Practical Lessons from Tobias Carlisle | Value Investing, Buffett and the Importance of Survival

[00:00:00] My objective is to survive first and foremost. That cuts out a lot of the universe becomes uninvestable for that reason. I was too concentrated early on too, and that's Buffett's fault.

[00:00:14] The objective as a value investor, I don't really care so much about the stock price performance even after I buy something because the returns for me when I buy are already baked in.

[00:00:27] There's a great line from Munger and Buffett where they say, I'd rather a lumpy 15% to a smooth 12%. And that might be true for those guys, but there aren't many other investors out there who are like that.

[00:00:38] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing and financial planning to help investors achieve their long-term goals. Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau, as we cover a wide range of investing and planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial life.

[00:00:53] Jack Forehand is a principal at Validia Capital Management.

[00:00:55] Matt Zeigler is managing director at SunPoint Investments. The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital or SunPoint Investments.

[00:01:03] No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of clients of Validia Capital or SunPoint Investments.

[00:01:11] So Matt, it's 9 a.m. day after Halloween and already loaded up on Reese's Cups and Leslie Crutch Bars.

[00:01:16] So this could be a completely wild education of a financial planner talking about lessons from Tobias Pyle.

[00:01:22] Let's get completely unhinged. I successfully made my way through a webinar yesterday where I inserted Halloween movie references for the entire quarterly market environment report that we did for SunPoint.

[00:01:37] And I was like, Jack's influence has just tainted everything I'm doing.

[00:01:41] You're too much wrong.

[00:01:42] I know who could basically do a webinar for clients that is completely Halloween references without any worth tied into the market.

[00:01:48] And we'll see if anybody even noticed, but I guess that's the point.

[00:01:51] I appreciate that we're having this conversation live from what I presume is your spaceship.

[00:01:55] I see the backlights beaming in overhead.

[00:01:59] You're so high on Reese's that you've entered orbit. Is that my take here?

[00:02:04] This is more my first computer. As you know, my first computer crashed.

[00:02:07] So we've now gone to the secondary computer and we were just basically we're basically winging it and trying to get through this thing.

[00:02:12] Well, what better time to talk about investments and things like extra computers and backup than for us to talk some Toby Carlisle clips.

[00:02:19] What do we got today?

[00:02:20] You never know. I might get some like Nestle Crunch bars on the side and just start eating them during the podcast.

[00:02:25] You never know how that might play out.

[00:02:27] The smear of chocolate.

[00:02:29] Well, it's spoken.

[00:02:30] You can't take care of me.

[00:02:31] Like the joke.

[00:02:32] Compare us to like these high production value podcasts in these studios.

[00:02:36] There's probably some things that are lacking.

[00:02:38] But anyway, let's move on to what we're doing here today.

[00:02:40] We're going to talk about Tobias Carlisle and lessons from him.

[00:02:43] And this is really cool because I think probably if I had to describe like the most important trait in successful investor right up on that list would probably be conviction.

[00:02:52] And I don't think there's anybody I would describe as having more conviction in what they do than Tobias Carlisle.

[00:02:58] And he does a good job of blending that as well.

[00:03:00] Like we're going to talk about he's always willing to come on.

[00:03:02] Obviously, he's very he's a high conviction value investor, but he's always been willing to come on with us and talk about the reasons value investing might not work anymore.

[00:03:09] So like blending that conviction with that willingness to look at the other side is so important.

[00:03:14] And I think you're going to see that in the clips we're going to do today.

[00:03:16] Yeah, absolutely do.

[00:03:18] And a hard plug.

[00:03:19] I should have pulled him off the shelf for this.

[00:03:20] Like all of Toby's books are just profoundly insightful.

[00:03:24] So worth the time.

[00:03:25] And there's so much more than just I know we're going to talk about some of the factor profiles and some of the other stuff that go into this.

[00:03:31] But the stories that he wraps into like why this is compelling, you really get why he believes in it so strongly.

[00:03:37] So I'm excited to do these.

[00:03:39] Yeah.

[00:03:40] And the first one is really cool because this is something this is an idea I've thought about a lot, which is the idea of is there an ideal business?

[00:03:45] And if there is an ideal business, what does it look like?

[00:03:48] So here's Toby talking about that idea.

[00:03:49] I think he says this in his letters that the ideal business, like the theoretical ideal business is a business that has this unlimited runway for reinvestment and takes all of its free cash flow and reinvests it at a above market return or a very, very high rate of return.

[00:04:08] And so he would say C's candy is an example of that.

[00:04:10] Like basically the top line growth in C's candy is absolutely minimal.

[00:04:14] It might be 2% a year.

[00:04:15] The global growth in chocolate is like 2% a year.

[00:04:18] And C's candy in particular has this problem that nobody would buy a box of C's candy for themselves.

[00:04:23] Everybody buys it as a gift and everybody loves to get it as a gift and everybody loves to eat them.

[00:04:28] But no one would go into a store and buy one for themselves.

[00:04:31] So they have this like, there's a psychological problem with it.

[00:04:34] But having said that, you know, California and now lots of places in the States, people will go in and they will buy a box of C's candy.

[00:04:41] And it's poisonously expensive.

[00:04:42] It's so, it's crazy expensive when you go to buy it.

[00:04:45] The margins on there are astronomical, but they still sell it all out every single year.

[00:04:51] So the prices aren't high enough.

[00:04:53] They've really not grown the top line very much in that business, but it's thrown off massive amounts of capital.

[00:04:59] It's basically built Berkshire Hathaway, you know, for an investment of whatever it is.

[00:05:04] It was 27 up front and then they've thrown another 30 at it over whatever the 30 something years that they've, 50 years that they've held at something like that, whatever it is.

[00:05:13] And it's thrown off, you know, billions of dollars that they've then, like an ordinary investor could have reinvested those cash flows and been fabulously wealthy at the end.

[00:05:22] But you take those cash flows and you give it to Buffett, then it just, he's gone and bought other C's candies that do the same thing.

[00:05:27] And it's just had this compounding multiplicative effect.

[00:05:32] So I think that that's the ideal business one that doesn't require any reinvestment and probably doesn't pay a dip.

[00:05:37] So, sorry, C's can't reinvestment, you know, the idea is that you just takes the capital that you give it and just reinvest it forever.

[00:05:45] Not very many businesses can do that.

[00:05:47] And it's often the businesses that you don't want to reinvest in that require the money, like they're the ones that soak up all the capital all the time.

[00:05:54] But I think that when you can't find the ones that can absorb infinite capital on a very long runway, then you want one that still maintains the very high returns on capital,

[00:06:05] but returns most of it to you so you can then go and find your own other high return on invested capital businesses.

[00:06:11] This sort of plays into what we've talked about before in our last episode, because we talked about dividends in our last episode and how much investors love dividends.

[00:06:18] And I think if you asked a lot of investors, they'd be like, well, the ideal business is going to pay me tons and tons of dividends.

[00:06:22] But I think the opposite of that is actually true.

[00:06:24] Like dividends are sort of something you do when you can't invest money in the business at like high returns on capital.

[00:06:30] And that's what Toby's talking about.

[00:06:31] Like the ideal business would be able to invest back in the business over and over again, earn high returns on capital and just compound your money forever.

[00:06:38] I mean, if you think about a lot of these big tech companies, they probably a lot of ways look like the ideal business.

[00:06:43] And nobody's going back and saying to Amazon, you know, I wish back in the day you would pay me tons and tons of dividends instead of putting money back in the business.

[00:06:49] So I think this is really interesting, the idea of the ideal business.

[00:06:52] But I think you got it right in terms of what that business looks like.

[00:06:54] Yeah, this is.

[00:06:55] And let's just be honest here.

[00:06:57] Excess returns is really the seize candy of YouTube channels.

[00:07:01] That's what I thought.

[00:07:01] I don't think anybody who looks at our financial behind the scenes and excess returns is going to call it the ideal business.

[00:07:06] It's because we're reinvesting the capital, Jack.

[00:07:11] From a planning perspective, I actually think this like overlapping of capital's idea is really useful too.

[00:07:18] Because if the ideal business, the ideal business in the perfect sense doesn't exist.

[00:07:22] Otherwise you would start a business, it would keep reinvesting the capital at above market rates, and eventually you would take over the world.

[00:07:28] Like that's a myth.

[00:07:30] But this is where you can start to think about, all right, so I have a business.

[00:07:34] Am I going to reinvest for an above market return in this business?

[00:07:38] And then if not, what else can I do?

[00:07:41] So I have this conversation a lot with people where they talk about the money that goes into their 401k or the business owner who's deciding to reinvest in the business and not put money into the 401k for a stretch of time or whatever it may be.

[00:07:53] And this is the fundamental question that decides it, is if you think you can get an above market return by doing the thing, then you should do the thing.

[00:08:02] If you can't, it's okay.

[00:08:04] You could have a crappy job effectively for a company that's not really growing but pays you a good salary and go, hey, I'm glad I am not an owner in this company.

[00:08:14] But I will gladly take that money and put it in my, you know, index fund, my 401k or whatever it is I'm doing, and I'll get my market return there because my salary, my wage is only going to go up by 2% or 3% a year or whatever it is.

[00:08:27] Understanding this whole different returns on capital at different layers and how you reinvest, this is a deeply profound and thoughtful point.

[00:08:35] And Toby makes it over and over again in the other clips we're going to watch today too.

[00:08:38] And I think the first thing you said is really, really important because the ideal business in a lot of ways doesn't really exist.

[00:08:44] Like at a certain point, you can't keep investing back in the business, investing all your money back in the business at higher return and high returns on capital.

[00:08:51] At a certain point, every company, even these great tech companies, you pay dividends, you buy back shares.

[00:08:56] Because the whole idea of capital allocations, I'm supposed to look at all my options and I'm supposed to decide what's optimal.

[00:09:02] And at a certain point, investing every dollar back in the business becomes not optimal anymore.

[00:09:06] And so this ideal business doesn't exist, or at least it exists for periods of time or windows, but it doesn't exist forever.

[00:09:13] But I think it's just important to make that point.

[00:09:16] Yeah, and highly, highly recommend go look at the Oswath Demedron episode too.

[00:09:22] Think about this in the life cycle terms because the point you're just making right there is this thing changes and evolves over the life cycle for this stuff.

[00:09:29] So as you move through different phases, different things are going to happen.

[00:09:33] And yeah, when you're a young company, you might be reinvesting a lot of that capital.

[00:09:37] When you're an old company, if all of a sudden you start reinvesting and it's not for the right reasons or not for the right return profile, bad things are going to happen.

[00:09:46] So this next step is very good too, because this gets to this idea I think about a lot.

[00:09:49] And I think a lot of people in the investment business and probably a lot of other businesses think about a lot too.

[00:09:53] So this is Toby talking about survive.

[00:09:54] My objective is to survive first and foremost.

[00:09:57] And so that cuts out a lot of the universe becomes uninvestable for that reason.

[00:10:03] There's either a problem with the balance sheet, there's a problem with the business model.

[00:10:09] It's just unproven.

[00:10:11] It's too early to say whether it's something that can...

[00:10:13] I just can't get enough of an idea about what it looks like through a business cycle to make a decision one way or the other.

[00:10:19] And so I think that that makes it uninvestable.

[00:10:21] And you probably miss out on returns doing that.

[00:10:23] You know, I've watched a lot of these guys who are the more compounder type investors.

[00:10:30] And they would say, well, you need to buy these companies when they're losing money,

[00:10:34] because they're going to inflect when they become cash flow positive and ultimately profitable.

[00:10:42] And you miss out on all that return.

[00:10:44] And that's true.

[00:10:44] It does seem that you miss out on all that return.

[00:10:46] But sometimes you also...

[00:10:48] They don't quite get there and they fall apart.

[00:10:51] And so there's risk in an untried business model.

[00:10:54] And so I'm just more of a conservative, skeptical investor.

[00:10:58] And it's not just personality.

[00:11:02] It's because it's based on data.

[00:11:04] Like I've done a lot of backtesting.

[00:11:05] I've looked at a lot of research.

[00:11:07] The reason that I invest is because of those reasons.

[00:11:11] I've looked at the research and I think that it's the best way to do it over the long term.

[00:11:16] Even though short periods like this where you want to perform are painful.

[00:11:21] They're not...

[00:11:21] They're not...

[00:11:22] It's not a new thing that's gone on, as I said earlier, where there have been lots of these periods.

[00:11:26] And they go on for an extended period of time.

[00:11:28] And I understand that people can say, well, 10 or 15 years.

[00:11:32] Like that's like half of an investment career or something like that.

[00:11:35] Like that's a crazy long period of time to be buying value.

[00:11:39] But it's not...

[00:11:40] And this is the longest period of sort of underperformance.

[00:11:43] But they're not...

[00:11:45] It's not the first time it's happened.

[00:11:46] There have been very long periods of underperformance.

[00:11:48] And they've all resolved ultimately to...

[00:11:52] The price matches the underlying performance of the business.

[00:11:55] And so that's where your attention should go to the underlying performance of the business rather than the price.

[00:12:00] Yeah.

[00:12:00] And I think this is a good way to frame it.

[00:12:01] I mean, I think as a manager, as somebody who buys companies, this idea of first and foremost, before I think about everything else, I'm down to survive.

[00:12:09] If I'm making bets, if I'm doing things that challenge my survival, then I'm putting everything at risk.

[00:12:14] So before I get into all the other stuff I'm going to do, let's first just focus on surviving.

[00:12:20] There was this idea.

[00:12:21] Were you a fan of The Wire?

[00:12:22] Did you watch that show when that was on?

[00:12:24] I watched just a little bit of it.

[00:12:25] I think it was a great show.

[00:12:26] Everybody says it's one of the greatest shows of all time.

[00:12:27] Um, I'll, I'll stand behind that as one of my favorite shows of all time.

[00:12:32] The, this is a sentiment.

[00:12:33] Don't get captured.

[00:12:34] Shows up in the show, a couple of different spots.

[00:12:36] But this idea, there's a great Run the Jewels song, Don't Get Captured Too.

[00:12:39] It's this idea of no matter what, you can go behind enemy lines.

[00:12:44] You can get, you know, mixed up in the wrong crowd.

[00:12:47] You can have this stuff, but like, don't get stuck.

[00:12:49] Don't get captured.

[00:12:50] Don't get trapped into a view where you don't actually have any way out.

[00:12:54] Because in many cases, like getting captured is worse than death.

[00:12:58] Maybe I'm making an extreme case of this, but like Toby's point of, uh, understanding,

[00:13:03] like not losing control of the situation and having the perspective to like stick it out.

[00:13:08] You got to be able to stick it out and get to that payoff.

[00:13:10] And that makes survival one of the most highly prioritized points.

[00:13:14] And yeah, I just have, don't get captured stuck in my head now.

[00:13:17] So pretty great lesson.

[00:13:18] It always stuck in my head now too.

[00:13:19] So that's the, thank you for that.

[00:13:21] Um, but the other thing he said that I think is important is you have to think about the

[00:13:24] types of companies in, in the context of this survival, like the types of companies I'm

[00:13:28] comfortable investing in.

[00:13:29] Like he talked about this idea about a lot of times with money losing companies that end

[00:13:32] up being compounders, like when they're losing money is the optimal time to invest.

[00:13:36] But he's just said, that's not right for me.

[00:13:38] And a lot of those companies that are losing money never become those compounders.

[00:13:41] So for him, it doesn't fit with his strategy.

[00:13:44] The risk of those types of companies in the context of survival is too much for him.

[00:13:48] For other people who are experts in that area, that might be the optimal time to invest,

[00:13:51] but it wasn't for him.

[00:13:54] Once again, I think this idea actually stacks out into other places too, back to the ideal

[00:13:58] company point.

[00:13:59] You can go, how do I match up?

[00:14:01] Cause you're always looking for that alignment.

[00:14:03] You want those things to actually mesh together.

[00:14:05] You don't want them to be conflicting, otherwise hard to stick to.

[00:14:08] But the same is true.

[00:14:10] You can have a boring job at a boring company getting, you know, inflation adjusted salary

[00:14:16] increases and go out and invest in a equally boring index return, but at least gives you

[00:14:20] market returns and gives you a better opportunity than reinvesting in the business that hopefully

[00:14:24] you're not an owner in.

[00:14:25] So there's all these ways that this like stacks where you're looking for your personal alignment

[00:14:29] with those values and with those risks that you want to take.

[00:14:32] And you're allocating based on how that makes sense because, you know, there's, there's

[00:14:37] no thriving without surviving.

[00:14:39] Yeah.

[00:14:40] And this is important in a business where you have investors too, because it's not just

[00:14:43] you surviving.

[00:14:44] It's also you surviving in the context of your investors staying with you.

[00:14:47] And we'll talk about this more when we talk about portfolio concentration, but it's important

[00:14:50] as an investment manager to think about survival like as a multifaceted thing.

[00:14:54] Like I can't, if I put all my money in one stock, you know, that's terrible on a lot of levels.

[00:14:58] But if my investors can't stick with me, if I have a high volatility portfolio, I might not

[00:15:03] survive.

[00:15:04] Even though I might make the right decisions in the longterm, if that concentration is too much

[00:15:09] for my investors, I might not survive.

[00:15:11] And it's important to think about it in both of those contexts.

[00:15:13] Yeah.

[00:15:13] You need those shareholders and stakeholders to all be in one place.

[00:15:16] And likewise, I'm worried for you if all you eat is candy corn and Reese's puffs today,

[00:15:21] you know, have a vegetable at some point.

[00:15:22] Well, yeah, hopefully one day is the outlier and I can just, uh, hopefully we'll be forced

[00:15:26] after Halloween to transition back to everyday life because the pile of candy stays there.

[00:15:30] So, uh, that's going to be, it's going to be, it's probably going to be a week or so,

[00:15:34] but hopefully I'll get a good run in every day and I'll overcome it some way or another.

[00:15:37] But there you go.

[00:15:38] Overcome the diabetes, gut speed.

[00:15:40] Exactly.

[00:15:41] So that's just something we've talked about a lot, um, with guests, but also you and I

[00:15:44] have talked about, which is this, these arguments David Einhorn had, he was talking about Mike

[00:15:48] Green's arguments about passive.

[00:15:49] And he was talking about this idea that with everybody indexing, less people are paying

[00:15:53] attention in the small cap space.

[00:15:55] So when my small cap company has good earnings, you know, usually when the business starts growing,

[00:15:59] I might get some multiple expansion on my company in the past.

[00:16:01] I'm not getting it anymore.

[00:16:02] So now David is focusing on things that would buybacks and dividends or things that are

[00:16:06] returning his capital directly without relying on this multiple expansion.

[00:16:10] So we asked Toby about that.

[00:16:11] The objective as a value investor, I don't really care so much about the stock price performance,

[00:16:17] even after I buy something because the returns for me when I buy are already baked in at the

[00:16:24] price that I pay, whether it's quoted in the market or not.

[00:16:27] So the returns that I get, really, there are two sources.

[00:16:31] There's the dividend yield and, or the shareholder yield, which is the buybacks and capital returns

[00:16:37] and dividends and all that sort of stuff.

[00:16:39] And then there's the portion of earnings that are reinvested in the business, reinvested at

[00:16:44] the marginal return on invested capital.

[00:16:47] And you can find over time that, you know, that, that will give you an output.

[00:16:53] You can sum that to the yield.

[00:16:55] That's your expected return.

[00:16:57] Whatever happens to the stock price in the interim between when you hold it and when you

[00:17:01] sell it is kind of irrelevant.

[00:17:03] Like that's the compounding is going on and you can be opportunistic.

[00:17:07] You can just sit in there and wait.

[00:17:11] But the idea that you would focus more on the, Einhorn's idea is that, well, we're not getting

[00:17:18] rewarded for the compounding portion.

[00:17:20] We're not getting rewarded for the reinvestment at the marginal rate.

[00:17:25] All we're getting rewarded for, well, we're not seeing any margin, multiple expansion.

[00:17:29] So therefore let's look at the, let's focus more on the yield portion.

[00:17:33] Let's make sure we're getting enough yield out and that's how we're going to get our return,

[00:17:38] which that's what Buffett has been doing for a very long period of time.

[00:17:42] You know, all of Buffett's acquisitions, like you can look at BNSF as an example of like,

[00:17:46] it's not a publicly listed company.

[00:17:48] It's private.

[00:17:48] He's bought it, owns it privately.

[00:17:51] I don't know the exact figures.

[00:17:52] I've sort of forgotten all of these because it was so long ago now, but he, he got most

[00:17:56] of his capital back pretty quickly when he bought BNSF.

[00:18:00] It's true also with the purchase of Oxy.

[00:18:04] You know, he bought Oxy, it's returning capital.

[00:18:07] The great concern with all of these oil and gas companies is that they tend to do most

[00:18:12] of their reinvestment at peak cycle, like all of the mergers and all of the action goes

[00:18:17] on peak cycle.

[00:18:18] And he doesn't want that to happen.

[00:18:20] He wants them, it's a good business.

[00:18:21] There's not a lot of money reinvested in the business that throws off a lot of cash,

[00:18:24] just return that to the shareholders will do very well.

[00:18:28] And he's, he's so focused on it that he took a slide from one of their presentations and

[00:18:33] he put it in his own shareholder meeting presentation.

[00:18:37] And he named the CEO, is it Vicky Golub?

[00:18:40] I think her name is.

[00:18:41] And he said, here's what you guys have said publicly.

[00:18:45] You're going to return capital.

[00:18:46] I want you to keep on returning capital because you've said that you're going to do that.

[00:18:50] And so he's sort of just kind of, you know, iron fist in the velvet glove encouragement

[00:18:57] and the way that he does it.

[00:18:58] Like there's no threat.

[00:19:00] He's just saying, you've made this public statement.

[00:19:02] I'm investing on the base, on a good faith base of this public statement.

[00:19:06] I expect you to sort of adhere to this public statement that you can return capital.

[00:19:11] I think that that's a, it's a, it's certainly a good approach.

[00:19:15] There's nothing wrong with investing that way, but it is only one source of the returns.

[00:19:19] There is this other source of returns.

[00:19:21] And it doesn't matter if you don't get the multiple re-rating.

[00:19:24] If you're getting that incremental reinvestment, you can, you can do a calculation.

[00:19:28] And that, that calculation that I outlined before, where you're looking at marginal return

[00:19:32] on invested capital multiplied by the amount of money that's reinvested, plus the yield,

[00:19:37] all of the yield that comes out, share buyback, dividend yield, capital return, whatever,

[00:19:41] all of that stuff.

[00:19:43] That is your return.

[00:19:45] Whatever happens to the multiple, you get that return.

[00:19:48] Toby was a really good guy to ask about this.

[00:19:50] And then the first thing he said that I, that I think is really important and is really,

[00:19:53] really hard to do, which is now how he focuses on a company and ignores the stock price.

[00:19:58] And I can't do that.

[00:19:59] You can't do that.

[00:20:00] The average investor can't do it, but it is true.

[00:20:03] Ultimately that at the end of the day, this is a business that has value that is going

[00:20:07] to produce cash flows in the future.

[00:20:09] And you can value that business on all of that stuff.

[00:20:11] And at the end of the day, a lot of the stock price on a daily basis, or even on a year

[00:20:16] by year basis is noise around that value.

[00:20:19] Even though we have to care about it as money managers, it is important to understand this

[00:20:22] is a business.

[00:20:23] And that is what more is more important than the stock press.

[00:20:26] I can't help it.

[00:20:27] It's a finkle and iron horn, finkle and iron cart.

[00:20:29] Iron birds.

[00:20:30] Like just this.

[00:20:31] Yeah.

[00:20:32] And you had to throw that in.

[00:20:33] I had to throw it in.

[00:20:34] It comes up.

[00:20:34] We're all thinking it, right?

[00:20:35] Everyone's thinking that.

[00:20:36] This, uh, this idea too, of like, you get the return when you put the trade on just the

[00:20:41] way he says that, that, that really, that really just, it, it, it hits me in a profound

[00:20:45] way.

[00:20:46] It makes you really think about like, okay, the trade is on.

[00:20:49] Uh, I, not that I don't care about the stock price.

[00:20:52] The stock price in time is going to give me that return, but like the trade is on.

[00:20:56] I'm an owner of the business.

[00:20:57] My brain or his brain is able to go straight to that.

[00:21:00] Like now I only think about this as an owner.

[00:21:02] I'm going to ignore that stock price because so long as the business stuff is all plugging

[00:21:05] and chugging forward.

[00:21:07] I don't have to worry about the other thing.

[00:21:08] That gap is going to get recognized and closed.

[00:21:10] Eventually the conversations we've had about Einhorn and the shift in his strategy and how

[00:21:16] he's thinking about this, it's a really profound statement.

[00:21:19] And it really shifts that perspective on how we think about.

[00:21:23] I'll relate it back people with illiquid businesses.

[00:21:25] So you own and operate a company just, or like private real estate, you, you own your

[00:21:30] house.

[00:21:31] You know, you don't think about the price of these things every day.

[00:21:34] You focus on what's going on internally.

[00:21:37] It's really hard to do that with our public markets portfolios in particular.

[00:21:41] And it's really profoundly useful to step back and go like, holy crap.

[00:21:44] If I think about this from the get go, it's a, it's a perspective shift.

[00:21:48] It's really fantastic.

[00:21:49] It's interesting.

[00:21:50] This is a dichotomy because in some ways, I don't know if you read the Fahman French

[00:21:53] paper migration way back in the day, but the, uh, the idea of the migration paper is a

[00:21:58] lot of your returns as a value investor historically have come from multiple expansion.

[00:22:02] They've come from value companies migrating out of the value decile into the more expensive

[00:22:06] decile.

[00:22:07] So on one hand, if we're not getting multiple expansion, it's a big, big problem for value

[00:22:12] investors because that's been a big part of the return historically.

[00:22:15] But the other side of it, and as Toby pointed out, and as Einhorn even pointed out, there's

[00:22:19] other ways you can get your return.

[00:22:21] One is obviously the dividends and buybacks that Einhorn pointed out.

[00:22:23] But the other thing is, even if I don't get multiple expansion, if this business is a profitable

[00:22:28] business that's investing at high returns on capital, you know what they're going to do?

[00:22:31] They're going to grow their earnings.

[00:22:32] And guess what?

[00:22:33] If I maintain the same multiple on earnings that are higher, my stock price is still going

[00:22:38] to go up.

[00:22:38] So you don't necessarily need multiple expansion in theory, at least to get really good returns

[00:22:44] as a value investor.

[00:22:44] And you also don't need just dividends and buybacks.

[00:22:47] There's other ways, as Toby pointed out, you can get that return without the multiple

[00:22:50] expansion.

[00:22:51] Yeah.

[00:22:51] And without buying the whole company yourself outright.

[00:22:54] So now, is eating seized candy the same as buying seized candy?

[00:22:58] And this is where we know that the difference is there.

[00:23:00] I love the migration point too.

[00:23:01] I love the idea that that multiple expansion or that change is what drives the returns.

[00:23:05] So thinking about the different catalysts that close that window is an integral part of

[00:23:09] any portfolio manager's process.

[00:23:12] So this next one, it gets at what we were talking about earlier in terms of the importance

[00:23:15] of aligning yourself with your investors.

[00:23:17] But here's Toby talking about portfolio size.

[00:23:18] I was too concentrated early on too.

[00:23:21] And that's Buffett's fault.

[00:23:24] I'd read Buffett's letters, put your best ideas, your biggest, most amount of money in

[00:23:29] your best idea and use the Kelly criterion to wait.

[00:23:34] It's edge over odds.

[00:23:36] So your best idea should have the most money in it.

[00:23:40] The most undervalued idea should have the most money in it.

[00:23:42] I think that that's the right approach if you're trying to maximize your rate of return.

[00:23:47] But I think that it introduces enormous volatility and path dependency and just idiosyncratic risk

[00:23:56] into your portfolio that's unnecessary.

[00:23:58] I wrote a book called Concentrated Investing.

[00:24:00] I looked at those two ideas, concentration versus diversification.

[00:24:04] Looked at value guys who had outperformed for extended periods of time like 25 years.

[00:24:08] And then looked at the academic approach to concentration and diversification.

[00:24:13] And also the practitioner approach from everybody, from Graham on one side to sort of probably

[00:24:21] Munger and Buffett on the other side where they're much more concentrated.

[00:24:24] The decision that I made ultimately was that there's something that the academics probably

[00:24:30] have it right.

[00:24:30] But the academics are trying.

[00:24:31] The academic approach to diversification concentration is to replicate a market portfolio with the

[00:24:37] fewer stocks possible because when they were doing it, it was expensive and difficult

[00:24:41] to build out a portfolio of stocks because now you trade virtually free with a Robinhood.

[00:24:48] But back then you had to pay pretty hefty fees to get these names into the portfolio.

[00:24:54] And so they said, if you just randomly pick stocks, it's actually hard to deviate from

[00:24:59] the market performance.

[00:25:02] Because if you're randomly picking, you're going to get some winners, you're going to

[00:25:04] get some losers.

[00:25:05] We want to replicate the market portfolio.

[00:25:08] So that's systemic risk.

[00:25:11] So how do we get that market portfolio?

[00:25:13] And they found that 30 names, somewhere between, I think 20 gave you 90% of the market return,

[00:25:19] 30 gave you 95% of the market return, and then beyond then you were sort of spending more

[00:25:24] money than you needed to.

[00:25:26] That's not my objective.

[00:25:28] My objective and the objective of Graham and other investors like that is to outperform

[00:25:32] the market.

[00:25:33] And so you have to introduce some sort of tilt into your portfolio, and value is an obvious

[00:25:37] tilt that works quality, is an obvious tilt that works, and size is a sort of side effect

[00:25:45] of probably those two that you can introduce into the portfolio to outperform.

[00:25:48] So then the question is, how much money can you lose?

[00:25:53] Can you afford to lose in any idiosyncratic pick?

[00:25:56] Because clearly, there are no free lunches in the market.

[00:26:00] The reason that you're getting something that seems like value at a surface level is because

[00:26:05] there's some underlying problem with the business.

[00:26:07] And in many instances, the market is right, and these things deserve to have their discount

[00:26:13] to what they look like on an earnings basis.

[00:26:16] And I've found it's about 50-50, half the time the market is over the holding periods, over

[00:26:23] my quarterly holding period, which is a short period of time.

[00:26:27] But it's replicated over and over and over again, so it is like a long-term window.

[00:26:32] Over a quarter, it's a 50-50 proposition whether a business outperforms or underperforms.

[00:26:40] So in my portfolio, what number of names do I have to hold so that I can capture the

[00:26:47] upside performance and not suffer too much on the downside performance?

[00:26:50] And I've found 30 is about the right number on the low side.

[00:26:54] This is interesting because he talks to the first thing he says, I was too concentrated

[00:26:57] early on, and he's responding to me where I basically said I was too concentrated early

[00:27:00] on.

[00:27:00] And it's an interesting balance because on one hand, you've got the question of sizing on

[00:27:04] a portfolio level.

[00:27:05] So just thinking about portfolio theory, I don't want one bad company to blow me up.

[00:27:10] How do I size my portfolio?

[00:27:12] And then on the other hand, you've got the investor side of it, which is I have to not

[00:27:15] just worry about the optimal sizing, I have to worry about the sizing in the real world.

[00:27:19] Can my investors stick with my portfolio?

[00:27:21] In terms of the position sizing, I'm using the number of stocks I have, all that stuff.

[00:27:24] So it's interesting to think about this on both levels, and I think the answer is a

[00:27:29] little bit different on each level.

[00:27:31] This whole idea of concentration is, well, concentration is fun until it's not.

[00:27:37] But concentration is fun.

[00:27:39] Diversification is boring.

[00:27:40] We see this over and over again.

[00:27:42] Somebody buys, you know, NVIDIA 10 years ago, and now it's a giant piece of their portfolio

[00:27:47] today.

[00:27:47] And concentration is fun when it works.

[00:27:50] Diversification is boring, especially when concentration is working.

[00:27:54] The magic trick is whether you're going to do it in a 30 stock portfolio the way Toby

[00:27:59] describes it, or you're going to build your diversified fund to preserve the wealth that

[00:28:03] you already earned.

[00:28:04] You got to concentrate on being boringly diversified in a beneficial way.

[00:28:10] That balancing act between these two things, and whether you're using Kelly criterion to determine

[00:28:14] your weightings, or you're doing some variant on it to figure out how you're going to come

[00:28:17] up with what aligns with your values and the outcomes you're trying to receive, you have to

[00:28:22] figure that out, how to concentrate on being boringly diversified in a beneficial way.

[00:28:27] And that's as much beneficial for you as it is for anybody else.

[00:28:30] Are you a big Kelly criterion guy?

[00:28:32] Is that like a...

[00:28:33] I'm not.

[00:28:33] You know, yeah, I'm familiar with it.

[00:28:35] And I know anybody who's tried to do it in the real world has said like full Kelly just

[00:28:38] blows you up.

[00:28:39] It doesn't work.

[00:28:40] So a lot of these guys try to do like half Kelly.

[00:28:42] But like in the world I exist in, I mean, we equal weight all our portfolios.

[00:28:45] We don't get into that too much.

[00:28:47] Yeah, but also I think what you said is really important because concentration is fun

[00:28:52] in retrospect.

[00:28:54] You know, concentration is horrendous in real time.

[00:28:56] And that's the challenge of it is like in retrospect, oh, I had a 20 stock portfolio

[00:29:00] and one of those stocks was Amazon.

[00:29:02] That's fantastic.

[00:29:03] But in the real world, when like Amazon's down 90% and it's what part of your 20 stock

[00:29:07] portfolio, you've got massive problems with it.

[00:29:09] And that's the challenge of it.

[00:29:10] And that's the challenge of even on the value level where we don't get the Amazons.

[00:29:13] It's like in a lot of ways, there's a lot of research that says we should run really

[00:29:16] focused portfolios for our clients based on factors.

[00:29:19] But on the other hand, we know in the real world, based on the multi-year periods that's

[00:29:24] going to struggle, that the degree of struggle is going to be too much in those a lot of times.

[00:29:28] So we can't do it.

[00:29:29] And that's just a very tough balance to strike.

[00:29:32] And to be honest, the answer to that is different for every single investor, which makes it hard

[00:29:35] to run.

[00:29:36] You know, we do more custom stuff now because it's hard to run broad portfolios because

[00:29:39] one person can easily handle the 20 stock portfolio.

[00:29:43] Another person needs hundreds of stocks or shouldn't be investing in factors at all and

[00:29:46] should just be buying the S&T 500.

[00:29:48] And that's a challenge of somebody who runs these portfolios.

[00:29:51] 100%.

[00:29:51] And that's where that, again, concentrate on being boringly diversified, but in a beneficial

[00:29:58] way.

[00:29:58] That beneficial is bespoke to you.

[00:30:01] What aspect of it's beneficial?

[00:30:02] It's the thing that you can stick to.

[00:30:04] But it takes, it's worth the extra time and effort to learn about yourself, to learn whether

[00:30:09] it's with a professional or on your own watching.

[00:30:12] Learn how to do it on YouTube, people.

[00:30:14] Subscribe to Access.

[00:30:14] You're trying to carry it.

[00:30:16] Make that plug.

[00:30:17] Something a Finfluencer would obviously say, Ned.

[00:30:19] Something a Finfluencer would obviously say.

[00:30:22] But it's figuring out what that way is to do that that's actually beneficial to you.

[00:30:26] And it might be, back to your concentration is always fun, like in the rearview mirror.

[00:30:32] Or that might also just be, there's just different times in life to take a flyer on those things.

[00:30:37] There's different times in life where you can say, maybe I can absorb this for whatever

[00:30:41] reason.

[00:30:42] And that's okay too.

[00:30:44] It's about what's beneficial to you and how much you know yourself.

[00:30:48] And the other thing is, number of stocks is just one variable.

[00:30:51] And it's really important to keep that in mind because what stocks you own, how you're leading

[00:30:55] the stocks, all that's really important.

[00:30:57] So like, for instance, if I had a 20 stock portfolio of deep value, small cap stocks,

[00:31:02] and equally weighted, and then I had the top 20 stocks in the S&P 500 market cap weighted,

[00:31:07] that second portfolio is going to be way, way, way less risky than, you know, those are

[00:31:11] big established companies.

[00:31:13] You know, that's going to be way, way less risky than the small cap value portfolios.

[00:31:16] So sometimes people put too much weight in, do I hold 20 stocks?

[00:31:19] There's a lot of other stuff in terms of what those 20 stocks are that really tells

[00:31:22] you about your level of concentration.

[00:31:24] Yeah.

[00:31:25] And it's really easy to, it's really easy to screw that up or it's really easy to turn

[00:31:30] the 20 stock thing into the Kramer, am I diversified segment from Mad Money, days of yore.

[00:31:35] I don't know if you're still-

[00:31:36] Chew buzzer, Matt, for this episode.

[00:31:38] Yeah.

[00:31:38] I can't wait to-

[00:31:39] You know those red buzzers.

[00:31:39] I can't wait to-

[00:31:40] You want to hear me anymore?

[00:31:41] Run around and yell.

[00:31:43] Tell me what we're doing, our Bear Stearns retrospective.

[00:31:46] So this next one is also one that we've talked about a lot in the podcast and we've asked

[00:31:49] guests about a lot, which is this idea that historically, if you've looked at the top 10

[00:31:52] companies in the S&P 500 and you looked decade by decade, there's pretty high turnover in

[00:31:56] that.

[00:31:57] So in one decade, you think, oh, these are the biggest companies in the world, then

[00:32:00] nothing could go wrong.

[00:32:01] They're always going to be the biggest companies.

[00:32:02] And then you look forward the next decade and they're not the biggest companies anymore.

[00:32:06] But there's a reasonable argument, and maybe there always was, but there's a reasonable

[00:32:09] argument right now with these big tech companies, things might be a little bit different.

[00:32:13] Their advantages might be so strong that they might still be the biggest companies a decade

[00:32:18] from now.

[00:32:18] And I think it's just a really, we asked Toby about it, but I think it's a really interesting

[00:32:21] thing to talk about.

[00:32:22] So let's get his answer and then you and I will comment on it.

[00:32:24] I couldn't agree more.

[00:32:25] I think partially it's because they're really, they've got one product that everybody uses

[00:32:30] and we're also locked in.

[00:32:32] I mean, it would be very hard for me to use something other than Word or Excel, even

[00:32:35] though I do use the Google alternatives, but that's not really one or the other.

[00:32:40] They're still the biggest names in the market.

[00:32:41] I mean, I'm stuck in Gmail.

[00:32:43] I'm never getting out of Gmail.

[00:32:45] I find it hard to believe that I, you know, Amazon's just so easy to use.

[00:32:49] I don't even check the prices to see if they're the cheapest.

[00:32:51] And I think my wife tells me they're always, they're not, they're always more expensive.

[00:32:55] So I should be checking something else.

[00:32:57] But what's the alternative?

[00:32:58] It's like Walmart is the alternative.

[00:32:59] So you're sort of, there are very few choices for the convenience or the lock-in.

[00:33:05] And I could easily imagine that in 10 years' time, it's still mostly the same names.

[00:33:10] Unless it's something like, you know, Nvidia was a little bit of a dark horse.

[00:33:14] It's just, it's for me anyway, it's come out of, sort of largely come out of nowhere.

[00:33:19] And then growing at extraordinary rates, particularly considering the size that it's at already.

[00:33:25] I think that it's probably got a little bit ahead of itself, but the business itself is still incredibly impressive.

[00:33:30] But it's hard to know again.

[00:33:32] Because it's clearly, it's those other big companies that mostly are consuming Nvidia's chips.

[00:33:39] Will they continue to buy at that rate?

[00:33:41] That's one thing that Jake Taylor, who's my co-host on the podcast that I have pointed out, is that the capital intensity of these big businesses, where historically they've been like not particularly capital intensive.

[00:33:57] They are becoming increasingly capital intensive.

[00:33:59] And Facebook was one that I, I was looking at which companies reinvest just in absolute terms beyond their maintenance CapEx.

[00:34:10] And I was just using his, you know, if you just say depreciation amortization is maintenance CapEx and then any reinvestment above that is growth CapEx.

[00:34:17] That's not, that's not accurate, but it's just as a sort of shorthand rough way of figuring it out.

[00:34:23] What are the biggest investors in the market?

[00:34:26] And the two were Tesla and Facebook.

[00:34:27] I was kind of shocked by Facebook.

[00:34:30] And that was, that was probably when Facebook was spending most of its money on the metaverse, but it was still kind of shocking to me that it was, you know, I would think of Facebook as being, it's mostly a, it's a couple of websites.

[00:34:40] It's a couple of apps, but really the infrastructure is enormous.

[00:34:44] And it's true for Google and for Microsoft as they build out the cloud and they build all that backend out.

[00:34:49] And it's going to be hard for them to get the same rates of return on those investments that they've had.

[00:34:54] But equally like that, it's going to be impossible for anybody else to compete with them because no one can spend that kind of money.

[00:35:00] But they're going to be less good businesses in the future.

[00:35:02] And so they may not have the same premiums, you know, returns on invested capital that they've had.

[00:35:08] They'll still be very good businesses.

[00:35:09] They just won't be as good.

[00:35:10] They'll be vastly bigger, but the business will be bigger and they won't be trading at such a huge multiple.

[00:35:16] I don't have the answer to this, to be honest with you.

[00:35:17] You know, the value guy in these always like, yeah, they're going to change.

[00:35:20] You know, this has always been the case.

[00:35:22] Like these, these great companies, these great growth companies, they're always seem like the great growth companies.

[00:35:25] And then someone comes from behind and dethrows them.

[00:35:28] And that's always going to happen.

[00:35:29] But then I also look at like AI, which I think is the next, obviously everybody thinks is the next big technology thing coming and here already.

[00:35:37] And I look at how much money these major companies are spending on AI and how much of an advantage they have because of that money.

[00:35:42] And I'm like, you know what?

[00:35:43] The odds might be pretty strong that these companies are still going to be dominant.

[00:35:46] Like it's hard for me to see how the upstart company like overtakes them.

[00:35:49] So I'm kind of 50-50 on this.

[00:35:52] I really, I look at the historical data and it tells me one thing.

[00:35:54] And I look at what I'm seeing in front of me and it tells me something different.

[00:35:58] Back to the point we made earlier about this survival aspect, like the don't get captured aspect.

[00:36:05] And I think the underlying theme of Toby's comment on this is that the potential for those higher returns as they're driven by like higher growth, that's the thing you should expect to diminish over time.

[00:36:18] So right now it's a whole like breath of new life as these companies figured out yet another area to invest in that sustains their advantage.

[00:36:25] Because I'm with you, or I'm definitely with Toby on this.

[00:36:29] It's like Gmail works really great.

[00:36:32] Amazon just makes it so frigging easy that it's even hard when I have to go out of the Amazon ecosystem to do something that's still, it is infinitely easier than it was, you know, 20 years ago to just go like, oh, Amazon's out of my dog food, but Walmart has it.

[00:36:48] And oh, woe is me.

[00:36:50] I had to spend the extra eight seconds to re-download the Walmart app and like figure out the thing or be like, this is, is this a surreal life?

[00:36:58] Is this just fantasy?

[00:36:59] Those returns though, that type of growth and whatever it is, wherever it's coming from, when AI changes everything here yet again, those returns diminish over time.

[00:37:08] And back to your Halloween comment too, it's like Reese's, those peanut butter cups are kind of timeless.

[00:37:16] They're not going away, but they are not the sexy growth story that I imagine they were when they were first introduced to the market as probably, you know, like bomb shelter food or something years and years ago.

[00:37:28] They will never die or never spoil in the wrapper and don't you dare question it.

[00:37:33] Extra, extra Oreos.

[00:37:34] But the idea is like these companies, you just stack these things that kind of never go out of style.

[00:37:39] That's what you want to do.

[00:37:41] You get the high growth, but the high growth comes in phases because somebody either disrupts you and takes your market share or you make something that may not grow as fast anymore.

[00:37:51] But I don't see a lot of Reese's Cup competitors probably for a reason.

[00:37:56] The other thing is this idea of mean perversion of growth is so key here.

[00:37:59] Larry Sweater just talked about this and we had him on.

[00:38:01] And the idea is as you get bigger and bigger, your growth rates historically have always had to come down substantially.

[00:38:06] That's just the way it is.

[00:38:07] Like you can't grow in these massive sizes.

[00:38:09] But in some ways, these companies have defied that.

[00:38:12] They continue to grow at higher growth rates than we've ever seen companies of that size grow.

[00:38:16] Now, certainly they have reductions in their growth rates, but it's been it hasn't been as much as you would expect based on history.

[00:38:21] So, again, you've got this balance of these things have always come down and then you've got them kind of define that and you've got to decide which one is going to play out going forward.

[00:38:30] And I don't know the answer to it, but I think it's a really interesting thing to think about.

[00:38:33] It's interesting, too, because it shows up in just and this is like a financial planning concept.

[00:38:37] I spend way too much time talking about with clients, the like the absolute versus the relative.

[00:38:43] So it's like, oh, we want to, you know, earn this much more money in absolute terms.

[00:38:48] I want to earn an extra million dollars to do this thing, buy the other house or do do the gifting strategy or whatever else.

[00:38:54] And then it's like, OK, well, as your wealth goes up, like earning that million dollars when you have five hundred thousand dollars that you're putting towards this thing.

[00:39:02] OK, we need 100 percent return.

[00:39:04] You know, we got to we got to grow this thing at this very aggressive clip.

[00:39:08] But if you have 100 million dollars and you're like, yeah, it's another one percent, like throw it in the money market, call it a day.

[00:39:14] Those things change over time.

[00:39:16] So the other maddening thing is to see the absolute and the relative returns for some of these investments that these big companies make.

[00:39:22] That's a pretty staggering thing.

[00:39:24] It's very hard for whatever Amazon Web Services is making, you know, both on a relative like percent basis on their revenue growth.

[00:39:31] And then you look at that number on absolute terms and go, it's really hard for any other company to earn this much money on this one division in this one idea.

[00:39:39] Those things both mean revert, but you kind of have to look at them both objectively and subjectively and understand in context.

[00:39:45] What are we trying to achieve?

[00:39:46] Why are we chasing it?

[00:39:47] And in many cases, you know, who's going to see the tinier portion of this and go, I'm not going to disrupt the whole company, but I'm going to disrupt this one little piece of it first and slowly eat that market market share in bigger and bigger pieces.

[00:40:00] So this will get to something we debate in the value community all the time, which is this idea of I could be a pure value investor and I could just buy the cheapest stocks or I can try to mix in some quality and invest in higher quality companies.

[00:40:11] So we asked Toby about that and here was his take.

[00:40:13] The benefit is sort of, as I articulated before, that if you go through a 99-2000 type scenario or not 2019-2020 type scenario, the quality factor does help you keep up with the market a little bit because those companies have earnings.

[00:40:28] And to the extent that investors aren't participating in the full-blown mania, they will also pay up for these sort of companies, whereas value doesn't really seem to participate much through that period.

[00:40:38] The downside is that over the full data set, the best returns have been to the cheapest of the cheap rather than, and this is what we found in quantitative value, rather than to the ones that are a blend of both.

[00:40:53] But the returns to that cheap value portfolio, they're hard to ride.

[00:41:03] They're up a lot and they're down a lot and it's difficult.

[00:41:07] Nobody goes in when they're down a lot, which is probably the best time to be in there because what follows is they tend to be up a lot, but they're so volatile that it's hard to invest in them.

[00:41:15] Whereas adding quality sort of smooths those returns.

[00:41:18] You give up some return to do it.

[00:41:20] There's a great line from Munger and Buffett where they say, I'd rather a lumpy 15% to a smooth 12%.

[00:41:27] And that might be true for those guys, but there aren't many other investors out there who are like that.

[00:41:31] Most people, it turns out, prefer the smooth 12 to the lumpy 15.

[00:41:35] Yeah, there's no right answer to this.

[00:41:37] I mean, Toby actually wrote in one of his books, quantitative value with Wes Gray, they took this idea of Greenblast Magic Formula and they tested it.

[00:41:44] And they basically said, you know, Greenblast Magic Formula effectively is a combination of value and quality.

[00:41:48] And they said, what if we just drop the quality?

[00:41:50] And what they found out is the value works better without the quality.

[00:41:54] But again, that's not the entire answer.

[00:41:56] And Toby got into this.

[00:41:58] It's basically the idea is I'm building portfolios, as we've talked about a lot in this episode.

[00:42:02] I'm building portfolios for people in the real world.

[00:42:04] And the risk profile of owning quality companies that are cheap is very different than the risk profile of owning the absolute deepest value stuff, as we're seeing right now, based on the struggles of value.

[00:42:14] So if this balance where in theory, yes, you know, just deep value is probably better than value and quality.

[00:42:21] But in practice, in most cases, quality and value together is probably better.

[00:42:25] I think just asking the quality question just more often than not, whether you're testing it really, really hard and aggressively in a quantitative manner, or just stepping back to ask the philosophical question of what's quality about this thing?

[00:42:38] What's the piece of this that goes, I think they can do this twice, if not three or a million times in a row?

[00:42:45] Because price is what you pay, value is what you get.

[00:42:47] Great.

[00:42:48] Part of value what you get should be the philosophy of quality around that thing.

[00:42:53] Is there a repeatable solution to this?

[00:42:55] Is there something that made sense?

[00:42:57] Because this dawned on me, well, you know, every time we've said Reese's Cups, I go back to, we took, my wife and I took our nephews to this, this like farm this past weekend.

[00:43:08] So we're leading up to Halloween and we went to this petting zoo.

[00:43:11] And on the way back, there's, there's this like cool local farm that has a bunch of like Amish goods and stuff like that from Pennsylvania, whatever else.

[00:43:17] And we stopped there and man, have you ever had, so they, they sold these Reese's, they're basically homemade Reese's cups, but nested inside of like a very soft doughy, almost sugar cookie.

[00:43:28] You ever experienced this before?

[00:43:30] I have not, but now I have to find it.

[00:43:31] They were small.

[00:43:31] I have to do whatever it takes.

[00:43:33] They were ridiculous.

[00:43:34] Like we have been talking since we destroyed the package of these things.

[00:43:39] There was like, I don't know, 12 or 16 of them.

[00:43:41] We annihilated the package of this thing.

[00:43:43] This, this farm is like a solid 45 of its way.

[00:43:47] And we've been talking all week about like, so we're going back to that farm to get more of those Reese's cups and those cookies.

[00:43:53] Right?

[00:43:53] Now the idea is like that thing might not scale, but I am very certain that those people can at least reliably produce that quality again.

[00:44:01] And the 45 minute drive plus the premium to the Reese's cups that I'm going to pay just to get that fix is probably worth it.

[00:44:07] So understanding what the value is, understanding what the quality is and understanding what you'll do for that damn thing.

[00:44:14] These are philosophical questions as worth exploring as understanding the mathematical functions behind them.

[00:44:19] It's a good thing you and I are not nutrition influencers based on what we've been talking about on this thing, because if anybody falls beside the bikes, they're probably going to be like hospitalized very short.

[00:44:28] Diabetes.

[00:44:30] We've got to get a sponsorship.

[00:44:32] We'll get a sponsorship from Reese's cups.

[00:44:35] I'll take it, man.

[00:44:36] I'll take it.

[00:44:37] Hey, yeah, no, I'll be, I'll eat those things during the whole episode if they'll pay me to do it.

[00:44:40] Let's go.

[00:44:42] All right.

[00:44:43] And our last one is, this is like from our original interview with Toby, which is way back.

[00:44:46] I mean, I think he's been on six, seven times now.

[00:44:48] So it's pretty amazing.

[00:44:49] But in our original interview with him, we have this standard closing question, which is if you could teach one lesson to the average investor, what would it be?

[00:44:55] And here's Toby talking about why you should write things down.

[00:44:57] I think you need to write down what you're doing at the time that you do it, because it takes, if you're a fundamental investor, it takes years really to work out whether the decision that you made actually resulted in the outcome that you thought.

[00:45:12] And the only way that you learned is by looking at outcomes against decisions.

[00:45:18] And it's so easy to forget why you did something.

[00:45:20] And really the worst case scenario, as funnily, as funny as this sounds, but the worst case scenario is when you get the stock goes up, but for a reason that you didn't identify.

[00:45:30] So you got lucky, but then you start conflating that luck with some skill.

[00:45:36] And I think that you need to be intellectually honest with why you did something and you need to recognize those things.

[00:45:42] You need to recognize the ones that won, but you were wrong.

[00:45:45] Recognize the ones where you lost money, but you were right.

[00:45:48] And you need to try to work more towards the process and getting that right than relying on the outcome and deciding that you were right.

[00:45:58] So that's my advice.

[00:45:59] I've always said this, write it down.

[00:46:02] Because I've got stuff now that I wrote down in 2008.

[00:46:05] I can go back and look at it and I think that's garbage, but at least it's there and it's written down and I can see that there's been some evolution over the last whatever it is, 13 or 14 years.

[00:46:14] Yeah, this is something that I know is good advice and I don't really do it, but I should.

[00:46:19] Because if you ask me historically, I'll tell you, when Amazon was selling books, it was pretty obvious to me they were going to sell everything else and then become a huge company.

[00:46:26] And obviously, why wouldn't they not use their technical infrastructure and just sell that to other people?

[00:46:30] Because that was an obvious thing.

[00:46:31] So obviously, I knew that Amazon was going to be great.

[00:46:34] But if I had been writing it down at the time, I probably would have written some different stuff down.

[00:46:39] Especially as a value guy, I probably would have written some different stuff down about my views on Amazon.

[00:46:42] So what's amazing about that is I was indifferent to Amazon as the book retailer and could vaguely understand the whole, yeah, you can trust these people with your credit card over the internet.

[00:46:56] Sure.

[00:46:56] Like that part didn't really bother me.

[00:46:58] The thing that I couldn't understand about Amazon, the part that I got, but the part that I didn't get is I love, like I love bookstores.

[00:47:06] And yes, the local small bookstore, great.

[00:47:10] Amazon's or the Borders and the Barnes and Nobles of the world, also great just because bigger selection.

[00:47:15] And the whole appeal of Amazon was like, oh, they'll have all these books in one place.

[00:47:18] But the thing that bothered me at the time was I can't touch or feel these things.

[00:47:22] So it's hard to understand.

[00:47:23] And I think even just being able to look back and grapple with the thing that I love most about buying books was going into the bookstore and browsing the shelves, like perusing these issues.

[00:47:34] Doesn't mean I wasn't still open to this idea of like, wow, if the shelf was infinite though, wouldn't that be so much cooler if I could flip through that on my phone?

[00:47:43] And trust me, my book buying habit has only been, you know, the first hit was on the house.

[00:47:48] And it takes way too much money as it stands now.

[00:47:51] But this idea, like life is fluid.

[00:47:54] You should write stuff down.

[00:47:55] You should write down what you think of it.

[00:47:57] Because later when you're reflecting back, it can be really useful to know what you were thinking at the time.

[00:48:03] And whether, you know, at work, when we do like our annual reviews with clients and stuff, we write down stuff that they say, not to like push back in their face when they say it later, but to remind them about it.

[00:48:15] And it's not just investment stuff.

[00:48:17] It's simple stuff too.

[00:48:18] It's like, what were you thinking?

[00:48:19] What were you feeling when you started planning for your daughter's wedding two years into the future or whatever it might be?

[00:48:25] The act of just writing down what you're thinking, feeling, what the logic is, how it applies.

[00:48:30] It's not just for the ego stroke.

[00:48:32] It's a very grounding exercise to repeatedly do over and over again.

[00:48:36] And yes, for investing, but investing in all things.

[00:48:40] I think this is a profoundly touching view from Toby here.

[00:48:44] And a lot of really great investors do this.

[00:48:46] And I may have this wrong.

[00:48:47] I believe it was your interview with Jim O'Shaughnessy, where intentional investor on the Epsilon Theory channel, where he was talking about, I believe it was his feelings like on one of the Gulf Wars.

[00:48:55] And he was convinced in the current time that like he had a certain feeling at the time on one of the Gulf Wars.

[00:49:00] And then he went back to his journals and he was like, actually, I had a completely different view on that at the time.

[00:49:04] And that happens all the time.

[00:49:05] It happens in investing.

[00:49:06] It happens in life.

[00:49:07] Like we think we become convinced by what happens that we thought something in the past.

[00:49:11] And then we didn't really actually think that.

[00:49:12] It was definitely that.

[00:49:15] And Jim's crazy in a good way, because he has these handwritten journals going back for literal decades at this point.

[00:49:23] And so he can go back and go, I feel pretty strongly about this.

[00:49:26] Let me reference check myself.

[00:49:28] And then go, holy crap.

[00:49:29] That's that's not actually what I thought.

[00:49:31] But again, not to punish yourself.

[00:49:34] Well, you can go back and look at this stuff and actually learn something about yourself in that process.

[00:49:40] That is a that is a feature, not a bug.

[00:49:42] That is a very deeply nuanced benefit inside of Toby's point here on how we capturing how you think and feel about something in the moment can have real profound value and impact later on when you reveal.

[00:49:54] Yeah.

[00:49:54] And don't don't write it down and go back and be like, I'm such an idiot.

[00:49:57] I'm such an idiot.

[00:49:58] How could I have been so wrong?

[00:49:59] Yeah.

[00:49:59] Like, don't use it as a mechanism to beat yourself up, which I probably would do.

[00:50:02] This is what I did say.

[00:50:03] Let's be clear.

[00:50:05] You and I can go back and watch any podcast we did from however long ago and do nothing but beat the crap.

[00:50:10] Hey, nice zebra pillows in that one.

[00:50:12] I just want to compliment you on that.

[00:50:13] One of those clips.

[00:50:15] Fantastic.

[00:50:15] Fantastic.

[00:50:16] My mother-in-law's house.

[00:50:17] I want to appreciate the zebra pillow.

[00:50:18] Looks like that is correct.

[00:50:21] Jack's saucy in this one.

[00:50:22] On the zebra bed doing this interview.

[00:50:24] It'll set up to be more aggressive.

[00:50:25] The other thing I just did to your point that I would say is like doing this podcast has been really helpful from that perspective.

[00:50:31] Particularly the episodes, we do the one at the end of the year every year where we make our market predictions, which are obviously not real market predictions.

[00:50:36] But you get a feel for like what we actually thought at that point about what the market looked like, what we thought would go on in the market.

[00:50:42] But even when we predicted what we thought would happen with excess returns.

[00:50:45] And, you know, if you look back at the one at the beginning of this year, like effectively everything I said, I think is going to end up being wrong.

[00:50:50] And so that's been a good way for me, even if I'm not writing it down, to be able to say, you know what, maybe you didn't actually think that.

[00:50:55] Maybe you didn't see this, you know, 30% rally coming in the S&P or whatever this year.

[00:50:59] Maybe you had some different feelings at the beginning of the year.

[00:51:01] Well, you know, you've made so many correct market calls, I'm sure.

[00:51:05] That's what I did, as we all did.

[00:51:07] I don't think I've ever made a correct market call, but no.

[00:51:09] But that's the point.

[00:51:10] And I think actually just the habit of doing stuff like this, like committing to do the habit to even talk through this stuff.

[00:51:17] You learn more by the act of doing and reflecting than just about anything else.

[00:51:22] You want to learn some like real life lessons, some hard life lessons.

[00:51:25] Just do something repeatedly and pay extra attention to what you're doing.

[00:51:29] Crystallizing it in time is insanely useful, too, because you start realizing it's fun to be wrong because you're going to feel wrong a lot of the time.

[00:51:37] But you can learn a lot from that process.

[00:51:39] And it takes a lot of the pressure off when you have to help somebody make a projection or think about the future where you go like, oh, I'm actually very comfortable with being dreadfully wrong.

[00:51:48] But I'm also very comfortable with figuring out a way back to that point to survive, how to not get captured.

[00:51:54] So, Jack, to you and I not getting captured in many more Reese's Cups, this has been a lot of fun.

[00:52:00] Yeah, not getting captured is a great thing to wrap up on.

[00:52:03] I'm told that influencers are supposed to like say like and subscribe or something at the end.

[00:52:06] But I'm not going to say that because I've studied the YouTube algorithm enough to realize that it doesn't really even matter that much.

[00:52:10] But we do appreciate everybody listening.

[00:52:13] And if you want to like and subscribe, it would be nice.

[00:52:15] We would enjoy it.

[00:52:16] But the fact that you're actually here at the end is the best thing you could possibly do for us in terms of the YouTube algorithm.

[00:52:21] Like, subscribe.

[00:52:22] I don't know.

[00:52:22] You know, shut off.

[00:52:24] Shut off all the back or get all the back lights you can.

[00:52:26] You should comment about the back.

[00:52:28] Yeah.

[00:52:28] Get your lighting comments in now, people.

[00:52:30] I've gone from horrific lighting to like pure spaceship lighting.

[00:52:33] So, I don't think I could get it right.

[00:52:35] But, you know, maybe next time.

[00:52:36] You are the spaceship lighting fanfluencer this market needs.

[00:52:41] Thank you, everybody, for joining us.

[00:52:42] We'll see you next time.

[00:52:43] Hi, guys.

[00:52:44] This is Justin again.

[00:52:45] Thanks so much for tuning into this episode.

[00:52:48] You can follow Jack on Twitter at Practical Quant.

[00:52:51] You can follow me on Twitter at JJCarbono and follow Matt on Twitter at CultishCreative.

[00:52:57] If you found this discussion interesting and valuable, please subscribe in either iTunes or on YouTube or leave a review or a comment.

[00:53:04] Also, if you have any ideas for topics you'd like us to cover in the future, please email us at excessreturnspod at gmail.com.

[00:53:11] We would like this to be a listener-driven podcast and would appreciate any suggestions.

[00:53:16] Thank you.