Evan Tindell - Where Poker and The Market Collide
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[The Business Brew theme]
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. I hope you enjoy today's episode with Evan Tindell. Evan and I have gotten to know each other over the past couple of years and we hung out at Berkshire, had a good time, at least I did, and I think he had a good time too. I digress. Anyway, Evan is really interesting guy and he's ex-poker player, went to MIT. I pinged him, because I wanted to have a conversation about thinking about bet sizing and portfolio management. He was willing to do so and I'm really glad that he was, because I enjoyed talking to him a lot. So, without further ado, none of this is financial advice. All of the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making investment decisions and do your own due diligence. Thanks for listening. All right, everybody, this is going to be a good one. Thrilled to be joined by Evan Tindell of Bireme Capital. Evan is a very cool guy. I've gotten to know him. When did we meet, probably a year ago? And then we actually met at Berkshire.
Evan: Yeah.
Bill: But I think I did something stupid like pitch you Altice and you're like, "No, man, I'm good without the leverage."
Evan: [laughs]
Bill: And you were right and I was wrong.
Evan: Well, Comcast hasn't been doing so well lately, in terms of stock price. So, we'll see how-- Yeah, right to not be in Altice, I guess.
Bill: Sometimes, when blood comes for a sector, all you can do is try to hide.
Evan: Yep.
Bill: So, do you want to give a little bit of your background and how you got into investing?
Evan: Sure. So, I went to MIT and there, I learned how to play poker from some friends, that's the cliché, like MIT gambling. Everyone always asked me if I played blackjack. I tried to explain that poker's the way better game to make money out, because you're playing against other people. You're not trying to play the house, where you're going to at best have 1% edge. You're playing against drunk idiots that are coming from the [crosstalk] table. [laughs] And so, yeah, played poker, started playing poker at MIT, and was making a decent amount of money doing that. And so, I was toying with the idea of going on doing various trading jobs on Wall Street but decided that I would rather make a similar amount of money and not have to go into work and do it from anywhere and travel, because I was playing online.
Bill: How many hands would you be playing at once?
Evan: It depends. Sometimes, I would be grinding four to six tables of $1,000 buy-in. Like 5, 10 blinds, no-limit $1,000 buy-in. And then other times, I would be playing one or two tables of $5,000 buy-in. It just depends on what the good games were going on at that moment, because different games require different amount of attention. And sometimes, there might be, what, one-- Usually, there wasn't even five games of $5,000 buy-in going on the internet. So, you would just play one or two and focus on that, if that was the best game. So, it just depends.
Bill: Is there like a sweet spot of people that have--? I know there is, but how would you think about the sweet spot of people that have enough money, but no skill?
Evan: Just in general, the games tend to get more difficult as you go up in dollar amounts with some exceptions. But just because of the really bad players-- usually, there's a relationship between the net worth of the person and how reckless they're willing to be and whatever limit game.
Bill: Yeah, that makes sense.
Evan: Some guys, that's worth $10 million. It's down at a $5,000 buy-in table and what's going to blow, could blow 20 grand and not think twice about it. That's not everyone. Obviously, most people, even 90% of people that are worth $10 million, still think twice about blowing 20 grand. That's probably how they made the $10 million in the first place, right? [laughter] Bill: Yes. It's true. Evan: But there are some people that don't think like that, but yeah. The lower limit games are always a little bit crazier just because anyone can sit down at a $50 buy-in game and go crazy for a few hands, because it's not going to change whether they can put food on the table, hopefully. And so, yeah. Although that being said, they would sometimes be really-- I play mostly online. It was more obvious when this would happen in person, but we're a really big whale would just come in and sit at $2,000 buy-in or $5,000 buying and just do absolutely outrageous stuff. I've actually played poker with Dan Bilzerian. I don't know if you know-- Bill: Oh, yeah. I know him. Evan: Yeah. He's got 20 million Instagram followers or whatever. Yeah, I was once at a table where he-- It was a nine-person table. You can play poker with 10 people, but a lot of the tables in Vegas are nine handed. It was at the Bellagio. Not the really high limit play area, which has a glass wall around it, but just the slightly higher limit, where you have to step over a step that's this big. It's not really a barrier, but it feels. I don't know why they do it. But anyway, we were in that area at a nine-handed table, and playing $5,000 buy-in and Dan Bilzerian walks in with just a stack of-- He had $25,000 chips and just a stack of them. And everyone at the table was like, "Yeah, this is a 10-handed table now." Bill: [laughs] Evan: That's what's happening now. Bill: We're going to let him sit. Evan: We're going to scoot over. He's not going to have-- or someone at the table is not going to have a proper drink holder, you know? [laughs] Bill: Yeah, we don't need to drink for these next couple of hours, folks. Evan: You're right. Exactly. We all moved over, and he sat down. He's interesting. He's not dumb, by any means. At the poker table, at least, he was. But he was just pretty reckless and so, he was a quite good player to have in the game. I've heard that he claims that he would not necessarily do that well in the casinos, but win a lot of money in some of these private games with some real idiots, which could be true. I have no idea. He was far from the dumbest player I've ever seen sit down at that table. So, it's possible, but who knows. But there was actually a hand, where-- I have a picture of this on my phone somewhere. I think it's actually in Flickr, which probably is dead by now. [laughter] Evan: Where there's a photo of him, where he convinced everyone at the table to just put out $500 just as like blind. And we did this blind hand, where everyone reveals one card at a time. No one has seen their cards at. There's no betting, but you just go around until-- It's Texas hold'em. Three cards in the flop and then everyone's turning over their own cards in order on the table. And then whoever has the best hand then just gets $5,000 from the middle, because it's 10-handed. And while we're doing this, people start to come over to see what's going on. And so, I have a picture of Johnny Chan, who's-- He was in the movie, Rounders. I don't know who that is. Bill: Yeah. Evan: Yeah. He's probably 1994 World Series of Poker champ, Main Event champion. I have of him looking over Dan Bilzerian's shoulder at his cards to be like, "What is going on at this table right now?" [laughter] Bill: Oh, those are fun times. Evan: Yeah. All right, so, we got on a little bit-- [crosstalk] Bill: No, no, I like it, because I'm-- All right, let's get into investing. But I find it an interesting background that you bring to the table. Evan: Yeah, and I think there's a lot of overlap and different concepts with poker that we can get into. In investing, obviously, people trade way too much. There's just bias towards doing something. People can't just sit there with their 10 decently priced stocks and just go on vacation. And in poker, it's the same thing. The main problem that 90% of people have is that they can't fold. They're there to gamble. Bill: Huh. That's interesting. Evan: They're there to gamble. They're there to play. They're not there to sit there. They're there to play. They're calling raises with five, seven or three, seven, or whatever and they just lose all the money. They get a lot of trouble that way. Yeah, I was making some money playing poker very stupidly living in New York City, because when you're making six figures as a poker player in your early 20s, you just think-- I could have lived anywhere. I could have lived at home in Florida and just banked all that rent money. Bill: [laughs] Why would you though? You're young. Evan: Yeah. I was young. I had friends in the city. It seemed like the right thing to do, but it was definitely pretty silly. Now, I go to New York, and I take the subway. But back then, when I was 21 at the time, it was a good amount of money. I took cabs everywhere. Bill: Yeah. Well-- [crosstalk] Evan: I've always [crosstalk] this, you know? Bill: Young people aren't the smartest with money. You're not alone. Evan: Like doing your gambling every day. It's actually a cliche with poker players, because you're gambling every day and part of what makes you good is your ability to divorce yourself mentally from the value. You're not like, "Ooh, I'm betting. I got to call it $2,000." You're just like, "Okay, what are the odds here? What are the pot odds I'm getting? How wisely am I to win the hand?" Bill: Huh? Do you think that's helped--? That skill, oh, was definitely got to translate. Evan: Totally. Yeah. It does, because obviously in investing, you can't be like, "Ooh, I'm investing $5 million in this. I better be scared about it or something." You just have to make the best bets at all times. So, there's that aspect. But what I actually think is almost more important is the necessity in poker always updating your perceived odds of the situation at every point in the hand, because yeah, you can start to hand with-- This is another thing that people get way wrong in poker is, they're not willing to-- There's the combination of sunk cost fallacy and probably some other biases that feed into this. But they're just not willing to update the probabilities as they go along, usually. If they have aces, they're seeing them to the max. You know what I mean? It doesn't matter what the action is, how many people are raising after the flop. They're not willing to update the probabilities based on the new information, because it's sad. It's a sad thing that they have to fold aces. You don't get aces that often. You can sit there for three hours and not get aces. So, to fold aces, this is very sad and most people just can't do it. I think similarly to investing, it doesn't matter how cheap the stock seemed when you first bought it? You know what I mean? Or, how good the business seems? If you have new information, you have to update the probabilities. The thing that's really hard in investing and I want to talk about this later, but we can just get right into it, if we want to is, the hard thing about investing is there's a second factor, which is the price is always changing. It actually doesn't matter, if you're now-- The thesis you had in the beginning is no longer valid, because what matters is the thesis relative to the price, actually. And if the price has changed a lot, then the thesis need is what's required to make it work is different. At the stock trading at 10 times earnings needs to stock trading at-- I feel this gets lost a lot in investing. A stock that's trading at 10 times earnings needs a different type of thesis than when it's trading at 30 times earnings. It's starting at 30 times, I need to hear about, yeah, industry growth rates market share like Tam, all that. Margins can be growing. You need a lot of things to go in your favor, where if that eight times earnings, you just need the business to not decline. You just need like their current customers to stay their current customers. The problem is, when something starts to go awry, there's another bias which is investing, which is not wanting to let go of losers, because there's always this hope. It's called the disposition effect. It's always just hope that it can things can turn around and the mind is wired to try to-- In your mind, there's this bias towards like it not being a real loss, if you haven't sold it yet. So, people tend to not sell things when they should. And so, people try to fight against that with the heuristic of "always sell" a broken thesis. That's how people try to fight against that. You say, "Okay, well, if the facts change and I have to have a new thesis, then I just sell." Because what are the odds actually that out of all the stocks in the world. This one that you were already wrong about is now a good purchase with completely different set of facts and that you're not just succumbing to just the disposition effect, where you just don't want to admit that you were wrong. Yeah-- [crosstalk] Bill: Yeah. The one thing that I would say though is, if you're buying a stock for eight times earnings, you do you need the current business to not go away. But you also need the capital to be returned to you. There's got to be some alignment of management and minority shareholder outcomes, because otherwise you can lose all the theory in reality. Evan: Yeah, I think that's definitely true, although, I feel that is equally true for growth stock for stocks trading at 30- or 40-times earnings, because like, "Okay, yeah, they're going to have all this growth and blah, blah, blah." But is that ever going to translate into free cash flow that gets returned or are they going to spend it on--? We own Facebook. But are they going to spend it on the Metaverse? You know what I mean? Or, are they going to spend it on something else dumb to try to keep that going or are they really going to return it? I think that cuts both ways. But it's a little bit more salient with the stock trading at eight times earnings, because they're just closer to the point of needing to return the capital. With a stock that's trading at 50 times, there's no earnings to really return. So, it's not going to affect the valuation that much or it's not as near term of a problem. Bill: Yeah, I think the other thing that's interesting is with something trading at 50 times, if they're investing and they can argue that the TAM is being created or growing, people like that, even if it's not necessarily provable at the moment. Evan: Right. Yeah. There's at least a story there around why not returning the capital is a good thing. Whereas with a company trading at eight to 10 times earnings, at least the market is basically saying that there aren't good reinvestment opportunities in the core business. It makes sense that the market wants them to prove why giving it back is not the right thing, I think. Bill: Yeah, that makes sense. All right, continue with your thoughts. Evan: I think that was a good tangent, but let's continue. I was playing poker, was making some money. But in 2008-2009 era, after I start, I've been playing for a couple years-- Well, I've been playing poker for four or five years by that point. But do just doing it like after college, purely professionally, I've been doing it for about two years. But by that point, some of the laws that had been implemented, which made it more difficult for banks to fund online poker-- Online poker was like a gray area. But then this law came down in 2006, which basically made it illegal for banks to transfer money onto the site. It wasn't illegal to play but banks weren't supposed to allow it basically. That made it more and more difficult. My theory is that, it just made it more and more difficult for the average show to put money on the sites. You had to find this semi-sketchy Caribbean company called Netteller, which was like a pre-PayPal-- or not pre-PayPal, but similar to PayPal type of solution to get money on the sites. You couldn't just directly do it with a credit card or a bank link. And so, that just made it harder for the fish, I guess, to put money onto the site, the bad players or anyone really. And so, what you had was, the money just kept cycling up and up and up to better and better players. And by the time, by mid-2009, I'd say, the games were signi-- An probably also the recession probably didn't help, but the online games were significantly worse than they had been before. And then you had the whole Full Tilt Poker fiasco-- Well, I don't know if you heard about this, where basically the owners were taking my-- This is just my recollection. If you're the former owner of Full Tilt Poker, don't sue me for defamation. But I'm not sure this is what happened. Bill: [laughs] Evan: But I believe what happened was, they were taking out giant dividends from the business and then one day, everyone woke up and there was just a giant FBI seal on the Full Tilt Poker website, and it just said like, "This domain is now under-- not investigation, but FBI owns this now." And so, you had to wait literally years to get your money back. This is one of those things where I completely forgot about it and then I got an email years later that like, "Oh, by the way, here's $10,000 from your Full Tilt Poker account," back in the day, because they were able to-- [crosstalk] Bill: That's a nice email to get. They are the worst ones. Evan: Yeah. Well, the funny thing is yeah, you get the email, but the email doesn't have the amount, then you have to click through. It was this moment where I was like, "How much did I have on there?" Bill: [laughs] Evan: Yeah, that was that was definitely nice. But I started thinking about what my next thing was going to be. And I'd always been interested in finance in college and earlier. And so, I was just thinking about it. Still playing poker, but just thinking about it. My buddy, Ryan Valentine, my current business partner, was graduating from MIT that summer in June of 2009 or whatever. His dad had run a hedge fund that he eventually returned into a family office in I think the early 2000s. But he had been running it since the 80s or early 90s. He had interned at Fortress and worked for a couple other Wall Street firms. He was debating whether to just go to a firm like that, just like a separate Wall Street firm or to go work for his dad, and he was like-- His dad had basically a family office where it was some administrative people and his dad doing all the investment. And I think he started thinking about it. He was like, "Do I want to move from Boston to Avon, Connecticut, and work one on one with my dad in the office every day where it's just the two of us 10 hours day?" I think he was basically like, "I need a buffer." Bill: That's fair. It's a little too much time together. Evan: He was 22. You didn't want to be moving back home to just languish in rural Connecticut at that age with no one to hang out with. He convinced his dad to interview some of his friends and whatnot and I ended up getting the job. That's one of the nice things about going to MIT is, just like your random friends are smart enough to do-- One guy I met at MIT, he tried to get me to join his fraternity was Drew Houston, the Dropbox CEO. Bill: Huh. Evan: And then I have another really good friend actually, who runs a crypto mining company. They do crypto mining at stranded oil and gas sites, where normally they would flare the gas. They set up these data centers. Bill: Oh, that's smart. Evan: Yeah. And they just got an investment from the Sultan of Oman in a $375 million round valued at a couple billion, I think. Bill: Wow. That's awesome. Evan: Yeah. And he's just a random friend I know [laughs] from MIT. That's one super nice thing. Bill: Auburn does not have that network. But we do have Tim Cook. So, we got that going for us. Evan: Yeah, that's pretty good. That's not bad. Bill: I can't call him up, though and say, we're equal. That does me no good. Evan: Right. [laughs] Do they ever have alumni events and things you can go through or not really? Bill: I haven't been anywhere that the Auburn degree has really helped me. In Chicago, there were 15 of us or whatever. But I did get to meet Frank Thomas and that was a nice conversation. But didn't help me professionally. Evan: Right. Well, all the more credit for what you've been able to do so far, I guess. Bill: I guess. Evan: It's all just your skills of talking and knowledge. [laughs] Bill: More or less. Mostly talking, less knowledge. But I have smart guests. So, it helps. Evan: [laughs] Yeah. He got me the interview, and he hired me, and I guess, the rest is history. Well, the rest is not actually totally history. It's worth describing. I was basically the soul Buffett style value investing analysts on the long/short portfolio. My buddy was more interested in-- He's more of a programming guy. He does more of the quantitative stuff and still does today for us. We run a couple of quantitative strategies that are just pure software. But I was the equity analyst. And so, spent seven years doing that from 2009-2016, which is a pretty interesting time for investing in general and pretty weird time for value investing, I think. And then in 2016, Steve, my buddy's dad, our old boss, he basically kicked us out of the nest, and told us to go start our own thing, and very kindly gave us an investment to get us-- [crosstalk] Bill: That's awesome. Well, that's sweet. So, he basically helped train you get your feet under you and then he says, "All right, go do your own thing for--" Evan: Exactly. Bill: You birds can soar now. Evan: Right. Yeah, which was awesome. It's not too often you get-- Obviously, it helps to be the son of the guy, in terms of [crosstalk] helping us. Bill: Yeah. Look, that helps you get the opportunity. But you don't keep the opportunity because of that. Evan: That's right. That's right. Yeah. We started in 2016 and we've been lucky enough to do pretty well so far. The strategy that I run is called fundamental value. Basically, it's a value investing strategy. It's long short. What I tried to really do is try to figure out why I think other people are wrong about whatever stock were holding. I tried to really think a lot about the variant perception, which is like this, Michael Steinhardt, no idea. And even more than that, I like to be able to express our varying perceptions in terms of cognitive biases, because I have this theory that-- And we talked about some biases already like action bias, and sunk cost fallacy, and disposition effect, and things like that. Basically, anytime someone's wrong, usually, if at least if it's in a systematic way, it's because of some type of bias, it could just be a simple bias towards things that are boring. We sometimes call that social conformity bias or availability bias, where you're attracted to flat things that are flashy or things that are available to the mind. Bill: It's a lot more fun to be invested in something sexy. It's more fun to tell people, it's more fun to follow. There's a lot of reasons to not be psyched about a garbage company for instance. Evan: Exactly. Yeah. And my brother actually works for waste management corporate. Yeah, it's one of the best performing stocks in the past few decades. And it's because I think it's probably partially. Actually, it's interesting. It goes both ways. Boring businesses, not only does no one want to own the stock, so they might be a little bit cheaper, but Silicon Valley isn't funding too many landfills. There are probably some now, because probably going to become like a pressing issue, waste disposal and stuff is probably getting some funding. But it's not the first thing that rolls off the tongue of a venture capitalist that you were working on trash, right? Bill: Yeah. No, the sexy thing is carbon capture. If you're in carbon capture, probably capital going into that. But as far as the actual storage of garbage, I don't think that's exciting. Evan: Yeah. We try to think really hard about the cognitive bias that might be at work in a particular situation and how that relates to our variant perception. Of course, you can trick yourself. You can tell yourself a story about what other people are thinking. You're not always right about what other people thinking. And sometimes, people are right. People were worried about something and they were correct to be worried about it. It wasn't like some bias. But we feel that helps us avoid some value traps and not just own things that are strictly cheap, but have like a a second story around, why we think they're cheap, and why we think other people are wrong, and we just hope that that helps us do a little bit better than a value index, for example. We tend to own things that are in the 8 to 12 times earnings range, like, cheaper than the market, but for what we think is a bad reason. Our ideal situation is, it's cheaper than the market for a bad reason and maybe we think it's actually a better than average business. But usually, it ends up being something boring. Although, right now, own some Netflix and some other things. So, it's not all boring stuff. Sometimes, it's the stuff that people have gotten so beaten down on that it makes them sick to their stomach. So, at least, that's the theory. Bill: Do you tend to play around in a market cap? Do you target a market cap or not really? Evan: We are agnostic to market cap. Honestly, I think personally, I think that that's the best way to use your smaller size. I know, obviously, there's a good amount of data that small caps tend to perform pretty well over time or outperform over time and actually that they're cheaper than ever right now relative to large caps. If ever was the time to double down on using your small size to look at smaller companies, I think probably now is probably the time. But in general, I think that for my investing style, I like to look at large caps as well. Especially with the whole cognitive biases framework, a lot of times you can figure out, what the market story is about a stock just because there's more coverage of Netflix or Facebook. And so, it's easier to figure out what Average Joe Investor or Average Joe sell side analysts is thinking about the stock. In 2018, when Facebook had the Cambridge analytical scandal and everyone was saying like, "Oh, people are going to delete Facebook" and it's this whole terrible thing, that's a story where you were able to see pretty clearly what the bear case was. It was pretty obvious, why the company was in the news and it was not for positive reasons. We were able to just look at the business and be like, "Wait a second, half of people in the US don't even know that Instagram is owned by Facebook." Bill: Yeah. Evan: They're not going to delete Instagram. That's where all the growth is. Why are we so worked out even if 5% of people are going to delete Facebook? They're not deleting Instagram. All the rest of the growth is overseas, anyway, too. Obviously, there's huge business in the US. If half of the people deleted Facebook, that'd be a real thing, but people didn't really care. Bill: So, when you're going through and you're updating your probabilities constantly, how do you keep in mind, like, what is junky news versus what signal? Evan: I always try to bring it back to the numbers. Is this piece of news? You're a lawyer, right? If I'm the judge and the trial is about whether this stock is undervalued. On the one side, their closing argument is presenting this news article about to try to argue that your free cash flow estimates five, six, seven years out is different. Then, what is the jury, I guess? What are you as the judge or the jury saying about this? Does it hold water or does it not? And you try to think about like, "Well, what would the lawyer on the other side say?" That's just what I said about Facebook like, "Okay, people are saying they're going to delete it." But are they really deleting it? You see people talking about on Twitter like, "Are your friends deleting Facebook?" Look at the actual data on usage and try to bring it back to the actual numbers. Very rarely, I think, two news articles that aren't actual earnings results move the needle for me in terms of how they make me think about the valuation. Very rarely. Bill: That makes sense. I've been interested-- I've followed Netflix. It's funny. I used to think their strategy was insane. Now, I think it's genius. And now that I think the strategy is genius. The stock has cratered. And the news articles have gone from-- I read one today that was like, "Well, no rational person thinks that Netflix could have kept that culture spending, and whatever forever." It's just interesting how-- I didn't read that in 2020 when the stock was going up. No one was saying, "Well, no rational person believes this is sustainable." So, I find it interesting how often stock price really does drive the tone of what's being said about something. Evan: Oh, yeah. I think it just helps me so much to always look back at the numbers. And with Netflix, they earned $5 billion last year on 33-- I'm just looking at Bloomberg numbers. $33.8 billion. And that's of invested capital. And that's net income. So, EBIT was like $6 billion. So, that's almost a 20% return on capital. The idea that this is not a good business is insane. Bill: Well, somebody's going to come back to you and say, "Well, that's because you're under accounting for the amortization." Evan: Totally. I think that story is one of the reasons why Netflix is so cheap. This is actually a great example of, when you have a large cap stock that's heavily followed, you at least can know-- If the stock craters, you usually are going to know why. This is not like some stock that's just falling 50% in the forest, and no one knows why, and maybe it's because the CEO is stealing from the company. You know what I mean? You know why Netflix cratered. And it's because, A, people are worrying about increasing competition and growth going forward, and people are worried about whether the net income will translate to free cash flow. I love situations like that, because I can shoot against it. You don't think that the free cash flow is going to try to translate from the net income over time. Let's look at that. Why? If you actually run the numbers, if you look at Netflix, the problem is, this is a situation where the accounting is a little bit complicated, and it takes a while to figure out that it's not as complicated as it first seems. And so, people, their eyes just glaze over, and they don't want to do the hard work on it. But I think it's a very interesting example of where you'd dig into it, you can figure it out. And it's a perfect example of a situation where, as a small investor, you actually have just as much information as Tiger Global or any of these-- They're not going to tell me something about Netflix. Maybe they've done some survey data in Indonesia or something. But the core business in the accounting, the accounting is there to be to be had. And so, if you look at Netflix's accounting-- Well, the main issue was that, if you look historically, cashflow has not matched net income. It's lagged significantly. However, during that time period, they were making a gigantic transition from owned or from licensed to owned and produced contents. And so, this is actually different than whether it's a Netflix exclusive. So, Orange is the New Black is owned by Lions Gate or whoever owns Lions Gate now. But it's a Netflix exclusive during this time period of the contract. It's not like the office or something. It's a Netflix show. But Netflix didn't produce it. So, they didn't put up the capital for Orange is the New Black. They just licensed it for 20 years, or 50 years, or something. Probably, it will always stay on Netflix, because it's branded as Netflix, and that's where people want it, and Netflix can write huge checks. So, it's definitely a negative expected value from them to tick it off. But if you're going to transition to the next show to be completely produced by Netflix, that means you have to put up significant capital over a period of years and you have to do it all before the show gets released. And so, what that means is, Netflix has an annual content budget of, whatever, $20 something billion. They were transitioning from it being all back end to all upfront. And so, they actually went from zero to $11 billion of unreleased production assets. So, that's $11 billion, they've spent on stuff that hasn't even been released yet. And so, what that means is, the whole issue of how long they amortize things for, it's actually a non-issue with respect to the unreleased content, because no one's arguing that they should be advertising stuff that's not released it. Obviously, none of the viewership has happened. They shouldn't be advertising that. And so, if you go back and run the numbers with that in mind, you'll see that if you remove that effect, the gap between free cash flow and net income is much, much, much, much smaller. They basically said, it's going away over the next few years. And actually, you can run a model. And this is where it gets a little more complicated, if you want to go this deep. You could actually just look at that only and say, "Okay, I believe in the amortization." Or, you could say, "Okay, let's actually build our own model and see what we think." You build a model-- I estimate that they amortize a little more than 50% of a TV shows value in the first year and 20 something percent in the second year. So, after two years, they've amortized 75% or 76% of the value. And to me, that seems pretty reasonable, and it honestly makes sense to me that that would line up with viewership rates, which is what they say it does. That's how they say they advertise it. I have I used to have these skeptical, because I'm a big cashflow guy. There's tons of things that I've shorted over the years where they're bullshitting about the net income and you have to go to free cash flow to actually like. That's a very standard short thesis presentation is like, "Okay, free cash flow, It doesn't match that income. What's going on? Are they just storing things in inventory or whatever?" But for them, I think it makes sense. And at the end of the day, the numbers check out and I also trust Reed Hastings to do things well, just in general. If you actually look at the numbers, the numbers check out, I have no reason to doubt them. So, at the end of the day, the stock's trading at 20 times earnings and they have this advertising opportunity, which people will obviously spin as like, "Oh, they're going back on their core tenant. They're capitulating. The business must be so terrible." Or, "They ran out of other growth options and now, they're running the numbers, and they realized that this is--" They did 1.3 trillion minutes of viewership in the US last year, last TV season, which is more than double CBS and they got no ad revenue from that. It's a multibillion-dollar business that they're just sitting on. And so, yeah, it's a pivot. They said they weren't going to do it and now, they did it. But I don't know, do you trust Reed Hastings to be able to hire Ag-Tech people along with Microsoft and figure this out and generate $5 to $10 billion of revenue over the next, call it, five years. I mean, I do. Bill: The other thing that I think is interesting is-- I'm not going to be the right person to push back on you unless-- [crosstalk] Evan: Yeah. Bill: I don't own it, but I wonder why I don't, and I may soon. But the amort argument, I really think a lot of this issue and what people are debating now goes back to Charlie Munger incentives question. And like, when the market was rewarding them for sub growth, I just don't think people were sitting around a table saying, how can we spend more effectively. Evan: Right. Bill: And now that the market is not, I think that there's merit to the question, if you drop eight episodes in a day, are you accelerating your amortization? Because you're burying what is otherwise-- I see with the podcast, if I dropped or when I dropped a number of episodes a week, these things would get buried. Okay, but is there a better way to release things? Is there a way to stretch out the cadence of certain spin? These don't seem as hard of questions to me as, how do I get to that scale? How do I get to that scale seems like the hardest question. How do I get to that scale, well, minimizing equity issuance seems like an even harder question. And now, it's like, "Okay, well, how do we get profitable now that we're at this scale?" Evan: Right and they issued no equity. Bill: Yeah. This has been insane. Evan: And their earnings are real. That's the thing people forget. They're famous for not really doing stock comp. Okay. For a Silicon Valley Tech company that does $30 billion of revenue, you would probably expect them to be doing $2 billion a year of stock comp or something. And it's $400 million. You know what I mean? It's not a material-- They don't talk about adjusted earnings to address that out. $5 billion is taking that out and it's a real number. Yeah, I completely agree with you about optimizing spend. It was a land grab for a long time, and it's become clear now, actually, that the land that's being grabbed is not as large as people thought maybe it once was. And so, obviously, that is a reason to sell off Netflix stock some amount, because the pot of gold at the end of the rainbow is probably not as big as maybe they thought. However, it's also a reason why competitors are going to struggle to invest as much to keep up. I do think that the streaming industry as a whole going to start to move a little bit more towards profitability, because it's obvious that like, "Well, if Netflix is stalling out at 250 million subscribers, then it makes a little bit less sense to go out and spend-- and triple, quadruple are spending year over year and just fun, gigantic losses." So, I think there could be some positives, both from internal budgeting as well as the effect on competitors. Bill: I think it's a certainty. I think we're on the right side of the capital cycle. I just don't think the headlines have come out yet. Evan: Yeah. Bill: And maybe they have through layoffs and whatnot. Evan: Right. Bill: Okay. You get yourself to this stage, how do you think about like how good this set of cards is, for lack of a better term? And how do you think about--? Bet sizing-- When I pinged you, I said, I'd like to talk to you about how you think about position sizing and managing a position throughout ownership. The way I frame Netflix and push back if you disagree, but leader in its category, growing cash flow, reasonable current valuation, is that like a pair of kings, is that a pair of jacks? Where are we on how attractive this is and how do you think about betting that? Evan: Yeah. The way I bet things--[crosstalk] Bill: Obviously, all opinion, by the way. Evan: Right. Yeah. This is not financial advice. Bill: And entertainment. Evan: Yeah. If you want financial advice, you got to sign a contract. Bill: That's right. Evan: This is not financial advice. This is just us thinking out loud, hopefully well. Bill: Correct. Evan: [laughs] So, bet sizing is definitely an art. I do think that there are some slightly weird attempts to make it into more of a science than it really, I think, can be. Obviously, there's the Kelly criterion, which talks about optimal bet sizing in a very strictly known framework of probabilities and outcomes. But the Kelly criterion doesn't really apply to investing, because you never really know what the probabilities are. It's actually similar to poker in that way. If you're in a hand and you have pocket aces-- Obviously, if you get your money all in before the flop with aces, you can have a good idea about what your odds are. But if it's on the flop, you could already you'd be or drawing dead. You just don't know what the probabilities are there depending on the person that you're playing against, whether they're tight player or loose player, you just never quite know. So, you always have to be way, way more conservative than a Kelly criterion would maybe imply. And so, for me, this isn't super scientific. Part of it's based on math. If you look at the volatility of a portfolio that has 500 names and one that has 15 or 20 names, they're not that different. The vast majority of the benefit from diversification statistically, if you started with one position, the vast majority of the benefit comes between one and 10 positions. Obviously, it's an asymptotic thing. Like the biggest benefit is from one to two, and then from two to three, then three to four. And so, as essentially a single person team, in terms of the fundamental value strategy, I prefer 10 to 15 positions, because that gives me the combination of each one-- Well, it gives me a combination of the benefit of diversification and just not lower portfolio volatility, like, lower risk of severe impairments and still having the ability to actually know things that I'm owning. So, it's a little bit of humility in terms of, because you can always be wrong. Obviously, if you were always right, you would just own one stock. [chuckles] Bill: Yeah. Evan: But I'm investing my mom's retirement portfolio, my mother-in-law's money with us et cetera. I've tried to be a little bit conservative in terms of position sizing. Our biggest positions tend to be 10% to 15% positions and our smaller positions tend to be 5%, 6%, 7%, 8% positions. And then occasionally, we'll go bigger. Actually, I know you mentioned wanting to talk about Twitter. Bill: Yeah. Evan: The Twitter is one of the few times where we've actually gone up to 20% for an initial position size, because that situation, actually, I think is one of the few that does lend itself to the known, because the merger arbitrage situation, the outcomes are more known and it lends itself a little better to a Kelly criterion type analysis. Of course, if you put the percentages that I think are correct into the Kelly criterion, it'll tell you to put 80% of your portfolio in Twitter, because equal upside to downside right now roughly and probably 80 plus percent to win. With those odds, the Kelly criterion is going to tell you to go all in, basically. So, we were willing to put a little bit more of capital into that situation just because the outcomes are so known. It's important to stay humble about what and what you don't know. And so, for the average position, that means for us like 7%, 8%, 9%, 10%. But I think it's super hard to compare, because-- What I do is, I do estimated IRRs for every single position. So, I can stack rank them in terms of what I think the IRR is. But it's such a guess as to like, "Okay, is my level of conservativeness really the same for all these stocks? Is my level of knowledge really the same for all the stocks? Is the edge cases--? So, it's hard to know. But that's what we do. Bill: Well, I appreciate that answer. That's very honest to say, it's hard to know, because that's how I feel as well and maybe that's just me saying something's honest, because I agree with it. I think that's reality. Evan: Yeah. And there's a lot of bullshitting in the investment world about how easy it is to know things. You know what I mean? Everyone knows that their investment strategy and their choices are good when they're winning. And everyone knows that they're just going through a bad period, when things are going against them. You know what I mean? Bill: [laughs] Oh, yeah. I do. Evan: If someone posted like, fuck, a graph of Fundsmith's free cash flow yields chart, where it went from 5% to 2.5% over a period of five or six years prior to this year, and this year, it's gone from 2.5% to three point something, and obviously, the reason why that happened is because the valuations were getting higher and higher on his stocks. And now, they went in the opposite direction this year. And the joke was like, "Oh, this is--" I forget what the chart was on the way down, but it was the temporary multiple compression, and our businesses are so great that they'll end up doing fine, well, when the yields are going up, i.e., the prices are going down. But when the yields are going down and prices are going up, well, the businesses are great. So, of course, they're trending higher valuations. They always should have been more highly valued. Bill: Yeah. It's interesting. It'll be interesting to see what happens over the next five years. It always is but I don’t know. Evan: Yeah. I'm still waiting for the-- I think [unintelligible [00:52:51] maybe said something similar to this. So few people in these Q2 letters, they stepped up and said, "Hey, we should have sold at the top. In hindsight, valuations got really out of hand. We're not going to make that mistake again, blah, blah, blah." I don't know. They just all say like, "Oh, our companies are still doing great." And not even really mentioning that there's this other thing called valuation that where your companies can be doing great, but that doesn't necessarily mean that they're a good purchase at that price. Bill: Yeah. I think the thing that's tough, where I've gotten myself on this issue is, I think that that's true. What you just said is true. I also think that people have mandates and to step out of quality investing to go into cyclicals or something, I might argue, it would be outside of the scope of a mandate for many managers. That's probably on the allocator to be pulling money from one manager and diverting it to another. So, sometimes, I think when you read these letters, there's a lot that goes unsaid. And the more in the industry, the longer I realized. Evan: Yeah, totally. Bill: Probably, the heroes at the top are somewhat smart and somewhat in the right factor and take everything with a grain of salt. Evan: Yeah. Allocators have a tough job. They have a tough job, for sure. But they completely just incentivize people to do exactly what you said, which is stick to the strategy, like, stick to the marketing pitch, stick to the mandate at all costs, because that makes their jobs easier. It doesn't lead to higher returns, I don't think. Bill: Yeah. Evan: It might, but-- It definitely hurt them this time around, because like you said, how many shops have a mandate of buy what you think is cheap or buy whatever is undervalued? Because pension funds, they want to know like, "Okay, we have $500 million invested in these growth funds. We have $300 million invested in these value funds and they'll tend to have opposite correlations." And there's benefits for the pension funds to be able to do that analysis to not have everything hit shit the bed at the same time. But requiring that of the manager definitely decreases the opportunity set. right? Bill: Yeah. Evan: There's definitely worlds where tying yourself to the mask in that way removes some sense of temptation to be a little bit more, I don't know like flighty, because for most good strategies, it does make sense to just stick it out for a long period of time regardless of what's going on. And that's what the mandates are really trying to fight against. They're trying to fight against people just doing things on a whim and not sticking to-- What they're really hopefully fighting against is the managers desire to do the opposite, which is pull out at the bottom. You know what I mean? At least with the mandate, they can say, "Listen, this is what you're paying us for. We're going to keep doing it." And usually, that is the correct decision, because the stocks are cheap now. The strategy is maybe cheap. But unfortunately, you by doing that, you do tie their hands at the top as well, because they can't just come in and say, "Well, yeah, this has been working for a long time. But that's exactly why it's expensive now and we should do something else." So, I can see why allocators do it. But at the top, it really hurts the underlying funds that are invested, I think. Bill: Yeah. Jim O'Shaughnessy has talked about this on his pod, where like, "Momentum was just ripping" and somebody came in and they were like, "Yeah, we want to allocate to your momentum strategy." And he said, "Well, that's interesting. I'm not. I'm actually drawing money out of it and putting it into small value." But that's somebody that studies markets all the time versus somebody that's just looking at each chasing. Evan: Yeah. And that's actually one reason why I like having our hitch be something other than we just buy value stocks, where I have this the idea is like, "Okay, cognitive biases and varying perception, and trying to think about what other people are getting wrong." Because hopefully, that allows me to-- It will hurt me trying to raise money with a lot of institutional allocators who just want to put you in a box. But at least, it gives me a little bit more flexibility for the people that do invest with me, because it allows me to take on opportunities wherever they are, whether they're cement companies that four times earnings or Netflix that 20 times earnings. Bill: Cement company of four times earnings. Interesting. I like the idea of that. Evan: I just made that up. That's the canonical like, I don't know. [laughs] Bill: Yeah. I was talking to our mutual friend, Elliot Turner about Kelly betting. And something that he said is, what a lot of people don't think about is if you take the bet off prematurely, it messes up your Kelly formula, because your risk reward has been truncated. Do you had any thoughts on that? Not that I need to have you in some random debate with Elliot who's not in the room. Evan: No. [crosstalk] Bill: When he said it, I thought it was interesting. Evan: He is right in the sense that, if you-- Let's talk about the Twitter deal, right? Let's assume for a moment that the upside is 54:20 and the downside-- Just to make the upside even to the downside, call the downside 22 stocks at 38. So, upside 16, downside of 16. It's on a temporal basis. If you think that the upside is unlikely to occur, let's say, you think they're not going to settle the case, like they're going to go to trial. The upside is probably some number of months out. The trials in October or at least unless he gets wins today the right to push it back. And then there's an appeal and that takes a couple months. You're talking December of these maybe January February, who knows before you get to 54:20. Now, let's say, you also think that there's the time between now and then has the potential for there to be negative surprises if, for example, Twitter's Q3 earnings are so bad that the banks call declare a material I've heard-- They declare that there's material change and they can get out of their contracts or something. Bill: Or, the whistleblower, which came out, right? Evan: Or, the whistleblower. Exactly. The whistleblower. If you allow yourself to be exposed to those negative surprises, but you then sell the position in November before you-- Sorry, in end of September before you can-- The top four, our right of chance to realize upside, then yeah-- I don't know that these assumptions actually applied to Twitter. This is a thought experiment. You are cutting off your upside potential without really decreasing the downside that you risk still along the way, potentially. Bill: Yeah. Evan: I would agree that there's the potential for the upside-downside to change depending on how long you fold it. That being said, for the average stock, where I'm not really a big believer in Kelly betting for the average stock, anyway, because the upside-downside is not really known. I'm not sure how much that makes sense, because-- And even in the Twitter situation, the market eventually is a weighing machine. But people are voting on what they think the outcome was going to be and there's definitely potential for upside surprises along the way that don't involve the court case. Today, it is a good example. We're recording this on September 6th, 2022. There's a hearing where the judge is going to decide a bunch of things, probably soon, with respect to the case that if they all go in Twitter's direction, it could speak to the judge's overall opinion of the case and the stock could trade off. Bill: Yeah. Evan: I think I definitely see what he's saying. Although, I think in practice, it's hard to know. It's harder to know how much upside versus downside you're giving up by cutting a position short. Bill: Yeah. And I guess, the way that you can reconcile, maybe trimming a position and also, what he's saying about the Kelley bet is, as the price goes up, your risk reward is changed. And that would tell you that all else equal of Kelly would mandate. Like a lower portion of your portfolio should be bet in that way. So, you could be trimming and following Kelly, if you're reducing your size. Evan: Totally. Just separately, yes, if you trim early, you might be changing the risk reward of some bet that you made six months ago with this money. But that's actually irrelevant, because what's before you now is a new bet with new prices, with new timeline. And so, yes, you change the risk reward from back then. But who cares, because you're not making that bet anymore. You're not presented with that bet. You don't have the chance to go back and buy Shopify at $2 or something five years ago. You have to bet on the price today. So, I completely think it's fine. Even if you are doing Kelly, there's just a new Kelly bet. There's just a new Kelly calculation that you have to do today. And so, you're completely right. But it's dependent on where the stock is trading and what the upside and downside are from today. That being said, there's a huge bias towards selling too early, which is always something to think about. And honestly, what I try to do is, being a value investor, there's this tendency to have a forecast originally. You're buying the thing, it is eight times earnings, and now, it's 14 times, and you're like, "Okay, I'm out. it's no longer cheap. Based on my previous forecasts, I wouldn't have thought it was cheap at 14 times earnings. So, therefore, it's not cheap at 14 times earnings now and I'm going to sell it." Yeah, but there's a bias toward selling too early. What I tried to do is, on the way into a stock, I'm trying to be super conservative. But once if it's working in my favor, I tried to increasingly make forecasts that would allow me to hold it, basically. The default hypothesis in my view changes a little bit and it's only because of this cognitive bias. This cognitive bias wasn't there. I don't think this would be correct. But the cognitive bias is towards selling things too early and some people, they fight that bias by just saying never sell. [audio cut] never sell exists, because people trying to fight a bias, I think, if it's being done with any thought at all, [chuckles] because it's not entirely clear. Bill: Well, Chris Cerrone at Akre, that guy thinks straight. So that's-- [crosstalk] Evan: Yeah, for sure. Bill: Yeah. Evan: For the people that are thinking deeply about it, I think never sell is being done to fight that bias. And so, what I try to do is, I don't quite do never sell, but if it's working in my favor, I just try to be conservative in the sense of not underselling how well the company has been doing. The company has been doing well, giving them full credit for that in my projections and really seeing if there's a way for me to hold on to the stock. Sometimes, there's not. Straight up, sometimes, there's not, and then you just have to sell, and you have to pay the taxes, and you just have to get the calls from your clients, where they're very, very annoyed that you're making them pay taxes on something that went up flat 7x or whatever, which is something- Bill: [laughs] Evan: -that [audio cut] literally happened to me. [laughs] Bill: Well, taxes are very annoying. But if they're long term, they're less so. Evan: Yeah. Bill: I'd be fine paying taxes on a seven bagger, by the way. Evan: Right. Yeah. I would hope that most people would be. But for some people, it's just easier to understand the check that they are sending to the IRS and feel that pain, rather than remembering what their account balance was the year before. You know what I mean? Bill: Yeah. So, how did you get the cojones to short the meme stocks? Or, were they the meme stocks or were they just really overvalued? Evan: We started in late 2020 with just really overvalued stuff. Honestly, at my old job, we did a lot of short selling. It was a long, short portfolio. Yeah, I spent a lot of time on shorting. My old boss was pretty bearish at various times and made a bunch of money calling some stuff that happened in 2008, 2009 correctly. And so, we always had this a little bit of a bias towards shorting and seeing the potential downside in things, which didn't always help us, but it definitely is a good way to think I think, overall, even when you're trying to go long something. But anyway, so, I got a little bit disillusioned that my old job with shorting, because probably it's between 2013 to 2016, like, more and more any kind of obvious short would have high borrow rates, or it would just be difficult to borrow, or just wouldn't be there. And enough liquidity. What Jim Chanos does is extremely difficult, because of all that extraneous things you need to manage to run a short portfolio that isn't just picking stock. It's literally like how much is this going to cost me to short it, am I going to be able to stay short, is there going to be a squeeze, etc. I shied away from shorting or doing much shorting when we were starting this business, because I was a little bit disillusioned with it. It's just very difficult. And because we were started starting from scratch, we were trying to start a business, and I just thought it made more sense to focus on the long portfolio, and nothing seemed that outrageously valued. We incorrectly thought for a while that value stocks were pretty cheap relative to their prospects. And that at least, our stocks did pretty well. But overall value did not do well. So, that sentiment definitely turned out to be wrong for a few years. But then in late 2020, summer fall 2020, we were just looking at all the COVID winners, and all the other growth stocks, and just being like, "This is insane." This is completely insane. I remember thinking like, "I just literally cannot chart these things. I'm sorry. If it fails, I don't know what to say. I just cannot do it at this point." I don't know, that's not really a good. But it's just all based on the valuations. The SPAC boom, there was just all the hallmark signs of a blow off top. And the short sellers had just been so burned over the years that they just weren't there. But the Robinhood craze, and the SPAC boom, and all that stuff was just-- Sometimes, when I buy a stock, I'll say that the valuation in the stock and the story just spoke to me. But I thought that about the SPAC boom, and the growth boom, and all the crazy stuff that was going on post-COVID. It just spoke to me from the shore perspective. I felt it was hitting me over the head. And so, we just decided, I think it was probably September or something 2020 to put that trade on. And honestly, it was pretty painful for about six months. Bill: Yeah. Evan: Obviously, you could have been years earlier. When I was putting this on, I was thinking to myself, what happened to David Einhorn's portfolio and his shorts over the years was both the reason to not put on this trade and the reason to do it, because exactly what happened to him and his shorts was the reason to not put it on, because you know what, there are great companies out there and they surprise you to the upside. Jeff Bezos, and Reed Hastings, and all these people are actually amazing. And shorting them is very dangerous and can really hurt you. However, a good thing can be taken too far. That idea had been taken so far that it was actually very difficult to lose over the long-term, like, shorting the things in 2021 that we shorted, I think. So many shorts would look to the guy like David Einhorn and his results would be like, "Yeah, see, this is why we don't short anymore, because you're just going to get annihilated." That created just a gigantic opportunity, I think to do the opposite of that and so, that's what we did. Bill: I know nothing about running a short book. How much brain space does that take to make sure that things aren't just moving up parabolically against you or is it one of those things that you're like, "The shortcuts more attractive as that happens?" It just seems-- [crosstalk] Evan: Yeah. The difficult thing-- Well, okay, let's talk about 2020, 2021. Honestly, those valuations that we were shorting things at were so ridiculous that it did not take a lot of brain space to figure out that Virgin Galactic SPACE and half of the other SPACs just didn't need it to be shorted. So, as far as figuring out that these things should be shorted, that didn't take a lot of brain space. It does take some brain space to keep track of all these smaller positions and think about when you should be trimming them. Because yes, if a thing doubles for no reason that you can figure out, it does potentially make it a better short, if it's just pure air, pure hot air. Again, we're investing my family's money, partially. I'm not going to risk losing 20% of capital on a single position. If it's a 2% position and it moves against us to a 5% position, goes up two and a half times, we're going to think heavily about trimming that regardless of the valuation, because we just can't risk it. We just can't risk it. And that's the hard thing about shorting. If you're not decent on the timing, you can get carried out just because of that factor. And so, that's why it took us so long, honestly, because we were thinking things looks overvalued in 2019, 2018 as well, but it just didn't quite make sense and they were all the hallmark signs. Yeah, these days, things are a little bit less obvious. But you still got GameStop, at what? What's GameStop, about $8 billion or something valuation? Yeah, $7.6 billion. The brain space to figure out whether that's short is required is zero. You just have to have a functioning brain, I think, to know that that's a short. Bill: Yeah. Unless they do something where they ape it again or whatever and then you're called out of it or whatever. Evan: Yes. So, that is the risk. That's the risk. That's the risk. I'm shocked that it's still trading where it is, although it is down 10% today. That's nice. Bill: As it deserves to be Evan: Yeah. Bill: It deserves the 50% lower minimum. Evan: Yes, for sure. The market cap in 2018 was $1.6 billion. [laughs] Bill: Yeah. That's crazy. Evan: The sales was 20% higher and they had a billion of EBITDA. Yeah, it deserves to go insanely lower. But you do have to manage the position, because you can lose a lot of money covering between when it goes to 5% and then covering again, then covering again. The shocking thing about GameStop, if you look at the history of the markets, usually the thing that happens once that's really crazy, it doesn't just immediately happen again, right? Bill: Yeah. Evan: The fact that GameStop went from on-- The stock had a split. So, right now, it's at $25. But it went from $280 and then-- [crosstalk] Bill: Geez. Evan: Yeah. It went from $280, and then all the way down to $10, and then it went back to $70 all in 2021. That's crazy. They actually did do it twice. They did it two or three times now. So, that is a risk. But I think as time goes on, it becomes less of a risk that they're able to have a go up quite as high just because the more people know about this game, it's just a little bit difficult to try to get it quite as high, I think. Bill: Yeah, that makes sense. The only one that I continue to be mad at for missing is Robinhood. But I also think that there were a lot of reasons for me to stay away. I was a tad too emotionally connected to that one, dude, to believe that, I was seeing it clearly. But man, when I was digging in on that thing, I was like, "This is just DraftKings. It's just a casino masquerading as a financial product." Evan: And you know what, that is a thesis that has worked a few times. DraftKings, it was a regular casino business masquerading as a different casino business, I think. Bill: [chuckles] Yeah. Evan: And then you had skills. I don’t know if you heard of this stock. But they were a gaming company or they are a gaming company, where theoretically you do real money gaming. Basically, they tried to make it they were an esports company. But it turns out they were just a gambling shop. Literally, the idea was like, you would bet $20 to play Tetris against your friend or something. And they were claiming that that was like esports. [laughs] Bill: Okay. That works, I guess in today's world. [crosstalk] Evan: Man, that's an example of something that we shorted. That was a $7.4 billion valuation- Bill: Oh, my gosh. Evan: -on $200 million of revenue and negative $90 million of EBITDA. Bill: That's crazy. Evan: December 2020, that was a $7.4 billion valuation. And today, it's $500 million. Bill: That's nuts. Evan: Yeah. Bill: It's wild how it can happen. Have you heard of FaZE, F-A-Z-E? Evan: Yeah. They are an esports gamer guy. Bill: Yeah. Evan: What’s his game? I forget what he plays. Bill: I don't know. But I think that it carried north of a $2 billion value. Oh, it's down 22% today. Evan: Oh, that's the clan. Oh, interesting. Right, right, right. I've heard of this. It's a Counter-Strike clan. Bill: Oh, my. Wow. Yeah. That's down from 19-- [crosstalk] Evan: I thought it was individual. Bill: No. Yeah. There's a guy that I follow that was like, "This is a terrible valuation." Then I pinged him and I was like, "Am I understanding this correctly?" And he was like, "Yes." And I was like, "Yeah, that seems like a good short." [laughter] Evan: Wait, could you forget that? Was that? Bill: I don't know. I don't know. That's the thing. I don't like check into the borrow or anything like that. Evan: Oh, that's a publicly traded thing. Bill: Yeah, man. FaZe. Evan: Wow. I didn't even know that. See, that shows you how many crazy things that are out there I'd never heard. Bill: It's still got a billion-dollar valuation- Evan: Wow. Bill: -if this data feeds are right. Evan: No, no. Yeah, that's what Bloomberg says too, I don't know what you got. Bill: Yeah. Evan: The short interest is 99.4% of the float. Bill: That's a lot. Evan: That's a lot. That's a lot. Bill: Yeah. I don't know, man, it's wild times. I guess it was funny. When it was going on, I saw some of it, I missed some of it, I wrote down how I felt through a lot of it. So, I think the next time that I can actually feel greed inside my body, I'm just going to force myself to sell everything. Evan: It's hard, though. It's the both an advantage and a curse that you have as someone that's primarily-- Well, do you have clients or you just manage your own money? Bill: No, it's just me. Evan: Yeah. That's an advantage that you have as just managing your own money where you can do that, and no one will. There's no one to answer to about why. Bill: But the other thing that I wrote in the middle of the time is like, "Yes, I think a lot of these returns have been pulled forward." Some of this crazy stuff, I think I vocally didn't like as a basket. But something like charter at 800, which I sold but I got into Altice, so, that was dumb. I was like, "I just don't see how the stock does well from here." On the other hand, your opportunity cost, nothing was really cheap, except for energy. People are screaming at their headphones saying, energy and commodities. But I've never known how to play that game very well. Evan: Honestly, I don't profess to know how to really sell stocks. 90% of the time, I am trading into something, I think it's better. Bill: Yeah. Evan: Or gross exposure will vary a little. It'll does vary, but for the most part when we make changes, yeah, it's swapping one thing to the next, because it's just so much easier to compare what I think the return is going to be on some new stock than it is to just trying to think about what to do with cash, you know? Bill: Well, that's what I think Munger would say to do is, you have security, that's your opportunity cost, and you weigh everything against that, and then make your decisions based on opportunity cost. Evan: And for us, we have a little bit of an advantage, depends on what the market is going to do. But we can express our view on how long we want to be by shorting things. Bill: Yeah. Evan: So, that's nice. Yeah, so, we'll tend to do it. That's basically what we did in 2020 as we decided. Yeah, A, we want to short all these things, but in B, that'll help us not be quite as long, right? Bill: Yeah. Your gross exposure will move based on how short you want to be on average, perhaps. Evan: Yeah, net exposure. But yeah. Bill: Yeah, that's right. I don't know why I said, gross. My bad. Evan: Yeah. [chuckles] Bill: Anyway. Well, I want to let you get out of here and prepare. So, if there's anything else that you want to talk about, but I know you got a big afternoon of watching some fireworks with Elon. Evan: That's right. That's right. Yeah. A friend joke that they were going to turn it into a drinking game, which sounds nice. Bill: It's going to be interesting to watch, man. I feel I'm taking crazy pills, because one, I think a bet on specific performance. You've got the richest man in the world with the best legal counsel negotiating against a multibillion-dollar public company with the best legal counsel. If this contract isn't enforceable, then what is. Evan: Yeah, and of course, he would argue like, the contract is enforceable and that's why the clause in the contract that says that we can get out, if they made material misstatements, blah, blah. Bill: Yeah. Evan: It's bullshit. It's so transparently a pretext. It's just so obvious. Nothing has ever been [audio cut] Bill: One of you watched him on Twitter and watched in real time. It's just so hard for me to believe that that's an honest assessment of the situation. Evan: He's blindly lying. As Matt Levine said in one of his emails, it's like, "It's important to remember he's lying here." [laughs] Bill: Yeah, [laughs] that's right. Evan: He said, "I try to explain it to family members, something." I was like, "Okay." Let's say, I was wanting to buy your house. And I was like, "You know what? This house, it's a good house, but it could really use a new roof." You know what I mean? The roof, it's got some issues. We're going to fix it up. It's going to be an amazing house and everyone's going to love it in a few years when we fix the roof. Then, you sign the contract and the local real estate market tanks. And you've tried to rip it up by saying, "You know what? You didn't tell me how shitty this roof was." Bill: Yeah, that's right. Evan: It turns out the roof is actually pretty bad, and I did not know how bad it was. I've never been up on the roof, but I'm pretty sure it seems bad from here. Like, "What?" Bill: Well, not just that. You specifically said, "I don't need to go up on the roof and check it out. I'm cool with the house." Evan: You offered me to go up on the roof that. But I said, "Nah, that's fine. It's fine." Bill: Yeah. Evan: It's crazy. It's the dumbest thing I've ever seen. Bill: Nervous at all about the whistleblower? Evan: Anytime you got some-- [crosstalk] Bill: It's not a great developer. [crosstalk] Evan: No, it's not a great development, but we put out an update on our blog recently. Basically, if you look at what he's really claiming, if that have come out, things like that come out fairly often about these social media companies. Facebook has had three whistleblowers, at least, that we know about. Is that come out on a random Tuesday? The stock might have moved 3% or something, because it's not directly relevant to earnings, basically. Okay. They have some unlicensed software issues or something. Probably every software company has some improperly licensed semi open-source software that they're using, that's just how things work. Even like the FTC privacy stuff, that stuff is a little more directly relevant, because they just got fined by the FTC for violating the consent decree. So, it's very possible that it could happen again. But if you look at the size of the average FTC fines, they're $100 to $300 million. And it just doesn't move the needle for $44 billion merger or Twitter. It's not material adverse effect. Now, he's going to try to claim that Facebook was fined $5 billion by the FTC. And therefore, $5 billion maybe is material to Twitter. And I actually saw Ben Thompson of Stratechery make a similar argument about Facebook's $5 billion and how that can be seen it. But if you actually look under the hood, Facebook actually got sued by shareholders over that fine. And what happened was, basically, Facebook agreed to a fine that was 20 times larger than that FTC had ever gotten. And it was 50 times larger than what they would have gotten under their statutorily maximal $43,000 per instance fine. The FTC is not just not allowed to find people whatever they want. It's 43,000 something, for instance. And the case law that has said previously, that's a per day fine. It's not per person that sends a Facebook message or something. And so, when they were pitching the settlement to the Federal Circuit Judge, they actually said, "Listen, this fine is so gigantic. It's actually more than any judge would have ever given us. It's actually more than statutorily possible. And therefore, you should approve it, because it's so punitive on Facebook." What a couple of FTC commissioners, the ones that Democrats that voted against it, because it passed by three to two, this fine, they were like, "Yeah, basically, this was a bribe, so that Zuckerberg didn't have to submit sworn testimony and open himself up to personal liability in this matter." And they knew they would have never got $5 billion if it went to trial. So, they just made up this gigantic number, so that Zuckerberg didn't have to testify. And so, if you look at that, you're like, "Yeah, there's no way this FTC thing is really good." I know, this is a super long-winded explanation, but there's no way in FTC fine would be large enough to matter here and the rest of the stuff is nonsense. And he basically admitted that Twitter was right about the bots. He admitted that Twitter was correct about the bots. So, what are we talking about here? I don't know. I didn't find it too compelling. Bill: Yeah. I was worried about it being a card that I didn't know how to handicap at the time. I do have this weird belief that I think Elon actually does want to own Twitter. I just don't think he wants to pay what he said he pay. Evan: Literally, nothing that he has done so far. Okay. You could argue that some of the stuff he's done could decrease the long-term value of Twitter, because he's disparaging it or it causing SEC to investigate or whatever. But not really. Really, the long-term value of Twitter is the platform and the users. And the users aren't going anywhere, because of this. No offense to Twitter employees, but the value is not the employees really, because Elon wants to go in and cut half of them anyway. That's the whole point. If some of them quit, because he tweeted a poop emoji, like, "I don't think that really this is the long-term value of Twitter." Bill: [laughs] Evan: If nothing he has done has really decreased the value of Twitter for five years from now, then everything he's done is entirely consistent with a rational person that does want to own Twitter, but just not at this press. Bill: Yeah, that's my read too. Evan: Yeah. It's just how LVMH did a whole song and dance of about how terrible Tiffany was, when they were under contract to buy that company during COVID. And eventually, they just bought it for a 3% discount. You know what I mean? They were like, "Oh, you guys managed it so terribly. It wasn't in the ordinary course. You like blah, blah, blah." They had a French politician send a letter about why LVMH wasn't allowed to buy them. I don't know, if you remember that. Bill: No, I don’t. Evan: Yeah. Look that up. It's hilarious. At the end of the day, they just wanted to lower the price. Bill: What is this American trash? We can't have this American trash in our luxury brand. Yeah. Evan: We will die. We will lose the culture of the-- [laughs] Yeah. Bill: Yeah. That's right. That's interesting. Evan: Yeah. Bill: Yeah. I have a couple people that I spoke to at Twitter a lot more with the Super Follow stuff. Some of them have left, but slow execution will cost you a lot. While I like them as people, I'm not sure that the value of Twitter's in the current culture and all that. Evan: Agreed. Bill: Well, we'll see how it all plays out, man. I'm rooting for you to have a not too exciting afternoon. How's that? Evan: I like it. I like that idea. Bill: All right, sounds good. Well, thanks for stopping by. I appreciate it. I'm glad we got to do this. Evan: This was fun. Bill: I look forward to hanging out in person again. Evan: Yeah, man. Me too. [Transcript provided by SpeechDocs Podcast Transcription]