In this episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle chat about:
- Defying Base Rates
- Second Derivative Suffering
- Lyapunov Time
- Greenwald on Buffett’s Moats
- Brewster On Chamath
- IEP, Berkshire, IAC, or Markel?
- Hedging At The Extremes
- Oil Is The Natural Interest Rate
- Sol Price vs Christopher Bloomstran
- Problems With Twitter!!!
- ARKK Down 50%
- COVID Was The Worst Thing To Happen To Peloton
- Everything Looks Expensive
- Facebook Is The Internet
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
Tobias: Going live. I think we’ve lost your video, JT.
Jake: Sorry. I’ll get back in a second.
Tobias: It’s 10:30 on the West Coast, 1:30 on the East Coast. It’s Value: After Hours with Jake Taylor, Bill Brewster, and me. What’s happening, fellas?
Bill: Not much, man. How are you?
Jake: What’s up, boys?
Tobias: Yeah, we’re seeing a bit of volatility in the market. Lucky, we started doing these things live two years ago in March 2020. It might get another go at it. Is that a big call do you think from here?
Jake: I don’t know. Show might get interesting again.[laughter]
Jake: Two years of boring for everybody.
Tobias: Yeah, we probably didn’t need to be live through that whole period. Sactown is in the house. There you go, JT. Not just Jake.
Bill: I mean, this shit’s been going on forever. I’ve been talking about it for five months.
Tobias: What has?
Bill: In insane drawdown in different spots. I literally feel like I’ve been talking about it for five months.
Tobias: I haven’t heard you say anything like that.
Bill: Oh, well, I guess, I haven’t been here.
Jake: I haven’t seen that in any index. I don’t know what you’re talking about.
Tobias: Yeah. Splice his note.
Bill: [crosstalk] that’s because the big tech names aren’t cheap, and they aren’t expensive, and they hold the index up.
Jake: So, drawdown for ants?
How To Hedge Today’s Market
Tobias: If you’re going to hedge this, how would you go about hedging it?
Bill: I don’t know, man. This goes back to the Google conversation. If you’re going to argue to me that it grows 5% for five years, I’m going to tell you it’s an asset allocation question. Because it’s basically a big cyclical call.
Tobias: Are we talking spy? The index grows 5% for five years?
Bill: No, I’m talking back to you to last week’s Google conversation. A couple of people on YouTube were like, “Is this where we’re, we’re at a point where people can’t even fathom Google growing at 5%?” I said, “Give me bottoms up way,” the only answers that I perceive to be somewhat legitimate or top down. So, it’s an asset allocation question. Go to cash and enjoy getting destroyed by inflation in the meantime and I hope you’re right on the call.
Jake: Since we already brought up the Google thing, a couple of follow-up corrections, errors, omissions. Yes, everyone and their mother are telling me that I needed to be adding cash back. I know I messed that up. I’m sorry. I’ve done thousand Hail Marys to atone for it.
Jake: The other interesting thing from that– [crosstalk]
Tobias: [crosstalk] fathers there, too.
Jake: Yeah, definitely. The other interest thing was Mr. Mauboussin chiming in with a paper that came out this last summer that they published that talked about base rates but with intangibles added as another kind of Bayesian update to it. I’m probably going to maybe do a segment on it more fully, maybe next week, but very interesting. So, we’ll get into that probably, hopefully soon. I don’t want to spoil it today.
Tobias: You’ve got the blue blockers on, Billy?
Tobias: You’ve got the blue blockers on?
Bill: Yeah, dude from Twitter. Shoutout to the team at Twitter.
Tobias: Does it work?
Bill: I like it.
Jake: It’s a solid prophylactic.
Defying Base Rates
Bill: Yeah, I don’t know. I like it. I just think what base rates, I really think it’s got to be contextualized and especially, when you overlay the idea of such a few amount of securities generating most of the return in the market. I just don’t really think base rates apply to things like Google. You know what, that’s famous last words. But I think that looking at Google and saying base rates apply is looking at Albert Pujols when he’s 25 and saying. Well, he’s got about 250 eventually. It’s true, after his whole career.
Tobias: You think–
Jake: Yeah, but okay. Let’s try that analogy a little bit farther and do you sign Pujols to that 15-year contract-
Bill: Look, this is what I think I know.
Jake: -which is a little bit of what some people [crosstalk] were under writing long-term cash flows.
Bill: I think I know that if you consistently try to avoid Albert Pujols, you go out there with a bunch of average players. If I’m going to go out there with a bunch of average players, I’m turning it all over to a computer. Because I don’t see what discretionary edge comes in picking a bucket of value stocks. I absolutely fundamentally don’t see it. I think a computer can do it better. So, for me, I’m looking for the outlier because I think that’s where creativity can actually have an edge.
Jake: Yeah. I don’t think that’s wrong. I mean I think insights can come from those kinds of things for sure that wouldn’t show up quantitatively, necessarily yet.
Google’s Dominance Not Going Away Anytime Soon
Bill: Yeah. Look, what would I worry about with Google decreasing market share of search worldwide? I mean, they own 95% of search in a number of countries. If somehow, I thought that search could go away for them, I would be really concerned. If YouTube massively decelerated or lost cultural relevance, I would worry about that. If they stopped investing and things like other bets, I’d worry about that. But it’s not happening in the next five years because the debate is really about 20 years from now. It’s not even about today, or tomorrow, or I mean, if it happens in five years, you ever might as well cut the stock by 70%. I don’t think it’s a high probability event because I think for lack of a better term, the infrastructure of information and I think replicating that is really fucking hard. Apple can try.
Tobias: So, [crosstalk] websites and google.com was on top. One thing that surprised me is Facebook was bigger than Instagram.
Bill: What? Facebook blue?
Tobias: We just did facebook.com.
Bill: On what?
Tobias: It was just a ranking of the biggest websites, and Google was number one, YouTube comes in at three or two, and Facebook was up there, but Facebook was bigger than Instagram. It was just surprised me a little bit.
Facebook Is The Internet
Bill: Blue consistently is surprising with the data on how sticky it is. I think communities did a big– it’s weird because I don’t ever use them but it’s obvious that a lot of other people do. The marketplace is crazy. If you try to sell stuff on Facebook marketplace it goes. I don’t know, for the rest of the world Facebook, I mean, there’s the science of hitting. He’s got something chart where there’s answers where the question is, Facebook is the internet and people say yes. So, it’s not even the association that internet exists outside of Facebook. It’s crazy.
The other thing that I like about those businesses is, if you think EM has a higher growth probability than the US, they are global. And especially, if you think the dollar is going to go down it’s some sort of natural hedge. That said most of their earnings come in dollars. So, it’s not like a perfect hedge at all. I don’t know, man. My answer is, you go to cash if you think a crash is coming or some negative stuff, but you’re going to have to stare inflation prints right in the face.
Everything Looks Expensive
Tobias: Yeah, there’s nothing easy. I had a look around on the weekend just trying to find not knowing there’s going to be some volatility today obviously just like looking to see if there was any, just because I like cheap hedges not necessarily predicting anything and there’s nothing that I could see that was screamingly cheap. Everything looks expensive to me.
Bill: Well, some SaaS is down. I don’t know what they meant.
Tobias: I mean, hedges.
Bill: Yeah, no I know. But I’m just saying, the time to look was a while ago. Grantham was right, look at that.
Tobias: What was he right about?
Bill: I need to go back and timestamp when he came out about the everything bubble and stuff but there’s a lot of SaaS companies that are down. If you factor in sales growth plus multiple compression 70%, that’s a correction.
Tobias: Yeah. You hedge that, you had to go into the software index or something like that.
Bill: Yeah. Just by individual names. Like, deep out of the money puts on individual names, but now the vol is so high. It probably doesn’t make sense.
Tobias: I think a vol is pretty high then to maybe lot of [crosstalk]
Bill: No, it seems high when I want to do that stuff. I’m always like, “I don’t want to pay the vol.”
Bill: Which I wouldn’t have done it there anyway because it can go to zero. But I always look at options and I never like the VIG got to pay.
Tobias: Yeah, I mean, 2015 was cheap. That was super, super cheap in some of those big names but haven’t seen that for a little while, too. There’s way too much vol everybody. All the punting and options is buying all that space up. Funny thing is VIX’s, I don’t know where it is today, but it was 20-ish over the weekend.
Jake: [crosstalk] quiet.
Tobias: That’s about the long-run average.
Bill: The internals of the leaders aren’t great. I probably knew things are leading, which is why the index is fine, but we’ll see.
Tobias: Market goes down 50%, UVXY goes up 10x. What’s UVXY? Is that ultra-short VIX? Oh, sorry. Ultra-long VIX?
Bill: Yeah, but is this one of these things that like, it’s a day trading instrument and if you hold it over–
Jake: Overnight, it’s gone.
Bill: Yeah. You’re fucked.
Jake: And [crosstalk]
Bill: Yeah, that’s what a lot of those things are. Yeah VIX, yeah short-term futures, I don’t know. I would highly, highly encourage people to figure out what they actually own if they’re trading that thing.
Jake: Good luck.
Tobias: That’d be a first.
Tobias: Why start now?
Bill: All those triple levered ETFs like, people the way smarter than me are like, “No, those are day trading vehicles. You can own those things.”
Tobias: Well, at some point, they start going up a lot.
Bill: Yeah. But I think the issue is the fees that you’re paying to hold them.
Bill: I don’t actually know.
Jake: Do we have any formal topics for today?
Tobias: Yeah, I do. Greenwald had this nice little bit on moats, which we put it on the blog and I tweeted it out this morning. Kind of interesting analysis. I’ll get into it when we get into it but I don’t think I’ve seen this before and I thought it was a pretty good one. So, I want to talk about that.
Bill: Was it market share capture?
Bill: Yeah, I like when he does that.
Tobias: That was clever. The point that he made is that, he said, Buffett’s a bit coy about how you actually go about determining. He says it pretty straightforward. I don’t know if anybody’s ever tested that. Yeah, I hadn’t seen that before. I thought it’s a good one. Anyway, I’ll talk about it at the appropriate time. So, it’s not really timel. That’s the only thing it’s– I worry about doing too much timely stuff. At some stage, we’re going to get some real volatility here and we’re going to be talking about what’s going on that day.
Jake: Till then it’s just punting. [laughs]
Tobias: [crosstalk] it’s not real volatility. Yeah, just sharpening the accent, I guess.
Bill: I think you guys aren’t looking below the surface enough. There’s crazy volatility out there, crazy.
Tobias: Dude, we’re messing with you right. We’ve been hearing you talk about it for months– I’ve been talking ARKK topping out on February 12th [crosstalk] since about February 13th.
Bill: Yeah, I know. But I’m just saying like–
ARKK Down 50%
Jake: Officially 50% down now in the ARKK.
Tobias: Is it really?
Tobias: Is that sub 80?
Jake: Yeah, I think it was like 78 or something [laughs] last I looked.
Tobias: 78. Well, yeah, that’s 50% from 156. I probably could have figured that by myself.
Jake: Checks out. [laughs]
COVID Was The Worst Thing To Happen To Peloton
Bill: I tell you what. My hot take is Peloton off 6% today is not enough. If they’re actually closing in stores, you just made an acquisition, now, growth is slowing and you’re talking about laying people off, ooh,
Tobias: Somebody said McKinsey restructuring. I don’t know if that was a gag or if it what was actually going to happen.
Bill: Yeah. Tough break to buy in. I mean they acquired, what was it? Was it nautilus? No, it wasn’t nautilus– [crosstalk]
Jake: Some other coat hanger. [crosstalk]
Bill: Yeah. No, they’re everywhere. I should be able to think about this. They do like a ton of gym equipment, but really sucks to go into an air pocket after you close on an acquisition. I think that they’re [crosstalk] restructuring.
Jake: I mean, really could argue that COVID was a worst thing that could happen to Peloton.
Bill: The guy from BMO actually made that argument and [crosstalk] and it has to make that argument.
Tobias: What’s the argument?
Jake: Well, you just all of a sudden get this absolute mad rush of demand and [crosstalk] then expectations for your stock price that you’re never going to live up to, and then world goes back to normal, and you had this like you staffed up, you did all of this stuff that now you have to undo some of it to get back to your normal, reasonable trendline growth that you were on before. You had a nice little thing going with a good culture and all that kind of stuff, and that kind of growth [crosstalk] explode your culture, right?
Bill: Yeah. Made a massive acquisition to get manufacturing in-house.
Jake: Cultural landmine.
Bill: Yeah. I don’t know. I was talking to my wife. I’ve obviously been intrigued by the stock but one of the reasons that I stayed away is the repricing of the bike down and then releasing a higher price bike, like, when you look at their advertising, it looks like they’re slashing prices which is discounting. I’m telling you this thing reminds me Under Armour. I’ve said it a couple times like, Under Armour was fucking cool and people don’t realize it because it sucks now. Managing a brand– [crosstalk]
Jake: Well, that goes our Under Armour sponsorship that we were banking on.[laughter]
Bill: I don’t even know if we’d want to be sponsored by Under Armour. Shoutout to Eight Sleep. Y’all can sponsor us.
Jake: Yes, we would. We’ll take anyone. [laughs]
Bill: Yeah, that’s true. Bed Bath & Beyond can sponsor us. We’ll handout coupons.
Tobias: Bath bombs. [laughs]
Bill: They’ve had insiders that are buying recently. It’s a stock that I have floated over the years and never dabbled with but always looked at it. I thought it was cheap.
Tobias: JT, you got a topic this week?
Jake: I do. We’re going to be discussing this thing called ‘Lyapunov time.’
Tobias: Lyapunov time?
Jake: Yeah. So, stay tuned for that. [laughs]
Tobias: It’s when someone offends you, then it’s Lyapunov time.
Jake: Yeah, [laughs] exactly.
Bill: I don’t. I pretty much just took up 15 minutes rambling through topics and thoughts. I will say my closing thought is–
Jake: Already? [laughs]
Tobias: You’re going to claim that 15 minutes is yours?
Bill: It’s a lot of mine. Yeah.
Bill: Look, I think comments of trees don’t grow to the sky and what can’t go on forever won’t, I used to be the guy that said that shit. I think they’re lazy crutches and I would really encourage people to actually do work before they say it.
Tobias: Trees can’t grow to the sky.
Bill: There you go.
Brewster On Chamath
Jake: I think we need some hot take Brewster on Chamath since that’s the hot news.
Bill: I don’t know. I don’t know that I really want to wade into this. I offended people with foie gras the other week. What can I possibly say other than dunking on him that people would be okay with?
Jake: Okay. Fair enough.
Bill: If I had to have a hot take, I probably would be like, “Why the fuck do people care what some guy that made a bunch of money, like, hacking a growth algorithm on a fucking social network has to say about politics.” And get your head out of your ass with billionaire warship and half these guys aren’t who you actually think they are. That might be my hot take.
Jake: [crosstalk] I like that one.
Bill: Secondly, I don’t actually think he’s that wrong with how politically it will play. I just think, generally, he’s a sociopath that doesn’t care about toeing a line. I can’t believe that he said it and– [crosstalk]
Tobias: Well, they were recording it [crosstalk] timely.
Bill: I don’t know. I think a real comment is to say that human rights and what’s going on with the Uyghurs doesn’t matter is absolutely insane to me as someone who grew up in a Jewish household. I think that people really need to think about what’s going on, and I think that we all should be really honest about where we’re buying things from, and I think that if you honestly are upset about what he said, then stop fucking buying stuff from China.
Tobias: It’s almost impossible.
Bill: I know.
Tobias: We tried to buy some Korean face masks and they arrive, they’re all made in China.
Bill: Yeah, it’s tough. That’s a power thing. So, what’s really the comment is China’s got us all by the balls to the point that they can go out and do genocide and nobody does anything about it. It’s terrible. It’s disgusting.
Tobias: Was the point that he was making, not that I really want to get into. Let’s just keep on going.
Bill: I think what he said because I actually tuned into that podcast, even though, I never do. I think what he was saying is like, “Look, politically a statement on the Uyghurs is not going to move the needle. They were having a comment– [crosstalk]
Jake: Thoughts of prayers.
Bill: They were having a comment about politics and whether or not what plays and what doesn’t in America. I don’t even necessarily think that he’s wrong on what will move the needle politically. I think the fact that he said what he said and how he phrased it is, I hope he comes out and apologizes.
Tobias: [crosstalk] I think he has made an apology?
Bill: Yeah. This should lead to a world war. I hope that we can all agree it’s very serious stuff.
Bill: But I will re-up my sociopath comments and also his SPACs suck performance wise, which is nice to see.
Jake: I think he already got up the door on those before. Left someone else to hold that bag.
Bill: Yeah. Imagine all the people like, “Oh, trust in him.” I’m like, “Fuck that shit.” Cult of personality in finance. It’s disgusting.
Second Derivative Suffering
Tobias: It’s funny how hot all of these topics get. Someone reminded me that I had something nasty to say about beyond me right at the very peak of it or not at the very peak I was in June 2019.
Jake: What did you say?
Tobias: I think just everybody punting it at these levels has gone insane.
Tobias: It’s not going to make it.[laughter]
Tobias: It’s just so funny like. I just about never see beyond being talked about as a like nobody– What are you going to go and do a victory lap? No one cares at this point.
Tobias: They’re hot for three or three months or so and then they’re gone. You could just like clockwork, AMC is another one. I’m just baffled by it. It got a ramp and now no one cares, except that are still people in this hoping it goes to the moon. Not going to make it.
Bill: That stuff I feel really conflicted on because I said this on an earlier podcast we had. There’s a part of me that’s like, “Let them all get rolled over.” Then there’s the other part of me that sees this woman’s picture on Twitter and she’s got her little kid and that kid does not deserve a mother that’s stupid. But he’s got one. Maybe he’ll learn some stuff from her. I don’t know. But fuck, what a shitty card to be dealt?
Jake: Well, I was happy to be on a call this morning with a little group with it had Arnold Van Den Berg that was giving a talk and he was saying, people either learn through suffering or knowledge of basically seeing other people suffering.
Tobias: Second derivative suffering?
Jake: Yeah, second derivative suffering. So, I don’t know. Maybe it’s unavoidable and we could just try to be compassionate for everybody that’s going to be going through a lot of learning here. [crosstalk]
Tobias: More details.
Bill: Yeah. That’s the guy that needs to answer the Chamath question or Chamath.
Bill: Chamath or whatever the fuck. I’m sorry [crosstalk] if I don’t say it right.
Tobias: What are you doing in this stuff anyway? Why are you in this stuff? In this stuff, they’re gambling in this stuff.
Bill: I know. That’s why I feel bad for the kid and not the person. You know what I’m saying?
Tobias: Well, the person is probably in some difficult financial straits to and trying to get out doing that. But that’s not the way to do it.
Bill: Yeah, you buy options, Nick.
Bill: Bad joke.
Tobias: More isometric.
Jake: Doge coin and [crosstalk]
Bill: Convexity baby.
Tobias: Let’s do a little palate cleanser. JT. Do you want to take it away?
Jake: Yeah, sure. [laughs] All right, so, this topic is called the Lyapunov time. That’s spelled L-Y-A-P-U-N-O-V. That was a Russian mathematician. This has to do with complexity theory and chaos. Basically, the amount of time that we can successfully predict the state of a chaotic system depends upon three things. Number one, it depends upon how much error we’re willing to tolerate in the forecast. Number two, how precisely we can measure the initial conditions of the system. And then number three, a timescale beyond our control is called the Lyapunov time and it limits the predictability of a system.
Roughly speaking, we can only predict up to that Lyapunov time and after that, the errors start to snowball to where it’s basically exceeded any allowable tolerance that we have. So, you have then only two options. You can lower your standards of how much you’re willing to tolerate in the err of the forecast or you can improve your initial measurements to extend that Lyapunov kind of horizon and allow you to then predict longer as to what a chaotic system will do. But what’s difficult about this is that it’s nonlinear. So, let’s say that you wanted to be able to look out twice as long with the same accuracy of a chaotic system, it’s not going to take 2x the effort of getting better initial measurements, it’s 10x. If you want 3x further out, it’s not 3x or 6x, it’s 100x. If you want 4x, it’s 1,000x that you need in initial measurement improvements.
It’s this nonlinear, basically, like a factor of 10. It grows exponentially. You can apply this then to different domains. So, the chaotic electric circuit has the predict like, it’s Lyapunov window, measurement is like 1/1000th of a second is about how far out you can predict before the chaos, the errors accumulate in a way where you can no longer predict what the system is going to look like based on the initial starting conditions.
Bill: How long?
Jake: 1/1000th of a second.
Bill: Wow. That’s not long.
Tobias: What’s a chaotic electrical circuit?
Bill: Thank you, Toby.
Jake: Yeah. You can get them in a lot of different ways but if you put in certain elements that will create a randomness of syncing between things, let’s say, it turns on or off depending on the other conditions of what the other elements in it are doing and it can cascade out and you’re not exactly sure. It’s that same like grain of sand analogy where you’re never sure exactly when it’s going to run away from–
So, now, when it comes to weather, we’re roughly probably about a few days for that Lyapunov window, like, where we can see the initial starting conditions. We know the cloud cover, we know high and low pressure, and that gives us about a couple days’ worth of accurate predictions at the most.
Tobias: We can predict weather for a couple of days? That’s pretty good.
Jake: I think most of the time. I think they’re reasonably accurate at this point, don’t you? Now, when it comes to the solar system, it’s about 5 million years. So, what that means is that, during our lifetimes, the motion of the planets appears to be perfectly measurable and perfectly predictable. However, in actually over the entire known astronomy, it has been true that they have been predictable. But over more than 5 million years, there’re enough errors that accumulate where we actually can’t make very good predictions as to where a specific planet might be 5 million years from now.
Now, it gives this illusion of predictability though because it feels like, Jupiter is where we think it’s going to be during all of our lifetimes but it’s not actually true. Then, Pluto’s orbit for instance, for whatever reason, we have about a 20-million-year Lyapunov window for that. For some reason, we know where Pluto is going to be with a relative accuracy 20 years from now. So, let’s bring this back to maybe something that we can all use. It’s interesting as a framework but I’m trying to imagine what are the Lyapunov windows for macro predictions or even like this AMC or whatever that something is if people are really hot on and interested in.
We can work at getting better initial known elements of the chaotic system. But within however amount of time like that, you lose that understanding and the chaos unfolds to the point where the errors accumulate to where you just don’t even know what the answer is going to be. You don’t know how the system is going to change. So, my hypothesis or my hunch is that, the Lyapunov window is much shorter than anyone imagines for a lot of this like macro stuff. We’d like to think, we could look out a year. Even if you knew a lot of the initial conditions and we’ve probably been getting better at that over time, like, data collection, I would imagine.
But remember, it’s exponential, the amount of data collection that you need the effort required to extend that window out. So, if you need 100x data collection and accuracy to get doubling the window, I think that we’re probably a little bit like, our intuition is off on that. We think if we measure everything in the whole goddamn economy that we can then make these accurate predictions as to what it needs putting on my Federal Reserve hat right now. But really that window is probably much shorter than– [crosstalk]
Tobias: It means the lower rates.
Jake: Oh, there we go.
Tobias and Jake: Problem solved.
Jake: Anyway, I don’t know. Is anything popped to mind on that of like, what applications might be from thinking through how chaotic systems devolve away from what we could ever predict?
Tobias: It’s interesting. Yeah. I wonder is it impacted further by a system like the stock market or a system like the economy where people are reacting based on the signals that they’re getting too. So, a prediction in one direction will make you behave in one way.
Jake: Right. There’s a Schrödinger’s cat kind of situation there where you don’t know the feedback loops and you don’t know–
Hedging At The Extremes
Tobias: If you think rates are heading up here and that probably changes, well, certainly, anybody has a commodity and put into a business is always trying to hedge the commodity input. So, if they think that they’re unusually high or unusually low, they’re trading around that and if they think it’s closer to the long run mean of what they need, then they’re probably unhedged at that point. So, those behaviors are going to impact that system as well, just to make it even more complicated.
Bill: I hope people aren’t doing that. I think they should have a stated hedging policy and always stick to that.
Tobias: They definitely do that, don’t they?
Bill: I don’t know. We used to bank some people that just ran unhedged and then we ran others that had stated hedging policy. We didn’t really care as long as you were consistent in what you did. Because otherwise, you end up making like market calls. That’s a good way to get upside down.
Jake: Any sense of what kind of did better over that time period?
Bill: There was one dairy company and I wish that I could remember what their hedging was. But they did a little bit of what Toby is talking about where they hedged at the extremes, and in the middle, they let everything run, and they did a very good job. I pushed back on them a fair amount when I read their policy, and they showed me the data, and I was like, “All right, you guys are right.”
Tobias: I had an econometrics professor, who had this idea that basically the only time to do anything with commodities was when they’re at the extremes. It was unpredictable in the middles. Yeah, when oil goes negative, then probably get long a ton of oil [crosstalk] theory.
Jake: Now you tell me.
Tobias: [laughs] Yeah.
Bill: That one was pretty easy. It was just the opportunity cost of doing it.
Tobias: Well, you don’t have to do it through oil. Do it through some other–
Jake: Triple x or 3x covered vol oil ETF?
Bill: Yeah, so you get blown out before you get right.
Oil Is The Natural Interest Rate
Tobias: I saw someone say that I’m going to get this wrong, but it was like, oil is the natural interest rate in the economy. So, when energy prices go up, that’s the natural handbrake. When energy prices go down, it’s the hit in the accelerator. What the Fed does is just around the edges of that, so, it’s interesting with oil running up so much recently.
Jake: So, Fed should be lending to– Well, I was going to say– [crosstalk]
Tobias: To oil? To drillers.
Jake: Yeah. Specifically to frackers.
Tobias: Ah, don’t give them any ideas, JT.
Jake: [laughs] Let’s goose this baby.
Tobias: What do you think about that as a thesis, like, oil running up? Is the thing that pops the bubble?
Jake: I’ve heard that before. I’ve a friend who believes that to be what happened in 2008. Oil ran up to hundred and whatever it was and popped the bubble.
Tobias: Where are we now? Anybody know?
Jake: I think it’s in the 80s.
Bill: Yeah, I don’t know. I thought that we were close. Yeah, somewhere.
Jake: It’s not negative.
Bill: I know. FinTwit is very bullish on oil.
Jake: Which makes you nervous, right?
Jake: Because it’s all these generalist bozos.
Bill: Not that they’re bozos. I just don’t think that they’re– If you want to talk about base rates, generalists getting into oil tends not to be great in my view, but yeah, it looks like the CME is 84.56.
Tobias: I want to know how oil bounces around from zero to hundred and the gas price at the pump always goes up. Why do it in California?
Jake: That’s right.
Bill: Dude, I’ll be very specific. I get nervous when generalists like something and my buddy who made all his money in oil doesn’t. That’s when I get nervous.
Jake: That’s fair.
Tobias: Have you spoken to him recently? Does he have a prediction for us?
Bill: I don’t know. Somebody is saying, I said something in fall 2019. What did I say? I say a lot of shit. I forget a lot.
Jake: [laughs] Thank God, you forget most of it.
Bill: What the weeds for?
Greenwald on Buffett’s Moats
Bill: All right, let’s get into your Greenwald.
Tobias: Yeah, Greenwald. I’m always looking for a little hack for figuring out moats. I’ve never really seen a good one. I’ve never really seen one that’s particularly predictive but this is interesting. I think it’s promising and the intuition of it makes sense to me. That’s from Bruce Greenwald. He says, “You look at what amount of money you need to be sustainable in an industry. How big you have to grow to get sustainable, and then you look at how much of the market you have to capture to get to that level of sustainability.” So, he gives the example of cars and he says that a very, very big market. At 1% or 2%, you can be sustainable in cars and then he said–
Jake: Can I ask a question? That means how much revenue you would need to drive to cover fixed costs or something? What does he mean by that?
Tobias: He didn’t actually dive into that. But yeah, I would assume that’s the case. What you need to earn a reasonable return probably.
Tobias: So, he said, 1% or 2% is achievable in autos. Then the advantage to having autos is that, people buy, car is a one-off purchase decision about every seven to 10 years. So, there’s no habit, there’s no locking, there’s no loyalty. You might have some– If you have a particularly good car, but you probably are just looking for something new and so you open to different types of vehicles. Then he compares that with the soda Coke, and he says to become sustainable in whatever that’s called non-alcoholic beverages or something like that you need 25% of the market, which seems extraordinarily high, but let’s just take his number for the moment because distribution is so hard to achieve. You need scale to get distribution.
It’s such a small purchase item that it is habit forming. So, people have a preferred brand that they buy repeatedly over and over and over again. It’s very hard to get them to switch. So, there’s a much bigger moat in that segment than there is in [unintelligible [00:36:43]. So, therefore, that’s how he’s measuring the moat, which I thought it was a really just simple elegant way of making that assessment. It wasn’t particularly intuitive to me that that would be the way that you do it but having read it I thought it’s a good approach.
Bill: Where do you write this? I’ve heard him say it before but I didn’t–
Jake: Bathroom wall.
Bill: Yeah. [crosstalk] He said it in his Columbia class. There’s a three-day class that he said–
Tobias: Yeah, Johnny grabbed it and threw it up on the site. I just thought it was a good one.
Jake: It’s interesting, though, because how it– You run a profit pool at the end of the day as well. So, competition derives a lot of what profit pool is going to be available there. I don’t know, how do you factor that part in because that’s just total revenue percentage of market share. But that doesn’t necessarily like, it’s a really fractured market, there’s lots of people competing, your price taker still, I don’t know. How much profits left over there? Because isn’t that what a moat really is, is the deep profit pool for you?
Tobias: Yeah. What does it mean to have a moat that you can control your pricing? Yeah, can you do that with autos? I don’t know. Maybe that’s not what it means. Maybe just being able to survive in the industry.
Bill: Yeah. I think that’s what he’s referring to. Because I think he’s talking about measuring the– I think in his Coke example, he’s assuming there’s profits for Coke and he’s trying to calculate– I almost think of it a little bit like Mauboussin’s idea of a competitive advantage period. Like, how long can this be chipped away at before your economics go away?
Jake: Yeah, duration of moat.
Jake: So, if it’s going to be a long duration, then buy that one. But if it’s not going to be long duration, then don’t buy it. [laughs]
Tobias: And if it’s something like Costco into analysis like that. Does Costco have a moat?
Bill: Yeah. But I don’t know that it applies to the same. I guess, what you would want to look at is membership atrophy or something like that. Because you’re looking at GMV that goes through the system. I don’t know. I don’t know that it lends itself quite to that exact thought pattern if that makes sense.
Tobias: Yeah. Someone’s saying WD-40, Brojo Lube. No, sorry, blade.
Bill: Yeah. [crosstalk] WD40 is a great moat.
Tobias: It’s funny to see the whole WD-40 stuff now in the hardware store.
Tobias: Because you buy a can so infrequently– or I buy a can so infrequently. I bought one recently. I was like, “Oh, the last one I’ve got probably 25 years old, something like that.”
Bill: Yeah, but you’re not going to buy anything else.
Tobias: No. Why would you do that? It’s crazy.
Bill: I have a squeaky door. It needs WD40. That’s what it needs. Somebody could have squeaky door stuff right next to WD40. There’s no way I’m buying it.
Tobias: Yes. squeaky door, especially, you’d have to flavor it or something like that.
Bill: Yeah. I like this. I like that stuff that I think Greenwald’s generally a smart dude. He should have stayed away from Amazon. He would have had a lot better career but he knows that [crosstalk].
Tobias: He was short it, wasn’t he?
Bill: Yeah, for a long time. I think I’m pretty sure he’s announced publicly. It cost him eight figures.
Tobias: Wow. I see someone saying today that there’s an article about Tobi Lutke at Shopify saying that this will be the first year that Amazon’s revenues don’t grow or revenues go backwards. I guess, they got a tough comp from– I’m not actually sure if it’s 2021 or 2020 but they’ve been some tough comps that I thought that was interesting.
Bill: Yeah, it’s on my list.
Tobias: Are things that are going to happen this year?
Tobias: Things to buy.
Bill: Of things, I have to deconstruct to figure out. It would make sense. You got 2020, literally, everyone was locked inside. That’s the perfect retail environment for Amazon.
Tobias: Yeah, it does make sense. Yeah. Is this more applicable to very capital-intensive businesses? What about companies have a specific market share and it is capital intensive, but the switching costs are low?
Bill: I don’t think capital intensity is the thing to think about because he uses Coke, which is not particularly capital intensive. Potentially, something that relies on distribution but I don’t know. I think you could use it on Google. There’s a website out there that shows you all of the market share data in different markets. You could track that over time on Google and see, is somebody actually coming into Google’s moat? For some reason, French people use Bing for a little while in 2020. It lasted for a month and then I went away but yuck.
Bill: You guys want to have worse information, go ahead.
Tobias: [laughs] It is as distressing as it might be that Google tampering with the results over time. Anytime you go and try and use anything else it’s just complete gobbledygook.
Sol Price vs Christopher Bloomstran
Bill: Dude, did you see the Sol Price thread that Bloomstran wrote up? So, he was looking up Sol Price, who I guess emerged his company into Costco and he was like, “That’s it. This is the top. All my hits are Solana Price.” It’s like “Well, obviously, dude, you’re the only fucking person looking for the guy that merged into Costco. No one else has cared about that for 30 years.” But then the founder of what is it? Part of my ignorance is its Solana. Yeah, Solyndra is something different.
Bill: That guy changed his Twitter picture to Sol Price. Then Chris and him had a back and forth and it was very playful. It was a great– the Internet won again. I thought it was fantastic.
Jake: Twitter at its best.
Bill: That’s right.
Tobias: [crosstalk] It’s been little a while.
Bill: Yeah, hats off to all [crosstalk] those guys. Yeah, I thought they handled it in the right way. Then Chris at the end of his back and forth, he signed off. He said like, Bloomer, Boomer, Bloomstran something like that. I forget what he said but I loved how he ended it. It was in good fun.
Jake: He should have gotten laser eyes for the end. That would have been funny.
Bill: Yeah, that would have been. He still can. Chris, there’s still time. That’ll be the top.
Bill: Even if it’s a joke.
Tobias: Shoot your questions to us, dudes. We got about 15 minutes. How do you value something that is growing topline but not profits? With the hope that one day they will be fully grown and are able to eek out profits?
Jake: To the moon.
Bill: Well, you got to benchmark it. You benchmark it to what companies you think you can go to in the future.
Tobias: Walmart, Amazon.
Jake: You mean like base rates?
Bill: Well, yeah. But dude, I think the problem with your base rate example is that, I think the Google base rate problem is a sampling error. That’s what I think you suffer from that. I think if you’re comping Google to all companies, it’s fundamentally different. I think that a more appropriate way to do it would be like, I don’t know how long did Xerox last when Xerox was x years old, and they were this percentage of their market or something like that. I think that why the inside view on something like Google goes further than the base rate is like, you talk about your segment today about not knowing the future.
The amount that that company invests in its people acknowledges the idea that it needs other bets and moonshots to remain relevant for the future and facilitates, and like a culture of development, and ownership, and getting to the truth, it’s just not an average company. It just isn’t. But I think for a software company, you got to look at what do you think terminal margins are, how big do you think the TAM is, how big do you think their market share is going to be and good luck? I mean, it’s a tough game but it’s one that can pay.
Jake: Yeah, really tough. I mean, you have incredibly wide variance on what the future will hold for a lot of those kind of companies, right?
Bill: Yeah. I think the distribution of outcomes that I would assign is wider than most, which is why I have had fun staying poor.
Jake: Well, this goes back to way, way, way back in when we did a segment on the St. Petersburg Paradox, which was that when you have something with potentially, seemingly infinite upside, how much are you willing to wager on a coin flip for that? Some of these, I think, suffer from St. Petersburg Paradox where you can imagine scenarios and there may be totally like that could happen, its potential but when you go to try to handicap that and create an expected return, you end up with something potentially asinine, even though, mathematically it would pencil out.
Tobias: What’s your back screen, JT?
Jake: That was a hike that we did yesterday with the fam up to the top of this hill and–
Bill: Oh, that hellscape known as California?
Bill: Ah, I can’t imagine why anyone would live there. That is beautiful.
Jake: Yeah, pretty nice.
Tobias: The weather is great.
Jake: The sky was very cooperative in the morning.
Tobias: That’s what you pay for.
Jake: Yep. It’s my happy place. That’s why I put it up. I wanted to feel safe.
IEP, Berkshire, IAC, or Markel?
Bill: IEP, Berkshire, IAC, or Markel?
Jake: What’s the question?
Tobias: That’s the question. That’s all it. IEP, BRK, IAC or MKL?
Bill: I wouldn’t go IEP because Carl is old as fuck and I don’t know that I could trust him. Berkshire as much as I don’t love to say that. I think you can probably apply the old comment, too also. I guess, I’d probably go with IAC given where they play and what I think their current valuations are but I don’t on it. So, shoot me, especially, since I have a big position in Berkshire while I say that. I think Markel is more sustainable because they’re younger guys.
Tobias: IEP, so, I think there are two questions here. I think it’s IEP versus BRK. IEP has this goes on this monster runs. Go and have a look at IEPs chart. It runs all the way up and then runs all the way back– [crosstalk]
Jake: You should probably say what that is.
Tobias: Yes, sorry. I can settle.
Bill: It’s his partnership.
Bill: I don’t know, man. He controls it.
Tobias: Yeah, he owns it from 92% [crosstalk]
Bill: I got mad love for [crosstalk] career. I have nothing bad to say about that guy’s career but I don’t know that I want to be the minority partner and his public entity.
Jake: He’s been kind of quiet lately, huh? Little conspicuously absent. [crosstalk]
Tobias: But he’s been coming up on 90.
Jake: Dog not barking.
Tobias: Not everybody can be.
Jake: [crosstalk] out there and mix it up, right?
Tobias: Yeah. Not everybody can be a spry in their 90s is as the two champs would be okay. Yeah, Berkshires going to be certain slow growth. So, Berkshire’s the safest of the bet of a lot and then the question is, IAC or Markel? So, IAC is growthier internet stuff, Markel–
Bill: I don’t know, man. IAC owns, is it Investopedia that they own? There’s that group of, I can’t believe I can’t think off the top of my head, these like very staid internet properties that just tend to do well over time. It’s pretty incredible that the properties do well.
Tobias: Try them a little bit today [crosstalk]
Bill: They got a Turo. Turo is legit product. I don’t know how to value it because it’s so young, but have you used it at all or looked into it?
Bill: So, you can rent people’s cars. It’s basically like Airbnb for cars [crosstalk] grown a lot.
Tobias: I prefer [crosstalk] the Uber model where you rent the driver at the same time.
Bill: Yeah, no.
Tobias: Carl’s 85, apologies.
Bill: Dotdash, thank you very much. I appreciate that.
Jake: Wow. What do I do with said car? I just go drive it around then give it back to them?
Bill: Yeah, you can run like Maserati’s, you can run Tesla’s, you can run bunch of stuff. It’s pretty cool concept.
Jake: For prom or something? What am I renting this car for? [laughs]
Bill: No, if you just want to drive– [crosstalk]
Jake: Flex like drive around town.
Bill: I thought about doing it at Richmond. I didn’t do it, but I thought about it.
Jake: All right.
Bill: I wouldn’t mind driving somebody’s Maserati for hundred bucks.
Tobias: Ah, imagine renting out your Maserati for a hundred bucks.
Jake: Yeah, that is like–
Bill: Yeah, I know.
Tobias: Then paying them a clip for doing it.
Bill: Tell you what, those things depreciate in value quick. It may not– [crosstalk]
Jake: Especially, when you are renting out.
Tobias: That’s [crosstalk] [laughter]
Jake: Oh, man. I better– [crosstalk]
Does Calculus Make You A Better Investor?
Tobias: Does knowing calculus make you a better investor or is more basic math skills sufficient?
Bill: I think you got to have a general idea of statistics. I don’t know that you need to go into calculus.
Jake: I don’t think you need anything more than addition, subtraction, multiplication, and division.
Bill: I think you need stats. I really do. I think at a minimum, you better have an idea of what probability curves look like. But that’s mostly because that’s how I think of valuation.
Tobias: Yeah. You should have a feel for it rather than you don’t need to be able to calculate your student T distribution or something like that there.
Bill: No. But I don’t know, I’ve looked at how many standard deviations is this result outside of the normal result.
Tobias: You’ve calculated?
Bill: Oh, yeah.
Tobias: I had no idea.
Tobias: I had no idea.
Jake: You had that on raw data?
Bill: Got to put that CFA stuff to work sometimes.
Tobias: [laughs] You fix– [crosstalk]
Bill: No, I did it on Ralph Lauren. I think it was in 2017 or something like that. I’ve done it a number of times.
Tobias: Ralph Lauren got cheaper-ish over the last few years. Was that when it was cheap? I don’t know where it is now.
Bill: Yeah, I think it was. I think it was. It gave me the wrong signal on Netflix. Oh, well. It’s not perfect.
Tobias: Anybody know anything about SHOP? Where would you buy SHOP? Because SHOP’S one of the things that I really love but I just think it’s too expensive, but I saw it’s come off quite a lot. So, anybody got a minimum or maximum price that prepared a swing it up there?
Bill: No, I’d probably just buy a little over time. I saw they just signed a deal with JD, which–
Bill: What a difference a couple of years makes for JD.com investors. If you know what I’m talking about, you know what I’m talking about, and then today you get a Shopify. Same with Activision Blizzard actually. Very similar.
Bill: One day, you’re dealing with rape, the next daily you’re dealing with a Microsoft takeout.
Tobias: Was it rape?
Bill: Yeah. JD.com, too, except it was just at the founder level. Yeah, that was the thing with Activision Blizzard. People were walking out because they said the CEO knew of rape. Not ideal.
Tobias: Cathie Wood stocks getting taken out in shot. Yeah, but still–
Bill: I will say about Microsoft. My first thought was first of all, obviously for the victims or whatever, I don’t know what happened at Activision but secondly Satya is a killer. That’s a value investment. We’ll see if that gets through–
Tobias: Allegedly. It was just allegedly told– [crosstalk]
Bill: Yeah, that’s right.
Tobias: I haven’t read that story. When does Twitter catch a bid?
Bill: I don’t know.
Tobias: Somebody can– [crosstalk]
Bill: I have this theory. Actually, everybody should fade me on this because I think advertising is going to be taken to the woodshed over the next two years potentially, and that’s a macro call, and everyone should fade that. It’s probably time to get long advertising companies.
Jake: Is that all advertising or is online exempted from that?
Bill: I think that it’s potentially all advertising. But that goes in my macro bucket. It’s not under writable and I would fade that. But Twitter’s not going to outperform in that.
Tobias: Trade Desk, is that one way to play that?
Bill: Well, they would benefit from– [crosstalk]
Jake: Yeah, you got–
Tobias: Fast money or something like that.
Jake: Jesus. Kramer over here.
Jake: Toby Kramer. [laughs]
Bill: Favorite Peloton instructor? Alex Toussaint, obviously. Love, Alex.
Tobias: Throw in the Solitaire on windows and it’s a gaming monopoly.
Tobias: It’s funny.
Bill: Minesweeper was awesome.
Tobias: You just going to rapidly click the button. If you get big open space, then you’re good to go. Then you can put in the work.
Problems With Twitter
Tobias: Yeah, I don’t know. Twitter seems cheapish to me at $30 billion.
Bill: It’s been very, very frustrating to be inside of their experiments and see the lack of progress. I cannot fundamentally believe that I’m still waiting for the ability to have private Spaces for my super follows. For me, the whole way that they did that stuff really fucked me and I think it was really stupid, like, I can’t change the price offering. So, I’ve got this price offering that’s 10 bucks a month to deliver literally no value to people.
The only thing that I thought that maybe I could do in a cool way is facilitate private conversations, and have a little bit smaller of a group to have Spaces where people maybe could be more free or they’d be more open with how they think because it’s not open to everybody and it’s part of a community. I can’t do any of it. I don’t have a Slack function. They told me to manage all that myself. Like why would I go through the effort of building something on top of their platform when the answer is go do all of it yourself, just give us a take? It’s like I don’t understand why they can’t close some of these loops. It’s crazy to me.
Jake: The upside is [crosstalk] sweet glasses though so.
Bill: I did get these and I appreciate the people over there. I appreciate them giving me a shot. But I mean, you got to call a spade a spade. They fumbled the ball, I think.
Jake: I mean, I would start with just being able to search DMs. That would be a– [laughs]
Bill: That’s what they said to me. They were like, “Oh, you want a Slack function you should just do it in your DMs.” I was like, “Have you guys ever used your own DMs?” You can’t find anything in the DM chat.
Jake: No. It’s unworkable.
Bill: Yeah, so, Blade is saying discord. Well, I don’t want to have to start my own discord. If I wanted to do that, I would just charge the $10 a month outside of Twitter and not pay Apple 30% and not pay Twitter eventually. It just doesn’t make any sense.
Tobias: Do you want to handicap the ATVI Microsoft trust risk there?
Bill: No. There are really smart people that do that for a living. I’m not one of them.
Jake: But if you had to guess?
Tobias: This is a podcast, sir.
Jake: Yeah. Don’t worry about that.
Bill: I don’t know.
Tobias: What do they feel about vertical integration? Because that’s basically what’s happening on Xbox plus those games.
Tobias: It’s a fragmented market. It’s only less than 5% market share.
Jake: Well, we’re not. They’re asleep at the wheel. There’s no–
Tobias: That’s the one that they’re going to go after of all this stuff.
Jake: Of all this stuff. This is the one they’re–
Bill: I don’t know. You don’t have the most friendly administration to this stuff. I could see them. I could actually– saying that they got their heads up their butts are actually very good reason to argue that this gets blocked. I was thinking about whether or not there’s another company that could come over the top, but I don’t think so. $65 billion is a lot of money.
Tobias: I see a Twitter, Jack Dorsey stepped away from running Twitter. Someone’s got the comment. Brent: Dorsey stepping away. Personally, I like founder led businesses better. Do you know what has vastly improved since Jack Dorsey left Twitter? Is Jack Dorsey’s Twitter account excellent now” He’s gone.
Jake: Is that right?
Tobias and Bill: Yeah.
Bill: It took him leaving defined Twitter. It was amazing.
Bill: He got all combative against people that got really great.
Jake: [unintelligible [00:59:51] leaving?
Tobias: The Twitter account is great. Yeah, he’s an inflationist. So, this is going to be interesting.
Bill: The other reason this take is the wrong is like, “Okay, Steve Jobs is gone from Apple.” Guess what happened? It went parabolic.” You can like founder-led companies. That’s fine. But what happened to Google when they left? I think that there’re some good examples of founders stepping away [crosstalk] and unlocking value.
Tobias: Have they left? Haven’t they got human shield–?
Bill: Well, they’re not CEOs of Alphabet.
Tobias: Yeah. They control all the stock. All the other stock is just like coupons.
Bill: Yeah. You got a different manager in your path.
Tobias: Yeah. But that’s a human shield. Something goes bad, the manager gets shot and those guys just sit in the background. They don’t have to show up to the office. There’s someone else in there. They got a good idea. They just pick up the phone and say, this is what we’re implementing. Now, go do that. That’s a good job.
Jake: That’s really sweet. That’s a sweet job. My advice would be to get a job like that.
Tobias: Do you think Jack can search DMs? Jack can search everybody’s DMs?
Bill: No, I don’t think so. I think even Jack can’t search [crosstalk]
Jake: He has [unintelligible [01:00:59] God moats.
Tobias: That’s time, dudes.
Bill: You lose stuff in DMs. Jack can’t search what’s lost.
Tobias: I can’t even search our DMs that we’ve got one ongoing thing, I can’t find what I want and that.
Bill: Part of the reason I was late today, I mean, it’s not the whole reason, but a decent amount is like, I’m looking for the Zoom code. I just need to save it somewhere else because every time I’m trying to find it DMs, I’m like, “Oh, my God, there’s so many DMs.”
Tobias: It’s too hard.
Bill: Anyway, if you reach out to me on DM and I don’t reach back out to you, this is part of the problem.
Jake: Blame Jack.
Bill: Yeah, that’s right.
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