VALUE: After Hours (S04 E38): No Panic, Value Investing in the 70s, 10-3 Treasury Inversion, Pace Layers

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In their latest episode of the VALUE: After Hours Podcast, Bill Brewster, Jake Taylor, and Tobias Carlisle discuss:

  • Value Investing In The 70s
  • No Panic But 2022 Daily Declines Only Exceeded By 2008 & 2002
  • Pick A Stock Or Credit To Lose The Most In The Next 12 Months
  • A Pace Layer Approach To Investing
  • 10-3 Treasury Inversion
  • How Do You Size Something That Could Go To Zero?
  • Bond Investors Are Panicking
  • Is Munger Wrong On Alibaba?
  • U.S Companies With Exposure To China
  • Musk Plans To Cut 75% Of Twitter Employees

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: We’re livestreaming.

Jake: And we’re live.

Tobias: Folks, it is Value: After Hours on its regularly scheduled time. I am Tobias Carlisle, joined as always by Bill Brewster and Jake Taylor. A few of us are playing hurt today but we’ll see how we go.

Jake: [laughs]

Bill: This guy looks better than he feels and he doesn’t look very good.

Jake: Oh, boy. [crosstalk] impacted.

Bill: I don’t actually feel that bad. Shoutout to marijuana, because if it was all booze, man, I’d be feeling real bad right now. Anyway, yes, it is a Tuesday and yes, I did rage on a Monday. Take your judgment elsewhere.

Jake: [laughs]

Tobias: I was doing Comcast due diligence. My buddy, he got one of those Sprinter vans. It’s decked out, it’s got massage chairs, and he was like, “Let’s get a driver, and let’s get six of the dads, and let’s go rage at Halloween Horror Nights.” So, since I’m interested in Comcast, I naturally said yes, because it’s part of work.

Tobias: Tax deductible.

Jake: Yeah, Universal Studios?

Bill: No doubt. I don’t need to deduct anything, because I didn’t even need to pay anything at the end all of this. I think I owe somebody for the ticket. But anyway, we get in, watch some Game of Thrones or House of the Dragon on the way up, had a gummy-

Jake: [laughs]

Bill: -had some High Noons. I don’t know, I felt bad about doing this. But the guy is the type of guy, he could sell– We skipped a lot of lines and we weren’t supposed to skip the lines. But he would just go up to people and he’d be like, “Look, it’s my birthday.” He had his kid’s birthday pin on and his kid’s name is Mav or whatever. So, he’s like, “It’s my birthday and Kevin told me that I could skip the line.” And this person looked at him on Velociraptor, which is an insane coaster. It’s fantastic. The guy’s like, “Kevin didn’t say that.” Oh, no, first he was like, “There’s no Kevin here.” And my buddy was like, “Yes, there is. The guy told me his name was Kevin and he told me to come here.”

Long story short, the guy lets us in. I don’t know how it happened. My buddy made up a name and then eventually got caught by this nice woman, Leah. Shoutout to Leah. She kicked us off the rides. [crosstalk]

Tobias: She’s listening.

Bill: At 5:30– She’s got to. It’s a good podcast. Some say the best in finance. Many are saying it. I don’t know.

Tobias: Many are saying it.

Jake: Many are saying it. [laughs]

Bill: Yeah. [chuckles]

Jake: Oh, boy.

Bill: Yeah, man. Anyway, so then we went to the Hard Rock, had some surf and turf, pounded some lobster, ate enough seafood to give myself gout, and then we went back for more rides. So, it was a rager. Got home at 3:00 AM on a Monday.

Tobias: Jesus.

Bill: I guess a Tuesday. And here I sit, because I love you all, but don’t expect anything smart out of me today.

Jake: [laughs] So, it really was just like the psychology studies, where they cut in front of the line at the copier, all they have to say is-

Tobias: Because.

Jake: -I need to make copies.

Bill: Dude, he calls it the power of suggestion. I’m sure he hasn’t invented it, but he just says it with such authority. This Harry Potter ride that we skipped the line, I felt so bad doing it, but I’ve never done anything like that before. And he just walked in the back of the ride. This girl, Leah, said that we couldn’t do it and he’s like, “Okay, you’re Leah, you’re the team lead?” She said, “Yes.” He goes, “Okay, good.” Walks around the back and he’s like, “Leah, the team lead, told me it’s my birthday and I can go in here.”

Tobias: [laughs]

Bill: Anyway, Leah was waiting for us at the end of that ride and that’s when we got shut down, deservedly so. But I rode the front of most of the coasters, had a fantastic time. We spent enough money, I don’t feel that bad about skipping some lines. Comcast made out pretty well. Like I said, somebody picked up dinner, somebody picked up the driver. I really won yesterday.

Tobias: Congrats.

Jake: You are playing with house money.

Bill: Yeah, I guess I got to pay it forward. So, eventually, I’ll lose.

Jake: There’s probably some eight-year-old at the end of that line who didn’t get to go on the ride, because you cut to the front and he got to– [crosstalk]

Bill: I almost feel bad for that kid.

Jake: [laughs] He had to learn that hard lesson.

Bill: I really do. I know, but his dad needs to be more of an alpha male. What can I tell you?

Jake: [laughs] You’re suggesting that society just breaks down at the seams with this– [crosstalk]

Bill: Anarchy, baby. Anarchy. I don’t like doing that stuff. It’s very not me. I was very uncomfortable, but it was also pretty fun to be able to do. So, anyway, I like Universal. Universal is good park. A lot of people around here that go into parks are saying that Disney is pricing themselves out of something, and SeaWorld comes up as a very reasonable alternative. Pull up through SeaWorld stock. It’s a three and a half x over the last five years. Bang. Imagine that.

Jake: Is that after a total crater or something and–? [crosstalk]

Bill: No, no, actually did fine during COVID. I think it’s after they– [crosstalk]

Jake: Blackfish.

Bill: Yes. I think that Shamu documentary was not kind to that entity.

Jake: [laughs]

Tobias: Poor Shamu.

Bill: Yeah.

Jake: Yeah. Buying then was blood on the streets, right?

Bill: Yeah. Well, I didn’t understand how good their coaster offering is. They have really good coasters. So, that’s where my birthday party is going to be. If you want to come to Bill’s 41st, I’ll be chilling at SeaWorld, ripping coasters.

Jake: Did they let you get in the tank with them when–?

Bill: I don’t care about the animals. I want to ride the– [crosstalk]

Tobias: Leah, the team lead, says that I’m allowed to get in the tank.

Jake: Yeah. [laughs]

Tobias: Oh, God– [crosstalk]

Jake: All right, mate. Go for it.

Bill: Yeah, that’s right. Yeah, Leah probably would want us to jump in the tank yesterday.

Tobias: Let me give some shoutouts to– We got Liege, Belgium, Gothenburg, Chapel Hill, Tbilisi, Mechelen, Belgium, Dubai, Madison Wisconsin, Turku, Finland, Valparaiso. All right. Jack Yorkshire, UK, Lisbon, Minneapolis.

Jake: Wow.

Tobias: Did I say Dubai? Norberg, Sweden, Glenview, Quebec. That’s a good spread.

Jake: That is a good spread.

Tobias: What’s your topic today, JT? What do you got on deck?

Jake: A little dramatic foreshadowing with my background here, but I’m going to be talking about this concept called pace layering.

Tobias: Cool.

Jake: How about you, TC? [crosstalk]

Bill: I needed a pace layer myself yesterday.

Jake: Yeah, you didn’t pace your layers. [laughs]

Bill: [sighs]

Tobias: I’ve just got a few topics just for conversation. PE ratio performance in the 70s. So, I’ve got quintile breakdown piece.

Jake: Strong– to buy strong?

Tobias: Well, it depends on what you paid.

Jake: Okay.

Tobias: We had a yield curve inversion. We just had just the tip of a yield curve inversion.

Jake: It’s happening. [laughs]

Tobias: One day, which is not the Cam Harvey. The Cam Harvey special, you need the whole quarter. You need the 90 days or something like that.

Jake: Oh, really?

Bill: What? 90 days?

Jake: I thought it was one and you’re in.

Tobias: No. I had a look at the paper. Unfortunately, it requires the whole 90 days. So, it didn’t qualify. And then, my definition of a bear came so close, didn’t quite get there, but I want to talk about that. Hope, H-O-P-E, and funky behavior in the VIX. So, I got a few.

Bill: Mm. Well, good, because I’m going to need to ride off you guys today.

Jake: [laughs] You’re going to be doing some layering yourself.

Bill: Yeah. I’m not– But 3 AM, I’m too old for that.

Jake: Yeah, that’s the real hangover is the lack of sleep.

Bill: Yeah.

10-3 Treasury Inversion

Tobias: Let me kick it off with– The yield curve inversion has typically– What the Cam Harvey paper, which has been very predictive of recessions, I think it’s had every– [crosstalk]

Jake: [crosstalk] never last five?

Tobias: No, I think it’s cool.

Jake: [laughs]

Tobias: I don’t think it’s got any false positives. Since he wrote the paper, it was like an 1986 paper or something like that, it’s including the COVID crash.

Jake: How did it know? What’s the conspiracy there?

Tobias: It picked the COVID crash. The idea is that the three-month treasury has to yield more than the 10-year treasury and has to do that for 90 days, and that’s his signal. So, Wednesday, last week, we inverted, but we only inverted very briefly for a day and we’re back out of inversion. So, that’s it. It doesn’t count, but if that happens, then there are a lot of other knock-on effects like the drawdown then becomes a drawdown or a recession, which means that potential drawdown is much deeper than it otherwise is. It’s just an interesting datapoint.

Jake: Is it still inverted right now?

Tobias: No, it uninverted almost immediately. Very close.

Jake: Just the tip of inversion.

Tobias: It’s that very strange shape. It’s that broken finger treasury yield curve is still there. It’s very close. It could go back into it at any point. Let me do– [crosstalk]

Jake: You know what yield curve isn’t inverted right now? Mortgage rates.

Tobias: It’s not– [crosstalk]

Bill: Yeah, where they at?

Tobias: Seven to two was the average last I saw.

Jake: Yeah.

Tobias: Those are Feddy effects.

Jake: The mortgage is too damn high.

Tobias: That’s amazing– [crosstalk]

Bill: It’s too damn expensive to move.

Tobias: It had a two-handle on it not that long ago. It’s crazy.

Bill: What’s crazy is people locked that in for 30 years.

Jake: Yeah.

Tobias: Yeah, you have to buy the house at some time.

Jake: Free money.

Bill: I guess. If you can afford the payment and you liked the house, who cares?

Tobias: Well, you just don’t have the optionality anymore.

Bill: That’s right. You got to like a house. It turns out it’s a long-lived asset.

Jake: [laughs] What’s the average holding those, like seven years or something?

Bill: Yeah. Well, the average person I think moves seven times, but you get a lot of moves when you’re young. A lot of renting moves, stuff like that.

Jake: Not anymore.

Bill: Then, you got to idiots like me. Well, yeah, they rent, but it’s not going to be cheap to rent. [crosstalk] people to die get those houses on the market.

Jake: Is that what it is?

Bill: I think that’s what Ivy Zelman says. I don’t know. I haven’t seen [unintelligible [00:10:50] though.

Value Investing In The 70s

Tobias: I’ve got also US stock market performance by PE ratio on the 70s. So, there’s a reasonable chance that we’re going to look something like the 70s with inflation and [crosstalk] high asset prices. [laughs] I’m sure they’re going to come back.

Jake: Okay.

Tobias: My nine-year-old updated her jeans to bell bottoms.

Jake: No.

Tobias: I was like, “Oh, God, we are going to [crosstalk], are we?”

Jake: Ah, polyester please. No.

Bill: That’d be sweet, man. Can disco come back?

Jake: I feel you would do well in that 70s outfit. It works for your style.

Bill: Not with this pair body type, no way.

Jake: Ah, you can hide it under a big billowy shirt. [laughs]

Bill: Bro, I need one of those– What do women were sometimes that sucks in their center? That’s what I need.

Jake: Yeah.

Tobias: This was Jeff Weniger, who’s– Sorry, Jeff. Wisdom Tree, head of equities. “US stock market performance by PE ratio in the 70s divided into five buckets. Most expensive PE ratio for 70s delivered a 25.8% performance over the full 10 years.” So, in 1969, there was a historic bear market began and that lasted until 1974. There was a crash, there was a little rally, and there was a second crash, 1973 and 1974 were the ones that broke a lot of hearts. And then, there was a pretty good rally after that, but they performed in rank order. So, the cheapest PE ratios delivered 213% over the full 10 years, but that was from really from 1974, because it was down in 1974. Then everything else, 199% from the second decile, 118% from the third, 97% from the fourth, and 25.8 from the most expensive. So, that would be quite a change from what we’ve seen over the last decade, where it was basically inverted. Kind of interesting. It’s my argument for deep value, but it’s also the ordinary experience of the full period. What do you guys think? Better companies, cheaper companies?

Bill: I don’t know. I’m not smart enough to figure this shit out. Yeah, I don’t know.

Jake: Well, the under– [crosstalk]

Bill: It should work. It should work unless this time it’s different. That’s what I think.

Tobias: [laughs] Yeah, me too.

Bill: [laughs] I don’t know.

Jake: Good point.

Bill: Yeah, you’re welcome.

Jake: I’m always leery of these type of analogs from time periods. There’s always something that’s different between each one that makes it hard to compare, but they rhyme.

Tobias: Yeah.

Jake: 70s, probably with maybe rising rates, high starting valuations-

Tobias: Inflation.

Jake: -inflation, cocktail, mixed all together. Yeah, it’s not the craziest thing I’ve ever heard to think that that might be the next decade.

Tobias: I think the reason that the 70s get brought up is because it was the last really bad decade that we had. 80s was a pretty good decade, 90s was a good decade, early 2000s pretty good decade, and the last, the 2010s have been a good decade.

Jake: You’re flat 2000 to 2010.

Tobias: On the market. But if you value, you are crushing.

Jake: Ah, okay. You’re only talking about value guys. Got it.

Tobias: Well, there were pockets of people who were doing quite well in 2000. I guess that was true in the 70s as well, but it’s mostly remembered as a decade of– When I think of the 70s, it’s like serial killers and-

Jake: [laughs]

Tobias: -lines for people filling up their cars for gas, like stagflation. Sounds pretty awful. Bell bottoms, the whole thing.

Jake: Yeah.

Bill: Shitty cars. The 60s had better cars.

Tobias: Yeah, there you go.

Jake: Yeah, just like really ugly color choices for everything too it seemed, like burnt orange, [laughs] brown.

Tobias: Yeah. There’s a little bit of that now. What’s up with that communist gray that they’re painting on all the cars, like matte gray color [crosstalk] like matte gray?

Jake: Oh, yeah, like cement, I think they all call it. I don’t know. Sometimes, that looks cool.

Tobias: [crosstalk] When I first saw that I thought that’s because there’s some supply chain issue and they haven’t been able to mix the actual– [crosstalk]

Jake: Oh, we don’t have any shiny paint anymore. [laughs]

Tobias: Whatever it is, communist gray is what I started calling it. You thought that was good? There was some– [crosstalk]

Bill: That’s matte’s a pain in the ass.

Jake: Really, why’s that?

Bill: Oh, it’s a pain in the ass to wash.

Tobias: I don’t think it’s actually matte. I think it looks matte. It looks awful, anyway.

Bill: A lot of people now are doing wraps. So, you see their funky paint colors, they’re just wraps instead.

Tobias: Yeah, I got a little bit of expel-

Bill: Yeah.

Tobias: -help on the rep front.

Jake: Yeah.

Bill: It’s not a low PE stock, but I bet it works.

Tobias: High return on invested capital.

Jake: Is that what it is? That’s how it got into your world?

No Panic But 2022 Daily Declines Only Exceeded By 2008 & 2002

Tobias: Yeah. It’s a good business, a good balance sheet. Since I added it, I don’t know where it is, but it’s done [unintelligible 00:16:13]. How about this one? The daily declines in the S&P 500 in 2022 have only been exceeded by 2008, which was the global financial crisis and 2002, which was the dotcom bubble. And yet, I don’t feel there’s a lot of panic around. I think that’s been reflected in the VIX as well. Is that anecdotal view fair? Do you think that nobody’s really panicked yet?

Bill: Yeah, I don’t think people are panicked. I’m sure there’s spots.

Jake: I think it seems like a relatively orderly liquidation, as one might call it.

Tobias: Orderly liquidation? Yeah. That’s what I think too.

Jake: Yeah, bad news if you’re dependent upon tail risk hedging type of insurance, because it just hasn’t really paid off in this slow burn. But Spitznagel was talking about this recently or I think he wrote an article about it. He likes to make that analogy to forests always, like forest fires and saying, “Now, the Fed is doing a controlled burn effectively and that can very easily get away from them as controlled burns sometimes do become uncontrolled.” If so, his tail risks offering will probably look pretty good then. So, who knows. He kind of has to talk his book but doesn’t mean he’s necessarily wrong about the control burns can get away from you.

Bill: It’s always something to worry about.

Bond Investors Are Panicking

Tobias: James Chapman says, “Bond guys are panicking.” I don’t know enough about the bond or I haven’t heard that.

Jake: Yeah. Just feel like you hear more market plumbing problems, especially in the bond world.

Tobias: There was a tweet today. I don’t know how I think it’s going to [crosstalk] but they said, “Would the JGBs have gone on bid the last few sessions, because the BOJ sits above all of the market participants taking everything out. So, there’s no record of any of the transactions going through,” which evidently that’s unusual. It’s a pretty deep market there.

Jake: Really? They’re buying every single one so there’s no pricing?

Tobias: They’re just buying above where the market sits.

Jake: That has to have some long-term consequence, doesn’t it?

Tobias: They’ve been doing it for a long time though.

Jake: I know.

Tobias: They’ve been messing with that market for a long time. They invented the term ‘quantitative easing’ and the US adopted that later.

Jake: Maybe that doesn’t translate the same.


Jake: This whole time, we’ve been lost in translation.

Tobias: Yeah, it’s a funny market. If you’ve had any VIX hedges, they just haven’t paid off.

Bill: Hmm.

Tobias: It sucks if you’ve done that much on your equities and your bonds and your vol hasn’t paid off.

Jake: Yeah, and you paid a bunch of insurance premium that never came in.

Tobias: That’s an argument maybe that– [crosstalk]

Bill: Yeah, but what were you hedging?

Jake: The market going down?

Bill: Should have bought puts or something.

Tobias: Yeah. Well, that’s right. [crosstalk]

Bill: That’s like when you start to get a little cued on a derivative thought and-

Tobias: True.

Bill: -you get screwed on the derivative, even though your thought was right.

Tobias: True.

Jake: Not enough convexity on the regular put product.

Tobias: That’s probably right. Yeah.

Bill: The puts probably got crushed by ball crush or something, so, you lost every which way that I don’t know.

Tobias: But you would have gone out on strike. You could have got paid on the strike.

Bill: Yeah, and if you had bought more in the money puts and had less– what is it, [unintelligible 00:20:17] whatever.

Tobias: That’s an argument for the Fed doing a pretty good job, isn’t it, that if it is a control burn and they have just managed to– They’ve sunk the market 20 something percent, which is a lot. And so far, there’s been no panic. I think that Jay Powell, he was saying that was the goal with the property market as well, with real estate, if they could–

Jake: Don’t think that one’s turned over yet, hasn’t It? Maybe a little bit, starting to.

Bill: It’s got to, actually.

Tobias: It’s down a little bit over the last three months, but it hasn’t made any noise yet.

Jake: I’m sure the hivemind can correct us on that if we’re talking out of our asses.

Bill: I think probably certain parts of– I don’t know.

Jake: Or, is it going to start, first Vegas, Pheonix-

Tobias: What goes first? Isn’t the most speculative parts or is it–? [crosstalk]

Jake: -Florida.

Bill: Dude, Boise. Boise had, I think, tertiary explosion– [crosstalk]

Jake: Denver.

Bill: Yeah, outside. I could see inside Denver being relatively strong through here. It’s a supply and demand issue. But yeah, tertiary markets– If people wanted to live there, it would have been developed already.


Jake: Yeah.

Bill: It’s not you’re getting the cream of the crop here.

Tobias: That’s manifest destiny– [crosstalk]

Bill: Yeah.

Tobias: If people were to live there, they’d be there already.

Bill: Yeah. It’s like when I had a teacher at Auburn that used to talk and people be like, “Oh, man, it’s so cheap down here.” And my teacher’d be like, “That’s because no one wants to live here. I don’t know what to tell you. It’s supply and demand.” Oh, man, man, stop being an ass.

Jake: [laughs] I vote that you do an entire show with your southern accent at one point.

Bill: Oh, man.

Jake: [laughs]

Bill: We had these guys above us. It would feel somebody got body slammed on the ceiling and then the entire apartment would shake, and then they’d be like, “Whoa.” I was like, “Oh, God, this–” [crosstalk]

Jake: They’re wrestling there or what?

Bill: Yeah, I don’t know. This one guy, every time he drank beer, he’d be like, “Whoa, just drank beer.”

Jake: [laughs]

Bill: I’d be like, “All right, cool, man. I don’t need to hear it every time.”

Jake: [laughs]

Bill: I think a lot of them too. Anyway. This is why people come here.

Jake: Yeah.

Bill: [laughs]

Tobias: There’s an acronym, H-O-P-E, which is the way that the data shows up– the lag in data. So, it’s housing goes first, and housing hasn’t done anything yet. This is for a recession. Housing goes first and then employment goes lost. And the chart that– [crosstalk]

Jake: What’s in between there, O and P?

Tobias: I forget.

Jake: [laughs]

Bill: Nice.

Tobias: [laughs] I don’t know.

Jake: This is hard-hitting stuff.

Tobias: I could guess.

Jake: Yeah, that’ll be even better. [laughs]

Tobias: I just remember it, because everybody was looking at employment like to point– So, it’s still a strong economy. There’s sort of employment. And Ensemble pointed out– They compared CPR jobs and the S&P 500. This is again, 1972 to 1975. Basically, fascinating to note, job growth was positive for the first year of the recession, while S&P 500 declined. When job growth went negative, stocks started a monster rally.

Bill: Yeah, we need people to lose their jobs. Lose your jobs and get a depression so stocks can go up. Please.

Tobias: That’s not a good look, but that’s the case. It seems to be the case.

Bill: Time to lose your jobs.

Jake: Is that that bad news, good news inversion thing that we’re dealing with, where–?

Tobias: I think it’s because the market– [crosstalk]

Jake: This is going to be terrible. Therefore, Fed’s going to do more. Therefore, I’m going to get rich as a stock investor.

Tobias: I don’t think it is. I think it’s because the market tends to be more forward. The market tends to react before-

Bill: Yeah, I think that’s right.

Tobias: -everything else happens. So, the market– [crosstalk]

Jake: Lag issue here.

Tobias: I don’t know why employment would be the last to go, because I’ve seen lots of big tech, anyway, has led lots of people.

Musk Plans To Cut 75% Of Twitter Employees

Tobias: Musk’s got a plan for Twitter as well, which is 75% of 7,500 employees. [crosstalk]

Bill: Yeah. I don’t know that that’s true. But I don’t know that it’s not. I certainly know that– [crosstalk]

Tobias: I think it’s just a negotiating position?

Bill: Well, I just– [crosstalk]

Tobias: Start with 75%?

Jake: You only cut 50%, then you’re a hero. [laughs]

Tobias: Yeah.

Bill: Well, and say that you think some people are not going to work there anymore. You might float that story to get them to leave naturally before you actually take over.

Jake: Yeah, [crosstalk] severance.

Bill: If you think there’s a bunch of weak people over there, maybe get them out. I don’t think that article claim that final staffing was going to be there. It’s like, “I know what it says, but I don’t know what it says” type thing, you dig?

Jake: Yeah. Those day in the life videos that you see from some of these tech company employees, boy, those are not looking very good right now, right?

Tobias: To be fair, she can’t really go and film what she actually does when she’s working. So, she’s filming around the work in a one-minute TikTok. I could put together a one-minute TikTok of me just scrolling Twitter all day long, and you’d be like, “This guy does nothing.”

Jake: [laughs] “Damn, this guy, he’s got it made.”

Bill: My day in the life yesterday would have been epic.

Jake: [laughs] Still the optics of it, not great. Not good, Bob.

Tobias: [laughs] The funny thing was that she works at Meta and she posted on a–

Jake: TikTok.

Tobias: – TikTok. Yeah.

Jake: Oops.

Bill: Uh-oh, [crosstalk] work at Meta for too much longer.

Tobias: Yeah, that’s the trap.

Bill: We have to call her up.

Tobias: I think she was a product manager. I don’t know what that means, but that sounds important.

Bill: I don’t know. It’s like banking terms– [crosstalk]

Tobias: Has the word ‘manager’ in it.

Jake: [laughs]

Bill: Yeah, but it might be very low, right? You might just manage a tiny little product.

Tobias: Manage yourself.

Bill: Yeah, that’s a lot of [unintelligible [00:26:15]

Tobias: Solid Prosperity says, “Housing never went in the TMT bubble period. I’m guessing that’s the dotcom bubble period, but employment did.” Actually, employment fell over. But yes, housing was a leading indicator. Was that a recession? Was that a Canada’s recession, 2000, 2002?

Jake: Yes.

Bill: Yeah, I don’t know. I felt like it.

Tobias: Sorry. I was in Australia. Australia hasn’t had one since 1992. I don’t know what that looks like.

Bill: It’s because you guys are pumping all those commodities over to China. Good luck with that.

Tobias: That’s right. We’re beneficiaries of the super cycle.

Bill: Good luck with that going forward.

Tobias: Need another super cycle.

Jake: Who’s next?

Bill: What’s going on over there?

Tobias: I [crosstalk] something. I don’t know.

Bill: I don’t know. This, I got no idea.

Jake: Yeah, what’s the consolidation of power?

Bill: Every time I say anything about China, somehow pops in and they are like, “Our zero COVID policy is rational.” No, it’s not.

Jake: [laughs]

Bill: There you go.

Tobias: I saw you got a nice shoutout today on Twitter, Billy, for your little crossing [crosstalk] to Munger.

Bill: Crossed words. I don’t know about that.

Tobias: [laughs]

Bill: I have no joy in Charlie being wrong.

Tobias: Well, I think it’s a little early to be declaring– I don’t think that you were necessarily talking directly about Baba there, are we?

Bill: No. [crosstalk] The thing that is funny about how this whole thing has played out is, I asked him about quality companies. And then, he launches into this thing about China that’s completely unrelated to what I asked him. He was like a very snippy Munger.

Tobias: Yeah, he was. Yeah.

Bill: So, it is funny to see him get that tone and then be wrong. But whatever, I don’t like it when Munger is wrong.

Jake: You can’t grave dance on Munger, right?

Bill: I’m not going to be rude for my hero to be wrong. That doesn’t make any sense.

Tobias: But he’s not necessarily wrong yet either. Just because you got an ugly– [crosstalk]

Bill: I don’t know, man.

Tobias: The underlying business is spectacular.

Bill: Well, I think this is more about China generally and whether or not they’re going to more open and hopeful society or one that’s closer to dictatorship. I don’t know enough to know. But I do know enough to know that the hivemind thinks they know and the hivemind thinks, “No bueno, Munger.”

Tobias: I don’t know how it works, but Xi Jinping is in for his third term. Do you guys know what you call it?

Bill: I don’t even want to go down this path, because it’s only going to expose how dumb we are. The only thing I know is, according to the internet, a man got removed from a room and I don’t think that’s a great thing to have happened to you in China.

Tobias: Well, somebody says that they thought it was because he was going to say something. I looked at it, he looked just pretty confused to me. I don’t know. That cannot be.

Bill: Yeah. The poor old guy was like, “What are you doing? I’m just sitting here. Let me hang.”

Tobias: But the question is- [crosstalk]

Bill: Careful with your word choice.

Tobias: -is China completely uninvestable?

Jake: Do you own what you think you own?

Tobias: Yeah.

Bill: Sort of depends. You own Starbucks? You own Nike? If you own those two, you got to think it’s somewhat invest [crosstalk] to some mechanism.

Tobias: They’ve got exposure. You might lose a limb there, but you’re not going to lose the whole thing.

Bill: [crosstalk] You get in permanent capital impairment. If Starbucks China growth is gone, I don’t know, what’s that saturate at?

Jake: It’s come down a fair amount, actually. It’s not quite as egregious as it was.

Tobias: I don’t know how much of it is counted in

Bill: Okay, well, this is silly current stuff. But you’re looking at a stock trading at north of a 33 times cash flow multiple. I’ve got to think there’s some China growth in there.

Jake: That’s fair.

Tobias: Is that where it’s trading now?

Bill: Yeah, man. $97 billion market cap, $117 billion enterprise value trailing. Obviously, it’s going to grow like this.

Jake: [laughs]

Bill: Yeah. Trailing cash flow’s $3 billion.

Tobias: How’s the stock done this year?

Bill: 2019 or 2018, $10 billion free cash flow. So, Starbucks always wins. It’s Costco like that.

Jake: It’s a strong brand, for sure and it has an addicted user base.

Bill: I’ll tell you what takes my Starbucks habit away is Celsius.

Jake: Oh, no.

Bill: That watermelon Celsius, I don’t allow myself to have it too often, but I crave that stuff.

Tobias: What’s in it? Is it caffeine?

Tobias: It can’t be good for you. Yes.

Jake: [laughs] Whatever.

Tobias: Sugar?

Bill: No. There’s some sugar, yeah, but not a ton. It’s mostly– [crosstalk]

Jake: Fentanyl is actually the active ingredient? [laughs]

Bill: Fentanyl is scary shit. No, it’s hypercaffeinated and some vitamin concoction found in Boca Raton. Good luck.

Jake: Really? So, like Flintstone vitamins ground up and sprinkled in there?

Bill: Yeah, dude, I don’t trust any company from Boca.

Jake: [laughs]

Tobias: I had a DayQuil over the weekend. I got to say that DayQuil are a little bit disappointing these days since they got rid of the speed.

Jake: Oh, yeah?

Bill: Yeah, it’s a shame.

Tobias: [crosstalk] Yeah.

Bill: Let’s kids get some speed. What are we doing?

Tobias: I remember those giving you a pretty good high when you were a kid, but they definitely don’t do that now.

Bill: Now, you got a show ID when you buy it? Come on. [crosstalk] Let it kids score DayQuil. Where are we living?

Jake: [laughs]

Tobias: It didn’t do anything.

Jake: Oh, man.

Tobias: Got one of those fentanyls.

Bill: Dude, that stuff scares me. That and porn really worried me for the children. Anyway, that’s a different episode. We can do that conversation on my podcast.

Jake: Hopefully, not mixed together.

Bill: Jesus. [laughs] No. That’d be terrible.

Tobias: JT, you want to give us a palate cleanser here?

Jake: Yeah, we’d better do it before– [crosstalk]

Bill: We certainly need it. We’ve derailed. I’ll tell you what, do you guys listen to Tim Dillon?

Jake: No.

Bill: I’m convinced on his current podcast, he was trying to see if he could lose sponsors.

Jake: Oh, yeah?

Bill: It’s one to listen to. I won’t repeat it.

Jake: Pulling a [unintelligible 00:32:23].

Bill: Yeah, he’s going for it.

Jake: Oof.

Tobias: Colm Moore’s in Mallorca. Good for you.

Jake: We’re back to that part of the show.

Tobias: Sorry. Hello from New York. Yeah, it’s it happens all the time.


Tobias: Have your shoutouts– [crosstalk]

Bill: We’ve gone back to the intro.

Jake: Okay. What time is it? [laughs] 11 o’clock on the East Coast. All right.

A Pace Layer Approach To Investing

Jake: This segment is on pace layering and it comes from this guy, Stewart Brand, who is an author and he’s a thought leader on a bunch of– He kept up this compendium, I guess you would call it, of the earth. He’s just done a lot of interesting work. I got to give a shoutout to my boy, Paul, in Ireland who reminded me about this topic when we were having a chat. I’d read this paper a couple years ago and then just totally forgot about it. But it has to do with how do you manage change and how do complex systems learn and keep learning. It was actually born out of a study of architecture. Like how do the different parts of a building change and how often do they change?

Going from fastest to slowest, and this is what Brand laid out at the very beginning, was things like stuff, the furniture and paint, those things turn over the fastest within a building and then the space plan, like the layout within it can change, non-load bearing walls, things like that. Surfaces, water, power, things like that change then at a slower rate. The skin of it changes, the exterior, and then the structure the skeleton of it, and then finally, the actual land site itself. This pace layering, it makes sense from architecture, but it also has a bunch of other explanatory power for different domains.

My background here shows the order that Brand lays it out in and moving from fastest to slowest. Fashion, and then commerce, and then infrastructure, then governance, and then culture, and then finally nature. So, Brand says that, “Fast learns and slow remembers. Fast proposes, slow disposes. Fastest is discontinuous, slow is continuous. Fast and small instruct slow and big by a crude innovation and by occasional revolution. Slow and big controls small and fast by constraint and constancy. And fast gets all of our attention, but slow has all the power.”

There’s a Mother Nature equivalent of this, which is there’s a hierarchy basically for the scale and the time, the size, and the amount of time that changes. First, the needles of a pine tree change annually with the seasons. The tree crowns that the needles grow out of change over several years. The patch of trees changes over decades. The stand that’s like a combination of patches changes every hundred years or so. And the forest every thousand years-ish. And then, the biome over tens of thousands of years. And so, all of these things have this interplay between them.

Actually, the turbulence and the slippage between the boundaries of these pace layers is where all the interesting things are happening. That’s where there’s a lot of uncertainty, surprise, innovation. It’s almost like intertidal zones in the ocean where there’s a lot of action that’s happening where the ocean meets the land. There’s a lot of animals, there’s a lot of energy exchanged. If you’re picturing plate tectonics from looking at this, you’re probably thinking about it.

Let’s make this a little bit more concrete. Per Brand, if commerce, that layer is allowed by the governance and culture, which is a slower changing thing. To push nature at a relatively fast commercial pace, then you risk the loss of that natural support of forests, and fisheries, and aquifers, and all the natural resources that support all the layers above it. Any governance system in that little middle area that doesn’t change– If it changes slower than culture and nature, then it ends up typically being in a revolution. And so, think about earthquakes that happened from the fall of the Soviet Union or the French Revolution. That governance layer wasn’t changing as fast as culture was. And so, perhaps, China today might fall somewhere within there, if they have a very ossified structure of governance that’s not adapting. That’s just a hypothesis. I’m not saying that’s true, necessarily.

It’s interesting that as people get older, their interests tend to drift more towards these lower layers and less towards the higher layers. Older people, they tend to lock in their clothing choices and their hairstyles from decades ago. They’re not as concerned about fashion. But young people are much more interested in fashion and less so in things like culture, languages, and religion tend to fall into that culture. Whether it’s social media, memes, or dance crazes, or whatever the hell’s going on that has this lifespan of a fruit fly, it tends to be young people who are in that kind of mindset and the older people are thinking about some of the slower-changing things.

The job of fashion and art is to explore the space and push boundaries and provide activation energy for commerce. Think about the automobile redesigns that happen every year. There’s a refresh of every single car and its design. And occasionally, good ideas sift downward from these upper layers and then get installed. This is how these pace layers are able to incorporate change, and make progress, and learn actually, but without allowing the whole system to just get out of control.

Infrastructure typically has long payback periods, like to build a bridge that’s going to run for 50 years. It often requires the intervention of a governance layer. The commercial world doesn’t think in such long timeframes. Of course, this can also go horribly wrong if the government is this guiding hand that’s misallocating capital into projects that turn into things that people don’t actually end up wanting like Go City’s, things like that. We talked, I think last week about Russell Napier, his recent interview where he talked about how Capex being guided by the hand of government over the next decade. I would say keep your eyes open for the potential of a misallocation of capital over the next 10 years.

Another interesting thing is that these deeper, slower-moving layers, they turn exponential curves into S curves. Something that seems to be going exponentially like a rapidly dividing bacteria in a petri dish, it runs into a resource wall, like nature slows it down and now, you end up with an S curve or even falling over. 19th century robber barons, the Carnegies and the– [crosstalk]

Tobias: Vanderbilts.

Jake: Yeah, the Vanderbilt’s, those type of guys. They ran into this governance layer of the Sherman Antitrust Act. You could say Amazon Prime really got going and was able to do this “free shipping,” because they really leaned on this creaking infrastructure of the US Postal Service for a long time until eventually it was forced to invest in its own infrastructure, all these delivery vans that you see driving around now.

Anyway, the different things that you can analyze with this pace layer mental model, I think, offer some interesting insights. Maybe it’s not the be all end all of mental models, but it’s something interesting to filter through as you’re looking and evaluating as far as how are things changing and how do successful systems actually integrate change into them so that they don’t become too brittle.

Tobias: That’s interesting. JT. Many investors try to avoid things that are fashion. Is that the same fashion? Avoid that high paced–?

Jake: Yeah. Right. To understand, let’s say that you could buy a hula hoop company for half a book value or energy company for half of book value. Which one would you maybe hang your hat on more of having relevant staying power and eventually becoming not being just a flash in the pan necessarily. This might help you to sort out where does something fall within that.

Tobias: How would you describe energy? Infrastructure? Commerce?

Jake: Yeah, probably somewhere in between those two. Maybe even nature. The physics of how we all live is based on hydrocarbons today. So, you take that peg out and the modern world just collapses.

Tobias: What about stuff like payment systems? Is that commerce or is that infrastructure like Visa, MasterCard, that kind of stuff?

Jake: Yeah– [crosstalk]

Bill: I’ll go with infrastructure.

Jake: Yeah. Definitely, the rails of the Visas and MasterCards seem very infrastructure like.

Tobias: So, rails are infrastructure.

Jake: There’s something– [crosstalk]

Bill: I think a lot of software as infrastructure.

Jake: Yeah, I think so. Maybe this is the difference between maybe a social media network being a little bit more in the fashion area and a little bit less in the infrastructure area as far as– [crosstalk]

Tobias: That’s an interesting point because I think that that’s true of social media in general. But I wonder if something like– I hate to say it, but I think Twitter’s like– [crosstalk]

Jake: Infrastructure now?

Tobias: Yeah. I think it’s getting towards infrastructure.

Jake: It could be. I read something interesting recently about product/market fit, which is a big topic for a startup. The analogy that was used was that if you don’t have product/market fit, it feels like you’re rolling the boulder up the hill all day long. When you do have product/market fit, it’s like you’re chasing the boulder down the hill.

Tobias: [laughs]

Jake: Twitter clearly found some product/market fit. This whole clown car crashing into a goldmine that Zuckerberg said, clearly, they found product/market fit and have been chasing that boulder down the hill.

Tobias: Yeah. I don’t know, why it’s so hard to run profitably? But evidently it is.

Jake: Yeah. No forcing function to do so thus far? Disintermediated ownership group?

Tobias: Yeah, that’s fair.

Bill: Well, you also have a CEO that doesn’t even care if it’s a company. So, there’s that. Or ex-CEO, who wants it to be a public port of call.

Tobias: Is he doing something in that space– [crosstalk]

Bill: it maybe hurts a little bit, the profit driving.

Tobias: But he was only doing it part time too.

Jake: Yeah. You have a 1/4th CEO.

Bill: Yeah. No, I don’t know for Twitter.

Jake: [laughs]

Tobias: Is that going to close?

Jake: Your guess is as good as mine, man.

Tobias: How do you feel?

Jake: The market thinks so, the spread’s pretty minimal now, isn’t it?

Bill: No, I think it’s [crosstalk] line.

Tobias: I saw it closed up and blew up.

Jake: It’s 52 now.

Bill: Yeah. But you’re talking about what like a week? Ah, 53.

Tobias: 53.

Bill: Yeah. All indications are that they’re going to close.

Jake: That seems like all downside there, if you’re trying to make that bet today.

Bill: Yeah. Well, you just need one thing to break. This is the problem in merger arb generally. You’ve got a lot of little wins and then you get whacked.

Jake: There were times where that spread blew out though pretty good.

Bill: Oh, yeah. Oh, yeah.

Jake: It’s not always picking up pennies in front of the steamroller.

Bill: No, that’s right. There are people that are really good at merger arb that made really good careers out of it. It’s just generally as a risk skew, not my favorite.

Jake: Yeah, definitely truncated known upside and deleterious downside.

Bill: Yeah. I feel like too you got to– You don’t have to do anything, but I feel I would have to size it. I don’t love stuff like that.

Jake: So, you’ve got to lever it up. That’s what I’m hearing.

Bill: Yeah, that’s right, and bro down.

Jake: [laughs]

Pick A Stock Or Credit To Lose The Most In The Next 12 Months

Tobias: I got to a game. I tweeted this up last week. “You have to pick a stock or credit for the next 12 months long or short, no derivatives. The winner is the investment that loses the most.”

Jake: We’ve played this game before.

Tobias: Yes.

Jake: It’s not an easy game to win.

Tobias: No, it’s not.

Jake: [laughs]

Bill: You’re telling me, I want something that’s going to lose.

Tobias: When I tweeted this out, a few of the suggestions that I got shot long.

Bill: Maybe.

Tobias: Uber long. [crosstalk] actually. Tesla, beyond.

Jake: Tesla, long or short?

Tobias: It was long. Beyond Meat?

Bill: Yeah, that one could be a zero.

Tobias: Open? Open Door?

Bill: Beyond’s a pretty good pick. Beyond might be my pick.

Tobias: Someone’s got a short Carvana. Pretty good argument actually. The upside is very high and the chance to have a small or big, may be everything works out for them.

Bill: Yeah. They’re saying a short on Carvana could lose the most-

Tobias: Yeah.

Bill: -over 12 months?

Tobias: Yeah.

Bill: Yeah, I can see that become like a face ripper of a short covering. I can see how that stock can go a lot higher.

Tobias: I got a few on the-

Jake: [crosstalk] squeezed hard.

Tobias: -screen here, “Short TSLA.” Short Tesla, “Beyond Meat” long I’m guessing. “Long Aus NZ New Zealand banks” are beyond short. Yeah, I think Beyond Meat’s going to pop to the upside.

Bill: I think a long Beyond has– [crosstalk]

Jake: What’s amazing is how you could almost make arguments long or short on any of these as being the winner of– [laughs] That’s what makes this game devilishly difficult.

Bill: Yeah.

Tobias: It’s a contrarian game. It’s a hard one.

Bill: The biggest loser. I don’t know. Man, the thing that’s tough is you’re going to have something that’s down like 80%, you know?

Tobias: Entire airline industry. [crosstalk]

Bill: I don’t think so.

Tobias: Yeah.

Bill: They’re going to get a lot of there– [crosstalk]

Jake: I might go somewhere a little more esoteric into that 100-year Austrian bond.

Tobias: [laughs]

Jake: But I’m not sure they’re going to be long or shorted. I just know that there’s convexity one way or the other.

Bill: Yeah.

Tobias: Yeah, that’s right. That’s a good one. Yeah, to lose the most– Yeah, it depends on a little bit with the market’s now.

Jake: It’s down a lot from what I saw and it’s rightfully so when rates move the way that they have. If you just tried to– let’s say you wanted to– Probably shorting it might be the way to lose the most in a year.

Tobias: Yeah. Well, you get the leverage. Yeah. So, you got some stuff with China exposure that’s not impacted yet? Starbucks?

Bill: Beyond stuff to be, I think. That product has no need in society.

Jake: [laughs]

Tobias: I saw Beyond Jerky. I almost took a photo of it.

Bill: Yeah.

Jake: What’s that made out of, the leftover burger patty?

Tobias: They just let the Beyond Meat dry up a little bit.

Bill: There’s a chance that enough environmentalists want to get off meat and beyond can survive. But I don’t know, it’s one nichey product, I don’t know that should be a publicly traded company.

Jake: Doesn’t it have all kinds of just gross oils in it too, that-

Tobias: That’s not good for health. Yeah.

Jake: -no one should be adjusting?

Bill: People don’t care about that.

Jake: Aren’t you trying to be healthy when you eat that?

Bill: No, you’re trying to save the planet from that thing-

Tobias: It could be principle.

Jake: Okay.

Bill: -which I can understand. I don’t do things like that, but I understand collective action and being the person that starts it. I got a couple of friends that stopped eating meat. So, I get it.

Jake: What do you have for dinner last night?

Bill: Oh, so much beef and lobster.

Jake: [laughs] Just killing the ocean.

Bill: Yeah. I was telling you, I had enough to get gout.

Jake: [laughs]

Bill: It was awesome.

Tobias: Snowflake has been nominated here. I don’t know if that’s long or short, but I’m guessing long.

Bill: Ooh, I don’t think people should be looking at it. I think snowflake’s probably closer to a buy than anything.

Jake: So, short would rip your face off?

Bill: Yeah. Dude, it’s down 24% and went public at that valuation. That’s got to tell you something.

Tobias: And one of the Berkshire boys is in it at the listing.

Bill: Yeah. I would be [crosstalk] much more interested in going long really expensive SaaS right now than short it. Much more interested.

Jake: Long it to lose money?

Bill: No, no, just to be long.

Jake: Okay.

Tobias: Short it.

Jake: So, we’re not playing the lose money game now.

Bill: No.

Jake: Okay.

Bill: Think about what that stuff has taken on the chin. Snowflake, down 25% in this rate environment with that valuation? If you don’t think that the market sees something special there, I think you need to get your head checked. So, obviously, it needs to come true, but I don’t know, you think that’s going to lose the most over the next 12 months? I don’t think so.

Jake: Catch down with all of its buddies that are already down 90%.

Bill: I don’t think that company goes down 90%. Maybe.

Tobias: “Short BABA.”

Bill: I don’t know.

Jake: This game was easier to play a year ago, wasn’t it?

Tobias: Yeah.

Jake: Things were egregiously priced.

Tobias: Yeah. I don’t know, what’s the name for that–? It’s a bell curve and at two ends, it’s got the Moron and the Genius both coming to the same conclusion.

Jake: Yeah.

Tobias: Mid Twit has the complicated version. Both Moron and Genius say China’s uninvestable, but the [unintelligible [00:52:01] in the middle says at some risk-adjusted point, you take [crosstalk].

Jake: [laughs]

Bill: Yeah.

Jake: Yeah.

Bill: That’s right.

Tobias: I feel that’s right in the middle. At some point– [crosstalk]

Jake: Ah, the guy in the middle this whole time. It’s going to be a Jedi. [laughs]

Bill: I don’t know. Russia was not priced in for US investors.

Jake: No.

Bill: China so far hasn’t been priced in. I think whenever I’ve gotten these feelings of like, “Oh, geopolitical risk might be priced in?” Fuck that. What do I know about that risk?

Tobias: Some bloke has asked me three times. Masoud Bahraini, “I’ve got a game without giving a prize.” The prize is you get a shoutout on the show in a year, if I remember. That’s the price.

Jake: What you won’t.

Bill: Yeah. There’s no prize.

Tobias: The winner will remind me.

Bill: Yeah, you just got your name read out loud on the premier finance podcast in the world, where people are demanding.

Tobias: Many people say. Many people say.

Bill: Many people are saying it. Yes. That’s the prize, bro. Probably drink a bottle of wine tonight and congratulate yourself for that kind of a shoutout. That was huge.


Bill: I got my kids football practice after the game. We prepared, we played well. Now, we got to go back to practice. I got to figure out, if I got to usurp this coach or not tonight. Yeah.

Jake: Power play.

Bill: Well, people said that I should replace him.

Jake: You got to show up in a cut-off hoody Belichick style.

Bill: Dude, you think I should go in cutoff jorts? [crosstalk]

Tobias: Belichick, his record since he was Brady’s not bueno. It’s a losing record since he lost Brady.

Bill: Brady’s record since he lost Giselle, also not great.

Tobias: Ah, it’s tough to perform. [crosstalk]

Bill: Yeah, you got to short people in divorces always. That’s the rule.

Tobias: Is that happening? Are they getting divorced?

Bill: Yeah.

Tobias: Wow.

Jake: Florida strikes again.

Tobias: [crosstalk] since happened.

Jake: Florida remains– [crosstalk]

Bill: That’s not a Florida problem. Come on now.

Jake: [laughs] Florida for the win.

Bill: It is a Florida problem.

Tobias: “Lucid has a market cap of $23 billion.”

Bill: Yeah.

Tobias: Yeah, some of these electric car companies Neo, Lucid. Nicholas still out there with couple of billion dollars in market cap, I think.

Jake: How? How?

Tobias: That’s good Britain recognition.

Jake: [laughs] CEOs well known or ex-CEO?

Bill: How’s Rivian. Where do they trade at?

Tobias: I told you guys I saw a Lucid in the wild.

Bill: Ooh, $31 billion. Lot of net cash though. $18 billion enterprise value, but you don’t have any sales which is an issue.

Jake: That’s as good as money, sir.

Bill: They got a lot on the com and their cars are getting rave reviews. So, I will– [crosstalk]

Tobias: Was that the Rivian?

Bill: Yeah, I will acknowledge that betting that the future is brighter than the historical financials could be potentially a positive idea.

Jake: How much is implied on the com from that $18 billion EV–? [crosstalk]

Tobias: What’s Rivian’s–? [crosstalk]

Bill: We’re hoping $18– Well, the market cap’s $31.5 billion. They got $14– [crosstalk]

Tobias: It’s like from 100? It listed at 100 or first traded at 100?

Bill: Yeah, 93. Yeah, 93.

Jake: Oh, what were we thinking?

Tobias: Well, we knew what was going up collectively.

Bill: Yeah.

Tobias: Yeah, it makes– [crosstalk]

Bill: Market’s thinking long.

Jake: [laughs]

Tobias: There’s definitely a premium paid for the prices over the assets for those company. So, you’re encouraged to pump them out. All Rivians were recently recalled. I wonder if that’s going to be [crosstalk] middle.

Bill: Yeah, that was short. Don’t fake news this. It was a software update. My buddy’s dad has one. It was nothing.

Jake: They recalled both of the cars that are out there?

Tobias: [laughs]

Bill: Yeah, I think so.

Jake: Oh, wow.

Bill: Better to do it now than when there’s a lot.

Jake: Yeah, smart.

Bill: Yeah.

Jake: That’s 3D chess.

Tobias: I’ve got a question for you from Keith Harmon.

Jake: Never put them out there that can’t get recalled.

Tobias: He was saying, “Is Bill turning back to value?” Bill never– [crosstalk]

Bill: No. Well, I don’t turn to anything. When I screen stuff based on cheapness, it creates a thing in me where I overlook risks that I wouldn’t overlook. I obviously think you should pay less than something’s worth. That’s not like brain surgery. I’ve just often said that if you’re doing it as a person, I turn it over to computer. I think it’s a superior structure and it is tax advantaged if it’s in an ETF. I don’t think I can outperform a computer doing value investing. I’m not sure I can outperform any computer, which would be sweet because then I can just turn it all over and be done.

Jake: I tend to agree with you. However, I also believe that every once in a while, the market throws up these just no-brainer, obviously attractive opportunities. And if you can afford to wait around for those and then pick them up when they become available, I think you can do just fine thinking for yourself without turning it all over to an algorithm.

Bill: You’ve got to swing so hard though, man. On a risk adjusted basis, I just don’t know that. It makes sense. For what? For me, for what? People like to hear me talk, but what am I doing? I’m not trying to raise money. I was a waste of fucking time. I do like everybody though. So, that’s why I like doing it.

Jake: [laughs] There’s just got to be a cheaper way to make friends than-

Bill: Yeah, probably.

Jake: -to get whacked on a portfolio. [laughs]

Bill: Yeah. Do you wonder if I’m a value investor? I still own cable. How many people that aren’t value investors are down 70% on a stock–? [crosstalk]

Tobias: What do you mean. Charter or HS?

Jake: Oh, no, I don’t know on Altice. Don’t do that to me.

Tobias: Altice.

Bill: [crosstalk] Charter which next Altice.

Jake: Yeah, got up from– [crosstalk]

Bill: I owned Altice. That I did do.

How Do You Size Something That Could Go To Zero?

Tobias: Somebody points out that “Cinches is what Munger calls thouse,” so like Ali Baba. All you got to do with Ali Baba is get over the issue whether you actually get to hold on the equity at the end or whether you quit, you got its equity.

Bill: Yeah. So, how do you say something that could be a zero?

Tobias: Yes. I said it’s an option position.

Bill: It’s not worth the fucking time, man. Just give it to a computer.

Tobias: Yeah. But it’s– [crosstalk]

Bill: All the brainpower that you got to spend thinking about whether or not China is going to take your money for an option position.

Tobias: But I don’t think that you can spend– This is something that you can’t reason to.

Bill: Yeah.

Tobias: You can’t collect that. That’s why it’s an option size position. It’s undervalued, but it’s got this on unhandy capital risk attached to it. So, you put it on as an option size position, which might be 3% or something like that.

Bill: Buffett would say it’s too hard, right?

Tobias: Go and stick it into your Kelly criterion.

Jake: Wouldn’t you say that– is a straddle the right? I don’t know some of these option things as well as you guys do. But whatever the price is, it’s wrong today.

Tobias: Yeah.

Jake: It’s either worth way more or zero. So, how do you structure a bet so that you get paid, if today is the wrong price?

Bill: You’re trying to have me tell you how to get Benn Eifert all your money?

Jake: Yeah, exactly.

Bill: Yeah, I can’t do that.

Jake: [laughs]

Tobias: The problem is that you got– [crosstalk]

Bill: That’s bait. [laughs]

Tobias: You probably can’t do an option in this, because if you’re looking at the call out, the call is going to be a donut if you’re wrong and you got a timer on the call too, say, you got to leap out two years.

Jake: Yeah.

Tobias: Whereas it’s a donut, if you’re wrong on the equity anyway. But there’s no two-year time limit on it. So, you’ve already got that convexity in it because it’s so undervalued relative to what it’s worth. It’s just the question of whether you can actually collect on that bet or not. So, I think that option is the equity and you size it like it’s an option size position. I’m not advocating anybody go and do this, by the way. This is just me talking out loud. I’m not going to go and do this. I’m just talking out loud. Thinking out loud rather.

Jake: Really, you actually don’t even need to find out whether you have the right to what you think you own? You just need everyone else to feel less doubt about that situation.

Bill: Nice. Now, we’re trading derivatives. I like it.

Jake: Yes.

Tobias: [laughs]

Bill: I like it.

Jake: [laughs] It’s a beauty contest.

Bill: That’s right.

Tobias: That’s time, fellas.

Bill: Yeah, I think a computer can do it. That’s what I think.

Jake: [imitating a robot]

Tobias: We made it. Thanks, folks.

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