In this episode of the VALUE: After Hours Podcast, Jake Taylor, Bill Brewster, and Tobias Carlisle chat about:
- This Is The Toughest Macro Environment Ever
- Charles Munger – Passive Billionaire
- Buffett’s Most Interesting Purchases
- The Importance Of Surrendering In Investing
- What Does Well During Stagflation?
- The Surrender Experiment
- AAII Bulls vs Bears vs Fear/Greed
- Opportunities In Chinese Stocks
- The Bus Ticket Collector Phenomenon
- Costco Is An Inflation Protected Treasury Return
- Converting Chinese ADR’s To Hong Kong
- AMC Bought A Gold Mine
- How To Get Long Black Markets
- Commodity Companies Are Deep Value
- Recent Sanctions Advantage China
- What’s Causing The Labor Shortage?
- Earnings Recession Coming Up
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Full Transcript
Tobias: All right, fellas.
Bill: Not trying to be–
Tobias: We are livestreaming.
Bill: Not trying to be Brett Favre out here.
Tobias: It is 10:30 AM Tuesday on the West Coast, 1:30 PM. on the East Coast, it’s daylight-saving sun.
Jake: Who knows?
Tobias: Who knows what it is over the rest of the world– [crosstalk]
Bill: It’s Value: After Hours During Hours. What do y’all know about that?
Tobias: It doesn’t make any sense. I grant you that. You might have to change the name at some point.
Bill: But it’s provocative-
Tobias: Gets the people going.
Bill: -that gets the people going.
Tobias: That’s right. What’s happening, fellas? There’s a little bit of volatility around. This is looking real-ish. We’ll have big bounce today, of course.
Jake: Sure.
Bill: Yeah. I liked your episode last week. I don’t know. Anyone that’s looking for my usual optimism can go somewhere else.
Jake: [laughs] Uh-oh.
Tobias: What do you think? Where are we?
Jake: What inning?
Bill: I’ve never been this bearish in my life.
Jake: Wow. Let’s unpack that. That’s a good topic. We don’t have to do it right now. [crosstalk]
Bill: I just–
Jake: We don’t have to do it right now. We’ve got the whole show.
Tobias: I don’t mind. Let’s do it now. Let’s do it.
Bill: Yeah, all right.
Jake: Let’s do it.
Tobias: We’ve got somebody from Cologne. Sorry, dude. Keep going. [laughs]
This Is The Toughest Macro Environment Ever
Bill: No, I’m trying to figure out and unpack– Look, I was always in camp transitory on the inflation side. I think I underestimated in the beginning of Russia-Ukraine. I did not foresee Ukraine capturing people’s hearts and the West being this united in sanctions. I think if you’re interested at all to open up the– How much potash, for example, Russia makes and how much oil Russia exports? This commodity environment could be super messed up for a long time. Then you layer on China COVID 2022, I think this is the hardest macro environment I’ve ever seen and I don’t think that macro is the way that I’d be paid. But COVID 2020 was pretty easy because we all had the same risk that we were staring at. This is really wonky to me.
I’m not confident. Look, three years of sustained inflation, food shortages, global dislocations, fine, the leading economic indicators are strong in America, household net worth is strong, the higher end of America’s is doing fine, the people on the margin are about to just get waxed. $5.50 gas hasn’t really come through yet. I’m sure America will be able to procure food, but it’s going to be more expensive. Emerging markets, I feel horrible for. Coming out of the back of COVID and now, you just destroy them with food inflation, I don’t know, this has risk written all over it to me.
Jake: Other than that, how is the play Mrs. Lincoln?
Tobias: [laughs]
Bill: Now, the only thing that matters is okay, well, what are the prices? These are first order thoughts that I’m having, but I am not a dip buyer. Maybe that costs me money or whatever down the road, but 2018, I thought that was easy, late 2015, I thought that was pretty easy. This one, I’m not sure.
Tobias: Where are you, JT? You’re pretty bearish?
Jake: Well, it’s a good question. I don’t know. I guess, everybody, I’m not as bearish about the companies I own. [laughs] So, it’s fall down under no duh, but yeah, it’s definitely possible to imagine a messed-up supply chain that’s still not unfurled from COVID.
Then you layer on commodity shortages, and higher prices for everything, and then the time that it takes for supply to get on line to match those high prices, it could just take time and it’d be messy along the way, which boy, it makes it tough to bet a profit margin expansion for anyone at this point. Top line, hard to imagine similar over the last decades being more than that. I don’t know, but then at the same time– [crosstalk]
Bill: Well, I think it’ll accelerate, but not in real terms.
Jake: Wow. Okay, that’s fair.
Bill: I actually think heavily levered industries with any type of pricing power are going to win relatively.
Jake: Think so.
Bill: Well, if you think– [crosstalk]
Jake: [crosstalk]?
Tobias: What is that?
Bill: Yeah, that’s one of the solutions. I don’t have the answer, man. I’m still working on this.
Earnings Recession Coming Up
Jake: It does feel we may be on the other side of peak globalization for a while, and maybe we’re going backwards on that front, which then that’s inflationary in its own right. If you bifurcate the world into different markets and some people are not trading with other people, that stuff that’s just going to cost more. That’s just how it works. So, again, pretty hard to be bullish on profit margins from here. I wouldn’t be surprised if we’re entering earnings recession coming up, which makes prices feel like they have to come in so maybe. I don’t know. It’s not a bubbly effervescent period. That’s for sure.
Tobias: There’s a comment here from John Battle. This is interesting. I have seen this phenomenon too “walked near the grocery store the other day and noticed a sign out in front for 8 positions they’re hiring for. I doubt we will have a recession while having a labor shortage.”
Bill: Yeah, I mean, maybe.
Jake: Well, what if you can’t move as much product? What if the unit volumes are pinched because of labor shortages?
Bill: It should get pricing power in that environment.
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What’s Causing The Labor Shortage?
Tobias: I don’t necessarily agree with the proposition that you can’t have a recession while we’re having a labor shortage. I’m just wondering about the labor shortage. What is all that about?
Bill: Some of it from my understanding is that people are still collecting a ton of unemployment. I think some of it is probably, people that made it through COVID that were later on in years retired. I don’t think it’s a stretch to say, “Trump wasn’t pro-immigration.” That’s four years of policy that was– But I don’t know what the data says. Maybe it was the highest immigration that we’ve ever had. I have no idea, but that would not be my null hypothesis.
Tobias: It’s very, very strange– I just don’t know what’s going on. If it’s something wrong with the data, if there’s some really odd phenomenon going on. Because it seems things are really expensive. You need a lot of money to be buying stuff. I just can’t see that all those payments are covering it. I don’t know. The payments are going out [unintelligible [00:07:58] roll off.
Bill: I was talking to somebody, who is trying to hire labor and he said unemployment benefits were one of the things that he was struggling with. Dude, I run people out of my grandma’s house. I manage her healthcare. That’s probably my primary job. I just gave people a $7 bump on 20 bucks an hour. So, that’s not nothing for them.
Tobias: Yeah.
Jake: It’s a lot. [crosstalk] a 30% raise.
Bill: Yeah, well, I’m looking at fucking food and gas, and these people are keeping my grandma alive. I need them to be happy. I certainly don’t want to be over there every day.
Jake: [laughs]
Tobias: Forgive me. [crosstalk] One of the states has got the minimum wage is $7.25 and you got gas at whatever it is for $4.50 at that point when I saw this tweet. It makes it tough. Good work half an hour to buy your gas.
Jake: 45 minutes to buy a tank of gas or buy a gallon of gas, I mean.
Tobias: Yeah.
Bill: I do think the other side of this is that a lot of prices have come in a lot much more than the index. So, that’s all-matter what odds.
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AAII Bulls vs Bears vs Fear/Greed
Tobias: Yeah, that’s another weird thing. The index just doesn’t seem to tell a story what’s going on. One of the topics that I’ve got today. I actually think this is a good instrument to trade with. I’m just fascinated by the Fear & Greed index. I’ve been looking for alternatives to the Fear & Greed index that have been around for a little bit longer. The bull minus bears, I think this is the independent investors, American Independent Investors Association.
Jake: Yeah, AAII.
Tobias: This goes back to 1969. From 1969 to even the mid-1990s, you got many, many more much more bearish readings that we’ve seen recently. Through the 70s, it was just a decade of really deep. Like much more bearish than we’re seeing today. Previously, the idea has been when you see that bearish reading, that’s a pretty good opportunity to get long as a contrarian indicator. But that would not have worked in the 70s. You’d been way too bearish for way too long. Sorry, you’ve been bullish at the–
Jake: Yeah. It would have taken a while for that to– [crosstalk]
Tobias: You got the signal for 10 years.
Jake: Yeah.
Tobias: Yeah. Plenty of time.
Jake: What does it say now?
Tobias: It’s actually still in slightly positive territory. It’s actually still slightly bearish. It’s careening towards zero, which would be flat, but it’s fallen from very, very bullish. It’s been increasingly bullish since the early 1990s. 2008 crash was quite deep, but other than that– I’ll post this chart.
We’ve got a long way to go before we bought them here. Even then, if it’s a 1970s style stagflation type environment, then could be that way for decades. I actually think in a weird sick way, I don’t want to be too gleeful about this, but it might be very good for value guys, it might be very good for deep value, guys. Lower prices, more commodity, inflation is probably better for deep value. But I don’t know, in real terms, whether that’s a good thing or not.
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Commodity Companies Are Deep Value
Bill: I guess, I think it depends on what the construction of the basket is. I doubt commodity companies are still deep value. Maybe, maybe.
Tobias: Well, they are right now.
Bill: Yeah, maybe.
Tobias: They’re all ridiculously multiples for pretty high returns for pretty high ROICs. It’s because everybody’s been conditioned for the last decade that you don’t want to touch any of those cyclicals, because there’s no floor and I’ve said that before, too.
Jake: Yeah.
Tobias: But at some point, they’re going to start running like software. They’re going to look like software, because they’re going to make so much money. I don’t know, if it’s necessarily– [crosstalk]
Bill: Just the matter whether or not people trust it.
Tobias: If it persists, it doesn’t matter whether you trust it or not. It’ll just take off.
Bill: Yeah, they’re going to get hit with labor inflation and to the extent that you’re a gold miner, your steel is going to go through the roof, and your maintenance CapEx is going to have to increase. It’s not all gravy, but yeah, I don’t disagree.
Tobias: Their margins– [crosstalk] That’s right. I agree with that.
Jake: Isn’t it annoying? Margins never stay where you are.
Tobias: And then they start doing silly things.
Jake: Yeah.
Bill: Well, they are shitty businesses. But I’ll tell you like, a lot of them don’t have shareholder bases that have any interest in expanding.
—
AMC Bought A Gold Mine
Tobias: Yeah, well, that’ll change once it all gets going. But did you see, AMC has bought itself a goldmine. Got to be the craziest thing.
Bill: I did see that.
Tobias: What are they doing?
Bill: I don’t know, man. I’m inclined to actually ask that CEO on my podcast to ask him that exact question. They have a shareholder base that reminds me very– [crosstalk]
Jake: What are you doing here? [laughs]
Bill: Yeah, well, I mean, he might have an answer. They have a shareholder base that reminds me a lot of MicroStrategy shareholder base. So, maybe that’s the game he’s playing.
Tobias: What’s the defining characteristic of the shareholder base?
Bill: Well, they’re on these– [crosstalk]
Tobias: It’s cultish.
Bill: Yeah. At least, a subset of them. I’m sure it’s not the institutional capital. But the retail apes or whatever, they’re the ones that are on Spaces bitching about the system all the time. I don’t know. I could see appealing to them through some gold hedge. I don’t know that a junior miner is the safest way to play it, but it’s probably the one with the most torque.
Jake: Yeah, I guess, you’re just giving the shareholders what they want.
Bill: I have no idea. That’s all I’m going to ask him.
Tobias: Hard.
Jake: [laughs] Yikes. All right.
Bill: It’s one thing if you’re in a Holdco or an investment company, I would see a scenario, like, I’d be like, “Okay, I guess, that makes sense. It’s an allocation decision.” But this guy made all his money in leisure and travel companies like, Royal Caribbean and Vail.
Tobias: So, why don’t go that direction? All that stuff is still pretty beaten up.
Bill: Well, I don’t know, the cruise is all beaten up.
Tobias: That’s a question for the pod.
Bill: Why a junior goldmine?
—
Jake: So, Toby to go back to your AAII sentiment. Does the ARKK inflow still factor into that in your mind at all as you’re messing around with this stuff?
Tobias: Well, I saw this morning, Baillie Gifford has seen net outflows. Another one of those, Lindsell Train has also seen net outflows. Yeah. Ark continuing to see people are still aggressively buying the dip out there in tech, I guess. It makes sense. If you believe in Cathie’s thesis, then that is just more cheap than it was before.
Bill: How do those stocks go down with Ark flowing in? I guess it’s just not a big enough proportion of that base. But man, that would terrify me if I was long those stocks. What happens if her bid goes away? Holy shit, that’s a snake. Go away. All right, sorry.
Jake: Yeah, I don’t know how that– Depending on the size of them, we’ve seen that in the past, where I think it was Janus that this happened a lot where some smaller stuff that they were buying just created its own illusion of prosperity.
Tobias: I think that’s happened on the way up.
Bill: All they said, I think European growth or European small, Chinese ADRs actually starting to look interesting. I would argue there’re some names in the hypergrowth SaaS that probably make a lot of sense. I wish I knew which ones. There’s definitely opportunity out there, but I don’t know, man. I get nervous when this political risk is on the table, because I think it’s real actual risk. But markets don’t usually top on that.
Tobias: Yeah. It’s very, very hard to say– [crosstalk]
Bill: This isn’t euphoria, right?
Tobias: Yeah.
Bill: I think we can agree on that.
Jake: No. It’s hard to tell if it’s– Well, always that Fear or Greed has to be relative to also what’s happening in the world.
Tobias: Yeah.
Jake: There’s fear, but you’re still under estimating how bad it can get as a group, then, well, you’re missing the boat still, I think.
Bill: Yeah, and the other thing is melt up and what inning are we in, that was closer to euphoria than anything. On the back end of euphoria cracking, you don’t still need euphoria. I don’t think despair is out there by any stretch. So, that’s very interesting.
—
Tobias: On that AAII Index, we’re not even bearish yet. We’re not even neutral yet. We’re still bullish. That’s funny, because I guess, the Fear & Greed indicator is much more– like that’s a daily bid and the chart is a little bit old, the one that I was talking about then. That is sub-20. It’s been sub-20, which is traditionally, it hasn’t been sub-20 much over the last decade since that data starts. That’s pretty bearish for the Fear & Greed indicator.
But if you look at that 70s run, it’ll just be the inverse of what we’ve seen for the last decade. We’ve just been mostly bearish and every now and again, it’ll be flicking into bullish. That actually makes sense to me that it would look that way.
Bill: Yeah, I think maybe. If I wanted to argue the other side, I’d say, even Roku bulls are saying, I think it’ll be higher, but you can’t buy it yet. That to me seem as bottomy. There’re a lot of things that I think people say you can’t touch, but they are pretty good businesses that with a long enough time horizon, I think probably make a lot of sense. But I don’t know, man. The thing about those growth stocks and we’ve said this in the past is, the NIFTY 50 may have outperformed from cycle to cycle but year five into holding that, you better really believe.
Tobias: Oh, you got 85% or something at that point.
Bill: Yeah, because every single person’s going to ask you about margin structure, and how do you know that it’s on the comp and do you actually believe this? Yeah, I think a lot of these stocks are in this pocket, where a lot of the growth guys are trading, accelerating, decelerating growth, and the value guys aren’t anywhere near touching them. So, who’s left to buy? That said, maybe this is a bottom and I’m a contra, wouldn’t it shock me. I’ve been wrong for a year.
—
Tobias: I tend to agree with that. I think that some of those things getting interesting like those, starting to look interesting. They’re not yet where I would buy them. I think that there’s some of that stuff is going to come in. If it comes in, I like some of it. What you guys think about– Do you think that this is a stagflationary environment? Is that what we’re going into this?
Bill: 100%
Jake: [laughs]
Bill: A 100%
Jake: What’s the thesis on that?
Bill: Commodities in supply chains are fucked.
Jake: All right.
Bill: How do you grow?
Tobias: What’s the definition of stagflation? It’s wages and salaries just don’t keep up with CPI without– keep up with inflation.
Jake: I think it’s inflation plus recession.
Tobias: Inflation plus recession. Yeah.
Jake: It’s economic recession plus– [crosstalk]
Bill: Well, of course, stagnant growth.
Jake: Okay.
Tobias: Inflation.
Jake: Well, anything that’s not growing they call a recession.
Bill: That said, the New York Fed, their consumer sentiment survey, people are expecting to spend 6% more and they’re expecting 6% inflation. Maybe there’s just no real growth. Household wealth is very good, the high-income earners are doing very well, balance sheets are in great shape.
Jake: It’s that marked to market wealth? Is that marked to unicorn private equity? [laughs]
Bill: Well, if you own real estate for instance, which is most people’s savings mechanism, and you locked in a 30-year fixed mortgage and inflation hits, you just made a shit ton of levered money. By the way, a lot of people refied out, can afford the fixed debt. So, now, they’re probably got even a more levered stuff on the real estate. I don’t know. I’m very confused right now.
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What Does Well During Stagflation?
Tobias: There’s a good write up stuck in the middle, Mr. Blonde. Don’t know much about Mr. Blonde. Sorry, I’ve only just seen this write up. I kind of enjoyed it. Did little discussion on– This is from his Substack or her Substack. 70s and most commonly cited as a stagflation market playbook. He’s done this little back test so to see what works through those periods of time. This is just in a style factor takeaway. Similar amount of time spent in stagflation mode 32% of the time between 1985 to 2019. Best sector neutral style factors for stagflation, a profitability. Growth, and momentum, and current value best to avoid high risk and deep value, which I was a little bit surprised by.
Bill: Deep values asset heavy on average, man. That’s what I’m saying.
Tobias: Yeah, that makes sense.
Bill: Well, hang on. Wait. I bet the theoretical portfolio that you and I have talked about in the past that you might implement. I bet those kinds of value names, I think, because they’re generally capital light. I think it make more sense.
Tobias: He makes a distinction here between deep value and current value. Have you ever heard that? I’m going to reveal how little I know here, but deep value and current value?
Bill: Dude, if you haven’t, I haven’t. [laughs]
Jake: Current value or deep value?
Tobias: Yeah, that’s the distinction. Current value and deep value. Not an expression I’ve heard of before, but anyway, I don’t know. I don’t know everything evidently about that stuff. So, just take it–
Jake: I could see deep value being passed value and I could see growth being more future value. I don’t know. But I don’t identify those terms either.
Tobias: Yeah. The strategy was long defensive factors, profitability, current value, dividend yield, short risk factors, beta size, leverage historically performs quite well and returns for growth over value improve after trading poorly during the reflation regime.
Jake: Another way to slice this would be, what was Buffett doing in the 70s?
Tobias: Well, I remember that, he– [crosstalk]
Bill: I have a follow up to this, by the way, once we’re done.
Tobias: He quotes that line. Well, maybe I’ve quoted it. He talks about gold– For all the effort that they put in gold does just as well as Berkshire did for that period. I forget the exact period now, but that was 70s.
Jake: Yeah, it was something like 65 to 82 or something like that.
Tobias: And he makes the point in there. When somebody else has made the point in the comments as well that and this might be the deep value issue that you have to– If you’re reinvesting in heavy assets the whole way through, the heavy assets are more expensive each time you get back to buy– [crosstalk]
Bill: That’s what I said.
Tobias: Yeah.
Jake: No, no. Someone smart said that.
Tobias: He did, he did.
Jake: [laughs]
Tobias: I’m not disputing that.
Bill: I’m just kidding.
Tobias: Someone got in early in the comments, and so, I just want to give them a shoutout. Now, I can’t remember the name, but might have been Wabuffo. Sorry. Whatever, it was.
Jake: Well, it was William Brewster. I saw it.
Tobias: [laughs]
Bill: Well, I’m not looking at comments anymore-
Tobias: William Brewman.
Bill: -because my ADD ruined my ability to participate on this show and look in the comments. So, I’ve amended my procedure. I think that the demonstration of–
Tobias: We’ve lost, Bill. Now, he is back.
Bill: Really?
Jake: Yeah, all right.
Tobias: [crosstalk] Demonstration. Yeah, you are.
—
Bill: Yeah, no. What we did as the West to Russia makes me wonder if gold becomes a more desired asset for sovereigns.
Jake: Another argument for that would also be and I’m way out of my depth here talking about this kind of stuff, but if the demand for dollars, let’s say that oil is priced in something other than dollars for some markets, and there’s less transactions happening in dollars, because people don’t want to be sanctioned, gold is a next likely alternative of something that they might want to use as a currency base instead.
Bill: Yeah.
Tobias: Macro stuff.
Jake: Macro stuff.
Tobias: Way over my skis.
Jake: [laughs]
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Costco Is An Inflation Protected Treasury Return
Bill: One thing that I wanted to say is, I think that Charlie’s answer and why I think things like Costco trade where they do is Charlie’s answer probably be just don’t Costco. In any scenario, it’s going to deliver more value to its customers, let’s say, inflation runs through. Maybe it gives them the chance to raise the fee of the membership a little bit more than inflation. They’re saving people money. So, on a free cash flow yield basis, maybe Costco doesn’t make sense from a certainty of actual return of closer to a real 2% or whatever out of the gate that grows, Costco makes sense. That’s where–
Jake: Costco is like a real tip.
Bill: Yeah.
Jake: It’s an inflation protected treasury return.
Bill: Yeah.
Jake: Hypothesis.
Tobias: JT, you got some veggies?
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The Surrender Experiment
Jake: Always. This one is titled “The Surrender Experiment,” and it was a book recommendation from a friend of the show, Rishi, who after we talked about this. Anything smart that I say in the next two minutes is basically I’m just stealing whatever Rishi said. [laughs] There’s this book called The Surrender Experiment by this guy named Michael A. Singer.
If you google him, it’ll come up with pictures of him with Tony Robbins and Oprah sitting on the couch, hanging out. But he wrote this book called The Surrender Experiment and its basically kind of an autobiography. But it talks about his life, and the increasingly just surrendering to the flow of the universe of where he’s supposed to be, what he’s supposed to be working on, and not trying to control things as much as– [crosstalk]
Tobias: Very Taoist.
Jake: It is very Taoist. Yeah. So, yeah, please feel free to chime in with extra goodies on this you guys as we work through it. But just a little of a backstory of this guy. It’s the 1970s and he’s kind of this hippie guy in his early 20s, and he is living in Florida, and he’s a grad school student studying ECON, working on his Master’s. He has a spiritual awakening. He ends up going into seclusion and basically, meditating and doing yoga all the time, multiple sessions a day, and just wanting to be alone with his thoughts. He’s still going to classes, and teaching actually, and finishing that, but he gets a little bit of money, I think it was an inheritance, and he buys a little bit of land in this forest area in Florida, which I didn’t realize there were forest, but I don’t know. Bill, you could probably tell me more about how dumb I am for thinking that. I thought– [crosstalk]
Tobias: [crosstalk] or something like that? Does it count it as a forest?
Jake: Well, I don’t know. Yeah, that’s isn’t that swamp? I’m not sure where the– [crosstalk]
Bill: I think they were forests.
Jake: All right, maybe it’s more in the north side.
Bill: In the middle. No one goes the middle of the state.
Jake: Yeah.
Tobias: Joe’s had some timber, didn’t? That was one of the–
Jake: Oh, yeah? Okay.
Tobias: I think it was It started out as a timber miner or something like that– timber grower. [chuckles] How does that all work?
Jake: He gets this little plot of land and him and a friend build a house on it. People like this little house that he builds, and they ask if they might be able to build a house for them on their little piece of land. He’s like, “Okay.” Before he knows that he’s got this little housing company that’s gone building houses, he’s living on the cheapest life that you can imagine basically, just meditating all day, and eating a really simple diet, and there’s no extravagance. Any of the extra money that comes in, it gathers up and then as a parcel of land that’s adjacent to his becomes available, he just buys it. Then he ends up actually building this, it’s called the, oh shoot, temple of the universe and it’s basically just a totally open nondenominational place to come and be one with the universe whatever your creed or religion.
Then, let’s fast forward a little bit. It’s 1978 and he’s wandering into a RadioShack and he happens to see this computer there. He’s just intrigued by it, he buys it, and takes it home, and starts playing around with it. He gets into coding and he builds for himself for that little housing company like an accounting software, basically, and tells the RadioShack manager about it when he’s back in there. The manager asked, “I have people coming all the time and asking. Can I send them to you to build stuff for them like software.” He’s like, “Oh, okay.” He does that and eventually, someone from a doctor’s office gets a hold of him, and he builds this software package for them that turns into, it’s basically practice management billing, all that stuff for doctors’ offices. It actually totally takes off and it becomes this company called the Medical Manager company, and it goes public. Eventually, in 2000, WebMD purchases it for like $5 billion.
Tobias: [laughs]
Jake: All along this path, each story is about the universe for him, someone showing up in his life and him recognizing, “Oh, this is the person that I needed for sort of unlock the next thing. I don’t know what’s coming exactly, but I’m surrendering to whatever it is that I’m just going to do my best with what’s given to me.” Fast forward a little bit. In 2003, the FBI raids all of their offices and takes all the hard drives every piece of paper out of the office, just totally seizes everything. They charged all of the top management in this company with securities fraud. There’s this trial that happens, there’re millions of documents and emails to sort through in discovery. Singer says that, it was one of the VPs they found out was embezzling and getting kickbacks as part of the sales process. When they got busted, they basically said that they were told to do that by the management, and flipped to the FBI, and tried to basically send everyone above him up river. Toby, you had a question?
Tobias: No, that’s bad news.
Jake: Yeah. Well, then it gets really hard to defend yourself, because this person clearly did these things, but how do you establish whether it was management told them to do it or not. It ends up costing to defend all of this top management like $190 million in legal fees.
Tobias: Oh.
Jake: It drags out until finally 2010, this is seven years after indictment. 2010, they finally are acquitted, and they drop all the charges, and basically, the DOJ had been totally pushing too hard for this, I think trying to make a name for yourself or something, one of the people there. Again, another thing of just having to surrender and basically, he felt the constitution that was set up 200 years ago at the time or whatever, what had been the head protected him in this case. In general, the whole thing is about surrendering to the universe and to life’s flows. He says that, “Surrender taught me to willingly participate in life’s dance with a quiet mind and an open heart.” You think about this, like, quieting the mind, suppressing and overcoming the ego, which is a big part of what he’s working on. Then surrendering to really like face reality, whatever it is.
One of the things that’s really admirable about what I feel like what how he went about life was that, when he was working on something that came across his desk, he said like that he would just throw himself into it 100% and focus on it. It reminds me of Charlie Munger’s, like, he says that the best source of new business is doing the work on your desk. He felt that the universe had given him an opportunity to work on this project and it was up to him to do the best job that he could with it, instead of trying to have too much attachment to even like, “Oh, why is it this way or why is it that way?” Letting some of those just recognizing those vicissitudes of life are going to happen and you have to just roll with them, recognize reality, do the best that you can. But surrender that you don’t have control over everything.
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The Importance Of Surrendering In Investing
Jake: I think some of the investment takeaways from that are obvious that we don’t have control over a lot of things, we don’t have control over all this macro stuff that we’ve been talking about for the last half hour. We have to surrender to that a little bit and just recognize reality, put our egos away of thinking that we could maybe even untangle some of the stuff, because it’s just so hard.
Tobias: It’s so true.
Jake: I thought it was maybe a good thing to talk about today when the world is especially noisy with all the things that are happening, and putting some of our own egos away, and just being reminded that sometimes, we have to surrender a little bit to follow our best process, do the work on our desk, do the best that we can, and let the chips fall where they may.
Tobias: I like it. I like the approach. I think one of the things that we’ve been talking about is how good value is usually at leading the way. if you’re finding something that’s bombed out and undervalued, it’s probably a good time to be spending some time in the sector. Then, two or three years, sometimes, they come rolling back.
Jake: You’re really smart like we’re prescient about something [crosstalk] going to change.
Tobias: Yeah, like you’re good macro investor just by being a value guy looking at stuff that’s– The only reason you’re there is because it’s undervalued. Not because you’ve got any particular view about the future. It’s just that seems to be the way that the cycle works. When the capital drains away from something, that’s a good time to go and look at it. Then as the capital comes back in you, you’re a vendor and you’re moving on to the next thing.
Jake: Yeah, I think there’s a lot of truth to that.
Bill: I’d like to know, I guess, historically, it seems to me that quality is the place to be in the beginning of a downturn and values what you want to buy on the backend. I don’t know. Quality in Poland, I think right now is probably a pretty good idea, because if Poland gets attacked, it’s not going to matter what stocks you own. I don’t know. The only thing I don’t like about this attitude is, I think some people take it too far and they’re like just surrender. Maybe I’m just talking about my own personal life and what people around me tell me. But it seems like a little too pacifist for my liking.
Tobias: [laughs]
Jake: Yeah, I do. I struggle with that a little bit, too. Because there’s this narrative, often, I think that gets assigned of grinding it out, and grab the bull by the horns, and seize the day, and all these different cliches that we would probably all think would be precursors of success. But I don’t know. I think that can also, maybe balance is the answer always and finding that middle path.
Tobias: I think you’re going to do well, when you have a particular interest in something. You have more interest in something than somebody else does. Your relative interest is high, because that allows you to do it more and for longer.
Jake: Even when it sucks.
The Bus Ticket Collector Phenomenon
Tobias: Yeah, you can push through. The bit that we skidded over there is the part where he said, “This guy owns a house out in the middle of nowhere, and he goes and buys a computer, and then teaches himself the code, and then codes up that thing.”
That’s a pretty big leap to have done that and that requires some intense study, intense concentration, focus for an extended period of time to teach yourself how to code and that all business, all coding too, and then to turn that into some software package that functions reasonably well. That’s quite a big leap. He had that advantage. When I hear it, that’s the way that I interpret it. Your interest is directed somewhere and you keep on working on that, whether you ultimately make money out of it.
Paul Graham calls it “the bus ticket collector phenomenon,” where there are guys out there collecting bus tickets and they do it because they’re interested. They’re not trying to make money at it. That’s the, the analogy that he gives. But there are lots of other advantages of that. I feel a bit bad. I’ve been shitting on NFTs here for a little while, but I do think that NFTs will have a great deal of utility at some point. I’m just laughing at the spending large amounts of money on the JPEGs. But it’s entirely possible someone digs into NFTs, they’ll find some use case for it, and it’ll take off and be huge. So, that’s the way I interpret it.
Jake: Yeah, I think that is not to be missed that hard work. It’s not surrender and then go sit on the couch and watch Netflix. I don’t think what was happening there. I think his isolation and insolation is probably led to a lot of success because it allowed him to have that extreme focus on what he was working on.
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Opportunities In Chinese Stocks
Tobias: Ignore the FOMO. This is a probably a good segue. The area that’s most bombed out at the moment or the probably the area that’s looking the most scary is Chinese tech, particularly, ADRs in the US. Literally, where there are American Depository Receipts.
Jake: ADR.
Tobias: Did the Chinese listings in America. So, let’s talk about Alibaba.
Jake: I thought those were the Armenian deposit receipts. [laughs]
Tobias: I don’t think that the Alibaba thesis has changed at all. I think it’s still a multi-bagger or it’s a zero. You just have to come up with your–
Jake: Position size for that.
Tobias: Yeah, I think so. Have you looked at any the Chinese tech? What do you think?
Jake: I mean, just breathtaking price drops in the last, even this month. If you go digging through, like, I was looking at some ETFs earlier and a lot of times they’re quoted– They’ll quote statistics that are summary statistics for the underlying with an ETF. Even if their valuations and they’re from even the end of February, you have to do some math to adjust them, because they’ve been so bombed and even the last two weeks. Yeah, I think there’s a lot of interesting things there. I’m not exactly sure what the right answer is, but I think that should probably be digging around at least if you’re interested in that thing.
Tobias: Because we’ve discussed this previously, where you said it was an ADR issue rather than a Chinese tech issue. Is that still the case?
Jake: Well, here’s my layman’s understanding and I’m probably, again, way over my skis. There’s this accounting rule that the US has now, where I think it’s a three-year window, maybe two, if some new legislation comes through that where Chinese companies have to show their audited books for basically disclosure to American investors.
Chinese don’t want to do that, Americans want them to do that, so, the question would be, then, well, what happens– America’s saying, “If you don’t do it, then we’re going to delist you.” What happens if you get delisted? The ADR is the one that’s closest probably to the US version. Then of course, now, you can get into the VIE structures and a lot of grey area there as to what rights do you actually have, what do you actually own? People go round and round with that.
Bill: Just assume zero.
Jake: Okay. I guess, you can assume zero.
Bill: Look at Russia. The idea that these are zeros, I think rests on some geopolitical assumption. If there’s conflict, you don’t own anything. They’re just going to tell you, fuck you. Like we did to Russia.
Converting Chinese ADR’s To Hong Kong
Jake: Sure. Sanctions that then they say, well, writing those to zero and we’re freezing at first, and then we’re basically writing it to zero. So, then you have the question of which I think my understanding is that those ADRs can be converted into the Hong Kong exchange shares, which then now, you’re out of the problem of the American Regulatory Environment. Then once you’re there, there’s supposedly some connection between Mainland China and Hong Kong, HK connect I think it’s called and then that is supposed to allow interoperability between those two exchanges much more, and then a deeper pool of potential investors.
I guess, the long answer is, who really knows exactly and it is fraught with that risk that Bill just mentioned that you could just be frozen and turned into a zero. So, I guess the question you have to ask yourself is, how much of your portfolio would you be willing to take a zero on and you’re okay with that? Then trying to back into what do you think the probability of that zero is multiplied by if it doesn’t happen, what do you think the upside is and then try to Kelly bet yourself somewhere into a reasonable idea.
Tobias: Yeah, I think that you’ll go cross eyed trying to figure out the likelihood of either outcome. I think you just got a–
Jake: Coin flip. [laughs]
Tobias: Yeah, I think you just got to assume it’s zero and it’s how much you can afford to lose, which is like it’s like option sizing. Any option that expires out of the money, you could size it like that. But then some people have pointed out in the comments and I feel this way a little bit, too. It is a lot to be taking on that risk at the moment when there are plenty of Western countries developed nations that have good rules of law with cheap stuff floating around and the US is one of them.
Jake: I don’t think they’re that cheap, though, relative to some of these Chinese companies.
Tobias: Yeah, that’s true.
Jake: But it is that problem of the Bayesian updated stack of Swiss cheese, where you have to get the pencil through every single– There has to be the hole for every single one of these and they’re all probabilities that start stacking up on top of each other. So, it might be tough.
Tobias: Yes, I still think it’s– [crosstalk]
Bill: The thing about– if it is a true assumption about it being geopolitical risk that people are worried about, something that I’ve heard that I need to put data to. But it’s what percentage of commodities right now are owned by China. If we really get into some geopolitical conflict, I just don’t think your US stocks are safe either. I really don’t. Now, if China just unilaterally for some reason says, “Well, US holders can’t own these ADRs,” then I guess that’s a different scenario. But I don’t see what’s in their incentives to do that. I don’t know.
Recent Sanctions Advantage China
Jake: Well, imagine this scenario where we keep all these sanctions on Russia and then they still have stuff to sell and output, but they don’t have as many buyers for it. Except, maybe China wants to be a buyer and now, China is getting all this stuff at a lower than market price. All these commodities to run their economy had much lower market prices than all the rest of the competition has to pay for non-sanction goods. We just advantaged China in a major way against and we’re supposed to be competing on a global platform with them. This stuff is so interconnected. I think it’s really hard not to cut your nose off to spite your face in this.
Tobias: Well, I saw that India has agreed or was talking about buying some oil from Russia, because it’s so deeply discounted.
Bill: China will, too. I mean, they have to. It would be stupid for them not to.
Tobias: Yeah.
Jake: Tough game.
Tobias: Very, very complicated.
Jake: [laughs] Hopefully we just reveal [crosstalk].
—
Bill: [crosstalk] Well, so, McMurtrie told me to read The Price of Peace, and I’ve been working on it this morning, and the part that I’m at is after World War I, how people carved up the interests of nations. I don’t know. I think it’d be interesting to see if we’re in a similar period looking back 10 years. I have no idea. But as I said, I’m not as optimistic as usual.
Tobias: This feels more cold war-ish to me just that there’s not going to be anybody who’s dictating terms to the other. It’s both sides are just going to become isolated from the other. There’ll be this schism in the world. I think what we’re fighting about now is where that line is going to be. That’s what the war in Ukraine is about. Whether that we know which way the dividing line is between the East and the West, and then they’ll be balkanized, and they won’t trade with each other much or we won’t know about it.
In that scenario, it actually makes me want to be more of a– I want to be more localized in the West like, I know that I’m going to get my money back in the West. When you say, they’re not safe, you just mean the valuations could get crushed here. That’s absolutely right. I expect that that’s probably what’s going to happen. But I’m naturally a bearish guy, but I think we’re going to see a real smash up somewhere through here at some point. That’ll be absolutely chaotic. But good businesses will still be good businesses. They’ll grow over time.
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How To Get Long Black Markets
Jake: I was just thinking like, “How would you get long black markets?” Is that a Bitcoin argument today?
Bill: I don’t know. The dollar is used for a lot of drugs. Yeah, I don’t know. I think what Charlie would maybe say is that, the pain of China and the US splitting into that fraction is too great. But it may happen. I don’t know. Like China, what did they say yesterday? They said that they propose that the US and China both stopped providing weapons to people in Russia and Ukraine. I don’t know. I think that’s a decent amount of why these ADRs are trading off, because I think there are risks that people perceive to be remote and you got to adjust your probabilities up.
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Charles Munger – Passive Billionaire
Jake: Speaking of Charlie, has anybody figured out the price that would trigger a margin call for Baba.
Tobias: Well, I saw what Buffett has said. They’ve got to dine out on the equity at the moment– on the net equity. So, on the net position, it’s a doughnut.
Jake: Okay.
Tobias: Do you mean, is there a price where it gets called?
Jake: Yeah. Well, is there a price for the shoulder tap?
Tobias: I don’t know.
Jake: Better hope that infamous Australian contract finally comes through, so they get some cash flow to pay off the margin loan.
Tobias: [laughs]
Jake: Oh, boy.
Tobias: Isn’t that duh?
Jake: I don’t know.
Tobias: Is it that bad?
Jake: I don’t know why Baba’s off a fair amount. I don’t know exactly where that trigger would be.
Tobias: Charlie’s always swung for the fences. Buffett’s the steady hand on the tiller there. Buffett just no zeros, no doughnuts.
Jake: A friend told me the other day and I thought this was pretty smart that Munger might be the best investor of all time and that he basically was a passive holder to get to a billionaire. Who’s been a passive anything and made a billion dollars?
Tobias: To be fair, he was vice chairman.
Jake: Okay.
Tobias: He’s on the board. [laughs]
Jake: [laughs] Okay. Don’t ruin my story with these little trivia facts, Toby.
Tobias: Billy, you’re rolling your eyes at that, too. I think that’s fair, isn’t it?
Bill: Well, I think Charlie is an incredible thinker. He had a heck of a track record for himself. I think that Charlie’s best investment was to find a truly talented savant that was also a workaholic and let that guy go.
Tobias: No doubt.
Jake: Said another way. A passive investor that rode something to billion dollars.
Tobias: There’s passive in this passive. He was actually sitting on the board. They’re like, “If I’ve to occupy the vice chairmanship of a public company for whatever it is 50 years, 70 years. I’ll do it. But I won’t regard it as passive.” But yes, the point is right. Yeah, he is–
Jake: He’s good.
Tobias: He did the right thing there.
Bill: I don’t think this is speculation. I think this is factual. When they were going through Solomon, I think Charlie probably provided very, very valuable advice on strategic decisions that Buffett should make. I think he was probably an incredible sounding board.
Tobias: As a lawyer? Will they give advice?
Bill: I think is everything. I think he probably– [crosstalk]
Jake: [crosstalk] the whole trip, it was good advice.
Bill: Yeah, game theory, legal, all of it. I think he added his value there, but day-to-day– That’s how I’ve always said. I’d rather be Charlie than Buffett. Charlie lives a pretty good life.
Jake: Found Li Lu, too, and rode that for quite a– I’m not sure how much he has still with Li Lu. But that’s got to be half his net worth maybe?
Tobias: How much risk is there really in this Baba position? Because I still think I’ve said this a few times, it’s a genuine risk for zero.
Bill: It doesn’t matter. It’s in Daily Journal. Who honestly cares?
Tobias: Daily Journal share holds might feel strongly about it.
Jake: [crosstalk] opinion. [laughs]
Bill: But here’s my beef with– If you held Daily Journal, and you have a problem with this, then I think you had the opportunity to get out when Charlie bought Baba. I don’t think it’s a fair criticism to say, “Well, he’s going out and doing things that Charlie wants to do.” It has never been a secret that that is Charlie’s entity and you’re along for the ride. It’s never been a secret that it’s a bunch of old guys running that company. So, it’s on you in my opinion.
Tobias: This is a big left turn though to put that much money into a Chinese idea, he’s gone a little bit off right there, hasn’t he?
Bill: No way, man. Think about the question that I asked him. When I asked him, if people should be studying quality companies and he looked at me and he’s like, “Well, I own the best Chinese companies and you own none. So, I’m right. You’ll realize it.” Well, suck on this pain, Charlie.
Jake: [laughs]
Bill: Please don’t clip that and put that as our thing.
Jake: Yeah, that’s it. [crosstalk]
Bill: I don’t want Charlie to have pain. But that’s what I’m saying. He’s never hidden his affection for the Chinese great companies ever. This bet isn’t working right now.
Tobias: Yeah. It may workout. Could you see Buffett do something like this? I doubt it.
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Buffett’s Most Interesting Purchases
Bill: Buffett said that he and Charlie would bet material portions of their net worth on a coin flip with the right odds. If you actually listened to that statement, that coin flip ends up a zero, roughly 50% of the time, unless it’s a weighted coin.
Jake: [unintelligible [00:54:39] out. [laughs]
Bill: Yeah. So, there’s a lot of scenarios, where Buffett looks wrong, too.
Jake: Sure. I mean, that’s the whole insurance game.
Tobias: Yeah, I was going to say, it’s at least–
Jake: [crosstalk] willing to lose-
Tobias: That was how I interpret it, too.
Jake: -$10 billion from an LA earthquake tomorrow. That’s fine.
Tobias: Yeah, I don’t think Buffett would do it.
Jake: Well, he’s done different. He bought a lot of Amex at one point, he bought a lot of GEICO when it was baby potentially– Both of those had potential zeros, maybe. I guess, he assessed that it wasn’t enough chance of that.
Tobias: I think Amex was a potential zero.
Bill: Also, with GEICO, he replaced management. He knew the new guy coming in. I think an error that I made when I studied Buffett when I was younger is, I didn’t realize the level of control that he insisted on when he got into really hairy situations. Maybe Amex is different, but he was never just some passive guy buying into total junk, I don’t think.
Tobias: Yeah, I don’t know what he did with the net-net. So, I don’t know if it was– That’s probably right. He was probably a liquidator in most of those.
Jake: Oh, yeah. Dempster Mills going in, I mean, my favorite story of that is him in the warehouse, and he draws a line on the wall, and says, “If you don’t get the inventory below this line by this time, you’re all fired.”
Tobias: [laughs] That’s not very cuddly grandpa of him?
Jake: That’s not cuddly grandpa. By the end of that, the whole town hated him. So, I think he was like, “I don’t really want to do that anymore. That doesn’t feel good.”
Bill: Yeah, the part of the story that’s not told when they tell that part of the story is, not only did the town hate him, but he was also rich. I think knowing who he is, he would do it to get rich. But I don’t think he’d do it once he’s rich. I don’t know who he is, by the way, for those that misinterpret my statement. It was all based on the snowball and study.
Tobias: Amex wasn’t a limited liability when it was listed in the 60s? Shareholders could be exposed to unlimited losses. Is that true when he bought it?
Bill: That’s my understanding, but I could be wrong.
Tobias: It’s like the Lloyds. You remember that when Lloyds, famously the partners in Lloyds or whatever they call are liable down to their shirt buttons and they were looking at like they are going to take their first real loss in a long time, which is when they did the big reinsurance deal with Buffett to cover them from that scenario. But even Buffett, he only underwrites a portion of it. If it gets bigger than that, it’s unlimited beyond that. That would have made me nervous. What do they call them? The names of Lloyds.
Jake: Yeah.
Tobias: I didn’t know that about Amex. That would definitely have changed, because that was financial company with a big fraud going on as a tough to plunge into.
Jake: That surprises me that why would you run a company if you can get limited liability?
Tobias: Yeah.
Bill: I don’t know. Back in the day, limited liability wasn’t as commonly accepted. I don’t know, but I wouldn’t be shocked if there were a lot of those. I think the world would be better off if there were more of those.
Tobias: Partnerships.
Jake: Yeah, there’s the argument of Goldman being run that way was probably run less aggressively.
Tobias: But they are not public. They can’t be public as partnerships. They all converted, so they could go public. I don’t know about Amex, though. I’ve never heard that before. There’s been a list of the some– [crosstalk]
Bill: Something beautiful about converting to go public and then incentivizing more risk taking. That’s a nice way to [crosstalk] the public.
Jake: Yeah.
Tobias: Yeah.
Jake: It’s a bag holder recipe right there, isn’t it?
Tobias: Yeah, for sure.
Jake: Especially, on something like a bank, where you can take money today and give promises back. There’s lots of room for shenanigans there.
Tobias: Rudy Havenstein always points out that Goldman Sachs is a levered hedge fund until they took the bank holding company safe harbor in 2008, and then as soon as they did [chuckles] back to leave a hedge fund.
Jake: Yeah, it’s hard not to leave a little sour taste in your mouth watching that episode, huh?
Tobias: There’s two that we haven’t talked about. BYD. I don’t know how BYD trades. Is that an ADR? I think he’s bought the Hong Kong shares of that, hasn’t he?
Jake: I believe so.
Tobias: And it was also ChinaPetro. I remember that. The ticker is like CNOOC or something like that. He crushed on that one. That’s a very unBuffett like investment, too.
Jake: Yeah, he did pretty well on that one.
Tobias: I think it was a six bagger.
Bill: His OXY purchase is so interesting. Didn’t get long–? Was it wrangled or was it a Freeport Matt Moran coming out of the recession or out of 2020?
Tobias: They bought Barrick. They held gold for like– But it was only like it was one filing. It was a very small position that tipped up the next time around [crosstalk] one of the boys.
Jake: [laughs]
Bill: I was just thinking, like, when he bought into OXY, I was thinking like inflation, it doesn’t help insurance flows as the cost of replacement goes up. OXY is a pretty nice hedge to that risk.
Jake: Yeah. Raising rates should help insurance as book value returns on equity. So, it’s kind of a mixed bag.
Bill: I don’t know that rates necessary– This is crazy to say, but I don’t know that rates necessarily go up. I see a lot of people are like, “What’s the Fed going to do?” The Fed can’t print a supply chain. So, I don’t know that the Fed can do anything.
Tobias: Keep rates low. That’s all they can do. That’s what they are going to do.
Bill: I think that’s ultimately what they have to do.
Tobias: So, you get the 10-year at 2% and you got inflation running at 6%, so, you’re just ripping up 4% on you. Oh, it’s running at 8%. Sorry. Ripping up 6% on your real purchasing power holding the 10-year. Don’t do– [crosstalk]
Bill: Yeah, the other side of it, the other side that that could imply is like this Lacy Hunt theory that years four through 10, maybe the 10-year looks like a really good bet. I don’t know. I’m freaking confused. So, any listener that can help me get unconfused, please hit me up.
Tobias: Me, too. That’s time, fellas.
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