VALUE: After Hours (S05 E11): Behavioral Errors, The Art of Learning, And Yield Curve Inversion

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

  • Forget Sleep – The Nerve Wracking Portfolio Generates Alpha
  • European Equities Poised To Outperform
  • Markets Will Always Be Inefficient
  • Tesla Won’t Sell 20 Million Cars A Year By 2030
  • SVB – U.S Treasuries Was A Bad Investment
  • Match Your Strategy With Your Mood
  • Should We Let The Charlatans, Hubris-Filled Pretenders, And Bad Guys Fail?
  • How To Avoid Ulcers When Investing
  • The Art Of Learning – Mastering The Basics
  • Tesla Will Never Dominate The EV Market
  • In Order To Win You Need To Finish
  • 10:3 Inversion Predicting Recession
  • Stick To Your Process Through The Bad Times
  • Embrace The Silliness Of Markets
  • Buffett Getting Ready To Bail Out Banks
  • SVB – Fastest Collapse Ever

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: You should be getting a message.

Drew: Got it.

Tobias: And we are live.

Drew: Live meeting.

Tobias: It’s Value: After Hours. It’s 10:30 AM on a Tuesday, 01:30 PM on the East Coast. I’m Tobias Carlisle, joined as always by Jake Taylor and special guest, Drew Dickson of Albert Bridge Capital. How are you, Drew?

Drew: I’m all right, Toby. How are you, buddy?

Tobias: Well, thank you. Thanks for joining us.

Drew: Well, thanks for the invite. [crosstalk]

Tobias: So, for folks who don’t know who you are, just give us a little taste. European equities is your main focus.

Drew: It is, although I am not European.

Jake: [laughs] No.

Drew: Yeah, I’ve been focusing on Europe for 20, 25 years now. My first job after business school was at Fidelity Investments. I was in Hong Kong briefly, but then, been in London and had been for the next 20 plus years, initially working for other companies, and then starting my own focused on individual stocks. We’re not big macro top-down folks, although that’s very [unintelligible [00:01:13] right now, and obviously, things that we all need to think about. But at the end of the day, I don’t feel any special skill in divining macroeconomic direction and try to keep a very concentrated portfolio. I know it’s the antithesis of what most of us in our world talk about the smart thing to do, but basically, for institutional investors, we run a 15-, 20-stock portfolio. Try to be very idiosyncratic, very stock specific, and never a dull moment, especially in Europe, and certainly, over the last few years. But I’m now based in the US.

My wife wanted to move here. So, I commuted for a while, but then during COVID, I made it full time. So, I’m still focused on Europe, but based in Florida, which is actually a lot easier than I expected. The weather is a little better. My wife’s a little happier, which is important.

Jake: Yeah. Key stakeholder in the process. [laughs]

Drew: Key stakeholder.

Tobias: Is she American?

Drew: It’s confusing what my wife is. She’s Italian, but her father was an expat in Africa. So, she was born in Yemen-

Tobias: Wow.

Drew: -and grew up in Zambia, Tanzania, Kenya, South Africa, the whole east up and down the East Coast, Ethiopia, Eritrea. All of her cousins live in Florence. So, when we lived in London, we’d hop over to Florence, and meet with her cousins, and it was awesome.

Tobias: It’s tough. Sort to– [crosstalk]

Drew: Not a bad setup.

Jake: Yeah. [laughs]

Drew: Less easy now that we’re in Florida. When she said she wanted to move to Naples, I thought she meant Italy. [Jake laughs] So, it turned out it was this place.

Tobias: You agreed?

Drew: Well, dude, I don’t agree to anything. I just acquiesce.

Jake: Yeah.

Tobias: That’s it. [crosstalk] Let me give a shoutout to all of the tune ins. Santo Domingo, Dominican Republic. Yeah, I think that’s the first. Baltimore, San Diego. Birmingham, Alabama. What’s up, Milton Keynes? San Jose, Dubai. What’s up, Samson. Sooke, Vancouver Island. Vaduz, Liechtenstein. Dorset, England. Oslo, Norway. Sandy beaches of Destin, Florida, what’s up? Jupiter, Surrey. Belize. Belize. Belize. I think I got everybody. That’s cool. Nashville.

Drew: Milton Keynes [crosstalk] has to be the best named city for any economist.

Tobias: How does that come to be?

Drew: I think long before Milton and Keynes or as Americans would say, Keynes, it was Milton Keynes.

Tobias: Yeah. Okay. [crosstalk]

Drew: So, they just happen to be two of the greatest economies on both sides of the argument in the same name town. [chuckles]

Tobias: There’s been a little bit of action. We’re living interesting times as the Chinese say. Decades happening in weeks. So, these podcasts are fun, again. I think that’s a good thing. [Jake laughs] Not so much fun for the portfolio, but fun for the podcast. SVB went down March 10th. I didn’t actually realize that was the date. That’s almost two weeks ago. It seems like ancient history at this point. There’s a few on the edge, and that’s creating some volatility in the markets.

Buffett Getting Ready To Bail Out Banks

The rumor over the weekend was that Buffett was ready to bail out some banks. I thought that was a little bit premature. Doesn’t he normally wait until you can see the whites of the eyes. I don’t know that we’ve even seen the– The enemy hasn’t even charged across the dead man’s land yet, has it? No man’s land. How are you guys feeling? Where are we in the cycle? What inning are we? [crosstalk]

Jake: [laughs]

SVB – U.S Treasuries Was A Bad Investment

Tobias: How do you think about it, Drew? What’s the mood in European equities?

Drew: Well, it’s similar to the mood here. Actually, we’ve had Credit Suisse also kicking in. So, it gets a little bit worse.

Jake: Yeah, it’s big.

Drew: Was that a bailout, as Josh Brown wrote this morning, or was that just something inevitably was going to happen anyway? So, yeah, people are nervous. Now, one thing that as someone that really tries to focus on the behavioral aspects of all the decisions I make, of all the potential mistakes the market may or may not be making, I do see a lot of folks talking about contagion and hearkening back to 2008, because even though it’s 15 years ago, I suppose, a relative recency bias, there’s something that– most of us are for over 35 can recall just how awful that was.

Tobias: I was only a teenager. I was in high school at that time.

Jake: Yeah. No, shut up. [laughs]

Drew: Or we can watch The Big Short again as I did last night, I mentioned to you guys and see it all happening. And so, there is a sort of human desire to try to fit narratives into a bucket that it can get a sense of. Now, are people too nervous about contagion, too nervous about the banks, too nervous about the global economy, or are they not? That’s something that I don’t know the answer to. I don’t think anyone does. The more they profess to be certain about it, the less likely– [crosstalk]

Jake: More circumspect we should be.

Drew: Yeah. But it’s definitely something to think about. It’s definitely the dynamics of where to put your money have really changed, I think. At the end of the day, SVB had its money sitting in US Treasuries, just made a bad interest rate bet. It wasn’t dodgy or spiffy things they took their depositors money with and blew it on bitcoin. [Jake laughs] They were invested in risk-free 2 and 5 years or 10 years, wherever they were. [crosstalk]

Jake: It turns out that was return-free risk that they were buying.

Tobias: Yeah. [laughs]

Drew: Yeah. So, that’s going to cause a bit of a rethink. But at the end of the day, money has to go somewhere. It has to be kept somewhere, whether it’s under your mattress or in a bank, in a hedge fund, in any product. There could be a bit of reallocation. Certainly, discount rates are going to be a bit higher. In the short term, the Fed and I think global regulators don’t have as much ammunition as they had before.

Tobias: Because rates have been pushed so low, do you think or what’s the reason for that?

Drew: They have been pushed– [crosstalk]

Jake: [crosstalk] debt too high.

Should We Let The Charlatans, Hubris-Filled Pretenders, And Bad Guys Fail?

Drew: They’ve been pushed so low, they were left with nothing. And now, not that they really need it– Country by country, we’ll be faced with this idea of, “Okay, is the government here to help or not?” I think the mindset has really changed since 2008. If you were libertarian tilt pre-2008, you wouldn’t have expected a big bailout of the banks, you got it, and now, that was peanuts in comparison to the bailout we got during COVID. And now, we see the FDIC insuring deposits over 250K. It’s almost like this governmental backstop is now a political thing, which is a change. I don’t know how that’s not inflationary in the long run. Maybe it could be, but we’ll see. I studied a lot of macroeconomics enough to know that I’m not a good macroeconomist.

Tobias: I think Milton Keynes felt the same way. Lord Keynes was the same. I got a good line here from Lawrence McDonald. I’ll read it out to you guys before we get started. “Never, ever forget the fundamental foundation of capitalism is to let the charlatans, the hubris-filled pretenders, and bad guys fail. For most of the last 20 years, we are living in a society where this is NOT the case. There is a price to pay for this charade. It’s coming.” How do you feel about that kind of Old Testament view?

How To Avoid Ulcers When Investing

Jake: Well, I think the saying is also that capitalism without failure is like religion without hell. [Tobias laughs] It just doesn’t really work. But I think one thing that’s interesting, you were talking about contagion, Drew, it’s important to keep an eye on your own cortisol levels as much as you can as well, because if you study like Robert Sapolsky’s work, where he was a primatologist– or still is. He wrote this book called Why Zebras Don’t Get Ulcers. The idea is that, actually, your cortisol level will dictate how your biology then primes itself for your environment. And so, when you are high stressed, high cortisol level, you focus on things that are very immediate. Like, you don’t worry about repair, reproduction, all the long-term processes get put on hold because you’re in survival mode today.

So, what you see is timelines coming in as far as what you’re focused on. I think we’re seeing that now, potentially, and I would expect to see more of that in the marketplace where the higher the cortisol level of everybody in that herd, the more that we’d expect to only be looking a day out instead of really focusing on long-term important things. So, if you want to have an advantage, I think keeping an eye on your own cortisol level is important in times like these.

Drew: I think that’s a great point. The pressure on retail investors, certainly on fund managers and advisors, we’re already probably thinking too short term as it is. But it’s hard to close your eyes and wait for tomorrow or wait for five years from now when everyone’s got such an opinion. Everyone’s publishing views and tweeting– [crosstalk]

SVB – Fastest Collapse Ever

Tobias: Well, that’s a great point. There’s a tweet today that said that it’s the fastest that a bank’s ever been taken into whatever they call it, receivership or when the FDIC takes control of it. It ordinarily happens on a Friday afternoon after the market closes, evidently. This time around, SVB was closed down in the middle of the day, which is the first time that’s ever happened. And so, the argument is social media has accelerated the bank runs. What do you think about that? You’ve been in the market longer, Drew. 2008, Facebook and Twitter existed, but certainly not to the– [crosstalk]

Drew: Not to the extent– [crosstalk]

Tobias: Yean, not to the extent that it does.

Drew: We had chatrooms and things in 1999. Pumping stocks up and some similarities to what we saw on Reddit or elsewhere. But I do think that it’s now for many of us, not just the kids, it’s the primary source of information is just hopping into Twitter, and seeing what happened overnight, and see what people are talking about. Whatever it is you’re interested in– We’re all Fintwit folks, but there’s so many random cool areas of Twitter where people can get all the information they want about the things they care about.

Jake: Did you say information or misinformation? Sorry.

Drew: Both.

Jake: [laughs]

Embrace The Silliness Of Markets

Drew: So, you have to be able to sort through that. Sometimes, when you’re bombarded with this, this is a real trick for smart investors, is try to filter out the noise and just pull out the individual pieces of information about a company that actually matter. When most of them don’t, it becomes a lot harder. Not only when you’re just bombarded with a ton of a mountain of avalanche of information, you have a lot of other folks that think it’s information, and then you have a stock market that reacts to that. Now, I do still think that in the long term, fundamentals are what matters. And so, to the extent that we get overreactions because of people doing silly things in the short term, that’s an opportunity for folks with reasonable time horizons.

So, I don’t mind if you get things out of whack. I don’t mind if the stock market does silly things. Certainly, at the individual company level, kind of love it. As long as I’m not long too much of it, that’s an opportunity. So, I think the cat’s out of the bag. We’re not going to stop all this. This is the way the market behaves. I think the trick now for all of us going forward is to take advantage of it, both from an entry perspective and also an exit perspective, and a sizing perspective, and a volatility and risk perspective. “Do I want to be a little bit more cautious about this because this is the other side of the trade now?” It’s not who you it used to be.

Markets Will Always Be Inefficient

Jake: Do you think the market’s more or less efficient than, let’s say, 15 years ago?

Drew: Mm. Oh, Jake.

Tobias: How would you show that empirically?

Drew: Yeah. Well, it’s impossible to show empirically. You can show higher volatility and claim like Schiller would. That means it’s not efficient. But we’ve also been through a wild period between the GFC and all the nervousness in Europe in 2011, 2012, 2013, 2014 to Brexit, now to COVID, and to the Ukraine. We just had a lot of stuff going on. In terms of market efficiency, I still think broadly, markets– As much as I’m a Richard Thaler disciple, I still think broadly the markets are tough to beat. Indices are tough to beat, especially if you’re really diversified. It’s tough to know where things are going to go. It’s tough to beat the market. The price is wrong. We just don’t know which direction it’s wrong in, usually.

Jake: [laughs]

Drew: Now, do things get a little crazier because of social media? Well, they certainly did for GameStop, and AMC, and Bed Bath & Beyond, and all those stories. That was a social phenomenon that wouldn’t have happened.

Tobias: We’ve seen manipulation before.

Drew: That was what I was going to say. We have seen other stocks, the pets.coms of the world and everything go crazy without it.

Tobias: I was thinking Robert Barron’s like– [crosstalk]

Drew: Oh, way back. Yeah.

Jake: Oh, yeah.

Tobias: Yeah.

Drew: Sure. That’s how you played the game back then. [crosstalk]

Jake: Cornering markets.

Tobias: Yeah. They’ve tried to make that illegal, but I don’t know how that works in a Reddit-type world. What are you going to do? Approach every single one of the redditors? Toss them all in jail?

Jake: Sweep all the ants up into a pile? [crosstalk]

Drew: Yeah, but back to your question, if our markets less efficient or more, I think they’re just as difficult as they were before. I don’t think they’re necessarily more efficient now even though we’ve had more time. I think that we still have these human beings on the other side of the trade as much as things have become algos and robots. But even they project what their creators are thinking. We still get overreactions and underreactions, and we still have all those biases that get in the way of us thinking clearly. I don’t think it’s ever going away. The trick is, can we do anything about it? Daniel Kahneman said, “Actually, I invented all these things. I still make the same mistakes.” How are we all– [crosstalk]

Jake: Yeah, [crosstalk] confidence.

Stick To Your Process Through The Bad Times

Drew: So, what can you do? Well, you can create a process at your firm or in your investment style that hopefully makes you more objective. Have a culture where making mistakes is okay, where you recognize that the goal is to bet 600, bet 700, if you’re awesome. You don’t need bet 1,000. Whether it’s your own money or you’re managing money for others, you have a horizon that’s tied to each other, so that you have good alignment which allows you to make better decisions when the bad stuff happens, because bad stuff will happen. If you’re not aligned and you’re not solid in your process, you can lock in that bad stuff by making the wrong decisions.

I don’t know who we’re going to have to talk about once things if they ever get back to being somewhat normal. Because right now– [crosstalk]

Tobias: [crosstalk] something going on.

Jake: There’s always something, right? You look at the 20th century and two World Wars. We had a… flu.

Tobias: Cold War.

Jake: A cold War that went a long time.

Tobias: Fall of the Berlin wall.

Jake: Inflation, Berlin wall. We had all kinds of stuff, and people figured it out over time.

Drew: Yeah.

Tobias: I got two social media takes today. One, Jeremy Grantham sees a super bubble. Jeremy Grantham always sees a super bubble. [Jake laughs] Cathie Wood sees super exponential growth. Cathie Wood always sees super expensive growth.

Jake: Oh, can we just like [crosstalk] the word “super” on either–? Is that just a good heuristic?

Drew: Yeah.

Jake: [laughs]

Tobias: I think that’s interesting. I think they’re probably two sides of the same coin. They’re probably both looking at the same thing.

Jake: This is maybe an uncharitable question, but how far does Ark have to go down before we just stop even-

Tobias: 50%.

Jake: -entertaining these–? [crosstalk]

Tobias: I think 90% peak to trough.

Jake: Okay.

Tobias: 90% peak to trough is the number. So, 156 is the peak, trades under 16. Done. Okay. I just made that up. That’s not real at all.

Drew: [laughs]

Tobias: That’s what I’m saying.

Jake: I shouldn’t say to mean things like that, but it is like, “Why are we still talking about this?”

10:3 Inversion Predicting Recession

Tobias: I’ve got another little datapoint here. I check the 10:3 inversion every day just to see what’s happening. For the reason that Cam Harvey– [crosstalk]

Jake: For the reason that [crosstalk] when you’re a kid and you had a loose tooth, and you just can’t leave it alone. [laughs]

Tobias: That’s probably right. But I also think that Cam Harvey has– Obviously, I don’t check it when it’s– I’m checking it now for the obvious reason that we’ve had the inversion. Cam Harvey’s research is pretty comprehensive about there are no false positives. There are four examples before he published. There have been four examples since he published with no false positives in either. We’re in the inversion. Cam Harvey himself has faded his own metric and said, he doesn’t think it’s going to apply this time around. He said the same thing in 2008, and that’s one of the–

You’ll like this, Drew. There’s the behavioral rule that simple models outperform expert judgments including when experts get access to the simple models. So, the simple model is more likely to be right, in my opinion, for that reason. But the thing that really stands out today, it is currently the steepest it has ever been. The data only goes back to 1980 or something like that. Not that long, I understand, 40 something years. But the steepness of that curve does make me a little bit nervous about the depth of whatever follows on, the depth of the recession that follows on. It’s tried to climb back out of the inversion a few times.

I think even Jeff Gundlach was saying the other day that he thought it was closing and it was just about all over, but here overnight, we’ve gone from closing to being quite wide. I don’t know what it means, but it’s just one of those datapoints that after whatever happens in 6 or 10 months’ time, I’ll tell you what it meant.

Drew: Yeah.

Jake: Does the steepness of it correlate with the eventual economic calamity?

Tobias: I don’t see any research.

Jake: I thought it was kind of more of a binary thing. It’s like, once this gets triggered, then your recession is imminent.

Tobias: What’s it saying?

Jake: I don’t know, but it’s provocative. [laughs]

Drew: Yeah. Toby, it’s so easy for us to take data, and go backwards, and find periods, and want to use that as sort of precedent, because it just makes us feel more comfortable, like we know what’s coming and it takes some of the risk away, takes some of the ambiguity away. But I just don’t know. I just don’t know if the variables are all lined up, so that the experiences we had at different levels of whatever, inversion curves, or interest rates, or whatever we’re talking about are necessarily foretelling a similar outcome.

Forget Sleep – The Nerve Wracking Portfolio Generates Alpha

Jake: Drew, can I ask–? I know that you own a car maker, for instance. So, in that instance, something that is perceived to be very economically sensitive, how do you wrap your mind then around the macro part, that you’re not accidentally making a macro bet sometimes, especially if something is very tied to macroeconomics often?

Drew: No. Yeah, it’s a great question, Jake. And also, sometimes, you don’t think you’re making a macro bet even within a sector or across sectors. But in certain environments, they all start looking like each other, because they’re cyclical- [crosstalk]

Jake: Yeah. Interest rates. That’s how a lot of times–

Drew: -whatever. What I would do even if it’s not a maker that I’m just working on and don’t own or any of these exposed types of sectors is look at what it is the market is already assuming. And it becomes that. And so, if everyone’s optimistic about the prospects for unit sales growth and taking over share of EV as the industry migrates from ICEs, and not paying attention to what’s going on in the world, then you’re nervous. But if it’s the opposite and everyone’s scared to death about how bad the economy is–

This is public market stock. This is not private equity. What is it that the market doesn’t know? What is it that is baked into this share price? Then, it becomes, “Okay, can I just pick the very best of these ideas across the half a dozen investable automakers in Europe? Can I pick the one that has the best risk reward of these?” Long-short guys might then take the best option on the other side and create a relatively market-neutral long-short bet, pair trade kind of style. That’s not my style.

Yeah, trying to estimate what everyone else is estimating. It’s that game when you go and want to own something. To the extent that either we’re nervous now that markets are about to turn down or that they have started, the question becomes, are you more likely to find things which are interesting on the long side in this kind of environment or a 2019, 2020 kind of environment, when everything’s great and everyone’s talking about how money is flowing. In my view, it’s more exciting than nastier and uglier it is. This is going to sound terrible, but I’ve written this to our investors before. Actually, one of our internal blog posts, I’m not sure if I made this one of my Drew’s Views posts, but I think I called it, “I’d rather not sleep.” If I’m sleeping well at night, I own– [crosstalk]

Jake: Forward returns are low. [laughs]

Drew: I own stuff that everyone knows. I’m not nervous about it because it’s smart and it’s not scary. But if I’m up nervous about what this company is going to report this quarter or how the market is going to react to it, well, I’m not the only person in this game. And everyone else, if I’m nervous and I own the company inside out, how is the rest of the market, feeling about this stock and what it wants to pay for it? So, as long as we have things which are nerve wracking in the portfolio, we generate more alpha. Don’t sleep very well, but that’s a good thing.

Tesla Won’t Sell 20 Million Cars A Year By 2030

Tobias: Can I ask you, Drew? How can you hold a car maker when Tesla is going to produce 100% of the cars at some point in the future?

Drew: I was waiting, Toby, for you to bring up Tesla.

Tobias: [crosstalk] trying to get in in there a few times.

Jake: You should provide a little context that you’ve been publicly critical of Tesla and that have had some debate– [crosstalk]

Tobias: Of the valuation– [crosstalk]

Jake: Yeah.

Drew: No, it’s a fascinating story to me. I think the benefit of historical perspective in 20 or 30 years, we’re going to look back on Tesla and call it one of the most fascinating single events in the history of capitalism. It’s either going to be as some folks that we know, the largest company in the world again, or it’s not. Despite my focus on Europe, obviously, I’m looking at all the automakers. So, you can’t ignore Tesla, even though it’s still relatively tiny. There’s a lot of things that they do very well. I mean, extremely well. But it became such a disconnect between what they actually did and did well and what their share price reflected that it really caught my interest, and I started doing some op-eds in the FT and MarketWatch a couple of years ago.

I think the stock got split adjustment. I think I got up to over $400 a share and I was like, “Well, I can’t get there, in any circumstance.” I think a very naive analogy people use is that Tesla is the next Apple, and that everyone else is the next Nokia or BlackBerry. So, I tried to push back against that a lot. The dynamics of why people buy handsets and automobiles is quite different. I know it sounds good, but when you look at the demand for autos, we kind of know what it is, give or take five million units globally a year, and we can project it out, and we can make estimates about how much EV share will be of that and how that progresses as we march toward 2030 and 2035.

We can also see the plans that Stellantis, or Ford, or GM, or Mercedes, or any of them have in terms of what’s launched in ranges and aesthetics. I will say that I’ve met some Tesla– usually, especially on Twitter, you see a lot of folks, it’s kind of a religion for a lot of folks. They don’t want to hear anything that’s negative, and they really band together as a tribe, and just hook, line, and sink, anything Elon says is gospel. But not everybody’s that way. There are some smart Tesla owners. Actually, last year, I was approached by someone who I didn’t know and said, “Hey, Drew, we’d like to have you on our podcast. You seem like a reasonable bear.” And I was like, “Ugh, I don’t know.” [crosstalk]

Jake: Yeah. Right into the lion’s den.

Drew: My experience on Twitter has not been one where it was a lot of sharing of knowledge and learning on both sides. And so, I didn’t respond at first. Then, Wes Gray, whom I think you both know, at Alpha Architect wrote to me and said, “Hey, you should speak to Emmett. He’s a smart guy, and you’d enjoy it, and have a nice bull-bear debate.” And so, when Wes said that, I was like, “Okay, fine.” So, I had it and it was fantastic. We both agreed to disagree, but it was civil, and it was cordial, and I think we both learned a little bit. He does the podcast, I think it’s called Good Soil. Let me double check it. Good Soil Podcast. Not trying to give– [crosstalk]

Tobias: Did you factor the fleet of robotaxis into your evaluation, Drew?

Drew: No, I do not factor the fleet of robotaxis. I think the thing that the Tesla fans miss is that if we really do achieve that, which is a whole another debate. This is an Isaac Asimov-Douglas Hofstadter kind of debate about hitting level five and governments allowing it to happen. People actually wanting to do that. The young kids that love Tesla, all think it’s an automatic, but guess what happens in that scenario, that Tony Seba scenario where we’re driving robotaxis. You don’t need as many cars. So, it changed the whole dynamic in terms of global SAR, USR, and how many units we’re selling.

I’ve tried a million ways to come up with some of these projections that Musk has made, “We’re going to sell 20 million units by 2030,” and people just take it a gospel. I’m just like, “There’s no way on God’s green earth, that’s going to happen.” I think they did 1.3– I’m going to get this wrong. Someone on Twitter is already yelling at me. Maybe 1.6 last year.

Jake: [laughs]

Drew: What Volkswagen has recognized, what Toyota has recognized is they do stuff really well. They take costs out. They’re innovative in their assembly line. They mega cast. They put a lot of stuff together, so it’s just less parts when you’re assembling a vehicle. I know there’s a lot of people that ride them hard on their quality, and maybe that’s an issue. But in terms of the safety and stuff, I’ve dug deep trying to be negative. I’ve dug deep into the– Jake, what do we call our regulatory agency here? The NH, the people that look at the–

Jake: Yeah. NHTSA.

Tesla Will Never Dominate The EV Market

Drew: Yeah, I’ve looked through all that. Teslas, they’re safe as hell. So, there’s things they do well. They’ve sold way more cars, I think, that anyone expected them to sell, but they’re still a spec. They’re still not a mass market manufacturer. They’re still not dealing with having 20 assemblies around the world and trying to sell 3, 4, 5, 8 million units a year. They have aspirations for that. They just announced plans to build in Monterey. People are excited about that. Presumably to build their Model 2 or whatever they’re going to call it, which is their mass market vehicle, the $25,000, $27,000 car that’s supposed to change the game and help them get to their 20 million. I’m just like, guys, Volkswagen started in 1937. Toyota coincidentally started in 1937, and they’ve both been kicking butt for 85 years. And Volkswagen is up to 10% market share in a world where we sell 80 million units. So, that’s eight million cars. Toyota is at 12%.

If you got to 20% by 2030, I think we’ll do about a hundred million units in 2030 around the world, give or take. You get to 20%, that’s 20 million cars. It’s twice as big as Volkswagen’s market share. As if Volkswagen, and GM, and Mercedes are sitting on their hands and refusing to make the switch. I think they’re being smart. People still want internal combustion vehicles. Now, if you’re in Norway and you get a gazillion dollars in tax rebates and all sorts of incentives to buy EV, you’re going to buy an EV. It’s impossible not to. Huge incentives.

But broadly, 90% of the world still buys EVs. The speed at which these traditional automakers make the transition, I think they’re going to be as smart as they can be about it. I think they recognize they need to step up their game to compete with Tesla on the cost side of these EVs. I think that Tesla has also encouraged people to say, “Actually, driving EV is not such a bad idea, not such a terrible thing.” And so, it’s enough that Ford says, “You know what? Actually, we’ll make the F-150 lightning,” or Ram says, “We’ll make the 1500 Revolution in 2024.” The lightning is out now Ford. “We’ll work on it, we’ll get it even better,” and they’ll sell.

To me, it’s just a share game. Toyota, Volkswagen, and the others, how much share will they seed in this transition as EVs become a larger proportion of the total production annually? We all have debates about it. I get to 75% by 2035, 48% by 2030 or 49%. Maybe it’s 5% higher or lower. A lot of these guys on Twitter think it’s 100% by 2030 and there’s 20 million blah, blah. Question is, what’s the share price reflecting? Man, is it reflecting a lot still? That’s what it still fascinates me. It’s up a bunch today on a debt upgrade by Moody’s or Standard and Poor’s, whoever it was that made him investment grade on the debt side, but that was enough to get the army rolling today.

Jake: [laughs]

Drew: I know you have a 700-billion-dollar valuation. As I think I’ve shared with you guys, it’s pretty impressive. I’m talking a lot here. I don’t want to go on and on, but there’s other things that could happen to this business which have nothing to do with auto making, I think have to happen to this business in order to justify the share price. I think it’s unlikely. But if they do come up with Level 5 autonomous, and they’re the first ones to do it, and then people start licensing Tesla’s technology, wqell, then it does become a monopolistic story where you can come up with whatever number you want.

If they actually figure that out, they’re behind Waymo and depending on whose rankings you use, they’re not in the lead. Of course, the Tesla fans think they’re in the lead. They could get in the lead. But there are a lot of ifs, a lot of uncertainty about getting there, who will take us there? Who will get us there? What will the adoption rate be once we do? That’s one way to get a lot of market cap though, if you did solve that. All of a sudden, in 2040, we’re all forced to drive autonomous vehicles, which Isaac Asimov predicted in 1955.

Tobias: The fact that we’d be forced to drive them?

Drew: Yeah. In his book– Oh, gosh. What was it? It’ll come to me while I did– I know the car. [crosstalk] The car was called Sally in the book. It was a short story. Yeah, there would be collectors that had him in their backyard.

Tobias: The ICEs.

Drew: The ICEs.

Tobias: I see. If you collect– [laughs]

Drew: Yeah. I think it was 2040 or 2045, it was illegal to drive an ICE. Sorry. No, not just an ICE, a car that you could drive yourself. This is the autonomous switch, right? If you solve that–

Jake: [crosstalk] dangerous.

Drew: That’s going to be difficult to define what’s that worth. But a whole lot of that Tesla market cap, I think assumes a whole lot, either on the FSD front, the Level 5 front, or on the energy front and their mega PACs. The insurance front, which arguably shouldn’t be a business they’re even in. I’m missing one other– Oh, Tesla bot. That’s another one.

Jake: Yeah, robots.

Drew: The robots. So, I spent all of my time trying to figure out what the auto company is worth, and then the balance I just call the Musk option. The Musk option is unpredictable. Will the market pay for these things that he might come up with next? He’s brilliant. I don’t have the same negative view about him as a capitalist, as a businessman, as an innovator. I’ve been pretty impressed. I’ve been very impressed. So, I don’t have a similar view.

Jake and I have one very good friend who’s not a big fan at all, to the extent of him thinking he’s a bad person. I’m not there. Also, it makes it very tough to have a civil debate with folks on the other side, if that’s your perspective. “He’s a crook.” “No, he’s God.” “No, he’s a crook.” “No, he’s God.” Okay, thanks.

Jake: [laughs] Yeah.

Drew: Anyway. So, I went on way too long, Toby. I told you not to talk about Tesla. God bless America. Jeez.

Jake: [laughs]

The Art Of Learning – Mastering The Basics

Tobias: JT, do you want to do some– get your veggies?

Jake: Yeah, we can cook some veggies. As I prefaced it with– The more the markets start to get skittish, the more I try to zoom out on the veggies so that hopefully, we recenter everyone’s expectations and what should you be focusing on? Today, we’re going to be talking about this book called The Art of Learning that’s by Josh Waitzkin. If that name sounds familiar, you may have come across him at some point where he was actually the subject of a book and a movie called Searching for Bobby Fischer, which came out when he was about 16. But the backstory is that, Josh was a chess prodigy as a kid, like six, seven years old, learned how to play chess. Actually, at age 11, he played Gary Kasparov to a draw in an exhibition event, which is pretty astounding. This is the best player in the world.

At age 13, he became a national master, and then at age 16, an international master. In 1999, he quit playing chess and he shifted his focus to martial arts, specifically like tai chi push hands. 2004, he won the World Championship for his weight class. And then he also has a black belt in Brazilian Jiu-Jitsu under Marcelo Garcia. He’s done some really great podcasts with Tim Ferriss, if you want to go check him out some more.

But in 2008, he published this book called The Art of Learning. It’s part autobiography, and it’s also part kind of a how-to manual of how he breaks down the learning process to gain mastery. He’s been a master in multiple places, like chess, tai chi. I think now he’s actually getting into kiteboarding and becoming a master there. So, he’s just very interesting person.

Let’s reveal some of the interesting findings about learning right now from this book. What’s very interesting is that most of the time, the kids that he played against when he was really young, they learned a bunch of opening moves and strategies that they basically just memorized to get a lead. So, they would just pick one of those and then run it. It was almost like they’re like parrots in a way. They weren’t really understanding, but they looked very smart. But it actually put a ceiling on their creativity, because they just had these rote things that they would institute.

It reminds me a little bit of Richard Feynman when he would talk about like, “Well, yeah, you know the name of all of these birds, but do you understand the bird and how it flies?” Instead, how he learned from his teacher was that– [crosstalk]

Tobias: Magic?

Jake: Yeah, it is magic.

Tobias: Sorry, dude. I didn’t mean to derail you.

Jake: His teacher instead reduced the complexity of the board and just they started out with just a pawn and a king against a single king. So, it was like three total pieces and a very simple endgame. It allowed him to gain a subtle understanding of the underlying principles of space and zugzwang, which we’ve talked about before, which is, remember where you force your opponent into they only have bad moves left.

This had me thinking that this very simple starting is mimics how Buffett started out with. He’s just adding up the balance sheet effectively and paying a hell of a lot less than what’s on the balance sheet. And then eventually, he worked his way towards understanding businesses more, and recognizing franchise value, and all of that. But you become a master of the basics first. Over time, his teacher, they added like a rook and a king versus a king, a bishop, a knight. Then you build the foundation, basically, of the strengths and weaknesses of every single piece and how they fit together, you’re really boiling it down to the essentials and then building up from there.

Match Your Strategy With Your Mood

So, he said that, “I’ve long believed that if a student of virtually any discipline could avoid repeating the same mistake twice, both technical and psychological, he or she would skyrocket to the top of their field.” I’m going to go through some more great quotes that he has that I think I just want to drop in here. “It’s rarely a mysterious technique that drives us to the top, but rather a profound mastery of what may well be a basic skill set.” “In every discipline, the ability to be clear headed, present, and cool under fire is much of what separates the best from the mediocre.” “If one player is serenely present while the other is being ripped apart by internal issues, the outcome is already clear.”

So, he tells this story of this other chess champion name– He’s very important to be in touch with your internal state and your feelings as well as part of being a competitor. He tells this story of this chess champion named Tigran Petrosian, I think it’s pronounced. While Petrosian was playing these very long matches that would last like weeks and months at a time, because some of these tournaments are like very long. He’d begin each day by sitting quietly in his room in introspection. His goal was to observe his mood in very fine detail, like very nuanced understanding of it. Was he feeling nostalgic or energetic or cautious, impassioned, confident, or insecure?

He would then build his game plan around how he was feeling that day and he would choose his opening based on how he was feeling so he could express himself in maybe the most authentic way that matched how he felt that day. He felt like if his mood and his strategy were in sync, he was playing his most inspired chess then. I think there’s something about that for us as investors, where it’s not necessarily like on a day-to-day basis, but really understanding yourself at a deep level, your strengths and weaknesses, and then matching that with your investment strategy.

A lot of that might be the timeline. Are you somebody who can sit quietly while the world is melting down and look out five years when everyone else is looking out one day at a time? If so, you should probably focus on that strategy and really lean into your strengths. So, I think at the end of the day, this game is really about you’re playing it against yourself often. The better that you’re a master of yourself and understand yourself, I think it’s just such a huge advantage. Hopefully, this is what people need to hear right now while things are getting kind of skittish.

Tobias: You now that Hans Niemann, you remember that the cheating scandal in chess last year, the year before, where that Hans Niemann was playing against Magnus Carlson. He said that he had studied Magnus Carlson’s games and he liked to use a particular opening. And so, he went and studied that opening and he found some variation in it where he had an advantage, because he had an idea that Magnus Carlson would play a particular opening in a particular way. And so, he counted that variation and that was how he ended up winning that game. So, he says he wasn’t cheating. [crosstalk] cheated before.

Jake: Waitzkin tells these stories about especially as a kid, there was all kinds of cheating that would happen. Kids like kicking under the table, kicking them in the shins. There was this one kid, apparently, who would just barely at the subconscious level be making a little tapping sound, and then he would speed it up, and it would just– you didn’t realize you were, but you would just start to feel more agitated. All these little tricks to play that interesting just to try to gain an advantage.

Tobias: Hey, Drew, your headphone’s off. Your mic’s off.

Drew: The example you mentioned with Magnus, Toby, isn’t that in life? Certainly in every sports, you’re playing soccer or American football or basketball, you’re trying to figure out what their move is going to be, what kind of formation are they going to have, how should I attack that? Preparing for it like an individual would for a chess match, I think, is pretty consistently used thing by professionals. But the harder thing, which you mentioned, Jake, I can’t remember the guy’s name, the one that wakes up every morning and spends a half hour figuring out what kind of mood he’s in, that’s next level. Because we all might have a certain inclination of behaving a certain way generally but, man, our moods will be different every day. This guy was figuring that out. “Well, my mood is this today. So, I’m going to adjust for it that way,” or what was he doing?

Jake: Yeah, he was trying to lean into his moods so that his strategy then would be in line with how he was feeling, and that would be his most essential version of himself at that point.

Drew: What if you’re just consistently insecure like me?

Jake: [laughs] Yeah.

Drew: It’s kind of standard. It doesn’t time vary. It’s the same strategy every day, Jake. Come on.

Jake: Well, then you build a quant ETF, and you tie yourself to the mast.

Drew: [laughs]

In Order To Win You Need To Finish

Tobias: That book on ergodicity, Lucas Della– Help me with the name.

Jake: Oh, yeah. De LA Luca, I think.

Tobias: De La Luca. That sounds right. Something like that.

Jake: Yeah, he’s an Italian professor.

Tobias: He has a great point in there about there are some games that have that non-ergodic quality to them which, for people who don’t know, that’s the possibility that a zero in the game ends the game. So, life is non-ergodic because you die. Investing is non-ergodic, because you can run out of money. You can go bankrupt.

Jake: Yeah. It’s the difference between playing Russian roulette by yourself, one in six poles versus six different people pulling it, and you end up with a very non-ergodic outcome if you’re the unlucky one.

Tobias: Statistically and econometrically, you can demonstrate that games that are non-ergodic, players that play non-ergodic games have an expected outcome, that is the worst-case outcome. So, your expected outcome is ruined. So, investing in the stock market, your expected outcome is ruin. Clearly, that doesn’t happen because we do various other things, like, we diversify and so on. But if you don’t recognize that the game that you’re playing possesses that quality, then you do things that end the game, and you can’t then succeed at it. So, you can be a modestly skilled player who recognizes the fact that the game is non-ergodic, which means that it can end. You can die. You’ll do a lot better than someone who is a highly skilled player who doesn’t recognize that quality of the game.

So, that’s why I think when you look at someone like Walter Schloss, may have been not the most highly skilled player of game. I don’t know. This is what I’ve read. I have no inside information on that whatsoever.

Jake: It’s what [crosstalk] Buffett [unintelligible [00:50:27]

Tobias: Right. He recognizes the non-ergodic quality of the game, stays in the game, does very well over a very long period of time, because you’ve got that random more quality of the market. Provided you don’t blow up, you can enjoy the upside success as well. And then if you’re highly skilled and you recognize the non-ergodic quality of the game, you Buffett. You end up wildly successful. So, I think that the most important thing in investing, particularly business, is recognizing that you can fail, and then doing everything in your power to not fail. If you recognize that, then everything else is– It’s important. It makes a difference where you come in the rankings, but it’s not that important. It’s not as important as recognizing that there is a [unintelligible 00:51:13] possibility out there. Death, ruin, those are possibilities. You should play the game that way.

Jake: Yeah. Tour de France is typically won by someone who never wins any single stage by itself. But they are just putting up reasonably consistent good times. And that ends up being a lower variance strategy but is what ends up winning.

Tobias: Also true in basketball. The year that the Golden State Warriors went for winning the most games in a season, evidently that took so much out of the team, such a burden on the team, that was the year that they didn’t win the championship, because they were so broken down from doing that. You just need to get through to the next stage. You just need to avoid the worst-case scenario and keep on making it through to the next stage and then you’re fine, rather than trying to maximize at every point through there, which is like investors levering up, or using option strategies that have zeros, or doing other things like that, shorting, potentially.

Jake: Yeah. Buffett says, “Always maintain your ability to play out your hand.”

Tobias: Yeah. I like that quote. You told me. I’ve looked it up since, the Niki Lauda quote. It’s Niki Lauda or Alain Prost. They both say it where they said, “The objective is to win the race going as slowly as possible.” They’re both Formula 1 drivers. “The objective is to win the race going as slowly as possible.” I like that idea.

Drew: Yeah. [crosstalk] Lauda.

Jake: Yeah.

Tobias: Both of them said. Lauda said it in the beginning of the 1984 Grand Prix after just coming back from getting burned all over his body.

Drew: Yeah. No, I only know, I don’t know if you saw that movie, Rush, with–

Jake: Yeah, it was great.

Tobias: Heath Ledger and whoever it was playing Niki Lauda just nailed it. That’s a great documentary. It’s not a documentary. What do you call those things? Real life– enactment.

Tobias: Biopic.

Drew: Yeah, it was excellent, if you haven’t seen it. Same guys that did Rush did Amy, which is also another great documentary about Amy Winehouse.

Tobias: Do they have that line in there about going as slow as possible?

Drew: I think, because that’s why I thought it was Niki Luda when you said it.

Tobias: Right.

Jake: Waitzkin has this one other quote that I think it’s an Indian parable of some kind, but it’s, “To walk a thorny road, we may cover its every inch with leather, or we can make sandals.” Just the idea of making sandals is for yourself. You guys have to insulate yourself and not try to change the entire world.

Drew: There’s a little less leather as well. Yeah, that’s good.

Jake: A lot less leather.

European Equities Poised To Outperform

Tobias: Are you excited about European equities, Drew? Is this a good time to be a European equity investor?

Drew: Well, obviously, I’m going to be biased because I’m managing money there and launching a new fund. So, take what I say with a grain of salt. But what interests me is we just had such a run here in the US for so long, certainly, in 2019 and 2020, and throughout the decade, but culminating then. A lot of my buddies running long-short or long-only funds in London, where half their books were based in the US, because that’s where all the action was. That was what was going on.

One thing that I like to look at is just how do things used to behave, how do things used to be? By saying that, I mean, okay, so you’ve got a bunch of multinational companies in the US, which is about the size of Europe. You think about how big it is with all the different countries and multinational companies all competing against each other. Boeing, and Airbus, and Nestle, and Mondelez, and Volkswagen, and GM. Basically, a lot of folks selling similar products to similar customers in similar regions. Why would one market outperform the other so much?

It used to not be the case. I’ve got the number here. From December 31st, 1979, to December 31st of 2009, 30 years, MSCI Europe versus the S&P 500 total returns. The annualized total return dividends reinvested for the S&P was 11.5%. The annualized dividends reinvested total return for the MSCI Europe local currency, 11.5%. Precisely the same number, which makes perfect sense. Then, we’ve had this disconnect over the last, now, 12, 13 years. It’s starting to sort of– [crosstalk]

Jake: No FAANGs in Europe. Is that the difference?

Drew: Well, the FAANGs is part of it, definitely. We have these great business models that take over the world, and technology became such a bigger piece and component of the index. I did a study looking at, “Okay, what happened to multiples of expensive things?” Let’s just take the top 10% of S&P, MSCI Europe, pull that growth, and see what kind of multiples they all went to over the course of the decade. The fascinating thing to me is that the European multiples went up about the same for what’s called the growthy stuff, 35 times earnings at the peak on average.

The difference between US and Europe though, in Europe, it’s 7%, 8% of the index, in the US, it is 26%. So, you get a lot of US stuff that way, a lot of US outperformance. But that was only part of it. A lot of it also was just people getting, I think, bombarded by a bunch of bad news from, most recently the Ukraine, going back to Brexit, going back to all the sort of crises 10 years ago. Is Spain going to make it through? Is Greece going to make it through?

Jake: [unintelligible [00:57:28]. [chuckles]

Drew: I do my own version of the magazine cover barometer. But man, every single article 2011, 2012, 2013, 2014 was Europe’s about to fall into the abyss. It didn’t. It’s not going to. The companies there are very similar to the companies here outside of that core group of companies, within 50 square miles of each other in Silicon Valley. We could have another episode. We talked all day long about some of these things becoming value themselves. But the bottom line is they captured all the eyeballs and a lot of babies were thrown out with the bathwater.

In the US, you saw a big disparity of value versus growth, depending on how you measure it, exceeding that of the 1998, 1999 tech bubble. That’s harder to correct itself in 2022. In Europe, it was even crazier. The price of value got even cheaper than the price of value in the US significantly so. So, yeah– [crosstalk]

Tobias: On a sprint basis or on an absolute basis, both?

Drew: Oh, no. If I look at US multiple premiums over Europe generally, Toby, in 2018, US stock market was about 20% more expensive than Europe. Fine. That went to 25%, and it got up to 40% in 2021, and it’s stayed up there in 2022. So, then you break that down to the whole growth versus value components of it, that’s where it gets interesting. The growth stocks are similarly priced from a price to earnings perspective. There’s not a big difference in US growth versus European growth. There’s a massive difference in US value versus European value. All of the difference in the overall multiple is from how cheap the value stuff has got.

Now, a lot of that also is the constituency of the indices, a lot more bank leaning, utility leaning things in the Europe versus what we have here. But you still find it by sector. So, from the perspective of someone that wants to pick stocks, don’t need alpha over the long-term and find idiosyncratic stuff, I think Europe is a very happy hunting ground given how ignored it’s been for the last 15 years, 13 years. Yes, things are starting to come back. We’re starting to see this sort of even here in the US. The growth things start to make surrender some of those wild gains. But it’s still there. What happened from 1998 to 2001, and then what happened from 2001 to 2004, and then put that as a map over the top of different periods leading up to 2022 and beyond, we haven’t given back anything like what we gave back then.

It was all growth that got hit before. Some things did well. It was a little bit sideways in growthy spaces [unintelligible 01:00:37] gave back the gains. But I won’t be surprised by something similar going forward. So, to the extent that I’m just focused on trying to find companies that people aren’t paying attention to or they are paying attention to, but to the wrong aspects of what they do, they’re not focused on the right aspects, their key value drivers will look markedly different in a few years. People are making some behavioral mistake with their anchor, if it’s confirmation bias, if it’s ambiguity aversion, something that’s preventing them from seeing clearly and knowing that will change in a year or two with more information. I think it’s a great time. But of course, I would. I run money there. [laughs]

Jake: [laughs]

Tobias: On that note, we’ve hit the time limit. Thanks, Drew.

Jake: Thanks– [crosstalk]

Drew: Good to see you, guys.

Tobias: If people want to get in contact with you, how do they do that?

Drew: Jake, you got to tell Chris to get Toby up to our St. Louis Pow Wow. I get to see Punky Brewster and old Jake every year. I don’t get to see you, Toby.

Tobias: I’ll come. He has been kind enough to invite me. I’ve had little kids. So, I’m unwilling to travel too much.

Drew: You are excused.

Tobias: My little [crosstalk] is at school now.

Drew: All right.

Jake: [laughs] Yeah, it’s a good time.

Tobias: Drew, if they want to get in contact with, you’re on Twitter @albertbridge?

Drew: @albertbridgecap, I believe.

Jake: Sign up for Drew’s Views. I read it every time it comes out.

Drew: Thank you, Jake.

Tobias: All right, good stuff.

Drew: Check’s in the mail, Jake.

Jake: [laughs]

Tobias: Thanks.

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