VALUE: After Hours (S03 E37): $ATUS; Did I Miss The Turn In Value?; The Ten-Year Spikes; Fingerprint Bias

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

  • $ATUS Share Price Drops Almost 50% YTD
  • Fingerprinting & Bias Blind Spot In Investing
  • Did We Miss The Turn In Value?
  • Averaging Down As An Investment Strategy
  • Estimate, Talk, Estimate Your Investment Decisions
  • What Minimum Locked-In Return Would You Take For The Next 10 Years?
  • 10-Year Spiking
  • Record Number Of Supply Ships Off The Californian Coast
  • Pick One Tech Company
  • U.S Debt Ceiling
  • Alternative Measures Of Inflation
  • The Problem With Goldminers & Commodities
  • David Einhorn’s Portfolio
  • Good Businesses Throw Up One Easy Decision After Another
  • Bearish Harami Analysis

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: Here we go.

Bill: I hate my Zoom persona.

Tobias: This meeting is being live streamed. Got it. What’s up, folks? 10:30 AM on the West Coast, [crosstalk] PM East Coast. This is Value: After Hours. Bill Brewster and Jake Taylor, and we’ve got a list of things. There’s finally some action in the markets. We’re all action junkies. There’s stuff happening. What’s happening, fellas?

Bill: Stuff. Lots of it. How about you?

Tobias: I’ve got lots of things to talk about.

Tobias: 10-year spiking.

Bill: What did you say?

Jake: Blood in the streets.

Bill: Oh.

Tobias: I would say that the amount of blood in the streets is the amount of blood that my kids show me when they want a band aid. I don’t think it even broke the skin. That’s not even a scratch.”

Bill: There’s was a lot of things that are down. I’ve been saying this for a while.


Bill: The thing is, a lot of the big stuff isn’t but FinTwit favorite, Fastly, is off from $128 to $40. I’d call that down.

Tobias: Yep, that’s down. I looked it up, the definition. $128 to $40 is down.

Bill: All right. Other FinTwit favorite, Zoom, off the highs of $580 now touching $260.

Jake: All right. The big stocks are always the last one to know that they’re in a correction.

Bill: Yeah, maybe. I’d like to see the advanced decline line if any of the fans like to monitor stuff like that. I’d like some market internal stuff to pop up in my feed.

Tobias: What does that tell you, the number that are advancing versus the number that are declining? Is that what it look like– Two things, what is the measure of and then what does the measure mean?

Bill: I have no idea at all.

Jake: [laughs]

Bill: But I suspect that new highs on declining breath is not exactly what you’re looking for if you’re looking for a healthy market.

Bearish Harami Analysis

Tobias: Is that a bearish harami?

Bill: No, dude. I’ve got to look up my technicals book for a bearish harami.

Tobias: I thought I completely made that up. I thought it was like shawarma or falafel. It was something that you got–

Bill: What? Bearish harami, that’s a real thing, man.

Tobias: Yeah, I didn’t know. I thought I’d made it up and then-

Bill: Oh, come on.

Tobias: -I sort of what–

Bill: You knew it’s a real thing.

Tobias: I heard the word. I just didn’t know what it was. I was just saying it to because I thought was a funny name.

Bill: You know it because you studied bullish haramis.

Tobias: [laughs] [crosstalk]

Bill: That’s a harami bro. Hang out and you see that in the box.

Tobias: What’s that in?

Bill: It’s you closing inside of a big day, and then you gap down, and then you close in the middle, and then I guess the world falls apart, obviously, duh.

Tobias: What were the really bad things? The death cross was the really bad thing? Remember the death cross?

Jake: [crosstalk]

Tobias: [crosstalk] Yeah.

Bill: Bearish harami seems to [crosstalk] bad. It doesn’t sound like a good thing. Probably has to be confirmed by a close below the low of the day before. I bet that’s how bearish harami is confirmed. Preferably on high volume, folks. You’re welcome.

Tobias: Is it Harambe’s anniversary?

Bill: It’s not a monkey’s cousin. Didn’t Harambe kill a kid or something, or what do he do?

Tobias: Harambe rescued that kid, mate. Check the tape.

Bill: I’m just saying, fake news.

10-Year Spiking

Tobias: I think it’s appropriate to use moving averages and all that sort of stuff on the 10-year. I’m just saying that the 10-year spiked up and it’s run over the 100 day and the 200 day, which just made it’s up. It went bananas last week. It’s up by 1.5. Nothing really happens until it gets over 2– I don’t know why 2 is the threshold. Do you guys know what the significance of 2 is?

Bill: It’s higher than 1.9.

Tobias: Yeah, round number.

Jake: Math checks out.

Bill: Yeah. Come here for the hard-hitting analysis, folks.

Jake: [laughs] Yeah,

Tobias: John Authers, Bloomberg columnist, had this nice piece up this morning saying that it’s the longest trend in finance. It starts in 1980 at 16%, the 10-year and it got down to 0.6% sometime last year in the depths or maybe it was even lower than that, I can’t remember. Now, it’s run up a little bit. It’s running up quite a lot.

Bill: It could be breaking out through a downtrend. That’s possible.

Tobias: I think it’s going to get to 2 to break out. I think that might be the significance.

Bill: It depends on where you draw your lines.

Tobias: Yeah.

Bill: I think we’re bumping up against some resistance for sure. This is exciting stuff, man. This is what makes fundamental analysis worth doing.

Tobias: Well, I wanted to talk about last– Well, it’s a discount. It’s important. It’s one of the things you need to look at and the thing that kept it suppressed probably there’s been no inflation that we can measure anywhere. The emphasis being on the ‘we can measure anywhere’. But now [crosstalk]

Bill: Thanks to Jerome Powell.

Jake: That we can or that we want to measure anywhere.

Tobias: Yeah, we just can’t see it. We’re unable to find it.

Jake: We are looking very hard, but we didn’t find it.

Tobias: We’re excluding all the things that going– [crosstalk]

Bill: Transitory.

Tobias: That’s how we were– [crosstalk]

Bill: It’s transitory. Jeez, God.

Jake: It reminds me of one of my favorite little pieces. It’s in Spaceballs when they’re out there combing the desert, [laughs] he’s got to pick and he’s out there moving the sand around, “We’ve found shit.” [laughs]

Tobias: Underrated movie. I watched it about hundred times when I was a kid.

Jake: So good.

Tobias: What topics have you guys got? I got a Research Affiliates bit, but what are you guys doing?

Bill: Why I’m not clean shaven, how minivan alfa adds, and how technical analysis plays into minivan alpha. More importantly, what it’s like to hold the Altice as it blows up.

Jake: Okay, sounds strong. I’m good. I have a little piece that I teased a couple weeks ago about fingerprinting analysis that might be interesting.

Tobias: Fingerpainting?

Jake: Printing, not painting.

Tobias: That’s going to follow right around from the technical analysis discussion.

Jake: Yeah, that’s fingerpainting. [laughs]

Bill: I’m not actually talking technicals. The technicals on Altice suck on high volume, by the way. But I do think it’s an interesting conversation. You guys cool if I lead off?

Tobias: Go nuts.

Jake: Take it.

$ATUS Share Price Drops Almost 50% YTD

Bill: All right. So, Altice showing people why hedge fund hotels and leverage is probably not a great combination. It has had an interesting path. My infatuation with the idea came from the idea that I’ve historically done pretty well with cable assets and think I understand the industry relatively well. Altice is a company that is not known for its customer service, is not known for employee morale being particularly high, is not known for cutting prices to its customers.

Tobias: Is it the cable company we’re were talking about here?

Bill: Yeah. Well, look, I think that there’s a reasonable argument to be made that Comcast and Charter actually have changed the way that they approach the market. Maybe that’s a stupid comment that’s driven by endowment bias, but I’m not sure that the AT&T and Verizon Fios subscribers are super happy with their service either.

Tobias: No. I got Cox in, they’re just as bad as everybody else. The price is going up 2x, cool. You’ve got no one else, you can go Altice. I know it’s cool. I just let you know.

Jake: Yeah. I didn’t really ask if it was cool. [laughs]

Bill: Here’s a good thing with Altice. They have this rack rate, and I guess that people that are paying the rack rate or people that don’t call, and they don’t call for 10 years, so these are people that are just paying their bill and haven’t [crosstalk]

Jake: The grandma.

Bill: Yeah, and how are they rewarded for not churning and not calling constantly? Altice fucks them as hard as humanly possible. I think that as a general like– What has cracked the story is, they have gone to negative sub declines this year. They’re going to say if you look at 2019 on a two-year stack basis, our growth is still there. 2020 pulled forward some demand. We haven’t quite had the same mover churn that we normally have. I think reality is competition has gotten somewhat tougher in some of the markets, and they’re now losing incrementally to Fios. They have the thing that got me excited, well, not excited about the idea. The reason the idea was palatable to me is they have a footprint called Suddenlink. Suddenlink is in a lot of the Sun Belt, and it competes against some legacy assets that I don’t think are very strong to compete against.

Altice has always, if you’ve done the research on them, they’ve been pretty– At least the company line has been that they’re going to invest in fiber. The math of it all worked, I think still probably does work. I think a really good podcast to listen to if you’re interested is Kyler Hasson and Andrew Walker did a podcast on Altice. If you listen to a podcast, it is a bull pitch for a stock, and it takes about 55 minutes to get to one thing nice about the company. So, this is a real value investment. Oh, it’s hairy, and it’s priced in, and it justifies the spread to the good competitors. I think that may not prove to be incorrect– but my cost basis was 33. I think it’s now a teenager. Last I checked, it was at 19.98. There are now concerns that management is going to take the company under almost all of the analysts on the street say, this thing’s too cheap, but who knows if management’s going to screw you as a minority shareholder.

In the Goldman Sachs conference that tanked the entire stock, the CEO said, “We may re-lever the balance sheet. We’re going to invest for a couple quarters, and then we’re going to revisit.” The Goldman analyst said, “You’re already four and a half to five times levered–” I think he said five times your targets four and a half to five. “You said re-lever. Are you talking about taking the company private?” And the CEO, Dexter, said, “Yes, that was the code that I was talking about.” So, I think that people that I have seen dunking on the idea are probably too confident that the story has played out.

If it does get taken private somewhere around $30, I think that it would behoove people to remember that this is a game of bet some of which lose, and if your downside on a bet is somewhere between 10% and 20%. Maybe that’s not such a bad outcome. But I personally sold on Friday, because I think that the really, really hard thing to figure out in a name, this is a company– people don’t like when you call it a name, but at this point, it’s just a fricking stock trading on paper. It’s not really a company at this point. The reason that I say that is now you almost have to handicap not what do I think the business can do, it’s what do I think management will do to me before the business does what I think it will do. That puts an artificial duration stoppage on a bet in my mind, and ironically, the lower the stock goes, the higher the probability that you get screwed is, which is not your typical outcome.

Whereas in theory, the lower it goes, the better it is. Here’s a very real example of that’s not the case. Well, that’s potentially not the case. Whether or not the game theory makes sense to take it private, people can debate that, but it’s been an absolute disaster. It was driven by evaluation-first thinking and I think I probably ran past at least three yellow flags. So, why did I do it? Probably because I think good assets are a little bit rich. Was that a smart decision? Not even close.

Averaging Down As An Investment Strategy

Jake: There is an interesting game theory that plays out in this take-under situation, where you almost have a big pot committed where you have to keep averaging down your price so that when the buyout does come you’re at least like– it will typically be over at least what the market price had recently been at. So, you almost hedge your bets by getting more and more pot committed into it. It’s a very dangerous and weird game theory playing out there sometimes.

Bill: My strategy has been to do exactly the opposite. [crosstalk] Yeah, and the reason– and I’m not folding permanently at all. I will watch this thing like a hawk because I still believe that if they commit to the long term, and we’ll just see, but I do think the stock is too cheap. I also think it is arguably untouchable right now. But I’ve seen too many people blow up by buying down into positions that they think are getting cheaper and cheaper to do that to myself. I’d rather just– the bet was laid and I’m either going to mismanage the bet or let it play out as it was.

Jake: Yeah, John Hempton has a nice checklist on averaging down that’s interesting. It might be worth checking out if you’re so inclined.

Bill: Yeah, the man The Science of Hitting wrote about not too long ago in his Substack, and Alex and I talk a lot, and I think he’s right. Between what Hempton has said and what Bill Miller is said, which, I don’t remember the letter that Bill Miller said it. But he said that his firm did a study on where they’ve gone wrong, and I’m almost certain it was him. If it wasn’t, I’m sorry, Bill. I know you listen and I know you are super big fan, the feeling’s mutual. I’ve got mad love for you. But they said that they’ve gotten themselves in the most trouble when they think that the stock has declined too far relative to the business expectations, and that in almost every case, it has been a better decision for them to just exit.

Tobias: What’s the main issue for them? They’ve got Fios coming and their DSL twisted pair coax or something like that, and they can’t overbill Fios without spending a whole heap of money?

Bill: Well, no, I think that their main issues is they have a shit shareholder base. If you’re looking at quality shareholder basis, it’s not a quality shareholder basis defined by Lawrence Cunningham.

Tobias: What’s the [crosstalk] in this instance?

Bill: Well, everybody’s addicted to the buyback, because everybody thinks it’s too cheap based on current free cash flow. Well, the cash flow exists arguably, maybe not true, but arguably, because they push price too far, and they’ve cut costs too deeply. They’ve now arguably cut to the bone, and you’ve got to potentially shrink your margins while investing in a Capex cycle, and if you have a bunch of hedge funds that sell because all of a sudden, the story changed, and you might take it under, your shareholder base matters a ton. Because then all of a sudden, you’re not making a business but you’re making a stock bet in my opinion.

Tobias: Good comment here from Arthur Watkins, Charter filed for bankruptcy when it was overlevered and going through its DOCSIS 3.0 Capex cycle.

Bill: It’s a different situation.

Tobias: What’s the difference?

Jake: Altice is like– if somebody informed wants to tell me that this is a legitimate bankruptcy risk, I’m happy to listen to how but I don’t think that’s the issue. Charter was way more levered, and Altice bonds are not trading in a way that indicate bankruptcy risk is on the table to me, nor do I actually think it is.

Tobias: What do you think the take-under happens at 30 bucks?

Bill: I don’t know, man. The lower the stock goes, the lower the take-under. That’s the problem. If the shareholders turn over, you need a vote from the shareholders. If the new shareholders bought at $20, what do they care about the people that bought at $33, or $35, or $40 or any of this?

Tobias: Are there any big minority shareholders or are there any smart minority shareholders?

Bill: Well, the guy that controls it controls it. So, yeah, you’re in a bad situation, potentially. Now, how bad is it? I don’t know all find out together. But I can tell you that the ride has not been particularly fun, regardless of the outcome.

Jake: Stay tuned.

Bill: Yeah. I don’t think there’s a bankruptcy story. I think if somebody has done a lot of work and wants to have that conversation, I’m happy to have it. But I don’t think that’s an informed comment. No offense to the people that listens– [crosstalk]

Tobias: He was asking a question.

Bill: Yeah.

Tobias: I might read it in a different way.

Bill: Yeah, no, I think we’ll see. It just sucks, because everything that they said, I actually agree with, like going out and investing in your southern link footprint. Even if they went out and they paid people more, and they got employee morale up, and they even gave people a little bit of a consumer benefit by not raping them on the rack rates, all of that, I would argue, improves terminal value if you’re truly driving the business in the right way.

But your terminal value might come in six months or nine months, and I think management has every single incentive to potentially sandbag all of the communications until then, and that sucks. That goes to, do you believe these are good people, and can you do a good deal with people with bad incentives? So, it’s been an interesting learning experience, probably one of the most valuable ones that I’ve had over the last three years. Absolutely terrible, but I think I will probably remember this one much more than any other one other than my beloved Qurate.

Bill: You’re updating your checklist with all these newfound items that you’re learning?

Bill: I don’t know, man. Go into the Journalytic– look, it’s unclear to me that the bet was bad. I think that [unintelligible 00:19:51] Capital has asked me a question on ideas like this where he has said that he doesn’t like these kinds of bets, because even if the best is not bad, there’s a potential to mismanage the bet. There’s a real possibility that I mismanage the bet as opposed to the bet being bad. So, it’s like what’s– Yes, thus far, it’s been a complete disaster. There’s no hiding from that. So, we’ll see how it all turns out.

Good Businesses Throw Up One Easy Decision After Another

Jake: It’s like how Buffett and Munger have observed that a good business just keeps throwing off easy decisions, and bad businesses throw off hard decisions internally to the business for management. Maybe, there’s a similar corollary for investments where the good businesses, the good investments throw off more and more easier investment decisions, like, “Oh, should I trim this huge winner?” or I don’t know, maybe that’s easier than like, “God, do I keep plowing money into this to lower my cost basis, so my take-under doesn’t get worse?” [chuckles]

Bill: Yeah. I think the good investments, like the truly good ones– One of the reasons that I rotated into Altice, because I thought Charter was a little bit rich. I thought Altice offered relatively better IRR or whatever. That was really, really– At least in the interim, very, very stupid and I guarantee you, harder to manage. If you listen to Charter talk, those guys or operators fundamentally. Read any of their calls, read Winfrey talk about that business. It’s amazing. It’s exactly what you’d want to hear. The Altice guys don’t do that for me, but somehow the multiple got me all hot and bothered, because I have this disease. I apparently am attracted to businesses that shouldn’t be public. That’s what I’ve learned pretty recently, which is not very rewarding.

Jake: Is this like the strippers of the investment world. [laughs]

Bill: Yeah. I just kind of lost trying to put some kids through college.

Jake: You just can’t say no. [laughs]

Bill: I digress.

Tobias: On that note, JT, you want to do your–

Jake: Yeah, we could do some veggies.

Bill: Anyway, I hope that was helpful to people. Good to talk about getting the shit kicked out of you occasionally.

Fingerprinting & Bias Blind Spot In Investing

Jake: Yeah. It’s good to rub your nose in it. So, fingerprinting, which may seem a little odd to start out with, but let’s open the scene on a commuter train in Madrid, 2004, and all these explosions go off from a series of bombs that were planted. 192 people killed, 2,000 injured. Some fingerprints are found on a plastic bag at the crime scene, sent to Interpol. The FBI lab jumps into high gear, starts processing it. They find conclusively that the fingerprints belong to this guy named Brandon Mayfield. He’s a former officer in the army. He married an Egyptian wife and converted to Islam, and now he’s a lawyer that represents men who have been charged with attempting to travel to Afghanistan to join the Taliban.

FBI, they sit on– He’s been on the FBI watchlist for a while already. They bug his house, they tap his phones. They eventually arrest him, and they hold him for two weeks trying to figure out if it was him, but he’s never formally charged and they eventually let him go. During that two weeks that he was held, it turns out that the Spanish investigators find a matching print to another suspect that they have. So, how did the FBI arrest a guy that was living in Oregon, hadn’t left the country in a decade, for having matching fingerprints on bomb materials found in Madrid? Well–

Tobias: Can I have a guess? It’s his twin. It’s an identical twin.

Jake: [laughs] Yeah.

Tobias: He posted a bag. He posted something in the bag. I don’t know.

Jake: I wish that it was that much intrigue to it. This is more actually just purely human error.

Tobias: They mix it up in the lab?

Jake: No, not quite. But let’s rewind a little bit and go back to some of the history of fingerprinting, which as an identification technique was really formalized in the late 19th century by the Scottish physician named Henry Faulds. So, a little bit of terminology here. When they find fingerprints, they’re called latent fingerprints. They’re left at the scene, and oftentimes, they’re overlapping, they’re smudge, they’re only partial. So, there’s actually a fair amount of subjectivity to this exercise. Although when we think about it, we think, “Oh, God, this is hard science. We’re matching fingerprints. There’s never any mistakes here.”

Then when they actually collect fingerprints in a controlled setting, whether it’s ink or let’s say, you clear customs and you put your hand on the little scanner, those are called exemplar prints. So, they match the exemplar prints with latent prints to see, is this a definitive match and an identification? Is it a potential, or can we rule this out? Is it inconclusive, or is it definitely not that? It seems invaluable, and especially when we compare it to eyewitness testimony, which is the notoriously terrible.

So, this neuroscientist named [unintelligible [00:25:39] I think is how it’s pronounced. He wondered if there might be some noise in these judgments, because latent prints are, there’s some subjectivity to it. What he did was these fingerprint experts agreed to at some point in time in the next five years, be fed prints that they had already at one point identified to see do they even match with their own predictions of whether this is accurate or not, which is a good way to tell if there’s noise in a system as you get a second reading on this using the same person.

But he added a twist, and some of the people were given some information about this second set of prints like, “Suspect has an alibi,” or, “Maybe detectives believe that this person is guilty,” or, “This person confessed to the crime already.” So, they’re given some confirmation one way or the other at the beginning of the process, and it turns out that it hugely altered their decisions. The first study found that like four and five altered their decision based on this nudge from some initial confirmatory data. A second study found that 4 in 24 decisions were overturned, like basically contradicted. One in six is not a hard science necessarily as much as I think maybe we all believe that it is.

What’s going on there, and this is probably deserves its own veggie segment at some point, but there’s this predictive processing that happens in the brain where from the top down, you have a model of what you’re expecting to see, and the bottom up is your senses feeding up this information in the form of electrical signals, and those two things are being matched in a neural network that is your brain and then figuring out like, “Is there surprise or not? Does this model have what I think it’s going to be matched with what I’m being fed?” What ends up happening is that the examiners literally don’t see these little nuances in the latent prints, because the top down is not looking for them, because the top-down part of the brain that is filtering the model is already looking for the answer that it’s expecting. So, this is how confirmation messes with our actual– what we view of our sensory input.

In the Mayfield case, there were three experts who got this wrong. The first one who looked at it was really impressed by the power of the automated system that found correlations with his print and the latent print that was taken in Spain. So, there’s the first little red flag for us, is that computer systems if we believe in them too much might throw us off and make us to close our minds a little bit. The second person who looked at it knew the first person found it to be a match it was like a very well-respected supervisor. They were much less likely to come in and say, “No, this guy is wrong,” because it’s like their boss practically. Then, a third independent person was looking at it and was also given that it was confirmed and was just verifying it. So, you had three experts who all had too much information at the beginning of their assessment basically.

Now, lest you think that they don’t understand this, they do understand this, but we have a blind spot bias. So, 71% of the forensic experts agree that bias is a potential concern in their jobs. 26% of them believe their own judgment could be potentially influenced. So, we always think it’s everyone else. It’s not us. We’re the ones who are not biased by this stuff. So, really, what’s important is that the sequencing of information actually can have a huge impact on the premature intuitions that we can draw from that information. In the science, they call it linear sequential unmasking, so only showing data to someone when it’s the right time. If you have too much information before you actually go do your own work on it, that can totally mess up and bias how you interpret the data.

If you really want to have truly the wisdom of the crowds emerge and have a group work on a project and try to come up with the right decision, you have to be very careful about the order of information that those people receive. The second person really should not know what the first person found to be true because it will wildly impact how they will interpret the actual new data that they’re looking at.

Jake: You think about this in the investment context, if you work on in groups on investment ideas, and you start out with anything more than just the ticker name basically and you have someone gives you their pitch, their version of it, you are almost already compromised similar to how fingerprint, which I would say has much less smudge to it than the investment process potentially, and much less potential for noise to creep in. I think you have to be very, very careful about the sequential information that is delivered to you and when you actually do your own work and then compare notes with other people.

Yeah, that’s trying to take something from hard science a little bit of fingerprinting and showing that we have to be very careful how we structure our investment processes.

Tobias: This automated system, does it scan the fingerprint–

Jake: Against the database.

Tobias: Does somebody have to enter the fingerprint in by saying, “Here’s a whorl, here’s a whirl,” or whatever it is his whatever the other thing is?

Jake: Well I guess I don’t really know but I would imagine that it’s just like, “Here’s a picture of the fingerprint we got off the plastic bag, run it against the FBI database of known potential matches and then show me the ones who have the highest correlations,” or whatever.

Tobias: Because it’s potentially– if it’s a computer looking at it and a computer making its own decisions about what’s important and then comparing it to another, I would have thought that’s reasonably unbiased but if you have somebody entering it and they have to go and manually kind of identify all of the identifying features–

Jake: Like match these points kind of–

Tobias: Yeah. Then you have two that’d just be entered in randomly get the same answer or–

Jake: I don’t know of the exact procedure of how the computer works.

Tobias: Yeah, but you’re certainly biased by hearing this has been confirmed twice. We just need you to [crosstalk]

Jake: Yeah, just check this out, and you’re the independent third-party assessment.

Tobias: Yes, one of the biggest problems in investing. As soon as you hear somebody else’s pitch, it’s very hard. You get told a company is a great company all the time, very hard to go and look at that and say– It’s why I like spending a lot of time looking at what the shorts are doing because I think the shorts, at least they’re skeptical. They’ve got their own biases. There’s no question they have their own problems, but at least it’s a different perspective.

Jake: Yeah, that’s true.

Bill: I don’t know.

Tobias: [laughs] You don’t know? All right. Proceed.

Bill: I don’t know that I buy that shorts are less skeptic. I don’t know, less bias. [crosstalk]

Tobias: They are looking at it from different perspective. They can be biased [crosstalk]

Bill: I guess, man. I’ve read short reports that I think are garbage.

Tobias: Yes.

Bill: [crosstalk]. Yeah. I guess it depends who. [crosstalk]

Tobias: If you had a team of analysts and you have identified this idea, you guys go and tell me why it’s a good idea. You guys go tell me why it’s a bad idea.

Jake: Yeah, red team. They call that.

Tobias: Your confirmation bias is to find the bad stuff.

Bill: Yeah.

Tobias: That’s what helpful.

Bill: Yeah, I’ll buy that.

Jake: But even then, you have to be very careful about how much information each person has before starting their independent assessment.

Bill: Here’s my beef. Fundamentally, I just don’t really believe that you should do work in a vacuum. At my core, I don’t think anybody that’s great has sat behind a desk, not talked to anybody, and figured stuff out. Whether it’s Buffett going to Geico, I don’t think Buffett goes to Geico if it’s not for Graham. If it’s Buffett hiring investigators to go out and find things out about people, I don’t think that I believe in doing things alone.

Jake: No, it doesn’t have to be alone.

Bill: I know. The source of the information, how you find it, theoretically, I should start to A and go to Z, and only read 10-Ks, and peel back the onion in a way. I just don’t know that I buy it. That’s fine.

Estimate, Talk, Estimate Your Investment Decisions

Jake: Kahneman would say or would probably describe this proceed– he calls it estimate talk estimate. What you do is, you on your own without– you haven’t talked to anybody like– let’s say we have a group of people who were trying to make a decision on something. You go make your own independent assessments, you write it up, and then everyone shares later after they’ve done their own work, you talk through it, talk through the points. Hopefully, some of you reveal– you get some outside view which is the important part that we’re trying to control for. But you don’t get your outside view before you have your own inside view first. So, you talk and then you make another estimate. Now, that you’ve incorporated the outside view, you’ve heard some of the other arguments, you make another estimate, and then actually blend of everyone’s estimates at that point, you can get a pretty reasonable wisdom of the crowd start to emerge.

Bill: Yeah, I guess I agree with that, because of Greenblatt’s little thing that he says too.

Tobias: You also have the problem that often, financial statements are just hard to interpret, and you need someone– there’s a weird thing and you can go to the CFO, what’s this mean? Go to somebody external, what’s this mean? It’s hard. It’s just hard to figure everything out by yourself.

Bill: Yeah, I just think there’s so many experts out there that actually have information that, I don’t know, not talking to them seems really foolish.

Jake: Yeah, I’m not. I don’t think anyone’s saying don’t seek outside views.

Bill: No, I understand. You’re saying form your own view, then go talk to people, then up your view, then go talk to people, then up your view, then go talk. I get it. I just don’t know how–

Jake: I don’t get the sense that that’s how people typically do it though. I think people pitch each other, and get biased, and then you go look like– well, are the few things that they said seem to be true, you go look for the data support that and like, “Well, lo and behold, you found it.”

Bill: Yeah. I guess I would say that I think it’s more accurate to say, if somebody is selling a newsletter or holds anything in their portfolio in size, they’re likely biased, so heavily discount what they have to say. But I don’t I don’t know that I agree– It doesn’t matter. I’m no good at this anyway. I’m just some fucking guy on a podcast. I just don’t know that I agree with it. I’m probably theoretically imperfect. I don’t think that without talking to people, I’ve come to very accurate conclusions almost ever.

Jake: That’s fair.

Bill: Even at the bank, we hire– I do think this is why experts have information to sell to people because I think that they’re much, much better than a generalist at assessing a situation on average within a sector. But then I think generalists are probably better at a cross-sector analysis and seeing all of the opportunities.

Tobias: Shall we move on?

Bill: Sure.

Jake: Let’s get some RA confirmation bias.

Did We Miss The Turn In Value?

Tobias: Research Affiliates joined the long line of AQR and GMO coming out with value is not dead. Did I miss the value turn? There’s a couple of good lines in there. They say that value stocks are the only stocks likely to generate 5% to 10% real returns over the next decade. They do this interesting analysis where there are two types of stock market crashes. There’s the bubble, and they identified this data runs back to 1950 or something like that. So, there’s a biotech bubble in the late 80s, 90s, and the tech bubble from the late 90s, and then there are these four other crashes, and that was the NIFTY 50 in 1973. When they classify these as economic recessions rather than a bubble collapsing, so, NIFTY 50 and 1973 oil crisis in late 70s, early 80s. GFC in 2008, and COVID, the most recent one.

The significance is that value seems to do reasonably well in the collapse of a bubble but doesn’t do particularly well in in an economic recession, because they tend to be economically sensitive companies, and often they haven’t participated in the bubble. So, they have this analysis where they said the two years that follow the collapse value does equally well in either scenario. But value does much better in a bubble-type collapse. They’re saying that the most recent one was a COVID, that was an economic recession, which is why value gets so beaten up.

Then, they say that if you look across the all of the asset classes, value in the States is the worst of EM, UK, all the other areas, but that the value of value, so the percentile value is at the 95th percentile on the states, which is still a very, very cheap. But down, it’s recovered a little bit from the 100th percentile that it was that in COVID, but it’s still basically as cheap as it’s ever been on the composite score, it’s cheaper, still than it wasn’t 2000 on a composite basis. So, it means that there’s reasonable returns for value with any luck somewhere over here, we’re probably walking into a second big drawdown maybe, this is a bubble drawdown, I don’t know. Interesting. What do you guys think?

Bill: I don’t know.

Jake: [laughs]

Bill: I think it would be helpful if I saw sector overlays, when I read stuff like value. That I would be interested in. I think the same when I see like EM pitched. In Russia, for instance, if you want to cite Russia’s PE, I don’t think Russia-US is a valid comp. I think you do Russia were some blend of energy and financials comp in the US and then say, “Okay, well, is that actually– how does it trade relative to those?” Because Russia, you’re basically long energy, financials, and then you haircut it for lack of governance. So, that’s just kind of when I–

Tobias: What about UK?

Bill: I don’t know enough about their economies. It just seems to me that I just like to know more about the sectors and the underlying. I think a lot of these software companies are fucking expensive, like really expensive. I think a lot of really good things need to happen for people to make double-digit returns from here. But outside of that thought, I don’t have many thoughts that are any good.

What Minimum Locked-In Return Would You Take For The Next 10 Years?

Tobias: What do you got, JT? Can it be drawn?

Jake: [laughs] I will say outperformance, yes. Absolute return, not quite sure.

Tobias: What they’re saying is 5% to 10% real return. So, they’re saying returns over inflation. I think that the US–

Jake: Over what timeframe?

Tobias: That’s a good question. Next decade.

Jake: [crosstalk] seven years? Yeah.

Tobias: [crosstalk] seven years.

Jake: No, next 10 years?

Tobias: Next decade, yeah. So, this thing real 5% from US value, and I guess you got to go more exotic to get the 10%. That’s a pretty good return. Real five is good. That’s a pretty good bogey.

Jake: I don’t know. I was promised 17.8 or something —

Tobias: Nominal.

Jake: Last survey we saw.

Tobias: Nominal, yeah. You get the 5 and then you add your 12% inflation, and you get the 17.

Jake: [laughs]

Bill: Yeah. I don’t know. Fundamentally, I guess it all depends on your reinvestment rate and your return on invested capital. That’s my answer. If a company can reinvest a lot, and they can do it at high returns, and there’s a lot of growth, then I don’t think it matters whether it’s value or growth. I think that company probably does pretty okay as long as you don’t pay too, too much. If a company has to reinvest a ton to stay swimming right around its cost of capital, I think a lot more things can go wrong. If that’s in a low multiple stock, I think you can still get pretty screwed. That’s where I’m at with it.

Jake: Let me see if I can reframe the question. What would be the minimum, locked-in, annuity-type return that you would take for the next decade, and you would then punt all your market risk, what would be the required return for you?

Tobias: 5% real, that’s about the number for me, 5% or 6%– I think 4% real, honestly. But 5% real, I think it’s that’s free money.

Jake: Bill?

Bill: [crosstalk] by Google. Yeah, I think 5% real is good.

Tobias: How about you, JT? How convenient, went into the Jatrix right at the–

Bill: Yeah. I don’t know there’s so much money out–

Jake: Sorry. I said the number but you’re never going to hear it now went into the matrix. [laughs]

Bill: Yeah, I just think there’s so much money out there that demanding much more than 5% real is probably not a way to make deals.

Tobias: I think that historically 5% real is a pretty big number.

Bill: Yeah. [crosstalk]

Tobias: It’s the real– that makes it a big number. I don’t know what the underlying rate of inflation is but could easily be two times that including inflation, so, one times, altogether nominal it’s like 10 or something like that. Throw your questions, guys, we’ve got about 15 to go.

Record Number Of Supply Ships Off The Californian Coast

Bill: It’s going to be interesting to see, these supply chain issues are really real.

Jake: Yeah, they seem to be stacking up right now, too.

Tobias: Like the container ships off the coast here. They really are like all over the horizon.

Bill: Yeah.

Tobias: It’s the COVID protocols. When they come in, apparently they will clean them all up. It’s huge, slows everything down as it comes through.

Bill: Yeah, it’s a problem.

Tobias: [crosstalk] what they’re doing.

Jake: That doesn’t match biology, that my understanding of how COVID spreads.

Tobias: No, I thought we decided it was in contact. So, it’s like that Simpsons episode where the guy sneezes into the box and [laughs] I don’t know.

Bill: I can’t believe you guys just got us demonetized again I was really looking forward to this. Where’s Thomas Braziel to super tip us?

Tobias: I got a few things here. You guys know anything. Bill, you got any thoughts on home furnishing companies like Restoration Hardware?

Bill: No, don’t bring that up ever again.


Tobias: Any thoughts on the energy crisis in China? I wasn’t aware that there was one.

Bill: Nope. Home furnishing companies are probably going to do well for a long time. That’s my thought. Whether or not it’s priced in, go, read your own primary sources, confirm what your own estimates are, and then start talking to people, and update accordingly.

Tobias: Those showrooms are cool. I want to go and drink in that club.

Bill: Oh, Restoration Hardware?

Tobias: Yeah.

Bill: Yeah.

Tobias: What are they calling them?

Bill: They’ve got a jet now. They got all types of stuff, man. It’s a lifestyle brand. Gary’s either a genius or a maniac. We’ll see.

Jake: Regarding electricity, as someone who knows a little bit about it, I’m shocked that we don’t have more routine outages all over the place, different countries. The fact that you have to instantaneously produce and consume at the same time at all times, the exact amount of electricity, it boggles down all the time or semiregularly.

Tobias: Say that again. It boggles down?

Jake: No, it boggles the mind that it isn’t more routinely intermittent.

Tobias: That’s a scary thought from somebody who knows about electricity.

Jake: Well, it’s a testament to modern engineering and human’s ability to control nature in some tiny ways.

U.S Debt Ceiling

Tobias: Do you guys have any thoughts on the debt ceiling?

Bill: Yeah, I’ve heard about this for years and years and years, and it’s never been–

Jake: [crosstalk]

Bill: Republicans have a structural advantage because they don’t really care if the government works. Democrats are too in love with the government, so they care too much. So, they’re always going to get waxed in these negotiations because they come from a fundamentally worse position. Those are my thoughts. None of it matters, it’ll be done soon enough, and a lot of people will bitch, ratings will go up, and we will move on.

Tobias: Are they going to close down the monuments?

Bill: Who cares? Who cares? How many fucking times do I have to hear about the debt ceiling in my life?

Tobias: More times yet. It’s not done yet.

Bill: Yeah, it’s going to happen all the time and nothing’s ever going to happen from it. It’s all just political theory or game, whatever. It’s nonsense.

Jake: It’s theater.

Bill: Yeah, that’s right. Made me so mad, I can’t even think.

Tobias: Does anybody saw care about [crosstalk]?

Bill: No.

Alternative Measures Of Inflation

Tobias: It’s the weirdest thing. Do any of you three use an alternative measure for inflation other than CPI? Seems like a flawed method to measure real dollar. [crosstalk] really conspiracy– The Chapwood index is gone, MIT’s Billion Price project, they fell in line when that was showing some real inflation. Shadowstats is– you’re a lunatic if you [unintelligible 00:50:07] Shadowstats.

Jake: It does really good job of positioning anything that isn’t CPI into like, “Oh, well, that’s just crazy talk. You need a tinfoil hat.” It gets marginalized very quickly, doesn’t it?

Tobias: That would just disappear. I thought that was like we’re going to measure it on a basket of goods that people actually buy in each city. Now, it’s running at 11%. It’s too high. Better hide that one.

Bill: Yeah.

Tobias: Website’s gone. It’s weird.

Bill: Was my volume too low, this whole episode?

Tobias: No.

Bill: Yeah, all right, my bad. I just realized one of the kids had been messing with it.

David Einhorn’s Portfolio

Tobias: Why isn’t Greenlight Einhorn having an all-time great year with the value rotation? Well, we sort of paused. We had a run from September last year through to March, and then it’s all come back a fair bit since March, which is why GMO, and Research Affiliates, and AQR are out with their new value– Value is not bad, it’s sleeping.

Jake: I wonder if part of it is– correct me if I’m wrong on this, but it’s been somewhat a size rotation as well.

Tobias: Yeah, or size ran up with it and then size has shed a bit since sort of March or something like that.

Jake: I don’t know what the average market cap of Greenlight’s portfolio looks like. But I have to imagine it skews probably a little bigger, right?

Tobias: Yeah, but it’s been sizes– The small stocks have been kicked around too.

Bill: Yeah, I don’t know.

Jake: Just guess.

Bill: All right. He doesn’t on the right stuff. That’s why his performance isn’t great.

Jake: [laughs] Yeah, he should have bought what was going to go up.

Tobias: If it didn’t go up, you shouldn’t have bought it.

Jake: Yeah, obvious.

Tobias: Simple. This is an easy game. How many books does JT read a year to get all the veggies?

Jake: I average about 50.

Tobias: One a week?

Jake: Yeah, typically.

Tobias: I can’t [unintelligible 00:52:31] that fast. Precious metals have been brutal in recent weeks.

Bill: Have they? I would do gold. Gold, interesting. Ship business though. Watch Goldminers on Discovery Channel and tell me if you like it.

Jake: [laughs]

Bill: [crosstalk] breaking down all the time. But it could work. I could see commodities working in general.

The Problem With Goldminers & Commodities

Tobias: The goldminers have all got religion after being sort of– This is the problem with goldminers or any of these sort of commodity businesses. When they get their run on, you think that their margins going to go up, but their margins get eaten because now they’ve got to spend more money on talent. You’ve got to get somebody that’s from marginal goldmine. All of a sudden, the margins will get eaten away, and they will go try and buy each other again. So, right now, I think their balance sheets look pretty good. They’ve bought back some stock, they’ve got some cash. There’s lots of interesting mining companies around but not going to do anything until gold goes for a run. Then, you can participate along with gold, probably leave it to gold to do pretty well I would say, but it’s tough to pick that bottom. It’s been looking like a bottom for a long time, I think.

Jake: That’s a fair assessment.

Tobias: Just about apply it to any commodity.

Bill: That’s what I’m saying. Every single commodity right now was beat up for the last 10 years. So, to work for the next 10, I really– maybe an oversimplification, but I do think in general, it’s like, “Oh, they’ve all got religion, they’ve all lived through the worst 10 years ever.” To be fair, that may be correct. It was a terrible 10 years. If you’re old enough to remember the bricks and the commodity boom of the 2000s like-

Jake: Epic.

Bill: Yeah, it was crazy. It resulted in a lot of overcapacity and then the last 10 years have been absolute decimation, and no one wants to touch them at all, and this is how capital cycle theory works.

Tobias: Yeah, and then we’ve got another one coming.

Bill: Yeah.

Tobias: Just reverse coursed– when it’s embarrassing to buy tech, that’s when you go and buy all the tech.

Jake: True. Too much change in tech, you can’t. It’s untouchable. You can’t buy it.

Tobias: Who does Elon musk date next now that he’s single?

Bill: Maybe Cathie.

Jake: Martian.

Bill: What if he dated Cathie? That’d be dope. To get together.

Jake: Conflict of interest. It might be a good name for the book eventually, Conflict of Interest. The romance novel of Cathie and Elon.

Bill: I’m just looking at Einhorn’s portfolio at least I think it is. Green brick, I don’t know how the stocks down, but it’s in a good place. But then you got BrightHouse, Atlas Air Worldwide, Tech Resources, Change healthcare, [unintelligible [00:55:27]. I think all the bets probably make sense, but they don’t seem like the type of bets that are getting rewarded in the market, is why I don’t think it’s working if it’s not working. But I bet he does fine.

Tobias: I don’t know. That return history is one of the more amazing things that I have ever seen. 1996 to 2007, so a decade, he was outperforming by 24.5% and since then, basically, he’s underperformed by 6% or 7% a year.

Bill: Didn’t he short a lot of stuff? He does short, right?

Tobias: He does. Yeah.

Bill: Was he short on Netflix?

Tobias: He’s been, as you say, short all the wrong stuff, sold all the wrong things.

Bill: That’s the problem.

Jake: Don’t show up if the price won’t go up.

Bill: Don’t want to [crosstalk] up. That’s right.

Jake: [laughs]

Bill: Yeah, that’s rule number one.

Pick One Tech Company

Tobias: Which tech do you like the best?

Bill: The big kind?

Jake: [laughs]

Tobias: Yeah. Can someone make up the index? My [unintelligible [00:56:35] Microsoft’s multiple expansion. That’s very impressive multiple expansion. Ski jump multiple expansion on top of pretty impressive revenue as well.

Jake: That’s a shower and a grower.

Tobias: That’s impressive, I’ve got to say.

Bill: Yeah, like Google. I don’t know, Salesforce makes some sense but I don’t know what well enough to say that. But Microsoft, Google, all that stuff I think. Facebook’s probably the one that makes me the most nervous.

Tobias: It’s cheapest at the moment.

Bill: Well, I think those two thoughts are probably correlated.

Tobias: Google or Microsoft, there’s no question about the quality of the business. It is just that the valuation that you’re paying [unintelligible 00:57:18], right?

Bill: Yeah.

Tobias: You think you get 5%? real at Google, here?

Bill: I think you could.

Jake: Yeah, probably reason–

Bill: I don’t know that [crosstalk] obviously better bets out there. They got a lot of gross spending that thing. Tell me a more important business to society than Google Search. Give me a better business in the world. I don’t know. Back in the days of the NIFTY 50, things are trading at 60 PEs when rates were six. I don’t think that historically Google where it trades is incredibly overvalued at all.

Tobias: There was a good one here I just missed.

Bill: People love the inning question. They keep asking the inning question.

Jake: [laughs]

Bill: I don’t think that people that are asking that or appreciate how crazy the NIFTY 50 got, and how crazy I think things can get. That’s the comment behind the comment. Even Burry was out here tweeting 95% correlation between the tech bubble and right now– there was a great comment in it. Even if you believe the chart that he posted, there was a huge blow-off top after where we sort of are if you look at those two charts. I don’t know how to play that game.

Jake: Yeah, I would say 1997 probably felt a lot like the ninth inning when you were living it.

Bill: [crosstalk] close to the sixth.

Tobias: There are a lot of guys who sold out in 1996. Yeah, because it was [crosstalk] on stage. Yeah. I read a book on the lows investors, I think it’s called Cash is King or something like that. They all punch out in 1996.

Jake: All the easy money’s been made by 1996.

Tobias: All the easy money’s been made. The problem is that everything’s just more and more expensive at a time. That’s just always been the case. You can go back, run that, you can get Standard and Poor’s data going back to 1850 or something, just gets more expensive every single year.

Bill: Inflation, baby. That’s a better measure than the CPI.

Tobias: Some good questions here, but folks, we’ve run out of time. Have to save them for next week.

Bill: Ah, let’s do one more. Come on. Come on, come on. Come on. Come on, Come on.

Tobias: How much growth does Google have to realize in order to give a 5% real to investors? Isn’t a lot of growth already priced in?

Bill: Yeah, it is.

Jake: Depends on what multiple you use out in the future too, so how much contraction do you have to get over through growth.

Bill: Yeah, how long is the growth? How terrible is it? What are the incremental returns? How much are you assuming for Google Cloud? It depends on a lot of stuff. I don’t know. Place your bets short it if you want to get– [crosstalk]

Jake: It turns out make you predictions about the future is hard.

Tobias: That’s the hardest one.

Bill: Yeah, I don’t have [crosstalk]

Jake: Especially, when it’s not about the future.

Bill: Yes, that’s right. I like that, Jake.

Tobias: Is Burry’s Tesla’s short going to pay off? Yes, in spades. Easy one.

Jake: [laughs] All right, folks. Thanks very much.

Bill: You see all the EV competition coming to market? There’s a lot of it, man. It’s good stuff.

Tobias: [crosstalk] issue as much as it’s a business issue.

Jake: Are any of those actually businesses or are they just PowerPoint?

Tobias: That doesn’t hold everybody’s else back.

Bill: That doesn’t matter. It doesn’t matter. All that matters is that you’ve got capital to back you.

Tobias: All right, dudes. Next week.

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