VALUE: After Hours (S03 E45): 100th Episode Special – The Value / Growth Reversal, Munger’s Mental Models, $VIX

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In this 100th episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, Tobias Carlisle, and friends chat about:

  • Munger’s Mental Models
  • This Is The Best Time Of Year To Buy MicroCaps
  • The Cockroach Portfolio
  • Shoot First, Ask Questions Later On Buy Decisions
  • Are We Reaching The End For High-Growth Stocks?
  • No Matter How Confident You Are, Limit Your Position Sizing
  • Nasty Undercurrents, More 52-Week Lows
  • Finding Opportunities Where All The Investors Have Left
  • A Thousand Brains
  • SARK – Anti-ARKK ETF
  • Inflation Is Good News For Value
  • $VIX Is Non-Tradable
  • Dispersion Trades Are Working
  • What Went Wrong At Peloton?
  • Ted Weschler – How To Make A Lot Of Money
  • Zoom Stock Down 140% YTD
  • Ed Lampert – Sears And Fake Online Accounts

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: All right, fellas, we are live.

Bill: Yeah, buddy.

Tobias: What’s up, amigos? It is the 100th episode of Value: After Hours. It’s two years, Thanksgiving 2019 was the first drop when we were recording them. Now, we do them live, madness. What’s happening, fellas?

Mike: The value investors glasses. It’s all about recycling, guys. This is an ESG [crosstalk]

Tobias: Mike’s incognito.

Mike: Yeah, that’s right. [laughs] What’s up, guys? Thanks for having me on.

Bill: Yeah. It’s been a while since we saw each other.

Mike: I know. It’s happy 100. My God, 100 episodes, how do you guys do it a hundred times? That’s insane.

Jake: Not well.

Tobias: [laughs]

Bill: I don’t know. People listen all the time. That’s the shocking part.

Tobias: We get some nice shoutouts from everybody. Melbourne, India, Abu Dhabi, what’s up? I think Townsville’s usually in the house too. Townsville’s like 100,000 people in Australia in Queensland. most of them watch Value: After Hours. [laughs]

Jake: It’s the whole time.

Bill: Two of them are always listening. I like it.

Tobias: Chapel Hill, what’s up?

Tobias: So, I’m not clear that this is a case but I’m going to tell that story I think we’ve got the value growth reversal, fellas. Who’s with me, one year in?

Jake: Ride or die.

Tobias: It does seem like– [crosstalk]

Bill: It’s a [crosstalk], Toby.

Tobias: Bundaberg, Bundy in the house, Gold Coast. Hey, Aussies, What’s up? Sweden, Netherlands, It’s Townsville.

Bill: I wouldn’t mind a reversal because I’m about three months into every day that I log in just seeing a slow grind blower in the account, which is fun. So, it’s like constantly getting flicked in the balls-


Bill: -not really into kick in the nuts, but just a little flick.

Mike: I’m the same, but it’s been six months. But also, just you got three months in front of you. So, enjoy the ride, buddy. It’s good times.

Bill: Turns out we have some overlap.

Mike: Turns out.

Tobias: Yeah, I heard that from the beginning of 2018 to about September 2019, maybe February 2020– Oh, sorry, no, September 2020, what am I talking about?

Mike: Yeah. When we did our podcast together a year ago, Toby, you were just coming sort of at the– You didn’t know, but you were just coming sort of at the end of that. So, you had taken your pain [crosstalk]

Tobias: Mate, I was at the bottom of very deep well staring up at a tiny dot of light, trying to hold true to the faith.

Mike: It puts the lotion on the skin, Toby. It’s the solution– [crosstalk]

Tobias: [laughs]

Jake: Yeah.

Mike: [laughs]

Bill: I’m so desperate, I’m contemplating sobriety.

Mike: Oh, no. Don’t do that.

Tobias: Ah, don’t do it. That’s a– [crosstalk]

Mike: It’s the wrong time for that, Bill.

Jake: I thought you’re going the other direction.

Bill: No, I’ve done that for too long.

Tobias: I don’t really have a topic other than the fact that I saw Ryan Kirlin who’s at Alpha Architect had a note today that said that even though value has had a pretty good 12 months, the spread is still as wide as it’s ever been on an EBIT/EV basis, which is The Acquirers Multiple. So, I’m also pretty excited about that.

Bill: I have a question to spring on you gentlemen on the 100th episode. As you guys think back, it’s a lot of episodes. Does anything jump out as your favorite episode over the last however many weeks? I mean you’ve been doing this for almost two years now, I would guess. So, is there a favorite amongst the hundred between the three of you? [crosstalk]

Bill: I’d say Episode 4.


Jake: What happened then?

Bill: We made it longer than I anticipated.

Jake: I spent playing with house bunny since then.

Bill: Yeah, pretty much.

Tobias: The first live one was pretty fun, I’ve got to say, the first one that we dropped–

Bill: Yeah, it was fun.

Tobias: Because we recorded them initially, and then the first one got dropped on Thanksgiving. Just because I was like, “Let’s just see what happens if everybody’s at home.” And it went absolutely bananas. It was much bigger than any other one that I had done to that point. And then, I thought this might work, and then we went live. That was also really fun. That was another one that sort of stood out. So, we’ve been live since March 2020. Did you guys realize that like we–?

Mike: Wow.

Tobias: The first live one was basically the bottom [crosstalk]

Bill: Yeah.

Tobias: I’m not saying that we caused the market to recover but I’m not saying [crosstalk] either.

Bill: We are not saying you all have to thank us but we’re also not saying that, that you don’t, you do?

Mike: Most people think it was Bill crying on CNBC. It wasn’t. That was not it. It was the– [laughs]

Jake: [laughs]

Mike: People have it wrong.

Jake: Different Bill crying.

Mike: [laughs]

Tobias: Exactly.

Bill: I maintain that if you listen his whole interview, he was saying that he was unwinding the hedges and buying, but I digress.

Mike: Yeah.

Tobias: To be fair, Bill cries a little bit. Bill cried at the Target general meeting when he got voted down too.

Bill: Yeah. It’s emotional.

Mike: The big Herbalife short pitch, there were definitely tears when it was the grandfather Russian immigrant story. There’s sad story.

Bill: I’m about to cry over Qurate.

Mike: Never heard of it. What’s that?

Ted Weschler – How To Make A Lot Of Money

Bill: I met Ted Weschler last week. He’s a swell man.

Jake: Oh, yeah.

Mike: That’s a very good story.

Jake: How’d that happen?

Bill: I was invited to the Liberty Dinner, thanks to Mike Mitchell on Wednesday evening. It was pretty awesome. Very cool room. Met Bill Nygren, very nice guy. It was cool.

Jake: Look at you, Robin– [crosstalk]

Bill: Yeah, it was cool.

Jake: -royalty.

Tobias: There were saying I met Bill Brewster.

Mike: Oh, there you go.

Bill: Oh, [crosstalk] definitely were not saying that. They’re like, “Who is this guy?”

Jake: Were you wearing those glasses? That would have helped.

Mike: [laughs]

Bill: No, I was not. But it was fun and– What?

Mike: Can you share what you asked Ted?

Bill: Yeah, I was just like how do you see Dillard’s? His short answer was study something for 20 years, study another thing for 15 years, put some pieces together and you can make a lot of money.

Tobias: It’s easy. It’s really easy.

Mike: Boom.

Bill: Yeah.

Mike: NFT, right there. Boom.

Bill: That’s right. That’s how you got to get interested in crypto. 20 years from now, you never know.

Jake: What it is [crosstalk] for 20 years?

Tobias: I think that’s true.

Bill: [crosstalk] Well, he followed Dillard’s forever. Then like–

Jake: What was the 15-year one then?

Bill: I don’t know that I’m at liberty to say until he wants to tell the story.

Jake: Oh, okay. Fair enough.

Bill: But it was another company that said something that he had something go off in his mind. He is like, “Dillard’s is the beneficiary.”

Jake: Okay.

Mike: Not going to make it.

Bill: Yeah, definitely not going to make it. Put stuff together like that in your head, just-

Mike: Not going to make it.

Bill: -reading, not going to make it.

Mike: Too long. It takes too long.

Bill: I don’t think he saw like some big buyback story. I don’t think that’s what he was looking for. It was more of a real estate idea.

Jake: Okay, cool.

Bill: Yeah.

Mike: I don’t know that if he had ever told you this, Bill. My whole summer internship with Michael Price at MFP, the only thing he wanted me to do was analyze every bit of real estate Dillard zoned, and then, research the Dillard family. That was in 2003. You’d think I would have caught that trade here, but–

Jake: [laughs]

Tobias: 17 years, mate. You were three years too early. Not enough time.

Mike: Yeah. Not enough time.

Tobias: That was 18 years. Just needed a couple more years.

Jake: Yeah. Two more years, [crosstalk] then yours. [laughs]

Tobias: Not to be fair, though. You could have said the same thing about Sears, right? Because there was 150-page research report on every bit of property that Sears owned and I sold some puts in it that were just a monster yield that expired worthless, and then, of course, the whole thing went through the floor. So, it doesn’t always work.

Ed Lampert – Sears And Fake Online Accounts

Mike: There was an article on it. Maybe, there’s a New Yorker, the Atlantic, or Esquire, there’s something or Fortune about how Ed Lampert, when he took over, that he became so focused on the minutiae, and like the micro details of SHLD to the point where he would like create fake accounts for the internal office message boards, and post questions to people and talk about himself in the third person. He was so down in the weeds with like, give people iPads and take iPads away. It’s a fascinating read. You think it was crazy? I can tell you it’s definitely not. I didn’t see it at Sears, but I’ve seen it on the inside of companies. I’ve seen it happen before where guys come in from the outside investors and just go absolutely crazy. When I read that, I owned SHLD at the time that came out, and I was like, “Well, I’m gone.” So, that’s all I needed. That’s it.

Tobias: That’s the signal.

Mike: So, yeah.

Bill: And he did it all from his yacht.

Mike: Yeah. I think, that’s probably true. [crosstalk] probably got couple of [crosstalk]

Bill: He won’t leave boat or whatever.

Mike: Oh, man.

Bill: But then again, I’ve never been kidnapped. So, I don’t know [crosstalk] boat either.

Tobias: Do you think that was what the play was? There was the play to turn around the business. I guess, it was. He paid for the business. But at some point, that became like a capital structure real estate play. It was well before it was through the floor.

Bill: They invested in Shop Your Way. That was a shitty product. Isn’t an app.

Mike: Yeah. The initial story was that they were getting, I believe, Kmart out of bankruptcy and then he merged it with Sears for sale, and there was a– I mean I’m digging deep. This is a long time ago. There was a real estate component that gave you some downside protection. The problem was they were–

Bill: Downside protection to zero. I like that.

Tobias: Well, he’s still got the debt right.

Bill: No, that’s fair.

Tobias: It’s all everybody in the sidecar with him who lost the money.

Jake: Game is not over either though. We’re still in bankruptcy proceedings.

Tobias: You could probably buy the Qs.

Bill: The game’s over. [crosstalk]

Tobias: Does SHLDQ still trade?

Bill: For most people, the game is over.

Tobias: I’m surprised that SHLDQ hasn’t had that big– [crosstalk]

Bill: Jake, Sears is like the girl that gives you herpes over and over again and you’re like, “No, this time, she’s not going to do it.” No, she is.

Mike: I think it could work for us.

Bill: Sorry, ladies. I’m sorry. It can be a guy. I’m not–

Mike: Oh, Bill.

Bill: I’m just saying.

Bill: That was messy.

Bill: She is just going to cheat again or he will. You can’t trust it.

Mike: Those locations, you don’t think have any value, but they’re going to become server farms. Just give it a couple of years and they’re going to become AWS server farms.

Tobias: That is good real estate because you can’t [crosstalk] in.

Jake: I always wondered that why, that would have been to me what seemed like the smart thing to do, it’s to sell all that this become distribution centers for Amazon and get that last mile like they have.

Tobias: Wow.

Jake: They’re within, I don’t know, whatever like 90% of the US population within, I don’t know, 10 miles or something insane like that.

Mike: Yeah.

Bill: To be fair, I think Seritage is turning out okay, isn’t it?

Tobias: It ran for a little while.

Bill: I don’t know.

Tobias: I think Buffett had a chunk of– It popped up in everybody’s portfolio about five or six years ago.

Jake: When Buffett bought some.

Tobias: Yeah, that’s right.

Mike: Yeah, he bought it personally.

Bill: Turns out Seritage is not doing okay.


Mike: And it’s gone.

Jake: [laughs]

Bill: The five-year churn is gone. Well, how well, who would have thought?

Mike: Who would have thought?

Bill: Anyway, yeah, it was a fun weekend. We met a lot of people and so, it was good.

Bill: The new CEO of Qurate, of QVC, David Rawlinson, is a heck of a nice guy. We’ll see if he’s a good CEO. I really hope he is. They have a lot of money invested in it, but God, he is the nicest guy in the world. I was just like, “Hi, David, you’re just great. I’d have you speak at my wedding. You’re the nicest, just well spoken, thoughtful, nice guy.” It was fun having dinner with him too. I enjoyed that quite a bit. We had dinner with a Peloton bear. The guy has been bearish on Peloton when it was mooning.

Bill: Yeah, Simian–

Mike: Remember, where he worked, Bill?

Bill: Bank of America.

Mike: Is it the Bank of America?

Bill: Yeah.

Mike: I thought it was somewhere else, a sharp guy. Really sharp guy.

Bill: Oh, my bad. BMO, My bad.

Mike: BMO.

Bill: Sorry.

Mike: BMO.

Bill: Yeah.

What Went Wrong At Peloton?

Mike: He made the case that the worst thing that ever happened to Peloton was COVID. I actually thought that that was a very good take. When I digested it the next day, I was like, “I bet you’re right about that.”

Bill: Why do you say that?

Mike: His whole thesis was that Peloton was new and different, and they were building– It wasn’t the bike. It was the culture that they were trying to build. What you would want is just slow and steady growth. Just keep going keep going keep going, and he thinks with COVID, it was like a huge steroid injection into not just their business, but also into their– it’s stretched everybody so thin, and then they started thinking that this was like the new normal, and they didn’t treat it internally as kind of a one-off. They gave the expectation that like, “Hey, this is it. We’ve arrived.”

Tobias: This is what we do.

Bill and Mike: Yeah.

Bill: [crosstalk].

Mike: Yeah. He’s basically like, “If you took COVID out of it, the business would be in much better shape today.” But that’s a pretty good take. Different take, anyway.

Zoom Stock Down 140% YTD

Tobias: Another COVID stock that reported recently that looks like it’s doing really well is Zoom. You see they’re up 72% revs year on year. Fantastic year. They’re like $340 million in revs, incredible. Stock price, ah, nasty.

Mike: I was going to say somebody was just talking to me today about the stock prices–

Jake: Give us an update, Bill.

Tobias: Curious how that worked out.

Bill: Qurate is winning. That said, look, anyone has heard me talk about Qurate and owns it, don’t come here first of all. Know what you own. But I would not be shocked if Qurate as a six handle, or a five, or a four at this point. I don’t know why it stopped.

Jake: 600 or 500? [laughs]

Bill: No, no, no. I think it could be like a $6 stock [crosstalk]

Tobias: [crosstalk] some capital back through that, don’t you?

Bill: Yeah, I mean that’s the whole thing. I don’t think the dividends are going to stop. So, that’s why I still own it. But if my job depended on short-term moves, I would not be owning that.

Tobias: Too hard.

Mike: Yeah. We paid 10 bucks last year, Toby, and we’ve gotten seven and a quarter back in 12 months.

Bill: Is that good?

Tobias: I like that sort of de-risking.

Mike: Not terrible.

Tobias: That’ll work. We’ve got a special guest knocking on the door.

Bill: Uh-oh.

Jake: Who is that?

Tobias: I’ve admitted him, I think. There he is.

Bill: Oh, shit.

Mike: Oh, no.

Bill: It’s Ian Cassel.

Mike: Oh, no.

Tobias: Ian Cassel’s going to come in without warming up. [laughs]

Bill: He’s muted– [crosstalk]

Jake: Out of the bullpen right away. Bang.

Tobias: What’s up?

Ian: There we go.

Bill: Look at him. Looking good.

Ian: How are you guys doing?

Tobias: How are you, Ian?

Ian: Doing great. How are you guys– [crosstalk]

Bill: Mike, you hanging or you leaving? What are you doing?

Mike: No, I’m going to give Ian– There’s no way. I’m so happy you guys put me on first because I’m like to warm up. This is the worst.


Mike: There’s no way I’m hanging out that– Now that Ian’s on, I’m like– [crosstalk]

Bill: All right, we’ll bringing in variety.

Mike: One more time. Happy 100, guys.

Jake: [laughs]

Mike: Happy 100.

Bill: That’s a pretty good one, man.

Tobias: Thanks, Mike.

Jake: Thanks, Mike.

Ian: See you, Mike.

Mike: Bye.

Bill: Ian Cassel, man, you had a very good tweet the other day about this air pocket that microcap’s in. I thought that was very interesting.

This Is The Best Time Of Year To Buy MicroCaps

Ian: Yeah, it’s something I think we see every year, but I think this year, it’s been more pronounced. I think every time kind of between this period when companies report Q3 earnings and the end of the year, you have obviously people selling for tax reasons, whether that’s tax loss or tax gain. But I think also, especially, in microcap where I would say, in general, the average investor is shorter term, even shorter-term focused than even the larger cap companies, people just don’t want to wait four months to get the next data point.

Especially, if they know what the next data point likely is, whether it’s mediocre or even good, why wait for months to see a result that is coming. They’d rather just sell it here and even buy it back higher later. It’s kind of counterintuitive, obviously, to what people should do, and that’s why it’s a really good opportunistic time to look at companies. If you have more than a six-month timeframe, now’s a good time to be looking at some of these companies that have been taken out to the woodshed. You can see it. Really, ever since November 15th which is the deadline for companies report Q3 results. I mean, the iShares micro-cap, ETF is straight down.

Bill: Huh, that’s interesting.

Ian: It’s pretty pronounced.

Bill: What if I personally am in the fetal position and have no confidence, is microcap where I should go to?

Ian: [laughs] I don’t know about that.

Bill: Okay.

Ian: It’s funny though. When you think about it, it’s excruciating for people to know that they could be sitting on dead money. It’s like they would rather just have the money on the sidelines and just even buy it back higher after a Q4 result. Because then when you get Q4 results into Q1, it’s an abbreviated time period. it’s like two months. You don’t have to wait a couple of months or 45 days. It’s got the opposite effect where you have a lot of activity. It’s a couple of data points, bang, bang, and people get really involved at that point in time.

Bill: Interesting.

Tobias: So, does the lack of liquidity means they trade down pretty heavily through Q4, but that’s great if you’re– If you know that that’s going on, you can go through and hoover them up. Is that part of what you do?

Ian: Yeah, honestly, I’m still susceptible to it as well. My portfolio has things that are down over the last two weeks a lot as well but I have the longer timeframe than a lot of people. But I do find that– [crosstalk]

Jake: It’s more like eight, not six months.

Ian: Yeah, exactly. Six months in one day, somewhere around there. [laughs] But it is a great time. Because there’s always a tax reason to sell something and then on top of it, impatience. But yeah, how are you guys doing?

Tobias: Are you kind of growthy small and micro? Is that fair to characterize it that way, do you think?

Ian: Yeah, I think it is. I think that’s fair. I’m primarily looking for unique businesses that can sustain 20%, 30%, 50% organic growth rates that aren’t selling me two products that another thousandth company tried to market the same type of product or service a little bit differently, trying to gain share, but a company that truly has a unique product or service so that– It’s kind of two things I try to play off of number one is, tailwinds, trying to invest in an area that has a tailwind with it.

Then, number two down to the company level, scarcity. I’m a big fan of scarcity of all forms. Trying to find those scarce businesses where there’s not another one like it, and specifically, it’s great when you can find, one, where there’s not another company like it, but there’s very few other public ways to buy a company like that. So, where you have this tailwind where it’s only focused on a couple of ideas, that’s right for price appreciation, that’s primarily what I’m trying to find when I try to buy things hopefully undervalued valuation that can get overvalued. That’s what I mean by that.

Tobias: Right. Have you been tagged in this growth so often, has that impacted you or that sort of trade idiosyncratically?

Ian: No. I mean I’ve been tagged in a few of them. Recently, we have a few growthier positions that are larger, I would say larger microcap, you know, that have been tagged in that as well. In fact, I was just looking at it. I think between end of October and today, there’s a few that are down 20%, 30% just in three weeks. So, I’m feeling it as well but I see it opportunistically.

Bill: Turning Point was off like 30% in the quarter, they reported and they dropped 30%. That was fun. I was like, “Okay, cool. That’s fun. Let’s get it.”

Tobias: This is that kind of market where stuff reports and it’s just down 20%.

Bill: Yeah, it’s wild.

Tobias: Zoom was down like 18% or 20% yesterday, I think or is it today? I’ve seen that with a few things reporting. Even Best Buy, which is more value than growth, had a big tumble.

Bill: On the other hand, Roblox is up 70% last month. I kind of wonder if we’re seeing some of Mike Green’s thesis play out?

Tobias: What’s that?

Bill: It just doesn’t feel like there’s a ton of active liquidity in certain places. And then it feels like there’s just a lot of momentum out there, man. I don’t know what it i.

Tobias: Relentless infinity index.

Bill: Maybe, [crosstalk] been that way. Maybe I’m just waking up to it. I’m not sure but things are moving hard right now. [crosstalk] feels.

Nasty Undercurrents, More 52-Week Lows

Tobias: That chart that Charlie Bilello circulated that had all of that– Jake just sent it through before night. Jake sent it through and it was like it came out on the 19th, and the numbers are all completely different since it came out because-

Jake: Worst.

Tobias: There’s been such a sellout–

Bill: Oh, the growthy– Yeah, the growth ones?

Tobias: Showing some of those names down, I forget exactly, but they were down like 70%, 80% some of those names, and even the last four days, those numbers would be worse than that.

Bill: This is why I haven’t been answering the inning question for a while. I’m telling you, we stayed too long, we’re all fucking hung over.


Bill: It’s no longer an inning. This is extra innings. People have gone home.

Ian: You definitely see those kinds of negative undercurrents. But I think there was another article out earlier last week that– trying to remember who put it out, but something to the effect of there was more–was it more 52-week lows, at least at a point in time last week than there was during COVID?

Tobias: No kidding.

Ian: Yeah, something like that. There’s this undercurrent that’s pretty bad outside of the largest companies.

Jake: Yeah, the breadth is troubling.

Bill: It’s been shit for a while. This has been going on. I think it’s continuing and maybe some of the bigger names are getting headlines. I don’t know. I tweeted a while ago. It’s a bear market, people just don’t know it yet.

Tobias: It’s like the top five names in the index are okay, but everything is getting beaten up. To be fair, I think value has been okay too. I think value snuck through. Value didn’t participate on the upside and didn’t participate on the downside either.

Bill: Yeah, that’s possible.

Tobias: As boring as it could possibly be.

Bill: Yeah. It’s been interesting. I was talking to somebody and he said that his buddies at a fund pitched an idea, and the PM said, “Can you guarantee me it won’t go down 30%?”

Jake: [laughs]

Bill: And he goes, “I cannot.” The guy goes, “Well, then, we can’t own it because there’s certain names that if we buy it and they go down, we get fired. So, we’re just not doing it.”

Tobias: I couldn’t guarantee that anything wouldn’t go down 30%.

Bill: I think that that shit’s going on though sometimes or right now. I think a lot of places are afraid to getting fired for owing the wrong stuff right now. You’re going into 12-31, not a lot of time to recoup if something goes wrong, got your kids who have to go to school next year, I don’t know.

Jake: Hmm. Therein lies the opportunity.

Bill: Potentially.

Shoot First, Ask Questions Later On Buy Decisions

Ian: One of the things I was I was journaling about– I was thinking about coming on today, I journal every once in a while, and then usually what happens is I try to boil down what I’m thinking or journaling down into a tweet, and that’s what you see online. One of the things I was thinking about or journaling about last two or three weeks, it’s just related to micro-cap, unlike probably any other area in public market investing, the discovery of a company is probably the most pronounced. The importance of finding a company early is most pronounced because one or two investors find an idea before you can literally move that stock 10%, 20%, 50% 100%. So, discovery really does matter a lot more down here in the small stuff than it does in small, micro, mid, or large cap.

It’s important to be decisive. Speed matters. I’m a big fan of quick no’s. When it comes to investing, I think most people in here would agree with that. I’m a big fan of a quick no, but I’m also a fan of a quick yes. I think the best buys are always, at least for me, have been ones that were quick yeses, and the other ones that kind of checkmark all those big boxes that you look for, a type of company, a management team situation, and maybe the business connects with what you’re going through or what you like as well for whatever reason.

Jake: Does that mean that you fill up a full position size relatively quickly then as well?

Ian: No, not at all. We actually had one of these situations recently about three weeks ago. We were looking at it and certain event triggered us to look at the idea. We started looking at it on a Thursday. We dove into it hard Friday, Saturday, Sunday, bought a smaller position on Monday, and we continued doing our diligence and as you continue to dive in, you add to it. I think the interesting thing, when you think about it is the companies that you like the most are the ones that you like more, the more you dig into them. Those are the rare ones because quite honestly, if we’re all being honest with ourselves, the more you dig into most things, the less you like them.

Usually, it looks like the acting quickly to take on an initial position that checkmarks those first 10 big boxes that I have, and there might be 20 other boxes that need checked along the way. But as long as I can get to those first 10 being checked, it’s reason enough to take on a position. Actually, I want to go back and read some of my journals from what I was personally in the past, and it kind of goes back to what you’re working on with Journalytic, Jake. It’s kind of going back to those previous decisions you’ve made, looking at what things you check there, and how did they perform, whether you bought them or you didn’t buy them. When they checkmark the big things, at least for me when I look back, I probably had a 70% batting average. So, that’s enough for me to at least get my feet wet in a position. I think it makes a lot of sense, especially in microcap where discovery is important to–

In some ways, shoot first, ask questions a little bit later when it does check those things. I think it also gets harder, more institutionally minded you become to act quickly, because obviously, it’s a lot more cerebral to say, “You stuck to your process and did due diligence. You stuck to your 86-point checklist and talk to management, suppliers, employees, went on top of a mountain and meditated for three weeks without your device before you became– got to a buy decision.”

Tobias: [unintelligible [00:27:09]

Ian: Yeah, exactly. So, that sound smarter. But a lot of times I look back at the past, it’s those ones where I was able to get to a buy decision quick, and really dove in, and liked it more and more, and continued to average into a position whether that was average down or up, those are the ones that I think about when we you know. Hopefully, this will be one that we just took a position here recently but that was a real-world example of one that we just kind of acted on quick.

Jake: It’d be really interesting to see if your batting average improves as you got deeper into your checklist or whether that actually added materially or not.

Ian: Yeah, not everything– we had to have these types of situations in the last 12 months where we layered into a very small position, and then layered back out of it because there was something that either evolved in a way we didn’t like or something just happened.

Jake: That thing kind of– [crosstalk] Interesting–

Tobias: The first few– Sorry, dude. I was just going to say the first few points are why you want to own it, and then you spend the rest of them like trying to kill the idea. You always find the first five points, “This is why I want to own it, and then the next whatever it is, the 81 points after that are all the ways that you’ve been sunk in the past that you’ve got to go through and try to kill it.

Ian: That’s what makes investing unique, because those 5 or 10 points that are important to you, or important to Jake, or important to Bill, it might be different than me and that’s what makes investing so fun. But I think there’s some of those quantitative-type measures, that checkboxes, but there’s also qualitative ones that are more personal that you might find important where I might not or vice versa.

Tobias: You just feel like you’ve donated enough money to a sector and don’t want to do anymore donations.

Ian: Exactly.

Tobias: Enough charitable giving in oil fill drillers for me.

Ian: Yeah.

Jake: It’d be fascinating to see some kind of return weighted against a checklist dollar-weighted return. So, I deployed this much capital at this amount of checklist items and then I did another tranche of capital at a different number of checklists, or even batches of checklists, and how those then correlated with the actual outcome would be pretty cool– [crosstalk]

Tobias: There is something [crosstalk] like existential metaphysical risk, like you really almost never going to see it even in your entire investing life. It’s just that when they come up, it’s just a donut– [crosstalk]

Jake: Let me put a big asterisk that the end needs to be large enough to be significant there because there will be tail events that are hard to predict.

Ian: It’s really interesting because what I just think about, I’ve been doing this for 20 years, but so much time is spent rationalizing into good ideas instead of great ones. It’s funny when you see a great one come across the plate, and you’re like, “Oh, wow, that’s what a great one looks like.”

Jake: Now, we’re right.


Bill: That is very intelligent, Ian. I like that.

Tobias: That’s the difference between Buffett and everybody else, that he just sits there waiting for the great ideas, and somehow, he’s figured out not to swing at the good ones.

Jake: You mispronounced Munger.

Tobias: Munger, Munger, yeah, fair. We’ve got another guest who is knocking on the door.

Jake: Oh, who could it be?


Tobias: Jason Buck, connecting to audio. What’s up?

Jason: [crosstalk] man. Congratulations.

Jake: Thanks, Jason.

Tobias: Thanks, man.

Jason: The big 100.

Tobias: So, Jason got off a plane an hour ago and he’s managed to get on. So, many thanks.

Jason: [laughs] I don’t know what I’m doing here because I will be providing no value but–

Jake: [laughs]

Tobias: The looks, mate.

Jason: Yeah, I really had technical difficulties because Mike now owes me a keyboard because I was listening to the beginning of the show, and when Bill brought up Qurate and Mike goes, “What’s that?”, I spit my coffee all over my keyboard literally.

Bill: [laughs]

Jason: I was trying to caffeine up for the show, ended up spitting all over my keyboard, I’m glad everything’s functioning, so, happy to be here.

Tobias: You are a vol maven. What’s happening in the vol world? Is this crash leaking over into the index or is this sort of an undercover crash?

Jason: No, I feel like a maven wearing these glasses. So, I [crosstalk]

Jake: Yeah, for sure.

Tobias: How did you describe it before?

Jake: Diva, even maybe. [laughs]

Jason: Yeah, it was like, Elton John meets Harry Potter, and I think, Jake throw in a little Golden Girls, Betty White. Yeah, it’s– [crosstalk]

Jake: [laughs]

Tobias: [crosstalk] average for the Aussies. [crosstalk] six people will get that one.

$VIX Is Non-Tradable

Jason: Yeah. Yeah, I was thinking about for vol space. I was thinking about, you know, Bill was talking about the pain he’s feeling, try being vol land from April 2020 to now. That’s some serious pain being long vol. What we’re seeing in general, yeah, you’re not getting these little head [unintelligible 00:32:03] are not big moves. It’s not really affecting– You’re not getting that spike involved. The VIX index is non-tradable. So, what we really look at is fixed trade volatility.

So, I’ll try to explain it simply. If at the money volatility say is 10 and you buy a put that’s 10% of the money at like a 20 vol, and then at the money vol moves from 10 to 18, but you bought that put for 20, guess what? You’re still down 10% on your put. So, you’re seeing a lot of that skew and buying up protection in the markets, and that’s why until we see big move and some of this gets washed out probably, that’s where we’re at in the vol space.

Tobias: That sort of vol, do you think that prevents big moves from happening because everybody’s say, hedged up? I’ve gone and had a look a few times trying to hedge up, looking at VIX, looking at HYG puts looking at spike, put stuff like that, everything was just stupid expensive, it’s hard to make money in them.

Jason: Yeah, I think that put and vols, the same as value, right? It’s always what’s the price you pay. So, what it creates with everybody hedging is then there’s inflection points. You’re bouncing off those inflection points, you’re getting that mean reversion, so you’re not getting paid out if unless we get a big move. But if it breaks through that inflection point, then all hell breaks through, or you’re going to lose and you have an air pocket there. So, it’s a little bit of both.

You’re having it, so it’s keeping markets constrained, and you’re having mean reversion, especially as everybody has protection on as market makers are taking the other side of those trades, we’re having a constrained market. But if it hits that inflection point and goes from a two sigma to a five sigma, then there’s nothing to stop it there. So, that’s what we’re looking at. Yeah, everybody wants insurance after the flood. So, that’s what we’ve seen for the past 18 months.

Tobias: This is after the flood? You still regard this as after the flood?

Jason: Yeah, definitely. Even though you’ve had the vol crush from 80 down to sub-20, like I said, you still have high skew and everything, so everybody has that recency bias. So, you just need time to pass before everybody goes, “Man, I’ve got to be just all in on this market. These hedges are dragging my portfolio.” So, until they capitulate– the Minsky waves and effects. In 2019 going to 2020, vol was the cheapest it’s ever been when you needed that protection the most. So, there’s this nice inverse correlation that you tend to see over time and like everything, we move in these long cycles.

Dispersion Trades Are Working

Jake: How about the call buying mania that’s been going on? What’s happening with that?

Jason: Yeah, especially with the GME and all that stuff, you had really interesting call buying and it works like one time to rip off the algos and the market makers but it doesn’t happen again. Then, they’re going to overprice implied volatility, it’s not going to really happen. So, everybody does need to pay attention to retail call buying, but then the question is like, “How much is it affecting the market? Does it just raise implied volatility both across calls and puts?” It’s part of market dynamics now in an interesting way that a lot of us go back to the late 90s e-trade and that favorite dotcom boom, and we’re trying to figure out how to YOLO calls back then, but we didn’t have an advent of the internet and we couldn’t get together in groups and do it.

Jake: [laughs]

Jason: So, it is a market dynamic that’s very interesting but then what it’s creating is more dispersion trades are back on where you can short the index and go long single names. So, people are picking right, they can get some nice dispersion trades on. We had some nice dispersion trades going in these past earnings. It was really interesting on that long dispersion trade. So, those are the ways it’s affecting the markets.

But I’m curious, did you guys start first or did the All-In Podcast start first?

Bill: I don’t care.

Tobias: What’s All-In?

Jason: [laughs]

Bill: How’s that?

Jake: No, it’s–

Jason: Toby was talking about the value versus short rotation. [crosstalk] Yeah, you guys are valued, they’re growth. When are you guys going to close that delta?

Jake: [laughs]

Bill: For listenership or just general episodes?

Jason: [chuckles] I think their listenership’s like over a million an episode. So, it’s– [crosstalk]

Bill: Right.

Tobias: All-In, that’s Chamath and those guys.

Bill: Yeah. It’s going to take us a while.

Tobias: Yeah, they’re always going to have the heat. They’re talking about the popular stuff that all the retail guys– we’re not never going to do that. We’re always going to be– [crosstalk]

Bill: It’s going to take us a while or like two more clovers.


Jason: No, I didn’t.

Tobias: We’re the redheaded stepchild.

Bill: It won’t matter. He’ll do five more clovers and get all those fees and I’ll be here demonetized on YouTube.

Tobias: How many times can you ship it though, do you think before folks are just like, “Ah, no more.”

Bill: A lot.

Tobias: [crosstalk] At some point, everybody starts playing busted SPACs and then it’s hard– If you can get a SPAC in the market at a discount to cash, it’s going to be hard to float one at a premium.

Bill: Yeah, I don’t know, man. I’ve seen a lot of stuff go on in my life and I don’t call ends to it anymore.

Jake: But rate’s back at 5% and that whole thing is a nonissue again.

Bill: [crosstalk] was the economy.


Tobias: At this point, worth it to get the portfolio moving, whatever it takes.

Jake: Yeah. [laughs]

Inflation Is Good News For Value

Jason: What do you guys think about historically, if you look back, there’s a lot of stocks and bonds become correlated again even if we do see inflation rates pick back up? But we have so few instances of that. I’m curious if you guys looked at it.

Tobias: Yeah, I don’t know so much about the correlation. Jake pointed me to an article by OSAM that looked at inflation against factors like quality and value. I read through it. I probably need Jake to explain what happened in it.

Jake: Oh, you would do that, wouldn’t you? [laughs]

Jason: [laughs]

Jake: I think the basic takeaway was that– and this has looked at, I think, 1926 to 2021 and looked at different kinds of regimes of inflation, and that value tended to do pretty good in an inflationary environment. A lot of that is– when you bin up inflation into 10 buckets of different time periods and then study how equities did, obviously, you get a couple of different little episodes that would fall into 9th and 10th percentiles or decile of most inflation. So, that tended to be like the 70s and– Value did pretty good then. Whether that is repeatable, and the dispersion, the stuff you could buy in the 70s like Buffett talking about in 1973, 1974 being his colorful language that he used back then about finding lots of good deals, it was a little– [crosstalk]

Tobias: Is that like an oversexed guy in a whorehouse? Is that where that pitch comes from?

Jake: Yeah. I’m just trying to keep it class.

Tobias: That’s Buffett saying it. He’s the grandparent of this market. I’m just quoting him.

Jake: Yeah, fair enough. The fish in the barrel kind of maybe that you were shooting at that point relative to other time periods, I don’t know if you can always make totally– I think the game is a little bit harder than just purely like, “Oh, well, this happened in the 70s. Therefore, you’re going to get the exact same outcomes.” But anyway, I think, historically, you could say that you probably want to be leaned more value than maybe growth in an inflationary environment.

Tobias: They’re joined at the hip, it’s the same thing. It’s continuum, just before everybody else let’s us know.

Jake: Yeah, okay.

Tobias: [laughs]

Jake: Academic value, academic growth, whatever.

Tobias: What do you think– [crosstalk]

Jason: [crosstalk] serious conversation with these glasses on.

Jake: [laughs]

Bill: The thing I don’t understand about that is, and maybe I’m just wrong on this, but if value is harder asset-based businesses, it would seem to me that inflation would hurt them more. Unless they were priced such that they were forecasting the inflation too much, and therefore, they ripped. Then, I would understand the second-order, third-order outcome.

Tobias: That’s the problem. That’s the problem with interest rates, looking at the impact of interest rates because you have the impact on the underlying business which is negative if you’ve got a whole lot of debt. But then, you have the impact on the multiple which also should be negative. I don’t know why that necessarily benefits value over growth, but it does seem imperiously some evidence for it.

Bill: You look at something like Data Dog or whatever. It’s going to outgrow whatever inflation is. These hypergrowth names, yeah, the multiple will compress but the growth should, unless inflation runs for multiple years– I don’t know, then somebody in the chats probably like, “Bill’s dumb. No way, they’re going to cut back IT budgets.” I don’t know, man. I’m not that smart.

Jason: Well, it depends on ability of price, right? How much margin can you maintain and what kind of pricing power you have?

Bill: I just think the thing that’s so hard is, I was listening to Space yesterday, and this dude was talking about selling cars, and he’s been in the car business forever, and he just can’t get cars, and he’s a dealer. He specifically, but I hear it a lot, was talking in hyperbole. He’s like, “Used car prices aren’t going to stay high forever.” It’s like, “Well, yeah, I don’t think anybody is saying forever.” But like five, six years, this could take a long time to work through. I don’t know.

Jason: Ian, when you’re selecting like microcaps, do you think about global macro issues with inflation, deflation, etc., or you just try to have a broad panoply of microcaps, and hopefully, it works out okay?

Ian: Yeah, you summed it up right.


Jake: Yes, that.

Ian: Yes, that. That’s right. Now, I do think about a little bit, especially as we get into where currency actually becomes– You just think about a little bit more like we’re getting more and more active in Australia, so you’re buying these Australian listed companies and obviously, in Australian currency. So, what I really try to do is kind of what you just described where you’re trying to negate out some of that risk just by finding high-quality, high-growth situations that can hopefully outgrow and get a higher valuation through all of that. But it is something I’ve been– actually, had this conversation with Michael, an analyst who works with me, just a couple of weeks ago.

Tobias: I just want to shout this quote out from David Kirkeby, another of Buffett’s gems. “When the brothel burns down, even the pretty girls have to run out.” I haven’t heard that one before. How has Buffett not been cancelled?

Ian: [crosstalk] cancel you guys.

Jake: Yeah.

Jason: [laughs]

Bill: He says it with a smile and he’s an older gentleman.

Ian: I have a question for you guys. You guys are smarter than me when it comes to a lot of things, most things. One of the things that we see in microcap quite a bit are a lot of these momentum microcaps where a hot headline will just rip the stock. You’ll have this $50 million microcap company at $5 that has 10 million shares outstanding that historically has traded 10,000 shares a day, put out a headline that for whatever reason grips Robinhood or grips somebody, and all of a sudden, it trades $100 million shares, it doubles the stock. I’m just like, “Where is this–” Okay, I can understand maybe where some of the buy volume is coming from but I’m actually more interested– [crosstalk]

Tobias: Where’s [crosstalk] volume come from?

Ian: Yeah, exactly. Yeah, I’m more interested in that because I’m like, “Okay, this is something that– it traded 20x the amount of float in the stock and it’s only up 100%. It just doesn’t make any sense.” [crosstalk]

Tobias: It’s for [crosstalk] trader for the day. Is it day trade or it’s just like buying and selling through the day?

Ian: I have no idea.

Jake: Algos maybe, I don’t know.

Tobias: Because that would be my guess, that just for whatever reason, the party just moves that stock for the day and everybody trades it, and then as the interest wanes, it probably stags on everybody trading it, and then there’s probably the guy who wrote the press release just shipping a whole lot of volume into that market.

Ian: Yeah, we actually have seen a few of these– especially earlier on, there was a few of these that they set it up– I don’t know if they set it up, but they have an ATM in place where they can lean into the market and fund the company at the exact same time. So, I’ve seen a lot of really bad companies just take advantage of momentum liquidity come into their stock and they’re able to raise $30, $50, $100 million because they had an ATM in place that allowed them to sell into that volume on the rise. It’s crazy how many crappy companies have gotten bailed out over the last 18 months because of that.

Jake: Some [crosstalk] a lot to become a trillion-dollar company.

Ian: [laughs] Yeah, exactly.

Jason: You are talking about AMC hiring Nicole Kidman to do their commercials now because they’re just awash with cash?

Ian: [laughs] Exactly. Through a larger scale.

Bill: Is that what happened? Good for them.

Tobias: She’s expensive these days.

Bill: Smart capital allocation. She was in my first Playboy ever. Shoutout to Nicole Kidman.

Jason: [laughs]

Bill: True story.

Jake: Oh, man, that’s– What a mess.

Bill: Long time ago. Wasn’t she in Batman?

Tobias: This is the 100th episode and our last episode. It’s been great.

Jake: Yeah, we had a good run. [laughs]

Bill: It was very classy. I’m almost certain my mom got it for me. That’s weird but anyway.

Jake: [laughs]

Tobias: It’s very tasteful.

Bill: Yeah, it was. I think she was on the beach. It was awesome. Anyway, I digress.

Jason: I’m just thinking about Brewster’s inner monologue now when he’s in drawdown, like does it [crosstalk] prices decline.

Bill: Bro, it’s a sigma [crosstalk] live in. Sigma.

Jason: Exactly.

Bill: You guys hear it with a filter on it. You should see what it is inside.

Jake: It’s a burnt down whorehouse.

Jason: [laughs]

Bill: It’s terrifying. The amount of stuff that I say don’t say to myself is shocking.

Tobias: You can’t say don’t say. That’s how you loaded up to say it?

Bill: Okay, I’ll just say forget it.

Tobias: Just sitting right from your mind, ready to go.

Bill: That’s fair.

Tobias: Hey, Jason, it’s great having you on. It’s good having someone who can actually ask questions. You’re really good interviewer. You should– [crosstalk]

Jason: [laughs]

Bill: You should consider doing it.

Jake: You should start a podcast.

Jason: [laughs]

Ian: Unlike me, I just sit here in silence and stare. [laughs]

Tobias: That was a good question. You’re here to answer questions about microcaps. The one that I keep getting is give us the Aussie names. Don’t do that.

Ian: Don’t do that.

Jason: Yeah. I’m just jealous of you guys, because I think Corey and I probably put a pause on our podcast, our YouTube show. I don’t even know what you call it after 23, 24 episodes. Because, man, it’s brutal every week trying to turn out ideas. At least you guys can bounce ideas off each other live. So, I guess that keeps it going.

Jake: Well, you guys have actual production value. That takes a lot more out of you.

Bill: Ian, do you watch Pirates of Finance?

Ian: I have. I’ve watched couple of episodes. Really well done.

Bill: Cracks me up. I had no idea Corey was such a crypto degenerate until I found that.


Tobias: Well, he was going to be on, just he’s traveling or something at the moment.

Bill: He moved on from quant stuff to just full on trading crypto [crosstalk] stuff.

Tobias: Degeneracy.

Bill: It’s awesome. I love it.

Jason: Yeah, well, he’s not here. We could talk about him. Yeah, he’s living on a crypto island like MoonDog, just living the dream and be– [crosstalk]

Bill: Telling me about forward prices on all kinds of things. I’m like, “Dude, I don’t even know what you’re talking about.” [crosstalk] I do actually know.

Tobias: Corey identified all those arbs. He was the one telling me about how much money you could make arbing them a long time ago. Does he do that? Jason, do you know?

Jason: Not as much because that trade comes and goes and shoutout actually to Twoquants, Moritz and Moritz. That’s actually I think where he got the trade from as well, they’ve been right about it for a while. But you’re waiting for that yield to expand. So, you’re playing the expansion and contraction of the arb between the futures and the actual prices at different exchanges where you can play the perps and play that difference but actually you’re trying to– [crosstalk]

Bill: What’s a perp?

Jason: Perpetual swaps. So, it’s like, you can have an inverse swap that’s perpetually updated even on a four hour to anywhere to 48-hour basis. So, it’s a way of trading like perpetual futures on day you can have on different exchanges.

Bill: Ian, can I write this up for microcap club? Can I write up microcap crypto stuff?

Ian: [laughs]

Jason: And unfortunately for us, it’s like– obviously, we’re TradFi guys, and I think even speaking of which, we all just learned that word three weeks ago, so, I’ll just put it out there is that, with cryptos like– [crosstalk]

Bill: TradFi’s like BoomerFi?

Jason: Exactly. In crypto, you learn a new language like every week, it feels like, and so we were trying to put out a lot of episodes primarily on TradFi but then it was so boring in the markets throughout this year, a lot of quiet and a lot of lows. So, then we ended up, then most exciting thing for us was crypto, and but we didn’t want to turn it into crypto guys either. Hence, the pause.

The Cockroach Portfolio

Tobias: How would you characterize yourself, Jason? I think of you as vol but you are broader than that, aren’t you global macro eventually?

Jason: Yeah, I was trying to–

Jake: Cockroach.

Jason: Yes, Cockroach. I was trying not to be a Brewster. I was going to be like–

Jake: That’s like that, I didn’t say that in a disparaging way. Explain, Jason.

Jason: No, yeah. Sorry. Yeah, a lot of people think of us as long vol guys, but that was the first one we launched was long volatility an ensemble approach. But the idea was, retail didn’t have access to protect our portfolio. So, that’s why we built that first, but it was in the guise of we are always going to build a total portfolio solution. So, in September, we just launched our Cockroach portfolio, and the idea is it’s very visceral, but the idea of a cockroach is we want to maintain our wealth for multiple generations. So, the idea is, we pair global stocks, global bonds, long volatility, commodity trend managers, and a little bit of gold and cryptocurrencies for that fiat hedge.

The idea is rebalancing over time allows you actually to get on the value of each of them as your scale trading the equity curve of all the world asset classes. The idea is we created the least shitty portfolio. I’m not trying to be smart or outdo anybody. I just want to efficiently compound my wealth over time with as little drawdown as possible. So, I reduce that volatility tax. So, that’s why we created the Cockroach portfolio. So, we’re pretty profligate and we invest in basically all of the world’s asset classes.

Jake: It’s kind of reminds me of like Harry Browne’s Permanent Portfolio a little bit, but just updated with some new tools that are out there.

Bill: 100%. Couldn’t say it better. I am huge fan of Harry Browne, huge fan of the Permanent Portfolio, and I like to think if he was alive today, he might do it similar than what we did. The only difference is we use that ensemble approach with active managers, but also instead of cash, we use long volatility, and instead of gold, we use commodity trend advisors. We just feel that that’s a better solution but otherwise, it’s definitely a rip off of Harry Browne’s Permanent Portfolio and I say that with great pride.

Tobias: Bill, I’ve got a question here. “Did you think that Liberty Investor Day was too denigrating of investors asking detailed questions? Why is it so bad to understand how many races FWONK might do in a year? Maybe hiding something?”

Bill: I don’t think they’re hiding something. I think they’re just tired of answering the questions.

Tobias: Why is that? Because COVID making it so hard to run races or what’s happening?

Bill: No, I don’t know. I think that they’re probably just tired of answering the same questions over and over and over again. I think that their opinion is probably, if you follow these stocks, you should be able to read documents. But I also understand why people wouldn’t like that and I also understand why there’s some questions about recent stock performance versus five-year stuff. Look, I like the IR team a lot. I like those girls. I think that they are an example of what women in finance should be doing, or could be doing, or whatever. I don’t know. I just have an immense amount of respect for them, and I think it’s awesome that it’s predominantly women. So, it’s hard for me to say anything negative about their IR team. Call me biased, I’ll own it.

Tobias: Are they doing all the races this year? Have they done all the races?

Bill: I don’t know, I haven’t followed. I don’t know how many– I mean they got the Miami race coming up, which is not Miami–

Tobias: I won’t know until the documentary comes. Until then–

Bill: Well, they were joking. Everybody asked them for guidance on how many races they’re having in 2023. I think they get a lot of the same question over and over again, and they use these convertible exchangables, and that creates a lot of questions, and some of that’s on them, and I do understand them saying like, “After 20 years of doing this, you guys should have it figured out.” The truth is probably somewhere in between.

Are We Reaching The End For High-Growth Stocks?

Tobias: I’ve got a question here kind of for everybody. “Bill’s opinion – so much pain under the hood of the index, is this the end of high growth tech?”

Bill: No.

Tobias: Let’s go around. Let’s go around.

Bill: [laughs]

Tobias: Because we got some growthier– I think that–

Bill: What are we asking? Are we asking have the valuations peaked for five years or we saying has high growth tech as the industry like– I mean it’s just going to continue to eat shit.

Tobias: Open to interpretation. How do you feel, Ian?

Ian: I think Bill said something smart there. Obviously, I’m more growth centered. I think the types of companies I’m in are a little bit– I don’t want to say isolated, but I look them at a micro level. These are businesses that I think will 2x or 3x over the next few years or five years, whatever it may be. So, I’m willing to give them a lot of volatility in my portfolio, which is going to happen as long as they’re performing on the business side.

That being said, I don’t really have a macro thought. I look at everything through a micro lens. But I think, right now, you’re seeing some good opportunities in some of these names, and when you see that list of companies and maybe the conversation is whether some of them are investable at any price, but when you’re seeing some of these things come down 50%, 60%, 70%, should at least get your attention to dive into some of them and research them.

Tobias: I saw a tweet from Joe Frankenfield which is something that I think that we’ve discussed a little bit but interested to get your opinion on it. He looks at growth, he’s interested in owning businesses, not that have a very high rate of growth but have the optionality, and then he wants that– Is that are you approaching it like that?

Ian: Yeah, I think that’s definitely part of it. I’m primarily looking for a business that has a product, or service, or a few of them that can grow through any market environment. I think for me trying to find sustainable multi baggers, a lot of people focus a lot on the buzz potential of it, the potential of it. I kind of invert that, and I want to find something that can survive through the worst of times, you know, a business. So, I think the only way that you can find a company that can go up 5x and 10x and sustain it is a business that can survive through a COVID environment can survive. So, the 10 things I look for, half of them are focused on survival, not necessarily growth, and then maybe the other five are focused on the growth side.

So, yeah, I’m finding myself more and more into– I’m just looking at it yesterday, we’re probably 60%, 70% focused on medical technology type areas right now, and it’s not because I sought out to be healthcare focused. It’s just because they have a lot of qualitative attributes that I just described that are still small and micro. Those types of differentiated products that have an IP, a moat around them that can sustain that type of growth rate that have 70%, 80%, 90% margins profitable, a validated platform attacking multiple verticals.

So, it gives you that optionality, like you said, a balance sheet that can endure even to a COVID environment like we had 18 months ago. You just have to accept that volatility in short-term to get the long-term reward as long as that business is performing. The only time people use the term except for Jason, volatility is when we’re talking about going to downside, not upside. [laughs]

Jason: Everybody loves upside volatility, right?

Ian: Yeah, exactly.

Jason: That’s their genius, that’s their smarts. It’s an upside volatility.

Tobias: I saw a tweet yesterday where a guy said, “I’m not looking for 100 baggers anymore. I’m satisfied with 10 baggers.”

Jason: [laughs]

Tobias: I thought, “Me too, brother. Me too.” Just going to be restrained, a little bit more conservative. Just go for the 10 baggers.

Finding Opportunities Where All The Investors Have Left

Bill: Ian, have you ever followed Regeneron when it was smaller?

Ian: I wasn’t following it back then but I’ve looked at it just as kind of a case study.

Bill: Yeah, it is a cool company.

Ian: It is. It’s also an example of something that I think that stock went next to nowhere for 15 years, really didn’t– Then all of a sudden, that just went– That’s what you see a lot, obviously, in medical technology too where everything just takes five years longer and $50 million more dollars, and then usually by that point in time, the current shareholder base has left and nobody’s around to see a transition to a growth play, because everybody’s forgotten about it.

Bill: Yeah, they get tired.

Ian: They get tired about it. So, that’s what we find in even Australian markets, too, and other places. We’d love to find ideas where the domestic investor base has left it because they remember it for what it was and not what it could be. They don’t have open mindedness enough to see that transition that’s happening. So, you have a three-, six-month window where you see inflecting financials proving out the thesis where no one’s really there to care.

Tobias: Do you guys follow Casper at all? Any lessons from the implosions in consumer DTC companies like Casper? Anybody got anything sensible to say about that? I don’t know them.

Bill: I don’t know. I think–

Jake: [unintelligible [00:58:21] nonsensical.

Bill: Yeah.

Tobias: Non-what? Sorry.

Jake: I was just making a joke.

Bill: I don’t know enough to talk about like the unit economics and stuff. Selling mattresses and boxes has always seemed to be a tough business to me.

Tobias: A lot of competition.

Bill: Yeah, Purple’s in there now– I don’t know. I have no idea.

Jason: I read the question as like, “What is their competitive advantage versus everybody else in the space?” So, is it a problem with DTC or is it a problem with Casper not being able to outcompete the Purples and [unintelligible [00:58:53] and everybody else in that world?

Bill: I like going and laying down in a store. Get to bounce around on them. It’s fun.

Tobias: JT, what do you think? Where are we in the turn? Have we seen the turn?

Jake: Come on.

Tobias: Confirm some price for me, brother.

Jake: Yeah. I’m going to like a politician not answer that question and answer the other question that I want to, which would be, if I were a betting man, I would say that probably, a lot of the businesses continue to execute. To go back to the question before about, has the worm turned for all these growthier SaaS– maybe not just SaaS, but they’ve been emblematic of what’s been happening?

They probably execute, and are bigger, and some great businesses emerge from it, and maybe they do totally work out from a business sense, but you may not go anywhere for 10 years on a stock price. You have to grow into your valuation. That would fit with a lot of other time periods where people maybe got a little overexcited about what a business could do, which from that high point your IRR ended up being not very attractive. So, I would say probably the base rate would dictate that’s likely your expected outcome for a lot of these names.

Tobias: I like it. JB, where do you fall?

Jason: Thankfully, I’m going to be boring [crosstalk] [laughter]

Jason: -have crystal ball. So, I don’t know. It’s the way I– [crosstalk]

Tobias: No, this is a podcast, sir. That’s never held anybody back.


Jason: Right. Exactly. I should, yeah. I should lean back and start pontificating. My mind actually goes to my just preternatural agnosticism, and that would be combining value and growth, and just rebalancing and scale trading in those positions almost like Ian was saying. So, I think on Bill’s podcast, I talked about I’d love to start a shit ETF where we buy overpriced shit and underpriced shit, and you just rebalance between them, and you’re just riding the wave of both markets.

Tobias: Isn’t that SARK??

Jason: Is there one?

Tobias: You know SARK, the inverse ARK. Someone’s just shorted ARK and the ticket says S-A-R-K, they’ve called it SARK. I think it’s because it’s short ARK, but I always read it as sarcasm, funny stuff, and they’ve really been doing very well at the moment that’s about a month ago. Not that I wish bad tidings on anybody, but it is funny.

Jason: Have you seen the girl that writes the inverse of Professor Galloway’s portfolio and is [crosstalk] tracking it? It’s outperforming like crazy.

Tobias: What’s the Twitter handle?

Jason: I’ll have to find it and I guarantee it– Not off the top of my head, I apologize I can’t remember but it’s great. Yeah, she’s just running a portfolio that’s the inverse of Professor Galloway.

Bill: To be fair, that dude made a lot of money making one bet at the right time. That bet he made on the four, you only have to get rich once.

Tobias: You’ve got to hold on to it after that.

Jason: Yeah. [laughs]

Bill: Yeah.

Tobias: It’s very easy to give it back.

Jason: Yeah. Bill, I think we both know through generations, you need to get rich more than once. You tend to give it all– [crosstalk]

Bill: Yeah, well, that’s fair.

Tobias: Amigos–

Bill: We’d had been all right if we avoided booze, but we didn’t. So, we’re not.

Tobias: That’s full time. That’s the hooter.

Jake: Oh, no, it’s not, Toby. We’re going to go into extra innings for today and I’ve got a veggie segment.

Tobias: Oh, good. You’ve got veggies. All right.

Bill: Are you serious, dude? I’ve got to go to the bathroom, serious.


Jake: Well, go to the bathroom and come back. You are not going to miss it.

Bill: All right, I’ll be right back. Sheesh.

A Thousand Brains

Jake: Couldn’t go before we started, huh? Maybe, perhaps, I’ve been saving this one, because it might be my most ambitious, which might turn into the biggest flop as well. So, we’re going to do a little shoutout to a friend of the show, Dan Sheehan, who recommended this book to me and helped me understand it. There’s this book called A Thousand Brains that just came out this summer. It’s by Jeff Hawkins, and I was surprised to see that Bill Gates yesterday put out in his five reads for the holidays or whatever, this is one of the books.

Just a little background on Jeff Hawkins. He studied electrical engineering in college, and then he worked at Intel for a little while, but he was so fascinated by the brain that he dropped or he quit Intel, and went, and enrolled in the neuroscience PhD program at UC Berkeley in 1986. He wanted to develop this overall theory of the brain, like how it functions. It was considered too risky by everybody at the school because you could work on this for five years and get to the endpoint, and then you wouldn’t understand anything more than you did. So, you’re not going to graduate and no advising professor’s going to take you on because they’re risking tenure by letting you mess around with this for five years. And you can’t get any funding for this kind of thing. It’s too ambitious.

Tobias: It’s like being a value investor.

Jake: Yeah, exactly. So, he spends the next two years in the library reading hundreds of neuroscience papers. He eventually drops out of school, and he goes back to industry, and in 1992, he founded Palm Computing, which made the Palm Pilot and Treo, and made a bunch of money from that. But his heart was always on figuring out the brain. So, he left Palm to go start this Redwood Neuroscience Institute in 2002. It’s a privately funded neuroscience research. Eventually, he moved that into UC Berkeley, who all of a sudden now they do want people working on theory of the brain, and he started a private research company. For the last 15 years, he’s been working on trying to solve the brain. This book is basically like the writeup of all the research that he’s learned in the last 15 years.

We’re going to go into a little bit of neuroscience and the brain in general, and maybe draw that actually, eventually get back to like Charlie Munger and the latticework of mental models if I can. So, a little background like, when you look at the structure of the brain, the old brain, it really grew by addition. The early nervous system, just the sets of neurons that ran down the backs of tiny worms, and they allowed movement, and really, they were kind of the early predecessors to our spinal cords. The old brain is responsible for movement, and breathing, and eating, and sex, and your reflex reactions. It contains dozens of organs that all have separate functions, and they look distinct in their shape, in their size. They’re all clearly linked to our basic survival. We should preface all this by saying that we’re still really in the early stages of understanding the brain. We just understand a little bit how a worm’s brain works and they have like 300 neurons, and we have like 86 billion.

If you stop to think, though, isn’t it wild that this three-pound lump of cells in all of our heads is the only thing in the known universe that even knows that there is a universe? How insane is that? I find that to be just wild.

Let’s talk then about the neocortex. It’s very different than the old brain, and it actually evolved much faster. It looks homogenous, the neocortex. It’s like this cover that sits on top of the old brain. If it wasn’t all folded up to fit inside of the skull, if you ironed out the neocortex, it’d be about the size of a dinner napkin. All mammals and only mammals have neocortices. So, it’s about 70% of your brain, the volume is the neocortex. It does have regions within it that perform different functions. So, vision is in the back of your neocortex. It’s wildly complex, the neocortex. So, under one square millimeter of neocortex, so just like a tiny little bit, which equates to about one square millimeter of neocortex and two and a half cubic millimeters, there’s roughly 100,000 neurons in that, 500 million connections, which are called synapses and there’s several kilometers of wiring that are called axons and dendrites. Imagine trying to stuff miles of wiring into basically the size of a grain of rice. That’s what’s happening inside your neocortex.

What’s crazy is that, the old brain and the neocortex, they’re like roommates. They have to work together to get things done. The neocortex doesn’t have direct control over anything. So, you can’t make your muscles move using your neocortex. Your consciousness basically in your neocortex sends a signal to your own brain to move your arm or to do something. So, Jonathan Haidt, who’s a psychology professor, researcher, he has this analogy that he calls like the elephant and the rider. So, your old brain is the elephant and the rider is your neocortex, your newer brain. So, you can imagine holding your breath, and that’s your neocortex saying like, “Okay, I’m going to hold my breath.” But eventually, the old brain takes over and goes like, “Ah, no, I’m taking back over for survival. I need to breathe right now. You’re out of the game, neocortex.” Obviously, that’s a whole that happens in a whole bunch of different ways, like your neocortex giving you impulses for survival, and maybe crowding out– picture Bill with his Nicole Kidman Playboy. [laughs]

One thing that’s always puzzled researchers is that there are different regions of the brain associated with sight, and hearing, and touch, and language, and yet, the neocortex looks the same. It’s homogenous. If you iron it out, it all looks the same. It doesn’t have unique structures like the old brain does. It’s like Mother Nature copied this same basic circuitry over and over again inside the neocortex, which actually it’s much more efficient from an evolutionary standpoint. If you imagine kind of Peter Thiel’s zero to one versus going one to N, the old brain was zero to one, but the neocortex is one to N like stamping out this same circuitry.

Jeff Hawkins has this interesting theory that explains why that might be. What he says is that the neocortex is roughly 150,000 of the stacked, what he calls, cortical columns. These columns receive input from our external senses. For instance, in mice, there’s one cortical column for each whisker as an input into the mouse’s neocortex. We can’t see these columns within our own neocortices, but under a microscope, but the columns will respond to certain parts of your retina or a patch of skin, and it will see it light up when that gets triggered. So, the basic function of the cortical columns is really to make constant predictions about the world as we move through it using models. So, Jeff says in the book, “With each movement, the neocortex predicts what the next sensation will be. If any input doesn’t match with the brain’s prediction, this alerts the neocortex, that its model of that part of the world needs to be updated.”

The name of this book, A Thousand Brains, is Hawkins conclusion that these cortical columns actually operate in parallel on their own and make separate predictions about what kind of the next sensory input will be for that cortical column. In other words, each column functions as its own separate learning machine. It’s almost like you have 150,000 brains inside of your neocortex making models of the world and working semi-autonomously. The implication of that is that your perception, like what it is to feel like being a human is the result of a democratic process of these brains voting as to what reality really is. It’s stitching together reality from…

So, this is like why priming works like psychologically is because it’s pre-loading some prediction into your brain.

I think all magic is based on this. The magician will give some kind of like get you looking at a certain and expecting a certain thing, and then when it doesn’t happen, it’s like, “Whoa, that’s a surprise for your brain.” If you take this a little further, it’s possible that persuasion might just be the selective turning on and off of cortical columns inside other people’s brains. I kind of couldn’t help but wonder if maybe this is why Montessori education works particularly well, is because it gets the young kids using all of their bodily senses as opposed to just sitting in a desk, and staring at a whiteboard, and listening to the teacher, which is only a single modality.

If we just summarize all this, the old reptilian brain is running basically survival software. Our new mammalian brain sits on top of that, and is creating mental models, and linking past stimuli with outcomes, and then making predictions about the future. Then, once they’ve all voted as to what reality is, it sends instructions to the reptilian brain to execute movement, or your actions, or your thoughts. What maybe one of the implications of this that’s really powerful is that our old brain was all about survival, and procreation, and really like Richard Dawkins’ Selfish Gene. But our new brain, so that for the first time and billions of years of biology, it has the power to defy that impulse of those selfish genes. So, we kind of get to decide our future.

Do we want it to be driven by these old processes, which were natural selection, and competition, and survival of the fittest or would we prefer a future be driven by intelligence and a desire to understand the world that the neocortex has? This is the first time in four billion years of biology that there’s been that fork in the road to decide.

Munger’s Mental Models

Jake: So, maybe try to tie everything back to Charlie Munger, we’re learning mental models and we’re arming our cortical columns with hopefully like these helpful understandings of how the world works. You get better predictions, the better the models that you have that you’re loading in, and the more of them that you have. So, they will then hopefully vote better as to what reality is, and then therefore, how closer you are in your perception actually approximating the reality that you live in.

So, maybe Charlie’s had this right all along by this latticework of mental models voting in as cortical columns. I don’t think he’s ever said that before but I would be curious what his take is, and I know he’s listening because he’s one of the 10 assuredly. Anyway, that’s one very interesting idea of how the brain might work.

Bill: Two quick thoughts. I should be a quant and Nicole Kidman may have never posed for Playboy.


Jake: Oh, my God.

Tobias: That’s interesting, JT. I read a book. When I say I read a book, I had a look at a book, I went through all the pages, I read all the words, but I don’t know how much of it I read. There’s a book called The Master and His Emissary, which I’ve spoken about a few times. It’s very hard to understand. If somebody else out there could read it and explain it to me that would be very helpful. The basic idea is that you’ve got two hemispheres that are painstakingly separated by this very small– except for this very small bridge for at the base, which is the corpus callosum, and it’s basically you have one part that is the imagination and the nonverbal, and that’s what they’re describing as the master. Then, the emissary is the part that interacts with the world.

Jake: Well, what’s wild about that is that if through surgery, you remove the connections between one side of the brain and the other, you will have a behavior that looks like people have literally two brains, because they’re not sharing information. Therefore, it’s almost like they’re voting on one side and voting on another, and one will know certain things and then one will not know other things. It’s just absolutely insane outcomes that then emerge that support the hypothesis that you do have multiple voting brains.

Jason: But isn’t the– not to jump in here, sorry. I don’t know if I was brought on to be the turd in the punch bowl–

Tobias: You’re welcome.

Bill: You’re part of this.

Jason: Yeah. As Jake was referencing though, we’re constantly learning about the brain. If we think about complexity of what we have is integrative complexity and complexity dynamics, and that is when you have interacting with complex systems means it’s really hard for us to know anything. I just think about in general, maybe I fall in the camp on the side more of the new mysterians of we are never going to understand the brain or consciousness because we’re using the wrong toolset.

We’re using subjectivity to try to understand an objective world and through science, we probabilistically get better hopefully at attenuating what direction we’re heading. But I really wonder, at the end of the day, also it’s like the idea then of Munger’s mental models, my brain always jumps like Feynman, “You should never fool yourself, but you’re the easiest person to fool.”

As soon as you start thinking, you have a handle on mental models or how the brain works, you start fooling yourself that you have a handle on how to run your life more effectively, and then it turns into this form of materialism hierarchy.

It’s like, “I’m smarter and better than everybody else, because I have a higher EQ and probably discipline than they do, because I understand mental models, and they don’t.” When at the end of the day, we’re all fooling ourselves, and we have no idea what we’re talking about.

Tobias: You could approach it in a slightly different way there where you’re working backwards. These are certain areas where I always make a mistake. So, therefore, when I go into these areas, I should have some guardrails up, so I don’t make that mistake. That’s the way I approach it. There are lots of things that I just know that I don’t do very well. So, I just prevent myself from doing them.

Jake: I agree. Jason, I think the key often is that we’re always suspect of adding more to our confidence than we are to our actual competence. So, keeping track of that a little bit, I think, is really helpful so that you don’t start to get too far over your skis. It is a natural outcome, I think, of spending a lot of time on– Even in more micro sense, maybe for Ian, the more time maybe that you spend with a company, you may be adding more units of confidence that you understand it relative to the units of actual competence of understanding it.

I think there’s probably some tipping-over point there where you don’t always quite know when you’ve gone over and that thousandth piece of information didn’t really add materially to your understanding of the company, but it did make you feel like, “Should I know this call? I know it better than anybody. So, I’m the one who gets to deserve to be the smart one on this.” So, I think you still have to keep humility even if you do understand this and try to stay in the spots where you have your strengths.

Jason: Well, that’s the hard part, isn’t it? It’s like man’s at war with himself or a woman’s at war with herself is that, there’s one thing I’m certain of is that, I don’t understand how the world works and I don’t know anything. But the other thing I’m certain of is my ego is trying to tell me that I do every day.

No Matter How Confident You Are, Limit Your Position Sizing

Tobias: One way is, you just limit your position sizing, so no matter how confident you get in a position, you’re just automatically saying, “I don’t know any more than this.” You can work that problem where you do the Kelly waiting, and you think that you should be sizing some things. But then if you build in everything else, the sizing’s go way down. If you build in every asset in the world into a portfolio rather than every equity in the US or equity under consideration and sizing goes way down, and I think that’s one way of controlling yourself when, “I’m an expert in this thing, but I can only size it up to 3%.” So, therefore, I’ve from the outset explicitly said there’s a limit to how much I can know.

Jason: Yeah, even Kelly though, it’s a ludic fallacy, because it’s an open loop system when we’re trading and we don’t know what did spectrum of outcomes are. So, even that’s like guessing at it because it applies to games of chance where you have known probability. Yeah, Kelly sizing, we still don’t know. So, I’d say–

Bill: I’m just turning this all over to computers. I don’t even know why I do this.

Jason: [laughs]

Bill: Really don’t. I said it the other day, I was like, “I’m just going to factor myself in public markets and go do something else.”

Bill: But also, I wonder, Toby, I thought about that too. When you talk about like Kelly sizing and everything too, the other thing where Kelly finally outperforms in general is you need 500 to 1000 iterations or rebalances. So, I really wonder if you’re a discretionary value manager, let’s say, you don’t have enough sample data set. Let’s say you have 20 to 30 positions and you’re not turning those over a lot, but let’s say 20 positions over 50 years, you have 1000 positions, but maybe due to turnover, you maybe have 200 to 500 positions, I don’t know if that’s enough sample or dataset to think if you’ve outperformed or underperformed, and if you’re just betting on Lady Fortuna shining on you.

Tobias: I’ve built Monte Carlo. I’ve got one Excel spreadsheet that I can send you. It’s got Monte Carlo of exactly that, and it’s got one that runs out to 1000. The number of times that the 1000 underperforms the others is, it feels like you can run it repeatedly every five seconds or something like that and it underperforms repeatedly doing that. So, that’s exactly right. I don’t use Kelly. I just rebalance back to equal weight but then, I just think that people who use Kelly should understand exactly those things that you want to size way down to where you think much, much smaller than you think.

Jake: Well, implicit in Kelly is that it’s the median geometric return. You have around that a big potential. When you run 10,000 iterations on a Monte Carlo, that’s just the median one that Kelly is giving you. So, it can go a lot of different ways on you and get ugly much faster than I think people appreciate.

Tobias: Martingale and double or nothing, they blow up pretty quickly by the way. Half Kelly is all right, but you never participate on the upside.

Jake: Right. Half Kelly, then we’ll truncate that.

Tobias: But it’s not optimal because it’s not enough gain for the vol or something like that. That’s the argument that I always hear, that Kelly is optimal vol foot, is optimal return for risk. So, half Kelly, like they say, cuts the volatility in half but it should cut your return further too because Kelly is literally optimal. As Jason pointed out, you can’t get there in the real world because it’s not a closed system. It’s not blackjack, and it’s plated parallel, not series.

Jason: Gents, Sorry, I’ve got to jump, but it’s been a pleasure. Happy 100. Congratulations.

Tobias: Thanks, dude.

Jason: Thanks for the glasses.

Jake: Thanks, Jason.

Jason: I’m going to wear these out in public today.


Bill: You should.

Tobias: I think we’ll shut it down unless anybody’s got anything they still want to add?

Bill: No. I’m just sorry, Nicole Kidman. It was a good memory. It was just a false one potentially.

Tobias: What a shame you have to end it.

Jake: Where are we storing that one?


Bill: In a bank.

Tobias: Corpus callosum.

Jake: Reptile brain, yeah. [laughs]

Bill: Yeah.

Tobias: Thanks, Bill. Thanks, Jake. Thanks, Ian. And thanks, Jason. It’s been a fun run. Let’s hope we can get a few more in until the wheels come off.

Ian: Happy Thanksgiving, guys.

Tobias: Happy Thanksgiving.

Bill: Yeah, Happy Thanksgiving.

Jason: Happy Thanksgiving.

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