In this episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle chat about:
- Value Returns 1866 to Date
- Managing Quotational Risk
- Basket Investing vs Idiosyncratic Investing
- Munger Using Margin To Buy Alibaba
- We’ve Had LBO’s For Seven Years
- Boyd’s OODA Loops
- Certain To Win
- Commodity Bets Are A Tough Play
- Protection Using The Best Tail-Hedges
- Social Media Companies Are Disrupting Harmony
- Shareholder Yield Is An Incredibly Strong Factor
- ZeroHedge Accused Of Spreading Russian Propaganda
- Flexibility & Winning Against The Odds
- Lawrence Of Arabia & Guerrilla Warfare
- Striving For Harmony
- Life As A Professional Full-Time Investor
- Super Bowl Halftime Show
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: And we’re live.
Tobias: It’s a Value: After Hours. I’m Tobias Carlisle, joined as always by Bill Brewster and Jake Taylor. What’s happening, fellas?
Super Bowl Halftime Show
Jake: Just living the dream, enjoying that Super Bowl 90s throwback show. I thought that was pretty good. You guys like that one?
Bill: Yeah, she was hot.
Jake: I needed more 50 though. I could have used another couple of verses from him, but that’s okay.
Tobias: That was good. Yeah, I watched it with the in-laws and they were just baffled– as the 90s hip hop came on and my wife was just like, “Yes.” But that was only directed to the middle-aged folk among us.
Jake: Us pre-boomers.
Tobias: Yeah, whatever we are.
Bill: My dad texted me after, he’s like, “I like Dr. Dre.” I was like, “Where the fuck have you been since I’ve been bumping this shit?”
Tobias: [laughs] Like, “Who are these people?”
Jake: Even 1990– [crosstalk]
Tobias: Oh, man.
Bill: Yeah. “This guy’s pretty good.”
Tobias: That’s fine [crosstalk]
Bill: Yeah, it is.
Jake: I did see a funny tweet that said, “The Dr. Dre has been the most believable doctor that we had on TV in a couple years.” [laughs]
Tobias: Yeah. 50 cent’s now full dollar too. I’d say 2.25 these days, 2.50.
Bill: He did. I rewatched it. I did see how he got himself up there. He was not helped. So, I give him props on that.
Bill: He got himself down.
Tobias: [laughs] [crosstalk] he got down though.
Bill: Yeah, at his age, I got mad respect for that. I didn’t realize Eminem was doing the knee thing. I thought he was mourning Tupac.
Jake: I didn’t see that.
Bill: That’s how out to lunch I was on that. Because he did it while Dre played the intro to the Tupac song.
Jake: Oh, yeah. That makes sense.
Bill: I found myself– [crosstalk]
Tobias: I need Dre [crosstalk] because I saw [crosstalk] thing, but that was cool.
Bill: Found myself really, really sad that Nate Dogg didn’t come out, because he’s dead.
Jake: Yeah. As a hologram or what was your plan– [crosstalk]
Bill: Yeah. I was sad about that. Then somebody mentioned, because I quickly tweeted that I was said that Nate Dogg wasn’t there, they were like, “What about Tupac?” But in my head like, “Tupac’s so big and has been gone so long that it wasn’t really even possible for him to be out.” I kind of forgot Nate Dogg was dead, and that reminded me, and I feel bad about that.
Tobias: Yeah, I like California. Love that song. Still prefer to Tupac’s version. Dr. Dre did a serviceable version of it.
Bill: Yeah. Well, he just dropped his own version.
Jake: Yeah, he just got his verse in. That’s fine.
Bill: Pac is sick, was sick. That shit’s still awesome.
Jake: Might still be on an island somewhere. We don’t know.
Bill: I don’t think that’s what’s going on.
Bill: Maybe? Who knows?
Jake: How crazy would the world have gotten if he would have come out though on stage like, “I’m back”?
Bill: Yeah. That would have been sick. Way to announce it.
Tobias: What do we got on deck for today, Fellas?
Jake: Just Super Bowl talk the whole time. [laughs]
Bill: Yeah. Basically, going to recap– [crosstalk]
Jake: [unintelligible 00:03:07] rap.
Tobias: Recap the Super Bowl. LA Rams won. Good if you’re a Los Angeler.
Jake: Spoiler alert.
Bill: We got Berkshire buying [unintelligible [00:03:16]
Jake: Oh, yeah.
Bill: Two years too late. Better late than ever.
Jake: And Activision too apparently, huh?
Tobias: Warren must have liked that Drive to Survive show on Netflix. It is pretty good.
Bill: I’m going to go with Ted on this one.
Tobias: I think it’s a Ted, yeah.
Bill: I do think it’s a Ted one.
Tobias: Yeah, it is a little bit late, isn’t it? But anyway, good pick. JT, what are you got on deck?
Jake: I’ve got some veggies for us that I’m titling ‘agility.’ We’ll see. I’m actually going to need your help on this one, TC. So, you factor heavily in it.
Tobias: I’m not that agile these days, but I’ll try my best.
Tobias: What about you, Bill? What do you got?
Bill: I got some general thoughts.[laughter]
Bill: I go last.
Jake: Some riffing? Any riffing?
Bill: Yeah, there’s some riffing.
Jake: Okay. I like riffing.
Tobias: JT did double duty this week. He gave me an article. I did have something else, but it’s a great article. I’m going to do it. Funnily enough, it answers I think some of the questions that we had last week. Not necessarily going to resolve them forever, but this is interesting out-of-sample testing for the value factor. Evidently, this has only just come out this paper, but I’m pretty sure this is what Mikhail Samonov was talking about when he did his 200 years of value. It sounds very similar. So, I haven’t had a chance to confirm yet, but there’s a new paper basically, they’ve looked at some data going way back, and I’ll talk about that a little bit.
Bill: Shoutout to my Money Gram peeps, that we’re playing the merger arb. Good job.
Jake: Hmm. Don’t know anything about that.
Bill: Yes. Well, people forget that I still do have some value investing in me.
Life As A Professional Full-Time Investor
Tobias: Can you guys do a segment on what it’s like to be a professional full-time investor? I’ll tell you what it is. It’s a lot of compliance.
Bill: Yeah, you get your teeth kicked in all the time, and then you wonder if you’re dumb, and then it works, and then you think you’re smart, and then it doesn’t work, and you think you’re dumb again.
Tobias: I don’t suffer so much from that, but I just have a lot of compliance. Compliance, that’s what I spend the most amount of money and that’s what I spend the most of [laughs] my time doing. [crosstalk]
Bill: I spend 98% of my time wondering if I’m an idiot.
Jake: What’s the other two?
Bill: I don’t know. Masturbating about how smart I am.
Jake: [laughs] [crosstalk]
Value Returns 1866 to Date
Tobias: Who wants to kick it off? I’m going to take Jake’s paper away. Either way, it’s you, JT. So, let’s do the paper. JT sent me the Mark Hulbert article. He’s always great. He picked up this paper and he’s done a pretty great job of that. I just tweeted out the relevant chart, it’s kind of interesting.
Jake: Shoutout to my man, Scott, for sending it to me first. So, it’s the network provides.
Tobias: That is good.
Tobias: The paper’s called The Cross-Section of Stock Returns Before 1926 and Beyond. Perhaps referencing the Fama-French.
Bill: We’re talking about history? History.
Tobias: Yeah, well, this is the reason why it’s relevant, because–
Bill: Dang. Someone get Allen Iverson on the phone.
Tobias: [crosstalk] The value research, the original stuff came out, it was 1992. This was the Fama-French article and it ran back to 1963. So, it’s a pretty short window of data that they had. They got this value effect in there using price to book. They said things bought cheaply on the basis of price to book tend to do pretty well relative to the market, relative to things that are expensive.
Bill: [crosstalk] the book. What a loser.
Tobias: I think there are good reasons why they choose it because it’s pretty static from quarter to quarter and from year to year, whereas low earnings don’t necessarily indicate that something is cheap or expensive. They might just be depressed.
Bill: Yeah, I think it made sense back in the day. What is it to recreate a business? What is that? The F score? What am I trying–?
Tobias: The Tobin’s Q?
Jake: Tobin’s Q, yeah.
Bill: What the fuck is it? Tobin’s Q, yeah. [crosstalk] I think Tobin’s Q, if you could figure out how to do that would make sense today. Like Altria has no book, because they bought in all their equity. So, it’s hard now with some of these more [crosstalk] ensure earn high earning businesses.
Tobias: Book doesn’t work. It’s pretty well accepted. The book doesn’t work. Even Cliff Asness pointed out that through that period where value is doing really badly, the value factor that did least worst was book, because it gives you the least value impact.
Jake: [laughs] He was the most far away from value of the values thing. So, it did better.
Tobias: Right. So, it did better, funnily enough.
Jake: Least radioactive.
Tobias: The problem with any in sample testing is what you might see is just complete luck. The gold standard for statistical analysis is to take the same idea and then apply it out of sample. We’ve got three potential sources of out-of-sample testing. We’ve got since that paper got published in 1992 to date. What has happened over that period is that the value factor, the value effect has been less good. It hasn’t been predictive as predicted through that period. It still worked, but it’s not as strong as the effect that they found in that 1963 to 1992 period.
Then, there’s also international data. So, you can take the same idea and apply to any other stock exchange around the world. The criticism there is that they’re too correlated. The global stock markets, even though they’re different, they tend to go up and down roughly together. Then, these guys have dug up– these guys have put all this stuff together by hand. I think this is what Mikhail Samonov 200 years value – Google Search was referring to when he did his 200 years of value post.
These guys have gone back to 1866. Fama and French pushed the ’63 data back to 1926 and then found the same value effect, but also there was a little bit diminish. These guys have pushed it back from 1926 to 1866 and I’ve done it with– The only filings that were made prior to 1932, there was no requirement to file audited financial statements prior to 1932. So, the filings were terrible and you couldn’t– they’re very spotty.
The only way they can do it is using price to dividend. So, they’ve used dividend yields and they found on that basis that period of time 1866 to 1926 was a very good time to be a value investor using price to dividend yield. it outperformed. So, I think it’s an interesting study. I don’t know that it’s necessarily groundbreaking. I’m sure it took a lot of effort and I’m glad they did it. But I think that everybody’s already got that– It just confirmed my price, value works for people who don’t like it. [crosstalk]
Jake: Any hypothesis on the time differences of, why did ’26 to ’64 or whatever it was, ’63, show less value sampling, and then ’64 to ’92 showed yes, since then, no. But pre-1926, why would that have showed yes? Are there any commonalities in these four periods that we can find that would give us some illustration as to why it worked or not?
Tobias: That’s a good question.
Jake: Interest rates–
Tobias: I don’t have a good answer but I can speculate.
Jake: Technological development?
Tobias: Period of ’62, whatever it was, ’63 to ’99, was a period of very rapid growth in the States. I think that does benefit– Vitaly Katsnelson characterizes them as being like this, where Shiller CAPE is peaking, that’s a bull market.
Where Shiller CAPE tends to go sideways for an extended period of time, that’s a sideways market, but that would be characterized by– So, periods of time like 2000 to 2015, and I suspect we’re probably still not out of this sideways market yet, but at the moment, it looks like a new bull market started in 2009 but we’ll see where this all ends up.
Through those periods, I think the last one was ’66 to ’82. That would have been a very good time to be a value guy, and not a good time to be a growth investor. So, it’s caught that in the middle, maybe. I don’t know.
Jake: See, the premium has more to do with actually the other side of the bet, which was maybe growth scuffling.
Tobias: I think value is fairly stable. Value tend to– it does better but I think a lot of performance is relative. Value hasn’t done that–
Jake: Just losses a little bit of money every year and then [laughter]
Tobias: Value hasn’t done badly over the last decade.
Tobias: Just on a relative basis, it’s done terribly.
Bill: ’63 to ’82 is when the boomers came into their own, right? Or, am I [crosstalk] on that?
Tobias: Boomers born in the end of World War II, so it’s ’45 to whatever.
Bill: Yeah. So, they were 23 to 40?
Jake: I think ’60 is the cutoff age or birth year.
Tobias: That’s probably right. That’s the hump going through the snake.
Bill: Yeah, I just wonder how much of that had to do with growth in earnings.
Tobias: Value tends to do better out of the bottom. I don’t know why on a relative basis. But everything I guess– [crosstalk]
Bill: Because it gets shitcanned in the downturn.
Tobias: Well, that’s funny, because it used to be the case that everybody believed that value did better through a downturn. That was based on the 2002 drawdown, I think, where value skated and everything else got smashed up. [crosstalk] the case in 2007, 2009 got smashed [crosstalk]
Jake: Always fighting the last war. [laughs]
Tobias: That is true. Do you think that view that value gets smashed up is a March 2020 view? Like value got smashed and growth skated through that?
Bill: I don’t know. I guess it all depends the reason for the selloff.
Jake: It’s also a little bit of where did you start. If you were expensive relative to normal valuation for your value basket, then you might expect a little bit more damage and vice versa?
Tobias: Right. I think that’s what happened in 2007.
Jake: I think so too. Bad dispersion.
Shareholder Yield Is An Incredibly Strong Factor
Tobias: Can price the dividend to yield effectively be the “carry” factor in stocks? Not sure what that means. Dividend yield is definitely– That’s the carry. Sorry, Solo, I don’t understand the question.
Jake: You have to go to a smarter podcast than this and ask that question.
Jake: Yeah. Do you have any misgivings about dividend yield as a metric for measuring?
Tobias: Yeah. As Meb Faber will point out, it hasn’t been a particularly great factor. I don’t know why that is. I don’t know why and clearly, it’s not very tax efficient. I guess there are companies out there that tend to be low growth. So, they’re paying out as much of their earnings as they can in dividends, because they know that’s why people hold the stock. So, maybe you get to a point where you’re just underinvesting in the business so that you can keep on servicing the yield, and that gets you into trouble, maybe.
Jake: Could be. It wasn’t until what, maybe the early 80s, anyone, aside from a few very iconoclastic outsiders’ types of CEOs, where they were doing any buybacks. So, that was your other outlet for return of capital to shareholders. If it was only dividend for most of that time period before that, then I would imagine it would be a more realistic measurement, but less so now when you have also buybacks as a potential– and even, there’s probably some comp, proxy statement kind of math and reasons you could look into to see why buybacks might be favored over dividends at this–
Jake: It’s just the incentives for management push for the buybacks more.
Bill: They’re also more tax efficient. If you sell pro rata into your buyback, you get advantage tax [crosstalk].
Jake: Yeah, and you get to decide if you want the dividend or not as the shareholder, which I like.
Tobias: Yeah, you can time it whenever you want to. You can time it whenever you want. Lower tax, there’s a lot of good reasons for doing it that way. Yeah, why are there not more shareholder yield funds? I don’t know. Meb’s got a great idea with his shareholder yield, which is buybacks plus dividend yield. It’s an incredibly strong factor, because I think it tells you that management is doing the right thing when they’re buying back when it’s undervalued. If the yield is significant or the buyback yield is significant, that’s a pretty good indicator that they’re shareholder friendly or they’ve got options struck at the right price, one or the other.
We’ve Had LBO’s For Seven Years
Jake: Well, I think interest rates matter here as well. Imagine that I lay before you as the CEO, your palette of potential options to color your own coloring book of cap allocation, and one of them is redeploy money into your own business. When you look at your swathe of potential investment opportunities inside your business, the lower the rates are, the more internal projects are going to pencil out as positive NPV projects.
It’s possible that we’ve pushed towards more reinvestment within the business. Even sometimes, maybe when it hasn’t been the best idea, because rates are lower and if you are an investor on the other side of that then and you’re deciding, “Okay, do I want the money back or do I want them to retain it?” and you have nowhere else to really put the money, because yields are so low with bonds or wherever else, you’re like, “Well, shit, they might as well just keep it and hopefully, maybe they know what to do with it better than I can.” TINA, right? There is an alternative, and there’s kind of a TINA when it comes to cap allocation as well for you.
Tobias: You are heavily incentivized to do what Qurate did, where if you’re trading really cheaply, go and issue a whole lot of bonds and get the cash in for that, and then and go arb that by buying back your stock, that’s a no-brainer for a lot of these positions. I don’t know if we necessarily want all of the businesses in the country doing that though.
Jake: Well, that’s effectively what’s happened. If you look at corporate balance sheets and you look at buyback timing, there’s been an LBO going on for seven years now. But whether that is good or bad in the longer term–
Tobias: We’re going to find out.
Jake: Like Buffett always says about everything with economics, “And then what?” So, I don’t know if we know the answer yet to, “And then what?”
Tobias: Just convert to bitcoin don’t pay it back. Or just inflate it away like that. That works too.
Jake: Yeah, that’s great. Except you have to feed a family, [laughs]
Tobias: Do you want to do your veggies, JT?
Flexibility & Winning Against The Odds
Jake: Sure. This is a segment on agility and it’s from this terrific little book called Certain to Win by Chet Richards, and he was an acolyte of John Boyd. Until Toby comes out with his book on strategy, grandmasters, this is a really nice starting point. I thought I would just go through some of the stuff that I found useful in the book, and please jump in and add, because I know that you have all kinds of great stories that are going to be way better than– you probably should have done this segment instead of me.
We’ll start out with– let’s just talk about agility in general, and I’m going to give you an example of it. My 10-year-old, who’s not a math or any kind of prodigy, could be a grandmaster at chess with one simple rule modification. He gets to take two turns for every one turn of the grandmaster. Now, there’s this idea called a Lanchester’s model and it’s like what you imagine when you look at playing Risk or something, and you have all the little pieces on the board and they’re fighting.
The idea is it’s a red team versus a blue team. You have the number of troops or whatever, tanks, whatever unit that you want to count. Then, you have the effectiveness of that unit. So, their firing rate, things like that, how much damage can they inflict. Lanchester’s model is basically like playing out a little game of back and forth of, “Okay, we have hundred units of blue and 200 of red, and blue’s firing capacity is 2x of reds.” It seems like an even match. We have twice the firing power, but half the number. Well, it turns out you actually need four times the firing rate to be able to beat a 200 or the double of the units if you actually play out the iterations a little bit.
One of the takeaways of that which is very interesting is that especially in a democracy, where conscription to join the military maybe not that politically palatable, you end up in a kind of game theory state, where you have to have super effective, which also means very expensive weapons. If you look at how our military has evolved and the F-22 Raptor program where it costs, I don’t know, $35 million a plane. You probably could have predicted that just based on this simple theory of like, “Well, we’re not going to be adding to the number of units that much because that’s not very palatable.” So, instead we’re going to have to have maximum effectiveness to be able to neutralize any opponents without a huge number.
Let’s shift the focus a little bit here to– When you’re looking at war, it’s generally speaking that the bigger army wins. However, there’s all these situations where a smaller, less technologically advanced side has won. In the seventh century, the Arabs beat the Byzantine Empire. In the 13th century, the Mongols beat the Chinese. 18th century, the Colonies beat the UK for the American Revolution. 20th century, you had Germany versus France and England in the Blitzkrieg. Israel beat the Arabs. Vietnam versus the US. Afghanistan versus the USSR. All these situations, how the hell did this smaller, ragtag bunch beat a bigger empire? What’s going on there?
Boyd’s OODA Loops
Jake: This is where we start to get into John Boyd’s OODA loops, which I think we’ve talked about before, but the basic idea of it is that it’s your operational tempo that you are waging a war in. So, the OODA stands for observe, orient, decide, and act. You’re taking in the battlefield, you’re orienting yourself as to what’s happening, you’re deciding what to do, and then you’re making your decision and you act on it. The faster that you can run that process over and over again, you can get ahead of your opponent as far as just understanding the feel of the battle, and then therefore, that’s how you’re able to get in front of a bigger army and outmaneuver them. So, Toby, want to add anything right here before I jump into some more stuff?
Tobias: Just that Boyd was a fighter pilot and reading the stories in the book, I think that it’s pretty clear that Maverick in Top Gun is based on Boyd as a fighter pilot, including that pancake maneuver where they fly right by. That was one of Boyd’s favorites that he pulled on a superior in Korea.
Jake: Oh, yeah. He buzzed the tower?
Jake: Oh, the upside down, yeah.
Tobias: No, no, no, wait. They send out on a training mission and– [crosstalk]
Bill: They hit brakes and they’ll fly right by.
Tobias: Yeah, that’s right.
Tobias: They send out– the new guys have to fly in front, and they’re being pursued by the guys who are veterans, and you always lose in that position because the other guy’s already able to fire at you. But Boyd hit the brakes and they all flew right by and they hadn’t seen anything like that before, and they turned around and he “hosed them,” as he likes to call it. So, all of his theories began with him as a fighter pilot, where he worked out that if you could turn faster, so maneuverability, agility was more important than speed or anything else that if he could get inside the turning loop of the other side, which is why an OODA loop– that’s the basis for it. It’s just an interesting story.
Jake: Yeah. One thing Boyd talked about too was his whole career was based on energy maneuverability like EM and exactly what you just said, being able to make sudden changes in movement. It’s not even speed, because speed implies momentum, which then has a sustainability to it that makes you predictable. The MiG actually oftentimes had better characteristics than the F-86 that was often fighting against each other in combat training. They figured out that probably what it was that the F-86 had a bubble canopy, so he could observe more. It’s the very beginning part of it. It’s something as simple as just being able to see things better was a big difference.
Boyd was trying to get these things– This is what you want to have on your side of the battle. A sense of mission, morale, harmony, and teamwork. I know, Toby, we’ve talked a little bit about this before in other contexts, I think, offline but when you’re flying a flag that is attractive, you can almost get the other side to join you, because they start to believe in your mission more than their other mission. You have the game three quarters one, right?
Tobias: Yeah, there’s a great line from Michael Dell where he said– Someone said, “Why don’t you do more acquisitions?” He said, “I try to buy all of my competitors one customer at a time.” That’s pretty good line.
Jake: Yeah. If you can get all those things on your side, it will allow you to appear ambiguous, be deceptive, generate surprise and panic, and then seize the initiative. They’re always scrambling, which then will cause your enemy to become bickering, scapegoating amongst each other, confusion, panic route, and then eventually surrender. That’s what happened in each one of those battles that we said historically, where the smaller one beat the– Maybe talk a little bit about like Lawrence of Arabia at this point, because he was a grandmaster at this.
Lawrence Of Arabia & Guerrilla Warfare
Tobias: Shoutout to Victor Hargrave. Thank you very much for the tip and to Jeff Nolan, thank you too. Lawrence of Arabia was this towering figure for a long period of time. I don’t know whether it was Lawrence of Arabia, the movie, was huge and it’s just fallen out of common consciousness or something like that. T. E. Lawrence was in World War II, a British Intelligence Officer in Turkey.
He was sent out and he got the Bedouin and the tribes to come and fight with him. They fought this guerrilla warfare where they found a way to confine the Turks to their forts. He said, “We control 99% of the land here. They only control the forts.” He got a fever, and he had this dream, and he woke up in the morning with his guerrilla warfare fully formed in his mind about how he was going to go and defeat them. It is just a great story and then they made a great movie out of it too. No prisoners.
Certain To Win
Jake: Boyd actually interviewed firsthand German officers from World War II, the ones who were largely responsible for executing the Blitzkrieg, which was a very, very effective strategy and tactic. There were four things that came out of this. I’m going to try to say the German words here. It’s going to be bad. All our German listeners, I apologize. Send your hate mail to Bill Brewster.
Tobias: [laughs] @gmail.com.
Jake: Yeah. Gmail.com. The first one is called einheit. It’s effectively means mutual trust, unity, cohesion, which allows quick communications within your group. If you picture your little army unit operating together, you know each other, you know what a particular look means compared to– you could see just important little cues that come only from working together and training together. It’s a huge part of having a very cohesive team. The next one is– okay, here we go, fingerspitzengefühl which it literally means finger on the pulse, an intuitive feel for the battle. Having your finger right on it to just know and especially in a chaotic and complex situation, having your finger on wherever one is and how the battle is developing.
The next one is auftrag which sometimes is put together with auftragstaktik I think it said, which just means what’s the mission. It’s more actually a contract between the superior and the subordinate, where the superior tells them, “Here’s what we’re trying to do in order to X, Y, Z. This is our bigger mission that we’re trying to accomplish. Can you do this? Can you carry it out?”
You don’t tell them how to do it, you just tell them what you want to get accomplished and your why behind it, and they’re in charge of the how. Why that’s so important is because when you’re actually on the frontlines, the general can’t be making those little decisions. Things are happening too fast, it’s too chaotic. Your OODA loop would be too slow. So, to keep the OODA loop fast, you have to have some kind of processing information on the front lines, which requires then empowerment of the people closest to what’s happening.
Then, the last one is schwerpunkt, I believe it said, which is a concept that provides focus and direction to the operation. It’s like center of gravity, emphasis– [crosstalk]
Tobias: Spearpoint, right?
Jake: Yeah, that’s probably what– [crosstalk]
Tobias: I think it’s literally spearpoint.
Jake: That’s probably what that is. Yeah. That gives people– maybe one particular unit is has the most important part of the mission, like set explosives on that bridge or whatever it is, and everyone else knows that that is the most important thing to be executed. That’s the emphasis of this mission. But they’re going to be doing a lot of other things around it to enable that to happen.
All of this stuff, I think, is useful in business and it actually shows up in Toyota’s production system, like lean manufacturing. It shows up in Agile software development. All these different places, the same concepts occur again and again, and you can find them. It’s basically when groups of humans work together, this particular strategy and these principles allow for success that is much outsized compared to resources and the size of the team. So, if you’re in a smaller group, you can see how this would be pretty valuable stuff to read. So, I would suggest picking up Certain to Win and giving it a read.
Striving For Harmony
Tobias: Yeah, that’s a great book. I like the grand strategy stuff, which is just a slight abstraction back from that where it talks about. That’s one of the things that I’ve been talking about a little bit, the idea of harmony, which you’re alluding to that a little bit. He’s got this great line, this is Boyd, where he says something like, “If you’re the empire, and you’re fighting against the guerrillas, and you have a look at what they’re trying to achieve, what their claims are, their morality of what their argument is, and if you find that more compelling, then you should switch to the rebels, you should switch to the guerrillas.”
I think there’s something humane in Boyd’s analysis. I think there’s some truth in it, where he says he’s striving for harmony, which is something that Sun Tzu talks about, as well, very unexpectedly that the most harmonious group is the one that tends to succeed.
Jake: Yeah, you can imagine this, I don’t know, playing out in Ottawa today. [laughs] It feels some people may or may not be on the right or wrong side of history there. We’ll see. But shoutout to our Canadian friends.
Tobias: Yeah. Both of my uncles are truckies. So, I’m pro truckie.
Bill: Yeah, I have nothing to add.
Jake: [laughs] Thanks, Charlie.
Tobias: All right, mate. You got anything to talk about?
Commodity Bets Are A Tough Play
Bill: Yeah, actually, that’s a reasonably good segue. The mission, plus morale, plus teamwork that Jake was talking about, while you were talking, the entire time I was thinking like, “This is why Netflix carries the valuation it does and something Warner Discovery carries the valuation it does.” I think that sometimes, there have been a couple comments that, I think, warrant at least some clarification. Because I do think sometimes I take shots at value guys, and it’s really me just talking to my old dumb self, and if you disagree with me, that’s probably good, because you’re right and I’m wrong, and I’ll learn it eventually.
Somebody had commented on oil saying that I’ve dismissed it. I have not dismissed oil. I’ve dismissed my ability to trade an oil cycle. If you want to know my dismissal of it, I dedicated a podcast to it with Will Thompson. You can listen to that on why it’s going to take a little bit longer. My history in commodities involves me buying Intrepid Potash in 2016 as a debt restructuring. I didn’t own it when it ripped from 8 to 46 recently. I bought Freeport-McMoRan in December of 2015. Didn’t own it for any of the run. I bought Cameco in 2019. Didn’t own it for any of the run. I bought– [crosstalk]
Jake: You were just early.
Bill: Yeah, one other one. My view of the world is I am not capable to look at commodity businesses and hold them and I’m not even convinced but for COVID, a lot of this commodity supply chain stuff happens. I don’t know how to do the earnings power normalized. If you know and you think I’m wrong, good for you, go make money. I don’t care if I’m right or wrong on that. It’s not my game. I have one commodity investment, I know absolutely everyone involved, and I think I know everybody’s exit plan, and what they’re planning to do. That’s the commodity bet I want to make and I reluctantly make that bet.
Protection Using The Best Tail-Hedges
Bill: This take on value versus growth, I think sometimes, some listener referred to me as– I don’t know, he used a fancy word from moody. I think at the end of the day, sometimes, I just don’t give a shit about this debate. It’s because I’m looking or attempting to look at a private equity type lens. I know that this is super overused and stuff. But this stuff I own, Swedish Match, Charter, Berkshire, Microsoft, Google, Facebook, unfortunately, recently, is stuff that I think are good businesses that have growth ahead of them trading at reasonable valuations. People want to debate the valuation thing, fine. Short everything I own, we’ll see who’s right in the end. I don’t care.
But as far as value versus growth and a selloff and what protects you, I don’t think that’s the right discussion to have at all. I think the right discussion to have is, do you have tail hedges in place, what’s your cash allocation, how much do you have bonds, do you have anything allocated to CTAs? Those are the conversations that I think are more appropriate. So, if I get a little moody, it’s because I think sometimes, people talk past each other. Sometimes, I get angry because I’m like a petulant child.
Bill: Finally, I had a comment about indexing. I wasn’t saying somebody said, “Well, rather than talking about mega caps, why don’t you look at small caps?’ I own some small caps. I’m not going to fucking talk about them, because if other people get their face ripped off, I’m not going to own that responsibility. People can do their own work and by the way, I’ve done a lot better in the bigger stuff than I have the smaller stuff. I’m open to it, I’m open to special situations, I’m open to all that stuff.
But I think what I am trying to accomplish is, like I said, buying these businesses that I think can grow that offer reasonable current returns. I think that worrying about an inflation print over the next year, it gets me distracted from the stuff that actually matters over the long-term. If you’re owning 30-year assets, I think that the next quarters CPI print is pretty much meaningless. But I acknowledge that you run the risk of getting run over by quotational indigestion, which is why I think a cash allocation come over the top is a more appropriate thing to discuss in that scenario. So, I don’t know. To the extent that people want to understand how my brain thinks, that’s more or less how I size up things.
I think Facebook actually did have a meaningful change. I don’t think that looking at a stock being off and presuming that the business is the same is the right presumption. I also do think businesses change less quickly than stock prices do. So, there’s a lot of nuance for everything and that’s my two cents. Somebody was offended that I said that my kid had to stop being a bitch, that person can go fuck themselves.
Bill: You know nothing about how much I care about my family. As far as criticizing me, the investor, all is fair in love and war. Criticizing me as a human is sort of you’re an idiot, and I actually know the truth. So, that’s my take on sometimes some of the conversations we have and some of my reactions.
Managing Quotational Risk
Jake: I think you did highlight an important point about– There’s quotational risk on anything. Do you want to ensure that quotational risk through CTAs, tail risk hedging, cash, maybe tilting some direction? Who knows that may or may not save you that much? Or, do you look past all of that stuff and you just self-insure quotational risk by taking a walk, getting some fresh air, not following every little blip of the market? That’s another way to self-insure against rotational risk.
Bill: Taking a walk didn’t help much when I was down 30% a quarter.
Jake: Well, you’re going to have to walk a little further. [laughs]
Bill: Yeah, it was 26 for what it’s worth.
Jake: If you’re going to earn equity returns, you have to be willing to stomach those types of changes quotationally. If you’re right about the business, it doesn’t matter over the longer term. But if you are in a situation where you can’t stomach that for whatever reason, whether it’s institutional imperative, whether you just know yourself that I can’t handle watching my stuff go down that much, whether it’s any multitude of reasons, then you should know that, and then therefore, do something from an asset allocation standpoint to make sure that you’re not going to force yourself into making a bad decision when the pressure does ratchet up at some point, which it will.
Bill: Yeah, I think that’s right. For me, I’m managing more or less a static pool. There’s some income coming in, but I think it makes more sense to try to own businesses that I can own for a long time than it does to focus on, “Is this transitory inflation or not?” I don’t care. I care whether or not people have to pay their cable bill and whether or not they’re addicted to nicotine pouches.
I have some degree of confidence that cable companies should be able to raise their pricing. If that’s not true, I need asset allocation to protect me because I’m not chasing shittier businesses in the name of trying to be safe. I’m not going to do that. I will take a swing at the right thing though. I swung pretty freaking hard at Qurate and that’s not exactly something that people loved and was easy to own. That said, I made no money, and it cost me a shit ton on opportunity cost.
Jake: And mental damage.
Bill: Yeah. I do love that business and I love the people there.
ZeroHedge Accused Of Spreading Russian Propaganda
Tobias: Segue to something else. Did you guys see that ZeroHedge just been accused of spreading Russian propaganda by US intelligence?
Bill: Oh, yeah, dude. That’s old news. That’s been since 2016. I don’t know that they’ve been formally accused. But I’ve [crosstalk]
Tobias: Yeah. They’ve been formally accused now.
Jake: By who?
Tobias: US intelligence [crosstalk]
Jake: What does that even mean?
Tobias: I don’t know. I didn’t see that, that it was US intelligence. There’s just the comment that was left here. But I saw the article that they had been accused. I don’t know how– What does that mean? Do you get a visit from the CIA? [laughs]
Bill: I’ve heard this for a long, long time that they’re basically a Russian propaganda outlet. That may not be common within finance circles, but I have heard that from people for a very long time.
Tobias: But you hear that anytime that anybody says something that nobody else agrees with. They’re always going to be misinformation or propaganda for somebody else, right? There’s only two types of information. It’s either propaganda or misinformation. There’s nothing in between.
Bill: Yeah, look, I’m not arguing the merit of ZeroHedge on this program. I’m merely saying that I have heard that in the past.
Jake: What if ZeroHedge was just an elaborate ploy to get you to dump all your equities, be long gold, and just make all the– weaken financially the opposition? [laughs]
Tobias: It’s a very elaborate– [crosstalk]
Bill: If you follow their advice, you probably are relatively weaker over the past decade.
Jake: That’s the long game.
Tobias: Yeah, I read ZeroHedge. I like seeing the weird stories. I like seeing the stuff that’s not printed anywhere else. I like that about it. I always look out for different stuff all the time. ZeroHedge had all of the COVID stuff way before anybody else did. I read it in Austin, came home, and told my wife to go and buy a whole lot of food, and everybody thought I was nuts.
Bill: Yeah, [crosstalk]
Tobias: ZeroHedge helped me there.
Bill: I think that they uncover some stuff. I also think that people have said that they’re a Russian outlet for a long time.
Bill: I have no formal opinion to lend to this particular topic. I haven’t read them in a long time.
Tobias: Yeah. Oh, I read regularly. I think it’s very good but you’ve got to filter everything you read.
Bill: I don’t read the news for the most part, either for what it’s worth.
Tobias: Well, most of it. Everything you read is bullshit. I just want different perspectives on the bullshit.
Bill: I read earnings transcripts and expert interviews, that’s most of my readings.
Jake: All those wrongs can’t allowed become one right. Is that how it works, Toby? [laughs]
Tobias: That’s the theory anyway.
Tobias: I don’t think it works that that way.
Tobias: Two wrongs make a right, I think that’s how it works. Throw some questions in dude. Hey, Bill. Do you have a suggestion on how I can learn about debt structure?
Bill: Not really. I think you’ve just got to pick up the credit documents, and start reading, and then ask questions. It’s boring work, but it’s important stuff. I’m Qurate. I had to ask people that actually work in debt, whether or not I was missing something. There’s so many different tranches of debt that searching for a negative can be very annoying in reading debt packages. So, I had to check my work and we’ll see. Who knows whether or not I was right or wrong in the long term?
Jake: Do you think there’s something to– [crosstalk]
Tobias: I don’t have food saved up from two years ago. Thanks for that question. I don’t have foods– I don’t use the just in time anymore. I have this inventory and I turn the inventory. Sorry, JT.
Bill: Actually, I somewhat lied. I’ve recently been reading Nothing But Net. That’s a pretty interesting book if you want to get the view of a tech analyst.
Jake: What’s that about?
Bill: Revenue Growth. You want revenue growth.
Jake: Oh, this whole time. [laughs]
Bill: That’s what a lot of it’s about.
Tobias: JT, what’s your background and are you going to be running a sideline to the University of Texas shortly?
Jake: [laughs] Oh, yeah, it looks like it.
Tobias: You are a linebacker coach?
Jake: This is a little hike yesterday or last week that I was on. So, I just took a little picture because I like to keep track of my favorite places to go walk and listen to the Berkshire AGMs on audio.
Social Media Companies Are Disrupting Harmony
Tobias: Yeah. Are social media companies disrupting harmony and inviting attack with too much censorship? Yeah, I think they are. I think the risk that they run is they get into the publishing, they become responsible for [crosstalk]
Jake: Section 230 removal.
Bill: I tell you what, if that happens, Facebook’s going to be the only one left, because nobody else has the scale to — Only Facebook [crosstalk] have the scale.
Jake: With all those regulations. [laughs]
Tobias: Yeah, Facebook spends more on some weird stuff. Facebook spends more on compliance than Twitter generates in revenue, something weird like that.
Bill: They put a lot of resources into it. You privatize the internet. You get the shit that the internet comes with.
Munger Using Margin To Buy Alibaba
Tobias: Why is Munger using margin to buy Baba? I don’t think that he has used margin specifically to buy Alibaba. I think that they have margin on that account when he was talking about that a little bit, I think.
Bill: Yeah, I don’t know. I didn’t have no idea.
Tobias: JT, do you know that?
Bill: Charlie doesn’t take my calls.
Tobias: He takes JT’s.
Bill: It’s true.
Jake: [laughs] Not going to respond. Not confirm or deny. My understanding was that there was already margin used in their account. So, I don’t think there was a like for like kind of, “Oh, we took margin to go by this particular thing.” But I don’t know. Do your own homework.
Tobias: Did you guys read Seth Klarman’s most recent letter?
Bill: No, I didn’t get that one. I would read it.
Jake: [crosstalk] a lot of doom and gloom.
Tobias: Well, they’ve had their best year in a decade or something like that. I don’t know. They’re not doing a lot in public equities these days. Most of its private [crosstalk] stuff.
Bill: They do a lot in real estate. I bet they made it rain in real estate.
Tobias: I find all those letters– I’ve just read so many letters now that it’s very rare that you see something new in a letter– I find you could feed all Klarman’s letters into a–
Jake: Algo, and then it just spits that same–
Tobias: And written the same letter.
Jake: Yeah, true.
Bill: It looks like the homie, Bill is saying that in the 10-Q, it says that Charlie use margin. I have not read the Daily Journal. Thank you. I don’t care very much what it has to say, to be perfectly candid.
Tobias: Oh, he borrowed $37 million in the latest year to buy Baba.
Bill: Dude, obviously, he thinks the stock’s going up and his other securities are not going to implode. Otherwise, he got himself in a margin call.
Tobias: Yeah, that’s aggressive.
Bill: Well, Charlie’s never not been aggressive.
Tobias: That is true.
Jake: Counts vigorously, I believe was his advice.
Bill: I don’t know his thesis. I don’t know why he’s so comfortable. Look, my thoughts on why he’s using margin, I don’t know, dude. He is Charlie Munger. He’s a savant. I’m an idiot. He probably sees something I don’t.
Jake: I was thinking about that the other day when I just happened to come across one of the AGMs and Munger was actually talking about Buffett, like how weird he is to everybody. He asks like, “Hey, Warren, didn’t you try to buy a town when you were 21 years old?”
Jake: And Warren’s like, “Oh, yeah, I did try that but I didn’t go through.” None of us were trying to buy a town when we were 21 years old. This guy is just different level than everybody. So, to think like, “Oh, I’m going to be the next–” Come on, get out of here with that.
Bill: The other thing is, the thing about Daily Journal, this is the risk with any corporation that somebody’s got control of. If you don’t like what he’s doing, you can sell the stock. But expecting Charlie not to be Charlie, I don’t think is very fair. Charlie’s going to do whatever Charlie wants to do. If you disagree, sell. I probably would have sold when they had all that shit with the Buffalo News. I probably would have been like, “What are these two guys doing incinerating cash on fire fighting a newspaper war?” You don’t like it, leave. If you trust them, trust them.
Bill: The beauty of liquidity.
Tobias: The Chinese accounting for Alibaba. There’s some websites that track Alibaba’s filings that are hilarious and make it hard to invest in Alibaba, even though optically it’s cheap. I don’t know. Charlie’s got some additional help there from Li Lu, I’m sure. So, it’s probably a good trade.
Bill: Yeah, right. That’s really what I think it boils down to is, you got Li Lu and Charlie on one side, and then you’ve got me in an office opining on it. I’ll take Li Lu and Charlie.
Tobias: Can always ask the question. The Daily Journal meeting, that’s coming up soon.
Tobias: How you come [crosstalk] them?
Jake: What’s that?
Tobias: Is it live or is it dial-in?
Jake: I think it’s on Yahoo broadcast, but I don’t know how you would try to ask a question.
Bill: I’m sorry, if I was curt with the Daily Journal thing, but I just don’t know and I just really do think any controlled company, you’re at risk of the person that’s in the driver’s seat go in a direction that you don’t want to go.
Tobias: What’s up with the turnover in Burry’s portfolio? So many moves. I don’t know, but I don’t hate it though. So, trying to [crosstalk] a little bit.
Bill: [crosstalk] Well, I shouldn’t say that. But I do think he turns things over a fair amount, doesn’t he?
Tobias: That deeper value stuff when it gets the value, you’ve got to punch it out. You can’t sit on it round trip it. Li Lu got destroyed on PDD and Facebook? Facebook’s interesting, right? How much do you guys hate Facebook, the stock?
Bill: I’m long. So, I don’t hate it. But I also think that people that don’t understand what’s going on there are completely fucking blind to the change that’s going on there.
Tobias: Were you long before or after the dump?
Tobias: Yeah. It’s interesting. I don’t know.
Bill: I thought it was interesting before. But I do think that fundamental–
Tobias: Was deep value before, might be deep value now.
Bill: I don’t think value and tech is a great combo.
Tobias: Ah, it’s where definitely in [crosstalk]
Bill: Okay. If you have statistical proof, I’m merely [unintelligible 00:54:08] in my head.
Tobias: I think you just about can’t exclude it from a technical perspective. Sorry, not technical, statistical perspective.
Basket Investing vs Idiosyncratic Investing
Bill: Yeah. I think you’ve got to have a view on what short-form video does to the inherent nature of the platform.
Tobias: Eh, you know.
Bill: What do you mean eh?
Bill: It’s a social platform and [crosstalk]
Tobias: We’ll do it in different ways, mate. I don’t know if using all that stuff. I’m never going to figure that stuff out too hard. If it gets too cheap, I’m just going to buy it.
Bill: Yeah, okay. Well, that’s fine. We have definitely [crosstalk]
Tobias: Hardly a little bit. Let it ride.
Jake: It’s the difference between basket buying and idiosyncratic buying.
Tobias: That’s right.
Jake: That’s okay.
Tobias: I think a lot of this stuff is unknown. I just think that, it’s a little bit like macro, it’s fun to talk about, but it shouldn’t really impact investment decisions.
Bill: I don’t think that talking, doing calls with advertisers, and have them tell you that stories monetize different than newsfeed, and that the reason is because the way that people click through it, and if you look at human behavior scrolling the news, I don’t think that’s unknowable. I think that’s just doing the work.
Tobias: That might be why it’s cheap. Yeah.
Bill: Okay. I mean sure.
Jake: [laughs] Eh.
Bill: But you don’t have a view on it. The whole point is, you have a statistical idea. So, you opining on it and just [crosstalk] away is–
Tobias: I’m not opining on it.
Bill: I know. I don’t mean this disrespectfully. But the way you’re treating this, it’s almost as if it’s not even worth talking about.
Tobias: Well, let’s talk about–
Bill: I was trying, but if it gets too cheap, you buy it. That’s the discussion.
Tobias: I think that’s– we’ve already established that’s my approach.
Bill: Yeah. I have no idea how you determine what is cheap and what is not without these questions being answered in a discretionary portfolio. If you want to outsource it to a bunch of bets, I totally understand that. But then, it’s not worth having a business discussion over. It’s a statistical conversation.
Jake: Well, you’re trying to handicap the future based on dynamics that are happening today. Toby’s looking backwards at what’s already happened and assuming some reversion of the mean somewhere, and both of you can be right, and both can be smart ways of doing it. It doesn’t necessarily have to–
Tobias: What it is for me, I can tell you– I’m not trying to be too flippant here, because there’s a lot of work that goes into the background. But the idea is that it has been historically a good business and that’s all observable quantitatively. It’s now priced too cheaply if it sustains what it has done in the past. It’s not priced too cheaply, even if there’s a pretty big diminution in its historical performance. If it’s not going to completely revert to the mean, then it’s too expensive. But it’s got a long way to go before it becomes too expensive at these prices. So, that’s the way that I think about it.
I think if it does anywhere near what it has done in the past with a very wide range, it’s too cheap here and it’ll probably do okay with a long enough time frame, 5-year, 10-year timeframe. That’s what I think about it. As to dive down into the detail of the business part of it, I question whether anybody can really figure that out, because they’re almost cyclical so quickly and maybe that’s why you don’t want to be in tech, but that’s my position without being too flippant. All right, fellas, that’s time.
Tobias: This was fun.
Jake: Dead air. [laughs]
Bill: I question how you can invest without questioning that stuff. But statistically, cheap bets is the way you can do it.
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