Bonus Andrew Walker - A SPACtacular Conversation
Andrew Walker, a PM at Rangeley Capital, author of Yet Another Value Blog, and host of Yet Another Value Podcast stopped by to discuss SPACs and his investment philosophy. We are releasing this episode as a bonus because there are some elements of it that require a faster release than normal. Areas discussed were SPACs, sum of the parts analysis, Getting Better as an Investor, and the current market environment.
Andrew has had an interesting career. He's found "compounders," special situations, and everything in between. He won the 2017 Sohn Idea Contest (that's a big deal for those that don't know) when "La Quinta (LQ) is sold its franchise business to Wyndham and spun off its owned hotel portfolio into a new REIT (CorePoint) in a taxable spin." You can see his presentation here.
We hope you enjoy this bonus episode.
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. We’ve got Andrew Walker with us today. As a reminder, none of this is financial advice, do your own due diligence. We're just two people having a conversation for entertainment purposes only. I will tell you that what you're going to hear today is smart stuff. I like Andrew a lot. I'm going to start out this podcast by pitching him because he starts all his podcasts by pitching other people. Andrew writes Yet Another Value Blog, he does Yet Another Value podcast, which I think is one of the best podcasts out there, specifically, I think he owns the niche of having people pitch. He's well prepared when people come on. He knows his shit, they know their shit. Listen to it. He's got a subscription service. How can people subscribe to you?
Andrew: You can just go over to yetanothervalueblog.com, they can read the stuff. I try to post some case studies of prior write-ups that have been written or if you'd like yetanothervalueblog.com, I think you'll like the premium stuff. There's all the normal subscription stuff on there, they can just go through that process.
Bill: One thing that I find particularly interesting about you as an investor is you have a knack, I think, for picking-- like Charter is what I associate you with the most. I apologize if that's not what you want to be, but that's in my head. That was early to see a compounder. Then, I also really like how you're looking at special situations a lot. There aren't that many people talking about the same stuff that you're talking about. I appreciate subbing, I appreciate what you do, and I think other people would get a benefit out of subscribing. If you like what you hear today, sub to him.
Andrew: Well, hey, look, I appreciate that. I appreciate you having me on for what I'm thinking in my mind is a home and home series because you came on my podcast a couple months ago.
Bill: That's right.
Andrew: No, look, I'm really excited. I love this podcast. I know everybody goes on a podcast and says they love it, but I listened to your-- I'm Mike from NonGAAP’s number one stan, so obviously I listened to that over the weekend. I like the creepy echoey ghost voice that was in the background there.
Bill: [laughs] Hopefully, we don't have to do that again. That was a pain.
Andrew: Yeah, look, I haven't gotten through all the podcasts because it's daunting, two hours. I was telling you before the podcast I was a little scared to come on, but I love them all. I thought your interview with Dan was actually the best podcast I listened to last year. I'm really excited. I know I'm stepping into big shoes to fill, but lots of stuff for us to talk about. I'm excited to do this.
Bill: Man, I'm just happy that I get the quality of guests that I have. People that complement the podcast I just say it's all because I get good guests. It's crazy. I tweeted out-- some Naval Bot or whatever yesterday, said that, “If you want asymmetric opportunities, start tweeting, start a podcast,” whatever. Just the network that I have found that it opens up is so worth it. I can see it on your podcast, man. You get crazy good guests to come pitch. People want to pitch their best idea I think on your podcast. That's got to be cool to be in the center of.
Andrew: Yeah, look, I think you're right. It's something I-- not that it happens all the time, but when people send me a message like, “Hey, how can I become a better investor or get a job in investing?” All this stuff. I'm like, “Look, the best thing to do start putting yourself out there.” If you want to go work at JP Morgan or something, they're not going to let you keep writing a blog but the way most people I think connect nowadays is on FinTwit, have a blog. I think I'm a much better investor for having put all this stuff out there. I agree with you. It is some work, I'm sure you feel the same way of getting podcast guests on and prepping for podcasts and stuff is work, but I think the returns are, A, they're asymmetric, and, B, I think the returns can be really good.
Bill: Yeah, I agree with that. I'd like to think of what this is doing is improving my life Sharpe ratio. I know that this is uncorrelated from my investment portfolio and it's taking some time away from investments, which is suboptimal in the short term, but I think it's probably de-risking other parts of my life. So, I'm pretty okay with that.
Andrew: Well, look, Spotify stock goes up 10% every time they buy a podcast network, so what we're going to do, we're going to roll Yet Another Value Podcast and the Brew.
Bill: Yes.
Andrew: We're going to roll them into one we're going to sell them to Spotify. Their stock will go up 20%. Would you sell it for $100 million? I’d sell my podcast for $100 million. Problem solved.
Bill: Yeah, before we just sell out to Spotify, I just want to throw out, there's some IPOs with letters behind them that I would be open to SPACing into also. If people want to start a bidding frenzy, I'm down to do whatever you want.
Andrew: It would be interesting to SPAC just a podcast. I don't know what subscriber numbers you're getting. The subscriber numbers on my podcast, it would be very interesting SPAC. I think we're going to talk about SPACs, but what are the--
Bill: We both have growth.
Andrew: Say again?
Bill: How can you value the growth that you and I have?
Andrew: I think we're going to talk about SPACs. That's one of the things that people don't realize about SPACs. I think one of the reasons SPACs are so popular is because if you go through a normal IPO process, you're not allowed to put out forward projections. But if you go through a SPAC, because the SPAC has already gone public, if you're merging into a SPAC as part of a merger, you can put out future projections. When we go into a SPAC, we don't have to reveal LTM listener numbers, you and I can just put our fingers in there and say, “You know what? I feel like Yet Another Value Podcast is going to be listened to by 2 million people in 2025.” We'll base all of our financials valuation, everything off that forward projection.
Bill: I like that. Then we could probably figure out what we think those listeners are going to be worth in 2025. We got some industry stuff that we could project to. I think this makes sense, man. You want to merge formally after this?
Andrew: Have your lawyers call my lawyers, we're going to get this done.
Bill: [laughs] Nice. My people will be in touch with yours. [laughs] Actually, one of the reasons that I reached out to you is Jen Ross wanted somebody that knew how to talk about SPACs intelligently. I said, “I know just the guy.” She was the catalyst to this conversation. I'm glad she did it, because I've wanted to talk to you for a while. You want to tell people that don't know about-- just from first basic principles. You already got into a little bit with the SPACs that you can show projections. Why is this craze going on right now do you think?
Andrew: Yeah. You gave this disclaimer at the start but let me just start with a disclaimer. I work for Rangeley Capital. We actually run a SPAC fund. My partner, Chris DeMuth, is the PM on that. You can tell I've done a lot on SPACs. My fund, Special Ops, has a large investment in it a SPAC as well. I'm very familiar with this. A SPAC is a special purpose acquisition vehicle. What it is, is a management team goes to it goes through a normal IPO process, and investors give them money, and most SPACs come out in the $200 to $300 million range. Investors give them $200 million, and that $200 million goes into a trust. It gets parked in a trust, it's completely safe. The management team then goes and tries to find a merger. When they find a merger, they strike the deal. They go back to their shareholders and they say, “Hey, here's the deal that we struck. Here's the valuation. Here's our projections. Here's everything. We're going to open the entire kimono to you.” As an investor, you have the option to either redeem your shares and get the $10 per share you got back or you can vote-- actually, the vote doesn't really matter, or you can keep your shares, the merger goes through and now you just want to stock in a company.
There's different twists, but in general, when you're IPOing-- hedge funds love this, especially now because you give someone $10 per share, you get your unit, actually you buy a SPAC unit, which is one share plus some of the warrant and the warrant terms can vary, but the warrant generally lets you buy a share at 11.50 if the stock’s are real homerun. You give them $10, you get a unit and then you can redeem for $10 if you don't like the deal, or you can sell-- if the market loves the deal, you can hold the share, you can sell whatever, but it's kind of a risk. Again, nothing investing advice, but it's a risk-free bet. Only opportunity costs, you've put $10 in trust, they'll come to you with a deal. If the deal is great, great. If not, you take your $10 back and you walk away, and you've only lost time. That's the overview of the SPAC process.
It's been around for a while. For years, it was a hedge fund favorite, just little bit better than bond returns. You would buy these-- and lots of people were actually practicing it. You'd buy these on the IPO and then you would just redeem, get your $10 per share, keep that free warrant, and if the deal went through, you could sell the warrant and it was pricing out very nicely. Most people said you could make 6% to 9% per year just buying the IPO, redeeming and selling the warrant, and selling the warrant.
In the past year, I think it started with Virgin Galactic, which was IPOA, it became SPCE, that was Thoma’s first SPAC. That happened, and that deal went parabolic. Then DraftKings last year went public through a SPAC and that's been about us. Again, trust is $10 per share. I think DraftKings is trading for $60 per share. All of a sudden with those two people realize, “Hey, if you take really growthy company's public through SPACs, the returns can be astronomical.” It's really retail investors will buy the heck out of these things, especially if it has anything to do with electric vehicles. There's a wave of electric vehicle companies becoming public. Literally, they’re announcing, their stocks are trading for $30 the next day. Buying SPAC at trust has gone from, “Hey, you get really nice risk-adjusted returns,” to, “Oh my God, they might announce an electric vehicle merger” and you're going to get 3X overnight.
Bill: You got the warrants on the back end.
Andrew: Yeah, you get the warrants in the back end. The market is so hot. The warrants were given to entice hedge funders to put $10 per share into the trust and get that return they needed. Right now, the stock market is so hot, you're starting to see a lot of SPACs come out without any warrants attached to them. I bet Thoma’s next SPAC is not going to have any warrants attached to it. TBA, which is another SPAC backed by Thoma Bravo, is that it? The really famous software investing private equity firm. They just did a SPAC that I believe doesn't have any warrants attached to it. Over time, because the SPAC market is so hot. If it's a bad founding team, they have to give more, so they have to give a better warrant, or they have to put more money in trust. With the SPAC market so hot, you're starting to see a lot of warrants come back, but I'm probably diving too far in the weeds here.
Bill: No, not at all. Just to take a step back. Historically, if you were looking at a market that you perceive to be frothy and the SPAC was coming out, you could say to yourself, “Okay, well, you know what, I'll buy the SPAC. I get the warrants. If I don't like the deal, then I can just put basically my shares back to the SPAC, get my 10 bucks back, no harm, no foul. Maybe I have some opportunity cost to that.”
Andrew: Exactly. Yeah.
Bill: Today, it seems you're paying premiums to the SPAC trust. Now, you actually do have some downside there.
Andrew: Well, if you're buying in the IPO, you're still buying at $10 per share, but the SPAC market has definitely become markedly different. A couple years ago, most SPACs, they would IPO and-- Again, you IPO as a unit, and the unit includes a share and a warrant. After 46 days, the company can break the units apart so that the shares are more and start trading separately. The shares are what you're going to redeem to get your $10 per share back. In general, those shares would trade at $9.70, $9.80 or something below trust until the deal was announced because people were factoring in the opportunity cost of time, and nobody felt these SPACs would pop like this. As you said, today, most SPACs are trading at an actual, just the shares are trading at a premium to trust. I think it's really crazy. If I gave $100 to a private equity firm and said, “Hey I committed $100, go find a deal,” I would never value that $100, at $110 or $120. They actually have to go find a deal and produce value. When you look at it SPACs right now, like Pershing Square Tontine is probably one of the most popular ones. As we're talking, I think it's trading at-- that has $20 in trust, not $10 like most bets, but that’s trading for $32 per share.
Investors are saying, “Hey, Bill Ackman, we like you so much, we think cash in your hands is worth 60% more.” 32 over 20, it's worth 60% more than what we gave it to you. “That's how excited we are for whatever potential deal you're about to announce.” It actually gets worse than that because founders and sponsors aren't doing this for free. They're doing it because they get what's known as promotor or founder shares. Basically, what that works out to-- Bill Ackman’s SPAC is unique, but in general, it works out, too. If you approve a deal, they get 20% of the equity of the deal. Right now, if you look at like an IPOF, which is one of the Thoma’s SPACs that trading for about $15 per share versus $10 in trust. It's trading 50% of both cash. After you factor in, his promote once the deal goes through, investors basically saying, “We think whatever deal you strike is going to be worth 2X whatever you price it at immediately.” That's how excited they are for these deals. It's really crazy. Again, if you gave money to KKR, and they hadn't done a deal, you wouldn't mark it up 10%, 20%, 30%, 40%, 50% above your commitment the next day.
Bill: The thing that is so confounding to me is not only are they marking it up-- Okay, if you had one SPAC out there, and there was a scarcity value on that SPAC, and it was Ackman. You could say like, “Okay, this guy, I know he's going to go into consumer and there's not a lot of bidders, and we're coming out of ‘09. Boy, the competition for good deals is probably going to be lower.” That's one thing. To me to say the market-- I don't know how frothy frothy is, but I do know that it's not a conservative market right now. All the SPACs, it seems to me there is more SPACs than there are quality companies out there. Maybe that's just the old man shouting in the wind. I'm not sure. It seems to me that on top of that dynamic, now investors are assigning a premium to these SPACs when they're buying in and it's like, I guess, some of them could work but seems like a risky proposition from my seat.
Andrew: I love that point. There's two things. You said, “Hey, maybe if there was only one SPAC in the consumer space, you’d value that at a premium.” Again, a SPAC doesn't exist in a vacuum. KKR and every other private equity firm has consumer arms that they can P/E, LBO these deals. So, even if there was only one set SPAC in a spectrum, it's not like they're the only person who can buy a company. I think Pershing Square is so interesting because Pershing Square, Bill Ackman’s hedge fund, is publicly traded, an LP interest in it through a-- it's on the London Stock Exchange, but it's PSH on the London Stock Exchange, and it trades for 25% discount to net asset value. By the way, the hedge fund is going to have a mammoth stake in whatever PSTH does because they've committed to buying a bunch of shares at trust value whenever they announce a deal. If you're really excited about PSTH, the play might be Pershing Square. They're going to have a huge stake. By the way, you're excited about PSTH, because you're excited about Bill Ackman capital allocation skills, go buy the hedge fund. It trades at 25% discount, but investors are so excited about SPACs right now that they want to go by PSTH, the SPAC itself at a 60% premium to trust without knowing what deal is going to happen.
I think it just speaks to how crazy the SPAC market is right now that you could have, “Hey, here's Bill Ackman’s main thing, 25% discount NAV,” and NAV is going to be a lot of this-- actually undervalued investment, it's the SPAC since they buy that trust. Let's ignore that. Let's go buy this back itself at a 60% premium just because it's a SPAC and we don't know what it's going to be. I just think that's a little crazy and it just shows how frothy the stock market is.
Bill: Why do you think that is? I know, you said you think it's crazy, but if you just had to-- you think it's just like SPAC mania basically?
Andrew: Yeah, I think it's SPAC mania. There was an article in the Wall Street Journal, I think we've been seeing it for months. The diamond hands, WallStreetBets people, they're really turning their attention to SPACs. I do think there's a little bit of, “Hey, the past 20 have worked. Let's just keep betting on this till it craps out.” People have said, it reminds them a lot of the.com bubble where the SPACs come out, they trade at huge premiums, and they announced the deal, and they trade at even bigger premiums. At some point, the music will have to stop one way or the other because right now there's four SPACs going public a day, and there's not four public-ready companies getting created every day. But while the music's playing, I think people are just dancing really hard with these SPACs.
Bill: I'll tell you, man, I was just having this conversation at lunch with my dad. I said, “I don't know what is going on--” I have no idea whether or not we're near a top, whatever. I don't have a clue to how to answer that question. What I do know is it is an odd time to watch baseball cards, bitcoin, vintage cars, SPACs, there is a lot of stuff that is ripping simultaneously right now. Part of me thinks it's all just short fiat or something like that. Part of me just thinks it's like, crazy speculation. I don't know how to decouple the thoughts. If we ever look back at this and say, “Boy, that was a top,” I'll say, “Yeah, that makes sense, in retrospect,” but it's hard to know living through it.
Andrew: It really is. It's hard to know, especially because, A, it's always hard to call top. With something like GameStop, the dichotomy was so crazy where you would see GameStop stock up 200% today, and the market cap’s gone-- it's up 1000% a year. Then they would cut from that to GameStop stores themselves where they have going out of business signs and their liquidating stores en masse. I'm with you. It's tough. I wasn't really around for the dotcom bubble, but I know a lot of people say it reminds them of the dotcom bubble. But I do think as an investor, it's exciting. There are a lot of things that are connected to all this mania and bubbles, that are not getting any appreciation for it. We mentioned Pershing Square, the hedge fund, which still trades at a 25% discount NAV, and it's even bigger once you adjust for how much they're going to have the SPAC versus the SPAC. There's a lot of these companies that touch and are benefiting from this mania that the market isn't giving them any credit for because maybe it's a little bit more complex to see how they're benefiting. Maybe it's not quite as sexy, but I think as an investor, there's a lot of opportunity on the fringes of this mania.
Bill: Do you have a sense of historically-- do SPACs work best if it's a private equity firm that wants to get out of their interest? Is there some pattern recognition that you think works well?
Andrew: I think the first thing is we're still pretty early into the SPACs. From 2010 to 2018, I think there were 40 or 50 SPACs IPOing every year, and then last year, it was like 250. This year, it feels like there's been 250 in January alone. We're seeing a lot more sponsors go into the area. KKR, I think they launched last week or it's this week, a billion-dollar SPAC. All the P/E firms are moving into it. I don't think we've seen a lot of data on what really works in SPACs. The data on SPACs, by the way, I would tell this every time for years, when people would pitch back and be like, “The data on SPACs is horrible.” If you're a company that goes through a SPAC, on average, I think the average stock is down 15% one year after the merger or whatever, which makes sense because the company has agreed to sell themselves at an agreed-upon price and the public buyers are actually paying a premium to that price, because they have to pay for the promote and the fees and everything. It makes sense that rational people agreeing to sell or selling at the top, and if you pay a bunch of expenses on that, you're going to lose. I don't know there's been anything that proves what works and what doesn't. I do think there's early indications that if it's a sponsor that has success in the past, it looks like they're going to have success going forward, which I do think makes some sense.
There's a little bit of a flywheel where you go to companies and you say, “Hey, our last SPAC was up 2X, people are going to be really excited about this. We've got great financing connections, we can get this done. We're going to get this done.” I think there's a little bit of a reputation flywheel that they benefit from. There's going to be some really interesting things, like, I mentioned KKR did a $1 billion SPAC. Well, if you're a KKR LP, how do you feel about KKR now having $1 billion SPAC? If I'm invested in KKR fund 11 and they find an attractive deal, does it go to the SPAC or does it go to me as a private firm? If they agree to sell a company from fund 11 into the SPAC, well, how do I know that I'm getting fair value if I'm on the seller side? If I'm on the buyer side, how do I know that I'm getting fair value? There's going to be a lot of conflicts of interest questions on the back end of this, too.
Bill: There's a guy that I know pretty well. He's got quite a resume, an older gentleman, and he told me like three years ago, he said, you need to start worrying about when private equity funds start flipping companies to other private equity funds. Then he said there's one exception, like, if one's a mid-market and then the other is like a large market, then it could make sense. In general, he's like, once you start to see these guys writing up their asset values by flipping each other, that's when you need to start to get worried a little bit. So, it'll be interesting to see whether or not they start flipping into SPACs. To your point, if I was in fund 11, and they flipped it to SPAC, I would be really concerned about whether or not there was a conflict of interest there and how it impacted me. That's a very good point.
Andrew: Yeah, it's interesting because most the private equity firms have launched, like Chamath with IPO, he had IPOA was one, IPOB was two. Most of them have launched SPAC one in the past three to six months. So, you're just starting to see the first deals come from this private equity SPAC wave. It'll be interesting to see what deals they do. As you said, it'll be interesting to see if they're doing deals with funds they already have, how are they explaining these conflicts of interest?
Bill: Hmm. How did you get interested in SPACs? How did that start? Also, if I was a skeptic, I might say, “Well, you're saying all these bad things about SPACs, why does your firm focus on them? It might make sense to clarify that a little bit.
Andrew: I guess, it started because in 2018-2019, we saw this opportunity. The SPAC fund was supposed to be, “Hey, we're going to buy these at IPO,” especially we think-- In 2018-2019, there was almost no divergence between the SPAC sponsor quality. We thought, “Hey, we can go and we can pick and choose and we can get good allocations to IPOs for SPACs with really good sponsors. Partner with them, try to shape this deal.” As we said, get the really attractive risk-adjusted returns. Well, partner with good people, if they come with a great deal, great, it will be a homerun. If not, we can redeem, get our money and go on to greener pastures. That was the initial thing.
Then, last year happened, and all of a sudden, it went, “Oh, hey, this thing that was really safe, this really careful strategy.” It's just swept up into this massive weight. Just because there's a lot of froth, doesn't mean that there's not opportunity. A, there's still opportunity in-- if you can buy the SPAC at trust value right now, I mean, SoftBank or Liberty Media did SPACs. They IPO’d at 10, and their first trade was 13. There's still a huge pop-- if you can get into the IPO, there's still a lot, but I still think there's a lot of SPACs that are trading at 5% above trust, which is-- two years ago, you would have never believed the SPAC pre-deal will trade above trust, but you can still buy really good sponsors who are maybe a little less ballsy than the real names out there for close to trust value and get access to really interesting optionality, I would say.
Bill: An interesting idea that I heard you talk about on Toby's podcast was selling puts at basically par for lack of a better term, with the trust value. If you're selling the $10, and you have the-- if you do get put the put, and you end up giving back your unit or whatever, at least you've collected the premium, right?
Andrew: Yeah. This was with a Pershing Square in particular. Again, $20 per share in trust, they haven't announced the deal. When they do, you'll have the opportunity to-- if you don't like the deal, if the market doesn't like the deal or whatever, you can give your share back to the company, and you'll get $20 per share back. The volatility on these things is so high. I think volatility in this market is really interesting because WallStreetBets seems to have determined that the way to play the stock market is to buy short-dated out of the money call options. There's another side to every trade. If they buy, if all they're doing is buying call options, volatility on these things spike up. The funny thing about a SPAC is, it's literally just a pile of money sitting in the bank. The volatility on this thing should be pretty much--
Bill: Yeah, like nil.
Andrew: Right.
Bill: Yeah, that's right. It's binary.
Andrew: Unfortunately, this trade, it's a different trade now than it was when I started talking about it. The volatility is still extremely high. When I was writing about it, you could sell a $20 put so at trust value, five months away for about $1 per share, 5% growth over five months, that's a really nice annualized return. By the way, even if they announced the deal tomorrow, it would probably take them three or four months to close. They would be closing the deal right around when your option expired. There was every chance in the world that if you sold this option, they would not be able to close the deal before the put option expired. If that happened, the shares couldn't even trade down below 20 because if they did, you'd get put the stock and then you just immediately go and put them to the company at 20. You were selling a put option on something that had a put embedded into it. The volatility-- it's still crazy. A lot of these things still have insane amounts of volatility.
Bill: Yeah. In rap terms, it's puts on puts on puts.
[laughter]
Andrew: [crosstalk] I think there's a SPAC mania, I think there's an EV mania. But if you're really open to exploring different areas, and looking at things through different lenses, bubbles do create opportunities for-- this is not value investing, this is more event investing. Again, options are risky, everyone should consult a financial advisor, be careful. If GameStop, if all they're doing is buying call options-- I wrote this up right at the height of the mania, you could have bought the sell $3 GameStop put options for 50 cents. In order for you to get put those options, GameStop would have to go back to where it was in November before the squeeze even started. And if GameStop decided to raise money at any point in time, these put options go to zero, because they'd have so much net cash on their balance sheet. The fact that everybody was going out their minds buying calls, it created this really weird pricing structure throughout all the options chain. I just think if you're looking at bubbles, bubbles create unnatural asset prices, and there can be a lot of opportunities associated with it.
Bill: Yeah. All I can say is, I totally agree. I also feel a little bit conflicted, given what my life has incurred through-- I had a family member that was not experienced in options trading, and he ended up taking his life. Anyone that is listening, please do take that with the respect it deserves. Options can be financial dynamite in the wrong hands. That said, man, I was looking at some of the implied volatility in that GameStop trade, I was like, “How do I figure out a way to make some money on this,” but then I tried to enter my order. By then, all the-- like TD was throttling what you were able to do. I called them, and I said, “Why can't I sell some--?” I wanted to sell a call spread. It was a long-dated call spread. I think it had to be under 120 for me to collect the credit. But they said the reason-- I've never heard this term before, but the shares were in a no borrow status. They said, “Since it's an American option, you can get put it prematurely.” If that were to occur, they said, “We just can't go get the shares to fulfill your obligation, so we can't let you do this. We just can't.” I thought that was an incredible explanation. I'd never seen anything like that before.
Andrew: It's crazy. Our financial markets were not designed for something like GameStop. Jefferies is our prime broker. They did something similar. They were saying, “Hey, we just can't support trading this. The risk department’s not letting it. Our brokers aren't clearing trades in this anymore.” Who would have thought like, I've got cash in my account, there's a stock out there. I literally can't go buy this stock because it's breaking the financial system?
Bill: Yeah, that was wild. Do you think that that was retail that is being reported? By the time this comes out, there may be things, but I don't know, man. I got a feeling that this is big-time hedge fund money and I haven't seen any of the reporting lately. I haven't--[crosstalk]
Andrew: I don't know. Matt Levine, his newsletter’s pretty much required reading for everybody in finance. He had a stat that Citadel showed that actually retail-
Bill: Yeah, that’s right.
Andrew: -was a net seller of GameStop into the spike in institutions[?] for net buyers. I don't know, man. I have trouble believing. There was definitely some short squeeze dynamics and stuff but I have trouble believing any hedge fund was really GameStop’s at $300, let's buy this for the quick flip or something.
Bill: Yeah, it's a dangerous game. [laughs]
Andrew: Yeah. WallStreetBets, they were adding a million members a month, based on my talks with friends and stuff, it seemed some really unsophisticated people were piling. I can't tell you how many times I heard from-- even from people who I thought would know better like, “Short interest is over 100, how does this thing ever go down again?” “This is going to the moon, I should put my whole life savings.” I'd be like, “No, you should put none of your money into this thing.”
Bill: [laughs] You should treat it like the plague and run.
Andrew: Yeah. It's funny. As a financial person, it puts you in a weird position where somebody comes to you and says, “Hey, GameStop is at $150. Should I buy this?” You're like, “A, not financial advice, but, B, no, absolutely God. No, please don't.” The next day, it's at $300 and they come to you and they're mad at you. They're like, “My money would have doubled.” Then two days later, the stocks at $40 and you're like, they never come back to you. It was weird.
Bill: Yeah. That was wild. Just for people that don't know about you, how long have you been investing full time?
Andrew: Let's see. I opened my PA account in 2008, so right during the financial crisis. I remember I was in college then, I would go to class and I'd sit in the back of the room and read 10-K’s in the back of the room and stuff. I probably got onto the professional side in 2013. I went to Bain Capital Credit, it used to be called Sankaty, and worked there. Professional investing since 2013, running a PA since 2008, I'd say.
Bill: When you pitched at Ira Sohn that was what year?
Andrew: Let's see. I pitched at Ira Sohn in 2017, I want to say, maybe 2018?
Bill: How was that? Was that intimidating?
Andrew: It's pretty intimidating. The way we're--
Bill: I would think.
Andrew: I think it was in February, March, you submit a four-page write-up of a situation. Two weeks before Ira Sohn, they call in the four or five finalists. They say, “Hey, you're semi-finalist,” but they don't tell you if you win or not. They say, “You're a semi-finalist, come to Ira Sohn and we'll announce the winner there.” You have to have your presentation, and everything prepared but knowing that you only have a 20% chance of winning Ira Sohn. So, you go, and obviously, the reason they do this is they don't want you front running if you're the winner or not, because the sun's probably going to pop a little bit if you're a winner. If you're David Einhorn and you're going to pitch your idea during market hours, that's okay for you to front run, but it's not okay for Random Joe who's winning Ira Sohn.
They bring the five or four finalists into a room. One of the judges comes out around like 3:45 or 4 o’clock and says, “Hey, great work everyone. The winner is this person and they're going on to present in 10 minutes,” or something.
Bill: Wow.
Andrew: It's a pretty weird situation where you have to have this presentation ready, you want to be on your best footing, because obviously, it's a big speaking engagement with a lot of names there. You don't know if it's going to-- if all that works going to be for nothing or not.
Bill: Yeah, that's cool. How'd your idea end up working?
Andrew: Actually, pretty poor. Well, it worked really well for a while. Then I think the management team made some pretty big mistakes. If you got in and then got out at the event time, so it was a pitch of La Quinta into the spinoff of CorePoint. I did a lot of work on the cost basis of the hotels, all the opportunity. If you had played just the event, it would have worked out really well. If you had held on-- they did the span. I think they were mismanaged and then COVID hit and COVID just wrecked it.
Bill: That makes sense. Yeah, that's my one fear about being so loud about Qurate, it was a special situation. Now, you see how the business seasons, but the situation worked. Sometimes, that's good enough. You bet the sit and then you move on.
Andrew: Well, you with Qurate-- I learned this a lot of times, but I did learn some lessons from that because, A, I've known Qurate for a long time. But I think you identified, and it's a lesson I've learned and I continue to learn. Sometimes, your story can be right or wrong, but sometimes it's just picking up on the inflection point where the story changes. That can be what matters so much whether-- you could have been right on Qurate for years, but the inflection point is you identified where they returned the capitals of shareholders, obviously, business was hugely benefited by COVID. A lot of times, it's these inflection points and catching them is what matters. I'm trying to think of a company, but sometimes you'll have a company that will-- IAC is actually a pretty good example. They did well, but since the spin of match, the stock has been on fire, and a lot of it's because their huge tail went to their stock, but if you catch the company right before that inflection point, that's actually where a lot of the alpha can be created.
Bill: Yeah. Do you look for that a lot when you're writing? How do you come across your ideas, generally? I know that’s random.
Andrew: I would love to go back to the 2017-2018 timeframe. A, because the valuations were a lot lower. What I was really like, “Hey, Charter, look three years out, five years out.” I see it was trading at a discount, the publicly traded Match shares for a while, it was wild. Right now, I feel a lot more is catching these inflection points where, “Hey, this company has--” especially with the SPAC mania. Again, if a company-- some of the parts investing has a very tough rap for really good reasons. Right now, if you're a company that has a really high growth subsidiary, there's almost never been a better time to some of the parts to invest, because a stock will go and buy that thing for top, top-notch dollar. A lot of the stuff I've been looking at recently has been things that are hitting that inflection point and benefiting from the bubble. We talked about Mike from NonGAAP, I'm a huge stan of his. He really opened my eyes to, “Hey, use equity comp and options as inflection points to determine when this is be accelerating into an inflection point or something.”
Bill: Yeah. To get a clue into management, how they're thinking, because part of the issue that I think that you can run into in situations where there's a high growth sub, is you’ve got to have a management team that's willing to let it go.
Andrew: Yeah, that's exactly right. Again, everyone has a sum of the parts story that they've been pitching for years, and that sum of the parts just never close. I think the thing I've lost the most money investing in, is, A, airlines before the pandemic, but, B, would be companies that have really good assets, but have a controlled voting structure, and just no desire to ever realize the value of those assets. A lot of times, the management-- it was founded by someone that person passed away, and now their son and daughters run it, and they don't really care about the business, but they've got control, and they can build the business for all it's worth. That's just a really tough way to keep losing money on some of the parts. But the interesting thing with this equity compensation angle or a lot of different angles is, you can see-- right before they're ready to incentivize to turn on this value, you can see it in the 8K, or there's a lot of other players on that, but yeah.
Bill: Yeah. That makes sense. I am intrigued by some of the parts analysis, but I always have had an aversion for the reason that you're saying. I need to be able to see why it's going to change. To your point, Mike has done a really good service for the community telling people this is maybe a good way to read the tea leaves.
Andrew: Yeah. Look, I thought I was ahead of people where I used to-- if a company would file on 8K, and they announced a change or an update in their change of control comp, that's basically the golden parachute the CEO gets if the company sold. I thought I was ahead of the game, because I'd read that and be like, “Oh, this company is about to run a sales process.” Charter, they gave Tom Rutledge a pay package that it went all the way up to $600 per share, and the stock was at $300. Actually, a lot less when they gave it to him. I was like, “Tom Rutledge is a very respected CEO. They gave him this thinking this was achievable.” Mike obviously opened my eyes to lots of different situations and ways that that situation could play it out. Yeah, it's really eye opening.
Bill: IAC has been somewhat similar in the way that they're incentivizing Joey.
Andrew: Well, so yeah. Joey has a lot of equity upside and stuff. I think he is more incentivized for long-term value creation. That's a lot of stuff that's very similar to Rutledge. But I see Joey if I remember correctly, his pay package runs up to $600 per share on IAC. I don't think anyone thinks IAC is worth $600 per share right now. I think that is incentivizing, “Hey, if you compound this business at a reasonable rate, you should get to a round $600 per share. But if you do better than that, you're going to get super rich off that $600 per share.” That is more an incentive to drive long term value creation versus a lot of what Mike writes about is, “Hey, this company normally gives equity options in March, they gave it in February this year, that's because they're about to blow out earnings and they wanted to get [crosstalk] strikes before then.”
Bill: Yeah. That makes sense. When you started investing, you came in from credit, how's your style morphed? Because lately, since I've watched you, Charter, IAC, these are more of management teams that are highly respected and compounder types. I guess, IAC is not really-- I don't know that I would call it a compounder in a traditional sense, but they definitely do compound wealth. [crosstalk]
Andrew: I'm going to tell Modest Proposal what you said, and you're going to have some real angry--
Bill: No, no, no, no, no. I am concerned that I am not being precise enough with my language with the identification of a compounder-- they compound wealth, but they're a built-in spin machine, which is I think of as slightly different than a traditional compounder. It's probably just terminology. We would get to the same endpoint. I want no wrath of Modest.
Andrew: At Charter and IAC-- I like to run a pretty concentrated book. When you're looking at something that you're going to put 20% of your book into for five years or something, that takes a lot of work. I'm happy to do a lot of work, but you're only going to find one of those situations if you're lucky and the environment’s right twice a year, just because the work precludes it. This is a big thing I've tried to get better at. You need to build the conviction in something to hold it through, “Hey, it's up 10%, I'm going to quickly sell this for a quick 10% gain.” “Hey, they announced some weak earnings, I'm going to sell this because my thesis is broken,” or something. You need to build that conviction, because it might sound silly, but if you've got 20% of your portfolio in something, and it's up or down 10% in a day, I promise you're going to notice. If you don't have the conviction, you're probably going to make the wrong decision that day. To do that, you need to build up conviction.
In this market, I'm not finding a lot of those things that I can look out three to five years from now and build a compounder on. But I am finding a lot of special situations, and special situations, in general, you're going to size them smaller, but you can do a lot more of them, you can do a lot more of them frequently. I'm just a guy, I'm just trying to swim wherever the action is taking me and right now the action has taking me like-- I just feel there's so many special situations out there that I'm [unintelligible [00:43:04]. I still want to find it like-- Look, we don't talk about it a lot but I wrote up ANGI last summer, especially when Facebook announced that they were going to move into this and ANGI stock was down, it traded down to $11 and said, “Hey, history rhymes. Match traded down to 30 when Facebook was moving to dating.” Match’s $150 stock right now. ANGI, I don't know, it's at 18, obviously it's early because it's only been six or seven months, so we haven't seen a lot but history rhymes. ANGI was a compounder a special situation, it was pretty interesting.
Bill: Yeah. That business back when it was like Angie's List and I was back in my flooring days. This is a while ago. Man, leads from that thing, now it's more of like a lead gen machine. Back in the day when it was just a closed-- I guess a closed loop is the way that I'm thinking about it, that's probably not the right way to say it. It was just a subscription service. If you’ve got a lead off that, you just didn't even have to-- there was not a competitive bid. You could basically walk in and price. I know that that business has changed a lot since then. But interesting to see how that asset has changed as it's shifted hands and IAC is now doing their thing with it.
Andrew: Well, may be tapping into ANGI’s a little beyond [unintelligible [00:44:22] but I do think ANGI is interesting and instructive in like-- one of the things I'm trying to do to get better as an investor, there's a couple things, but one thing is, A, I'm trying to get over my, “Hey, I started buying this when it was at $10 and now it's at $15. I can't buy anymore that price--” [crosstalk] The other thing is, like, I think when I started investing, I was a deep value guy. I wanted to go buy things below price and net asset value, or I wanted to buy things at five times first earnings. I think the big money has been made recently, maybe it’s done in the market, maybe it's not. The big money is made not by saying, “Hey, this trades at seven times price to earnings and I think it trades for 10,” but the big money is made by saying, “Hey, the trailing financials are relevant.” The future of this thing is bright or it trades at 100 times last year's earnings, but it trades at 10 times three years on earnings, it trades at two times, six years on earnings. With Angie's List, I think it's so instructive where you had this great team who is maybe the best marketplace investors in the world, and they were literally telling you. They were saying you, “Hey, the trailing financials are crap, our trends don't look that great. But guess what? We are the best marketplace investors in the history of marketplace investing. We see all the signs that we've seen in prior successful marketplaces. Now, doesn't mean it's guaranteed but we've got all demand. If you look at our history, when we've got the demand, we will find a way to get the supply. We will find a way to monetize it.” They were out here screaming it to you. ANGI was sitting there and the marketplace was doubting them, the early signs are, it hit that inflection point, it's starting to gain a little steam.
Bill: Do you think that part of the lack of success of deep value is a lot of the SPAC and private equity money floating around? I feel a lot of these assets that I would use to look at because I've come the same whatever journey, where I thought deep value was the only answer. Now I'm a little more skeptical of all the deep value names that I look at, because I figured somebody else's diligence them and passed on them. Which is maybe unfair, but I think it's also there's some truth to it. What do you think of that?
Andrew: No. Look, I think you hit it right on the head. In the 60s and 70s, markets were a lot more inefficient, and this deep value stuff could work because nobody really knew how to read a balance sheet and it was more inefficient. Starting in the 90s and 2000s, everything got picked over. There were all these private equity firms with tons of money. If something traded below liquidation value, an activist stepped in and forced them to liquidate or private equity firms stepped in, partnered with management team, bought this thing up, made a fortune. It probably started in the 2012 to 2013 timeframe, anything that traded below net asset value, I would say traded below net asset value for a reason. There was the awful management team who they were just going to loot. They were just going to loot, loot, loot and everything would go to their pockets. Or, it said it was trading at half of book value, but if you market book value today's value, it was trading for four times book value or something. It was either an accounting issue or a management team that just did not care. I think that got picked over. I think one of the things is marketplaces get-- systems evolve, systems get harder, and you have to evolve. If all you want to do is buy things for below net asset value, you're probably not going to outperform these days. A computer can do that. You've got to evolve at times.
Bill: Yeah, the nice thing about the idea of the past is irrelevant and the future is what matters is that requires a level of creativity that I don't think can be outsourced. It's got to be by definition somewhat more fragile, so I think you've got to be pickier as to what you can see, or an investor can see. But I do think that's the human element that can't be replaced.
Andrew: I agree with you. There's a lot more pattern recognition with it. A computer can go recreate a price in that asset value, but a computer can't recreate, A, ANGI’s having all the supply and it's not hit their numbers yet, but if you look at the history of marketplaces, this is going to be successful. It can't recreate that-- Yeah, I think you're exactly right.
Bill: What are some of the patterns that you are naturally attracted to? Are there any? I like scale. I see everything through a scale lens. And also behavior, I look at a lot of stuff through a psychology lens, which pisses me off that I missed software, because that was clearly a psychological element to it that I never--
Andrew: Which one pissed you off?
Bill: Man, software in general. I think it was because I was so tied up on current valuation, rather than thinking about what it would be 5, 10 years out, and I was just hung up on this you can't predict the future stuff. Then I look at, even some of the software that I use today, that's just garbage and my unwillingness to try something that's better, even this recording platform. I've had a couple problems on it. I really don't want to switch to a different one. I know this one, it's easy. Even if it's got problems, I'm not convinced that another one won't. There's a lot of psychology that I think if I had just opened my mind to, I could have seen, but I just wasn't willing to look through that lens. It was a stupid.
Andrew: No, I hear you. The ones I like right now are really the ones where the optionality to-- I've called it leveling up in the past. Twitter, you look at that, on trailing financials, you're like-- Mark Zuckerberg called it, “The clown car that fell into the goldmine,” or whatever, but you would never buy this thing on trailing financials. Then, you look at it, you say, hey, this thing, literally-- I mean, they banned Donald Trump and they de-platformed him and they completely changed his power. Things are a lot different. You look at the power of that platform, the optionality around-- I do the subscription service, but Twitter is how I get most of my subscribers and they make no money from that. There's so many different things that they could level up into. I think that's super interesting.
Then, the other thing I've really been interested in recently, I tweeted this, the New York Times, they grew digital subs 50% last year. I think it's 7 million subs, they grew by 50%. They've got the number two podcast and the number 21 podcast out there. When somebody says New York Times to me, I just think, “Oh, newspaper,” whatever. If I told you, “Hey, here's a company that has people's credit card information, and they're growing subs 50% year over year, and they've got two of the most popular podcasts out there.” If that was a startup, what would that be valued at? That might be valued at $20 billion. I do think there's something really interesting in looking at legacy businesses that have the potential to pivot into something really interesting. Look at what Disney did. Disney switching over to Disney Plus, and using the power of all those platforms. It's really interesting to imagine old world businesses and how they can pivot into something a lot more interesting in the future.
Bill: Do you ever look at Graham Holding company?
Andrew: I have looked at Graham Holding company. Speaking of the incentives, the CEO there has what I believe Warren Buffett called the best incentive system out there. Yeah, I've looked at them a lot. I think some of their venture bets-- the history does not suggest we're dealing with IAC when you talk about Graham.
Bill: Yeah. I got interested in them because they had that podcast angle. I don't know if they still do. I ended up--
Andrew: I think they sold their podcasting business for a big premium actually.
Bill: Yeah. What do you think's going to happen with podcasts? What do you see going on in your own? This one seems to have, I don't want to say leveled out, but there's a consistent a number that I think I know it can hit and it's been really fun. I don't know. There's no barrier to entry, though.
Andrew: For you and me, hopefully, above average guys doing a podcast, I agree, there was-- my podcast started a month before your podcast, but there was no barrier to entry keeping it. For Spotify, I'm so angry. I was bullish on Spotify, I had a little position into him, I sold him two days before the Joe Rogan thing. For Spotify, I do think-- there is no barrier to entry to create a podcast, but there is barrier to entry for Spotify, like the distribution, they're on everybody's homepage, they've got everybody's credit cards, there's going to be a lot of barriers to entry for the ad tech behind podcasts. I've used this example before. I listen to Bill Simmons podcast every now and then, not religiously, but I do enjoy him. One of the ads on his would be, “Hey, if you're in one of these eight states, sign up for Fanduel. Because Fanduel is only available in eight states.” I would always listen to that podcast and I wasn't in one of those eight states and I'd be like, “Oh, well, they're paying to reach 50 states but what they really want is for Spotify to come in and air that advertisement to people in those eight states and then air an different advertisements to people in the other 42 states.” There's going to be a lot of barriers to entry on the ad set behind dynamically inserting ads into these things and building up all of this different stuff. I think Spotify has got a great strategic position. There's no barrier on the podcasting side, but on the podcast tech side, I think they've got a really nice barrier.
Bill: Who do you host yours with? Is it with Anchor?
Andrew: Mine is hosted with Buzzsprout. I don't know why I chose them. I think I just chose them randomly, but yeah, that's who I host it with.
Bill: I went with Libsyn, I'm actually looking--
Andrew: Because you're looking at the stock?
Bill: No. I got interested in the stock a little bit because of how I got recommended into it. The guy that helps me with this, Matthew Passy.
Andrew: I used him when we did the Rangeley Capital Podcast. I'd like to use him again but right now my podcast doesn't require that much editing.
Bill: He said that Libsyn was a good place to host because you don't pay per download. I only pay for what I upload. I can control that a little bit better. Then, I got interested in Libsyn and I don't know that I can quite get there on the stock, but I don't know. A little while ago, it was definitely cheap.
Andrew: I did some research into Libsyn in the past because I'm a fool, but my thing with Libsyn was, it was the same thing you had. I didn't understand the barrier to entry for uploading a podcast. There is stickiness. I wouldn't want to switch my podcast hosts at this point. That seems like it would be tough, though if they raise prices too far, I'm sure they could get me too. I just looked at Libsyn, I was like, What's the need? It didn't feel like it was a super moaty business. I just had trouble with it. Obviously, it's done well. I know a lot of smart people who really like the business.
Bill: They've got an activist involved if I'm not mistaken. I know nothing about the activist though.
Andrew: I think that's right. They also have a lawsuit to cancel a bunch of shares that [crosstalk] I've heard from some people, they think it's a really interesting lawsuit.
Bill: Yeah. Would that fit within your special situation? You’d deem that, right?
Andrew: Oh, yeah. I looked a little bit at the lawsuit, I didn't get super comfortable with Libsyn as a business. That's another one. There was an activist, new management, all this. I think one of the most consistently mispriced things in the market is companies that have big upside from a lawsuit because people like you and me that are probably the marginal buyer of most stocks and we can't do a lot of-- it's very difficult to do due diligence of a legal case and whenever I read one, I'll read both sides, because they have to do filings. Lawyers are good, man.
Bill: Yeah. [laughs]
Andrew: [crosstalk] -and be like, “Oh, this seems like a 50/50 case.” I'll bring it to a lawyer friend and they'll be like, “Oh, no, this company is just demolishing them in court.” I think it's really tough because most of us don't have legal backgrounds, due diligence in these things is different than valuing a company. It requires a lot of work stay on top of them, and there just aren't many of them. I think things that scale get priced out of the market pretty quickly. Diligence in legal things does not scale, so I think it's very difficult to price that out.
Bill: Yeah. To your point, even if you do have the competence, it's still-- if it goes in front of a judge, you still playing a probability game. It's very, very hard to get an attorney to tell you, “Yes, I know, this is going to happen,” right?
Andrew: I don't disagree with you. Let me give you an example that was in real time last year. The former TiVo, it merged into a business called Xperi. XPER is the ticker. They had this lawsuit, TiVo, they license all of their technology, they've got patents on everything that has to do with a DVR. Comcast, who is the biggest provider of DVRs in the country, played hardball with them and said, “We don't want to pay your licensing fees.” TiVo sued them, and all their trailing financials-- the Comcast thing was a double whammy, because not only were they not getting the money they would normally get from Comcast, which is super high margin, but they actually had the expenses of these huge legal fees for suing Comcast. They had it for years. This was a four-year thing, and they would say, “Hey, we're really confident in this,” but nobody gave them any credit and it was probably deemed because most people value things on EVs, EBITDA or something and they're EBITDA included a lot of these legal expenses. If you went and looked, everyone had licensed this technology, including Charlie Ergen, Dish’s CEO. If you've ever heard any stories in telecom, Charlie Ergen does not license things freely. He agreed to pay this because he looked at the patent and he looked at everything, he said, “Oh shit. If I don't license this, I'm going to get rolled over in court.” Nobody gave them any credit for it.
Then, one day, I think it was with Q3 earnings, they announced, “Hey, we suffered with Comcast, we're going to get $200 million. Plus, they're going to pay us a fee going forward. It starts up 50%.” If you had done the work on this company, you saw, yeah, it's probably 100% they're going to win the Comcast thing, but everything around this set of patents I was telling you, they're pretty likely to win this deal. But the market was giving them zero credit for it, because it's a one-off, it doesn't go into the numbers easily, it actually pings their trailing numbers. That's one that played out. I was on it, but not a big enough size. I think that's just one example of the type of things that can get overlooked because they're one-off and they're legals.
Bill: Do you think that part of what TiVo suffers from too is people's perception is that it's just this old company, and there aren't that many people that are really willing to put the time in to dig into the patents? Is it over? Do you think there's a complication factor there? Or, do you think the market’s smart enough to ferret that out?
Andrew: Yeah, I think there's definitely a complication factor. I think the best bear, I heard was TiVo had this suit against Comcast for years. They agreed to merge in a stock for stock merger with Xperi who was another patent company. The best bear case was, “Hey, if they had so much upside from the Comcast case, why do they agree to a stock for stock merger? Why wouldn't they hold off with a Comcast thing?” I don't particularly have a great answer for that. It happens all the times. People get stuck in their head. “Hey, I can't look at Qurate because I got burned on it at $20 when the merger they announced with HSN wasn't very good, and that's a dying business, and I don't want to look at it.” I definitely think you can get those things and there's often opportunities if you can bring a fresh lens to it.
Bill: Yeah. When I looked at TiVo, I dug into the K a little bit. Then, honestly, I was just like, “I'm not going to be able to figure this stuff out.” I don't know how silly that was, the opportunity cost probably wasn't that high of me passing on that, but it was in the too hard pile.
Andrew: I'm with you. That is one thing with a lot of these legal situations. You size them small, because they're attached TiVo which you might not love the business, you might have competence on the legal case, which you might have a lot of question marks around the other thing. I was just more using that as an example where the market wasn't pricing in anything for this Comcast lawsuit and if you had done any work on it, it was pretty clear that they were very likely to win and when they did, the business would look a lot different.
Bill: That makes sense. Let me ask you a question since you just commented on this. The smaller the size, have you gone back and seen to the extent, does that drag on performance? I'm struggling with it right, now is really the question that I'm asking is to solve my own head. Because part of me is saying, there's a couple ideas-- Naked Wines is one that I've said that I'm long. I'm not fully there on it. I think that the valuation given to what I think it could be in five years is pretty inexpensive relative to the potential, but I also think that there's some real problems that I'm not fully sold on with the consumer adoption. Part of me is, like, “Well, is it worth a 2% bet or a 1.5% percent bet? Or should I just put that capital into a better idea, like Liberty Broadband?” Obviously, none of this financial advice. I have a sense of what I think is-- like Liberty Broadband, I think, is a lot more sound from an execution standpoint. The upside, I think, is much smaller, but the downside probably-- well, I don't know what the downside is in Naked. I think it's trading relatively close to replacement cost. If it's worth replacing, which I think is a question people can debate.
Andrew: Was the question small--
Bill: Sorry, I just rambled.
Andrew: No, I love it. Look, Naked Wines, A, I passed on it several years ago. I still have a box of Naked Wines sitting in my WeWork office that I haven't been to in a year because COVID. But look, Elliot Turner, who I think gave most of us the idea, I looked at it two years ago. Anything Elliot pitches, I'm like, “Elliott is super smart. I want to take a dive into it.” I just couldn't go back into it because that stock has run, but were you asking small in terms of small company size or small in terms of small position sizing?
Bill: No, position size.
Andrew: Oh, I think it depends. I like to run concentrated. Again, it depends if you're doing compounder versus special situations. I think special situations you need to blend those out a little bit more and more event-y type stuff because if you're betting on a spin or something, it's an event but there's still some value questions and stuff. Whereas if you're betting on cable just taking over the world, I think you can get pretty comfortable in that thesis and ride that out. I don't know.
Bill: Greenblatt, he was concentrated and special situation, which is like--
Andrew: Greenblatt is interesting. I think in a lot of ways-- to bring it back to the person who I'm the number one stan for, Mike. I think Greenblatt, he identified events that nobody was looking at properly. He identified incentives. The famous one is the Malone with Liberty Media, and he bought up all the rights. He concentrated. He saw something that was mispriced, and he swung really, really freaking hard at it. It was mispriced, but he had everything aligned. If you think about Liberty Media, it was what turned out to be a great business. Cable channels, great business. All-time manager, and the all-time manager was pouring as much of his net worth as humanly possible into this thing.
When I think about something like Charter, Charter was a historically stable business, but one that people thought was not good because of video, which me and a lot of other people thought, “Hey, this is actually a great business when it becomes broadband, 95% margins, huge cash flow. No one's ever going to come in. It's got great pricing power.” When you think about Charter, it was, “Hey, this is a business people thinks an average business that's actually becoming a great business run by a great manager and a great capital allocator, who's going to become a billionaire if he hits a target. He's super incentivized. You had all these things lining up and you could make a huge swing into it.”
Whereas Naked Wines, I leave it aside for a second, but something like TiVo, which I described earlier, so-so business, patent trolls, a lot of people don't like it. I don't super love patent trolls, but you had this great legal angle, it was really cheap. They bought back a lot of shares. You probably can't swing as hard at that as a Comcast, but you could probably buy a basket of those things and do pretty darn well.
Bill: Yeah. In a non-correlated way, right? Theoretically.
Andrew: Yeah. The Comcast suit, they won it in November, but they just as easily could have won it in April, and the stock probably would have been off even though the whole market was melting down because of the pandemic.
Bill: Yeah. It's interesting. You talk about starting out in deep value-- I think back to the person that I was when I first read Buffett and what I thought he was saying, and it's so embarrassing. I wish me now could talk to me then. This is the classic mistake of you're smart too late, and I'm still working on getting smarter. I messed around with Cleveland-Cliffs. I still do like that CEO. I love that guy. That guy cracks me up, but it's just not the kind of business that you can really own, I don't think, and make real money on right. You can make some money on a rerating or whatever.
Andrew: Yeah. This applies to, are you buying into cyclicals versus compounders? If you're buying to cyclicals, what you're looking to do is buy them at the bottom of the cycle and then flip them at the top of the cycle pretty much. That's a generalization because there are some most people would consider home builder cyclicals but there are some home builder that have done incredibly over time. If you're doing cyclicals, you just need to know what you're there for. You're not there for this thing to, compound EBITDA and be a platform and sell this thing for 24 times in 10 years. You're looking to sell it for 50% gain in four months when oil prices go up or something.
Bill: Yeah, that's right. I do have to ask you, because I know you're obsessed with it. Where are you at on cruise lines?
Andrew: Yeah, so cruise line. Look--
Bill: Cruise is going to cruise, man.
Andrew: I specifically focus on cruise lines because for people who don't follow me on Twitter, in April, there was an article and it was interviewing people, I think was in The Region. Their CEO said, “Look, I know a lot of you read stories about people trapped on cruise ships for 45 days and COVID’s just running like crazy through the cruise ship and think, ‘Oh, these people will never cruise again.’ Actually, our research shows that those people say, ‘Norwegian Cruise Lines is a great cruise ship, and I can't wait to go on another cruise.’”
Bill: [laughs]
Andrew: I was like, “Oh my God, I can't believe this.” That was the thing that brought me in. At the end of this article, there was a quote from a woman who said, “I'm addicted to cruising like a rat is addicted to cocaine. I just can't stop.”
Bill: Wow.
Andrew: I saw this, and I was like, “Oh my God, I can't believe that.” Just the passion for cruising was what attracted me to this. People could be trapped on ships, stuck at sea, COVID running through it, and they were like, “I've just got to get my buffet ice cream. I can't turn this down.” Anyway, [unintelligible [01:08:05] in December, I was doing all these sweeps because especially after the vaccine bump, the cruise line stocks were down on the year but if you looked adjusted for all the equity they raised, all the debt there was and stuff, they were actually trading at enterprise values equal to or higher than the start of 2020. The market was looking at these and saying-- hey, a cruise line, it's not-- like a movie theater, there's some depreciation but if you mothball that, it's not like it's just falling apart. A cruise ship sits in saltwater, it is getting eaten alive. They have to have crew members on it even when they're not running. Cruise lines were burning hundreds of millions of dollars of cash every year. The market was leaning in and saying, “Ignore the cash burn. Ignore the disaster. Ignore the fact that it's going to take years for the cruise industry to return.” The cruise industry is more valuable today than it was at the start of the pandemic.
I was looking at this and saying, “I just can't understand how this could be possible.” AMC, even before the WallStreetBets fueled it, AMCs enterprise value because they had to raise a lot of money. They have lease operating leases. Yeah, their assets are depreciated but they have to pay their landlords and stuff. I was looking at and saying, “Oh my God, this company is going through an existential crisis.” Wonder Woman 1984 is coming out on streaming. Disney is not going to release a Disney movie into theaters when COVID’s is running rampant and they're going to have, “Hey, mommy and daddy took the kids to see a Little Mermaid and mommy died because she got COVID in the theater.” Disney's not--[crosstalk]
Bill: That would mess up your mental association with Disney.
Andrew: Yeah, they're not releasing movies in theater. Even if they would, if capacity is limited to 25%, movie theaters can't make a profit, movie companies are going to release-- it was just a disaster. AMC’s enterprise value was higher than it started at the year. I was looking at these, I was like, you can run any assumptions on these, it doesn't make any sense that these things would be valued like this, and I've tried to look at a lot of different ways. I think there is something to, “Hey, a cruise line is an operating leverage business. When people can go back to cruising--" my first vacation when I post-COVID, you can see how ridiculous my hair has gotten. First, I'll get a haircut and then I'll go on a vacation. Yeah, I'll probably like spend a little more than I normally would. If you're a cruise ship, or who's a rat addicted to cocaine, and you haven't been able to go on a cruise ship in two years. Yeah, you'll probably buy a couple extra drinks and pay for a premium package and stuff, so you'll get a little boost and profitability, but the market was looking at something much beyond that to value these things there. I just grew up obsessed with the evaluation. I still think the cruise ships, AMC, they're selling equity at paces you wouldn't believe, and I think that's because they look and they say, “Hey, we're on death's doorstep, our equity prices are really attractive way to raise money.” I personally think all the stocks will probably drift down over the near to medium term because they're just really buoyed by this, “Hey, reopening” play but I think they're misinterpreting just how slow the reopening is going to be and how much expense to get there and stuff. It's just a really interesting group of companies.
Bill: I've felt similarly about airlines. Actually, the cruises, in retrospect, are one of the dumbest tweets I made in March of 2020 because my mom has a financial advisor, and this is pre-bailout or anything. she really can't afford to take real risk. She asked the guy for a stock tip, and he was like, “Oh, you should buy Royal Caribbean.” I was livid at the suggestion given what I thought her risk tolerance should be. I said, “I want to go punch this guy.” Meanwhile, it's up 3X, 4X or whatever, since he said to buy it.
Andrew: It is interesting. I think the thing I miss most of it, at the end of March, I thought, every travel company, and every restaurant and every hotel, maybe not those companies, but every travel company, and every restaurant in America was going to go bankrupt because I looked at these-- with airlines, “Hey, the airlines are effectively going to be operating at 25% capacity for the next year.” For a while, it's going to be 0% capacity. These things have huge operating leverage. They've got huge debt burdens. I looked at and I was like, “There's no freaking way that these things are not going to be able to file, they have to restructure.” Thanks to, I think, a lot of government support, a lot of Fed, but the market took a much longer view. I never doubted that, “Hey, the airlines three years from now they're worth 10 times EBITDA,” or something like that. I'm just pulling a number out my head. What I doubted was these things were 6X levered, and I doubted that the market would look and say, “Well, there's four terms of equity three years below that three years from now. We'll let them raise equity,” or whatever. I thought all these things we're going to have to refile. I thought all of them were going to go bankrupt. You look at a lot of these restaurant stocks. Chipotle has benefited a lot because that's fast casual. People can take it out. A lot of these restaurant companies that are currently reporting zero sales, not flat same store sales, they're literally reporting zero sales, and their stocks are barely budged because the market feels perfectly comfortable looking out two years into the future and saying, “Oh, yeah, we'll value you on that.” I just didn't think the market would do that because these businesses needed capital. All these businesses run negative working capital and I don't think anybody ever ran in their model, “Hey, what if a restaurant isn't allowed to operate for four months?” So, they needed capital just to fund that working capital. I just didn't think that the markets would give them the capital to fund.
Cruise ships, same thing. I don't think the cruise lines thought they were going to survive because they were selling equity at rates you wouldn't believe, at the absolute bottom, but I don't think they survive, and the market took a much longer view than I thought it would.
Bill: Yeah, that's something that Modest has said in the past. I think it was almost a year ago or so that-- now, it's almost COVID, but where he had said the market looks way longer. I never understand that people say that it's short term. I think that once the liquidity crisis was taken off the table, that thesis was pretty much proven. The thing that I missed-- He and I even DMed, I don't do it often with him but we were around then or maybe April, and we were talking about Gavin Baker saying that, “There's a point in the cycle when you have to do what's really uncomfortable.” I just was never willing to rotate into the riskier stuff. It worked out fine. I'm not mad at myself or anything. I was more concerned with making sure that I survived for my family than really making some hero call, but in retrospect, I probably should have done that.
Andrew: No, I'm just mad because I just think the returns can be better, something like AerCap was very big into for a long time and I basically sold at the bottom because if every airline company goes bankrupt which I thought they all would, AerCap goes bankruptcy, who's going to need all these planes? There's going to be playing overruns. The right play and it's very easy in hindsight, I don't think AerCap was the one I would dump but I held on to my Charter shares. I made Charter stand, you can read all my research, but at the bottom of the cycle the answer is not to be in Charter, the answer is to be-- there were a lot of businesses that I love that I thought were going to survive. Some of the mall companies. A lot of people look at mall companies say, “Oh, these are zeros,” but some of them own great assets. A lot of them look super leveraged, but all the debt is on the malls, and may switch for a while. I did analysis at the bottom and I was like, “Hey, if you look at their non-core assets that they have no debt on, it covers the stock price right now.” They don't have that much corporate debt, so you could buy this thing for like-- The apartment building next door to them, so they own that, and they have no debt on that. If you value that and some other stuff, I could get to $5 per share, which is where the share prices stay. You are getting a free call option on all of their other malls, which some of these malls put up huge number. You're going to free call option and the stocks like a triple since then. The answer was not to be in Charter, it was to be going to find more-- I'm just throwing May switch out but it was more interesting situations like that.
Bill: Well, Simon Property Group, David, he came out of pocket. I think it was at 55 bucks a share, I don't know where it is right now. When I saw him make that buy, I probably should have said like, “Oh, I should check that out.” I don't know, man, to be honest, even with Charter, going into March, I was thinking, “How are people going to service their cable--?” In the very beginning, I didn't know what the heck the world was going to look like. I've never seen an economy stop. I didn't buy more. I didn't sell, thankfully. But I would be lying if I didn't say that that debt did worry me in the beginning.
Andrew: I had people who told me that like, “Hey, what if people can't pay their cable?” To me, the answer was like, “Look, if you're worried about Charter solvency, or you're worried about people not being their--” we're talking about something different.
Bill: Yeah, that's right. Then you're talking about a meltdown.
Andrew: Yeah, go buy guns, because now gun stocks, go buy guns, because we're going into the apocalypse time. To me, that wasn't the concern. You saw this with Congress. If things get bad enough, they're just going to start mailing checks to people. I always felt pretty good about Charter. I didn't think the whole world was going to melt down, but I definitely heard it from people. It was nerve racking for a while for sure. To me, the better cases were something like Match. When I got my IAC set the Match shares, I sold them pretty quickly, because I was like, “We're in a pandemic. Nobody's going to meet up in person.” I met my wife from a Match competitor, but nobody's going to meet up in person, this could break network effects, because the whole reason you go on Tinder is because everyone else is on Tinder. Well, if nobody uses Tinder for six months, that opens up the opportunity for a Tinder competitor to grab all the people when they start coming back on. I think the opportunities in things like Match where, “Hey, people still want to make that connection,” that network effect doesn't get broken.
Bill: Yeah. That's right. I think those are the type of concerns that you need to be thinking about when you're in those businesses, especially since it's all an intangible asset anyway. It's not as if-- something like Cheniere, for instance. For those that don't know, it's like a natural gas exporter-importer. Those assets can't be replaced. If that's ever going to happen, again, it's got to happen through those terminals, and maybe a couple others, but fundamentally, that asset base is strong. Network effects are, by definition, theoretically more tenuous. They can unravel.
Andrew: I thought a lot of the network effects would get broken. I think of something like-- Yelp has much looser network effects, but I thought or something like Yelp, the biggest effect they have is, similar to Google, like when you go Google a big moat for them is the ingrained habit of typing in google.com to go search for something right. If you didn't search for six months, it's possible Bing can lure you over because they could create that habit in some form. For Yelp, I was really nervous. The big thing for Yelp is, when you want to go to a restaurant on Friday night, you open up Yelp. That's an ingrained habit. Well, if you don't go to a restaurant for nine months, I was really concerned that you might just switch over to Google Maps for the review or something. You've broken that habit. A lot of these companies kept that network effect and people kept using them a lot better than I would have thought at the beginning of the pandemic.
Bill: That was actually-- not that I thought Starbucks would be in trouble, and I still struggle mentally with the equity valuation with Starbucks, but I was concerned and do remain so, but I also am open to the idea that Asia is such a big opportunity, it may not matter. I know a fair amount of people that invested more money than I ever thought they would in an at-home coffeemaker. I've seen the comps on Starbucks are pretty strong actually relative to where I thought they would be. I still don't trust it. We'll see what happens when there's other legitimate dining options that are open and it's not like a drive-thru world because it's-- I just think about myself and my friends habits and we're all making a whole lot more coffee at home. But things have reverted much quicker than I thought they would, but that was a mistake on my part.
Andrew: One of the most interesting ones is like Peloton right now, right?
Bill: Yes.
Andrew: [crosstalk]
Bill: Oh, let's talk about this, for sure.
Andrew: I've been obsessed with Peloton. A, because I got a Peloton, I love it and I wish I'd gotten one when the stock came out because I wrote a bearish note which-- I did not short it or anything, anything goodness would be I would never short a-- high NPS growth company like Peloton. I wrote a bearish note, when it came out, I was like $10 million for this, look at the unit count, it's no frickin’ chance. Now, I really appreciate how passionate the user base is, how great the brand is and stuff. Now, there is a big question. Everyone is working out at home on their Peloton. When things reopen, me, I like to lift weights more than I like cycle. Am I going to keep using the Peloton so much? Or am I going to switch a lot of it back into the gym? Peloton, it's in my house now. It wasn't in my house a year ago. I would guess I'm going to stick with a lot of the Peloton. It's interesting, like how does that habit change, going to the gym, getting Starbucks in the morning? All this type of stuff.
Bill: Dude, my wife, we're building a house and she's like, “Well, do we need a room for your Peloton?” I was like, “No. We don't know. We don't need a dedicated--” [laughs]
Andrew: What are you talking about, Bill? Of course, you need a Peloton room.
Bill: [laughs] No, we don't need to design a house around the Peloton. But it was a legitimate question that we had, and I said, “No, I can just go out to the garage or something and use it. That's not the end of the world.”
Andrew: Peloton, I've looked at it, at this valuation, it's tough for me to want to get excited about it. You do look at it. you say, “Hey, think about how good the brand is.” I laid this out, like, it's a $40 billion brand. Peloton is going to have an apparel brand to it. The instructors-- [crosstalk], they're going to build a $20 billion apparel business out of that thing. You just think about all the latter opportunities from something that has your credit card, has a great NPS and that people use basically every day. It's just incredible.
Bill: How do you think when you're thinking about that? We're not talking about the stock, just business wise. How do you think when Lululemon buys Mirror, does that impact anything for you or not really?
Bill: It's something I've been thinking about a lot lately. I did a premium post and it's bringing back all to the SPACs. This is a premium case study I put on the website so people can go look, but there was this company called Worthington. A former employee of theirs started up Nikola, and because he started up, Nikola, they made a $2 million investment into Nikola. When Nikola went public through the SPAC, that $2 million dollar investment was worth $1 billion. It was the literal investment of a lifetime. It’s one of the best investments of all time. They've got a couple other small equity investments on their books. You look at that, and you say, “Well, they just shorted a $2 million venture capital investment into a billion dollars. How do I think about those small equity investments on ___? Do I value that cost? Do I value that zero?” Or, you're not going to treat it like a $10 billion investment but do I just put a little bit of room in my numbers for there to be a call option on that?
I think the right answer for Worthington is, no, Nikola was a former employee, complete lock. There's all this stuff around Nikola. One of the things we didn't talk about SPACs is-- we should talk about in a second, about the due diligence and the level of the craziness that's going on there. I don't think you'd give them any benefit for that. Something like IAC, they've done it 20 times before. When they buy care.com, most people are going throw care.com on their balance sheet for I think they paid $400 million for it. They're going to throw it on for $400 million. I don't think that's right. I think you look at and you say, “Hey, the best marketplace investor in the world just bought this business. Maybe I put a little bit of upside on that.” When I value all 10 of their equity investments and all 10 of them are worth a billion dollars at costs, probably value that at $2 billion just because three of them are going to pop. I don't know, maybe you don't want to do that, maybe you do, but it's very tough to think about that, it's one thing I've been debating a lot. I don't know where we're going, I'm just rambling over here.
Bill: No, I think that's true. I think care.com is a very interesting asset in the IAC world. The one thing that's really shocking to me that IAC is, they have the random public assets right. Wikipedia is not what I associate them or not-- or Investopedia rather. Yeah, my bad, wrong pedia. But it is a really good asset. It may not generate a ton of growth or whatever but when you think about that webpage has been around forever and remains very evergreen. They're very good at creating the evergreen content. When I got interested in them was when a-- one, seeing Modest tweet about them, “I think you're an idiot if you're not--" If Modest is consistently pounding the table on any management team and you don't at least open your mind to it, I think you're probably doing yourself a disservice. Not investment advice, that's thinking advice. Then Kara Swisher did an interview with the guy that turned around Ask Jeeves, and I thought that was a really interesting interview. I liked how they thought, then like, Barry Diller is the man.
Andrew: Yeah. Look, Dotdash isn't going to change anyone's world, though. I do know some-- I think it's Mule on Twitter, he runs the Mule substack, which I love. He tweeted that Dotdash what he's most excited about. It's not the asset I'm most excited about. I think it just shows these guys like, IAC, they put the incentive structure in place, they put smart, talented people into internet and marketplace companies, and some of them are going to strike out, but some of them are going to be hits, and some of them are going to be unexpected hits, like Dotdash.
Bill: Yeah. How much of your-- when you do something, do you go out and talk to other people about sentiment and stuff?
Andrew: Very little, I would say. It's something I have trouble with. I get lots of emails from people like, “Hey, have you seen this sell side note?” The answer is almost always, “No.” I think sell side, they are short guys. I do think part of investing is you need to have a differentiated view on something. I think if you're reading a lot of sell side notes, it's not that there's an issue with it, but what you read is eventually what you think. I think if you're reading a lot of sell-side notes, eventually that's going to be how you think and you're going to have a sell-side mindset. Not to dunk on sell-side people, because I like a lot of them. They're on the sell-side for a reason, and the reason is they can tell a good story, but they probably aren't out there generating alpha. I think if you want to do that, you need to be thinking for yourself a little bit. They're smart guys, like if you're interested in Qurate, and I'm trying to get up to speed, I'll probably send a note, in general, I tried to develop all my thoughts myself, and especially with sentiment. Sentiment goes back to-- if somebody's saying sentiment’s really bad or really good, it's probably because of the price and they're probably doing a lot of price anchoring there. I'd almost rather do my work, get bullish on a company, not look at their chart or anything, and then decide, “Hey, if this is at 10, I'm going to buy it because I think it's worth 30 three years from now,” and then be surprised when I look at the price and see what it is.
Bill: Can we talk real quick about how you're like TB12 of investing. When you posted all of your reading-- when you did that public accountability thing, what did you say that you tried to do a 10-K a day or something like that? When you posted that, I thought that was awesome. Do you still post that publicly? Or, is that a thing you did-- [crosstalk]
Andrew: No, I don’t post it publicly anymore. I’m probably only doing a 10-K every two days at this point, because there's other stuff. It really stopped turning the pandemic, to be honest with you. I was looking at so many different things so quickly and things were moving too quickly. That's one of the funny things that pandemic taught me. If you read a 10-K for a company that would have literally published on February 15, 2020 and you read it in early April, it was almost meaningless. You're reading the cruise line 10-Ks in early April, I was like, “Okay, cool. The company made $4 billion in 2019.” But now, their moats are selling right now. It is interesting. I feel I go in waves with it. Sometimes, all I want to do is read 10-Ks. Then sometimes like, you know what, obviously, you've got to look at the 10-K, but it's almost better to be reading other things. I go in waves with that.
Bill: Well, I guess what I was really referring to, is I like how you set out your-- It was a public accountability mechanism-
Andrew: Yeah.
Bill: -when you posted what tried to do to every day to make yourself better. I thought that was a very cool move.
Andrew: Actually, I have this in my notes. I think as investor, you're always trying to get better. I have wondered when do investors peak? Tom Brady, he's 43, he's still peaking, apparently, but I would bet most investors peak in their late 30s to early 40s, would be my guess. How do you improve your process? I'm still 32. That would mean I’d probably peak in five or six years. How do I improve my process? How do I get to the best version of myself when I'm at my peak? Again, it's about building conviction. One thing I'm trying to do is when I find something I think it's really interesting, how do I do enough work and make sure that I'm good enough and confident of my skills, so that I can swing really hard when the right opportunity comes, because you don't get a lot of opportunities and when you do, if you don't swing hard enough, that's the worst thing you can do to your portfolio. Buying something having to be down 80% sucks but buying Apple and putting 1% of your portfolio into it in 2000, instead of 10% of your portfolio, that's where you really messed up.
Bill: Yeah. I've gone back and forth on this. I still don't know. The concentrated method of running a book is the thing that resonates the most with me. Now, anyone listening to this would say, “Well, why do you have a small position in Naked Wines?” Part of the reason is I actually liked the product, and I like the company, and it's my money, so I can do that. If I was running a fund, I don't think that would hit my hurdle as to what I could put in yet. I've studied David Gardner, and these guys like Matt Cochran I talk to a fair amount, and he's helped me understand the Motley Fool method of letting your winners grow. The interesting thing is you get to the same place of concentration eventually. The guy that runs it, David Gardner, that guy-- if you bought Amazon super young, it's probably a huge part of your portfolio now. He actually seems to re-recommend things as they go higher. Either way, I think you end up getting pretty concentrated in your best ideas. It's just a matter of whether or not they grow into it or whether or not it's at cost.
Andrew: Yeah. Look, if you get concentrated in Amazon because you put 1% of your net worth into them in 1995, great, you did really well. The life changing is when you put a significant amount of your portfolio into something early, and then it becomes the Amazon or something. Again, if you run hundred 1% positions and one of them is Amazon, like you're going to do really well. The way you really outperform is you run ten 10% positions, and one of them is Amazon or something.
Bill: Yeah, I think that's right. The other thing is, they really run a subscription business. That's a cash cow. At its core, that's what they really run.
Andrew: Yeah.
Bill: Their methodology is the way to sell the subscription.
Andrew: As someone who runs a subscription service, I'm never going to dunk on another one. I do wonder like with the Motley Fool there, you do run into the issue of, “Hey, if I pitch 10 stocks a day and 10 stocks tomorrow.” Yeah, one of them's going to be Amazon. There's a former value investor who's now running a very popular subscription newsletter, and once a week, he'll come on, and he'll say, “Hey, I called this stock. I dumped it. I called it right at the bottom.” You'd be like, but you did five calls that week, and that's the only one you're shouting out.” You do run into that issue.
Bill: You also shut down because you felt you underperformed. So, that's interesting.
Andrew: I wasn't mentioned anyone by name. [crosstalk]
Bill: I don't think, did we name a single person? Everybody else can guess who it is that we're talking about. On the back of that, let's talk about SPAC due diligence. What's going on there?
Andrew: We talked earlier about how the SPACs are really attractive from the IPO, from a risk-reward perspective, if you're buying them close to trust and all this. The issue is, the real magic comes, the founders put up-- if it's a $200 million SPAC, they put up $8 million of what's called risk capital. If the deal fails, that $8 million is gone. That goes to cover the banking fees, all that stuff. But if the deal succeeds, that $8 million is going to turn into it-- again, the numbers can vary, but it's basically 20% of the company. If you think about a $200 million IPO, they get 20% of the company, that $8 million is turned into $40 or $50 million. If the stocks a screamer, that $40 or $50 million is a double or triple, a lot of these people are making hundreds of millions of dollars on that. But the issue is you have to do a deal, and you have to get the deal done. They've got a certain amount of time before they liquidate.
What happens is, as the easy SPAC targets go away, you're encouraged to do deals quickly, you're encouraged to do deals that other people wouldn't do, maybe pay top dollar or maybe just ignore things and due diligence. I think we've seen a lot of shenanigans here. Last week, there was a short report on Clover. That was Chamath’s. I think it was IPOC was the SPAC. They had a DOJ investigation outstanding that they didn't disclose in their SPAC process, and the short seller revealed it. Then the company comes out and confirms and says, “Yes, we had this, but we didn't feel we need to disclose it.” They said Chamath was aware of it. I don't know. Was he aware of it or did he see a sexy story and he took it public? It's tough to say. I don't know, but I've never seen a company have a DOJ investigation and feel they can go public without disclosing it.
You look at Nikola. We talked about Nikola earlier. Nikola went public because they were a sexy EV story and all this stuff. They had this product and it turned out their product was, they took a truck and they literally rolled it down the hill. They said it was a working prototype, but all they did was roll a truck down a hill and they didn't have a working prototype, or there was a-- Triterras, TRIT, which went public and it was the bitcoin, I think they called it the blockchain of trading finance or something. Then a short report comes out, and the company, they bought it from originally, they were going to buy the parent, but the parent was about to go bankrupt, so they just bought this company, and the parent was all of their revenue, and all this stuff. They didn't disclose any of this in the process. I don't know if it's shady due diligence, I suspect that's part of it. Or, if they're just willingly ignoring all this stuff, when they bring the sexy story, they come to investors, but either way, there's a lot of risk here and it's not getting captured. Yeah, it's really crazy to me how wild I think the lack of due diligence is here.
Bill: Yeah. Well, it's a lot of capital and a lot of fees that are generated if the deals get done. So, the incentives aren't to be super picky.
Andrew: Again, they're incentivized to put their best foot forward, because if the shareholders vote the deal down, they're going to lose $8 million. So, they need to put their best foot forward, so that they can get the deals done. Then they can go raise their second and third back and they can do follow-on offers and stuff. I get it. When bubbles happen and everybody's encouraged to get a deal, they're ignoring a lot. I think they're ignoring a lot of red flags. I think it ends in tears, a lot of these things. Every time Chamath announces a deal, and Chamath is someone who-- he's extremely controversial and there's parts of him I really like and parts of him I really don't. he did Clover, and I used to cover healthcare, and I got so many emails from people, when he did Clover at-- let's say, he did at a $10 billion valuation, I can't remember. They were like, Clover was in the market to raise money at, and again, I'm just making rough numbers up, at a $4 billion valuation and no one would touch them. He's taking them public out of $10 billion. Literally, healthcare specialists I knew were laughing at this and saying it's all I can do not to short this thing because this thing is such a piece of shit and I can't believe valued at this. Again, the Nikola stuff, the Triterras stuff.
Opendoor is another one. That was IPOB for Chamath. Everyone said, Opendoor was trying to raise money and they could not raise money at anywhere close to [unintelligible [01:37:03]. They were locked out the market. Then, Chamath took them public at five times everyone thought they were worth, their stock tripled. paper gains will cover up a lot of wrongdoing, but you do wonder how much diligence was put there? How do you price this when no one else was paying attention to this? Maybe the dude, he's a trend spotter. My favorite thing is he pitched-- I think it was Ira Sohn 2017. He pitched Tesla converts and basically, he ignored convertible math. He said, “Hey, Tesla converts give you no downside and 95% upside,” and basically ignored what you're basically just buying a call option and putting stuff. Anyone who was familiar with converts dumped on this, but he was hellaciously right. Those things worked out crazy. He was in bitcoin, he was Amazon. Maybe he's just really good at spotting sexy stories and getting on trends early. Or maybe he's just riding the bubble wave. When it all comes crashing down-- the Clover, Opendoor missed due diligence destroys him. Either way, he's a fascinating character. Some of these things are just-- you can see both sides and both sides are really interesting.
Bill: I watched the SoFi presentation, I think it was SoFi. 2025 estimated earnings. Okay. [laughs] We’ll see. Look, it could work. I have no idea. All I know is that my capital is going other places.
Andrew: No, I'm with you. It could work. SoFI is so interesting because he does SoFi. I think he's the person who took the GameStop pump to the next level when he bought the-- [crosstalk]
Bill: That really upset me.
Andrew: [crosstalk] -and he tweeted out. I'm with you. We should talk about that because I feel like an old person how upset it was. I can't remember if we talked about this before the pod or on the pod, but it really upset me that he did that. I also think the SEC needs to look into, maybe that's legal-- I don't know, if celebrities can tweet out stocks and send these stocks racing. Elon Musk has done it with four different companies in the past two weeks. He tweets out, use Signal, and Signal stock is up 1000% and it's a completely different company. The SEC needs to think about the power that celebrities have to move stocks. But Chamath tweeting out I bought $115 call options and just throwing fuel on this fire. Again, he saw a trend, he exploited it, he benefited from it. I think a lot of people lost money. But then, he used that say, “Hey, leave Robinhood and go to SoFi.” It was just crazy all around.
Bill: Yeah, I could not agree more. Then on top of that, to come in and be like, “I donated all my money to charity, and I was just trying to learn.” Like, bro, you're taking SPACs public and you don't know about buying call options on a busted retailer? You're really going to say that you're trying to learn here? That's the excuse? Okay. I can't believe that the news anchor let that go. I would have so many follow ups to, “I just wanted to learn.”
Andrew: I'm with you. He tweeted that and I saw a lot of people-- For those who don't know the story, Wednesday morning or Tuesday morning, he tweeted, what should I buy to speculate or something, and people tweeted GameStop, and he bought those calls. I think that's what took it to the next level. Then he sold him, and he made a profit. It's literally the definition of pump it up. He bought short stock options. He told people what he's doing, the stock went to the moon, and then he sold them, and he donated all the winnings to charity. Just because you donate the winnings to charity doesn't mean what you did was right. I thought it was very dangerous. But I also think it comes to the GameStop buyers are also the buyers of SPACs. I think he was also like-- he knew, “Hey, buy the GameStop,” even if he wrote those to zero, that was going to get him in good with the WallStreetBets guys, who were going to buy his SPACs, give him a low cost of capital to go to his next deal. I think he saw that cycle. He's a really good marketer.
Bill: Yeah, man. I think that that's the one thing that I-- my old man syndrome really comes out when I see people that are playing a marketing game, messing around with the market and putting people that I believe are less sophisticated. I don't mean that to be a pejorative asshole. I really do truly care about the people that are on Twitter or whatever that don't know anything and they're trying to follow these guys and learn something. They see him buy calls, and they go out and buy GameStop calls, and then they don't understand what the hell is going on. And by the way, Robinhood doesn't actually answer any emails. For those that don't know, my cousin-in-law is the one that committed suicide. It just got released today to timestamp this episode, that they sent him an automated email asking for $178,000 or $73,000. This is in the complaint, they have to answer it. He wrote back and there was no answer. They didn't get back to him. He went to bed. There's-- other people can argue the causation, but the fact of the matter is, you're dealing with options, you’ve got to have customer service, you have to. For people to treat it like a game-- I've personally lived the consequences, I get really, really offended at that stuff.
Andrew: Look, I'm with you. That's horrible. The stuff you did with trying to hold Robinhood accountable last year, I think reached out to you and said I thought it was awesome. I'm with you, the GameStop stuff like, I had last weekend friends who'd never bought a sock in their life who were calling me and saying like, “Hey, should I put all of my money into GameStop on Monday?” They would string a lot of words together that sounded smart, but they had no clue. They said, “Hey, the short interest is 115%. How can this stock ever go down until the short interest goes below 100%? How can a short interest even be over 100%?” I have friends who lost lots of money. I have some friends who have come to me and be like, “Hey, I was up $30,000. I thought it was going to keep going up and I never sold and now I'm down $4,000.” It's life changing amount of money to people. I get mad because it was all for the lulz except for all these people who lost serious amounts of money because they got caught up in this pumping. I get everyone's responsible for their own behavior, but when you've got these influential billionaires who are going on and tweeting GameStop, can't go down, all this, we're buying calls, that influences people. They're using their platform in a way that really hurts people. I'm with you. I feel like an old man, but it really upset me.
Bill: Well, welcome to the club, man. I've been here for a little while. The other thing that sucks, man, to your point. Okay, so let's say those calls go to zero. Then, IPOE or whatever pops off or F, all of that money that was lost is now recouped in SPAC fees. It's all just marketing. It's all [crosstalk] expense.
Andrew: [crosstalk] It's so much more money gets recouped in SPAC fees, but I'm with you. The other thing is, I do think we scoreboard a lot, where all of Thoma’s SPACs-- and I tweeted this out. He's 12 for 12 in SPACs so far. The average return on his SPAC that he's been involved with is up 150%. It's incredible. I do think we scoreboard though. Virgin Galactic, SPCE. Yeah, the story is starting to look good, but it's not like they've delivered any financial results yet. You could imagine a different world where Virgin Galactic comes in and they put up projections and they're not raising their revenue, and the market goes south on them in a hurry for one reason or another. I just think we result a lot. I don't think a lot of these billionaires has ever proven something. It's a little TSLAQ. Tesla hasn't really turned-- Yes, they report a gap profit, but they haven't really gotten profitable or like hit any of their targets or anything. Yes, it's a $700 billion company, maybe just scoreboard stock price, bro, but also, they haven't delivered the financials yet. At some point, that has to matter.
Bill: Eventually. Yeah, I mean, we'll see how smart the market is. Maybe the market is right that it really is worth it and the financials are on the come, I would take the other side of those bets.
Andrew: Oh, look, I'm a 100-- [crosstalk]
Bill: I don't lay any money. That is a statement that isn't really worth saying, but let's put it this way, I avoid those bets.
Andrew: I'm with you There is a different world where Elon Musk has said Tesla was on the verge of bankruptcy during the Model 3 launch. This is what a lot of short sellers, including-- I'm sure they're stuck at the time, we're looking at and saying like, “This company is a disaster. They are on the verge of bankruptcy.” There's a different world where they do go bankrupt. Their cost of capital isn't zero. The SEC shuts them down, or all these different things, they go bankrupt. Then, we're talking about a completely different world. It's the same guy but because the stock price is split adjusted 3000 instead of split adjusted zero, and there's all these investigations into fraud, we worship everything he says. For Chamath and these SPACs, he announces the deal and the SPAC price triples in a day. Scoreboard, bro, but none of these companies have delivered on the promise, they've just run up a lot on these deals.
Bill: Yeah, I’ve got to ask you something because I think it's important to give people that are short sellers a voice right now. I may think that people that are short maybe overly oppressed, but part of what happened in GameStop is Chamath and Elon coming out and really going at short sellers. What is the purpose of shorts in your book and how do you view short selling?
Andrew: My book has a lot less shorts than it used to. I do think there is something to, “Hey, if you're a concentrated long focus manager, the time you spend looking at shorts is probably better spent looking for the next 5X or something,” but to me, the short, it's everything. Shorts have revealed tons of fraud. You look at this stuff with Wirecard where German regulators were literally pursuing these short sellers, trying to arrest them and Wirecard was a complete fraud. They've revealed tons of frauds. There's also short sellers do help companies raise money. You look at AMC, AMC probably would have gone bankrupt last year, except people could short their stock and lend money to them. It increases a company's options where somebody can go hedge risk somewhere and do that sort of stuff. I don't know. I really respect short sellers, I think they do the market a service. I think the markets work better with them. I do think the days of 115% short interest stocks is long gone. I don't think risk managers are going to let people do that anymore [crosstalk] prime brokers are going to let people do it. Look, shorting is scary, though it is not for unsophisticated investors. It needs to be done with a lot of risk management. I think there's a real role for short sellers. You look at some of the stuff short sellers are uncovering on, to bring it back to my favorite topics, SPACs right now. The Clover, they come out FOIA, a DOJ investigation that the company didn't disclose in their S1, it's wild. Short, we wouldn't know that if it wasn't for short sellers.
Bill: Yeah, no doubt, I think that they do a great service to the market. Hopefully, some of the billionaires with influence don't get AOC or whoever else to listen too much, because I really hope that this particular conversation is handled with the care that it deserves, because it's a dangerous thing to start saying the short sellers are unamerican, that stuff pisses me off.
Andrew: Look, I'm sure every politician would like critical news outlets to go away but that would be a grave disservice to the public. Similarly, I'm sure every billionaire who's trying to paint the rosiest story possible would love short sellers to go away, so no one called them out when they made misleading statements. But the fact is the short sellers are the only people with the economic incentive to go call out and find these types of shenanigans.
Bill: Agreed. Very agreed. On that note, I’ve got to ask you, is there anything else you want to talk about? Or should we wrap this one up?
Andrew: No, man. Look, I was nervous, I wouldn't be able to fill two hours, but I've had fun doing this. I think we covered everything. If anybody wants to reach out obviously, I'd love to come in on this again, love to have you on Yet Another Value Podcast next time you've got an idea, people-- [crosstalk]
Bill: Dude, I’ve got to come up with an idea that warrants it. I'll let you know when I do. I'm focused on this for now. Hopefully, in a couple months, I'll be back.
Andrew: These have been great. I really enjoyed them. Again, Dan was awesome. I'm really excited to listen to Shomik Minion Capital, that's been on the back burner for a while but I love Shomik, I'm excited for that. I really love this project. It's been awesome.
Bill: Thank you. It's been fun to do, man. I feel like it was the right time and I guess audio is something I understand, so it's been a fun thing to do. I’ve got to figure out how to monetize it eventually, and recoup some of the cost but I think I've got some decent ideas.
Andrew: We’ve just to sell to Spot--
Bill: Well, yes, you and I are going to merge and then we're going to SPAC, but if that doesn't work out.
Andrew: Not to reveal to your listeners all of your future intentions for the podcast, but what are you thinking?
Bill: I think what would be cool like Whitney Tilson did a book back in the day, that was The Art of Value Investing. It was a collection of quotes. I actually think Ted Seides might have done this off of Capital Allocators. I think it would be a cool way to compile some of the better comments from each interview and try to package it in a way that is a coffee table book or something that is nice. That's just one thing. I don't know. I don't really want to do advertising. I got a shoutout to Masterworks. They tried to hit me up, but I don't know. That's not really like the way that I want to do it. I mean, I've said this on a couple before, but the network potential that this has opened up, I'd rather use it for that than to core myself out for revenue. Unless we do this SPAC or Spotify brings me that Spotify money, then all bets are off, and I could care less.
Andrew: No, look, I'm with you though with the network thing. One of the things younger me thought is like, you have to get paid for everything you do. Sometimes, the network and just putting good products out there, you don't realize it but you're almost planting the seeds for some type of monetization in the future or life is just friendlier when you're doing these types of interviews and making some new connections too and there's value in that as well.
Bill: Yeah, for sure. For me, personally, I don't think people knew that I had a good voice or whatever. A lot of people say I have a good voice. If CNBC needs a radio guy, like, I'll go do that.
Andrew: People are insane. [crosstalk]
Bill: Many, many are saying that I have the best voice ever.
[laughter]
Bill: Not exactly, but it's been fun, man. I'm glad that-- look, if people like you are enjoying it, then I'm doing a good job because you're my target audience. One of the things that means a lot to me is doing-- real talk, when I came into this four years ago, I was trying to figure out how to invest for my family. What am I going to do that I can stick with and believe in, and I can build wealth? I have been fortunate to have some money, I don't have enough money, I need more. But investing is the way that I was going to accomplish my goal. I was with a firm that was really well respected. Them and I didn't see eye to eye, and I needed to be able to do something that I could believe in. I look up to a lot of you guys. A lot of you guys taught me what I know today. So, to be able to deliver a product that a lot of the people that like I look up to now like is a really cool form of reciprocation. For me, that's what I get out of this. And then, I get to have these conversations, so who the hell who wouldn’t want that?
Andrew: Yeah, I'm with you, man.
Bill: Thank you for coming on. I do think everybody should check out Yet Another Value Blog. Do you know, I'm not going to name his name, but MDC from Clark Street Value?
Andrew: Oh, yeah.
Bill: Yeah, he's--[crosstalk]
Andrew: Is he coming in on the podcast?
Bill: I'm trying to get him on. I think he's going to come on. Yeah.
Andrew: Oh, that jerk. I've tried to get him on mine before. Yeah, we met up--
Bill: He hasn't committed. He's got a job that I don't know if he can.
Andrew: In the pre-COVID times, we met up for a drink in New York City once, but he's a great guy. He's one of my favorite blogs. Selfishly, I just wish he wrote more because all of his ideas are interesting. I love trading thoughts with him.
Bill: Yeah, I know. I'm from the Chicago CFA Society.
Andrew: Oh, I forgot about that. Yeah, the Chicago-- [crosstalk]
Bill: Yeah, man. I've never been in a room with him and not thought he's the smartest guy pitching an idea. Especially if it's a real estate or a special sit thing, I've seen people pitch something to him and he just like-- it's been funny to watch him knock down ideas in two seconds. Once I see him do it, I'm like, “No, if he's not in, I’m not in. This is circle of confidence, I'm not doing this. So, it's interesting.” All right, man. Well, we'll talk soon.
Andrew: All right. Sounds good, buddy. Talk to you soon.
Bill: Hopefully, I’ll bring you an idea here sooner than later.
Andrew: I'll be looking forward to it.
Bill: All right. Take care of yourself.
