Asymmetric ReturnsThe Acquirer's Multiple
In their recent episode of the VALUE: After Hours Podcast, Taylor, Mitchell, Brewster, and Carlisle discussed Asymmetric Returns. Here’s an excerpt from the episode:
Mike: My problem with all these is, I’ve had a couple of bites at that apple, and I do the stupidest thing, and I’m so consistent at it, I start buying the easy, safe stuff. That’s what I did. That’s the dumbest thing to do. My business partner, Brian Jacoby — [crosstalk]
Tobias: Maybe ground zero.
Mike: Yeah, he’s buying [unintelligible [00:47:46]. He’s like Taste, the Burger King franchisee. By the way, this is a five bagger in six months, it is crazy. The guy’s a lot smarter than me. I’m like, “Oh, look at these preferred shares down 8%.” [crosstalk]
Jake: [laughs] Yeah
Mike: Good job. Good job. Cool.
Tobias: Yeah, I learned that when BP had the spill. I went and bought all of that stuff that was surrounding all of the jack-up rigs, and everything was out servicing at not BP, and what you should have done, and what I should have done is gone in and bought BP as it was the crescendo of the news, when it was peak fear, that was the time to go right to ground zero and buy it. Having said that, the counterfactual might be well, the fine was so big, it put them out of business, and that didn’t happen.
Mike: Well, but there’s an asymmetry. I don’t so much mind in that scenario, where they’re going to go out of business. That’s not an outcome that I would prefer, but if it’s incredibly asymmetric, and you say, well, the odds are 50-50, but it’s 10 to 1 payout-
Mike: -okay, great, then, you just size it the right way.
Tobias: Yeah, that’s right.
Mike: That’s fine. You don’t have to swing it with 100% your capital. Swing to 5%. Anyway, I think it’s the asymmetry of it, and that’s what I– Focusing on the downside is how I grew up. Always thinking about how much can I lose and try to lose nothing, because the only thing you don’t want in investing, the only thing that as best I can tell that you really don’t want to do is get knocked out of the game. If you get knocked out of the game, it is game over. If you survive, you’re going to do very, very well. It’s all survival. The guys who I appreciate how they think about the world is they always look at it as asymmetry, and they’re just looking for that asymmetry. Losing everything isn’t a problem. It’s not a big deal to lose everything on one bet.
Mike: You want to lose everything, like everything, but losing everything on one that is not a big deal. You just have to size the bet right, and if the asymmetry is there, who cares?
Tobias: Yeah, it’s a bankroll Kelly betting approach-
Mike: Yeah, exactly.
Tobias: -to the world where– You’re always just putting up some portion of your bankroll rather than the whole bankroll.
Mike: I feel Mr. Brewster is disagreeing with me. He’s got this very [crosstalk] look on his face.
Bill: Oh, dude. I’m just pissed off myself, because I didn’t fucking bet Eldorado resorts and Restoration Hardware. I was too stupid. I held myself to this standard of you need at least 5% of your portfolio, and both of those would have made me a lot of money.
Tobias: 5% big or small– No smaller than 5%, otherwise– [crosstalk]
Bill: Yeah, I didn’t want to get cute, and– I’m pretty proud of what I did last year. But those are two errors that will probably grind at me for the rest of my life.
Tobias: Ah, you’ll get another go at it. Don’t worry.
Jake: You’ll make new– You’ll make bigger ones than that.
Bill: I don’t know. Eldorado would have been a 10x.
Tobias: Is that [crosstalk]
Bill: You can make money on 10x, even if it’s only 1% of your portfolio.
Tobias: Mike doesn’t get out of bed for less than 11.
Mike: Yeah, I don’t. Yeah, that sounds weak. Sorry.
Bill: That’s fair. It was scary, though. No doubt. The only reason that it was there is that it was a casino that had bankruptcy risk, and I didn’t feel taking that shot. But in retrospect, I think I underestimated the amount of policy response. Next time, if they come out with some bazooka, I may take a little total risk off, but put a little more risk on some of the scarier stuff.
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Article by The Acquirer’s Multiple