VALUE: After Hours (S03 E35): Value Growth Spread Widest Ever, Fishing With Munger In China, Think Twice

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

  • Investing Lessons From Fishing
  • Value Growth Spread Widest Ever
  • Lessons From Thinking Twice
  • Bay of Pigs & The Dangers Of Groupthink
  • Take A Swing At China Stocks
  • Choose One Growth Stock
  • One Simple Valuation Hack
  • Dutch Bros Coffee IPO
  • Max Price-To-Sales
  • The First Stage Of Taking A Loss Is Not Admitting That You’re Wrong
  • Spend Your Research Time On Better Businesses
  • Find Opportunities That Match Your Personality
  • Tech Companies Competing For Talent
  • #neversell
  • Where Are All The Cyclical Investors?
  • The Gerrymander Of Competence
  • VAH Gumball Machine

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: I think we’re going live.

Jake: And we’re live. Hey, yo.

Tobias: We lost BB in the moment that we go live.

Jake: All right.

Tobias: Prepared these earlier now. So, it’s 10:30 AM on the West Coast, it’s 1:30 PM on the East Coast. This is Value: After Hours, and I’m joined– Here we go. He’s come back in. Jake Taylor is definitely here, and Bill Brewster’s going to join us momentarily.

Jake: What’s the haps, fellas? He’s back. [laughs] Toby, what do you got on deck for us today?

Tobias: Value spread. Sorry, team. Value spread is as wide as it’s ever been. That’s growth over value in the S&P 500. There’s a little bit of research, it’s updated every now and again. The research is all the spread is new. The research is from February 2020 just showing that this relationship, the wider the spread, the better performance of value over growth. The tighter the spread, naturally that’s–

Jake: I don’t believe you. [laughs]

Tobias: Yeah, well, we’re yet to see it. We’re yet to see it this time, and we see it a little bit, maybe had a year of pretty good value performance, I’d say. But basically, the spread is still extremely wide in the S&P 500, and typically, that indicates pretty good performance of value, but we can get into that in due course. What do you got, Bill?

Bill: I’ve been reading some Mau-boussin. Maubouss-an?

Jake: Yes.

Bill: How do I say his last name?

Tobias: Mauboussin.

Bill: Mauboussin. So, I’ll probably riff on it, think twice a little bit.

Tobias: What do you got, Jake?

Bill: Then, I’ll say it, and then I’ll think twice about whether or not what I said was smart.

Jake: [laughs]

Tobias: Regret it.

Bill: Yeah.

Jake: Yeah, catch 22. As my background would indicate, I’ve got a little segment on fly fishing, that might be a little fun. We’ll see.

Bill: Was that a stock pond?

Jake: How dare you?

Bill: Yeah. [crosstalk] fish, man.

Jake: Yeah, it was stocked.

Bill: I knew it.

Tobias: That’s a rainbow trout just from eyeballing it.

Jake: [laughs] Yes, it is.

Bill: Did they have those where you grew up, Toby?

Tobias: No, I had to ask Jake before we came on. I would have said it was a bass or something like that, mate. I’ve got no idea.

Bill: Yeah, no, I know. Because you were in the middle of the desert if I recall correctly.

Tobias: I’m not a fishing guy. The fish that we used to catch were the ones that they bury themselves in mud, and they just wait seven years for some rain to come along, and every now and again, when the rain comes on, the mudskippers pop out. I don’t think you can eat him. We went fishing for yabbies which is like a little crawfish or something like that. You take a bit of meat on the end of a string, and you put it on the edge of a really gnarly little swamp, and they grab on, and you whip them out. Then, you’ve got to put them in in clear water because they pump out a whole lot of mud inside them.

Bill: Oh, God. Do you end up eating them after?

Tobias: Well, we did. Yeah, that’s probably why my immune system’s so robust.

Jake: Yeah.

Bill: Yeah, nothing has a chance against you. I like that.

Tobias: What should we do? Should we kick off with value spread?

Jake: Yeah. that’s sounds like a good idea.

Bill: Why not?

Value Growth Spread Widest Ever

Tobias: So, I retweeted this this morning. It’s just showing the spread of growth over value, and it runs back to about the early or mid-1990s, so you capture that first big ramp. It was the dotcom bubble that fell back a little bit and then it rallied all the way back. Yeah, it is barramundi. Jim, that’s exactly right. We did fish for the barramundi —

Bill: I like barramundi. I’ve had barramundi.

Tobias: Ah, it tastes like sand. Tastes like at the bottom of the river that– [crosstalk]

Bill: Really?

Tobias: Yeah.

Bill: Oh, I liked it. Maybe, it wasn’t barramundi. Maybe it was just marketed as such.

Tobias: Ah, probably. They taste sandy. It’s got a very distinctive sandy taste.

Bill: Fake news barramundi. That’s what you’re telling me I ate?

Tobias: Back to value spread before [crosstalk]

Bill: This is derailed.

Tobias: So, it’s my fault. I derailed it. Then, there was an initial collapse that rallied all the way back. Since then, we’ve now vastly exceeded the value spread that we saw in in 1999. This is in the S&P 500 specifically. So, it rallied, had a little collapse and it’s rallied back. At this point now where either, it’s all-time highs today, that spread. There’s research that it’s updated every now and again. Jake read some ages ago, and there’s some more recent stuff that shows the spread is indicative of future returns. I know I say this all the time. I’m starting to sound like a broken record, but I really do think this is one of those extraordinary opportunities where value is just so enticing relative to growth.

There are two ways that can resolve. Either you get the nasty kind which is where you get a growth collapse, and either value doesn’t collapse as badly or it rallies a little bit, or the nice kind where value just stages this rally. In the early 2000s, we had both. Initially, we had a nasty collapse of growth which had some value. Value got dinged up too initially, and then there was a subsequent period that went on for about four years after the first two-year collapse where growth did nothing, and value was very strong. Obviously, that’s the kind that I’m hoping for, but I suspect we get both. We get the growth collapse along with the value collapse, and then we get some good performance out of value. [sighs] I’ve said that a few times.

Jake: It’s been a good 20 years. Maybe it’s time to mint a whole new batch of gurus.

Tobias: Is there a way I can NFT this?

Bill: Can you NFT this picture? Yeah, but no one wants it bro. You need to NFT the growth stocks. Just a picture of these beautiful compounder growing– [crosstalk]

Tobias: You’re just saying– of those charts.

Bill: Yeah.

Tobias: Those charts are pretty, aren’t they?

Bill: Yeah, they are, and they got nice tickers too.

Tobias: Yeah. Values all in old boring industries too, there’s just nothing sexy about it at all. The only reason you do it is because you get some performance out of it. But you can’t even get performance out of it, there’s just no reason. They’re boring stocks with bad names and no performance.

Bill: Tell you what you can’t do, you can’t drive Substack subscriptions with it.

Tobias: What?

Bill: Ain’t nobody cares about steel stocks.

Jake: What are these, returns for ants? [laughs]

Where Are All The Cyclical Investors?

Tobias: Cyclicals. Are there any cyclical investors with — You just about couldn’t be. You’d be wiped out.

Bill: No, you could. You had a hell of a bite at the Apple last year.

Tobias: I guess Mike Mitchell’s probably– he’s the real deal doing the cyclicals.

Bill: [crosstalk] we don’t talk about him right now.

Tobias: Oh, we’re not allowed talk about that?

Bill: No, we are.

Jake: What are the [crosstalk] guys doing? They’re still marathon guys? They’re still rocking capital cycle theory or is that–

Bill: Y, I think so. Robotti, they’re pretty public about not being opposed to cyclicals in the right times. [crosstalk] them.

Tobias: One of other times before they rally.

Bill: So, there’s one firm–

Tobias: Let me know when that’s going to happen.

Jake: Yeah.

Jake: It’s going up. Buy it.

Bill: No, but you could– there was a ton of cyclicals to buy last year. A ton. Now, it gets nerve racking.

Tobias: Yeah.

Bill: The problem is when the commodities or whatever rip, people get way too excited about the stocks and everybody forgets to normalize, and then you have a problem. I’m sure somebody in the chat’s like, “Uranium, uranium.” I get it.

Jake: Yes. It’s going to say subtweeting uranium right now.

Bill: Yeah, well, what’s Cameco doing? That’s the only one that I used to look at.

Tobias: That was a weird period last year when all the cyclicals just took off and then the stock prices took off even more. It’s all sort of come back to work. I include small and micro, which is economically sensitive, had this explosive run for about six months and then just stalled out.

Bill: Yeah.

Tobias: Tried it– [crosstalk]

Jake: Seen natural gas prices lately?

Bill: No.

Tobias: Is natty gas having a run?

Jake: It’s up to a five handle for the first time in six or seven years.

Tobias: I remember looking at some natural gas stuff back in 2015 or something like that, maybe even earlier than that. Maybe, it was 2010. I don’t know, trying and have a go at that and just getting absolutely smoked.

Bill: No, fracking fucked it, too many gassy wells.

Tobias: Is that what it is?

Bill: Yeah.

Tobias: It was like two bucks for 2010 something like that, and that was way undervalued. But yeah, it was fracking.

Bill: I’ve got to talk to my boy. I don’t have oil takes without confirming anything with him. Why? Because he makes money in oil and I know nothing, and that is how it goes.

Tobias: Does he take a Mike Mitchell approach to it where you just wait until it’s completely bombed out and then you find something that’s the higher cost operator and just — when it runs but it doesn’t–

Bill: Well, he doesn’t mess around in public stocks for the most part. I think he bought a little bit of Chevron when oil went negative, but he plays a different game, man. Other people’s money, flipping assets to public companies. That’s the game to play.

Tobias: Yeah, don’t be in public companies.

Jake: It’s for suckers.

Bill: Yeah, well go out, lease up the acreage, and then bundle it, and sell it to somebody quite a bit bigger. It’s a smarter game than trying to pick a bottom in an occidental. You need to work in March, by the way.

Tobias: You really need to know what you’re doing. That’s not entry level stuff.

Bill: No, but I will say, I happen to think in anything that you’re doing, you’d really have to know what you are doing.

Tobias: That good point. That’s good point.

Bill: I don’t think the money-making game is easy.

Jake: Is that what Buffett’s been saying this whole time?

Bill: I think so. Then, I think it’s important to know when you don’t know what you’re doing. That’s all I got for today, folks. That’s the veggies.

Jake: If you’re going to do something-

Tobias: It’s pretty good.

Jake: -you want to know what you’re doing.

Bill: That’s right. There’s like, if you think about it, you’ve got this radius around you of shit you don’t know or you know, and outside the radius, you’ve got to know where that is. If you were to call that a circle of competence–

Tobias: Smart.

Jake: Maybe it’s an oval. [laughs]

Bill: It could be. It definitely could be.

Tobias: The dodecahedron of competence.

Bill: The what of what?

The Gerrymander Of Competence

Tobias: The gerrymander of competence as I like to call it.

Jake: Gerrymander. Let’s keep it PG here.

Bill: Yeah, geez. Talking about doe dicks and whatnot.

Jake: [laughs]

Bill: Is that a thing? I don’t know. It’s 2021, it might be.

Tobias: Probably got to edit it out.

Jake: Yeah, we got demonetized for that somehow.

Bill: The doe identifies as male. That’s not a problem.

Tobias: I was astonished that the last one we didn’t get demonetized, they didn’t even try. I think they’ve just stopped listening.

Bill: Yeah, well–

Tobias: It’s possible, isn’t it?

Jake: If you’re below a threshold of interest, there’s no demonetization because there’s no monetization. [laughs]

Tobias: One of the Apple reviews for this podcast was like one star. It’s just three guys talking about nothing.

Jake: [laughs]

Bill: Wow, that’s fucked up. It’s so true. That’s hurtful.

Tobias: It did hurt. It got right in there.

Bill: I’ve read one from mine, and this is very self-aggrandizing and something else. I was like, “Son of a bitch. They pegged me.”

Jake: Yeah, got it.

Bill: [laughs]

Tobias: Nothing worse than being pegged unwillingly.

Bill: I know, right? By someone I don’t even know, a random person on the internet. You know what I did? I handled it like a man and I stayed up all night and ranted.

Jake: Blocked him, tracked him down him. All right, we’ve devolved. What’s–

Tobias: Where have we gone? Let’s do some veggies. Let’s see if we can redeem ourselves.

Bill: We cannot.

Jake: You’ll have veggies or Mauboussin?

Tobias: [crosstalk] behind.

Lessons From Thinking Twice

Bill: You’re a very thoughtful man, Jake. I guess this is what I’ve been thinking about. I’m going to put it together right in front of everybody. So, I found an interesting study or anecdote in Think Twice where they were doing a very simple experiment. It’s five lines, and your job is to match the length of the line that you’re looking at with the length of the line on paper.

Jake: Sounds like Solomon Asch study.

Bill: Okay, cool. You know all the big words, man. I’m just teaching it like I would a five-year-old. Anyway, Jake.

Jake: Sorry.

Bill: Most people can do it., I don’t know, maybe 99 out of 100 times, one time you’re drunk, whatever. We add that one back, adjusted accuracy. But when you’re in a group of people, so the study was there’s like seven people and six people pick before the person that’s picking, the person very rarely got the correct answer. I think about that sometimes– I’ve actually thought about this a lot over the past year and a half or something where I actually know what people are talking about, but then the chatter around the thing that they’re talking about is so wrong, and the take is so wrong, but people are confident in a wrong take, and I think that some of that has to do with– I do think there’s something real about watching the first thing that goes into your brain, and whether or not you’re actually protecting against that, and forcing yourself to think for yourself.

Bay of Pigs & The Dangers Of Groupthink

I guess that as it currently relates to my situation, I have just read so much never sell shit that I don’t think that, I need to go back to first principles a little bit on this whole never sell stuff, because I get it, and I really do get it, and I know that I just said I got it, but I also think that maybe it’s gone too far. I think part of why it’s gone too far, maybe of the echo chamber that I’m in. I also tweeted out something today. Let’s see if I can find it. But the gist of it is groups of people can get themselves to conclusions that are wildly, wildly wrong. When you separate partisan groups and you let them discuss an issue, they get further and further more drift into their partisan nature.

Tobias: That’s the Pigs groupthink idea.

Bill: Sure. We’ll call it that for here.

Jake: [crosstalk] polarization.

Bill: They’re just three guys talking about shit. We’re not actually trying to be accurate here. So, yeah. It’s the Bay of Pigs invasion.

Tobias: But that’s where the idea of groupthink comes from. Oh, that was just they didn’t have any– There was nobody who was pushing back and saying this is a bad idea. Everybody was just in the room saying this is a good idea. Even though each individual might have had reservations about it, because of the social proof, they didn’t feel like they could express those reservations in that. So, it sounded like everybody was reinforcing what everybody thought was a bad idea that everybody’s reinforcing in a positive way. You may not even think it’s a bad idea. You may not even be able to think about your own feelings about it because you’re in a group and even if you think about the way that you view the problem, you think, “Yeah, this is the right path” when you walk away from the group and you start thinking about it for yourself, you start “I don’t know. This is a problem. We’re going in the wrong direction here.”

Bill: Yeah, and I think the combination of– I’m just going to roll through every chapter. But the interesting thing is, when it comes to politics and I really do think investing is this way, especially, when you get into value growth camps and shit like that. When you start to have conversations and echo chambers, the thought can get taken way too far. And then, the other example is, in politics, at least, the people within a party can’t see the hypocrisy within their own party. When you’re talking about the value growth spread, I think a lot of people unless they’re really consciously thinking about it, whether they’re in the value camp and they dismiss growth, or if they’re in the growth camp and they dismiss value, I think this stuff takes a lot of brain power to really work through, and I think that you should probably be pretty tired at the end of every day, because you’ve thought. That’s where I’ve got [crosstalk] Yeah, there you go, or you’re on thin ice.

Jake: Yeah.

Bill: See? See what I did there? You told me, for those that are watching, thin ice. So, anyway, I don’t know. Those are just some of my thoughts, and I don’t know. That’s what I got.

Jake: I think you’re spot on, and there are, I think, all kinds of–

Bill: This is the happiest day ever. Jake and I agree.

Tobias: [laughs] You guys sounded great.

Bill: I think people think we don’t agree a lot. You listen to us– [crosstalk]

Tobias: [crosstalk] 99% of the time. Want to sit around the edges.

Jake: 1% on this [crosstalk] of the show.

Tobias: There’s no fun if everybody’s sitting around here agreeing.

Bill: This is true. Sorry, Jake. Please continue telling me how correct I am.

Jake: Yeah. The working in teams thing is really a double-edged sword, where you have that order of information as it’s presented to you, and as you get feedback from others, while that feedback is gigantic to create that outside view and helps you to entertain more possibilities, because there’s just less blind spots when you have multiple people looking at something different perspectives, the biasing, the noise that it can introduce is also tremendous. So, you have to be really thoughtful about how you orchestrate group projects when it comes to decision making.

The First Stage Of Taking A Loss Is Not Admitting That You’re Wrong

Bill: Now, [crosstalk] I’m sorry. I do think is important to know. I know I talked about Twitter a lot, but I’m fucking live on it and so whatever. But the reason that I pivoted on the airline idea in March of last year is I wrote something about what it’s like to own the airlines going into pandemic, and what it’s like to be a long-term owner. This dude, Edwards Deming, I don’t know if you listen to this podcast, I don’t know who you are, dude, but if you ever need a dinner, I got you for dinner and wine, and it’s going to be nice. He popped into my feed, and he was like, “The first stage of taking a loss is not admitting that you’re wrong.” That comment really, really forced me to think.

Tobias: The first stage of taking a loss is not that meaning that you are wrong.

Bill: He did seven stage– Yeah, seven stages of taking a loss, and the first stage is like not admitting that you’re wrong, like upfront justifying why you were right in the first place or whatever.

Jake: It’s like stages of loss, like grief kind of loss like that same framework?

Bill: It’s something similar, but I can just tell you that what he did for me in that, that was a huge change in my performance. I’m really, really thankful that he made that comment. I’m also thankful that I was open enough to think, “Hey, he might be right.” So, that’s the double-edged sword of it, right? He gave me the outside view that I needed to hear, but also, I don’t know how you figure out when to listen and when not. It’s tough.

Tobias: In a group setting to avoid the groupthink, I think that the best thing to do is everybody has to think about what they’re going to say beforehand and have that written down somewhere or have that set at least. Then, you start with the person who has the least authority in the group saying what they think, and then you move all the way up until you have– Because if you don’t write it down initially, then people change their minds in the meeting. If you start with the person who has the most authority, then everybody’s inclined to agree with that person.

Bill: Hmm.

Tobias: That’s a different matter– [crosstalk]

Bill: You would be kind of interesting to shuffle the paper, and then have everybody read the paper out loud starting with the person of least authority, and then discuss the ideas. That would be a really interesting test.

Jake: I may or may not be working on solving this problem from a first principle standpoint in a software format.

Tobias: Do you have any broad principles that you want to share with us? Bit early?

Jake: Yeah, it’s still a little early, but–

Bill: I’m just going to tease that and hold the fish at you.

Jake: [laughs] Yeah, exactly. I think I’ll wait for that. I’ll do a really good segment on it. I’ve got a segment actually on fingerprinting that I think might be interesting that ties in with all this.


Tobias: I like the idea of never sell. That’s a more recent thing that in the last couple of years that I’ve been thinking about never sell more deeply. I like having conversations with– guys like Matt Cochran have helped me, and Bill, particularly, because I like the idea– The first thing to notice, it’s not a prescription.

Jake: Bill Ackman?

Tobias: Bill Brewster, who’s got a brand-new Twitter handle. The idea that it’s not prescriptive, that it’s aspirational. I do think that that frames up the way that you think about positions too, because if you think ideally, you want to hold this thing forever. Clearly, that eliminates a lot of stocks that you just can’t get comfortable with over long periods of time. Then, when you’re holding them, maybe you’ve got to be a little bit more forgiving for bad quarters and things like that. Ultimately, you’re not trying to hold forever, but you are– I mean you are trying to hold forever, but you recognize that there are going to be periods of time where maybe the valuations just so extreme, it can’t be justified at that point. Maybe, I don’t know. Buffett doesn’t seem to approach it that way.

Bill: Do you know I’m going bring up a stock I never talk about, my beloved Qurate.

Tobias: Qurate.


Jake: Never heard of it.

Bill: You know how I think you don’t lose much money in that or I don’t? You should not listen to me, you should do your own damn work. But if I actually look at that business, I owned it, I bought it, and I’m just going to own it until the terminal value, whatever happens, it happens from here, I think it’s a really low downside bet. If I start to get cute with where the stock is, and whether or not it’s gone down more than a quarter or whatever, then I could see myself taking a loss. I think that a real ownership mentality when executed can really reduce risk a lot. But it’s going to feel bad at points, just like owning the business. The good news is, I don’t have to go and manage through the shitty days. That’s the beautiful thing of investing.

Tobias: Yeah, you’ve really got to ignore the price as an indication of how you’re doing in that position. Qurate’s a very good example of it, because it’s a deep value position. It’s got some balance sheet and some capital structure changes that materially change, will help you realize the value there.

Bill: Yeah, you’ve just got to let them do their thing, and I’m either right or wrong.

Jake: Build your empire.

Bill: Yeah, a little bit, and that’s an interesting way to look at it. I think sometimes, you can associate it with stocks that are going up. One of the things that I really respect about Mike is Mike looks at it– Even the lumber play, I don’t think he likes the current price action, but he doesn’t give a shit about this stuff. It’s amazing to watch.

Tobias: He’s watching the fundamentals.

Bill: Yeah. All he cares about is what’s going on underneath. He doesn’t care about stock price or any of that stuff. I’ve learned a lot from watching him this last year.

Jake: It’s quite the advantage.

Bill: Yeah.

Tobias: Fellas, let’s do Jake’s veggies.

Investing Lessons From Fishing

Jake: All right. Fish is on the menu today, not veggies.

Tobias: Fish is good for you too.

Jake: Yeah, I think so. I was in Vail, Colorado last week for the VALUEx event that Vitaliy Katsenelson puts on. One of the mornings, we went to this kind of a camp, I guess you would call it, where they had archery, and fly fishing, and ride four wheelers around, all kinds of stuff. I chose to do the fly fishing, and while I was doing it, Vitaliy came over, and he challenged me to come up with a veggie segment for fishing. I thought, “All right, well, I’ll give it a shot.” So, we’ll see how it goes.

I have seven things that might be points related to fishing that might make you a better investor. Without further ado, number one is, of course, we have our main man, Munger, telling us to fish where the fish are. So, it doesn’t get much more on the nose than that. But I think what that really means is, where the fish are can mean multiple things, it can mean tailwinds for that entire industry, or country, or maybe that particular business, or the business model. It could mean competitive dynamics. Maybe there’s not a lot of capital being put into that industry, and so maybe there’s a chance for prices to firm up and profit to be realized. And of course, maybe it’s just valuation based, that’s maybe where the fish are is based on the price of the fish. So, that’s number one.

Number two is fish where the other guys aren’t. That is somewhat related to valuation. If nobody’s interested, that tends to be fetching a lower multiple, whereas if people are very interested, those multiples tend to be quite a bit higher. And there’s also something to be said maybe that means too, if you’re not a professional especially, maybe focus on smaller companies where there’s less attention, there’s not the big guys in there trying to fish with you, because maybe they’ve got better gear than you do, and you need to keep your advantage.

Number three, fishing is, fly fishing especially, is really all about a delicate presentation of the fly so that the fish is attracted to it. A lot of that is sort of like pattern matching for the angler to know like, “Oh, when I’ve done this certain move or made it move a certain way, it’s attractive to the fish.” But you also can’t force it. It’s a very delicate operation. I view that as the one-foot bars that Buffett talks about. Not forcing it, and really waiting for your opportunities, and being not so much brute force, and trying to talk yourself into how you can get over that eight-foot bar. It should be obvious and easy. Toby, in your research and work on this Invincibles idea and book, maybe explain a little bit of the concept of going with the flow, or with nature, or being– How would you explain it.

Tobias: Well, this is all still a little bit inchoate, I haven’t entirely formulated this part. But there is an idea that basically things continue as they are for the most part, and the better you are able to figure out what reality is– I wrote a note for myself just then when you said maybe look at smaller stocks or fish where the fishermen aren’t and I was going to fade that slightly for exactly this reason that probably some of the problem is approaching the problem like you’re trying to beat the market or you’re trying to do something like that, when sometimes I think that the better approach might be– and I’m talking about fundamentals here, not stock price performance. If the fundamentals have been succeeding for a really, really long period of time, and it’s in business, it’s going to be very hard to disrupt, make up or something like that. People get used to buying what they’re used to buying. They’re already buying it for semi-irrational reasons, and they’ve shown a propensity to do it for decades, they’re probably going to keep doing that for decades on. Now, does it really matter if you slightly overpay for those earnings, if you’re confident that– I’m talking about in a market normalized with low interest rates. There are lots of very expensive companies out there, if you’re buying something that you’re very, very confident.

So, I think about this in a non-makeup type thing. Shopify is a business that I think is absolutely spectacular. But it’s always incredibly expensive, and I’ve tried to work out how you get– What you’re waiting for with Shopify maybe we’re going to get a big collapse at some stage and Shopify will be down 90% like Amazon was, and you get your opportunity to buy. But equally, you can’t rely on that happening. I’ve been waiting a long time for that to happen, and-

Jake: [laughs]

Tobias: -it’s never happened. But I do think that Shopify is a business that it’s going to be much, much bigger in 5 or 10 years’ time. The stock price might not be much, much bigger in 5 or 10 years’ time. But if I think a business guy, I kind of want to own Shopify at the right price. So, that’s the idea, just that you’re trying to buy stuff that is going to win in the future, is going to be here first. is going to be winning in the future, or is going to be growing, and then you’re secondarily trying to find the right entry point for them.

Bill: I think just to riff on that a little bit, Bill Miller has said that he has an addiction to value stocks, but all his money has been made in growth stocks. I think it’s interesting. Something like Farfetch, something like Etsy, I don’t know. You’ve got to figure out how long you want to or how– I think you can pay a really high price by just being, “Oh, just duration, bro. Just own it forever.” It’s okay, but I do also think that those are very reasonable– They are not objectively crazy to me. I can understand why people buy them here for the reason that you’re speaking about.

Jake: Sure. All right. Number four, you want to find a deep-water pool. That’s where the best biggest fish are. They tend to be down at the bottom. If your fly doesn’t get deep enough, you’ll never really attract them. But if your fly gets too deep and banging along the bottom, you’re likely to get tangled up in the rocks, and weeds, and stuff. I think that’s somewhat similar to the research process where if you don’t get deep enough, you’re not really going to get at what’s important there. But if you get too deep and down and tangled up in the weeds, I think you also reach a suboptimal level. What’s especially dangerous is that, for every unit of information that you add down at that very depth, you probably add more confidence in what you think you understand faster than you are actually understanding. So, I think there’s some sweet spot there, and probably the amount of work that needs to be done on an idea to get that 80% to 90% of the most relevant information before you get diminishing returns, and then overconfidence instead.

Spend Your Research Time On Better Businesses

Tobias: Could I frame the problem as, it’s sort of a classification problem. A deep pool might be something that, it might be worthwhile spending a whole lot of time studying a never sell type business, because that’s the business that you need to understand, and you need to be able to see if that starts fading or something like that, because you’re paying for the premium. But cyclicals and things like that, you need more of a forest for the trees type view where you need to be able to stand back and see where it is in the economy and its cycle rather than– it doesn’t help you to know a great deal about the grade of the ore or something like that. But you need to know that once and then you get a rough idea what this thing will do if the commodity runs, and you’re better off spending some time working out when the commodity is going to run. But it doesn’t really pay to get tangled up in a company like that, cinemas, or whatever the case may be, and I know some people who spend huge amounts of time on these companies that just the businesses just don’t justify the amount of time that they spend on them. I think you’d be better off spending that finding the never sell.

Jake: Maybe the analogy would be there that the better business that you’re researching is a deeper pool. So, if you’re going to really sink a lot of time into it, you want to make sure it’s a good depth.

Tobias: That’s worth spending the time on. Having said that, you made a great point once that if you don’t trust the management team enough that you feel the need to read every single footnote, then it might not be the right business. You need a business where you trust the guys running it so well that you don’t feel like you need to read it like-

Jake: A lawyer?

Tobias: — [crosstalk] contract. Yeah, like a lawyer.

Bill: This is a tangential thought. But the nice thing about studying business is that you only want to own is all the time that you sink into it, that’s not lost time. If you’re just researching a cigar butt, then you’ve got to start all over from zero the next one.

Tobias: Yeah, that’s a good point.

Find Opportunities That Match Your Personality

Jake: Number five, the best anglers, they make their own flies. Really, it’s almost like finding your personality and what works for you, and then matching it with the environment and the opportunity set. So, I think knowing yourself as an investor and knowing what opportunities make sense to you, where you’re likely to succeed, and waiting for those, I think is, I don’t know, a big, big chunk of this game. So, know thyself is really good– and the best anglers, they know themselves by making their own flies.

Tobias: Yeah, I think that’s a good one. You’ve got to be whatever your personality fits. If you–

Jake: Number six. Oh, go ahead.

Tobias: Yeah, I think that’s a good one. That’s all.

Jake: [laughs] This is pretty smart. Really good anglers will check spiderwebs along the banks to see what bugs are currently in bloom, what have recently hatched. That’s what the fish are likely biting on. And they’ll pick a matching fly then that looks like whatever they find in the spiderweb. I think that might be an interesting analogue for stock screening. You want to check that spiderweb to see what’s in there, and what you might pattern match.

Bill: Reminds me of buying momentum stocks.

Jake: [laughs] A little bit. Yeah.

Tobias: We’re going to invoke Mike Mitchell like five times in this podcast, but I think about Mike keeping an eye on lumber for a decade, and finally seeing the opportunity and having– [crosstalk]

Bill: It hasn’t worked yet. Knock on wood.

Tobias: It is what it is. It’s not given.

Bill: Knock, knock on wood.

Tobias: That is good.

Bill: [laughs]

Tobias: It’s still good. Regardless of what happens with that position, his analysis is spot on, and it’s a good risk-adjusted bet. The outcome is irrelevant at this point. The thought process that went into producing it is sound.

Take A Big Swing At Your Best Ideas

Bill: I don’t mean to talk about him so much, because I got a lot of really smart people that I talked to, and I have mad respect for a lot of them. But if you’re talking about a dude that is not afraid to fucking swing at out of favor ideas, and then be a true fundamentalist, that’s him. I just haven’t seen it before, and I hope it works out.

Let The Price Run

Jake: Number seven, in fly fishing, you’re using very, very light tackle. The string, the final string, where the fly attached to is supposed to be very hidden so that the fish doesn’t see it. So, it doesn’t produce a lot of weight when it’s moving around. So, it will break very easily. You have to be really– When you do get the fish on, you can’t just reel them right into the shore. You have to actually let them run and tire themselves out, and you bring them back in and let them run again. So, your only chance of really getting them is to work with the fish until eventually, they get tired enough that you can bring them in.

I think that’s somewhat similar to– The prices can run all over you while you’re holding it. You have to just like let them run, let them do their thing, let them tire themselves out a little bit before you really try to reel them in. So, it can be really hard to hold on to what will eventually be a big winner, because if you look at the study of 100 baggers, the prices go all over the place, and they’re almost impossible to get that fish into the boat or on to the shore. But you have to let it run around if you’re going to get that 100-bagger outcome.

Tobias: It’s interesting hearing Bezos talk about Amazon in that year that it was done 90% because from his perspective, he could see it– Well, I forget the exact scale that he was like, the revenues grew three times that year. We were getting close to being profit– I can’t remember exactly what he said, but he was entirely focused on what the business was doing, and they’re expanding beyond books and other things st that point. It just didn’t faze him at all where the stock price was.

Jake: Yeah.

Bill: Hard to say about your employees. They got stock-based compensation, but–

Tobias: That is an issue. Yeah, you’re right. This reflexivity in there, I guess, that’s [crosstalk] the issue.

Bill: Huge.

Tobias: Yeah.

Tech Companies Competing For Talent

Bill: Especially today when everybody’s trying to compete for talent.

Tobias: But then, the rest of the market’s a little bit like that too. Everybody’s kind of beaten up at the same time.

Bill: Yes, I think in that example, you’re probably right.

Tobias: But that’s an issue for the tech companies in particular, all the tech, what doesn’t eBay fix its website? Probably because it’s hard to get folk in there.

Bill: Yeah, [crosstalk] best engineers there.

Tobias: Yeah. Even Facebook’s are a little bit old. Not even Facebook, but Facebook is old hat, like newest shinier objects to chase.

Bill: Yeah, but you make a lot. Making a lot and get over working for the man.

Tobias: But then that takes away a little bit of their competitive advantage. Now, you’ve got to pay more to get those guys where previously you’re paying in stock.

Jake: I think you’ve pay them a lot, because their other opportunity is to go start their own thing that might disrupt them. So, this is almost like a form of engineering greenmail.

Tobias: Yeah.

Bill: That said, they’ve got good talent. So, I don’t think they’re hurting for talent.

Tobias: They’re going to be okay. Don’t worry about them.

Bill: Could argue the same thing at Google, right?

Jake: Sure. All right. That’s all I got for fishing.

Tobias: That was good.

Bill: I like it.

Tobias and Bill: Yeah.

Tobias: You could write a book on that, JT.

Jake: No, thank you.

Tobias: Fly fishing in investing. How much fly fishing have you done before you caught that fish?

Jake: None, or hardly any. My dad’s a pretty good fisherman but I am not. So, I haven’t really done much fly fishing before that. But I think it is kind of– [crosstalk]

Bill: [crosstalk] fish on the hook for him.

Tobias: [laughs] Everybody took a photo with that fish.

Bill: [laughs]

Tobias: They got that one off the ice.

Bill: Pass it around.

Jake: It’s actually plastic. [laughs]

Bill: That poor fish, he got caught seven times that day.

Jake: That’s probably true. What the guy that was teaching us was like– I don’t know. There were thousands of fish in there. He’s like all of them have been caught dozens of times. [laughs]

Bill: Yeah.

Jake: They’re all used to it.

Tobias: Lots of holes in their face.

Jake: Yeah.

Bill: They just swim into shore so they don’t even get like tugged on. They just like, “Yeah, fuck it. We’re going in.”

Jake: “They’ll let me off soon.”

Bill: Yeah. [chuckles]

Tobias: Is it catch and release?

Jake: Yeah.

Tobias: You don’t get to eat them. Can you eat rainbow trout? I don’t know.

Jake: Oh, yeah. It’s good to eat them. Put it into like tin foil and put [crosstalk] butter

Tobias: These fish are for catching or for eating?

Jake: I don’t know. Look at the tail on it. He’s pretty– The really farmed ones have small tails because they never really need it to develop. This guy’s got a pretty good tail on him. So, this is a real fish.

Bill: Interesting.

Tobias: There are a few things that we should talk about from the comments. Yes, China as a fish for the fisher. Has Munger sold out of Baba?

Bill: No.

Tobias: Is that a rumor? I keep on seeing that tweeted out or it’s tweeted at me occasionally but LiLu or Baba–

Bill: Fake news. Until I see the disclosure, fake news.

Tobias: Yeah. Okay. That would seem like a very surprising thing for them to reverse the vol face so quickly on something like that.

Bill: Yeah.

Take A Swing At China Stocks

Tobias: But that’s a pretty good example, isn’t it? China at the moment, nobody really disputes the valuation? It’s the question of whether the security that you own will give you the underlying value that is there. That’s the debate. I don’t know how to answer that question.

Bill: I recorded an episode with Rui Ma and I’m going to try to get it out not this week, but next week. I think people should listen, because she’s way more intelligent than I am on this particular issue. She does the China Tech Daily or whatever. TechBuzz Daily. TechBuzz China Daily. I don’t know exactly what it is, but I know it’s China, and it’s Tech, and I believe it’s Daily.

Jake: I’m looking forward to that one. That’s good.

Tobias: Yeah, just going to tease us like that? You’re not going to give us any– you’re not going to give us the seven fly fishing tips?

Bill: I don’t think it’s anything that anybody doesn’t know. The one thing that she said that really stuck with me and she said it on Twitter, she said everybody that I know that’s informed about this situation doesn’t have a strong opinion, and everyone that has a strong opinion doesn’t know what’s going on. I think that–

Jake: So, that’s just normal then.

Bill: Yeah, I think she has a lot of nuance, and I think that China is trying to accomplish a lot of different things, and I’m not sure that the answer means that foreign investors aren’t ever going to see the dollars, and I’m not sure that the corporations aren’t going to be able to keep the dollars, and I think it requires the ability to hold conflicting thoughts in your head. So, maybe 1% of people can do it, and we’ll see how it all works out. I’m sure that no matter what happens, everyone will be overly confident about knowing the answer.

Jake: That will appear obvious in hindsight.

Bill: Yeah, everyone, write their answer down now, so that when it happens, we can actually go back and see who is right for the right reasons.

Tobias: Yeah, for my two cents, I think it’s worth taking a swing and having me on that one in a few years’ time.

Bill: No, I do too.

Jake: [laughs]

Tobias: But there’s no certainty. I can’t even guess the probabilities because it’s just unknowable. But let’s say, it’s 50-50.

Bill: Yeah, I think I was talking to my wife about whether or not it’s worth a swing. If I were to swing it, I’d probably ETF it because I just don’t know enough over there, but a tech ETF is somewhat appealing to me.

Tobias: But the time that you’d spend researching an ETF or something like that, you could look at the four big ones couldn’t you and figure out which of those is better? Which of those was the best?

Bill: Maybe. I don’t know the answer to this question. I don’t not know, and I just don’t know. Which is to say, I don’t disagree with you. I just don’t agree.

Tobias: [laughs]

Bill: I am neutral on your– [crosstalk]

Tobias: Yes, and not yes.

Bill: That’s right.

Tobias: Not no.

Bill: That’s correct.

Jake: Thinking twice.

Bill: It’s exactly correct.

Jake: Next step?

Tobias: I had a good question, but it’s gone.

Bill: [crosstalk] people keep asking us China questions like we know. The answer hasn’t changed at all.

Tobias: Nobody knows. I think it’s worth seeing people think through it, because that’s how I’ve been learning. I’ve been listening to people talking it about one way or the other. It’s unknowable. That’s the thing you have to get comfortable with, you don’t know. The valuation looks good, but you don’t know. If you can capture that value– this is putting aside all the other normal stuff where they may just issue a whole lot of stock. There’s thousand ways to die in this particular instance, but the upside is huge. So, it’s worth having a pretty close look at it.

Bill: I just think that from an incentive perspective, I’m just not sure there’s really thousand ways to die. I know that everybody wants to say it, and I think I know why people want to say it, and it’s definitely concerning when a government that has pretty much absolute power starts flexing the power. But if you invested there and you didn’t know they had the possibility to flex the power, you’re a dumbass. So, don’t clip that and put that on Twitter. I’m not going to have that out there.

Tobias: I don’t do the clipping.

Bill: I think I understand some of the goals that they’re trying to accomplish, and I don’t think that they’re patently crazy at all.

Tobias: What about an alternative way of playing? You just luxury through the states where luxury is sold into– So, Tapestry is one that’s the old coach side.

Bill: Oh, God. No, thank you. You’re going to go luxury, go to like LVMH. I would not got to Tapestry for a luxury play.

Jake: If you own Nike or Starbucks, you’re as long China as if you owned Tencent.

Tobias: Yeah. Okay.

Bill: That’s a good, fair point.

Jake: All the growth that your underwriting is baked into China basically.

Tobias: So, you better off than coming with a list of those things. Yeah. You’re better off coming up with a list of those that it’s not a 100% all in bet on how they traded. You’re probably going to be okay with the other parts of the business that are good at the moment. You’ve got this now, you got the free option on this other part.

Bill: Well, I don’t think Starbucks has a free option.

Tobias: Yeah, it’s not a free option. So, you got an option on it?

Bill: Yeah, but I think that option twiced.

Jake: You should hang for the price.

Bill: Yeah, I agree with Jake. I probably rather play directly than then play some ancillary play, to Jake’s point.

VAH Gumball Machine

Tobias: John Battle is offering us a gumball machine. Set the kids up– I’ll buy the gumball machine for me, John, if you hit me in the DMs or an email.

Bill: Oh, wait. he’s trying to sell us a gumball machine?

Tobias: He’s going to give us one, I think. But I’ll buy it.

Bill: Oh, that’s dope.

Tobias: You’re just going to tell me what to do.

Jake: Do we take turns, the ownership of it?

Tobias: No, we get one each.

Jake: Oh, shit.

Bill: One each? How big is this gumball machine?

Tobias: I have no more information than I’ve given you. But that’s very kind enough. I’ll take you up on it. I’ll buy it– [crosstalk]

Bill: Yeah. Ship them all to Toby, and then Toby can ship mine to me.

Tobias: Definitely, don’t do that.

Bill: I don’t like my address getting known.

Jake: Yeah, your wife’s going to kill you when the giant full size gumball machine shows up on the Porsche.

Tobias: It’s a business. You’re supposed to put it out somewhere as a business.

Jake: Oh, really?

Bill: Oh, damn.

Tobias: To teach the kids about business.

Jake: Okay.

Tobias: That’s the part that I need to help with [crosstalk]

Jake: I’m very interested now. Let’s get these kids on the passive income train.

Bill: That’s right. One gumball at a time.

Jake: That’s very Buffett. Early Buffett.

Choose One Growth Stock

Tobias: Here’s another question like. If you had to buy a growth stock, so I guess this is one that– We’ve got to think a little bit how you defined that stuff because there’s plenty of stuff that is fast growing that I would classify as still value, so literally are we saying it’s something that– Yeah, it’s hard to find this stuff, but let’s– [crosstalk]

Bill: I hate this question because I don’t know all of them. But if I had to buy one–

Jake: [crosstalk] take one to buy?

Tobias: I like Shop. But Shop’s too expensive for me. I would buy Shop. I think Shop’s almost a no brainer.

Bill: [crosstalk] Farfetch, and Etsy, and maybe even Peloton, maybe.

Tobias: Do you buy Shop– Do your stuff with the little Shopify app? I think it’s phenomenal. You get all these random little websites and it recognizes you, knows how to ship it, tracks the shipping, it’s genius.

Bill: Yeah, it’s great.

Tobias: It gives you the all of the good stuff about shopping on Amazon without the need to shop on Amazon. It’s unlimited growth, but it’s expensive, and everybody else in the world has figured that out too, and they are much more aggressive than I am. I’ve got a question here from Samson, what do I need to see to buy it? It needs to be able to generate a reasonable return. The pricing at the moment doesn’t put in a reason, but everything has to go right. It’s going to perfectly execute, and you’re probably not going to get a market return.

Jake: A very smart friend who looks to– He just tries to answer the question.

Bill: Jesus, Lord. That’s evaluation.

Jake: [laughs]

Bill: I got it. But I mean, look–

Tobias: That’s how you look at Shop?

Bill: Yeah. [crosstalk] board. Yeah. Smart people are long it but holy shit.

Tobias: When were they long, 2016? Sorry, JT.

Jake: Not [crosstalk]

Bill: [crosstalk] stayed long. But oh, my. I guess, if you think that in seven years, they can generate– Oh, boy, they really need to flex up their cash flow. I don’t know. That’s not my kind of stock.

Tobias: Shop?

Bill: Yeah, I hope everybody wins. I hope Shopify takes over the world. Good for y’all, if you do.

Tobias: Yeah, if you don’t think– Yes, sorry, JT. You go. I might say some of the dumb shit offline.

Bill: I’m sorry, Jake. I just don’t often see $175 billion valuation hanging on $500 million of free cash flow. It’s just not something I tend to look at often.

Tobias: Don’t worry about that so much. It’s going to be the revenue growth margins. That free cash flow line is not making [crosstalk] this point.

Bill: Oh, get it. But I’m just saying you’ve got to grow into it.

Tobias: It’ll do what Amazon did. It’ll stupidly ramp at some stage, but we’re not there yet.

One Simple Valuation Hack

Jake: My smart friend tries to figure out, is it reasonable that it could double within 10 years, which is then about a 7% hurdle. If he can get comfortable with that, then he’s interested.

Tobias: I would have said, because I use double in five years, which is just a fraction under 15%, 14.87% just in case anybody who wants to check that. But compound, that’s very modest. Double over 10 years?

Tobias: This is why you can’t buy stuff, man.

Tobias: Well, that’s true.

Bill: For your discount rate.

Tobias: That’s true. That’s true.

Jake: Your hurdle’s too high. No wonder you can’t find anything attractive.

Tobias: Yeah.

Bill: We just solved it.

Jake: Yeah. That’s why you are underperforming.

Tobias: Little margin of error [crosstalk] lots of reasons.

Jake: Too disciplined.

Tobias: Two times in 10 years, does he own Shop? Was that the connection?

Jake: No, but he owns some things that are bigger growthier and feels pretty confident that business could be 2x.

Bill: It sucks that Netflix ripped, because I would have said Netflix, and it would’ve look smarter. But I still think Netflix does well over this [crosstalk]

Jake: Is the question here that we’re trying to answer like, I don’t care what it costs-

Tobias: Yeah, I think so.

Jake: like [crosstalk] on this business?

Tobias: Well, I think you do got to care, you have to [crosstalk]

Bill: No, because then we’d all be long Shopify.

Tobias: Yeah. You’ve got to generate returns over. You can’t just–

Jake: No, you don’t.

Tobias: I guess the business is going to be bigger, and you can’t then declare victory in five years’ time. Yeah, the business is five times bigger than it was, but the stock price is still where it was.

Dutch Bros Coffee IPO

Jake: So, I have a candidate for that. It’s a company that’s coming out. It’s IPO, and maybe tomorrow actually, or at least this week. It’s called Dutch Brothers. It’s a coffee–

Bill: Oh, yeah, the coffee.

Jake: I’m pretty familiar with the brand, because it’s very West Coast centric. Imagine a little hut basically that goes into a parking lot, and then picture a mile worth of cars backed up out of it for the drive-thru, because that’s what every single one of them looks like. People just coming through and buying sweetened coffees, milk shakes, basically.

Tobias: It’s good business.

Jake: It’s a hell of a business, incredible business. Very, very–

Bill: You think it can travel?

Jake: You have it. So, I’ll go it like a little bit of it– [crosstalk]

Tobias: Sugar and caffeine. But that [crosstalk]

Bill: Yeah, but dude, Dunkin’ Donut, Dunkin’ is East coast.

Jake: [crosstalk] hasn’t really traveled.

Bill: Well, man.

Tobias: There’s Dunkin’. When Dunkin’ open up here, there was a line down the block.

Bill: No, like the East Coast.

Tobias: At 4 AM in the morning.

Jake: All right, well, maybe, you are right.

Jake: The current valuation, I think on the IPO is something like $3.3 billion, and–

Tobias: They’re in three stores in Seattle. [laughs]\

Jake: Well, there’s 400ish stores. I did the math. I’d have to double check it, but you’re basically paying $7 million per unit right now which the units cost, I don’t know, something like $500,000 to build, but the thing is, they’ll pay back within 18 months or something.

Bill: Yeah, your returns on capital F be crazy.

Jake: Crazy returns on capital. It’s just how long is the growth runway for this? It could be huge, but you absolutely have to have it be huge for you to win. So, it’s a great business, would love to own it, but the $3 billion price tag is a little tough for me to picture how to get to that.

Bill: Maybe nibble it, dude. Just a taste.

Jake: No.

Bill: Okay, I’m just saying.

Tobias: Too disciplined.

Bill: David Gardner would say take a taste.

Tobias: Ben DiMiero points out the Dutch brothers is the Chick-fil-A of coffee in the Pacific Northwest. One thing I’ve noticed, what is it with all the chicken places opening up? If I get into the commercial area from where I am here, there’s like four of these things and they’re in a lines down the block and out the door. There’s this huge unmet demand for chicken sandwiches [crosstalk]

Bill: I think it’s delicious.

Jake: One, it’s good. Two, you get a higher price point. So, the average ticket size of a chicken sale is higher than a burger. So, you’re able to drive more revenue through the same four walls from chicken than a burger. That’s my hypothesis.

Bill: This is true?

Tobias: Okay, that’s–

Jake: Chick-fil-A average ticket sale is quite a bit higher than in and out or any other comparable– That’s why we are able to–

Tobias: That’s why you want to own one. But what do you want to eat one?

Jake: Oh, well–

Tobias: Yeah, Cane’s is the one that I’m talking about. Someone mentioned below. Yeah, Cane’s just opened up. The line is bananas.

Jake: Have you tasted one, bro? That’s the [crosstalk] driven one?

Tobias: The line is so long, I don’t have half a day to get in the line and wait for chicken. I’ve got kids to drop at soccer.

Jake: That’s fair.

Bill: Chicken’s really good.

Jake: Especially, when it’s breaded and deep fried.

Bill: Yeah.

Tobias: I think that we need to start our own coffee shops. That’s a good– Arthur Watkins, we’re going to do a GoFundMe. Not a GoFundMe, a Kickstarter, get Value: After Hours coffee.

Jake: We’ve got the gumball machine to put in the coffee shop.

Jake: [laughs]

Tobias: That’s the profit center.

Bill: Then, we’re going to sell some dental advertising on because we’re going to have a sugary coffee, the gumball machine, and then push people to–

Jake: All vertical integration.

Bill: Yeah, buddy.

Tobias: Interesting fact about Costco, they don’t make any money selling anything. They make it all through the subscription. It’ll be like interesting fact about this coffee shop is all the money comes from a gumball machine in the corner.

Bill: [laughs]

Tobias: The coffee shop runs breakeven but the gumball machine makes a million dollars a year.

Bill: Yeah. Why, because the gumball machine is really a bitcoin trading app.

Tobias: It’s a helium miner.

Jake: No, there’s little QR codes that go to NFTs inside the gumball.

Tobias: Oh, yeah. Each one is an NFT, non-[crosstalk]

Bill: [crosstalk] you got a picture of a gumball. You give us money, we give you a picture of a gumball.

Tobias: You eat it and then you’ve got a photo of that gumball forever.

Jake: I like the margins on that.

Bill: Yeah, this could be good.

Tobias: This is a big business.

Bill: We’re going to pay for gas. Shoutout to my Ethereum fans.

Tobias: I opt for the Kickstarter, which is coming soon.

Jake: [laughs]

Tobias: Cane’s sweet tea and Cane’s sauce is where it’s at. Oh, now, we’re going to go and get in the line, get all that stuff.

Bill: Yeah, you do.

Jake: Both of those are better, just jam packed with sugar, right? It’s all just a sugar addiction at the end of the day, all these businesses.

Max Price-To-Sales

Tobias: They figured out how to caffeinate the chicken’s sauce like. That’s game over when someone does that. So, here’s a good one. What’s your max price to sales bullshit filter– what’s impossible?

Bill: Oh, I don’t have one.

Tobias: [crosstalk] the business. Yeah, it depends on the business. If it’s all margin, then your price to sales is just PE. So, it doesn’t– [crosstalk]

Bill: It’s enterprise value to me. I think it’s all about your rate of growth and what your enterprise value is. Now, I don’t know what it– It all depends on your margin structure and stuff. But the thing that I think objectively tough about Shopify, and I’m sure this will be wrong, but on $175 billion, it seems harder to compound off that the $9 for instance, or $44, or anything lower than $175.

Jake: Can I give a nuanced answer to that?

Tobias: Oh, this is the one forum.

Jake: Yeah. I think this is somewhat like art where early on rules help you to grow and become a better artist but as you get more skilled, I think then you learn which rules to break and when it makes sense to break them. So, maybe early on in your investment journey, it’s a good idea to have some guardrails, like a certain price to sales that you would just say, “No, as a base case, I’m never going there.” But as you get more understanding of businesses, more understanding of how markets work, then perhaps it’s time you should be allowed to express a little artistic discretion, and decide when it makes sense to go above your rules.

Tobias: I like that.

Bill: I like that answer.

Tobias: Me, too. That’s time though, folks.

Listen To Bad Bunny

Bill: Listen to Bad Bunny, folks. Shit is hot.

Tobias: [laughs] But what is that?

Jake: Yeah. This is a [crosstalk].

Bill: Oh, dude. He is awesome. He’s a Puerto Rican.

Tobias: Oh, Bad Bunny. I know Bad Bunny.

Bill: I can’t even understand him, and I can’t turn him off. It’s freaking. It stings my ears.

Tobias: I was thinking Bhad Bhabie.

Bill: Nah, man. He is so– [crosstalk]

Tobias: You know that little ‘Cash me outside’?

Bill: Oh, yeah.

Tobias: Bhad Bhabie.

Bill: Cash me outside. How about that?

Tobias: Yeah, Bad Bunny’s great.

Bill: That’s right.

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