VALUE: After Hours (S03 E36): China; $BABA; Evergrande; $AAPL Losing Innovation; Mauboussin Strange

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

  • Mauboussin Strange
  • Western Media Bias On China
  • Charlie’s Right On BABA
  • $AAPL Losing Innovation
  • Explosion In Retail Trading
  • Insane Housing Market
  • Your Albert Pujols Stock
  • Gamification Of Investing
  • Evergrande – Everything’s A ‘Lehman Moment’ Today
  • MSOS Weed ETF Drops 40%
  • Working-From-Home Projections Are Way Off
  • Brands Losing Their Moat
  • Status Quo Bias
  • Science Progresses One Funeral At A Time
  • NFT Plays

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

Bill: Yeah.

Tobias: Here we go. This meeting is being live streamed.

Jake: Got it.

Tobias: It’s 10:30 AM, unbelievably, we got away on time, on the West Coast, 1:30 PM on the East Coast. It’s Value: After Hours. What’s happening, fellas?

Bill: Yeah. [yawns]

Tobias: The hype man is a little bit flat.

Jake: Yeah, we need to get those– Oh, Jesus. Then, he leaves. [laughs] Well, the show must go on.

Tobias: Oh, we lost him already.

Jake: Yeah. Better to lose them early than I guess when he’s mid something important.

Tobias: [laughs] Was it you last time who bailed out?

Jake: I think we all take turns with [crosstalk]

Tobias: Yeah. I disappeared a few weeks ago, didn’t I. Forgot that. London, Ontario. What’s your topic today, JT? What do you got on the–?

Jake: Well, I’m an unabashed Mauboussin fanboy, all in–

Tobias: Aren’t we all.?

Jake: -standing hard for him. So, I will be doing a little update hitting the highlights of his latest piece that came out that’s called Turn and Face the Strange. I appreciate him going David Bowie reference too, there. So, hi, Michael. [laughs]

Tobias: I like the name. Yeah, I got a few on deck for today. We’re going to get back into China, talk about Alibaba, and it’s like a little bit macro, this is a little bit politics. I don’t really know exactly what’s going on.

Jake: This is what we’re at our best.


Bill: Yeah, everybody’s going to love this.

Tobias: And then, there’s a book, Dopamine Nation, which talks about the addiction of gambling a little bit, and there are these four signs of gambling addiction or the environments that create gambling addiction. I’m just going to at the same time mention the fact that there are now as many brokerage accounts in the States as their households, which is a big ramp from where they were but I’ll get to that when we get there. What are you talking about, Billy?

Bill: I’m probably just going to listen to you guys, and then I’m going to riff on this.

Jake: So, you did nothing to prepare is what you’re saying. [laughs]

Bill: No, I did. Toby said he’s got three topics.

Jake: Yeah, he’s going big today.

Bill: There’s a reasonably good chance that we’ll at least get through 30 minutes talking about his if we actually get into it. I’ve got some stuff to riff on about yours. So, let’s see [coughs] where it goes.

Jake: [laughs] Let’s start with UTC. I want to get into that.

Tobias: Which one do you want? Let me do one and then the other. I’ve got two topics here. So, do you want to start with China or do you want to–

Bill: You’ve got to– Oh, your third was the broker accounts– [crosstalk]

Explosion In Retail Trading

Tobias: Well, it’s just the households. Yeah, the brokerage accounts and households. So, let’s start with, there’s a book, Dopamine Nation, Lembke is the last name. I got this from a podcast that I did last week with Dr. Richard Smith, he is a risk guy. He said the four ways that you can induce this gambling addiction or the environments that induce a gambling addiction, you need to be able to get a reward that creates–

Bill: Not value investing.

Tobias: Well, occasionally. Value investing might be the worst of the lot. I’ll tell you why. Anticipating a reward is part of it too. So, looking forward to getting the reward is as important as getting the reward.

Bill: There you go.

Tobias: You also need a rich, complex environment with lots of learning opportunities. So, definitely, that’s investing, and if you’re in an app where you’ve got all of the fireworks and the confetti going off, that’s probably helpful too. Then, your reward needs to be highly randomized and best is about 50-50 because that amps up your anticipation and your reward receiving as well. It gives you an outsized thrill when you actually get the reward.

This is a factoid. I learned from Vincent [unintelligible [00:04:34] yesterday. There are currently as many brokerage accounts as there are households in the US, and this is a big step-up from recent times. I looked at the start of the year, there were 100 million at the start of the year, brokerage accounts, for about 122 million households. In the US in 2013, which was the last time I could get data. There were 17 million brokerage accounts. So, in eight years, we’ve put on-

Jake: 5x almost?

Tobias: -83 million plus brokerage accounts. But in 2001, there were 19 million. So, in 2013, there were fewer than there were in 2001.

Jake: Because they’ve got blowed up.

Tobias: I think that’s what happened, and then there was a long time of the market. So, going backwards, like you remember from 2000 to 2013, SPY was flat or backwards.

Jake: That’s no fireworks.

Tobias: It’s not much fun there, and it’s been on a vertical ramp since about that time to today. So, that’s probably why there’s a lot more brokerage accounts. What do you guys think?

Jake: Sell everything. No, I’m just kidding.

Tobias: It’s not a market call. This is just–

Jake: Oh, okay.

Tobias: There’s a particular provider who you’re always dunking on but have they mindfully or have they knowingly created this environment where it’s incredibly easy to sign up now, and it’s incredibly easy to trade, and then you’ve got these that they’re meeting all of the four criteria for inducing a gambling addiction in somebody?

Bill: Yeah, I don’t know. I want to be like fuck them, but I don’t know that thought’s right. As it pertains to Robinhood specifically, the idea that they at least historically have not provided the customer service is atrocious. The actual inducement of people to sign up for brokerage accounts does not bother me that much. Even options trading, the only reason that I’m doing what I’m doing is that I came in through options trading. So, I don’t know.

I have really mixed feelings. I don’t like the gamification, and I don’t like the idea that discount brokerages can just basically provide absolutely no support, and then just say, “Well, externalities are to the rest of society, and we don’t have any responsibility.” That really bothers me. But I don’t know. I guess I would need to know the definition of a brokerage account. If a brokerage account can have five bucks in it, then how much are we really talking about? My intuition–

Tobias: There’s probably quite a few of those around. There’s probably quite a few. I’ve probably got one that I’ve forgotten from 20 years ago.

Bill: Yeah.

Jake: How much was the last stimi check? It’s probably about how much is in there. [laughs]

Bill: No, probably, less. People are trading it.

Jake: Oh, yeah.

Tobias: The average is quite high.

Bill: No.

Tobias: The average is like 300. Well, the last day that I saw which is this is the 2013 data, but the average was like $357,000 in the account. Averages– [crosstalk]

Jake: We need a median probably for this.

Tobias: Yeah, average is a skewed. That was just all the data that I had. It’s actually pretty hard to track down that data. I tried to google around for it and couldn’t pick it up.

Bill: If Google can’t do it, no one can.

Tobias: Yeah, well, that’s fair. Vincent would know.

Bill: Yeah, I don’t know. Certainly, it would be one of the things that you could take on to the late cycle indicators if you were so inclined.

Gamification Of Investing

Jake: Something Toby and I were talking about before we started today was that the digitization of a lot of these things, these habits, these activities really hide it from us in society, like what is happening. Imagine if you had to go down to the bucket shop, and they had all these people hanging around and trying to read the tape and do all this stuff, or imagine everyone going to the sports betting parlor, and they’re all hanging around there all day, would we look at that and go like, “Maybe this isn’t the best thing for us as a species to have these people doing all of this basically gambling behavior”? But because it’s on your phone, and we don’t know what you’re really doing on your phone at any moment–

Tobias: That might be the healthiest thing you can do on your phone.

Jake: Yeah, exactly. [crosstalk] swiping right and dropping coin on– Yeah, I think there is something interesting about how it’s now been removed from our view in general.

Bill: Yeah, I guess what I’m thinking about what the brokerage account specifically is, I don’t know that I trust a lot of MAU numbers, I don’t know that I trust a lot like monthly average users. I don’t know that I trust a lot of the daily average users. I think there’s a lot I did–

Tobias: Why not?

Bill: Because I just think a lot of it’s bullshit whether it’s–[crosstalk]

Tobias: They just making it up to them look more–

Bill: I don’t know that it’s as nefarious as fraud. I went to college with a girl who just lost her husband, and I signed on to Facebook to check that. I’m a monthly active user. What does that mean? I literally signed on, because it’s the only place that I knew how to send her a message. I sent her a message and I got off. Now, I think when your sample size is large enough, people could push back and they could be like, “Well, it’ll show up through ARPU, and if you’re not seeing the ads, then the revenues are–” It’s a balancing act, but I just think that it doesn’t tell you about the quality of engagement on a lot of these platforms, and then how engagement is shifting. I don’t know. I think there’s a lot of data, and I’m sure that in large numbers, it’s reliable, but I just don’t know what conclusions to draw from each individual datapoint.

Tobias: I’m sure that there are a lot– The 17 million brokerage accounts in 2013 with an average $350,000 in it, they’re probably a lot more engaged and serious in using them than the 100 million plus that– I might even have a Robinhood account because I tried to sign up one day to have a look at it and see how it worked and never used it since then. That might count as one of those brokerage accounts. [crosstalk]

Bill: Yeah, I’m almost certain I do too because I wanted to see what it was like and I guess I have my $2 coal stock that they gave me. Thanks for that, assholes.

Tobias: I don’t think I got a free stock. I think I’ve probably signed up before that.

Bill: I think they always give you a free stock and-

Tobias: Was it? I can’t remember.

Bill: -[crosstalk] to trade. They give you something you don’t want, then you sell it and you realize how easy it is to sell it and [crosstalk]-

Tobias: It’s pretty clever.

Bill: -[crosstalk] buy something else, and all of a sudden, you’re a trader, and then they get to tell you that it’s because they’re getting you into investing.

Tobias: What innings does that mean we’re in, Bill? Someone wants the update.

Bill: I don’t know. It’s hard to look at what’s going on. Forget about the index. There’s a lot of carnage in this market from the high. Maybe, we’re in the 10th.

MSCI China Index Peak

Tobias: I tell you one thing interesting that I saw is that, I just randomly turned on Bloomberg late on Sunday night, and I saw there’s a little piece on China which I want. I think, JT should go before I come back to the China part because I don’t want to do it all the way through, but the peak of the MSCI China Index was February 17th, which is about the same time that everything tech peaked over here, too. I don’t know what that means. I just noticed, I thought it was odd.

Bill: Yeah, what’s going on in the Russell? I bet that peaked probably around a similar time.

Tobias: Well, ARK was February 12th. I just looked that up immediately just to see, so there were about five days apart. Tesla was a little bit earlier.

Bill: I guess the Russell’s pretty flat this year. It’s interesting.

Tobias: Which one?

Bill: The Russell 2000. It’s pretty much flat since February. I would have thought it was down.

Tobias: Did it have a big ramp and then a big fall back?

Bill: Not really. It’s just in this consolidation pattern. Some would call it a bull flag.

Tobias: Bull flag. [crosstalk].

Bill: Yeah, you looking at. [crosstalk] at a bull flag off of these March bottoms breaks out to the upside, you could have a real nice run.

Tobias: [laughs]

Bill: Could go to 3,000 on the bull flag. You want big volume when it breaks out though.

Tobias: That kind of language is probably going to make this podcast break out. That’s exactly what we need.

Bill: Dude, we’ve also got– We’re sitting in the consolidation pattern, you’re looking at a 200-point consolidation pattern. I’m telling you, that breaks out on big volume. You’ve got to buy it.

Tobias: [laughs]

Bill: Smash the bid.

Jake: [laughs] This is great. I love this. I could listen to this all day.

Bill: I don’t know what the candlesticks are. I got a line chart up here. Maybe, I can switch that over and get you some harami. Isn’t harami– or is that an ape?

Tobias: I don’t know. If so, you can — [crosstalk]

Bill: I want to what it was. Anyway.

NFT Plays

Jake: Bill, I want to know though, did you buy an NFT yet?

Bill: No, man. I’m not going to do that shit but I do like them.

Tobias: [laughs]

Bill: I don’t have the money. If someone wants to give me money like–

Jake: They going to have cheap ones. [crosstalk]

Bill: [crosstalk] GoFund my NFT.

Tobias: [crosstalk] like collectibles.

Bill: You try to find something in the internet.

Tobias: If you buy one for 100 bucks and it runs up to $100 million, that’s how you turn into a legend.

Bill: Dude, the way I view it is you’re trying to signal something on the internet. You don’t try to go out and signal something in a Hyundai.

Tobias: [laughs]

Jake: Hmm, got it.

Bill: That’s not the game I’m trying to play.

Jake: Yeah, you can’t flex with a $2 NFT.

Bill: That’s right. No one cares. You can pick up, what, like 20 followers?


Tobias: That’s a day at the office for you.

Bill: Oh, jeez. I do that in my sleep.

Jake: [laughs]

Bill: Anyway.

Tobias: JT, do you want to do yours, and then we’ll come back to the China one? I don’t know if that’s the least of the most of the topic.

Bill: Everybody wants the China thoughts, man.

Tobias: Well, I don’t have any thoughts. I just got stuff that I’ve read that I’m going to throw at you guys, some quotes, see what you think.

Bill: Yeah. I think people are clamoring for it.

Jake: Yeah, I believe. They came to the wrong podcast and probably they want–

Tobias: There’s nobody clamoring for anything on this podcast.

Jake: Yeah, just clamoring close to stock. [laughs]

Bill: China and macro.

Mauboussin Strange

Jake: All right, let’s jump into some Mauboussin and then we can come back to give the people what they want. This is what we want right now. So, his latest piece is about sports teams, and investing, and if there’s a ton of parallels, I think some of it is not quite always lines up perfectly just because of some of the constraints that sports teams face like drafts, and things, there’s exclusivity to a player, whereas assuming you’re not too big, there’s not much exclusivity on an investment. You tend to be able to buy whatever you want.

So, it starts out by saying sports teams, they’re trying to maximize two things. Winning on one hand operationally, and then also profits for the club. The first thing to ask is really like what contributes to winning, especially in a changing environment. It’s the players, it’s the strategies, it’s the tactics that should lead to winning. But for some reason, sports franchises are generally very slow to change. Why is that?

This whole paper is basically trying to address why is that. To give an example, talking about three-point shooting in the NBA, the expected value of a three-point shot, basically, the shooting percentage times the number of points that you get when you make one, is higher than a mid-range jumper, which you shoot at a little bit higher percentage, but it’s only worth two instead of three. This expected value– When the three-point shot first came about, no one was shooting them. They just thought like, “It’s too far away to shoot.” Even Larry Bird was anti three pointer, even though he was a terrific shooter.

But eventually, teams realize, well, dang, if we get better at this, have our players practice shooting threes, maybe we can score more points that way. It actually crossed over in 1990 when the three pointer was a higher expected value shot than the mid-range two pointer, and yet, it wasn’t until 2014 when teams actually started taking more three pointers than mid-range shots.

Science Progresses One Funeral At A Time

So, why did it take 25 years basically, you could almost use that observation, that science like Max Planck observed that science advances one funeral at a time. Maybe the same thing is sports science advances one GM canned at a time, but– Daryl Morey was one of the first ones to realize that he was the GM of the Houston Rockets for a long time. Now, I think, the GM of the 76ers. But he observed that, when you shoot more threes than midrange twos, that equated to 12 more wins in a season, which is almost the equivalent of adding $30 million to your salary, to your payroll.

Then, Mauboussin observes that this three-point idea is pretty well out of the bag now, it’s been competed away, and now, the next thing might actually be offensive rebounding. So, teams have traditionally not sent everyone to crash the boards to get an extra possession and an extra shot, because they’re worried about getting back on defense. There’s some game theory playing out there potentially right now.

We sort of zoom out, why is change impeded? Why are these teams so slow to change? Mauboussin puts forth three different reasons, all of them behavioral ideas basically. But the first one is loss aversion. This is Keynes classic thing about it’s dangerous to fail unconventionally. It’s better to just for your job prospects to fail conventionally, and not stand out, and get fired. Basically, only the really losing teams or the winning teams that have enough goodwill to try new things with their fans are in the sweet spot enough to be able to try out these novel experiments. Everyone most of the time are stuck in the middle and they can’t really get out of the middle because of that.

Status Quo Bias

Number two is the status quo bias, which is where we favor doing whatever we were doing. There’s an inaction and– We observe inaction as a neutral thing, whereas if you take an action and it was wrong, then you get fired for that. There’s also the endowment effect where the GMs, they’ll re-sign players for higher than they should have on a base rate, if they were just to hire them as a free agent. And then, there’s sunk costs. The teams are more likely to play their first-round picks as opposed to later picks, even if the later ones are proving to be better players. We spent a first rounder on this guy, we’ve got to play him, see what we have.

Then, the third reason is sample size. There’s lots of randomness in any given year. Sometimes, a guy will be a terrific shooter, and sometimes, he’ll just have a terrible night and you’ll lose. The tactics that are supported by analytics don’t always work. It’s a statistical thing where you have an expected outcome, but you don’t always get it. Thinking about hitting into like when teams do the shift, let’s say there’s a lefty up and they move everyone over to the right side of the field, and then, it’s a ball that gets hit that looks like it should go right to where the shortstop is, there’s nobody there.

So, that’s a base hit, and you go, “What are you doing?” Those are very painful for the fans and for the pitcher maybe, where like, “God, I just got the ground ball to short, and there’s nobody there to make the play.” But we don’t notice as much when the guy rockets one towards where the second baseman wouldn’t have been, and the guy who’s playing in the shift gets it and gets the out. It’s all about playing percentages.

The last thing here is the importance of time horizons. The NBA average for the number of seasons with the team for a player is 1.9 years. This is pretty short turnover. It’s an average of two years that you’re going to be with a team. A coach is two and a half years, the GM is 4.9 years, the owners 10.9 years. The example of this is last year, the New York Jets were 0 and 13 going into whatever, week 14. The perfectly logical thing for everyone upstream of that coach would have been to lose these next three games, get the number one pick, and go get Trevor Lawrence. That’s who everybody wanted. Instead, the coach, because he’s on a shorter time horizon, goes and they went to the next three, and they don’t get the number one pick. You have these time mismatches.

Optimizing Draft Capital

Another interesting thing here is that they’ve done some really cool work on what they called draft capital. What is the number seven pick in the first round worth relative to the number of 15 pick in the second round, let’s say. So, there’s different scoring that you can use for that to figure out what is a particular pick worth. That’s based on what the expected value is of a mid-range or a mid-round second pick, what they typically produce. The Browns from 2017 to 2018 were in full rebuild, full tank mode, and they actually built up almost two extra drafts worth of draft capital for the subsequent years by trading away their reasonably good players then for picks later. So, basically, optimizing draft capital over a different time period than just that one year. It’s allowed them to rebuild in a reasonable way. The Dolphins and the Jags have been doing something similar recently.

Your Albert Pujols Stock

Jake: Last thing, maybe, the most interesting, Albert Pujols. Cardinals, first ballot obvious Hall of Famer. 2011, he’s 31 years old and the Angels sign him to a 10-year $240 million contract. Based on what’s observed, he contributed about $40 million worth of team value of baseball production to the Angels over that time period. So, it was like a $200 million hole that was created in relative what they paid, and that happens a lot. So, I thought it’d be fun for us to throw it out there to the chat as well as I’d like to get your two guys ideas on, what is the possible Albert Pujols in 2011, today? What’s the stock that has done Hall of Famer right up until now, but maybe long in the tooth that you don’t want to sign up to that 10 year and very expensive $240 million contract?

Tobias: The reason why it took– it was 1990, they figured out that shots, three points were worth more than two pointers is basically because on average, you get a little bit more, and then it takes until 2013– is that Steph Curry or someone like that comes into the league and starts. Is it too early for him?

Bill: No.

Jake: No.

Bill: I don’t think it was him, but go ahead, Jake.

Jake: No, I think it was just statistically, well, one the players actually started training on the three-point shot a lot more. So, you had these guys, they just park them in the corner, and they shoot like they– [crosstalk]

Bill: Yeah, like Kyle Korver, guys like that. They would just sit there and shoot threes. The Suns were one of the first running gun three-point shooting teams. Mike D’Antoni, I might be wrong on that, but that’s a version of the truth I’m going to tell.

Tobias: I don’t know if it was– when Moneyball came out, it’s not that the As were doing anything that was– The structure had been created for the As to do exactly what they were doing. It just seemed nobody was really exploiting that the way that the As were. Now, everybody’s aware of the Moneyball phenomenon. Every single clubs probably got the data guy who can tell you which position to have– Maybe, it just took a little while for that to bleed into basketball. It just took a little bit longer. Now, everything is sort of– they’ve got data on everything, and they’re tracking all that stuff.

Jake: Yeah. Part of it is, how hard is it to measure things? Hockey is harder to measure than baseball, which has very discrete actions. You either made an out or you didn’t, but the hockey equivalent of that is like, what were you in the right place or not. So, until you had player tracking, it was a much harder thing to keep track of. Basketball is the same way too. It’s a more fluid game. So, it’s harder to measure maybe the effectiveness of driving in or who’s good at spacing themselves, who finds an open spot. Those are harder things. They’re a little bit more subjective maybe than just purely this guy got a hit or even measuring the exit velocity of the ball in baseball, which correlates well with hits. So, a lot of it has to do with the sport itself that’s intrinsic to it.

Tobias: Investing doesn’t really suffer from that because there’s a lot of data. There are a lot of other confounding factors too, but there’s also a lot of data. There’s a couple of good suggestions in the chat. One is Peloton and the other one is Tesla. Tesla’s almost like– they’re probably the most obvious one, but Peloton is interesting.

Bill: Yeah, I don’t know.

Jake: I would say, it’s early for that one. Peloton to me seems like coming off of their rookie contract and about to sign a big contract, but it’s not sure whether– they put up some good numbers but maybe they weren’t expecting a really big payday. I don’t know.

Tobias: I guess the Zoom-s in the same– Same idea as Zoom, right?

Bill: Yeah, I just think those companies are so young that they’re not a great Pujols.

Jake: Agreed.

Bill: They’re not a great like Pujols comp yet.

Tobias: What about Tesla then? Tesla’s got the age, got the valuation.

Bill: Yeah, maybe, I don’t know. I think anybody that shorts a guy that shot four random civilians into space is out of their fucking minds.

Tobias: I’m not saying necessarily shorted. You clearly can’t short that stock, but just in terms of underperforming the index for the next decade.

Bill: Yeah. Could work. I don’t know. I have no idea where the cult will bid it too. I would be like more– I don’t know. Dude, beer as a category–

Jake: [crosstalk] like bid though. It’s about production versus price.

Bill: Yeah. Beer is a category would make me nervous to pay up for. CPG continues to be– I don’t know. People are going to hate this, but if you need one– The thing about Pujols is I think that they knew that he wasn’t going to be worth the back end of the contract. That’s the unique thing in sports. You’re bringing them in for what you hope to be a World Series or something, but there’s part of me that wants to say, “Watch out for some of the narrative around luxury.”

Jake: Yeah, but you don’t sign a 10-year contract for a guy like that when you’re trying to win today. You put them on a two or five year. 10 years, that’s a big commitment.

Bill: Yeah, but I think if you think you can win today and you got Mike Trout, you pay him what you need to. I don’t know. It’s a dick- measuring contest at certain stages. It’s not like an investment portfolio.

Jake: [laughs]

Tobias: There’s also marketing for those guys. You want [crosstalk] so well known and liked, and people go and buy the shirts with their names on the back.

Bill: Yeah, and I think, you can bring in– You don’t want to pay a guy $30 million to just coach up young guys. But a guy like Pujols was so well respected that I think having him in the clubhouse can go a long way. There’s some nonmonetary benefits.

Tobias: Apple.

Bill: I don’t know.

Tobias: Good a couple of suggestions, Apple and Facebook. Theranos, good one.

$AAPL Losing Innovation

Bill: Yeah, I can maybe get down with Apple. I’m starting to hate Apple.

Tobias: Why?

Bill: I don’t know. It just like some big tax on the internet. It’s so not–

Tobias: Their App Store?

Bill: Yeah, it’s funny. Just dealing with the super follows on Twitter, Apple gets 30% for what? If 75% of my Twitter activity is through the desktop, and the only reason that Apple gets to pay is because they’re processing payment through the App Store, and people think Visa and MasterCard are taking too much? Get out of here.

Tobias: Why do it through the App Store? Isn’t that Twitter’s fault which can’t they arrange it some other way?

Bill: Yeah, they could but fuck Apple too. I just I think it’s not good for– Forget about me as a creator. Who gives a shit about me? But the entire internet, they’re going to take 30% of digi– That’s anti-innovation. That’s just like a huge tax.

Tobias: The internet will [unintelligible 00:31:06] around it eventually. People will [unintelligible 00:31:06] around it eventually.

Bill: I get it. I’m just saying, that’s not Apple to me. Apple was an innovative company that put consumer need first, and now, it’s just like some extractionary moat based on software and whatnot. That’s lame. That’s what Microsoft used to be in the late 1990s. That’s not inspiring. That’s like–

Tobias: Why pay them then?

Bill: Because I don’t want to text in green.

Tobias: But you don’t have to pay– I’m not saying you. I’m saying, why does Twitter pay to do it, or do you pay them? How does it work? I don’t know. I haven’t done it.

Bill: No. Twitter is building this particular thing on iOS. Companies are starting to get outside of the ecosystem. I understand that workarounds are working, are starting to happen. It’s the whole Apple Epic gaming thing. But they’re still massively extractionary. It’s not in any way beneficial to society in my opinion, other than the fact that, if you’re a Berkshire fanboy, it’s helped you, and I happen to be one. So, that’s nice. But they’re not an innovative, exciting company, they suck.

Tobias: Not excited for the iPhone 13?

Bill: Yeah. The Air Pods were dope. I got love for the Air Pods. I guess the Watch is fine in stuff, but I don’t know. I just find that it’s not an inspiring business model to me anymore.

Tobias: Isn’t the iPad coming out in a slightly different size?

Jake: [laughs]

Bill: Yeah, right. That’s what it is. I use luxury tech, because I want to signal that I’m a luxury human, and that’s what it is. That’s fine.

Tobias: Get a big diamond embedded in my forehead.

Jake: Ooh.

Brands Losing Their Moat

Bill: Yeah. Brands matter. I guess this is an interesting– Mad Thunderdome and I were going back and forth on the Twitter machine on Saturday, and the question that spurred us going back and forth, and I don’t even think we’re that far apart, but is brand the moat. I had used Lululemon as an example but I think Apple applies too, like brand enabling a company to make supernormal profits. But I think he and I would probably agree that a brand is closer to a strategic asset than a moat. But then, I would get to go further and say, “Well, if anything a moat, you could argue low cost as a moat, but really execution’s the moat.” So, I think execution is really always the moat when you really cut down to the core because anything else can be destroyed.

Tobias: Brands are more important when you’re browsing a shopping aisle, and you’ve got limited time to get the thing that you want, and you’re just looking for that thing, get it off the shelf, and keep going. It’s different when. This is a problem for CPG, I don’t know what different avenues being used, but is it social, was that how they’re selling that stuff now?

Bill: Yeah. I don’t know that I agree with your comment on brands though. Lululemon, I think people like to wear it because it says something about them.

Tobias: Well, you can go on Instagram right now, and you can buy lots of brands that have a very similar-looking logo.

Bill: Yeah, well, that’s fine. But then, if you’re a woman and you bend over in yoga class, you’re probably going to show your thong which is what almost ruined Lululemon for a little, their pants–

Tobias: They’ve got the better technology. [crosstalk] technology.

Bill: It feels good. But they had problems with their execution for a little while. Their quality got shitty, and they almost lost it. But then, they got it back.

Jake: It’s a good segue for China.

Western Media Bias On China

Tobias: All right, let’s do China. The thing I saw on Sunday night on Bloomberg, Deng Xiaoping, who was a Premier of China, whatever the leader of China is called, he had this philosophy sort of to embrace capitalism with the idea that would allow some people to get rich at a faster rate or some people to get rich first, and that was going to be okay. But Mao Zedong had this philosophy called common prosperity, and it seems now that Xi Jinping is trying to bring back this idea of common prosperity. This is a term that keeps on turning up in quotations from people in authority.

The implication is that’s what we’re seeing, the tech crackdown, there are other things going on in an attempt to– It is an explicit move towards more socialism. I don’t know if that’s the Western media’s interpretation of what is actually happening or whether that’s what is actually happening. But would that change your view on say– Does it make investing in tech in Chine or Baba or any of those stocks, does that make them less attractive?

Bill: Not even one bit.

Tobias: Doesn’t change anything?

Bill: September 10th, I tweeted out– somebody asked when I was talking to Rui Ma which should come out here in the near future, “Would love to hear you ask her about capital controls and the inability of companies to return capital to shareholders abroad.” I said, “I’m taking that one even further and asking whether there’s a massive off balance sheet encumbrance, because the government will end up requiring donations back to society rather than shareholder profits.” I think if you haven’t been considering this, you’re not paying any attention to how China works.

Tobias: They do seem to be requiring very large, philanthropic– Well, there have been some leaders who’ve come out and said, “I’m going to make [crosstalk]

Bill: Yeah, it’s a fucking socialist country or a communist country. I’ll tell you, the hard thing for me to understand is if we’re worried about Chinese tech, how have the questions around Starbucks profitability and Nike’s profitability in that country not come into question? Because it’s hard for me to understand how you can be worried about Chinese tech companies making too much money and not giving it back to the people, but somehow Nike making humongous margins off the people of China and extracting it, and sending it all over the world. We don’t think the Chinese government has some level of insight in the Nike’s margins in China? We don’t think that– [crosstalk]

Tobias: [crosstalk] I guess.

Bill: Yeah. We don’t think the Chinese government has some level of control to say Nike, “You’re either going to make massive donations back to this country or you’re not going to sell stuff here anymore”?If we’re going to ask these questions on Chinese tech, I think you have to ask questions of everything in China.

Tobias: Well, what does that do then?

Bill: I don’t know.

Tobias: China growth is lower going forward China. Profitability is lower going forward for US companies participating there.

Bill: Or, this is Western media and Western interpretation run amok. But I think that’s part of the bet that’s being offered in the market. That’s where you get to have your variant view and either make your money or lose it.

Tobias: Which way do you lean?

Bill: I lean towards, if I was forced to bet one way or the other, I’d be long Chinese tech.

Jake: Maybe we can zoom out a little bit and think about this.

Bill: I’m not forced to bet. That’s what’s nice.

Jake: [laughs] Yeah, you are not. If we look at it on a longer timeline, a lot of the purpose, I think, of this rhetoric, or legislation, or however it gets expressed is to actually create more stability. One thing that leads to instability is often very large discrepancies in incomes and net worth historically. That’s typically what has led to revolutions. So, I think that the CCP probably wants to get out in front of that before there’s enough tension built up in haves and have-nots to even that out a little bit more so that there’s maybe more stability for a longer period of time.

Now, that’s a working theory. I don’t know if that’s necessarily true. I’m not sure you can actually make stability disappear that easily, but we’re trying in a different way here where we’re just letting a lot of inequality build up, and is that working out particularly well here? I don’t know. I’m not sure over what timeline, but these are all really hard problems to solve. They’re choosing a different way of trying to solve it. I don’t know. I’m a little bit less judgmental about it, I guess.

Charlie’s Right On BABA

Bill: Dude, I totally agree with you, and I think this is where Charlie falls on it, and I think this is why Charlie was okay buying Alibaba is, I think that if you believe that a lot of years of cash flow are what you’re buying, having a country that you perceive to be doing things in an effective way reduce the amount of inequality and extend the duration of your society in the aggregate wealth can potentially result in a good outcome. I have no idea how to handicap it. I was born in America, I voted for Ron Paul once upon a time, I find top-down economics very fucking offensive to everything that I believe in.

At the same time, assigning a high degree of confidence to the fact that they’re doing the wrong thing is very, very hard for me to do. I think that we’ll see. But I’ve always thought that no matter what happens, whoever’s right is going to pretend that they knew what was going to happen, and they’re going to say, “See, I told you.” I think the range of outcomes is pretty wide here as far as– I’m not sure that you can be certain on whether or not this is the right thing to do or the wrong thing–

Tobias: It’s not so much whether it’s right or wrong. It’s a matter of what the implications of what they’re doing are for those companies that are listed there. What the right thing for their society might be the completely the wrong thing for those companies, and I don’t know how it’s going to fall out either. I’m just interested in following it, because I find it’s an interesting experiment that you get to see in real time.

Bill: Here’s the thing, though. The education system, what they were doing was atrocious, what they were doing to children.

Tobias: Which country? China?

Bill: Yeah. How hard children were working, and then teachers weren’t teaching in class to divert children into afterschool for profit tutoring. Fuck those companies. I’ve got no problem with them going under. I think this is part of what Charlie says when he says, “I wish that I could wave a wand in certain areas of the US and make things disappear.” The difference is over there, they can. So, I think, if you are operating from like Peter Kaufman’s win-win-win strategy, and part of your win is the government, and you’re thinking about the people, my gut tells me that you’re probably not as in danger of the government coming after you. But over there, it’s always a risk, and I think like anyone that invested that didn’t think it was a risk, I don’t think has their eyes open.

Jake: Have you tried running a small business in California?

Tobias: [laughs]

Jake: We have plenty of things here that are also not that much different, I feel like. I don’t know. I just feel like we’re a little bit of a glass house throwing a lot of stones.

Bill: I think that the thing that you said that resonates the most with me is, I look at how our country has handled the hollowing out of the middle class and the idea that is a stable system to me is just offensive. I don’t want to live in China. I understand that in China, they can take everything from you for saying something and its absolute power, and I get all that. I’m not advocating for what they have, but I think people are way, way, way too certain of right or wrong either way. That’s my only strong opinion.

Evergrande – Everything’s A ‘Lehman Moment’ Today

Tobias: What about Evergrande? You guys followed that at all? The suggestion is that it’s the Lehman moment, and I don’t know if that’s for the US or for China. I assume it’s for China, but I’ve got some quotes here. UBS says, “It’s not Lehman.” Dalio says, “It’s manageable.”

Jake: Subprime is contained.

Tobias: It sound like a little bit. Didn’t it?

Bill: Yeah, that was Dalio’s science, as sells everything China related, and tells everybody it’s manageable. Just hit the [crosstalk]

Jake: Cash is crash.

Bill: Yeah.

Tobias: Yeah. S&P came out with default likely without support.

Jake: Okay, what’s that mean? [laughs]

Tobias: Well, I guess the S&P is just like– well, I guess that means unless China steps in and bails them out, the default is going to occur. I don’t know what the implications or I haven’t followed the story really closely. I just find that, it’s one of those things that’s making a lot of noise at the moment, probably because people falling into the press. But it’s interesting, again, a very wide range of outcomes. UBS saying it’s not Lehman, but then S&P coming out saying, it’s default likely without support, and then I guess you could add Dalio onto the end of that where he says it’s manageable in a sense that they are going to bail them out.

Bill: Yeah, or if they go down, it’s not going to take everything with it, but I don’t know. I have followed this situation. I have no idea how to quantify the risk. I think that it’s hard to live through 2009 looking at how financial risk went throughout the system and not at least have your ears perked up at it.

Jake: Fingers of instability, they call it.

Bill: Yeah. You see, I always get nervous with finance. I think total return swaps, all these derivatives, credit exposure, it’s always concerning to me.

Tobias: One of the short guys, Carson Block or Muddy Waters or– I realized it’s Muddy Waters, but Citron somebody else has been pointing at Evergrande is an issue for more than a decade.

Bill: Yeah.

Tobias: It’s hard to be short in this market, I guess.

Bill: Yeah.

Jake: Those timelines on the extinction events can be longer than you think.

Tobias: Yeah, indeed. The other problem is that everything is a bloody Lehman moment too. Every single thing that occurs, someone is saying this is the Lehman moment for this market. They’ve been half a dozen over the last year or so.

Bill: Yeah.

Jake: Yeah, of course.

Bill: This is why I don’t have strong opinions on it.

Jake: So, you shouldn’t read the news.

Tobias: I try not to.

Jake: Except on Tuesday morning for about 15 minutes before [crosstalk] [laughs]

Tobias: When I open Twitter to see what’s happening.

Bill: I do think that the Wall Street Journal article on China was interesting but I have a lot of questions about why we’re hearing about this now. I don’t know that I have a good answer.

Tobias: Well, ask the questions.

Bill: That’s mostly the question that I ask myself is just like, why now?

Tobias: Why we’re hearing this now?

Bill: Yeah, and who’s leaking it, and for what purpose, and what’s really going on behind the scenes? I’m much more interested in those answers than the words on the page.

Tobias: Yeah.

Bill: That’s just how I look at the news. I don’t even care about the story as much as I care about who are the sources of the story, why are they speaking out now, who’s trying to signal what? My closer–

Tobias: Epsilon theory. That’s a great question.

Bill: Yeah.

Tobias: I should think that too.

Bill: I think that’s the only thing that matters because the rest is just PR.

Tobias: What do you make of the fact that MSCI China peaked around February, everything peaked around the same time? ARK peaked, China peaked, Tesla peaked, all the tech companies kind of peaked in February.

Bill: [crosstalk] Weed stocks peaked.

Tobias: Was it weed stocks?

Bill: Yeah, I feel bad that I interviewed– did my 420 episode, but I can’t help when the weed holiday happens and when the market peaks. That’s not on me. But yeah, I think a lot of things went risk off. It’s been interesting to watch things trade recently, man. Yeah, I guess weed stocks, February 10th. Look at that. That’s interesting. It’s come out of a speculative time.

Tobias: Yeah. Well, any stock market crash that I’ve ever got back other than 1987, and probably, March 2020 has been preceded by basically a year of chopping sideways before anything happens, and then six months of terror.

Jake: Hundred million new accounts, there’s no action. This is boring now. It’s not scratching that gambler itch.

Tobias: Right.

Jake: Stuff trading sideways or choppy is not-

Tobias: It’s not fun.

Jake: -that exciting. It’s not that much fun. So, you lose interest and you go find something else to gamble on.

Tobias: You need someone to sell an NFT for $68 million and get the people excited again.

Jake: Yeah.

Bill: The thing that’s crazy though, you’re talking about– Just looking at the weeds stocks–

Jake: Go back to the lotto.

MSOS Weed ETF Drops 40%

Bill: MSOS, and I don’t know if this is a split or what, but you’re looking at– it’s off from $120 a share to $29.34.

Tobias: Which was this? What was the stock?

Bill: MSOS. It’s like the weed ETF.

Tobias: Hmm.

Bill: Now, I don’t know how real that trade was. Maybe, that’s a wrong print on Bloomberg or whatever, but it’s easily down from $40 to $29, easily. But the screen that I’m looking at has 140 bucks a share down to $40. So, I don’t know. Oh, maybe I’m looking at total return. Sorry, my bad, my bad, my bad.

Tobias: Those are big special dividend?

Bill: No, I think I’m looking at the wrong thing. Hang on.

Jake: [laughs]

Bill: Sorry. Jeez. Oh, shut up.

Working-From-Home Projections Are Way Off

Tobias: When did retail go back to work? Retail had to get back to work. I saw an interesting thing yesterday about the number of people who work from home telecommuting, that if you ask people who telecommute, they massively overestimate the number of people that work from home at the absolute peak of the pandemic, and they also overestimate how many people going out now. What would you guess for how many people working from home at the peak of the pandemic, as a proportion of the working population, and now as a proportion of the working population, how many people are still working from home? Throw your guesses in the chat and we’ll everybody know in a moment.

Jake: Ooh.

Bill: Hang on, I just want to correct the record. MSOS is off from $55 to $29. That’s a reasonable correction. That’s a lot of different things, man. A lot. That’s what I think is hard about looking at the index.

Tobias: You don’t know how to concentrate it, though. If it’s market cap weighted and the big into the one thing that’s come off a lot, then that can easily explain that.

Bill: Well, you can follow that whole sector. But I’m just talking about there’s a lot of stocks that are off big.

Jake: Bigly?

Bill: Yes, a lot. So, you want me to throw out my really dumb guess on how many people were working outside–

Tobias: At the peak. At the peak, how many were working from home? At the peak of the pandemic and now?

Bill: I don’t know. I don’t even know how to think through this. I feel like this is a trick question. I’m passing.

Tobias: It is a trick question.

Jake: This is one of those like cognitive reflection tests like a bat and a ball is a dollar to it. [laughs]

Tobias: That’s right. It depends a bit on, if you’re working from home, people who are working from home guess 70% at the peak, and down to 40% now. The number that I saw was 35% at the peak, and it’s about 13% now. So, basically, yeah, 39%, 18%, that’s a pretty good guess.

Jake: 13% right now are working from home?

Tobias: Yeah.

Jake: That’s it?

Tobias: Yeah. All of these discussions about people going back to the office and all that stuff, it’s really–

Jake: They’re already [unintelligible [00:52:36]

Tobias: Yeah. It doesn’t get it doesn’t affect most people.

Jake: Or, they’re not working at all. [laughs]

Tobias: Maybe, a little bit of both. I don’t know. They’ve got a few jobs. They’ve got a few brokerage accounts and a few jobs.

Jake: You don’t need a job if you got that brokerage account that just keeps going up.

Bill: That’s right.

Jake: That’s the new way to spread the wealth.

Tobias: It beats working.

Jake: Interesting. That’s quite low.

Tobias: What’s your sense now? What innings are we in? You’re going to say 10?

Bill: I don’t know what fucking ending we’re in. I’ve no idea. I don’t know. There’s a lot of stuff that’s really beat up. A lot. There’s a lot of stuff that’s not. But even the stuff that was ripping and stuff, I don’t know. Give me a really growth name.

Jake: Shopify.

Tobias: Shopify.

Bill: Shopify is a juggernaut. You can’t stop that.

Tobias: But it’s not a carnage right, the index is all-time highs.

Bill: Yeah, well, I think that the issue is, a lot of people think that these businesses are going to be really good for a really long time, and I guess, if you think that, I don’t know why it would change anytime in the near future. Other than it changes.

Jake: They do have a good five years’ worth of conditioning of the S&P 5, just carrying the weight in a major way, and the S&P 495 not really doing anything that’s special. So, there’s a lot of conditioning in that right now.

Bill: There’s a balance between valuations imply Mauboussin concept of competitive advantage period. The higher the valuations go, the more that you’re implying the competitive advantage period, it has to sustain. So, to me with these valuations, [crosstalk] Yeah, well, it just doesn’t make a lot of sense that would change tomorrow, but it also can. People are fickle but I don’t know why it would stop.

Jake: I would question to [crosstalk] so much of it is based on advertising. Selling eyeballs is a huge part of the market cap.

Bill: Yeah. But a lot of it though is subscription businesses, and enterprise software, and stuff like that. I don’t know. We’re probably early innings, because I’m getting tired of the innings question. That’s how contrarian my answer is.

Tobias: Yeah.

Jake: Oh, yeah. Second inning. [laughs]

Tobias: Possible. Is it the flows that keep the index so strong, or is it that five?

Bill: Well, it’s those five but they get a disproportionate amount of the flows. I don’t know how the chicken or the egg works on that thing. I’m not smart enough to figure out these questions.

Tobias: What about the Fed? How much of that is Fed printing? Got to be something, right?

Bill: Oh, it’s all Fed. It’s all Fed.

Tobias: There’s a lot of Fed printing going on there that the numbers that like it was you, JT, you said the balance sheet, the Fed balance sheets up 140% of the last four months?

Jake: I think from September of 2019, I think I saw that the Fed balance sheets 140% higher today.

Tobias: I don’t know where– the stock market maybe is a slightly different base, but would you see that in housing prices? Would you see that in real estate?

Insane Housing Market

Bill: Well, I think housing, you got rates plus there’s just no supply. We don’t have enough houses.

Tobias: It was all pretty flat until pre-March 2020, and it just seems to have ramped since then.

Bill: February 2020, it broke out. You’ve got to listen to my pod with Logan.

Tobias: What happened?

Bill: Oh, it’s a humongous demographic thing that he’s been talking about coming through– The demographics through 2024, just incredible. I think that the story that people told themselves is, millennials don’t want to live in houses, and what they didn’t realize is millennials just don’t want kids till they’re 30, because they’re probably going to live till 85. So, they’re going to live in a city and romp around with each other for a little bit longer. But women have to have kids by 35 to 40. There’s only so much you can do to keep that off, and that’s where the millennial age curve is coming up. So, once you have babies, living in a city sucks. Some of you may want to do it, but yeah.

Tobias: They realize that the window was closing and they’ve all tried to get through the window at the same time?

Bill: Well, they’re starting to get through the window. I think his argument would be we could have four more years. I think Logan’s most bearish assessment of housing from a healthy versus unhealthy market perspective is that prices just absolutely rip from here.

Jake: In housing?

Bill: Yeah. He calls that unhealthy because then you have people that are truly priced out and left behind. He doesn’t view that as a healthy market.

Tobias: House prices where I have looked at about 20% year on year which is a 100% increase in deposit. Sorry, that’s not right. It’s a big move up.

Bill: Yeah. No, it’s huge. My mom’s out in Arizona, she’s saying that they’re offering 10% over asking cash and you can’t get the house.

Tobias: Yeah, I heard that from one guy two times, a real estate agent, who coaches my daughter’s soccer team. He had two houses go 300, 400 over the ask.

Bill: [crosstalk] You’ve got to look at housing inventory days. They’re insanely tight. Does it always happen? I don’t know.

Jake: This is your inflation you’ve been looking for. Because it’s the same house that it was two years ago. It’s the same roof over your head. But now, you pay 20%, 100% more in property taxes. You pay 100% more because I have to insure a million dollars for this piece of property that was $400,000 five years ago. There’s no actual gain there for you if you’re going to have to go buy another house that’s just as expensive.

Bill: Yeah, I think the real question then becomes does this create an incentive for builders to build more?

Jake: Hope so.

Bill: Yeah. I don’t know. That’s you would think capitalism might solve it, but if they don’t, we could live in a perpetual shortage for a while.

Tobias: On that note, that’s time, fellas. Thanks, everybody.

Bill: Cheers.

Jake: [crosstalk] everyone.

Tobias: See you next week.

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