In their latest episode of the VALUE: After Hours Podcast Jake Taylor, Tobias Carlisle, and Tim Travis discuss:
- AIG, Fairfax, Berkshire Hathaway: Favorite Insurance Plays for Long-Term Returns
- Think Smarter, Not Harder: How “Obvious Adams” Can Boost Your Investing
- China’s Investment Landscape: A Risk Worth Ignoring or Embracing?
- Buffett’s Bullish Tune Change: Stewarding the System
- Investing in Choppy Markets: Energy, Dividends, and Tactical Approaches
- Unbelievable Earnings Growth: John Deere, Home Depot, and Caterpillar
- Big Pharma Profits from Weight Loss Craze, But at What Cost?
- Value Investing in China and Russia
- The Fed’s Dilemma: Will Unemployment Increase, Prompting a Rate Cut?
- Covered Calls and Cash-Secured Puts: Adding Income & Reducing Risk
- Election Year Looms: Calm Before the Storm or Unrealistic Optimism?
- Leveraged ETFs, Covered Calls, and the Search for Yield in a Low-Volatility World
- Beyond Equities: Opportunistic Debt in Fairfax-Favored Kennedy Wilson
- Default Looming for Office Giants? The Debt Threat and Big Bank Exposure
- Attractive Options in a Sweat-Inducing Market: Bonds & Bond Ladders
- Leverage, Volatility, and Expected Returns: Lessons from the LTCM Era
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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Transcript
Tobias: And we are live. This is Value: After Hours. I am Tobias Carlisle, joined as always by my co-host, Jake Taylor. Our special guest today is Tim Travis. How are you, Tim?
Tim: I’m good. Thanks for having me, guys. Appreciate it.
Jake: Welcome back, Tim. Good to see you.
Tobias: I always characterize you as a value guy who’s got a special realization in options and financials. Is that fair?
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Covered Calls and Cash-Secured Puts: Adding Income & Reducing Risk
Tim: I think it’s somewhat fair. Definitely, a value guy. I think that we’re a little different, and that we use a lot of tactics. So we’ll do covered calls, cash secured puts. We’ll do that type of stuff with options for our clients to add a little income and reduce the risk a bit. So I think that that’s kind of a unique niche. But yeah, financials are definitely a space where we’re confident in insurance, banking, but we also do a lot in real estate and energy and stuff like that, so wherever there’s value. We’re constantly working to increase our circle of competence. That’s a big, big focus.
Tobias: As an options guy, what do you think the impact of the zero day to expiry options has been? Have you noticed any change in the prices you get?
Tim: Not a ton to be honest with you.
Jake: In the casino?
[laughter]Tim: Yeah, not a ton. Volatility has been pretty low. Volatility index has been pretty low. Most of the ways that we use options are longer term. So maybe like 6 to 9 months, 12 months even. An example would be like– I like the real estate investment space right now. Real estate investment trust, I think there’s some value there in some of the triple net names. And so a lot of those are paying dividends of 5.5% and they’re growing their earnings even in the difficult rate environment. And so you might layer on a call 10%, 15% above the market price and add another 4% or 5%, and you’re getting double-digit yield, plus retaining some upside. So things like that is how we do it. We don’t do the zero day ourselves. I think obviously, that’s the Robinhood type genre of investor, I’d say.
Tobias: [laughs] Yeah. So you’re selling that call to add on a little bit of extra. So you’re saying 10% or 15%. If you get a 10% or 15% rise in the price, you’d be happy with that. So [crosstalk]
Tim: Yeah, I’m sure we’ll touch on that. But yeah, in this environment, if you can get a double-digit yield with the dividend, plus the call premium, and then still have 15% upside on the stock or even 12%, that’s pretty attractive in this environment in my opinion.
Jake: So you feel like it’s pretty unlikely to– It’s not going to be like three bagger or– I mean, in that situation. You’re taking out some of that.
Tim: On those spaces. Yeah.
Jake: You’re taking the right tail out.
Tim: Right. And it does burn you from time to time. We were super bullish on Meta and Google and Amazon going into last year after they had sold off so aggressively in 2022. And so we capped some of our upside on a few of those names. We still did really, really well. They were big positions, but that’s also the discipline. It’s helped us. Like, stocks that haven’t done great over the last decade doing some selling some puts here, selling some calls. Even like a stock like Citigroup, which has been just a total dog and a pain to own. But if you’re selling puts at certain prices, and then using covered calls, and then collecting the yield– It’s worked out a heck of a lot better than it would have had we not employed those strategies.
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Election Year Looms: Calm Before the Storm or Unrealistic Optimism?
Tobias: What do you think is driving the low volatility?
Tim: There’s a lot of contentment out there. Going into 2023, I feel like so many people, there was such an impetus on, “Okay, look, you can get yield in CDs or high yield savings deposit or Treasury bills.” And then as the year progressed and you saw the AI stuff take off, people started getting greedy again. And then even us, lowly value guys, we benefited the last few months of the year. It was a ho-hum year. And then the last few months, small cap and value ripped, bonds ripped.
So I think going into this year, there’s a lot of optimism. And so I think just that complacency reduces volatility. Still a lot of money out there. So that would be my best guess. I would expect to see volatility perk up. It’s an election year, massive geopolitical disruption. It seems to get worse every day. So I would expect we’ll have a March type event, like we had last year, for instance.
Tobias: Any reason not to look at the news– It is a good reason not to look at the news. I just ignore it completely these days.
Tim: Totally.
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Tobias: Let me give a shoutout. Santo Domingo in the house. Miami, Pittsburgh. Miami again. Petah Tikva, Israel. Basingstoke. Tring, UK. Deaon’s in Townsville. What’s up? Malaga, Espana. Cleveland. Vestavia, Alabama. Brandon, Mississippi. Toronto. [unintelligible 00:05:11] land. Good job. What’s that? Newie. I don’t know. Australia, somewhere. Nanaimo. Someone’s going to have to help me out with one. Springville, Alabama. Edmonton. Lima. Norwich. Tallahassee. Sugar Land. Sactown. Gothenburg. London. Louis. Cromwell.
Jake: This is just fun to see if Toby can pronounce different words.
[laughter]Tobias: Lincolnshire. Santa Monica. What’s up? good spread.
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Citi Earnings Breakdown: One-Off Charges, Argentinian Woes, and a Glimmer of Hope
Tobias: Someone wants to hear you talk a little bit about Citi. What’s going on with Citi?
Tim: Well so, they reported earnings on Friday. It was just a basket case quarter in terms of lots of one-off charges. They had the FDIC surplus charge. So the big banks are having to pay for the VC backed banks that failed last year. That’s one reason that’s– It’s a frustrating industry to invest in. So they had a $1.7 billion charge for that. Then they had a bunch of Argentinian– [crosstalk]
Jake: Wow. That much, huh?
Tim: Yeah, that’s what they had– It’s due to based off size, really.
Jake: Right.
Tim: And then Argentina had some big, big charges with their devaluation. So outside of that, it wasn’t a bad quarter with some of their– So it wasn’t a good quarter though, either. The new CEO– I mean, she’s not new. She’s been there a couple of years now. But she took on a tough job. They had major restructuring. They’ve done a lot of the work. So this is the year where you should see an inflection and the cost curve start to go down. So it reminds me of Wells Fargo a couple of years back when Charles Scharf took over. They had the regulatory issues, and then they went on some pretty aggressive cost cuts. I think Citi in a similar space.
Really, for me, it’s not that I love the business. It’s not a great business by any means. The stock is trading around 52, 51 and some change. You got a tangible book value at 86. They think they’re going to earn 11% to 12% on tangible capital in a few years, maybe. Can they earn 10% again? Yeah. I think capital markets will be a lot better. There’s a lot of pent-up demand. So we’ll see. But yeah, I think it’s attractive. I understand people not liking it.
Jake: What do the net interest margins look like these days right now in the big banks?
Tim: Citi has got international scope. So theirs is holding up a little bit better than some of the other ones. I think the expectation is is that net interest margins and net interest income peaked in 2023. We’ll see. Is the yield curve correct right now? I really think it could go either way. If you said, look, we have a supply issue in the Middle East that’s increasing inflation and rates aren’t going to go as down as quickly, I would understand that. And if you said, look, the economy is falling apart and rates are going to go down a lot more aggressively, that wouldn’t shock me either. So I try to be somewhat agnostic there.
Jake: Neither one of those sound like that good of scenarios. [laughs]
Tim: That’s my mentality right now. I’m not the most optimistic I’ve ever been in the world.
Jake: [laughs]
Tobias: How do you feel–?
Jake: It’s either inflation or depression? Those are our two paths? [laughs]
Tim: Yeah.
Tobias: Let’s [crosstalk] We have the wisdom to choose.
Tim: Okay. Yeah.
Jake: [laughs]
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AIG, Fairfax, Berkshire Hathaway: Favorite Insurance Plays for Long-Term Returns
Tobias: What about financials? Banks in general, financials generally, same deal?
Tim: Well, I think insurance companies have done really well. So like big positions for us for a long time, for many years were like assured guarantee, municipal bond insurance company. AIG was a big one. Fairfax, Berkshire, some of those are– And the mortgage insurance. All those have rocketed higher and have performed really, really well. Even though they’re highly regulated, they’re not in the spotlight as much as the bank. So I think that that’s an advantage. Nothing’s really as bad as the banking industry, it seems, as far as just regulation and sentiment and volatility economic stress. So those have been good– But we’re selling into this. We’ve seen a big rally on those names. So I think it’s a good time to take some profits there.
Jake: [crosstalk] Isn’t it tough to sell Fairfax still at book value?
Tim: No, Fairfax is one I’m not selling.
Jake: Okay.
Tim: Yeah. I would put Berkshire in a similar class as that. But those are, I think, better business, especially Berkshire. I like Fairfax a lot too there. I think they’re capable of generating a better return on equity than some of the other ones. The mortgage insurance space, we bought those at big discounts to book. Now a lot of them are at premiums to book. I don’t know how I feel about housing. I have some concerns. They might be totally wrong, but I don’t need to own those up here.
Jake: Yeah.
Tobias: You guys don’t have a diversion opinion on Fairfax, do you, both [crosstalk] Fairfax?
Tim: Same. We both like it a lot, and lots of–
Jake: Yeah. Well, obviously, it was easier to buy it at whatever 60 cents on the dollar book value like that. It felt like it made sense. But thankfully, it’s never really run up past book to really force my hand and make me feel like I needed to sell. So I’ve been able to enjoy the rising interest income without Mr. Market testing me too much.
Tobias: Do they still have all the hedges and things in there that they–? They made a pretty good name for themselves in 2008 with all the hedges, but are they still on? Can they make a name?
Jake: It didn’t work out so well for the–
Tobias: [crosstalk]
Jake: Yeah. 2015 to 2019 period, driving around with the brakes on. Didn’t work out. No, I don’t believe that they have the– I think there’s actually still some leftover like they have some– [crosstalk]
Tim: There’s still some laugh. Yeah. Not as much. So.
Jake: They have some swaps that are– I don’t know, they’re probably written down to practically nothing at this point, but I think they’re still on the books.
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Beyond Equities: Opportunistic Debt in Fairfax-Favored Kennedy Wilson
Tim: Yeah. On the subject of Fairfax, there’s one stock that they own quite a bit of. They’re one of the largest shareholders. If not the largest, on Kennedy Wilson. It’s that real estate company. They’re based out of Los Angeles. The equity I think is challenged a lot of the space they have a little bit office exposure in Europe mostly. Some in the US. They have an asset management business. They have really good multifamily. They acquired a lot of this stuff via distressed loans during the financial crisis, and then took on the loans when they defaulted and then built stuff up. They’ve done amazing stuff in Dublin.
But right now, their Capex, they were in a big swing of spending a lot, and now that’s going down. And the debt, I think, is an interesting play. So we’ve been able to buy those bonds at double digits, even as high as, I think, 12%, I believe was around the high that we got in at. I think now it’s still probably around 9.5%. So it’s interesting, just because Fairfax has been a large sponsor. They even did a preferred stock issuance to Fairfax. So just on that topic, I think that’s an interesting way to play.
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Default Looming for Office Giants? The Debt Threat and Big Bank Exposure
Tobias: How do you feel about that ongoing debacle in office? Is that over–? Best year to come?
Tim: No, it’s not over, man. It is not over. It’s a nightmare. It’s so bad. The occupancy levels are so weak in most areas now. Now Europe’s a different environment. They’re not doing as much work from home as they are in the United States.
Jake: Just not working at all?
Tim: Yeah. No. But I don’t see that that situation. Office is just tough, man. I wouldn’t want anything that’s individual of– At the right price though. We actually did do some stuff with Vornado and SLG, when they got really, really depressed last year. But that was more of a trade than, I’d say, a long-term investment.
Tobias: There’s got to be some risk that a lot of those can’t meet their debt obligations when they fall due. That’s more of like a 2024, 2025 issue, isn’t it, than a 2023 issue?
Tim: Yeah, on the property level. Yeah, on the property level, exactly. A lot of them are going to give back the keys. And so prices have to come down to where demand is. And I think big companies, they still want to be more office oriented, but it’s a long haul. There’s too much supply in a lot of the big cities like Los Angeles and San Fran. When those things are defaulting, it’s huge. But to be clear, that’s much more of an issue for some regional banks. I don’t even think it’s going to be devastating for regional banks. But definitely the big banks and stuff like that, it was totally overblown.
Tobias: It must be overblown for the big banks?
Tim: Oh, yeah, for sure. On office? Yeah, their exposure is not that huge at all. And they’ve reserved a lot. I think Wells Fargo, it was like at 11% reserve for office. So if you think about what that entails, that’s huge. How I got interested in real estate investment trust last year was that I was looking at interesting areas in commercial real estate, because a lot of that stuff came down 50%, 40%, 30%. The triple net leases, a lot of those companies are doing really well, really high occupancy, some like 98, 99. I think apartments are pretty interesting. So there’s various spaces there that I think are attractive. So I don’t think you need to speculate with office, especially, a lot of that stuff had a huge run too like Vornado and SLG. They ran up a lot from their lows.
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Tobias: What do you see that all looking like as we go through this 2024, go through an election cycle?
Tim: Oh, gosh, I don’t know. Pick your poison. Especially with Davos going on now, it’s always a weird agenda there. And then you have all the geopolitical issues. So I’m not optimistic on a lot of stuff. So that’s why if I could get double digits this year– And even if the market was up 20%, if I was only up 12% or 14%, I’d be very happy with that, especially if that’s at the cost of if the market’s down 15%, being down 5% or flat, I’d be very happy with that type of outcome. So I don’t think it’s a year to be super aggressive in my opinion. I might be totally wrong.
Jake: Toby, did you get your Davos invite or did it get lost in the mail again?
Tobias: I did, but the jet’s in the garage.
Jake: Oh, okay.
Tobias: I’m not going to fly commercial. You don’t fly commercial to Davos.
Tim: The new Argentinian guy did. I was impressed by that.
Jake: Oh, is that right? Milei flew–
Tim: Yeah. I at least respect that.
Jake: I love it.
Tim: Yeah.
Tobias: Yeah. [unintelligible [00:16:10]
Jake: Well, you can’t run around with a chainsaw pretending like you’re cutting all the red tape and then fly private to Davos, right?
Tobias: [laughs]
Tim: No, you can’t. I’ll be curious if he really gives them hell or not. We’ll see. I feel like everyone conforms there. But I hope the heck he does.
Tobias: Outside of financials and REITs, what else are you finding that’s interesting?
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Investing in Choppy Markets: Energy, Dividends, and Tactical Approaches
Tim: I think energy is interesting. They took down the strategic petroleum reserve to such low levels, and they’ve started to put that back a bit. And then you have incredible geopolitical strain. But the US did produce a record amount last year, and other countries are producing quite a bit too. So I see the bull and the bear argument. For us, it’s valuation. A lot of that stuff I think is pretty attractively valued and so.
On dips, especially with our tactical strategies, selling puts to own the stocks at cheaper levels, I think is an attractive avenue there. Some of the dividends on stuff like Devon or Chevron even are pretty attractive. So if you sell puts, and then get exercised, and parlay that into a covered call or stuff like that, I think there’s a lot to be done there.
Jake: Tim, do you feel like your strategy is good for choppy markets?
Tim: Yeah, totally. This reminds me a lot of, kind of, I’d say like going from 2009 to 2012 a little bit, just like. There’s a lot of–
Jake: Yeah. Couldn’t find a direction.
Tim: Yeah. Even stuff like MLPs. If you can get 7% plus a little extra on– I’d be very happy to get double digit returns over the next decade on average. I have a tough time believing the indices are going to do that again. I know that’s like people are baking into their financial plans. But to me, that just seems crazy given where valuations are at. A lot of stuff’s priced for perfection, in my opinion.
Jake: Yeah. Well, where’s it going to come from? Is it revenue? That’s typically GDP, is it going to come from profit margin expansion off of already very profitable companies? Is it going to come from share count reduction? Already pulled that lever with basically LBOing the S&P 500 in over the last decade. Or, is it going to come from dividend yield, or does it come from valuation multiple changes? You’re already starting pretty expensive there. So tell me which of those five levers can be pulled to produce a 10% annualized over the next decade.
Tim Travis Well, it’s interesting. The bulls would say AI will transform margins for at least the largest in– [crosstalk]
Jake: Even higher?
Tim: I don’t know. You look at Nvidia. That one quarter they had– I think it was their second quarter or something like that was one of the best quarters I’ve ever seen. It’s interesting, because the multiple has come down a lot based on current earnings. But semiconductors has always been a very cyclical industry. So what does the E look like next year and two years from now and three years from now? I just don’t know. It’s in the too hard pile for me, especially with where the valuation is at currently. So not a player in some of those names.
Jake: Yeah, for sure.
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Leverage, Volatility, and Expected Returns: Lessons from the LTCM Era
Tobias: It’s hard to pick. How do you think about the economic environment? Is that important for energy and for financials? We really do get soft–
Jake: Sensitivity to economic cycles?
Tim: Yeah, absolutely. I don’t think you want to just own the banks outright here. I think it’s stock specific. I like a couple of them that are really cheap. Some are in Europe, some are in the US. But they’re always going to react. You saw March, if there’s any hiccup in the economy, they always overreact, which is frustrating. But the reality is they’re probably the cheapest sector on a normalized earnings basis. So I think you have to watch that.
But I think most people are more constructive on the economy than I might be, or maybe you guys might be. And so if we do see a decent economy or a soft landing and rates start to go down a little bit, I think that would be a lot– There’d be a lot of deal activity, probably pretty good for growth. So we’ll see what happens. But I like the valuations. I think you have a good margin of safety, you’ve got a big fat dividend on almost all those names. So that gives you a little bit of cushion. But I’d just be very valuation focused, for sure.
Tobias: I think it’s a tough environment to find your way through, because I think many of the– I think a lot of the economic data is ugly. And the 10-3 is still massively inverted. I’ve just stopped talking about it. Mostly, I took a vow of, I don’t want to say poverty, but I decided–
Jake: Celibacy?
[laughter]Tobias: Not celibacy either. I think I decided not to pay as much attention to the macro. Maybe it’s a problem because podcast is really all we can talk about.
Jake: We’ll fix that, sir. [laughs]
Tobias: Yeah. The economic data was so bad last year. It just looked to me like imminent destruction. I don’t actually think that much has changed. I think the risk is that I get too deterministic. Should try and be a little bit more probabilistic about it. There’s lots of different things that can happen in any given year. To what extent do you think that the economy has any impact at all on what happens? Like, I would have thought last year should have been a terrible year.
Tim: Well, starting valuations. One of the good things about you is that you stayed invested and you had a great year, even if you are come up–
Jake: Even if you were scared shitless [laughs]
Tim: Yeah, exactly. Same thing here. I am not like an optimistic person on a lot of the stuff going on right now. But I’m not not invested. I think there’s great opportunities in bonds. A lot of my clients are retirees or people close to retirement, and I tell them, “Look, we haven’t had interest rates like this in 20 years. So take advantage of that. You finally are being rewarded for being a saver. And you don’t need to take all the equity market risk. Take your 7% dividend.”
When that banking stuff went down last year, we were buying a lot of investment grade credits at 8% to 13% yields. Some of those were like a Comerica. So in the spotlight a little bit. But now you look at those and they might be 5% or 6%. It’s much, much lower. So they were just no brainer, double digit earning investments. The only way it went to work is if it would have gotten– Hell would have taken over.
Jake: Then you lever that up about 10 times and– [laughs]
Tim: Then you’re LTCM.
Jake: Yeah, exactly.
Tobias: I think they were like 30 times.
Tim: [crosstalk] sure.
Tobias: You couldn’t get enough leverage in them. Maybe it’s 100 times or something crazy in that.
Jake: Well, they were getting like a 50 bip or 100 bip type of spread differences and then levering that up 30 times.
Tobias: I think as the book goes on, they said they wanted equity like volatility. And so they were trying to do stuff that was riskier to increase the volatility. So in the end, they were doing stuff like VC.
Jake: Is that what you want?
Tobias: [crosstalk] You get big enough, you just do everything. You do whatever you want.
Tim: Yeah. Well, it’s like what you learn in economics. I remember in college, just learning, “Oh, the higher the volatility, the higher the expected returns are supposed to be.” I don’t know, it’s nothing that drives me [crosstalk].
Tobias: Never worked out that way.
Tim: I never think about that stuff when I’m actually investing money.
Tobias: I think Eric Falkenstein has a paper that shows it’s the other way around. “Lower volatility lends to higher returns,” which I think that should garner him a Nobel prize in economics at some point.
Tim: Yeah, no kidding.
Tobias: Let’s go say, if it didn’t exist, I’d write it just so I could get one out there.
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Tim: Last decade. Sorry, Jake. Quality has been so good. Quality stocks have done so much better than the more deep value stuff. But maybe that’s different over the next decade. Who knows.
Jake: Yeah. I forgot who wrote the paper, but wasn’t that just Buffett was quality levered above all–?
Tobias: That’s AQR.
Jake: Yeah.
Tobias: That’s one of AQRs purpose. Yeah, it’s 1.7 times the quality factor.
Jake: Give the man a Nobel.
[laughter]Tobias: Yeah. He got smart, got lucky, all by design, I’m sure.
Tim Travis Yeah. Over 50 years, 60 years, however long he’s been– [crosstalk]
Jake: Yeah, he’s at now what like– They were saying he was one sigma event, and then two. And now I think got up all the way to six which is one time in the known universe shit this ever happened. But now it much be even higher at this point. [chuckles]
Tim: Well, I always like the paper, Jake. I’m sure both you guys are familiar with it, but I believe it was called the The Superinvestors of Graham-and-Doddsville, where he’s like, “Okay, if I was the only one,” or something like that, but there’s so and so, so and so. And he lists all these people that all had similar philosophies, but differently done, who had the best long-term track records. It’s not going to resonate with a lot of people based on the last 10 years, the way markets have unfolded. But looking at things over 100 years, I think it’s as poignant as ever.
Jake: I think you nailed it. [chuckles] There’s the world of the last 10 years and everything that worked. And if you use that as your base rate, then you could construct a very different portfolio than if you look back at the last 100 years and then ask what worked. Just night and day differences.
Tobias: That’s been my experience. I started looking at it in the late 1990s, and I wanted to be a value guy in the late 1990s. And so I remember reading these fortune articles about value guys who they had– His business got modestly growing top one, pretty good returns on equity, buying back stock, got a dividend, and it’s trading at a massive discount too, all of the stuff that was like the dotcom type stuff that we have today. And then that got increasingly crazy until 2000. So the decade before then was all growth. And so from 2000 to really only probably 2007, maybe it was 2010, it was more value, and then value got really overvalued. And then 2010 to 2020 probably was growth again. I think it’s been value since about late 2020, but last year was a little bit anomalous.
Tim: Yeah. Last year, value was having the worst year since 2020, except 2020 was the only other one where it was like that, where just value got crushed. But then the last two months was just so good for value. Even owning a lot of bonds, still being able to put mid double digits, high double digits type returns from stuff like that was great. So we’ll see. One big difference though, and I think– You look at like Cisco in 2000. I don’t even know what the PE was. I don’t remember it. Like, 145, something crazy like that. And then you look at Microsoft. If earnings are what they are– What’s the 4 PE like? 28 or 32, somewhere in that range, maybe. It’s not 75.
If you look at who’s in the best place business wise, you’d think them as one of them. So it’s just hard. It’s not for me to invest in that. I don’t feel a margin of safety in it. But I also don’t know that I would say, “Okay, this is the biggest bubble in that name, or a few of those other names ever either.”
Jake: Yeah, incredible businesses also. There was at one point, I believe that during the dotcom bubble, the most expensive decile had a lower ROE than the cheapest decile. So you had better-quality businesses actually that were obviously much cheaper, which is a very, very rare occurrence. They talk about just a perfect set up for a value opportunity set.
Tim: I remember talking with you guys about it before, and you’re exactly right. When Microsoft was trading at 12 times free cash flow, I remember Johnson & Johnson trading at 13 or 12 times earnings. So yeah, Procter & Gamble was cheap. Like a lot of those–
Jake: It was too easy. Too obvious.
Tim: It was too easy. It was too easy. Yeah.
Jake: I got to get more cleverer than that if I’m going to make money, right?
[laugher]Tobias: That was the funny thing about the– Everybody remembers the being a dotcom bubble, but really it was a large company bubble. It was everything from like Walmart, Microsoft, Cisco. Take your pick of all of those really big, high quality entrenched businesses. They just got too far over their skis.
Tim: Yeah, Coca Cola. Exactly.
Tobias: Yeah, Coke, another good example, took GE, although GE seems to have deteriorated a fair bit, but GE was very highly regarded. They all did pretty well from 2000 to 2015, but the stocks just went down every single year. In 2015, I was looking at Walmart and all those sorts of names like they had, you could get leaps on them for just about nothing because there was no volatility in the stock. There was no expectation that they were going to go up, even though the underlying business as have been compounding at pretty high rates like 20% a year, something like that. It’s amazing. They just got cheaper and cheaper. But you didn’t want to buy a leap, because you didn’t know if it was going to go up in two years.
Jake: Yeah. It hadn’t gone up in 15. So why would it go the next two?
Tobias: Yeah. Why would it go off in two?
Jake: That’s dead money, right? [laughs]
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Unbelievable Earnings Growth: John Deere, Home Depot, and Caterpillar
Tim: Right. I was looking at John Deere. And Home Depot, I’ve looked at, and Caterpillar. If you look at just their earnings growth that those companies have seen over the last, let’s say, five years, it’s unbelievable. It’s unbelievable, and the stocks reflect that they’re not super overvalued if those earnings can keep growing. It’s amazing what they’ve been able to do.
Jake: Well, there was so much Capex that was put out in the, well, 50 years, I guess but even, let’s say, the 10 years before that. And then with Home Depot, for instance, they slowed down store growth and focus more on driving profitability. And then I think retiring shares as well. So EPS just– You had all this capex that started just showing up on the bottom line, free cash flow, and then less shares across that, and you just explosion.
Tim: True. No, a compounding machine, for sure.
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Think Smarter, Not Harder: How “Obvious Adams” Can Boost Your Investing
Tobias: JT, it’s the top of the hour. You want to do your–?
Jake: I would love to. It’d be my honor.
Tobias: Veggie?
Jake: [laughs] So this is a perfect segue since we were just talking about obvious things to do. I think I believe this is the book that Toby was referencing about–
Tobias: I think we did that offline.
Jake: Yeah, we did. So the name of this book that we’re going to do a little book report on, is called Obvious Adams. And it was recommended to me from my friend, Dan Sheehan. So thanks, Dan. It’s a fun little read. You can do it in well under an hour. It’s super, super quick. Or, you can just listen to this segment if you want instead.
So this was first published as a short story in the Saturday Evening Post in 1916. So it’s quite old, more than a 100-years old by my math. The story is about this poor, young man, who wants to get into the advertising business after hearing this spellbinding talk from the president of a famous advertising agency. The only trouble is, this guy, Adams, this kid is completely unremarkable. He is just average in every way. And to be a successful ad man, you have to be rather clever. So to get into advertising, he makes an appointment with the president. And the president, he talks his way pass the secretary, gets in and talks to the president, and the president asks him some questions and determines like, “This kid isn’t nothing. We can’t do anything with this.”
And then Adams takes that nicely enough when the president tells him this, and he simply says, “I’ve decided that I want to get into the advertising business, and that I want to work for you, and I thought the obvious thing to do was to come and tell you. So you don’t seem to think that I could make good on this. So I will set out to find some ways to prove it to you, and I’ll call on you again when I have found them. Thank you. Good bye,” and he walks out and just leaves. And the president is dumbfounded, and he spends all evening thinking about this kid and their interaction, he realized, we could use somebody around the office that has sense enough to just do the obvious thing and then not make it more complicated than it has to be.
So the next morning he sends for this kid and he offers him a job. And Adams comes in, he starts doing this little menial job, and he has some suggestions about obvious improvements to do his job that increased his productivity. And eventually, he tells his boss that someone could be doing my job for half of the salary. So they end up promoting him and someone else takes that job. He actually gets into starting to write copy. And so his ad work was focused on– He just goes and talks to the companies that he’s doing the ad work for and to understand what are they doing, like what makes their product special. He gathers the facts, and then he spends a lot of time just thinking about them, and he determines the essential points and then puts them down clearly into ad copy, and that’s it. And it worked like a charm. He became one of the most sought-after ad men from just basically discovering the obvious thing to do. Hence the name, Obvious Adams.
So when asked why don’t more people do what’s obvious? He replies, “Thinking is the hardest work many people ever have to do, and they don’t like to do any more of it than they can help. They look for a royal road through some shortcut in the form of a clever scheme or stunt, which they call the obvious thing to do, but calling it doesn’t make it so. They don’t gather all the facts and then analyze it before deciding what is the obvious thing. And therefore, they overlook the first and most obvious of all business principles.” And then at the end of the book, the author gives you five tests of obviousness in this appendix, which I will share with you now.
Number one, and this came from Charles Kettering of GM, who is like a pretty famous CEO of GM way back in the day in their heyday. He had it placed on the wall of the GM research building, and this little plaque said, “The problem, when solved, will be simple.” Or, said in another way, “The solution, when found, will be obvious.” Number two. Does it check with human nature? If your idea or plan can’t be understood and accepted by your mother, wife, brother, friend, gardener, all these people, etc., it’s probably not obvious. Human nature makes or breaks any plan, and the public’s mind is simple, direct and unsophisticated.
Number three. Put it on paper. Write it out like you were explaining it to a child. Can you do this in two or three short paragraphs? If the explanation is long and complicated, it probably isn’t obvious. Number four. Does it explode in people’s minds. If people say, “Now, why didn’t I think of that?” Of course.
Tobias: [laughs] Too obvious.
Jake: Yeah. Then you’re probably on the right track. If it doesn’t explode in the mind and it requires lengthy explanations and hours of argument, it probably isn’t obvious. Number five. Is the time ripe? Sometimes the windows pass for an obviously good idea. One is reminded of the quote, “What the wise do in the beginning, fools do in the end.” And sometimes the idea is ahead of its time, which then calls for patience and alertness.
So I think if you take these five obviousness principles and apply them to your investing, you hopefully can recognize a Microsoft in 2012 at a 10 PE, and not try to overcomplicate things and think about, “Hey, I got to be more clever than that. Anybody could buy Microsoft.” [chuckles] I think when you look at Buffett’s record, and the way that he’s able to boil things down– when he explains it’s like, “Oh, well, duh, that’s so obvious and a smart thing to do.” Oh, the KPI for Coca Cola is unit cases sold per share. If I just keep an eye on that, if both of those things are going in the right direction, this is going to work out just fine. Being able to boil it down and become your own Obvious Adams, I think might be one of the untapped potentials in this entire business. We like to make it so complicated.
Tobias Carlisle Yeah. Jake sent it through to me, and I had to read it through. I worked out at seven words per line, 21 lines per page. Now I forget the number of pages, but it worked out to about 8,000 words. It’s a very quick read, like, literally half an hour.
Jake: 40 pages?
Tobias: 40 pages.
Jake: Look how thin this is. This is it. It’s a pamphlet, practically.
Tobias: Great book. He tells a great story about being tasked with going and figuring out why a hat store wasn’t selling. There were two hat stores, and one was selling a lot and one wasn’t. And when he tried to find the second hat store, he couldn’t find it because it was hidden down an alleyway. And you’re coming up to a busy intersection trying to figure out why you’d cross over, and he’s like, “There’s the answer. It’s too hard to find.” [crosstalk]
Jake: Yeah. And the sign, I guess was obscured, and no one would have been looking up, because they were worried about crossing the street there.
Tim: It makes sense, totally.
Tobias: Yeah, good little read. I think that’s right. I think that’s like the best investment decisions are often and stuff. It’s just obvious. And I think Buffett’s Apple is also another obvious one in 2016, where it was just overearning. Everybody had an Apple phone. Toes up. There’s a ladder of like, you have to keep on buying every few years where your phone doesn’t work no more.
Jake: Or, the battery will just start draining mysteriously. [laughs]
Tobias: Yeah, that’s right. Or, you get a whole ecosystem of Apple TV and Apple computers and Apple phones and Apple Watch you’re locked in. No one’s getting outside of that ecosystem anytime soon.
Tim: Oh. I’m an Android person.
Tobias: [crosstalk] [laughs]
Tim: So everyone hates when I’m on the text messages and stuff like, “Who’s the non-Apple [crosstalk]? This idiot.” [laughs]
Jake: Who’s the green guy?
Tim: Yeah.
Tobias: One you look–
Tim: Oh, sorry. Go ahead.
Tobias: No, you’re fine. I was going to say, once you lock into the pixel, it’s hard to get out of that too. I’ve got a pixel.
Tim: Oh, yeah. That’s what I have too. I have the foldable one. I love it.
Tobias: Oh, yeah?
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Value Investing in China and Russia
Tim: Yeah. But no, the simplistic explanations for investment makes total sense. That’s my premise on Citigroup. Look, the stock is at 52, the tangible book value is 86, I think that they could get a 10% ROTCE. I do know a lot of details, obviously, of the business and the industry. The capital levels are good and stuff like that. So it’s a pretty simple thesis.
Another one I thought was interested in your guys’ opinion on is, what do you guys think from a fundamental value play? China would be really interesting. But I got burned a little bit on. I own some of that Russian ETF as the war in Ukraine took off. And so that just went to zero. [Tobias laughs] So I’m too scared touch China. But from a fundamental standpoint, I think it would be a no brainer outside of that massive potential issue.
Tobias: That might be one limitation of that obvious stuff is that– There’s two obvious answers there. One is that, yeah, it’s all really undervalued, and they’re all really obviously good businesses too, some of them. So they’re going to be much, much bigger in 10, 20 years’ time. But then you’ve got some China regulatory issues there. It might be hard to collect as an outside investor, and whichever one of those turns out to be the pivotal decision, you look back and say, “Well, that was obvious.”
Tim: Exactly.
Jake: Yeah, but can’t you– Okay–
Tobias: Option sizing?
Jake: Well, yeah, I was going to say. So using, let’s say, that you were of that mind and that persuasion that both of those things were obvious that there’s obvious existential risk and that these are obviously cheap, good companies, so what then? Yeah, it’s a position sizing question then. You put some in there, but you don’t make it too big because it’s also obvious that zero is in the cards and you don’t want to necessarily wipe out a huge percentage of your capital with that. But give me 25 similar looking, non-correlated versions of that and I think you end up doing okay.
Tim: I thought I was being smart with Russia. And instead of picking like an individual company, I thought, “Oh, just own the ETF.”
Jake: Yeah. Buy the index.
Tobias: [laughs]
Tim: You don’t expect the whole stock index to be valued at zero.
Jake: It was all just gas and banks anyway. So it wasn’t like you needed to go special hunting through there.
Tim: True. Yeah.
Tobias: Yeah. There was always the cheap stock market for a while. I remember Meb Faber has that– One of his ETFs has got some exposure to Russia.
Jake: GVAL? Yeah.
Tobias: GVAL. Yeah. I think it looks at what’s a cheap index on a CAPE basis and then it says what are the cheapest companies in here, and that’s how he figures out what it owns. Russia was cheap. Russia’s been cheap for more than a decade now, I think.
Jake: Yeah.
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Big Pharma Profits from Weight Loss Craze, But at What Cost?
Tobias: Any of those economies, any of those stock markets and Australia and Canada I guess are like this where its largely commodity based, then they’ve often got big banks as a big part of the index too. They’ve struggled a lot, like they struggle in these kind of markets. I don’t know what characterizes these markets, but it’s been by far and away a US decade and the rest of the world has suffered in absolute terms and also in comparison.
Tim: 100%. Yeah. Japan had a great year last year, but that’s after decades of underperformance. Europe has just been a basket case. So we’ll see. International is so much cheaper. I definitely own some international stocks, and I’m optimistic that they’ll have their way in the sun, time in the sun.
Tobias: The US is singular in producing those gigantic consumer discretionary type businesses like Google and Facebook and Microsoft. All that stuff is unique to the US. It doesn’t seem to exist, although China does seem to have its sort of analogous–
Jake: [crosstalk]
Tobias: Yeah. I don’t know where it is. Europe doesn’t seem to produce them.
Tim: They have ASML In the Netherlands, that semiconductor company.
Jake: Novo Nordisk has done just fine.
Tim: Oh, my gosh, Yeah, I know. That’ll be interesting to see how that whole trend plays out, for sure.
Tobias: Is that the weight loss? All the weight loss stuff?
Jake: Yeah. That’s part of it, but they’re also– It’s been a pretty well-run company on top of that.
Tobias: Healthcare has been a good industry.
Jake: Like, the returns on capital when the pharma works are pretty exceptional.
Tim: Well, yeah, and those weight loss drugs, I see it down here, I’m sure you guys do too, but just like I’ll go to the gym in Orange County and you see the dramatic weight loss.
Jake: They are just giving you shots as you come in the door? [laughs]
Tim: Yeah, pretty much. Oh, pretty much. You see the dramatic weight loss. I don’t know what the long-term impacts are. I wouldn’t do it myself, but I can understand the logic and the appeal for people. We’ll see.
Tobias: Yeah, I do wonder if pharma’s got a liability there that’s matching, a hidden matching contingent, hidden matching liability.
Tim: It seems like they find their way out of liability– [crosstalk]
Tobias: They do. Yeah, they do. They are quite good at that.
Tim: Yeah. They have a way of doing that.
Jake: Clever.
Tim: [laughs]
Tobias: I think you just pay enough money to the– It’s not a bribe. What’s it called? Lobbying.
Tim: Aren’t they the biggest advertisers too? So they’re the biggest advertisers as well. So who’s going to criticize it?
Jake: Oh, yeah. They are like 75% of TV ad revenue or something comes from pharma.
Tobias: That’s crazy.
Tim: Oh, yeah.
Tobias: The other 25%, election advertising.
Jake: Oh. Kind of makes you sick, doesn’t it?
Tim: It’s going to be a long year. It’s going to be a long 2024, I think.
Jake: I missed the days when it was beer commercials with dogs, and girls eating hamburgers on the top of cars in their bikinis. Those were the good old days. [laughs]
Tim: Yeah. Good old Coca Cola.
Tobias: And [crosstalk] still cancel.
Jake: Oh, sorry. Yeah, that was exploitive. [chuckles]
Tobias: I didn’t mean to pour cold water. Keep going, I didn’t mean to– I was enjoying it.
Jake: [laughs]
Tobias: I was just making sure that the cancellation was yours alone.
Jake: Yeah, thanks. I’ll wear that one.
Tobias: Yeah, it’s tough. I think this market is particularly tough because I see a lot of– There’s a lot of risk, but I don’t think that there’s lot of– It’s not obviously cheap.
===
Jake: When is it easy, Toby? I keep waiting for this. You keep telling me it’s tough, but I’m waiting for that time where you say, “This is easy.”
Tobias: Well, I tend to like crashes, because things get cheap. And then I think you know you front it. I don’t like crashes because they’re nerve wracking to go through. But you get really good prices at the bottom. And that’s the time that I feel best. That’s the time that I feel most confident.
Jake: Did you feel excited in 2020? We’ll go back. We got the tapes.
Tobias: Review the tape?
Jake: Yeah.
Tobias: Yeah, pull up the tape.
Jake: We got receipts.
Tim: I think I remember some of that tape.
Tobias: I was pretty sweaty.
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Attractive Options in a Sweat-Inducing Market: Bonds & Bond Ladders
Tim: Yeah, it’s very sweaty. Yeah, that’s what bonds– I think bonds are pretty attractive. Obviously, they were more attractive in October of last year before the big rally, but if you can get high single digit yield of maturities on good credit quality, I don’t think that’s the worst place to be in the world, plus you have convexity if interest rates decline from here. So I don’t think that’s the worst pool to swim in.
Jake: Tim, would you be worried about, I don’t know, let’s just say, like some geopolitical event? Supply chain snarled, we’re back to 10% inflation again, and no one was ready for that, everyone was already cheering that we’d put the inflation genie back in the bottle. That’s your downside for–
Tim: Yeah, I think, absolutely. And so the stuff going on in the Middle east, people should pay some attention to that, for sure. And God knows what else is going to come this year. But yeah, that would be your biggest downside. That’s why building a bond ladder is important. So there’s stuff where you have floating rate bonds, like some really good ETFs that you can use that trade at discounts to net asset value, and then just build that bond ladder with different durations. I don’t think you have to reach too much in terms of credit risk, but that would be my best answer to it.
Jake: Yeah, there’s some pretty good– Like they’re relatively cheap now for the rolling over of the bonds that they do for you now in some of these ETFs. It’s so much better than trying to do it yourself anymore, I feel like.
Tim: For a lot of the stuff. Yeah, I agree.
Jake: If you’re trying to go buy individual Treasuries yourself over and over again, that’s real work.
Tobias: Do you feel that there’s inflation risk in the bonds? Or, it is more technical?
Tim: That’s why it’s important to have the bond ladder. I don’t want to be Silicon Valley Bank and buying 20-year mortgages or 30-year mortgages at 1.5%. But also that’s where having some yield and having some floating rate exposure can be really helpful here. What was 10-year treasuries at in 2000? Wasn’t it like 6%, 6.5%?
Jake: Oh, yeah. 7%.
Tim: I just remember in hindsight, being 2020, it’s like, “Gosh. Man, if we could have gotten 6.5%–” That’s Treasuries. But maybe just take that to the bank, and you missed that whole 80% decline in the NASDAQ.
Jake: Collecting 6% from the beach.
Tim: Yeah.
Tobias: Yeah. That’s right.
Jake: [laughs]
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The Fed’s Dilemma: Will Unemployment Increase, Prompting a Rate Cut?
Tim: So lot of deflationary factors out there too. You look at used cars, some of the housing, the way that that stuff’s calculated, we’ll see. I still have a tough time believing housing affordability is. I just can’t imagine prices aren’t going to– I just think they have to go down a little bit. It doesn’t make sense like the rent to own equation right now does not look very good for home buying.
Tobias: There’s a little stimulus out there. Inflation Reduction Act is massively stimulatory. We’re running deficits though like 8% to 10%, which is just massive on a historical basis, particularly when they normally run and they are closer to the bottom of a—
Jake: Worse.
Tobias: Yeah, when there’s a collapse. We’re running this at the– I don’t know really– [crosstalk]
Jake: The best economy ever?
Tim: Yeah, you’re right. That’s the whole story of the macroeconomy is that you have the huge deficits, like a World War II type deficit, and then you have the reshoring. So manufacturing in Arizona or Tennessee or whatever, a lot of those cheaper states, Texas, it’s just booming. And so it’ll be unemployment. What’s going to cause the Fed to cut? It’s got to be unemployment increasing. And if it doesn’t increase, then I can’t see them cutting. I really can’t.
Tobias: But it’s still at historically low levels if you look back–
Tim: Yeah.
Tobias: Almost every single people will make this point that almost every single recession naturally occurs out of a very, very tight labor market, and then it only has one way to go. When it turns around, it accelerates very, very quickly. That hop seems to happen very quickly, but it’s later in the cycle is that–
Jake: Hope.
Tobias: Yeah. Michael Kantro has that hope framework, housing, whatever it is. [crosstalk] profitability-
Jake: Something, something.
Tobias: -in plan. The E goes last. It’s been amazing to watch like how long this thing has dragged on. Particularly the 10-3 inversion, which historically has been 12 months is the average and we’re at October 2022. We’re now January. So this would be the longest period of time before seeing any sort of action. We’re still deeply, deeply inverted, and [crosstalk] front-end.
Jake: Did all those other inversions have 8% deficits?
Tobias: I don’t know.
Jake: Does that just like-
Tobias: This is an unusual deficit.
Jake: -buy time for hope, just extend, pretend? I don’t know.
Tim: I’d say, it’s what it feels like. It feels like a lot of extend and pretend. And then every jobless number was like revised last year. It’s an election year. There’s a lot of factors like that have to be considered.
Jake: Yeah. It’s getting tinfoil hats on.
Tobias: [laughs]
Tim: I remember 2007 being at my old company, and they’d have the TV on in the background, CNBC, and it was Larry Kudlow, “This is a Goldilocks economy.
Jake: Oh, yeah.
Tim: This is perfect. This is exactly what you want.” And then even 2008, that continued until you started seeing the funds freezing up and you see those catalysts.
Jake: Like January of 2008, like 91% of analysts had– I forget what it was. It’s just like positive expected returns for everything.
Tim: Probably the same as this year. I think most people are bullish. At least going into the year before the last couple of weeks, optimism was so darn high.
Jake: Yeah.
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Buffett’s Bullish Tune Change: Stewarding the System
Tobias: To be fair, Buffett was pretty bullish in 2007 too.
Tim: He was a big bullish America guy. Like, always bet on America. I think that he spread that a lot, which is–
Jake: He certainly wasn’t bullish on housing. I remember him talking in, I think, the 2006 meeting about like, “Housing is the median income to median price had gotten pretty far out of whack.” He pointed it out.
Tobias: I think he said something similar last year, didn’t he? I recall there being this something similar, a similar exchange last year, as well, I remember that one too from 2006. I think that a lot of his earlier stuff was– If you look at green backed emissions and all of that earlier stuff. I think his tune changed a little bit as he became more of a– He’s more of a steward.
Jake: Don’t you dare call him a political animal.
Tobias: No, I was going to say more of a steward of the system. He’s assumed that role of Morgan back in the day where–
Jake: Yeah.
Tim: That’s a really good analogy, actually.
Tobias: They want him to be a calming influence rather than. He’s not out for himself in Berkshire, just telling you what he actually thinks is going to happen. He’s trying to get everybody to calm down.
Jake: He’s a shock absorber now.
Tobias: Yeah, which is probably why you can discount a little bit of that kind of commentary, a little bit.
Jake: Yeah. He’s not writing how inflation swindled the equity investor today.
Tobias: Although, I think he’s pretty blunt about when he discusses it at the meetings though. I don’t think he guild it at all at the meetings. It’s just when he’s on some sort of– In an interview, he’s much more upbeat than he sounds at the meetings. And then he’ll revert to something like, which is all true, which we would all agree with like– And over the very long-term, it doesn’t really matter anyway. It will work so.
Jake: He does a lot of caveating too. The market is-
Tobias: Yeah, it’s interesting.
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China’s Investment Landscape: A Risk Worth Ignoring or Embracing?
Jake: -it’s reasonably priced. [Tobias laughs] If rates stay this low and returns on equity stay this high, then the market is fairly priced.
Tobias: Right. You find his returns on equity the most mean reverting series in finance?
Jake: Are they?
Tobias: Yeah. It seems not maybe. Maybe not.
Jake: I don’t know. They were. [laughs]
Tobias: It’s been amazing. It’s been quite an extraordinary period.
Jake Taylor Yeah, it really has.
Tim: It has. Just like the tech bubble was. They’re not the same or anything like that, but, yeah, it’s always surprising how long stuff can go on. It’s been weird. You had 2020, which was just such a bizarre year. You had the huge euphoria with the AMC and all that stuff. You’ve had a lot. You had the pseudo banking crisis last year, and now you have the geopolitics and an election year. We’ve never had an election like this is going to be after the last one. At least in the modern era, it’s going to be different. I’m not someone that dwells too much on the macro. I don’t let it dictate my decision making, but I think you can expect a wild ride.
Jake: What do you think that–? Let’s put the history. We opened up the history book in 2050. What does it say about the markets of today?
Tim: That’s such a good question. People thought earnings were going to keep growing at the same rate. It would be that type of thing where you have high valuations, you don’t have mean reversion, which you should expect mean reversion. That’s one of the things that Toby does a great job talking about in his books is that you should expect some type of mean reversion.
Tobias: That’s been wrong.
Tim: Yeah.
Jake: We’ve identified the problem. [laughs]
Tim: Yeah. Maybe we’ll be idiots for not jumping on China. Who knows? I hope that is the case. I hope that is the case instead of like, “Well, people didn’t jump on it because that situation got a lot worse.”
Tobias: There’s a lot of that investment where you get right one times in a row. We’ve acknowledged that there’s some serious risk with China, but someone could set up a fund, just plow everything into China, have it come true. They’re a genius because they’ve ignored the one risk that everybody else was ignoring or it doesn’t work out in the other way around, they get a big short on or something like that. I think that’s the same thing that Paulson had that– He had that trade on where he was long all the CFDs or whatever, long all the CFDs, insurance.
Tim: CDFs. Yeah.
Tobias: It didn’t eventually blow up. There’d been other people who’d had that trade on for a long-time and–
Jake: Yeah. It went bust before it could pay off.
Tobias: Yeah.
Tim: Well, there’s people that will have–
Jake: So much will have dependency on this stuff a lot of times that–
Tim: Yeah. There’s people that will have multiple funds too, and then it’s like one– This is bigger in some like the manage future space and stuff like that, where they have all these different strategies and then they only really market the one that hits a home run, you know?
Jake: Yeah.
Tobias: You run three times long in one and three times short in the other. And the one that works, you change the name to your flagship fund. And the one that doesn’t work you just-
Tim: Yeah. Exactly.
Tobias: -remember you hold that one.
Tim: Yeah.
===
Leveraged ETFs, Covered Calls, and the Search for Yield in a Low-Volatility World
Jake: Speaking of levered long, I saw that there was like 1.5 or 2 times Nvidia ETF. So it’s just purely single stock levered long ETF. [laughs] That’s reminded of Keynes is– What did he say something about when markets become speculative? They don’t become very good at allocating capital.
Tobias: Market can remain insane longer than you can remain sane.
Tim: Yeah, very true. Well, you know what’s big now too are those like covered-call ETFs and stuff like that which, gosh, I feel like I missed the boat on that one. I wish I would have set up a–
Jake: Just watch one of those. [laughs]
Tim: Yeah, seriously. I’ve been preaching that for a long time. But yeah, those are pretty popular now.
Tobias: Chris Cole did this paper years ago now when after Japan had no returns in their stock market for a long time, and there was nothing really going on, they started selling a whole of these things called Uridashi notes. And the function of a Uridashi note was it basically sold vol. So it sold upside vol and downside vol. And so it’s a way of generating yield where there’s nothing happening in the markets. But the problem is that the moment that volatility returns, you get knocked out one way or the other really easily.
Jake: Yeah. It was like that XIV that went caput in like an afternoon.
Tobias: Yeah. Very similar to Taleb’s turkey. As soon as you see those yield strategies emerge, something’s the yield–
Jake: Not ready to kill them? Yeah.
Tobias: Yeah. The low volatility environment is over.
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Tim: You’re right. I know we’re coming up on time, but I worked at a firm that was doing that for a long time. And that’s where I learned options. And so they were doing iron condors and stuff like that on the indexes. This was like prior to 2008. Maybe 2003 to 2007 there wasn’t lot of volatility.
Tobias: Yeah, the index is flat.
Tim: Yeah. And then of course, that strategy ended up blowing up. And so I want to make clear to people. When I talk about options, I’m only talking about them to generate income and reduce risk. We don’t do any speculation on options. So I’m definitely not advocating on that. They’re not suitable for everybody.
Tobias: Hey, Tim, we are coming up on time. If folks want to get in touch with you and follow along with what you’re doing, what’s the best way to do that?
Tim: Sure. Our website is www.ttvalueinvesting.com. And then my Twitter handle, I think is @timtravisvalue, I believe.
Tobias: Cool.
Tim: Yeah.
Tobias: Well, Tim, that’s always good to have you on. Thanks so much. We’ll have you back again in the not-too-distant future.
Tim: Cool.
Tobias: And thanks, everybody. We’ll be back next week. We got Dan Rasmussen. He’s coming on to set us all straight. Thank God.
Jake: Yeah. He’s going to give us what everyone’s doing wrong. [laughs] He’s very good at that.
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