The Invisible Present | The Acquirer's Multiple®

In their latest episode of the VALUE: After Hours Podcast, Morris, Taylor, and Carlisle discuss The Invisible Present. Here’s an excerpt from the episode:

Jake: This one comes from, shoutout to my boy, Paul, in Ireland who sent me this article that’s from the Long Now Foundation, which we’ve done a few of their things before. I like them a lot, because they’re trying to get humanity to think in longer timeframes, which is I think near and dear to my heart. But one of the things that they do that I always find funny when you’re reading one of their articles is that they put a zero in front of the years. So, it’ll say, zero [Tobias laughs] 2022 to get you to think about like, “Well, someday it’s going to be 12022.” It’s always a little off putting when you first read it, because it’s like, “Wait, oh, that’s supposed to be a year.” But then, when you remember again what they’re trying to get you to think about is fun.

So, let’s paint a little picture. For nine months of every single year, there’s this guy named Chris Halsch who, every two weeks will walk this same 10-mile loop near Donner Pass, which happens to be in my backyard. It’s high up in the California, Sierra Nevadas. His sole purpose when he’s out there every two weeks is to count butterflies. He visits five different sites at different altitudes. And with this metronomic regularity, he’s out there for the past five years counting butterflies. Every time he retraces his steps, he’s jotting down what species and the number that he’s seeing. It turns out that these notes that he’s taken are actually highly coveted by scientists. He types up in a spreadsheet and every single datapoint, adds a new segment to this really long chain of observations that’s been growing without interruption for more than half a century. It’s these exact same places that they’re measuring, these really long-lived efforts to monitor the butterfly population. It’s like a relay race, where now, Halsch is the one who is extending this run, this marathon that actually started 20 years before he was even born.

So, these type of multidecade time series observations, they’re really rare and they’re very valuable artifacts in measuring ecosystem health, because they overcome this particular weakness that we have in our ability to perceive the natural world. We’ve developed all these powerful methods for looking at past events that could have been like the birth of galaxies billions of years ago, mass extinctions millions of years ago. We have instruments now that will measure and parse the present down into these tiny, tiny slivers of time that we can measure. They call them zeptoseconds.

When it comes to this modest timescale of our own lives, we’re almost basically blind. So, for instance, scientists had been tracking atmospheric CO2 at the Mauna Loa Observatory in Hawaii for 64 years. Right now, we will use tree rings, and ice cores, and sediment drilling samples to capture, sometimes, data that are millions of years old. There’s some fun stories about– locals in Finland had been keeping the freeze and thaw dates of a particular river for 325 years. So, we have some pretty good idea of some of the temperature changes for that particular area. And of course, Japan, we’ve talked about longevity in Japan before. They have some data series that are measuring the flowering of cherry trees and when did that happen. It goes back like 12 centuries. They have these notebooks from monks who are keeping track of when the cherry blossoms happened. So, it’s back to like 800 AD or so.

The problem is that our perceptions are often distorted by– we have really selective memories and cognitive biases, sometimes political agendas. One of the most difficult parts of this is that we have this shifting baseline syndrome, where whatever the recent past has been will influence what we think is normal. Each generation gradually forgets the conditions of the past and we accept the new ones as completely normal. There was an essay by the zoologist named John Magnuson and he wrote about this temporal myopia that we get trapped in what he called the Invisible Present. So, that’s what I’m calling this segment. It’s this space where we can’t see the slow changes and we can’t see the effects, because often they’re lagging years from their causes.

One of the issues that right now in science is that there tends to be these three-year grant cycles. So, if you wanted to have a longitudinal study, you can’t get the funding for it because there’s nobody to pay for it further out than about three years. And so, we end up with these thousands of snapshot studies that look at a single hurricane, but it won’t look at what happens, cyclical damage of hurricanes over 30 years, like that type of analysis just doesn’t get done.

So, I thought it’d be interesting to think about like, “What’s the invisible present to us today in the investment world that we’re missing out on?” These shifting baselines, they mean that we start ignoring the past and accept the present as normal. We get used to it. We start taking it for granted. What would appear right now today to be anomalies in a bigger, longer dataset?

The first thing that comes to mind is interest rates for me. The relative president has been these incredibly low rates, but that seems like a historical anomaly. I think everyone’s waiting for rates to go back down to 2%. We just think that’s going to be the new normal. I wonder about that. Multiples, obviously, which are often driven by that interest rate. We got used to getting 30 or 50 times revenue for a SaaS company. Is that going to come back or was that an anomaly? Profit margins, we talk about this on the show a lot. These 12%, 13%, 14% profit margins, is that the new normal or is it that’s the historical anomaly? Because 6% used to be the normal. And then, factors obviously like value’s dead, those type of arguments. But historically, if you look back further, it tended to work out pretty well.

A little bit of self-promotion. These time series data are really hard to just remember and it’s really dangerous, I think, to do this kind of work all in your head. So, you should probably be keeping a journal. It’s pretty impossible to remember what you were thinking in the past in high fidelity and to keep track of the changes. One of the biggest problems is the business effects can lag their cause by multiple years. Bezos famously said during– He’d get congratulated on a quarter and he would say like, “Well, I can’t really take credit for that, because that was all stuff that we did three years ago that’s finally showing up today.” It’s just simply too hard to keep track of all that stuff in your head unless you’re writing it down.

I would say the short research grant cycles of academia today are analogous to short-term horizons in the investment world. It really easy to be blind to the slower developing, but important trends when you’re only thinking a few months out or the next Fed cycle. And then, it’s shocking when you read about these crazy percentage of options today that are trading that are really turned out in hours, not days or weeks or months. It’s this insane gambling instinct that’s still taking place.

Tobias: Well, that’s exactly what it is. Otherwise, you don’t get the satisfaction of your answer straightaway.

Jake: Yeah, exactly. Toby, of course, you have these value charts that go back hundreds of years, but it’s really easy to dismiss it today that all that stuff is not applicable to this new digital age. Price to book’s been discarded because intangibles are the new normal in the business world.

Tobias: [unintelligible [00:30:48]

Jake: Well, yeah, maybe that’s the anomaly. I don’t know. But I think we all have to be thinking in these– Thinking about our longitudinal datasets and how applicable are they today and should we– What’s the new normal and what is not the new normal? I think that if you can get some of that stuff right, I think the game gets quite a bit easier.

Alex: Yeah, great example. I was listening to a portion of the 2004 Berkshire meeting before we hopped on here randomly, and a question was about corporate profits as a percentage of GDP, and Buffett’s answer was basically, “Technology is just as likely to make that better as it is to make it worse.” He effectively said, “The real beneficiary of the GDP growth over time, a lot of it goes to the consumers.”

You could think of that comment being said almost 20 years ago now and thinking how long even the largest, most well-established — They’re really just getting there now in terms of what was being seen late 1990s, early 2000s, it’s only now and obviously, it’s still reshaping and will continue to reshape. But it’s a good example of it takes a long time for these things to play out and there is an open question still, whether or not are the companies the beneficiaries or the consumers? Is there a reasonable mix? What’s the actual breakdown there?

Jake: Yeah, they’re going to have to share those economics with their customers, eventually. I’m fairly confident over a long enough time horizon eventually that it almost all goes to the consumer. It’s just a matter of how long does that take and how much profit is there available to the producer surplus in the meantime.

Alex: You can layer on top of their political version of that same idea, which is 20 years ago, M&A, that might be able to get done, is that still applicable today. Or has political regime or thinking on these topics changed in a way that fundamentally impacts industry structure over long term?

Jake: Yeah, what do tax rates look like? They’re quite a bit lower than they were 20 years ago.

Alex: Yeah.

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