In this episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle chat about:
- Is iPhone The Best Toll Road Ever Created?
- Mega Bear Market Coming
- Netflix Gets Torched
- CAPE’s Predictivity
- Five Levels of Gravity
- The ARKK, Tesla, Bitcoin Correlation
- To Sell Or Never Sell
- The Weirdest Things Are Out of Stock
- Rudy Havenstein Suspended On Twitter
- Read Financial News From A Year Ago
- Bill’s Qurate v Zoom Bet
- Einstein’s Happiest Thought
- Berkshire Meeting Open To The Public
- Never-Sell Guys Are Getting Hosed!
- Growth vs Value Sell-offs
- Cable Looks Reasonably Priced
- Brewster on Chamath
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, livestreaming.
Bill: You would think that.
Jake: I would.
Tobias: We are livestreaming, gents.
Bill: Yeah, buddy.
Tobias: It is Tuesday 10:30 AM on the West Coast, 1:30 PM on the East Coast. It’s Value: After Hours. I’m Tobias Carlisle. This is Bill Brewster and Jake Taylor.
Bill: Markets in Motherfucking Turmoil Edition.
Tobias: Markets in Turmoil Edition, finally. We’re back.
Jake: Markets in panic.
Bill: [laughs]
Jake: [laughs] Ratings through the roof.
Tobias: [laughs]
Jake: Do we even have ratings? I don’t know. That’s–
Bill: I don’t know. Look, I’ve got to make an apology. This is unfortunate. My mouth gets me in trouble often. I am going to try to pronounce it correctly once and from here on out, he will be known as Voldemort. It is Chamath Palihapitiya. I apologize if I don’t pronounce it correctly. And more importantly, if I dismiss that I don’t pronounce it correctly, I’ve gotten messages now on a couple of occasions. My father-in-law’s name is [unintelligible [00:00:59]. I understand that it’s tough. Well, I haven’t lived with a tough name to pronounce but I’m not trying to be insensitive with that.
Jake: ‘Chaboi? Is that hard to say? [laughs]
Bill: ‘Chaboi. If I have a throwaway comment on pronouncing Chamath’s name, it’s because sometimes his mannerisms annoy me. I’ve been thinking about what annoys me so much about him though, because I’m not– [crosstalk]
Tobias: [crosstalk]
Jake: He likes surprises.
Brewster on Chamath
Bill: Well, here’s the thing though. I’m friends with Kyle, and Kyle has SPACs. So, I just think it’s inserting yourself right in the middle of all that shit, and then encouraging the AMC stuff, and then taking vaporware public. I think it’s just all the things together that really bothered me. It’s not one or the other. When I listen to that guy speak, he says some things that I think make a lot of sense. And then, he says stuff that I’m just like, “You’re out of your fucking mind and only out there for you.”
Jake: What are you apologizing about, by the way? I don’t feel like you really got to the– You were saying —
Tobias: Mispronouncing the name.
Jake: Okay.
Bill: Yeah. There’s a lot of people out there that have names that are hard to pronounce, and I think that they get upset. We used to make a joke and we stopped making it.
Jake: We’re not going to make that joke anymore?
Bill: That’s correct.
Tobias: [laughs]
Bill: To the extent that it triggers people’s childhood memories or stuff that they feel bad about, I’m sorry that I did that. [crosstalk].
—
Growth vs Value Sell-offs
Tobias: In other news, there’s a big selloff going on.
Bill: Yeah. Well, I’ve been– [crosstalk]
Tobias: Bill, are you aware of that? There’s been this selloff going on under the– [crosstalk]
Bill: I haven’t heard. No, selling off– [crosstalk]
Tobias: Since February last year.
Bill: Thank you. I appreciate that.
Tobias: If you’d been watching the indexes, you might not have known.
Jake: Yeah. It was here already. It just wasn’t evenly distributed.
Bill: Right.
Tobias: Is it being more evenly distributed now, do you think?
Bill: Yeah.
Tobias: It does seem to be– it still like every time I check in on Ark or Tesla, they seem to be catching it a little bit more forcefully than the index.
Bill: See, we hit the Brewster family partnership, which is not a partnership, hit bottom December 2nd. We topped out on June 30th. So, it was a long six months of bleeding, but now other people maybe have felt what I was tweeting about.
Jake: That’s when you went all the cash? December– [laughs]
Bill: No. You know what was interesting is in June– and I wrote to some people too. I was like, “I can feel it that I should de-risk.” But I didn’t want to pay the tax, and I want to get used to the art of not selling, and I probably learned the exact lesson at the wrong time. But I do think it’s the right thing to do is to do less.
Never-Sell Guys Are Getting Hosed!
Tobias: I do feel like a lot of the never sell guys are the ones who are getting hit hardest in this. I’ve watched a lot of the never sell guys crying pretty hard on Twitter.
Bill: Yeah.
Tobias: I know how it feels. It sucked being a value guy for the last 10 years. So, I have some sympathy.
Bill: I don’t know, man. I think a lot of the never sell guys are like high quality. High quality isn’t getting hit that hard. I think it’s like the MOMO SaaS bros that– [crosstalk]
Tobias: Well, high quality growth is.
Bill: Yeah.
Tobias: Everything growth is getting torched.
Bill: Said differently, anything that Cathie Wood owns.
Tobias: I feel so bad, honestly. Every time I look at it, I’m amazed at how much it’s done. It’s incredibly volatile both ways.
Bill: Well, I’ll tell you what I don’t see much anymore. I don’t see much of the posts of what’s she buying today. Because that was plastered all over the internet. Like 12 months ago or whatever, it was like daily updates on what Cathie’s buying.
Tobias: She publishes daily. Her moves are published daily.
Bill: Yeah, but people don’t want to look now.
Tobias: [laughs]
Cable Looks Reasonably Priced
Bill: That said, I think some of this stuff’s getting reasonable. My beloved cable, not investment advice, but if you’re ever going to take a shot, it’s a decent thing to look at now.
Jake: Is it pretty beat up?
Bill: Yeah, it’s been drifting down on some concerns of wireless now. Charter topped off at 800, and now, it’s under 6. I don’t know. It’s been like a three-month hemorrhage, I think.
Jake: Even something like Costco, I was surprised to look and see, I think it’s off 20% from its highs, which– Costco that’s kind of a bulletproof–
Tobias: A bit expensive though.
Jake: It was pretty expensive, but when has that ever mattered?
Tobias: Well, it hasn’t mattered for a while but it doesn’t mean that it doesn’t ever matter. Maybe we get back into evaluations, fundamentals matter type market. You watch Tesla. When Tesla gets cracked, that’s when you know it’s back.
Bill: Well, to be fair, Costco, you could get yourself convinced it’s a bond equivalent with growth. So, if rates go up, long-duration bonds should come down. That makes some sense to me.
Tobias: I wonder if– [crosstalk]
Bill: Just to close the thought. I wouldn’t say that on Costco, fundamentals haven’t mattered. I would say that the valuation appears stretched. But I think that’s a bond proxy issue in people’s minds.
Tobias: That’s fair. But it’s still expensive particularly in a world where we’ve been sub 2% on the 10-year, but that seems to be increasingly irrelevant where inflation is running at 7%. So, you’re going to be chewing up 5% of your capital, sticking it in a 10-year.
Bill: I think that’s just one year, man. I’m still Team Transitory.
Tobias: I don’t know. It pumped out a lot of dollars.
Bill: Rudy is so mad right now. It’s all going to go to the rich, and they’re so rich, they’re not going to spend it. It’s all going to end up in more wealth inequality. I don’t think it ends up in velocity of money increasing through the system. I think it just ends up back in asset owners’ hands as it always does.
Rudy Havenstein Got Suspended
Jake: Speaking of Rudy, I saw that he got suspended by Twitter.
Tobias: Oh, yeah. We were– [crosstalk]
Bill: That’s not right.
Jake: That’s not right at all.
Tobias: Well, for taking shots at Klaus Schwab.
Jake: This is a parody account. It’s meant to be the court jester and point out the hypocrisies, right?
Tobias: Klaus Schwab is a parody account.
Bill: When did he get suspended?
Jake: I don’t know. Over the weekend or something.
Tobias: I only saw a note. I saw a note this morning from Phil [unintelligible 00:07:39] that said that it came out at about 5 AM and I said, “Yeah, that’s ridiculous,” honestly.
Bill: That is ridiculous. Yeah, he should not be suspended. I don’t think he said anything that I have seen– [crosstalk]
Tobias: You can’t criticize the World Economic Forum and Klaus Schwab who’s out there polishing Xi Jinping?
Bill: He’s bad.
Jake: Oh, man. We just got– [crosstalk]
Tobias: Good.
Bill: He tweeted eight minutes ago. Welcome back, Rudy.
Tobias: [laughs]
Jake: He’s back. Oh, thank God.
—
Bill: Yeah. The inflation thing remains hard for me because I think it’s supply shortage driven. I’m not saying that– [crosstalk]
Tobias: Well, supply shortages aren’t– The boats are still stacked up out here. You can still walk to Catalina. They figured that this is what the most optimistic estimates are unplugging that blockage. It’s like summer 2023. Whenever they make estimates like that, when they said that, that’s like 18 months away, they’re just like, “That’s as far out as I can possibly think.”
Bill: Yeah. I guess there’s some path of the world that creates the incentive to increase aggregate capacity, which could actually put deflationary pressures on price, if you’re thinking long enough. I 100% agree that the next two to three years, who the hell knows? But I just I have a hard time believing this is sustained. We’re in a slow growth environment anyway, and now, you kill a bunch of people, and then, you’re going to argue we’re going to be faster on the backend? I don’t know. I have a hard time believing it.
Jake: I think on a long enough timeline, I pray that human ingenuity leads to incredible deflation, because that’s quality-of-life improvements. But I don’t know how likely that is from this particular setup, at least for a while.
Bill: I don’t know. Dude, if you have an asset bust, that’s deflationary to me all day long.
—
The ARKK, Tesla, Bitcoin Correlation
Tobias: If you pump asset prices up high enough, you’re going to get a bust eventually. They get to a point where they’re so far over their fundamentals that there’s no ability to make any money out of them holding them. So, people just will look for other alternatives. They’ll stick their money into silly stuff like NFTs, with all due respect to the crypto bros. Crypto, that’s not the big market capped ones.
Bill: Yeah. You know what I thought was funny about crypto, I hopped on a Space with Akram’s Razor’s, and we were chatting. I’ve been trying to figure out because I look at how bitcoin trades, and it seems like a levered beta asset to me. I need to run a regression analysis on this but it seems totally like a risk on asset the way it’s– [crosstalk]
Tobias: Crypto?
Bill: Bitcoin, specifically, which is odd, because it’s supposed to be like this– [crosstalk]
Jake: Store value.
Bill: Correct.
Jake: Outside the system.
Tobias: It’s the same crowd. The growthy tech guys tend to be the same guys. I realize there’s some overlap with the gold buggy type guys, and I’ve got some sympathy for those guys. But when you look at what’s underperformed most this year, Cathie’s off 25% plus, Tesla’s off 20 something percent, Bitcoin’s off 20 something percent. They’re all pretty correlated with each other.
Bill: Yeah. You guys know Preston better than I do. But over time, I’ve heard him advocate Ark as a long and Bitcoin as a long. I think that the underlying premise, correct me if I’m wrong, but I think it’s similar in that it’s predicated upon kind of nuts monetary policy. A lot of the long Bitcoin thesis is government can’t be trusted. So, when the government actually shows that maybe it can be, Bitcoin falls to the ground. So does SaaS–
Tobias: But there’s a big [unintelligible 00:11:40] component, right?
Bill: –it’s like the same fucking trade.
Tobias: I agree with that.
Bill: I’d like to see factor overlayers or something. I don’t know what I’m trying to say.
Tobias: Oh, Preston’s more value than he is growth. I vaguely remember the Ark pitch. I don’t think he’s pitched Ark. I don’t know.
Bill: I think he did. I think it was on your Mastermind. But I think it was on a policy based– I think it was almost a macro call that would drive people to Ark. He wasn’t saying this is a value investment. I think he was just trying to come up with something not named Bitcoin to pitch, because that’s what people wanted him to do.
Tobias: Ethereum.
Bill: Yeah. I don’t know. I like him. I’m not trying to– [crosstalk]
Jake: That’s as good as money, sir.
Tobias: [laughs] Doge.
—
Netflix Gets Torched
Bill: Yeah, I just think it’s interesting. Netflix is another interesting one. Lot of bears happy right now.
Tobias: Wow.
Jake: Torched.
Tobias: That got hammered.
Jake: Unbelievable.
Bill: Feels like nothing. Qurate was down 30% on earnings and we’re making a big deal out of 20%?
Tobias: Wasn’t it like 25% overnight– Was it 20%, 25% and the next day, it was 10%. I don’t know where it ended up yesterday. I think I saw 10%.
Bill: Yeah. Qurate was 30% in 10 minutes. It was brutal. But also, much smaller market cap. So, volatility sucks when it hits you and it’s bound to hit you somewhere. I don’t know. It’s interesting. I was talking to Francisco and Alex about Netflix.
Bill: Alex had some US estimates, and I asked him how he was getting there. I think it’s an interesting exercise to open up the 2012 to 2017 financials when they used to disclose by region, and I think that they’d probably do investors a service by disclosing by region, but I don’t know that as a long, I wouldn’t want that necessarily. But I think the US might be quite a bit more profitable than people give it credit for.
—
Tobias: JT, what’s your topic today?
Jake: I have a little piece prepared on gravity since–
Bill: Since everything is falling?
Jake: Yeah, exactly. I thought that would be apropos of a falling market.
Tobias: You got anything, Bill?
Bill: I do, I do. Netflix was what I was thinking about talk about. Then, Evan Tindell popped in, and Evan is way smarter than I am, and he was talking about sampling for base rates. So, I’ll probably just cover those two things.
Tobias: Third Avenue’s note came out. They had just some interesting bits and pieces, and it’s all stuff that I love.
Jake: Confirmation bias, after the break. [laughs]
Tobias: That’s right. That’s what you come here for.
Jake: That is what you come here.
Tobias: Partially. It’s what keeps me going. Then, just a few things. I had a look what the Shiller CAPE implies, and I had a look at the two drawdowns. I was just interested to see Russell 2000 growth and Russell 2000 value in March 2020, the experience then versus the experience now. I just ran some charts from YCharts. Kind of interesting.
Bill: This makes sense to me, by the way. When you posted it, I was like, “That makes perfect sense.”
Bill: Let’s get into that. Let’s just do it right now. I want to hear the story.
—
Mega Bear Market Coming
Tobias: I was just interested to know. We’ve talked about this a few times before. The smalls were the only kind of group that were sub debt, long one year– [crosstalk]
Jake: 20-year average P/E.
Tobias: Yeah. I just wondered if that made any difference at all in this drawdown because it hasn’t in the past, it just hasn’t in the recent past. It’s because, obviously, they’re not as financially robust as the midcaps or the large caps.
Tobias: Not that that should really make much difference. I think it’s a perception thing. When people want to tip out, they just hit the button and the market’s just not as liquid, they tend to fall further. It’s the same thing that, it’s that Qurate versus Netflix thing, like the little ones move around a lot more. They’re a lot more volatile just because the bid ask spread is wider and various other things. The big difference was March 2000– sorry, March 2020, I’m getting confused. Too hopeful.
Jake: Yeah. [laughs]
Tobias: The smalls really got wrecked through that. The smalls went down much, much– Smalls got wrecked, but growth held up a little bit better than value did through that crash. Interesting, this time around, it’s been value has held up quite a bit better. I’d say it’s down half as much as growth.
I don’t know whether this thing keeps them going or not. I’ve said on a few podcasts half joking that– February 2012 is a year after Ark topped down and I’ve just observed in the past that it takes about a year. The market goes sideways for a year and then you get the real volatility that lasts about six months or whatever.
That means that we’d still really kick off in February and we finished somewhere in August. It looks like we’ve kicked off a little bit earlier but who knows? That’s assuming that we go into this–correlations go to 1, systemic kind of mega bear, who knows? I think there’s one coming. I don’t know if this is it or not. But just interested. If you guys have– [crosstalk]
Bill: Just do your survival instinct.
Tobias: Yeah, that’s true. You’ve got to survive, right?
Bill: No, this actually is my third topic. I came fully loaded today.
Tobias: [laughs]
Jake: Holy shit.
Bill: Yeah, I made up for a lot of weeks of not doing anything.
Jake: [laughs]
—
To Sell Or Never Sell
Bill: So, pardon me as I speak about Qurate once more. I have struggled and I think part of what is difficult about owning a business like that versus maybe a business that is perceived to be much higher quality with a– One, I think the reason that growth held up is, on average, I think those are more digital businesses. People were forced to use it, market extrapolates, higher growth rates in perpetuity, blow off top, whatever.
Now, you’ve got decelerating comps, and now everybody’s arguing about, “Did it pull forward–?” Before we were pulled forward five years of demand. Now, it’s, “Did it pull forward any demand?” I think that you get this wave. With Qurate specifically, the thing that I’ve been struggling with is, Mike Mitchell said to me, “You’ve got to figure out if you want to wear a hedge fund hat or a private equity hat.” The private equity hat would say, “Hold it and don’t do anything.”
Jake: [crosstalk] up.
Bill: Well, yeah. But I’ve been rereading the Art of Not Selling, and I think that part of what is tough about not selling at times is having a feeling that a bad quarter is going to come and that you might get punched in the face, and just sitting tight. That’s tough.
Tobias: Who is messing around on the options [crosstalk]?
Bill: I think it is going on everywhere.
Tobias: Just on a little size, just a speculative kind of thing, then you don’t eat the taxes as much on the whole position.
Bill: Yeah.
Tobias: It’s not advice, mate.
Jake: Yeah. You could collar your position. Something like that. But anyway, I don’t know. I think that’s what’s going on. I think you had accelerating rate of change. Now, you have huge de-sells and people don’t know what the hell they own.
—
Tobias: What about Peloton? Holy cow.
Bill: Yeah, my beloved. I wrote on Sunday. I’ll read again. Oh, shoutout to the listener that made the meme.
Jake: How funny was that?
Bill: An Australian bloke.
Tobias: [laughs] He’s from Brisbane too.
Bill: Yeah. There you go.
Tobias: Yeah, that was funny. If you haven’t seen it, I tweeted it out.
Bill: Yeah.
Jake: Yeah, that was hilarious. I’m glad I stayed out of that one. [laughs]
Tobias: I think that you should be lifting weights, not riding Pelotons. [crosstalk]
Bill: I don’t disagree with that. I also think that getting your heart rate up is a good thing though.
Tobias: But you’re not doing– [crosstalk]
Bill: I know. If I lift heavy– [crosstalk]
Jake: [crosstalk] lift, bro? [laughs]
Bill: No, I don’t really lift because I fucked up my back lifting– [crosstalk]
Tobias: I’m going to do kettlebells, as I said. You buy the kettlebell once and then I charge you $35 a month for like– [crosstalk]
Bill: You should.
Tobias: Instagram account.
Bill: Well, first of all, a pretty good business if you can get enough subs. Second of all, you should do that.
Tobias: [laughs] Just for the lolz.
Bill: I don’t disagree lifting heavy gets your heart rate up. That’s very true, especially legs. So, point taken. I also don’t think most people are going to do that. Peloton is not actually a health product. It’s a spin class product.
Tobias: Pornography as a service.
Jake: [laughs]
Bill: No, that’s Pornhub and that could SPAC for a lot.
Tobias: There’s a little bit of that too, from what I understand. I don’t have a Peloton but from what I understand.
Bill: Yeah, I don’t know. I always ride with Alex Toussaint. So, just kidding– [crosstalk]
Jake: Revealed preferences there, huh, Bill?
[laughter]Bill: Yeah, I like to get yelled at.
Jake: Okay. [laughs]
Bill: I don’t know. Look, I obviously have been attracted to that business over time. I’ve also not bought it for reasons. I think Peloton and Netflix are somewhat similar, although I think Netflix is in a much, much better fundamental position as a business. I just think it’s one of those that bulls and bears are going to tussle over and we’ll see who’s right in the end. But hard to argue that people buying at over 100 or– I mean they’ve got a long time before they can say they were right.
Tobias: Did you make the point that they’ve just taken a year’s worth of ideal conditions and then extrapolated that forward forever?
Bill: Yeah. I don’t know that it was me. The vision that I thought made some sense is if the tread didn’t almost kill children, and they could have sold that, and gotten people into, — I think they probably should have led with a rower and not a tread. Then, I think if you can get people in multiple different systems– 40 bucks a month for a spin class that you can go to 30 times a month if you’re willing to go is actually quite a good value proposition. Whether or not people think about it that way is a different issue. But for me, I maintain I get good value out of it. I like the product. Put me on another meme. I don’t give a shit.
Jake: [laughs] The Hitler one. That one’s a good one to go.
Bill: I don’t want to be associated in any way with that. Pavlovian associations, they’re a bad to quite bad. The guy laughing, I was totally cool with.
Tobias: Just on a valuation basis, I had a little look at the index. I use this– [crosstalk]
Bill: You see my man, Braden Brock, you see him in the comments? You can get your heart rate up by looking at the stock.
Tobias: The Peloton one-year chart, yeah.
Jake: That’s a heart attack.
Bill: He’s helping me with Business Brew. I like that guy. Shoutout to Braden. Anyway, continue.
—
Tobias: Nobody likes CAPE, nobody likes hearing what CAPE has to say.
Jake: CAPE, come on.
Tobias: I thought was interesting. I was watching it going into the yearend and it got– I use this model that assumes you mean revert over about a decade and–
Jake: That’s where you went wrong.
Tobias: Yeah. It’s basically John Hussman’s method. The only difference is that I actually go in and calculate the growth rates and other things, and I think he just uses a fixed 6% and a few other things. It means we get slightly different answers, and he’d [unintelligible 00:23:48] me about five or six years ago for saying it was his model. What I was trying to say was I stole his model and I used my own inputs but my inputs are based on the data trailing back to about 1850, anyway. I get a slightly more optimistic answer than he does.
Jake: The other key difference is you don’t use it at all in actually formulating your investment strategy. [laughs]
Tobias: Well, that’s right. That’s right.
Jake: Okay. Sorry.
Tobias: I’m on Team John. So, I don’t want to be kicking John.
Jake: Yeah. No, I wasn’t trying to kick him.
Tobias: I think it’s interesting, this move. Coming into the end of the year, it had forward returns of 0.2% which included one point something percent in dividends. So, it was saying the index was going to be negative. I think it was negative to the tune of 0.7% a year. That’s the index.
Bill: I just don’t get it.
Jake: Go back and jump and– get into buy something in 2000 and then ride it till 2010. That’s what you are– [crosstalk]
—
Bill: Here is something I don’t get. Okay, Google, let’s see by the whole thing, and Apple. I’m reading Roblox. Okay, I’m doing research on that. They say like, “We’ve got to pay Google and Apple 30% of all of our dollars that come through it.” Google and Apple have absolutely no incremental cost to collect those $30. The digitization of the economy, I think, is only going to continue. They’re a major part of the index. Every single dollar drops straight to the bottom line in those transactions. It’s accretive to margins. I just don’t fundamentally buy it. I think a lot of the mean reversion of margins has been, if global margins were exceeding what they have been historically, then maybe I would get it, but– [crosstalk]
Tobias: I think they are, aren’t they?
Bill: Okay.
Tobias: Margins have been about high as they’ve ever been.
Bill: I think in the US, but we’ve exported a lot of the low-cost stuff to other countries. Look, maybe.
Jake: Yeah. I get it.
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CAPE’s Predictivity
Tobias: I have expressed I have some skepticism about CAPE. I just think that if you look back at how predictive it has been, it has been quite predictive for most of its history using this method that I’m discussing. There are periods of time where it has not been predictive, and they tend to be at these historic peaks and historic busts, where we’re so divergent from underlying earnings values. I don’t use it to invest. To be very clear, I don’t use it at all. I just watch it because I always want to just check one more time, do these assumptions make sense in the context of what’s going on?
All this is saying is that– well, it’s saying two things. Maybe you get a little bit of compression in margins and maybe you get a little bit of compression in multiples. It doesn’t require much in those two things. At the moment, we’re at peak multiples on peak margins. It may be that those businesses are so good that they justify it, and there’s such a huge part of the index that they justify it. So, any historical comp is irrelevant and none of it makes any sense.
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Is iPhone The Best Toll Road Ever Created?
Jake: Let me try to ask a question, Bill. At any point in history, has there ever been a technology that is comparable to this network effect advertising platform that– is this truly a one-off technological advancement and economic moat that we’ve never seen anything like it and therefore– because why wouldn’t something from the 1920s have carried with it huge margins for 50 years, if that’s what the argument that we’re making right now?
Bill: Yeah. I think that for the first time in– You can throw Microsoft if you want to get outside of mobile. But yeah, for the first time– I was thinking last night. I was in bed and I was like, “Holy shit, Buffett got his toll road, and it’s the best toll road that’s ever been created, and it’s the iPhone.” I could be wrong. I don’t think that there’s ever been a time in history where incremental margins can increase like they do, and the toll road looks like something that everyone carries around in their pocket and looks at almost 40 times a day. I don’t.
You could have a railroad but you’ve got to put money into that. Yeah, you’ve got to put R&D in the Apple, but you sell these devices at huge gross margins, and then you just take, and take, and take, and take, and take. That’s a hell of a business. I don’t think that’s been created. And you’ve got global scale now. So, it’s not like somebody can outflank you on a scale position. But I could be wrong. From wrong, [crosstalk] I’m an idiot.
Tobias: I’m sympathetic to that view. I don’t know whether– I’m somewhere in between. I don’t know exactly. But I just keep an eye on– As far as I can see, that’s reasonably good. It doesn’t have to be any one of those measures. It’s not CAPE. I’m just using CAPE because it’s the easiest one for me to calculate. Tobin’s Q is a bit harder and the Buffett metric is easily calculated too, but it’s just harder to pull that data automatically. They will give you the same answer. So, it’s not the–
Jake: They’re all directionally in the same– [crosstalk]
Tobias: They’re all directionally the same. The only possibility of anything that is different is the case that you’ve articulated there where it’s these businesses are so fundamentally different that we have to treat them differently. Possibly, that is true. I’m just wary of kind of arguments like that, because that argument has been made at every other peak that we’ve ever seen, which is not to say that it’s wrong this time. It’s just to say that I’m just skeptical a little bit.
Bill: Yeah, well, and look, when I said the thing about Google growing 5%, it’s possible that Google grows 5% per year. I’m telling you right now if that outcome is the case, my answer is you sell everything. If that’s the bet, I think that’s a macro bet. That I think is an asset allocation question. Dude, in that world, I don’t know, a lot of things are really screwed. Unless some big technological advancement comes in, kneecaps it, it’s possible but I just don’t think it’s probable.
—
Tobias: What about just a recession more generally that just impacts everything? There’s just fewer dollars to spend.
Bill: That’s an asset allocation question, in my mind. I think if you want to call a recession or you want to say these peak multiples on peak earnings and things are going to come in, I think cash protects you more than going lower quality in stocks.
Tobias: I forget what the number is, but I’ve seen various systems. But, JT, you might know this better than I do. But the number of dollars that are outstanding versus a few years ago, there’s 40% or 80% more dollars outstanding than they were only a few years ago.
Jake: Yeah, it’s 110% more the balance sheet of the– Well, we should probably be a little more careful in what we say, dollars versus the balance sheet of the Fed, because I don’t think those are exactly comparable. But anyway, sorry, go ahead.
—
The Weirdest Things Are Out of Stock
Tobias: But just that flood of money, I think that’s what made all of the asset prices run in a silly way. It’s also filtered through it to some extent. All the stimulus payments have filtered through to some extent. The folks where they’ve had more disposable income than they have had ever really, if you look at some of those statistics, and the impact of that has been, again some speculating in NFTs and other stuff like that that they wouldn’t otherwise do, but there’s also been some consumption.
That consumption has turned up in used car prices, which again, there’s a demand, supply. This is why this stuff is hard and why it’s probably not worth speculating about at all. But there’s clearly massive supply chain issues everywhere. It’s just weird when you go to the supermarket, they’re just out of stuff that I’ve never had any problem getting in the past. And then, I’ve spoken to a few guys– [crosstalk]
Jake: Like Vegemite?
Tobias: [laughs] I’ve spoken to guys like Jesse Koltes who’s @TheCharliton. He runs a business where they supply these protein foods and things like that. He runs this LonoLife. So, shoutout to Jesse. I like LonoLife stuff, and I eat it. I was talking to him and he said it’s just weird the stuff they can’t. So, inside their little jars, there’s some sort of a liner and he said the backlog on the liner is like 18 months or something. It’s crazy.
Bill: Somebody’s trying to scale a tequila business and he couldn’t get the glass. He was like, “I was waiting on glass to sell–” They had all the tequila and he was like, “I couldn’t sell anything for four months.” Oddly, it created– or somehow the world worked in the way that some guys from Anheuser-Busch split off and figured out how to make cocktail kegs. The problem with a cocktail keg historically is that it separates.
Jake: Is it killed everyone at the party?
Tobias: The keg of cocktails.
Bill: So, vodka cranberry, right? It would be in a keg. Historically, I guess the cranberry would drop to the bottom and the vodka would go to the top. This thing now, you shake it once or twice really hard and it doesn’t separate. Tell me tech isn’t amazing.
Tobias: Science.
Bill: Tell me tech isn’t amazing.
Jake: That’s like landing a man on the moon. [laughs]
Bill: It’s pretty close.
Jake: Oh, boy.
Tobias: Those weird things that make things more expensive, that is going to impact– For some companies, that’s going to impact their earnings, and that’s just how it happens. That’ll be the margin compression, whether it’s any– just choose any one of those variables and you will see–
Jake: Labor component.
Tobias: Yeah, labor. Although I’ve seen something that crypto going down is pushing people back into the labor force. So, the supply might come back.
Jake: The universe provides. [laughs]
—
Tobias: I’m going very long on this, but I’ll leave my other point for the Third Avenue letter for next week, but JT, do you want to-
Jake: Cram some veggies real quick?
Tobias: -do the gravity?
—
Five Levels of Gravity
Jake: Yeah, well, I think we’re everyone’s thinking about rates right now, are they are going to be raised? Of course, everyone knows Buffett’s analogy of interest rates being the financial gravity for all assets. So, when someone sent me this video that was probably about 35 minutes long, they try to explain phenomena at five different levels of complexity.
This one happened to be on gravity, and I thought, “Huh. I wonder if I watch this and try to build up in the complexity of it, is there anything revealed as to the analogies that we can then draw between gravity and financial assets, and maybe just get a little bit deeper nuanced understanding of what maybe Buffett is talking about other than just our day-to-day understanding of gravity, which is dropping an apple on your head?
The first one is a grade school version of it. So, it’s like level one. They just talk about how gravity wants to attract us to the earth, and actually, also, it makes us attract the earth towards us. So, we attract the earth towards us. But because the Earth is so much bigger than we are, then, we don’t really feel the earth being attracted to us. It’s really mostly the other way around. Of course, obviously, the moon pulls on the earth, which is what causes the tides. The sun actually pulls on the earth as well, which keeps Earth in orbit around the sun.
Interestingly enough, one of the astronauts who went up has a twin and he spent time at the International Space Station. When he came back, he was taller than his brother because the gravity pulling on you will actually compress your spine. So, he had an elongated spine for when he was out of the gravity of the earth and he was taller than his brother for a little while before it came back.
Tobias: So, if you hung upside down and you got that working the other way, that would make you taller over time? If you say, you’ve got to sleep upside down like a bat with your feet hooked in those gravity boots–
Jake: [laughs] Yeah. I think there’s actually measurable differences between your height in the morning versus your height in the evening because of the gravitational compression. But I think a lot of this stuff just gets evened out. So, I probably wouldn’t hang like a bat unless– [crosstalk]
Bill: I think people should hang like a bat.
Jake: [laughs]
Bill: It’s science.
Jake: That’s just science. So, that’s level one. I thought let’s try to draw some analogies and maybe some insights for us. It has me wondering, let’s call it the US Treasury market is the bigger the Fed’s balance sheet– basically, the bigger the mass, the more gravity there is for all the other assets. Is that true? I don’t know the answer to that and it’s hard to tell, but did you guys have any insights into that?
Do you think that the bigger the mass of what is anchoring the rest of the gravitational pull? Do you think that that matters more? Or, do you think there are periods of time where if that stuff was smaller, there’d be less connection from between gravitational pull?
Tobias: I like the crowding out argument. I don’t understand how the crowding out argument can be even controversial. If the Fed’s balance sheets got so big, they have to expand it to MBS and other things like that. So, rather than just being in treasuries and making up the market in treasuries, they’ve gone and bought other things.
I don’t fully understand how that makes sense. It’s not so much– and I guess, that’s a product of just being the sheer size of it. But isn’t it that they’re competing at the marginal buyer of those things and then that money probably has to go somewhere else. So, it goes further up the risk of–
Jake: Sounds right.
Big Moves Suck People Into The Behavior Of The Move
Bill: Yeah. My tortured analogy is just how price begets people piling on in either direction. I feel big moves suck people into the behavior of the move.
Jake: Perfect segue for level two, which is this is a high school– They bring in a student and have a conversation with high– [crosstalk]
Tobias: That was level one? [laughs]
Jake: That was level one, yeah. [laughs] That’s going to get harder. When we want to send something to the moon, and I’m using that tongue in cheek, we have to get it going fast enough to escape the Earth’s gravitational pull. The escape velocity for Earth’s gravity is 11 kilometers per second. So, you have to be really motoring pretty fast to get away from the Earth.
It turns out that ISS is actually going about 17,000 miles per hour as it orbits the Earth, but there are no engines that it’s using. It’s almost like it’s just falling back to Earth but because it’s moving so fast, its angular momentum is so fast, that it’s not like it just comes crashing back down. It wants to be thrown off due to the angular momentum, but the Earth’s gravity keeps it on this arc going around. That’s how it’s able to orbit the Earth.
That has me thinking what you just said, Bill, that price momentum, if it’s fast enough can trigger the escape velocity of common sense and pull people into it and make them disregard anything fundamental based. They’re able to get away from the gravity of common sense and achieve escape velocity to the moon. Of course, we find that probably is not a permanent situation, but do you guys agree with that?
Bill: Yeah. I think it goes both ways to be honest. But yeah, I do agree with that. I also think that what I really have to fight in times like this is– I’ve watched things rip higher last year, and now, they’re correcting, right? It’s like slow down, do the work, figure out if you actually like something. You don’t have to rush into buying something. But I feel these feelings of like, “Oh, my God, if I don’t do it now, everything’s going to bounce back.”
Jake: Hmm. Yeah.
Tobias: Yeah, buy the dip.
Jake: Buy the dip hard, huh?
Bill: Yeah. Well, it’s closer to FOMO than buying the dip. Because [crosstalk] I think buy the dip is reflexive nature. I don’t know. Maybe it is the same thing. You guys are both saying it. So, I’ll cop to that.
Tobias: But the other the other possibility from by the dip is solo rip, right? When we get into a solo rip, well, that’s when you get the mega bear.
Tobias: Well, I think we’re close.
Tobias: Well, it depends on how– there’s clearly going to be some massive volatility through here both ways, which is why long-short, it needs to get a little bit flatter through something like this, because you can get ripped on both sides of the book. You want your gross to be pretty small here, I think. The thing that does concern me is that if you bounce and you don’t get back to where you were and you fall again, and you fall to a lower low, that’s what the bears look like and that’s the– [crosstalk]
Bill: Lower lows, lower highs.
Tobias: Yeah. That’s solo rip. That’s definitely not FOMO. That’s fear of the other thing.
Jake: [laughs]
Bill: Yeah.
Tobias: I don’t even know what’s that’s called.
Jake: That’s just regular fear.
Tobias: Regular old fear?
Jake: Oh, yeah. Just vanilla fear.
Bill: I will tell you what, goes back to a previous conversation but nice to own cigarette companies, if you’re worried about that.
Jake: How’s that divi treating you?
Tobias: I think you– [crosstalk]
Bill: Getting a lot tighter. Yeah, but cigarettes, man, you know what happens when people get stressed out?
Jake: [laughs]
Tobias: Do they smoke and drink more?
Bill: Yes, they do.
Jake: All right, level three. This is a college level physics. We’re talking about the inverse-square law.
Bill: There’s harder stuff.
Jake: Oh, it gets way harder.
Bill: Okay.
Jake: It’s going to kill me probably. We’ve actually talked about this on the show before, this inverse-square law. The closer you are to the mass, the stronger the pull that is felt of the gravity, and it diminishes as the square root of the distance. What’s interesting is that there are gravitational fields all around us all the time and they permeate all of space. This solves the idea of telekinesis of almost imagining the spoon bending. There’s waves that are actually working through everything and that’s how magnets can appear to attract each other in what seems like there’s no way for that to transmit.
Einstein’s Happiest Thought
This relates to what Einstein called his happiest thought of his life, which was that– it’s called the equivalence principle. If you’re standing in an elevator, and the cord is cut, and it starts falling, you could float in the elevator. If you tried to drop an apple, it would float with you. This is where how these zero-gravity airplane rides work, is they take you up really high, and then they just basically dive, and then you get to float around for the amount of time that they’re diving. Obviously, they’re mirroring Einstein’s happy thought when they do that.
Now, here’s an interesting thought experiment. Imagine that the Sun were to just suddenly disappear just like that. We wouldn’t know it for eight minutes because that’s how long it takes for sunlight to get here. We’re eight light minutes away from the sun. And nothing can travel faster than the speed of light.
These gravitational waves that are emitted from this giant mass of the Sun also take eight minutes to get to us. So, we would actually continue– the Sun disappeared, the Earth would keep going for eight minutes along its trajectory, like arc around the Sun, until those waves were disturbed enough to where then we would just shoot off in a straight line away from Sun.
Tobias: I think we are going on an adventure.
Read Financial News From A Year Ago
Jake: Yeah. We’re going on a big-time adventure. So, we’re flying off into orbit. This has me thinking about– this gravitational field, and how much are you pulled by it, and being the closer you are to it, maybe the harder their pull’s on you. I think from a geographic perspective, if you’re running a hedge fund in Downtown New York, you’re just constantly surrounded by these gravitational waves of markets, and information, and stuff that’s happening. You’re psychologically closer to the gravitational field.
I think there’s a reason that Buffett lives in Omaha pretty happily away from all that stuff, is that gravity of a lot of these emotions that can obviously ripple out in a gravitational way, it just doesn’t pull on you as strong. You’re away from it. Maybe Templeton might even be a better example, living down in the Bahamas. He did and he would get the paper from two weeks ago, and he was running his shop two weeks behind that’s on a lag.
Tobias: That’s brilliant.
Jake: It’s almost like the Sun blew up and it took two weeks for the information, the gravitational field to get to him, and he had no problem doing that. So, I find that to be– [crosstalk]
Tobias: It’s actually smart. Taleb said the same thing. You should read a paper from a year ago. Read the paper from a year ago and just it doesn’t matter.
Jake: I think there is something important to that. You guys have anything to add on that before we go to gravity level four?
Tobias: No, I think that was a good point. No, that’s as far as I got in physics but let’s see what grad students learn.
Jake: Okay. This gets a little bit more macro, a little bigger. When a large star dies, there’s this huge explosion that’s called a supernova. The stuff that’s left behind collapses in on itself into this blob that is roughly the size of a city. That’s called a neutron star. To give you a sense of how dense this is, one teaspoon, if you could scoop out of that blob, would weigh a billion tons on Earth.
Tobias: [laughs]
Jake: It’s very hard to wrap your mind around some of these things. A black hole is effectively a neutron star’s big brother. It’s collapsed even further to such a density that even light can’t escape away from that gravity. Well, there’s so much gravity there that spacetime actually breaks down. This is an interesting thing. When two neutron stars are orbiting each other, they ripple the waves of gravitational field in such a way that it’s almost like a drumbeat, like there’s almost a sound that you could pick up on.
We were able to detect those soundwaves– or not soundwaves, but gravitational waves, and then astronomers knew like, “Oh, there’s something happening here. Let’s point our telescopes at it.” Because the field that we’re trying to look at is so huge, anything to help you narrow down where to look is very important. They could take then and look at that area where the gravitational drumbeat was coming from, and then they were able to then record when they did collapse on each other and had this huge explosion, we could see it finally and they were able to capture it. That’s a pretty big deal.
But as you can imagine, there is crazy amounts of energy that’s being released when these things are going around each other and when they run into each other. What effectively happens is that it creates nuclear fusion, literal nuclear fusion, and this is how elements are created. Gold, anything– Basically, the periodic table is populated by this type of just insane energy released. We all are made up of the stuff that was shot out of these kinds of explosions. We’re all made literally of stars.
Now, I’m not the biggest goldbug in the world necessarily, but I find it very remarkable that this is the process that creates gold and happens to have some deposited on Earth. I find that to be a more remarkable and interesting phenomena to wrap my mind around and think about just how amazing the world is than I find cryptographic scarcity personally. I find that to be a bigger wrap around my mind F than cryptography. I don’t know. How do you guys feel about that?
Tobias: Yeah, I love it.
Jake: All right.
Bill: I have nothing to add.
Jake: So, everyone’s [crosstalk] long gold and short bitcoin got it. All right. This last one, this is expert level five. I’m going to totally whiff on this. So, send all your hate mail to Bill. This is quantum mechanics and they say that this is the most successful theory in the history of science because it explains the most different phenomena and the most precisely. Yet, we barely understand the basics of it, which is interesting.
To give you a little sense of how accurate and how precise they’ve been with this, Dirac, who was a famous theoretical physicist around the time of Richard Feynman, he had this number that– I don’t know the exact details of what he was predicting, but his theory predicted this precise outcome that they were able to experimentally test and how close to accuracy that they were was the equivalent of if you were measuring the distance from LA to New York and you were off by the width of a human hair. Just insane precision.
Now, I would push back on this actually a little bit that that’s the most successful theory. Probably, if you’re looking at a very, very cosmological way, I would say that’s true. But if you’re being a little bit more provincial, I’d probably give the nod to evolution then because I think that explains even more stuff that’s relevant for us.
That’s just my own biases maybe. So, these quantum wave functions, they get into this idea– I can’t explain it. They start talking about the multiverse. That doesn’t make sense to me. They’re talking about how these different states of how the universe could be. You could add them up and somehow, they’re additive, makes no sense to me. It’s possible that the entire universe is a 2D hologram. Again, I don’t understand any of this.
So, I don’t have any really good takeaways for that one other than just the idea from the multiverse that the ping pong ball doesn’t have to bounce the way that it ends up bouncing. You should really be thinking in a much more probabilistic manner. The outcome that you get is one of millions of possible outcomes that could have played out and just respect how much luck there still is in all of this stuff. Even if you’re very skillful, you’re still subject to a fair amount of luck.
Tobias: Yeah, that’s a good takeaway.
Jake: All right, I’m spent. I’m not going to talk anymore the rest of the–
Tobias: [laughs]
Jake: You guys got it from here.
Bill: We have no more podcast left.
Jake: Sorry.
Bill: No, It was good. I like it.
Tobias: We do have a couple of interesting things. I don’t know where to go with that, JT. I read some of that quantum mechanics stuff a few months ago, and while I was reading the book, I could understand it in the context of that, but I couldn’t connect it to anything else that I knew about. So, it just all immediately fell out of my head.
Jake: Yeah. You’ve got to try to explain to someone else and it’s just like, “Ah, I got nothing.”
Tobias: Impossible. I tried to explain it to my wife and I just gave up. It’s not her problem. It was my problem.
Jake: Yeah. [laughs]
—
Berkshire Meeting Open To The Public
Tobias: So, Berkshire, sounds like it’s going to be in person this year. We’re all going.
Jake: Yes.
Bill: That’s the plan.
Jake: Can’t wait. It’s going to be good times. I hope all 10 of you who are listening come.
Bill: Yeah.
Jake: That’d be nice.
Bill: 10 should come.
Jake: Let’s throw a party or something.
Tobias: Yeah. We’ll have to do that. We have to figure out where we go. It’s a little bit too dirty for me to– I think it’s too small. I think we need to– Not that [crosstalk]
Jake: Whoa, what’s that?
Tobias: Cost of thousands, just a bigger avenue. What’s directly across the road from Berkshire?
Bill: Dude, that thing is booked. We’ll take this offline. There’s something– [crosstalk]
Tobias: Ah, we’ll figure it out.
Bill: TIP did something way out of town a couple years ago. I don’t want to do that.
Tobias: Ah, it’s too far.
Bill: I’d rather do a bar crawl but just keep it not so formal.
Tobias: Yeah.
Bill: I really like Omaha and just that area down there. I don’t know. If we just tweet out where we are, that might be enough.
Tobias: Yeah, we’ll do something like that.
Jake: Like come and see, pay homage to the two great ones.
Tobias: Yeah.
—
Bill: The other thing I don’t like about Chamath, also known as Voldemort–
Jake: [laughs] Wait, what’s– [crosstalk]
Bill: He went at Buff Dawg, man. You can’t go a Buff Dawg with your unaudited track record. Calm the fuck on. That’s a GOAT.
Jake: Yeah. He outperformed by–
Tobias and Jake: 50%
Jake: -of the–
Jake: So, disrespectful.
Tobias: I think there were quite a few people taking a shot like just before– Ah, Colm, [crosstalk] £25. Thanks, Colm.
Bill: Hey, shoutout to Colm Moore.
Tobias: How many Guinness is that now? I think that’s–
Jake: He’s got all the Guinnesses.
Tobias: I think we’re going to be swimming in Guinness.
Bill: Look, I’m fine with taking a small shot at the Buff Dawg. But he went at Geico too. Come on, bro. Now, you are coming at the Dawg in his circle of competence. That’s not cool. Anyway.
Jake: Yeah. Well, only one of the best insurance analysts of all time.
Bill: Yeah, that has ever walked the planet.
Jake: [laughs]
Tobias: How’s lemonade doing these days? [crosstalk] lemonade?
Bill: That was [crosstalk] not that well. Did I zone out when Jake described gravity? At the very last section, I did. Yes.
Jake: In fairness to Bill, I did too.
Bill: You lost me. The first three, I was there. The last one, I was like, “I don’t know what’s going on right now.”
Tobias: It’s a cyclical kind of thing where people take shots at Buffett, and that’s when you know that it’s almost all over. It’s happened every single time. I don’t know. I take my hat off to whoever’s prepared to do it. You’re just about to look silly, good for you. [crosstalk]
Jake: Was there an easier buy though than Berkshire at that point whenever one was piling on?
Tobias: Well, I bought it then. Yeah, it was statistically cheap, that was silly.
—
Bill’s Qurate v Zoom Bet
Bill: I ran the Qurate, Zoom. I didn’t do every single stock but the only tech stock that’s outperformed Qurate since that call was Google. Now, I’ve only gone– I don’t know.
Jake: Get some, Brewster.
Bill: Yeah, well. Problem is you’ve got to own Qurate now.
Jake: [laughs]
Tobias: When’s your date for that?
Bill: Dude, it’s next year, and it might be a year too long. I think Zoom is probably set up to rip, and I was not expecting a fire that took down 30% of fulfillment capacity. That sucks. But we shall see. You never know.
Tobias: Yeah. Some of those expensive tech stocks have been flogged. But when I go and look at them, I still think these look expensive tech stocks to me. I could be wrong.
Bill: Well, they are today. I think it’s objectively true that a lot of growth has been taken out of the multiples. But there may be more to go.
Jake: What’s the process to tackle this smartly and actually, maybe find some, a baby that’s been thrown out with the bathwater?
Bill: I don’t know. I think you just try to study them and figure it out. I think Roblox is a really interesting company.
Jake: So, the same answer that I think I should have been doing all along. [laughs]
Bill: Yeah.
Jake: Okay.
Bill: I don’t think it because I think it. My buddy, Francisco’s the one that’s been in my ear about it for a long time. But I do think that’s a pretty interesting company. If you believe in anything that the Metaverse is selling, I think that’s a reasonably good way to play it. But you’ve got to be willing to look out a while. Can they get the 400 million subs, or daily users, or whatever?
Tobias: Amigos, that’s time.
Bill: Yeah. All right.
Tobias: Thanks, folks. It’s always fun. We’ll see you next week. Same bat channel.
Bill: Buff Dawg, thanks for tuning in.
Jake: Be good to each–
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