In their latest episode of the VALUE: After Hours Podcast, Bill Brewster, Jake Taylor, and Tobias Carlisle discuss:
- How To Avoid Blowing Up Your Portfolio
- When Warren Buffett Saw The Terror Threat
- Value Spread Closes – What It Means
- Uncertainty And The Precautionary Principle
- What Is Going On At Disney?
- Warren Buffett – Underwriting Genius & Equity Investor
- Nothing’s Cheap On A ‘Bottoms Up’ Basis
- Nassim Taleb – Fat Tails
- Don’t Risk Ruin!
- Tesla Up 140% YTD
- Carvana Up 750%
- Sub-Prime Lending Will Do Well Going Forward
- Bull Case For Natural Gas
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: Hey, it’s Value: After Hours. We made it. I’m Tobias Carlisle, joined by Bill Brewster and Jake Taylor. Oh, Billy just dropped out, too hard.
Jake: [laughs] Oh, man.
Tobias: Jake’s in a helicopter above– What’s happening, JT?
Jake: What’s up, my man? Sorry for being little bit late. I was scrambling to get to the airport and just crazy traffic. I don’t know, everybody’s flying today or what the hell’s going on.
Tobias: Yeah, busy times.
Jake: I guess we’re back. The economy is back. [laughs]
Bill: I’m back.
Tobias: Bill’s back.
Bill: [crosstalk] Sorry, I don’t know what happened.
Tobias: Comedy of errors, but we got there. We made it.
Bill: We were hanging out before went live waiting for Jake, and then once Jake came back, I figured I’d have a problem. Now, we’re all here. The mouse is spinning in all of our places.
Tobias: [unintelligible [00:01:03] this end is going as hard as he possibly can. Can you hear this? It sounds like it’s going to take off.
Bill: What mobile service are you on, Jake? Are you participating in the lead poisoning cellular networks of yesteryear, or are you on something that’s newer like T-Mobile? Judging by your freezing, you’re probably on AT&T.
Bill: There you go. There you go. Just poisoning the earth.
Tobias: Let me do a quick shoutout.
Jake: [unintelligible [00:01:34]
Bill: It’s okay.
Tobias: We got Santo Domingo, Dominican Republic. Kansas City. Highland Park. Salam from Dubai. What’s up, Samson? Sugar Land, Texas.
Bill: Samson in the house.
Tobias: Roseville, California. Toronto. Moncton. Gothenburg. Minneapolis. Tallahassee. Norberg, Sweden. What’s up? Pittsburgh. Munich, Germany. It’s a good spread.
Bill: See how Samson’s doing out here. I don’t know why he’s– But you know what, he’s probably retired and he’s just listening to us now, sitting on a beach.
Tobias: Yeah, Tesla’s had a pretty good run.
Bill: I respected Samson. I respect it.
Tobias: I saw Carvana. He’s up like 750% for the year. Is that a lot? Is that good for the six months? Good for the half year?
Bill: Yes, indeed. Sosin, I think he was buying– He had a lot going into it, but I think he was buying a decent amount at least top it off down there. So, we’ll see. Hopefully, who knows? I don’t know anything about that. Smart people on both sides, I guess.
Tobias: Do you think that the markets get quieter over summer? Do people– [crosstalk]
Bill: I don’t think anything’s quiet right now.
Tobias: Yeah. Not the markets? The markets are up a lot. I just don’t feel like there’s a lot of people around. I don’t know, maybe it’s like Yogi Bear in that restaurant. Too popular, nobody goes there anymore.
Bill: [laughs] I haven’t looked at total volumes.
Tobias: I’m not [unintelligible [00:03:09]. I’m just–
Bill: Yeah. I don’t know, I have heard that a number of people that– I’ve heard anecdotes of people that have just said, “Screw it, I’m going on vacation.” I think a number of people are confused and they’re saying, “I’m going to take some time off. Maybe when I come back, either I’ll see the ball clearer or the ball will be more deflated.”
Tobias: Yeah. What do you think–? You try to be or you are less macro economy than I am. What do you think?
Nothing’s Cheap On A ‘Bottoms Up’ Basis
Bill: I don’t know. Look, I think I was looking at Microsoft today and I think it’s trading at a 2.8% forward free cash flow yield. It doesn’t scream cheap. But you’re at 35 times cash flow-ish. So, if you are going to hold it for five years– I don’t know, I doubt it performs like get wealthy returns from here, but do I understand why people that own it, don’t want to sell it? Yeah. I think generally quality stocks that I look at tend to give me that feeling, and I think that some of the cheaper stuff that I look at– I don’t see a whole lot of things that I perceive to be cheap from a bottoms up basis that I usually can say like, “Oh, this makes some sense why this is going on.”
I probably should be looking a little bit smaller. I’ve got an itch to look at natural gas. I like natural gas as a theme and that’s where I’m at. I don’t know. I spend a lot of time talking to people about media and I try to say, “You don’t have to belong something.” But maybe it is the time. Who knows? It doesn’t feel like the time to me, but I’ve been saying that for a bit.
Tobias: You there, JT?
Jake: I’m back.
Jake: I’m going to try leaving my video off.
Bill: They’re still trying to repress your comments, Jake. It is a dreamy picture we get to look at though.
Tobias: I look at the underlying, the economic stuff. It looks terrible to me for the most part, but the market clearly is forward looking, and has already discounted all of that, and is looking forward to the glorious decade that we have in front of us.
Bill: Well, what looks terrible? What do you mean?
Tobias: I’ve got long theories– [crosstalk]
Bill: A thread of bear porn?
Tobias: A thread of bear porn. I have to dig it up. I don’t want to tell you what it was unless I get the actual name of it, but manufacturing is down year on year. I don’t know, I don’t like the underlying. But then again, I’ve been wrong. So, don’t listen to me.
Bill: Well, I don’t think that you’re wrong. I think the question is, has the market been through digesting this data?
Bill: I will agree with you that it feels confounding to see rates where they are and not think that– The tenure, I think still makes some sense. Short-term rates are pretty high, right? What’s LIBOR at right now. That’s what a lot of bank borrowing is going to be based off of. So, LIBOR is at 5.36, say, like you’re borrowing at LIBOR plus 1.1.25. When you refi, your rates probably are going to go up if you had a swap in place and whatever. So, I don’t know, it does seem like– Well, the cost of credit is objectively higher, whether or not we have sufficient demand to blow through that, I don’t really know, would be the way that I’m thinking.
Tobias: If you had said to me 12 months ago rates will be at wherever they are, the 10-year will be at 5.5 and the market will be up over that period of time, I’d have said no chance.
Bill: Well, if I recall correctly, we had done our predictions in the beginning of the year, and I chose the market to be down 7% after a down market.
Tobias: I think I said up 12%.
Sub-Prime Lending Will Do Well Going Forward
Bill: So, I tended to agree. Probably a big mistake on my part going against base rates. Yeah, I don’t know, the top-down theme that I’ve been thinking about a lot is the subprime consumer. I suspect that subprime lending will do pretty well for a little while, unless of course there’s another huge bailout, but [unintelligible [00:08:46]
Tobias: What do you mean by subprime lending?
Jake: Like, credit acceptance, one main world acceptance, stuff like that. It doesn’t make me feel great to say it out loud, but I think that generally the subprime consumer is feeling more pain than the average prime consumer. If I were a lending officer at a bank, I really wouldn’t want to lose my job because we extended a bunch of credit to subprime consumers going into an obvious slowdown. So, I think that there’s 2020, I think there were a lot of entrants to that market. I think there are fewer people participating in that market right now, and I think that that market is probably experiencing fairly high demand. World, W-O-R-L-D is ripped, so I don’t think the thought gets you paid on that. There’s some pretty sharp people that have pitched that recently, and I think that probably makes some sense. I don’t know, I’m not a financials guy, so I don’t own it. But I’ve been trying to get smart. I have a long way to go.
Tobias: Red book retail sales, -2% year over year. I wouldn’t have picked that second negative point since 2008, excluding the lockdowns.
Bill: I hate to do this on live, but what does retail sales incorporate? Is that just goods, because I would think a lot of spending is shifted to services? Of course, if you’re down and inflation is up five, you’re losing a lot. But I do think this is mostly goods. Could be wrong.
Tobias: Banks will seem to be earning pretty well.
Tobias: Because everybody’s on 0.25% cash at call, and they’re getting 5% on the other side.
Bill: Yeah, there is that. I think generally the consumer is in pretty good shape still. Whether or not that continues is a fair question, but we’ll see. I don’t know, as long as labor hangs in there, I think that there’s a reasonable chance that they do. I don’t know what that does to rates. I think that’s actually probably the best bull case for energy. If the consumer hangs in and we can stay strong, I would think that there’s a reasonable possibility oil goes higher than lower as other parts of the world come on.
Tobias: Yeah, right. Above my pay grade.
Bull Case For Natural Gas
Bill: I don’t know either. I did a podcast with this guy, Arvind Sanger last week, and I think that’s a fairly compelling pitch. I like natural gas though as a theme, because if we do go into a recession and oil gets less expensive and they shut off oil, you get less natural gas production. So, you could actually have a weird scenario where a recession could create a little bit more tightness in natural gas and it’s bombed out.
Bill: It’s [unintelligible [00:12:08]
Tobias: It’s cheap natural gas equities around too I’ve seen.
Bill: Going to sound like the anti-me here, but I like the idea of buying commodity companies on a price to book basis. It makes sense to me. Tyson Foods makes some sense to me. You got to sit there until you get paid.
Tobias: I thought they are the chicken guys.
Bill: They were. Now, it’s a lot of beef too, beef and pork. Chicken got so consolidated that they had an actual suit against the Sherman Antitrust for price fixing and they lost. That’s crazy to think about how– [crosstalk]
Tobias: Not much as market power. Not just antitrust.
Bill: Yeah. No, they actually came together and were price– [crosstalk]
Tobias: It’s collusion.
Bill: Yeah, that’s pretty amazing.
Tobias: That is amazing.
Bill: Isn’t that amazing?
Tobias: I thought they could do it with that. I thought that you can arrive at the same answer just by using that tit for tat. They increase their prices a little bit and just see what the competitors do. If the competitors are smart, they increase their prices a little bit too, and then you get somebody who somebody always– What do you call it? Somebody always leaves the cable because now they can see that they can undersell everybody else.
Bill: Yeah, they cheat. Prisoner’s dilemma type stuff right there. Well, and then when I was at the bank, I think there were 13 chicken producers at the time, and they all talked to Informa, and then Informa talked to us, so there was like a middleman. But I guess that it’s got consolidated enough that they all just hang out and talk directly, or at least they did. I think the DOJ maybe put a squash to that, but interesting. I don’t know what that says for our food supply.
Tobias: There seemed to be a lot of stories in the media for a while about food production plants getting burned down, if there was an unusual number. I don’t know what the point of that. Do you remember that?
Bill: I don’t, but I could see a scenario where they wanted to get the supply tighter, so there were some fires. It’s fathomable to me. Here we are spreading fake news. That’s okay.
Tobias: That’s circulating. It’s opinion. It’s all right.
Bill: Google doesn’t mind if we do that. We just can’t say COVID.
Tobias: I don’t think they care anymore. I think they’ve moved on.
Bill: Well, that’s good. After they demonetized us, all our Twizzlers gone. It’s a shame.
Tobias: On the energy, I don’t know what size the SPR is relative to the energy market, but the SPR– I had the big-short guys on last week.
Bill: Yeah, I listened as I hid under my bed.
Tobias: We were talking about the SPR being– The SPR is still being drained. I don’t know what impact that has on oil prices. It must have some, but it can’t be. Relative to the size of the market, it’s not huge, is it?
Bill: Dude, I don’t know. All these things happen on the margin. I’m way out of my comfort zone when I talk about energy. But I did see estimates, second quarter estimates, I think for energy were down 47% from the earnings. So, if you were at a 5 PE, now you’re closer to 10 PE, that doesn’t scream cheap to me. Of course, if it goes back up, then you’re a 5 PE and then it’s cheap. But this is how the world works, right?
Tobias: I know where oil is at the moment. It’s about long run, mean? Long run [crosstalk] at 65– [crosstalk]
Bill: Oh, yeah, I bet it’s 72. That would be my uninformed quasi informed guess.
Tobias: It’s had a little rally over the last–
Bill: 75, 84. Boom. It’s ripping. There you go.
Tobias: Yeah, I was up to my risk limits on energy. Need a little bit of help there. That would probably help– Although I don’t think it needs to do anything for those to work. If you can just keep it around 65, 70, it’s all fine. Break evens are much lower than that.
Bill: Yeah, that’s probably right until it’s not. Who knows?
Tobias: Yeah, for the equity to work, you probably need higher prices.
Bill: Yeah, I don’t know. I really don’t. What you don’t want is destructive acquisitions. It seems to me– [crosstalk]
Tobias: You’re going to get that good and hard whether you want it or not. [laughs]
Bill: So, I don’t love that industry.
Tobias: It’s all cyclicals. All cyclicals do that. They all get religion when there’s no money around, and they become very good capital allocators. They know what they’re supposed to do. And then the moment that going gets good, they all forget all of that.
Bill: Well, I’ll tell you, if I was to defend cyclicals, and I wanted to say– [crosstalk]
Tobias: I say, this is someone who lives in cyclicals. [laughs]
What Is Going On At Disney?
Bill: Well, I would just say what did Disney do with the acquisition– We’ll see, but it does not– [crosstalk]
Tobias: Is Disney divesting?
Bill: That’s a rumor. They’re thinking about divesting. I don’t really know.
Tobias: What’s the benefit to them owning something like ESPN?
Bill: Well, I guess, it depends. The version of Disney that I can understand and believe in is a version where they own Hulu. So, I sub to Hulu Live and the Disney Bundle. My kids are into lacrosse, right? So, I can go onto Hulu, and when I see Sports, I see ESPN+. It’s right there, but it’s seamlessly integrated. I don’t really know that it’s on Hulu Plus. It’s just like a channel within Hulu. And then I click, I get all the NHL games. We like to watch NHL. I don’t really care if I watch it live or not. We watch lacrosse. So, I think with that asset, it makes sense. I think sports hold together the bundle, and to the extent that Disney wants to compete in that world and own Hulu, I understand that.
Then you invest in FX and some of your originals to acquire some customers, and then you’ve got a holistic offering that I think makes a lot of sense to a lot of households, because me and my kids can watch sports, and my wife gets what she wants, and whatever. A world where they’re like a pure distributor and they’re just leaning into Star Wars and Marvel, I think is a little harder. It’d be nice if they had all the rights to all the Marvel people in Orlando, that would make sense to me because– [crosstalk]
Tobias: What do you mean?
Bill: So, if you go to NBCUniversal to Comcast Universal Studios, you hop on Hulk. Hulk [crosstalk] is a marvel character. And then you get Superman rights or Spider Man rights are super confusing. You got to go to my man, Francisco for all this. It sucks that it’s not all in one place, because if they could own and then they could build out Marvel World, and then you’ve got Star Wars and Marvel and all that, that makes sense to me. Long story short, I think Sports protect the Bundle, and I think to the extent that they want to be a Bundle company, sports makes a lot of sense. But I think you need everybody, because nobody just subscribes to ESPN, like CBS has football games. I don’t know, man. It’s a mess. I fundamentally don’t think cash cows facing structural headwinds that are levered are the best way to find base rates of high equity returns, especially not when starting with $200 billion valuations.
Tobias: I like the underlying idea of Disney’s business where they basically have– They’ve got some of the great franchises ever made, Star Wars, the Marvel stuff, their own Disney. They got Pixar. Those are just incredible properties. All you’ve got to do is just get all of your creatives working on stuff, pumping out movies, and IP, and content for those things and just make it better than anything else out there. I know that’s easy to say and really hard to do, but you know what I mean. Just find stuff that people really want and feed that to them. That is just an indestructible brand that people have good feelings about will just mint money forever. And instead, they just do crazy stuff in there. I don’t get it.
Jake: And the mouse doesn’t have an agent.
Tobias: That’s true. There you go. It’s the oil well that keeps on refilling, as Buffett says.
Bill: Well, I think Pixar has lost a little of its luster relative to what it used to be, or maybe the competition caught up. Star Wars, I’m hopeful for– [crosstalk]
Tobias: I agree that it has. But that’s their mismanagement. That’s not–
Bill: Yeah, I think some of it is. I think some of it’s just really hard to keep it going.
Tobias: For sure.
Bill: I don’t know. Andor, I thought was excellent. This new Star Wars movie, I’m excited to see it. Marvel is tougher, man. They got all these worlds going on. It’s hard to follow.
Tobias: But there are kids who love it. There are people who love it. I don’t get it either, but there are– [crosstalk]
Bill: I’m big into it.
Tobias: I don’t love Star Wars, and I don’t love Marvel, but there are welded on fans for all of that stuff. I talked to lots of people who are super excited for the next, whatever it is coming up. Ant-Man? Come on. Who gives a shit about Ant-Man?
Bill: I thought Ant-Man was better than most, but I watched on an air plane, and it had me questioning. If you could put actual dog shit in front of me on a screen on an airplane, would I enjoy it? I’m not sure.
Tobias: Low threshold on a plane.
Bill: Yeah. I was like, “This movie is not nearly as bad as people said.” I don’t know, man– [crosstalk]
Tobias: [crosstalk] staring at the back of the seat rest.
Bill: That’s right. I think maybe there’s a limit to how hard you can pimp out the same content over and over and over again.
Tobias: Yeah. Mark Azzoth says, “Disney feeling is like Coca-Cola feeling.” That’s what I think too. “In 200 years there will be Coca-Cola and Disney movie on our spaceship to Mars.”
Bill: I thought it was only five years away.
Tobias: That’s in Musk time. Musk years.
Bill: I like Musk years.
Tobias: JT, while you’re up and functional, do you want to do your–?
Tobias: Do you want to do your veggies– [crosstalk]
Bill: I thought you are fully back.
Tobias: [crosstalk] in case you fall out.
Jake: I just had to run a mile from the car to find some wi-fi in the terminal, so I’m a little gassed, but let’s do it. [laughs]
Bill: It’s a nice-looking airport.
Jake: It’s a lovely airport. It’s actually a hidden gem. Real easy to get in and out of. All right– [crosstalk]
Bill: [crosstalk] find it.
Uncertainty And The Precautionary Principle
Jake: Hopefully, that you guys have been talking about something that might be somewhat tangentially related to the idea of uncertainty, because that’s what we’re going to get into today.
Tobias: We’ve been plenty uncertain. Don’t worry about that.
Bill: I was going to make a similar comment.
Bill: Look at that.
Jake: We’ve got 15 guys worth of uncertainty on a three-guy call.
Bill: That’s right.
Jake: So, I thought it’d be interesting to ask you, guys, do you think that today feels more or less uncertain than normal?
Tobias: I’ll buy it more, even though I know that the answer is– That’s not true. I know that feeling is not true. The feeling is not right, but I do feel that way.
Bill: Yeah. I have been doing a little bit of research on the 1800s, and fire insurance, and I would argue that today probably is more certain. But I agree with the feeling.
Tobias: [crosstalk] I said more uncertain. I’m going the other direction to said more– [crosstalk]
Bill: Yeah, I think I know where JT maybe is going. I agree with you that it feels more uncertain, but it’s probably just in line with history.
Jake: No, this is a subjective thing. So, it wasn’t like there’s no right or wrong answer here. But what I did– [crosstalk]
Tobias: Still going to wrong, God damn it.
Jake: But also, you’re wrong.
Bill: We both miss.
Jake: I thought it would be helpful then maybe to look at– Gary Klein, he has five sources of uncertainty. So, I thought maybe if we dug in a little bit as to what can lead to uncertainty. Maybe it’ll help us to describe almost like emotions where probably the better that you do of putting words to them, the more you understand them. So, number one is missing information. Number two is unreliable information. Number three is conflicting information. Number four is noisy information, and number five is confusing information. Now, if all five of those sounded basically all of the news flow that you and I [laughs] have to dip our toes into, I would agree with that. What do you guys think about that?
Tobias: Yeah, I like that framework. Conflicting is different to missing. Yeah, there’s a lot of conflicting information.
Bill: Wait, what do we have? We got missing, conflicting, confusing, and noise, and what?
Tobias: Yeah. There’s more uncertainty– The conflicting information, how long have we had two news channels that are just totally divorced from each other? It used to be one network television. There was one authoritative propaganda that’s straight– [crosstalk]
Bill: We used to get all our misinformation from one place.
Tobias: That’s [laughs] [crosstalk]
Bill: Now we get it from both sides. Very confusing.
Jake: That’s right. You can either be uninformed or misinformed. Those are your two options.
Bill: That’s right. Yeah, I generally like this. I can’t poke any holes thus far.
Jake: All right, let’s proceed then. One of the possible ways to deal with this uncertainty is called the precautionary principle. You guys heard of this one?
Bill: Yeah, negative.
Jake: The basic idea is that it’s a broad, philosophical, and often legal approach to innovation where there’s a potential for causing harm, but there’s not extensive scientific knowledge on the matter. It’s lacking at that point. So, it’s like, we don’t really know the answer which uncertainty. It really emphasizes caution, pausing, and reviewing before leaping into new innovations that may prove disastrous. So, one of the key tenets is that the burden of proof is about the absence of harm, and it falls on whoever’s proposing the action as opposed to those opposing it that have to prove that it’s not harmful. So, it’s like, you’re guilty until you prove yourself innocent.
In an engineering context, the precautionary principle goes by the name margin of safety. I think your grandma probably summarized it the best when she said, “Better safe than sorry.” That’s the precautionary principle, basically. Now, Nassim Taleb is a proponent of this principle, and he’s battled Monsanto about GMO crops and citing the precautionary principle specifically about it. If we don’t know, we need to be more careful, especially– [crosstalk]
Bill: Oh, that to the people that are starving. But anyway.
Jake: Well, so, that’s part of it. What he says is that it’s a mitigation against black swans of things that could prove to be completely ruinous, full zeros existential crises. Taleb, he’s skeptical of the traditional cost benefit analysis that you usually see because it doesn’t apply when outcomes have infinite costs. So, even a high benefit, high probability outcome that can’t outweigh necessarily the existence of a low probability, infinite cost option. This is what blew up long-term capital management.
Bill: One place I think that he and I would probably agree and we’d probably agree a decent amount because he’s smart and I’m not, and I just defer to him, but– [crosstalk]
Jake: Smart and you’re right.
Bill: Yeah. I think limited liability especially adds a kink to this. When you can make these bets that have massive payoffs to the upside, and then when you have just total shit happen and you’re like, “Oh, we’ll just fold the company up.” [crosstalk] Yeah, that’s right. That creates some real incentives that I don’t like.
Jake: Yes. So, on the show, we’ve talked about normal accidents what “normal accidents.” We talked about it in the context of nuclear meltdowns. And just a reminder of what that is it’s when you have a connected, tightly coupled, complex system, there’s just a greater risk of these errors that accumulate. They’re very benign errors on their own. But when they accumulate, and they connect, and then it spins out of control, it lead to these runaway nonlinear disaster outcomes. So, I think COVID snarling the supply chain is probably one of our good recent example that we’ve all lived through tightly coupled, just in time fragile. So, the precautionary principle is a useful antidote to a world that’s increasingly vulnerable in a lot of ways to these fragilities of normal accidents.
Don’t Risk Ruin!
Jake: I think Taleb would say that the precautionary principle helps you to separate out what’s like a global problem that could be systemic and potentially humanity like species threatening versus local ones, which can’t spread, and then you can relax about those a little bit more. So, we can draw this then into the world of the portfolio with the precautionary principle in mind. So, of course, Buffett got here first and said, that’s rule number one for him, don’t lose money, which is basically another way of saying like, “Don’t risk ruins. Don’t play Russian roulette, no matter how enticing the odds.” That’s what he preaches. “Leave a margin of safety in all of your operations. Look for the aggregation of risk.” He talks about this a lot when it comes to insurance.
For instance, in your portfolio today, are you more heavily correlated to interest rates than maybe you might otherwise think? Did 2022 reveal that for you, a little bit, potentially, with rates moving up and crunching a lot of long dated cash flows? And then that last nugget, I think, from Buffett would be like, “Don’t risk what you have and need for what you don’t have and don’t need.” That’s a version of the precautionary. So, little mental tool to add to your toolbox. Glad I could squeeze it in from the road for you. [laughs]
When Warren Buffett Saw The Terror Threat
Tobias: I like those ideas. I get a few comments on that. Using that precautionary principle, he realized that he had too much concentration of risk in the World Trade Center, in the towers. And so, you know that story a little bit better than I. He asked the insurers to take down some of that. Can you tell that story?
Jake: Yeah, the telling comes from Alice Schroeder probably talking out of school a little bit. She said that Buffett didn’t know, obviously, that terrorists were going to blow up the World Trade Center. Like you said, he was worried about it and the aggregation of risk there. And so, he told Ajit and then he told whoever at the time was running General Re that he wanted those contracts wound down, not resigned like, “I want to get out of this. I don’t like the risk. We’re not getting paid enough for it.” Ajit followed the orders. Whoever it was at generally did not. They ended up on the hook for, I think, it was a couple billion dollars of losses there. And apparently, Buffett was just furious, like cold fury, which not too many people have ever probably seen that side of him, but I think he does have that side. So, that’s the story.
Tobias: I think if you read the letters from around that period too, he heaps praise on Ajit in about 2002 or one of those– Like the following year, he heaps praise on Ajit and he’s obviously not mentioning the other gentleman because we don’t even know his name.
Bill: This 1890s insurance thing that I’m researching a bit. I came across this thing, there was this guy, Wiley, and he– [crosstalk]
Jake: Wile E. Coyote?
Bill: Not him. He did not respect risk enough. This was New York– [crosstalk]
Tobias: He’s indestructible though.
Warren Buffett – Underwriting Genius & Equity Investor
Bill: New York in the 1890s, and this guy was like– Or maybe it was the 1880s, whatever it was, before the big fire in New York. He would not insure any building over 80ft in height because he was like, “We can’t put the fire out and you’re going to be screwed.” And a lot of PNC companies did take that risk, and then they were wiped out. I tweeted out a little passage of this thing that I’m reading, and I said, “Imagine having the mental flexibility to be both a good underwriter and a good equity investor.” And then I said, “In 40 years, people would probably look at you and reduce you to some levered quality bet like people do to Buffett.”[laughter]
Bill: I think he’s just like kind of guy that can both see the upside in American Express when it still is not a limited liability company, and he could come to the table with that risk, and also look at the World Trade and say, “We need to reduce our risk.” The guy’s freaking genius, man. People may say, “We nerd out over him.” You’re all wrong. People don’t talk about him enough.
Jake: Yeah, he’s underappreciated even still somehow.
Bill: Yeah, the guy’s a beast.
Nassim Taleb – Fat Tails
Tobias: The one thing that I always struggle with Taleb stuff a little bit is he says, “No matter how much weight you put into the tails, even if theoretical weight, there’s more weight there.” You can’t figure out how much weight there should be in those tails. And so, it always makes me think a little bit of Pascal’s wager. If that’s the case, then you’ve got this Pascal’s wager type thing. For those who don’t know, that’s the great mathematician who said– The Pascal’s wager is why you should believe or why you should at least go through the motions like you believe in God. Because if you don’t, then your immortal soul is damned to hell. And if you do, then you to heaven.
Jake: That’s a bad downside.
Tobias: Yeah, that’s a bad downside. Because that– [crosstalk]
Bill: Like God doesn’t know you’re thinking about it that way.
Tobias: I guess that you could say that going through the motions is better than not. I don’t know. At least you’re behaving well. You’re not behaving badly. You’re not sinning, at least. But if you’re following this rule, anytime you encounter anything– So, then you’ve got someone like Taleb who’s saying that the weight in these tails is so great. It’s eternal damnation, so you can’t afford to ever be offside with the tails. You have to be always considering the tails. Is that always the case? Is that true? Probably not.
Bill: I think when the six-month Treasury gives you north of five, it makes some sense to hold some of it.
Tobias: What if goes to 10? I don’t know.
Bill: That’s be nice too.
Tobias: [crosstalk] Tow insurance. Yeah.
Bill: Yeah, to the extent that you have an equity mandate and you have to be out there and invested, I don’t think that rolling in and out of the market, if you’re an equity investor makes sense. That’s not what you’re hired for. But in your own personal portfolio, I think having some of the short-term risk free, even if you’re losing to inflation a little to mitigate the tails, it makes sense for me. People can do whatever the hell they want. I don’t care. But if I look back and I say, “Boy, my return wasn’t optimized, but I could sleep at night and God forbid a tail event came out, I could actually potentially have big upside from it.” Especially where a lot of the stuff is currently trading, I don’t view a lot of the pretty good companies right now as like get rich stocks. Now you can tell me, well, you buy them and it’ll compound for 15% over the next 20 years.
Tobias: 20 years. [chuckles]
Bill: A lot of shit can happen in 20 years. A lot.
Tobias: [crosstalk] a multiple compression, probably.
Bill: Yeah. So, I don’t think you have to be optimized to a theoretical like– I don’t know.
Tobias: The other approach they– [crosstalk]
Bill: Now, I’m sure that’s a wrong statement, and I know the data does not support it, but I also would like to see the data from these valuation levels.
Tobias: You could approach it like a value investor and say, “I’m only going to buy these things when they’re cheap. I’m not going to buy them when they’re expensive.” So, I think when tail insurance gets cheap-
Bill: It’s tough, man.
Tobias: -it might be worth a little bit. I don’t know.
Bill: I don’t think it has to be that binary, by the way.
Tobias: To be fair– When I used to talk about this stuff with Chris Cole, Chris would say that the best time to be long vol is when vol is picking up and spiking, because vol– [crosstalk]
Jake: You say like VIX of 20 or something was the sweet launching path?
Tobias: You might have to think a little bit more about the valuation of it. You might be looking more directly, because it’s volatility of volatility. Because you can’t trade the VIX directly. So, you got to trade an instrument that is attached to the VIX, which is an option or a future. And there’s also volatility in the instrument. So, you’re looking at the volatility of the volatility, so, you can find– Even though the VIX might be low, there could be a lot of volatility in it. So, you might be overpaying for the– Because people can get scared at any point. The VIX doesn’t necessarily reflect the fear in the tail hedging market.
Bill: Well, would he basically say that the intuition behind that data is– When things are calm– Everything is calm until the storm hits. And then when it hits, people panic incrementally. I would imagine that– [crosstalk]
Tobias: The people, they still underestimate how far it will go is, I think what he says, that the tails become exponential.
Bill: Yeah, that makes some sense. I think that makes sense.
Jake: I think there’s a few different ways– [crosstalk]
Bill: And then the Fed comes out with a Fedzooka and then get long.
Jake: Long hard.
Bill: Yeah, levers.
How To Avoid Blowing Up Your Portfolio
Jake: A few approaches that make sense with respecting all this uncertainty that can exist with how fat are the tails. One school of thought is aim for extreme diversification where you just try to own everything and get non-correlated return streams as much as possible, and then let the chips fall where they might. I’m not as attracted to that, because you end up with what seems to me like you own a lot of expensive stuff also a lot of the time. For better or worse, it’s hard for me to get over that mentally. And then I think the biggest thing that tells me is, you have to be able to play out your hand, no matter what markets do.
So, markets go crazy, they’re going to go crazy. Economics can go crazy, our economies can go crazy. No thing should be able to force you to have to liquidate, to have to margin call whatever it is that could blow you up. Otherwise, if you keep a little bit of cash, you own businesses and you understand the businesses that you own and they’re not existentially threatened for the most part. There’s not a whole lot of ways that you can really screw it up too too bad, I don’t think. As long as you’re not overpaying, as long as you know what you own, don’t stay away from leverage as much as possible, including inside the companies and your portfolio. And if anything, I think you become somewhat antifragile then to the world and you’re then seeking opportunities when they do arise. So, at least that’s my biased version of it.
Tobias: Yeah, I like that approach. [crosstalk]
Bill: I’m probably balls long one factor and don’t know it and I’ll get wiped out because of it. Thanks.
Tobias: You’ve definitely got some blind spot in there somewhere. We all do. You just don’t know what it is until after the fact and then you’re like, “Yeah, that was obvious.”
Bill: Not enough crypto.
Tobias: Not enough crypto. Exactly.
Tobias: Something like that.
Jake: Or shitcos.
Tobias: Not enough of– [crosstalk]
Bill: I own a lot of shit codes. They’re just not the ones that catch a bid.
Tobias: The wrong ones. Yeah.
Jake: How did you miss?
Bill: I don’t know.
Value Spread Closes – What It Means
Tobias: I know that everybody likes the value spread update. So, the value spread came crashing in from May to June, end May to end June. This is the alpha architect one that they measure. It looks to me like there might be a little data area in there. I haven’t said this to the guys, but it’s come in so much and I don’t think that the underlying– [crosstalk]
Jake: I was going to ask, is it been the fundamentals or the price that has changed to cause this tightening?
Tobias: June was pretty good for value, and half of July has been pretty good for value. But not to the extent that– If you look at it, it looks like it’s come in a 2000 or a 2009 type move, which you would have felt, I’m pretty sure.
Jake: When you’re looking at it every day like you are. [laughs]
Tobias: I would have felt it. I can tell you that.
Tobias: You probably would have heard me from Sacramento.
Bill: Well, you could have earnings roll over, and then the multiple goes up.
Tobias: Right, and the reverse. Yeah.
Jake: [laughs] A bunch of banks in there getting squeezed by net interest margin and earnings evaporating.
Tobias: Maybe it’s the energy. I don’t know.
Bill: But that wouldn’t come through yet, I don’t think. That’s the one– [crosstalk]
Jake: Yeah, they are just starting to report it out.
Bill: I’d be interested to see after this quarter.
Tobias: The banks do seem to be doing pretty well, I think.
Bill: Let’s just see over the past year. I’ve got QVAL up here against the SPY and the Qs. Past 12 months, the Qs have done 37%, QVAL has done 18%.
Jake: That’s pretty good.
Tobias: It’s not against the Qs, because the value spread in this one is against– [crosstalk]
Bill: Oh, yeah, [crosstalk] thought me how they do this.
Tobias: It’s the median stock.
Tobias: It’s the 1,500 largest stock. So, it’s the median stock, which is the 750th stock, and then it’s the median stock of the value decile. So, the value decile is 10%.
Jake: 75th cheapest.
Bill: Yeah, that’s right. I forgot that. I totally forgot that.
Tobias: So, it’s 75 versus 750. I don’t know how– [crosstalk]
Bill: Even if you do, quality, like, QVAL has done 20%, quality has done 25%, the Qs have done 37%, the SPYs have done exactly what QVAL has done, more or less. I don’t know, hard to see how the spreads come in. But what do I know? Nothing.
Tobias: Yeah, index against– Yeah, I don’t know. But the index then against SPY is not that– SPY, it’s the 1,500, not the 500. And the 500 has been heavily concentrated in Magnificent 7, or whatever we’re calling– [crosstalk]
Jake: Yeah, six, whatever it is. Those guys have carried all the weight, haven’t they?
Tobias: I certainly think it’s that the smaller the stock, the worse it’s done, although it does seem to– Maybe it’s turned a little bit recently. I don’t know.
Bill: Rhymes with what I’m seeing.
Tobias: When I say recently, I mean, probably since Monday.
Tobias: Rallies are very short.
Jake: Yeah, these are reverse Musk gears.
Tobias: Yeah, that’s right.
Tesla Up 140% YTD
Tobias: I can’t believe how well Tesla’s done. Not that I can’t believe it. I believe it, but it’s amazing. It’s relentlessly bid.
Bill: They’ll go on until it doesn’t. Who knows when it won’t.
Tobias: It is free cash flow generative now. It’s got a whole– [crosstalk]
Bill: The financials are quite impressive, actually. If you believe them, then the people that don’t you can go down that road if you want.
Tobias: I don’t think that fraud, is it? It’s too big.
Jake: Unreliable on some– [crosstalk]
Tobias: it’s just too much going on.
Jake: -number two of five on the– [crosstalk]
Bill: Sir, can I remind you of WorldCom and Enron? Those were fairly large as well. I’m not saying that it’s that for the record. I wouldn’t say it’s too big, therefore it’s not a fraud.
Tobias: There’s so much tangible evidence. I can drive around the hill where I live.
Bill: Oh, yeah.
Tobias: I could probably leapfrog from Tesla to Tesla and get anywhere I want to– [crosstalk]
Jake: Never touch the ground.
Tobias: Just run across the roads. Yeah.
Bill: Look, I think the more interesting conversation here is, if you want to get long EVs from here and you believe that the energy transition is coming, it appears, maybe what I hear is wrong and what I’ve read is wrong, but it appears as though there’s a lot of tight commodity companies out there that should benefit from this transition. I guess, this is thoughts bound to make you poor, but do you want to play a derivative in a cheap stock on the same trend or do you want to play the obvious thing that has made people generationally wealthy some people, right?
Jake: Yeah. First order thinking or second or third?
Bill: That’s how is the question, man.
Jake: How deep do you want to go?
Carvana Up 750%
Tobias: What about Carvana?
Bill: I don’t know. Tried to sell my car to them and they gave me a weak offer, so they will not be getting it.
Tobias: You might use it to transact and not to own the stock. But the stocks up 750%. I’ve seen a few people who say who are like, “It’s like a third of the way to what it’s worth.”
Jake: It’s a wild chart depending on how do you like your stopping and endpoints. If you go year to date, it’s like, “Oh, my God, rocket ship.” Add another year to that like, “Ah, kind of flat.” Add another two years to it, “Oh, my God, you’ve been murdered.” [laughs]
Tobias: Whatever you want in it. Yeah.
Bill: There’s enough going on in that stock in that company that I will be perfectly happy watching the outcome and not owning any of it.
Jake: It’s a great sideline stock.
Bill: Yeah. That can be the answer.
Jake: Get your popcorn and see how it finishes.
Tobias: I agree with that. Before we came on, that’s exactly how I was thinking about it too, because I had a little look at it at the start of the year when it was bombed out, and then I just couldn’t get over the– I don’t want to say management, but I think of the management– [crosstalk]
Jake: You just like making money or what?
Tobias: [laughs] Yeah, I guess so.
Bill: I will say, the guys that are long it in size that had the world shitting on them– I have a little bit of me that roots for the people that can take pain, stick in a position, and then be proven right at the end. So, given that I think the shorts had the chance to make their money. It would be nice to see it work out. I am not smart enough to know whether or not it will and understand the unit economics down the road and whether or not you can trust everyone involved. Other people can make those decisions. But I like guys that stick in positions that go against them and then are ultimately proven, and women. I shouldn’t make it a man thing.
Tobias: Is guys gendered?
Bill: It could be women that identify as men, for all I know.
Tobias: We definitely do not want to go down that-
Bill: I’m just saying.
Tobias: -pathway on this podcast. We’re still trying to get over the COVID bump.
Bill: Here’s a question. Here’s one that’s bound to get people– actually, maybe it won’t get people mad. It got my wife mad at me. I was sitting next to man– [crosstalk]
Tobias: Hey, we run out of time.
Bill: Yeah. I’m not even going to say it. I’m not even going to say it. I’ll hold it till after.
Bill: No, I don’t want to get into it. I don’t know, I thought I had a legit comment, but apparently– [crosstalk]
Tobias: No, let’s not do it.
Bill: All right, noted.
Tobias: We can’t win.
Bill: I don’t often bite my tongue. But what I said to my dad is I was like, “Some people think I don’t have a filter, but they don’t understand how much I filter.”
Jake: Yeah. You know how bad it is up here. [laughs]
Bill: Yeah, it’s hard to live in.
Bill: Anyway, who’s got questions other than what was the story going to be?
Tobias: I’m probably perpetually saying this, so it doesn’t really matter, but I do feel like we’re still mid bounce. We’re still below our all-time high by material amount. Fear and Greed is very, very greedy, which has typically been quite stipulate.
Jake: Is that index that you look at?
Tobias: It’s been sustained very greedy for a while and sustained extreme greed for longer than it ordinarily has been. I don’t know.
Bill: The nice thing about commenting on the market is you can argue it either way. If I wanted to present the really bearish take, I’d say, the market exists to make the greatest amount of fools out of the greatest amount of people. And wouldn’t it be super poetic if it sucked everybody back in right before a real heartbreaker?
Jake: One real flush.
Bill: Yeah, that would be really a beautiful thing to see from a watching just psychology crush people standpoint.
Tobias: I hope we get to come back to this one, because I think that’s what’s going to happen.
Bill: And if I wanted to be a bull, I’d say it’s a bull market, baby. Get long. Inning three.
Jake: Oh, boy, innings three. Didn’t we count there were 17 rallies or 18 rallies within, what, 2020 to 2002–? [crosstalk]
Tobias: This has probably blown through any of those in terms of its size. I think the biggest one was 43%, and I think this one’s now well past that. Although in 1999, the market almost rallied all the way back to its all-time high before it really. That was a year later from its peak. It almost rallied all the way back to the all-time–
Jake: Like it was [makes a rising gesture] and then.
Tobias: Yeah, and then it fly– [crosstalk]
Bill: Well, that’s how it should work before a real soul crushing sell off, right?
Bill: Everybody’s got to feel like, “Oh, I missed it.” And then they have to get in and then it’s got to just– [crosstalk]
Jake: My last chance.
Bill: Yeah, kill them. It would beautiful in a sick way.
Jake: Well, maybe this is my own BS talking, but it didn’t feel like full capitulation in 2022, did it?
Bill: I don’t know, man. It was not.
Tobias: [crosstalk] 20 something percent.
Bill: Yeah, but the underlying, there were some things that were slaughtered.
Tobias: They’d also participated a lot on– There’s two things going on. There was the Ark complex of overvalued profitless companies that topped out in February and then got crushed– Speaking which, she’s had a really good recovery as well.
Bill: I was going to say, it would also beautiful if she ends up being the smartest person in the room. That would blow my mind.
Tobias: She missed Nvidia, but she’s had a fair bit of Tesla. She’s been lightning up her Tesla I saw.
Bill: There you go.
Tobias: Full time.
Bill: yeah, indeed.
Tobias: We made it, dudes.
Bill: Shoutout to Cathie.
Tobias: Yeah, shoutout to Cathie.
Bill: Number one ratings driver.
Jake: [laughs] Yeah, [crosstalk] inversely proportional.
Tobias: She’s tough. She’s tough, Cathie. I hope she keeps on going. I hope she’s around for a while. All right, dudes.
Jake: Me too.
Tobias: Thanks, everybody. We’ll see you next week.
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