Bonsais and Investing; Portfolio Management; Small, Cheap, Junk RallyThe Acquirer's Multiple
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:
Q4 2020 hedge fund letters, conferences and more
VALUE: After Hours Podcast
- Apple Podcasts
- Pocket Casts
- Google Podcasts
Tobias: What’s up, amigos?
Jake: And we’re live.
Tobias: It is–
Jake: [mimicking Tobias] I’m your host, Tobias Carlisle.
Bill: On the arguable investors podcast. Wait, where are we at? Where am I?
Tobias: Joined by Bill Belichick and Jake Taylor.
Bill: That’s right
Jake: Off to a hot start.
Tobias: What’s happening, fellas?
Bill: What’s going on, folks?
Tobias: What a wild market. We’ve had a little bit of– the tech has looked a little bit soft, but wow, it’s back big and strong today. Tesla’s up 18% of the day, market’s close to all-time highs, ARK’s having a monster day. So, business as usual.
Bill: Tesla’s up 18%?
Tobias: More, I think. It was up 19% last time I looked.
Bill: Oh my.
Jake: Is it infrastructure week and nobody told me what–? [chuckles]
Bill: That’s like $100 billion a market cap, no?
Tobias: That’s real money.
Bill: They used to be before the stimi.
Tobias: Yeah. Is that what’s causing it do you think? People got their stimi checks yet?
Bill: No, I don’t think so. I don’t know, man. Seems like there’s more buyers than sellers today.
Tobias: More buyers than sellers. That’ll do it.
Bill: That’s the science.
Tobias: [laughs] This is a Value After Hours. I’m joined as always by Jake Taylor and Bill Belichick Brewster. What’s happening, fellas? What are we going to talk about today?
Jake: Billy, what do you got?
Bill: I was going to talk a little bit about portfolio construction. I think it might be a decent topic.
Jake: All right. I took the last couple weeks off mailing in a little bit of the veggie segments, just doing recent letters that I liked. But I’m back, and I’ve done some homework. We’re going to be talking about bonsai trees, and what they mean for business and investing. Might be good.
Tobias: Yeah, I’m going to be talking about just my utter confusion about what’s going on in the market at the moment right after this. Jake, do you want to take it away? You’ve got some good veggies there?
Jake: All right. Yeah, we can start off there.
Tobias: The crowd want sperm whale facts, mate. Sperm whale facts is where it’s at.
Jake: We did that already. Go back and re-listen to that. I don’t redo topics.
Tobias: Got to give the crowd what they want.
Bonsais and Investing
Jake: All right, so shoutout to John Chu, who’s a listener who sent me a really nice writeup on this topic. I’m basically just going to steal all of his ideas and pretend that they’re my own. Thanks, John, I appreciate it.
Bill: Nice. That’s called cloning in value investing circles.
Jake: Yeah, exactly. [laughs] Hard cloning here. Bonsai– it’s funny to me, what analogies people use, because it’ll betray your mindset and sort of how you think about things. There’s often a hunter mentality in the investment world like, “I’ve got to land this whale.” “Buffett’s bringing out the elephant gun.” There’s a lot of hunter analogies, a lot of hunter metaphors. I think it’s probably maybe a disservice actually to go that route. I think this actually the bonsai is a little bit more of an interesting analogy and mindset to use. Gardening in a way, or farming, is somewhat similar in some of those analogies. Anyway, I never knew this but I thought bonsai was a type of tree, a species or something. Turns out, it’s not. It’s actually more of an aesthetic and an approach to managing the growth of a tree. It can be any kind of tree. There’s cedar bonsai, I don’t know– [crosstalk]
Tobias: You can bonsai anything.
Jake: Apparently, you can bonsai–
Bill: You bonsai me, Fokker.
Jake: Yeah. I could. It’s an art form, the aim of it is to express this very efficient beauty that brings out the tree, and what you’re really going for is to create a miniaturized version of what a full-grown tree would look like. But what’s interesting is, you have to also keep this thing alive while you’re doing it. So, there’s a lot of tradeoffs as far as design aesthetic versus actually keeping it alive. Another thing that’s very interesting about it is that it’ll be a 50-year project to do one of those full really nice-looking bonsai trees. This is almost a life’s work to create one of these. I thought what would be fun to do that this way would be, I’m going to go through the higher points of bonsai and the process of it. Then, maybe we can tackle together some of the forced analogies after that.
Tobias: I like where this is going.
Jake: In that way, it’s more of a team effort, yeah. The first thing that they to figure out which seed to start your seedling is apparently you pour hot water over a bunch of seeds and the ones that float, you want to throw those away, because apparently, they don’t germinate. You tick the ones that sink, I have no idea what the physics is behind why the sunk ones, I’m sure our crack team of researchers around the world will tell us the answer eventually. Once you pick up the seeds, you plant them, and you have to keep it moist for a really long time. After about a year, you have this little sapling that’s three or four inches big, and you’ve done almost nothing, except for just keep some fertilizer and moisture. Really what you’re trying to do is encourage the roots to grow, because apparently the roots will only go as far as the moisture is. If you’re only watering the top and it never gets lower, the roots will not dig deep enough into your pot to really create a strong anchor for it. All right.
Then, next comes this phase where you do a lot of thickening of the trunk, and you’re letting it grow more and more until that sapling becomes much more of a branch that’s growing. In order to do that, you have to allow the branches that come off of it to– [crosstalk]
Bill: I just want to say real quick–
Jake: I know. There’s so many double entendres there.
Bill: I’m not mature enough to handle this conversation.
Bill: I just want to throw that out there that I have tried not to laugh, and between moisture and branches and thickening things, I don’t have it in me. I apologize that I am straight back to second grade. I can’t help myself right now. Okay, continue.
Jake: I knew I was teeing it up for you when I was doing this. There’s a long planning process that goes into the things that you do now today, and even the things that you do two years from now will dictate what you’ll be able to do with the tree five years from now. A lot of it has to do with– they use these wires to bend the tree and have it grow in a certain direction. I don’t know if you’ve seen a lot of the bonsais have these zig-zaggy growth patterns, that’s not a normal thing for a tree. It wants to just kind of get height as quickly as it can. They’ll use wire to bend it and it’ll grow for a year to the left. Then they’ll use wire to make it grow the other direction. You’re crafting it, how you want to do it, but you have to think about like, “Okay, well, that’s going to be the top of it in 10 years or 50 years, what do I need to do today to allow myself the optionality down the line?”
Then, there’s a whole thing around branch management because there’s a lot of temptation to do something today, and chop off the branch and make it look good. But when you’re doing that you can actually risk losing the tree because it’s getting a lot of the– like the photosynthesis is happening with the leaves that are there, or the pine needles. There’s this pressure that you want to do something today immediately. There’s a time for everything in this and your overreaction can end up killing your tree. So, you have to be very careful about taking actions when it’s the appropriate time to do it and being very patient with it. You have to work in harmony with the tree… -are really risk, but the small maintenance is continuous, like you have to water and fertilize it all the time.
Then, last thing will say is that you can actually let a branch grow for a lot longer than you would think and then you trim it off and you can start a new tree with that branch. Okay, so we’ve just laid out probably 10 different sort of actions, mental models, ideas that might be interesting to jump into now the business or investing tortured analogies. I don’t know what’s the first thing that jumps out at you guys.
Tobias: Let me just before we do that, what stops them from getting really big? How do you keep them small? Is it because they’re in a small pot?
Jake: I think it’s in a pot, yeah. I mean, there’s only so much, I think that it can be built when you have a small amount of foliage to absorb resources, nutrients. I think that limits why it can’t grow to be too big. The other thing too is there’s a lot of maintenance in shaving down the roots. One for aesthetic reasons, and two, I think, to maybe limit some of the– how big it gets.
Tobias: Do they grow miniature leaves, is that what happens?
Jake: Well, I think leaves always look the same when they first start out. Then, the branch gets bigger, everything just keeps getting bigger. There’s sort of a fractalness to it.
Tobias: I think it’s a good analogy. As you were saying, and I was like, “Yeah, this is a good analogy that I need to steal for something at some stage.” The fact that it takes 50 years and the fact that you have to nurture it and prune it every day and decisions impacting down the line, yeah, I think it’s a very useful analogy. It makes me want to go and get a bonsai, actually, makes me want to grow a bonsai.
Jake: Yeah, it’s a lot of responsibility. That’s a big commitment.
Tobias: That is a big commitment. [laughs]
Jake: [laughs] How about you, Bill, anything jump out to you other than a bunch of double entendres that were distracting?
Bill: Yeah, when I was mature enough to think about it. I’ve been struggling to hold on to Disney here a little bit, and I trimmed it a little bit today. Not a big trim, but a little trim. The idea of not touching something too much and letting it grow. That said, it’s grown a lot. It reminded me a lot of never sell what you were saying actually. All that I was thinking about was never sell.
Jake: [chuckles] Boy, we hear what we want to hear, don’t we?
Bill: Maybe. Yeah, I don’t know.
Jake: No, there is something to that though. Kind of letting your winners run in a way where letting the tree be a little bushy for the sake of the tree longer than maybe you would’ve think, so that then you can trim it to be more aesthetically pleasing later. I think that’s a big part of it. Another thing I thought was interesting was the–
Bill: [chuckles] Toby, what did you hear there, sir? Do you have a thought?
Tobias: We have to trim it down to another topic.
Bill: This is been a winner. I just want to say this is one of my favorite veggie segments yet.
Jake: It’s a little– Yeah. All right. That’s good. To go back to the big decisions being rare, and a lot of it is just blocking and tackling of water and fertilizing, I’m reminded of your terrific conversation that you had with Ian that dropped last week. Something that struck me that I thought was interesting and that probably goes against the majority of how people practice this. He said he spends 80% of his time researching and learning more about the things he already owns, and 20% of the time on looking for new things. The argument was that if it’s not in the portfolio, it can’t kill you. I find that to be very interesting. To me, keeping up and being a good owner of these businesses is the watering and fertilizing that you need to do all the time. Occasionally, there’s big action called for. I thought that was a nice tie-in.
Tobias: I had another chat to Chris Bloomstran, and the same thought occurred to me while I was talking to him about Berkshire. He’s been in Berkshire since 2001, I think he said, I hope I haven’t– it might be it might be 1998. That’s coming up soon. He has such an intimate knowledge of Berkshire. He said he’s bought it regularly over the years because it’s one of those stocks– it has for the last sort of decade traded pretty cheap. As a result, he’s quite familiar with– when something happens, he understands it really well, whereas the market might not so. He’s able to buy some more, sell some more, do whatever is appropriate in the moment. I did think that would be a– if you have a handful of bonsai trees that you just keep your eye on, that makes life pretty simple.
Jake: Yeah, what a huge advantage. If you have a very solid scale of what to weigh something and you don’t have to– he’s sleeping like a baby when it comes to Berkshire. He understands exactly the price to value relationship. Probably makes the game a hell of a lot easier if you have a few of those.
Tobias: Yeah. Which is why he was able to buy it so aggressively last year, when it got super cheap around this time last year. I like the analogy because I like the idea of– we talked about this a little bit, but not just being in or out of something, scaling in and scaling out, iterating as you’re in it. If you have a handful of things that you know really well, you can do that easily. You scale in, scale out, never really want to get out of it because it’s hard to find really good businesses like that. If it’s a 50-year business, is what I’m talking about. Not everything’s a 50-year business, but for 50-year businesses.
Jake: Yeah. Mohnish had a talk that he gave recently to Peking University, and he’s talking about spawners, and that’s his new thing that he’s really into. It’s the idea of these companies that grow other businesses inside of them and spin them off, or not, and they keep them internal, but this idea of letting a branch really grow for a while and then cutting it off and starting a new tree, I find to be interesting. Allowing the tree to be aesthetically not pleasing for a long period of time in order to have that branch later be available to cut off and the patience required from the businessperson who’s trying to run a spawner kind of strategy, I find to be an interesting idea.
Tobias: Did you say IAC?
Bill: Yeah. That’s what IAC is.
Tobias: Yeah, I thought about IAC, too. What’s the thesis for focusing on things that spin stuff off a lot rather than just keeping it in house? Why would that be an advantage over just holding it?
Jake: For the business?
Bill: Well, [crosstalk] management teams. One of the reasons that they want to spin Vimeo is, Vimeo is an asset that probably warrants given where things are trading, a little bit more specific attention, and you can start to compensate your employees based on that particular stock as opposed to the conglomerate stock. It just aligns more incentives. I do think that when you’re talking about something that’s trading, at least at a certainly not depressed multiples, I hope is not a controversial thing to say, you might want to argue that you want to recruit the best possible talent to that organization and allow them to be judged on their own merit, and not within what goes on at Angie or whatever like that. I think that’s what they would say.
Tobias: Can you compensate them out of the flows from the business rather than– we’ve lost Bill, rather than the performance of the stock?
Jake: Sure. Yeah. You can take cash.
Tobias: That’s not a popular thing to do, some businesses do that.
Jake: Yeah. Rising markets, nobody wants cash. They want stock.
Tobias: You can buy it. It’s freely traded.
Jake: Exactly. I think that is actually a pretty compelling argument for sometimes some of these stock option plans are maybe a little misguided.
Bill: I’d like to point out that it took, what, 19 minutes for my computer to update. That’s crazy.
Tobias: The camera has fixed your hair, it’s amazing.
Bill: Hey, there we go. Can you still see my boogers?
Jake: Always. We have anything left on this carcass to pick off before we move on?
Tobias: I think we’ve bound it in wire and forced it into an unusual shape, it’s when we need to let go for a little while now.
Bill: I’m not a very good bonsai tree owner. I tinker too much to mess with bonsai trees. I’d kill them all.
Tobias: In the 80s, they always had– the executive would give it a little spray. That’s all you got to do. Just give it a little spray and then get those little scissors and cut off a leaf or something.
Bill: I bet I’d kill it.
Tobias: I kind of want to have a go. It sounds like fun. You want to do your topic, Bill, so I can mix.
Bill: I guess it actually dovetails with Jake’s.
Jake: It always does.
Bill: I don’t know about always always, but today, yeah. I was talking to somebody on the Twitter machine about the cigarette stocks, and I haven’t really noticed the drawdown, like some other people have, despite the fact that I have some names that are in the drawdown. For instance, IAC has gotten whacked, Naked got a little bit whacked. There’s some other things, but then I also in March bought TGS-NOPEC, which has energy exposure, like the cigarette companies have held up some of the midstream assets right now.
Tobias: Yeah, what about the pipelines, what do they do?
Bill: They’ve been okay. I think that’s one of those– it’s been an cool time to watch the portfolio work, like it’s supposed to. I do think that when one thing that I’m probably reasonably good at is I really do try to think through, are these bets correlated and what are the actual exposures that I’m taking? I think that– that’s not to say if you’re a NASDAQ investor, like, go out and do your thing, but I do think that your personality type has to be such that you’re okay with some of these bigger drawdowns and some of the more volatility–
Jake: If you’ve been winning consistently, then you’re not diversified. Don’t kid yourself.
Trying To Find Uncorrelated Bets
Bill: Well, yeah. Honestly, a lot of those guys, they’re are like, “All right, whatever, this is a drawdown, this is what happens. We’re up 4X, now we’re down 20%, and you want to call us a loser? Fine.” I totally get that. You’re still up, what, 3.2X. I think that for me, one, I don’t have the knowledge base to play around in that hypergrowth space. Two, I have enjoyed having a portfolio that I’ve watched absorb blows on one side by catching a bid on the other. Then, today has been– I have underperformed the NASDAQ, but I’m up slightly more than the S&P. The portfolio’s doing what it’s supposed to do. It’s been a cool time to have it tested and see how it’s performed. I would just encourage people to think through like, what does Dalio say, 15 truly noncorrelated bets? Some of these like TransDigm and Disney are clearly correlated, but a lot of my bets are not. I don’t know how many are noncorrelated though because it seems like when everything sells off, it all goes to one anyway, but–
Tobias: It’s hard, isn’t it?
Jake: Yeah. I was going to say, I can’t even find 15 things that aren’t correlated on planet Earth in the finance world. I don’t know about that.
Bill: Well, this is the bitcoin argument, man.
Jake: All right, there’s one. What else you got?
Bill: Then, you’ve got equities.
Tobias: You could get some vol.
Jake: Okay. Those are correlated.
Jake: What else you got?
Tobias: Vol, commodities.
Tobias: That would mean you’ve got to buy stuff that’s not working and that sucks. You’ve got buy commodities. I mean commodities are ripping now, but they weren’t for a long time. Vol has been getting– Vol’s up and down. I guess that’s what it does. It has been–
Jake: It’s in the name. [laughs]
Tobias: Yeah, that’s right. It’s been a rough ride. Vol guys were pretty suicidal before March last year. Or long vol guys anyway, I think the short vol ball guys were Thanksgiving Day turkeys, but they’re feeling pretty good. I guess that shows that it works, the diversification works. Real estate? Yeah. VSG’s got some suggestions here. Gold, treasuries, real estate, stocks, farmland.
Jake: Man, I was being a little glib, but still, it is hard to untangle how much of what you’re doing is just taking interest rate bets, and duration bets more than almost anything else.
Tobias: There’s also the argument to be made, Dalio’s talking at a macro level. When you’re putting together a stock portfolio, stock portfolio is always going to be pretty correlated. But then, you also get the thing like sectors and industries get cheap together. Everything gets cheap at the same time. You can’t just pick the one out of a sector or the industry, but there’s a possibility that you miss it, add a little bit more exposure to it. You get a little bit more concentrated in undervalued sectors or industries. Although that hasn’t worked for a decade or so. [laughs]
Jake: [laughs] Yeah, that’s a sucker’s bet there.
Bill: It seems to me that big tech is cheapish here or at least presents decent value. [crosstalk] I would be rotating.
Tobias: FAMG? That kind of group.
Bill: I mean, I don’t know. There’s a lot of smart people chirping about Adobe, and I can see that. This is going to be sound crazy to people and I apologize for offending a bunch of value people, but I can even see Tyler here, and that trades at a nosebleed valuation, but it’s an incredible business and they’re about to do an acquisition, they funded it with debt, they’re not issuing equity. I don’t know. I could see it working. I would be long the ineptitude of government. I don’t think that’s a really hard thing to be long. If that trades at a premium multiple, I think it probably deserves too.
Tobias: Like bitcoin? Or is that Tyler?
Jake: [unintelligible [00:25:36]
$TYL vs $DJCO
Bill: No, it’s Tyler. They do a lot of the payment stuff for governments. I was reading Morningstar writing about them. I haven’t done deep work, but a lot of the government systems are so antiquated that the people that have been employed to keep them up are now retired and the skill set is not– they’re not replacing the skill set. You do own a major, major arms dealer of software to government. That seems to me to be a decent place to play. If it trades at a massive multiple, I get it. You’re not buying some energy company.
Jake: You can get that same thing at a lower multiple, and it’s your boy. [crosstalk]
Bill: No, it’s not even close. Those guys don’t have a clue what they’re doing in that space relative to Tyler, they just don’t, and they admit it. If they did, they’d be growing like a weed. Now, can they land that Australian deal? Maybe? Yeah. You’re telling me the Daily Journal is going to recruit talent against Tyler? That’s really the bet you want to come work for us in tech? What’s the quality of technician or engineer that’s going to go work at Daily Journal? At some point, it just doesn’t pass the smell test to me.
Jake: I guess it’s always a matter of how much are you paying to make that bet as well.
Bill: Yeah, but you can’t just buy shit and expect it to turn into flower. You got to have the players in place and you can’t be like, “Well, I paid shit multiple, so maybe if I get a flower out of–” Conjuring it in my mind because I worship Munger, that’s crazy. Munger would tell you that’s a terrible bet. He even said I wouldn’t buy the stock here. That’s his words, not mine. I’m not trying to be rude but they are older men, their competence is running a newspaper business that served the legal industry in runoff, and people are making a software bet on it. That’s fine if you want to play that game, but if it doesn’t work out, don’t act it wasn’t– whatever, it– [crosstalk] Yeah. If the bet is cheap, yeah, some shitty ass horse wins a race every once in a while, and you get paid out, but how often does that happen?
Tobias: You don’t have to back the one that’s 100 to 1. You can back the third or fourth horse at better odds.
Bill: Yeah, no doubt. I’m not saying that you have to play in that space. I’m just saying I don’t think Daily Journal objectively has a real shot to win in that space. I just don’t.
Tobias: I don’t know at all well enough. I’m just wondering if it has to win for it to be a worthwhile bet.
Bill: I don’t think that you can perpetually promise that a contract is coming that never comes. That doesn’t sound like winning to me. It’s been what, three years I’ve heard about this Australian deal?
Tobias: Well, the Aussies– [crosstalk]
Bill: Great, now you implement it. Then, how do you grow it? How does it expand? Where are you going to go into your next adjacency? Meanwhile, Tyler is an acquisition machine that that Charlie did talk shit about a couple years ago, and here, let’s see what the revenues have done since Charlie has said, “I wish all of our competitors were them.” Let’s pull it up. You guys can take the combo from here.
Bill: I’m pretty sure they grow at like 17% a year.
Tobias: Let me do my topic. There’s been quite a big move in the market. Tech’s come off quite materially. It’s probably technically in a– what do you–
Tobias: Correction, is that–
Tobias: Is that all it is?
Jake: I don’t know.
Tobias: I’d have thought more than– [crosstalk]
Jake: [crosstalk] -say that’s a– [crosstalk]
Tobias: Correction is 10%. What’s 20%? That’s a crash. That’s a bear market, okay. We’ve gone through correction, but we’re not in a bear for tech.
Jake: I guess. I don’t know. Is that right?
Bill: Certain of these names have gotten shellacked, man.
Tobias: Some of them have got. Yeah.
Bill: If you really think about Adobe, that’s sold off, I think like 20% or so, since I think it’s been over nine months. If you also include the business’s growth, that’s down 25%, 30%.
Small, Cheap, Junk Rally
Tobias: There are big moves going on under the surface of the market, the market at the moment is basically at all-time highs. It fell off and it had a couple of days’ rally, so it’s back to all-time highs, and then tech is up, ARK and Tesla are up a lot today. I don’t know about ARK, but Tesla is up close to 20% of the day, which is a big move, particularly in a stock that big. But then, there’s been a lot of talk in that momentum strategies are going to have their biggest turnover in a very long period of time where they’re now going to start picking up some of the fins and some of the energy. I just wonder what that– all of this turmoil under the surface, it’s not really being reflected in the market at all. I just wonder what– that’s part of my confusion. When I look at what’s been working over the last probably since November, it’s been small, cheap junk from what I can see. That sort of helps some of the stuff that I do and hurts some of the stuff that I do. I wouldn’t say that value has started ripping just yet.
Jake: How does that work with those momentum strategies? I’ve heard this argument that’s going to turn over soon. Isn’t there somebody who does the momentum on a slightly shorter timescale that tries to front run the other person, and you just get this Red Queen effect?
Tobias: There are lots of implementations of it. It depends on what they look– they could be looking back 12 months, or 9 months, or 6 months, or 3 months, or some blend of that, and turning over portions of the stock that could be doing on an absolute basis, looking at what’s up the most. They could be doing it on a relative– absolute basis, looking back over a fixed period of time relative basis. There are so many different implementations of it. It’s like value, there’s so many different implementations. You can’t really use it as a monolith, you have to look at the detail, but it does seem that the stocks that are up the most are the ones that are going to be going in, which means that they get continued buying for a little bit longer, at least.
I think it’s a funny market, because I’ve heard some talk about the reopening trade. When I look at the stocks that are in the reopening trade, airlines and cruise lines, and things like that, their stock prices might not have fully recovered, but they’ve all taken on so much debt that the EV’s are way, way up, enterprise values are way, way up. Then, the load factors are still in the toilet, and I don’t see how– If you’ve got an EV that’s higher than it was in March last year, or pre the selloff, and you load factors weigh down, it’s going to take probably years to recover. I don’t see how they can be trading where they are, it just makes no sense to me.
Jake: You’ve got to look out really far probably to get comfortable because not only do you need the economics to return to the business, the operational leverage, but you also need to pay off all the people you put in front of you in line to get paid as these debt holders. You have to do something with them as well. You’re looking through multiple levels of cash flow changes to get to where you get paid as the owner of the business.
Bill: You better hope another pandemic doesn’t come.
Tobias: Yeah. I don’t know if people would put up with the lockdowns again, but yeah. It was a fact of life. You can read Casanova’s autobiography. He talks about when you went from one Italian city to another, you were in quarantine. He very sneakily figured out how to get around and he told the bloke who was in charge of quarantine and he said, “That’s impossible.” Then he showed him how he did it. Quarantine, that it’s something that has been with us for a very long period of time. Maybe we just go back to this world where this quarantine when you fly somewhere, when you travel somewhere, that’s a horrible thought. It’s what we’re in at the moment. I don’t see anybody planning to take that off anytime soon.
Bill: That would suck.
Tobias: I kind of hope it all reopens, but even if it all reopens, and everything goes back to normal. I still think that all of those junky names are way, way too expensive.
Bill: Jesus. Sorry, I don’t know why music just started. Yeah, no, I don’t understand any of these things. I do kick myself for not buying Spirit, not the airline, but the fucking fuselage maker. That was stupid to me. I even wrote it up when it was 20 bucks, now it’s $48. Good move, Brewster. Great, fantastic. Anyway, that’s somewhat revisionist history. I think they’re going to have to spend a fair amount on these new– they’re going to make their own fleets younger. That’s not a news story, if you follow the airlines. You’ve got some CapEx come in, or at least increased lease costs. If you don’t have the increases in the lease costs, they’re going to have longer tenures on the leases. You’re not get something for nothing and you got more debt. It’s a consolidated industry, but I’m not convinced to–
Jake: What’s not to like?
Bill: Yeah. Good point.
Tobias: I find all this period very confusing, because I can see that there’s some run in the cheaper value names. Tech seems to have been a little bit softer. It’s a weird kind of rotation. There’s no real reason why it’s happened. It sort of just started happening, and it’s been in the press the last few weeks. I don’t know how sustainable. It hasn’t sustained at any other time.
Bill: What, the tech selloff?
Tobias: I care less about the tech, a lot more about the value rally.
Bill: Oh. Yeah. I don’t see why value wouldn’t do okay with the reopening trade. I could see people–
Jake: How many head fakes have you had now, Toby, in the last 10 years?
Tobias: I ran out of fingers, so I can’t count them. It’s that kind of number.
Jake: [laughs] This time for sure.
Bill: Just real quick to close the loop on the Tyler thing versus The Daily Journal. I’m not trying to take shots at Charlie. I love that guy. Berkshire is a huge position for me. I bet with them. Since 2014 to 2020, Tyler, their gross profit is 2.33X. It’s gone from $233 million to $543 million. Daily Journal has gone from $37 million to $45 million, which is what? I’ve got 1.2X, but that doesn’t feel– Yeah, I guess it’s a little light. Anyway, I think that there’s a lot of danger listening to your heroes and just hearing them say something and being like, “Well, they’re right, because they’re my hero,” because I think the writing has been on the wall for Daily Journal for a while. I don’t think that it is performed and I have seen a presentation where a guy did really, really good work. If he’s right, he deserves to be right for the right reasons, but I’m not going to be right with them. It’s just not a horse I’d bet on. Plus, a lot of it’s marketable securities, what happens when Charlie dies? Then, you get some random person running an equity portfolio. No, thank you. Or, you could never sell Wells. If that’s the bet you want to make, you could just go buy Wells.
Jake: Big part of its BYD right now also, which is running a little hot probably, or was at least.
Bill: Which, Charlie was like, “I don’t even know how to hold this, but I’m not going to sell it.” Which I totally get. I like when Charlie gives an answer that I feel like I could give. How do you hold BYD here? Well, I think they’re good at what they do.
Jake: What’s your sell methodology? I don’t know. Still working on that.
Tobias: Haven’t figured it out.
Bill: [crosstalk] That was a real human moment that I really enjoyed listening to. I was like, All right, cool.” Charlie and I are as confused by some of this stuff.
Tobias: Yeah, I was always happy to hear that he hasn’t figured it out either because I don’t think that anybody’s figured it out. I think that people have done the best are never sell. I don’t know if that’s always the case, but it certainly feels that’s the case now. I think that at the bottom of a bear market, you kick yourself because you didn’t sell some stuff.
Jake: There’s going to be some survivorship bias into that idea as well. How many people held something all the way down to–? We don’t hear from them.
Bill: This is why I love David Gardner, man. I think he’s the true OG of never sell and I think he’s actually built for it. I don’t know how many people are actually built for it.
Tobias: Well, the way you can do it is just by having smaller positions, and then just not worrying about it. Just don’t check them.
Bill: Yeah, I think he adds to the winners too and he just lets the small ones die in nothing. Then if they get a pop, he’s happy. It’s crazy. I mean it’s not crazy. What’s crazy is how simple the strategy is, how hard it is to actually execute and how good the results have actually been. That’s wild.
The Real OGs
Jake: The real OGs are the robber barons and their entrepreneurial ownership of a few businesses that they never sold. That’s a earlier case study, probably that would be helpful thinking about your empire–
Jake: Rockefeller, Carnegie.
Bill: Yeah. Berkshire.
Bill: Did you guys see the Tom Gayner interview.
Tobias: I haven’t.
Bill: I thought that one was pretty good.
Jake: I haven’t.
Bill: Yeah, it was good. I liked it.
Jake: When did that come up?
Bill: Sunday, on that Good Investing podcast. That guy gets some good guests. He does some good stuff. I enjoyed listening to Gayner. I thought that that was a good interview if people are interested in how Markel thinks.
The Interest Rate Spike
Tobias: What do you think about the interest rate spike? 10 years been kind of running up, it’s off a little bit today, but it was through 1.6 yesterday, I think. Historical basis, it’s still squashed. I think the long run average is about 6%. The low last year was like– [crosstalk]
Tobias: Yeah, that’s at 1.6. It’s still nowhere near. I think it was three before, it got squashed through the pandemic last just. There’s been some argument that that’s the cause of all the value getting so beaten up. Cliff Asness had a look at it, couldn’t– Cliff Asness’s crew couldn’t find any correlation. It does seem to me that it’s loosely tracks that as it runs up value seems to run up, and it runs backwards, value seems to run backwards. Just eyeballing the chart, it looks like it’s a reasonable association to me.
Value Does Better In A Rising Rate Environment
Jake: Value does better in a rising rate environment is what you’re saying?
Tobias: There’s probably some limits around the edges to it, but that does seem to be the case.
Jake: [crosstalk] -the mechanism is.
Bill: Well, but the reason that rates are going up is people think that the economy may run hot. I guess also inflation or whatever. If the reason that rates are going up is because people think that velocity is going to the money supply, it’s going to pick up, I could see how value which probably tends to pick up more cyclical names would catch a bid in that environment, if that’s actually what’s going on.
Jake: Is the idea that it’s hard to fail then in that sort of environment. Your shitco doesn’t– like you take bankruptcy risk out for your shitco and then it does better then?
Bill: I just think it outperforms. You get operating leverage through an industrial and you get margin expansion. I guess I could see that, but I don’t really know what the composite value is. I don’t know what the companies are that make up the bottom decile, or however, it’s all broken out.
Tobias: It’s energy and finance at the moment, I think.
Bill: Yeah. Finance, you would think your loan loss reserves improve if the economy gets better, energy is going to get more usage, I guess. I don’t know what I’m talking about them.
Tobias: Yeah, I don’t know how much of this is related to. Banks are particularly sensitive to interest rates, but I have no idea. They want to spread, that’s all they need rather than a directional bet.
Tobias: The rising rates, I looked at the 10 year before we came on, the 10 year is off a little bit today, not much but it’s been very strong very consistently for the last month or so. That’s coincided with a little run-in value and then it backed off today and all of a sudden, tech’s come back to life and value’s looking a little bit softer today.
Bill: It does make sense why tech would do well, if rates go down. That makes sense to me.
Bill: Why Peloton is up 14%, that seems a little aggressive to just call it a rate issue.
Tobias: It’s wild that it’s so pervasive across all of those names. ARK’s up a huge amount, and I guess that ARK’s got a holding in Tesla, so that’s how that happens. All of those things are up a lot today.
Bill: Yeah. 14%, again, that’s like over $3 billion, so it’s almost $5 billion. That used to be a fair amount of money.
Tobias: It used to be, yeah. Marginal trades to get that up though, what do you think went through? I don’t know off the top my head, but it’s just–
Bill: I’d be interested to see how many dollars flowed through that security today.
Tesla’s Biggest Daily Rise In A Year
Tobias: A lot of those names trade an enormous amount. It’s astonishing how much gets through Tesla on a daily basis.
Jake: Oh my God.
Tobias: It trades more than SPY some days.
Jake: Yeah, it’s obscene. When it was really ripping there, it was more than 10% of the company. shares were turning over every single day. That’s a lot.
Bill: I hope it continues if momentum on the up and momentum on the down is the new norm, you could get some rubber bands that unwind, presents some nice opportunities.
Tepper & Wood Doing The Rounds
Tobias: Do you think Tepper and Cathie Wood doing the rounds on the financial news networks helped or did anything? Is that the reason?
Bill: Yeah, I think people listen to Tepper.
Jake: Does anybody watch news? I don’t know.
Bill: I think people listen to Tepper.
Tobias: Tepper’s got the famous balls to the wall. I don’t know exactly when that was, but that was close to the bottom in 2009.
Bill: Yeah. Cathie Wood is a bit interesting. I saw Kubico or that’s how you say his name on the Twitter machine. He said like, “Oh, yeah, everything’s fine. That’s why she’s got a big PR tour tomorrow.” Which, if you just think about it for a second, it’s not too hard to figure out that she’s coming to put out some flames. It’s what you would do if you were her.
Bill: You can’t not do it. That’s insane to just be that media friendly, and then put your head in the sand today. That’s not the game.
Tobias: It worked.
Jake: Especially if you’ve got to unload some shares to– [laughs]
Tobias: It was a good call.
Tobias: All right, folk. Hit us with your questions.
Tobias: We’re at that time. Yeah, Tesla’s up $100 billion today.
Bill: Yeah, that’s a lot of money.
Tobias: That’s a solid move.
Bill: Shit, $100 billion is really a lot.
Tobias: How many billions is that?
Jake: Adjusted for inflation?
Bill: That’s crazy. Yeah, shoutout to the people sending ideas. Thank you.
Using Cash Secured Puts As A Forcing Function
Tobias: I saw a question earlier about cash-secured puts. I don’t mind it as a strategy. None of this is investment advice and puts– you can really blow yourself up on puts, but cash-secured puts to a size that makes sense, if you would. You sell them out of the money at a price that you want to buy a stock, and you get a little bit of premium for doing that. Then, if you get hit, then you’ve got the advantage of buying that stock where you wanted to buy it and getting the premium as well, so you bought it a little bit cheaper than you’re otherwise going to do it, and you’ve got some cash in the door for the period before your put runs out. I like it as a strategy. It’s not very tax efficient, you pay a lot of tax on the premium when it comes in the door. But it does mean that you can time a little bit, you can move when the strike is into this year or next year depending on what you’re trying to achieve. I don’t mind that as a strategy. I have done it in the past. and I would do it again in the future. I don’t do it in the current things that I do, because equity only, but I like it as a strategy.
Bill: I guess the thing about the puts is when I have employed it in my own self, I do hear Buffett in my ear being it’s a lot more important to be right on the business than to be right on the next 10 cents of the move or whatever. Sometimes, I wonder if I get a little bit cute when I enter the options world, and I just should go ahead and be long or not be in it.
Tobias: I think if you’ve got nothing else to do and there’s some stuff that you would buy, it’s just a long way out, you just do that.
Bill: Dude, there’s an opportunity cost to that capital because when the world crashes, you’re going to incur that obligation. Is that the place that you really want to put your cash if that’s the scenario that you’re looking for? It makes sense. I just don’t know that I like it for me.
Tobias: We’ll turn it around then. It’s a behavioral thing that forces you to buy at that price.
Tobias: You’ve got to think to yourself, in a scenario where the world, where this market goes down 20% or 50%, what would I want to do in that scenario? Then, you go through and you make your list, and you go on sell puts where it makes sense.
Bill: That’s an interesting thought. You use it as like a forcing function.
Tobias: Yeah, that’s how I have used it in the past. I’ve never been hit on anything, but I’ve pocketed the premium. I know some people who do it quite a lot. I think the problem is that when you actually do get hit on that stuff– the problem is when it goes down and you don’t get hit, and in many instances, you should have just bought the equity.
Bill: Yeah, that’s what I like– I don’t know, every time that I messed with options, I feel like I probably should have just kept it a little simple. I probably instead of trimming Disney should have sold some calls today. That is maybe something that I should have done instead. You’re bringing in cash instead of paying, like incurring a tax obligation and you’re deferring it, and if you’re okay selling here, then you should be okay selling higher, that I get.
Tobias: Do I think the current move in value is of value run or junk run? Yeah, I think it’s a little bit more– it’s three things. It’s small, cheap, junk, that is running at the moment. To the extent that that touches value, it seems to, but there’s also this– I don’t know if this is inside baseball, but there’s a there’s a negative momentum element to this as well. For whatever reason, momentum is just inverted itself recently. A lot of these things that were sold off have like rallied pretty hard. That’s something that Michael Green has been talking about. I actually think he’s right on that. It is more negative momentum than value.
Bill: The other thing is, I’m not sure the junk hasn’t been priced really high lately. There’s a lot of junk out there that’s caught in a nice bid. Thankfully, some of the people that manage it are outperforming the index by 56%, so that’s good. Do you know what I’m referring to?
Tobias: Sorry, I was trying to find the next question.
Bill: What a thread.
Tobias: What happened?
Bill: Oh, dude. Just absurdity.
Jake: Toby, if you put up a 3.2% return-
Tobias: Oh, yes.
Jake: -and the index did 2%, would you say that you are 56% outperformance?
Bill: Also, wasn’t it negative 2% if I read the thread properly?
Jake: It doesn’t matter. It’s just using percentages in an inappropriate way.
Bill: That was awesome.
Tobias: Yeah, that was funny.
Bill: It’s fantastic.
Jake: Everyone was pretty merciless on that in Twitter, weren’t they? They just went to town on that one.
Bill: I think I say his name, Jim Pallotta. I love that guy. That guy cracks me up, although he’s come over the top on me in a couple tweets and I’ve had to hit him in his DMs to smooth, I’m like, “Jim, that’s not what I was trying to say, man.” He’s a good guy. He came over the top part on that one.
Housing Market Has Gone Bananas
Tobias: There are some good questions in here that have just scrolled past me. Sorry. I missed them. Inflation, I saw something about inflation. Last time I looked, which was a few weeks ago, the market looked like it had been pricing in the highest inflation we’ve seen in a little bit of time. I don’t know if that’s– what the market expects to happen and what is actually happening under the hood are two different things. It’s showing up in stuff like– housing has gone absolutely bananas. Then anything that’s housing related has gone bananas, too. Lumber has gone nuts too, right? Have you followed that?
Bill: I think this is all supply chain, man. You’re on the back of a ton of tariffs, and one of the biggest global supply chain shocks ever. The idea that maybe policy and COVID took nine months to materialize is not that unfathomable to me. You’ve got to start all these things again. These are high operating leverage businesses, and a lot of them just stopped.
Bill: Yeah, shit’s fucked up, and that’s a technical term. The question is, is it transitory? Or, is it here to stay? I think that’s the hard stuff. My gut says it’s transitory. I know that people don’t want to hear it, because of all the money printing, but that’s how I lay the bet. I think all the money printing is making everybody have a motivated conclusion rather than think through what’s really going on. I will tell you that I’ve talked to a couple people that are in supply chain and it is really messed up. I guess part of the problem too, is I guess, like some of the PPE and some of the vaccines coming through the ports and whatever, it’s not good. I wouldn’t expect it to go away either. I think supply chain, this story is going to be here all year.
Global Supply Chains
Jake: Well, if you think about reconfiguring a global supply chain in a more nationalistic, isolationist kind of world, which may or may not be what we’re leaning a little bit more towards, at least, having some critical things that you as a sovereign nation have to be able to get your hands on whenever you really want it. Of course, that’s probably going to be more expensive. It’s going to take time to get up and running. It’s going to be a painful, messy process to reconfigure the world like that. We shouldn’t be surprised if there’s a lot of Hail Marys, all of which is– are not Hail Marys, but you need Hail Marys to get to an easy, clean outcome. But all of which should make you say, “Boy, a lot of uncertainty out there with that kind of thing. We should probably be paying a lower price for that uncertainty.”
Bill: You’re not going to get your wish. Secondly, I think-
Bill: -that the other thing, the part of the chess game that I really don’t understand is we’re fresh off four years of being hard on China. Asia has done a whole lot better with COVID than the Western world. Is it possible that they’re kind of screwing us on supply chain to get back? I don’t know, that’s not an unfathomable geopolitical game to me. I don’t think Toyota has a ton of problems getting the chips. Ford and GM seem to, I think some of that was a sourcing issue, but I think there’s stuff going on behind the scenes that people may not fully understand, myself included.
Jake: Put me on that list twice.
Tobias: Yeah, I’m one of those people too. Ben at Epsilon Theory had some charts a few days ago where he was showing house prices relative to rents across all of these major metros. Every single chart looks exactly the same. House prices have just gone vertical, and rents have fallen off a cliff. How does something like that–
Jake: Is that if you’re paying the rent?
Tobias: I couldn’t figure out whether that was asking price, whether that was– whatever they call actual rent, whatever that is. Either way, it seems to be saying that the people who pay rent are paying less rent, are willing to pay less rent or they can’t ask for as much rent, however, that market resolves itself. But housing’s gone absolutely vertical, the divergence is incredible. I just don’t know how that resolves itself. I don’t know why there’s a divergence like that, or how it resolves itself. Any bids on that?
Bill: I think there’s a lot of people that are stupid right now.
Tobias: Which way, buying houses?
Bill: Every way. People are still living in the middle of a pandemic. I think that like there’s a lot of social proof and house prices start ripping and interest rates are low, and then you’ve got families that are talking about, “Well, we’re not going to be able to afford something.” I think there’s a lot of stupidity right now. I think people should slow down generally.
Jake: If you go back to the– I think it was the 2007 Berkshire meeting, and Buffett’s talking about the housing bubble. He’s saying that houses should trade based on some rough number. I think he said, I want to say 10 times, but I might be off on that. The average income for that zip code, that area, that’s what supports housing price, that’s the fundamental to probably key off of how much– so the average person in that neighborhood earns X, then you should maybe be willing to pay up to 10x for that house. Well, we had been up to like, I don’t know, it was like 30X or something insane at that point. I’m directionally correct and probably off specific numbers.
If you think about reconfiguring our entire labor force in a way where people want more space, they don’t want to be in a city as much and then they’ll have to earn that city wage, it makes sense to me then that the suburbs and other outside of major cities would be bid up because you have a better supported average income potentially for that area. Now, whether that’s been taken too far is another question, but there is some kernel of logic to that.
Tobias: Before I came on, I just pulled up for my area and everything’s under contract. Everything that’s listed on Zillow was under contract or virtually everything listed on Zillow is under contract. People are aggressive at the moment. This stuff, it’s been on for five days, it’s under contract, which is–
Bill: My mom’s in Arizona, man, she’s having to knock on doors of unlisted homes and she’s losing bids on some of them. There’s nut stuff going on. People do need to take a chill pill.
Tobias: Clearly, there’s not much inventory out there because who wants to move and show their house in the middle of a pandemic? You’re only doing that if you’ve got to move for work or for some other reason, or you just have to get out of the city, I guess.
Bill: Yeah. Two, I’m talking about building this thing, I’m not in a real hurry, with all the raw material prices where they are, I’ve got to fade the rent while I’m not building so it can’t go on in perpetuity, but I’d like to wait till Q2, Q3 to see how it all settles.
Tobias: Do you think it’s resolved by then?
Bill: Probably not. I’m probably just going to get screwed.
Tobias: The move in lumber had been like an 8X move or something like that.
Bill: Yeah. It was nuts. I don’t know that it was 8X. I know it tripled in– [crosstalk] tripled in Q3, I think. Right? Or maybe it was–
Tobias: I think I saw someone saying from this time last year to this time this year, I think that was the move.
Bill: Oh, well, that makes sense, but nobody was buying lumber in March.
Tobias: Well, that probably makes sense too. Yeah.
Bill: So, you’re low tick in that– [crosstalk]
Tobias: They might have done that. Yeah. To be fair, I looked at the housing–
Bill: Cheap [crosstalk] loser. I called you out in two seconds.
Tobias: I think that the same thing might have happened with those house prices, because I think that they’ve based it to 2012, which I think was there was a bottom in 2010 and there was a bottom in 2012. Since then, it’s been like a vertical run.
Is The Market Front-Running The Housing Market?
Jake: What if this was all the market front running the housing market, front running student loan debt jubilee? Could you imagine–
Tobias: Market is very smart.
Jake: Market might be smarter than all of us put together.
Bill: Well, then you’ve got to pay high prices.
Jake: [laughs] Well, hey, you have to unanchor maybe the original fundamental there if you’re going to allow debt to completely disappear.
Tobias: All right, amigos. That’s full time. That was fun. We’ll see everybody next week. [crosstalk] fellas.
Bill: I had a reasonable amount of enjoyment out of this. Thank you, guys.
For more articles like this, check out our value investing news here.
Article by The Acquirer's Multiple