Late Innings Complacency

In their recent episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle discussed Late Innings Complacency. Here’s an excerpt from the episode:

Jake: Sure. Like I said at the intro, sometimes, there’s a lot of sometimes people complaining that I don’t share personal things, whatever. [laughs] So, this weekend, both of my boys are pretty heavy into sports and we’re in the middle of the soccer and fall baseball season. On Saturday, we played– So, I coached my older son’s– I’m one of the coaches one of the older son’s baseball team, which is amazing by the way. I get to spend so much quality time with him about something that he cares about, and I enjoy it as well. So, really, it’s a true blessing to be able to do it. But we had a double hit–

We’re in a tournament. Just to set a little bit of a context, our team is a neighborhood team that was taken out of Little League, because we like the families, and we like all the people and the kids and then we’ve just– basically, it’s sort of invite only just this little group that is our team. But we play in tournaments, and it’s a “travel ball” situation” very competitive, where we play teams that are like academies and tryout teams where they’ll just take a 100-mile radius and take the 12 largest 13-year-olds, and these are kids who hit puberty two years ago, and they’re 6’2″, 210, strapping young men already and we’ve got all these little kids still, basically. Yeah, that’s the competitive world that is travel baseball.

Anyway, we are in a tournament this weekend and Saturday, we ended up winning both games and getting a pretty good seeding, which I was pleasantly surprised with. So, we show up Sunday, and it’s in the fourth inning, and our starting pitcher’s cruising, and we’re up like five to one, and then six to two into the fifth inning. We’re playing pretty good baseball. We could tell the boys started to relax a little bit like, “Oh, we’ve already got this one. We’re looking to the next game already.” And the baseball Gods do not smile kindly upon that kind of disrespect. We end up losing the game 10 to 6.

Tobias: Oh.

Jake: It was just a brutal loss, and it was a lot of mental mistakes. Little things like not knowing where the play is going to be. So, that’s a huge part of baseball. Baseball is a little bit like war in that it is like hours of boredom followed by little moments of panic. You could sit out in right field for three innings and not have a ball come within 200 yards of you. Then, the ball could get hit to you all of a sudden, and you’ve got to know exactly what you’re going to be doing. So, you have to stay mentally locked in on every single pitch. But when you get up and you are kind of cruising, that’s where you left off a little bit as mentally. So, we had guys overthrown the cutoff guy on a hit, and then the guy gets an extra bass and now double plays on an order. It’s a million little things that break down and turn into that kind of loss. Just real painful as a coach and as a dad to watch the meltdown and not be able to really do anything to stop it.

Anyway, where this comes in from an investment standpoint, is I think there’s a lot of people who are up 6 to 2 in the investment game right now, and whatever inning it is, they might have turned off a little bit of some of the little things that they should be doing to keep their head in the game, and they feel they’ve already got this one won, and they’re sort of looking to the next game, and salting it away here. I would just caution that you can’t ever really lead up in that way and that you have to keep your– The next ball might be getting hit at you at any time. If you don’t preplan on what you’re going to do when that happens, where you’re going to throw the ball depending on where it’s hit, all of these little things that we’ve talked about before about having a Ulysses contract with yourself as far as you know if something gets to a certain price, I want to buy it or I’ll sell it at this price. I know that selling is a taboo word now, but–

Tobias: That’s where he went wrong

Jake: That’s where he went wrong.

Tobias: -selling at that price.

Jake: Selling it at an unreasonably high price is the worst thing you could ever imagine. But anyway, I think the translation to me is like, “Boy, if you get complacent, the baseball Gods and probably, the market and business Gods will remind you that you’re miss stepping there.”

Tobias: The baseball Gods and the market Gods know each other pretty well.

Jake: They’re homies for sure.

Tobias: They’re looking for reasons to punish you for complacency.

Jake: Yeah, and they’re looking to add some humility to your life.

Bill: This reminds me a lot of my segment last week.

Jake: It does. That’s what I [crosstalk] tied it together.

Bill: It’s like what I was saying a little bit with how I messed up. I think I got a little lax on some stuff.

Jake: Sure. So, our underwriting of risks can become lax, our underwriting of expected growth, or multiple, or exit multiple can start to get lax, and you could talk yourself into some stuff. That’s just the way that this works.

Bill: Adjusted EBITDA exit multiples, those are best.

Jake: [laughs] They’re always high.

Bill: Yeah, good account.

Tobias: You also have the problem where, at the start of a cycle, whatever the cycle might be– we’ve had a pretty good run to tech from 2015 to date. At the start of that cycle, I ran back the other day and had a look at Microsoft in 2000 and I might be a little bit wrong on the data. I can’t remember it was 5 year or 10 years. So, let’s say 10 years ago. 10 years ago, you bought it on like it was a nine times free cash flow multiple. So, it’s like an 11% free cash flow yield, and then run it forward 10 years, and the earnings have done really well, and that stock has done even better because the multiple has expanded five or six times over that 10-year period.

But if the dopamine receptors are getting pleasure from finding those kinds of opportunities where it’s going to be high rates of revenue growth, high rates of earning, lots of free cash flow, reinvestment at a higher rate, and it just gets– Every time you buy it, it just goes up. That’s how you get a little bit complacent. The same thing happened to me in a value context, probably 2015, as I talk about every single month, I guess where Jake pointed out that the spread was very, very tight, and that would have probably been a good time to go and buy some of those techier stocks and didn’t do that. Stuck in the in the in the dogshit deep value.

Jake: We’re all just learning, Toby. It’s okay.

Tobias: [laughs]

Jake: [crosstalk] What is the next one?

Tobias: Had enough lessons. It never ends.

Jake: It never ends.

Bill: The lesson can go on for much longer than you want it to, sir.

Tobias: It’s true.

Jake: Try not to relearn them. That’s the ticket.

Tobias: I would be happy just to do that. Not to relearn the same lesson over and over again. Haven’t figured out how to achieve that yet, but at some point, some maturity maybe. Have you come up with anything, BB? I’ve got– [crosstalk]

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