In their latest episode of the VALUE: After Hours Podcast, Tobias Carlisle, Jake Taylor, and Tim Travis discuss:
- AI, Tech, and Alphabet’s Valuation
- Bank Holdings and European Valuations
- Jake’s Veggies – VC and Startup Lekking Analogy
- REITs and Real Estate Opportunities
- Musk’s Empire and Market Fragility
- Crypto and Speculative Trends
- Market Valuations and Current Sentiment
- Geopolitical Risks and Market Impact
- Energy Sector and Commodity Plays
- Housing Market and Economic Signals
- Book – The Business Mindset Investor
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:
Transcript
Tobias: It’s possible we’re already live, and it’s setting up. You never know, you never can tell.
Jake: Just go. It doesn’t matter.
Tobias: Well, this is Value: After Hours. I’m Tobias Carlisle. Joined as always by Jake Taylor. Our special guest today, Tim Travis, repeat offender again. [Jake chuckles] It’s good to see you again, Tim. How are you?
Jake: Yeah. Welcome back, Tim.
Tim: Great seeing you, guys. Everything’s good. Life’s good. Can’t complain. Glad we’re getting some excitement in the markets. And summertime’s coming.
Tobias: Yeah. So, tell us a little bit about what you’ve been seeing in the markets. How long is it since you’ve been on, six months? We talked about past six months?
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Market Valuations and Current Sentiment
Tim: Probably something like that. Yeah, I don’t think we’ve talked since tariffs or anything that. But like you guys have been saying for years, I think valuations were obviously really, really stretched. A lot of indicators were closest to 2000 in many different respects and indications. And so, I thought it was really helpful to see the bear market that we did see. It’s so interesting.
It really does echo 2020 a lot, where the market recovered so rapidly once again. I think right now, a lot of people are thinking that same playbook, buy the dips, you can’t lose that thing. But now, once again, valuations are a lot more stretched once again.
It’s tough to find good value out there, in my opinion. There’re certain pockets, I think, where there’s really good opportunities, stuff that’s been impacted by higher rates or lower energy prices perhaps. But in general, I think the market’s gotten a little bit ahead of itself again. So, we’ll see what happens.
Tobias: It’s interesting to see the softer, more anecdotal things like Pomp’s got a SPAC, Chamath’s SPAC with some investment opportunity. Does anybody ring a bell at the top or–
Jake: Some victory laps.
Tobias: Yeah, victory laps.
Tim: MicroStrategy, people love the end of those yield plays that have come out of that stock. I know a lot of people that are really ramping up their activity in that. We had a client. Wonderful lady. She wanted to drop all of her fixed income and focus on the MicroStrategy yield plays. So, it wasn’t-
Jake: Jesus.
Tim: -our recommendation, but there’s a lot of speculative fervor out there. Look, you have the administration there embracing crypto, which is a big difference. That’s a big change. I’m not a big crypto guy. I’ve never bought any myself. But when the United States government is putting some impetus behind it, I think it does add more legitimacy than it did prior, whatever your thoughts are on it, but still not for me.
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Crypto and Speculative Trends
Jake: What yields was she being promised in that whole thing?
Tim: I’m going to say it’s like 13 or something like that. It’s high. It’s high. They’re just leveraged bets. MicroStrategy itself is an enormously leveraged bad. And then, they go beyond that. We definitely talked, sprinkled in some conservative. Whenever someone shows an interest in crypto– as long as they can afford it, I always recommend, maybe scratch that itch a little bit, because what I’ve seen happen is if they don’t play it at all, then it goes up, then they’re kicking themselves, their wife’s mad at them for it.
Jake: And then you come in big later.
Tim: And then, they go crazy. I’ve seen people want to put their whole IRAs in it. And so, yeah, managing the psychological aspect of being a financial advisor is something that I think I’ve gotten better at over my career, and it’s important consideration there.
Tobias: Well, if it performs like it has in the past, you only need a 1% allocation. Pretty soon, that’ll be half your portfolio.
Tim: No kidding.
Jake: Is that the NGU technology that they’re using? Have you heard this?
Tobias: No.
Jake: Oh, it’s number goes up. That’s the technology that’s [Tobias laughs] at play there. I don’t think it’s even a joke actually.
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Bank Holdings and European Valuations
Tobias: So, Tim, before we came on, you were selling down some of your bank holdings earlier in the year. What prompted you to do that?
Tim: Well, valuation started getting pretty stretched. I’ve been pretty long the banks for quite some time. We tend to buy them, especially when they’re trading at discounts to tangible book value as long as profitability looks good. We finally were able to cash in on some of our European banks. So, BNP Paribas, Deutsche Bank, Barclays, they had really good runs. I still like a lot of those. I think the fundamental outlook’s pretty good. But the valuations finally caught up to our estimate of intrinsic value.
Whenever the market catches a cold, the banks get pneumonia. And so, for us, once they get close to fair value– I don’t think they’re the greatest businesses in the world. So, it was an attractive time for us to sell. Citigroup’s another one. I think intrinsic value is probably close to maybe a slight discount to tangible book, which is around 90. We sold in the 80s, probably, high 70s to 80s, just because that stock, whenever something happens, it gets clobbered. I think it did dip in the 60s again or whatever.
We sold some puts, we took advantage of volatility and so we’re established some types of conservative positions in them again, but not really playing it too much. I think that they’re pretty close to fair value right now. But it’s interesting finally seeing Europe catch that bid. I know you guys have been talking about it and I have too. The value nerds. Just the arbitrage between European valuations and US valuations, and it’s finally see that come to fruition a little bit.
Tobias: I saw just not even on European valuation, but someone was comparing BYD and Tesla. BYD’s revenues now I think exceed Tesla’s-
Jake: Wow.
Tobias: -and the market valuation for Tesla is like 10 times BYD.
Tim: Is it still? Wow, I’m a little bit surprised to hear that. I know BYD has been such a monster for so long.
Tobias: That was a tweet that I read that from. I haven’t independently verified that.
Jake: So, that’s as good as truth.
Tim: You’re probably right.
Tobias: Repeating falsehoods here.
Jake: Yeah.
Tobias: So, what do you think is interesting, Tim? You’re saying there’s a lot of overvaluation, but what’s relatively interesting?
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REITs and Real Estate Opportunities
Tim: Yeah, I think there’s pockets of opportunity. So, one area that I like is I like real estate investment trusts right here. People look at those businesses, and they’re not the sexiest necessarily, but look, they have lease escalations where you’re getting 2%, 3% increases in revenues each year. So, depending on what area of the market you’re in– Something like Avichi Properties, where you got 5.6%, 5.7% dividend yield and 100% occupancy, 100% collections. They’re growing at a reasonable rate. High single digits, low double digits type returns moving forward. And these things, they’ve taken dips over time.
Crown Castle. Another one. Wireless towers that they got hit really hard. They did some restructuring, and that’s one where we were able to take advantage when it got cheap. Both those I think are closer to fairly valued now.
One stock that I think is criminally undervalued right now is Alexandria Realty. So, that is kind of life science technology REIT. So, they house a lot of like the Modernas, a lot of these really high-tech, biotech type companies. They have the real estate for the labs and the office facilities. These are not work from home businesses. I’m sure obviously they can do some stuff, but it’s not something you want in your garage refrigerator necessarily.
Jake: [laughs]
Tim: I actually say that from my experience, because my dad was a biochemist. He’d have these things in the garage refrigerator and was like, “Don’t touch. Don’t drink.”
Tobias: [laughs]
Tim: So, I don’t suggest that. You got RFK Jr. You have a new administration that looks at the vaccine regimen and the Wuhan lab. They look at it a lot differently than the past administration did. And so, there’s a lot of pessimism in the space. Biotech stocks as a whole are beaten up. And so, the market’s projecting that, “Look, there’s too much supply. They’re not going to be able to fill all their buildings.”
And so, the stock’s gotten really cheap. So, this is a stock that used to trade at 16 times cash flow to up to 36 times cash flow. The stock was over 200 just a couple years ago for a couple years in a row. It hasn’t been this cheap in, I want to say, over a decade, something like that. And right now, it’s trading at about a little over nine times cash flows. It has a dividend yield of 7.8%. The dividend is really well covered. It’s got one of the best coverage ratios in the industry, an investment grade balance sheet. They’re focused on clusters.
So, around MIT, around San Diego. The top scientists, they tend to gravitate towards the Bay Area, these certain areas. And so, it’s a clustered approach. It’s very different than traditional office space. And so, that’s one I just wrote up a research report on it for Seeking Alpha. I haven’t done that in a while, but I’ve been adding a lot to it. Definitely down on it. It’s been one of the few big losing positions year to date, but it’s one that I like quite a bit. I think it could double and you get 7.8% dividend while you’re waiting.
Jake: How interest rate sensitive do you feel the REITs are these days?
Tim: It just really depends. So, they have long-term leases and they have long-term debt maturities. They just did a debt issuance when rates were a little favorable pre-tariff at 5.5%. So, that was a solid financing for them. So, you got to look at the debt maturities for these ones, their liquidity. A lot of them, they fund themselves through disposition programs. So, they fund their new development by offloading noncore assets.
I think that’s one of the negatives in the industry, is that sometimes those noncore asset sales might not be at the most advantageous prices, because they’re in some ways some of them are somewhat pressured sellers, let’s say. And so, that’s something you got to watch. It’s a good question to watch. But I feel good about that balance sheet. It’s an interesting company. It has the office tinge associated with it, but they’re not a company that’s going to see revenues and earnings just plummet from here. And it’s just so cheap. So, that’s the type of thing that we’re finding attractiveness in.
Tobias: What has happened to office more generally? Have you followed them?
Tim: I’m back, man. If you look at the stocks, I did some distressed like preferred stock plays, bond plays on Vornado. That was one of them. And SLG Realty. But this was a couple years ago when office, it was like peak work from home and people were really questioning the viability of a lot of those companies. We bought some of those at double digit yield to maturities.
Vornado was still an investment grade company. I don’t know if it still is or not. I believe it might still be. And so, those were really attractive. But now, the stocks have rallied a lot. The preferreds have rallied, the bonds have rallied and so there’s less opportunity there in my opinion. Yeah, that was an area where– Obviously, it’s so clear what the bear case is, but at some point, the valuation gets to a level.
People are moving back. There’s a lot of people that move to Florida. I love Florida personally, but they move there and they miss New York. They miss New York. They want to go back. They can’t deal with the– I guess it’s hot in New York in the summer too, but they don’t like the humidity and all that stuff, that’s more present, I guess, in Florida more consistently.
Jake: Well, Jamie Dimon says, “You got to come back to work, then what are you going to do?”
Tim: A bunch of them. Isn’t Amazon saying that too? I think even some of those companies. So, yeah, I think that those are huge movers and then people copy it. So, I think it’s a positive thing.
Tobias: Do you think there’s a layoff programs disguised? People won’t come back so they–
Tim: Oh, my gosh. Probably. That’s probably really [crosstalk] smart. Probably a lot of the more obnoxious employees are just not willing to comply.
Tobias: Headlines on his bed.
Tim: Yeah. But I can’t talk. I like working from home too. It’d be hard to adjust back to a normal office grind again. Fortunately, owning their own business and focusing on research and analyzing companies, it serves me best to be at home usually. But yeah.
Tobias: What do you think more broadly about– We were in a bear market. We were down 21%. We’ve had this pretty violent rally. I don’t know, it’s not as frothy as it was in 2021, but it’s pretty frothy out there.
Tim: It is. It is. Well, it was interesting, because when the sell off was occurring always, there was a lot of panic, a lot of paranoia. A lot of it’s politically driven. I think if you don’t like the administration and then the administration comes out and says, “We’re going to do this tariff regime,” and then all the news media is like, “Well, Trump’s tariff war and Trump’s bear market,” whatever. If you agree with that mindset, they’re going to be like “Sell everything.” And I did have that. I had people that were like, “Why don’t we just get out of everything? Because it’s going to keep going down.”
Toby and Jake, you guys know. People say this almost every severe bear market.
I remember it during COVID. I remember it in 2011 with the sovereign debt crisis, of course, 2008. They always think that they can pick the timing of that. The reality is is that you’re not going to do that. You want to do your risk management prior to the sell off. And so, that way, when you do that, when you’ve managed the risk before by owning bonds, by selling stocks when they’re trading at your estimate of intrinsic value or in excess of that, then you’re able to actually play offense when you get these types of sell offs. And so, fortunately, that’s what we were able to do. It doesn’t always work like that. But we were able to–
When the VIX was rocketing, we were able to sell puts on stocks that we would be glad to own anyways. That’s a really good way to get a higher margin of safety, really attractive premiums. If we end up owning the stocks, that’s great. Same thing, just buying stocks outright when they’re getting cheaper as well. But now, we’ve seen the recovery, a little complacency is kicking in.
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Geopolitical Risks and Market Impact
One thing I really didn’t like over the weekend was allegedly there was a drone attack on Putin’s helicopter. And so, then there was intense bombing in Kyiv. I’m not making a political statement here, guys. No one write in the comments. [Tobias laughs] I’m just saying that the narrative one way or the other. And so, then there were heavy attacks on Kyiv.
And now, even Trump, who’s been pretty optimistic about ending that war, he seems a lot more pessimistic. And to me, that’s a huge negative. I was really hopeful that we could put that terrible war in the past. So, that’s something that I think is worse today than it was a couple weeks ago as far as the outlook. I’m being cautious, guys. I don’t think it’s a time to be super aggressive, that’s for sure.
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Energy Sector and Commodity Plays
Tobias: Yeah. I don’t know that there’s a lot of opportunity around either. The only things that I can find are the energy, I think, because it’s so beaten up and the energy stocks have all been smashed since 2021. But then, it’s still a commodity. You’re still relying a little bit on some geopolitical event or strengthening the economy to make oil and gas work, whereas it’s not just a simple growthy little business that compounds away.
Tim: I would agree with you. I think energy is another one I would have named it. I think there’s opportunity there. You look at a Devon trading around 30 again. That’s a big discount to its net asset value when you look at the properties, and the cash flows and really solid management team there. And so, how do you play it? If you own the stock, obviously, that’s probably going to give you the most upside potential.
Our firm, there’s a lot of implied volatility priced into some of these energy stocks, because exactly, you’ve got OPEC increasing production, you’ve got drill baby drill in the United States. So, it might make sense for us to do the cash secured puts type thing and hope we could get in at a cheaper price or target a double-digit type return. But just owning the stock outright, I think you’ll do pretty well on a lot of those.
Tobias: You say the volatility in the options is already making the options expensive?
Tim: Pretty high. Yeah. Yeah. I think a lot of people are bearish. I would imagine short interest is probably high. And so, we sold some puts, for instance, today on Devon Energy. I think we sold them at 27.5 or something like that for January. It was low-to-mid teens annualized returns and then your breakeven is probably around 25, something like that, which for us– We’re happy to own that stock at that price.
A lot of institutions, they’re not going to mess around with the options stuff. We manage $170 million. So, we’re midsized-boutique-type investment advisory firm, but we’re able to do things like that for our clients. I think it’s a competitive advantage versus some of the larger firms that are more constrained, I would say.
Tobias: Yeah, for sure. I like those strategies.
Tim: So, workouts, man. That’s one of the ways I found it. Buffett, what did he do when he had the partnership? He had the general investments like the American Express or the GEICO’s or that thing. And then, he had the workouts like blue chip stamps and things like that or merger arbitrage type things. I feel like with options, you’re able to simulate some of that, because there is a time element to it.
Tobias: You can embed the return and you know what your downside is. If you’re happy to own the stock at that level, then it’s a win-win because you can’t even buy it in the market at that level.
Tim: Correct. Yeah. If you do it with a fundamental basis– I believe I’m right, but one of the things that really got me interested in it was, I believe when Buffett was buying Burlington Northern Santa Fe, accumulating the stock, I believe he did it with cash secure put options at one point. I do believe he might have done that with Coca Cola at one point. I’m not sure about that. That might have just been something I’ve heard and I don’t know, for sure.
Tobias: I haven’t heard that before. You’ve heard that, JT?
Jake: I haven’t. But maybe AI elucidated it.
[laughter]Tim: I was before AI. I’m pretty confident on the Burlington Northern Santa Fe. It was a small amount. It wasn’t obviously how he built such a large stake. I believe that he was doing that. They’re so big.
Jake: He’s done it in private transactions too with-
Tim: Yeah.
Jake: -families, like carving out part of it can be put later at a different price.
Tim: Yeah. True. Yeah, exactly. The gas station one, yeah, they did that.
Tobias: Let me give a quick shoutout around the horn. Winter Park, Florida. Buffet’s calling in from there. Good one. Toronto. Lausanne, Switzerland. Limerick. What’s up, Colm? Valparaiso. Mac’s in Valparaiso. Bixby. Silicon Valley. Miami. Jupiter, Florida. Bethesda. Tallahassee. Östermalm, Sweden. Sacramento. Kennesaw, Georgia. Nashville, Tennessee. Boise, Idaho. Snowden, North Wales. Wow. Oregon City. Goshen, Indiana. Antwerp. Camas. Jebel Ali Palm, Dubai. Good for you, Samson. [chuckles] Prague, Czech Republic. Saskatoon. Vienna, Austria.
Jake: Oh, good day, mate.
Tobias: [laughs] Tyler Cone says, “Vornado Sr Unsecureds are now Ba1/BBB-/BB+ [stable/neg/stable]”
Tim: Mm-hmm. Yeah. I wonder what the yield of maturity is now. I bet you it’s probably around seven is what I would guess. But those were double digits high nines for quite some time.
Tobias: Torino, Italia. Good one. Last one. Do you have any thoughts on natural gas?
Tim: No. Clearly, with all the AI stuff, the right energy at the right time, it’s just how do you play it. These companies, they produce so much natural gas almost as a byproduct of their oil production and stuff like that. So, I don’t have a strong conviction on it.
I do like the MLPs. We had a lot of success on buying like EPD, ET, MPLX. They had a really nice run. The dividends are still good. They’re still covered. They’ve had a big run. Sometimes they do get hit when the commodity prices go down a little bit and then they’ve pulled back a bit, but I like that space a bit. The K1s are a huge pain in the rear though for retail investors. They hate it. I hate it personally too. But what are you going to do? You can do the ETFs, I guess. ETFs are more favorable for that.
Tobias: [unintelligible [00:22:37] the manager. [chuckles]
Tim: It’s not ideal. Do you ever do those? Do you ever do the MLPs in your fund, Toby?
Tobias: Can’t talk about my fund specifically.
Tim: Okay.
Jake: Theoretically, would you potentially do that?
Tim: [laughs]
Tobias: I don’t have to take that. I don’t take the K1s in there. That’s all handed back office. But yeah, I have had some– If you can’t get exposure to looking for a particular business– If the criteria line up, then, yes.
Tim: Exactly. Gotcha. Okay. Okay.
Tobias: So, it feels like there’s a little bit of trouble at the top end of town to me. It feels like the Mag 7 have been a little bit shakier this time around. Although, to be fair, so it’s deep value. Nothing’s really [Jake chuckles] done particularly well. I’ve been surprised. I don’t know where the bounce has been in this most recent run. It seems to be in the index.
Tim: Nvidia has bounced a lot.
Jake: Well, you can’t find it anywhere? [laughs]
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AI, Tech, and Alphabet’s Valuation
Tim: Yeah. Nvidia has bounced a lot. That went in the 80s, I believe. And now, it’s at 135. So, some of those have had pretty big runs. Microsoft. The Mag 7 one that I think the value guys are attracted to, including me, is Alphabet. I think that one’s trading at a pretty attractive multiple. I get the bear case. AI obviously is going to have a major impact on search. It reminds me a little bit– I was thinking about this today at the gym actually, was reminds me of when Microsoft had to transition to the cloud and people were like, “Whoa, all these software applications, how are they going to transfer to the cloud?”
Honestly, that was in my too hard pile at that time. I didn’t really understand it that well as I should have, but I feel like there’s a good chance that Alphabet will be able to parlay all the different things that they’re into and be still really, really competitive. And the valuation has obviously come down quite a bit, so they might be able to play some offense too. So, I like that stock.
Tobias: Yeah. Without having looked too deeply at it, I tend to agree. There is that risk that people just aren’t searching. And so, if your interface with all of the internet is now through an AI chat window.
Tim: You don’t search anymore? I still do.
Tobias: We’re not the kids. We’re the wrong generation. I think you want to– [crosstalk]
Tim: Well, that’s true.
Tobias: We use the desktop. The kids don’t use a desktop. They do everything through the cell phone.
Tim: Yeah, it’s like TikTok.
Tobias: I typed it into the search bar.
Tim: It’s all TikTok.
Tobias: Well, I heard an interesting stat over the weekend that– So, previously, Google used to trawl and they would deliver a click for every two hits on a page and then that’s changed to about a click for every six hits on a page, which is the click is the thing that translates into ad revenue for the content provider. So, you need to click–
Jake: Are people just getting their answers now in the Gemini box above?
Tobias: Yeah.
Jake: Okay.
Tobias: But for ChatGPT, it’s one in 1,500. There’s one click for 1,500 web crawls. So, that content provider being supported through ad services seems to be like– that seems to be going away.
Jake: Yeah. It was always a bit of a strange bedfellow to have the advertising along with information together, and it had to come in a package with Google. You’re always serving two masters. The user who you’re trying to provide answers to and then the company who’s trying to buy eyeballs and you end up with some– you have to make tradeoffs there.
Tim: If they’re for profit, the AI companies are going to run into that same issue. They’re going to want to do the same thing, because it’s going to make sense to the bottom line, just like TV.
Jake: [crosstalk] a long enough timeline, everyone sells advertising.
Tim: Right. Exactly. Exactly. Like, TV commercials. yeah, they pitch what they’re incentivized to pitch. Pharmaceutical commercials. So, I don’t know. I would think that that’ll continue. It’s trillions of dollars. It’s just trillions of dollars in that market.
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Tobias: But I guess the ChatGPT can serve it in the window that it serves its answers and it doesn’t necessarily filter through then to the actual content provider, because they’re just taking a group and finding the median response out of that group. I don’t know if that’s actually how AI works. That’s my explanation for it. That’s how it writes to me. That’s what it looks like it’s writing.
Tim: I thought I was so smart. My wife, her x5, it needed a new air conditioner. And so, I was like, “Oh, I’m going to use one of the-
Tobias: AI.
Tim: -AI ones and I’m going to find local shops that can deal with German cars,” because I didn’t want to take it to the dealership. I gave her a list of 10 and I’m just feeling, “Oh, I’m so prepared. This is so great.” She literally called seven in a row, and they were all closed. zero of them were accurate. None. [Tobias laughs] So, I don’t know if I’m doing something wrong. But I old-fashioned, I guess. I’m not that impressed with a lot of what I’m seeing.
For some stuff though like– I’m sure legal documents or what David Solomon of Goldman Sachs said that preparing an S1 for an IPO, they can do 90% of the work in a couple hours where it would take weeks of a whole team engaged to do it. So, stuff like that, I guess they just can’t find auto repair shops.
Jake: Toby, what percentage when you were a corporate attorney what percentage of work that you did was just find and replace?
Tobias: Well, you start with the template. But the things are– Even an IPO which is they call– That’s a pretty straightforward document, because you’ve got a prospectus and you’ve got filings, but then you’ve got to find supporting evidence for every sentence in the prospectus, basically. It takes a lot of touch to get that done. But then, I think that that’s something that AI could get done.
If you can put the universe of documents into the project and then instruct it to only draw from the project, that’s probably something it could do. Well, that’s a lot of work. If the AI gives you a first draft and then you just got to verify what’s in the AI, yeah, that chops out a lot of work.
Tim: LegalZoom. That’s basically, it’s all templates like you just said. They simplified it and made it super easy to do. Yeah, AI could do most of that. If there’s a mistake, I guess I’m not sure– [crosstalk] .
Jake: Who can you sue?
Tobias: Your lawyer. Yeah, if there’s a mistake and you haven’t used the word, that’s what the lawyers are for. You access their insurance.
Tim: Yeah, that’s true.
Jake: Big part of it is, yeah, who can you sue in this to keep it honest.
Tobias: The bigger problem is if the car crashes, who do you sue? I think that’s one of the things that Ajit Jain was talking about at the last meeting. They’re going to have to work with regulators and work with autonomous driving to figure out it. Probably, my bias is based on all of that research that I’ve done for the other books, Quantitative Value and so on, that it’s probably highly likely that the cars have fewer accidents, but it’s possible that they have worse accidents. I don’t know, but I think that– I think it’s possible to have fewer accidents. And so, it’s a net benefit for society.
Tim: I believe that to be the case. We had a tragic accident in a community, and it was someone reaching for the phone and ran into a truck, and the truck basically towed and crushed him, unfortunately. Yeah, that’s something that maybe the AI wouldn’t have. But then, I saw there’s a basketball player, an NBA player, whose son sadly died in a crash in a Tesla.
According to the former NBA star, he said that the wheel just went like limp. And so, I don’t know, for sure. I guess they track the data and stuff like that. So, maybe he does know for sure. It’s like that’s also really scary. It’s like, okay, through no fault of your own, maybe just the robot took over and crashes you and kills you. That’s scary. That’s definitely scary. we all understand we’re going to make mistakes on our own. So. yeah, it’s a tough– They’ll thread the needle, but that’s probably why it’s taking so long is the liability issues like you mentioned.
Tobias: There seem to be some Waymo around though. There’s Waymo in Arizona, right? That’s where they– [crosstalk]
Tim: They’re so many. There are so many. It’s creepy. Yeah, they’ll just pull up right behind you and it’s staring at you. [Jake laughs] I was walking around downtown Scottsdale and this one just staring at me. I thought it was a police one or something. But yeah, they’re all over. I didn’t see them as much in Orange County, California. But probably in the Bay Area too, I think they’re all over.
Tobias: They’re definitely in San Francisco. They only have four seats though, so it didn’t work for me and my– I got five and my little family, but we were trying to catch one. They’re now available in L.A too, but not in my service area. They’re only down in Santa Monica, that kind of area. I will get in one by myself, [chuckles] probably won’t try and kill the whole family on the first go.
Jake: Yeah. [chuckles]
Tobias: Save that for later.
Tim: Some of these cab drivers and Uber drivers, really–
Tobias: Well, that’s true.
Tim: Yeah, it’s scary either way.
Jake: Well, they’re day trading Bitcoin on their phone while they’re driving, right?
Tim: Yeah.
Jake: What’s more dangerous?
Tim: Ignorance is bliss sometimes.
Jake: Yeah.
Tobias: So, what do you think about this market, Tim? What are your–
Tim: Look, I like high cash flows and dividends right now. So, I think there’s still opportunity to get really good dividend yields. Well, one area that we targeted especially in the dislocations during the bear market was some of these business development companies like Blue Owl Development Company, OBDC, for instance, when they trade at reasonable discounts to their net asset value, they like that. You’re getting a 10%, 11% type dividend and then you’re getting it at a discount to their net asset value.
Now, if you get a recession or something like that, those companies are going to face higher credit losses, for sure. You can’t be naive about that. Some of them are better underwriters than others. I think that one’s decent. Like, Oaktree, for instance, they’ve been a really poor underwriter with their business development company, OCSL. They’ve had increased losses just about every quarter and the net asset values have been plunging at a rapid pace and it’s been a value trap.
So, the ones that are well managed– If you can buy those at a discount, target a really high dividend yield and then maybe get a little bit of appreciation and hope that the credit stays reasonable. I’m not as bearish as a lot of people are of the economy. I think that the tariff situation is going to work itself out one way or the other. I don’t think it–
Clearly, clearly, it’s not like winner take all type thing that people were worried about on the day of the announcement. They’re obviously compromising and wanting to do deals. So, I’m not super bearish on the overall economy. I feel we should have been in a recession many times over the last few years. So, if we do dip into a technical recession, that’s not going to really change my investment thesis whatsoever. But being smart, buying them at discounts to net asset value, I think that’s opportunity.
Tobias: I tweeted this out earlier today, but I just thought it was interesting. It was from Mike Shell. And he said, “US Recession Probability dropped to 30%,” which is still pretty high. Just before the 2017, it got to 40%. And in 2020, it got to 40%. It looks like it hit 70% late last year, maybe sometime 2024. It’s bounced around 60% since then, now fallen to 30%. I tracked in 2020–
Jake: What is that based on just their polling economists?
Tobias: That’s a good question. US Recession Probability, it’s a US PEM that looks like an EDGAR series. That’s IUSRPEM if anybody wants to verify that.
===
Housing Market and Economic Signals
Tim: One clear negative and unfortunately, I’m totally exposed to it, as I mentioned to you guys before we went on the show, I’m selling a house and then I just bought a new house. So, I’m way leveraged to residential real estate when I’m actually bearish on it, but life happens. The housing markets had a material change. Obviously, that’s local. It depends on the area. But houses are staying on the market a lot longer. Finally, people are feeling like they have to make a change. It’s great having a low interest rate, but maybe you got to move for work, or family stuff or whatever.
And so, there’s more supply coming on board, but the houses are sitting a lot longer and price reductions are occurring a lot more rapidly than they were before. And so, that’s an area that I think a lot– A lot of real estate agents or mortgage brokers, they’ll tell you the mortgage rates being above seven, that’s highly problematic to getting those deals done. And affordability is just still so terrible. So, that’s one area that could point you to the recession card, for sure.
Tobias: Yeah, it seems to be very sticky, those prices, even though rates have gone up a lot and volumes have fallen off a cliff. Mortgage volumes have fallen off a cliff too. Mortgage originations falling off a cliff. But the prices haven’t budged.
Tim: If a realtor tells your house is worth $2 million and then you can’t sell it, and realistically the clearing rate’s $1.4 million, it’s a tough pill to swallow. You take the word for granted. And so, yeah, it takes a while for people to take those reductions. But they are reducing prices and houses are sitting on the market now, and buyers are seeing that they have a little more flexibility to negotiate. So, that’s hugely, hugely negative, I think. Real estate can really drive stuff. And with affordability so bad, you start to see prices go down a bit.
Other areas like auto loans– Ally Financial, that’s a stock that we’ve owned a lot over the years. We’re not super in it now, but we have positions in it. I would like it more in the 20s. But auto loan delinquencies are very high for the industry in general. Not necessarily for Ally, particularly by any means, but for the industry itself that’s high. I’m not an expert on it, but a lot of these student loan deferment programs.
I was talking to one of my neighbors and he’s a doctor and he’s telling me– We’re playing pickleball. He’s telling me that, “Tim, I haven’t paid any of my loans off. I have all the money saved up. It’s in a high yield savings account,” but there’s some program where, I think probably waiting for potential forgiveness, I don’t know–
Jake: Yeah. He’s just doing a carry trade right now.
Tim: Right. Just a carry trade. I’m like “Well, you’re smart to do the carry trade. I get it.” But at some, he’s like, “Yeah, we’re ready to make those payments. I don’t know when stuff like that comes due.”
Tobias: That’d be unusual, I would think, having saved up to make the payments.
Tim: Oh, for sure. Yeah. To handle it responsibly, I’m sure there’s a lot of people going yolo, but maybe they’re making a lot of money on Bitcoin or something. So, who knows?
Jake: Tim, back to your comment on the lack of liquidity at prices of today, really, which is driving a lot of this. It feels like that’s pervasive in– I think there’s a lot of private equity that they don’t want to sell at today’s prices and take different marks on it. There’s venture, I think falls under that. It just feels like everyone– Maybe it’s part of the echo of a bubble. But you’d like, no one wants to admit that these are maybe not the right prices anymore. As long as everyone agrees not to call each other out on it, you can just hover there for a while, like Wile E. Coyote, running off the cliff
Tim: Right. Oh, yeah, what forces your hand? I was talking to a prospective client. He’s big in apartments. And so, a lot of these smaller businesses they created syndications, and they would buy apartment buildings and they’d use variable rate debt to finance them. And so, that’s one of the ways that supply increased a lot over the years. So, not necessarily the most established or largest or more sophisticated necessarily entrance into that space. And so, it’s crazy.
When rates are going up, his ability to invest just goes down completely, because he feels he has to keep all liquidity to service these loans because the rates increasing so quickly. But then when we do get a dip in rates, then he feels more aggressive and actually wants to do other things and diversify more and stuff like that. So, that’s a big issue.
If rates don’t come down, that’s going to pressure a lot. At some point, you still have a lot of arms and stuff like that. So, at some point, these loans—Probably, 2028, some of those loans are going to be needed to refinance anyways. So, we’ll see what happens. But the long bond, rates going up on that really hurts. It’s good that Japan did something today that reduced long bond rates. I’m not exactly sure what they did, but that would be positive if rates went down.
Jake: Everyone back in the pool.
Tim: Yeah.
Jake: [laughs]
Tobias: JT, we slipped past the top of the hour without doing vegetables. Sorry about that.
Jake: Let’s take our veggies.
Tobias: Market fellows, 11 minutes past the hour.
===
Jake’s Veggies – VC and Startup Lekking Analogy
Jake: All right. So, this segment’s inspired by Matt Ridley’s new book, Birds, Sex and Beauty. Ridley’s one of my all-time favorite authors. I think I’ve read everything he’s ever written. So, to paint the scene for you, imagine it’s early morning on the grasslands of South America. A dozen male birds gather in this open patch of dirt, each holding down a little postage size stamp basically of territory.
There’s really nothing special about this land, except generations of birds have been coming here for decades. The birds jockey around for the territory. Occasionally, the fighting can get intense. But mostly, they respect each other’s little sovereign areas. When they leave to go find food, they’ll travel together like friends, hanging out. And then, when they come back, they all get back into their little spots that they had previously held.
So, every morning, from roughly March through May, these birds gather in a cluster in these little chosen areas. It would be quite boring to watch most of the time. But then, out of the blue, you’re sitting there watching and they all start dancing. They puff out their chests, they flutter their feathers like they’re sequins. This whole scene looks like a cross between a Vegas floor show and a nature documentary.
They’re definitely not fighting at this point. They’re not trying to show each other up, they’re not feeding. They’re trying to be seen, because somewhere nearby there’s a female who’s watching. What they’re really trying to do is find their way into another F word. So, [chuckles] strangely though, dozens of males will perform, but only one or two do most of the mating with the females who come and watch.
These females are very selective. They’ll watch the males put forth their best show, and then they’ll leave, and then they’ll come back the next day and the next. And then, they’re really in no hurry. The females are definitely in control of deciding like who they want to pick. Eventually, they choose their next baby daddy from this gathering of males. This whole phenomena has a name. It’s called lekking. And like the little area that they go show up is called a lek, L-E-K.
Many species of bird lek, several varieties of grouse, the mannequin, the ruff, but also some mammals, including the fallow deer and a species of fruit bat. So, you may be wondering, why is the mating so skewed to just a few of the males? If you watched, you wouldn’t be able to see much difference between these males that are gathering together. Their behavior is the same. They look the same. Even these alpha males aren’t really healthier than the other ones as far as scientists can tell. They tend to be a little bit older and therefore bigger, but that seems to be mostly a lot of luck and randomness in the female selection.
There’s this interesting evolutionary idea here called the sexy son hypothesis. The females aren’t just picking based on their own personal taste, and they’re certainly not picking with the hope of pairing up with the bird equivalent of Fabio and living happily ever after. In fact, the males contribute almost nothing to the child rearing more than the few seconds it takes to copulate. [chuckles] The females, they’re picking based on what the other females in the cohort are also finding attractive.
So, if all of her female peers think that this one particular male is sexy, chances are maybe the next generation of females will too. So, they’re all choosing the same male in order to increase the odds of having a sexy son. So, even if another male might be slightly more fit, it doesn’t really matter. She’s betting on sex appeal, because that gives her sons the best shot at being chosen in the next round, hence the name the sexy son hypothesis.
So, let’s leave the savannah behind for a minute and let’s head to San Francisco. Startup founders gathering at demo days, investor summits, coffee shops. They puff their chests out with techno jargon. They vibrate their feathers looking for product market fit. They dance forth grand visions in their pitch decks, all within this small three to four square mile patch that’s the heart of San Francisco. It’s really a modern-day lekking environment.
The goal of these founders isn’t necessarily to find natural selection of building an enduring business. It’s the sexual selection game of getting chosen for the next funding round. Most of these entrepreneurs won’t make it despite their fancy displays. A lucky few will get funded by the venture capitalist females in this analogy. So, when a top tier firm picks a startup, it triggers this cascade. Other investors like rival females and lek start to notice, and suddenly term sheets are flying in and piling up, valuations are ballooning.
Being chosen increases the likelihood of being chosen again, just like in nature. And just like in nature, the sexy son isn’t necessarily a business with the best fundamentals. It’s the one with the best odds of attracting more capital down the line. So, you think about the PayPal mafia with Musk and Thiel and Hoffman and others, they didn’t just succeed once they became fundable again and again and they produce new companies, new founders, entire VC theses.
There’s another concept from biology that we’ll hit right now that also you might see from observing bird mating. And it’s called the Fisherian, like Fisher, runaway selection. And so, a small preference, say, a bright tail, snowballs over generations. And these traits get exaggerated, because both the signal and the preference are heritable. This biologist, Ronald Fisher, worked out the mathematical proof in the 1930s of how runaway selection can occur from persistent directional female choice.
So, that’s how you get that iconic example of a peacock with their tail that they can barely fly. But it shows up in other species like the stalk-eyed flies, swordtail fish and lots of other birds. And the females are drawn to something interesting that maybe is slightly bigger, shiny or something. Within a handful of generations, you get some appendage that bumps up against the odds of practical survival for this thing.
So, back into the VC lek, runaway selection gets you these probably these startups with $10 million seed rounds and 100-person engineering teams that only exist for valuation purposes. But why should this lekking analogy matter? Because if you recognize the dynamics, there might be some unknowingly amplification of traits that are creating fragile businesses.
So, what I mean here, like, each investment round isn’t necessarily just about funding the company. It’s setting the standard for what attractive looks like in the next generation of founders and investors. And that feedback loop can then start to unintentionally prioritize showmanship over stewardship. So, we’ll consider like the trope of like Theranos. Elizabeth Holmes had this carefully crafted Persona with the Steve Jobs black turtleneck, high profile board with all these luminaries and dramatic.
Tobias: Deep voice?
Jake: Yeah, the deep voice, exactly. This runaway selection created a character of a founder that Fisher might have anticipated. Similarly, FTX used celebrity endorsements, stadium naming rights, high profile sponsorships to signal credibility, which really was anesthetizing the need for rigorous financial diligence on the company. And then, of course, you got WeWork’s lavish offices with Adam Neumann walking around barefoot with these aspirational narratives of elevating human consciousness and via community adjusted EBIDTA.
All these powerful signals distracted investors from sustainable actual financial models. And really, anyone who is paying attention could see that when you have variable revenue of renting out office space on an hourly basis against very high fixed costs, that’s a troubled business model.
So, anyway, the louder the signal, the bigger the hype, valuation, celebrity backing, whatever, the more investors are piling in and amplifying these small initial advantages into this overwhelming market perception. And this creates environments where irrational evaluations become rational, because everyone anticipates future up rounds as far as the eye can see. But it also creates this vulnerability that if you’re reliant on these signals rather than substance, they can collapse very swiftly once the momentum fades.
I think we see that a lot in all over the place. And so, you get these spectacular implosions of companies like Theranos, FTX and WeWork. They’re not really isolated anomalies. They’re inevitable consequences of runaway signaling. And so, just to wrap this all up with a pithy little take, VCs and others should probably be focusing more on funding actual flight and not just feathers.
Tobias: [chuckles] Tremendous, JT. Sure to be up there with your sperm whale classic given enough time.
Jake: Yeah. Well, history will be the judge of that.
===
Musk’s Empire and Market Fragility
Tobias: That’s right. That’s right. Some of these private market valuations for these firms are amazing. ChatGPT, OpenAI at $100 billion, and then they translated that $100 billion and that’s probably– That’s an old mark for all I know. It’s harder than that now. Then they use that $100 billion to buy Jony Ives design consulting startup for $6.5 billion.
Tim: Wow, I didn’t even see that one. That’s crazy.
Jake: Was it that much of a number? Jeez. I saw the little talk about it.
Tobias: So, it’s $6.5 billion. I don’t know if you get that in OpenAI stock, I’d be asking for cash on the barrel [crosstalk]
Jake: Yeah, cash please.
Tobias: Probably, that’s not available. And then, what they’ve worked on, the product is no screen because Jony Ives is a design genius. They’ve gone and they’ve produced this thing that looks a little bit like a miniature spaceship, hockey puck thing. So, it looks to me like they’ve made Alexa or something like that. So, you get Alexa for $6.5 billion.
Tim: Wow.
Tobias: I don’t get it.
Jake: I want one though.
Tobias: Not a VC.
Tim: Yeah. I read a funny article on those, the Apple, the glasses or something like that, the virtual glasses where if you wear them for 10 minutes, you get a horrible headache and stuff like that. These early adopters, they just can’t stand using it and stuff like that. So, yeah, that’s a big bet. But when money’s floating around like that– Look what Musk just did with Twitter. That’s insane. Those banks were taking haircuts on the debt and then he was able to combine it with the AI company and-
Jake: xAI
Tobias: xAI, yeah.
Tim: -it’s wild. It’s incredible. That goes to what you were saying in your veggies
Jake, is just that Musk is one of those attractive birds, attractive peacocks, where people believe, that he’s going to be successful with pretty much whatever he does. So, it helps him from the corporate perspective, for sure.
Jake: And as long as you can just keep rolling the misses into underneath the winds, the game can keep going, right?
Tim: Yeah. The solar company, that’s what happened with the solar company. Was it SolarCity was– [crosstalk]
Tobias: SolarCity.
Tim: Yeah. Merged it with Tesla. Didn’t Sunrun just go bankrupt? One of those solar companies just went bankrupt not that long ago. I can’t imagine the economics of SolarCity would have been that good as a standalone enterprise, given the dynamics of that business. But intertwined with Tesla, you can have it be a loss leader for a while.
Tobias: Yeah. He raised money into xAI and then he merged xAI into Twitter. And so, he got to set a valuation for Twitter by doing that. Probably, there was some capital from xAI that becomes available for the bondholders in Twitter. If he can merge that into Tesla, which I’m sure the Tesla guys are open to just increases his ownership–
Jake: And into SpaceX and then–
Tim: Oh, the SpaceX is going to be though. that’s a monster already. I can’t even imagine what the market cap is, but they’re incredible.
Tobias: It’s like a $100 billion. There are all $100 billion– [crosstalk]
Tim: At least I’d say conservatively, $100 billion, would be my guess.
Jake: What does the actual revenue or [crosstalk] look like?
Tobias: Yeah, it’s one customer, hasn’t it? It’s got like US government customer.
Tim: I think some of the companies that launch satellites and stuff like that use them now. I believe so. I know a friend of mine– He has a manufacturing business in California believe it or not. And he builds a lot of materials for SpaceX. Gosh, I’ve seen his business just grow tenfold. It’s ridiculous how well they’re doing. It’s good to see stuff like that manufactured and the United States, let alone California. I think that they’re branching into Blue Origin too now.
Jake: How much working capital would you ever let get against a Musk company? [chuckles] Your AR for you?
Tobias: So far, they seem to have been okay. But yeah– [crosstalk]
Jake: No counterparty risk?
Tobias: There’s still the possibility of a gigantic smoking crater at the bottom of all of that, I think. It’s not a guarantee–
Jake: [crosstalk] zero. Yeah.
Tobias: Zero is not taken off the table yet with the debt.
Tim: On what? Tesla or which one? If you look at like what he did with Twitter, I think Twitter is a much more viable business now than it was prior. A lot of people, regardless of your political affiliation, you’re at least going to see it as more of a free speech platform than some of its peers.
I was a witness to that personally, honestly. I won’t get into it. But I think that what he’s done is incredible and he’s brought back advertisers and things like that and he created the premium memberships and things like that I think helped enable it be able to be merged with the other company and help it.
Tesla’s economics are good. Obviously, him getting involved with politics alienated a lot of people and the sales are horrible now. So, I don’t know how that’s going to shake out. You look at like the used car prices for some of these EVs, and that’s an interesting dynamic too.
Tobias: What’s happened to those? Have they collapsed?
Tim: Oh, they’ve been plummeting for a while. But yeah, they’re really bad. The resale values on a lot of those cars are just terrible.
Tobias: Is that because they brought out new models? Their new models have just fallen– [crosstalk]
Tim: The models on the Tesla’s are the same. Like the S and the Y, they’re the same. They look so generic in my opinion. Obviously, you’ve got the trucks which are pretty popular. But I don’t know, I know at some point you have to replace the battery which is really expensive. I don’t know, I feel like some of these low-tech cars are going to come back into vogue again, because these new modern technology cars are so expensive to repair.
Tobias: I still prefer an EV to an ICE. I think its–
Tim: I’m the opposite, man. I have a ICE, a 7 Series BMW. I had to get it repaired and they had replacement cars and there was like a big line, and all they had were EVs for you to. And nobody wanted them, [Jake laughs] because no, I don’t know how to charge it. I don’t have a charger at my house. I have no idea how to go to the gas station.
Tobias: Yeah. Once you get that charger though, it’s a game changer. You just charge it overnight.
Tim: I think I’m going–
Tobias: You don’t have to go to the gas station.
Jake: Never even think about like, do you have gas or not in the tank?
Tim: I like the smell of gasoline. Going to the gas station, grabbing a soda, lottery ticket.
Tobias: Get some two-stroke.
[chuckles]Tim: Yeah.
Tobias: Get the weed eater up.
Jake: Pack of Marlboros and lottery tickets. [laughs]
Tim: Exactly.
Tobias: I’m interested to know because I think that there’s– For the market from here, it’s impossible to say. But it feels to me all the big drawdowns that we’ve had 2007, 2009 have this initial drawdown and then a rally back to almost all-time highs. [crosstalk] Yeah. And then, the real action starts 12 months after the first drawdown.
I think we’re in a funny no man’s land here where we peaked in November last year, around Thanksgiving last year. We’ve had a big drawdown, 21%. We’ve rallied almost back to all-time highs now. So, it feels to me like nothing’s particularly undervalued, nothing seems particularly interesting. It feels to me the economy is slowing a little bit, even though those recession odds have come down. Maybe that’s backwards looking too much.
Jake: Yeah. Those are reflexive on stock prices?
Tim: Going on vacation soon, so that’s usually a good time to short the market, because–
Tobias: [laughs]
Jake: Shit happens when you’re off.
Tim: You never get to just relax and enjoy your trip when you’re in this business. I feel like it’s just the market tends to tank then. So, I think you’re right, Toby. There’s a lot of complacency in there. It wouldn’t be shocking at all to see more volatility creep up. Who knows if the EU and the US can come together on a deal. The China thing is still out there. Are they really going to be able to come to grips with it? The geopolitical situation now with Russia’s, that’s really alarming again. That’s a lot worse. The rhetoric coming out of there is a lot worse than it was a couple weeks ago when it looked like there might be a way to a peace deal. So, yeah. And then valuations are high. Tariffs were the spark, but that’s–
Jake: What’s not to like. [laughs]
Tim: Yeah. Tariffs were the spark, but the tinder was out there for a long time in terms of high valuations. So, we’re right there again, just waiting for that spark to ignite the next sell off, in my opinion.
Tobias: Even down 21%, I didn’t think it was that interesting. It got to 33 times on a Shiller PE, which I know that there’s lots of problems with the Shiller PE, but as an example. You get the same answer from Tobin’s Q or from the Buffett measures or anything like that.
Tim: Yeah, I would agree. Stuff like JPMorgan, it wasn’t even close to book value or anything like that. Think of just like the bank crisis a couple of years ago. A lot of that stuff– That was crazy. So, the huge move–
Tobias: The Silicon Valley bank, that one?
Tim: Yeah. You saw huge moves on all of those. Insurance companies, things like that, where a lot of that started trading at huge discounts to book value. You look at insurance companies now and they’re trading at high premiums to book. There’s credit risk on those, there’s underwriting risk, there’s stock market risks. So, yeah, this is not a market that’s screaming recession or risk aversion, in my opinion.
===
The Business Mindset Investor
Tobias: We’re just about coming up on time, Tim. If folks want to get into contact–
Jake: Tim, tell us about your book also.
Tobias: Yeah.
Tim: Oh, yeah. So, I wrote a book. It’s just a short, little easy read for you. You can find it on Amazon. But it’s called The Business Mindset Investor. It just articulates how we intertwine the deep value investing principles, the Warren Buffett’s, the Benjamin Graham’s. And then, we intertwine that with conservative income generating strategies like covered calls and cash secured puts to generate income and reduce risk. So, you can find that on Amazon or on our website, which is just www.ttvalueinvesting.com.
Tobias: We will link that up when we get the link to it in the show notes.
Tim: Thanks, guys.
Tobias: And how the folks will get in contact with you?
Tim: Yeah. ttvalueinvesting.com, they can reach us that way. Yeah, we’d love to help you. We work with clients all across the country and manage portfolios for them.
Tobias: JT, any final words?
Jake: Nope. [Tobias laughs] Have a good week everybody. We’ll see you next week.
Tobias: Thanks. Tim Travis, thanks very much.
Jake: Yeah, thanks Tim for coming.
Tim: Thank you.
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