In this episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle chat about:
- Facebook Goes Meta
- Toxoplasmosis Makes You A Better Investor
- The Game Within The Game – Yen Liow
- The Two Sides Of Dual-Class Shares
- Cloning Pabrai
- The Future Of VR
- Who’s Long Tesla?
- Housing & Inflation
- Understanding Return Ratios
- Harvard Invested In Oil
- Bill Miller Retiring On Bitcoin
- Secrets To A Better Night’s Sleep
- Cane’s Chicken Fingers & Costco Hotdogs
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:
Tobias: Okay, fellas, we are going live. We’re half an hour earlier than normal, because I have to catch a flight, and I really wanted to come on and chat to everybody. How are you doing, fellas?
Jake: Our normal 30 minutes of prep time beforehand is gone.
Jake: So, it’s going to be even sloppier than–
Tobias: [laughs] Hard to imagine, but here we go.
Bill: I didn’t help out very much.
Tobias: Oh, good.
Bill: You want me to say why?
Tobias: No, I don’t.
Jake: No, I don’t.
Bill: All right.
Tobias: You guys have been traveling. So, what’s the news?
Who’s Long Tesla?
Bill: Well, we were around. Last week, we were at Bloomstran’s thing, which is interesting because he posted a thread and it filled up my inbox with people. So, he mentioned that one of the questions that was asked is who’s long Tesla, and he mentioned that there was laughter, and I wouldn’t say lit up, but a number of people reached out to me, and they were like, “Is this really what it was? That’s so close minded, that shuts down conversation.” What I would say is, I think that the idea of being curious is much more beneficial than being judgmental.
When you’re in a room and Chris asks if anybody is long Tesla and you have any idea what his view of Tesla is, it somewhat hard not to laugh. I am beyond the thought on the equity. I don’t really care and since I got there my life got a lot better. It’s either going to be worth a lot more or a lot less or the same or neither or none, and I don’t care. But when he asked the question, I laughed because of who was asking not because of a view, and I think in general that’s probably not that far off from the group idea.
Tobias: Just to contextualize it. It blasted through trillion market cap. It’s been truly fully diluted for a little while, but I guess market cap is– yeah, more people know about that.
Jake: [crosstalk] it matters.
Tobias: It’s like a 300 P/E. Did I say that?
Bill: Yeah, I guess.
Jake: It’s a north of [crosstalk]
Bill: Earnings, I mean, earnings aren’t the right measure. But anyway, it doesn’t matter. You’re paying a lot for a future.
Tobias: Yeah, I see what you’re saying. The P/E doesn’t matter because it’s going to grow into the valuation.
Bill: Well, I’m just saying like, you wouldn’t value that on trailing earnings, right? I don’t think anybody is doing that.
Tobias: I don’t think anybody’s doing that either. Just to clarify. [laughs]
Jake: I think the other part of why there was– I don’t even think laughter was the right thing necessarily. We had just all been talking about it.
Tobias: [crosstalk] Ruthful laughter.
Jake: We’ve been talking about the numbers of it before that little vote started, and so it’s just like after everyone had expressed their opinion and then no one raises their hand basically, it’s just like a little bit funny. There was no like– and therefore, I’m better than everyone else, or that my mind is close to it, or anything like that. I don’t know. People are reading way too much into that.
Bill: Yeah, I don’t know. People were like, “Oh, this is a bunch of value guys that are destined to underperform and whatnot.” As somebody that was in the room, I guess, I’m bound to take a little bit of offense to that comment. What I would say is that, in that room, there were people that pitched high multiple stocks, there were people that pitched cyclicals, there were people that pitched other things like I don’t–
Everybody– well, not everybody, a large majority, was Caucasian male, if people want to take homage with their whatever if they want to–
Bill: Yeah, that’s what I’m looking for. Not umbrage, but that’s a fair critique, and maybe, a little bit more Silicon Valley mindset in the room from one or two people wouldn’t be the worst idea. Look I just continue to go back to it. Unless you’re in the room, you don’t know what happened, and even somebody that was in the room, I don’t–
Tobias: Still don’t know what happened.
Bill: That’s right.
Bill: Like I have my version of what happened, and he has his, and that’s just how it is. So, that was fun. But it was a good weekend. A lot of good guys.
Jake: Fundamental research on display there. You forget that people are still doing real work in markets and [laughs] [crosstalk]
Bill: I do think this is like a legit pushback. There’s a lot of tech guys that do real work that like we just don’t fully get or don’t look at the world the same. That’s fine. People don’t see that.
Jake: I’m at more like passive indexing as a broad category.
Bill: Yeah, I think that’s fair. Well, I don’t know. One of the nights at dinner, I talked about hypergrowth with one of the guys and we were saying that like, “You know, for the right business you can pay.” I mean, really, if the business is small enough and it’s growing enough, you could pay 30, 50 times sales for some of these. I just don’t know which ones. If I did, I would be buying them.
Jake: You probably just don’t want to do it for all of them is the [crosstalk] base rate.
Bill: Yeah. I think the basket is unlikely to outperform over you know, if you believe in historical studies having any relevance, I guess, would be the way to say it.
Tobias: This is a kind of a bumpy segue, but I can’t tie it together. Just one second.
Bill: Wait, hang on, wait.
Bill: I’m going to guess growth and value are at a wide dispersion.
Tobias: [laughs] That it’s tied at the hip. Did you know that?
Bill: I did not. Oh, they are tied at the hip.
Tobias: That’s how you do at evaluation?
Bill Miller Retiring On Bitcoin
Tobias: Yeah, you got to incorporate some growth. Now, I was going to say, I read the quarterly letters of some of the big investors when they come out. One of them was Bill Miller’s, and it looked to me like Bill Miller, maybe have written his last quarterly letter. Do you guys catch that one?
Bill: No, I didn’t see that. Who’s going to be taken over, Samantha?
Tobias: Yeah, that Bill Miller Jr. and the other lady there. Yes, it’s Samantha.
Bill: Yeah, oh, interesting.
Tobias: I just thought it was an interesting moment– [crosstalk]
Bill: So, it happens when you make shit tons on bitcoin and growth stocks, folks.
Tobias: That’s the point that I was going to make that he said, we’re in a bull market that started in March 2009. I don’t think that he said he’s not predicting that’s going to end or anything like that. He just said, it’ll end when it ends. But I just thought it was interesting, because he has it for exactly that reason. He’s a guy who owns a lot of bitcoin and he’s been a really great growth stock investor his entire career, and taking a step out now, is there any significance in that like just maybe can’t find the kind of things that he likes to aim at?
Bill: I don’t know. Bill, I’m sorry for what I’m about to say, but he’s kind of up there in years?
Tobias: He makes that point. He does.
Bill: And he’s super rich.
Bill: So, I don’t know why would I– Shit. I don’t even know if I want to stay in the game. I don’t know why I would stay in the game if I was him.
Tobias: Because it’s fun, because you’re crushing it, because it’s easy.
Bill: Yeah. But at some point, what are you doing it for? I don’t know. I get it. Everybody’s got to retire. Why not walk out on top?
Tobias: Get out of the– He makes the point that he’s been in the markets for 40 years and he’s achieved threescore– he’s a lot of threescore in 10 which is 70. I understand. But he’s a little bit older than that I think, isn’t he?
Bill: I don’t know. If he says, he’s 70, I’m going to go with he is 70.
Tobias: Well, he said three scoring. I think, he said at least threescore in 10. I don’t know.
Bill: Yeah. I don’t know, man, I’d probably just go chill on a boat somewhere.
Jake: It’s fair. [laughs] Everyone’s aiming for that.
Bill: Yeah, I’ll do [crosstalk].
Tobias: I’ll be hanging around until value works. So, I’m going to be an old man.
Jake: Keep that.
Bill: Well, you know, I mean–
Jake: Jeff. [laughs]
Bill: I don’t know, if he’s got grandkids. I don’t know his personal life. I would be bowing out if I were him, too.
Tobias: Then what about the two old legends who are still running Berkshire? They passed threescore in 10 more than 20 years ago. More than a score ago.
Bill: Yeah. I don’t have it in me. I wouldn’t want to work for that long for that hard, and I know that they love it and all this tap dancing to work stuff. I would argue there’s a non-illegitimate argument to be made that Buffett has always been a workaholic, so expecting him to hang it up is unlikely to occur. I don’t know what Munger really does.
Tobias: Yeah, I’m looking for a moment [crosstalk]
Jake: Whatever he wants. [laughs]
Jake: Where is the job posting for that one? [laughs]
Housing & Inflation
Tobias: The other letter that I read that I thought was interesting was the Third Avenue one. You know, Marty Whitman passed away a few years ago. But Third Avenue continues on and Third Avenue does as much in credit as they do in equity. So, I just think they’re kind of an interesting shot to read.
The first thing that they discussed is inflation. I was saying to Jake before we came on. I feel like I could just about write a Third Avenue. Well, not a criticism of Third Avenue. It’s just I think the same way for all the disasters that have befallen both of us through that period of time. It’s very group thinking but I like their letters and the thing that they talk about is inflation of, they made this kind of interesting point. The Fed has its own calculation for the rent equivalent home costs. So, if you own a home that they translate that across into rent, so they can do their calculations. They calculated 2.6%. It just escapes me. I think that’s for the last, I don’t know, it’s for the quarter or for the–
Tobias: [crosstalk] quarter or a year.
Jake: Today? [laughs]
Tobias: Let’s say, it was year. Let’s say, it was for a year.
Jake: Oh, yeah.
Tobias: Then, Zillow does takes in all those data points, and they have a calculation, and theirs was 11.6%. Third Avenue says–
Bill: [crosstalk] Zillow.
Tobias: If you take Zillow’s number and then you feed it into the 5.3% number that the Fed got for the rolling 12 months, you get 8.3% which is a very substantial inflation. We all know that the Feds slightly undercount– they undercount because they’re incentivized to do so.
Jake: Zillow’s about to get cancelled like the Chapwood, and Billion Prices Project, and ShadowStats, and– [laughs]
Tobias: They’re not buying houses anymore. Maybe that’s what happened. Then, the final point that Third Avenue made, oh, damn, it’s just escaping me at the moment.
Jake: So, 8%, though, kind of more realistic right now like year over year?
Tobias: That was what they thought. And then they made the point. This was the other thing they made. The house prices are up like 18.3% over the last four months. Even if you regard that as transitory, like if you think about that over a three-year period, it’s like 5.7% a year for three years, which you know that’s very, very substantial inflation. But Fed saying 2% is their target. So, they’re way, way over shooting that target.
Bill: Dude, I feel like you don’t listen to my podcast.
Bill: You need to check out the Logan episode.
Tobias: What did he say?
Jake: He thought that house prices would go up like 21% over the four years ended, 2024. He was like the problem is, it happened in one year and he called it the most unhealthy housing market that he’s seen, and the reason that he says it’s so unhealthy is, he didn’t anticipate. I don’t think, I don’t want to put words in his mouth, but I think the pandemic created abnormal shortages relative to what he expected and also pulled forward this demand that was tough to predict. So, now you got a bunch of labor backlogs and all that stuff. We’ll see how it all turns out.
Tobias: Is that a commentary on housing or is that commentary on inflation?
Bill: I don’t know that it has to be either or. I think it can be a little bit of both.
Tobias: Yeah. This is one of the things that breaks my head a little bit. We talked about with Mike, lumber prices, and housing being for the last decade, and you can see like housing probably, there weren’t enough houses built because there was a hangover from beforehand.
Bill: Ivy Zelman disagrees for the record. I don’t know that she’s right, though. I’ve gone through a deck a couple of times. I can’t figure it out.
Tobias: I’ve said, I don’t know, that’s the case either. I just thought it just looked like it was lower than it has been traditionally through this part of the cycle. So, it’s just a very, very slow running cycle. We’re still only midway through the rate at which we have. It tends to be quite a sawtooth pattern and we’re really like a very flat recovery.
But the question is, how much of this is like a housing shortage and how much of this is just like a whole lot of money dumped into the system? That’s the hard thing to figure out which one is driving, which maybe, it’s a little bit of both as you say. Maybe it little bit of both.
Bill: Yeah, I think it is. I don’t know. Look, I think that ultimately, when rates are where they are, the affordability is pretty good. Now, people come back and they’re like, “Well, what about the down payment?” I don’t know all of the necessary requirements to where you could get the 97% FHA loan. I think it’s for your first house. I could be wrong on that, though. Maybe, it’s got to be multifamily.
But I don’t think people are priced out per se. I do really believe that if you’re buying a house and it’s moderately levered right now, if you can afford the payment, you better really like your house. Because if rates go up, you may not have much equity left which is fine, right? If you can pay it down over 30 years who gives a shit really. You’ve got somewhere to live and it’s just a markdown on paper and whatever. But I do think liquidity could be the risk that people [crosstalk]
Tobias: If you have [crosstalk], it’s an issue.
Bill: That’s right. So, hopefully like where you live is kind of the takeaway. Because then, I think you are hedged. I know somebody is out there laughing at me. Fuck you. No, I’m kidding. I love all of you. Especially you, Bill Miller. Shoutout to you. Anyway, I digress.
Tobias: Bill Miller, [crosstalk] Bill Miller Junior.
Bill: I don’t know, Junior. Junior will probably start listening once he gets higher status.
Tobias: [crosstalk] better.
Bill: There’s only 10 listeners. 10.
Jake: Someone has to die and then someone could take their spot.
Bill: Yeah or retire. He doesn’t have to die. He can just say, “All right, you know Junior, I’ve done my listening, I’ve learned what I have to do from these guys. Now, it’s your turn.”
Jake: I’m not dumber for having listened I have to retire. [laughs]
Bill: Yeah. I came into Value: After Hours with alpha and I leave out of the game. You’re welcome, folks.
Jake: You’re talking about that supply and demand and like, “Which is it or is it just a bunch of money?” It’s almost as if it’s really hard to figure out when there’s millions of people who are making decisions, and there’s billions of transactions. They have a particular calculus in their head of where they find subjective value. It’s almost as if it would be impossible for anybody sitting in Washington DC to know what the right thing to do is, and maybe we should let the market figure some things out once in a while.
Tobias: I’ve read on Twitter that they are the best forecasters in the game.
Jake: Oh, well, they are putting up good returns in their PAs. So, that makes sense.
Bill: I do think one of the more compelling arguments that I have heard for why inflation is less transitory than someone like I may be in the camp of is and this is really famous last words. But there’s been so much pain in a lot of the distributors of commodities and commodity businesses in general that there has been a lot of consolidation in a lot of different markets, and a common theme, and this is bound to be said by people that are long. So, call it selection bias if you want.
But is that a lot of these industries that have historically been pretty shitty have now consolidated into three to four rational players and therefore even if you can’t take price necessarily, you don’t have to be in a price war. The competition is more rational throughout the chain. If you have a scenario like 2020 that gives you the chance to bump prices once, you may not find yourself lowering them down the road even if your inputs go down. You may actually get some of that margin for once in your life or [crosstalk]
Jake: And maybe even withhold some volume to keep that price at a-
Tobias: None of these going to happen.
Jake: -the rational level.
Tobias: I think [crosstalk] about it.
Bill: Yeah, I tend to sort of agree. On the other hand, when Mike and I, we were calling people in the lumber business last year, maybe it was earlier in the year, but people were really shell shocked from the five years leading up to that mooning period. So, there wasn’t a whole lot of appetite to increase capacity.
Tobias: It’s underinvested. That’s what it creates this capital cycle theory. That’s what creates the–
Tobias: Yeah. It’s what creates the conditions that lead to the next little boom, and then that’ll draw all the people who are currently making NFT’s and all that other shit. They’ll come in and then they’ll be– everybody will be a mining expert.
Harvard Invested In Oil
Bill: Yeah. I do think one thing that I found myself wondering is, a common theme too was these institutions not wanting to touch industry or energy, and they want investments in renewables. Part of me was thinking, shoutout to the homie, The Science of Hitting Investing for putting this the seed in my head, and then I expanded on it, but if you’re Harvard, do you really need an oil investment? You got enough money anyway.
There is a part of your endowment that’s not really about returns and it is actually about driving society where you think it should be. Now, we can disagree and debate whether or not oil should be in that equation. I would argue, it should be, but fine. I don’t actually disagree with them saying that industry has enough funds to self-fund itself, capital going into it has resulted in decimation of capital for a long time, we’re just not going to play in that game. I don’t think that’s patently stupid of them.
Jake: Have fun staying poor.
Bill: But they’re Harvard.
Jake: Just kidding.
Bill: I mean, their returns don’t even matter. The endowment’s so big like who gives a shit?
Tobias: They’ve underperformed apparently. That just means they didn’t hold a whole lot of it. They went 150% S&P 500.
Bill: Well, I guess what I’m saying is, I do think that they–, the allocators there would probably call me up and chew me out for saying this, but I just wonder how much they’re like, “Look– Really behind closed doors. They’re like, “Look, this may underperform, but it’s good for the world as we perceive it to be. So, that’s how we’re going to allocate our capital and if we underperform, so be it.” I bet their freaking alumni base doesn’t care. They’re like, “Whatever, we’ll just shovel more money at you if you underperform, it doesn’t matter.”
Jake: That’s fair.
Bill: So, it’s different. Not the same goals.
Tobias: Do you guys have topics to—
Bill: Or, I’m wrong.
Tobias: JT, you get some veggies for today?
Jake: Of course. When would I ever show up without veggies? Do we want to do them right now?
Tobias: All right. Well–
Bill: I’m going to talk Facebook.
Toxoplasmosis Makes You A Better Investor
Jake: At your own peril. So, I have a kind of gross one for us today which should be fun. And it’s this little protozoan, that’s called the Toxoplasma gondii and Gondii, I’m not sure exactly how people say that, but [crosstalk] it causes toxoplasmosis. And it turns out 30% to 40% of the world’s population is infected with toxoplasmosis to varying degrees. So, in rats it will cause rats to take risks including go up to cats and basically get eaten. Obviously, it greatly increases your chances of being eaten if you go up to a cat and you’re a rat. But that’s where toxoplasma wants to end up is in the gut of a cat, where then will come out of the cat in the cat’s poop and somehow find its way into humans from cat poop.
Now, lest you think that there are all these people out there eating cat poop, I don’t think that’s actually true, because this little thing can live for a year outside of the gut of whatever animal it’s in and get transferred. So, somehow a year, it touches something, it touches something else, and eventually, it winds up in your mouth, and that’s how 30% to 40% of people have this. It’s disgusting but we’re going to keep going.
Bill: Somehow it ends up in your mouth.
Jake: Well, we’re going to get to more of that. So, it seems to are we–
Tobias: More coming?
Jake: It seems to preferentially prefer to take residence in the amygdala of the brain of whatever animal that it’s in. So, oddly enough the amygdala, when it is suppressed will make rats less fearful and actually more sexual. So, if you remove the amygdala of an animal, it will become hypersexual, fearless, and I’m just reading from this is research, it’s not me, become hyperoral, which means inappropriate objects placed in the mouth.
Bill: There you go.
Tobias: I’ll take some swabs down the Wall Street to find out what’s going on.
Jake: We will get to that, but a lot of this came– the inspiration of digging into this more came from this guy that I follow on Twitter named Ethan Mollick, who’s a professor at Wharton that studies innovation and entrepreneurship. What they found was that, Toxoplasma gondii, the infection is associated with a subsequent increase in the probability of becoming an entrepreneur. So, your risk appetite in the world maybe dictated by this little tiny thing that forms cysts in the brain, and there’s this little 50 micrometer which is 10 to the negative six power of a meter, little tiny things.
Tobias: It’s easy to visualize.
Jake: Well, sorry, it’s like a roughly the diameter of a human hair.
Jake: So, people like students with this who are measured are 180% more likely to start a venture and infected founders have 8% more revenue when surveyed in the venture space. So, it does make you wonder like what if you’re a trader or an investor or maybe you want to get tested to see like, “God, am I predisposed to risk because of this little tiny protozoa that is infecting my amygdala and changing how I perceive risk,” or maybe, if you’re a VC, you actually want to measure your potential founders that you want to invest into, maybe slip a little cat poop into their food. I don’t know.
Tobias: That was I was going to say. Is this a risk factor, is this like one of the things that you like 8% more revenue, that’s material?
Jake: Hey, I mean, sometimes you got to-
Tobias: You got to do whatever is necessary.
Jake: -break a few eggs to make an omelet. [laughs] So, here’s what I think is what gets weird is that–
Tobias: Here’s where it gets weird. [crosstalk]
Bill: Good. I was looking forward to that. I’m convinced I’m not even mature enough for this segment by the way.
Jake: Yeah, that’s fine. Google Trends, if you look in 2010, there’s a lift off in people searching for cat videos. So, I’m thinking you know maybe there was an infection period there and that’s why everyone’s risk taking deep into this bull market. It’s because it’s all toxoplasmosis.
Bill: I actually have a theory that right now, despite all the surveys, and despite the valuations, and this is going to sound really stupid. But I think these IPOs and some of the SPACs that we’re seeing may actually be some really, really good 10-year businesses to own. Because I think that coming out of 2010, there were some tax incentives that created some really good companies. I don’t know. I’m going to be really interested to see how this period seasons. Obviously, starting valuations are a headwind.
Jake: Yeah. I would probably– If I was a betting man, I would say incredibly high dispersion with some of probably the biggest winners of all time, but a base rate of like nuclear fallout.
Bill: Yeah. I don’t think that I disagree with that.
Jake: That’s because we’re just part of a big group chamber, Bill. [laughs]
Bill: Yeah, that’s right.
Tobias: Can we deduce anything from the fact you’re wearing a Patagucci vest there? Have you joined the [unintelligible [00:26:20]?
Jake: It’s cold in my house. That’s the– [laughs]
Bill: The Patagucci.
Jake: That’s what you can deduce.
Tobias: Patagucci and toxoplasmosis, and your superstar trader.
Jake: That’s what we figured out this week.
Tobias: The really scary thing about– [crosstalk]
Bill: All I know is, Jake’s putting a lot of stuff in his mouth. That’s the only thing that I took from that entire segment.
Jake: Hyperoral, there’s the term.
Tobias: The scariest thing is that impacts your behavior so much like, rats showing up in front of cats like, I think they’re attracted to the smell of cat urine as well. It completely gets rid of their fear of cats and reverses it, it makes them attracted to them. Who knows what it does to humans?
Jake: Sexually attracted to them is what the study showed. I don’t know, what kind of like, Tom and Jerry stuff you’re watching to come up with that one. [laughs]
Bill: Dude, I tell you what. That’s some Darwinism cold stuff for the rat. It’s like, “Oh, you get all turned on and all of a sudden this cat [sound].” Just like buying a value stock.
Jake: It’s how you want to go, isn’t it? [laughs]
Tobias: Eaten by a cat. Oh, it’s toxoplasmosis. I mean, this has got to be–
Bill: [unintelligible [00:27:37] Altice murder right there.
Tobias: It’s not necessarily but you’re saying, toxoplasmosis has these beneficial effects too, increased risk-taking behavior is not necessarily all negative because it makes you become an entrepreneur, and then it makes you generate 8% more revenue than you otherwise would.
Jake: Yeah, maybe. I mean, we have this idea that being– Humans are a little biased towards optimism, which probably helps us in an emergent way, but maybe not in the individual way.
Tobias: It helps society, it doesn’t help individuals.
Jake: Right. So, this is maybe a comparable thing where it’s from the individual standpoint, it may actually be suboptimal. But from moving–, grinding the wheel forward of society it is perhaps more optimal.
Tobias: I think if I look at my portfolio, it’s pretty clear that I don’t have toxoplasmosis.
Jake: You got a real shortage of it, huh?
Tobias: There’s not a lot of risk taking in that portfolio, yeah. Bill, how’s your portfolio?
Jake: There’s your problem.
Bill: I think I probably have a moderate amount of cat shit.
Jake: He’s been eating some cat [crosstalk] [laughter]
Jake: It’s the cat shit portfolio.
Bill: Yeah, just a little bit.
Tobias: Yeah, that’s really scary. It used to be the thing that if the cat lady would die of toxoplasmosis.
Tobias: Well, so it can eventually-
Bill: It’s a bad way to go.
Jake: -cause 70 cysts in your brain that it will mess up the function and lead to actual real health consequences. For the most part, people don’t notice that they have it obviously, we’re not all– 30% to 40% of us are not running around like cat shit zombies.
Tobias: So, I’ve got this urge to go and put everything on red and just let it ride, just let it keep on going.
Secrets To A Better Night’s Sleep
Bill: So, speaking about just like brains and how they’re messed up, I had this talk with a woman about how I need to sleep better. So, I’m like, “All right, I’m going to try to sleep better.” Well, that’s not going too well. But you guys have kids. You’ll know this. I switch sides of the bed with my wife. This is totally unrelated, but Jake talking about tumors in your brain is what triggered the thought. Every fucking night my four-year old comes up and I just hear [sound] right up in my ear. I’m like, “Bro, get away from me. I’m in deep sleep.” Then, he goes away, then the six-year old’s coming in two hours later and I got to pee some time. There’s no way I’m getting eight hours of sleep for like the next decade.
Bill: So, I’m going to die of tumors, and I don’t even eat cat poop.
Bill: I’m sorry I brought that up but it’s been bothering me.
Tobias: Well, sleeping is a very important part of life. It’s hard to function if you don’t get good sleep. So, you got to be careful.
Bill: I know.
Tobias: I’m careful to make sure that and it’s hard with little kids because they interrupt all the time. But there are lots of things you can do like exercising, try not to be too stressed [crosstalk]
Jake: [unintelligible [00:30:34] the floor. [laughs]
Tobias: Yeah, well, I can’t do that. Why would I’d that be. But then there’s no caffeine too late in the day because caffeine has got a very long half-life, all those things, you got to be careful of that. And then [crosstalk] no devices-
Tobias: -an hour before you go to sleep. You can control a lot of it. There’s a lot of it you can control, but one thing that I found that makes it really, really hard to go to sleep is lying there thinking, “I really got to go to sleep.”
Jake: Infrared sauna before bed is a game changer for the deep sleep.
Bill: What the heck is an infrared sauna?
Jake: Oh, baby. Let’s get into it. It’s a big wooden box that you get in and just sweat out all the impurities.
Bill: Do you have that?
Tobias: What about– [crosstalk]
Jake: I don’t indulge a lot and I’m kind of a tightwad, but when it comes to health stuff, the wife and I will pay up for things.
Tobias: And you find that works. Do you do it an hour before sleep for an hour?
Jake: An hour would be a fairly long time. It depends on how high up the temperature as well. I’m usually like a good 30 minutes and that’ll be real nice. Shower off.
Bill: Dude, look at you.
Jake: Boom, sleep like a log.
Bill: [crosstalk] Joe Rogan stuff or some Tim Ferriss stuff right there.
Jake: Oh, we’re just scratching the surface, man. I got all kinds of crazy shit.
Tobias: What about melatonin? Do you have any melatonin pills? I’ve heard that that’s something that can–
Jake: I don’t do that. I have if I’m traveling. We’ll try to reset the clock a little bit especially if it’s like a really big time zone shift. but now, generally getting sunlight into your eyeballs first thing in the morning, it will tick the melatonin timer going, better than if you don’t do that. So, that helps kind of set your circadian rhythm.
Bill: So, you’re saying I need to wake up and stare at the sun?
Jake: Just some, go outside, get some fresh air, don’t wear sunglasses in the morning. That helps I think.
Tobias: What else?
Jake: Paid up for the Chilipad, which is basically like a mattress cover that will circulate cold or whatever temperature, but typically cold water through it, so that you stay cooler and sleep deeper.
Bill: Ooh, I’ve been sweating. I need that.
Jake: I’ve experimented with a teaspoon of honey before bed and it will lead to very vivid dreams. I don’t know why that happens exactly, but I’ve read about it, and tried it, and I found it to be kind of true.
Tobias: You don’t continue to do that though? Dreams are too vivid?
Jake: Yeah, too scary. [laughs]
Jake: I don’t know. I just forget sometimes. I just don’t do it. Also, I like just I don’t know if I need to add any extra sugar over and above my already– the amount that I make or take in. Sleep specific–
Tobias: Do you do the like chill the room down to whatever it is, six to seven degrees or whatever you’re supposed to be at?
Jake: Yeah. Well, we keep the house pretty cold in the winter and don’t–
Bill: Dude’s in a Patagucci.
Jake: Right. So, here’s the other weird one. Mouth taping. So, I tape my mouth shut at night.
Bill: Do you, really?
Jake: Yeah. so I only breathe through my nose. I found that actually makes a pretty big difference. Like I’ve AB tested that one a fair amount.
Bill: Does it hurt when you take the tape off?
Jake: Less so if you’re cleanly shaven. A little bit more so, but it’s not so bad. It’s almost like an athletic tape that, it’s not like you’re putting duct tape on your face or something. [laughs]
Bill: My wife might like if I did that during the day.
Tobias: [crosstalk] tape.
Bill: And hurt my podcasting career. But I don’t know [crosstalk] how that’s going anyway.
Jake: Save it all up for the podcast.
Bill: That’s fair. Just rip it off. I’m just going nuts.
Tobias: The words just come out. Those are good tips. Let’s do a segue. Let’s do Facebook.
Facebook Goes Meta
Bill: We can do Facebook. Earnings, interesting. You got– [crosstalk]
Tobias: What are they like 35% year on year, something like that?
Bill: I don’t know the actual earnings. I can tell you that the ARPU growth globally was 27%, UCAN, to use Netflix’s term, was 32%, Europe 33%, Asia Pacific 17%, rest of the world 41%. But the big news is the Zuck machine is going to create the metaverse, and he’s going to be, I think this is going off memory, do your own work. I think he said that they’re guiding to like $90 billion in expenses next year. To put that in perspective, target’s revenue is $100 billion.
Jake: I thought this was a cap like business.
Bill: Negatory, Julio. It hasn’t been for a while.
Tobias: It’s the money going into, but how do you spend the money [crosstalk]
Bill: Well, I think that’s what people are trying to figure out.
Jake: Not your pocket though.
Bill: Well, my man, Akram’s Razor, his theory is that they may have developed their own chip. I’m pretty sure you said that publicly. I think that one of the things that’s interesting is–
Jake: Is that the chip gets implanted in me or is it–?
Bill: No, that’s [crosstalk] Oh, de-monetize, boom. Thanks, Google.[laughter]
Bill: Now, I got my head in a [crosstalk]
Jake: Sorry, Bill.
Bill: -different place, it’s okay. No, so, the changes that Apple implemented is causing some havoc among the advertising industry. Specifically, tracking and attribution are the issues that people are speaking about. I think Zuckerberg, I’m a huge Oculus fan as you guys know from–
Tobias: Do you have one?
Bill: Yeah, and I fuckin love it. I think, it’s [crosstalk]
Bill: I tell you what, I really think people are sleeping on is–, I think that assuming the trend line in airline miles traveled leading up to 2019, and then post-COVID, that is a scary, scary proposition. I happen to know of a consulting firm that just ordered 60,000 Oculuses and distributed it to their workforce. They have a television inhouse studio, and they’re sending Oculuses out to boardrooms to have presentations in the boardrooms. So, it’s like VR presentations. They’re not perfect yet, but this stuff is coming. I don’t know that Facebook’s going to win. But I think I understand what Zuckerberg is doing with what he’s trying to invest in and I think what he’s saying is, “I want my own closed system, so that I never have to deal with Apple’s tax ever again or being beholden to somebody else. If I can win the next version of the world, then I will own the whole thing like create this closed loop.”
It’s not crazy to me. I don’t know how you assess the probability and I think that, it’s going to be– I’m fascinated to watch this all play out. Because last night, people read some of the guidance, and he says, I’m almost certain I’m doing this one off memory, but I think he said like three to five years before you even start to see any progress in these investments. It’s easy to read the first quarter out and be like, “Oh, I got a long-term time horizon.”
Bill: Let’s see two years out, because this guy has not stopped the investment ramp. It’s amazing to see what that company has been investing on the expense side. It’s just incredible and it’s amazing to see the revenue continue to grow at just huge rates on huge basis. That’s despite all of the concerns that I share with you guys about what’s the duration of these assets and stuff and end of the day one thing that was interesting that came out over the past week, shoutout to modest proposal for sharing this one, but they did a TikTok verse reels comparison, and one of the complaints about Instagram reels is that, it was too targeted. So, people like that TikTok has a bunch of different things and that people are authentic, and it doesn’t feel fed to you. Reels almost feels like too tailored to certain users and they want more spontaneity.
So, Zuck said that he is going to start developing the apps with young people in mind. It would be interesting to see how many changes. On top of all of the news that has come out about it in the recent past, I don’t know, it’s going to be real interesting man. I can make a really articulate argument, this one big value trap, and I can make a really articulate argument that they’re investing for the future, and I don’t know which one will win.
The Future Of VR
Tobias: I almost bought a Rift last year and I saw it again this year, and I thought I might get one for Christmas. What is the benefit– There’s a good question from Beefy Capital. So, I’m just saying, I’m sympathetic to this view, and I do think that the next operating system like that the shift has gone from the desktop operating system to probably your browser, to probably mobile, and then the next one is probably, I don’t know if it’s the Rift or whatever it is, but it’s probably a VR-type interface. But there’s a good question here from Beefy Capital. What’s the benefit of doing a presentation over VR versus Zoom?
Bill: Well, I don’t know. I guess the question back to Beefy. Please, hit us up in the comments is, have you used a Rift yet?
Jake: What is that? Is that the headset?
Bill: Well, the Oculus. Yeah.
Tobias: That’s 300 bucks from what I can see. Is that entry level?
Bill: It feels real. You have sensory feelings that I don’t think you get on Zoom. Zoom is very 2D. The Oculus is very immersive.
Tobias: Do you need any other hardware to make it operate? You literally just have the headset and like the– [crosstalk] [crosstalk]
Jake: Haptic body suit.
Bill: Yeah, and I don’t know what this consulting firm is doing. But my buddy, he and I talked about this with like, he just said to me, he goes– So, this is not a presentation comment. But he goes, “The technology is just not there yet. But it’s a matter of time. AR with deep fake tech is going to change the game. Think of watching a movie in 3D on Oculus, where you can pick the characters, and then you deep fake your own face on to the characters.” That’s pretty fucking cool.
Tobias: That’s very near term, stuff like that. It can’t be that far away.
Bill: It’s not that far away. So, then I think about why I’m so hesitant on airlines and stuff that’s airline related is, I could see a scenario where, maybe I go look at the David in VR or AR or VR, I guess. And then I say, “Okay, well, I’d like to fly there and actually feel the experience and touch it and whatever.” But if you get consulting firms in mass adopting this stuff and they’re no longer flying around the US, I don’t know, good luck. A lot of the airlines profit margin is that. Not so much spirit, but like the big hub carriers, I don’t know.
Jake: We inch one step closer to the matrix.
Bill: Well, yeah. Yes. I think why Zuckerberg would say that he’s got the core competency because I’ve debate this–
Jake: He’s a robot already. [laughs]
Bill: Yeah. But it is the next logical extension of social, right, is the idea like what he wants to or my perception of what he wants to be able to do is you’re in your living room and the three of us want to have a conversation, but we don’t want to do it this way. I want to look over here and then look over here and see Jake and Toby, and all of a sudden, I’m doing it, and it feels very real. It’s got a long way to go, but I think it’s inevitable. Who wins is kind of the harder question.
Tobias: So, you’re currently using it to play games?
Tobias: Are they fun?
Bill: Specifically boxing. Yeah, they kick ass. But they don’t know how to knock the guy out and it upsets me. The other thing is, I always hyperextend my elbow. When I’m really going for knockout, I end up [crosstalk] hurting my hands, so I’m like, “Ah.”
Tobias: It feels real then.
Bill: Yeah, for sure.
Tobias: What’s the lag like?
Bill: It’s not. There’s not.
Tobias: There’s no lag?
Bill: It’s awesome. For now, it’s just a cool like novelty toy, but I haven’t checked if they fix Facebook TV, but I would 100% sit down and watch an NBA game on that stuff or NFL if he gave me like a sideline view. I think it’d be sick.
Tobias: Yeah. You’re not sitting around watching it. You’re sitting down as if you’re at the game and you can look around and see.
Tobias: That’s interesting.
Bill: It’s dope.
Tobias: Well, I’ll get one.
Bill: It’s just not there yet.
Tobias: I’ll report back at some stage. I will report back having bought a whole lot of Facebook stock.
Jake and Bill: Yeah.
Bill: Well, I think what I would say is there’s the development and developer community is not there yet. If I were running Facebook, I would just pour money into that. Because I would say like, “The tech has at least demonstrated flywheels in the past. If you can get the developers, you can get the products. If you get that and you can get the headsets out, and that’s how you lead.” It’s almost like a Roku strategy with the Oculus. Not quite. I understand there’s problems with that analogy.
Tobias: Then how does that give him the metaverse, it gives him the only entryway into it or the only entryway into Facebook’s closed system.
Bill: Yeah, I don’t know that he gets the metaverse, but what they’re going to try to do is have their own enterprise software system, and then you can have plugins on top of that, and you can build into their software, and think they kind of want to become windows to the metaverse, and then have a closed system.
Jake: And then it’s just all ads everywhere you look inside, yeah. [laughs]
Bill: Well, a real question is, do people trust them enough to allow Facebook to do it? But I’ll tell you what, I don’t trust Apple at all, and I know, I was too hard on Apple a couple of episodes ago, but I do not believe that, that is some, “Oh, we’re here for you.” Fuck that. That’s so marketing nonsense.
Tobias: Yeah, I don’t trust any of them. None of them are trustworthy. They’re all scary.
Bill: Yeah. I don’t know. I just think it’s a natural conclusion of once you’re public and you have to show growth. I don’t know, I think you get perverse incentives at a certain size.
Understanding Return Ratios
Tobias: I got some questions for you guys. There’s a question here about what’s the difference between return on invested capital, return on equity, return on assets? Do you guys want to take a shot at that?
Bill: Yeah. Return on assets is like your unlevered return on assets. Sorry for being obvious, but it’s the truth.
Tobias: It’s worth. Yeah. Let’s look at what they actually are.
Bill: Yeah. Your asset base, and net income, let’s just assume everything’s clean, and you’re not adjusting anything. So, net income divided by your total assets should give you an idea in theory of like how profitable your asset base is. Your return on equity is going to be influenced by the amount of leverage that you apply to that asset base, and then your return on invested capital includes working capital, you’re going to give yourself some benefit for some payables and maybe some liabilities and whatnot that create the working capital cycle of the business. Your return on assets would not give you credit for any of the positive effect of liabilities to the extent there is any.
Jake: I would add that in general when you’re thinking through return on whatever it is in this domain that it really helps to try to think of it from a businessperson’s perspective. And what is it that is needed to create that dollar of revenue, to create that eventual return, and getting hung up on accounting definitions or academic definitions, they are a place to start. But you have to think through as a business person and really look at a balance sheet and say, “What is required to generate this?” It doesn’t matter what they call it, but in the real world, what is happening? I find that, that will eliminate a lot of the arguments and sloppy thinking around what is a business actually doing.
Bill: Return on invested capital, you can argue that intangible shouldn’t be in that, right? But then, it depends if you’re inquisitive and all that. I don’t know. I will say one thing that I really enjoy talking to Kyler Hasson about this. His perspective, “If you lever up and you make an acquisition, and then you pay down the debt, you’re using equity.” You might get the time value of the equity but fundamentally you’re using equity.
A business like TransDigm that buys a business and then improves the business metric to the point that they can continue to not pay down the debt, that’s truly not using equity. That’s like a wrinkle between these serial acquirers that do it well. Now, one can say, “Well, if you have a bunch of debt, it goes south, is it a zero?” I would say, yes. CLTs. Even though it’s not a zero, folks, I’m just saying, that’s the risk.
The Game Within The Game – Yen Liow
Tobias: There’s a question here about– I saw Scotty Jackson had one about Yen Liao. Someone had suggested to me that I go and do some research on Yen a little while ago and then linked up to his presentation to the Ian Cassel’s MicroCapClub, it’s a really great presentation. It’s worth having a look at. He’s an Aussie. He’s lived in New York for a long time now. I think 20 years or something like that, and he runs a firm called ARAVT Capital. A-R-A-V-T, something like that.
Jake: The game within the game.
Tobias: Yeah. The presentation is called the game within the game. Absolutely fascinating presentation, because he’s got an interesting approach to that micro-cap where they’re still doing the testing to see if the product market fit to the point where they’re in the replication stage. So, they got the business model right and they’re building that.
That’s what their bread and butter is, they’re trying to find those firms that have that rapid period of growth where they’re just replicating and then they’re looking for things that aren’t particularly cyclical so that where there’s the volatilities in the price rather than in the business results. So, if they see lots of volatility in the price, they can take advantage of it knowing that the volatility won’t be in the business results. They’ve got some great returns. It’s a very interesting presentation. It’s worth checking out. I tweeted it out yesterday and I think you can also find it on MicroCapClub YouTube channel. Are you familiar with Yen?– Either of you guys are familiar with Yen?
Bill: I’ve heard fantastic things about him. I reached out to him to do a pod, and he said he’s all talked out, which I can understand.
Jake: [laughs] Mouth taping will fix that.
Bill: Yeah, He’s like, “I don’t know. I shared everything I got for this year.” So, that makes sense to me, man. When you’re ready to share again, let’s chat.
Tobias: Yeah. He did [unintelligible [00:50:49] as well. I think, I haven’t seen that one yet, but have a good–
Bill: Yeah. Everyone that I know that has talked about him says that when he’s talking about compounders and the way that he analyzes longs, it would behoove people to listen.
Tobias: Yeah, Ian says he does a very deep dive.
Bill: Shoutout to Ian. Shoutout to Scotty. 2 of the 10. Bill Miller’s, the third. Who else is out there?
Tobias: [laughs] There’s a lot of guys.
Bill: I wonder if the Buff dawg listening. What’s up Buff dawg?
Tobias: He probably waits until it comes out on audio.
Bill: Yeah, that’s right. He’s deferring the cookie, of course.
Jake: Marshmallow, yeah.
Bill: That too.
Cane’s Chicken Fingers & Costco Hotdogs
Tobias: We’ve got about seven minutes left, amigos. Throw any questions you have. I scroll back through and see if I can find some. Have I tried Cane’s chicken tenders yet? No, I haven’t. The lines– every time I drive down the street for all the chicken places, the lines are just out the door. It’s nuts.
Bill: You even eat stuff like that? You’re beautiful. I assume, you didn’t–
Tobias: Ah, no. [unintelligible [00:51:58] [laughs] I mean, maybe. I’m not saying, no. Friday-Saturday night.
Jake: Oh yeah. Life’s too short. Not to do some of that.
Tobias: How often do you mentally go through any one trade?– How often do you mentally go through any one trade?
Jake: What’s that mean, like reviewing it?
Tobias: Yeah. I’m not sure.
Bill: I’ll tell you what. I do a lot a better if I thought a lot less. [crosstalk] honestly.
Jake: [laughs] That’s [crosstalk] market comment. [laughs]
Bill: No, it’s not. It’s not at all. One of my absolute fucking weaknesses is impatience and overtrading. 100%, I know it about myself and I would just do better if I did the guy spear, buy it and go look in two years and don’t touch it for that long. I sit there and in between a quarter when there’s no real news, I think about stuff and it’s a deficiency that I have and it is one of my weaknesses.
Tobias: Box Combo, no slaw, extra toast is the Canes order. Okay, thanks for that, Beefy. I’ll get that one next time. I got to feed a family of five. So, we get a big hole when we go through there.
Bill: Can we get sponsored by them?
Bill: We need something.
Jake: Something, anyone. [laughs]
Bill: Google just takes these 32 cents every time.
Tobias: All that [unintelligible [00:53:22], she doesn’t go far. You can get a hotdog– [crosstalk]
Bill: I’m just saying. I was trying to tell people about the Gates chip. It’s not my fault.
Tobias: My wife reports that the Costco hotdog, apparently, got to go through security at least in California before you can get access to it [crosstalk] it not rolling up outside. Well, the last [crosstalk] one.
Bill: Can I say something serious?
Bill: The guy from Bridgewater followed up with me. Wrote me very, very detailed commentary. I still don’t know why some of our listeners listen to us. I hope, I bring and we bring some happiness to your life. We sincerely appreciate your input. So, thank you. That’s an honest comment. Except for the trolls.
The Two Sides Of Dual-Class Shares
Tobias: Thoughts on companies with two or more classes of shares and all the voting rights are concentrated in that single family. So, this is something that I did a little bit of research on, because there’s clearly, it cuts both ways. If you’ve got a great family with concentrated voting power, then that’s the ideal situation. If you have a family that isn’t great with concentrated voting power, that’s the worst situation.
So, there’s nothing like quantitative about concentration of shareholders that necessarily leads to better results. Diffusion is great. If they’re bad and you can have some catalytic event to come through and tip them out, concentration is great, if they’re good. So, there’s other criteria there. That’s my two cents.
Bill: My gut answer is, if you’re looking for the huge outliers, you probably want to fish in that pond. I’m thinking like Buffett, Zuck, Bezos, and I’m not even necessarily saying dual class. I’m just saying like, clear voting control. Founder led voting control is probably where you’re going to find the biggest outcomes. But if they do something like Zuck chose to do with all this investment in the metaverse and you don’t agree with it, [crosstalk] you’re screwed.
Tobias: Yeah, you’re along for the ride.
Bill: But if you got liquidity to sell.
Tobias: JT, you got two cents?
Jake: I think, you guys are right. I think founder or at least, owner, operator mindset is skin in the game is hugely important. However, the dual class can create different sets of skin for different shareholder bases, and that could be problematic. So yeah, I think both of your thinking around it does make sense to me.
Bill: I didn’t mean to forget Malone. Love you doctor.
Tobias: Oh, shoutout to Malone.
Bill: Okay. There you go.
Tobias: I saw a chat yesterday. I wasn’t sure it was Pabrai’s. If you had shamelessly cloned Pabrai using 13F data which is delayed, and then you had been fully invested and rebalanced quarterly to the portfolio as it was disclosed. You’ve like handily beaten, I think that the base was 2009. So, this is pretty recent history to date. You’ve handily beaten the MSCI universe that he’s invested in. I don’t know how he has performed relative to that tracking portfolio.
Jake: Like a robot.
Tobias: Yeah. I couldn’t see how he had done, but I just thought it was interesting, because that was one of the things that JT talked about a few weeks ago, and it’s one of the things that I employ in my process that I really try to build up– as JT puts it, build a robot of yourself or build a bot of yourself that then implements the trades without fear of failure, because there are plenty of times that I look at it, it makes me a little bit nervous, too. But I think it’s a better approach and it seems to certainly have worked for Pabrai’s bot. I’m not going to have a lot of people joining me on that journey, but that’s all I’m doing.
Bill: I have nothing to add.
Jake: Yeah. We talked about this already, but the fact that you’re a different version of yourself every time you sidle up [laughs] to the trade desk could be good or could be bad.
Tobias: I’m very [crosstalk] where the sun’s at.
Bill: Do you know anyways to systematize that or maybe track how you’re thinking–
Bill: Oh, okay. Well, maybe someday you’ll have some announcements. I don’t know.
Jake: Someday. Well, we’ll slay this beast.
Bill: There we go. Do it before we eat all that cat poop.
Jake: [laughs] Yeah. Exactly.
Tobias: Eat the cat poop then go and build the bot.
Jake: Then go YOLO.
Tobias: [crosstalk] will be like the 8% and then when you go increasingly nuts from all the cysts in your mind, the bot will stay sane the whole way through.
Bill: But aggressive.
Tobias: But aggressive.
Bill: Sane but aggressive.
Tobias: Yeah, there you go. That’s a good approach. Sane but aggressive.
Bill: Yeah. The conservative aggressive [unintelligible [00:58:22].
Tobias: There you go.
Bill: It’s the next book.
Tobias: [laughs] That’s it, amigos.
Tobias: That’s fun.
Jake: Oh, my gosh. Going out– [crosstalk]
Bill: [crosstalk] would end it. I would say fly, Toby.
Tobias: Thanks, guys.
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