or she is a great person. But I don’t know.

Jake: She is, I married her. [laughs]

Bill: Oh, there you go.

Tobias: [laughs]

Bill: I just think it’s an interesting thing to observe and think about, because they were pretty loud about back– before Wells, all the stuff came out, they were pretty loud about how Wells was great, and they’ve been pretty loud about how 3G’s been great, and those in retrospect, don’t look great.

Company Culture Can Decay

Jake: I think the other part that comes to mind for me is that culture can decay, and it’s tough, probably, especially, if you have allegiance to friends. I think Buffett and Munger have both been very loyal to get people. They’re kind of ride or die for the most part, until someone, I’m thinking like [unintelligible 00:45:59], then they’re just like [gestures throat slash] off with your head. But in general, they’re pretty ride or die. So, then, I think maybe makes you a little bit blind too– But it also I think is that loyalty gets rewarded with maybe some deal flow that other people wouldn’t get. So, I think it’s not entirely obvious that like one way is the right way or not, and there’s probably some balance that needs to be executed there. But I do see that on occasion, that can create a big problem for you if that loyalty and maybe not checking up as often as you should. I don’t know.

Bill: Yeah. The other thing is, it’s the other side of leverage. I joke about loving leverage a lot but when it goes wrong, it goes wrong. When you have interest expense, a lot of people in the EBITDA world like to pretend it’s not a fixed cost. It’s pretty freaking fixed. You don’t pay the bank, you don’t get your company. So, it can limit what levers you’re able to pay. I think it’s the big [unintelligible 00:46:57] thesis on AT&T historically. Maybe that’s changed now but all the debt and all the dividend created a fixed cost in that entity that may have prevented investment where there should have been investment.

Jake: That’s a kind of a corporate-wide phenomenon right now. Maybe more buybacks and dividend but leverage added, shares count reduced, operational flexibility reduced, long-term thinking reduced.

Bill: Yeah, it’s dope when it works.

Jake: Sure. It’s dope for those-

Bill: You’ve got to keep working.

Jake: –five years when you’re this average tenure of the CEO. It works like a charm.

Bill: Yeah, and I think that stuff’s important to think about. That’s more where I’m at with this whole Kraft Heinz thing, is trying to reassess kind of what my priors were, and I don’t see any good going at those guys over it.

Tobias: It must have looked a lot better. You’ve got great brands, you’ve got all the grocery space that you need. It’s hard to figure out how that’s going to go wrong, and then this shift.

Bill: Yeah, and I think too. They got attacked by private label. I don’t know why. Post Market said that Hormel has done fine. I’m not going to fade them. They’re smarter than me. But I don’t know. When I was in food at the bank, it was always 2008 really open consumers mind to private label, and they were willing to trade down, and then once they traded down, they realized like, “Oh, this is actually really good value.” I think maybe the brands lost more value than they realized quicker than they realized. But I don’t know.

Jake: Yeah, and all the DTC stuff really made people more adventurous I think on trying different brands.

Fight 1 Horse-Sized Duck Or 100 Duck-Sized Horses

Bill: Yeah. Like Bud, I have fairly strong opinions on. They just got attacked by craft beer. I think some of what people say about Bud is wrong, and I think some of it’s right. But some of its like Budweiser and Bud Light got kind of stale as brands. I don’t know that was an investment issue as much as the world changed on them.

Jake: Yeah. Do you want to bet on the horse-sized duck or–


Jake: -duck-sized horse?

Bill: That’s a good analogy. Yes, the thousand small ducks beat the horse. Some people will be like, “Well, they underinvested in that brand,” but I don’t know. You can look at Miller and Coors, their volumes have been crap too. Now, Bud Lights underperform, but that’s just a tough category.

Jake: Yeah. We got time for some questions?

Tobias: Yeah, I got the world’s worst internet connection here, but we’ll see if we can–

Jake: Bill, can you make [crosstalk]

Tobias: I don’t know if you guys can hear me at this point?

Bill: Ah, I can. I can try. I don’t know. Somebody had a question about Peloton. I don’t have any good thoughts on Peloton. It’ll either work or it won’t.

Jake: Okay.

Bill: You’re welcome for that.

Jake: [laughs] That’s what they come here for, is the hard hitting–

Bill: Yeah. I got my subscription turned on yesterday. I had cancelled it, and it got turned on, and I’ll be turning it off again. I didn’t mean for it to come back on. So, there’s that.

Bill: Oh, phantom revenue.

Bill: Yeah, well, that’s the power of subscription businesses, is that they can just jam you.

Jake: I don’t like that.

In-App Purchases

Bill: I’ll tell you the other one. Did you get this? My four-year-old or something got a hold of my wife’s iPad, all kinds of charges came through Apple.

Jake: [laughs]

Bill: She’s like, “What the hell?” But it’s my wife’s account. How am I going to dispute them?

Jake: What kind of stuff did he download?

Bill: Just like a bunch of Monster Truck games and stuff.

Jake: Okay.

Bill: These damn games, the in-app purchases, they frustrate him so much, and then he’s just like clicking and got like 70 bucks of charges. [crosstalk] “What the hell, man?”

Jake: [laughs] Oh, man. I think you have something wrong in your settings if he could just push buttons and make money disappear.

Bill: Yes. Well, we had a talk. It’s a family.

Jake: Oh, good. [laughs]

Bill: 30% goes to Apple. What a crock of shit.

Jake: [laughs]

Jake: Yeah, you just gave Tim Apple like $21 or something, huh?

Bill: Yeah, for no value, like none. I got no value. I would have had more fun lighting the money on fire. Instead, I have this shitty video game that has all the Monster Trucks unlocked. Great.

Tobias: [laughs]

Jake: Okay.

Bill: I don’t know. I don’t see too many questions.

Jake: Oh, good. We answered them all already. [laughs]

Bill: Yeah.

Tobias: Thoughts on Porsche? I don’t really have any thoughts on Porsche. Thoughts on QRTEA, Qurate?

Qurate Crushing Zoom

Jake: Yeah, what’s the update on Zoom, Qurate?

Bill: Oh, Qurate’s crushing Zoom.

Jake: Hmm.

Bill: We’ll see. I don’t know. Look, the supply chain stuff is real. The way that that business works, they need like–

Jake: Are cat sweaters currently supply chain crunched?

Bill: Do not– man.

Jake: [laughs]

Bill: That’s not right. We give the ladies the inventory they love.

Jake: Okay.

Bill: Yeah.

Jake: Grandmas love cat sweaters.

Bill: The deal of the day– I’ll tell you what. Grandma, they have to watch cat sweaters because it’s basically going to come down to the deal of the day is whatever vendor can fulfill that size. [crosstalk] Yeah, that’s right. So, who knows? I don’t know. We’ve got nothing.

Is Gaia Punishing Supply Chains?

Jake: Yeah. Have you guys heard of the Gaia hypothesis before? It’s like Mother Nature kind of pushing back in ways?

Bill: It’s like COVID coming out?

Jake: Yeah.

Bill: Like push back against Silicon Valley saying that they’re going to live forever? Yes, I have heard of this.

Jake: [laughs]

Bill: I think it just happened.

Jake: I was thinking more about environmental footprints, and supply chains, and pushing them back towards a little bit, because I just think you have all this shit inventory that needs to be moved now because we don’t have other inventory that people really want. Maybe you’ll just be happy getting that cat sweater because you just need an actual sweater for the wintertime.

Tobias: It’s the thought that counts.

Jake: Yeah, maybe this is Gaia shrinking the footprint a little bit of all these supply chains and pushing us back in our place a little bit.

Bill: Hang on. Somebody says, thoughts on all the reverse repos. If you’ll say more, I’m open to– I need more details. I don’t even know what the question means.

Jake: You’re using a lot of big words. I’m going to take that as offense.

You Can’t Pump & Dump Commodities

Bill: Pretend that you’re talking to a three-year-old, because that’s about this brain. Lumber was not a pump and dump. This is such a stupid comment. You can’t pump and dump a fucking commodity market.

Jake: Whoa, Hunt Brothers.

Bill: Yeah, well, okay, but it’s a cash market. there was a lot of problems, people got speculative, then people stopped buying lumber. Lumber crashed. People got too bulled up. Here’s an amazing thing that happens when stock prices or lumber prices go up. People get too bulled up. That’s what happens. It’s not a pump and dump. I don’t understand the comment. It’s like saying oil was a pump and dump. Okay. they pumped it out of the ground and then they dumped it into our cars, I’ll agree with that.

Jake: Different negative price for a little while.

Bill: Yeah. Any good books lately? I’m reading Think Twice. I like it.

Jake: Oh, yeah, Mauboussin.

Bill: Yeah.

Jake: It’s so smart because it says thin ice right in the middle of the– Did you notice that?

Bill: I don’t.

Tobias: Look at the title, Bill. Come on. If you look it, it says, thin ice in between Think Twice. It’s genius.

Bill: Oh, I got to check that out. I’m come to defend Green First a little bit, because my man, Mike, was involved in that. If you’re looking at the stock price, then you may think so, because you don’t understand that there were three rights attached to every single share. Now, there’s arguably arbs that are in the stock, and we’ll see what happens when it’s all flushed out. But I don’t think it was a pump and dump. I think that’s not an accurate description. I can assure you, Mike did not dump any. To come at him or anyone in that way would be not correct.

Jake: I’m reading right now, Kahneman’s new book, Noise. It’s clear to me that we’re doing so many things wrong as a decision-making species.

Tobias: [unintelligible 00:56:21] as a society.

Bill: Yeah.

Jake: Oh, well. Yeah, present company heavily included. [laughs]

Bill: Responding to questions that are based off Twitter craziness that people aren’t doing due diligence and get waxed in, and then they don’t know the actual story, and then they’re saying stuff? Yeah, that’s probably right.

Jake: [laughs] Yeah, we’re a little bit sloppy with our decision making, it turns out.

Bill: Yeah. The thing about the pump and dump thing that bothers me is it’s just not true. It’s a pretty heavy accusation to say without any facts and if you don’t know what was dumped and you can’t say this was dumped, then it’s like you’re kind of a schmuck for even saying it.

Jake: I thought we had moved on past securities fraud anyway at this point. That’s what I learned. You don’t really get in trouble for that.

Bill: Yeah.

Jake: [laughs]

Tobias: Nikola is still out there trading.

Bill: I’ll tell you what [crosstalk]

Jake: That’s shocking.

Tobias: Yeah, it does.

The Rivian Truck

Bill: That Rivian truck looks sweet.

Jake: Oh, yeah. How much is that going to retail for?

Bill: I thought I read like 65 which, I mean Ford Fiesta is going to be that not too long.

Jake: [laughs] Yeah.

Tobias: They’re all very good at over promising those guys. Those Rivians were supposed to be out 18 months ago, and there’s an SUV version of it. They’re just nowhere near it.

Bill: Yeah.

Jake: That does not matter for evaluation.

Tobias: That’s right. It doesn’t.

Jake: EV space. Oof.

Tobias: I don’t know that meant reverse– I don’t know if they’ve SPACed themselves yet.

Bill: Who, Rivian?

Tobias: Yeah, are they SPACed?

Bill: I think they’re getting an IPO.

Tobias: Okay.

Bill: I don’t know.

Tobias: Oh, old school.

Bill: Yeah, I don’t think the SPAC market is-

Jake: Strong.

Bill: -really ready to receive as– I don’t know. Bill Ackman’s got a lot of money. Maybe he’s the one.

Jake: Yeah. He’s going to rescue the whole complex.

Bill: That’s right. He’s got a nice promote waiting for it. So, maybe he’ll bring it public at a big valuation.

Jake: It’s not like the incentives are there for him to get a deal across the finish line, huh?

Bill: Yeah, well, that is the fair argument to SPACs. The thing that I’ve been thinking about though is, how different is that than an IPO? Because all the bankers get paid, and you do these road shows, and you’re like– the danger comes in a SPAC, you can actually show forward projections, but I don’t know. I’d be interested. Anyone that has thoughtful comments on that, please let me know.

Tobias: But that’s it, fellas. Got the world’s worst internet connection here.

Jake: Toby, thanks for showing up today.

Bill: Yeah, appreciate it.


Jake: You really carried the weight.

Bill: [imitating lag]

Jake: Yeah, pretty much.

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