Jake Taylor - From First Principles
Major Topics: Process and Decision Making Improvement
Jake Taylor is CEO of Farnam Street Investments, Co-Host of Value After Hours, Host of the 5GQ podcast, author of The Rebel Allocator, and Founder of journalytic.com. Jake and Bill met at Berkshire and immediately became friends. While they invest differently, they have more in common than Value After Hours fans may think.
On Value After Hours Jake is known for his "veggie" segments, which are segments that tie investing ideas to other worldy concepts. He is very passionate about making the best decisions possible and drawing from a wide range of subjects.
We hope this episode highlights how Jake thinks about the world and spreads better decision making. Topics covered include:
-Base rates underpinning underwriting
-Bayesian updating
-Tracking what happens vs what you thought would happen
- Few stocks driving the majority of return. See https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
- W. Brian Arthur's theory of Returns to Scale. See https://hbr.org/1996/07/increasing-returns-and-the-new-world-of-business
- And much more
We hope you enjoy this conversation!
This episode is brought to you by Koyfin, one of the fastest-growing platforms for financial data and analytics to research stocks and understand market trends. Check out Koyfin.com to see what a Bloomberg-lite, with tons of high-quality fundamental data and a powerful graph engine looks like.
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode is for the Value: After Hours fans. My guest today is Jake Taylor. Jake is my co-host on another podcast called Value: After Hours. If you don't know, check that one out. It's with me, Jake, and Tobias Carlisle. Jake is usually the one that's looking at me like I have two heads when I do have two heads. He's a great thinker, and a great friend, and I am super happy to be able to feature him on my own podcast. This episode is brought to you by Koyfin. You should already know that Koyfin displays financial information simply and elegantly, because you've been trying it since you listen the last episode. I thank you for that. But in case you don't know that, Koyfin is one of the fastest growing platforms for financial data and analytics to research stocks and understand market trends. I discovered them, thanks to their very passionate users, many of which are my friends. Imagine a Bloomberg light with tons of high-quality fundamental data, a powerful graph engine that can show it all clearly any user interface that doesn't look like it was built in the 1990s.
If you're an individual investor, research analyst, portfolio manager, financial advisor, or really anyone else that is interested in seeing financial data displayed very, very beautifully. Do yourself a favor and check them out. You're not going to regret it. Sign up for free at koyfin.com. That's K-O-Y-F-I-N dot com. Without further ado, please enjoy my episode with Jake Taylor. As always, 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. So, with that other way, Jake, how you doing, man?
Jake: Good to be here, Bill. I've been very excited for this. I'm 50% excited and then 50% terrified, because there's been so many good people come through in front of me and the bar is so goddamn high now that I'm not sure I could jump over it.
Bill: Well, I'm a little bit nervous as well and part of why is I feel a lot of pressure to give you a very good interview, sir.
Jake: Oof.
Bill: We go back. When did we really start to get to know each other? It was the night that we all met in Berkshire, which was, what 2015 or 2016?
Jake: Somewhere around there. Yeah.
Bill: Then we had our nice trip to Toronto, where you and I shared the equivalent of a studio apartment and slept in kids beds next to each other, not together.
Jake: Big spoon or little spoon. [laughs]
Bill: A little small. That was a fun experience.
Jake: Yeah.
Bill: And then what? That was pre-Value: After Hours, right?
Jake: I think so. Yeah. Then, we got to hang out in Virginia.
Bill: Yeah, that's right. We did that. Yeah, that was a fun weekend.
Jake: Yeah.
Bill: We've got to do more of those.
Jake: I agree.
Bill: For people that don't know, it was a group of people that came together, and we discussed a topic, and it was one of those situations where what said in the room doesn't leave the room, and I would highly recommend that people do that. I think that that was like a very good-- You got to have, what do we have? We had eight or nine guys?
Jake: Yeah, something like that.
Bill: Probably, good to have a woman in there next time to get a different perspective. But generally speaking, I think it really facilitated some nice conversation.
Jake: Yeah, I agree. I think, especially if you can get some diversity of thought, you can catch a lot of different angles in a relatively quick iteration, because you're actually in the same room together as opposed to those disparate threads of ideas all floating around in your Twitter, DMs, or wherever.
Bill: Yeah, I think that's right. The other thing that I like about it is, I find the industry is so focused on presenting oneself as being almost omniscient, even though, that's not true. That's just my perception of how people market themselves. To be fair to many, a lot of people talk themselves down, but it's nice to get in a room with people and be like, “Look, I could be a complete idiot on this. I need to work through these thoughts, and to not worry about somebody outing you as a moron is kind of a nice thing to have.”
Jake: Yeah, I think nothing sells like a very overconfident pitch, right?
Bill: Yeah.
Jake: We're all susceptible to it, whether it's the latest fad for losing weight or an investment pitch. It is the humility-- There's a disconnect between what's a good business practice in the investment world which is to be Uber confident, and then actually like what would probably lead to good outcomes, which is to eat a big dose of humility.
Bill: Yeah. How do you reconcile like when taking a position, there's that saying that any buying any stock is an act of hubris? How do you know you know, is a question? Chris Mayer actually wrote a book entitled this.
Jake: Yeah, that's a great-- [crosstalk]
Bill: I think it's an interesting thing to think about.
Jake: Yeah, it's something I struggle with. You never want to be the dumb one at the table. I think where what helps me is, I'm largely numbers driven for the most part in my research, and I let the qualitative things-- I think they're important. They're hugely important. I've just always not quite as sure if I can hang my hat on them as easily. The numbers drive a lot of it and the numbers assuming that they're legitimate numbers, not fraud or something, which is very rarely the case that you have something to hang your hat on that. All right, well, they're looking at the same numbers that I am at least. Maybe they have other understanding that I don't. Maybe I have more understanding that they don't, but my numbers give us some apples to apples at least.
Bill: Yeah, I guess that the reason that I perceive myself to have shifted more to a qualitative person is like I struggle with what I see in the numbers that other people don't. That's like I think the qualitative part is, maybe this is just bull cycle, I'm an idiot talking, but I do think that like that's where the insights can come from. I don't know.
Jake: I agree. I think those are the biggest paydays too, actually. But I think they're also less frequent than people imagine and especially, late cycle.
Bill: Yeah.
Jake: There aren't as many insights to go around as we would all hope.
Bill: Yeah, I guess the one insight that I wish that I’d had a lot earlier is that a multiple, really the way that I want to state this is a high multiple on a small business is not necessarily an expensive price to pay. The one that really hurts is Lululemon. My wife, when that was a really, really nascent brand, she was like, “You need to buy this stock.” I looked at it and I was like, “Oh, it's 50 times earnings or whatever,” and I said, “No.” Just the amount of money that that cost me.
The other really big mistake that I hope I never forget, and I don't think it will be possible, but is like having Buffett in my head, saying like, “Tech's not in your circle of competence,” and not allowing myself to think for myself when I saw that first iPod come out, and it had that wheel, and they had just released the color computers, and you could see them flying off the shelves. Then there was another shot. Now, wait, in the middle of a basically depression, you've got people lined up around the store to buy an iPhone, and here I'm the idiot that's concerned about how sticky it's going to be. I don't know. I don't think you had to be at that multiple, but or price in retrospect.
Jake: Yeah. The eternal struggle is, do you want to use base rates and a statistically expected outcome and have a lot of bets, and capture the expected return of what that basket should produce historically, or do you have some insight something that would negate the base rates, actually some Bayesian update to what the base rate, maybe it is not capturing that you understand that nullifies the typical base rate? I've joked before that if I wanted to do one of those Biff giving his younger self the sports almanac to do sports betting, one of the papers that I would have told younger self to go read and really focus on this one and take it seriously as opposed, because you read a million articles, and it's hard to tell which one would have been the one to really focus on.
But there was a paper by Brian Arthur of the Santa Fe Institute back. I think he wrote it in 98, and he talked about returns to scale. It was basically an early recognition of some of the network effects that would be coming down the line. If you recognize that, you would have been an easy recognition of some of the FANG potential companies much earlier, maybe, just all kinds of places where that probably would have served you really well. All of those companies have defied base rates in ways that I'd never would have imagined and continue to this day. Shame on me for not recognize thing that soon enough or ever, maybe. [laughs]
Bill: Well, I don't know that you're alone in that. So, then the question becomes, if they've defied the base rate for so long, what is their specific base rate going forward? What's going on like I see people rail against the valuations of those companies, and I do understand that at some point they need to take over the world in order to justify the multiple, but the other side of it is like we are in a truly global world now, and the idea that historical multiples when you were limited in your geography that you could compete in and had the need for reinvestment capital. I understand, they need to hire employees. I'm not saying they don't need any reinvestment capital and they have become fairly capital intensive. But generally speaking, I think that people have really underestimated the duration that this growth can go forward for.
Jake: Yeah, I'm the president of that club of [laughs] having not been respectful enough of how amazing some of these businesses turned out to be.
Bill: So, why not pivot on it?
Jake: It's too late now. I don't know. It's always [laughs]
Bill: Well, yeah, it is. It's always [laughs]
Jake: Yeah. I’m going to be the last guy to the party.
Bill: Yeah.
Jake: I think what a lot of the wise did in the beginning, I don't want to be the fool that does in the end.
Bill: Yeah, but okay. I think that that makes a lot of sense. But that thought could be mitigated with position sizing. The answer could be opportunity cost, but I just don't know that we're at the end.
Jake: No, I know. I agree. I have other places that I'm feel like I have a little bit more insight and a little bit better chance of recognizing mispricing then, especially in those names, and how big they are, and how much coverage they have, and I tend to traffic more in smaller companies anyway. So, I'm joking a little bit when I say like, how much I missed the boat, but I definitely miss the boat.
Bill: Yeah, when you say mispricing, that's something that I've actually been thinking about a lot over the past, I don't know, 18 months or whatever. You must be correct on the future in order to have a precise and accurate price today. Like a mispricing implies knowledge of the future. But I also think that when I was younger, I focus so much on price, whether it was to book or a multiple, and then playing a re-rating game that I missed really focusing on the future and thinking like, “Okay, well, where can this business actually be in five years? Where are we priced relative to that? How did your learning curve go in that journey?”
Jake: Very similar, I think, probably to yours where early on, I had zero confidence that I could tell you any number in the future, and I was almost like the intellectual equivalent of throwing your hands up in the air and saying, okay, I can't tell you anything about this in the future. So, I'm going to only look backwards at the results of businesses to then basically, as a base rate, assume that some of these will get better, and hopefully have underpaid to what the results of a few of these will work out, and become then asymmetric returns that carry most of the return. I think the return profile of what I was looking at was most of the things won't do much, they'll just sit there and tread water. Some of them will could be zeros, but are pretty big losers. But the ones that win, that small percentage will win in such a way that they will create the asymmetry that then leads to some reasonable results.
I think where I've morphed is that one after doing this for a long time now, and being a pretty diligent student of business, and psychology, and economics, and all the other things that you have to have your mind wrapped around this multidisciplinary toolkit to maybe have a shot at some understanding of how the future might look a little bit always with a pretty heavy dose of not skepticism, but at least realism. I realized that I could do such a better job of tracking what I was expecting, and then what happened. What I mean by that is, think about decaying your returns into different buckets. So, one would be the change in the business results, and then the other one would be change in multiple. Both of those have a valid strategy to them. You could be saying like, I think I understand where this business is going to go, and then actually making probabilistic predictions about key fundamentals about the business, whether it was revenue, or profit margins, or you could go all the way just to the earnings if you want to skip to one step.
And why you want to do it probabilistically is that, you then get a much better sense of when you say that Apple's earnings are going to be 10% higher, I think it's a 60% chance of that-- Well, over enough data set like that should happen 6 out of 10 times. If it doesn't, then my calibration is off on how confident I am versus the prediction that I'm making. You can be both over or under confident on the calibration of those predicting those business fundamentals, and really, what we're getting it back to is, the 1950s, there's this guy named Glenn Brier, who is actually a meteorologist, and he came up with this scoring system, simple two factor scoring system. Make a probabilistic prediction, and then does it happen or not. This Brier score will tell you how accurate you are on your predictions and whether they're coming true or not at the rate that you believe that they're supposed to be coming true.
You could be making those kinds of predictions about the business fundamentals, or you could be making the predictions about a re-rating of whether it's price to book or free cash flow earning some fundamental. If I could've had enough data about my decision making on that, and how I thought I was going to win, and then did I actually win that way like, did the earnings re-rate, or was it the business did something that I wasn't expecting? I would start to get a sense of, “Okay, well, where's my advantage? Is my advantage in that being patient enough to be a good buyer and wait for a business to re-rate, or was it that I actually have some insights into the business?” I think knowing how you're going to win is a huge advantage that most people, I don't think have probably done the work yet to know exactly like what's my advantage? How am I going to win in this game?
Bill: Yeah. For you, how are you building out a way to monitor that for yourself?
Jake: Well--
Bill: I think you've spent a fair amount of time thinking about something like this.
Jake: Yeah. If I had a penny for every hour that I've spent thinking about the investment process and how to improve my own, I probably wouldn't even need to be an investor. That's the irony of it. [laughs]
Bill: Well, I’ve been maybe you invest in this type of thing, right or whatever.
Jake: Yeah. I've been working on a project for a while now that is really originally designed and built for myself to improve it. It's a software package that is about improving my decision making as an investor. I know where all my shortcuts are. I know where my brain wants to conserve glucose and not put in the effort. This is that structure that's delivered in a software package that allows me to hold my own feet to the fire and not cut corners and do the work that I know that I should be doing. Almost in a way like in some ways, it's a coach. Like a coach.
Bill: Yeah, I was just thinking, it's like your physical trainer or whatever, except it's your investing trainer.
Jake: That's right. When you want to give up and not do those last couple reps of that set, because you're tired, and it doesn't feel good, but then the coach says like, “Hey, pull your head out of your ass. This is where all the gains are really going to come from are these last few reps. Get in there.”
Bill: Yeah.
Jake: But I think the same thing is true in the investment world. and it's amazing. It really any decision making, but it is amazing to see how much-- I have this theory that, supposedly something like 80% of the mass of the universe is made up of dark matter, so it's things that we can't really see or measure at this point with our current tools and capabilities. I think that there may be a similar amount of data about our decision making that is falls in that 80% category of dark matter of things that we're not measuring, things we're not keeping track of, but things that are actually like carry a very real mass to the outcomes of our decisions.
Bill: You need to partner with Annie Duke in a university or something, and go like do a study.
Jake: Annie’s amazing. She's one of my heroes.
Bill: I know, you and her could chop it up. Have you talked to her?
Jake: Yeah, we've done a couple of podcasts together, actually. I don't know if you've seen those. They came out--
Bill: I haven’t. A semi one.
Jake: Okay. Yeah. It was the good life kind of series that those guys-- [crosstalk]
Bill: Yeah. Dude, I would love to listen to that. I'd be super interested in that.
Jake: Yeah, Annie is great. What's really nice is that, she has all the theoretical underpinnings and understandings, but she's got the practical side to from actually being the woman in the arena making poker decisions which have huge consequences, and that same thing that we deal with an investing where there's probabilities, but there's also much more to that there’s psychology. It's not just purely a numbers game. So, yeah, she's terrific.
Bill: The coolest thing that I have, obviously, from watching poker and talking or listening to her, I have not talked to her. But I think that an interesting part of poker is that you're reading the other person. I think that investment is a lot of reading the other person and their incentives. But I think that a lot of people are like, “Well, don't talk to management.” I don't know where you fall on that, because we've been to Fairfax before, and we went to big Laurie. Shoutout to [unintelligible 00:20:33], what's up? Then we've got a Berkshire. It's hard. I find it funny, or if not funny. I find it at least something to ponder that a lot of people are like, “Well, don't listen to management,” but then they'll have Buffett and Munger in their ear nonstop. It's like, “Well, you are listening to a one-way managed communication here.” So, that's how do you reconcile those four people or how do you think about that for yourself?
Jake: I've gone back and forth on this topic in my head, and what I think is a smart thing to do, which is usually a dangerous place to be.
[laughter]
Bill: I guarantee you, your heads a better place to be the mind.
Jake: I don’t know. Obviously, the people who are running the show, it's hugely important. Every day, they're making decisions that are going to become material to your outcome. You want all of those things that Buffett talks about with energy integrity and intelligence in a good blend. But they're also you have to recognize that you get to that job, if you are a good salesperson, and you're not there by accident. I think the halo effect is very-- You will assign either higher score to them in the intelligence integrity and energy category, because they're charismatic. So, you just have to be careful.
I think one thing that does help a little bit is that, I tend to look more for either founders led companies, because they had to do a lot more than just be charismatic. You had to actually execute to get to that to where you are at that point. Whereas, if it's more of a bit of a call it a very uncharitable term, but like more of a mercenary kind of CEO that comes in is going to run it for four or five years, collect a bunch of options, cash out, and then they're on to the next board or CEO position, then that lack of skin in the game that-- I think what we're really trying to control for is the time horizon and having a similar time horizon in what we're optimizing for.
Me, I personally, ideally, I want to buy a company and hold it for a really long time and earn the results of the business, and that would then require that I have management who's thinking in a very long-term. But if the typical CEO now, I think in the S&P 500 turns over four and a half or five years is the average tenure. Well, if they're optimizing for four and a half or five years, that's not my time horizon. They're going to be making a lot of decisions that are short-term good for them, and maybe long-term bad for me. It's not that they're evil, it's not that they're trying to screw me over. It's just that, at the margin, those little decisions where it's like a little pain today, maybe for a bigger gain tomorrow, they're just not going to come to the longer-term optimization.
If you have a lot of short-term optimizations, you can end up at a local maximum that is much lower than if you have longer-term and a little bit more slack in the timelines. So, a lot of times a founder, who really cares about the business as much as they care about the money will solve some of those principal agent problems.
Bill: Yeah, that makes sense. That makes a lot of sense. I don't know how you're not involved in SaaS, if you love founder led businesses. I'm sorry to bring it up, but that's the thing that's ringing out in my head.
Jake: I do love SaaS, and in fact, I think there are some elements to SaaS that are, I probably should have appreciated sooner. For instance, imagine a good retail store, and it's small, you have a sole proprietor there, and he's watching, he or she is watching the customers and like, “What are they looking at? What are they interested in? What are their eyes pass over or where do they like get glued for a second?” They're studying human behavior and human nature, and if the really good ones like they're laying down in the aisles, they're talking to their customers, well, SaaS lets you do that similar thing but in a statistical way, where you're seeing mouse hovering, you're seeing what pages did they click through quickly or bounce from, you're getting an insight into human psychology at such a large and that it becomes statistically relevant.
I think, therefore, and also the fast iteration that you can do like that lean startup methodology. It allows you to put capital and human effort to work and get the feedback loop closed much faster than in other businesses where, let's say, I have to go build an oil refinery, and it's going to take me five years plus with the permitting, the world could change so much in those five years. I'm putting a ton of capital at risk. But if you as a SaaS engineer, have your stethoscope pinned to the heart of the customer at all times. I can see exactly what they're interested in the chances that you make an entrepreneurial error, and a bad investment and resources that don't serve that customer well. I think you are dramatically de-risked, dramatically reduced. So, it's an amazing business model. I don't know if everyone knows that already, and that's why it feels like it's been priced at such a level where I haven't been as comfortable owning most of those names.
Bill: Yeah, well, this is bringing up two interesting points. One to further your point on the re-tailer, I think that I have historically penalized SaaS businesses for share based comp.
Jake: Fair.
Bill: Well, yeah, but here's where I'll argue the other side of it. If you're that re-tailer and you see all these people lining up at your store, and you're like, “I don't have enough square footage,” and you don't want to go out and rely on the capital markets for debt, or you want to reward employees for coming to join you, you've got to open up a lot more stores quickly. That requires a lot of growth spend. Share based compensation is one way to use your balance sheet in order to avoid maybe some more tenuous situations in debt through growth, and I wish that I had thought that through earlier.
Jake: It's employee financing in a way.
Bill: That's right. Yeah, that's right. If you want your employees to buy into a long-term mission giving them equity is like a really good way to do it. But all good concepts that can be taken too far.
Jake: I think that's the key, and I guess maybe everyone's line is a different place of, how much should be carved out for employees or not? You could make the argument that that's almost PP&E in some ways.
Bill: Yeah.
Jake: That's the new PP&E is the rockstar programmer, right?
Bill: Yeah, and I think I like how post-market, shoutout to you on the Twitter machine. I like how they referred to-- I've always adjusted cash flow. If you are buying in shares to offset dilution, that's an operating cash flow to me. But I like how they articulated it. They say that they refer to it as phantom OPEX. I think that they meant that when they said that. If they didn't, I'm going to take it because I actually do like that. I think that is what it is.
Jake: Yeah. If they didn't say it, they should have.
Bill: Well, they definitely said it. I don't know if that's how they actually treat it internally, but I think it's how it should be treated internally. That makes sense to me.
Jake: I think that brings up a good point that is under discussed in circles is that, I think we see a lot of people complaining about value investing specifically, and they set up to me a straw man argument in an academic value, book value, especially kind of construct, whereas I think the good value investors have been making adjustments to the accounting treatment that you get for time immemorial. Buffett said forever that the financial statements are a starting place, and then people then just stop there and then say, value doesn't work. Well, that's not fair. I think, the real practitioners all along were making their own adjustments to what made sense to them from a business context. What are these numbers actually telling me are happening inside the business and not just arithmetic exercise of, “Oh, we'll take these numbers and add them up?”
Bill: Yeah, I guess here's how I'd push back though. This is the other side of the argument, there's a lot of value people-- [crosstalk]
Jake: Bill, can’t you just agree with me ever? You always got to push back. [laughs]
Bill: No, well, no. This is why I like talking to you. Because I think sometimes people think that you and I see the world very differently, and sometimes, I think that. But I don't think we actually do when we sit down and talk.
Jake: No, we don’t.
Bill: I think that where value investors have gotten themselves mentally hung up. Is to your point on like, let's say that you're in a refinery business. That business fundamentally, if it's printing $5 billion of cash flow, I'm not going to capitalize that $5 billion the same way that I would capitalize $5 billion in software, and I think that you could say, well, you're going to earn a lower return, that would be fine to say. I would say the SaaS business, you probably deserve a lower return as an investor in the SaaS businesses, because they carry so much less risk.
On the other hand, they've been able to grow so much that the SaaS investors have been winning. I think there's a combination of psychological biases that are working against rational discussion about what's going on, and I think a lot of it's like, nobody likes to admit that they miss something. Then, nobody likes to admit that maybe they're not like-- I don't know. Once you have, once you've written like some of the shops that are traditional value shops. They've written so much about-- [crosstalk]
Jake: Yeah, [crosstalk] kicks in a little bit.
Bill: Yeah, well, and you have institutional risk to then turn around and say, “Hey, we were wrong.”
Jake: [laughs]
Bill: That's really, really difficult.
Jake: Yeah.
Bill: I see it when I look at GIMO. I have mad respect for what those guys do from a research perspective, and I think I understand what they're saying. Because I've read a lot of what they write. But part of it's like, “Guys, at this point, the world may have moved.” No, maybe the right. They've called bubbles before, and I'm just some guy. But at the same time, it just feels like things are a little different and to not pretend that is--
Jake: You know, one thing I've wondered to go back to that lower risk for a SaaS company. Is it possible that there's diminishing returns on code? What I mean by that is, 1985, a workable spreadsheet that added numbers together for you like Lotus 1-2-3 was a huge breakthrough. That piece of code was so valuable and could do so much. Similar to Windows. Having windows originally was such a valuable piece of code, because it allowed all these other things to start functioning on from there.
Well, as we work further and further into specialization of code, which is where we are like, Is there not some point where there's some diminishing returns where even if it's good code, it's not going to be as valuable as those original sort of first just legendary pieces of code that created so much value around the world as all these businesses, like, all of a sudden, I went from literally adding up numbers by hand on a piece of paper with an abacus to being able to run some pretty like I save a ton of time now by being able to drag and drop a formula, and then it'll calculate all those numbers for me.
Bill: Yeah, I think that makes a lot of sense. I still think that a lot of the communication tools that are coming out are helping iterate ideas much, much faster. I do agree with you that the incremental code that comes out maybe-- I don't know. I guess where I'm at with it is code is super sticky. I was talking to Shomik about this not all that long ago. He was just like, “Dude, when's the last time you learn new code?” I’m like, “I'm not technically a savant by any stretch. I'm closer to a caveman, basically a boomer at this point.” But his point, I think, made a lot of sense, where it's like, “Okay, well, once it's embedded in your workflow, your willingness to change is actually much, much lower in reality than I think in theory.” I guess what I would say about some of these high valuations is, there's this dude on the Twitter machine. I like to shout people out when I steal their ideas.
Jake: Yeah, it's nice.
Bill: He goes by the handle of market makers, but he was on Spaces last night, and I thought that they were saying something pretty interesting, and his comment today was 30% of these businesses are going to be really, really good. But what they were saying on Spaces last night, and I really liked this concept is, liquidity is basically confidence. The hard thing about a bull market is people are willing to buy a story and instill confidence in many shaky stories. So, the 30% are probably real, but the liquidity overall is higher than maybe it should be on average. That doesn't mean stay away. It just means be like hypervigilant about what you pick. I personally don't have the ability to do that outside of a couple spots.
Jake: I wonder if I would modify that to say that liquidity is opinion.
Jake: Yeah, I think that's the same thing. Liquidity drives valuations, right?
Jake: Short term.
Bill: Yeah, that's right. It's interesting to think about it, and that one of the conversations that was going on was they were talking about shorting. I think, a comment that I really, really liked is they said, and I might get this wrong, but this is how it's going to go in my head. So, I'm just going to say it-
Jake: [laughs]
Bill: -that you can find a really crappy business to want to short and you can be right, but you really need the bulls to then come to the same conclusion. I think that part of what's so tough about shorting as someone who doesn't do it, but is an interested observer is you not only have to be right on the business, you also have to be right on the capitulation. And that is really difficult, especially in a time where confidence is very high. So, you just try not to get your face ripped off.
Jake: Yeah, and I think in some cases, it's been surprising that such lackluster business results have not resulted in more [laughs] market change, more market cap change.
Bill: Well, where? Are you saying just losses continuing to pile up, generally speaking?
Jake: Yeah, some of these, like, I'll criticize by category, but some of maybe the food delivery space, the unit economics of a lot of them, at least that I've seen seemed broken. But they're making it up in volume. Somehow like you know, well, wait a second, at some point, it doesn't this have to make money like how big does it have to get to actually start making some money here?
Bill: Variable losses made up in volume is my favorite loss?
Jake: That was a better way of saying it, then I said it.
Bill: No. Well, I mean, it's the same thing.
Jake: Yours is pithier.
Bill: [laughs] I work on it.
Jake: [laughs]
Bill: I'm trying to get better at being pithy. Why do you traffic in small? What do you define small as?
Jake: I don't really put market cap constraints on anything. I look at anything, but it's very opportunistic. If I own some bigger things, but most of the things that I own are small, and a lot of it has to do with prior my own bias towards perceived ability to grow from a smaller base. A lot of it is, I just don't think that people are looking as hard at a lot of these businesses. They're more likely to be mispriced. They also often, because there's less volume in them. I know that it's harder to get in and out, especially, for someone bigger and maybe more sophisticated. To give you a sense, [chuckles] I bought this company the other day that--
I use Schwab as my custodian. They are the biggest in the RIA space. Their Investment Advisor Space. They're the 800-pound gorilla. There's tons of advisors on there, and they actually had to get this security registered in the Schwab database, because literally no one owns it in there.
Bill: Oh, wow.
Jake: But that's the stuff I like to find, because I know that probably not too many people have kicked the tires on this, and if I feel like I've got a good chance of understanding it then, I think things might work out okay.
Bill: How do you exit a position like that, very carefully?
Jake: Well, yeah. Ideally, I don't really want to.
Bill: Yeah, well, your exit could be that eventually the business owner returns capital.
Jake: Sure.
Bill: That's a fine exit answer.
Jake: Yeah. It's part of my empire. I want to hold things for a long time if possible, and I think Ian Cassel is probably right about how, when things are working the liquidity finds you.
Bill: Yeah.
Jake: I don't worry too much about-- I feel like that's a little bit more of a trader’s mentality of like, “Well, how am I going to get out of this?” I don't worry about that as much.
Bill: How do you size a bet like that then? The reason that I'm asking these questions is, we just had a discussion about there's a probability that you're wrong on this. If you're wrong, how are you mitigating just absolute disaster if you're trafficking in something that's very illiquid? Because if you feel like you have to sell it all of a sudden, there's going to be no bid.
Jake: Right. I tend to not position those too big, if zero is a possibility. I feel more comfortable betting bigger positions, if I don't feel like zero is part of the not a realistic scenario.
Bill: Yeah. Maybe something like maybe the downsides 30%, 40%, or something like that. You're like, “Okay, I can stomach that.” I'm not saying you would bet that big. I'm just saying that might be some downside that you would entertain if you thought the upside was much larger.
Jake: I think the other distinction to make is that, downside over what time horizon, because especially in these smaller names, they can move a ton on almost no volume., It's that like grain of salt index that we've talked about before on the show where, what's the total amount of volume that's moved relative to the market cap and if you take that back to a Mr. Market analogy, are you really going to let $10,000 worth of volume tell you what your $1 billion company is worth?
Bill: Yeah, no.
Jake: That's what you're doing?
Bill: Yeah.
Jake: I don't think that that's very intelligent behavior.
Bill: Yeah, especially, when somebody could fat finger some order or whatever.
Jake: Totally, or they just woke up. One person woke up, and panic sold, and put in a market order instead of a limit order, and got taken to the cleaners, and now, you're going to reprice your entire ownership stake of that. Come on, that's a little bit childish to me.
Bill: Yeah. Hard to mark your book to market, though, when you're dealing with stuff like that. You almost have to do like a volume weighted average over the quarter or something like that would probably be the most accurate way to do it.
Jake: Well, yeah, I think that's right. Or, you have investors or your own mental capability to recognize that all of these things on mark to market are whatever the last trade was, and extreme patience, and discipline are required if you're going to try to execute this strategy.
Bill: How do you find such investor, sir?
Jake: There are less of them than I thought when I started in 2000--
[laughter]
Jake: Honestly, if I knew the answer to that, I'd probably be worth a lot more money, but anymore now, I've stopped chasing them and just tried to do a good job of planting the flag of this is what I'm about, and if you want to join then, great, I'd love to help, if you believe the same things that I do and want that same execution. But for me, at the end of the day, I love doing this, and if I didn't have any clients, and I was just managing my own money, my life would look pretty similar to how it does today.
Honestly, I view it more as like, I'm bringing all my friends and family along with me on the ride of the investment journey that I want to be taking myself, and if I can help them do it, and it matches their timelines, and their ability to ignore the crowd then terrific. I feel great about it. But I don't try to talk anyone into it. In fact, I pretty actively dissuade people from trying to come along on that journey.
Bill: Yeah, you tell people, you don't want this pain?
Jake: Yeah, well, I tell them it's-
Bill: I’m joking. [crosstalk]
Jake: -not easy thing. No, it's real though. I totally underappreciated that when I first started out that most people are probably not wired to want to go to do this strategy where you can just ignore your-- You shouldn't be looking at your price every day of what Mr. Market’s quoting you, because it will just tear up your psychology.
Bill: Yeah, I do agree with that. I've noticed. I don't know, whatever. People, you shouldn't listen to me, and I've said it a lot. So, whatever. But I'm probably more confident in Qurate than I've ever been since I underwrote it, but it's hard to look at how the markets reacting and not say to myself, “What am I missing?”
Jake: Yeah. I like how you said that you underwrite it. The last quarterly letter I put out, I talked about insurance, and investing, and how similar they are, and about how you should be thinking about it as if you were an insurer who was underwriting different risks in that business, and what's the premium that you're getting is a similar to the price that you're paying to underwrite that risk. I want to give you some credit for inspiring that initial kernel of an idea because I'm-
Bill: Oh, thank you.
Jake: -really saying it. I think it's from your banking background.
Bill: Yeah, it is.
Jake: Then, hearing Buffett talk about it in the annual meeting so much about, he says like how similar insurance and investing is like so many times, and I'd kind of missed it before until you planted that seed.
Bill: The only thing that I would like to chop it up with Buffett about on that particular topic is the payout structure is quite different. I think the insurance and bond investing have very, very similar payout structures where equity, you can get these right tale events that just create massive mean, ‘Lollapalooza Effects’ would be the way that Charlie would describe them. I'm not trying to go at my heroes, because that's not at all a goal. But I, sometimes wonder if he's so dogmatic or has been so dogmatic on his need to have a margin of safety and have something in his circle that it has caused him to do things like go into IBM and miss Google, when I know that this is hindsight bias, and I know he's the greatest, and I know that like, “Who the hell am I?” But also, I think I have a point. I think probably in private, he might acknowledge it, too.
Jake: I think you're right. The surprises can come both to the upside and the downside in investing. The surprises only come to the downside in insurance. But that's where Buffett, he tells the reinsurance business, and most of their business lines that to aim for a 90% combined ratio, basically, like get a premium that would then, we want to give out 90% of the money that comes in back to the customer. That's basically how he tells them to run it.
That 10% to me is not an accident, that that's the number because that I think is also similar to his internal expected rate of return for a solar panel in for MidAmerican, or Berkshire energy, or a railroad tie. He wants 10% on the money of putting that line in. So, I think he's use it as a use of capital that he's looking for a 10% hurdle and anymore, there's not going to be a lot of left or right tale events. I don't think as much for a lot of the businesses that he's really plowing money into today.
Bill: Yeah, I think that's fair. I guess it I just think that studying David Gardner, who has become my beloved citation on the matter. I just think that like there's power in embracing the right tale when you see a true disrupter that you actually think can make it. Now, that's a completely different strategy, though, because Buffett's strategy is, you wait, and you wait, and you wait, and you wait, and you swing and hit a massive homerun. Gardner’s closer to Ichiro to me, although, I'm not even sure that his batting average is as close. I think he's probably closer to Adam Dunn.
Jake: [laughs] Yeah. Batting 150, but--
Bill: Yeah, but his OPS is just massive, because when he hits, he really slugs.
Jake: Yeah.
Bill: And this is a slugger’s game.
Jake: Yeah. Especially, I think you're supported by the Bessembinder study about 4% of the securities carrying a 100% of the returns above treasuries, something like that.
Bill: Yeah. It gets me to think like, “Okay, well, it is a better strategy to basically just dig into that 4% and just figure out, what I think they can do and wait for the market to sour on them?” Of course, the risk is one day, the narrative breaks and narrative, I think sometimes can be somewhat self-fulfilling, and then you take a big write down on one, and then if that's a big position, you're pretty screwed.
Jake: Yeah, you can give a lot of it back in a hurry, potentially.
Bill: Yeah. I think if you're playing the right tale game, and you're swinging earlier then you'd be comfortable, I think you have to mitigate that risk through position sizing and diversification, and then letting the winners run into a concentrated position. Maybe adding once you realize that the stock is-
Jake: Working.
Bill: -working. Yeah, when I say like stock is working, the business is performing and people are recognizing it, and then you like lay your chips on it more.
Jake: Well, here's an interesting question for you then. If that is a model that's attractive to you, and let's combine that with the data point observation that companies are coming to public markets at increasingly large size and scale, which means then that almost by definition, they have to have done a lot more growing as a private company. Therefore, there's less meat available potentially for you, once they're a public company. Why not go further upstream in the lifecycle of the business and focus more in venture capital then or in earlier stage than public markets, which may have already let the cat out of the bag a lot by the time they get to be on your radar?
Bill: I think that's not a bad idea. If this podcast leads into somehow generating idea flow in that realm, I would be totally down to go into stuff like that. I think that the tough thing for me is, it's a deal flow game for the most part. I say that strategy appeals to me. I think there's a lot of opportunity to make money in the $500 million to $3 billion market cap range where businesses are starting to inflect up, big funds really can't own them.
Buffett has talked about this before. People don't like to say that he loves this or realizes this. But it really is true that when businesses grow, liquidity does improve, and as you get larger and bigger funds can own you, you attract more funds. So, when you traffic in the areas that they can't touch, if you're right, I think you can make a lot of money still.
Jake: Yeah, I think that's right. It has to be right. That's just the mechanics of it.
Bill: It seems right.
Jake: Your pool of potential buyers as that expands, so does your potential of maybe an excitement level building. I, sometimes think about, there's a return, let's say, and this is just a price change return that you earned based on fundamentals, and that's up to a certain price, and then maybe if it goes above that, you could say that that's the speculative part of the return. I think the probability of maybe getting a little bit of a runaway self-fulfilling momentum type of speculative return increases as you add more buyers to the pool, just like-
Bill: Yes.
Jake: -the potential of a riot gets bigger, the more people that you add to that equation and each one maybe, as they cross a threshold of going from, they become activated within the riot that spreads to the next person, and it's crowd contagion at that point.
Bill: Yeah, I think that's right. I always try to visualize things in a real estate lens. I think it's because it's tangible. But it's almost like, if you can find a good house in a good neighborhood, and you can tell that families are moving in, and they're planning landscaping, and all this stuff, whatever, you're early on it, but for some reason other people don't want to participate in it, as that turns into this community that everybody can see how beautiful it is more and more buyers come in. Then, it's not a perfect analogy, but I think, as the vision needed decreases to see what the future is going to be the crowd’s confidence level in that future increases as does their willingness to bet. That should result in a higher multiple.
Jake: Yeah, I'm wondering why not the analogy that I'm imagining that I often have used for my portfolio is more like trying to buy that apartment complex. That's like next door to Chernobyl. [laughs]
Bill: Yeah, well. I think that that's a really good question is like, does it make sense to spend time looking for things that can really become jewels and maybe risking over paying a little bit, or does it make sense to buy Chernobyl, which should steadily increase right as the nuclear waste goes away, but you still buy in nuclear waste?
Jake: I've literally bought a based on nuclear waste before when I bought a bunch of stuff in Japan in 2011. [laughs]
Bill: I made that same trade. That one worked out. I felt bad, but I was like, “Well, you're either going to make money or not.”
Jake: I didn't feel bad. I bought all kinds of amazing, reasonable businesses for valuations that just made absolutely no sense to me.
Bill: Yeah, I guess I don't like to-- Just theoretically, I don't love profiting off pain.
Jake: Oh.
Bill: But at the same time, it's a market and you got to make money.
Jake: Yeah, I am more attracted to-- Well, I do love getting a good deal, but increasingly, I'm more attracted to the idea of, I use speculation often especially on things that do not have any yield and which to measure against. So, let's say that the greater fool theory. I see that speculation often more as a zero-sum game where like for you to win someone else has to lose. Someone else has to buy it off your hands for a lot more than it's worth, and I don't like participating in win-lose increasingly, as I get older. I really want to try to find as many win-win.
I understand like, maybe I'm totally torturing this, my perception to feel good about it, but I view owning a lot of businesses and especially being a long-term owner, and wanting to earn the results that the business earns as an owner. I view that a lot more as a win-win mentality as opposed to wanting to sell in NFT to someone else, because they wanted to pay more for it than I bought for it. I view that as more zero sum for some reason.
Bill: I'm kind of into the NFT game. I don't dabble in the NFT game I don't, but I am very, very interested. You watch any of these bored apes?
Jake: No.
Bill: The apes, and then you got these punks and whatnot. It's interesting stuff, man. It's like social flexing and it's art. I have a picture of an ape that I like on my phone. I just took the picture. I was like, “I like this ape.” Because I got a buddy that's really into these apes. I looked up the price of the ape that I like, and I am not going to spend that much money on a board ape. But the thought crossed my mind like, “Should I make it my profile picture is a joke,” and then I was like, “You can't do that.” That's against the social code. It's interesting that, there is no cost to physically-- I have the ape on my phone. I can show anybody. I have this ape. This guy that owns the ape has the same ape. What's the difference? The difference is, I don't want to use it, because I feel like it's like not cool to do.
Jake: Ah, interesting.
Bill: He can use it, and I want the ability to use it.
Jake: Yeah. One thing I've been learning about recently, that's been a big aha, and it's like one of those ideas that I was surprised I haven't either stumbled across it earlier or did a deep dive in it sooner. But it's this idea of mimetics.
Bill: Yeah. Jim O'Shaughnessy loves mimetics.
Jake: Did he talked about it a bunch in the [crosstalk]
Bill: Ah, dude. Jim and I went, yeah.
Jake: All right. Well, I'm going to go over it. My version is going to be a shitty, watered down version of whatever he said. So, forget, I even spotted it out.
Bill: No, we can talk about it.
Jake: [laughs]
Bill: We can talk about it, because I think it's interesting. McMurtry’s just wrote about it, too.
Jake: Oh, really. Okay.
Bill: Yeah.
Jake: Great. I’m right in the--
Bill: In good company is how I would think about that. Forget about any other way to think about it.
Jake: Okay.
Bill: One of the things that's tough about the pod is, with the production schedule, we're talking about this conversation, and it's referring to the conversation I just had with Jim, but it's coming out later. It's like, the timing is difficult. From a listener’s perspective, I would be a little frustrated, I guess, but from my perspective, I really hate the idea of recording something, dropping something, and then needing to book the next person. I want to make sure that the guest list is thought out, and really, so there's costs and benefits.
Jake: Right.
Bill: How long do you take between when you drop five good questions when you record it?
Jake: [laughs] Well, how much when I was actually spending a lot of time on that project?
Bill: Yeah, I would keep two or three in the can and stay ahead two or three, typically. But I was doing that every Friday release schedule for the first couple seasons. It was like--
Bill: It’s a lot.
Jake: It was. I think I did 25 episodes. The first one and then 22 or something the second season, then I got smart was like, no one's going to notice or care if I put this out every Friday or not. So, now, I just put them out whenever I record one because I wanted to do it not because there's even hardly seasons anymore, and I've gotten lazy on that project. I feel bad about it, but I just have other things I'm working on.
Bill: Well, Value: After Hours takes a lot of your time. How long does it take you to come up with these veggie segments?
Jake: A lifetime.
Bill: It must. You have a lot of them.
Jake: Yeah, I am shocked that I've been able to keep that ball in the air for as long as I have. Because, they come from just reading different random stuff widely, and then trying to imagine how could I torture this into a segment? So, far I think I've probably landed at least half of them. I don’t know maybe.
Bill: I think more than half of them land. Sometimes you do lose me. That's okay, though. I am a simpleton, my friend.
Jake: I lose myself sometimes. It's hard.
Bill: Dude, the one I really liked was when you talked about your time in the power plant or on the power grid.
Jake: See as because I actually knew what I was talking about.
Bill: Do you want to tell people a little bit about what you used to do-
Jake: Sure.
Bill: -in case they don't listen to Value: After Hours? Because I think it's very fascinating.
Jake: Yeah. I got an undergrad degree in economics. Maybe, I'll just tell a little bit in long story.
Bill: Yeah.
Jake: But I grew up in actually like on an apple orchard and up in the sticks. You had to drive 15, 20 minutes to get to the nearest grocery store. It's like, “Hey, we're going to town today,” that kind of lifestyle. A little different than what how I live now. Anyway, I went to a little school, went to a state college, and got a degree in economics, and my dad worked for, and my grandfather actually as well worked for PG&E, which is our local utility in California and everyone knows them, because they start fires apparently. So, that's the only thing they do which is very unfair.
Bill: It's not good.
Jake: It's very unfair, actually, but so anyway, we--
Bill: Why is it unfair, to those that don't know?
Jake: Okay, well, imagine that the state tells you that you have to provide power to people who live out in the middle of nowhere. They're way out in the sticks off the grid, driving an hour to get to the post office, and you have to provide power to them. That means to run a line out to them, you're going through some really rough terrain up in the mountains, and there's trees growing all the time, and they grow up into the power lines, and the requirements of the tree trimming to service people out there are incredibly difficult to just maintain.
Bill: They do with helicopters, don’t they?
Jake: Sometimes, yeah. It can make can make more sense than trying to-- There's no road to get to that part. So, it's that rough a terrain.
Bill: Yeah, that's wild. I've seen that at where my dad lives. He lives in the mountains in North Carolina, and they sometimes will just come through and they've got like blades.
Jake: Yeah, it's pretty badass. Those buzzsaws hanging from a helicopter.
Bill: Yeah.
Jake: Anyway, I came from an energy family, electricity. I grew up climbing around on power plants or on dams. So, I always wanted to go into the energy industry out of school, but I got a degree in economics, and I graduated in 2003 from college, and it was actually a tough job market then, I don't know if people remember but there were, especially, if you had no experience, which was me, the only experience I had was, I put myself through school working in a grocery store. Most of that time, I worked nights, and then I would get off at 8 AM and go to school till 2 or whatever, come home, do homework, sleep from 6 PM to around 11 PM, and then go to work from midnight to 8, again. Not your typical college experience. But I did graduate with no debt, which was felt good, and actually had a few pennies in the bank even when I graduated.
Anyway, I wanted to get something in energy, and there was an operator and training program at the California ISO. The ISO, it's called the Independent System Operator, and they are the overarching entity above PG&E, above Southern California Edison, above San Diego Gas & Electric. They monitor the bulk electric system and also run the market for bulk electricity. So, that was my economics background. It got me a bit of a foot in the door, and then I think my enthusiasm for telling some stories of climbing around on shit as a kid might have helped my--
Bill: Yeah, they're like, "This kid actually likes what he's going to do."
Jake: Yeah. It was an awesome job. The first year that I was there, they just train you how to become an operator, and they pay you to basically learn, and you get to go on all these field visits to different places, and I'm like switching in these giant transformers, and there's just awesome stuff. The sheer ferocity of high voltage electricity is pretty humbling. It is loud, it is powerful. Just imagine, where does it come from? Picture this giant turbine that water is falling hundreds of feet to then smash into it and make it turn. Well, that physical motion gets translated then into electricity. So, you can start to understand how that much power gets produced and how powerful it is. Imagine that force of that water hitting like that is just or imagine a jet engine, that's the other way we make-- Literally, a jet engine strapped to the ground, and spinning a turban, the force that that's putting out is so incredible, and then it gets translated into electricity.
Anyway, amazing job, and I work then at the power grid. Actually, worked there for 12 years. I was probably about working out in the actual control room floor which looks like NASA's control center at Kennedy. I probably had 10 screens all around me at my desk to just be monitoring all this stuff about how the system is running. Balancing, “Hey, we've got an overload on this line. We need to redistribute the generation on one side and the other to balance it out. So, that there's less flow going over that line," or “Hey, we're going to be short on energy next hour. Call Oregon and Washington and see if we can get some more coming down the pike.” I worked with so many great people. It is a terrific job.
But my second year there, I wasn't quite sure what I wanted to do when I grew up. So, I enrolled and I got into UC Davis' working professional MBA program. I was able to do shift work at the same time as I was going to school. My first year there, the first semester, they happen to have this lottery to send some students back to Omaha to have lunch with Warren Buffett, and do the whole Buffett student thing.
Bill: Yeah.
Jake: And I won.
Bill: That's dope.
Jake: Yeah.
Bill: Yeah. That's dope.
Jake: I had always been into money and saving, and I liked money and wanted more of it. Once I read the more about what Buffett did and how he's looking for a deal on something, he's trying to pay less than something's worth, that just resonated with me right away, because I'd always lived my life that same way like cruising on Craigslist to buy something, and then try to sell it on eBay for more. Just looking for little arbitrages all around. I’d buy salvage title vehicles because you can't get traditional financing for a salvage title vehicle, so the demand pool is much, much smaller.
Bill: Yeah, way lower. Yeah, no doubt. My dad's friend, he buys a pickup truck. If it's got something-- if the chassis is bent, it's something, it's like total, and he knows how to fix them, and I guess it's not technically okay, but the dude's in the sticks in North Carolina, and he gets really nice trucks for almost no money.
Jake: Yeah, the problem with that move is, I've seen this [chuckles] is that your tires will wear out in really weird and fast ways when your chassis is out of alignment like that.
Bill: Well, I do think actually, he's a mechanic. So, I think he fixes it. But yeah, that's interesting.
Jake: When it came to then partial ownership of businesses, getting a good deal just made perfect sense to me, and I was like, “Shit, how would you do it any other way?” So, I got really interested in it, and I was very fortunate that my boss at the time, and who I was modeling myself after, to talk about mimetics, he was a huge Buffett fan as well, and within a couple years, he left to start his own Buffett partnership, similar to 0625 model. It was shocking to everyone at the company, because this dude was on the fast track to be the CEO within probably a couple years, but he had an entrepreneurial spirit. I said, “Hey, can I come up the floor and do whatever for your “hedge fund,”" what it's just basically him and I hanging out at his house and talking about business? He was like, “Yeah, but I'm not going to pay you anything.” I was like, “Okay, that's probably fair. I probably not worth paying.”
While I was going to school, and working, and we had our first kid, and my wife was finishing her PhD program, I took this internship at his fund. We loved working together, and I learned so much in that year. It was probably one of my favorite years that I've ever had, because he was about 10 years ahead of me on the learning journey, and it's just such an advantage. It's such a privilege to learn from someone that smart and that talented. I was sitting there one day with him and I was like, “Shit, I'm going to school and I'm learning all this stuff that is almost the opposite of what you're saying, and the opposite of what Buffett's saying.” It doesn't jive in my head like, “Why am I learning about business almost a total opposite of what seems logical?” I thought, “What if I put together with your help a class that then basically I can just do this internship and have it be one of my classes, and then that way, I can save some time?”
Bill: Smart.
Jake: Yeah. It was like kill two birds with one stone. I'm always trying to find an edge. He's like, “Yeah, we could work on that.” So, I proposed it as an independent study class to somebody at the school, and they're like, “Yeah, go ahead. You could do that.” Then, I asked some friends if they wanted to do it. They’re like, “Yeah, that sounds easier than taking a real class.”
Bill: Yeah, you're definitely not going to create a real class.
Jake: Right, exactly.
Bill: That's funny.
Jake: We put together a curriculum of, like a value investing curriculum for UC Davis, and did the class, and it was a ton of fun. Basically, we would just take current examples of deals that were out there, let's tear it apart and see like, “Well, what did the acquire pay? What did they get?” People around that time, Michael Jackson had passed away, and we did an exercise on, what is his catalog worth, how much would you pay for his catalog of music rights? What would be a reasonable price?
Then I graduated, and I didn't really think much of it. I was pretty happy to be done with school, and then the next summer that was still in the program said, “Hey, would you come back and teach that class again? We heard good things about it.” They're like, “Oh, it was fun. What the hell? Let's do it.” did and we went from 15 students were just my friends the first year to 30.
Bill: Oh, wow.
Jake: Yeah, and then the same thing happened again the next summer and we had 45, and then the same thing happened again the summer after that, we had 60. And then, at that point, the school saw the some of the numbers, and I think there was a little bit of issue with the competing classes at that semester not getting much enrollment, and us not being part of the finance faculty actually. So, they didn't cancel us, but they did throw up a bunch of regulatory red tape, and it was like, “Dude, we're just doing this for fun. I'm not going to go jump through hoops, and committees, and stuff to make sure [laughs] to come to go work my ass off for the students here.” I stopped doing it. We did it for four years, and it was amazing as a learning experience for me selfishly to have to think through a lot of-- they're going to ask you really good questions. These are smart people in the program. They're going to ask you tough questions. Do you have a reasonable answer?
Probably, when I think back to that time period, at first, I had no good answers. I had probably no business even teaching that class other than just an interest and staying a week ahead of the students, basically. I think I do a lot better job now. But now, I’m--
Bill: Do you think podcasting has helped you now?
Jake: For sure. I think I have a little bit of a natural affinity towards wanting to be a teacher. The podcast lets me scratch that itch in a way that is really-- I have to prepare for it, but I don't have to prepare quite as hard as I do when I'm writing a quarterly letter, or if I was to, say, try to write a book. They're much more permanent feeling to me. So, I don't prep as hard as I would if it was like, here's your one shot at talking about that topic.
Bill: Yeah. People want you to talk about what you own. That's the complaint that people have.
Jake: Yeah, I don't do that on purpose, though.
Bill: Yeah, why not?
Jake: I don't want that--
Bill: I'll give you my answer after you give me yours.
Jake: Okay. Well, my answer is that it's a total commitment, consistency bias trap that I don't want to fall into. I don't want people to agree with me necessarily either. I don't need their validation to feel like I'm doing good work. So, it's all downside to me relative to what the potential upside would be. Perhaps on occasion, there's something big that I'm missing, and maybe it would get surfaced by someone smart who knows it better than I do. So, maybe a touch of hubris there that I can afford to miss those relative to the commitment, consistency bias that I'd be exposing myself to.
Bill: I think that I try to fight commitment and consistency bias by being pretty honest about what the downside case is in the investments that I make, and we talked about this when we did our podcast on your platform, but I think that law school helped me with that. I don't know why people are not okay admitting like, yeah, this could go bad, and these are the risks. One that I'm not thrilled that I have talked about to say the least is Twitter.
Jake: The irony.
Bill: Well, the reason is that, one, I'm very happy when I went out among fans that people are like, “No, we're clear it's not investing advice." But people don't know what I'm doing with my portfolio when I'm trading things like, when I'm getting out of something, and that particular name I have such an endowment bias towards. I fought Robinhood on that platform like the notion that I'm not emotionally attached to Twitter is objectively, provably false.
Jake: [laughs] Yeah.
Bill: I don't think that people necessarily should listen to me on that. Then there's another part where like I'm actively working with them to try to help them improve their platform and I have contact with people over there. I don't feel right towards those people if I were to then say, “Hey, I'm selling the stock.” Really, that's not a position that I like being in, because I want to make that platform better, because I care about it, and I care about the business, and I don't love having the stock part to that. Qurate’s slightly different. Qurate, I just actually really like that business. If people want to come at me for loving selling things to old ladies, that makes them happy, then you know what, come at me. I think Twitter's the only one that I'd have a real problem pivoting on.
Jake: My other problem is that if I'm going to have a position in something, I've probably done quite a bit of work on it, and I have conviction about it. I can tell you what my thesis is, but I can't give you the conviction that I had. The work that it took to get to the conviction and you have to get there yourself. Especially, because the market will test your conviction and you'll be down 50% on a name tomorrow, and I told you about it, and you don't have the conviction, you're likely to be selling it and then saying what an asshole I am. Whereas I'm likely to be buying more of it because I have the conviction, and then on a net, I don't think I'm serving anyone's best interest to actually talk about ideas specifically, and I'd rather they seek what I sought than to try to copy exactly what I'm doing.
Bill: Yeah, I think that's right. I happen to not-- I have a different approach to it. I would say that, I have gotten a lot of really good feedback on the businesses that I talk about, which is why I do think that on balance, it's been a positive for me outside of Twitter.
Jake: Yeah. [laughs]
Bill: That's not even true, because I'm in a really cool group of people that we talk about it all the time, and I wouldn't know those guys, but for the investment, there is an element of I've trimmed a little of it, and I feel almost guilty about it, which is odd. Part of me just says, I should just announce that I'm selling it because I'm obviously too emotionally attached and just be done with that. But alas.
Jake: Yeah, there is some argument there, if you have enough emotional investment in it, you maybe don't need to make it financial also.
Bill: Well, yeah. For me, personally, it is financial. I'm trying to build some sort of media brand, I'm doing it on the platform, I'm working with them to get specific tools that I think could help me. I already have bets, but they're not the same bets that a listener might have.
Jake: True.
Bill: That's why I wish when people talked about position sizing, and I'm bringing this up a lot recently when I talk to people, but I say it, because I really mean it. If you say to me, 30% of my net worth is in x company, my question back is like, “Okay, well, how much is your net worth? How much do you earn, What's your time horizon? How real is this? What's the actual discussion that we're having here? Do you write a newsletter? Does that drive subscriptions to your newsletter? Is that your real bet here?” The longer I'm in the game, the more I see the game behind the game.
Jake: Yeah. Even that's an improvement though from the typical, which is, I like this company, and they're like, “Okay, well, just tell me how much do you even have? What's the percentage of your portfolio that you have in it?” If it's under some certain threshold, I almost don't even want to hear what you have to say after that.
Bill: Yeah. I agree with that. When people come in and they're like, “I don't like that company,” it's like, “Okay, well, how much of it have you shorted?”
Jake: All right. [laughs]
Bill: "Well, this skew on the short isn't very good," it's like, “Okay, well, why?” Let's have that conversation, because if you don't like the short, maybe you could like the long. [laughs]
Jake: I think we [crosstalk] need less opinions.
Bill: Yeah. I don't know, man. I have gotten a lot of very, very positive feedback from being as open as I've been about investing.
Jake: Yeah, I'm not saying my way is right at all. This is just how I want to protect my own mental headspace.
Bill: Yeah, I think that's right. I think Mohnish used to do it. I think podcasting is the way that a lot of people are marketing whatever their ideas are. The nice thing that I personally have is I have no desire to ever run outside capital. It I think keeps some incentives a little bit better, but I don't know.
Jake: Yeah, for sure.
Bill: I have no idea. Let me go to the Twitter machine speaking of which to go to some questions for you.
Jake: Oh, boy.
Bill: Something that you have talked about publicly. So, I am going to ask you about it--
Jake: Yeah.
Bill: -- is Fairfax, they performed pretty well last quarter, if I recall correctly.
Jake: Yeah.
Bill: Prem doing Prem things that you agree with?
Jake: Yeah. I think insurance results were pretty solid. I think operationally left a little bit something to be desired the other non-insurance businesses. I think the little bump in value that occurred over that time period for everybody, Prem didn’t miss that. I think there's a lot of reversion to the mean potential. I think it's always been a little frustrating--
Bill: When you say, he didn't miss that, what do you mean, like he was not spared from it or he bought some--? [crosstalk]
Jake: No, no. His positions did pretty well from the value.
Bill: Oh.
Jake: Little bump.
Bill: Oh, you're saying value got a bid and he participated in that bid.
Jake: Correct.
Bill: Okay.
Jake: It's always been a little bit of a frustration. Two beefs. One that they never can seem to get insurance and operations clicking at the same time as the portfolio's clicking. It's always like one's working and carrying it, and the other one's not. That's a little bit by design perhaps, like you have different ways to win. It sure would be nice if it ever both ways worked. The other thing is that, I think we've talked about this before, but to me have always operated on an N+1 acquisition level, always trying to digest that last acquisition, whereas Berkshire’s always been an N-1 where they could have always made one more acquisition than they had, and they've always then had the capital available for when the great deals come along. When was the last acquisition that Berkshire had a hard time digesting? I don't think precision has worked out like they probably would have hoped, and that was a bit of a speed bump. But is that really materially impacting Berkshire's results right now? I don't think so.
Bill: You could argue against Kraft Heinz, but that's not really an acquisition that was closer to a partnership.
Jake: Yeah, that's a good point. Anyway, Fairfax, certainly valuation wise, much cheaper than its brothers in a similar insurance investment cap allocator bucket. So, I think it's still reasonable. I guess, disclosure, I still own Fairfax. So, I must be a fan, but I wouldn't say it's my absolute-- how the table best idea. I think it's a reasonable place to keep some money. I think he does a good job. I think he's a great cheerleader of his team.
Bill: He is a big cheerleader of his team when you get in that room and watch him go.
Jake: I think they're decentralized, and I think their exposure to the rest of the world is considerably more than Berkshire is, especially in the insurance world, that is attractive to me. I think there's going to be a lot of smart things to do around the world for a reasonable amount of time. So, I don't know. I think there's definitely worse places to park some capital.
Bill: I hope there are smart things to do around the world. That would make the future brighter than the past.
Jake: Well, yeah, I was thinking about this the other day that we almost need-- maybe China specifically, but maybe more broadly, we need a lot of the rest of the world to do well. Maybe from an environmental standpoint, I'm a little bit still agnostic on the whole climate change thing. It's become so political, it's an issue I almost don't even want to go near. But it would be nice if a lot of the rest of the world got rich enough to then be able to consume more environment as well, which is what history shows that as you move up in your GDP, one of the things that you can choose to buy is increasing protection of the environment. I would like to see China and India, places with large human populations, big footprints, be rich enough to be able to spare their environmental-- [crosstalk]
Bill: Yeah, because right now, it's hard to tell them why don't you stop using oil while we're all rich?
Jake: Yeah.
Bill: And you're struggling.
Jake: That leaves a very bad taste in my mouth to tell a couple billion other people, “Hey, I know in America where we're living at a certain standard,” and a lot of that's driven by energy per capita. That is your quality of life, is dictated by your energy per capita available to you. We pulled up the ladder in the tree. Now, we've got to protect the environment. You don't get to live that lifestyle. It's only for us.
Bill: Yeah, we got here one way, and then we'd like for you to agree to transition your future like we're transitioning ours. By the way, you don't to get to our standard of living first.
Jake: No. I think the fastest way for us to get that environmental protection is for per capita GDP to grow in such a way that allows for that slack in the system to protect more environment.
Bill: Yeah, I’d buy that. Here's another question that came in that I liked. How do you deal with a stock that runs ahead of-- say you're you've gotten the stock to work, the business is trending in the right direction, but the stock is working more than the business, how do you think through forward IRRs, and holding, and when you should trade something out?
Jake: You're asking me why the hell I sell so early always? [laughs]
Bill: Yeah, I think that is the yes, maybe.
Jake: No. It's a great question, and it's a really difficult question, and I'm reminded of Munger talking about how at 97, I'm still working on my sale procedure. [laughs]
Bill: I thought that was probably my favorite answer that he's given in maybe two years other than when he dunked on me.
Jake: Yeah, that was good too. I tried that one.
[laughter]
Jake: I think I've learned to be a little slower to sell in those situations and just let the business keep going, and this might be a little bit of bull market influence talking too, willing to accept that. But I think previously my disposition was, boy, I don't see a big IRR from here. Let's get out and find something else. A lot of times, maybe I didn't-- It's pretty easy to go from understanding, you understand something pretty well, and you punch out, and get into something else that maybe you don't quite understand as well, because it seems like it's newer, and it's cheaper, and there's more upside baked into that where it is today. You could be taking some risk there that you unknowingly are taking.
All the which is to say, I tried to actually really have the market force my hand to sell something, and watching Buffett and his holding Coke through 1998 when it was at whatever the hell it was, 50 times earnings or whatever. But now seeing on the other side of that, and him admitting, yeah, I probably should have sold that if I was being totally optimal. But now he's getting, what I don't know, it's like a 50% dividend yield on his original purchase price?
Bill: Yeah.
Jake: That's a pretty bad ass place to be in life too.
Bill: Yeah, man.
Jake: You kind of have to hold through some shit to get there, right?
Bill: Yeah. But the other side of that is, he bought that business when it was in pretty bad shape, or maybe not the business was in bad shape but they had bad capital allocation around them, and they were not as focused as they should have been.
Jake: Oh, yeah. They got into all kinds of crazy, stupid stuff, movies, and--
Bill: I think going back to the right tale question that you had, I do think that the potential Achilles heel in that strategy is when things are coming public later, it is harder to get the returns off bigger bases. Sir Mix-a-Lot likes big bases.
Jake: Cannot lie.
Bill: That's right. All right, here's one. When you're researching, valuation first or business quality first?
Jake: The ideal scenario would be to have no preconceived notion of valuation coming into it, and instead do a workup of going through the business, coming up with what you think would be a reasonable price for it, maybe a little range of a price, and then at the very end being able to compare valuation to your non-jaded, non-colored by the price interpretation of what you think it's worth. That's ideal. Very hard to do though, because of screening problems. There's too many ideas to look at to know what everything on the planet is worth. So, you almost need to filter down a little bit at the beginning, almost by valuation potentially, to then run a workup of those ideas to come up with your intrinsic value, which then you can compare to price. So, it's not an easily solved problem, because of the exploration costs of looking at so many ideas.
I do think there are ways that you can speed that up a little bit, which Buffett does this. He has a disqualifying checklist, and there's three items on it. Does he like the CEO? Does he like the margins of the business? Is there anything tail risk that is would be concerning? If any one of those is a no, there's no balance of other factors that he could ever learn about that would overcome that, and he throws it in the garbage, and he moves on. So, he can evaluate things very quickly now and decide, does he want to put more work into trying to figure out what it's worth? I think that's a really smart way to do things, and that's what I do as well.
It brings up a more maybe interesting conversation, which is, how do you know that your filters are serving you well? How do you know that what ideas that you're rejecting, you're rejecting them for the right reasons and that your reasoning is correct over the future prospectively, where you right about rejecting it? This is something that I started doing about a year ago, where I now will code whatever reason that I rejected an investment idea. Eventually, I will have a big enough data set of that to tell you pretty definitively whether the reason that I rejected it for was good for me or not good for me. So, I think one that you and I have talked about before that I'm very curious to hear what the answer will be someday when I have a big enough data set is leverage.
Bill: Yeah, I love leverage.
Jake: [laughs] Right. So, I have this natural disposition against it, and I cannot tell you unequivocally at the moment whether that has helped me or hurt me, but someday I will have enough ideas that I've rejected, because “too much leverage,” and tracking what the price of those have gone on to do over a long period of time that might have represented my ownership. Did it help me or did it hurt me to have such a fine screen? Another place where you might use that would be Buffett famously has the too hard pile, right? Well, I have my too hard pile and I keep track of how all of those things do subsequently from my rejection. What if like they go on as a category to just shoot the lights out? That might tell me that I was maybe a little too quick to throw things in the too hard pile, and maybe if I dug just a little bit deeper, there might be some gold just under the next couple of swings of the pickaxe, and it might behoove me then to do that. But maybe it's not true. Maybe the too hard pile will protect me for a bunch of stuff. But I can't tell you that yet until I get my data, until I track actually what am I doing. And I have those to go back to that dark matter of keeping track of our decision making. I think there's just so many places that we take shortcuts and don't keep track of the decisions that we're making that eventually will be able to tell the answer to that.
I think it's not inconceivable to me to imagine that we could look back at this time period and say, “Holy shit, that was like the dark ages of decision making. We were so sloppy, we were so lazy. There were so many places that we could have been much more scientific and done a much more thorough job of understanding our decision making.”
Bill: I think that areas that I would be interested in is like the upside, like the idea outside my circle. That rejection, I'd be really interested in knowing whether or not on average, that is a good decision. Too expensive rejection, I think, is a pretty interesting one to track.
Jake: Yeah, for sure.
Bill: There's a couple of them that I'd really like to have a back test or not a back test, but to track. The problem is, it takes a long time to get a sufficient sample size.
Jake: That's right.
Bill: Rejection should in theory be a lot easier unless you're just not like looking in stuff, right?
Jake: Yeah. So, that's another thing too is like I keep track of what's my decision output? How often am I making decisions, and that is a big driver of how hard am I working by looking at enough stuff. Am I putting in the reps?
Bill: You know the other side of that though is, I was talking with Jim O'Shaughnessy and Adam Robinson. I don't mean to just like say that. I don't know how the hell I got in that conversation, but I did. Adam said something really fascinating. He said that, we were talking about this idea of people reading a lot, and he was like, “I hear people talk about reading a lot. I will think about one idea for the entire day.”
Jake: Yeah.
Bill: I just sit there and think. Sometimes, I think that like maybe if you're not-- It's important to be honest about whether or not, not making a decision is actually not working, or whether or not it's just the right pace to work at.
Jake: I agree with that. I think that some decisions should take more time than others too. It shouldn't be a linear-- It's not a factory, necessarily. I think it's more of an artisanal or artistic expression, which should mean that you get it right, and not that you produce a thousand widgets in a day. I think that's wrong. One thing that I found that's really helpful for me is that-- there's what I think, and then there's when I actually write down in my journal, and I will find that my brain will come up with often very different answers when I-- I write to think. I don't know what I think about a topic until I try to write about it. So, I think there's such a huge advantage to journaling that people should definitely consider if they're not journaling at the moment. It's such a game changer.
Bill: Do you have any premonition or thoughts of commercializing the software that you're working on?
Jake: Yeah.
Bill: I think it would be interesting for people. I think firms and stuff could-- I don't know. I think it could be like real value add.
Jake: I do mostly because of the team that's involved with it already, and it's just, I don't know, I found these amazing guys to work with, and they're really passionate about it. I think we have a shot at actually putting together something that would really make a big difference for people and really give them a chance to improve their decision making. I've got a million ideas in the hopper of different things to measure and even pulling in some even crazier data sets that I'm not quite ready to share yet, because I don't want someone stealing the idea.
Bill: Yeah, no, that's cool.
Jake: But yeah, no, I think it’s-- [crosstalk]
Bill: I'm not asking you to share where you're going with it necessarily, but it's an idea that I think is really interesting, and I think it would help me.
Jake: To go back to that we're talking about SaaS, there is that Tobin's Q idea of, do you buy it or do you build it depending on the price? At some point, I was just joking to myself that I can sit around a bitch about how expensive all the SaaS companies are even though, I think they're amazing businesses or you can build one yourself, and stop bitching, and put your money where your mouth is. So, I've chosen a little bit more of the latter.
Bill: I like it. I'm trying to build a media company. I'm not sure that that's going to go so-- we'll see if the returns to media are any good. I'm not convinced.
Jake: Yeah, that's a tough game. The name that we have working for the project right now is called Journalytic. The idea behind that is that--
Bill: Do you have this trademarked? You don't need to give people ideas here.
Jake: I don't know if we've trademarked it yet or not, but the idea really is like journaling on the front end. So, you're just like putting in your thoughts and recording your decisions, and hopefully, it's the input is relatively easy and things that you should be doing anyway, making it your external brain. Then analytics on the back end, hence Journalytic, where we will be coming up with increasingly sophisticated ways of explaining and pulling out threads from your thinking, your decision making, and helping reflect back information about how you make decisions in a way that allows you to improve and gives you that feedback, then that will allow you to maybe start trusting your intuition a little bit more.
Bill: Hmm. I find it a little bit interesting that you're not a quant. Just a little interesting. Because the more that I talk to quants, the more I realize that a lot of them came to quant because they recognized the inherent problems with decision making.
Jake: Well, I bet if I had never heard of Buffett, I'd probably be a quant.
Bill: Yeah.
Jake: But I think Buffett open my eyes to there are certain subsets of decisions that are just such no brainers, because you understand what's going on, and for whatever reason, the price gets to a weird place where it just makes no sense, and that the base rates then cease to apply to those situations, and you can be comfortable taking a stand. But I think most decisions are probably done better based on getting that outside view, finding the base rate. If I had to choose one or the other fully quantitative life, all my decisions were made based on base rates, or if I had to allow for idiosyncratic qualitative insights, I would probably go with the quantitative side and have my life driven by base rates. But that doesn't mean that there aren't certain opportunities occasionally that markets will provide because they are still driven by human psychology, where you can take advantage, and there can just be things that seem so blindingly obvious to you on occasion.
Bill: Do you think that-- Here, I'll ask the question that I want to ask.
Jake: Yeah.
Bill: I think that Buffett is an absolutely incredible teacher that I will be forever grateful to that changed my life. I'm not convinced that he should be the teacher that most people have.
Jake: That's fair. I think you have to recognize that he is such-
Bill: A savant.
Jake: -such an anomaly with his intelligence, his memory, his single-minded focus at getting better at this one particular little game, which is business and investing and to the exclusion of broad swaths of the human experience. So, if you're going to try to hold yourself up to the same standard, it's going to be tough unless you are also similarly wired and have a similar, just insane preoccupation with being the best that's ever done this. I know that I don't have that. There's other things in life I enjoy. I'm much I think more plugged in with my kids than he was as his kids were growing up.
Bill: I think this is a very interesting tangent. But if you think in the form of concentrated bets, he bet everything on his career, at least when he was young.
Jake: Yeah.
Bill: Viewed in totality, how's that outcome? I don't know. But I think it's an important question that people should ask themselves if they actually want to live by the letter of the law, for lack of a better term.
Jake: Yeah, I think you can imagine-- let's try to run a thought experiment where if I was to have the maximum impact on the good of humanity, what would I do to accomplish that? Now, with Buffett, he's a special case in that him focusing on business things and teaching a lot of people a way of doing business that I think is very high integrity and is worthy of emulation is probably the best thing that he could have done to make a huge mark on the human species. This actually goes to his charity giving as well. He could have been giving money away much more as he was going. But he chose to keep most of it and compound which is probably the right decision for maximum impact. I'm not sure that I fall into that same bucket, and I think actually my best impact is probably going to be more like these two little knuckleheads that I'm churning out and putting into the world, and I put a lot of energy into them, and I think they're going to be able to do amazing things someday, and totally eclipse anything that I was capable of.
Bill: Yeah, I feel the same way, mostly because my kids are half their mother.
Jake: [laughs] That doesn’t hurt-- [crosstalk]
Bill: So, they're dealing with me as the anchor and her as the motor. So, we'll see.
Jake: Yeah, that's fair. I definitely have some of that too. Then, giving too. I think probably more people will have a bigger impact on the human species by churning out good citizens, good humans that treat other people right, and maybe give along the way as opposed to Buffett, who is a rare thing where his sharing through business understanding, his integrity, and at the expense of his family was probably maximal for society. But those are very qualitative judgments, and there's no number we could measure ever that would tell us that that's the case. But these are my intuitions around it.
Bill: Yeah, I feel so odd even talking about it. But I also think it's important to talk about because-- I don't think that I deserve to speak his name for real. You've got like Chris Bloomstran really refers to him as Mr. Buffett. I am out here talking about him like the Buff Dawg, but I got mad love for him, and everything that he has taught me and the lifelong journey of learning that they sent me on. But there is a real part of me that is like, boy, teaching people to take concentrated bets. If that's the takeaway, the amount of work that I think like--
I've been fortunate to be able to see behind the hood of some of these younger managers that are up and coming, and these guys think a lot and have-- I know that it's like, “Oh, access to information doesn't matter.” A lot of them are working with a lot better information. Now, you can maybe beat them playing a different game, but I just worry a little bit about retail taking concentrated bets.
Jake: If all that you got from studying Warren and Charlie was that concentrated bets, then you've missed 99% of the important things to draw from them about living a good life.
Bill: Yeah, I think that that's fair. Yes. If my kids tell me we're interested in investing, I'm going to say, “These are the five things that Buffett said that I think you have to fundamentally agree on.”
Jake: Capital teachings.
Bill: Yeah, that's right. I don't know that it's five. I haven't written it out. I probably should. Then, I think that you should probably read more of the Motley Fool to begin, but have a Buffett overlay. So, I talked about David Gardner a lot. The Gardner brother that I actually identify the most with is Tom. I think Tom Gardner is actually quite a good marriage of the two thought processes. It's just I'm so obsessed with David, because he sees the world so fundamentally different than the way that I was trained and it worked for him. So, it's like, well, why, and that just set my mind on this path.
Jake: Well, I think you bring up a good point in that there's no one right way to do this. I think there's a way that is probably best suited to your genetics, to your environment, to your goals, and all of those things that blend, is what makes this game so interesting is that it does require so many different domains and so many different disciplines to actually do a really good job at it.
Bill: Yeah. Do you know Jim O'Shaughnessy?
Jake: Not [crosstalk]
Bill: I've got to introduce you guys.
Jake: Yeah, to say I know, that would be very exaggerating.
Bill: I think you and him would get along. I think you guys could riff on topics to [crosstalk] for long time.
Jake: I talked to him for a little while at Capitol Camp in 2019 whatever, but he probably wouldn't remember. That's fine. I wouldn’t take any offense to that.
Bill: Yeah, no. Sometimes, it takes an introduction. I wouldn't know him, but for Dan McMurtrie. Dan was like, “Jim, I think that you should know Bill,” and then we got talking and he helped me through some stuff that I really need to help with. So, I like to think of us as friends now, and I think he would agree. We'll see.
Jake: Isn't it amazing? The world now where you can get to know people in-- I think a lot about how tribal we are as a species, and the typical human experience would have been your tribe is just whatever it is that you were born into, and you're stuck there. Now, you could say that for better or worse, that actually might have been a good thing in that-- If you use that idea that comparison is the thief of joy, you are living in a very egalitarian system as a tribe. The average person didn't have a million times more food than you did. We all shared, and we're all in it together, and there was probably something very comforting about that. Whereas now, we're a little bit more on an island. But one of the advantages is, if you can be very discriminating, you can really find your tribe now, and it's like the tribe that really sets you on fire and gets you excited to wake up every day. It's not geographically constrained anymore.
Bill: Yeah, well, man, Value: After Hours for me, and I think for you too, has been such a-- I just go back. Toby doesn't take a shot on me, and then, fuck the podcast and stuff. When that stuff with Robinhood happened, if I don't have some following base, I don't know that any of that bubbles up. And then, I don't know that any of that-- that's real life shit.
Jake: Yeah.
Bill: Because I think the three of us on Value: After Hours are honest, and I like to think that we're not overly promotional, and we're self-deprecating, and that people like that, because of that, I was able to accomplish very, very real outcomes for my family.
Jake: Yeah. It’s huge.
Bill: And raise very real awareness of what I perceived to be a very real problem. Then, this podcast happens, and one of the reasons that I think you and I get along so well is, I do fundamentally think we're driven by very similar things, and the core of us is, I don't want to say the same, but when we get together, there's not much that we don't agree with on the big tease of life.
Jake: Yeah, I think we have similar values, and similar-- We probably want similar things out of life.
Bill: Yeah, that's right. The ability to distribute-- whatever network that I found myself lucky enough to be in, to be able to give that to the world via podcast, it's awesome. Then, the fact that the world reciprocates is even cooler. It's bizarre. We both found ourselves talking to Peter Kaufman in the past, what, 18 months. That guy's really cool. To be able to sit there and listen to him is really, really cool.
Jake: It's unbelievable. I pinch myself every day that that kind of serendipity exists in the world.
Bill: Yeah, I think it comes from leading with good.
Jake: Well, that's what we talked about last week or this week in when we did our podcast was, go positive, and go first, and increase your serendipity coefficient, and put yourself out there in a positive way. I think the universe tries to even that shit out.
Bill: Yeah. There's a lot of attention given to the negatives. Attention given to the good is deserved. To your point on the universe evening itself out, I think there is a void of people leading good or leading with the good. So, if you can be one of those people, I think you're rewarded nicely.
Jake: I just find it to be more fun too. I get more energy from having a positive exchange with someone as-- It drains me. I don't get into arguments or I'd rather just say like, “Yeah, you're probably right.”
Bill: Yeah, that's what my dad taught me to do. He's like, “If somebody says something that you just think is really wrong, just look at him and say, you might be right. Just walk away.” You know what? Because they might be. It maybe it's you, maybe it's them, but who cares? You're not going to change their opinion. They're not going to change yours.
Jake: No. It's rare the person that you could talk to can actually change their opinion on anything.
Bill: Yeah. So, dude, now that we're like two hours in the podcast. I had asked you what you wanted to talk about. What did you write down? Were there any things that you wanted to talk about?
Jake: No, I think I snuck most of them into it along the way.
Bill: All right, cool.
Jake: I get excited and I geek out a little bit about investment hygiene, in really decision making and thought hygiene. A lot of it is because I think your hygiene will dictate your habits, and your habits will then dictate your process, and your process will eventually dictate your results. Especially in the investment context, your results can be so lagged from your process, and from your habits, and from your hygiene that you really can only focus on those things that you can really control.
We've talked about it before jokingly of, in the next year, tell me what you think would do the absolute worst? Give me your worst pick--
Bill: Yeah, how would you blow yourself?
Jake: How would you blow yourself up? And it's not obvious that would actually do worse than something else. If that is the case, and it is so goddamn noisy in the feedback loop of, I made a smart decision and I got a good result, if that is so long and so noisy, and such a wicked environment to use the research term for that type of feedback system, then you have to do something else. You have to focus on something else if you want to get better. And to me, that is the hygiene part. That's the process, that's your habits, that's your environmental design. It goes all the way to your health, your inflammation diet, all of these things are hugely important.
At the end of the day for me, it always goes back to driving, some way of bolstering my patience. What am I going to do today that's going to make me more patient and allow me to make the right decision not under duress, and be in a position, a mindset of a biological, chemistry optimization to be in the best place that I can to make a good decision? There's so many ways to tackle it which is what makes it so interesting to me as a multivariate problem to solve.
Bill: You know what makes me nervous is last year, I made some very good decisions. I made some, I think, questionable decisions that worked out very, very well, and the feedback loop between the speed at which I felt I had to act last year, the positive consequences of acting that quick last year, and then reminding myself, just because it worked for a period of time, it does not mean that should be how you should treat the world forever.
Jake: Sure.
Bill: Like that's really tough, and then the juxtaposition too of-- or not just juxtaposition. But the interesting thing about equity markets is, if you believe that they are efficient on average which I do, more often than not, then the idea of finding a mispricing by definition should not exist for very long. So, I'm just always fighting this, I should do something, no, you really shouldn't. That tension is, I think, part of being a very good public market investor.
Jake: 100% agree. It's really difficult to-- I think you can try to get too cute with the timing of everything, and I think Buffett is probably doing it right where if they see a deal that makes sense to them, they pull the trigger regardless of all the other macro factors, whether he thinks the price is going to get cheaper in six months from now. You just find the opportunity, pull the trigger, and I think if you do that enough times, I think you get a good enough result. But it's not going to be perfect. You're never going to bottom tick, you'll never top tick. Just try to make some reasonably good decisions along the way, and hope for the best. But I think it will torture you, because there is no way of knowing, no way of doing it in a perfect way.
Bill: Yeah. Well, dude. I look forward to Journalytic, and I really do hope that you commercialize it, because I think there's a really big need for it. I know in my heart of hearts that you're the right guy to put together a really good program. So, I hope the world gets to find out what it is, and I appreciate you dropping by man. It's been fun.
Jake: It’s means a lot to me. That's a very sincere and that compliment hit right in the bull's eye of the heart.
Bill: Yeah?
Jake: Yeah.
Bill: Am I going to give you a tear?
Jake: No. I’m a robot.
Bill: Well, I mean it. I really do mean it.
Jake: You ask my wife. I'm a robot.
Bill: Well, I really do mean it. It is a sincere compliment, and I really hope that not only is it successful for you but fulfilling.
Jake: I appreciate that. I have this mental image of a few years from now after maybe it gets up and running, and it's found a good product market fit, I'm like this mad scientist, the decision maker where I'm tinkering with all these way out on the edge, potential ideas that might really move the needle for people. I think that sounds like a lot of fun to me over and above just finding interesting businesses to buy and doing my normal work that I like to do.
Bill: Yeah, well, I'm rooting for you, man, and again, thank you for coming on the pod, and we'll talk on Tuesday.
Jake: [laughs] If not sooner.
Bill: And every Tuesday after. [laughs]
Jake: Thanks, man. I appreciate you bringing me on and I actually, I really appreciate you waiting to record this, because I know I asked you because I was hoping I would have some more things to talk about that might be useful. So, I'm glad you let me wait a little while.
Bill: Yeah, well, you can come on whenever, and you can wait as long as you want. I appreciate it, and I'm grateful for our relationship. On that note, we're going to shut this one down.
Jake: The mutual admiration society is over. [laughs]
Bill: [laughs] The mass. We're becoming mass-holes.
Jake: Yep.
Bill: All right, talk soon.
