VALUE: After Hours (S03 E44): Returns To Growth And Value, Inflation, $ETH, $BTC And Crypto

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

  • Nothing Is Cheap!
  • What If The Fed Is Wrong?
  • Bitcoin As A Hedge Against Money Printing
  • Learning From Complexity
  • Getting Compensated For Eliminating Risk
  • Investing Strategy – 1 Year At 40% Or 5 Years At 15%
  • Money Printing Is Non-Progressive Thinking
  • It’s Not Alpha It’s Beta Scalping
  • Keynes Investing Style – From Macro To Buffett
  • Insurance Companies Are Compensated By Eliminating Risk
  • Warren Buffett Cashed Up
  • The Problem With Austrian Economics
  • Is Mean Reversion Dead?
  • Valuing Cryptos
  • Grocery Stores Are A ‘Float’ Business
  • Analysing Large vs Small Companies
  • 100th Episode Next Week

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: Going live. Preparing to live stream. There we go. I think, we’re live now. It is 10:30 AM-

Jake: Somewhere.

Tobias: -on the West Coast, 1:30 PM on the East Coast. I think, it’s 630 UTC. I might have accidentally put in 5:30 UTC. Sorry. Sorry, team. All the daylight-saving changes–

Jake: Who can keep track of this? It’s too much.

Thomas: –I was an hour early.


Tobias: I don’t think you’re the only one, we will see.

Thomas: Okay.

Tobias: I’ve got a few tweets.

Thomas: [crosstalk] talking to someone. [crosstalk] about it, though.

Tobias: A few guys tweeted out and said, “What’s happening?” Yes, sorry.

Jake: What’s good–

Tobias: What’s happening, fellas? Bill’s not here. It’s Thomas Braziel.

Jake: Welcome.

Thomas: My brother’s name’s Bill. I could just go by, Bill, today.

Jake: Close enough.

Tobias: Bill and Tom. We’ve got some from the Caribbean, Vancouver, Saskatchewan, Henderson. Bill got that hair did.


Thomas: What’s the craziest locations you’ve seen people dial in from? Can I even ask this question?

Jake: Mars.

Tobias: Yeah, I don’t know.

Thomas: Mars. Oh, it’s pretty crazy. [laughs]

Tobias: Oh, there we go. Townsville. The Aussies are in the house. It’s an early start for the Aussies.

Jake: Exit 9 in New Jersey. Have you seen that one?


Tobias: Midian.

Thomas: The metaverse.

Tobias: I think I want props for getting Saskatchewan and Midian, correctly pronounced.

Jake: Wow. International.

Tobias: Yeah.

Jake: What topics we got today? Toby, do you have anything prepared?

Tobias: Yeah. Jake and I have just come off another podcast, but I found this interesting little chart showing returns and valuations by style, little style boxes. It’s got 10-year annualized, 20-year annualized. I tweeted it out last week saying there’s plenty of confirmation bias in this for anybody looking to support their own story. So, I’ll be using it to support my story because I write a– [crosstalk]

Jake: It’s a Rorschach test of–

Tobias: [laughs]

Tobias: I’ll give Tom a little bit more time to think about his topic, and JT, what’s your– yours?

Jake: Yeah. a friend of the program, Rishi, sent me an article. It’s on complexity that I thought was interesting. There’re a couple other things to just tie it into that I’ve come across in the last few days. So, I was inspired to weave some strands together and we’ll see how it lands.

Tobias: Tom, big ask. Mate, have you got anything?

Thomas: Me? Oh, jeez.

Tobias: Bankruptcy in crypto would be–

Thomas: I got absolutely nothing. I can talk about the intersection of crypto in the legal system because it comes up a bunch for myself when it comes to doing distress in Ether and crypto, not good. For instance, we have DAO, DAO is not eve an legal entity, how are these things going to work [crosstalk]

Tobias: What’s DAO?

Jake: Oh.

Tobias: Distributed Autonomous Organization, something like that?

Thomas: Distributed Autonomous Organization.

Tobias: So, it has no legal structure. What is it? Give me the code.

Thomas: Good question. I think the legal system is quite [crosstalk]

Tobias: Partnership.

Thomas: And also like–

Tobias: It will have a default, like it’ll default down to something. It’ll default down to some form of partnership or something like that?

Thomas: Yeah, but there’s not even like an LLC set up in places.

Tobias: But you don’t need an LLC. You can have a partnership, which is just without any sort of documentation. Any real lawyers can jump in the comments and let me know how that works.

Jake: Oh, boy.

Thomas: Somebody tell me in the chatbox. Well, I would say one thing is how DAOs are interpreted, how tokens are interpreted whether in legal disputes or in courts of law, whether it’s a bankruptcy court. We had this come up where tokens were considered maybe– there were going to be vouchers, there were going to be coupons, there were going to be equity. So, it’s very interesting from the distress standpoint how these are treated and then legal interpretations of crypto. So, I can talk about that. That’s one thing that’s good about. Another distressed topic.

Jake: I’d like to hear that. That sounds interesting.

Thomas: Okay, yeah. I’m going to back that up.

Tobias: Where’s Bill, today? Did we resolve this? People want to know.

Thomas: What did you say? Does anyone know where it is? I don’t know.

Jake: [crosstalk] on an airplane, I think.

Tobias: Somewhere cold. That was what I gathered from the–

Jake: I don’t know.

Tobias: From the tweet?

Thomas: He said something about crisp air.

Tobias: Crisp air. Yeah, that’s where he got to. Rocky Mountain air maybe? I don’t know. Yeah, I pronounced the wrong one. Saskatchewan, not Saskatoon. Sorry, I thought that was how you said it. Anyway.

Jake: Sorry, Canada.

Tobias: Sorry. Sorry, Canada.

Thomas: Luckily, they’re very friendly. So, it’s okay.

Jake: You’re already forgiven.

Tobias: [laughs]

Thomas: You’re already forgiven. Presumptive forgiveness.

Jake: All right. Where do we want to start? Toby, why don’t you go first? Let’s get some confirmation bias out of the way.

Tobias: Yeah.

Thomas: [crosstalk]

Jake: Yeah. Then we’ll work down from there.

Nothing Is Cheap!

Tobias: This is JPMorgan Asset Management slide. It got the 10-year annualized returns for value growth, small to large, and there mid in there as well.

Jake: Whose definition of value?

Tobias: Yeah. That’s a good question. FactSet, Russell, Standard & Poor’s. I don’t know. I’d have to read this. There’s a pretty big disclaimer at the bottom. I don’t know. I don’t think everybody’s got the time for me to get through it.

Jake: No one’s got time for that. Yeah. Okay, sorry.

Tobias: Last 10 years annualized large growth, no surprises, big outperformer, 19.2%, compound for per year. Wow, that is good returns.

Thomas: Great. I’ll put my money in that.

Jake: [crosstalk]

Tobias: Yeah. Small value,11.8%, that’s actually still pretty good.

Jake: That’s a [crosstalk]

Tobias: That’s a very good return. Large value 12.5%, slightly better. Small growth,14.3%. So, the answer was the more growth you had, the better you did, and the big you were, the better you did.

Jake: Not normal, historically, right?

Tobias: Not normal. Yeah. Not the usual experience, not the typical experience. I found this interesting that this is the current price to earnings ratio as a proportion of its 20-year average. So, I’m not going to give you the ratios. I’ll just give you where it stands relative to its 20-year average. So, large growth is 165.6%, and this is the highest.

Jake: That would be like saying normally it’s a 15 PE, but it’s 165% of that, whatever 15 or some number like that.

Tobias: Right. That’s like in the low 20s or something like that. Mid growth is 179%, small growth 141%. Even large value is 118% of its 20-year average. So, it’s expensive. The only one that’s under its 20-year average is small value, but it’s at 98.4%. There is no way to hide [crosstalk].

Jake: So, it’s like average price basically.

Tobias: It’s average price. Yeah. That’s probably going to deliver its average returns which you get in the interim. I don’t know what to make it though.

Thomas: [crosstalk] all of it.

Tobias: I think the returns have followed the valuation. So, the more overvalued you’ve got, the better your returns have been, but none of those things are cheap. It’s not clear that small values– I mean, small values basically at its long run average, which is what I’ve seen in other studies as well. So, you’re going to get some pretty– There’s no way to hide. This is all US. So, maybe if you look globally, have you got a like crypto or Tesla? Maybe, that’s a solution. I don’t know.

Jake: That’s where you hide.

Thomas: Yeah, that’s probably where you hide. I don’t know. Yeah. What are your thoughts on this, Toby? What are we supposed to be doing? Maybe you’re not– Well– [crosstalk]

Is Mean Reversion Dead?

Jake: Well, first question, is reversion of the mean dead? Time to get comfortable with that.

Thomas: Yeah. I’m not going to bet on that one. [laughs] I’m just going to bet against reversion mean.

Tobias: There’re two issues. The growth argument is that the companies that are in that growthy bucket are destroying the industries that they’re in and accumulating all the profit from those industries. So, there’s no scenario where Google’s business mean reverts or Microsoft’s business mean reverts. Then, you’re looking at the index and saying, “Well, the index is like– would blew through 40 on the Shiller PE, not that mad. We’re still pretty greedy on the Fear & Greed-ometer.” Is there going to be mean reversion in those valuations? There may be mean reversion in the valuations, but not in the underlying businesses.

Then, you get guys like me who are hunting around at the uglier end of it, hoping for some mean reversion in the business and in the pricing. I don’t know. I feel like it always hurts and I feel like there’s some evidence that it is mean reverting. So, I still believe in it. But the market can be irrational for longer than you can remain solvent, where I think we’re blowing through any kind of anybody’s estimate of how long we could remain irrational.

Valuing Cryptos

Tobias: Let’s talk Rivian.

Thomas: Yeah. Let’s just punt on that idea.

Tobias: It’s got no revenue.

Thomas: Oh.

Tobias: $135 billion market cap today. Ooh, that’s expensive. $135 billion, you still have to actually do something. You have to be reasonably– well, perform to get to that kind of level.

Jake: Yeah, but not like cast any dispersions on crypto, but that’s– what’s that? A trillion-dollar market cap and no revenue?

Tobias: It’s a currency though. Would you say– What’s the US dollar at in terms of market cap?

Jake: All of it?

Tobias: [laughs]

Jake: I don’t know how to–

Thomas: Have you ever read, there’s a Chris Burnside book. I think that’s his name. He used to work at Ark. He was like their head of crypto. Can you guys hear me? Okay? Is my connection okay?

Jake: Yeah.

Tobias: Yeah, you are good.

Thomas: Yeah. He had some idea where you look at the velocity of money, basically, the value of the underlying crypto. But you don’t need to do that with a lot of protocols or using smart contracts. But I don’t know, I wouldn’t– I mean Bitcoin is kind of its own thing, compared to the other cohort of cryptos. But yeah, I mean, the value [crosstalk] same there.

Tobias: Ethereum’s up there with Bitcoin, isn’t? And [crosstalk] are they sort of–

Thomas: Basically, you can look at their usage and adoption and you can come up with some S curve valuation or I guess stock and flow. But then, you can also look at just what kind of fees are generating in terms of gas fees? A lot of those and think about, “Okay, the valuations are high, but the growth rate has been spectacular,” that doesn’t mean it’ll keep going.

Tobias: Do you value it on that basis? How do you think about it?

Thomas: For myself?

Tobias: Yeah.

Thomas: I try not to overthink it frankly. I studied a bunch. I just rarely get answers.

Jake: [crosstalk] is the right approach, I think, actually. Learn a lot–

Thomas: Well–

Jake: Don’t necessarily assume, you have all the answers.

Thomas: I meet a lot of very smart people in space and some are not, but once you get away from just like people punting around on coins and things, I meet some very, very smart people in the space, and they could have some pretty crazy models about how to value the stuff. But it’s not fool’s gold. It’s just like there are very aggressive assumptions. They’re talking about winning huge categories, and if they work, of course, they’re worth– just like Rivian, they’re going to be worth a huge amount of money. But you pulled a lot of that forward with the current valuations, I don’t think anyone would say against that.

Even the venture capitalists are putting money in the space, and I guess I don’t want to call it smart money, but more thoughtful money with institutions and things that are invested in, some of these managers, they’re not going to lie and say there are a lot of the valuations haven’t been pulled forward. In fact, they don’t mind because most of them have access to valuations that you and I could never get. They do pre-IPO type deals– well, not pre-IPO. The pre-ICO deals where they’re getting tokens, they’re getting rev shares on token, rewards between now and infinity, and they’re getting them now, and you don’t get access to it. I don’t get access to it. So, I look at a lot of this stuff, I find it fascinating.

But even here where we’re talking about [unintelligible [00:13:06], you look at the deal that the VCs got in that, they made out great. You and I are just punting around the coin, that’s a totally different transaction. It’s like people talking about buying B of A versus Buffett’s B of A. It’s very, very different transaction. So, I think some of the people don’t appreciate that sometimes in crypto. Yeah. So, the valuations are insane. But what’s better than expectation in a story without actually having to deliver? Crypto fits all– check the boxes. All these great growth stories, it’s all out here. So, it’s a perfect storm for overvaluation. But I’m still a believer, if that was the question in the technology.

Bitcoin As A Hedge Against Money Printing

Tobias: What is it that appeals to you about it? Is that replacement of gold, as a hedge against fiat currency? Is that the attraction to it or what else is it?

Thomas: Sure, yeah, I like the autonomy, individual sovereignty. People that are real cypherpunks if you go and try to get past all the speculative crap that’s going on, and who knows what some of the tokens are worth, and who knows what coins really worth, some of the ideals and ideas of cypherpunk movement and then now I guess crypto in general movement are pretty revolutionary, if you think about it, like self-sovereignty, censor less internets, Web 3.0 projects that are incredibly interesting. I don’t know if you guys have ever– Jake or Toby, have you ever looked at any of these? Have you all ever looked at any of these like Web 3.0 projects?

Tobias: No. What do they do? What does it look like?

Thomas: There’s one called R Ware, another one– they are basically, the whole internet is going to be archived using like a cryptographic system with rewards. The idea is no one can take down any pages. There’s no censorship of the internet. It can’t be blocked by governments, things like that. The same thing gets [unintelligible [00:15:19] the idea is to have a censor-less infrastructure of Wi-Fi hubs or whatever.

Another one that I really like is supposed to be like a cryptographic– like GitHub. So, GitHub, all those repository of computer code is stored in GitHub, which is owned by Microsoft, just kind of bizarre, and this is going to set up a basic and independent structure where they can have GitHub where people are putting up all the code that basically runs the entire planet of software that we all use, and things we don’t, any electronics, and they’re going to have mechanisms for paying people micropayments that maintain the code or fix bugs in the code and things like that. So, it’s not going to be owned by anybody. It’s going to be basically this sort of out there thing where it’s totally censor less. I think that’s incredibly interesting and powerful.

Who knows what the token’s worth? Honestly, who gives a shit what the token’s worth? It’s not the point. The point is something that is very interesting and powerful, and probably great for humanity. So, that’s why I’m like fascinated by crypto, but that doesn’t mean I’m like going out and have a bunch of coins in my wallet, and oh, my God, it’s up 1,000%. Who cares about that? I understand that people invest money try to make money, but there’s so much more to crypto than just punting around with tokens, which is what’s talked about all day, every day.

Tobias: Yeah, I find that aspect of it, the token punting, boring as hell. But the other part is very, very interesting, the distributed organization, if you can find some way to make that eternal, incentivize people to use it and keep them functioning, because that’s the problem where all of these things kind of break down over time as the interest disappears. But if you can find somewhere to keep on incentivizing people to work on them, then that’s very interesting. Probably, even– [crosstalk]

Thomas: That is provocative.

Tobias: Yeah. It affects that and don’t have a legal– [crosstalk]

Thomas: The thing can hold that they don’t experiment. It could just disappear and all not worthy.

Tobias: You never want the legal entities sorted out, right? You want them to remain in that– [crosstalk]

Thomas: Oh, yeah.

Tobias: Because if you saw at the legal entity, then you’ve got residents issues, you have taxation, you’ve got other things. But if you don’t ever resolve that issue, then it’s just not resolved.

Thomas: Is it possible, Toby, that you could have– Someone could still sue you in a local court of jurisdiction, even though you’re a foreign corporation or foreign DOA. You don’t need to say- you know what I mean, like if I sue someone in New York or Delaware or California just because that’s my location and we had some clear contract, if that organization, it claims to be a DAO, it doesn’t really matter. I can sue foreign, I could sue Jane Doe, John Doe. I don’t know.

Tobias: You can sue anybody, but you’ve got to be able to collect on the damages award.

Thomas: Well, yeah.

Tobias: So that changes the equation.

Thomas: Details, details, details, details.

Tobias: You can sue anybody and win. Just some people just not worth suing.

Thomas: I don’t mean to jump back to what you’re saying, but you were talking about high growth companies and large cap growth companies that not all those high growth companies have those crazy valuations are Microsoft and Google. No offense.

Tobias: I don’t think that those are the ones who have crazy valuations. I think those valuations are stretched and expensive, but I don’t think they’re insane. I think they’re–

Thomas: [crosstalk].

Tobias: [laughs]

Thomas: Working from home. It’s okay.

Tobias: I think there’s been quite a few reckonings to some of these. Oatly down 20%, 50% yesterday?

Thomas: I love the product too.

Tobias: All those things have been blown up a little bit. Rivian, just a matter of time on that one. Time and patience will wear that one down.

Thomas: I think the one of the most interesting opportunities– Oatly wasn’t a SPAC, but it makes me think of all these crazy SPACS. All these busted SPACs are going to be such great hunting opportunities, I think.

Jake: Long or short? [laughs]

Tobias: Well, busted SPACs, busted SPACs.

Thomas: I don’t know. Yeah, busted. I wouldn’t say– yeah, no.

Jake: Okay.

Thomas: Yeah, yeah, yeah, no. I wouldn’t. Although I’ve been stuck in some of the stories when they’re down a little bit and then of course, I’m like, “Oof, glad I didn’t swing at that one.”

Tobias: 2008 and 2009 were fun when things are trading, boy, their cash back and you could get like 15% or 20% just by holding them and voting down there whatever deal they tried to Hail Mary at the very end. I think that’d be happening again.

Thomas: You are totally that guy, Toby. [crosstalk]

Tobias: That was pretty fun. I wasn’t the only one.

Thomas: And no.

Tobias: Yeah, lots of people voted no. In fact, the majority of us voted, no.

Thomas: No, I know. I’m joking.

Tobias: JT, you want to give us some vegetables?

Learning From Complexity

Jake: Sure. I guess you call it a blog post at this point. It’s called What I Learned from Complexity, and it was by Cedric Chin, who I’m a fan of mostly because he said nice things about my book, which always makes me feel good. So, that’s–


Tobias: He’s got taste.

Jake: He’s actually a good twitter follower too if you find him. He’s talking about Michel Waldrop’s book called Complexity that’s about the Santa Fe Institute. It kind of gives the story, the narrative behind that. I think we know a fair amount about these things already but let’s work through some of it. It’s a large network of components that they have no central control to them and they exhibit complex behavior that emerges from sophisticated info processing and adaptive learning that is more than the sum of the parts. The interplay between the nodes is what creates this emergent phenomenon.

He uses actually traffic as an example of a complex adaptive system. I really like it. I’ve tended to use more biological references like ant colonies and things like that for the analogies for complex adaptive systems. But actually, traffic might be better because more people have that as a mental model. We’ve all been stuck in a random ass traffic. We’re like, “What is going on here? There’s nothing, right?” Then, it lets up and there was never anything there to justify why you were stuck in traffic.

It’s impossible to predict. We know what it looks like right now. We could look up, go on to Waze, or Google Maps, or any of these other traffic apps, and we can see what it is right now. But making predictions about it in the future is so– the actual end state of the system at any point in time is incredibly difficult to predict, because there are little feedback loops that get turned on by some little random– the proverbial butterfly flapping its wings, and it leads to these cascading changes within the system that are just impossible to predict. But we know we can observe characteristics about it as it’s happening and we could see tendencies. So, the 405 on Friday night, Toby, what’s that going to look like?

Tobias: [unintelligible 00:23:05] Friday night.

Jake: The 405 at 3 AM on a Sunday night– [crosstalk]

Tobias: Christmas morning.

Jake: Yeah, Christmas morning. What’s it looks like? We can make generalizations about it and have some idea, but it’s incredibly difficult to predict it. So, let’s start with that, load that as a mental model into our minds. And then, I’m watching the 60 Minutes segment from Sunday night, where Ryan Petersen of Flexport, I don’t know if you guys know who he is, but he’s a pretty interesting guy.

Thomas: [crosstalk]

Jake: What’s that?

Thomas: I saw that interview.

Jake: Okay.

Thomas: I saw that interview.

Jake: He’s flying over the LA port with Bill Whitaker, and they’re talking through like, “What the hell? Why are all these boxes stacked up? What’s the problem here? The whole thing snarled up.” It’s a traffic jam effectively. And it’s getting worse. The ports are packed and a lot of it is because the shopping from home binge that took place while we were all stuck at home with COVID, it started to get worse from the beginning, and it’s been growing and getting, it’s cascaded into this. It’s taken much longer, I think, to play out than what maybe all of us wouldn’t imagine. But that’s how complex systems work. They’re really hard to predict like how they’re going to cascade.

Some people are blaming the shipping companies for jacking up rates a bunch because I think it’s like 10x what it was a couple years ago to ship a box from Asia to here. Some people are blaming the ports for not processing the containers fast enough. Some people are blaming the truckers for not being available to get the boxes out of the port, so they’re all stuck there. Some people are blaming the port that the truckers– There’re all these apparently empty chassis with just empty containers sitting on them all over LA that they can’t get back into the port to send them back. The whole thing is just FUBARed at this point.

Now, our governments are like, “Oh, this is a problem. We need a task force to come in here and figure this out.” But complex adaptive systems don’t work on from a task force. It’s this emergent property to it. It has to almost clear itself out, just like we couldn’t say, “Well, we put in a speed limit or even a speed minimum, why is there traffic? Everyone should be going 45 miles an hour on this road because that’s what we said it needs to be.” That’s just not how it works. My hunch is that this might actually take a long time to get figured out and it may take– I don’t know, we may have a snarled port for a couple of years from here and that wouldn’t be actually totally surprising to me.

Tobias: That’s the estimate that I have seen, back end of 2023. When I heard back end of 2023, that’s just like I don’t know. We don’t know how to fix that problem. It’s going to take so long. We don’t know how to do it.

Jake: Yeah, so what are the knock-on effects of that then as far as Christmas? Christmas of 2021 is-

Tobias: It’s off.

Jake: -obviously, has a question mark on it. Christmas of 2022, I don’t know. What does this change in our world? I think there’s actually probably some big stuff that could be a consequence of this and it’s even that these disruptions, like any system, have echoed out fractally into the system. So apparently, the Chicago rail system, that hub is just totally snarled as well right now, and they can’t get boxes to the right places and moved around. It’s echoed out through the supply chain.

What If The Fed Is Wrong?

Then, we have that sort of as an observation. Then, I read Roger Lowenstein had a, I guess, you can call it a blog again of “What if the Fed is Wrong?” is the name of the article. He’s talking about the annual increases in the cost of everything, which are probably, largely related to this supply snafu that we’re running into, but beef is up 20% year over year, furniture 12%, eggs 12%, cars, 10%, clothes 10%, gasoline 50%. We’re talking about like, “Oh, wages are going up” We have this great– everyone’s quitting the great resignation. But actually, in real terms from January to today, real wages are down to two and a half percent. So, I don’t know if wages are necessarily keeping up with this.

Meanwhile, we have another complex adaptive system, which is our whole economy, and then we have this fiat level above that wants to dictate, “Here’s what needs to happen. We’re setting rates for this. We need to have all this stuff happen.” Dude, that’s not how complex systems work.

So, this idea that the Fed is going to engineer a soft landing of all this and be able to raise rates in 2022 or 2023, and thread the needle perfectly between supplies, constraints, and the right amount of money supply to be having circulating around, this just seems like such hubris to me to think that you take a mindset of that this is a washing machine with knobs that you can dial in and pulleys that you can mess with, it’s nothing like that.

That is just totally the wrong model to be approaching this world, and I can’t help that we’re all not going to pay a lot of real physical prices. Well, actual inflation, but also just like the toll of quality of life from people having this assumption that they know the right knobs to turn on a complex system that is incredibly difficult to predict.

These guys, how do they know it’s going to be transitory? They didn’t know that COVID was coming. They didn’t know that the supply chain was going to have problems. They didn’t really know 6% inflation was going to print. They didn’t anticipate this great resignation. They had none of this stuff baked into it. So, why do we think that they’re going to know the answers prospectively from here? I don’t know. I just have to be scratching my head as to why we put much faith in this much power into these kinds of organizations.

Tobias: The articles that I have been seeing are not that it’s transitory now that it is here, but it’s good for you. Inflation is good for you. There’s plenty of articles out there like that now.

Thomas: It’s like fiber, just so good for you. Can’t get enough.

Jake: So, real wage of minus 2.2% is good for me? That’s what you’re telling me?

Tobias: Inflation is good for you. I’ll find some articles and repost them. It’s is funny. I saw that the air quality in Los Angeles is down because of all the ships idling out in the bay. The air quality is [crosstalk]

Jake: So, those are 80 ships apparently off, which is a record and it just keeps building. It’s worse today as it’s ever been. It’s not clearing up. It’s going in the wrong direction still.

Tobias: You can walk to Catalina Island over the shipping containers. You don’t have to take a boat anymore.

Thomas: My kids love it. The giant [crosstalk]

Jake: I don’t know. What do you guys make of this? Am I just like tilting at windmills here and totally off my rocker or are we creating the problems that are going to have real impact?

Tobias: I think you’re exactly right. I think that I’m of your school of thought as well and where–

Jake: This is the problem. [laughs]

Tobias: Yeah, unfortunately, this is complete conspiracy theory podcast stuff where you and I can’t agree with each other and everybody else just tries to be quiet. Let us talk way–

Jake: Let us get demonetize together.

Thomas: Hey, what are you guys agreeing on? You agreeing that inflation is not transitory or the [crosstalk] experiment of monetary policy?

Tobias: Yeah, all of that.

Thomas: Okay. How can anyone not think that at least at least a decent probability of being the case?

Tobias: You go and read any mainstream article out there, nobody in the world thinks this. Well, nobody with a mouthpiece thinks this.

Jake: We’ll cop to it.

Tobias: Yeah.

Jake: What is a trillion dollar or whatever infrastructure, throwing money at it do to solve this problem either? We have a real physical Adams problem in the world that needs to be figured out. It’s a supply chain problem. It’s not a we don’t have enough pieces of paper chasing the supply chain problem.

Tobias: What we need to do is mint the coin. We need to mint a trillion-dollar coin and that will solve the problem.

Jake: What does that do? I don’t understand [crosstalk].

Tobias: It solves the problem.

Jake: Okay. Well, fair enough.

Tobias: You’re not serious unless you’re considering minting the coin. I’m told.

Thomas: I think maybe it’s more of an agency issue, which is like a lot of the people, it’s hard to come out against these things. You talk a lot about momentum. There’s so much momentum behind not this. So, what’s working is working, what’s not is not and if you want to lose your job, you can really stick your neck out there. Now, if you’re a smaller person in the ecosystem, you can probably be vocal on it and it doesn’t cost you as much, but to be big and outspoken against, I’m sure you know– [crosstalk]

Tobias: You don’t get to invited Davos with these kinds of views.

Jake: No. We’re out for Davos for sure. [laughs]

Thomas: Yeah, there goes our Davos tickets. Yeah. I don’t know how someone can think that MMT is not grand experiment. For myself, I definitely think it is. That’s maybe partially why I’m in the crypto but also, I got it in a very backdoored free optionality way. But I’m actually gotten quite interested in gold as well. When you listen to crypto people, especially bitcoiners, most of them, they sound a lot like gold bugs. What I love is they don’t think that either–

The two parties are like, ones over here, ones over here, and they’re like, you listen to one, they’re like, “Uh-huh.” That’s the other one, they’re like, “Uh-huh.” You’re like, “You guys could actually be really be friends.”

Jake: Really good friends if you just– Yeah.

Thomas: Peter Schiff, I think that you guys could actually, there’s a dance here, anyway. But it’s funny to listen to people that are crypto and they don’t think– and the same thing with–

Jake: Yeah, totally.

Thomas: [unintelligible 00:33:40] someone who’s 17 or 20 years old and they’re in the crypto, you just think you basically sound like a 75-year-old gold bug. [laughs]

Jake: Yeah. [laughs]

Tobias: I mean, it’s not wrong. It is funny. It’s funny how, it’s such a conspiracy theory, so far outside the mainstream that you read every day, and don’t talk to many people who disagree. That’s the funny thing. Someone drop in the comments here. Tell us where we are wrong.

Tobias: This wasn’t live, right? We’re just talking. [laughs]

Tobias: No. This isn’t going out [crosstalk]. We’re just talking by ourselves.

Thomas: [laughs] The feed was cut.

Money Printing Is Non-Progressive Thinking

Tobias: If you print a whole lot of money and you reduce the number of goods that are in circulation or able to be consumed in a timely fashion, that’s almost definitionally inflation. Then, that’s why the argument is that it’s transitory. But the money printing is not transitory, that’s going on and then the snarls is going to be real for a very long period of time. Maybe when the snarl’s resolved in the back of 2023, if we print enough money between now and then, we’ll be okay.

Jake: Here’s the problem, though, at least for me is that the velocity of money has been incredibly low, and that is largely a psychological phenomenon. So, if you monkey around in here too much and you tip the scales of the psychology part of it, it’s totally possible to me that you move from velocity– if velocity picks up at all, you have the dry powder of all the little token, all the claim checks that would be chasing these goods and services, that tips over and now the genie is out of the bottle, and now you run straight to 10%, 15%, I don’t know, whatever percent inflation and good luck.

Then, it’s going to be real painful getting that back, that genie back in the bottle and a Volcker type of backbone and fortitude is needed. Like, boy, I don’t see how many public intellectuals are much discourse where there’s a Volcker type of mentality of pain today for a better future.

Tobias: Chapwood had the inflation running between 11%, 15%. I think, it was a 11% pretty consistently for Los Angeles, anyway, when I had a look at it, that’s why Chapwood got nuked.

Thomas: [laughs] I have to say, don’t you think the solution is that, it forces an investment program, I guess? I don’t know if it is. Well, I know it’s not investment, entertainment, just entertainment. But what do you say the prescription– Okay, some people try to do crypto, some will try to do gold or whatever but the prescription can just be finding great businesses. I think Buffett’s totally right about this, not that I need to tell Buffett he’s right about anything, nut finding great businesses that can compound or have incremental high returns on an incremental investor capital is clearly always going to be the best hedge if you don’t pay a ridiculous price for it.

Tobias: That’s a solution for guys like us who’ve got enough money to cover what we eat every different– [crosstalk]

Thomas: Yeah, that’s true. Right. It’s tough on wage earners.

Tobias: We’re fine on that front. Yeah, it’s tough. you’re closer to the poverty line. All the money printing– Someone made the comment before that AIC and Peter Schiff are pretty close together. They’re just disagreeing on the policy prescription. They both identify the problem. It’s surprising to me that some of the left don’t figure out that the money printing is a big part of the problem. It benefits those in the top 1% at the expense of those closest to the poverty line.

Jake: That is kind of a grotesque outcome, isn’t it?

Thomas: [crosstalk]

Tobias: Say that again?

Jake: That there is a grotesque outcome in a lot of ways and very counter to what you would think that a progressive agenda might prescribe.

Tobias: Look at the cost of a turkey. They do this to the cost of the turkey in a year on year. It’s gone up modestly every year. There are other competing factors, like we’ve become more efficient at growing turkeys and getting stuff to places, all sort of stuff, but honestly, there is a natural deflation there because technology advances and creates deflation. So, you’ve got to work really hard to get those prices up.

Jake: [laughs]

Tobias: So, year on year, turkey price has gone from $20 for a turkey in the last year to $55 this year.

Thomas: Wow.

Tobias: That’s going to sting.

Thomas: What is the Big Mac Index? That’s my favorite one. [crosstalk]

Tobias: That’s [crosstalk] the economists purchasing power parity.

Thomas: Right. That one’s good for national trade.

Thomas: was just thinking of Big Macs but yeah. My brain wandered. [laughs]

Jake: So, do they factor that in when people are substituting for– Shit, I know I went to Costco last week, and I came home with hamburger and not steak. [laughs]

Tobias: It amazes me that they’re allowed to count that as against inflation. It’s just a thing you do one time. What a bullshit kind of assessment of the CPI to do. It’s outrageous that they can get away with it.

Jake: Hm.

The Problem With Austrian Economics

Tobias: Also, the hedonic adjustments, give me a break, you don’t get the advantage of technological advances to say that that’s deflation and therefore we need a policy prescription because the TV or the computers are faster. So, now are we going to print some more money to make up for that? How? Why does that work?

Jake: Toby, you’re not going to get a PhD in Economics now. Honorary.

Tobias: I’m not. This probably going to be demonetized. I’ll probably be tarred and feathered.

Thomas: [laughs] I don’t know about that. There’s got to be some schools of economics who thinks this is kind of MMT, it’s kind of crazy. I don’t even know.

Tobias: Austria has.

Thomas: The Austrian, yeah. [crosstalk]

Tobias: But Austrian’s, as soon as you say Austrian, you can be dismissed because it’s-

Jake: Crackpot [crosstalk]

Thomas: Whatever I–

Tobias: [crosstalk] simply the Austrian.

Thomas: I think I went to their website or maybe I was on their email list or blog list or something, and I would get some things and be like, “That’s stuff is pretty crazy.” I don’t know. I’m mentioning that bit of Austrian. I don’t know about all stuff that we’re talking about.

Tobias: Which part did you object to?

Jake: [laughs]

Thomas: I can’t remember. It was stuff that I was not interested in. I’m very one dimensional. I find myself really only interested in things about investing. So, I think we got very political. I was like, “Oh, God, the problem is–”

Tobias: No, there’s political–

Thomas: Going well and going right.

Tobias: That’s the problem. It’s political but it’s all political. There’s one form that is politically acceptable and the other one is not. Investing with Tom says, 5’10” is the new 6-foot inflation. I said that’s my solution for daylight savings time, too. So, I think in the summertime, we should make the foot 10 inches. Therefore, when you go to the beach, you’d be six feet tall. My short kings out there who are like 5’6″ and below, I get you to six feet for the summer. Who’s with me?

Jake: What else are you measuring?

Tobias: [laughs] I was– [crosstalk]

Thomas: Taking about inflation. I think it’s still about inflation.

Tobias: That’s my [crosstalk] prescription.

Jake: Yeah. In fairness, I’ve done quite a bit of study of Austrian economics over the years.

Thomas: Oh, really?

Jake: I find it to be similar to value investing actually. I feel they’re sort of cousins in a way of, this is what a business person would look at and say like, “Okay, here’s the interactions of people and here’s what the business is doing. Therefore, we can say some things about what does this system exhibit.” I personally find it to be compelling and I’ve had some kind of grandiose ideas of actually trying to marry the two together into a cohesive framework and maybe talk about it at some point, but it’s like– [crosstalk]

Tobias: There’s an article by Chris Leithner called, Value in Australian economics, was posted on [crosstalk] a lot long time ago.

Jake: When Mises met Graham or something like that?

Tobias: Is that it?

Jake: Yeah.

Tobias: That’s a good article.

Thomas: Wait a second. Oh, I want to look that up. So, you mean like, what the idea of like the boom-and-bust cycle, and maybe even weaving that into the marathon idea of– what is it called capital cycle theory?

Tobias: Marathon is very Austrian, right?

Jake: Yeah.

Thomas: Yeah.

Jake: Yeah, and also entrepreneurial errors, and how do they manifest within the system, and what causes the entrepreneur to make an error as to what do people actually want from that business, I find it to be a pretty useful framework myself. Maybe I can’t always express it, but it’s somewhere in here.

Keynes Investing Style – From Macro To Buffett

Thomas: Speaking on that topic of macro and then putting it into investment, sort of a policy or strategy, have you guys ever heard the book, Keynes on the market?

Tobias: I’ve read a few Keynes books possibly– [crosstalk]

Thomas: [crosstalk] Dude, it’s phenomenal. It’s basically– I guess, what do you call it where it’s like letters that he wrote back and forth to someone about his changing– you call that compendium? I don’t know what you’d call that. But basically, they take all the letters that he wrote to a bunch of his friends over the years and it shows his investment philosophy, how it changed over the years from being– and I mean, they’re cute papers that came up and got pressed in like Jeremy’s Zweig–

Tobias: Jason Zweig.

Thomas: Jason Zweig.

Tobias: Wall Street Journal?

Thomas: Yeah, they pick up in the Wall Street Journal. But he, early in his career, of course, was very macro, and then towards the end, he was basically an icon of clastic like value and deep dive contrarian.

Tobias: He was very Buffett like. And Buffett gives him a shoutout in one of his letters-

Thomas: Oh, really?

Tobias: – as being one of the models that he used to formulate his own investment– [crosstalk]

Jake: Chapter 12, specifically, from his main treatise on–

Tobias: The General Theory?

Jake: The General Theory. Yeah.

Thomas: Oh yeah. Totally. Yeah, General Theory, Chapter 12 is great. Oh, my God. Man up from heaven.

Tobias: It’s funny that Keynes, he thought that his superior understanding of the cycle would be the thing that would help him. So, he was global macro and blew up twice, and got bailed out by his dad.

Thomas: [laughs]

Tobias: Then, he learned his lesson and he makes this statement, and that’s the statement that Buffett quotes where he says, “The more I do this–” the more I think he just try and find businesses that are going to do better over time, and you just try and participate alongside them.” But his investment strategies were interesting. He did deep dives into how much money you could make per car in some of the automakers and things like that. He is a good investor.

Jake: He bought Tesla early? [laughs]

Tobias: He was very early in Tesla.

Thomas: Very early.

Jake: Oh. Actually, the Tesla, the man. [laughs]

Tobias: I read about it in Concentrated Investing because I covered his investment strategy in that. Because he ran a couple in King’s College and he ran two insurance companies, and he has some great quotes too. The bottom of 1929 when everybody was devastated and the performance in one of the insurance companies wasn’t great, they fired him. In the other insurance company, he said, “We can liquidate now and put ourselves into bonds, but basically, nothing matters at this point. If we do that, we’ve locked in losses whereas if we stay long in this stuff, and then recover, we’ll probably will recover.”

Jake: At least, we have a chance.

Tobias: Yeah, and he was right. His performance was excellent over very long-term. He had very, very good performance. But as a value investor, not as the sort of global macro genius that he’s regarded as today among some quarters.

Jake: Well, in fairness–

Tobias: I should have said– I referenced the wrong book.

Jake: I feel like the salad bar picking what you like from what Keynes said and not the whole prescription has been a lot of the problems. So, I think when people blame Keynesian economics, I think no one ever does the part where you save money for the rainy day when times are good. It’s always just pump, pump, pump. So, to call MMT Keynesian is maybe not fair to Keynes’s original intentions.

Tobias: Yeah. I still think it would be difficult to implement even if you were trying to do it because–

Jake: The complex adaptive system conversation we already had.

Tobias: Yeah, Timing’s hard. Timing in anything’s hard. There are investors who studied this stuff who understand that you can’t get the timing. Have a look at any of Cliff Asness’ AQR articles where he talks about how hard it is to time factors. He was calling for a value recovery. To be fair, he was probably only up by about 12 months which, in the grand scheme of things, it’s nothing.

Jake: That’s pretty good. That’s nailing it in the grand scheme of things.

Grocery Stores Are A ‘Float’ Business

Tobias: There’s a couple of good questions in here about grocery stores. What does inflation do to whole foods and sprouts? What does inflation do to grocery stores? I can’t remember but I do remember that the last time, the 80s, a whole of inflation from the 70s, the 80s, a lot of the raiders went after the supermarkets and I don’t know why they did that.

Jake: Well, just generally speaking, unit economics of a grocery store are incredibly thin margins, high turnover, high velocity of inventory. So, theoretically–

Tobias: It shouldn’t impact too much as long as you’re not holding on to it for long.

Jake: Yeah, you’re probably passing through most of– [crosstalk]

Tobias: You’re still getting squeezed. Constantly squeezed but you shifting–

Jake: But you always were. You were always squeezed on a pretty thin margin.

Thomas: Yeah. I knew someone that worked for a private equity firm that bought– one of the big private equity firms and he was telling me, “Yeah, the whole thing is like almost the float business. Grocery store is like a float business.” I was like, “What do you mean?” I was like, “Float like insurance float?” He was like, “Yeah.” I was like, “Really?” So much of their actual margin comes from that velocity, and then, I guess, just the money they make it sitting in the bank while the velocity is going like this. So, I don’t know that prices make a huge–

Tobias: I did hear a story like that. I thought it was Aldi but it might have been some– I’m thinking that it’s Aldi now but the story was it basically they made no money from the entire supermarket operation. They only make the money from the float.

Thomas: Yeah, that’s what this kid was saying.

Tobias: Costco is in the same boat. Costco doesn’t make any money from its business. It makes it all from the subscription fees.

Jake: Yeah. It’s a little bit plus margin but mostly membership fees.

Tobias: Or, the profit equals membership fees. Is that an urban myth?

Jake: No.

Thomas: I don’t know.

Jake: –If that’s real.

Thomas: That’s fun, Nick Sleep. Ask him what he thinks. I don’t know.

Jake: Let’s ask Charlie.

Tobias: Yeah. Did you guys see Mohnish dumped Baba?

Jake: Trimmed, is what I saw.

Tobias: Trimmed. Did not dump, okay.

Jake: I don’t know.

Thomas: Fade? Fading. It’s fading it.

Jake: Who knows?

Analysing Large vs Small Companies

Thomas: I don’t know. How do you get into these big businesses? How do you analyze? Maybe he’s got real people working on it. I don’t know.

Tobias: Analyzing the big businesses. In some ways, big businesses are a little bit easier because they’re a little bit more stable. It’s the little ones that are whipping around all the time. Little ones–

Thomas: Yeah. They need to balance.

Tobias: Little ones through this whole shutdown have been really beaten up because where they’ve got one product and they’re sourcing from only one supplier often, if the supplier can’t get it, then they’re in trouble.

Jake: They do also tend to be easier though operationally to untangle big business.

Tobias: To understand, yeah. They get more probable– I think the bigger ones are more statistical and probabilistic. Dead end.

Thomas: I don’t know. There’s a lot of ways to make money.

Jake: Yeah. [laughs]

Thomas: Lots of ways to make money in the market. I don’t want to knock anybody. I’m sort of a special sit guy, and I’m trying to reform myself, because I think we have to–

Tobias: Which way? Reform to go further into special sits or to come out of special sits?

Thomas: I think to set a higher bar for special sets because the after-tax returns aren’t as good if you can compound at a decent rate in a real business. I use real business pejoratively-

Tobias: [laughs]

Investing Strategy – 1 Year At 40% Or 5 Years At 15%

Thomas: -to make sure it’s a real business. Not some bullshit business. Yeah, actually, it’s funny. We’re talking about topics, I’m changing my topic. That’s all I’ve been thinking about recently, is what’s better? One year at 40 or a five year at 15, and I pay the tax after the five years? Actually, I can even own in year six, seven, and eight, and I just peel some off.

Tobias: It’s so true.

Jake: It’s true.

Tobias: When you do that tax [unintelligible 00:51:09], tax [unintelligible 00:51:10], to get over 15% in a year. I mean, I slightly forget this, but I think it was long-term– Even transitioning to long-term from short-term– Short term 40%, it’s like a long-term 15 something like that. And short-term 40 is– [crosstalk]

Thomas: so, my point is even. Yeah.

Jake: Sounds high.

Thomas: Yeah. Go ahead. You have to crush it.

Tobias: Maybe it’s no tax. Maybe it’s no tax 15 equals like– I can’t remember exactly. Wes Gray did the calculation a few years ago and the numbers–

Thomas: Quote wasted. [laughs]

Tobias: The numbers, they’re shocking. I was like, “How many times do I see an easy 40% in one year?” You see some options stuff like that, you can get some options that IRR out at 40% over the course of year and if you’re going to do that repeatedly through year. But you’re working hard to get your 40 when you can get your 15.

Jake: Yeah.

Tobias: There’s a lot more 15 around.

Jake: I’ll just play devil’s advocate here, Thomas, and say that this was sort of the realization that everyone has been coming to the last couple of years and that a lot of it, I can help but wonder– [crosstalk]

Thomas: I’m not unique? I’m not a unique snowflake?

Jake: Well–

Thomas: You’re hurting my feelings right now. It’s really hurting.

Jake: It’s possible that it is priced into that in such a way where it’s not that 15, and it’s more like do you want that easy five now or maybe less? I don’t know. So, if it was 15, I’d say, “Sure. Yeah, that makes sense. Let’s just do that. That’s easy. Let’s just earn 15% ROE from here on these businesses,” but I think a lot of that might have been pulled forward at this point as everyone’s come to that realization. And again, Buffett is 30 years ahead of all of us in the understanding and application.

Thomas: Yeah.

Warren Buffett Cashed Up

Tobias: Buffett’s been selling some stuff. Buffett’s been raising cash. Not that he’s a timer. He’s just what he is. Sorry, keep going.

Thomas: I might even say it’s not relevant you know what Buffett doing. But yeah, we have to optimize for yourself your own situation. For myself, I’m getting to the point where taxes really matter and I really think long and hard about this, and also for just quality of life. Sudden death securities analysis is a lot of work versus finding good businesses where you could feel like you’d be part of a company that’s going to grow for 10 or 15 years or something.

Recently, I bought a stock maybe a year ago, and then someone recently– it’s called Basic Fit, which is basically a European equivalent of Planet Fitness. Let’s just call it that. Planet Fitness, of course, has gone up like 10x. So, hey, why can’t Basic Fit? It’s much more complicated than but the idea is this is a real story with like a real owner operator, where this thing could probably compound for 10 plus years, and you think, am I going to make 40% on this in a year?

Okay, maybe if the valuation gets pulled forward, but you could probably compound at it, 10 plus percent, maybe more, maybe 15%. Who knows? After tax, it’s probably going to be better than all of this gunslinging that, I will say, we all try to do, but I’m definitely guilty of. So, I’ve been looking in the mirror a lot and thinking about [laughs] whether I really have any more shootouts in me or if I should be looking for real companies to invest in. Anyway.

Jake: Give me chaste, but not yet.

Tobias: [laughs] I don’t think you have to be at that rate– I think there are some 10% to 15% returners around, in the US at least.

Thomas: Yeah.

Tobias: We don’t have to do anything too heroic to get there. To be fair, there like to–

Jake: What’s your exit multiple on that?

Tobias: Well, I assume no change in the multiple these days. I’ve learned my lesson. I do all my calculations based on yield and reinvestment, and just hope that I don’t get dinged on the multiple on the other side. So, I’m trying to buy multiple, it’s submarket multiple with the hope that even if it doesn’t move.

Jake: It stays submarket.

Tobias: I try to buy companies that are better than the average at a discount to the average. Hopefully, that works out.

Getting Compensated For Eliminating Risk

Thomas: I’ve been meeting with a lot of managers recently just to try to like think about allocating and whatnot and there’s some incredibly talented people. I don’t know that the talent separates some of these people. I think, sometimes, it’s just age and experiences, and other times, I see at them and like, “Hey, this strategy is probably good for you but as an LP, I’m not sure it’s so great. You’re really turning the book a bunch,” and just certain things that they’re doing, you think this is not optimal– Every time– [crosstalk]

Tobias: In what sense? Too much risk for the return? Too much trading for the return?

Thomas: All the above. No. Yeah, it depends. Sometimes, it’s more institutional oriented. So, I’ll see the strategy and I’m like, “Yeah, you’re really sharp. I’m sure you will make a solid 10.” But this is a ton of work and a ton of just complexity. I see a lot of complexity to make returns that I think you could make this in a lot more simple fashion. But they’re optimizing for themselves. They’re optimizing for their GP, and they’re optimizing to try to get institutional capital, things like that.

So, every time we have the discussion, any discussion around, it’s like what are you trying to optimize for? I don’t know. I feel like that can really lead you to different strategies. I find a lot of complexity with very little upside. So, for me, whenever I see complexity, I’m like, “That’s okay. I just have to be compensated for that complexity.” When there’s a bunch of complexity and yet, I’m not getting compensated, in fact, I’m probably going the other way, I’m like, “Eh, why?’

Tobias: Yeah. I’m with you 100%. I just try to pick complexity out all the time these days out of everything. Get rid of the complexity, get rid of the risk. Just lower both relentlessly. Then, whatever return–

Thomas: I don’t mind it actually but you have to be compensated, wildly compensated.

Tobias: Yeah. The more moving parts you have, the more compensation you need. You need to pay us– you need the convexity to be bigger for the complexity. There’s my t-shirt slogan, something like that.

Jake: Put that on a t-shirt.

Tobias: [laughs] Okay.

Thomas: Well, put on a t-shirt. Call the printer and they would be like, “That’s an extra $20 a shirt. I’m sorry. It’s to many words.”

Tobias: [laughs] I only voted in one– [crosstalk]

Thomas: They’re like, “All right.”

Tobias: Not the typewriter font.

Thomas: Today, I was working on like a litigation finance deal we’re working on and this sort of issue came up. It’s actually quite complex. The issue is, it’s so complex, there’s so many moving parts, that you have to make it as simple as possible, and you have to do your best to make sure you’re just getting compensated for the risk, because there’s no way to beat around the bush. It’s risky. But there’s enough facts and tealeaves to point that this would probably be a very good risk reward if you’re compensated for it. I don’t know. Again, that’s been going through my head, which is some of the stuff even I do in my own portfolio, I’m just like, “What am I doing? Is this for entertainment? Why am I taking on so much heartburn?”

Jake: Uncorrelated returns though might feel pretty good, potentially.

Thomas: Nothing is truly uncorrelated.

Jake: That’s one of the– well, I mean, isn’t that one of the selling points about what you do though, is that tends to be hopefully somewhat uncorrelated from market returns?

Thomas: Some of the stuff we do, yeah, for sure. I think that there’s a great– we’ve been over this. Toby, I think we spoke about eons ago when you had me on the pod which, thank you for having me on the time and thanks for having me, again. But I think I was saying, what’s his name? Andrew Redleaf, the guy from Whitebox, the founder of Whitebox. He has two great investment saying which I just love. One of them is, in investing, everybody thinks you get compensated for taking risk. I had the opposite theory, which is, I think you get compensated for eliminating risk. His theory he gives is twofold. One he says a tightwalk roper, a tightwalk roper–

Jake: [laughs]

Insurance Companies Are Compensated By Eliminating Risk

Thomas: A tightrope walker. That’s a tongue twister. Everyone thinks, “Oh, he gets paid a lot of money because he walks on a tightrope, and boy, isn’t that dangerous and think, okay, he’s taking all this risk.” Actually, it’s the opposite. If he dies the first time he walked on the tightrope, that’s not a great compensation at all. So, really, he’s getting compensated because as a kid or as a young person, him or her, probably really practiced a ton to the point where they almost eliminated the risk, and that’s why they make a lot of money because they don’t die the first time they get out there. In fact, they can walk a gazillion times, because they practiced so much. In fact, they’ve eliminated the risk to make some money. Then, another example he gives is like an insurance company. Everyone thinks, “Oh, my God, insurance company takes so much risk.” But actually, the insurance company is compensated by eliminating the risk through the law of large numbers. So, it’s actually the opposite of everyone thinks.

I think similar to what we do is, we underwrite a portfolio of things to where we’re hopefully not– I don’t want to say we’re eliminating risk but we’re really catching like an extra amount of return by-

Jake: Per unit of risk.

Thomas: -somewhat, yeah, per-unit risk across the board. We write a bunch of policies, and then across these policies, we make money. I think that’s just any business. I don’t know that that’s an investment strategy.

Tobias: Yeah, I couldn’t agree more.

Thomas: There’s another too. I forgot what the other one was.

Tobias: Well, [laughs] we have to have you on to get the second one, Tom.

Thomas: Sorry, I’m a talker by birth. [laughs]

Tobias: Do you have the second one? Can you look it up?

It’s Not Alpha It’s Beta Scalping

Thomas: Oh, you want to hear it? Okay. The second one, that was a great one. This was going to be a letdown [unintelligible 01:01:47] because it’s so great. He says– what does he say? It has to do with, it’s going to come to me. Oh, most guys think they are producing alpha when they’re managers. They’re not producing alpha at all. Most guys, he refers them as beta scalpers, meaning you have a very specific skill set, and you overlay that on some pool that you’re playing in.

I don’t know like TNT companies or if you’re doing bankruptcy trade claims, that’s the return for that market. If you’re skilled, you can access that return. So, it’s not really alpha. It’s really just beta, but you have a particular skill that allows you to– he calls a beta scalping. We could post the paper in the show notes. He wrote an article about this. But I love the idea because it makes you get out of this mindset of like, “I’m supposed to be out there outsmarting everybody.”

Tobias: Good stuff. That’s time, folks. Same bat channel. Same bat time next week.

Jake: Well, next [crosstalk]

Thomas: Too fast.

100th Episode Next Week

Jake: Extravaganza, next week.

Tobias: Oh, it’s our 100th. It’s our 100th next week.

Thomas: Whoa.

Tobias: And we’re doing something special.

Jake: We have something in the works. Maybe, we’ll see.

Thomas: Cranberries?


Thomas: Cranberry and turkey?

Jake: Well, we can’t afford that-

Thomas: Can we afford turkey?

Jake: -because of inflation. [crosstalk]

Tobias: We dropped the first one on Thanksgiving in 2019. So, this will be 100th on Thanksgiving. 2021.

Jake: Oh, I love that kind of symmetry, don’t you?

Tobias: Isn’t that amazing?

Jake: All planned.

Tobias: All right, dude. This is fun. Thanks, everybody.

Jake: Thanks, Thomas.

Tobias: Thanks, Thomas.

Thomas: Thanks, guys. Thank you.

Tobias: See you next week. Bye.

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