Home Value After Hours S03 E28: Scott, Scurvy and the South Pole; El Farol Bar problem; $PSTH

Value After Hours S03 E28: Scott, Scurvy and the South Pole; El Farol Bar problem; $PSTH

by smart

all right here we go live streaming no idea what happened then but here we go we are live hey there we go apologies folks the little man on the wheel in the back he’s running flat out all right it’s a little bit after 10 30 on the west coast it’s a little bit after 1 30 on the east coast i took a nap while we were waiting so i’m fully rested and i for the first time in a long time i’ve done a whole lot of preparation i’ve got veggies that are actually fruits what’s what’s happening what’s that franks and beans uh not much today jeff bezos went to space in what looked like a giant penis that was interesting looks sharp yeah he looked good i look man i thirsty pretty cool i’ll tell you what was amazing was the cameras oh yeah i haven’t seen any of the footage of it is it good dude you could see the whole thing it’s like i don’t know how many feet 360 000 feet in the air and you can like watch the whole thing happen it’s crazy almost like i don’t have to go up there myself they seemed like they were having a lot of fun up there i would go up there when like tickets are like 400 bucks so we’re gonna need to work on the technology a little what’s uh what are we talking about today fellas what’s what’s your topic jt you got some veggies of course i wouldn’t show up if i didn’t uh i’ve got uh we’re going to be tackling the el farol problem so we’re getting complex systems going i don’t know what that is what do you got bill i’m probably just gonna listen to jake and try to figure out what he had to say and then if it comes to me last i don’t know we could talk about psth blowing up or some other thing in the value world we need an innings update too at some point i don’t know man there’s a lot of cheap stuff out there yeah it’s funny i’m kind of of that view too i’m in a little bit of two minds because the i tweeted this out yesterday fear and greed drop below 20 historically like not going back very far the data only goes back to sort of post 2009 it’s like 2010 or 2011. at least according to the wayback machine and uh it’s been a pretty good indicator of when to buy i appreciate how silly that is given where like three percent off all-time highs and it’s giving you that that little signal but it did do the same it’s done that before it did that in 2013 and anybody can take a look at 2013 it was a pretty good year i don’t know that uh any of this stuff is particularly helpful i’m just kind of interested in this indicator as a a an objective way of saying how nervous everybody is about the level of the market and i don’t know what it means that it’s come off so little over uh it’s i mean it’s showing so much fear given it’s come off so little probably that just speaks to how the sort of a lack of volatility in the market that it’s been such a good market now for whatever it is 15 months or something well it just seems to me like months or years well yeah particularly 15 months but the 13 years before that have been pretty good too the um i mean tech had sort of it sell off earlier in the year and now like value cyclicals are having theirs i don’t know this just feels like normal [ __ ] to me i’ve been buying some stuff yeah when i when i run my my higher quality screen it looks to me like it’s a uh there’s a there’s an unusually large amount of pretty good stuff in there so there’s undervalued high quality stuff kind of in abundance i found bitcoin not catching a bid kind of interesting where’s bitcoin right now i think it’s like under 11 000 yeah so i don’t know i had the whole you know like if you assume which i don’t but let’s just assume that the headlines are correct and like the market was actually selling off because of the delta variant uh this is my attempt to get uh us demonetized yet again um then then you would think that uh like i i thought that maybe a logical conclusion would be more stimulus which would mean weaker fiat which means bitcoin should catch a bid but i was not right that’s macro mate it’s really hard yeah well that’s why i don’t mess around with it for the most part once you get to that second which means you’re in trouble yeah that’s fair we should have macro people on the show it would really help ratings it does that’s true people love it people love the macro you gotta look at uh the the company that’s taking whitney tillerson’s newsletter uh i mean not like yeah not like him particularly there’s like six or seven of them the data on the macro newsletters that they write is crazy crazy the thing about macro is it can sound it’s a lot like politics like it’s just your your political views inform your macro views and i don’t think that’s a particularly good way to invest yeah i’ve been it’s a decent way to write a newsletter though yeah it is it’s it’s a fun way of writing i’ve been to some macro conferences uh as chris cole’s plus one carrying his bags and uh they’re fun but the uh the the macro as it’s practiced by the big boys it looks more like special situations well there’s it’s a time immemorial there’s been demand for prognostication whether it was the chicken guts or oracle doffy macro calls i mean that’s just people have always wanted to think that someone else knew what the future was going to hold and i don’t think that’ll go away either no it’s unfortunate you got to be careful of eclipses earthquakes uh plagues all those sort of things my kids are watching youtube and some creepy guy came on and said that the end of days is near in november you you know everyone was gonna die he was in a ski mask wow thank you after peppa pig yeah dude no not peppa peppa’s g you can’t mess with her it’s some like silly uh ninja kids or whatever the kids are watching you know what i like about that they’re like well why does that kid’s dad play with him well maybe because he’s paid too you little [ __ ] shut up i got a job he loves his kids i need to go on a podcast and i make no money i don’t feel strong really hard that’s right that’s not very nice i got some i got some i got some veggies so i’m going to take i’m going to take away with some veggies uh i think there’s an interesting lesson in this one i kind of backed into this after a conversation that jt and i had last week but uh this is an old article from 2010. i’ll link it up in the show notes um but it’s on uh robert’s school and yeah no i went and he’s and he’s uh but you can search scott scurvy and something else and you probably find it robert scott uh had a run at the south pole in the early 1900s about 1911 1912 which is uh basically modern history um because they were they were um they were doing it thinking that they were pretty modern like we we basically sold scurvy in 1747 james lind who was a royal navy surgeon um pointed out that people who ate citrus fruits didn’t get scurvy on these trips and it took about 40 years then the rural navy man all of the ships carry some citrus and it basically solves scurvy because scurvy is caused by a lack of vitamin c and so uh this is 1911’s this is a long way afterwards and they they had this conversation with one of the [ __ ] all the the the trip was ill-fated half of them died the ones who didn’t die did something in a little bit that i’ll want to give the whole thing away just yet but basically they they headed out on the ice they they were they had scurvy before they got there they headed on the ice they all died of scurvy including scott and uh that they recorded the conversations that uh scotland would have or other people would have with the surgeons on the ship about their views on what was causing the scurvy and the funny thing is that we sort of thought that we’d solved this you know a hundred plus years earlier 200 plus years early and it turned out that we hadn’t so all we figured out was that there was this association between citrus fruits and uh and scurvy and we know we knew that if you ate it but we’d known that for a very long time all james lin did was codified that kind of information before that even vasco de garma knew when he headed out on his voyage in 1497 that they should take some citrus with them and it had been known but the exact mechanism wasn’t known we didn’t know it was vitamin c we didn’t know about vitamin c and so we the royal navy mandates these citrus it was it was sort of an advantage it allowed their ships to stay out on a blockade of of napoleon uh for years at a time where the other navies couldn’t do that because they didn’t know about the citrus fruit protecting you from scurvy so what happened in this 1911 1912 trip that caused these guys to all die of scurvy given that we’d known about it for so long beforehand that being a variety of things uh confounding factors in between and so one of them was ships got faster and faster and in the early 1800s mid-1800s they became steamships which were very very quick so it would take a couple of weeks and you don’t get scurvy in a couple of weeks it takes longer than that and so it was unnecessary to have vitamin c at all on the ship because you’re getting fresh food before you left you get fresh food when you get to the other side you don’t get scurvy and so that’s the sort of the reason why these other things started happening because we just didn’t know that it was superfluous through this period so lemons were difficult to get hold of so they subs they had an abundance of these limes and they thought that the association was acidity so it was a lack of sort of acid in the blood that was causing scurvy and so you had these limes and they’re more more acidic than than lemons are but the problem is they’ve got about a quarter of the vitamin c of lemons and then in addition to that they stored them in these oh they you don’t want to take the whole lime with you so you juice the lime and then you stick it in this um open air pot and they’re copper piping taking it from one place to another and the copper piping denudes the lime of its vitamin c and it’s already got not much vitamin c so basically they eliminated all the vitamin c but it didn’t matter because they were getting everywhere so quickly that nobody was getting scurvy now fast forward to 1911 they are following all the things that they should do they’ve got their they’ve got their lime that’s been stripped of all of its vitamin c they head out they’re already people are getting the the telltale signs a little bit of white around the edges of the gums a little bit of red starting to see old sores open up they stuck on the ice in the dark uh half of the party heads off to trump they basically almost all die wait what did they try to do you froze up for me did he freeze up for you jake they’re trying to give us the stuff okay all right okay they’re making their assault on the south pole so they head out on the ice um the ones who stay back on the ship they they sort of start losing their minds and they decide they’re just gonna eat whatever they can get their hands on so they eat polar bears they eat whatever i don’t know if there are polar bears in doesn’t destroy the story so basically if you eat fresh meat you get some vitamin c from the fresh meat so they didn’t get scurvy uh they didn’t really know until they they it was a terrible expedition all the guys died including scott half of the crew gets back and they sort of tell a story and once again they have to go back to the drawing board and figure out what is the connection between citrus and and scurvy and that’s when they figure out that it’s in fact vitamin c but they had these other theories because we just sort of become aware of bacteria is it bacteria in the blood and that and therefore the acidity should that that should kill the bacteria is it this sort of uh termaine poisoning is it this uh mysterious kind of poisoning that everybody’s getting so it turns out that it’s vitamin c um and if you get that you you just don’t get scurvy but you if you don’t get that even as someone who’s on land if you don’t get enough vitamin c because you don’t need enough fresh fruit you can get you can get scurvy to this day so i just think it’s an interesting um illustration of uh how there are various confounding factors combined together to um to make us realize how little we actually know it’s one of the concerns that i always have when i’m you know looking at a company looking at going through the valuation process what what are we actually trying to find what are we what do we know about these things and what what can you learn from even reasonably long periods of time in the market 10 plus years that that you know to be true that are just con confounded by all these other factors so what do you guys think of that i don’t i definitely don’t want to get scurvy it sounds like an awful way to go yeah that doesn’t sound fun at all they detail it in this thing it’s it’s pretty nasty it’s uh that they describe the death as a welcome death by the time you get to the end of it oh that’s terrible i don’t want to welcome death it is amazing the uh the diffusion of information and how slow it was back then and you had to kind of keep relearning the same lessons well we knew we knew that it was vitamin c and it had just sort of been like a uh an old not a white old wives tale but just like received wisdom that people knew that if you ate the vascular garment like 1497 so uh 400 413 years beforehand he knew that if you took fresh fruit you’d be okay but as they were trying to like just they’re trying to refine it down make it more efficient and then refining it down and making it more efficient they completely removed the thing that was keeping people safe so there is some interesting parallels there with um fragility and kind of lindy effect of you know what what’s worked for a long time and then you think you understand why but maybe you actually don’t understand why and and therefore you’re you end up creating a much more fragile situation for yourself yeah i i think that’s right i also agree with uh with the person who says that uh the cure for scurvy is stimulus clearly yeah you could print scurvy away no problem i think generally i think um what what you’re somewhat drawing in parallel to is you know are you take you take a risk you have an outcome are you right for the right reasons are you right for the wrong reasons what do we actually know that’s going on within companies what do we actually know that’s going on like anywhere i have no good thoughts on this so you’re welcome for my comment but i can tell you it’s something that i struggled with a lot over like you know sort of my break or whatever um so i i don’t know i i i’ve been i’ve said to people uh recently like i don’t know if i know what i’m doing at all and i think people think that it’s like a cute thing to say uh i honestly mean it i don’t know how how like much i can say it to people until they like listen but you know i’ve i’ve had a a year the whole reason that i left the bank the entire [ __ ] reason was because i didn’t want to sell at the bottom and not only did i not sell at the bottom i traded a macro event pretty well um am i a good investor because that i have no [ __ ] clue man like i i have no idea whether or not what i did was replicable i have no idea whether or not i should theoretically be proud of it i don’t know you know somebody asked me the other day like because i bought some more curate they were like well is it the best stock in the market i have no idea like i can’t answer these questions i leave that [ __ ] to the pros all i know is i’m trying to make money in the market when i see blood or when i see an opportunity that i that i see um i have a lot more traitor in me than i wish i did like i wish i was more of an investor guess what i’m kind of not i mean i like to fancy myself one but i got a long way to go is that wrong i don’t know there’s a lot of how many how many do i actually know um and sometimes that’s why i have an itchier trigger finger than i otherwise would and sometimes i get into things before they’re fully diligenced like but sometimes i think you have to in the market uh i don’t know it’s uh in case you don’t know i can’t tell i’m like very conflicted about a lot of big things that i’ve been thinking about and to your point on what do you know like what do you know you know i i i’m not certain so you’re welcome for that mind dump is that kind of what you were going for yeah like i think it’s i i think you know he’s not going to be happy until you’re crying so just well it’s going to take a while what we’re all trying to drive at is to come up with the best uh conception of valuable this is what i’m trying to try to come up with the best conception of value uh you know over probably the nearest term the next three to five years and if you think in those terms then you know that gets you out of the stuff that’s sort of i think it gets you out of the value traps a little bit because you’re looking at stuff that should be still growing on a on a um on a revenue basis and it probably uh gets you out of stuff that’s overvalued too because you’re still trying to look out for three to five years and work out where you’re going to get to if you do that the problem is it’s very difficult to tease out over shorter periods of time what are in fact the drivers of value and it you know it does change over time with the whole market has thought it’s you know various stages it’s the leverage buyout value uh you know conglomerates combining all those sort of things together like the our view of it has changed it’s i don’t know if we’ve landed on the correct one now i just don’t know i i get i like you i’ve spent a long time in the looking at this stuff and i’m i don’t know if i’ve advanced any from where i started out i will go to my grave saying that miss like for now value investors misunderstand leverage that is one place that i think that value investors massively miss under pricing of common equity because of leverage and i think that maybe the reason is that like their bibles were written when deadhead covenants and it actually mattered and like it doesn’t now right and like it the interest rates are somewhat non-existent so you have no covenants and very low rates like can it go wrong sure it can go wrong but like i don’t know today i was looking at tiva which i’m not saying to go out and buy i don’t know [ __ ] about you know generic drugs but if you look at that cap structure um mckesson like just settled do you think they can settle like i don’t know you got um you can have some pretty interesting outcomes when you have that kind of leverage on business on the market like on the common equity now you know a lot of that’s going to be encumbered right so um the the enterprise value to free cash flow to the firm’s not screamingly cheap but the common equities compressed in a lot of situations uh i think trans was one of those situations last year so you know but i don’t know like it’s so great so trans time worked is that because i’m smart or did i just get lucky by a bailout i don’t [ __ ] know man like it’s a question i’ll never be able to answer but what i do know is that it was a fortunate bet part of the problem um with making any kind of prognostications or you know final drawing any final conclusions on the significance of debt or otherwise or discount rates or otherwise i think that we’re in this you know this sort of this is going to be my bias but i think that interest rates are probably below where they would otherwise be freely floating in the market now does that mean that you use that discounted interest rate in your where it is in your model which gives you these fantastical values and clearly like that was the right thing to do for the last five years was to use this very aggressive discount rate or not very aggressive just that was the alternative in the market do you assume that it goes back roughly to where it was over an extended period of time because we’re valuing these things on 10 plus years of of earnings does that mean you you you think that over that period we’re going to have some mean reversion back to roughly like what it has been in the past and if you do then you’ve then you’ve undervalued these things and i i don’t know what the right answer is but i do think that part of it i think that if you hit the system like this with you pin those interest rates too low it does make everything makes everybody go crazy it makes people borrow more money than they otherwise would you’re incentivized to do that borrow a whole lot of money and buy back your stock that’s going to make and if you’re in if you particularly if you’re a ceo of a big company and you get paid on that basis yeah that’s the you go where your incentive you you do what you’re incentivized to do so you’re going to carry a whole lot of debt and it hasn’t mattered yet to be fair though um i mean you’re like this the 30 year right now is at 186. like i i don’t understand not issuing the [ __ ] out of bonds especially when credit spreads are tight because there’s no way that you can argue to me that 30-year equity capital costs less than 5 right so like if you’re interested in maximizing the value of the firm uh i mean especially when you have no covenants like i just don’t understand why you wouldn’t push the debt markets as hard as you possibly can in the context of the prevailing interest rates and uh equity risk premium it makes complete sense but that’s the point that i’m making that it’s completely sensible inside the context of what you’re doing now but the question is if those interest rates move out and you have some sort of floating rate or you have to hit that you have to make that bullet payment at some point in the future with more expensive debt that’s a different kind of consideration right yeah but i i guess that like we’re so i think that there are a couple answers to this one i think you really have to look at how the debt matures like you don’t want a huge debt maturity in three years with a business that could undergo like some cash flow problems in the interim um because you know then you get like cross defaulted if you can’t uh refi but um i i guess that i just have this conflict in me that’s like okay i hear what you’re saying but also there is no evidence to me that there’s any shortage of money looking for deals so i just like whether or not that’s because it’s a uh you know government it you know it has their finger on the scale or whatever like i got to play the the cards as they are i can’t and like to me the answer may be something like okay well i’m gonna address this in my asset allocation it’s not on ball’s long equity right now which may be like a big mistake at a top or whatever i’d fair fair excited so if it goes down from here yeah well fair criticism to those that say that that’s a mistake i i uh internally think about that a little bit but maybe like the answer is to hedge something in a different way because if you’re going to argue that rates are going to go to six or something like that then i’m going to tell you everything collapses like there’s no the housing market’s gone your pension funds are [ __ ] your equity markets are down like it just the world doesn’t work so maybe there’s a different uh hedge there but within an equity allocation i don’t think that you can put money out the door and assume that rates are gonna mean revert to anything north of three and and get anything done that’s right yeah so are you buying lower quality companies yeah which that violates kind of like what buffett said about debt right like don’t go out on the risk curve to get more yield i would argue the same thing for equities like i mean this is kind of what charlie’s been saying to people forever like bring your expectations down now they haven’t done it at berkshire so that begs a different question but other than that how is the play mrs lincoln well that’s kind of what i don’t know that’s i think it’s a really interesting conversation like how to deal with this is a really tough thing to answer very difficult financial repression is real yeah yeah what does that mean like what does financial repression mean it means if you can’t get a reasonable return on your asset in less risky ways you have to go looking for it other places and you then bid up the price of those things to the point where you’re you’re chasing yield right off of into much riskier situations than what the the price of that so you know s p 500 at a three percent yield you might be able to argue is uh is chasing a bit even if yeah and because treasuries are at 1.8 or whatever for 30 years and if you think about equity as a as a 50-year let’s say bond um you know maybe three percent kind of slots in with that but does that mean that’s right i don’t know well what would cause one you know that what what are like what’s what’s going to cause the the 30-year to go higher than where it is because of its growth that’s not that bad inflation yeah i mean that that could be a problem but i don’t know like i guess that i don’t know that the debt market’s not buying the inflation story even though labor is super tight you would think that um inflation’s not implausible off that even though i have been in cancer can you read what the what the uh and what the debt market is doing like can you can you read from it is there a signal in there is the signal um destroyed by the fact that the fed’s in there with its finger on the scale i just don’t think that they can move that big of a market in in like in the 30-year or the 10-year like i don’t i just i don’t buy the fed thing i think that’s people want to have a tin foil hat on and maybe i’m wrong i mean i’m open to that i i attribute it more to but it’s their explicit like what does the what does the what does the fomo do fomc what does the fomc do yeah i mean i guess i just i don’t know how i don’t know how deep the market is and how how deep the fact that the margin it’s all at the margin yeah but that’s i guess um i don’t know i don’t know what i’m talking about in this i really don’t so i’ll just stop talking i mean either the fed has an influence or it doesn’t and if it does have an influence then it’s not a conspiracy theory to say that it’s influencing the market right yeah but i guess my conclusion to that is like why in the world would that influence ever go away like i i don’t know you might lose control of it like this is all it this is the if inflation does in fact pop up you know then they they can’t be having negative i mean they’ve got negative real rates now but like at some point you have to lift it otherwise there’s going to be there is going to be some sort of refusal to participate in that market okay well i guess that the other way that i would maybe say that i think about this is like i’ve i’ve been looking at swedish match a little bit you know anything about swedish match i just know the original story written by frank partner well they have this product called zin okay zinn my my degenerate friends and we’ll met if you’re listening shout out to you guys i love you guys but you are degenerates with this stuff uh they’re like these nicotine pouches they have no powder they got no tobacco they got nothing highly addictive taste great my friends rip them like they’re going out of style i put one in my mouth in the golf course i won’t do it again i couldn’t even swing a golf club and i don’t need another addiction in my life no thank you but um i uh like that company to me the the probability that rates destroys wealth in that investment given the fact that i think that they could probably grow mid single digits for 10 years generating 70 gross margins and 30 net income margins i mean i guess i could keep cash rather than that or something like that it doesn’t have to be that bad but like i just don’t i can’t run from a boogie man that i’m afraid of and still keep up with the wealth treadmill and maybe that’s the exact problem but um man that’s a huge opportunity cost if you missed out on these 10 years like you really have to be right on the back end and i don’t know that that would put me specifically in the right frame of mind to make cognitive like cogent decisions going forward i think that’s right i mean if there’s good or good deals to be done i think you still have to do them it’s just more of a general gestalt of are we to expect headwinds or tailwinds from here and i i personally think you could make a pretty reasonable argument that people should be lowering their expectations and expect some headwinds from here for either we have to grow into this valuation or we have to reduce the valuation one of those two things kind of has to happen from this level so um it’s it’s not clear to me that which one we’re gonna have but um but if you have good deals to be done on an individual basis i think you have to keep pulling the trigger and regardless of what else is happening i mean the world is big enough that there will be smart interesting things to do regardless of whatever else is happening with all this macro stuff yeah i guess i i guess that i’m not sure that the market saw the market would eventually solve the outcome that i’m going to describe but um something that worries me is like what what ends up happening is the government starts to try to say well you know look at the wealth inequality and we got to figure that out and then you get some stupid top-down economy and i hate that like call out the socialist card because i debate this with my in-laws all the time but uh you know it’s like fixing the problem could cause more problems than the problem and then you know you would think that that could create uh some sort of re-rating downward and that would be a pretty bad scenario because the wealth gap is unacceptable i think it always was yeah well yeah but i don’t know you’re really gonna i don’t know we can go back and forth on march but i think the government did the right thing last year let’s do your veggies jt because we’re we’re gonna run out of time otherwise this is a good conversation good topic toby yeah they’re talking psth it’s going to be surprising how well this is going to tie together almost as if we planned it which assuredly we did not know okay so this is the uh kind of famous at this point el farol e-l-f-a-r-o-l in case you want to look it up yourself and actually learn about it as opposed to my version of it but um so el farol is this bar that is near in santa fe um and it used to feature irish music on thursday nights and there’s this uh economic professor at the santa fe institute which uh his name’s brian arthur and by the way like if if you could uh if you had a time machine and you could force yourself to go back to like i think it was 1998 when he wrote this paper on increasing returns of scale uh if you could have gone back and read that and like said like listen this one’s important like forget all this other stuff read this make sure you read it like that like you were biff in with the sports almanac uh that would have been a very very lucrative uh idea for you to have internalized in 1998 anyway so brian arthur he wrote that paper um so he’s from belfast originally and he likes going to hear this irish music of his youth at el farol this bar however he doesn’t like going when there’s a bunch of like you know drunk lunatics at the bar uh and it’s too crowded so uh suppose that 100 people like going uh or suppose 100 people are considering going but none of them want to go if more than 60 people are going to be at the bar because it’s an unpleasant experience then but less than 60 it’s quite pleasant and what if we we pretend that over the past 10 weeks uh here are the number of people who have gone 15 18 83 66 45 76 67 56 88 37 so we have we have five good nights and five bad nights over the last 10 weeks when you to have gone to go see this irish music well some people now these hundred people who are deciding should i go to the bar or not on when on thursday evening they all have their own model of what might be the right reason for them to go or not right and so maybe some people would would use just last week’s and say like oh well it’s 37 last week therefore it’s likely to be below 60 this week i’m gonna go now what if some people said well i’m going to take the average of those last 10 weeks what hap which happens to be 55 and they decide well i’m gonna go that’s below 60. or maybe there’s some people who maybe take the average of the last four weeks which would have been 62 and they decide well i’m not gonna go well there are different methods of prediction end up in this ecology of prediction so there all of these prediction models are sort of competing with each other for accuracy and you know some of the models will live and some of them will die based on how accurate they are and people are they’re evolving their models you know with new data to try to figure out what’s the right thing to do and the thing is if they all shared the same rational model what would end up happening it would end up negating itself because everyone would end up predicting that few people would go and they would go and that would be wrong or they’d all be predicting that too many people are going and no one would go and then it actually would have been a good time to go right so they have a way of canceling themselves out so each and each model is affected by the prediction of other people’s models right so it’s uh you end up getting really you end up with chaos in this complex adaptive system and this happens to basically describe how the market works as well uh people have their predictive models and everyone’s competing against each other with their models and there’s a there’s an ecology of models out there competing with each other to try to figure out is this a good time to go to the bar or not right is this a good time to buy or not um and so actually uh merrill lynch did this study for a long time and then they got acquired by b of a and so the last um the last publication of it i could find was from 2019 but what they did was they survey institutional investors to see what factors are they using basically like what model are you using to decide whether you want to go to the bar or not and um so the forward pe has been the number one model for 14 years in a row as of 2019 and by the way it’s underperformed by 46 over the last nine years right so everyone’s using the same model and then therefore kind of negating themselves out and it’s not working so say that again the ford p has been the most popular model but it’s also been or it hasn’t performed very well right exactly perhaps probably because everyone has been using it as their as their number one factor um so but i mean they have tons of different factors in here like earnings surprise dividend yield beta size return on equity peg ratio relative strength like all these different um machine learning all this other stuff so since 1991 earnings revision as one of the factors has been underperforming by 1.4 percent uh per annum when years when it’s in heavy usage by everybody but the time when it’s not in heavy usage it’s like plus four percent per annum so uh and the average uh model today or in 2019 they use 18 factors whereas in the early 90s it was like seven or eight um and really what we’re like john maynard keynes actually sort of described this problem a hundred years ago when he talked about this beauty contest right where the you are trying to come up with what you think the the average person is going to guess is what they would say is what they would pick for the for a beauty contest right like uh and then so you start to think like it becomes recursive where each layer down you’re thinking well what’s the average person thinking that the average person is going to think that they’re going to pick for the beauty contest it’s it becomes a total mind scrambler right to try to and really all we’re they’re really trying to figure out is it’s it’s really a very complicated form of greater fool theory like is someone going to pay me more later compared to and am i using the factor that’s going to be the one that’s the winner who’s going to allow me to pick over this time period uh the thing that someone’s going to pay me more for and i what do you guys think of uh the el faro problem to start yes that’s a good summation of it right it’s like you’re not necessarily trying it’s not you’re not trying to come up with a valuation you’re trying to pick which which ratio best predicts the next 12 months that’s probably accurate i would say maybe it might be generous to say 12 months but are we measuring quarters or totally yeah gays i don’t know it’s going to be it’s going to be noisy because there’s the the conf that i don’t want to say confounding factor but the the thing that the in the influence is what other people are doing like did the cheap stocks all on a pe basis all of a sudden become popular in which case there are fewer of those because everybody’s trying to buy the cheap stocks so if your approach was to try and figure out which one best predicts where the underlying business will be in x period of time do you still run into the same problem probably possibly you still get booms and busts in that scenario right well it’s all it always goes back to what is everyone else imagining and are they bidding that factor up to a level where there’s nothing left for you except maybe even under performance and you don’t know what everyone else is doing a priori so it’s it it’s almost as if this would be telling you that all of the the machinations of trying to figure out where the hell this thing is going and what’s what’s going to work is is perhaps uh wasted cpu cycles yeah so what’s the solution what’s the answer wait i got two quick thoughts ken fisher even though you’re not allowed to speak his name he who shall not be named uh he used to do this when he would do his his uh market predictions he would always like he would admit that he’s cheating but what he would do to to uh in order to come up with it is he would look at what everybody else has predicted uh after the big money polls had closed and he was like all right that’s what’s priced in so that’s what’s not going to happen and then he’d pick like the slices outside of that um which i thought was kind of interesting and then um the other uh the other thought that i had was i just think i think forward ps hasn’t worked because i there’s like a very real possibility that we are in the middle of like a huge global asset grab for the next layer of the you know basically internet infrastructure and there’s like really rational reasons to reward people that are spending a ton of money if that thesis is correct and their businesses are sticky um they would have more losses right now because gaap requires it um that like it makes sense to me now whether or not that that assumption is correct is debatable but i can at least understand it ken’s dad phil who wrote the book on uh the uh uncommon prophets common stocks uncommon prophets he had a similar there’s a similar story in the start of one of his books but it’s not looking at where the big money goes he looks at it’s just one of those competitions and i think the prize was like a color tv or something back when that was that was a big deal whoa and he they just got everybody’s prediction for like where the stock market would close the next day and everybody predicted you know like plus point five plus one percent minus point five minus one percent and then he just picked like plus three percent and of course that turned out to be the right thing he won the he won the tv and but the prediction was not on the basis of that’s what he thought was going to happen he just knew that he’d be the only one out there predicting that and it was just a wild move one side of the other and everybody would forget the correct answer in the years to come unless it was of a wildly divergent answer so that was why he picked it which is pretty smart so he’s he’s playing the game more than he’s trying to figure out what’s happening yeah yeah so i think that bill gave us probably the correct answer earlier when he named an individual security and situation that he thought made sense to him and this makes me happy took him away from all the macro predictions and you know trying to factor in which factors are going to be the the winners over the next period of time and instead just focusing on the business focusing on the price that you’re paying does that the the odds implied of the business results from the price that you’re paying do they make sense to you or are they under uh are they aggressive or are they conservative and if they’re conservative enough for your threshold of uh what you feel comfortable with and you proceed and i i think that’s probably the smart way to play the game that’s really the way that buffett and monger have been playing the game the whole time the only criticism of that and let me play devil’s advocate because i’m i’m a deep value guy and this is one of the things that has occurred to me is that by virtue of the fact that you’re always digging around in things that are conservatively valued on a conservative basis are you missing out on some of the stuff that is very very good and you should in fact be paying what is an optically high price for it in the moment given that it might have this behavior down down the track the only thing is that’s a very very difficult game to play historically ford pes don’t work it is that growth doesn’t pan out but dude the other side of that is like think of how much money has gone into private equity so like some of the cheaper companies that are smaller i really think you got to be able to articulate why hasn’t private equity bought this yet and like they get to see under the hood on a lot of these things and going back to like what we don’t know i i would not be shocked if a lot of things that are optically cheap are like truly [ __ ] shows under the covers and like you know that that’s tough i know it always has been and i realized that that’s how value works and i get all that i’m just saying that as this market evolves and more and more and more money goes into private stuff some of these companies that make me scratch my head and be like why is it public i’m not saying there’s not a reason like there’s plenty of good people doing smart work that say there’s not you know there’s a reason but i think private equity checklist private equity is looking at the market too like private equity is not doing this independent of where the market is they’re looking at what what can i flip this back onto the market privately doesn’t want to be stuck in it so they’re also influenced by there is if you can there that tends to be most of them yeah for sure and it seems that a lot of a lot of companies now are just permanently private equity from one fund to the next or from one firm to the next yeah there’s a great uh quote from temple 10 that drop draws it all together if you’re going to be successful in selecting investments you have to keep changing your methods don’t have to change your principles but you you have to keep changing your methods keep getting better at what you’re doing i like it you guys want to take some questions so we got a we saw like i think we got a uh some sort of uh tip that was like uh in euros i thought it was in euros so thanks very much for that uh i think it was i missed the name sorry sort of scroll by where we were talking but thank you very much for that i’ll spin it on booze ah looks like we’ve devolved into some argument in the comments that’s great that guy he’s like obsessed with this lumber pump it’s like the second week he’s been saying it uh look here’s the thing since i know some people who happen to be involved in talking about lumber on twitter um the fact of the matter is i don’t think anybody uh especially that came out of the itasca crowd was arguing that you should underwrite lumber at 1200 bucks i do think that when prices moon like that it gets more attention but like if you underwrote 1200 lumber like you’re an idiot welcome to the market uh you know that’s that was your first education and you should learn to uh be more conservative in your underwriting you know and if you bought it because it was going up and you saw it on twitter also not the smartest decision in the world welcome to your first uh education in in trading now why aren’t people talking about it now i don’t know maybe when it’s being painted red and force selling is occurring it’s not the most fun thing to talk about that doesn’t mean it’s a pump and dump people are trying to exercise their rights right now and there’s no bid under the stock so that’s my two cents on what’s going on there as far as the united healthcare peloton deal goes i have no thoughts worth sharing except for the fact that it’s probably a pretty interesting deal peloton’s got an interesting uh you know some of the some of what has come out has proven the valuation to be less absurd than i thought it once was and i’ve seen the operating leverage in that business you still got to believe it’s got a long way to go though i think i might be wrong but what would you handicap the odds that that united would uh would overpay for that asset i well i don’t think they’re like i think they’re just giving subscriptions to their members i i look there’s a very real possibility that peloton where where my opinion on peloton shifted last year was when i realized that it might actually be like very affordable personal training for everyone and that’s when i started to be like oh okay i get this when i thought that it was more of like a high-end equipment company i was much less interested i was close to buying it with that recall i didn’t but i was close i got a good question thanks to colin moore who was the uh we’ll spend it at an irish pub we’re going to get three guinnesses guinea in omaha next year uh this is the question though any thoughts on the rising short interest in consumer durable companies on the view that the cycle is over and everyone is over earning restoration hardware for example is becoming a popular hedge fund short baby that’s probably humid yeah i mean look i what the hell’s restoration hardware trading at 7 billion or something like that right now like i you know i get shorting it there i saw one of the clubs and stuff but evaluation shorts are [ __ ] terrible ideas in my book so uh oh my god 13 jesus lord uh that’s actually 14 billion 15 billion enterprise value um yeah i don’t know i’d short it no i i mean i wouldn’t that’s exactly why i wouldn’t right i mean exactly what i just said i i would never short that company gary has got unlimited ability to do whatever the heck he wants people think he’s a genius he’s maybe actually pivoting the brand in the right way certainly appears to be i don’t know you want to get in front of that train enjoy there are easier games to play in my book i’d short it after it rolled over maybe i saw one of the uh one of the i think they’ve got a uh the club the restoration hardware club whatever they call it i think there’s one in uh beverly hills hollywood had a look pretty cool yeah they’re sweet i mean look man he’s doing a good job with the brand it’s just you know yeah the club like you go there and drink yeah it was closed though on a saturday night so maybe it’s just too early because i’m old okay that’s a big part of what they’re doing um dining and experience i mean it’s it’s a way to get people to be habitually introduced to a furniture brand that they otherwise would come back and make a purchase you know every five years or something you like are actually brought in and you’re constantly reminded of restoration hardware it’s just like when i go to ikea to get the meatballs no it’s a lot different but similar you know it’s i mean it’s it’s much more akin to starbucks roasteries which i think are smart right uh i think it’s a great big advertising cost there’s a whole lot of small space that’s basically empty these days right so the only reason you need to go out there is for the experience you don’t need to go and buy something anymore because it’s all delivered on amazon so you go out and hang out in a restoration hardware and while you’re in there like this stuff is pretty cool wrap it up send it home i’ll take it yeah nordstroms was like i think probably the pioneer in in doing that but they messed up where they put their stuff their their dining rooms are like in the back like gary sort of had the idea to make a lot of these dining rooms the focal point if not the focal point somewhere that people want to go and like if you go to the one in chicago it’s when you enter it’s right off to the left if you go to new york like it’s got this sick rooftop like you you know it’s smart it’s a good idea all right team that’s time that was fun next week the lumber king himself is back so you greg you can come directly at him and uh baby’s on vacation and then we’ll be we’ll be around sometime after that all right that’s good all right have a good one cheers everyone


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Value After Hours S03 E28: Scott, Scurvy and the South Pole; El Farol Bar problem; $PSTH
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