In their latest episode of the VALUE: After Hours Podcast, Bill Brewster, Jake Taylor, and Tobias Carlisle discuss:
- Todd Combs Provides Insights Into Buffett & Munger
- Fortune Favors The Brave
- Investing Lessons From Formula 1
- The Diverse Nature Of Berkshire’s Stock Picks
- Chris Hohn Goes Activist On Google
- Mass Layoffs In Big Tech
- Is Meta’s Share Price Too Cheap To Ignore?
- Michael Gayed – Melt-Up In Stocks To Come
- Could Sam Bankman-Fried Go To Prison For The FTX Disaster?
- An Asteroid Mining Startup Soon To Launch On SpaceX
- The 10-3 Yield Curve Is Now Inverted
- Munger On Crypto
- Is Price-To-Sales Still A Relevant Metric?
- Another Prediction From Cathie Wood
- VCs Have To Be Pure Optimists
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 are preparing to livestream. That’s it, fellas. We’re live. It is 10:30 AM on the West Coast, 1:30 PM on the East Coast. That means it is Value: After Hours in hours. Makes no sense. I know. We all know.
Jake: Glad we did. Never will. [chuckles]
Tobias: Now, we’re live. We [crosstalk] live.
Bill: It’s about the vibe. The vibe.
Tobias: That’s right.
Jake: You are vibing hard with that shirt, Billy.
Bill: Dude, had to.
Jake: [laughs]
Bill: I didn’t like the shirt I had. But yeah.
Tobias: I’m Tobias Carlisle. This is Jake Taylor and Bill Brewster. Just did namechecks just in case there’s somebody new watching. I don’t know, just in case you don’t know who we are there.
Jake: There isn’t, but that’s fine. [laughs]
Tobias: Never know, in the future. [crosstalk] About a thousand years when they spelunk this civilization, they’ll find this and say, “Who are these guys?”
Bill: “And why were they saying what they were?”
Jake: Yeah, look at the idiocy. [laughs]
Bill: I think the vibe has been fairly successful. Well, we’re going on almost three years now, huh?
Jake: That’s right.
Bill: 2019. That’s almost December of 2020.
Tobias: That’s right.
Jake: Somewhere around.
Tobias: It was Thanksgiving was the first one that I put out.
Bill: Yeah, man.
Jake: Wow.
Bill: It’s been a minute.
Jake: That’s a good, pretty good run. I would have bet the under on that one.
Tobias: Yeah, me too.
Jake: It could have been under five episodes.
Jake: Yeah. [laughs]
Tobias: Well, the average is nine episodes.
Bill: Oh, is that the [crosstalk]
Tobias: Once you’ve made it to 10, we’re already in rare–
Jake: House money at that point.
Tobias: Yeah.
Bill: Interesting.
Tobias: Let me do some shoutouts because we got a good crew here today. FTXville, [laughter] [unintelligible [00:01:37] Belgium.
Jake: Oops.
Tobias: San Diego, Columbus Wisconsin, Barrie, Ontario, Germany, Las Vegas, DefiDownsville, Bahamas [laughs], Kennesaw, get it? Philadelphia, Pittsburgh, Dallas, Warsaw, Victoria, British Columbia, Nashville, Toronto, Bristol, what’s up?
Jake: Boy, that’s a full slate.
Tobias: Nobody from nobody from Townsville? Get on Townsville. Budapest.
Jake: They’re probably an hour late because we moved.
Tobias: Budapest, Saskatchewan. I can never say it. It’s not Saskatchewan. Saskatchewan. Toronto. All right, Calgary. There we go. Let’s go. Fellas, lots has happened.
Jake: Yeah. Boy, we broadcast a week ago and lot of the world changed for a lot of people.
Tobias: What do they say, sometimes decades go by and nothing happens and sometimes days go by and decades happen. We’ve had a decade in a week anyway.
Jake: Yeah. Who was that? Was that Lenin said that, I think?
Tobias: Sounds about right. Yeah.
Jake: Might’ve been.
Tobias: Got Aussies in the house too.
Jake: Yeah. We have crypto in panic meltdown mode. We got Charlie on CNBC chiming in about it. We’ve got– [crosstalk]
Tobias: Cathie’s got a prediction. Google’s got an activist.
Jake: Oh, I don’t know– [crosstalk]
Tobias: Inflation is down, the market’s up.
Jake: Marie 13F, might be fun to go through that.
Tobias: Tech layoffs. I got a list. Arkansas.
Jake: Buff Dawg getting Taiwanese. I don’t know. We got a lot of stuff to cover.
Bill: Do it.
Jake: We’re done. We just got it all. [laughs] Where do you want to start?
Tobias: Yeah, what’s the most surprising thing?
Jake: Where are you going to get the most fired up?
—
An Asteroid Mining Startup Soon To Launch On SpaceX
Tobias: Okay, I got one. Musk is raising for SpaceX at $150 billion.
Jake: That’s just one asteroid you have to mine.
Tobias: That’s true.
Jake: Because you just have to get one.
Tobias: That’s true. You last see one asteroid and your money good.
Jake: It’s all the gold in there. Think about what that’s worth.
Tobias: There must be a lot of gold in the universe, because there’s a little bit on Earth and there’s a lot of universe. So, you just sieve the universe and you got unimaginable amount.
Jake: I’m joking a little bit about that, but that is actually Cathie’s argument about all of this disruption and plentiful this in the future.
Tobias: Sorry. Just before we move off SpaceX, I want a list of everybody who invests in that at $150 billion. [crosstalk]
Jake: Anyone short the whole complex?
Tobias: Well, they just– [crosstalk]
Bill: I’d like to know when he decided to do this. Was it before he realized that he was incinerating capital on Twitter or was it after?
Tobias: Well, it needs capital. SpaceX is a consumer of capital.
Bill: Yeah. As it should be. Growth company, very capital intensive.
Jake: Didn’t he put some money on advertising-
Bill: I’m just curious.
Jake: -into Twitter from SpaceX?
Bill: Yeah, but to be fair, the slots on Twitter are cheap these days. So, that’s probably actually a pretty value buy on his part.
Jake: Is that right? Okay.
Bill: Oh, yeah.
Jake: That’s interesting to know.
Tobias: I got a good one from Robert Mackay here.
Jake: Already? We’re going to the– [chuckles]
Tobias: “Get the asteroid headed for earth. Don’t deflect it.” No, that’s second order thinking. We’ve been spending all this money trying to deflect asteroids. What we should do is catch it and mine it.
Jake: Asteroids create jobs. That was what I learned from that movie with Leonardo DiCaprio.
Bill: All right, guys, hear me out. [crosstalk] Hear me out. A big net.
Jake: How big?
Tobias: Yeah.
Bill: We’re going to need it high.
Jake: Okay.
Bill: High in the sky, and we’re going to need the net to be big, and you want it to be made out of Vibranium. So, you got to call Wakanda.
Tobias: When they make the movie, you don’t want astronauts who can mine, because they can’t be taught how to drill. You need guys who already know how the drilling equipment works. It’s easy to teach them how to be an astronaut.
Jake: [laughs]
Bill: You know what? They should make that movie.
Jake: Are you referencing that it was Ben Affleck?
Bill: Yeah, he is. Yeah, it’s a fantastic movie.
Jake: With drunken voiceover though. He was doing– [crosstalk]
Bill: Bruce Willis is in it.
Tobias: That’s right.
Jake: So funny.
Tobias: It was a great movie.
Bill: Aerosmith had the soundtrack.
Tobias: Yeah, it was a great song.
Bill: Shit was hot.
Jake: Banger? Yeah.
Bill: Yeah.
Tobias: JT, sorry, you’re going somewhere. I didn’t realize. It was an interesting place.
Jake: No, it was– [crosstalk]
—
Another Prediction From Cathie Wood
Tobias: Yeah. So, Cathie’s got a prediction. Cathie Wood has a prediction. She says, “All of the innovation in the world right now is worth $6 to $8 trillion.” I forgot the period of time. Was it five years or it was more than that?
Jake: I think it was a little bit more.
Tobias: Eight years?
Jake: Something like that.
Tobias: I think it was eight years.
Jake: 30x, right, is that what she said?
Tobias: 30 bag which is $200 trillion worth of innovation.
Bill: Well, wait, she’s saying it’s currently valued at $6 trillion and it should be worth how much?
Tobias: About eight years, $200 trillion.
Jake: It will be worth $200 trillion.
Tobias: Got a 30 bag in eight years. I don’t know how you catch it though. That’s the problem. [crosstalk]
Jake: Layup 30 bagger from here.
Tobias: One of the things worth discussing about something like this and I think Jake pointed this out, even if that is the revenue number, which seems unlikely to me, but let’s assume that it is.
Bill: Well, it’s not. That’s the multiple of sales. So, it probably trades at a 50 times price to sale multiple.
Tobias: Oh, there is about– [crosstalk] But here’s the thing, right? A lot of innovation turns into consumer surplus. So, it’s entirely possible that even on those highly optimistic numbers, there’s a big chunk of that turns into consumer surplus. And then, the part that turns produce to surplus, that’s just a revenue earn. And then, you got to be able to pull out some profit out of that and you got to assume there’s some competition in that, because I don’t see $200 trillion in taxi, it’s like– we’d just become a taxi economy do it like this. People are either riding around in taxis or calling taxis and there’s nothing else or owning taxi companies.
Jake: I tried to get all of my venom out in our little DM thread that we have, because I didn’t want to get on here.
Tobias: Go publicly?
Jake: Yeah and go crazy publicly. But it drives me nuts. It is like she hasn’t read any of technological innovation and what that does, the cycles to it, how it turns into the installation phase when it just becomes normal life, normal cost of capital– [crosstalk]
Tobias: It’s a toaster. How far are we into it’s a toaster?
Jake: Oh, it makes my brain hurt. It makes me angry. I just want to– [laughs]
—
VCs Have To Be Pure Optimists
Tobias: I read something interesting that one of the VCs said where they were like, “To be a VC, you just have to be a pure optimist. You have to be a goldfish who can swim around. Take a giant hit, swim around the ball once, come back around and stick your money into SpaceX at $150 billion.” Get dusted on FTX.
Bill: No, you can’t do that.
Tobias: A week later, stick your money into SpaceX, because they just need– [crosstalk]
Jake: Goldfish due diligence. That’s the– [crosstalk]
Bill: I don’t think that that’s true. I think what you have to do is you got to bet on people early at small valuations and then flip it to the people that want to go into SpaceX at $150 billion. The VCs that are putting into SpaceX are going to get waxed at this multiple.
Tobias: But look at the list of people who put money into FTX, putting in hundreds of millions of dollars. I get that $300 million is 3% of somebody’s fund. So, it’s not much, but still that is a lot of money that if you got to save it all up.
Bill: Yeah.
Tobias: On the [crosstalk]
Jake: That’s fair.
Bill: I don’t know what’s true and what’s not. I certainly– [crosstalk]
Tobias: It’s just speculation, mate. Podcast, just speculate away.
Bill: Yeah. Actually, hang on. Give me a second.
Tobias: Bill’s doing more due diligence on answering these questions-
Jake: No.
Tobias: -than the VCs do sticking their money in. [laughs]
—
Munger On Crypto
Jake: Can I drop the Charlie Munger quote from this morning right now?
Tobias: Yeah, that’s a good one. Let’s do that.
Jake: [crosstalk] Nobody’s going to say, “I got some shit that I want to sell you.” They say, “It’s blockchain.”
Tobias: [laughs]
Bill: I’m interested to know why Third Point was in FTX. I think that’s interesting and I think he made a bunch on upstart. Yeah. So, I don’t know, it’s interesting. I’d love to interview him. I’d like to ask him those questions rather than making a statement about it. I don’t have an opinion on it. I just find that to be an interesting firm going in that way.
Jake: Make that happen, Twitterverse. I’d love to hear that interview.
Bill: Yeah, that would be tough to ask those kinds of questions, but I think I could probably do it, because I’m legitimately interested. This guy that I that I’ve looked up to and read for a long time, he’s got a hell of a career. So, it’s interesting to see them morph that direction towards this part of the cycle as I perceive it. But maybe they did a long time ago. Who the hell knows? Or maybe the reporting is wrong. Also, a possibility. Lots of fake news in the world.
—
Is Price-To-Sales Still A Relevant Metric?
Jake: So, what do you guys think about using price to sales then? Is that still going to be a relevant metric for a toaster in 2032?
Tobias: Here’s the thing. I do think that there is a place for– Quantitatively, price to sales, in one of Jim O’Shaughnessy’s early versions of What Works on Wall Street, price to sales was the king of the price ratios, because for the sole reason–
Jake: Clean.
Tobias: Yeah, just construct it from the top of the statement down. I also think when you go through a really– I’ve got this personal bias that we’re probably headed into a recession. We’re having a little relief rally here, but ultimately, we haven’t seen the tail end of this bear market.
Jake: [laughs]
Tobias: At the bottom of the bear market, cheap on a price to sales basis might not be a bad idea. Because if things aren’t earning, but they’ve still got what’s coming in the top, where you have just a little improvement in margins and you get them cheap on a price to sales basis, those things probably rocket out of the bottom. I’m not doing that. I’m just saying it’s worth– It’s not a total joke metric is my point.
Bill: I got a text from a banker buddy that said that he’s starting to feel that in the commercial banking market, that lending standards are getting tighter. It’s getting harder and harder to go to credit committee. He said the sole bank deals, you can still get done, but the syndicated deals are getting tough. That is not stuff you hear in the last innings of a recession, I don’t think.
Tobias: Yeah.
Jake: The beginning.
Bill: That is credit contraction, which last I checked, does not increase the velocity of money out there.
Tobias: When you get scared, it’s hard to take third party. You’re going to be looking at yourself. Do you want the syndication? You trust the DDM as other guys?
Jake: Yeah.
Bill: Well, you get a sim and you get to do your own due diligence. But stocks are probably discounted on a lot of this, but we are not– We are close to the end of the stock bear market, we’re not close to the economic end, I don’t think.
—
Mass Layoffs In Big Tech
Tobias: Well, this is one of my talking points here was the tech layoffs kicking off. So, I retweeted this this morning. I don’t know how good this data is. This is from a Twitter account. I’ve got no idea if this guy knows what he’s talking about at all, but he had some data and it did sound like he knew what he was talking about. Never heard this– [crosstalk]
Bill: Is he anonymous? If he’s anonymous– [crosstalk]
Tobias: No, no, no. He’s got a blue checkmark. So, he’s got the $8 a month to spend.
Jake: So, you know he is good. [laughs]
Tobias: So, he’s got a list of all of these tech– [crosstalk]
Jake: Is this Chiquita Banana?
Tobias: No.
Jake: Okay.
Tobias: Tech layoff. He’s got Meta at 11,000, Twitter at 3700, Intel 20%, Snap 20%, Netflix 450, Robinhood 30%, Stripe and Lyft at 13%, Salesforce 2K, Amazon 10K. It’s like 120,000 plus layoffs. 2001 dotcom layoffs were 107,000. Q4 layoffs have just begun. A brutally cold tech winter is coming.
Bill: Maybe for the employees in Techville.
Tobias: For the shareholders too, potentially.
Bill: I think that winter has come in a lot of cases. But yes, [crosstalk] it’s not over. But they’re chilly. If you’re down 90%, you are not feeling great.
Tobias: Yeah, that’s fair. There’s some that have down a lot more than that, Blue Apron. You guys remember that? That’s down about 99%.
Bill: Yeah.
Jake: Is that bad?
Bill: I’ll tell you one that’s interesting is Redfin. Now, you can look at their financials and I’ll tell you they make nothing. No cashflow, no nothing. But $500 million for that asset, I don’t know. I could see that having lead-gen value to somebody for $500 million.
Tobias: For sure.
Bill: Shoutout to my man, Bluth Capital, for putting that on my– I’ve been watching it go down, but I didn’t realize how low the market cap had gotten.
Tobias: When did layoffs show up in the data? Because we know that there’s the H-O-P-E, housing goes first. We’ve certainly seen some at least price destruction in housing. I forget what the O and the P are. I just don’t care. And then, there’s E at the end which is employment as a lagging indicator. Once you get the bad print, the really bad prints in employment, typically, we’re closer to the bottom than the top. But employment still seems very strong. That’s what everybody keeps on saying. There’s still a shortage of employees. So, we’re a long way from that point. It’s possible that says that the recession is not coming. That’s a data point that seems to be at odds with all the other data points.
Bill: The advertising market has slowed significantly and banks are tightening credit. This is on its way.
Tobias: That’s what I think too, but I’m trying to think about the other explanations. Credit card use seems to be trending back to its long run mean, where it was done for a while. I guess, because people were getting some COVID shutdown type relief and that’s now working its way out. The savings numbers were crazy there for a while. People have saved much more money than they have at any other point in time. And that’s still not back to trend. That’s still above trend. People are still holding more cash. How you square that with credit cards being used being way up? I don’t know, maybe they’ve taken the savings and stuck them into bitcoin and stuff like that and now, they’re down on that. That’s still counting. I don’t know.
—
Fortune Favors The Brave
Bill: Woman that takes care of my grandma, poor lady had 30 grand in savings and put it in some freaking crypto thing, because they promised her 6%, because of yield farming or something, poof.
Tobias: Damn.
Bill: Sucks because I know her. But I’m like, “Also, you could have just asked me and I could have helped you avoid that.”
Tobias: You remember like a year ago, even two years ago just the fact that we went in that stuff, the hate that I was getting on Twitter for not being in any of that stuff for just saying, “I don’t think so,” That’s all gone away now.
Bill: Some guy keeps coming at me about interviewing Preston Pysh. Tells me I interviewed a charlatan. I just wanted to talk to Preston. Thought it was an interesting interview.
Tobias: Preston is an interesting guy.
Bill: I don’t know that bitcoin’s even– that may survive. I don’t freaking know. I’ve never known. I don’t understand buying a promise and I don’t understand how crypto is any different than fiat, except for fiat is actually backed by the US government, which I trust more. Maybe that’s because I’m some capitalist, or cuck, or whatever.
Jake: [laughs]
Bill: I don’t know what I am. I tend to like the dollar. I like going to a bank and getting dollars. I actually go into branches and I can touch it and feel it. I know it’s FDIC insured. It’s a crazy thought. [crosstalk]
Tobias: [crosstalk] 250K. If you got 250K in your bank account, then good for you. Well done.
Bill: Yeah, and also next year, 250L will be a cucumber.
Tobias: Yeah, that’s right. One espresso.
Jake: Oh.
Tobias: Tom Brady has had a cracking year. He’s getting divorced and he’s put $650 million into FTX.
Bill: Wait, that’s how much he put in the FTX?
Jake: Ah, I don’t know if that’s right.
Tobias: That’s the headline.
Jake: I think he got granted- [crosstalk]
Tobias: $600– [crosstalk]
Jake: -or whatever the hell they’re calling it in FTX for being a spokesperson and that’s probably- [crosstalk]
Tobias: $650 million worth.
Jake: – a poof.
Bill: It’s just promises, man. It’s just tokens.
Jake: Yeah.
Bill: It don’t mean anything, anyway. Why not give them away?
Jake: Totally. We’ll just make more.
Tobias: He’s incinerated himself in 12 months. Wow.
Bill: I haven’t paid a ton of attention to this but I talked to Kyle Cerminara yesterday about this issue. He is more– [crosstalk]
Jake: Tom Brady specifically?
Bill: Well, yeah.
Jake: Oh, okay.
Bill: He’s more heated about this issue than I’ve ever heard him upset about anything.
Tobias: Which one?
Bill: So, I can’t articulate it like he can. He’s a legit analyst and has gone down a rabbit hole on this. But just the amount of fraud and blatant– I guess, it’s fraud and who benefited. My interpretation of what he said is maybe a better way to say it than putting words in his mouth. But he’s like Brady, there are people that got money out of this that are well off.
Tobias: Matt Damon.
Bill: There are people that got smoked.
Tobias: Fortune favors the brave.
Bill: And the idea that the people that are okay still and got money out of this whole system don’t have to give it back to the people that got smoked is morally offensive.
Tobias: Matt Damon.
Bill: Yeah.
Tobias: [crosstalk] Fortune favors the brave.
Bill: Matt Damon can afford $10 million to give it back or whatever the fuck he made. I know it’s a lot of money, but he can actually– It’s like Chris Rock’s joke. If you got $50 million and your wife won 25, big deal, you’re not starving. But if I got $50,000, the bitch won $25, I might have to kill her.
Tobias: [laughs]
Bill: It’s the OJ joke. Anyway, watch the special. It’s not me. It’s him. Anyway, it’s a shame. I feel for those people. I feel for the girl or the woman that takes care of my grandma that lost everything. I had to advance her– I didn’t advance her, but I gave her Christmas bonus early so she’d get a car repaired. And Matt Damon’s fucking still on commercials probably cashing checks.
Tobias: Just that you know that line, “Fortune favors the brave”? So, this is something that I put this in my book before Matt Damon says it actually. I had it in there, and I looked it up. You can find it. It’s a lots of militaries around the world, lots of special forces use that expression, “Fortune favors the brave” or different variations of it. And so, I was trying to find where did that first come from? One of the early ones that I found, Pliny the Younger describing Pliny the Elder, who evidently said it– So, Pliny the Elder and this is Ancient Greece. He’s going to investigate the eruption at Mount Vesuvius and he says, “Fortune favors the brave. I’m heading for Vesuvius.” Fair to meet his doom. Never heard from again. Last thing he ever said.
Jake: Got [crosstalk], huh?
Tobias: When I heard fortune favors the brave on that bitcoin ad, I was like, “Huh, how about that? History repeats”
Jake: Makes perfect sense.
Bill: Hmm.
Jake: Yeah.
Bill: Well, when did they learn to brew beer?
Tobias: [laughs]
Jake: Yeah, exactly. [laughs]
Bill: Those are good.
Jake: One of the Cardano, I think it was, is named after a guy who was a total degenerate gambler in the 1600s but came up with some little bit of math on something gambling wise. But they told us how this was going to play out, didn’t they? This is [laughs] speculative gambling.
Bill: I do think if you run tape back–
Tobias: Dude died poor.
Bill: I think If you run the tape back, I’ve been open to the idea of crypto. But the other thing that I know that I’ve said, you guys have been much more skeptical than I, so you’re more right than I am. But I did say this reminds me of the late 90s in that area. Late 90s, there was a lot of dog shit that was floated to the market.
Jake: Oh, yeah.
Bill: I don’t know that it brought down any exchanges, but I think people are seeing it now. Probably, out of the ashes, there will be a couple projects that are maybe even worth buying and investing in.
Tobias: No doubt.
Bill: Right now, this is when the fire is burning.
—
Tobias: I get another slightly– This is a little bit off topic, but I saw this tweet this morning. Mark Brooks tweeted this. This is something I’ve been saying over and over again, and he articulated really well. He just said, “This is the fourth straight year of trashed year on year data where you can’t get a good comp.” That’s right, because we’ve had a COVID crash, money printing boom, plus the stoppage in global shipping. Now, we’re halfway back to normal, but the housing market’s crashing. As a businessperson, how do you plan through something like this? Isn’t this the kind of thing that makes people just say, “Let’s just pull back for a little bit and make sure we survived to the other side”?
Jake: I would counter that to say that– I think this is more the norm than in the last 10 years where the abnormal thing was where nothing really bad was happening.
Tobias: Yeah, that’s a good line.
Bill: I think COVID is a little bit different, but yeah.
Tobias: What was the response to COVID then?
Bill: Yes, that’s correct.
Tobias: COVID was probably stimulative in the same way that broken windows are stimulative.
Bill: It shocks me the China’s still apparently locked down. This is fucking crazy. Somebody, come at me in the comments telling me it makes sense. It makes no sense. Yes, I live in Florida. I get that maybe we’re a little too liberal on that.
Jake: [laughs]
Bill: But that’s insanity.
Tobias: I saw a stat that said COVID deaths are down 90% this year. I don’t know if that’s true or not. It’s just another internet stat that I saw. You can let me know– [crosstalk]
Bill: I want to know how many people are forced to get skinny in China right now.
Tobias: Get a what?
Bill: Get skinny. Get on a treadmill.
Tobias: Oh, get skinny. [laughs]
Bill: I know you can’t say that, but it’s a big contributing factor to deaths.
Tobias: Somebody just run a marathon for like the third time. He’s spread the whole way through.
Bill: Dude, you said it like straight off the bat when we talked about what are you doing and you were like, “I’m going to make sure that I lose weight.” Right off the bat, you’re like, “That’s a major contributing factor to a lot of death.” We’re going to get a COVID thing on Spotify. It’s going to have a blue [crosstalk] episode.
Tobias: I don’t think they can.
Bill: They yelled at you, man. [crosstalk] a ton of stuff. It’s ridiculous.
Tobias: Yeah.
Bill: it’s the one thing, the label. The only thing. Okay. So stupid.
—
Could Sam Bankman-Fried Go To Prison For The FTX Disaster?
Jake: [laughs] How do you guys think that this SPF thing plays out? What’s the ending of that story?
Bill: Hope he goes to jail.
Jake: Okay.
Bill: Assuming the charges that are alleged are true. If they’re not, then we’ll see. Somebody seems like they should go to jail over this shit.
Tobias: I don’t know what the story is, but if it is the case that FTX has re-hypothecated assets to Alameda, and they leave it up, and then smoke them in the crypto crash, unable to return them, then– [crosstalk]
Jake: Was I not supposed to do that?
Tobias: Sorry. [crosstalk] I wasn’t aware I wasn’t allowed to do that.
Jake: I got a pleading [crosstalk] on this one.
Tobias: [laughs] He’s still out there tweeting. I would have thought that he’s either confident that nothing’s going to happen and they’ve done nothing wrong or he’s an absolute idiot, because I would have thought the lawyers would have just said, “Stop saying stuff publicly.”
Bill: Yeah, or his lawyers are like, “You’re so screwed, it doesn’t even matter.” I don’t know. I doubt lawyers for– [crosstalk]
Jake: [crosstalk] who said that.
Bill: Yeah, they are– [crosstalk]
Tobias: It’s more contrition at this point. They’ll just be like, “Express contrition. Express contrition.”
Bill: Yeah.
Jake: Well, he did that. He said he was sorry and he messed up.
Tobias: [laughs]
Jake: Water under the bridge.
Tobias: There you go.
Bill: Should have worked at a big bank in 2008. He’d have walked away.
Tobias: Yeah, good point.
Bill: Not totally but he sort of– [crosstalk]
Tobias: When music is playing, you got to keep– [crosstalk]
Jake: What?
Bill: Guys should have gone down for that too and he should go down.
Tobias: Do you know in medieval times, if you’re a banker, they stuck them in the stockade and arrested you basically, stuck you in jail, and they gave you 12 months to pay it off. And if you couldn’t, they just chopped your head off at the end of that. [crosstalk] I’m not advocating that.
Bill: How are going to do it from jail?
Tobias: Well, that’s part of the problem. [crosstalk] back it back.
Bill: That’s fucked up.
Tobias: I like to pay back the $300 million with a paper or two.
Jake: Yeah.
Bill: It’s fair.
Jake: We do that to poor people in this country though too. They hit him with fines that run while they’re stuck and they can’t get to work. If you dig into the criminal justice system a whole lot, it’s a little depressing.
Tobias: Yeah.
Bill: It’s for celandine bags, man.
Jake: Come on.
Bill: Whatever.
Jake: Let’s keep some perspective here. Where’s the common sense?
Bill: This is true. This is true.
Tobias: Left a long time ago. Just to continue the datapoint– [crosstalk]
Bill: I like these topics, man. We’re really running through current events.
Tobias: [laughs]
Jake: Yeah.
—
Michael Gayed – Melt-Up In Stocks To Come
Tobias: We’ve had this monster rally over the last week. Michael Gayed, in particular, has been calling for a melt-up through the end of the year. I think his thesis is, he’s so bearish and so as everybody else that any slightly good datapoint that leads to this giant run up. And I don’t think he’s necessarily saying run up for fundamental reasons. He’s just saying sentiment is so bad, we are likely to see all– [crosstalk]
Jake: Oversold, basically.
Tobias: Yeah. I think we’ve seen that and who knows where that goes to. But I still don’t think that he’s saying it’s all clear and he’s not calling for a new bull market.
Bill: No, I think he’s saying it’s a runup before a flush. I think that’s what he’s saying.
Tobias: Yeah, I think that’s what he’s saying. I think that’s what he’s saying too. That’s trader stuff. I don’t know one way or the other. I’m looking at a little bit– One of the things that I think is that we’ve seen inflation come off a little bit and that has led this monster rally in the market. It was coincident with that day where it came in at 7.7%, which means it’s down or it’s no longer– I don’t even know what is-
Jake: Keeps up coming higher.
Tobias: [crosstalk] change?
Jake: Yeah.
—
The 10-3 Yield Curve Is Now Inverted
Tobias: It’s still pretty high. But I would have thought that probably, the likely scenario for inflation or what typically brings it down is you go into a recession. And I think that’s probably what’s happening. The 10:3 is inverted, got a pretty good record. It hasn’t met Cam Harvey’s definition yet, which is 90 days of–
Tobias: A quarter. 90. Yeah.
Tobias: Yeah, a quarter of being inverted.
Jake: But we’re on pace for that right now still?
Bill: It’s negative 0.46 the three months over the 10-year currently.
Jake: But the clock is running on that quarter is what they are saying.
Tobias: Yeah, still. It’s only 10 days in or something like that. Who knows? It could be over tomorrow.
Jake: That’s a long 10 days. I could have sworn– [laughs] It’s got to be in at least two months. [chuckles]
Tobias: No, I don’t know. It got really close, then it just stalled out for a long time but it has actually inverted. It’s at 0.46 negative now. I think at the depths of 2019, it was 0.49. So, it’s pretty inverted right now. If the slowdown and inflation is in fact leading into a recession, which is what the 10:3 indicates, then that means we’re in the worst bucket for these big drawdowns too in the stock market. So, we’re down whatever 15%, or something, or 20% from the all-time high. And then typically, that’s halfway if you’re in a recession, we’re going another 20 something percent to go which should be closer to. Fair value.
Bill: This is what makes me so nervous about big tech right now. People are like, “It’s cheap, it’s cheap.” These are people that have not liked big tech in the past. And all of a sudden, you’ve got these businesses that have bloated cost structures that are working on cutting them but are slow to do it. I don’t even necessarily blame them for that. I don’t know that you should manage your business for the stock market and keeping your stock high. But you’ve got bloated cost structures and you’ve got cultures that are not quick to fire. To the extent that there’s cloud, you’ve got more fixed costs, probably than you used to have. It just reminds me of Top Gun when he was inverted.
Jake: Yeah. [laughs]
Tobias: Whoosh.
Bill: Yeah, I could see them flashing some results that people are like, “Wait, I didn’t realize that that level of operating leverage was in that business.” And it’s not as fun when there is a recession.
Jake: A lot if it’s ad based as well. We talked about this a long time ago about how– [crosstalk]
Tobias: Ad’s cyclical.
Jake: Is there any concern for everyone in big tech of how much of the market cap is derived from advertising dollars?
Tobias: Plus the VC plus advertising whether you are actually advertising [crosstalk] not.
Jake: Historically have been somewhat cyclical, which is– [crosstalk]
Bill: Well, and social, it’s easiest to turn off. That said, Meadows would buy it.
Jake: [laughs] I love how you do that. Here’s all the reasons why this is terrible, also buy this. [laughs]
Bill: That is to buy.
Tobias: That’s right. That’s there.
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Is Meta’s Share Price Too Cheap To Ignore?
Bill: We had our big thing on Meta. That was part of the tiff. The other part was my shitty attitude. But when we had our thing at the end of that show, I was nervous. I don’t know that– I couldn’t have articulated what came out, but now, I honestly think if you like value and you like good businesses, I don’t see how you don’t buy Meta. I don’t see it. It may not work, but that company is cheap as fuck right now.
Tobias: It’s quantitatively cheap. And all the arguments are in the price. It can get cheaper from here. And who knows if this thing– The business might be irrevocably broken.
Bill: But it’s not though. Look at the results in core. Yes, the margin structure has gotten worse, and returns on capital have gotten worse, and it deserves the derating, because it can’t ride on Apple anymore. It requires Capex and all these GPUs for AI and I get it. That business is cheap right now.
Tobias: We’ll see it’s sealed– [crosstalk]
Bill: It’s not a sideshow. He changed the name of the business to Meta. But I really think you’ve got to get yourself to the point where you believe that Zuckerberg can’t possibly pivot the Metaverse bet to think that you can’t buy it here. And I don’t think he’s that dumb.
Tobias: You are on a suicide pact with Zuckerberg though.
Bill: 100%. But he always had been.
Tobias: Yeah.
Jake: Yeah.
—
Chris Hohn Goes Activist On Google
Tobias: True also in Google. This was leading on from the– You got in front of me a little bit there. But the tech’s overearning, it’s becoming very cyclical. Tech has a lot of layoffs. You’re stuck in the same thing with Google because I think there are two classes of shares in Google and neither of them vote. There’s three books that control Google and you never hear from them anymore. They’ve wisely hidden behind their gated communities so people with pitchforks don’t come with them. They got some human shields up in front of them. TCI, Chris Hohn’s outfit has gone activist on Google. They’ve got a $6 billion stake and they say there’s too many employees. Well, there’s a couple of things going on there. There’s nothing that they can do from outside other than shaming them into letting people go but that might just be the cover that they needed. This is perfect. Let’s some people go.
Bill: I talked to a guy that sells for Google Cloud. He said he thinks that Google Cloud is by far the best technical cloud. He loves selling the solution. He’s not the sales guy. He’s the guy that the sales guy brings in on the engineering side. Then, he said, “Now that the stock’s down, I look around the office and I think 50% of these people could get fired.”
Jake: [laughs]
Tobias: Yeah.
Jake: Without any interruption to– [crosstalk]
Bill: Yeah, he’s like, “I welcome it.” Now, it’s tough to say that and survive, but I heard the same thing out of Wells Fargo people when those layoffs started and I think that some of them would argue that the business is running more efficiently now.
Tobias: In another life, I sold some deep-sea fiber to Google and their entire team, which was bigger than their whole organization, flew first class and stayed of the best hotel. I was like, “There’s a little bit of bloat there. You could cut back on that a little bit. That bottom line is going to get a lot fatter.”
Bill: Yeah, obviously, I want the value investing group over there to all get raises. But outside of that–
Jake: [laughs] I thought your buddy was– [crosstalk]
Bill: It was super cool place to visit. I love that. I think that there’s merit in keeping a workplace somewhere that people want to be. I think that there’s probably a way to do that at 15% to 20% to cost. As someone who worked at a bank once, and looked around, and people were reasonably happy. I guarantee you we are not living like that. We’re trying to get free coffee pods.
Jake: [laughs]
Tobias: Well, Musk says that the Twitter launches cost $400 a head.
Bill: At Twitter, I could buy it.
Tobias: I find that a little bit hard to buy, but that’s a big number.
Bill: Yeah, they probably give you some allowance to go out and eat also. Not everybody eats the food. That’s probably what’s going on there.
Tobias: Give me a $50 stipend and the other $350 in my pay packet. Or give me the $350 and I’ll bring a brown bag lunch from home.
Bill: Yeah.
Tobias: Save you 50 bucks.
Bill: I ate sardines and onion yesterday. How much is that? $4, like Biggie Smalls, homie.
—
Tobias: [crosstalk] JT, you got any veggies for us today?
Jake: I do.
Bill: Hang on, don’t we have more? We got Burry’s thing. We got to have more.
Jake: We can get that after. How about that?
Bill: All right.
Jake: We’ll pick it up in the Q&A section.
Bill: Yeah. You do do a lot of work for this show. So, you deserve the 15 minutes.
—
Investing Lessons From Formula 1
Jake: [laughs] Yeah, that’s not as much as it seems. All right. We’re going to be talking about the 1998 Hungarian Grand Prix F1 race. So, feel free to chime in with your F1 knowledge, Billy, because you know more about it than I do. In this race, Michael Schumacher, who’s one of the all-time great drivers, is racing for the Ferrari team. And the two McLaren cars for their team were faster in their qualifying times and had better starting positions. So, that’s the setup for this race. Now, as you guys know, raw speed isn’t always the deciding factor in winning races. There’s actually a fair amount of decision making that happens that’s also key. Like, how do you plan for the race? What’s your approach to pitting? That’s what we’re going to be talking about here. All the other teams for this particular race chose a two-pit-stop strategy. That was their plan. How much fuel, tires, all that stuff that gets–? They change it in 10 seconds. So, Ferrari decided to be nonconformist and they did a three-pit-stop strategy. So, here we have these competing strategies.
So, you’re probably fairly wondering, you’re sitting in the pits, the clock is running, everyone’s out there and going 200 miles an hour while you’re stopped. How are you going to win if you’re obviously way slowed down by sitting in the pits for a third time when everyone else is only doing two times. So, if you’re Ferrari and you’re starting with a weaker starting position, and you’re choosing to be in the pits more, doesn’t that seem like a stupid strategy?
Here’s what the difference was. First of all, amount of fuel. So, fuel is heavy, relatively speaking. And at this track, each additional 22 pounds of fuel cost a car about a third of a second per lap. If you imagine using three stops, Ferrari was able to run with around 66 less pounds of fuel through most of the race, which enabled them to go faster by 1.1 seconds per lap. So, I would say the takeaway for the investment side for this particular part of it is that obviously, having a smaller asset size is a bit of an advantage because you’re more nimble, you can go places that other people can’t go, you’re not burdened by size as much.
Number two, by doing three instead of two, Ferrari was basically out of phase with their competitors. Everyone else is all stopping at the same time roughly, but they’re doing three instead of two, that gives them more free time out on the track when it’s relatively open. So, there’s less jockeying for position. They’re able to run more qualifying laps, which is you’re out there racing almost by yourself so you can go faster, you’re not trying to get around people who are going slower. The takeaway from that would be that– maybe I’d be curious to hear, Toby, what’s your quant testing about this says, but it might be better to lag some of your rebalancing in a quant strategy to be out of phase with what everyone else is doing.
Tobias: You would be [crosstalk] face the SPY. That’s what you’re going to try to do.
Jake: Is that the key?
Tobias: [crosstalk] spy rebalances, everybody rebalances around SPY.
Jake: Okay. Did you find that that was like advantageous? If you did stay out of phase with everyone else?
Tobias: It was more an operational thing, just that it was hard to do it on those days. You’re better off doing it on other days. I’m not entirely sure that there’s a performance advantage to doing that. Just that it’s easy on the ops team.
Jake: Okay.
Tobias: It’s probably a good thing.
Jake: Speaking more qualitatively, if that’s more your game, I personally try to wait at least a week before I go look at a new 10Q that’s come out. I just want to let the noise die down first. Let everyone else pit stop together on it, and fight, and try to figure out what it’s worth and be influenced by Mr. Market. But I’m going tried to be out of phase with them, let it die down, and process the information. Hopefully, have a little bit more of a qualifying lap for myself to not have to dig through as much.
Tobias: Do you worry that you get secondhand reports of what’s in there before you get your own look at it?
Jake: Yeah, that’s why I try not to read anything about it.
Tobias: Yeah, fair enough.
Jake: I don’t want anyone else’s voices in my head. Then the third thing that happened was tire choice. Ferrari was able to make different tire choices as the track conditions changed. Everyone else only got to make two decisions as opposed to a Ferrari got to make three decisions. So, the takeaway there is that even though it can feel it’s taking more time than necessary to have these extra pit stops, it’s useful I think to be able to evaluate the track conditions that you’re in more regularly than maybe some people, which might look like re-underwriting a lot of your positions as it feels track conditions are changing and really asking yourself like, “Do I need to make changes in the portfolio based on what the conditions look like? Do you have the right tires for the next section of the track?”
Buffett is largely celebrated for having these long holding periods. He wants to hold forever. But I think it’s instructive to remember how quickly he punched out of airlines when he felt the track conditions changed. I feel it’s a little bit underrated how he’s willing to pit stop maybe more than others give him credit for. So, in the end, Ferrari ended up winning the race by choosing what apparently looked like a slower and more laborious process by having three pit stops instead of two and yet, it allowed them to make adjustments in the race that other teams couldn’t, so I think there’s just something to be said about our process, and really thinking through it, and having more check-ins maybe regularly on your investment process, and not letting it go too far and drift from what track conditions are changing.
Tobias: Let me ask you a question. So, you pit three times instead of two. You’ve got 10 seconds of additional time that you have to make up somewhere. And you said you carry 66 pounds less fuel, which means that each lap on average is 1.2 seconds faster. So, you got- [crosstalk]
Bill: All else equal.
Tobias: -eight laps.
Jake: Yeah. Right.
Tobias: All else equal. So, you get eight laps-
Bill: You get new tires.
Tobias: -to catch up. New tires. Okay.
Bill: It’s going to make you quicker.
Tobias: Eight laps to catch up. So, how many laps are those races? How many laps is that race?
Jake: I don’t know how many laps that races. I don’t know. BB, you probably have a better sense of– [crosstalk] these.
Bill: I don’t know. That one, no.
Tobias: More than 24?
Bill: Let’s assume Ferrari calculated it.
Jake: I think there are a lot.
Bill: There were sufficient laps.
Jake: I think they are like in the–
Bill: Yeah, there are more than 24, for sure.
Jake: [crosstalk] 50 or I don’t know. 100?
Bill: Yeah, it was 86, I think. Somewhere around that.
Tobias: It was a quantitative decision. It was a mathematical decision that even with one extra pit stop, that would make them– provided they made some adjustments– as long as you don’t run with a full fuel tank, you run a little bit lighter, because you pit more often.
Jake: Right.
Tobias: It is interesting, but then you’ve got some risk. Because every time you pit, there’s a risk that the pit stop– [crosstalk]
Bill: Yeah, if [crosstalk] goes wrong.
Jake: Yeah, that’s true. Just like you can’t get the tire off or something bad happens.
Bill: You zig them with the zag.
Tobias: That’s a good strategy.
Jake: Yeah, you are trying to zig a little bit.
Bill: Zig.
Tobias: Is that no longer the case that the–? [crosstalk]
Bill: Can we say zig or we allowed to even say the word–? [crosstalk]
Tobias: Without context, it’s okay.
Bill: Okay, that’s good. Yeah.
Jake: [laughs]
Bill: It’s like Voldemort.
Tobias: [crosstalk] whatever SEC regulators [crosstalk] in the future.
Jake: You can’t say bomb on a plane.
Tobias: [laughs] Yeah, that interesting, JT. It presumably makes you a little bit more robust, although they were running with less fuel. So, they were running about up to the red line as much as anybody else was.
Jake: But I was thinking about this too, I think there’s something to be said about running with a little less fuel psychologically, like less stuff weighing you down, that extra stress outside that might be coming in and impacting your decision making. I think running lightweight up here mentally is actually a pretty big advantage.
Tobias: It’s one of the reasons I like smaller position sizes, because you don’t have to put so much– Once you get into an 8% plus position size, you really got to be-
Jake: That’d be right.
Tobias: -pretty certain about what you’re doing. I just can’t get to that level of certainty, which is why– 3.5% could be pretty Zen. I would consider like Facebook at 3.5% is a no-brainer. Bigger than that aside getting now, we’re going to really know what’s going to happen and I don’t think you can, I wouldn’t be comfortable doing more than 3% for anything other than Berkshire, like those kinds of enterprises where you’re just certain.
Bill: I don’t know how certain you can be with Berkshire. I understand why you say it and I’m not trying to talk down about Berkshire.
Tobias: Well, I’m interested. What’s the concern?
Bill: Well, you got two of the guys– [crosstalk] Well, two of the guys are going to be gone.
Tobias: That’s fair.
Bill: I don’t know what it’s going to look like in 20 years. That thing can unravel a lot quicker than I think a lot of people want to admit, myself included.
Jake: Might want to have a pit stop before that 20-year marker. Just checking.
Tobias: Yeah, that’s a fair point.
—
Todd Combs Provides Insights Into Buffett & Munger
Bill: We were talking, Jake, about the Wechsler interview or wasn’t it Todd? Who was that?
Jake: Combs. Todd Combs.
Bill: Yeah, Combs. Ted, Weschler, anyway. What were we talking about offline? It’s the 15 PE-
Jake: Oh, yeah.
Bill: -that’s going to grow over the next five years? How did he frame that?
Jake: I’ll pull up my notes real quick, so that we can– [crosstalk]
Bill: I think that’s what he was saying.
Jake: Get the real one.
Bill: You solve for stuff like cyclicality. What probability [crosstalk] way that this is going to be higher?
Tobias: Yeah, I wish we would discuss that. Let’s do that.
Bill: I think that’s the test that Facebook potentially fails, because I think everybody in the world is concerned about duration risk. So, even if all the data can show you, right now the core business is pretty stable. I think in the back of everyone’s mind is like, “Yeah, but it could be the next MySpace.”
Whereas to Jake’s point over the past years, something like energy, you can argue that there’s going to be some EV transition or transition to electricity over time. But oil is going to be here. Or refining capacity, for instance is something that looks like it’s going to be pretty constrained for a while so maybe when that gets really cheap, you can bet that a little bit harder, then you can bet when it’s something that’s maybe as amorphous as– [crosstalk]
Jake: Something low Lindy like Facebook?
Bill: Yeah.
Jake: So, Combs recalled the first question Charlie Munger ever asked him. What percentage of S&P 500 businesses would be a better business in five years? Combs believed that it was less than 5% of S&P businesses. Munger stated it was less than 2%. So, that’s the first little thing here, which is kind of surprising. You would think 2% in five years, I feel that might not be the base rate. What do you guys think about that?
Tobias: Well, as soon as I read that, I thought immediately of the Mauboussin research that he does, where he looks at the buckets of return on invested capital. And he’s been doing this for a long time now. So, it’d be interesting. He’s probably done it for more than 10 years.
So, you can probably actually look at that initial crop. But every year, he updates it and he looks at just ranking every company in the S&P 500 or Russell 1000, whatever it is, by return on invested capital, to create five buckets so that the highest return on invested capital is in the top bucket. Worse return on invested capital, which is typically negative return on invested capital in the bottom bucket. And then, you wind that forward over 10 years and you can see that there’s this incredible mean reversion. So, that is the pervasive– [crosstalk]
Jake: Yeah, they are just fall like–
Tobias: The really bad ones get better, the really good ones get worse. They don’t actually ever return [unintelligible 00:49:54]. It’s kind of asymptotic. So, the best ones are still better at the end of that. But then, that’s not discussing the valuation in there. But the thing that stands out to me from that, there’s 4% of businesses that are in that top bucket that don’t mean revert. They tend to sustain those pretty high returns on invested capital. So, I would have thought that 4% is probably statistically the number. But whether they’re better or not, I don’t know. So, possibly Munger’s right. Off the 4%, only half are better after 10 years or 5 years.
Jake: So, Munger goes– or Combs goes on, “You can have a great business, but it doesn’t mean it’ll be better in five years. The rate of change in the world is significant, which makes this exercise difficult. But this is something that Charlie, Warren, and Todd think about. When Combs started at Berkshire, they had a 7 out of 10 confidence of the business’s outlook for the next five years. The nature of the world is that things are constantly changing and Todd said that they are right on maybe 1 out of 10 predictions.” So, that should have been a headline to me. When they first started, he felt they were good 7 out of 10 predictions. But the world has become so hard to predict that now they think they’re only on a 1 in 10 batting average.
Tobias: But you got to be surely 50:50. Surely, it’s not– 1 in 10 means that you’re actively wrong. 1 in 10– surely the base rate is 50:50.
Bill: I think it depends how specific you want to get with why you’re right.
Tobias: Oh, fair enough. Well, it’s like a Tetlock type thing, right?
Jake: Yeah, it is.
Bill: yeah.
Jake: This is probably their entire population of predictions-
Tobias: Yeah, fair enough.
Jake: -even the ones that are on the low confidence interval. I think if you asked me to guess what they would have said for that number, I would have never come up with 1 in 10. I would have been maybe coin flip.
Tobias: Yeah. I learn that the strike rate and back test for various things that I do. It’s 50:50. And you’re hoping that you get a bigger payoff and the stuff that works than the stuff that doesn’t work. But that’s not always the case. It cycles.
Jake: So, Bill, here’s what you were referencing. Combs goes to Buffett’s house on many Saturdays to talk. Here’s a litmus test they frequently use. Warren asked, “How many names in the S&P 500 are going to be 15 times earnings in the next 12 months? How many are going to earn more in five years using a 90% confidence interval and how many will compound at 7% using a 50% confidence interval?”
Bill: Hmm.
Tobias: Has he just told you his formula there?
Jake: Well, Combs said that this rubric was used to find Apple since at the time the same three to five names kept coming up. So, in this exercise, you’re solving for cyclicality compounding an initial price.
Tobias: Yeah. When he says 15 times in 12 months, what does he mean by that? Which way? It’s going to be reverting down or reverting up? What’s the directionality? Which way is he going with it?
Jake: Probably down, I had to guess.
Bill: I don’t know, you could do both.
Jake: You can. 15, that’s the matter which way the elevator’s going. [laughs]
Bill: Yeah, they just bought Louisiana-Pacific. What’s LPX’s trading multiple? Like three or something ridiculous?
Jake: Going to 15.
Bill: Yeah. That’s because the E is going to go down.
Jake: [laughs]
Bill: I wonder they say, “Okay, well, even with that fade, do we still think that we can make 7%?”
Jake: Yeah.
Bill: You get yourself somewhere that you need to go? I don’t know. Ask a follow-up question, somebody that’s got access. Holler back. The 10 are strong.
—
The Diverse Nature Of Berkshire’s Stock Picks
Tobias: I love when Buffett comes behind me picking up my trash like HPQ, LPX.
Jake: [laughs]
Bill: [crosstalk] Oh, did you own LPX? Well, I can’t even ask you that.
Jake: Was that– [crosstalk]
Tobias: I own LPX.
Jake: –you might be interested in it?
[laughter]Tobias: I want to get a good one, having to buy a good one. Not happened yet.
Bill: Taiwan Semi was interesting.
Jake: Yeah. What do you think about?
Tobias: Yeah.
Bill: Makes sense. There’ve been three issues on the show, geopolitical risk related, and I’ve said I don’t know how to handicap any of them and I’m not going to start now. [crosstalk] two, I think. Well, actually, I don’t know what we are on the China issue, but I’ve always thought it was too hard.
Tobias: Do you think that the main issue with that is geopolitical or do you think there’s a valuation issue? And is Buffett buying that answer that question?
Bill: I think risk– [crosstalk]
Tobias: It was expensive every time I look that. I haven’t looked at that a year though.
Jake: I think it’s off some. So, it might be cheaper than you remember. But it is an interesting question to ask yourself, what would it be trading at if it was on US soil?
Bill: Oh, God, it’d be way higher.
Jake: [laughs] So, therefore, if you frame it that way, is the discount appropriate?
Bill: Yeah, I don’t know.
Tobias: Are we see there’s a discount in it?
Jake: Well, relative to if it wasn’t just geopolitically risky.
Bill: Yeah. It depends if you’re talking about earnings or cash flow because they’re completely different things.
Jake: A lot of re-investment, right?
Bill: Yeah.
Jake: Capex is large.
Bill: You could argue it’s pretty rich on a cash flow basis. On an earnings basis, it’s pretty cheap. Strong balance sheet.
Tobias: I find Berkshire’s buys interesting. They do seem to spend– On one hand, they’re buying LPX, which is a very traditional deep value type pick.
Jake: [laughs]
Tobias: And then, on the other hand is TSMC, which is a compound probably off the end of what I would be prepared to pay for something like that.
Jake: Well, it might be kind of GARP, right?
Tobias: GARP. All right.
Bill: But I think LPX, you’re dealing with, what, OSB and then this– Basically, it’s commodity plywood and then they’ve got this siding product. I did some work on the siding product. And the guy that I talked to was like, “Yeah, it’s pretty commoditized.” [crosstalk]
Tobias: But as we discussed before, two times earnings.
Bill: Well, but it’s super normal earnings.
Tobias: True. That’s fair.
Bill: I don’t know what the normalization is. But I think you have to pay a cheap price for that kind of a business.
Tobias: Yeah. That’s why I just think it’s interesting to have those two picks in there.
Bill: Yeah.
Tobias: Plus, Amazon. Remember, Amazon that was a year ago or something like that? A little bit more than– [crosstalk]
Bill: And Restoration Hardware, they bought more of. It seems like they are buyers of the structural bull housing thesis.
Jake: Little bit, huh?
Bill: Yeah.
Jake: I guess Clayton has been doing really well. So, I don’t know. Maybe there’s–
Bill: Well, the more unaffordable homes get, the better Clayton is as a value proposition.
Tobias: I saw somebody say that they might have had some insight into TSMC because of Apple. Apparently, Apple buys all of their inventory. Does that make sense?
Bill: Yeah.
Jake: [crosstalk] thing though. Based on lots– [crosstalk]
Tobias: Yeah. All right, fair enough.
Jake: I don’t know.
Tobias: I saw the tweet. I’m regurgitating tweets. It’s like me retweeting something. I’m retweeting it on a podcast.
Jake: [laughs]
Bill: There you go.
Tobias: I try to let everybody know when I’m retweeting. Just some random dude I found on Twitter said something, for what it worth.
Bill: It was also 20% lower for a while, I think. I don’t know what their price was. I haven’t looked at their 13F.
—
Tobias: JT, what’s your shirt say? People want to know.
Jake: It says Journalytic. This is the software product I’ve been slaving over for a couple of years that’s hopefully in the not too distant future is going to be available for anybody who wants to get in there and get some work going.
Tobias: We’re going to be– [crosstalk]
Bill: I like JT’s veggies. That’s how you can implement them.
Tobias: You’re going to have a pod where JT could let us all know what it is coming up sometime soon.
Jake: Yeah, I should do that definitely. I’m excited. I think it’s going to help a lot of people which is going to feel good. Got a great team working on it. We’ve been busting our ass for a long time. So, [laughs] it’s going to be fun.
Tobias: Norbert Lou has bought Smith & Wesson. All those things are cheap, right, Ruger Smith and Wesson?
Jake: Is that one of those peak earnings things? I don’t know. Where are we at with the Armageddon and–?
Bill: That’s right.
Jake: All preppers’ basements already full ammo? I’m not sure.
Tobias: I don’t think that’s possible. I don’t think that’s possible, honestly.
Jake: It’s a bottomless–
Tobias: But like a decade, I think it’s every time there’s a Democrat president, that seems to be a good time. I don’t think they slowed down at all when Trump was in power.
Bill: They are taking our guns.
Tobias: So, they always trade cheaply, because they are ESG unfriendly.
Jake: Oh, yeah.
Tobias: Yeah, maybe there’s some cyclicality in there. Smith & Wesson has been around for a long time. Is that the gun that won the West?
Bill: On an earnings basis, it’s really, really cheap. Cash flow? I don’t know.
Jake: I think that was a Colt .45, wasn’t it? Winchester? I don’t know.
Tobias: Winchester .30-30 lever action, the gun that won the West?
Bill: Yeah, you’re probably paying no more than seven times normalized cash flow. I’m just eyeballing this. That doesn’t seem a ton of– It seems like if you think the S&P is going to do somewhere less than 9 and your entry multiple is seven times actual cash flow, that equation seems one’s an outperformer and the other underperforms.
Jake: Cathie says as soon as rates go down, if the Fed smart, then we can all have that roaring 20s again. That’s the only thing holding us back.
Bill: I don’t think that’s it-it. We’ll see.
Tobias: That’s it, fellas. We’ve made it.
Jake: We made it.
Tobias: Full time.
Bill: Everyone, have a good week except the one guy that says that I have verbal diarrhea. I hope you get diarrhea.
Jake: [laughs]
Tobias: Verbal diarrhea.
Jake: Cheers, everybody.
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