In their latest episode of the VALUE: After Hours Podcast, Bill Brewster, Jake Taylor, and Tobias Carlisle discuss:
- Value 92nd Percentile Cheap
- Interest Rates Are The Inverse Of A Curfew
- This Reminds Us Of The 1920’s
- Use Parkinson’s Law To Increase Productivity
- The Years Of Silly Returns May Be Gone Folks!
- Tesla Up 88% YTD
- EV/EBIT Wide As It’s Ever Been
- Remember When Coke’s P/E Was 69
- When Quants Meet Qualitative
- Gold Companies Have Cleaned Up Their Act
- 60:40 Going Forward 2.5%
- Apple Stores Are So Good
- You Have To Endure 50% Drawdowns
- Fear & Greed: 12 Month High Greedy
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
Tobias: Looks like we are live streaming. My computer sounds like it’s about to take off, so I’m guessing that we’re live. What’s happening, fellas?
Bill: There we go.
Jake: Whip that hamster.
Jake: What’s up, gents?
Tobias: It is Value: After Hours. I’m Tobias Carlisle. This is [chuckles] Bill Brewster and Jake Taylor. What’s happening, fellas?
Jake: I’m Ron Burgundy.[laughter]
Jake: What’s the haps, boys?
Bill: I have no clue what’s going on.
Tobias: Yeah. No, I’m right there with you.
Jake: Bill’s frantic.
Tobias: Let me give a shoutout to– Nashville in the house. What’s up? Bangalore. 12:00 AM in Bangalore.
Tobias: Kingston, Jamaica. That’s the first time. Teslaville. What’s up, Samson? Los Angeles in the house. Vancouver Island, Toronto. Offshore Israel, still going strong. Good to see you.
Tobias: Toronto. Jupiter, Florida. All right, Hamburg. What’s doing? That’s a good spread. Rockville.
Tobias: What’s up, fellas? Good to see you all. Evan Tindell in the house.
Jake: Hey, Evan. What’s up, my man?
Tobias: Ben’s in the house. Tallahassee. All right. Good spread.
Jake: So, tomorrow, Daily Journal got 99 problems, and Munger ain’t one of them.
Tobias: Yeah. Wow. What a run.
Jake: What a run. What a legend.
Jake: Really is.
Tobias: If there’s any justice in the world that he gets to turn up for one more DJ next year too?
Jake: Yeah, we need at least a hundred, right? That would be legit.
Tobias: What is the oldest director? Does anybody know the statistics on that, the oldest director who’s ever sat on a public company board?
Jake: Yeah. Where’s non-GAAP Mike. He’s probably got that off the top of his head.
Tobias: Got to be the oldest vice chairman. Got to be the oldest in that kind of role.
Jake: Yeah, I’m trying to think– Well, who’s the oldest CEO of any company? Is Buffett got to be it at 92?
Tobias: Could be closing in.
Jake: It’s got to be in the ballpark, if not already the winner.
Tobias: We got some of the media asset– I’m just blanking– [crosstalk]
Jake: Oh, yeah, Sumner Redstone.
Tobias: Yes. Sumner stuck around too [unintelligible 00:02:23].
Tobias: He was at least in his 90s.
Jake: More like a crypt keeper.
Tobias: NewsCorp. Murdoch is still going.
Jake: Yeah, I [crosstalk] saw him– [crosstalk]
Bill: He was hanging with Elon.
Jake: Yeah. [crosstalk]
Bill: Gents, I got to take a pause on this for, like, 15 minutes. I’ll be back. Sorry.
Tobias: All right.
Jake: All right, Bill. Yeah. So, Elon hanging out with– Is Twitter going to be bought by Fox? Who knows? [laughs]
Tobias: I’ve already seen that season of-
Tobias: -of Succession.
Tobias and Jake: Yeah.
Tobias: Does he do the deal? Nah, there’s no way he does that deal. Maybe he buys it. I don’t know. Maybe he invests in it. That’s not crazy. NewsCorp has spent big money on assets in the past. I think they bought Myspace, didn’t they?
Jake: Mm. I think you’re right.
Tobias: I’m pretty sure they bought Myspace and then they turned around– It was a pretty clever deal, because everybody said they massively overpaid. But I think these numbers are wrong. But this is roughly what happened that they spent, I think, say, $700 million on Myspace, which everybody was like, “That’s a crazy amount of money.” And then they turned around and they sold advertising space. They sold all of the advertising for a period of time to Google for, like, $2 billion. Well, everybody know now that actually was a pretty good deal.
Tobias: Something like that. I think those numbers are wrong, but that was a pretty good deal. That’s a little while ago there.
Jake: Directionally correct.
Tobias: Yeah, something like that.
Tobias: What do you get on deck today, JT? [crosstalk]
Jake: The show must go on. I have a piece prepared on Parkinson’s law, but maybe before that, I’ll give some highlights from my trip to New York City last year. That might be worth– [crosstalk]
Tobias: Oh, yeah, sounds good. Let’s do that.
Jake: We could fill some time with that.
Tobias: You want to do that now?
Tobias: I’ve got some– [crosstalk]
Jake: What do you got? Value spread or inversion or– what do you got? [laughs]
Tobias: Now, I’m going to say this because I love the fact that every time I talk about the value spread, It’s Always Sunny in Philadelphia doing the splits, “I can go lower,” always shows up underneath the tweet.
Jake: Oh, yeah. [laughs]
Tobias: I’m doing it for that reason.
Tobias: “Any prognostications on the animal entrails?” Yeah, you guys know I like all of those little–
Jake: The augur. They used to call that.
Tobias: The auguries. Yeah.
Tobias: Yeah. I favor the shoulder bone in the fire. Look at the way that it cracks. That’s how you determine the future. That’s what I found to be the most effective in back test.
Jake: Okay, that makes sense.
Tobias: Entrails. Not so much lower R squared on the entrails.
Tobias: Yeah. Value gap is wide. Closed a little bit. This is the common stock guys quoting. I think this looks like a Ned Davis chart. It’s closed a little bit, but it’s still got a long way to go. But Parrot Cap has an interesting one on top– This is not a metric that I’ve heard of before, but I think it doesn’t really matter. The intuition is pretty right. “Percent of the top five S&P 500 stocks, aggregate market cap needed to buy out the average Russell 2000 stock.”
Jake: Ah, interesting. Never heard that one before.
Tobias: No. I guess that’s a spread between large and small, wider than it’s ever been before or 30 years of data. Anyway.
Jake: Hmm. Interesting.
Tobias: You got to think that aug as well– No pun intended.
Jake: I see what you did there.[laughter]
Tobias: Or small in value at some point then. I feel like we’ve been saying that since this podcast started. So, don’t hold your breath.
Jake: Yeah, exactly. None of these are timing tools.
Tobias: That’s right. Not a timing tool.
60:40 Going Forward 2.5%
Jake: So, just to give you some confirmation bias, I attended the Columbia event on Friday of last week, and Cliff Asness was one of the speakers there, and it was great. He was his usual irreverent Cliff-self, really funny. But he said that– Well, first of all, AQR’s 60:40 looking forward estimates for the next, I think, ten years, he said. Hope you’re sitting down.
Tobias: [laughs] [crosstalk]
Jake: 2.5% real, which is, I don’t know exactly what pension funds and insurance companies have plugged into their forward-looking assumptions on their return on stocks and bonds, but I’m guessing it’s probably north of 2.5%. So, anyway, they’re not particularly bullish there. [crosstalk]
Tobias: They’ve got access to private equity. All that private equity is going to make up the difference.
Jake: Oh, there you go. Yeah, that’s going to be it. [laughs] He actually had a pretty good comment on private equity that I thought was smart. Cliff said that illiquidity that it used to be considered a bug, right? And typically, bugs within systems in an efficient market approach, which he came from Chicago– the University of Chicago, I should say, you got paid for that type of for tolerating a bug.
Jake: But now that it’s considered kind of a feature that you can insulate yourself if you’re an allocator from that career risk, usually, you have to pay for features. You don’t get paid for features. So, I like that framing. I think it’s actually a very clever way of thinking about it.
Tobias: Yeah, that says there’s a problem with it. I think Munger talked about it a little while ago. I thought Munger was the first one that I knew I had talked about it, where he said that the fact that mark to myth, that’s the feature that they don’t have big drawdowns because they don’t mark them.
Value 92nd Percentile Cheap
Jake: Yeah. So, Asness, the other thing for you, Toby, the value of value, their AQR’s current dataset, which is a blend of a bunch of different value ratio metrics, different places to measure is at 92 percentile right now, which matches up with Greenblatt’s, his value of value or how cheap is the value right now. So, maybe another datapoint that says the same thing that value is relatively cheap right now.
Tobias: Yeah, I think that’s right. I think that rhymes at least with every other value metric out there.
Jake: Yeah, I think so.
When Quants Meet Qualitative
Tobias: How did Asness get invited to Columbia? That was crossing of the streams, with the efficient market guys in there.
Jake: Well, I don’t think he’s an efficient market guy, actually. His talk was good. The whole point of his talk was actually how quant and qualitative investors, active investors as he would say, they often end up in the same place but just taking very different routes. So, kind of end up holding the same names, discount to some valuation and the quant guys using one measurement and the qualitative guys finding other ways of measuring and comparing intrinsic value and price, and oftentimes, they end up in the same place. So, maybe it’s not as dissimilar as we might like to believe. Although he did say that he doesn’t think that those two should be crossed together in the investment process.
Tobias: He doesn’t like quantumental, does he?
Jake: He doesn’t like quantumental. But he thinks it makes sense though to have some diversification from a portfolio level of quant and qualitative arriving at different places. But to mix them together, you end up with something Frankenstein, that’s not as good.
Bill: One could just index.
Jake: One could just index.
Bill: Then, you get the blend of all of it.
Tobias: Market capitalization weighted, float adjusted, chosen by the S&P 500 committee.
Bill: One pretty freaking well.
Jake: Momentum based.
Bill: Most robust factor.
Tobias: What, size?
Tobias: The market? Yeah. Do you think it’s momentum?
Tobias: It has momentum-like features, but it’s not necessarily momentum.
Bill: Yeah, I don’t know.
Tobias: It’s not something– [crosstalk]
Jake: You load up more on what’s been working. So, in that way, it’s–
Tobias: You just load up more on what’s biggest, right? You’re taking the size side of– the size, whatever that is, large minus small.
Jake: All right, let me hit some more highlights from the New York trip. Had a great long lunch with the main man, Dan McMurtrie. Shoutout to SuperMugatu. What a really smart and creative and funny guy he is. I find myself really rooting for him.
Tobias: Yeah, Dan’s awesome.
Interest Rates Are The Inverse Of A Curfew
Jake: Have [crosstalk] with him. He’s really smart and I’d like to see him be successful. Let’s see, what else? I was going to share Tom Gayner gave a talk and had a pretty good analogy that I hadn’t heard before. Maybe you guys have. But he said that interest rates, whatever they’re set at, is a lot like the inverse of a curfew. So, rates are really high. He made the analogy, when him and his wife bought their first house in the early 80s, he had a 15% interest rate and he said once you made your payments, there wasn’t a whole lot of money left over really to do anything.
Jake: He said those high rates are like a 06:00 PM curfew. It’s really hard to get into trouble when you work and then you get off and you have to be in the house by 06:00 PM. You just go home and go to bed, basically.
Jake: Whereas really low rates, he said it’s an equivalent of like a 02:00 AM curfew for a 16-year-old boy and you’re giving him alcohol and a fast car and putting attractive girls in that car. Of course, he’s going to end up–
Jake: It’s a recipe for mistakes. There’s going to be some problems that happen with that. I hadn’t heard that one before. I thought it was a nice framing of it.
Tobias: Yeah, it’s a good analogy. Nothing good happens after midnight. I conducted an extensive survey over decades. I think I can confirm that’s the case.
Jake: [laughs] Rigorous.
Tobias: Very rigorous.
Jake: [laughs] Let’s see, what else? Finally got to meet Jason Zweig in person. What a sweetheart, awesome guy, really friendly. Also got to catch up with Michael Mauboussin again, which is always another amazing person. Just a genuinely nice guy like way– His ego to horsepower ratio is very favorable. And the last one was– I was really impressed, actually with Lauren Taylor Wolfe, who is Josh Wolfe’s wife. Not that it matters who your spouse is, but on her own, she’s a PM of Impactive Capital.
I was under the wrong impression that their strategy was kind of like inclusiveness and that kind of thing, but actually, I don’t think that’s true at all. I thought it was like some version of ESG, but it’s not. She does real work with her companies. She knows business and value and knows exactly what the drivers of value for her companies are. It was very legit. I was very impressed with her. So, add another person to follow on your list of– It’s nice to see– We kind of joke that there’s only guys watching the show, which is probably statistically mostly true, but [Tobias laughs] it’s nice to see that the fairer sex-
Tobias: On average.
Jake: -also being well represented.
Tobias: Yeah, that was good. Sounds like a good trip.
Jake: It was a good trip.
Tobias: Were you speaking in Columbia, or you were attending?
Jake: I was just attending and catching up. A little ulterior motive is I would really love to see Journalytic in Columbia at some point just because I think it would be so awesome to– Studied Graham and Dodd and Buffett, and the lineage coming from that school and to contribute something to that, even in my own little minor way, I think, would just be very satisfying for me personally.
Tobias: Yeah, very cool.
Jake: Yeah. I know that there are professors there who the main work product for the students is producing an investment journal for the professors to read and give feedback on. So, it’s like, “Well, duh. why wouldn’t we be in there?”
Tobias: Perfect match.
Jake: Yeah, exactly.
Tobias: Do you have any more from the trip or should I?
Jake: Everyone’s probably bored already with regaling these stories. Let’s move on to the next thing.
Bill: No, this is good.
Tobias: Especially since I’m going to have to take another break.
Bill: We need you to fill air.
Jake: Stretch it out.
Bill: Yeah. Did you see William Green at all?
Jake: No. [crosstalk]
Bill: Did you already say that?
Jake: No. He was still in Europe. He was visiting. I talked to him, but he was out of town when I was there.
Bill: Being all cultured and stuff.
Jake: Yeah. Well, I think he was visiting his mum in– [crosstalk]
Bill: Ah, she seems like a lovely lady.
Jake: She’s got to be, right?
Jake: To Make a kid like that.
Fear & Greed: 12 Month High Greedy
Tobias: Let’s do a segue into something that’s more serious, less serious, I don’t know which one.
Tobias: Fear & Greed Index.
Jake: All right. Where are we at?
Bill: Definitely more serious.
Tobias: Haven’t been checking it for a little while, but I just started feeling good. So, I thought about a week ago, I should check in and see where it is.
Jake: Where’s it at.
Tobias: Yeah. It’s as greedy as it has been in the last 12 months. It’s funny.
Tobias: It picked the top again. It got into extreme greed. It just nipped into that part that is the selling zone, top 20%, and it seems to coincide with the weakness that we’ve seen in the market over the last couple of weeks.
Jake: Undefeated, huh? [laughs]
Tobias: It’s a remarkably good indicator for how dumb that little indicator is.
Tobias: It would have had you buying in October.
Jake: If you were a day trader, is that how you would do it? Would you use that for– if you just had to be like in and out and–?
Tobias: I think I would know what to do on a day trading basis. But in a shorter-term, I think, yeah. I think you could use it– If you’re an option straighter or something like that, yeah. Where you’re looking at like a quarter or two, yeah, I would certainly use it. It got fearful in April at the low and it got fearful in October at the low, and now it’s extreme fear in both of those two instances and it’s back to extreme greed now. It’s come off extreme greed a little bit, which just coincided perfectly with the local high here.
Bill: The guy that owns puts though wants me to say it’s a melt-up. He’s very excited right now.
Jake: [laughs] He’s loving it.
Bill: Yeah. [crosstalk] I just tell him he never should have bought the puts. You’re just donating money to options market makers, but do your thing, man.
Jake: He wants to hear that you’re bowled up like crazy right now since you’re his contra.
This Reminds Us Of The 1920’s
Jake: Yeah. Well, Jamie Catherwood says that this reminds him of the 1920s and that we’re in the lull before the Roaring 20s. He said that’s the parallel on his most recent Investor’s Podcast. So, there you go. I’ll roll with– [crosstalk]
Jake: He looks pretty young to [crosstalk] remember-
Bill: Get ready for the good times.
Jake: -the 1920s. [laughs]
Jake: He looks pretty young to remember the 1920s.
Bill: Yes, he found the fountain of youth.
Tobias: What are the parallels that he sees?
Bill: I don’t know, dude. You always ask me this. I hear stuff, I parrot stuff.
Bill: I dispose of things immediately. I think what it was is we had inflation, then maybe we had some deflation. Listen to him on The Investor’s Podcast. And then, we had the Roaring 20s. So, there you go. I don’t know, we had a decade of subpar growth. It wouldn’t be totally shocking if somehow, we’re on the verge of some industrial revolution. Also, maybe we’re just about to crash and it’s going to be famine. Who knows?
Jake: Interesting because that doesn’t fit with my understanding of what the 1920s looked like before and then leading into them.
Tobias: What’s your impression?
Jake: Well, you had a forgotten depression in 1920 and 1921, where Fed basically just got the hell out of the way, let prices reset, and it was a complete deflationary event, like a real deflationary event that wages, everything reset to a much lower level and then grew from there. I don’t think we’ve tried since basically in 100 years. Not the full– [crosstalk]
Bill: Nor should we. That sounds awful.
Jake: Well, I don’t know. Take your– [crosstalk]
Bill: I do know. Kick that can down as far as you can. Make sure it’s three generations away before it comes.
Jake: Well, yeah, that’s good in theory until it’s your generation that finally has to deal with all the problems that all the ones before you have been kicking down the road.
Bill: Yeah, well, it’s working so far.
Jake: [laughs] That’s what the turkey thought early in November also.[laughter]
Bill: That’s true. That is not untrue.
Jake: Well, in any event, great book on that, by the way by Jim Grant, if you want to read to really get into the historic nitty-gritty of it.
Tobias: The Forgotten Depression?
Tobias: That’s the title?
Tobias: Yeah, I think that we’re more likely to be in a little bear market rally here. But then, I think that’s consensus, I would say. I think everybody feels very bearish.
Jake: I thought you just told me the greed was up at the-
Tobias: Well, that’s a good point.
Jake: -80th percentile.
Tobias: That’s a good point.
Tobias: It’s very hard to tell, because it’s hard to know to what extent the Twitter stream or whatever the people who I talk to are representative of the main field. I did get the feeling through most of the bubble run through 2020, 2021, or whatever that period was, 2019 and 2020, I got the feeling through most of that bubble run that Twitter became very much the crowd through there.
Jake: They became as smart– [crosstalk]
Tobias: Yeah, I think so. Maybe Twitter’s not the crowd at the moment, but– [crosstalk]
Bill: All right.
Jake: You see retail– [crosstalk]
Bill: Thankfully, I save things, because I know my mind is not a trap door, thanks to partying.
Tobias: [unintelligible 00:21:18] trap.
Bill: Yeah, that’s right. It is a trap door.
Jake: It is a trap door.
Bill: I’m a mess today. Anyway, [Jake laughs] I think he said I would say that the period I’m finding most interesting in terms of parallel today would be the 20s, which I’m sure most people know by now, but I found really interesting since honestly COVID started, the similarities and progression in timeline between the late 2019s and 2020s with today, because while we obviously, at least, knock on wood, didn’t have or don’t have a world war today. It looks like that got avoided with Russia-Ukraine, yada yada, yada.
But a hundred years ago, you had a pandemic with the Spanish flu. After that, you had a wave of summer protests around race called the Red Summer of 1919, which was similar to George Floyd’s and Black Lives Matter summer protests and demonstrations. Then, you had a reopening, where things really got speculative and surging to make up for pent demand that had existed while were all locked down, which also occurred coming out of World War I and the Spanish flu a hundred years ago.
Then in 1920 and 1921, you had this really sharp and severe recession, which was very short. But again, it was a problem of, in that case, rampant inflation very quickly turning into rampant deflation and it’s an interesting period. But then after that is when you got the Roaring 20s, but people like to skip over the part when they talk about the Roaring 20s, yada, yada, yada.
Tobias: Which part of the– [crosstalk]
Bill: The story sees the parallels today.
Tobias: What are they skipping–?
Jake: We’re going to skip over that.
Bill: No, you need to listen to, because you know it came out of the pandemic, then we had a recession, then we had the Roaring 20s. And so, today, obviously, the parallels are pretty obvious. We had the pandemic, we had the George Floyd summer, then we had the recession. And now, the question is, are we going to keep following roughly in line with the 20s, or that we would be experiencing, or on the precipice of experiencing a true Roaring 20s, or is it something different where the economy takes longer and rebuilds to truly get back to pre-COVID levels? Anyway, that was all AI generated.
Tobias: Was it really?
Bill: So, if some of it didn’t make sense– Yeah, you can go to The Investors Podcast and listen to Jamie.
Tobias: AI listening to the audio and then transcribing it?
Bill: Yeah, man.
Tobias: It’s pretty good.
Bill: Jason Buck put me– Corey actually, I think, told him about it. It’s this podcast listening app, Snipd-
Tobias: Oh, yeah.
Bill: -and you can listen and then you just create Snips. So, this is like a three-minute Snip that I had and then– here, I’ll do my tech. You got tech, I got tech. Look at all that.[laughter]
Jake: Oh, my God.
Bill: So, you just request an AI transcript, and then you got all the words.
Tobias: It’s very cool.
Bill: Yeah, it’s pretty cool app.
Tobias: We’re not sponsored by Snipd, by the way.
Bill: Not yet.
Tobias: Snipd, if you want to- [crosstalk]
Bill: They should.
Tobias: -give us– we reach dozens of people every week.
Jake: Snipd. [laughs]
Bill: That’s a different thing, sir.
Jake: Oh, okay. [laughs]
Tobias: I think the big difference though between– [crosstalk]
Jake: Now brought to you by the urology group.
Tobias: The 20s are now. The 20s started on a very low valuation base. After the recession, that was coming out of single digit Shiller PE, and now we’re about as expensive as we’ve ever been before. They’re only famous [crosstalk].
Bill: Pretty shitty businesses back then.
Tobias: Were they?
Bill: There was definitely more market fragmentation. I think, in general, you had more asset-heavy businesses. It was a lot more industrial-type stuff. I don’t think you had hyperfinancialization of everything. You didn’t have Burger King spin off the franchise or restaurants from the franchisor economics from the franchise, restaurants, and cram the shitty economics down and float the public entity that has pretty solid returns on capital and lever it three and a half times. No, you didn’t have that stuff.
Jake: Well, you kind of did though. Utilities at that point were very hot and you had this– I think it was Sam [unintelligible [00:25:37], if I remember right, was leading these– They would pump the stock up for utility and then issue a bunch of shares. It was like the early playbook of a lot of the same things– [crosstalk]
Bill: Yeah, but that’s securities fraud type stuff.
Jake: Well, it-
Tobias: Didn’t rise to the level of fraud [crosstalk]
Jake: -came because everyone was so– They believed so much in the captured demand of a utility at that point. This was before we had a lot of regulation around it. So, same story about– [crosstalk] for Amazon–
The Years Of Silly Returns May Be Gone Folks!
Bill: I guess. You got Microsoft trading at 22 times, Google’s trading at 18, Apple is trading at 22. These are not the craziest valuations in the world.
Tobias: True. But not obviously cheap either, to be fair.
Bill: Yeah, but why would they be? Why should the market give you an opportunity when everyone is watching it all the time and everybody’s got a podcast and everybody’s talking about how to freaking buy stocks? Why it should that market sell off?
Tobias: It shouldn’t. But in order to generate those silly returns over a decade, you need to start from a very low starting point.
Tobias: That’s the point I make.
Bill: The years of silly returns may be gone, folks.
Tobias: Uh, I don’t know.
Bill: I don’t know.
Tobias: You can take the famous quote about, “We’ve reached a permanently high plateau.” This is the absence of humility that we see every single time that we always think we’ve conquered the business cycle.
Jake: Cycle. Yeah.
Bill: Yeah. I don’t think it’s a business cycle. Sure, the business cycle will come. If you’re smart enough, like my put guy, sell out. Play the cycle. See how that works. I hope you are one of the five people, I think, on earth that can actually do that well.
Tobias: Sell vol for the bull.
Bill: It’s not something I’m ever going to be very good at, so I just don’t care. It’s fun fodder.
Jake: I agree.
Bill: But by the time the headlines come out about the cycle, the market is already going to be gone. Now, unless we have some deflationary crash, which some permabears are going to jerk off too and tell you it’s always coming, and they’ve been saying it for the last eight years. Someday, they’ll finally be right.
You Have To Endure 50% Drawdowns
Tobias: But didn’t you just say that wasn’t going to happen?
Bill: It could. Yeah. I do think if the economy completely rolls over and people can’t service their debt and all of a sudden, you have this bust? yeah, sure, you could bust again. But I don’t see why valuations alone– I don’t see why the market is going to present that kind of opportunity other than it always does and it always will.
Tobias: That’s what happens. I think the market just gets complacent, because we haven’t seen a crash for a while. So, people take on too much debt, they get too speculative, they just can’t help themselves collectively, as a group. It happens every single time and that is what creates the conditions of the crash.
Bill: But how are you invested right now? You’re long value. Value is going to get saved in the crash?
Jake: Long-levered shitcos. [laughs]
Tobias: Unlikely they get saved in the crash, but that’s one of the– As Buffett and Munger would say, that’s just one of the things that you have to endure. You have to expect these 50% drawdowns every decade or so. You have to be able to endure the 50% drawdown. And so, with the idea also that you’re going to take advantage of it when it presents itself. So, I’m trying not to be– [crosstalk]
Bill: Not if you got 100% invested before it.
Jake: Yeah, you could trade up though into higher quality, potentially.
Bill: Nah, that’s a suckers’ game. I’d trade into lower quality.
Tobias: There are other outcomes too though. There are plenty of people who sell out when they see the crash, thinking, “I’ll sell out now before it gets too much worse,” or “I just can’t take it anymore. I can’t take the constant drip lower,” and they sell out. And so, what I try to do by saying, these things do happen all the time and the conditions do exist where you could see one of these things, is the idea that if it occurs, you’re mentally prepared for what’s going to happen. So, it’s not unexpected, it’s not the end of the world. This is just par for the course and you can invest more at that point. Hold on, know that the end will come eventually. But you can’t be standing at the top of the blue sky saying, “Hey, it’s just blue skies forever. We’re going to be fine from here.”
Bill: Better have cash.
Jake: Or, I would suggest, and I’m sure everyone listening has their man overboard plan already filled out, ready to go, and they’re not going to lose their heads, and they’re just going to pull out the procedure and be like, “Okay, here’s the next thing I need to do,” and they’re ready to go.
Bill: Yeah, I don’t know. Yeah, we could go lower. Could go higher. Who knows?
Jake: [laughs] “Where’s the market going?” “It will fluctuate.”
Bill: Yeah. We’ll see.
Tobias: Would you load up on Ark here then, because it’s sold off to two years from its peak?
Jake: It’s down a lot.
Bill: I don’t think Cathie Wood knows what she’s doing at all. That’s not an index bet. That’s whether or not you actually think she knows what she’s doing.
Tobias: That’s the new [unintelligible 00:31:04].
Bill: Well, I’ve talked to enough people that know her names that– I wouldn’t be comfortable interviewing her. I would not feel like I was doing my duty to my listeners to interview her.
Jake: Hmm, interesting. That’s a pretty good litmus test there.
Bill: Yeah. But that guy, Tom Ricketts, that guy’s portfolio, I’d probably go along that. I’m not, but he’s a guy that I interviewed that does innovative investing. I bet he’s got a lot of cheap stuff in his portfolio. But he is not Cathie.
Jake: Cheap or price has been beaten up?
Bill: I think he’s legit and I think his forward returns are probably going to be adequate. Satisfactory, as the Buff Dawg would say.
Tobias: We had an inflation print today. It came in at 6.5. They’re expecting 6.2. I know this against my– [crosstalk] Yeah. No, I mean–
Jake: I don’t know.
Tobias: The best thing about Twitter is all of the Meta takes. Somebody tweets out, “Hey, it came in at 6.5, expecting 6.2. So, that’s red hot.” The next person comes out and says, “It’s 6.5, which is down from wherever it was. So, it’s cooling, cooling.”
Jake: 9.1? Yeah.
Tobias: Then, you chop into it, and they back out all of the other stuff that’s not core or super core, and you get to this inflation is not going up or something. But then, somebody captures them both and says, “There you go.” Nobody really knows what’s going on.
Tobias: But the higher inflation, if we run at 6.5 and you can’t have the 10, and who knows? It’s coming down. It’s going up. It’s going side by side. I don’t know. But you clearly can’t have the 10-year sitting at a discount to inflation for a long period of time, if the 10-year comes up and equity prices are coming down.
Bill: Could be right.
Jake: This is the caveat that Buffett always detaches to every single time that they ask him to, if stocks are cheap and he says, “If rates stay where they are, if profit margins stay where they are, then yes, equities are cheap right now.” [laughs]
Tobias: It may not matter. We’ve had a pretty good rally here from October. And clearly, over that period of time, things have deteriorated, probably except for inflation has come down a little bit. But 6.5 is still pretty high.
Jake: Yeah, if you told someone in 2019, it was going to be 6.5 in three years, you would think– or four years, they’d be like, “Jesus, the market has got to be in the crapper right now.”
Tobias: Yeah. Tell me where the 10-year is and tell me where the market is if inflation is running at 6.5.
Jake: Yeah, I think we all would have whiffed on that one, right?
Tobias: It’s always transitory, right? Everybody thinks it’s always transitory. That’s the lesson that I take from the story that you told a little while ago about the 70s.
Jake: Oh, yeah. Always transitory until it’s– It will recede and then come back. At least, it did then. I don’t know about it. Who knows?
Tobias: Do you want to say something, Billy?
Bill: No, I was just looking back. This coincides with your crash. In 2008, August 31st, 2008, it was like 5.6, then it went down to negative two.
Tobias: What was 5.6? The 10-year?
Tobias: Inflation? CPI.
Bill: Year over year. Yeah.
Jake: 5.6 in August of 2008?
Bill: Yeah, 5.6, 5.7.
Jake: Wow. That’s higher than what I guessed.
Tobias: That was before it got scorched.
Bill: Down to negative two. Boom. Transitory, bitches.
Jake: Well– [crosstalk]
Bill: Just had to get there the hard way.
Tobias: Do we have negative rates?
Jake: Yeah, it’s how we want to get there.
Tobias: That’s inflation. Sorry. Keep going. Yeah, inflation. What is– [crosstalk]
Bill: [crosstalk] a decade of not much.
Tobias: Yeah. Well, rates at zero.
Bill: I don’t know. Does it lead or is it a product? I don’t know. All this stuff is way too hard for me.
Tobias: Yeah. Here’s a good question. “If oil goes to structural $120, what does the 10-year do stuck at 3.7%?”
Jake: Can’t live down there, right? I don’t know.
Bill: I have no idea.
Jake: That’s got to be– [crosstalk]
Tesla Up 88% YTD
Tobias: Holy cow, Samson. Congrats, Samson, “tsla up 88% ytd.” “arkk is up 30% YTD.”
Bill: Boom. See that? I don’t know why anybody listens to us.
Tobias: I will say something. The thing– [crosstalk]
Jake: [unintelligible [00:35:37] Samson’s podcast. [laughs]
Bill: Yeah. Do you want to listen to us or do you want to make money?
Jake: Yeah, exactly. [laughs]
Tobias: Yeah, I’m still trying to process those numbers. Tesla is up 88%. It amazes me, just the volatility that moves in both of those things. Tesla’s a huge stock.
Jake: Oh, the volume’s just mind boggling.
Tobias: It’s bigger than SPY some days. It’s bigger than SPY often. The moves on it are just– like, every single move, it’s like that was a complete– Every day is like something completely unexpected happened.
Jake: Plus or minus 5% daily.
Tobias: Ark too. An Ark is not a single stock. Ark’s across lots of different stocks. And so, every time I look at the Ark volatility or the Arc daily moves, I’m just blown away.
Jake: Well, it’s a rocky road to get to the future.
Tobias: It’s not a straight line.
Bill: That is not untrue.
Tobias: It’s not a straight line.
Jake: Can we bang out some quick veggies-
Tobias: Yeah, let’s do some veggies.
Use Parkinson’s Law To Increase Productivity
Jake: -before we run out of time? So, this is a little piece on Parkinson’s law, which you guys may or may not have heard of before.
Jake: But it is this idea that work will expand to fill whatever time is available for its completion.
Tobias: It’s a good one.
Jake: Yeah. Originally, it’s from this satirical essay in The Economist in 1955 by this guy, his last name was Parkinson. And he was a British naval historian and author of 60 different books. And his observation came from extensive experience with the British Civil Service. It ended up describing kind of bureaucracies everywhere though, but he saw how the British Civil Service interacted and worked.
He explained the growth of bureaucracies, there’s two different forces that cause it. One is that officials want to multiply their subordinates, not their rivals, and often get themselves promoted by just putting more people under them. And then number two, officials want to make work for each other. So, they end up just creating busy work effectively. So, he noted that the number employed rose by 5% to 7% per year, irrespective if there was any variation in the amount of work, if any, to be done by these bureaucracies.
It’s been weird to watch it. If you look at healthcare, if you look at education and you look at the number of administrators to professors, administrators to doctors, that ratio in the last 20 years has just gone parabolic on the number of administrators. Administrators to students, it’s just been insanity. And so, these bureaucracies have just gotten huge.
Isaac Asimov had a corollary to Parkinson’s law, which he said, “In 10 hours a day, you have time to fall twice as far behind your commitments as in a five-hour day,” [Tobias laughs] which I thought was pretty funny. And then there was another little kind of clip in here that was called injelitance. Obviously, made up word. But this is the disastrous rise to authority of individuals with an unusually high combination of incompetence and jealousy. It’s expressed in the chemical formula I to the third power for incompetence and J to the fifth power for jealousy. [Tobias laughs] So, there’s this idea of injelitance.
So, it begs the question to me, what’s the right amount of time that we should allocate to our investment process? Should it vary by external factors, like maybe, what’s the value of value at 92nd percentile? Does that mean you should really be digging in today? Is that the time to be doing extra work? Should you be making a bigger time budget? Or, if it’s let’s say the opposite and maybe like a 2015 that we’ve talked about where the value of value seemed relatively tight valuation spreads, relatively expensive market, should you be just going fishing and lower your time budget?
Tobias: It’s a stock tickers market.
Tobias: Sorry, dude. Keep going.
Jake: All right. Let’s do that. [laughs] Or should time be even budgeted at all or should it be more freeform, an exploratory, more like jazz approach? I don’t have the right answers to any of these things. I just think they’re provocative questions that we could be asking ourselves with the idea that Parkinson’s Law, like would we actually get more done in our research time if we made it into fit into a box. Like we said like, “Okay, you have three hours a day or whatever it is that is right for you, would you actually be more productive and focus on the things that are more important?”
Tobias: Yeah, that’s a good question. Probably.
Bill: Everything is more important. as Charlie Munger would say. Too many people waste in too much brain power on this stuff. I was at a charity for children, people that need child care, they raise the money, and the children are able to go so the parents can go to work. That is so much more important than this stuff.
Jake: So, Parkinson had this other kind of law, but it was an example of this fictional committee whose job was to approve the plans for a power plant, like a nuclear power plant, okay? The joke was that they spent all their time on, what materials the bike shed for the employees would be built out of as opposed to the actual plans for the nuclear reactor? This now in software development is a very common term, it’s called bike shedding.
In fact, the CTO for Journalytic had explained to me this term ‘bike shedding’ before. I’d never heard of it, but I found out that it came from Parkinson originally. It’s the idea that we focus on these small, easy, irrelevant parts of a problem as opposed to the hairy, important, hard to figure out parts. The majority of time in a committee is spent on discussions about these relatively minor and easy to grasp issues. And so, that’s like bike shedding.
Last thing to wrap this up. As an experiment, just because I like to play games with myself on these things, I purposely left only 30 minutes to prep today’s episode to see like, “Okay, well, shit, what can I get done in 30 minutes before we go live to demonstrate Parkinson’s law?” So, I was curious, did you guys even notice that was true or not?
Tobias: No, I think it worked.
Jake: Ah, shit. [laughs]
Tobias: I think it worked.
Jake: That’s the worst-case scenario now for me. [laughs]
Tobias: I had this idea that I do, back in the 1800s or something like 1900s, something like. 1800s, maybe, where you have to wait for everything to come by sailing ship or paddle steamer.
Tobias: It’s hard to get information. So, your day had to be different, like you go and have breakfast, and then you go for a walk, and then you come back, and then you do correspondence in the afternoon, do like an hour or so of correspondence. And that’s your working day. That’s what I’m trying to get down to. I just want to do correspondence for an hour in the afternoon and then I’m done.
Jake: How’s that working out with you all your– [crosstalk]
Tobias: I haven’t done it yet.
Tobias: It’s not working at all. I haven’t put it into place yet, but that’s the goal.
Remember When Coke’s P/E Was 69
Jake: You guys know what Coke’s PE was in 2000?
Bill: Yeah, 69 for Coke. Crazy. I think this is why Munger says that like, “Now is not then.”
Jake: [laughs] What do you mean? Did he mean today is-
Tobias: Single datapoints?
Jake: -not as crazy as 2000?
Bill: Yeah, he said that a while ago.
Jake: No, I think he said the opposite.
Tobias: I think the last Berkshire meeting, he said that this is the craziest behavior he’d ever seen in last year.
Bill: Well, maybe crypto, but not the overall market. When he was at Daily Journal, he was like, “This is not nuts.” I don’t know. I’m an idiot. People should not listen to me.
Jake: I’ve got [crosstalk] but maybe.
Bill: I just don’t think the stock market is that crazy. It could totally implode, but I just don’t think it’s that nuts.
Jake: I don’t think you’re wrong. We’ve talked about this before, but the technological changes where perhaps, these winner-take-all markets are so huge, they’re global in scale, which might be the first time that that’s existed in that level. I don’t know. Maybe someone’s yelling at the screen right now about the Dutch East India Company or something. But the returns on capital, invested capital, incremental invested capital are so high, these companies don’t need any capital from outside at all.
Shoot, maybe they just do make a ton of money and will continue to make a ton of money, and that competitively advantaged period is open for a really long time. The market’s kind of sniffed that out and is paying above a normal, let’s call it 15 PE for them, but rightfully so, and they’re pretty reasonably priced. I could buy that argument.
Bill: Procter & Gamble looks like in 2009 at the bottom, it traded for 14 and a half times earnings. It’s 24. Its average over the past 23 years is 22.6.
Jake: Their top line has got to be growing at barely GDP, right?
Jake: You’re paying a pretty healthy multiple for a company– [crosstalk].
Bill: They’re probably higher than GDP.
Jake: You think so?
Bill: Yeah, 4.8, 7.3, 5.3, trailing is 2:5. I guess forward’s 4:1. They take a little bit of price.
Jake: Yeah, that’s fair.
Bill: I don’t like Staples. Staples, that I do think is a pretty rich part of the market, but I’m just trying to pick stocks that– I don’t know. The idea that Apple is now Procter & Gamble, I think, makes a decent amount of sense. So, I don’t know, is like a 24 PE for that high? No, [crosstalk] I don’t know. I feel like people would be like, “It’s crazy. Nobody will buy their phone anymore.” And then, you ask that same person to forgo two upgrade cycles and they’re like, “I would never do that. That’s crazy.”
Jake: Here’s the problem though. We always have to remember that it’s a Keynesian beauty contest in a lot of ways, right? And so, if everybody believes that all the same stuff, these are good businesses, the surprise is likely to be the downside in that situation.
Bill: Maybe. I don’t know. Sometimes, favorites are priced like favorites for a reason.
Jake: Who’s out there saying though that any of these companies are zeros, are in any kind of trouble? It’s not really happening at this point.
Bill: Well, I think there is. You’re seeing Microsoft and Google bat up against each other. I mean, they may not be. I don’t know, if you’ve ever been to a horse track, just betting on the long shot because they got good odds is usually not the best strategy in the world. Now, betting the favorite all the time is also not a great strategy. So, you got to wait to see the odds you like.
Jake: That’s what I’m trying to say is that the betting odds, I’m not sure you’re getting these amazing mispriced bets necessarily.
Bill: Yeah, I just don’t think we’re at a time where those– I don’t think you’re getting the odds really anywhere. I don’t think the debt market is screaming these great odds. Probably, some microcap special sits. I heard AAMC pitched a little while ago. That was a pretty interesting pitch.
Jake: What would Asness and Greenblatt’s 90th call it percentile value of value to say about the mispriced bets of a quant value strategy right now?
Bill: I’m not smart enough. I just say that they’re smarter than me. So, it’s got to be a good bet.
Jake: TC, any thoughts on that?
EV/EBIT Wide As It’s Ever Been
Tobias: Well, obviously, I like it, but I’m biased [Jake laughs] and I’ve been talking for a little while. But yeah, I think there’s a relative value trade, which is the spread, and that’s however you measure that, expensive to cheap or market to cheap, it’s very wide. Unusually wide. It has closed a little bit on some metrics, but on others, EV/EBIT, as wide as it’s ever been. I think that the forward returns there are unusually high.
And then at the same time, I think the forward returns on the market are pretty modest, but then that’s using those cyclically adjusted measures. So, in the short term, anything can happen. I don’t really know. But at the same time, there are a lot of those– That inversion still staying very steep, I saw the 10:2 is as steep as it’s ever been or over 30 something plus years of data. I don’t know, dude. The 10:3, the 10-year, 3-month has an incredibly good track record. Not very many ends. I get that. There are like four examples before his paper, four examples since. No false positives. It is pretty good metric.
Jake: That’s not bad.
Tobias: He fades it. Cam Harvey fades it. Other people fade it. They just say there’s too much intervention in the market that it’s unnatural. It’s not an expression of what’s going on underneath. And the other response to that is always, “Well, what if everybody watches it? Doesn’t that negate its utility?”
Jake: Yeah. Right.
Tobias: I don’t know the answers to those things. I’m a simple models over expert predictions guy. So, I look at simple models. Simple models seem to say same thing to me.
Jake: I posited a hypothesis that everyone– and I say that kind of tongue in cheek, but everyone is inclined, if you think that you’re going into a recession, to try to hide out in quality and maybe not be in some of these more junky companies that would represent the value basket and therefore, that gets displaced and everyone’s like, “Well, I know we’re going into a recession. I can’t hold something with a lot of leverage. This is a bad company. It’s bankruptcy risk. Apple, I know they’re not going anywhere. So, I can hide out there.”
If everyone is saying that, everyone’s standing all on the same side of the boat, isn’t that where you get opportunities, that type of thinking? That sort of dynamic playing out?
Tobias: It’s easy to understand the reasons why people don’t want to hold a lot of those.
Jake: Of course.
Tobias: The cheap stuff is, the argument there would be, “Well, it’s full of oil companies that have had a good 2022. And so, you’re getting–” [crosstalk]
Jake: That’s not permanent earnings at all, right?
Tobias: Yeah, they’re overearning. So, you’re not getting a cheap price. It’s just identifying overearning companies.
Jake: Yes, exactly.
Bill: That would be the rebuttal.
Tobias: But I just don’t know that the rebuttal is any different at any other point in time. The opportunity exists, because people don’t want to hold them. Whatever the reason is, is beside the point.
Bill: Yeah, you’re right. On the other hand, management teams might be incentivized well for now, right? I’m not sure commodity companies generally have proven managements that allocate capital very well over time. So, if you want to own it– [crosstalk]
Jake: Except for goldminers. They’re known for– [crosstalk]
Tobias: Well, to be fair, I’m glad you– [crosstalk]
Bill: Let’s just talk about how hated oil is. Let’s just talk about it for a second. If we assume ExxonMobil is a reasonably good oil company– It’s a half a trillion-dollar company. It looks like the previous decade, normalized free cash flow was like, I don’t know, what, let’s see. It looks like from 2004 to 2010, call it $20 billion. From 2010 to 2020, let’s even forget the $3 billion negative cash flow. It was probably $15 billion. So, what’s half a trillion divided by $15 billion?
Tobias: No one knows.
Bill: Yeah. I don’t know. Is that that hated? I don’t know. Now maybe it earned $60 billion in perpetuity for the first time ever. That’s very possible. But every other discussion we ever have is mean reversion.
Jake: [laughs] Yeah.
Bill: So, I find it hard to think that mean reversion wouldn’t apply to commodity company over the long-term. Then, I got to buy into an overearning asset because it’s cheap. Then when I get whacked when the earnings come in, I got to figure out how long I want to hold that? I’m not playing that game. Fuck no. [crosstalk] the one thing to do with that.
Tobias: Capital theory where you said– it’s not hard to figure out why the oil companies have had a bad decade, right? It’s a combination of low oil prices and ESG being quite loud and impacting the way that people invest.
Bill: [crosstalk] I don’t know that it’s ESG. I really think that’s a little bit over– [crosstalk]
Tobias: It raises their cost of capital. It makes it hard to raise money.
Bill: They don’t need to raise money. No oil company is going out to the equity market. When’s the last time Exxon issued shares? Because they needed to issue them.
Tobias: It’s not just the majors. There are juniors that are investing in various different places, and they’re the ones who do need access to the market and they do– [crosstalk]
Bill: Well, but is that ESG or is that they all snorted cocaine and went nuts on shale and blew a bunch of money?
Tobias: Yeah, that’s true. That’s right as well.
Bill: So, I don’t know. That’s not ESG.
Jake: That might have been G, actually.
Bill: [chuckles] Fair.
Jake: Lack of governance there.
Gold Companies Have Cleaned Up Their Act
Tobias: The gold companies are a good example. The gold companies, they’ve also had a bad decade. I don’t know if they’ve necessarily done it out of the goodness of their own heart or an attempt to get their governance to a good place. I think probably they’ve had it forced on them by the market. But they have got some discipline around spending, and they’ve tidied it up their shareholding. They’ve done a lot of good things. So, they are in a good place.
I don’t disagree with you. If they get a good run, there’ll be a whole lot of silly mergers. They’ll pay themselves big bonuses. They’ll do all of the dumb stuff again. But you do have that period of time now where they look better than they have. I’m not necessarily saying buy gold companies. I don’t know. I’m just saying as an example of the way that it would work, that’s what would happen. So, you might be paid to do it now.
Jake: We’re all racing the clock in different ways, right? If you’re buying a super high quality moated company, you’re racing the clock that that moat’s going to stay intact and grow over time, hopefully. If you’re buying an overearning levered industrial company–
Bill: I don’t think this is true. I think this is the wrong takeaway from Buffett’s career. I think the right takeaway is look for See’s and look for Geico, and look for things that get stronger over time, and rather than racing the clock, you’re running with the clock. That’s what I think the actual takeaway is.
Jake: I don’t disagree with that. But that’s such a tiny, tiny sliver of companies– [crosstalk]
Bill: Why spend time on the rest of the bullshit? Why not just try to find those small slices of companies?
Jake: You’re probably not wrong.
Bill: The rest is [crosstalk] is whatever.
Apple Stores Are So Good
Tobias: Relevant to the exchange. Steve Jobs and Bernard Arnault, who’s the CEO of LVMH, richest man in the world at the moment, he had an exchange where Jobs wanted Arnault to take care of the Apple Stores and he said, “Jobs was worried about the sustainability of high tech products.” I don’t know who’s saying this, but I think he said he then said to me– So, this is Arnault describing Jobs, “You have eternity for you.” I asked him why. “Because I sell iPhones,” he replied. “The iPhones, will they still be around in 25 years? But what I’m sure of is the world will continue to drink your Dom Perignon.”
Tobias: I don’t know.
Bill: The Apple Store is so good. The implementation of how they did that was so, so good. That was really something. I’m really glad that I thought that stock was too expensive my whole life, [Jake laughs] when people were lined up to buy them in a fucking recession. In 2009, when people were lined up and they were building new stores, and I thought, “Man, the PE is too high.”
Jake: Get it like a 10 PE. [laughs]
Bill: It would have changed my life. It’s cutting you off.
Tobias: It gets cheaper and has got– [crosstalk]
Jake: Hey, feel the juice. Bill, you own Berkshire.
Bill: You didn’t have to wait.
Jake: So, you own a big chunk of Apple. You’re all right.
Jake: Look through.
Bill: Yeah, whatever. I’m an idiot.
Tobias: We made it, dudes.
Jake: Oh, we made it.
Tobias: Thanks everybody.
Bill: All right, gents.
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