Thomas Braziel - An Esoteric Episode
Major Topics: Special Situations, Small Cap Investing, Unique Thinking
Thomas Braziel is the Founder and CIO at 507 Capital. The son of bankruptcy lawyers, Thomas was destined to become an expert in distressed investing. He loves looking at weird and esoteric trades and investments.
This episode covers behavioral investing, special situations investing, how illiquidity breeds good behavior, and Thomas' big win on his Mt. Gox claims. Thomas has a unique mind and introduces some ideas that are not en vogue in 2021. We hope Thomas' thoughts help expand the definition of an investment in some people's minds.
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
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode is brought to you by Koyfin. 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. Koyfin displays financial information simply and elegantly. Imagine a Bloomberg light with tons of high-quality fundamental data, a powerful graph engine that can show it all clearly, and a user interface that doesn't look like it was built in the 1990s. If you're an individual investor, research analyst, portfolio manager, or financial advisor, do yourself a favor and check them out. You won't regret it. Sign up for free at koyfin.com. That's K-O-Y-F-I-N dotcom.
Now, without further ado, please enjoy my episode with Thomas Braziel. Thomas is one of the most interesting, special situations thinkers that I've come across in a long time. He gets into some really esoteric and hairy stuff. I really enjoyed the conversation and hope that you will as well. As always, none of this is investment advice. All of the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making any investment decisions and do your own due diligence. So, with that other way, Thomas, how you doing, man?
Thomas: I'm okay. I want to know who the sponsor is? [laughs]
Bill: Oh, okay. This is a great segue. For those that don't know what's going on, I was saying that I used to start the show by doing the full intro. But now that Koyfin is sponsoring the show-
Thomas: Oh, Koyfin.
Bill: -I need to-- Oh, Koyfin. Koyfin’s dope.
Thomas: No, it's like a respectable sponsor. I thought it was going to be like-
Bill: Of course, it's respectable.
Thomas: -local [crosstalk] or something. I was going to enjoy making fun of the sponsor. This is less like legit sponsor.
Bill: I'm not hoeing myself out, man. I'm trying to give people legit sponsors.
Thomas: See, that’s the problem, though. [laughs]
Bill: Well, we’ll see. I'm not above it. It just costs a lot more than --
Thomas: What’s merch? What's going on in the Bill merch side?
Bill: I don't know, man. I tell you what, I've been dealing with this firm, and I like them. I'm not trying to be rude to them. They're very nice people, and my friend runs them. But I think they're frustrated with me because of my brand direction. I think I'm getting a little frustrate--
Thomas: Or, [crosstalk].
Bill: Yeah. Well, no, I think I got an idea here.
Thomas: No, I like your brand. I like it. I'm joking with you, man.
Bill: No, you're fine to give me shit. I don't mind that at all. But I'm getting a little frustrated with them on their timing. So, I think that we need to have a group reset and say, so when's this going to get done, and what are we doing here? Because it's just been pencils down, much like the house on building is just like completely pencils down?
Thomas: Are you building a house?
Bill: Yeah.
Thomas: Good for you.
Bill: Well.
Thomas: Trying to support your stocks. You're like, “Oh, we got to buy the appliance from here. I got to buy in the wood from here.” [laughs]
Bill: Yeah, well, no, that's not quite the goal. The problem is and I've been researching this a lot, man. I don't think this is a unique problem, and it's why I am comfortable having directional ties to lumber. The housing market is under supplied in a fairly big way. Lumber tends to be correlate-- like the marginal buyer seems to be repairing replacement, and the existing housing stock sucks. There's so much. When we were looking to buy down here, there's just so many homes that if you buy. We're in Florida. So, the building codes have changed, and a lot of these houses are older. If you take the windows out, then the new windows are way too efficient for the amount of air conditioning that comes in, the old AC systems are too big, so you end up with these houses that just constantly have condensation, and then you end up smelling like must. I don't want to live in a fucking must box.
Thomas: Elon Must.
Bill: Elon Must indeed.
Thomas: Elon Must.
Bill: Then there just weren't that many new homes and there's almost none that are available.
Thomas: Also, your wife's going to want to rip out anything you buy anyway, might as well [unintelligible 00:04:46].
Bill: Yeah, I think so. Dude, the other thing is we bought the land in September, and we've already received an unsolicited bid that makes me think that once we build this new home, the probability of actually losing money is super low. Now, the market can crash, and then you're fucked, and I get all that risk. But that's not real. I think building was a much smarter decision than buying is the short answer.
Thomas: What you need to do, mark to market, start a fund, I'm great at land speculation, [unintelligible 00:05:22]. This is a-- what do they call it? Brownfield space opportunity here.
Bill: I like it.
Thomas: Greenfield space. I don’t know, whatever.
Bill: Yeah, whatever field.
Thomas: There’s fields. There’s fields everywhere.
Bill: That's the whole point of buying fields, and then we're going to turn it into something. This is genius.
Thomas: Right. Homebuilders always scare me. I don't know. Of course, I appreciate what you're saying is a personal story. In general, I got pitched a homebuilder recently, and I was just like, yikes. They're just worried about capital. This is way off of anything I'm knowledgeable about, but I’m just worried about capital allocations.
Bill: Good. That's what we're doing here. We're just talking.
Thomas: Yeah, okay, good.
Bill: You pitched a homebuilder and your brain goes what?
Thomas: I just think like this is scary. Of course, they're growing crazy, and the returns are ridiculous, but what do they know about the markets they've never been in? These guys are like, “Oh, we're great in Washington. We're going to do the same thing everywhere.”
Bill: Yeah.
Thomas: I was like, I don't think that's how it works. [laughs]
Bill: No, I don't think that's how it works either. You know what, an idea that I was looking into that I don't even want to say, I like. It's an idea that I think warrants more attention is builders for source.
Thomas: Was that the offshoot? No, that's distribution now.
Bill: Yeah.
Thomas: It was like, that’s not the offshoot of Home Depot? No, that wasn't it.
Bill: No, that was HD supply, if I recall that correctly.
Thomas: I remember that. That was the best worst spin ever I always love a SpinCo where the CEO of the parent goes to the SpinCo, I'm always like, “Oh, there is your sign. That's the one to buy.”
Bill: Well, then they ended up again collapsing back into Home Depot, right?
Thomas: Oh, did they? Okay, I haven't involved it in so long. Yeah.
Bill: There you go. You need to.
Thomas: Genius. Corporate genius at work.
Bill: Yeah.
Thomas: Corporate genius at work. Let's spin this out.
Bill: Yeah, somebody made good fees on that.
Thomas: Oh, my God. The merry-go-round of corporate transactions is always so funny. It brings up a topic. I've been thinking a lot about, Bill, which is like, I think this is why I'm currently in a funk, which is--
Bill: You don't seem like, you’re in a fuck, man.
Thomas: Yeah, sometimes--
Bill: You're super happy, dude. Let's get you out of here funk for the next hour and a half or two hours. Let's get you out of your funk. How's that sound?
Thomas: Well, it's so funny you call me. I did I went to the pool, because when your kid looks at you, and they're like, “Oh, do you want to come with us?” I'm like, “Jeez, that's too cute. Yes, of course. Yeah, of course, I want to come.” So, I ended up going to the pool.
Bill: Well, glad I got back inside and funked out. So, let's talk about this funk here.
Thomas: Well, with better Wi-Fi. Yeah. But it's like sometimes if you're not doing anything, you just feel like, I'm not accomplishing anything. There's just like this culture of accomplishment, I guess. I suppose, it could be very bad for you as an investor, because sometimes you just need to be doing nothing. Sure, you're still maybe looking at things. But there's no actual action. I think this whole idea, like even there's an investment firm called Arena Partners, like the whole idea is to be in the arena, and action, action, action. This activity can probably be pretty detrimental to you. But at the same time, mentally, it's really hard to decouple yourself from non-activity.
Bill: Yes, I do know. I know bigly. I am in the period of a drawdown that is bigger than what-- Well, not bigger, almost as big as what I experienced in March of 2020.
Thomas: You're going to make you feel better? No, I’m joking.
Bill: No, I don't. But the thing is, I--
Thomas: I meant like my drawdown, I'm sure will be bigger than yours, but go ahead. [laughs]
Bill: Yeah, well, yeah, for sure. You deal with more volatility than I do. But I've said on the podcast that I'm long OPFI. We're like one quarter out of an I--, not an IPO but a SPAC transaction. They missed, but they didn't catapult miss. If you asked me to go back to the beginning of the pandemic, and you said to me, “How's the consumer going to come out of this?” I wouldn't say so flush that all the retail comps are going to be insane, and I wouldn't say like what the best balance sheet ever. So, the idea that they somewhat miss forecast is totally okay with me, and I didn't buy it on some short-term trade nonsense anyway.
Did I pay too much? I think it's hard to argue that I didn't, given the fact that I'm down 40% on it or whatever. I also think there's a huge rebuttable presumption when you're down that much whether or not you're wrong. But I honestly don't think I'm wrong yet. So, what do you do there? Because there's some opportunity cost of capital, is that sunk cost fallacy or not sunk costs, but do I have endowment bias like all this shit?
Thomas: Right.
Bill: I guess what I've been thinking about is, as I look at my decision making going into that, I was definitely in a heightened emotional state, because the podcast was growing, and I thought that I had found something unique in Kyle, and I think that there was probably motivated reasoning going on, and on top of that, I had recorded an episode with Tyrone V. Ross, which was super meaningful to me, and he had mentioned that there's a need for these services. So, there's a lot of things that are even need that want to root for the idea. So, that's probably not the smartest time to make decisions.
On the other hand, I don't know that I'm wrong yet. I should probably do nothing. But there's a huge part of me that wants to do something, and that's tough, but at the end of the day, I think, you know where I think a lot of problems in my personal investment, what I've seen in people's investments come from is, I almost think of it like an asset liability mismatch, where your timing cut short the actual bet. But the duration of the bet on something like OPFI, objectively, the bet is five, six year bet if I'm going to be right on valuation. So, if you have a short-term drawdown, don't cut it short with some timing mess up.
Thomas: Well, I think it's very important as an investor to be introspective, because you really can get-- so much of it in psychological, once how to do CFA level analysis on companies. Once you know how to think about margins and competitive forces in industry, so much of it is psychological. And also, your scorecard has to be an internal scorecard, not an external scorecard. It's tough part for people that are actually running funds like a hedge fund or something is, people say they’re long-term, and you can talk about that in your quarterly letter to your investor, and the person says, “Yeah, I get that. I get that. How are we doing this month?”
Bill: [laughs]
Thomas: You're like, “Oh, right. That was my favorite. I was sitting with an investor once I was running my fund, and the guy said. I said, Oh, well, it's all long-term.” When I was really doing special situation stuff, I was trying to manage the duration of the portfolio, because I knew people even though I said they were long-term weren't really. But this was really stark, because the guy was like, “Oh, yeah. No, I know, three years. I get it. I get it. I get.” It was literally the 9th. I was like, April 9th or something or August 9th. It was the ninth day of the month. He’s like, “How are we doing this month, though?” I was like, “Why have I been talking for half an hour?” But I think you bring up a good point.
Bill: I'm listening to anything I'm saying, sir.
Thomas: Well, yeah, Bill, you'll love this. Did you ever run a fund?
Bill: No.
Thomas: No. You worked at a like a family office, and then you, okay.
Bill: No, man. I worked in a bank. This is why I tell people not to listen to me with investment stuff. I'm not formally trained on this shit. I'm not anything.
Thomas: Man, I think I learned a lot. Yeah, but I think a lot. I honestly made a lot of people learn bad stuff working at the proper shop to work at or whatever. So, I'd be careful with that. Because they learn stuff that works where they work. We're like political animals. You're sort of learn your environment [crosstalk]-
Bill: Yeah, that's fair.
Thomas: -enough thrive. I met a guy who was in his 50s, and he was going to do, I guess micro-cap and small cap equities, special sit, and he was talking about how easy it was. This was like 15 years ago, and I was a kid, and I just happened to be tagging along for this meeting to meet hedge fund managers. This nice guy at JPMorgan said, “Oh, come in on these meetings. Just tag along and listen to these hedge fund managers.” He spent 30 years at [unintelligible 00:13:40] but somewhere. I can't remember the name of it, but a pretty famous firm. The name will come to me later on. But anyway, a famous firm, and he says, “Oh, I just learned how to rotate the sectors, and over time, my performance was really good,” because he was managing 3 billion bucks or something. Doing small cap for $3 billion. Imagine that. Yeah, he had thousand positions, and I was like, “Oh, that's really great. So, how long you've been doing this?” He's like, “Well, I've done a little bit on the side, but now it's been like a year.”
Bill: Nice.
Thomas: This guy basically has a year of experience.
Bill: Nice.
Thomas: Even though he's in his 50s when he's been 30, he has such a [crosstalk]
Bill: If I recall correctly, they call that style drift.
Thomas: Well, my point was just like, he thinks he has 30 years’ experience. I think he has one year experience. The last 30 years you've been doing, oh, gosh, the name of the firm's not going to come to me. But it's good to be introspective. I think I don't know, man. You definitely can't hit them all, and also for me, I guess the positions I've lost the most money on, it's probably back to the envelope analysis match with somebody I felt smart was involved in it. A consistency bias. I said, I like something, I felt the need to stick with it, and the things that have not worked have probably been things where it really went against me hard and I stayed with it as opposed to just being a bit aggressive. No, not, not, don't put that on your own situations. This is not.
Bill: No, I'm not. I'm not. I just think that's interesting.
Thomas: I listened to your podcast with your friends. The ones with I guess, his name’s Tosh. I don’t actually know their names but Tosh investing, I guess. [crosstalk]
Bill: No, the science of getting T-cell.
Thomas: T-cell.
Bill: Yeah. His name’s Alex. Well, because it's TSOH versus Tosh.
Thomas: There was like Tosh TV. I don't know. That's probably where I'm connecting it. Anyway, I was listening you guys talk, and I can't remember my point here, but I think it's important to be introspective. But I don't know. Don't be to-- In my book, just wake up every day and beside whether you like something or not, but I've been sucked in by liking somebody in that position. I guess the biggest thing where I like the people that lost the most money was probably [unintelligible 00:15:45] which is a security that I don't own, and we’re not here talking about securities. But anyway, so for me, mine's a little different. You have your setup for myself like I'm transitioning into probably setting up my own family office later this year, next year. I guess I sometimes, I feel like I have an imposter syndrome, because I got very lucky on one trade, and so that's why I'm--
Bill: I don't know that this is true. We're going to get into that by the way. You know where may have screwed myself?
Thomas: Go ahead.
Bill: I committed to not selling for a year, and a lot of people were like, “You don't have to do that.” I was like, “Well, I think I do,” and I have not reduced exposure, because at some point, it's like, you only have your word in life. So, I'm not willing to trade that for some-- It's a tiny little position anyway. It's not like some big thing.
Thomas: Well, then you're fine. You know what? I always think it's important to have investment heroes. One of my favorites, I mean these aren't people that I know. I just know of them and read everything they've done in all their videos and things like that. There's a guy named Andrew Weiss out of Boston, and he does a lot of SPAC arbitrage, and really, they do like pure arbitrage. The returns are fantastic, but their fees are fantastic as well. It's really perfect for an endowment or I actually think it's great, but I know people that don't like him, because I pitched them to a family office friend of mine. He's like, “Dude, their fees are like four and 40.”
Bill: Wow.
Thomas: I was like, “Well, yeah.” When you do the numbers, he's making you like net 10. I'm like, “Yeah, but it's net 10 every freaking year.” It’s made off returns, but it's actually legit.
Bill: Wow.
Thomas: And it's a constraint strategy. You can only run like-- I'm sure he has other strategies, but I think his main strategy only runs like $700 million. Basically, they're doing almost pure arbitrage through derivatives and all kinds of international markets and stuff like that. It's not all arbitrage. There's some value investing in there. He started out doing closed end fund arbitrage. That was how he got into the business. He's actually pretty, I guess, celebrated the weird word to use for somebody, but he's a well-known economist before he gotten to become an investor. I think I ran across him because he did the Russian voucher programs, or the actually the Eastern Bloc voucher programs, which I have an obsession with, Bill.
Bill: All right, let's talk about it. Because people are going to be like, “Who's Thomas Braziel?” I'm about to say, one of the most interesting investment minds I've ever talked to. So, let's talk about what you're into?
Thomas: What am I into?
Bill: Like this security that you just mentioned, or this idea that you just mentioned.
Thomas: That trade?
Bill: Yeah.
Thomas: Well, you can't really get people to talk about it. I remember asking someone that was involved in it, and they were involved with Thunderbird, and I shouldn't really mention his name, because I don't know if he wants to be mentioned. Because he even said to me, I said, “Oh, I really want to do a podcast where we do the untold stories of the Eastern Bloc voucher programs and privatization programs.” He said, “Tom, no one's going to come on your podcast.” I was like, “Why?” He was like, “Because it's an unsavory thing.” People were buying. You were buying stuff off citizens even know what they were doing. They were literally giving people a bottle of vodka for their 10,000 shares of Gazprom when we're basically buying Gazprom for two cents or something. So, that will be the pushback. But anyway, the guys that did that trade made absolute fortunes.
Even the oligarchs that float around, a lot of them, people say, “Oh, these guys just basically stole the money.” Maybe there was some of that. But a lot of it was they were there early, they had a really optimistic mindset, and they knew how the system worked, and how to get access, and I'm sure there was a ton of shady stuff that went on, but also like, a lot of them were just super opportunistic. Some of them, the bank that they use to buy the company was the state bank. So, how'd they get the loan, they didn't put any money down? I'm sure there was a lot of stuff like that. But I'm fascinated with the greatest trades of all time in my mind like Russian voucher and privatization programs is a big one. All those privatization-- You know the Bill Browder book. Have you ever read the Bill Browder book, Bill?
Bill: No, I haven't.
Thomas: Oh, my God. Oh, my God, Bill. We should stop the pod.
Bill: Dude, this is why I like talking to you. You expand my mind.
Thomas: It’s cool.
Bill: I exist in some fucking echo chamber of compounder bros, which who I love all of you. I'm sorry if I'm talking down to anybody. But I've gotten this itch and addiction to special sits and obscurity, which is potentially very, very harmful to my financial health, but so far as not been.
Thomas: A compound town has worked. Look, I'm into all that stuff too, I guess. I guess for me is, I don't necessarily-- Sometimes, when you run across people that are really good at it, I walk away and I'm just like, “Oh man, these guy’s so much better than me at this.”
Bill: Yeah.
Thomas: It's nothing wrong with that. When you do it in compounding in great companies, you don't have I think as much of an imposter like a while I did was just put money in something that they want a lawsuit. But when you do these esoteric special sits like it can feel a little like, “Well, I didn't even do anything to make this money.” But maybe you don’t feel that way when you have compound-- [crosstalk]
Bill: Well, you had to identify it.
Thomas: Yeah. There's a lot of toil. Well, anyway [unintelligible 00:20:52] Andrew Weiss, which is Andrew Weiss says, “I could teach you how to make money, but I can't teach you how to be happy.” I remember when he said this and it was on old Columbia University videos. They take them all down for some reason. I sent one to Mike Mitchell because they took down all the old ones which I have no idea why, Columbia. Bill, you got the sway. You got to get Columbia to put them out. I don't know what's going on CBS. They're don't want anyone to see old videos of great investors.
Bill: Well, I think if that is their strategy to somewhat hoard the information, that's a very poor strategy for the world that we're living in.
Thomas: Well, remember that whole-- Take about compound town. Do you see that whole [beep] story or whoever the name of the firm was?
Bill: No.
Thomas: They were going to sue the kid that was putting out a Substack about finding compound [crosstalk] or something.
Bill: Oh, yeah. They said that they trademarked compounders or whatever. That shit was nonsense.
Thomas: That’s fucking shit. Oh, sorry. We could curse on here?
Bill: Yeah, that was ridiculous. Yeah, you can say whatever you want.
Thomas: Cursing Tom [unintelligible 00:21:48]
Bill: Come on. They need to get their heads out of their ass. People have been saying compounder forever.
Thomas: Ridiculous. I know, but okay, so a few things. You read the-- What's the guy? Mike Mauboussin? Have you read the Mike Mauboussin thing around? What is it? As you take in more information, your confidence goes up, your predictive ability doesn't.
Bill: Yes.
Thomas: I am always so worried about that. I'm always so worried that like, I'm too friendly with the CEO, I like them too much, I like the pitch too much, I like the story. I had a stock with a similar fact pattern or my mind and similar fact pattern that worked really well. You know what I mean? I'm always worried of overfitting, and that's why I'm almost, I don't like going too, too deep. That's my only push back on compound town, guys, is sometimes they go so deep. I'm just like, “Are we even really talking about a stock anymore?
Bill: [laughs]
Thomas: What are we fucking talking about?”
Bill: Well, if you see the world through conviction is everything, then you need the incremental information to get your conviction. But I'm not sure that that gets you any closer to precise answer if that makes any sense, or maybe accurate. Sometimes, I confuse those.
Thomas: I think the guy's a new compound overlaid with something going on. I think Buffett with Amex. Amex is a great company, and they have the [unintelligible 00:23:09] issue. If you can combine those two, I guess maybe Andrew Wyden does that. He's super concentrated. He should change the name of this firm to way [unintelligible 00:23:19]
Bill: Did you talk about Adam Wyden?
Thomas: Oh, Adam. What did I say? Andrew Wyden, yeah.
Bill: Andrew.
Thomas: I like him though.
Bill: I think I like that way of looking at the world. I think the way that I want to run the portfolio going forward is, there's an element of the stay wealthy portfolio, and then there's an element of the actually increase your lifestyle portfolio, and I think that the increase your lifestyle portfolio is where I want the special situations to be, and then the stay wealthy. I don't know. Here's the stock I don't own, but I wish I did is Texas Instruments. What's the probability that over time you actually lose wealth owning Texas Instruments? I think the answer is very, very low. Your absolute return may suck, but in a world where your absolute return sucks, I think everybody else's results suck harder.
Thomas: Yeah, I’m barbell guy.
Bill: I mean, maybe not. But that's just something I toyed around with, and I've thought this for two years, and never owned it, and I'd be way wealthier if I did.
Thomas: What's the Taiwan semiconductor? Why not Taiwan semiconductor market leading position who knows what the valuation supposed to be good tailwinds? You can have a sucky return.
Bill: Yeah. No, I think you bring up a good point. I mean, then then you can get to Lam research is one that makes sense. I guess ML has got just like this valuation on it that makes me, like my stomach actually hurts when I look at it. But sometimes that makes sense. Sometimes, the markets telling you something that you don't understand.
Thomas: This is rarefied air, Bill. This is like Mount Everest there. You got to get your oxygen mask when you're buying some of these stocks. Don't you know that? [laughs]
Bill: Well, so, you know where I think that value investors have a serious blind spot is like, I think a lot of people look at those valuations, and rather than saying like, “Okay, why is this trading at this valuation?” They dismiss it as nonsense. I think that I've gotten somewhat smarter about the way the world works when I started to say, why does this make sense rather than this makes no sense.
Thomas: Yeah. I think it's just important to have a healthy respect for the price in front of you.
Bill: Yeah.
Thomas: We're looking at a distressed property in Miami, and the pushback from the family office that I worked for, I was like, well, is this really such a great price. I was like, “Yeah, it's a few million cheaper, but this isn't really hot area.” It's an area between just outside the design district. It's on the edge of the design district going into Midtown. I'm not familiar with Miami, maybe you are.
Bill: Well, how can you say, it's in a good area and also say I'm not familiar with Miami?
Thomas: No, no, no.
Bill: [laughs]
Thomas: All the brokers that I’ve spoken to--
Bill: The Sim told me it was good.
Thomas: Yeah, exactly. Twitter told me it was good. No, no, the brokers I spoke to was like, "This is really hot area, There’s a comp right next to it. Barcadia is doing some development down the street." I was like, “Oh, Barcadia. If it's good enough for Barcadia, it's good enough for me.”
Bill: That's right.
Thomas: It's supposed to be a hot area. I’m like prices have come down from like I don't know, I'm just going to use a random number a hundred down to 80, and we're buying in the 70, and the pushback standing up is just like, “Well, it's not that cheap.” I’m like, “Well, yeah. But it's cheap off of cheap, because the markets cooled off a bit,” and since you’re buying land, it’s raw land in a bankruptcy. It's like the most levered thing you can do. So, I was like, “Hey, your family office. If the market cools, it's still in a good area, it's growing like, If you can ride it out, the worst thing is lower IRR.” Their pushed back is like, it's not that far off of current comp. I'm like, “You being too valuation driven.”
Bill: Yes.
Thomas: I just think people get a little too-- That would be mine push back on value guys, and also they buy junk, because I've gotten older, and I think your friends are saying this-- [crosstalk]
Bill: Those two things are correlated by the way, and potentially [crosstalk]
Thomas: Yeah, people buying junk.
Bill: Yeah. Because it's cheap. They'd rather own cheap shit than reasonably priced good stuff. It makes no sense.
Thomas: No, man, there's a famous hedge fund manager who I like as well, and he says, you go shopping for deals on Madison Avenue, not on Canal Street. The stuff on Canal Street’s fake. [laughs]
Bill: Yeah, dude. From first principles, if you're like, “I'm going to sell you a pile of junk to put your family's net worth in, but I'll sell it to you real cheap.”
Thomas: Real cheap. [laughs]
Bill: Yeah, in car terms, I'm going to give you a Pinto, but I'll give you a deal on it versus like a Ferrari at a fair price. Your wealth is safer in the Ferrari. A 100%.
Thomas: No, I agree that.
Bill: You can maybe find some sucker to flip the Pinto too, but that's not a good investment.
Thomas: What's interesting is like, you do you end up getting into the greater fool thing even if you're a value investor. Yeah, I agree. Time is not your friend as your friends are saying. I totally agree with that. You would be very careful.
Bill: Take it one step early. Just to close this thought. You could maybe melt the Pinto and liquidate it.
Thomas: [laughs]
Bill: But then you got to pay taxes on your liquidation, then you got to go find another. That's a tough game.
Thomas: Well, here's the other thing for you like even for myself, I started thinking more and more about taxes. It's a good problem to have. But I think, Jeez, well, if you flip your portfolio four times a year and that's not super tax efficient, you better put us in crazy gnomes to make up the tax delta, if you can hold things for five years. But I don't know, man. For me, I think relative valuation’s dangerous, and relative valuation in your own life is dangerous. In thinking about your portfolio, you just can't benchmark yourself other people. It's bad for you psychologically. I think so. I see like--
Bill: What do you think about benchmarking yourself to the S&P?
Thomas: Nah. Bullshit, forget it. Forget it. I used to tell people the index. I guess, for me, talking about following your heroes or something for me like yeah, whatever Buffett says is right.
Bill: [laughs] I understand.
Thomas: Well, for myself growing up, he was such a mentor, unbeknownst to him. I’m just like my myself thinking about investing and really about life, more and more about life even in investing. I forgot I was going with this as well. I'm clearly, I lost the words.
Bill: No, we’re talking about indexing. We're talking about indexing and Buffett said index and you think it’s BS
Thomas: I think, it's BS. How can you index in a market like this? I don't know. Maybe, what do I do?
Bill: Dude, I, 100% agree and I know it is very, very difficult for me out of one side of my mouth to say like, “Well, you should look at ASML and wonder why it's valued this way,” and also say, “Well, indexing, I couldn't do it in this market.” But I'll tell you what, if I lost to indexing in this market, I could never look myself in the mirror. You talked about massive regret, I'd rather underperform being me than lose to an index. I couldn't do it. I would never be able to respect myself, and that's the biggest risk of all in my opinion.
Thomas: Hmm. Oh, man, you got to be careful. I think it's just psychologically dangerous, too. Because think about it. You could have 20 years where you underperform. But you've got let's say you're very conservative on one side of your portfolio, the other part of like total risk on with 10% of your book, and it takes you 20 years to maybe outperform “if you were to either benchmark to the S&P or whatever you'd call it,” where you benchmark to what your weightings are. I don't know. It's irrelevant in my mind. You should just be trying to find good setups. I always think like investing is, if I think about in mathematical terms, to me, it's analogous to doing analysis, which is like, you have to apply all the disciplines to attack a problem, and to learn as much as you can about the function in front of you and how it behaves, and maybe you can only understand how it behaves in certain areas. It's not solvable in any real sense. So, you can't just apply one rulebook. That's why I feel like value investing, of course is like a bedrock thing in North Star to be using, but I think the paint by numbers approach, I think that's what people say in the marketplace that I totally agree with. The paint by numbers approach to value investing is, I don't know, is it dead? I don't know, the DFA kill it, probably.
Bill: Oh, you're talking about just like this is statistically cheap. Therefore, I can just buy this.
Thomas: Yeah, I think so. Our replacement costs as valid today as they were 30 years ago. I don't know. Probably, but not in everything.
Bill: Yeah, I tend to say no. I'm with you on that. You need much more qualitative insight today than you ever have in my opinion. Now, maybe everybody has always said that, but I don't think it's wrong.
Thomas: But wouldn't you say my observations over years of investing would be, it's not the stuff that's safe that gets you in trouble. It's not the stuff that's super risky, that you know is risky to get you in trouble. It's the shit in the middle, where everybody's like, “Oh, it's not too bad,” and then they either make it too big or they don't see stuff, because they think, it's the stuff in the middle where it's hard-- If you already know something's risky, you're like, “Oh, I can only put $100,000 in it. It's very risky.
Bill: Yeah. Said differently. It's not what you know. It's what you know that ain't so.
Thomas: Yeah, exactly. Exactly.
Bill: No, I think that that's right. Yeah, I guess that the reason that I'm so intrigued by special situations is, you and I got long these lumber rights at the same time, and that was objectively a situation of capitulation and too many rights coming on the market at the-- I would write people that I knew the stock, and they were like, “Yeah, this is crazy.” I understood the underlying thesis on Qurate. Sorry, people are talking about it again, but I wrote to funds or talk to funds that said, I like this idea, but it's too small. That stuff that I can understand why I have an edge. You don't need to be a genius there. You just need to be smart and small.
Thomas: Yeah, smart and small, I like that. That's a good way to put it. If you're smart and small or okay, smart, not do anything too stupid and small. There's a lot of hay out there. I'm all for younger guys and girls going out there finding investments. What I think some of those are interesting is people will get a little full of themselves if they have a rip roaring three years or five years or something, and I'm like, “Dude, you're managing like 3 million bucks.” [laughs] Of course, you can dive around in special sits, and that's cool. That's totally cool. Just have some healthy respect for the fact that most guys that are managing $100 million, or $500 million, or billion dollars, that are very, just as smart have all the expert network crap and have meaningful management. They can't move out of stock like you. They have to accumulate the stock over the course of a month or two. You went in and out at a month.
Bill: Yeah. You can get in and out of a day.
Thomas: Yeah, or in an afternoon.
Bill: Or, three or four days.
Thomas: Right.
Bill: Yeah, I think that's right.
Thomas: There's a lot out there. That's why like--
Bill: That’s why I would never talk shit about other managers, especially bigger ones.
Thomas: Some of them are a lot better. To myself, humbly I would say about myself, and some of these guys are much better analyzers in businesses, but I can't. I can dance around them because I can go in and out. I can dynamically increase my position on a day or trim it on a spike of some news, and you can take advantage of that. That's what I think. I always think, you're going to take whatever unique advantages you can find and just pulverize them. Use them until they don't work. When you're smaller and you have less than $50 million, $30 million, $10 million, the world is your oyster on special sits. As you said once on a podcast, you said the reason I got into small caps, I think you said was, because you just thought about it from first principles that, hey, this is where a lot of-- it's harder for bigger firms to look at. That's still true.
Bill: Yeah. If you were advising somebody that had under $30 million, where would you tell them to focus attention?
Thomas: Look at every stock under $50 million. Every stock under $100 million, you'll find tons of stuff. So much stuff that you shouldn't be buying all the-- I don't know. Because you can't possibly follow all of that. But after-tax returns matter. Also, like for me, myself, I'm trying to think about after-tax numbers really matter. I knew someone that was an investor [beeps] all the way through, and he was like, “Yeah, the returns were 30%, 35%.” He was turning over his book like a gazillion times a year, and you got which you bet, and there was some other tax as well that could float through, but you bet I think was a big one. He was like, so net-net, we're making like mid-teens which is great, but the after-tax on this fund was just horrendous compared to the net headline number. I think, it's a boring thing to talk about. But if you do have some money like taxes really do matter--
Bill: Unfortunate consequences of life, it doesn't make it untrue.
Thomas: You can move to Puerto Rico, I guess.
Bill: Yeah, that's true. Shoutout to my boy, Francisco.
Thomas: I considered it actually.
Bill: Yeah. Did you?
Thomas: You have a friend in Puerto Rico?
Bill: Francisco, who is on the podcast with The Science of Hitting. He's in Puerto Rico.
Thomas: Oh, cool. No, I really haven't thinking about Puerto Rico.
Bill: Puerto Rico, as they say.
Thomas: Puerto Rico. I get really diverse response. Some people say, “Oh, that's great, man. Oh, it's great. You're going to love it.” Then other people are like, “Have you been to Puerto Rico?” I was like, gosh--
Bill: Yeah, I mean, they got some real problems down there politically, but I don't know. I would be open to it. It's just too damn far. I'm not trying to get on a plane every time I need to go somewhere. But I don't disagree. I also don't know that I care enough about taxes to make a move like that. But a lot of people have--
Thomas: If you manage it properly, if you're having a big liquidity event, if you can stay a US citizen, you can basically toggle. You want to be there, and legitimately jump through the hoops. But you don't want to become an expat, and yet, if you're having a big liquidity event next couple of years like why not?
Bill: Yeah, that makes sense to me.
Thomas: Yeah, if your company’s going public and you go on Coinbase. Right, Bill?
Bill: Yeah.
Thomas: You’re on Coinbase, right?
Bill: Yeah, that would be-- I am not. That's not my thing. Although, I am very interested in-- I'm crypto curious, and I'm really interested in what's going on in like NF's and stuff.
Thomas: Oh, yeah?
Bill: I think that's super wild. Yeah, man.
Thomas: That’s pretty cool.
Bill: Here's the thing. I have two conflicting parts of my brain. Part one is, this shit is Beanie Babies all over again. Part two of my brain says, whenever I have seen trends like this explode and then I have dismissed them, I have been pretty wrong, and I do fundamentally believe, I think the metaverse is super overused now. But I do think that the melding of your online life and your offline life, the probability that decreases in the future is super low. The probability that it increases I think is reasonably high, and in that world, the ability to flex, in the real world, you buy a car in online, you need some NFT. I understand why people think that's nonsense, but I don't know why that's that different than buying like I'm going to mess up. Like an ADMAR-- What the hell? How do you say an AP watch, or, someone like--
Thomas: ADMAR, Piguet, Piguet, Piguet.
Bill: Yeah, I knew I was going to mess it up.
Thomas: That’s AP.
Bill: But yeah, that's why is that different-- that versus a Rolex versus a swatch. To me, NFT's are just the digital equivalent.
Thomas: Yeah, no, I agree with you.
Bill: You got money to blow, and you're going to blow it, and you're going to signal the people, and that's what it is.
Thomas: No, I totally agree with you.
Bill: But it could all implode. I don't fucking know.
Thomas: Well, gosh, it's a lot to unpack in crypto. Yeah, I totally agree with that sentiment. The question is like, how do you make money from it? How do you actually put on a trade that makes sense with a worldview? That's why I like, I love the-- [crosstalk]
Bill: This is an interesting question. Why don't we talk about your Mt. Gox claims?
Thomas: Yeah, sure. That's the thing that worked really well. Obviously, basically, I bought a bunch for myself. I will get a tiny bit of background, but I run capital for a few family offices and mainly distressed investment. When I was running my hedge fund, I started buying these Mt. Gox bankruptcy claims in 2015, I guess.
Bill: What happened with Mt. Gox, just so people have a sense of the set up?
Thomas: It was one of the largest, what was the largest with 70% of the volume at the time it went under. In 2014, they had a hack or maybe it was an inside job. But somebody hacked the exchange stole like basically all the bitcoin, and everybody freaked out and filed for bankruptcy or insolvency administration in Japan and also in the States, I don't what's called chapter 15. So, I'm a little bit of a distressed nerd, principally because it's the only area of people really getting capital to invest. Also, I don't know, I guess, it's probably the only thing where I know a lot more than most people. For the rest, I'm basically pants at everything else. Let's just use that as a premise.
I came across this trade, and I was doing it in my small hedge fund, and it's funny to think about because I liquidated my hedge fund since then, and I just run the capital and bought a bunch of claims for myself as well as for this one family office. Yeah, the trade worked out very well. I have to like actually do the math. I know what the NAV is, although, I try not to think about it, because it's such a life changing amount of money that crypto moves $1,000. It's like almost hard to stomach when-- [crosstalk]
Bill: Yeah, it’s meaningfully-- Yeah, and your NAV is tied to a super volatile asset.
Thomas: Yeah. Right.
Bill: When you did this, just taking a step back.
Thomas: Yeah, please.
Bill: How long did you think it would take you to realize the NAV for lack of a better term?
Thomas: Yeah, it was 2015, I thought it would be three to five years at the time.
Bill: Okay, and now we're what? Six years out?
Thomas: And it’s what? 2021. It’s six years in.
Bill: Yeah, and now, what are you thinking?
Thomas: Well, it shouldn't be out. It's not the end of the year. Let's call it summer. Next year is the outdate if you want to be conservative, because they're voting on the plan right now for distribution.
Bill: Okay.
Thomas: I really believe this, Bill, which is like I really think illiquidity breeds good behavior sometimes, a lot of times. It ties your hands to the mask. It makes you actually follow the thesis, and not just wake up and be like, “Oh, shit, I've totally cocked this up, and now [unintelligible 00:41:53]" I'm cursing like a sailor. Sorry.
Bill: You can say cock this up.
Thomas: Oh, okay.
Bill: I've never heard that. I think that's funny. I may adopt that.
Thomas: Okay. All right. So, you really mess this up, and this is like, I can't believe I put money in this. I'm such an idiot. It's like that the quoted prices, it could be your friend but boy, they can give you some mental turmoil.
Bill: Yeah. I do know. This is literally the discussion that you opened up with.
Thomas: Well, for myself, it's been good for me, because I've totally sold stuff that I believed in the thesis, and I was just like, I just can't take any more pain. This actually hurts my gut. I think it's good for you. Some people are probably better at taking the gut-wrenching mark to market prices.
Bill: Did you resist the thread that Mike Mitchell wrote where he said like, I think it was charter when it was down 40%, he literally threw up in the trashcan. Because I think it was his only position at work.
Thomas: Oh, that’s really funny.
Bill: So, feeling it in your gut is something that I know that people do. I have felt it. Usually, when I feel that I'm like, do not do a damn thing, because this is real close to the bottom. Sometimes, I’ve used that tax less sale and I have never been happy with that decision. Ever.
Thomas: Yeah, I think investing can teach you a lot about life. It's almost like people say like, “Oh, if you have an emotion, don't necessarily react on it. Just observe it, and be in the moment, and feel the emotion, and how almost come outside of yourself, and just say, ha, this is really interesting that I feel this way, and why do I feel this way, and I wonder how long this will last?” Then over time it dissipates. Then you think like, “Okay, what's the right decision?” But you're right. But Klarman says this, which is like, if your whole portfolio is down, he was talking about the financial crisis, I think.
He said, we know guys that are great investors, but they had something on their portfolio that was half of their book, because he was talking about the perils of being too concentrated. And he was saying, when you're down 40% your entire portfolio, you can't really think straight. You like are in a paralysis. I think it is something to be said for that for the hyperconcentrated guys, which is, it's going to be really hard to stick to the program when your face is really being ripped off. 40% of your entire investor’s capital. On one position, I understand but on your entire book would be [unintelligible 00:44:21].
Bill: Oh, yeah. For sure. I think we're in a period to where people have made a fair amount of money and things have run to a concentrated position. I've long said, I think that we should have more nuance around position sizing. I have 50% of my book at cost is different than I have 50% of my book because I let it run. Or, I have 50% of my book in something, but by the way, my income is 30x bigger than or my future earnings is 30x bigger than my book, therefore what do you really have? They just have like a marketing position which is fine.
Thomas: It’s very true and fair. It's like a mental accounting issue, right?
Bill: Yeah.
Thomas: Like even for myself, I was posting the size of certain positions I had on, and I was like, this is disingenuous, because I have a decent amount of income, my current income. I just make money every month running the stress deals. Then I also have this huge bitcoin position effectively. It feels disingenuous, because people like, “Oh, man, this person's like 50% of their book in this,” and I'm like, Well, yeah, but it doesn't show that I own a home, and then I have this income, and things like that.” So, I don't know.
Bill: What's your effective cost basis in bitcoin?
Thomas: I'd have to think about it, but my own personal claims that I own is probably like $80 or bitcoin, or something. Something under 100--
Bill: Holy shit.
Thomas: Yeah.
Bill: Ah, good for you, man. I'm happy for you. You know what? You say that one big swing, but how did you find this idea?
Thomas: I actually read about it in the paper and was like, “Oh, this is really interesting. You can buy bitcoin for,” and then I researched it, and then figured it out, and I was like, “Oh, this would be fun to try to buy.” I did it for fun. I literally bought the first coin because I wonder if I could do this, this would be cool. I actually almost bought bitcoin in 2010 when there was like maybe it was 11 or 12. But it was really early, but I never bought it because I had someone convinced me out of it, because they thought it was absolutely ludicrous to go. I'm not like a bitcoin fanatic. So, I don't want people to walk away with this. But I am someone who's like a real believer in focusing on the weird shit. Bill, this would be my not advice, but my approach would be, once you're rich, keep all your stuff in just simple, straightforward. Like, hey, let's just turn out dollars, and then take a piece of it and just focus on crazy shit. [crosstalk]
Bill: Yeah, this is what I’m saying. Yeah, the stay rich portfolio, and then the part that you can actually level up your life.
Thomas: Yeah, and also, there's nothing wrong. What you were saying were I think on your last thing, you were saying I want to support products I like, companies I like, people that I like. I think it's not a form of charity, but I do think that there's something to be said for that. If anything psychologically, I've done that a little bit in crypto where I've put money with a few people that I think are smart, and I really like, and I think what they're doing is incredibly honestly important compared to what I'm doing. I think like it comes back around because it gets you in the ecosystem, and it's not even karma. It's just you build out your network because at the end of the day, I don't know about you, but most of the stuff I've found over the years is keeping a really strong network where people want to call you, and want you to know about an idea they love or about some company they're investing in. That network is where the value is in my mind.
But on [unintelligible 00:48:03], yes, I found it. I read the paper, and I bought it just for fun, and the trade was okay, but you were basically buying bitcoin at a third of market price, and it was an okay trade. But then I go deeper and deeper. That's my other thing. I'm like a real big believer in following the thread, which is really a Michael Price thing that I stole from Michael Price. He’s always says like, “You can just keep following thread further and further down.” What I did is, I did that, and I was like, “Okay, this is cool.” But then there was a time when you could buy the claims and get the crypto for free which is that's when I got a family office to put on a few million bucks of it, and that was really great.
Bill: Do you get promote from that or no?
Thomas: Yeah. It's like a 0 and 20.
Bill: Nice.
Thomas: Yeah.
Bill: I would say, you earned your 20 on that one.
Thomas: Yeah.
Bill: They're going to be pissed when they cut the check or whatever, but you earned it.
Thomas: Well, we have to cut the check with them, because we control the LLC. But yes. [laughs]
Bill: Yeah.
Thomas: Now, I would trust the guy emphatically. The funny thing is like--
Bill: No, I'm just saying. When you look at the grossed up number, you're going to be like, “Fuck, that's a big check.” But at the end of the day, you got--
Thomas: You know what’s crazy? I pitched the trade. Bill, I pitched the trade to literally everybody in Special Sit Land in New York. Every big hedge fund in New York, I probably pitched this to and they all said no. Every single one of them. I could go through a laundry list of hedge funds that people probably know that I pitched it to.
Bill: Why did they say no? Is there a common reason?
Thomas: They thought I was too small. Most guys, even the people, I would say most guys were like, I did have a few people laugh at me because they're like, “Bitcoin?”
Bill: [laughs]
Thomas: I was like, “Yeah, bitcoin.” They were like, “Jesus Christ, kid.”
Bill: Yeah.
Thomas: We're trying to run a respectable organization here coming here-- [crosstalk]
Bill: That’s right. How am I going to raise funds saying that I'm buying up Mt. Gox claims? I can't do that.
Thomas: No, but I had a few people. That was the other thing. I suppose it's true of markets in general or business. You want an opportunity to be potentially big enough to want to work on it, but not so big that like Apple wants to crush you.
Bill: Yeah, an interesting niche.
Thomas: Right. You don't want something so mainstream that like I don't know. Tiger Global's like, “Yeah, I'll have that for lunch.” You're like, “Oh, shit. Now, you just messed up the trade.”
Bill: Yeah. Well, I think that's why you and I connected. Especially, after we did that space, I think we look at the world pretty similarly in that like there's we're both looking for pockets of inefficiency that have potential big upside. I like to be able to articulate why I think something's inefficient. Now that said, I own big stuff. I own stuff like Google and whatever, but that's turned out to be a pretty good decision. So, it's not always great to be-
Thomas: Only monopolies?
Bill: -in the smallest ever. Yeah, that's right. of search. Come at me for that. I'm fine to take that heat.
Thomas: No, I think you do. Sometimes, the monopoly trade I should have been-- I don't know why I wasn't in the monopoly trade. I was in and out of them over the years, but I can never hold them. It was just too boring. In my mind, I was always like, “Ah, this is so boring.” Like I’m not [crosstalk] anything.
Bill: Well, dude, a lot of people sold that to Google because it didn't move for a while. I actually like that setup. I like stocks that have ripped, and then I bought Starbucks when it was in a five-year consolidation period. Disney spend time in that.
Thomas: Oh, Disney.
Bill: I like that. I think people get tired of owning the security, and then it's like, “Oh, wow, there's a reason this thing ripped.”
Thomas: Yes. I definitely think that's true. People get bored. Also, if you're wealthy, I guess it doesn't matter. But if you're broke, you're looking for a lottery ticket. you're like, “I need this to happen now.” I got to eat.
Bill: Not now, but now now.
Thomas: Now now.
Bill: Yeah.
Thomas: Like right now. It is funny, though that I think about it like why do people say no to Mt. Gox? I think that was one, and then more thoughtful people were a little like, “Hey, this sounds great. But what am I going to put $10 million in this on?” I was like, “That'd be great.” Then they're like, “See, that's why I don't want to work on it.” So, some people will pass on because of that.
Bill: Yeah, I was just talking to a woman this weekend who cuts minimum check sizes of $200 million. I was like, I can't imagine--
Thomas: Give her my number, Bill. [laughs]
Bill: I don't even know that you and I could absorb that.
Thomas: [laughs] I figure it out.
Bill: Yeah. Well, she's--
Thomas: Jesus Christ. $200 million at a time, yeah.
Bill: I have her contact, but she's at a pension fund.
Thomas: Right.
Bill: I don't want to like out who she is or anything.
Thomas: No, don’t do-- [crosstalk]
Bill: They buy like fruits and stuff. I was like, “Well, how's it gone?” And it's gone like shit. But at the end of the day, they could absorb it, and it's non-correlated, and it's like, okay.
Thomas: Wait, they like directly buy fruits? They're in the fruit trade business now?
Bill: Land and whatnot, yeah.
Thomas: Oh, okay. Yeah.
Bill: Yeah, like land.
Thomas: Really taking [crosstalk] into next level.
Bill: It’s interesting.
Thomas: Mine, bananas.
Bill: Yeah, well, it’s just so much money like what do you do?
Thomas: No, I think it's smart. I actually think that's-- if I had over a billion dollars, I would probably do quantitative strategies that I would never do at my size. I would do arbitrage stuff, because I don't want to take duration risk. Because I feel like you're getting the same thing. It's basically like a fixed income return but without duration. That's very generalization.
Bill: What do you mean like without duration?
Thomas: Well, being long anything investment grade like sub, whatever. I don't even know how low the rates are.
Bill: Yeah, that seems crazy to me. I just can't get there.
Thomas: Who would do that? Why wouldn't you just be long real assets? Buy self-storage units. Even if you pay up in the yields 2%, 3%? I'd much rather that trade than 2%, 3% on my Triple B or Double B like Single A.
Bill: Yeah, I do know that, and I agree with that. I was pitched on public storage when Elliott got involved, and I like Elliott. I know why I like them. I can understand why people may not like me rooting for the Goliath, but there was part of me that was like, “I should just do this shit.” Because I think over time, they do create value. Then I looked at the stock and I was like, “Ah, that could have been my bond allocation.”
Thomas: [laughs] To me, that's what I felt--
Bill: It's what cigarettes were for me for a minute.
Thomas: Buffett's, of course, amazing. I feel his investment style is inexorable truth. He only wants to bet on things that he thinks are inexorable truth. Now, I could still be wrong. But it's like people shit they own storage, like I got a storage unit. I can tell you, I don't really want to get in a fight with my wife about what we should throw away. I'm just like, “All right, I'll just pay the damn bill.” [laughs]
Bill: Yeah, that's right.
Thomas: If you're ever late, do you have a self-storage unit, Bill?
Bill: Do I?
Thomas: Yeah. Do you have--
Bill: I was in self-storage. I had a storage unit that I was housing furniture and I would have rather burned my furniture than keep it at that point.
Thomas: Exactly.
Bill: Because [crosstalk] sanity.
Thomas: Well, then my favorite is--
Bill: That’s a good business.
Thomas: Oh, it's a great business, and what's great is, if you're late by a day, they put a lock on your cage. [laughs]
Bill: Yeah.
Thomas: It’s amazing.
Bill: Yeah, you get nothing.
Thomas: Yeah, it's like, "And that's ours now." You're like, “No, no, no, no. I'll pay the bill. Please unlock it.”
Bill: You know what else I'd like to own is mobile home parks.
Thomas: What's the theory on the mobile home park? What's the inexorable truth there?
Bill: Well, I think that you have a lot of nimbyism going on right. There's not a ton of approvals going on. You have a real problem of affordable housing in this country, and you have a scenario where-- My buddy's dad does it. The cap rates are at the point where they're like upsettingly low, but what isn't? I guess the way that he is explained it to me is that-- and it's getting more efficient. I don't want to frame this as, oh, it's easy money to be made. But a lot of the operators are still mom and pops, and they're underutilized, and if you can have a creative mind about how to invest in common area space and make it more livable, or if you can have a creative way to create, I don't know, if it's a basketball court. Something that is very cost efficient can last a long time. I don't know if it's digging out a pond. I don't know what it is, but it's creating something for the tenants that are really forgotten about. That resonates a lot for me, is businesses that are actually providing services for people that most people don't give a shit about in the business world. I like that stuff a lot, because you're making people's lives better, and there are people that need it now you do really have to worry about your tenant base in that stuff, because you can have drug problems in communities, and stuff, and that's an issue.
Thomas: Also, I assume that the mobile home market is niche enough to where Blackstone's-- I mean, self-storage like Blackstone’s claims-- [crosstalk]
Bill: Oh, Sam Zell. Sam Zell holds up a lot of it.
Thomas: Oh, Sam Zell has a mobile-- [crosstalk]
Bill: Yeah, He’s got a lot of really, really good stuff. So, if you're driving along the beach and you see a mobile home park a lot of that as Sam Zell.
Thomas: Of course, he has the ones-- [crosstalk]
Bill: This dude is a monster.
Thomas: He's great, man. There's an old article about him, or he wrote the article. I think it's called the Grave Dancer. It’s the original-- His book is great, by the way, but this original article is great.
Bill: Did you listen to the book or did you read it?
Thomas: I read it and I listened to it. I found his voice and just hit-- I think he's great.
Bill: I don't know if my Sam Zell voice is good, but I think it's good. So, I like to do it. He's the man. Sam Zell is a beast.
Thomas: Yeah, he really is. He sounds serious about strikeouts.
Bill: I love how he talks about like-- Yeah, but who doesn't have strikeouts in this game?
Thomas: No, of course. No, of course.
Bill: The thing about blowups and stuff or strikeouts is structure matters too. If it's in some LLC that's away from the parent entity, that's part of structuring a deal. It doesn't help the single LLP owner of some whatever. But in aggregate, I don't think-
Thomas: No, no, he's done great. He's amazing.
Bill: -that I fault people like him for strikeouts.
Thomas: No, no, no. Of course not, and there's always going to be-- I wouldn't call them strikeouts, but you always going to have--
Bill: People shit on Bill Miller over this. They're like, “Oh, he blew up once.” It's like, "Well, I understand what you're saying, but if you look at a career, it still pretty impressive."
Thomas: Yeah, I definitely agree. Someone was asking me once, we're having a discussion because I was working on this big distressed deal that didn't come together, and also, it really pissed me off, because we were almost there. We’re just short basically like seven and a half million bucks. But anyway, long story short was, someone was saying like, “Oh, how do we de-risk this transaction?” I was like, “Uh, what are we talking about?” He's like, “Well, this is very risky. It's a levered structure.” I was like, “Dude, the only way to de-risk this is to put less money in it.”
Bill: Yeah.
Thomas: You’re personally, right? He wanted me to figure out how to de-risk a transaction, and I was like, “We can't be changing a transaction.” It's a stock that could be a 10x could be zero. You can't de-risk it. Instead of putting a million and you should put $150,000, whatever your number is that matches your risk tolerance, and how much capital you have, and what drawdown you would take.
Bill: Yeah, it's an asset allocation way. That's it. You can't de-risk risk.
Thomas: Yeah, I hate all that shit. All these institutional people talking about managing risk and stuff like that, I'd almost rather manage my own risk than have them doing it. That's why I don't even like any a lot of institutional-- even though I think some of these hedge funds are great, I think they're trying to manage your risk for you, it's like I just rather than be trying to shoot the lights out, and I'll just manage it by allocating less to them.
Bill: Yeah, well, this may be saying the same thing but from a different lens. One thing that I have seen from some of my friends that operate in the industry for real is some of them are getting pushed to get more and more concentrated, because the allocator spreads the bets. I'm like, “Yeah, but they're pushing you to take real life and career risk, and then they're diversifying their risk." That's fucked up to me.
Thomas: I think it's smart. [laughs]
Bill: Well, it is. But the fact of the matter is, if you're betting on 30 managers and telling them all to be concentrated, I don't know, the skin in the game is different. That's an incentive issue.
Thomas: Yeah, it is. I like really love how Klarman runs their book which is-- I don't know exactly. I haven't worked there anything. But he's trying to run absolute return strategy. He's doing all kinds of stuff. I know he gets written about for whatever is public. But they do all kinds of private stuff, a ton of real estate stuff, a ton of private capital, and I think private credit stuff. I see him in distressed land all the time or not all the time, but sometimes. They're pretty disciplined. They're never going to shoot the lights out and stuff, because they're normally on the conservative side of the risk spectrum, although I'm sure they-- They bought, what was it, the nuclear business that went under? Not PG&E. Westinghouse. They showed up and bought, I think it was one of the utilities, insurance claims. That was an amazing trade. They literally doubled their money, serious money. I think they bought a $600 million claim for 200, 300 and double their money and it literally a week. It's a long story, but Brookfield showed up and bought the business, and it ended up being 100% repay case. I don't remember it. If it is not 100% repay, close to 100% repay. That was a phenomenal trade. Phenomenal. It just got lucky, because I’m sure they were trading--
Bill: What’s the story behind that? You said it's a long story. How did it set up?
Thomas: Yeah, so, Westinghouse, they were building nuclear plants, I think one in South Carolina and one in Georgia. They were like 80% complete, and there were like $5 billion over budget. Five billion with a B. So, they filed for bankruptcy, and if I recall, they were suing the contractor saying that they owed-- or no, the utilities were suing them saying that they were on the hook for the cost overruns, and they were saying, "No, no, no. This stuff was out of scope. You guys kept changing the plans or how this was supposed to fit with this." It's like stuff that was not agreed to and so the cost overruns are on you.
The two utilities were supposed to take delivery and pay for it. Westinghouse designed it Toshiba-- I want to say, which was-- I can't remember who was the builder, and then we had the utilities, and they basically got in a fight over the cost overruns.
Bill: Yeah. Somebody saying change orders, somebody saying incompetence. Yada, yada, $5 billion.
Thomas: And here's the bill.
Bill: [laughs]
Thomas: I looked at it because I was trying to buy mechanics liens on the nuclear plants, because mechanics liens are great. They normally have, what are called submarine liens, and usually, you don't have to actually follow UCC-1. Normally, you come ahead of the DEP and things like that, or the debtor in possession loan. So, it's a messy situation. I couldn’t get any transaction--
Bill: How big were the liens that you were looking at?
Thomas: Yeah, they were all like a few million bucks. So, there were a few that were-- I love cases like that where the plant's not done and you have all these liens, because normally, they can't be primed-- They normally can't be primed by the debtor in possession loan, because you were actually coming in as a preparation lender--
Bill: By prime, do you mean jumped in security?
Thomas: Yeah, exactly. You can't be like jumped in-- Sometimes you can, but a lot of times you cannot unless they pay you what's called adequate protection. That's like a bankruptcy term that would take an entire episode to explain. I'm not even sure a lot of bankruptcy professionals understand what adequate protection is. I'm not even sure the bankruptcy code itself understands what adequate protection means. But this is really turned into bankruptcy--
Bill: Well, it seems like a high level, it's just saying that they've got to give you enough money to then jump you in priority. But then, you get into an argument about what's enough.
Thomas: Yeah, exactly. No, no, no. You're exactly right. The code is super vague on that, and then it goes --
Bill: Seems like a great way for attorneys to make a lot of money is what it sounds like.
Thomas: [laughs] Well, my favorite is, when you really get into bankruptcy arguments, people will say things like, “Well, what was the legislative intent of the word is, shall?" People really get deep into-- "Well, the code before they changed, it used to say this. So, if you think about why they changed it, because they wanted to say that." So, you get into these, these arguments. I love all that nerd stuff. I didn't really get much background but I am from Georgia, and my parents are bankruptcy lawyers there, and that's how I learned a lot about the bankruptcy code. So, really just hanging out at the courthouse. I've used that as my unique advantage. I think for me the lightning bolt or whatever, the lightning bulb that went off was, I was reading actually securities analysis, you know the 10th edition one with all of the great intros was like a David Abraham’s chapters--
Bill: Oh, yeah. Klarman was in it
Thomas: Klarman did a chap--
Thomas: Jason Zweig did something I think in there.
Thomas: Yeah, Jason Zweig one. [crosstalk]
Bill: I think Greenblatt may written in that.
Thomas: Greenblatt, I think, did one.
Bill: Anyway, yes, I know it.
Thomas: Anyway, I loved it. I remember him talking about-- He is basically talking about buying into liquidations, and litigations, all the stuff, and basically, to me, a paint by numbers approach that people pull away with Graham and say, “Oh, he was a quant.” Not really. If you really read it, he's like the intellectual father of modern-day value investing or special sit investing, and why I think is interesting is, to me, the philosophy is what's interesting. It's still so true, I almost feel like I should get out of the quote book and read some bits of it. But in my mind, he was basically saying, you should be using your unique advantages to just print money. Then I was like, “Oh, well, I know a lot about bankruptcy, and maybe I should do that.”
Bill: How often do you need attorneys? You got to need attorneys all the time, yeah? What’s your minimum amount of capital that you think that you could run your strategy with?
Thomas: For myself or for an institution? If you're buying claims, let's say, you’re doing claim works.
Bill: No, I’m being selfish. Let's say it's me.
Thomas: [laughs] We do [unintelligible [01:14:12] trade claim book that we run for a family office, and that's like a few people-- right now, I think our book is $20 million in claims. It's hard to scale that, but the returns are good, but it's hard to scale. Then, the dip business like better possession loans, those are great. That's actually my favorite area and I think claims are great, too. But for me, I like the idea of trying to take over companies at very cheap valuations. It's not a secret. Whatever the phrase is, the medium is the message. The medium you what you're doing it is, maybe [unintelligible 01:07:09] a little bit unique, but at the end of the day, you're just trying to buy cheap shit. You're trying to buy cheap shit that's not like crap. Sometimes, it's pretty hairy. There's always a question around whether it's crap or not. I looked at a travel MLM during the COVID.
Bill: A what?
Thomas: A travel MLM. A multi-level marketing--
Bill: Oh, yeah. Okay. All right. Yeah, I get it. That sounds hairy.
Thomas: That was pretty hairy. We were just like, “Is this a legitimate business?” It was pretty funny, because all of the conversations at the family office, there was one person on the call that kept referring to it as a Ponzi scheme, and I was just like, “We're not going to be able to buy this company if you keep referring to it as a Ponzi scheme.” Jesus.
Bill: That's right. Yeah, we can't call our own purchase a Ponzi scheme. That's not going to work out very well.
Thomas: Yeah. Because he was sitting there saying like, “The way the Ponzi works--" and I was like, “Yes, it's an MLM.” I was like, “Please, can you stop calling it Ponzi?”
Bill: [laughs] MLM is really interesting. I understand why everybody doesn't like them. On the other hand, man, Amway is a hell of a business.
Thomas: I'm not against them. I just think it's like a lot of things. It's how it's done. Like mobile home parks, because, “Oh, what a junky business.” These people like they get that-- I'm sure you could make anything-- and I think MLMs get a lot of heat because there are bad actors.
Bill: Yeah.
Thomas: Again, a lot of it is selling a dream, that these people are going to become independently wealthy selling lotions and potions. Sometimes, it's a bit too much.
Bill: Well, I think it was my uncle actually got into MonaVie, and I went to one of the MonaVie meetings and I was just like, “This is crazy. I can't get down with this.” I bought some of the juice to support my uncle or whatever. Whatever, but fuck, that was crazy.
Thomas: Wait, MonaVie was the wine company, no?
Bill: No, it was acai berries, sir.
Thomas: Oh, squeezy. Sorry.
Bill: Dude, it got big for a minute. Oh, the people at the top of the Ponzi did well.
Thomas: Ponzi, see, there you go. Can’t call it Ponzi.
Bill: [laughs]
Thomas: This isn't going to work if you're going to call it a Ponzi. That's what's happening in the family, we're talking about it. Of course, they have also reputational issues that they were worried about in terms of transaction, which is a whole another conversation. I love doing the distress stuff. It's fun. It's hard, it's complicated, and very great deals. But it's not everything. There's lots of deals everywhere. I was interested-- You must meet some super interesting people. I love meeting people doing different strategies and different stuff.
Bill: Yeah, I want to have more of them on. I'd like to have credit guys, I'd like to have distress guys, I'd like to have all that stuff because I like to decompose and think about how people think of bets. That's just cool to me. I'd love for somebody in credit to be able to explain to me outside of we have a mandate and this is how I get paid. Why taking institutional grade risk right now makes sense.
Thomas: Good luck.
Bill: I think I can get it if you're hedging against deflation, but that's the only scenario that I can see. Maybe that's the answer. Maybe that makes sense. Because everything that I--
Thomas: I know guys that are keeping duration short, and--
Bill: Yeah, you could reach for some yield or whatever. I think I'd just rather have cash. I don't know.
Thomas: Can’t make any money selling cash my friend.
Bill: Maybe that doesn’t make any sense. Yeah. Well, I know.
Thomas: That's the other thing I think, not just the industry but even remember that most people are trying to sell you something. Even, no offense to emerging managers, they want you to invest with them. Everybody has something to sell, so it's sometimes the optimal strategies have no natural-- I think you were saying this early, you were saying, I was like-- [crosstalk]
Bill: Right now, I’m just selling Koyfin. I recommend everybody go out and try that product. For real, I am happy that they're my sponsor.
Thomas: That’s pretty cool, man.
Bill: I did slide that in.
Thomas: Congrats on that.
Bill: [laughs] Well. I don't know. I got to figure out what I'm trying to sell. But for now, it's just been fun not to sell anything.
Thomas: Well, there's nothing wrong with selling something if you believe in the product. I'm just saying that as an investor, again, it's back to this idea like sometimes the best action is inaction, and it's so boring, and you were talking about like why something is cheap. Well, sometimes why there's no buyers or something is because there's no natural seller of it. Even liquidations are good pocket of fun opportunities. You grind out 10% or 20%.
Bill: Yeah, liquidations. It's something that I haven't spent much time on. But someday when my man, Mike, and I are done with some of our current bets, I've got to have him coach me a little through the liquidation phase. Because if I could grind out 10% or 20%, I'd be pretty okay with that.
Thomas: I did a bunch of liquidations when I ran my fund, and I don't really do it much anymore. So, I'm torn. To me, it's almost like a fixed income return. Maybe this is an answer to doing bonds. But the reason partially they exist because they're small, but also there's no fanfare around liquidations. Sure, maybe on FinTwit, there's a few guys rounding them up on their Substack like, “Oh, I bought up $2,000--"
Bill: No, dude. You don't get Substack subs writing up liquidations. You've got to write up Etsy, shit like that.
Thomas: Right. Well, my point was, there's no fanfare around it, there's no coverage. The only firm I know that I feel like does that no one say in scale. You see Baupost doing it and you see Fairlawn doing it, and sometimes special sit managers will put them on. But the returns are low. You're talking 10% returns probably as an IRR. I mean, that’s not low. I think it's very high for the risk. I don't think there's a whole lot of risk in lot of them. Normally, the risk is--
Bill: Have you ever seen one go bad? What are the risks that people should be aware of in a liquidation, is maybe a better way to ask the question.
Thomas: Horrific IRR. That's the risk. Just absolutely worst. You end up making 10% over five years, and you just want to blow your brains out because it takes so long to get paid on it.
Bill: They're pretty close to SPACs trading below trust value, right? They can't be that much different.
Thomas: Yeah, I suppose it should trade in Perry. Although SPACs are now trading in premiums. I guess, you can get the allocations.
Bill: Oh, they got hammered. They've gotten hammered. Yeah, there's a ton below trust. A ton.
Thomas: Who is on it? Was it you on Twitter, was it Mike Mitchell on Twitter saying, "Yeah, I know in 2009, you could buy trusted like 70, 80 cents on the dollar to go to $1?
Bill: It was not me.
Thomas: That's all cool and everything but remember when that was like March of 2009, you also could have bought [crosstalk] 15x--
Bill: Yeah, your opportunity cost is huge.
Thomas: Yeah. So, that's the other problem with liquidations. It's great for a rich family office, but there's an opportunity cost because your money is pretty much locked in there. Unless you can get someone to borrow against that book, that's not liquid at all. Also, it doesn't mark to market well. If you're running a fund, it's mark to market, you get administrator asking all kinds of questions like, “Oh, what's going on with this? Didn't you say it's going to pay out last year?” I'm like, “Well, takes a little longer, and it's a wall trade.” It's not a side pocket. It could be a side pocket, and you might have a side pocket, and you get pushed back on those things where the stocks don't trade and stuff like that. So, it's probably perfect for home gamer.
Bill: I was going to say, you are making me more and more exciting.
Thomas: Yeah, I think they're great. I get tempted by them from time to time. What I find interesting about it again, it's the microcap guys are zigging in and out of positions and think there are track to be Warren Buffett. Same with liquidations are like, “Oh, I did all this deep analysis.” I'm like, “Dude, you don't need to go crazy here. It's just cash and there's expenses, and if you spent more than 20 minutes on this, I'm going to get you a sudoku book."
Bill: [laughs]
Thomas: You need some other hobbies. I wouldn't say that like to overthink it, but sometimes it's good to spend a lot of time thinking about it, but then sometimes, it's just very straightforward and you shouldn't overanalyze it. I don't think you're going to get better predictions through more analyzing.
Bill: Are there shysters in the space that you have to avoid? This is really something that I've never looked at, but I know that I should.
Thomas: Usually, I've never run across one with shysters. I would say that you have guys with incentives to burn through more dollars than they should or give themselves a job for an extra three years.
Bill: Sure.
Thomas: The incentive structure is, hey, why not be ultra conservative and take an extra two years to liquidate and blah, blah, blah. In liquidations, you don't really run across shysters. Also, sometimes you get guys who end up with shells and they just sit on these things forever. I would say that per unit of risk, you're way compensated. In my mind, there's only a little bit of literature on empirical returns of liquidations, and it's quite interesting.
There's one in The Journal of Portfolio Management from the 80s, and it was 30% returns during liquidations. Now, that was a different time. But I still think you can get into the double digits doing liquidations. If someone has any updated empirical-- I actually think you just buy them all. Just buy them all, don't think about it too much. It's not your friend to overthink it. Do a few to really follow it, and then once you get it down, it's not rocket science. You're not going to get rich. It's a strategy for someone who's already wealthy.
Bill: Yeah. Well, it makes sense. This is why you and Mike get along. How often do you guys talk?
Thomas: Not that often.
Bill: Because this is what Mike did. Mike was straight up-- Yeah, for a while, I don't want to speak for him. But I'm almost certain that his strategy when he left his firm is he's like, “Well, I can do liquidations and basically make myself my income.” Then, he stumbled into some other things. That's how he found Kyle.
Thomas: That's interesting. You’re right. That makes sense. Because I actually knew about the security because I was friends with Larry back in the day, Larry [unintelligible 01:17:35]. So, I knew about [unintelligible 01:17:42] or whatever the name it that was before. I should have owned some just to support Larry. See if I would have owned it the support Larry because I thought Larry was great. But I was going through a phase I was like, “No more cash shells, no more liquidations,” because I just basically wound up my fund, and I was like, everything that was like a tiny [unintelligible [01:27:00] micro-cap Pico. What do they say when they're really small? Picocap? Whatever.
Bill: I don’t know.
Thomas: You know what I mean? Tiny ass stock.
Bill: I don't traffic in that.
Thomas: Picocap, nanocap. Anyway, it doesn't matter. I was having a reaction to this. I was like, “Oh, my God--" Because I had to basically give some stuff away, because all my bankruptcy claims and stuff paid out but these pico caps and nanocaps, I just couldn't get rid of that thing. Anyway, the hunted become--
Bill: I had a stock that-- it was the first time that I've been talking to somebody like you, you've had it for a long time. But I had something that had like no bid for two, three weeks or whatever.
Thomas: Two, three weeks. How about two, three years? [laughs]
Bill: I know. Well, that's the thing that was interesting, is I'm so used to having that liquidity. So, it's interesting to be like, “Okay, well, this thing. I know where this is marked, but this mark, it's nonsense."
Thomas: Well, it's tough on smaller fund managers. They all get sucked into this stuff I think because the valuations are incredible. But you start having issues around like this is level one, this is level two. What mark are you using? Are you marking into the bid? Well, I am the bid.
Bill: Yeah, that's right.
Thomas: I own it, I'm the bid. So, it makes it tough. I think it's great for home gamers, and there's a lot of stuff out there. I have a friend who was talking to me about Waxman recently, which is a very well-known, well-trodden whatever nanocap. It trades for, I don't even know, a few dollars and the real estate in the business, probably worth like $100 a share. But the guys that run it, hard to trust, haven't been as shareholder friendly as a lot of people would like, and I think that a lot of those things exist. For me, if you have enough capital and you know enough, and you can try to figure out an angle for unlocking the value, those are interesting. But I'm not sure I would touch those. Liquidations are different. There's like a mechanism for realization. It's already there, not to do any work.
Bill: Yeah, this is the old Munger incentive thing, where liquidation at least, you don't have to worry about the incentives as much.
Thomas: Yeah. That's the only thing. Could you do more net-net-driven value strategy? I think yes, if you control the cash flows. What I worry about some of those -
Bill: That’s right.
Thomas: -I don't control the cash flow, and it scares me because the person controlling them scares me. It is not [crosstalk] something that work.
Bill: No, this is why I haven't invested in Intrepid Potash in a while, and I know it's ripped, and I'm happy for the longs because I did invest in it in the past, and I have followed it. But end of the day, yeah, fuck, man. Oh, God. I hate looking at some stuff in 2020 that I held for a little while. But it was so cheap that I was like, I know that I can't really trust this guy, but also, it's up 3x since then. But end of the day, I couldn't hold it, because yeah-- well, 3x actually in 2020, it's not that impressive.
Thomas: [laughs]
Bill: But the guy that runs it, I'm not convinced he doesn't use it as his piggy bank. That's a problem.
Thomas: Yeah, I think it's a problem also, if there's no liquidity in the name you really have to-- But sometimes, I think the biggest-- I don't know the biggest miss ever. I remember once I was looking at the WWE when they were transitioning from pay per view to OTT, now it's a great story. It was a fantastic setup. The stock totally fell out of bed. They basically ripped pay per view out, and then we're going OTT, and stock was down bond. I can't remember, was it the 20s and went down to 10 bucks or something. Now, I don't even know it's like 60 or 80 bucks or something. It was such a great setup. It was quite a liquid name. I remember looking at the proxy, and I was like, “Wait, Steve McMahon makes $14 million a year?” Or Vince McMahon, he was some former wrestler. Maybe it was Vince McMahon, and I was just like, “I can't own a stock. Fucking wrestler make $14 million a year.”
Bill: Yeah, that’s funny.
Thomas: I was like, it just feels wrong, and I was like, wait, private jet-- You know how to [unintelligible [01:22:14] the proxy.
Bill: Yeah.
Thomas: I've seen some of that stuff, it can throw you off though. I think some of the stuff is can really throw you off. It's like not as relevant as you think even though I know people say, “Oh, too many red flags.” It’s like, “Okay, well.”
Bill: Well, I asked Gabelli if he had pitched--- I think it was MSG in 2015, and we were at the Berkshire dinner that he hosts and I stood up and I asked a question in a roomful of people. I said I just don't understand Isaiah Thomas has these sexual, harassment allegations, and now he's in charge of the women's basketball team. That doesn't seem to make a whole lot of sense to me. Dolan's flying around on a helicopter, what's going on here?
Thomas: Throwing money out of the helicopter.
Bill: Yeah, just making it rain from the sky, and Gabelli just looks at me, he's like, “Where are you from?” I said, “Chicago.” He's like, “You don't get it. If you're from New York, you'd get it. At the end of the day, the Dolan families made me a lot of money, and if you don't like it, you don't have to own it." I was like, “Okay, there you have it.”
Thomas: All right. Well, that was a succinct answer. [laughs]
Bill: He was. That’s what happened. But then that night, I offered to buy him a beer my whole life changed after that.
Thomas: Oh, that’s cool.
Bill: Yeah, he's a man. He spent two hours with me. We're not friends or anything, but he's always been kind to me.
Thomas: I love that guy. He's like a deal machine. Actually, you know who ran his partner capital? This guy named Sal Muoio? He only did liquidations.
Bill: Oh, really?
Thomas: Yeah. The partner capital at Gabelli, this guy, his name is Sal. I'm messing up his last name, but Muoio or something. He's on the board of a few like ARLIX. You know what I mean like rural telcos that Gabelli has?
Bill: Yeah.
Thomas: Anyway, but he used to run a book for Gabelli and some of the partners, GAMCO for a long time, and almost half if not more than his book which is liquidations. [crosstalk]
Bill: If I recall correctly, Gabelli’s got like it's either a net operating loss, or a cash shell or something. It's got big investors. It's him and two other guys. Part of me was like, “I should just have a little bit of this to see what they do with it.” But then, I never know what they're going to do with it. He’s a great guy. I want him to come on the pod, man, but I don't know. We'll see. I have to figure out how to pitch him in a better way. I told him I said I want to do an interview of your career, and he sent me a Business Insider article. I was like, “Yeah, this isn't quite what I was thinking," but whatever.
Thomas: [laughs]
Bill: I was thinking something a little deeper. [laughs]
Thomas: I like him. I think he's amazing. He's an idea junkie. I'm blown away at how many ideas and how on top of and touch with a lot of markets he can be. I guess he's got a lot of media. There's some [unintelligible 01:24:58].
Bill: Auto, media.
Thomas: But he's the man. Honestly, I can't hope to come up with that many ideas. I think part of the guys that run money at scale that are good are very good at probably sourcing and just having lots of ideas, because it's hard to fill a full book of institutional quality or really high-quality stuff versus picking a few names that you spend a lot of time on as a home gamer.
Bill: Yeah. No, I think that's right. My sense of him is he's probably not the easiest human in the world to work for, but most guys that come from nothing and create billions are not, and I've always heard that he has treated the people that have left very well. So, I don't know. He's always been kind to me. So, I've got no beef with him.
Thomas: No, he's cool. I think he's great. He's someone that's up there for me, the whole private market value. I'm a big believer. It's not that hard to think about why that would be applied. But he's right. He's like, what would a knowledgeable person-- It's actually a better way to think about like value investing, what would a knowledgeable person pay for this, and I want to pay a lot less. He’s like, “Yeah.”
Bill: And he wants a catalyst, which makes perfect sense because you're not stuck in some idea.
Thomas: No, he's great.
Bill: You can also track it. If you have catalyst and it doesn't happen, you can be like, “All right, I was wrong--" “Within two years, I think they should happen.”
Thomas: That’s feedback.
Bill: "Okay, I was wrong."
Thomas: Yeah. Feedback loops are great because it helps you learn. You're playing golf, the feedback pretty straightforward. Maybe my swing does suck, how that ball just chilly dipped across the fairway or whatever.
Bill: Yeah, no doubt.
Thomas: I think it's good when you're young. I think it's great to do specialist sit when you're young, because it teaches you a discipline of, how to look at companies, analyze them, analyze corporate transactions, and you don't have to do it forever, and it really is hard to scale special situation like stuff up and then Greenblatt basically says that. It helps you really learn the craft of the mechanics of just doing work on companies.
Bill: I got to get Clark on here. You know, Matt, right?
Thomas: Clark Street Value?
Bill: Yeah.
Thomas: Oh, yeah. He's cool.
Bill: Yeah, he's the man.
Thomas: I like all his real estate stuff. You were long--
Bill: Yeah. I was only idea, I was fed it and I knew it was smart. That's is the only thing that I will take credit for. I knew this setup, and I bought into the political stinkers keeping people away, and this is a big time change with the CEO, and I couldn't find anyone that would talk shit about Gansey at all. So, the combination of those events made sense to me.
Thomas: I didn't know who he was, and I totally judged him as an outsider. Because when he came in, I was long and I was looking at it, and I'm not really big on real estate plays in general, because I normally think that they're just not cringy enough. It's too straightforward. They're never going to get that dislocated, but that one did. When Gansey came in, it's perfect. It was my favorite setup, the CEO change. But I remember looking him up, and I was like, “This guy's really tan. He plays Polo? What the fuck?”
Bill: Yeah, and he lives in Boca which is terrifying.
Thomas: [laughs] Yeah, don’t invest in liquidation [crosstalk] Southern Florida.
Bill: Boca scares the shit out of me.
Thomas: What's going on with Florida and fraud? I don't know what it is. It's like a Mecca for South Florida.
Bill: Well, it’s the Homestead Act.
Thomas: Ah, that’s true.
Bill: Like they can't touch your house. These guys come down and they build these mega homes, and then they go to jail.
Thomas: [laughs]
Bill: [crosstalk] doesn't matter. They come out and they have their house.
Thomas: Yeah, that's true. That's true.
Bill: Dennis Kozlowski, there's tons of guys that you know. I don't know. I used to go to school with some kids whose dad's rumoredly spend some time in the clinker.
Thomas: The clinker. The pen.
Bill: I don't know.
Thomas: But I like all the different people-- I do think compound has taken over the what the limelight, whatever the phrase would be, taken over the stage, even a lot of FinTwit and stuff like that. But special sit is great. It’s just hard to scale his work. It's like grinding out dollars.
Bill: Well, I think the compound town has done well for a number of reasons and a number of them are valid, and I think some of them were probably unforeseen. I hate to be the guy that says, "Let's see how the next couple years go," but I do think that there's going to be some areas. It's just the nature of adaptive systems that the thing that wins for so long can't win forever. Maybe, they can. I don't know.
Thomas: Yeah, the monopoly trade, I would call it the monopoly trade, anything that's like a dominant tech company, jeez, it's hard to argue that you shouldn't be long. Well, not shouldn't be long. but I can understand the thesis, I can back in though, I can be like, “Yeah, that's totally plausible and probably right. I'm not long it, but I get why someone could be long it."
Bill: Yeah, and I think to like some of these businesses that have executed for a long time in the same way that returns compound, so does competitive position. Some of these businesses that have executed, and executed, and executed, they may continue to take share. If they take share, you would think that as their relative advantage continues to grow, so do their relative profit pools. And as that continues to grow, probably surprises people to the upside, and then their stocks continue to work. I can get there on the idea. I guess I have a natural bias to fade it.
Thomas: Ah, to fade it, yeah.
Bill: Not go short per se, but to say I should probably look at somewhere else.
Thomas: No, I agree. I can't disagree with that. I think there's just so many ways to make money. Make money in markets, you don't have to be doing everything. Just play your game. For me, I like working on stuff where it might not work, but if it does, the payoffs are really, really big. That's probably-- I don't know, maybe it's something inside myself. Deep inside me, I'm an underdog or have this inclination to want to find these underdogs-type situations. So, I should take money and put it aside to not pull it, because mathematically, the underdogs are just that. I suppose in a NPV calculation, it's just a negative return strategy, if you're not careful. I like it, though.
Bill: On the other hand, you made the bet, and that worked, and now, you have your family office that you get to work with. So, maybe, take a percentage of that and put it in the safe stuff or whatever, and then keep your underdog mentality for the rest. What?
Thomas: You probably--
Bill: How do you get paid? Are you going to get paid in bitcoin or are you going to get paid in fiat?
Thomas: Well, I own a bunch of claims myself and on that stuff, like I'll just get-- Yeah, you'll get paid some fiat and mostly crypto for the family office that we ran capital for, and we also buy claims for a large crypto hedge fund now, basically the same trade. I think most of them will want the crypto. So, we'll get paid probably in crypto. It also helps from a tax perspective, if we get distributions in crypto as opposed to fiat. I don't know if this is really true, but there's some basically tax people that are saying that it might not be a taxable event if you're getting distributions in crypto. I don't know.
Bill: Can you enter into total return swaps to then get some crypto exposure off the table?
Thomas: Oh, I had spoken with a few people about this. It's still a pretty nascent market. It's very hard to-- If I just had bitcoin, yeah, I'm sure I could do this transaction. But until I have bitcoin, these claims are too off the run [laughs] to be collateral for anything. But it's an interesting idea, and that's actually probably what we should do, which is take distributions. I never really went into this, but I don't just don't Mt. Gox. I also this other thing called Bitcoin ICO, which that's really where I put all my personal money. That's why I got it on so, so cheap.
Bill: What was that?
Thomas: It was basically like a nested docket. You had Mt. Gox which was the largest exchange. But they didn't allow leverage. If you want to leverage, oh, well, there's this thing called Bitcoin ICO that was in New Zealand, and that was the first bitcoin CFD exchange. It was all totally unregulated. But effectively, these were contracts of difference. If you posted bitcoin, you would make 10% or 12% a year, and if you wanted leverage, you were basically borrowing their crypto. But of course, they had all the coins actually on Mt. Gox. So, Mt. Gox went under and they were like, “Oh, little problem here.” So, they ended up filing in New Zealand.
I mainly bought those because they were cheaper. They're still cheaper, but they used to be at a fifth of the fifth. You're basically buying them for -- It's not quite that aggressive, but you're buying them for a 10th of the workout value of bitcoin, and of course, bitcoin’s gone up a bunch.
Bill: That's awesome.
Thomas: Yeah. I’m very interested in asymmetric-- Bill, I really believe that like if you find something is really asymmetric, even if it has a probability of going to zero, you should probably bet big enough to where--
Bill: It depends on probability.
Thomas: Well, sure.
Bill: You want your expected value to be greater than whatever your hit rate is, right? So, call it too if you have a 50% hit rate.
Thomas: Yeah, I agree.
Bill: Theoretically.
Thomas: My point would be because this is where I think you get really find mispriced bets. Russian voucher program is a good example in my mind of this as well, which is, even if it has the possibility to go into zero, if I'm compensated for it, like wildly compensated, and this is you can map this out and have an analytical approach. If you think you're really being compensated, you should really try to do it and be willing to take a hit on it, willing to take a drawdown. I feel like that's where people messed up is they sort of just unwilling to take anything that could not be intellectually defensible or could be zero. People say, "Oh, this could be a zero."
Bill: Yeah.
Thomas: I am but anyway.
Bill: No, I think that's fair. That seems like loss aversion to me in a way. People just don't want to accept the risk of a zero.
Thomas: Yeah, people don't want to accept the risk of a zero.
Bill: Unless, something you bet it wrong.
Thomas: Yeah, I think that's right. I think people intellectually, they also don't want to risk zero. I find that when you meet people that are working in hedge funds and stuff, they want ideas, but they want something that's also defensible. If it doesn't work, they're like, “Oh, well, it didn't work. But I knew it couldn't work, and I knew exactly how to map where it wouldn't work.” This is, what is it? Uncertainty versus risk paradox where they're thinking of risk and I’m like, “No, no. It's uncertainty.” You don't really know what the risk is. You don't know what the exit is going to be, but it's not all risk. A lot of it is just uncertainty. Because you are buying at such a low price that really-- the total loss is what you put in-- Remember, we started where you said, if you want to de-risk it, just put less money in it. Don't try.
Bill: Yeah. No, that makes sense to me. I think you just have to make sure that you're being honest about the upside and how asymmetric the bet really can be. I think that's probably where I sort of-- If I have a flaw, I think maybe overoptimism and underweighting the probability of a zero is probably where I need to be aware of a blind spot.
Thomas: I can make you money, but I can't make you happy. You don't want to be too much of a curmudgeon, because then you'll be unhappy in life.
Bill: Well, I’m pretty happy. I’m a happy dude. So, I'm not sure-- Look, so far, it's worked out. I say it in the middle of a huge drawdown-- or not huge, but big enough that it matters, and I really don't care about the drawdown. So, I think that's probably an indication that I'm trending in the right direction.
Thomas: I find that if you're ever feeling really down about your portfolio, either talk to your parents or someone older, or talk to your kids depending upon your circumstance, and they'll pretty much let you know how little it matters, your drawdown. [laughs]
Bill: Yeah.
Thomas: Or your great success.
Bill: We don't really care.
Thomas: Or, you're like, “Oh, man, this is so great.” They're like, “Oh, that's really great.” They kind of give you a good perspective.
Bill: My grandma did that shit to me. I was so proud of myself last year, because I had some big life moments, and she was just like, “Huh, okay.”
Thomas: [laughs] I know.
Bill: I guess I got to look inside for that validation. Thanks, nan.
Thomas: No, it's good, though. Because I think it gives you a good perspective. Sometimes, when something works out well, you almost want give yourself a ticker tape parade, and you go and talk with someone who doesn't give a shit about money, and they're looking at you like, “Oh, that's really great.”
Bill: Yeah, that's right.
Thomas: And then, you realize that they're just being nice, and now, we're going to talk about the pie. To me, it's good. It's a good perspective.
Bill: Yeah, I agree with that.
Thomas: My kids are that way.
Bill: As are mine. I think a decent place to wrap unless you want to continue, but is to say keep the big things in perspective and value happiness over performance is probably a reasonably good place to leave people.
Thomas: Yeah, maybe best long-term performances, sure, you might give up some by being a little optimistic, but it's good for your life, and it probably keeps you in the game. You don't want to be so negative when you have drawdowns that you're like, “I hate this shit, I'm done, I'm going to index, I'm going home. I'm just going to pack it in because clearly, I'm not good at this.” Yeah, maybe that is a good place to leave it.
Bill: I do think too from an investment perspective, the optimism enables-- or has enabled me I shouldn't say enables because it presumes what other people think. But it can allow you to actually visualize and believe in the right tail and the right tail is where a lot of returns come from. A lot.
Thomas: Yeah, I think so. I think so.
Bill: All right, cool, man.
Thomas: I'm all crypto. So, I have to believe in that. [laughs]
Bill: [laughs] Well, I'm happy for you and you’re a cool guy to get to know and I appreciate you stopping by the pod, and I hope we can do another sometime. Maybe after these claims pay out, you and I can figure out how to structure your family office.
Thomas: Sounds good. I'll take any advice.
Bill: [laughs] No, I’ll tell you what, it's worth what you're paying for it.
Thomas: Oh, there you go.
Bill: Which is nothing. [laughs]
Thomas: Yeah, Bill. Thanks for having [crosstalk]
Bill: All right, man. We'll talk soon.
Thomas: Okay. See you, Bill.
