Value After Hours S06 E06 200th Episode, Bill’s Back, Value on Macro, Value and ZIRP, Farmer’s Fable

Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, and Jake Taylor. See our latest episodes at https://acquirersmultiple.com/podcast

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ABOUT TOBIAS CARLISLE
Tobias Carlisle is the founder of The Acquirer’s Multiple®, and Acquirers Funds®.
He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, the Amazon best-sellers Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014) (https://amzn.to/2VwvAGF), Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012) (https://amzn.to/2SDDxrN), and Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (2016) (https://amzn.to/2SEEjVn). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.

Prior to founding the forerunner to Acquirers Funds in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam.

He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).

Like nothing different yeah you’re spending a lot more to to live exactly the Oh Billy fill out we’ve just gone live and we’re live see if we can get him back in this is value after us I’m SP car this is Jake Taylor we short The Prodigal Son he’ll be back in a

Moment perfect uh technical difficulties for our 200th episode on brand on brand totally on go the prodical sun returns he’s on mute there he is he’s back I’m happy that happened it would be a shame if if given our can you imagine no technical difficulties yeah that would

Be would not be us that would not be us at all Billy’s broadcasting from new digs the prodical sun that’s right returns where are you now I’m I’m at my crib man so I’m in I’m in the uh the office beautiful it’s good to see you my

Man it’s nice to be here I was uh I was making my cider jokes I that was cracking me up last week man I guess that’s a real drink in Florida or in uh in Australia dick and cider yeah but the uh the joke came first yeah no doubt but

It it’s a three star drink so people buy it and they say it’s a reasonably decent out of how many stuffs oh that’s a good good question anyway yeah I don’t know nice to be here I I thought I was going to be on last

Week and then I I signed on I was like oh my God I don’t know what’s going on and then I saw the tweet that John was on I said oh that’s good for the fans they can wait one more week before they have to have

Me yeah keep them hungry JT’s just come back from Columbia in New York yeah not not not not po Columbia but yeah Columbia University noted I want to go to columia Columbia what was the event uh it’s the like a student investment Association uh C simsa or

Whatever yeah sisma that they do there you go regularly any any good speakers uh yeah you had uh John Griffin from Blue Ridge he’s kind of one of the X tiger guys um they’ve been pretty successful Moos did an interview with him um who else oh

Gosh uh Sally cruk is that I think how you say her last name she’s been in a lot of different Finance positions over the years she was she came in over a zoom that was was was pretty I felt like she was pretty candid and forthright about her career that was

Interesting uh yeah I had to duck out for a little while so I missed some of the stuff but you know caught up with some old friends and uh it’s good to good to kind of be in the value community sort of where it I feel like

That’s a little bit Ground Zero in a lot of ways uh where Graham was was teaching many many years ago any good takeaways any good learnings make benefit glorious nation of value after hours yeah I know you’re sworn to secrecy in the room but yeah you know I

Mean it’s it’s all the same stuff guys I mean we’re you’re not missing anything I guess right yeah bite cheap understand what you’re buying uh grab a ankles have patience all the same stuff it’s been a it’s been a pretty good run for growth over value since the start of the year

And or and you know the year before that and the decade before that but I I thought we had a little bounce yesterday but then I I switch to the machine and more this morning yeah why is uh why does a CPI print that’s a little hot come right

After you if you’re a value what’s the where’s the connection there yeah I can’t figure it out either it seems like good news is good for growth and bad news is bad for value and I don’t I don’t know I think I think that value from what I have seen lately

Is screening a little bit more industrial so maybe if there’s hot CPI the theory is the Fed doesn’t cut and things slow a bit maybe but I don’t know that I believe that but that’s that would be what I would think I would think that longer term longer dated cash

Flows that might be more representative of a glamour basket would be a little bit more interest rate sensitive if you imagin that rates were going to be moving up maybe I don’t the the S&P I would argue probably has more pricing power so I’m I’m not sure my official

Position on the S SMP is that I I don’t think it like is objectively bubbly I don’t think you can own it and expect more than one to three% real but like if you’re living in an existence where wealth disparity is as big as it’s ever

Been you only have to get wealthy once if you want to protect it I can understand being in the S&P I just don’t think you’re going to like do what you did yeah Toby give me an update on uh where profit margins are these days I

Think we saw well there was a little there was a little chart out I think they they peaked at 13.1% I think 2021 I should have a quick look at that but they are mean reverting it’s the slowest mean reversion in the series dude even if they’re I mean even

If down to like 10 right yeah they’re down 10 where were they in where were they in 2019 so here we go I have it up this is from Charlie Belo so they they got to 12.1 that was sort of late 2018 early 2019 fell to 5.9 at the the trough of

The co we can look through that you almost have to look through the peak though too because 13.5 was the new Peak post that was the and so now we’re back to 10.7 8.9 being the long run average going back to well 2000 one to 107 that matters yeah 13.5

To 10.7 I mean if you’re if you’re more on your way to six that’s really going to matter well .9 The New Normal since 2000 yeah I still well I know this is an intangibles returns of scale we’ve had all these arguments already before and uh tax cuts I think Corporate America is

Taking a a pretty good bite out of the total pie at the moment and that’s you know who knows we’ll see yeah did do the uh does labor get its uh get its due it seems like unemployment’s pretty tight yeah you get any movement in the other direction that would seem to be

Bad for labor wouldn’t it and it depends on robots pay uh pay higher interest rate costs have taxes move the other way potentially for you maybe back up to 20 23 again uh or gonna do that though I don’t know you’ve got you’ve got I I don’t think this is

Controversial to say neither party I think is really willing to take pain unless they absolutely have to and then they can come together and they seem to get stuff done in crazies but Biden could come back in and say we’re running massive deficits these are unsustainable the top end of town

Has to do its part we’re going to increase taxes on corporates and high income earners aren’t the think tanks in his party basically saying we’re running massive deficits and inflation’s not a real problem so we can continue to do it like isn’t isn’t that the intelligencia right now is that mmt like

Kelton and those guys yeah I don’t really I don’t really follow I don’t understand how that stuff works I don’t either I if you did we’d have to question your sanity if you’re not confused you don’t know what’s going on pants party first in the house p Israel happy 200 thank

You Toronto Miami dead cat gly New South Wales me too brother happy 200th fellas Birmingham Alabama not England Norberg Sweden Val paraso cotor Montenegro Grimsby Ontario Monteray Mexico Santa Monica Jupiter Florida what’s up it’s nice in Jupiter shout out to Jupiter ke Castleford England savan L Finland Poland Cleveland

Tennessee Kissa Georgia London Tulsa Oklahoma Winter Park Florida Tallahassee my God D poo Poland D like a bit of a goway pipe the drink Brookings South Dakota Highland Park Illinois well Georgia Chapel Hill what’s up daram Cardiff Wales keep this going Philly yeah let me know when

You’re done I’ll be back got them all I think I got them all quille Scotland Scotland where’s scurrying off to did get a shot at those Cavs though on the way out the door did show off the Cs we’re gonna have to mark this one not for kids yeah not safe those

Are what a and Winnipeg sorry I missed you guys hang on Billy’s back with a dog he’s brought a dog back that’s good yeah so here’s a good question I’ve been thinking about this one a little bit I don’t have an answer but I’ll throw this question out to you guys I

Forgot yeah oh you got the glasses actually I have some I got my hundreds too oh still here yours is probably in a box somewhere Billy since you moved I know so here’s a good question I like this one do you guys have any hypothesis for what the effect of the bation between

Monetary policy tight and fiscal policy loose could have on different sectors of the economy I’ve been thinking about this a lot I still don’t have an answer but I think that’s a good question a very good question that’s a good question and I wish an appropriately League strong answer to

That mid flight to Jamaica all right well so I think here’s my my answer is it I think that that fiscal or monetary policy is able to get into the nooks and crannies of the the economy more through the transmission of interest rates uh and that and but it’s also much more

Broad-based it’s like a it’s like taking a antibiotics pill as opposed to a topical application which I think the fiscal policy is a little bit more targeted um but also probably more susceptible to crony capitalism as well where the first pigs at the trough get to get those dollars before anyone else

And so you get those cantillon effects where you get the dollar before it gets weekend um so there’s there’s a political element to it there um but I would say that yeah there’s probably the arguments that that same thing happens with the fiscal side or the the monetary side as

Well where the banks are the first ones at the trough at the fed’s uh you know when they’re dumping you could basically borrow money for free buy treasuries get collect the spread uh and we just like sort of give resources away but um yeah I think probably Banks benefit more from

The monetary and then um the uh subsidy truffle hounds get more at the uh from the fiscal side of things what do you guys think about that that’s a good answer that’s a good answer it’s just off the top of my head that was a good I don’t know that I

Agree that Banks benefit the most but I don’t disagree I just need to think about it from loose monetary policy yeah I don’t know banks are first in line he’s saying where tight monetary policy and fiscal spending is going to be the Truffle hounds yeah the subsidy travel hounds yeah that could

Be I don’t know I I the thing that keeps me up well I’m not actually staying up thinking about this but the the thing that I wonder a little bit is our current it seems to me the current iteration of our economy is fairly strong data with tight monetary

Policy and it is unclear to me why if I were at the FED I would cut until like the until jobs started to crack a little bit and I kind of Wonder a lot of this inflation data has a lot of benefit of rent that’s flowing

Through and if you look forward to 2026 and 2027 there’s not a lot of real estate that’s being developed today that’s going to deliver then and I just kind of wonder if it’s gonna stay high then is that what the if well if rates don’t come down right now

I mean if you read like the earnings calls of any of these reats they’re just Supply Supply Supply Supply well I mean that that’s a product of the zero interest rate environment of two years ago three years ago right because you’re building huge buildings so rates stay higher I don’t know I

Mean I kind of wonder what shelter looks like in three years I I I can’t help but think if you think rents are high now they may go a lot higher too damn high already that’s what I’m saying so I don’t I don’t know it’s going to be interesting because I I

Don’t know how you’re going to get Maybe maybe we don’t need more housing I mean maybe that’s the answer but I don’t know that I don’t think housing starts look very good but maybe I’m wrong good good answer here from Adam Jones He says pal gave the answer in 60 minutes he’ll

Protect against recession at the risk of high inflation yeah well we’re not like there yet no I mean that would be well I guess I don’t know that that would be my answer I mean that kind of talk to me sounds like sub is contained and permanent new

High Plateau like to think that well we’ve just got we could just control all this very easily but I think what he’s saying is that even though inflation is running hot and they going to keep rates up the moment that there’s any kind of crack they’ll cut to

Zero well certainly the market feels like it’s kind of sus that out or at least leaning that way huh l also saying that but he’s also saying that after a period where I think he uh possibly deservedly can take a little bit of a Victory lap on squashing

Inflation so I don’t I don’t know we’ll see iess I guess what I’m really saying is it’s easy to say that now and I understand why maybe he would say that but what if all this fiscal spending actually has an inflationary problem even in some sort of

Recession I I don’t know the answer to this question you guys talk macro I know this is a never ending just well you know I it it bothers me that the country is being run like a leverage buyout and I you know this is like this old Charlie

Munger show me where I’m going to go to die so I don’t go there this is like one of those things that I think I don’t know that we need to push it so far to figure out where the problem point is yes I agree with that and they were

Talking uh at the 2000 meeting about uh you know borrowing money as a country and what does that mean and what do you do with that money and it really does matter what you do with it like they were saying and when I say they I mean

Buffett and Munger in the Berkshire AGM if I wasn’t clear before um that if you’re borrowing to like spend money on infrastructure that’s going to create you know the ability to run a society at a at a much higher level for 30 years like that might make sense like there’s

There’s sort of this I think there’s not all Keynesian deployment is the same like what you do with the money matters too but if you’re if it’s all just for like consumption um or to buy like you know stuff you’re going to throw in the garbage in a month from China or

Whatever like maybe that doesn’t pencil out from from a a societal deployment of of resources and so I think maybe we’re we’re doing ourselves a disservice not to like differentiate a little bit more as to like what are we spending money on we haven’t even hit the wave of

Entitlements and this is like the old look you could take a turn of Leverage you can take two turns of Leverage you could probably take three turns of Leverage probably take four I don’t know there’s comes a point where is not s it was three we we uh

Overshot yeah found out the hard way so I I know I hope it’s all under control it’ be good for us all if it is it’s such a bummer that they found that hard cuted cell in that Ken rogo thing where he said that higher interest rates at

Some point I sorry higher debt loads at some point High government debt loads are bad which just seems like ax that’s just common sense isn’t it yes yeah yeah obvious but then they but that’s that’s anti kind of krugman’s worldview so they they found and they found the hardcoded

Sell in there so they just said none of this no it’s just do count it doesn’t count yeah well when you don’t have much that krugman’s point of view where you could take more okay true like yeah you’re right I don’t know that you want to mess around with finding the edge of

This yeah no I agree I’m a little worried that we’ve all sort of said oh The Edge doesn’t matter but it it just hasn’t yet I but that’s we haven’t found it yet until it does until it does yeah yeah Miss uh ocean o Old Ocean Texas in Fort laale what’s

Up giving everybody a shout out today could you imagine though if if we had a complete like 180 from the existing sort of stance of like well you know it doesn’t really matter what if the US was actually like a Bastion of like we’re gonna have a very sound currency we’re

Going to help facilitate trade around the world uh we’re going to use our Navy to make sure that that trade happens freely um I mean really in a lot of ways it’s sort of like the Marshall Plan over again um but imagine if you think we’re that

Discipline ah I don’t know man I think we’re that now I just think we’re teetering on [ __ ] it up yeah I mean every every ethos from our leadership is not of we need to set a good example monetarily fiscally um and we’re going to be like a very good

Neighbor about these kinds of things we’re we’re not going to create this I mean we’ve exported a lot of inflation all over the the world and uh and we’re we’re abusing our our monetary Reserve currency status I think um and you can only do that for so long yeah you need a good

Military that you need you will you will take these pieces of paper that’s correct I let’s let’s do uh enough macro [ __ ] Einhorn is finkl Einhorn did you guys listen to Einhorn yeah I listen to Einhorn Einhorn says the market is broken passive has broken the market

I’ll tell you what pisses me off about Einhorn and I say this as someone who does not deserve to have this opinion but when I listen to his argument it sounds a lot like I used to be better at the Keynesian Beauty contests than everybody else and now I’ve found

Religion and if I buy businesses that are returning Capital to me that’s how I’m going to win and I just don’t understand why he didn’t start there but he’s also David Einhorn and I’m me so I I I just I don’t know that I understand

Like you know I can’t flip it to people in anymore so therefore Market structures messed up yeah I I more understand like I now because Market structure is messed up I look for C Corp conversions they’re going to have index buying I look for index inclusion

That I can flip it to somebody I buy cheap stocks that are flipping momentum because alos are just going to buy it like that to me is is makes some sense but to buy cheap stocks that are returning capital is kind of just like owning businesses that’s that’s like Buffett 101 I

Think yeah I think that’s fair like the uh where’s my greater full r-rating you’re not doing that it boore for me yeah and he’s complaining that that’s gone away and it’s kind of like well maybe the greater fuel fool has just been killed Where are all these Den dentists

That were supposed to take this off my hands that are unreasonable price wouldn’t uh wouldn’t passive breaking the market be the best thing ever for Value investors this is what i’ understand the first time I heard Michael Green’s argument I just thought this is if this is true this is the best

Thing ever if all the money rushes to the big end of town depends when that’s exactly right what do you mean what what’s the question what’s the conversation that we’re really having here because I think this is important uh is it do I want to make the most

Money in a forward return basis or is it do I have to justify to outside investors why the S&P is kicking my ass yeah because I think that’s a different question yeah that’s fair yeah I think it’s the best market for like the fact that value is so

Beaten while the rest of the market is expensive is great that’s a gift particularly if some of these companies are buying back stock I don’t need to return of capital but like concentrate the value let’s go yeah yeah it’s a it’s flows versus fundamentals it’s it’s

Um you know voting machine via VIA flows momentum versus weighing machine eventually and if it takes longer that’s just kind of the price that you have to pay for for this new world but I agree it seems like the disconnection there should create extreme valuation opportunities to take advantage for the

Discerning buyer who is actually like looking at businesses and the quality of the business that should be I mean I I was looking at the S&P and I guess somebody said it’s trading at like a 2.8% current free cash flow multiple or something like that and I’m thinking to myself

Okay well you know if I want to preserve wealth and I and I got a 10-year duration I can take the S SMP or the tenure that’s going to give me four and I’ve got to take on the some of the currency things that we’ve identified yeah maybe the S&P gives me some

Earnings power should it should it rate down I I need to know the scenario that it does but the companies if they can protect some of their earnings power buying in shares so like over time I think that 2.8% will grow well if I can like talk myself into why that’s

Rational here I’m sure you can just extend it and say well at 1.4% it works that’s up 100% yeah like I don’t know that value outperforms that reating at some point over the future you would think your entry fee cash flow yield should matter so like yeah I think you know

There’s this company I follow oec if people want to take a look and tell me why it’s stupid let me know but they they’re guiding the like 500 million in in midcycle cash flow it’s a two two billion dollar company makes rubber black like it’s it’s terrible in like

Like a not a terrible industry but it’s not something people are going to enter you know I don’t know the S&P probably kicks its ass for a while eventually I think that’s like that pay off but you got to own them you can’t control the multiple right you can’t control the multiple

Reating either for your own stocks or for the rest of the market so there’s no point worrying about it what you can control is how much value you get when you buy and the value that you get is the yield plus the reinvestment rate you don’t need multiple reating

It’s nice if you get it and I would like some don’t like the headwind all the time I’d like a Tailwind but you can make money just just on the yield and the reinvestment and you know even if you get even if you get a little bit of a

Headwind then over time eventually it it all works out I don’t I I think I think that’s exactly what irh Horn’s saying I don’t think he’s actually complaining too much I think he’s saying you can’t he’s just saying you don’t think about it in terms of getting the don’t buy

Something that’s cheap relative to the index expecting it to catch up to the index buy it because it’s genuinely undervalued and you’re getting a return at the moment that you buy it but I I think that he keeps on coming out and saying it and it sounds like

He’s sounds like he’s complaining a little bit the FED Ate My Homework yeah it does it it it just sounds a lot to me like we used to identify opportunities before the market saw them and we’d flip them to people who probably underperformed right if he’s outperforming doing it they’re probably

Underperforming he’s doing it he was doing it during a time when the S&P went on an insane run and like where the where the value Factor went on valy went on a insane run well but I’m saying I’m saying the last 10 years that he’s saying that things are broken yeah I

Mean a lot of those people that were buying this stuff from him like I don’t know they they weren’t doing it in a tax advantage rapper a lot of them were like old school you know shops I mean I don’t know those people going away is that is

That the market broken or is that just kind of capital markets iterating I think the Advent of ETFs to do some of this stuff makes a ton of sense that put a lot of pressure on those people that probably would be buying that do I think value ETFs existing have distorted

Market structure no I don’t so I just don’t know there’s a little bit of exogenous things happening too there where uh you have the perhaps adverse selection bias of PE kind of sucking out maybe the better companies potentially I mean we’ve we’ve seen some measurements of like the Russell 2000’s business

Quality has deteriorated so that might be PE driven and then secondly you have big pools of capital who have looked for liquidity in places to meet their private investment obligations uh Capital calls in PE and VC and where do they get the money from well let’s sell

These you know this dog or let’s redeem this dog manager um where and it it tended to be probably the on the more value end of the spectrum over the last 10 years and you you have this sort of reinforcing momentum of that where this guy stinks now he doesn’t know what he’s

Doing let’s let’s redeem from him he has to sell those stocks they go down it just drags in other value investors that might have held it as well and then you you know you kind of get these these feedback circular um self-reinforcing Loops that that can can go on for longer

Than you you would probably hope as as a manager who’s trying to just be rational doesn’t seem to have a lot of impact on the Russell 2000 if anything they’re at the low end of the Russell 2000 the small end rather Russell 2000’s quality I think is largely driven by you know

When the market gets when it’s easy to raise money you get a lot of the biotechs and you know the things that they don’t have any Revenue they just TR comes public yeah the Ducks are quacking you got to feed the Ducks I think that’s

What it looks like now and I there’s a good question here which we come to in a bit but the question is do you think think the it’s gerain to this one from Tyler again do you think the underperformance of the value factor in the recent past is partly explained by

Zur and bailouts preventing consolidation of industries from low return on invested Capital firms to high return on invested Capital firms I do a little bit that like Japan had this problem where they had these zombie companies that they just never declared bankruptcy they were able to stumble from you know

There there’s yeah yeah with no lack of enthusiasm no loss of enthusiasm what’s the definition of value yeah wow we’re not defining it for these purposes you submit your own low low PB yeah low PB is tough because some of the best firms in the world have no B right so for

Sure even cigarette companies have no B right they just bought it all in yeah so you almost have to do like a price to assets on some of those businesses or a bunch of Leverage that can take your book value to nothing yeah I don’t know you know like green

Brick has worked great and the stock has worked as the business has worked it doesn’t seem like a broken Market but he’s a lot smarter than I am yes all right let me let me let me throw out another one Tyler’s got a couple of good ones here not fire

Today yeah do you guys think the value Factor will perform better with a period of sustained higher rates was above by pay grade Toby take this one yeah that’s an interesting question it doesn’t really make sense that higher rates should help equities but I think that if you’re if

Your higher rates certainly hurt firms that have got back-ended cash flows so the growest stuff that isn’t doing anything now and things that are highly levered which might be you could maybe say value firms tend to be more highly lied I don’t know it’s hard it’s you know that the

Buffett said following the last big period of inflation where whether it was 70s or 80s or something like that that he would have rather been in the asset light businesses that had pricing power than in you know the received wisdom the the common wisdom was that you want to be in

The asset intensive stuff because the assets go up in value ignoring the fact that you have to periodically replace the assets which means that you’ve got to stump up you got to find the money to buy them at a higher price than you bought them previously and so you might

Earn money on your assets for a period of time but then it’s sort of it’s illusory because when you go to buy you got to pay more it’s a tough one right certainly low rates didn’t help let’s try High rates and see what happens well look I I think like to the extent

That that rates would cool the labor market and to the extent that labor runs through value firms income statements I think it could help like I I I noticed met Cole is in some value screens met Cole seems to me to be a big beneficiary fiscal stimulus

If rates stay high I could see an argument why you wouldn’t build more sort of facilities and you may not expand your operations so I think I think that the combination of of fiscal spending and high rates could help some of these value stocks a lot because I think it may restrict

Supply from coming on Cole’s had a pretty good run over the last 12 months yeah but I’m I’m just that’s I’m thinking the same thing I just I kind of have this theory that high rates might actually create inflation and I and I think it’s because

It it may reduce aggregate supply and I think that may help value but maybe not what about giving you know all these Savers a little bit more spending power too and like you know Grandma’s savings account now gives you gives or four before that she can go buy things with

That she wasn’t when it was at zero it depends a little bit on the composition of the economy like if it’s mostly net Savers versus I mean maybe that doesn’t work out maybe you have to have the maybe the savings has to equal the the borrowings I don’t know I don’t

Know I think the composition of the economy is maybe one one reason to be a little less scared of oil than we were in the 70s right oil going higher will actually do wonders for Texas which not was not historically the case it didn’t used to bring much money into

The US economy now now it could yeah and the the uh the sensitivity to oil the the oil what’s the word um amount of oil concentration required to run the economy has has come down quite a bit um just efficiencies uh more service than heavy labor or heavy production EVS EVS saving

The I’m not sure that applies here that’s sort of energy intensity that maybe that was the word I was looking for intensity yeah I remember when you did that segment I was actually on that show or I was watching I don’t I think I was here I blacked out what if it helps

Commodities and valy tends to be concentrated more in Commodities yeah as long as it doesn’t hit the income statement right as long as it doesn’t impact your cost more than your Revenue there’s the easy answer yeah well if you’re selling them you’re okay but yeah as long as you’re not

Buying new machines yeah right if the capital is already in the ground and the price goes up and you don’t have to put a bunch of Maintenance capex in then yeah it should work I think it’s a chart crime I don’t know exactly why it’s a

Chart crime but it always gets pulled up by the guys who call out the chart crimes but the comparison of like the S&P 500 to a to a basket of Commodities that relationship you know in 2000 was stretched the way it is now in favor of equities over Commodities in

2010 or whatever or the 2020 was stretched in the other direction and it’s it’s still sort of stretched that way so it’s like a you’re better off buying Commodities rather than equities here yeah what you say though that one like one is a bet against human

Ingenuity and the other one is a bet for human Ingenuity over the long run you want to be for human Ingenuity yeah so that might be why it’s chart crime it’s not a Min reverting series there’s maybe there’s a drift we certainly stationarity in the data energy intensity is just one I mean

Probably find the intensity of all all of all everything is we’re using less of it we’re more efficient digitization removes a lot of material out of your economy I I ier mostly a paperless office like that was that was a big deal at one point we’re going to be a paperless

Office I can’t function without paper I am a straight up Boomer I hate when I have to print something out oh it’s the worst shall we uh do some Veggie let’s do some veggies top of the let’s do it what do veggies cost these days it’s a lot they’re kind of expensive yeah

Surprisingly given that has it has it taken you longer to do veggie segments with inflation or not so much does that not apply you know there’s a little bit of inflation it’s just purely ego I think is the input cost is low relative to the what he sells them for good

Productivity increased you know what it is is there’s diminishing marginal utility from them as I scrape the bottom of the barrel for ideas yeah you’re learning about the oil industry youve minded your good Wells first yeah I’m definitely uh I don’t know that’s not true you come

Up with good stuff so let’s let’s get it let’s get it this is uh this is called the farmers Fable and uh it’s a story about a farmer named Bill and in a good season he’ll Harvest 150 seeds for every 100 seeds that he plants so it’s a 50%

Growth rate not bad and uh if if Bill plants these seeds every year this business will grow exponentially but alas farming is not so easy and sometimes there’s a bad Harvest and when that happens Bill only gets 70% of his Original Seed count so it’s a 30% loss

So where Bill lives in Florida you know it’s random coin you should have given me a trigger warning sir I’m not going to I wanted to get you off here like on tilt here uh so where he lives in Florida it’s a random coin flip between a good season and a Bad

Season so we’re still looking at like a pretty good bet with a positive expected outcome it’s you know half the time it’s plus 50% the other half of the time it’s minus 30% on average we can expect a 10% outcome and uh bill has an edge here

Given all this we could run simulations on what Bill might expect to happen over the next hundred years of his farming and in the first run that I did of this bill fared pretty well things started choppy you know you know good season Bad season back and forth and but then he

Had a run of good luck and he ended up with over 100x his Original Seed count he’s the man uh and then the next time I ran it he started with a run of bad luck and he lost 90% of his seeds before bouncing back and finishing with 10

Times the original Mount after 100 years that bill didn’t he didn’t stick with it that bill blew out at the bottom after a 90% draw down started selling himself on the corner he did went broke yeah the next time I ran it Bill started hot but

Then he hadit a rough patch lost his confidence and and he finished with actually less than he started with which is is bad luck and so even with an average of a 10% expected return Bill ended up with 100x in the first scenario 10x in the next and then a loss in the

Last one so there’s a lot of luck involved here and so maybe farming maybe isn’t as good a business if it’s so Random right uh but here’s where things start to get interesting bill has his friend named Toby and he’s also a farmer and they happen to live on opposite

Sides of the country from each other so their weather is completely unrelated h and it’s it’s random who will have a good year and who will have a bad year so let’s run another 100-year simulation with both Bill and Toby farming alone this time Bill ends up with a relatively

Lucky outcome and he has 16 times as original seeds and Toby’s unlucky and he ends up at just barely break even so maybe T Toby is a bad farmer I don’t know but uh but however what if these friends decide to make a deal and at the

End of every season Bill and Toby agree to pull their Harvest and then split it equally so here’s a little the math behind it and it’s actually quite counterintuitive uh so I would urge you if you’re listening to this to go to Farmers fa.org which is where I I got

This from and click through the little animations that it has and that’s Fable with an F right it’s not table um click through the animations yourself to follow along and and honestly like I’ve had to run this multiple times before it really made sense to me it’s that counterintuitive but eventually I’ve

Kind of started to wrap my mind around it and it honestly it’s a like kind of blows your mind a little bit and so that’s why I’m sharing it with you guys now so I’ll I’ll try my best here to keep it simple of what’s what’s going on

But so imagine that Toby starts with with we’re gonna change it to like one bundle of wheat okay and in the first harvest it’s a great year and Toby triples his bundle to three all right awesome right then he has a second harvest but it’s not so good and he merely

So Toby finishes years with three Bund of wheat all right we’re following along so far at the same time running along with this bill also starts with one bundle of wheat he breaks even in his first year and then triples in his second so both Bill and Toby started with one bundle

And finished with three after after two runs of the simulation right simple enough now let’s imagine that they pulled and shared but it and it’s the exact same weather patterns held over this just like in the first example in the first year Bill finished or sorry Toby finished with three and Bill

Finished with one okay but before we move to the second season to run it they pull their bundles and then split them up so three plus one totals to four they split it and they now they each have two for the next harvest season in this next

Season Toby breaks even and keeps his two Bill triples his two and which then takes him to six okay what a stud they pull again and split it and this time it’s 6 plus 2 equals 8 so they split it in half and now they arrive at each at

Four bundles so that’s one more each than when they were farming by themselves so there’s like this there’s actually this like free lunch that occurs from diversification and pooling uh and that’s maybe what everyone’s been talking about when they talk about this free lunch um so anything that grows

Exponentially like this in a multiplicative series there’s an advantage to sharing and it pays to redistribute after each step moving forward uh because you only take a partial step backwards uh when you share and so this like luck then becomes what was it like luck becomes more of a

Certainty over the long run with this pooling and sharing and so you’re you’re actually interestingly reducing risk and increasing the growth for everyone involved because it’s reducing the fluctuations right it’s this Varian strain that we’ve talked about um and you know you can even there’s actually ways you can demonstrate this

Mathematically that that someone who is objectively better farmer than the person that they’re pooling with will benefit from a pooling Arrangement um although there are some limits to it right like you can’t if if you if I was paired up with Warren Buffett of farming and then I was like you know totally

Dead weight for them that would not be a a good arrangement but but there is allowance for a little bit of Delta there so it really shows you the importance of going of avoiding those big Downs that the variants drain as much as possible which of course is is

Why probably Buffett has rule number one is don’t lose money right so um and this whole Farmers Fable was inspired by a 2019 research paper from from ol Peters and Alexander Adamo I believe is how it said called uh an evolutionary advantage of cooperation um if you wanted to like

Read the more scientific treatment of it but but they’re they’re basically able to prove that um this Cooperative transactions in a multiplicative Series where you have to like multiply things out like geometrically uh there there’s a real uh advantage to be had for for pooling arrangements so I find that to

Be very interesting and if you you click through the fa that farmers fa.org um it’ll help do a better job of what I just you know said in orally which is you know not as good of a a way of teaching this is probably looking at little bundles of wheat yeah good good

Good call Tyle Ferris got there again with Shannon’s demon before he before he’ got very far into that story again uh correct Shannon’s demon is a is a great example of that which is why you want the uncorrelated or anti-correlated you know Ray Dalia says get 10 uncorrelated series that’s a good

Way of doing it if you can find them yes that that diversification of being able to limit the downside and which allows you to catch that bigger upside with a larger pool of capital evidently we’ve crashed Farms fa.org that we dozens of people went there once couldn’t handle a lot [ __ ] I didn’t

Think about that sorry guys why rollup math makes sense you know you add some things AC getting Geographic diversification it’s actually worth more interesting I haven’t roll up Civ work some I don’t know that the base rates are great what goes wrong there I don’t know I would I I suspect

If you were to um study it that you’d probably find incentives are squarely in the middle and you probably have to be fairly decentralized to do them really well I I would think I haven’t done a good rollup study despite wanting to when they’re thematic they start with

Lots of little ones and then they get to move the needle they get bigger and bigger so their biggest mistake is always well the mistake that they finally make is always the biggest mistake they make the ones well like you know constellation or birsh used to be 3G but well Valiant

Remember Valiant yeah that was a roll up I’m got to imagine some overconfidence creeps in when you’ve done a bunch of small ones you’re like Hey we’re pretty good at this let’s take a bigger bite of the apple and then you get clobbered yeah you start believing that you’re actually worth the multiple

That people are giving you and get a little bit of a God complex I can see that constellations manag to keep their acquisition side incredibly small unbelievably small I can’t like I almost don’t believe them it’s so impressive it’s distributed Acquisitions all the way to the edge of the network

Rather than having to rely on the dude in the middle coming up with all the ideas it’s a good way of doing it yeah you need the right kind of leader in that right like that’s a guy that I suspect doesn’t require all the attention maybe the opposite is trying

To avoid all the attention yeah could be something to learn there stay of podcasts that’s definitely or have keep your podcast very small yeah that’s why we’re doing it that’s why we keep it small and intimate um yeah do you guys want to do predictions for 2024 haven’t we already

Done those yeah but I just mean generally what’s gonna happen oh God I don’t know can you just beat me with a stick instead Toby and we’ll just call it even I certainly can thank you next time I see it Dan her that’s good there’s a good

Rollup big sell off today because we got a hot CPI print does that make sense Market looking for a reason to sell off I don’t know lots of people Lots people seem to be commenting on the Twitter machine for whatever that’s worth that things are really heated I you know I

Look I just think that um some of these like just middle of the road old economy businesses don’t seem crazy to me and I I bet if you own them you do okay maybe you got to live through a little bit of a recession in the meantime but like the

Prices aren’t indicating Euphoria at least as I see it but then again who the hell knows I could be blind what kind of multiples are you seeing well I mean you know like what oec I mean look you got to they they have to bring this this leport plant on

But I mean you know what four times forward iida in 2025 like that’s not crazy okay how much is DNA call it maybe I don’t know 990 million or so let’s let’s say 500 million is 300 million in free cash to equity you’re two times levered and uh I mean obviously it’s a

Commodity so who the hell knows what’s actually bankable but you’re looking at Equity value of 1.3 billion I don’t know four and a half times free cash maybe that’s Peak so maybe it’s 100 million okay well then you’re 13 times cash last I checked that’s still like

Seven % return right you got to own it though I mean you know if a cycle goes against you and you puke it at the bottom you’re screwed look I just described Charter for me I kid I puked it a little higher but I do think it is uh all but

Impossible to time these kinds of things you really don’t know when the the worm will turn I don’t think so I I think like let me try to make it more concrete do you think you could have timed the 2000 to 2007 value Renaissance no but I but but I do think

At some point the valuation spread does get a little too big where it’s like value probably does well I think the harder question is after it does well I don’t know when I sell it but you got to Surf that wave all the way to the beach

Billy I don’t know what that means it just like Crash It On the Rocks dig that nose into the the sand at the bottom Fairfax short report yeah that’s interesting H any thoughts on that seemed like a funny I mean all the things in the out there

That might be fugazi and you’re going after Fairfax okay well they have they have a historically um people that know Insurance some have had some questions about their underwriting I think if you believe publicly reported data I think those questions I mean I was just looking at it what like their last 10

Years of of combined ratio is like 97 or so or 96 seems like the could be worse than that um then what you’ve got acquisition accounting and you’ve got a stock that’s been on a hell of a run so if you wanted to scare people I I think it could make some

Sense to write a report like that and you get some some shake out and then you close your short and then you move on yeah I I don’t like the idea of publicly shorting man I mean especially Prem like I I I think Prem has come after people in

The past and I I think he would not be afraid to do it again if if you did not have pure motivations I think you better be [ __ ] right on your analysis if you come after a guy like prom my interpretation of Muddy wat’s complaints were mostly like we don’t like the way

IFRS accounts for things it’s like well yeah fine I mean you don’t like the way that it was marked to market for something like say like digit for instance well that was like a what seoa led that round and that was the price that they marked the

Equity at like what I mean what do you want them to do like it’s that’s just sort of how it works like make your own adjustments like none of no one’s saying accounting gives you the exact answer like these are all just abstract approximations of reality at the end of

The day um you need to make your own adjustments but that doesn’t mean that it’s fraud so I I don’t know I I found it rather unconvincing myself but the uh the question that I had by the way is I I believe that Prem sued uh

Rody Boyd if if I I could be wrong I I believe a lot there was a big short interest in what was like 20056 time frame for for Fairfax if I remember right yeah I may be wrong on that but I’m just saying like you know he seems

Like he’s they released the response they released a response to the response you know I actually talked this weekend to a guy who was a short seller who found himself the subject of an investigation and you know his side of the story is he was just doing good work

And you know he wrote a public short report and the amount of heat that came on them you know even if you’re right the legal bills are a lot I just don’t I don’t understand the risk W SK the only the only way it makes sense is if you’re

Running a firm and you want to attract assets and you think it’s worth all the headache but man being public and short would I commend the guys that do good work and do it it doesn’t sound like a fun existence sounds like even when you’re right you can put yourself

Through hell oh God the Einhorn entire book about shorting Allied was like would if you read that before you ever even think that you might want to do it because that probably scare you straight all right uh here’s a good question briefing on Buffett’s uh chat

What do you think some of the few companies are going to be better businesses and earning more five years from now with 90% confidence that’s from Tyler Ferris the our fourth help producer Tyler Ferris is responsible for 90% of this episode uh yeah it’s a it’s interesting

That came from I think Todd comes talking about what him and Buffett talk about on Saturday afternoons um and they’re they’re basically mostly just talking about businesses that that fit that criteria is that is that a correct yeah do we do we have a price on this are we lied to

The 15 times earnings thing yeah that’s that makes it a little harder doesn’t it yeah it wasn’t a limit on this so I guess you can you can swing away anything what about mag seven I don’t think I’d bet against it yeah I mean it was true all all of the

Big the big growthy companies from 2000 like they all compounded away from 2000 2015 price didn’t go anywhere but the the businesses certainly got bigger over that period this isn’t a unique thought given where it trades but I I think the one that make would make me the most nervous is Google Um yeah I don’t even know that it’s like AI it’s um it’s just like they’ve made so much money for so long that I I just wonder if something to compete with their economics do they even have the muscle to learn how to Pivot it’s like it’s like uh first

Generation makes it second generation spends it third generation’s got nothing again like what generation are we in I don’t know Generations it’s it’s been interesting to watch you know meta when it was smashed like a year ago or 18 months ago whatever whatever was the bottom it was

Like half Google on my I have this screen on the acquires multiple with the little Bubbles and meta was half Google for a while and now it’s more expensive than Google yeah Z that’s cuz zck went he’s like time to get hardcore sucks yeah well you

Got comp slap and all that jiujitsu and massaging his cows and feeding him macadamia nuts and beer I want to be one of zuck’s cows copied Tick Tock figured that out pretty nicely pay himself a big fat dividend live in the bunker on in Hawaii he’s got a fig out that

How come zuck’s not demanding 25% of the company be given to him oh I actually think that this is I’m actually sort of on team Elon here all right break that down for me all right so to the extent that you are are would be a shareholder

Right so you’re already signed up on team Elon like he wants to build a robotics company He is building a robotics company he refers to it as robotics company but to I think I think out of all the people that are actually like kind of worried about artificial

Intelligence I actually kind of like resonate the most with what he says and I kind of see if I were him being like look if I’m going to unleash this Beast I want to control where it goes I don’t think that that’s necessarily um if anybody’s going to

Make the monster that destroys Humanity it’s going to be it’s not going to be somebody else yes and you don’t have to say that it can be him by the way right like that’s fine if you say no it’s not you or it’s not in this entity let’s get

That a into some of those Bots give them guns let’s see what happens well I think he I mean look I think he’s he thinks he wouldn’t but um I don’t mind the man asking we’ll see well he got approved by the shareholders for the last slug so the

People who really count but voted for it and then the court said no yeah well it yeah it could be not it could just be voting shares it doesn’t even have to be the economics I don’t understand I need to realize why the court said no that doesn’t seem American

To me on its face feel like if shareholders are going to give you that much money they should be allowed to yeah it’s a big shareholder Bas it’s lot of people in there a lot of sophisticated investors Christ it turns over a milon times a year too so whoever just rented it most

Recently hey man don’t hate the player hate the game that said I don’t like his Securities fraud or my perspective or my perception of it that that has always bothered me and always will he’s a complicated figure I think he’d be good to do without the means in his life the

Dopamine and the ketamine I think he could get off of it’s probably fair for all of us I’ve tried to reduce the dopamine I’m in a better spot all right fellas that’s 200 episodes in the bag wow congrats boys I’m proud of you well done thanks everybody for sticking with us happy

Valentine’s for tomorrow play this for your significant other to show them how much you love them I remember when I got my dog and she was a puppy on this show she’s now 80 pounds and sleeping just a fat Beauty she learned watching you hey now