Tobias Carlisle (00:03:02):
What stands out about the most recent burst, which was the 2007, 8, 9 burst was that the new starts fell to the lowest number that is in the data running back to 1959. Then the starts have run up at this much lower rate than they have in the previous boom. This boom has been going on for a little while, but it’s still really only back to about the long-run average.

Tobias Carlisle (00:03:29):
The June data that we have is about 1,643, I think that’s a thousand starts. I’ve been invested in the Acquirers Fund, which is the ticker ZIG. We’ve got exposure to a number of home builders. Pulte, DHR, which is D.R. Horton, and MTH, which is Meritage. I’m just going to talk today about Pulte for a variety of reasons. I think that it’s the best of the three on some measures, the other two very good opportunities as well. I think this is an industry that’s got a secular tailwind behind it for the foreseeable five or 10 years.

Tobias Carlisle (00:04:07):
If you’re in the better, safer names, I think you’re going to do pretty well. My pick is Pulte and the ticker is PHM. Pulte is, it’s about a $14 billion market cap as of today. It’s diminimous net debt, they’ve got some debt but they’ve got some cash balancing that debt against that. The company itself has been around for about 70 years.

Tobias Carlisle (00:04:30):
It’s got this nice geographic diversification and it’s got a nice price point in the homes that are built. Half its homes it builds for less than $400,000, or half of the homes that built self for less and $400,000. 75% of the homes sell for less than $500,000, which is around the median a little bit north of the median in the States. They’re sewing to a very broad market of people.

Tobias Carlisle (00:04:53):
Last year they did about $12 billion in revenues, and if you look back over the last, since the 2009 low, they’ve grown very consistently through that entire period. They’ve got a very solid balance sheet. The things that I really like about it, that very safe balance sheet, I think it’s got one of the best balance sheets in the industry. It’s also got these great gross margins. They make a lot of money and they keep a lot of money from each home that they build.

Tobias Carlisle (00:05:20):
They’ve got the lowest debt to capital ratio in the industry. Just for those reasons, I think it’s the safest bet. I think it’s one of the better builders out there. They know what they’re doing. They’re making lots of money. They’ve got this great geographic diversification. I think that the industry tailwinds mean that these, you can almost pick whichever one you want but I just pick the better, safer ones. I think that it’ll do pretty well.

Tobias Carlisle (00:05:42):
For all of that, it’s trading on a P of nine or below, depending on where you look. Acquirer’s multiple, which is my preferred measure around seven. I think it’s a reasonable bet. It’s got a little dividend yield of about a percent they’re reinvesting inland and so on. It’s a business that I think will continue to grow, particularly if they get these if there’s secular tailwinds.

Tobias Carlisle (00:06:03):
We’ve under-invested in housing for a decade. It looks like now that’s starting to kick off as millennials transition into wanting suburban houses and they start having kids. We’re short quite a few homes and we’re going to have to build those over the next five or 10 years? For me, I think the industry is likely to do well. I think this is one of the safer, better options in the industry along with Meritage and D.R. Horton.

Tobias Carlisle (00:06:26):
I think that it’s suffered from that. They have had this overhang, there’s a record of people getting hurt in the equity. I think the other part of it is just, the market has been a tech software as a service high growth market for the last decade. Anything that is like this, reasonably capital intensive has suffered as a result… For those two reasons, I think that it’s been overlooked.

Tobias Carlisle (00:06:55):
But for some other reasons, I think it’s at this inflection point where it still looks reasonably valued, even though you can have a look at the last decade it’s done on a stock price basis. Since 2011, I think it ran from three bucks to about 53 bucks, 52 bucks today. So it’s done pretty well over that decade, even though there hasn’t been the supply, there haven’t been in the sales of these houses that you might expect given the underlying demographics.

Tobias Carlisle (00:07:22):
I think it’s just one of those times where you can’t necessarily see it in the historical data. You just have to understand the underlying demand, growth, and the supply picture, the current supply picture, and what that means for the next five or 10 years is that there’s going to have to be a lot of supply there. A number of companies are going to be beneficiaries of this. Pulte I think is one of them and my bias is always towards the safer, better companies.

Tobias Carlisle (00:07:50):
There are lots of different ways to play. You could play at the marginal, the more expensive ones that tail, the end of the whip will crack a little bit harder, but I just think that this is the safer, surer option, Pulte. Any of this, any of those three, but Pulte being my preferred one.

Stig Brodersen (00:08:05):
Whenever I look at the numbers, I can’t help but think whether or not this is at a top of the cycle. In all fairness, this is your pick and I’m sure you… and look at the top line and see how it’s grown. Also, keep in mind that we have this huge burst. I can see that the gross margins are slowly creeping up. It looks really, really nice. They’re starting to pay out this dividend, a small dividend called the 1% of so.

Stig Brodersen (00:08:31):
But that’s trending upwards to a strong balance sheet, all the things you want to see. Then you are seeing at TTM or the train 12 months, you have $6 and 18 cents. It might look like the slightly more here whenever you do the next financial year.

Stig Brodersen (00:08:47):
Then you’re like, “I wonder what the stock is trading at. It should be probably be trading at, I don’t know, 100 bucks or something like that. Probably north of 100 bucks.” And today here 17th of August, it’s trading at 54. The market just opened and you’re like, huh. Sometimes whenever I’ve seen things like that, and I can tell that from bitter experience, sometimes I’ve seen numbers like this and perfect timing.

Stig Brodersen (00:09:14):
Everyone yells, it looks like no, so this is a cyclical stock and sometimes it looks really cheap. The allies or whatnot, and then you see that burst, and then you see that turnaround. I’m trying here to show, for those of you who are not following this on YouTube, it doesn’t really make any sense whenever I’m drawing things in the air. But I was trying to draw the boom and burst here. How does the cyclicality then play into your thesis here, Toby?

Tobias Carlisle (00:09:39):
Certainly cyclical. There’s no question about that. The driver of the cycle is home starts. You can pull this, this data is from the Alfred website. If you just Google F-R-E-D, Fred home starts, or housing starts, it’ll pull up this chart and you can look at the data going back to 1959, and you can see, it’s very distinct sawtooth pattern, as I was referring to earlier, at the very peak.

Tobias Carlisle (00:10:06):
In 2007, I think we were doing this from memory. We were doing something like 2,700 or 2,800 starts, and now as of June, we did 1,600 and it bottomed at 478 starts in April 2009. It’s crept back up really, really slowly. If you look at the other boom periods, they rent much more quickly and they top out at a much, much higher number. To my eye, it looks like we’re about mid-cycle.

Tobias Carlisle (00:10:36):
For those reasons that I identified before, I think that there’s a little bit of an overhang because the GFC is still, global financial crisis is still very fresh in the minds of a lot of investors. And it’s a capital-intensive business. It’s not software as a service. It’s not as great a business as that. It’s not a spectacular business like that, but it is entering into the second half of its cycle where it will become much more profitable and it’s going to look like a much better stock over the next few years.

Tobias Carlisle (00:11:04):
I just think you’re in this little period now where you can get it at a reasonable valuation before it really does start to run. Then you probably got five or 10 years to enjoy that. I still think it is a very good business because I don’t think you necessarily need to buy it. I’m just saying at this point, it’s a pretty good risk-reward.

Stig Brodersen (00:11:23):
One thing, and you know me, Toby, I always like to play devil’s advocate, even whenever you bring these awesome picks to the group, you’re like, “Why are some negative?” But we all always wanted to figure out the negative before we make that major investment. But how about inflation? Does that play into your thesis in any way?

Stig Brodersen (00:11:41):
I would imagine that it’s relatively capital intensive being a home builder company. Having your profits saved up in old dollars, having to pay in new dollars, could you talk to me about the cash flow, the inflation? Do you even see inflation being an issue?

Tobias Carlisle (00:11:55):
Sensitivity is for home builders that are interest rates? As interest rates go up, home prices have to come down because people can’t borrow as much to pay for the homes, but that’s where it’s important that this has two important qualities to it. One is that it’s got the geographic diversification, so it’s not concentrated in any particular market that might be hot or might miss out completely on what’s happening, and the price points material to it under $400,000. A little bit over half of their homes, and under $500,000 for 75% of their homes.

Tobias Carlisle (00:12:28):
They’re in that part of the market where there is a great deal of demand and if you look at the interest rate impact on those homes, interest rates going up a few percent, maybe running back to the long-run average, it adds like 50 to $75 a month in terms of costs of owning the house. I think that millennials, I’ve gone through this experience over the last five years where one kid, you can live in an apartment, two kids, you can’t really live in an apartment and three kids, you have to have a house.

Tobias Carlisle (00:12:59):
Nobody’s rushing out there to have three kids. That’s a lot of kids. Two kids probably need a house and I think millennials are going through that process now, where you discover that you can’t stay in an apartment. You need to move out into the burbs. You need a backyard. I think that that demographic shift as they start buying houses, and by the way, that has an impact on a lot of other industries too. That will show up in furniture and it will show up in places that supply stuff for the home, like Williams-Sonoma and those businesses, which is another interesting one that I like too.

Stig Brodersen (00:13:30):
I remember back in the good old day, the good old day here, two or three mastermind groups that go, and we were like four people and well, we’re still recording but we took that out afterward. You impressed them with going head to head in terms of inflation, and at the time you have Presto saying, “He looks very much at the money supply.” And you’re like, “I don’t think inflation is that high.”

Stig Brodersen (00:13:52):
I think in relation to your pick, it’s really important to understand since it’s so interest-rate sensitive. We can probably just lead off by saying, if you have a high inflation, then generally you would like to increase rates if you’re the FED because you want to put a damper on inflation and so that would have a detrimental effect on a company like DHM.

Tobias Carlisle (00:14:14):
The tenure at the moment is about 1.3%, which is historically quite a low yield. Long in average is about 6%. Recently though, that is a reasonably high yield over the last 12 months it got down. I think it got under 60 bips, which is 0.6% through the middle of the 2020 drawdown. It’s run up quite a bit and that has coincided with value stocks doing much better.

Tobias Carlisle (00:14:36):
This is why I watch it so closely because the value will do better as inflation kicks up a little bit because the underlying cash flows become much more valuable as inflation kicks up. Now you look at inflation estimates. The last print that I saw was 5.4%. You contrast that with 1.3% on the tenure, which means that the real yield is negative 4.1%.

Tobias Carlisle (00:14:58):
It’s very hard for bondholders. Bondholders are losing 4.1% a year. If nothing changes, they’re going to lose 4.1% a year, which is chewing up a lot of capital year on year. You cannot sustain that for very long, so one of two things has to happen. Either that inflation print is completely wrong and it’s all transitory, and it’s as a result of a low base in 2020. It’s going to look much different when everything comes down and the supply all goes back to normal.

Tobias Carlisle (00:15:28):
Because we also had that quarantine, the shutdown, everything stopped and got rebooted. And it’s had this crazy prices and lumber, which is an input into housing has gone absolutely bananas. It ran up and then it’s run back down again. A lot of commodities look the same, or rates go up. Very hard for rates to go up because the federal government here is carrying a lot of debt.

Tobias Carlisle (00:15:50):
There’s a point at which interest rates start impacting the government’s ability to make its payments. I don’t think the fed is going to be like the Japanese Central Bank. They’re not going to let the rates run-up. But it may mean that we have this very high rate of inflation and interest rates being low. I have no… That’s a scary thought. That’s like a ’70s stagflation style environment, which I think is that there’s a reasonable chance that we are in that or going into that.

Stig Brodersen (00:16:17):
Whenever you say inflation is understating. Now, we had this, just recently I had this interview with Colin Roach, our masterclass in inflation and we talked a lot about how he defined it. We had multiple really, really smart people, including Colin Roach on the podcast to talk about how they look at inflation, how they define it. And it’s very different.

Stig Brodersen (00:16:38):
Most people agree that it’s not CPI. It’s not what comes out. But you would have people who are saying, M2 or it will be all over the place. I’m curious to hear, what are your thoughts on that, Toby? What is the inflation number? Not necessarily a specific number. If you can say 2.23, that’s fine. But how do you look at that?

Tobias Carlisle (00:17:00):
The CPI is the consumer price index, is one measure of inflation, but it is not inflation itself. That’s the way I think about it. The CPI is this chained basket of prices where they look at from period to period and compare to the last period and look at the change in the price of the goods in that basket to give you a sense of what inflation might be, and it’s geographic. I think they drill down to the city level, at least the state level.

Tobias Carlisle (00:17:33):
The problem that I have with it, and I think a lot of other people have with it, is these hedonic adjustments that they make. I think in some instances, the hedonic adjustments are fair and in other instances, they are not. The hedonic adjustment is, if state gets too expensive, there are substitutions.

Tobias Carlisle (00:17:49):
State gets too expensive and you would substitute mince for steak, which might be cheaper. Then that reduces, the CPI doesn’t reflect that increase in-state price, which just seems insane to me that it doesn’t. It also excludes energy and an excludes housing, which are two pretty big price cost centers in most people’s lives.

Tobias Carlisle (00:18:08):
Then they make these hedonic adjustments. Televisions have got better resolutions and bigger and televisions that were extraordinarily $20,000 televisions 20 years ago. You’re probably just about get them for like 100 bucks now and a really good, big TV might be a few thousand dollars. The CPI has to adjust for that. Somehow computers get more expensive, cars get better, TVs get better. And so they make these hedonic adjustments for those things.

Tobias Carlisle (00:18:35):
Whether all of that is warranted or not, I think it muddies the picture a little bit, makes it a little… I don’t know why the fed gets the benefit of the technological advances that folks make to pin down the CPI. The CPI is an imperfect measure of it. And it seems to always slightly understate the true rate of inflation.

Tobias Carlisle (00:18:55):
The reason is that there are a lot of government prices that are chained to CPI, and so they want to reduce their payouts for various of these things, and so keeping a low CPI, understating CPI is to their advantage. That’s why CPI tends to be understated.

Tobias Carlisle (00:19:10):
I think CPI is a true reflection of inflation. There are other competing services out there like shadow stats, which uses the 1970s definition of inflation and they’ve always got a running at 10% plus. There was this MIT billion press project, I think it was. And for a long time, that showed it was running really, really hot, and so then they went in and they fixed it with their quotes so that no longer runs really, really hot.

Tobias Carlisle (00:19:35):
Then there are some other words like slightly mangled this name, but there’s a cottonwood index, Chapwood Index, which has now gone from the internet, scrubbed from the internet. But the Chapwood Index tracked for each city the amount of money that a family spends, actually spends on various things, and it was running very, very hot. It was like 10 or 11% a year.

Tobias Carlisle (00:19:55):
It’s a very political argument, so basically your politics determine which index you prefer to believe. If you say that you like Chapwood or shadow stats, you’re making a declaration that you’re outside of the mainstream and if you prefer the CPI, you’re very inside the mainstream. I just, I don’t know which one’s true. I think CPI is probably understated. The other ones, maybe they’re slightly overstating. I’m not sure. Probably somewhere in the middle.

Tobias Carlisle (00:20:19):
It doesn’t really change. The real measure of it is ultimately probably going to be the tenure or something like that, because these bond buyers won’t sit in stuff that’s constantly chewing up their capital. I think that you probably see the tenure has to run up a little bit through here. I think fair value for it’s probably 1.5% now, probably looks more like 2% at the end of the year. If it does that, it’s going to be interesting to see the impact on some of the tech stocks.

Stig Brodersen (00:20:43):
It’s always a lost cost to talk about what fed’s going to do and where do we see the interest rates going. There’s so much at play here. We talked about entitlements and perhaps why the government wants to peck the inflation low. Do you see interest rates going up because of inflation going up here, as people have been talking about for a long time now? Knowing obviously also, that the inflation number you see now is because of the base effects to some extent from last year.

Stig Brodersen (00:21:12):
Base effect meaning that you sold these deflationary pressures in 2020 because of COVID. There’ve been a lot of talks and those two hikes in 2022 perhaps already, instead of 2023. How do you see that discussion whenever you look at your own portfolio, whenever you look at DHM? Is that something you pay attention to at all?

Tobias Carlisle (00:21:32):
Not really, honestly. Because I just think it’s too hard to predict this. But Peter Lynch normally says that 15 minutes spent worrying about macro is 15 minutes too much, or something like that. I like talking about it and I like thinking about the impact that it could potentially have on the portfolio. But I don’t make any investment decisions based on it, because I just know that I’ll be wrong and I don’t want it to influence what I do on the portfolio.

Tobias Carlisle (00:21:54):
Portfolio is always going to be concentrated into the cheapest things in the market because I think that that’s an evergreen strategy. Just makes logical sense to me that if you can buy cheap cash flows, then you should do that, and over time, if they do other things like buy back stock over time, that will be reflected in the value of the share price.

Tobias Carlisle (00:22:13):
There will be better times for that strategy and worse times for that strategy. It turns out that when the market is very bullish when there’s a lot of capital around, that strategy doesn’t do very well because the constraints that I impose on it, which is that they don’t raise a lot of external money. They’re internally funded for the most part buying back stock and they tend to be more mature companies. They’re not at that very fast rate of growth. They’re still very good companies, I think very good businesses. But they’re at that slower rate of growth. And so they’re just less attractive to people who are actively searching for growth.

Tobias Carlisle (00:22:44):
I’ve written some books about, it’s a little counterintuitive that if you really want portfolio growth, based to find it is not necessarily in revenue growth. It’s in slower-growing businesses that can pull other levers and pulls their earnings and cash flow to grow very rapidly. Buy back stock, which causes the share price to grow very rapidly.

Tobias Carlisle (00:23:03):
That’s the way that I approach the problem. Then the interest rates, just the only impact of interest rates is whether that will then make my portfolio take off. Whether it’ll be this part of a cycle where it’s been a little bit more expensive. The 2020 drawdown and seems to have signaled a return, I think over the last six to 12 months to a more traditional value.

Tobias Carlisle (00:23:27):
Strategies do seem to be working a little bit better in this market and you can look at ARKK perhaps as a representative of, that’s Kathy with A-R-K-K, as a representative of the flashy a techie stocks has struggled since February, and it’s down pretty materially since February. Whereas Berkshire Hathaway perhaps as a representative of a collection of value stocks has done much better over the last six to 12 months.

Tobias Carlisle (00:23:49):
Interest rates and inflation going up will tend to benefit value stocks. I’m probably a little bit biased that I’m always looking for that in the market, even though I do think that’s manifesting now. I do think you can see that in the market. I’m just one person. What do you think? Do you see inflation? Is it understated?

Stig Brodersen (00:24:10):
Well, it depends on which number we are looking at. I think you’re right. It’s probably higher than those, 5.4, they came out last month and-

Tobias Carlisle (00:24:18):
Which is a high print.

Stig Brodersen (00:24:20):
It is. It is. It said one-to-one with the money supply and with a lot of people, especially in the Bitcoin space, they’re talking about they’re chasing the same goods and you’re pulling that lever. I don’t know if that’s necessarily the case. I can easily see why you would make that argument because it does sound intuitive.

Stig Brodersen (00:24:37):
I think it’s also important to understand that it’s at interest rate zero, and so you have to pull all the levers. It’s a derivative of that number. There’s a lot of money effect put out into the system whenever you lower the interest rate, which might just look different from an into perspective compared to all the quantitative easing that you’re now seeing.

Stig Brodersen (00:24:57):
You see these crazy numbers and you’re talking about, that you meet x, y, z for the asset prices. I don’t necessarily see that as the case, but I do want to say that inflation has had an impact on how I invest. I don’t know if it’s just a natural progression of getting more experienced with investing. But I would say that probably in 2017, 18, I started to think differently about all of my cash position.

Stig Brodersen (00:25:24):
Before then, I’ve learned from Warren Buffett, just like, I guess most people listening to this podcast and him and especially Charlie Munger, they talked about having cash laying around, always be ready to pull the trigger on something that’s really cheap. I did that. I did that for many years and of course, lost something and I’m tuned to cost. I also hit a few home runs, so it wasn’t all bad.

Stig Brodersen (00:25:46):
But whenever the market just rallied and you’re like 30% in cash or whatnot, everything else equal, that’s just not beneficial for you. Whenever I saw that inflation, whenever I… was probably around ’17, ’18, like you. Whenever you’re saying, I’m two, that’s probably like an overstatement. And CPI is probably an understatement. I would agree with that.

Stig Brodersen (00:26:07):
I quickly came up with a conclusion that even if it was 5% or something like that, which it wasn’t at the time, but even if it was 5%, that’s a huge opportunity cost that I had to beat. And it just made sense for me always to be invested in, quote-unquote, something. Obviously, I want to view something it was cheap, something it was a good investment, all that stuff. But it always made sense for me not to have cash around.

Stig Brodersen (00:26:32):
One of the things that you told me, Toby, really, at the time where, I remember we talked about Warren Buffett you and I and how we talked about, being 70% in one stock, what’s wrong about that? If you have a high conviction, put 70% into something that’s a really good business and that’s cheap and you’ll make a lot of money.

Stig Brodersen (00:26:52):
You said, “We always have to think about, is this statement true?” And you said, “For Warren Buffett, perhaps it is true. It’s true for me, Toby. It’s not.” I might paraphrase. Please tell me if I’m putting [crosstalk 00:27:06]. I thought a lot about that and I was like, “Buffett is right and Toby is right, and anyway you think that I’m as good as an investor as you, and I’m sure to not as good an investor as Buffett.” I was like, “I probably should be 70% in anything.” Which it wasn’t at the time, but it really made me think and become really humble about not understanding macro to the extent that I wanted to. I would also say not understanding the micro to putting something like 70% into one pick.

Stig Brodersen (00:27:35):
At that time, as with, I guess, many home investors had some hits, had some misses, and it was just one of those where I pivoted to this. I always wanted to, I don’t want to build positions more than 10%, but also let it run if arrive on that pick.

Stig Brodersen (00:27:50):
It also made me realize, now that I’m putting myself where I would lose some of the potential upside in not putting more than 10% into one pick, assuming it was the right one, well, I would also lose some of that just from not being Warren Buffett a great investor. Because that opportunity cost for me is much more expensive. Not because I can’t make more Buffett returns, but because I can’t pick the same stocks.

Stig Brodersen (00:28:16):
I was like, okay, let’s say worst case 5%. You lose 5% when you’re 30% of your portfolio, 1.5% you’re losing every single year. I guess that’s like I’m looking at inflation and why I’m now thinking about opportunity costs and I’m missing out on some of the best gains by not being as aggressive as it used to be. But also feel that it’s been quite profitable by always being invested.

Stig Brodersen (00:28:45):
Of course, you can argue well, the last four years won’t be like the next four years, but just from doing that, that’s 1.5%. Assuming that’s 5% inflation, and the market has a lot more than that. Let me throw it over to you again.

Tobias Carlisle (00:29:00):
That does make sense to me in a sense that, so you’ve got this 1.05% of whatever cash you’re holding is being purchasing power of that is going down year on year. The only thing that I would say is that it’s been a very long time since we’ve had a genuine bear market, and the market is expensive at the moment. It’s a historically high, but really the only times that it’s been higher than this is the dot com boom, right at the very top last few months where 39, I think on a Shiller PE last time I looked, it’s been as high as 44 at the very peak in 2000. Then market didn’t do anything for a very long period of time.

Tobias Carlisle (00:29:36):
Having said that, I’ve done lots of testing about what strategies tend to work, carrying cash just does tend to reduce your returns just to the extent that the lower your exposure to the market, whatever return you’re getting, you’re going to get a lower return than that over time. You’re assuming that you can deploy it or when the market goes down, it’s scary when the market goes down like that that you’ll have the presence of mind and the fortitude to get fully invested.

Tobias Carlisle (00:30:01):
I just know myself that I don’t have that, and so I have a different approach to money management, to holding money, waiting for those times that I run a short book as well as a long book, and I carry some cash. Just by virtue of the fact that one side of the book is working and one side of the book isn’t, I’m always rebalancing towards the thing that’s not working, so I’m putting more money to work, either long or short as the market’s moving around, and that’s how I get around.

Tobias Carlisle (00:30:27):
But I have some sympathy for that view, that there really is an opportunity cost holding cash, particularly when the rates are so low. Where previously, in 2000 rates were at 6%. If you didn’t want to participate in the market at 44 times [silicate 00:30:40], which the inverse of that is that 2%, you don’t want to get a 2% yield and go and get 6% in the tenure. That’s something that tends to rally if there’s a crash. You were paid to wait and you had this tail risk protection holding that, now that’s a different story at 1.3% which is below the rate of inflation.

Tobias Carlisle (00:30:56):
So you compel to be exposed to equities in that market. That’s the explicit policy of the fed, is to induce risk-taking by investors, which is why we have a stock market where it’s at. And we have interest rates where they are. You can’t get enough return from the safe stuff and you’re forced into the market. That creates, I think, this crazy behavior in the market where you’ve got these tokens and the NFTs and those things.

Tobias Carlisle (00:31:24):
I don’t know the use case for those that have been fully proven out. There may be one eventually as where it stands now. I don’t want to go and put my money into those things when I can find a company that produces goods and makes a profit, generates free cash flow, and pays it out to shareholders. That just seems to me like an easier way of doing it.

Stig Brodersen (00:31:43):
We probably talk like 20 times here on the show or something like that. We always talk about the market being expensive.

Tobias Carlisle (00:31:51):
It’s been expensive since 1996.

Stig Brodersen (00:31:54):
It’s unbelievable. I think it was Benjamin Graham who said something like, I had a good track record but I only had four decades or something. I should have a much longer track record to prove. I can’t remember. It was something like that. Perhaps it was five, but you’re like, okay, right, I shouldn’t be looking at the past four years or two decades or whatnot. It’s unbelievable how long it’s been expensive.

Stig Brodersen (00:32:17):
One of the things I’ve been puzzled about is, I’ve looked at different value ETFs, and very often, most of them are U.S-based only. Some of them are international and then, in that case, it’s typically, it’s simply only international. Why is it that if you have a value ETF, that you don’t have a global value ETF? Why is that not more common?

Tobias Carlisle (00:32:39):
It would include the U.S. and internationally. Probably that’s driven by just the investment choices of, U.S. investors who want a U.S-focused ETF. And there are lots of U.S. investors around, so you can make a business with a U.S-focused ETF. Then if you already have U.S exposure, when you go to set up your next ETF or your next fund, you don’t want to double up on the U.S. exposure so you get international exposure to complete your own exposure.

Tobias Carlisle (00:33:10):
But I agree with you, it’s an imperfect way of doing it because there are… Globally, the U.S. has lots of really good consumer discretionary companies that just don’t really exist anywhere else in the world, so a global portfolio will be reasonably heavily weighted towards U.S. companies anyway. And so an international portfolio just gives other countries a better showing in the portfolio. You get more exposure if you just exclude the 45% of the market which is what the U.S., the S&P 500 represents, I think where the U.S. market, it’s like 45% of the market. If you exclude that, you’re just going to get a better concentration of international.

Tobias Carlisle (00:33:44):
But I agree, and this is why I’m pretty eager to talk about your pick. Buffett gave this great, at the last meeting, he put up these two slides and he said, “In 1989, I think it was, this is what the 20 biggest companies in the world look like.” I think it was something like that. There were a lot of Japanese companies in there. There are a lot of U.S. companies in there and there wasn’t much of anybody else.

Tobias Carlisle (00:34:05):
Then he replicated that slide as of 2021, and it was dominated by U.S. companies, so it was maybe one Japanese company, and there are a handful of Chinese companies in there. I think if you wind that forward 30 years, probably what that will look like is it will be dominated by Chinese companies. There’ll be quite a few American companies in there, and they’re probably won’t be much of anything else.

Tobias Carlisle (00:34:25):
I think if you’re an investor thinking about the next three decades say, you probably should be looking at China. When you do that, there are some phenomenal businesses in there, and this might be an unusually good time for it because the regulatory changes have resulted in all of those tech stocks getting absolutely smashed to smithereens. I know what your pick is.

Stig Brodersen (00:34:48):
My pick is Alibaba, and I’m not necessarily saying it’s your traditional value pick. Perhaps it was a bit misplaced, whenever I asked you about that in terms of ETF. I guess just from being a big universe like the U.S. stock, you can obviously find value picks but that’s just how it is. But at the same time, if you look at our tool, TIP Finance, we have trend three developed markets in there. The U.S., the most expensive. You were fishing where their fish are not. It’s a big pond though, the U.S. is the biggest pond, but they’re not good water to fish ratio. I don’t know if this is correct English.

Tobias Carlisle (00:35:25):
You’re quoting a Charlie Munger. I know he’s got a position in Alibaba too, so that’s what… I’ve looked at quite a few of these stocks now. I think Alibaba is interesting 10 cents interesting JD that covers a whole lot of really interesting Chinese stocks in there.

Stig Brodersen (00:35:39):
That’s all specific. I wanted to talk about Alibaba because it was one of the socks that I find particularly interesting and the thing I understand better than a lot of the other Chinese picks. That was actually too tied into back what we’ve talked about before and having that in the ETF. I’m not trying to say, run out and [inaudible 00:35:55] ETF after this.

Stig Brodersen (00:35:57):
It’s just one of those I’m like, I just see a lot of value there, but it’s hard to get to. Just never mind that I live in Europe and it has to be specified, you’re certified here in Europe so it’s even harder here, but even in the States.

Tobias Carlisle (00:36:10):
It’s the ETF.

Stig Brodersen (00:36:11):
The Chinese value, Chinese/Indian value ETF for all of us who can see the value there, but can’t access them and don’t feel too comfortable about going to this huge, but to us, we’re looking Chinese or Indian company. Anyways, I wanted to talk about Alibaba today. I actually already pitched that back in Q1 2019, and at the time, Alibaba was trending around the 170, I want to say. It’s almost back to that today, actually. These are one of the few lucky breaks I have here in my life. I sold it earlier this year, and it was-

Tobias Carlisle (00:36:50):
Just so at pre-Munger?

Stig Brodersen (00:36:52):
Yes.

Tobias Carlisle (00:36:52):
Or post-Munger going into [crosstalk 00:36:54].

Stig Brodersen (00:36:54):
Pre-Munger. It doesn’t make me feel good whenever I sell something that Munger buys. Except in this very specific case where it seems to be fantastic. I decided to liquidate my entire position. It was like a few reasons. One of the most, my wife and I were moving, bought a new place so I needed to have some funds.

Stig Brodersen (00:37:17):
The other one was that I want us just to liquidate the entire portfolio because at the time I felt like Berkshire was probably on the value by 30 or 40%. It was just one of those where I’m like, Alibaba trading and 250, 300 whatnot. It actually didn’t seem all of value to me. But it just seemed like, it might be fairly valued definitely. It didn’t feel like it was undervalued at that point.

Stig Brodersen (00:37:38):
Knowing that it would have to raise funds, tax, staff, Berkshire being just slightly more attractive, just liquidated. Again, talk about bald lock then scale. Because not only has Berkshire gone up. That’s actually not what I’ve been most excited about, but Alibaba just blew up and it wasn’t because Xi Jinping called me and said, “I’m going to crack down on Chinese tech.” It wasn’t anything like that, but it has just been prominent. I think it’s like 175 or something right now. The market just opened and-

Tobias Carlisle (00:38:11):
Xi saw it because it was expensive. What was the reason for selling? [crosstalk 00:38:14] gone too far.

Stig Brodersen (00:38:16):
No. At the time, it just seemed to me it was fairly valued. And then going back, I needed to sell some stocks for the down payment for a new condo. I could easily see myself whole and if we move next year instead.

Tobias Carlisle (00:38:31):
It was the closest to fair value in your portfolio, so you wanted to ship the thing that was just the fair value.

Stig Brodersen (00:38:38):
Since then, the Chinese government has just been hitting big tech parts, educational companies that create that they can’t be profitable. So you can imagine what that had done to the share prices of those. And then you had investors like Charlie Munger who bought in, in Q1 already. I think when his pop right did at the same time. Mohnish Pabrai added here in Q2. Guy Spier billed a new position.

Stig Brodersen (00:39:01):
And they probably borrowed in the 210, 230, perhaps a bit higher, especially for Munger in little they’ll earlier. So they’re both in that range. So the stock trading at cold, 175. I’m not saying that you’d go, just go buy it but it definitely makes you wonder if there’s value there. And so I did take a very small position. I think it’s one of the things I always like to put up as a disclaimer. I was thinking I actually, at the time it was like lower than 200. And I was like, “Yeah, why don’t they just buy a few shares?”

Stig Brodersen (00:39:31):
So I have this thing where I buy very little stock in a company. It was less than 1% just because I… I don’t know if it’s just me getting lazy or what’s happening, but I have a hard time sitting through earnings calls and reading 10Qs and 10Ks. If I don’t have a little skin in the game, even if it’s very, very little, it’s just like a mental thing. I just saw things differently. And so I decided to do that. I felt like a 200 or 198, which was, I bought a very small, less than 1% position.

Tobias Carlisle (00:40:04):
It makes sense to buy a little bit. And then because it’s optically cheap and you’ve got lots of good signals. Charlie Munger runs, Lee Lou owns it. There are a few other investors in it too. He didn’t mention who I know, who are very well respected, he picked up. It makes more sense to buy a little position than it does to go and buy your whole position before you’ve done your research. So you bought it that’s appropriate right buy a little position because those are good signals. It’s cheap. Charlie Munger sport and so on. Now you go and do the real work to determine whether you’re gonna ramp it up to a full position or not.

Stig Brodersen (00:40:31):
So let’s do Alibaba here in Q3 2021 massive company. 1.1, 8 billion active customers. Just thinking about that. If we break that down into four different business units, 87% of revenue comes from core commerce. So that’s the premiere of the Chinese E-commerce through Taobao. You can think of Alibaba if you don’t know too much about the company, perhaps if it’s one of the first time you’re hearing about this. Just think about it as the Amazon of China, with lots of localized tweaks, it’s different.

Stig Brodersen (00:41:04):
But you can buy everything just like you can on Amazon. Eight percent of revenue comes from Alibaba Cloud. This is the segment you better watch out for. We’ve seen just last quarter, year over year for the June quarter, 29% growth. And this was actually quite disappointing growth because they lost ByteDance the owner of TikTok. If you’re just for that we’re much more than 29%. If you actually looked at it and took that out and you look at it year-to-year was close to 50%.

Stig Brodersen (00:41:31):
So it’s now a $10 billion business unit with a lot of growth ahead. If you look at the global market share for the Alibaba Cloud, it has around six percent and that makes it the fourth largest [inaudible 00:41:44] in cloud computing. So it’s trailing Amazon, Microsoft, and Google. I would also argue that for the time being Alibaba is not really competing in the West for cloud computing, just like you would say, Google is not competing too much in China.

Stig Brodersen (00:41:59):
I would rather say that you divide up between East and the West and you might even just say to China. Alibaba has the most dominant player and they have three times the market share as Tencent Cloud. If you look into some of the stats, Asian companies for itching priors. I would imagine it’s the same here in the West. We had to decide on just internally and the company on the cloud service. We look at, I want to say four or five or the modern American.

Stig Brodersen (00:42:23):
It wasn’t even like it was a conscious thing. It’s just one of those things like where do you want to store data? I don’t want to store it in China. I don’t think you’ve even made that analysis. I think it’s something that’s subconscious. I would argue that you would see very, very high growth in Asia, specifically China, probably more than in the West where Alibaba would just have that first-mover advantage and the ecosystem around it. And you can say to some extent, the same four for 10 cents.

Stig Brodersen (00:42:48):
The cloud business, as much as it’s eight percent of the revenue, doesn’t make a lot of profit. It just turned the profit though. But it’s the most profitable unit. It’s all about growth right now. Then you have three to four percent of the revenue. That’s the digital platform, entertainment, and video. So the crown jewel here is Youku. You can think of it as a hybrid between YouTube and Netflix.

Stig Brodersen (00:43:10):
They have more than half a billion users, which makes it the third-largest in China. It doesn’t make it the biggest. Both Bado and Tencent actually have bigger providers. And then you’ll have Alibaba Pictures and other entertainment. They also have gaming. They have a few different things. In this unit, it’s not well, it’s growing a decent clip around 12% a year right now, but we do see some growth on that. And then they have less than one percent is something called innovations initiative and others.

Stig Brodersen (00:43:40):
The best way to think about this is similarly to all the bets for Google. So you can think of as a BABA has like a small army of companies that are not generating any revenue or they have a big risk of failing, but you have a lot of potential upside in that too. If when they become profitable, it will be broken out. Just like Waymo was one broken out, YouTube was one broken out in Google’s statements.

Stig Brodersen (00:44:05):
The way that Alibaba operates that they generally take lots of controlling stacks in acquisitions and they do not consider themselves an investment company. This is different than Tencent. They have a very mindset investing in a bunch of different businesses and then their investor, they made a significant investment in Pinduoduo, Tencent here. I’m talking and they use their ecosystem. It’s a way of growing too but they’re investors and yes, there are on the board, but they’re not operating the company. Alibaba has a different mindset.

Stig Brodersen (00:44:40):
If you look at, at the valuation and then we can perhaps afterward go back and have a conversation about everything that’s going on with the regulation. Was this just a big mess right now. If you look at the valuation, what is Alibaba worth? And it’s a tough question. I can come up with a range between 250 and $350 perhaps. This is for a stock that’s trading at called $175, but it’s hard. And you can argue for an even wider range.

Stig Brodersen (00:45:12):
It’s trading at 20 times free cash flow. Is that cheap for a company that’s been growing earnings per share on average for the past three years at 30%. It’s pretty cheap. And it’s not 30% in total. It’s 30% annually. You have a company here with revenue or the train 12 months, that is 40%. And all the past five years, it’s averaging 47% like 47%. You can argue that in a world where the interest rate is zero.

Stig Brodersen (00:45:44):
And it’s a company we go back to the discussion about inflation. By nature, it has inflation protection that’s in the nature of the business. Meaning you don’t have all those capital expenditures, you don’t have to lay the tracks for your railroad or whatnot. Let’s flip it. Let’s say you have a company that’s trading at 20 times free cash flow.

Stig Brodersen (00:46:04):
You have an unpredictable and [inaudible 00:46:06] government. Is that cheap? No, it’s actually quite expensive. Whenever you have a big unknown like the Chinese government, it’s hard. What I would suggest that people do is I guess as with all the stocks come up with different scenarios, assign percentages to that, and then discount those cash flows back. That was my pick, Toby. I want to throw it over to you for any questions, thoughts on this pack.

Tobias Carlisle (00:46:33):
I really like it. I’ve some real questions. The questions are, what is the impact of these regulatory changes on BABA? That’s the first question.

Stig Brodersen (00:46:43):
It’s not pretty. If you might remember, and financial. Really something everyone talked about the financial world, which was not fully owned by Alibaba, but Jack Ma was a controlling shareholder. And BABA had made a major investment. At the time, I think it was valued more than $100 billion. And that had an IPO where I think the goal was to raise 37 billion, something like that. It was a massive, massive company. And all of a sudden it just stopped.

Stig Brodersen (00:47:11):
The regulators just said, “No, you can’t do that.” And since then they’ve started to force and financially open up some of that data. So all of that hasn’t been played out, but they want… the government what access to that data. And they also want rivals to be able to purchase that data in a marketplace. And it hasn’t really been figured out. And then what’s the price, and this is all data, it’s some data but it’s not ready.

Stig Brodersen (00:47:37):
And so this is my long-winded way of saying, I don’t really know what the entire impact is. And it seems the market doesn’t really know either but they don’t like it. I don’t think that you won’t see what they did with the educational sector where they just said, “No, you can’t really make a profit anymore.” I don’t see that happening again. I would never have thought they would come out and say, no, these businesses can’t make a profit anymore. It is definitely a major risk.

Tobias Carlisle (00:48:04):
Do you know what drove the changes? What was the rationale, what was the reason that the government gave for the change?

Stig Brodersen (00:48:12):
They said that the party line was something like we want more social equality. They wanted not just social equality but they also want a better competition. They wanted to curb the market powers. And so this is something generally the people and whenever say people, the population likes to hear. Just like in the West, in China, they’re also afraid of companies collecting their data and what they would do about it. But I think it also served a different purpose. If you look at… The country is just so, so different.

Stig Brodersen (00:48:50):
You have Xi Jinping, the president who has changed the legislation in terms of how China is now ruled. And it seems he’s more or less giving himself infinite runway to stir the country in whatever direction he wants to do. I think one of the issues was that he saw potential rivals. And he saw potential rivals that didn’t necessarily like the Chinese regime. Jack Ma would be the poster boy for that.

Stig Brodersen (00:49:19):
He disappeared from the public eye for cold four, six months or so and he came back a lot more humble. He was quite an open critic, especially for Chinese from the person. And he came back speaking very differently about the Chinese government. Not long after that. I think it was only like within three or four months after that, you have two very prominent people in China that removed myself from the public.

Stig Brodersen (00:49:44):
One of them was the founder of Pinduoduo, [Huang 00:49:46] but also the founder of ByteDance who owns a TikTok. I think it was also a signal that he’s in control. I think it’s a power play. If you look at the legislative body, you have so many wealthy people. But if you look at the 83 wealthiest from MPC & CPPCC. So you can basically look at this as less basic delegates. They have an average wealth of 3.3, $5 billion.

Stig Brodersen (00:50:17):
And this is like, I wouldn’t call them [inaudible 00:50:19] because that would probably be the wrong thing to say. But these are the people like on Xi Jinping’s side who are running this country, they are determining the loss. In comparison, if you look at the U.S. Congress and don’t feel sorry for the people in the U.S. Congress. If you look at the 83 richest members, they have an average wealth of $56.4 million. That’s still a lot of money, but whenever you compare it to, what is that? 60 times, what they will have in China? I think it was one of those power places more than, I wouldn’t say more than anything else but I definitely thought that that played in.

Tobias Carlisle (00:51:02):
The next question was, what does that mean for the regulatory landscape more generally? So it just means that probably it’s a little bit more unpredictable is that fair or that there’s potential for more of this? How does it differ from the United States? If a company gets too big in the States? So Microsoft had antitrust legislation against it in the early ‘2000s or antitrust action against it rather.

Tobias Carlisle (00:51:25):
There are rumblings now in the states. And there has been for about five years about the bigger tech companies here that they may have too much market power, or there may be collecting too much data, they’re exercising some censorship. How is it different from… Nothing’s happened in the state? So it’s purely theoretical but what’s the difference between the two?

Stig Brodersen (00:51:46):
Speed and magnitude, I would say. Let’s take Google for instance. Sued last October 2020 by the DOJ and 11 states for holistic abuse. And it’s only been for the search business, not for anything else. That will come before 2023. In comparison, if you look at what happened with Alibaba and not just stopping from one day to the next, like there at the IPO. It took less than four months to slap a $2.8 billion fine on the company and open them up to sharing data.

Stig Brodersen (00:52:18):
And so I guess I see this differently than whenever… I read through all my notes here from 2019. I typically for these mastermind meetings, I typically prepare between eight and 12 pages of stuff like that. Luckily I don’t go through all of them because I think people would be bored. But I’m just at the time writing, this is what I’m thinking, this is the outlook. And I remember one of the things I wrote was thereby Alibaba has a significant advantage over the U.S. because they are allowed to collect data and they can collect more of them and they will collaborate with the Chinese government.

Stig Brodersen (00:52:53):
So they would have a leg up because it’s a global power play to be the front runner in AI, for instance. And now I guess I think differently about it. I still think that of obviously the Chinese government was still collect that data and figure out what to do about it. But I’m not sure that big tech in China had the same advantage as I used to think. I think they have the advantages in the sense that there are allowed to collect more data than the West.

Stig Brodersen (00:53:23):
The individual company probably wouldn’t have the same moat as thought they would. Chinese communists aggregate probably still have the most compared to what’s in the U.S. Simply to operate on the Chinese market, you need to give green light to different type of updated collection and two different types of IP, which you don’t have to do in the states for instance, if you come comments as a Chinese company, at least not yet.

Stig Brodersen (00:53:47):
And so the Chinese government just have and especially if there are forced companies to share them, they will merge one or two, how many winners who then figure out what to do with that data. And so collectively it might be an advantage for the individual company in this case Alibaba. I don’t necessarily think that the advantages is as big as I used to think.

Stig Brodersen (00:54:07):
Whenever we look at this as investors and we’re like, yeah, we might not care about politics or whatnot but we’re going to where the value is. I see it as the opposite of all the bets. You have these other bets, which for Alibaba would be something like Ding Ding, for instance, which is like a workspace corporation tool. But you can think of this as what Google have with all the bets because all these deep minds, all that cool stuff. Where you would say, “It’s really difficult to value what all that is worth,” and not generating too much revenue, how profit will be.

Stig Brodersen (00:54:46):
They’re actually just burning cash, but it probably has some value. It would be weird if it didn’t have any value. You might be willing to pay a bit more for the rest of the company, who would probably need to understand in say Google’s case, you would need to understand the advertising space pretty well because that’s how they make money in terms of search.

Stig Brodersen (00:55:02):
And I would say to to go back to Alibaba, just like I would pay more for the e-commerce in the cloud business. Because that’s clearly going to be profitable and it’s easy, especially for the e-commerce business to figure it out what that’s worth. I probably pay a bit more from that because of all the bets. Then I would also say I would pay a day less because of these regulatory pressures.

Stig Brodersen (00:55:26):
It’s a bit more art than science. I think that’s what the late runs with we’ll call it in known unknown. We definitely know it’s an issue with tech and the solution you’re seeing right now that’s being taped around it. It’s just too hard to tell how bad it would be.

Tobias Carlisle (00:55:43):
When I look back over where it has traded over the last five years, this is about as cheap as it is traded over that period of time. I don’t think the question is so much. It’s optically cheap and you’re probably getting the right odds for a bet on… It just continuing to do roughly what it has done or maybe just a little bit worse than that. If it does that, you’re going to make out really well in this position. If there are material changes to it, then all bets are off and who knows. But I think it’s a good opportunity potentially to grab something that is spectacular because the upside is huge.

Tobias Carlisle (00:56:18):
If it does go back to doing what it had been doing, and you get some of those other bets paying off the risk-reward is good. The risk, if anything has been pressed into it here. And so I think that it’s… I like the position. I like a few of these opportunities just for that reason that were previously, there was a lot of… You had to be right on what the underlying business did because you’re paying up for it. Now, the valuation is to the other side, you’ve got this opportunity. Nobody really knows what’s going to happen but at least you’re getting the right odds to take the bet.

Stig Brodersen (00:56:50):
I came up with this, what is it worth? And I said, between 215 and 350. And you can really make an argument that the brain’s just not wide enough but do it there putting some numbers on how you look at the intrinsic value for BABA.

Tobias Carlisle (00:57:05):
It’s too hard. I just think that you can look at it on a ratio basis. It’s the cheapest it’s been the last five years. It’s clearly the underlying business is spectacular because it’s got massive returns and I agree it’s growing incredibly quickly. They’ve got lots of little businesses that aren’t even included in that, that are still burning cash. They might be opportunities down the road. All of those things like the cloud is very early days still and that’s been a monster business in the states for Google and AWS and for Microsoft as well. So I like the opportunity.

Tobias Carlisle (00:57:33):
The thing that you got to get comfortable with is the regulatory regime. That’s true everywhere in the world. This one might be a little bit more arbitrary and a little bit more aggressive, but then I think regulatory regimes globally are pretty arbitrary, pretty aggressive too.

Stig Brodersen (00:57:46):
Oh boy. I definitely agree with that. Again, I’m trying to be my own devil’s advocate. So not only with my good friend Toby, I should have tried to take myself down if I can. I guess one of the things where I look differently today here in Q3 2021 than it didn’t Q1 2019, whenever I built the initial position. Which was at the time it was… I think it was in seven percent or something like that. So it was quite significant bad for my portfolio.

Stig Brodersen (00:58:14):
I think where I look at this differently was that I really looked at them having this massive moat in e-commerce. They have this, their own ecosystem you have to go to. It might sound odd that it can be a moat that you have to go to the website, you can find anywhere else. So let me just tell you a bit more, what I mean by that. Because for instance like Baidu called the Google of China.

Stig Brodersen (00:58:39):
What Alibaba is doing is it actually blocks Baidu’s spiders from indexing of both the Taobao and Tmall, which is the two primary sites. And so you actually have to go directly into Alibaba to buy and have the whole ecosystem around it. We need to enter the ecosystem. And then it’s very easy to buy and it’s very convenient for you to make any purchase. That also makes search a lot more valuable, that makes the advertising dollars go up really quickly, because it’s very efficient for Alibaba.

Stig Brodersen (00:59:05):
I saw what Tencent was doing with their ecosystem. And it seemed to me that it made sense that we’ll be like this duopoly and will be really, really hard to get into that market. And then Pinduoduo comes up. In this year, they’re probably going to sell more and JD.com. Not more than Alibaba, which is still a significant first but I was surprised how fast that happened. And so I guess one of the concerns I have with this pick still, I see great value.

Stig Brodersen (00:59:33):
But one of the concerns I have is just the disruption that I see in Chinese habits and how I’ve never seen that coming with Pinduoduo. Just one more thing to be cautious about and look out for, if you want to, to invest in this. Can ask you one question Toby about this. Because this has been like a… Looks like a falling knife. It looks ugly whenever you look at how the price has moved here this year. I read this book by Stephen Sportsman. I think his book was called What It Takes.

Stig Brodersen (01:00:03):
And he’s talked about Billing, Blackstone and talked about how he made money in Blackstone. And he talked about how he would never catch a falling knife. He would always look for the button, then want to see at least a 10 to 15 increase from any button before he would make a position because otherwise, he could get really, really ugly. And you would pay a high opportunity cost from having to wait. Even if you think the intrinsic value is, is on your side. Do you think there’s anything to that? Is that something you looked into at all? Just curious to hear thoughts on that.

Tobias Carlisle (01:00:37):
The way you can deal with it is by, you combine some momentum measures. I don’t know that it necessarily changes the… So you look at, when I say momentum, you just, like you said bounced up from some point, it’s not still falling. I think that statistically across a number of positions, it doesn’t really improve your chances. It doesn’t really improve your returns on a basket of positions. I’m valuation only. I don’t really care so much what the stock price is doing because these things bounce too. They can bounce really hard and really high. And then you miss your opportunity.

Tobias Carlisle (01:01:08):
I think you look at a stock price chart and it’s joined together in time and it looks like it’s got this momentum and movement to it but really what it is is just people transacting at different prices. And so you’ve got you get the opportunity that you have based on the market price, where it is, and what your assessment of the value is. And then your timeline is long enough. If you were thinking in a three to the five-year, 10-year timeline, does it really matter whether you get it here or up 30% or down 30%? Probably not.

Tobias Carlisle (01:01:37):
So I think you just take your opportunities where you find them say, don’t worry so much about what you think it’s going to be in the future. In the short term, you just buy it here. And then if you’re worried about it, continuing to fall down, don’t buy as much as you want, buy off a position or a third of a position and then bounce 10 or 15%. And that’s just signals that buy the whole position. And if it falls another 30%, then you can buy a little bit more and maybe you get to a half position at that point. I think it’s impossible to know. You just got to look at the odd city offered at each stage and make a decision based on that rather than where you think the stock price is going to go.

Stig Brodersen (01:02:11):
Makes sense. And what does he know? He was a Sportsman, just because he built Blackstone.

Tobias Carlisle (01:02:17):
He’s a private equity guy too. So that’s quite a lot, but it’s primarily a private equity guy. I don’t think that he’s doing that when they’re buying things privately, that I’d go in and say, what price are you going to offer? And they say, well, it’s a billion. And then they go back next time he says, what price are you going from there? So 500 million. Oh my God. It’s a falling knife. I can’t buy it here. I’m going to come back when it’s at 600 million or when it’s 575 billion that I’m going to buy. That’s a 15% debt.

Stig Brodersen (01:02:45):
Exactly. Cool. I’ll let you go here, Toby. But before I do, I would like to give you an opportunity to tell a bit more about where people can find you, what else you’re doing other than being on this podcast?

Tobias Carlisle (01:02:56):
I run two ETFs. The first one is called the Acquirers Fund and the ticker ZIG, it’s long and short U.S. domestic companies Deep Valley. And I run a small and micro version of it, that’s just long, only and a little bit more diversified called Deep, D-E-E-P. I also have a podcast called The Acquirers Podcast and a website called acquirersmultiple.com. And I’m on Twitter at Greenbackd. It’s a funny spelling, G-R-E-E-N-B-A-C-K-D. And I’ve written some books. A most recent one is The Acquirer’s Multiple, which came out in 2017. Available in all bookshops, including Amazon.

Stig Brodersen (01:03:33):
That’s amazing. And so for the rest of you out there listening to this, or perhaps you look at this and YouTube makes you choose to subscribe or follow us on Spotify and podcast and wherever you’re listening to this. All right, guys, that was all that we had for you for this week of the Investor’s Podcast. We will be back next week.

Outro (01:03:51):
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