Alex Morris - TSOH Returns
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[The Business Brew theme] Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode features Alex Morris, also known as The Science of Hitting. He writes at Substack under the TSOH Investment Research Service. He's been on the show before. He came up, saw me, we hung out for the day, we had a little bit of wine, a whole lot of fun and recorded this episode. I can't say enough good things about him. I think he's got his head on straight. I think the way that he looks at the world and has settled into his investment style is very cool. I think that he's one of the few people that practices what he preaches. He's totally transparent with what he's doing. He doesn't shy away from performance when it's bad. He answers questions directly. I think the world of him, I think he's one of the guys that really is doing things the right way. I enjoy reading him. I hope that at least some of us subbed his service and get some value out of it. Without further ado, none of this is investment advice. All of this is for entertainment purposes only. Please do your own due diligence and consult a financial advisor before making any investment decisions. Hope you enjoy the episode. Science of Hitting Investing, who I once referred to as an investment sherpa. I don't know, your mother thought that was funny, I believe. Alex: [laughs] Bill: Back for a repeat performance. We had a nice day to get today, right? Alex: We did. We played some golf, which you destroyed me at. We played some tennis, which-- There are a lot of people there, but I would say I destroyed you at. [laughs] Bill: Yeah, you have two forehands. Alex: Yeah, a lot of people don't know that about me and my backhand is two four hands. [laughs] Bill: Dude, it was wild. You were sitting there and you reached out with your left hand and I was like, "Is he lefty?" And then the next time I saw it, I was like, "No, he's just got two forehands." That is a different way to play tennis. I respect. Alex: It works for tennis. Being ambidextrous, which I think I technically and not positive. It doesn't work well for basketball, because when you go to shoot, you do the open wing thing as opposed to having a dominant hand. So, my basketball shot has struggled for a long time, because of that. But it works for tennis. Bill: You played pretty reasonable defense on the children today. Alex: Yes, they're not that tall. Bill: No. [laughter] Bill: They are quite a bit smaller than you. I enjoyed chatting with you today as always. My favorite quote of the day is we're talking about waiting for a pitch to hit and it feels like the current market, everything is a major league pitcher. And potentially, they look like fast balls, but they're sliders breaking off the table right now. Alex: Yes, they're not that easy to hit right now. It doesn't seem-- [laughs] Bill: Yeah. No, it really does. At the firm that you left, when did you start investing professionally? Alex: Going back, when I was in school and just figuring out what I was going to do, eventually found investing. That was in 2011. I went and worked at a really small RIA, which had $10 million of assets, basically a family office where the guy was just trying to figure out what to do. He brought me on as the only employee, which for me was absolutely perfect, because I just want to complete just go out and do whatever you think you need to be doing to learn investing. So, I'd sit there and study for the CFA. I was looking deeply at companies for really the first time ever or at least I thought it was looking deeply and maybe in hindsight, I was still just getting my feet under me. But it gave me a lot of flexibility and I use that for five years. It was a perfect job for me. I didn't get paid very much, but [laughs] it was a perfect job for me. Got CFA-MBA, all that jazz. Moved to a much bigger firm. There was much more access to resources, but a very similar gig where I came in and said, "What I care about is the investment research process and looking at companies." And that's what I want to spend my time doing. And thankfully, they were open to that. So, yeah, that was in 2016, I believe. Writing through this whole period, it was just so hugely important. Even before meeting you and other people like Francisco, who have become great friends and people I talked to investments about all the time. It was a way to start building a community and getting feedback in a way that-- In the RIA business, it's a financial planning business more than anything else and rightly so. But you don't fit in as well, if you're really want to be an investment person and really should be at a fund of some kind. But it's been fantastic to have that experience and also to learn from people online. Bill: Yeah. I sometimes wonder, maybe I shouldn't be so much of an investment person is [crosstalk] I got going on right now. Dude, it's been a wild time. I guess what I was getting at is, have you ever seen a market like this before? And I think the answer for both of us is no. I don't think many people have. Alex: I was so new to it in the financial crisis days that I don't even remember it as a formative event. Maybe it's different for you. It didn't stick probably, because the companies I was buying anyways deserve to be down 60%, 70%, 80%. They were not good businesses. Bill: [laughs] Alex: I had no clue what I was doing. I think about it a lot as I look at a track record now and my performance over time. I think they really know what I was doing 5, 10 years ago, maybe even 3 years. You're always trying to learn and get better. It's tough to say, it's a business where it's so objective in terms of what your performance is and whether or not you're good. I also think when you're in your 20s, 30s, maybe even older than that you need to give yourself the time to actually get the experience to figure out if you're a good investor. Bill: Yeah. I think it's wild. I find myself wondering a lot how many of the wrong lessons I learned over the past, I don't know, six years or whatever. But then I honestly think that I think I've learned a lot of the right lessens too. I came into this and I fully believe in value as a factor. If you want to turn that over to computer and you want to make the argument to me that like the trashiest of trash is overly hated and as a bucket, it works. I'm down to have that discussion and that appeals to me. I used to think I was the guy that could find that and that I had the emotional fortitude that the market didn't have. I think I was lying to myself a decent amount. I think you and I know cable reasonably well. And even this period to look at people and be like, "Oh, yeah, I'm not questioning whether or not I'm wrong, because the stocks are down fucking 70%." I'm not sure what I'm missing. Owning Charter and having it the worst stock in the S&P, that is not fun even if you think you're right. Alex: No, one of the hardest things for me is, as someone who actively tries to be a business owner and a long-term investor is thinking about poor results in the short-term and trying to decipher in any way what's noise and what's a signal. It's very, very, very difficult to do. I don't have a great way for even thinking about it today. One thing I have started to lean on more than I probably did in the past is looking for managers and management teams where I think they actually can try to put themselves in the best position possible to basically try to find a path forward. But even judging people is also very difficult just like judging businesses and where they might be in 5 or 10 years. It's a very difficult thing to do. In terms of actually managing a portfolio, it's been instructive for me in a way where when I was younger, a stock price goes down and the pie-- The most notable example is like, "Hey, stock prices down 20," but I think intrinsic value is down 10 or something. It's even more attractive. I've just learned to in those situations to actually wait for the business to turn once again before just buying into what could be a whole. I think you and I have talked about this a bunch, The John Hampton post on losers average down and his kind of approach. And a lot of these things are just very arbitrary, but I think his approach to risk management makes a lot of sense in terms of basically just giving yourself a cap, which I'm allowed to spend, I think he said basically 900 basis points. That's the most I can spend. And he also had a time condition on it in terms of when he can make additional purchases forcing the business results to shine through. I think you can really get into a dangerous place, if you don't have any constraints on it. You just say every time this thing goes down, I'm just as convicted as I was before. If not more so, because it's cheaper, he's going to buy into every depth. You find yourself in a position where you have a very large allocation is something that he may very well be wrong on. The market is not stupid. [chuckles] I've said this to you about cable for a long time, right? His stocks always traded at a discount. I think the markets always sniffed out certain risks in terms of what wireless could potentially become, especially for a certain type of customer. And now, we're seeing that reality at least play out in a certain way. Now, whether or not it's going to have 10 million plus subscribers over time is still to be seen. But I think the market probably rightly sniffed out some of the technological risks that is a real part of this business. Bill: Yeah, my favorite part about cable is I used to be amp that it was the best network that it was competing against. And now, I find myself pitching, "Well, it's the best value. It may not be a superior tech to fiber, but it's the best value." If that's not thesis creep, I don't know what it is. On the other hand, cable is such a good example, because I've said to you in the past that if I'm wrong on this, I'm wrong on everything like this is the thing I think I know. I think those kinds of statements are bound to bite you in the ass eventually. But I still have not seen evidence that I and we, we have similar opinions, are wrong on that thesis. I think objectively, my mistake, at least, when everything was ripping, I should not have traded out of Charter and Altice. But some of that's hindsight, some of that was bad work, and some of that's probably just the lesson to carry forward. I think where I'm at on that particular idea right now is, they buy in so many shares that I'm just going to let that be my buyback. But man, if we are now five years forward and cable is what we think it is and I didn't bet it here, I'm going to be fucking mad at myself. Alex: [laughs] Yeah. Bill: I have bet it. It's a real position-- [crosstalk] Alex: Continue to own its betting it. Bill: Yes, and it's not small by average sizes. Some people out there run crazy concentration. I'm not smart enough to do that stuff. But for me, it's a real bet. Lately, less real. Alex: [laughs] Bill: If Charter continues to buy in 12% of their shares, I should own a decent more percentage of that company when it's all said and done. So, I don't know. Alex: Yeah. Bill: How does Buffett look at this in your opinion? Alex: Well, let me start with how I look at it, because it's a less informed way [crosstalk] investing that Buffett, but just taking a step back on the business, first of all, before stepping into the buyback part. I think Comcast ripped off 12 or 13 years of a million plus net ads in the broadband business. If you went back 18 months ago and said, "Hey, if this thing is flat to down on net ads and broadband, does that break your thesis?" I think you'd probably say yes or you'd at least say, it has serious concerns. When it happens in real time, there's a bunch of moving parts right now, whether it's COVID pull forward move or churn. FWA potentially being something that has a capped limit in terms of how big it can become. I think those are all reasonable points to make. But my point is that, setting these rules in advance, especially if you're talking about something that applies to just a quarter or a year, it's too limiting to some extent, but it does help you to say, I'm going to set these rules at the outset. If that thing happens, I don't really care what the reason is. That's something that's very directly attributable to the problem like a complete change in macro in an advertising business. That would obviously be a bit different, because it'd be so short-term in nature. But you could do it that way. Again, I think about it more in position sizing than anything else at this point. With the buyback being so substantial and Charter, it's a levered equity strategy basically, I just think I had to tell myself, I have to be happy with the fact that they're buying-- My equity interest in this company is increasing without me buying more. Again, going back to that Hampton way of thinking, to me, it probably leads to a lower number being the cap on how much I allow myself to purchase. If we're actually right on the business and they can buy back a lot of shares at current valuations, it's going to work very well over the next 5 to 10 years and I think you just have to be happy with that in terms of position size. I think Buffett, it's funny. As you and I were discussing this past week, I had never seen this before that Buffett wrote in the, I think it was a 1998 letter that maybe it was a couple years after that that he had not bought or sold a share of Coke since 1994. I was looking around that time and it was 30% plus of the equity book. In terms of the position size, it was a massive position. I kept looking at the numbers and we realized, jumping to today 2022, he has never bought or sold a share of Coca-Cola since 1994. It's nowhere nearly as big as a percentage of the book, because the equity book has grown so much over time. But it's just fascinating to me to think that during that 10-year period from 1994 to 2003, I think it was, it was 30% of the book the entire time and he never touched it once. Bill: And expensive, wasn't it? Alex: And expensive. Yes. Bill: He doesn't do anything with it, right? Alex: He didn't do anything with it. Now granted, he was-- [crosstalk] Bill: Corporate taxes have something to do with that. Alex: Taxes, something to do with it. That one was unique situation in some ways, because he was on the board and certainly knew the people involved. He knew Don Keogh personally. They lived in the same neighborhood. He may have been a little skittish about things in that regard. But I also think he said, the point on taxes, I think on tax basis, he probably said, over a long enough period of time, I'm happy to own this business. I'm sure he thought the predictability of that business was at a high enough across a certain bar for him where he was okay with saying, "Yeah, I'm going to get multiple fade on this thing over a period of time." But I think on a net number, I'm going to do okay here." Again, I think that example, for me, it really just comes back to the business and thinking about the long-term growth trajectory. On cable, you have to ask yourself that question, what's the addressable market? Is it broadband homes, is the wireless part of the business now, something that's clearly additive, which in my mind I think it is. I completely miss it early on. Francisco was telling me, it's more important than it is. In my mind, this is basically a different version of pay TV. Yeah, it helps a bundle, but you don't make money doing this ever. I think now I see much more clearly. With his help that this is part of a much bigger connectivity strategy, whether or not M&A can happen in that space, I don't know, but I think cable is very well positioned for where this goes over time. But it is a competitive market. As with all these things, when you don't have a product that's completely differentiated your competitors' actions can impact your business in a very meaningful way. So, if wireless runs a strategy that does not generate attractive returns, that certainly could have an impact on cable. So, we have to wait and see. Bill: Yeah, I agree. For those that don't listen over and over again to my disclaimer, this shit is not investment advice. It is the opinion of Alex and I, and do your own work. I guess, the thing that's wild to me about cable, it's funny. I guess I knew it, but today, I was reading a note that illuminated it. The inability for a wireless company to sell a bundle throughout their entire footprint versus cable who can sell the Comcast-- I have Comcast mobile. I think it's as fine as any mobile product that I've had. I was an X sprint user, which basically didn't work in rural areas. Alex: [laughs] Bill: Comcast is on Verizon, right? Alex: Yeah. Bill: That's MVNO. The ability for them to attack Verizon using its own infrastructure throughout their entire footprint is different from Verizon being able to bundle, because they got national coverage and they only have so much fiber. It makes the marketing of Verizon's bundle very difficult. I think that's a real issue. I was just listening to AT&T today, and I'm sure cable earnings are going to absolutely suck, and we're getting punched in the face, because why not. But just listen to AT&T and they're going to push the wireless pricing, they're going after ARPU, which is average revenue per user for those that don't know. I think that wireless is in a tough spot. and the wild card and all this is T-Mobile. But I'm not convinced that I've seen anything that makes me think that the physics of T-Mobile's market makes sense at maturity. On the other hand, a lot of what I read is cables, right? Am I fish in a bowl that can't see that I'm in a bowl or whatever? I don't know what the analogy that I'm trying to say is, but how much of it's that I don't know what I don't know and how much of its reality. I think figuring that out in real time is really difficult. You read like cable cowboy and cable has gone through these periods where people are like, "Oh, it's going to die, it's going to die" and it's survived. Reading about those periods and living those periods are such different feelings. Alex: Yeah, for sure. One thing I think I can say pretty confidently is that the average American has no interest in changing their wireless provider or their broadband provider, unless there's a very good reason to do. You can think about price differentials, quality of service, etc. I saw T-Mobile was running ads recently for their fixed wireless offering and home internet offering and they were advertising the $50 a month price point, which again, this is not very different from the ARPU is that you're seeing at a Comcast or a Charter. It's not in my mind $1 amount difference that's going to make the average person consider switching service, which by the way, T-Mobile's offering is only in certain geographies is based on where they have excess capacity on their network. It's funny in my mind that they were advertising the $50 price point, because they have a more attractive offering. The only problem is that it only applies to the Magenta Max, the highest tier wireless customers of T-Mobile. It just speaks to the nature of to the point you made like the geographic/marketing area that they have to weed through in order to get people to find out about this. Obviously, if you have an advertisement about something on TV, and somebody goes and pull it up for their area, and the service isn't even available, that's going to ding you in terms of whether or not they're going to consider the product again down the road. Certainly, don't think it's all roses for cable, but I think their position with the MVNO, the opportunities that they have with offloading in terms of just picking spots and then network to basically arbitrage where it would make sense to in terms of the ROI they'll get from doing. I think they're in a pretty strong position and they have opportunities potentially in video. I just think having the best product, at least relative to what a fixed wireless offering will get you. I think it positions them pretty well outside of somebody coming in at a price point that's very significantly below the ARPUs that they charge and doing so in a way where the customer thinks it's basically a good enough offering. I don't have any reason to believe at this point based on everything I've read that you can truly do it at scale. On the flip side of the coin, cable's done pretty well on wireless so far in terms of sub ads. Talking to people like you confirm some of the fears I had anyways. I think, especially in the case of Comcast, I think they have even hinted at this at some point on the conference call that their ability to actually sell these things together and to service these relationships in a way that's really well done for the customer is certainly not where it needs to be and that's-- [crosstalk] Bill: Dude, it sucks- Alex: Yeah. Bill: -if I can sucks. Alex: Yeah. Bill: Comcast Mobile doesn't know that I moved. First of all, to be fair to Comcast, my broadband in Mobile right now is super cheap. I have plenty of bandwidth. My only beef with them is I have a fair amount of upload capacity, because I have this podcast and I don't have symmetrical upload download. But I don't need a gig. That's way over what I need. But I do need more than 10 megs, whatever. The inability of that company to talk to itself when you're moving is insane. So, I got an email that was like, here's your bill. I click my bill and it's a blank page. Okay, cool. Alex: [laughs] Bill: Now, I got to call them. Now, I'm on the phone and I'm like, "Why can't I even see my bill?" 35 minutes go past, I say, this isn't worth it. Okay, I call back. Do it again. Finally, I'm in the airport, and I had a six-hour delay, and I was like, "I'm going to take care of this shit." So, I get a guy on the phone and he's like, "Oh, well, we just didn't know that you moved and there's some internal problem with our system and you got to have a broadband connection in order to pull up your bill." I was like, "I have one." Long story short, it's like how the fuck don't your systems talk to each other? Alex: Yeah. Bill: There are two totally separate organizations. But once I got through that-- It really is a fine product and I really am paying nothing for the bundle relative to what I would be paying otherwise. How mad am I really? I don't know. Is it super annoying every time I have to talk to their customer service? Yeah, I hate it and I've moved a lot in the last five years. I've had to talk to them a lot more than I would like to, but it is a really good product. It's something that I know I can depend on. If I have a problem in my home, I'm almost certain it's my Wi-Fi, because that's the weak point. I've got it wired into my home. Honestly, I don't have many other choices where I live. I didn't in Chicago and I think it's a pretty good product. We'll see. But man, it is fucking hard to watch a stock go that hard against you and not wonder what am I missing? And then you got Wells and Oppenheimer out here with Uber bearish takes. I think Charter would push back pretty hard on those. And then somebody did really deep work two weeks ago? Alex: Was it Credit Suisse or no? Bill: Could have been them. Yeah. Alex: They might have been. Bill: That was a really good report, which was confirmation porn for me. Alex: [laughs] Bill: Then you got a certain boutique research firm that I think very highly of MoffettNathanson that sometimes I'm lucky enough to see some stuff from. Which fighters do you have? Do you have Credit Suisse and MoffettNathanson, a division of Silicon Valley Bank, or do you have Wells and Oppenheimer? I don't know, man, I asked-- Who's the dude from for specific? He was at the Future Proof event. But I asked him. It was on Meb Faber's podcast. Anyone that checks out Meb's podcast can find out. I really liked his answer, because they said, "When do you think you're wrong given where the stock is today?" Because we're talking about below COVID lows now. And his answer was, "We have KPIs. We have a thesis, we've got KPIs, and that's what we watch." I thought that that was a really awesome answer to hear. I think it's the right answer. Alex: Yeah, where it gets really messy is, again, cable's a perfect example. You look at the COVID pull forward and what we're seeing now on the back end, depending how you look at those numbers, I think you can make a really compelling, especially if you consider something like move or churn, you can make a really compelling case that a very significant percentage of this is purely that all washing out. Now, it's even hard in hindsight for me to explain why some of these-- across different businesses, not just cable, but it's hard for me to explain why certain things happened during the pandemic and now, why you're seeing the other side of the curve, basically. But just purely from the numbers, I think you can make that argument. It's funny. I wrote something recently where essentially, I said, "I've come more to the idea that in the short-term, I certainly won't let price drive my decision making or my views on the long-term prospects for a business. In some ways, I'm willing to even let the business results be a little bit more flexible than might seem reasonable at first glance." It goes to something that you and I have discussed before, especially as it relates to Buffett. I think we talked about it with KHC. You might have been the name, not sure. It might have been another one. But the idea of laying a bet and saying, the bet is the bet and I'll reassess in five years. As it relates to KHC, he specifically talked about when Kraft sold, I think it was Kraft sold their frozen pizza business to Nestle. He specifically said on CNBC like, "Well, we'll see in five years how that decision turned out." I think more and more for me, if I'm going to have mistakes, it's going to be that I look back in five years and that these just hasn't panned out, but I'm not going to get myself caught in a situation where there's a three-month period where it's like this doesn't make any sense to me. It's crazy. What's happening right now, what's going on, I'm just going to get out and wait for it to clear. It doesn't align with who I am as a person and who I'm trying to be as an investor like anything. There's pros and cons, obviously, to that approach. But for me, it's the thing that I think most aligns with what I'm trying to do. Obviously, when those things are happening as well, probably goes without saying that during those periods of stock prices are typically under pressure. [laughs] Bill: Yeah. Alex: That can get taken too far, but I think more and more-- I think Jeff Gannon wrote something about this years ago where-- Bill: I like Jeff Gannon. Alex: -basically said like-- Yeah, I wish to-- [crosstalk] Bill: Shoutout to Andrew Kuhn too. Alex: Yeah, Andrew certainly helped with getting Jeff back out there again, because as output at least from what I could see was-- [crosstalk] Bill: Jeff's got to come on the pod. Alex: He's definitely. Yes. Bill: Andrew, if you are listening, get his ass on the pod. Alex: Please. Bill: I've been texting with Andrew trying to get him on. Alex: Oh, yeah. He was someone I was reading I think when I suspect-- [crosstalk] Bill: Some of this is my fault. I know I haven't been good at scheduling. I apologize to listeners and the people that I've been trying to schedule with. I've got some shit going on in my life. Alex: [laughs] Bill: But I think I'm fully back or at least, 78% back. So, that should get cleaned up in the future. So, Jeff used to write a lot? Alex: He used to write a lot. I think he's a good investor and a good analyst, but I think he's also a very good writer. I won't put words in his mouth, but I think what he said one time is that he essentially operates from the perspective of five buys something, there's 0% chance of selling it within the first year after buying it. Bill: Yeah. Alex: That's the way that he thinks about stuff. I think for me, the right way to operate, because it impacts your decision-making. It changes everything really. Bill: Well, that's some guy spear stuff too with the two-year hold, period. Alex: Yeah, and a lot of this stuff is-- Your conversation with Chris Cerrone and how Akre approaches stuff. It's a seemingly small change that impacts every single part of research, managing a position after you buy it, adding more potentially trimming, selling out completely-- It impacts everything when you change the lens from thinking about stuff in terms of where's my best IRR over whatever select period of time that you choose to finding great businesses. In my mind, management teams and businesses are somewhat indistinguishable over a long enough period of time. You have to have both. But finding those things and then changing the question to like, "When would I have to sell not because of valuation, because the business is actually changing?" I think sometimes the unsatisfactory answer is that you actually need a few years to see whether or not it's breaking. It's very hard. The conversation in that interview, you were you him about DG versus Dollar Tree, Dollar General versus Dollar Tree. I think the point was very fair when you were asking him. It's funny, in hindsight. I think what Dollar Tree has done in the past 9 to 12 months with the price hike to 125 from-- For people who don't know, the baseline price point in the store is from $1 to $1.25 across-- [crosstalk] Bill: Buck twenty-five, Tree doesn't roll of the [crosstalk] well. Alex: No. The name might not sound as good, but I was in a Dollar Tree yesterday. I've written about the company before. Their merchandising mix is very unique. The products they offer very different from for people like us in the southeast, what you would find that a Publix especially the price points are very different. It will work at that price point. I think, basically, trying to heap praise on them, because I think they rightly assessed that the Dollar Tree banner is a very good business. I think they made the right assessment in that case, where- [crosstalk] Bill: Yeah, Dollar Tree's great. Alex: -the situation got in a bit of trouble as he said during the conversation as a Family Dollar stuff. Bill: Yeah. I know the Family Dollar. What's that like? Alex: It's much more comparable to Dollar General, but it does not have the same geographic characteristics to the business. Bill: Interesting. Alex: It competes more in my mind. Not the whole footprint, obviously, but they certainly have more stores on a percentage basis that compete with-- [crosstalk] Bill: More like Urban with Amazons, yeah. Alex: -Walgreens or CVS's and regional grocers and it's just more competitive in that nature, where DG is in my mind, it's a rural grocery store, effectively. They're actually expanding how much of the grocery basket they can serve over time. Bill: Dude, Dollar General, their exteriors are so nice. If you drive America and you go through Appalachian, you really drive it. Their locations are so good. Alex: Yeah. Bill: I don't know how many they can do, but I've been in the ticks of Wisconsin, and one has popped up, and I've been like, "That's a nice store." And then I look at it, it's Dollar General. We got a couple around here. I think there's some real competition around here. This is not nearly as rural as-- Amazon's come into my house every day. I'm not [crosstalk] sticks. But they really have a real estate division that is world class. Alex: Yeah. The hard thing is, when you own something like that-- to your conversation before about traditional value investing, when you come to that conclusion about the business, how do you start to think about what a multiple that makes sense is? You could operate from the perspective of buy it at 15 times and I'm going to sell at this at 18 or 20, or I'm going to comp at the Dollar Tree. If the spreads more than five turns, well then now, Dollar Tree's the better investment than DG is Bill: Yeah. Alex: Of course, it's certainly applicable to have those discussions and think about that. I think you can also start from the perspective of filtering for the business has to pass a certain bar and in industry, probably it would be a reasonable bar to make as part of that decision-making process. You still have to worry about and think about valuation from there. But for me, I just find that aligned so much more with where I'm at now than where I probably was certainly five years ago, and maybe even a couple years ago, then that might also be partly a lesson of this crazy run or seemingly crazy run that we've had over the past couple of years, which now looks like it may have ended. We talk all the time about cable and other names. It's funny. We never talk about Microsoft, and Berkshire, and other stuff that we both own where, yeah, the multiple can come in the short-term, but I think we're very, very confident on the businesses and the management teams over long periods of time. And so, I try to find more and more, and just avoid the other stuff not get sucked into situations, where you can back into justifying doing it, because it's cheap enough. Bill: Well, something I was obviously super public on was Qurate and that business was so interesting, because I was so focused on the consumer habit. Look, I think I will go to the Matt saying that that was a good bet to make when I made it. I think that there is a very reasonable case to be made that I should have sold when-- Is it 12? I think when I underwrote it or whatever, I was telling you, I thought nine bucks was on the higher end of fair value or whatever. But that business was humming like humming and how quickly it changed from everything is going well to we're having problems obtaining shoulder inventory and supply chains are hurting our model. There were things about that business that the-- What's the way to say this? I think that the cards that came out on the table expose things that I didn't even know the questions existed to ask, if that makes sense, because the business had not faced supply chain difficulty like it did and then the fire in that warehouse really sucked. Shoutout to my man, Rollinson. I hope David turns it. I think they're doing the right thing. We'll see. I don't own it. I own some preferred shares, my trading account, my IRA, because I apparently hate my IRA. Alex: [laughs] Bill: Look, I like the people at Liberty, I like David, but I just think it exposed this element of when you're investing in these businesses that are somewhat fragile, stuff can go wrong. And maybe this is true in my perception of anti-fragile businesses or businesses that are much higher quality. But things can go wrong that make things go really fucking wrong. Alex: Yeah. Bill: Cable, if it goes wrong, you're talking-- Look, the stock is not going to work. I'm not saying you can go x growth or lose subs and things are going to be rosy. That's not the point. But the business is not going to hemorrhage subs overnight. Alex: Right. Bill: Qurate went from this is insane to this is really bad in two quarters. Alex: Yeah. Bill: That was wild to watch and to be, I guess, so close to and you care so much about it. I don't know, that was a really good lesson for me. Alex: Yeah, it's a funny one. I was involved in the situation as well for anybody who hasn't-- [crosstalk] Bill: Yeah, you sold at the right time. Alex: Yeah, I only ever found out about it, because you and Mike and-- I completely agree with you. At the time that we are, at least when I did, you guys placed before me. So, you might have even had better pricing. I think it seemed like a very reasonable bet and was fortuitous/lucky on selling at a really good time as well. It's a really hard one for me, because I don't even know if I step back and assess like, "Was it a good idea? Was it smart?" When I try to apply it to my framework of how I think about investing generally. It could be something completely different from what I do. I appreciate that. But I'm also trying to stay in my lane and try to find a game that I can win out over time. I really struggled to answer that question, honestly like, "Was it a good idea?" Bill: Fuck you, it was a great idea. Alex: [laughs] No, it might have been. Bill: No, I'm kidding. I'm kidding. Alex: But that comment also gets to the way that I manage my portfolio in the way I size positions. I take the Munger idea to heart of like, "You buy obviously not in the same geographic region, but you buy a handful of businesses." If You own a handful of businesses throughout the country that are well run and they're good businesses and you've paid seemingly reasonable prices, that's plenty of diversification. It's how I think about it and it's harder when I stray outside of that framework of doing it. It just works so much better for me given how I'm in a position size thing and the expectation of being around for a long time that I just stick away-- Even Twitter arb situation, ATV arb situation, these things can all be perfectly sound ideas, maybe even great ideas. But I find myself more and more comfortable with the conclusion of, it's great for other people to do those things and make money from doing them and I cannot care. I don't have to do these other things. Bill: Yeah, we talked about this today, for sure on-- [crosstalk] Alex: [crosstalk] well enough doing what I'm trying to do well. [laughs] Bill: No doubt. No doubt. Look, I will go to the grave and maybe this is because I love it too much and fine. Human minds have bias. I'll go to the grave saying, you give me Greg Maffei as a capital allocator and Qurate bringing in that much cash flow with that market cap, that's a good bet to make. My evidence for why it was a good bet to make is even as wrong as that went, I ended up down a negligible amount post-tax. So, if you can have what my perception of a catastrophic result is and still not lose money, that's a good bet. Alex: For sure. Yeah. Bill: However, it's interesting to watch a business-like Google go through a pandemic. They can throw thousand different curveballs at it and it just morphs in real time. Alex: Yeah. Bill: Or you watch a business like Berkshire go through the pandemic and like, "Okay, cool." Geico has to rebate customers, because it made too much money, because too few people were driving. I don't know, some other part of the business picks up steam, and then BNSF comes roaring back, and you just watch how that machine works. It's like, okay, well, one is really, truly anti fragile. The other is fragile with a good valuation. So, if you're going to stack your chips and put them in on the table in position size, something, how do you really want to position size it? The reason I never really bet Twitter hard was this merger arb position hard. First of all, to the people that listen that that were long, mad respect to you guys. But I just felt like, if something wonky happened, you don't have two ways out. You got one way out, because I played it for a bit. Even if I was right on the call, there's weird shit that could happen and all of a sudden, I'm down like 50%. I'm not trying to bet money that could actually change my family's life on that. Alex: Yeah. Well, I told you about the time when you were doing it, I was like-- Obviously I was partly joking, but I was like, "If you're going to do--" Because stock prices were down a good a lot, maybe they're even lower now. [crosstalk] [laughs] Bill: Yeh. No, the opportunity cost of the bet was real. It wasn't like we were 2021 and this is some random opportunity to make 45%. There's real opportunity cost that bet. Now, in retrospect, it was right that the make and shoutout the longs. Alex: But I think we specifically discuss Netflix [crosstalk] and I think I said some of you like-- You got to promise me. If you're going to do Twitter arb and it works out, a promise me, since you want to buy Netflix at x price, you'll roll the money into it, because that's where for me again, it gets away from like-- [crosstalk] Bill: I think what was Netflix trading at when we had that discussion? Alex: That's a good question. I don’t know. Bill: Like 200-ish? Alex: Yeah, maybe. Bill: Yeah. Alex: It's hard to know when that was now. But yeah, point being like, it's these offshoots that get you away. I just more and more go back to just trying to really find one thing to do and try to do it well. Again, it's hard enough to do one thing really well and I don't want to miss out on potential ideas that I really like and things I really want to own for the long-term, because again, Quarte situation worked well, but I wouldn't want to have capital there, because-- This is something that it's just like a personality thing. It is the way I want to operate. I think it certainly impacts thoughts on position sizing and everything. But as an investor, I think it's really important to actually figure that stuff out for you what is the game you're trying to play. Are you going to do a little bit everything? Even the idea of having an account that is like, "Hey, this is more of a play account and I have a real account, where I'm only operating in one style here." I've always thought that it's so easy to trade. Especially, a lot of people in this game are very, very smart. You and I both know. We talked to a lot of these people and they're a lot of them are very, very intelligent. But I think intelligent people also have a blind spot and thinking that they don't fall into the holes that other people fall into. I try to do what I can to avoid that and I'm sure I still fall in the holes anyways. But for me, it's something I truly think about a good amount. Bill: Well, I've told you about my current account that matters, right? I don't even know the password. Alex: [laughs] Bill: I have no idea what my weightings are. I don't know how the stocks are performing. Somebody ping me on a stock that I owned the other day and I was like, "Dang, that thing's gotten murdered." I had no idea, because back a couple months ago, I was looking at my account on Fidelity all the time. It was like fucking with my mind. So, I moved it over to another place. I don't even know, I have no idea where my portfolio looks like right now. Alex: Some modern coffee can portfolio, brokerage account, you got locked. You don’t remember password too. [laughs] Bill: Look, this is some this is some retail bag holder shit too, where retail doesn't look-- I get it, but also, I tried to tie myself to the mass post with it, because on the way up, I was checking it too much and feeling greed and excitement. And on the way down, I was feeling too much panic and fear. I was just like, "I need to get back to the stuff that I know it matters." And to me, that means looking a lot less. And the way that I could do that, because I'm like an infant in my mind is to just like send it away. I don't have a clue what I own, right? I know the, but I don't know the weights. Alex: Yeah, it's smart. When I go in and trade, which is people who subscribe to my service knows very infrequently. When I go in and trade or when I do a quarter and portfolio update with returns and everything, that's when I look. Outside of that I do not pull up Fidelity basically at all. I'm the same way. Again, the only way I know how to do it is to have-- I'm the same with Twitter. I don't have the app on my phone. I literally can't have it on my phone. [laughs] Bill: Yeah. Alex: I still go to the browser, a decent amount which I tried to squash, but I literally can't have the app notifications on my phone, I'll be a crazy person. Bill: The nice thing about my approach in this market is I only cry once every three months or whatever, as opposed to every day as I get shat on. I will say to those that are interested in Qurate, my interpretation of the situation, I don't know how it defies what I would project, but minutes watched, continue to climb, they at all-time highs-- Alex: It's fascinating. Bill: I think it's a sales conversion issue. The people that I talked to also think it's a sales conversion issue. Apparently, David has changed the incentives over there to incentivize the Salesforce to get a better, wider breadth of offerings, because I think they got away from the daily special value, which I agree with. If you're going to offer the same thing every day, they weren't. But they're going to get lazy and you offer it four times a month, it's no longer some special value. It's just like an offering. I think David has incentivized people in the right way to the extent I know. I really hope that that business turns around. I don't know why I love that business so much, but it's my favorite business by far. I know that people love great businesses. I walked into my grandma's house the other day, and for the first time I saw it on, and they were keeping her company, and that may be exactly who they exist to serve, but damn, if she doesn't deserve to be kept company. We'll see. I hope it makes a transition. Alex: This is a comment/question for you. The thing you just mentioned about what they started doing in a way that I think you would say and I would say that it's probably not aligned with the actual value add that they bring to their customers. Do you think in the case of Qurate and maybe Charter as well, do you think the financial leverage has been pushed to too much of an extreme where it made them susceptible to exogenous or changes in industry trends in a way that was too aggressive or hey, that's just a reality of life and if things--? Bill: I'm going to go off the top of my head. But what's Charter's weighted average maturity? 13 and a half years? Alex: It's long out there. Yeah. Bill: Right. And they're weighted average cost that is four, six. Alex: If that's not sensible what they've structured, I don't know what it. Bill: Look, why wouldn't you do that? Alex: [laughs] It's very sensible, the structure of it. Bill: Right. And now, if you're going to attack Charter, you're paying labor more and your cost of debt is higher. Charters got infrastructure in the ground. Now, can you argue should have those dollars been leveraged to put fiber in the ground and not a such essentially recap the business? Yeah, probably, you could make that argument. I think if I were going to debate John Malone on how to run a cable plant, I would need to have a pretty good-- I think he understands taking care of the plant first and returning capital second. With regards to Qurate, I think that it's important to remember when looking at a security. Qurate gave Malone the money to buy Charter. This is an asset at the end of the lifecycle. The debt is not particularly restrictive, but I also think like, could that business probably were less leverage? Yeah. I guess, the most direct way to say it is I think that if you invest with Liberty, I think you're investing in a private equity, public fund. I think a lot of people like to say, I take a private equity approach to public markets. I think Liberty actually does it and I think that there is the risk when you are taking that strategy that you get outflanked. I have thought for a while that SiriusXM had that same risk and Spotify was outflanking them. As I continue to watch SiriusXM execute, I continue to be impressed with it. And continue to be impressed at the life of these assets. To the extent that it is true that Qurate actually has minutes watched growing. I think my perception of what the market thinks, I think that's wrong on Qurate. I do think they have some very real problems there, where if you look at the growth relative to retail sales, why does it lag so much? Why do sales per minute watched lag? Those are very real questions, but I'm not sure it's a leverage question. Alex: To be clear, some businesses leverage or not are just going to go through the lifecycle like they're just going to die. I mean it more so in terms of-- We've talked about some million times with ECA and dying retailers are a lot of value names really, where you're paying a little multiple on-- it could be on a cash flow metric or an earnings metric, but your ability to actually get the cash back can be significantly constrained given the incentives of the people running it. Bill: Yeah, but that's what I love about Liberty. Alex: Right. Bill: That is one reason I like investing in them. When you were investing in Qurate, you knew that cash was coming back to you. You can say what you want about how they lever things, you can say what you want about their reinvestment to pivot, you can say all that shit. At the end of the day, Greg Maffei and John Malone understand getting capital back to shareholders. They're the only reason I would have made the Qurate bet. If they were not involved, I would not have made that bet. Alex: I'm simply saying on the flip side that excess significant leverage puts you in a position, where you could consider doing things like running today's special value multiple times in terms of drivings. You can start to become really focused on short-term numbers potential. Again, I'm not I'm not-- [crosstalk] Bill: No, that's an interesting point. Alex: I'm not trying to make this specific to that [crosstalk] clear. Bill: No, no. Well, I don't care. Let's make it specific to them where they're not-- [crosstalk] Alex: Well, to be clear on unlimited broadband. [laughs] Bill: Yeah. Look, the girls over there know that I love them. Shane and Courtney, what's up? And they're free to come on the pod and rebut anything we say, right? We're just talking. Alex: We could even say the same thing. Just to give another example as we're seeing now, significantly declining stock prices at businesses-- As Francisco has told me today like snaps run rate, SBC is north of a billion dollars a year and the market cap is now getting to a $10 billion range. Bill: Yeah. Alex: These businesses have very real reason to care about maybe directly the stock price or short-term financial results in a way that-- [crosstalk] Bill: I don't think that's Liberty. I really don't care. Alex: Fair. Bill: I would encourage people that are interested to call them, because I think they will-- Well, I'm fairly certain they will pick up your phone call and they'll talk to you, especially now, because I doubt, they're getting as many calls as they used to. But I think what probably happened there, I think people got bonused out on a scheme that drove sales and maybe didn't drive diversity of sales from a product standpoint. To the extent that incentives matter, I think that maybe the incentives got a little bit lazy. I think that maybe it's possible that the CEO change as much as I think. Mike did a good job at watching the data. I think maybe fresh eyes can change some of what was going on, because for a long time, they've said like, "We don't have a minute's watch problem." But the sales have not told you the same story. Alex: Yeah, that's fair. Sure. Bill: Maybe it is. I don't know. Alex: Again, it's another really hard one, because as we both know, we were laying-- [crosstalk] Bill: It defies logic why there are minutes. Their minutes watched are higher than they've ever been. Assuming they're telling the truth, which how could you not assume that. Anyone that wants to prove otherwise, good luck. Alex: Yeah, even with them playing in the right demos for linear TV. It is amazing to think that the bundles may be 20% below its peak in terms of the number of households out there. [laughs] It's very impressive. Bill: And they have successfully pivoted, right? In the past, there was the DirecTV is going to come, you're going to get 200 channels, why is anyone going to find this? They have figured out a way to go through that. I think that there is a non-insignificant probability that they have figured out how to manage the distribution aspect of everything. I also think there's a non-insignificant probability that the incentives got fucked up. We'll see. I don't know in the common-- If I was certain, the common is trading and nothing right now. So, I would buy that. The preferred is yielding 17 or whatever and the bonds are yielding quite a bit too. So, my bed within the Liberty complexes Charter right now. Alex: Yeah, fingers crossed. [laughs] Bill: I probably just cursed it. No. Alex: Joking. [laughs] Speaker 1 Yeah, diverting this conversation a little bit. By the way, now that we're in an hour and if you've stuck with us, I'm going to probably pour some more wine. But dammit, what were we talking about? Why did I get lost? Probably, because I'm a little drunk. Alex: I don't know what you're talking about. I can't remember. [laughs] Bill: Well-- Alex: We talked about a lot of stuff. Bill: We have. Alex: The Munger and media? Was that it? [laughs] Bill: Oh, the top, the top. Remember when I killed the market by interviewing-- [crosstalk] Alex: Gardner. Bill: Yeah, David Gardner and [crosstalk] Mark Mahaney. Alex: Yeah. Bill: That sucks. Can you believe I did that to people? Alex: Yeah, it was rough. Bill: Yeah. Alex: You hurt us bad. [laughs] Bill: I'm really sorry. Alex: I know you say this is financial advice, but I took it as financial advice. [laughs] Bill: Well, apparently the entire market figured, if some other moron with a podcast is going to interview these guys, it's time to short and good for the people that went short. Alex: Now that everything's got rocked. Let's talk about Mahaney's book. What do you think about his general--? I'll give you my version of the framework before we go in. I'd say at a high level. It's a taking mindshare, taking the engagement revenue growth approach to business and especially in sectors or industries where there's clear chat. The good examples would be advertising, would be media, names like Google, names like Netflix, obviously. I think Airbnb would probably fit in to the framework that he approaches things. Bill: Uber. Alex: Uber. Bill: Spotify. Alex: Spotify would fit in that bucket. I think he wrote about maybe all those names in the book. Definitely a handful of them. Bill: What Spotify is market value right now? Net of cash and net of the 10-cent investment. Alex: It's lower than 20, for sure. Bill: Yeah, I think it's probably 14 or 13? Alex: It might be down there. Yeah, the 10-cent stake-- [crosstalk] Bill: It's 80, 82 bucks a share, whatever. Alex: Something like that. Bill: I bet it's-- [crosstalk] Alex: Yeah, 86, something like that. Bill: Yeah, I bet it's like, shit, I don't know. Alex: You think if you run that strategy over a long period of time that you-- Bill: Well, it's $17 billion gross. Alex: Yeah. Bill: So, what $3 billion cash-ish? Alex: I don't know. It's top of my head. The 10-cent stake's probably worth very-- [crosstalk] Bill: Let's call it $13 billion market cap. Alex: Yeah. Bill: Net of everything. Alex: Yeah. So, you pick 10 of these names, you equal weight them-- Bill: What's your free cash flow? Do you know off the top of your head? We've been drinking. So, I don’t know. Alex: I think it's very much. [laughs] Bill: Yeah. Alex: Were you counting for stock-based comp? [laughs] Bill: Yeah. They got this Snapchat free cash flow. Alex: Yes. Bill: First of all, I'm going to say what I'm going to say with the caveat of I am literally guy that was put on a podcast, because I think I'm moderately entertaining. And Mark Mahaney is like a real sell side analyst that's been around for a long time. Alex: Yeah, he does good work. Bill: Yeah, that's right. So, he's legit and I am a dude. I think that Mark's framework of looking for underappreciated margin stories, that's what I'm looking for in the industrial space right now. I just happen to like the industrial space rather than tech, because I think that it's a space that people have not looked at over the past decade as much, because it's underperformed. And I really think the Inflation Reduction Act has the possibility to be like a very meaningful subsidy to corporations. I think maybe the reason I think that is I watched with Obamacare did health care industry and how much UNH ripped off that and it would be a shame to miss that twice? I think that would be pretty fucking dumb. Alex: [laughs] Bill: I think that there is a possibility that some of the guys that have focused on tech have gotten lazy on valuation. But I also think to disregard their framework is really stupid. Gardener, I need to have him back on, because I know he'd do it and I think he deserves the chance. Well, I don't know what the hell he wants to do with my audience. But anyway, I think a guy like that has a strategy that works over the really long-term. I think the people that bail on that strategy now are fucked. No matter what strategy you run you've got to stick through. And were his returns outsized because of rates? Yeah, probably. Do I think over the long-term he's running something that's rational? Yeah, I do. And I think the same thing to Mahaney, right? I just think we came through a period where anyone that was doing anything that was moderately related to tech is a fucking God and turns out it was a factor bet and probably indirect interest rate bet. Alex: I was listening, I've already have already mentioned this, but I was listening to Cerrone's podcasts. Akre has this special place for me because of just how much I've learned from them over the past 10 years. I've had a little bit interact with them personally, just from basically last place I worked. But just studying how they operate and how true business owner their approach is, it just clicks with me in a huge way. But I was going to say-- So, I wrote a post a while ago. I don't defend this logic about Charlie Munger, basically saying, if I own something, that's an evaluation that is just too rich. I just won't sell it essentially. Bill: Well, look at what he did with BYD? Alex: Yeah. Bill: And even he said with Google or something else. I don't know what it was. But he was basically like, "Why would I sell it? It's got the greatest competitive position other than Google" or whatever. I think that's a window into how he thinks. Alex: Well, Cerrone put in the perfect way when he said. Bill: I do think it's Cerrone, by the way. Alex: I think it's Cerrone. I don't think the E is hard. Bill: I think it's a hardy. Alex: No, I'm going to say Cerrone. [laughs] Bill: Okay. Do what you want. Alex: I'll say Chris. How about that? [laughs] Bill: Yes, that works. Alex: The guy who wrote The Art of (Not) Selling, I'll call him that. [laughs] Bill: That's right. And he did say the "art not never sell," which it is a very important distinction. Alex: I think some of the wording in there is pretty direct. We'll have to pull it up and give it a reread. But anyway, he said during the podcast which I think is 100% correct, but it goes against some of the approaches of investing when he said, "The great businesses basically have a way of surprising you." Bill: Yeah. Alex: It's true. I'd add managers as well, because I think it's massively important part of what a business actually becomes over time. And you can look at something like Amazon for the clearest example of that. AWS is obviously something of an outlier, but it's obviously, incredibly valuable now. But even the decision making that they made in the business relative to someone like eBay greatly informed where they ended up. Bill: I'll tell you what, by the way, real quick. eBay is making some interesting moves under the hood. Alex: Oh, yeah? Bill: Yeah. But pin that and let's go back. Alex: Anyway, that comment, it gets to this -- We live in a world of, I'm going to sit down and build a five-year model and I'm going to get a rough idea about the value. If you do at a very back of the envelope kind of level, you're sitting down there and looking at numbers, and then you add in a comment like that. There's a certain amount of faith involved with being that type of investor, which again, I think it's justified based on some very notable examples of when it works. And I think you only get to that position where you're willing to have that level of faith in certain companies or certain management teams where you've been studying them for long periods of time or have been invested with them in a meaningful way for long periods of time. I think it's one of the beneficial parts of being a more concentrated long-term investor that you can't really pick up if you're more of a scattershot and I'm going to be in a couple of things here and there for relatively short periods of time. For me, it's just harder to see how you get there. I just think the way he worded it just so perfectly nails what Charlie Munger exactly what he's saying when he says, "I don't defend--" That's what he means by it. That's why he's willing to do it with something like a Costco, because he appreciates how these guys can just find ways to continue adding values to customers and it eventually flows through to the results of the business in a way that's just simply-- Go back and read what Nick Sleep wrote in 2005 or 2004 about Costco. Bill: Yeah. Alex: His estimate of what it was actually worth, if I remember correctly was probably significantly understated relative to what actually happened. There's obviously some hindsight bias there, but he was clearly grasping something about this business and the management team that was differentiated from what you would broadly call retail. Bill: Yeah. Alex: I think it's a fascinating part of the game that is, again, not something that you can really put into a model or an evaluation in a way, but it clearly can work. I just find it fascinating. Bill: Well, I think about stocks is like beachfront real estate sometimes. I grew up in South Florida. If you told me, maybe not when I was a kid, but if you told me now, I could buy a house in Delray Beach on the water. Would I want that? it's not going to be a "value investment." Do I think in the next 20 years that house is going to appreciate, but for a hurricane? So, I guess, I have to say, "Okay, well, how much can I afford to lose on this bet without meaningfully changing my life?" But if the facts remain as they are today, am I going to lose wealth or gain wealth owning that particular piece of property? I would rather own the beachfront real estate in Delray than some slum at 12 cap that should trade at a 10 cap. I don't care about that thing. The cheap slum is fungible. There will always be another that one property is scarce. Now, is there a distinction between cash flowing assets and non-cash flowing assets? Probably, yes. However, let's go to media, okay? Does Netflix deserve to trade at a massive premium to the rest of media? My argument would be yes, because I think that there is one actual asset, maybe two that has a clear path to the future with pricing power that you know no one else can replicate. I'm sure Netflix shorts will laugh at what I'm saying, but I think the onus is on them to disprove the thesis. My personal opinion is if you're buying some of these levered legacy companies that are trying to make a pivot and your rationale is this is cheap, I think that is a way to get absolutely fucked. I don't think that's a great way to invest. If you see some pathway to pivot and you think cash flows will be the same or higher in the future, fine. But if the argument is, it's cheap, relative to Netflix and Disney and where they should trade. I almost think if you're doing a comp set, you need to remove Netflix and Disney from your comp set. And then you got the rest of the stuff and then you better hope that the rest of the stuff doesn't fade as you are waiting for your rerate. Alex: Yeah. Bill: Is that Rambly? [crosstalk] Alex: No, I don't think it is. I think another way to say it is or as I think about it, I think a very sensible approach that Bill Nygren talked about is this idea of a model things out seven years and in year seven everything-- [crosstalk] Bill: Yeah, I got to ask him about this. I don't understand why he puts everything in a market multiple. Alex: Well, I think they do it, because they are effectively saying that you can't see out in the future beyond that point. I think what you're effectively saying about the beachfront real estate or I'd say certain businesses and certain management teams is that it's patently absurd based on the work you've done and the things that you've seen to say that after seven years, it's going to be-- You're making some comment about the duration of the asset or obviously, growth, value creation, whatever, some combination of all those things. Or, you say, even if I can't, obviously make very specific comments about what this looks like 10, 20 years down the road, there's something here that leads me to believe that I need to have a certain amount of hope that's essentially built into this. You can completely reject that and sell Microsoft in 2016 at 20 or 25 times earnings as I'm sure many traditional value investors did. Even myself, I trim that points in that time period. Bill: When? Alex: 2015, 2016. Bill: Okay. Alex: I think around that period is when it really started taking off in a way that and my dates may be a little bit off. But as I remember it, it's a 2011, 2012, 2013 period when the value investors were really interested in Microsoft. And again, myself completely included. It was three, four years later, where they were like, "Okay, this is kind of work and the definition of value investment." And now, the PE is gone from 10, 20, or 25- Bill: Yeah. Alex: -and now's the time to get off the boat. I think part of the lesson I've learned in hindsight is-- [crosstalk] Bill: Yeah, and that was right before it really ramped. Alex: There's some reason to think that that was probably the exact wrong time to sell. It might have actually been a time to buy. Bill: Time to add. Yeah, no doubt. In retrospect, easy to say. Alex: Yes, that is definitely true. But if you look at what was actually going on during that time period, the most notable one is they set the commercial cloud goals for 2018 that they would get to, I think it was $20 billion by that point. They ended up hitting it pretty well ahead of that timeframe. I think, again, when you look at something like management, I think you had enough information at that time to start to really understand that the changes underway were not just small positive for the business, not something that deserved for it to trade at three turns of a premium to the S&P 500 or something. It was putting the company in position to be significantly better than where it had been. You can look even today like-- Look at the thing Ben Thompson wrote about which I think we both agree is pretty good analyst in terms of thinking about technology companies and where they're going over time. What he wrote about Microsoft is the good encapsulation of how the business is positioned today. And again, just to think that you would sell something like that and I used to think this way, and again, I acted on it in a small way, but just selling something because okay, well, the PE is at x number, I think that approach clearly has downsides. Again, there's certainly some cap in terms of how you think about these things, but cutting off right tails-- You said one of my favorite quotes of all time, which is-- Bill: Nice. Yes, please. He preys on me. Alex: Do you even remember the quote? [laughs] Bill: Yeah, I know. I said, "Value investors think about the left tail of outcomes and growth investors think about the right tail." Alex: There you go. Bill: I think that's moderately correct. I think in order to be a good value investor, you've got to look up in order to really understand the full distribution of outcomes. I think too many people that are attracted to value camp only look down. I don't think they allow themselves to look up. I think that that really truncates the potential return. Alex: I was on the Chit Chat Money pod and I said, "Think about someone who's paying the Roku tax, if you're a VOD service, you're competing with Netflix." Let's say, you have the same budget, you have the same number of subs, you have the same ARPUs, everything. I have a billion dollars to work with, let's say, and let's assume all your customers are through them, you're paying the tax and you have [unintelligible [01:13:29] to work with. I'm in a very significantly advantageous position relative to you in terms of operating my business in terms of how much content I can put on there, and in terms of how much I can pay for the content, etc. Bill: You're talking about the channel right now? Alex: Yeah, I'm talking about some player on there, who's actually paying the tax versus a Netflix who is not paying the tax at all. Some of these things will just naturally drive consolidate-- Netflix can-- [crosstalk] Bill: Dude, there's no fucking way that Paramount and Comcast continue this strategy. I'm sorry, there's not. Maybe for one or two years this stuff can be cute to play with and you can hope that you have some outcome at the end of the rainbow. But it's not there. Alex: They're spending real money. Bill: Yeah. Alex: I think part of the question is, especially in this regulatory environment, how does that get resolved? Bill: Well, dude, now let's to Francisco. I get it if you're Paramount. You got no choice. But if you're Comcast, at what point does Peacock-- why are you spending the money on Peacock? You should be spending the money on driving fiber deep into your broadband business. It is a misallocation of capital. Alex: Yeah, I don’t-- [crosstalk] Alex: Peacock is the tree that fell in the woods that no one heard. Alex: [laughs] Bill: It's fine to think that it can turn into something, but it can't. Alex: Yeah, I don't think it's going to turn the anything. I think the eventual strategy here, they either need to get bigger, they need to sell. I've been saying some version of that for long time now and I think that's still pretty evident today. And again, you're seeing pay TV numbers that are-- We saw Verizon today and not a big MVPD, but subs are down 9% year over year. Most of the traditional MVPDs are seeing significant pressure on their business. Some of that's being offset by vMVPDs, but most of those are month long agreement. So, someone can stick around for a couple of months during football season and then cut it off. If you're a media company, you're not going to get paid. We've said this a million times to each other, but the price of the traditional bond bill continues to go up, the value offer continues to go down, especially for younger audiences and especially for entertainment programming. And that has completely dried up. What good content is left is being pushed to each of these companies' streaming services. [crosstalk] Bill: Except to the [crosstalk] MTV challenge. Alex: Yes. I know you love that show. Bill: That shit is still on the bundle-- [crosstalk] Alex: Is it on Paramount+? You might be able to watch it without ads. [laughs] Bill: No, I don't think I can. I think I get the MTV challenge all stars on Paramount+, which I would watch. Alex: That sounds good. [laughs] Bill: Yeah, it's pretty pathetic, but I would watch all of it. Yeah, I don't know. I don't know at all shake out. It's going to be interesting to watch, man. But I do think the natural progression of this probably leads to Paramount licensing content or selling. The problem with them selling is one you got to get Charter to one. And two, there's a lot of bundle assets in there. Alex: Yeah. Bill: See, you almost have to do asset sales. Alex: Yeah. Bill: I do think a lot of their franchises are very good and especially to Netflix. Those are real churn reducers. Alex: Yeah. Bill: I know I homer out on the challenge, but the challenge is dope. They could do something with that. Alex: Yeah. Francisco and I were talking about this today. To your point, I don't think they want to sell for one, if we're talking about something like Netflix. I think they've been pretty clear that they have no interest in buying the linear channels, basically. Bill: Yeah, they don't want it. Alex: CBS in theory could just continue-- They could basically operate the Fox Strategy with a licensing agreement across all of their-- Obviously, after current agreements run out, they could run-- [crosstalk] Bill: But how do they compete with Disney when they have to go out and renew the NFL down the road? What's your terminal value on that asset? Alex: I think it's very difficult, because Disney is going to play both sides of this in a way that in my opinion, nobody else really can or at least has shown no ability to so far. Bill: Yeah. Alex: Again, it's still very, very early in terms of engagement on a lot of these over-the-top offerings. I think you can honestly make the point that the people have their backs against the wall or someone like Amazon, who just purely has solely an OTT strategy. They may find the path forward in the sports quicker than Disney given the fact that Disney has a little bit more of a balanced strategy. And then, they could potentially happen, but we'll see. Paramount's a good example. They have been a little bit more aggressive in terms of their NFL content being on Paramount+. And Disney has been with NFL content being on ESPN in some ways. So, I don't know. It'd be interesting to see. Paramount, I think they could do something like the Fox Strategy and then license all the content. You could do it like a Hulu way or how HBO does now with House of the Dragon and things. You just dropped the show on Netflix or wherever you're licensing it to at the same time that it's on. Whenever the challenge is airing on TV, you can just drop there at the same time or the day after. I think they could find a path forward there that may be-- I'm just becoming a little bit more negative generally speaking on these big companies being able to get M&A done. Not even just in tech. I think generally speaking, it's very difficult. And that's a tough spot to be and especially in an industry where you need consolidation. Bill: House of the Dragon is really good. I don’t know, man, Warner Brothers Discovery is going to be really interesting. I've said it to you thousand times. Netflix has with Zaslav said wanted. But now that Zaslav has sports, he wants what he has. But I think that's a function of having the cards he has not-- Look, one of two things is true. Either he believed what he was saying in the past or he believes what he's saying now. Either way, I think they're motivated statements. I'm certain one of those things is true. I'm just not certain which motivated statement is closer to reality. Alex: Yeah, zooming out just investing generally, it is funny how they're just the two most notable exam-- I've had plenty. KHC, plenty of others. But it's funny how-- ATOS and WBD were very similar in terms of the thesis never changed as the stock price went from a high number to a significantly lower-- [crosstalk] Bill: Charter maybe similar, man. Be careful what you saying. Alex: It very well could be, Bill: Yeah. Alex: It very well could be. I think there's a lot of reasons why it's very different, but it could be. But that's the tough things with these names. I'm not even sure the lesson is that, especially if you're going to operate from the perspective of being a business owner that you can necessarily avoid them. I think the bigger lesson is, and again, something you and I talked about a ton is position size and thinking about how you react when something like that goes lower and lower and lower. You really have to ask yourself, "Is this business actually getting better? Are there cracks here?" There might be a real problem. In the case of Altice, there was a real problem. [laughs] It turned out. In the case of Warner Brothers, there very may well be a real problem. Again, going back to sports rights, they so far have no strategy for taking what they have on linear and putting it on a direct-to-consumer offering. That is not the easiest thing to do without branding, without a lot of technology spend, etc., etc. So, if the bundle is getting to a place-- Even someone like Bob Iger now, he was the former CEO of Disney. He's saying, this is heading to a precipice and it's going to fall off. Bill: Well, it can't. Not. Alex: It's not all Reed Hastings and TTD, people who are going to benefit from the CTV explosion. It's people who are legacy media people. Bill: By the way, if you're still with us and you're not media person, TTD is the trade desk and CTV is connected TV. Alex: What does trade desk do, by the way? Would you like to answer that for us? Because I'm not sure I can answer-- [laughs] Bill: No, I'm not sure I can answer either. I just know it's everything on the internet not named Google and Facebook. Alex: That sounds like a lot. Bill: Yeah, it does sound like a lot. Dude, I need to read their investor day. I don't know. I've always kicked myself. The Adam Robinson quote things that make no sense and things that are blatantly obvious. I've been kicking myself lately, because I wasn't interested. I have such an aversion to Elon Musk's personality that I haven't been interested in Tesla, the company. And I opened up the financials and I was like, "Man, that's fucking crazy." Now, a lot of people are going to say, "It's a fraud. Fine." All y'all can debate all that. All I'm saying is, what that guy has created is pretty incredible. I hope we can all baseline agree on that. The stock, I have no interest in owning. People can debate it all they want. One of the other things that I think has been blatantly obvious is how often the trade desk comes up in conversations and I still don't have a really good view of what they do outside of that one podcast that came out in 2019 and I should have just listened to it and bought the trade desk. It would have been by far my best performer, but I don't know. Alex: Yeah, I like John Hampton's take on Elon. I'm going to paraphrase it badly, but he said something like, "On one hand, you have a fraudster and a scumbag. On the other hand, you have somebody who sent a rocket into space and was able to make it come back and land on a platform." [laughs] Bill: Yeah. Alex: So, you have an interesting mix of person in there. Bill: Yeah. Alex: Maybe not someone to bet against or at least not much. [laughs] Bill: Yeah, and maybe not someone to bet on. It's okay to not have money involved and also make observations of a situation. Alex: Yeah. Bill: I did not appreciate how I think he treated Twitter during this process. I also have never done a $44 billion deal. I don't know what it's like to feel like I overpaid by $20 billion and to do whatever I have to do to get out of it. So, I don't know. He's not cat, man. But I do know that I think EVs are going to continue to take share and I do think this Inflation Reduction Act is a big deal. I don't know how to play it yet, but we'll see. Hopefully, if I can find one idea-- I think Munger says, that's all you need. He may not say that, but I'm going to say he said that. Alex: [laughs] How do you think about with something like that? How would you think about getting up to speed obviously can take some time? It's a relatively new area of-- [crosstalk] Bill: I think [crosstalk] take years. Alex: It could take years. As I said to you today, I think it's interesting to look at railroads and Berkshires activity there in hindsight, where the real OR, operating ratio improvements started and call it the 2004 timeframe. And Buffett had some bets in place for sure before the BNSF deal. But he really didn't take that really big step for-- It took five years, basically. Now, obviously, some of it was just seeing that it was real and that it was as been proven in hindsight, very sustainable and incredible. These businesses have gone from 10% EBIT margins to 40% margins EBIT margins. It's been a massive change in terms of the industry economics. But it's just funny to think that-- Again, he had a lot of patience. He has an interesting combination that you don't see very often in terms of both patience, but also the willingness to bet really big. And again, as I mentioned before, Akre is another firm that strikes me that operates in that same manner where-- As Chris said on your pod like Visa and MasterCard, basically, same bet. Bill: Yeah. [crosstalk] Alex: Position size is like 20% of their fund. It's a big bet when you think about it as a single thing. And same with AMT and the other entity that's similar. They place big bets and they're things that they're going to own for very long periods of time. It's just so uncommon. I don't see many other people operating in that way. And yeah, you look at the track record is that people like them to put up and it's eye opening and you would think more people would copy it. [laughs] Bill: Yeah. Well, I-- [crosstalk] Alex: But it's also very hard to do. Bill: I recently put on the Twitter machine. I think it's Eric Mandelblatt. I apologize if that's wrong. But the guy from Sorbonne. That invests like the best podcasts that he did. I think that can be a really interesting thing to revisit right now. Look, I think I'm 60% confident that NAFTA is going to have a pretty good run here. I don't know what the stocks are going to do, I have no idea what that means for each region. I think that it's reasonably probable that the Inflation Reduction Act was actually a pretty well-crafted trade bill at the end of the day and I think it's reasonably probable that it's going to bring Capex and jobs here. I think especially if you believe we're going to some stagflationary environment, it would be really dumb to not try to study who are the companies that are getting the subsidies and who are the tangential beneficiaries. But I have no idea how to play that yet. I guess what I've realized is I don't need to have that answer now. [crosstalk] What I need to do is to put-- Yeah, well, some of the subsidies don't come out till 2024. What, we're recording on, what would we say, October 21st. So, I think the market probably looks at to October 25th of 2022. Alex: [laughs] Bill: I think I probably have some time. We'll see. I don't know. I do have some listener questions though for you. Alex: Oh, boy. Bill: Yeah, man. First of all, the man, Viggy, he says, "Curious for Alex's take on all the recent drama at Ally?" Alex: Oh, that's a very good question. I'm still working on-- [crosstalk] Bill: That's how Viggy does. Alex: Yeah. Bill: He's very smart guy. Alex: He is a very smart guy. I'm still working through the most recent quarter. It's funny as I spend more time in this game, I came from the perspective early on that short-term market moves are completely irrelevant, and you just live in your own bubble, and think about things in that way. Ally is a good example of how, at times, the stock can move in very significant ways and its smart people saying things that are coming around the corner. [laughs] I think that's happened here. And maybe some of the things that have played out particularly in terms of rates on the short end maybe should have been perceivable even at a high level before we got here. With the specifics of what's happened lately, the CFO resigning or getting fired, whatever, however you want to label it, day before the earnings call is obviously a terrible development, last thing you want to see the day before an earnings call. Honestly, I'm still working through some of my thoughts and working through some of the things I'm going to share with subscribers. For me, there's certain tests that companies need to pass. And companies, I should say management teams more directly that how you think about communicating with shareholders is a very important relationship. I think Charlie and Warren say it in the way of if we were sitting the other side of the table would give you all the information that we think you should have if we were in your seat. In this case, there was an AK, which is obviously required by law and no press release, which maybe isn't the biggest thing in the world, but for me, it's a relatively important thing. I want to hear what happened and I want to hear why it happened. You could say the conference calls the next day, but I think they should have addressed it more directly at the outset. Is that a deal breaker? I don't think it necessarily is. But I would want and more directly expect the company to do better on something like that going forward. If it were to happen, again, it probably wouldn't be a deal breaker for me just in terms of how I think about the people that I want to partner with and the companies I want to invest behind for the long-term, because there's other options to look at. I In terms of the underlying results, we've obviously gone through a crazy environment in terms of use car pricing and that is concerning, but it's also very obvious. In terms of their credit underwriting, they should be thinking about that. As I wrote in the deep dive on Ally, you have some historical reference in terms of financial crisis for how this asset class performs, and I think how are performed, and how I would expect it perform in a very difficult environment going forward. It's logical given the nature of what the asset is, given the duration of the loan, etc., etc. I think it's an asset class that I like, but they're also moving into other types of lending, which may be a smart thing to do, but will certainly come with learning curve. Some of the stuff that they're doing is unsecured consumer lending and things like it's different and it could certainly have very significant costs as part of that learning. There's puts and takes, as always, I less often go back to this idea of like, "Well, it's cheap." I'm just going to stick with it, because it's cheap. It's very much a trying to constantly update business outlook five years out, quality of management team, etc. So, I still need to get my head straight in terms of where that's at, but this past week was very certainly not what you wanted to see. And again, less so in terms of the business results, more so in terms of how some of this stuff was communicated. It left a sour taste in my mouth, for sure. Bill: Interesting. Sometimes, I don't know how much communication matters and sometimes, I think it's like a ton. One of the things that I think Buffett has done the best is be a communicator. He's created this aura of truth around him. I believe it's well deserved but I also believe it's well crafted. He is too smart not to understand how he approaches communications. Alex: Yeah. Bill: I don't know, that was a bizarre series of events. I didn't understand how you would preannounce the CFO leaving. You do think people that don't understand communications maybe don't understand other things that are not so small, if that makes sense. Alex: Yeah, I think in this specific case, based on what was said on the conference call, my read on it is the CFO had sights at a more meaningful role potentially at the company, which obviously would probably mean the CEO spot. CEO probably has no intention of leaving. I guess, things can get personal and can get muddy from there, where it would get to the point where it's announced effective immediately the day before the call- Bill: Yeah, it's odd. Alex: -suggests that it got really muddy and that's certainly not good. The companies also-- [crosstalk] Bill: The more nefarious thing is, there's some reserves that [crosstalk] disagree on, right? Alex: Sure. Could be that as well. And again, the company's now looking ahead at a 12-day two-month period that is certainly not going to be-- 18 months ago was as rosy as it can be. ' Bill: Yeah. Alex: But it's certainly not going to be anywhere close to that and it may be even below what baseline expectations would be for this business. It's going to be a tough period. I certainly will be looking to do more digging on this and trying to get a better sense for what actually happened to the extent that's possible. But it's painting my views on this business in a big way, which doesn't feel good when-- Obviously, I don't typically disclose on podcasts when I've done things, but I added a little bit more recently and it presents a tough decision, especially when you-- Yeah, and you can talk about this as well as someone who's public. When you are telling people what you're doing and you're trying to be very logical and sensible about it and again, also trying to be very long-term, it feels very weird turn around and say potentially the right decision here is to sell, but-- [crosstalk] Bill: This is one of the things I liked the most about Ackman's Netflix decision, man. Alex: Yeah. Bill: I don't think it's that easy to disclose a position- Alex: Not at all. Bill: -that publicly and then flip. And people can say flip too quick and people can take shots at him. You can argue a lot of those shots of jealousy. Sorry if you hear this and you mad, because I triggered something in you. But I do think that the way he flipped on that, it's tough, man. Alex: Yeah. On to the point you made at the time he did it. The fact that the stock now is higher than when he sold is potentially irrelevant for the reason you made, which is you may have just looked at the opportunity set and found something he liked better. Bill: That's what he said. Alex: Yeah. Again, I think some of this is just simply a choice of what kind of investor you want to be and what kind of constraints can be used I think in a helpful way in terms of what situations you'll ever get involved in. Maybe there's very rare instances where you break that, if it's a naked wine situation where something happened, that seems pretty big-- when it did happen or something like what's going on with Ally. And maybe you say, one out of hundred times, I'll potentially have to break these rules for a very specific reason. But I also think there's a lot of value in having these constraints in terms of what it actually gets you into in the first place. Bill: Yeah, I agree with that. All right, we're going to ask you one more fun the listener question than you and I are going to hang out, because I've enjoyed this very much, but I'm ready just hang. "How does Alex determine when to invest in or sell a position?" Alex: Well, invest in, that can be pretty simple in terms of as I-- I think I said to Francisco recently. I've been doing this for over a decade now. It's 20 businesses that I really feel I have my arms around. [laughs] The hardest part is literally just getting to the point where I feel I'm in a position where I really want to place the bat. Again, for people who don't and read my work, I have a rule for myself, which I don't make any positions, a minimum position size of 5%. So, I want to make a real bet. I forced myself to make a real bet. And again, my intention is to be partner with these people for five to 10 years. So, it fairly high bar. Yeah, to be able to get my arms around the business, around the industry have clear line of sight to where it's going to be over 5 to 10 years. Hopefully, earnings power has gone up very significantly over that period. That's a starting point and that can take a while. It's not as at least not yet. Not as long as Buffett with his 50 years of IBM annual reports before he invested. But there's certainly companies I've been following for years that have just been on the sidelines through that whole period. Again, I think there's a ton of value. Nike is a good example now which I don't own. They're going through inventory issues in North America. I watched this exact same thing happened in 2016. They went through this exact same thing. It gave me some insight into how this works, and how the market will react to it, and how sell side will be forced to think about these things in a certain way because of the incentives of their job and what short-term price movements mean for how they talk about these things which [crosstalk] expecting. Bill: This is even odder though, because a lot of people are dealing with inventory issues. Alex: Yes, that is very true. Anyway, there's value that comes from that time from following a company and management team closely. Once I can eventually get my arms around something-- In terms of valuation, I do generally build models depending on the industry to the extent that it's feasible. But it isn't the driving factor in my decision making by any stretch. Obviously, it is in like a range. But I'm much more concerned on the people I'm betting behind and the businesses I'm betting behind, I do think about more now than I used to. You and I have said to each other, "A year isn't that long in terms of like an Excel spreadsheet but living through a year is actually a long period of time." Bill: Dude, brutal. Alex: I do try to think about, is this business actually performing well, is trajectory looking good before I either buy initial position or start adding to it? On the buy side, it's just really understanding the business and understanding the management team. On selling, I lean more towards the Akre view of, is the business broken, is there been some transformative M&A that is really going to take their eye off the ball, it's those type of things? I keep valuation and focus. I think about it, but it's not the driving factor. Again, I think personal circumstances do have an impact on how I approach this. I'm going back to the Buffett Coke example we talked before. I'm still fairly young and I'm going to be a net saver, hopefully for at least another 20 years. I have a little bit of flexibility in terms of needing to sell things to have the capital versus just having incremental savings over time that- Bill: It's a good way to frame it. Alex: -again [crosstalk] can naturally take the position size down as he did with Coke. Without ever selling his share, position size went from, I think it might a peak just south of 40% of the book. As of the most recent report, it was 7% of the equity book. So, there's some ability to do that. Bill: That's smart. Alex: Yeah, that's how I generally think about it. It's just business, if there's cracks or major changes in the story. Bill: Yeah. All right. Well, cool, man. Thank you for coming. Thank you for coming up to my hometown. I've had a great day with you. Alex: Sorry, I kicked your ass in tennis. I didn't mean to. Bill: it's okay. You got two forehands, man. I can't fuck with that. Alex: [laughs] Bill: So, anyway, I hope you all enjoyed the episode. Alex, Thanks for joining and we'll talk soon. All right, see you. [Transcript provided by SpeechDocs Podcast Transcription]