I'm good. Thanks for having me, guys. Appreciate it. Welcome back, Tim. Good to see you. I always characterise you as a value guy who's got sort of a specialisation in sort of options and financials. Is that fair?
I think that's somewhat fair. Definitely a value guy. I think that we're a little different in that we use a lot of tactics. We'll do covered calls, cash-acquired puts. We'll do that type of stuff with options for our clients to add a little income and reduce the risk a bit. I think that that's a unique niche.
But yeah, financials are definitely a space where we're confident in insurance banking, but we also do a lot in real estate and energy and stuff like that. So wherever there's value and we're constantly working to increase our circle of competence. That's a big, big focus. As an options guy, what do you think the impact of the zero day to expiry options has been? Have you noticed any change in the price again to be in the casino?
Yeah, no. I mean, I mean, maybe I mean, volatility has been pretty low. You know, volatility index has been pretty low. Most of the ways that we use options are longer term. So like maybe like six to nine months, 12 months even. You know, an example would be like, I like the real estate investments based right now real estate investment trust. I think there's some value there in some of the triple net names.
And so, you know, a lot of those are paying dividends of five and a half percent and they're growing their earnings even in kind of the difficult rate environment. And so you might layer on a call, you know, 10, 15% above the market price and add another four or five percent and you're getting kind of double digit yield plus retaining some upside.
So things like that is how we do that. We don't do the zero day ourselves. I think obviously that's kind of the Robin Hood type genre of investor, I'd say. Yeah, so you're selling that call to add on a little bit of extra. So you're saying 10 or 15% if you get a 10 or 15% rise in the price, you'd be happy with that.
In this environment. Yeah, I mean, yeah, I'm sure we'll touch on that. But yeah, in this environment, if you could get a double digit yield with the dividend plus the call premium and then still have, you know, 15% upside on the stock or even 12. That's pretty attractive in this environment, in my opinion. So you feel like it's pretty unlikely to, I mean, it's not going to be like three bagger or, you know, I mean, in that situation, you're taking out some of that.
Yeah, right. Yeah, you're taking the right tail out. Right. And it does, it does burn you from time to time. I mean, you know, we were super bullish on, you know, meta and Google and Amazon going into last year, you know, after that sold off so aggressively in 2022. And so we kept some of our upside on a few of those names. We still did really, really well, you know, and they were big positions.
But, you know, that's also the discipline and it's helped us like, you know, stocks that haven't done great over the last decade. Kind of, you know, doing some sell and some puts here selling some calls, you know, even like a stock like city group, which has been just a total dog and a pain to own.
But if you're selling puts, you know, at certain prices and then using cover calls and then collecting the yield, you know, it's worked out a heck of a lot better than it would have had we not employed those strategies. What do you think is driving the low volatility?
You know, I mean, there's a lot of contentment out there, you know, going into 2023, I feel like so many people there was such an impetus on, okay, you look, you can get yield in CDs, you know, or high yield savings, the pods are treasury bills. And then it was kind of as the year progressed and you saw the AI stuff take off, people started kind of getting greedy again. And then even us lowly value guys, we benefited the last few months of the year, you know, it's kind of a ho-hum year.
And then the last few months, small cap and value ripped bonds ripped. So I think going into this year, there's a lot of optimism. And so, you know, I think just that complacency, you know, reduces volatility, still a lot of money, you know, out there. So that would be my kind of best guess. I would expect to see volatility perk up. It's an election year, massive geopolitical disruption. It seems to get worse every day.
So I would expect we'll have a March type event like we had last year, for instance. Any, any reason not to look at the news is a good reason not to look at the news. I just, I just ignored completely this. Totally. Let me give a shout out to all of the cause. We've got Senator Mingo in the house, Miami Pittsburgh, Miami again, Pettitik for Israel, passing stock,
Trink UK, Tina's in town. So what's up? Malaga, Espanya, Cleveland, Vistavi, Alabama, Brandon, Mississippi Toronto, Brisbane, Atlanta, good job. What's that newy? I don't know, Australia somewhere. Nanoimo, someone's going to have to help me out with that one. Springfield, Alabama, Edmonds and Lehman, Norwich, Tellerhassee, Sugarland, Sacktown, Gothenburg, London. This is just fun to see if Toby can pronounce different words. Lincoln, she's Santa Monica. What's up? Good spread.
Someone wants to hear you talk a little bit about city. What's going on with city? Well, so, you know, they reported earnings on Friday and it was just kind of a basket case quarter in terms of lots of one-off charges. You know, they had the FDIC surplus charge. So the big banks are having to pay for, you know, the VC backed banks that failed last year. That's one reason that's it's a frustrating industry to invest in.
So they had a 1.7 billion, you know, charge for that. Then they had a bunch of argination. Yeah, yeah, that's what they had. It's due up based off size, really. Right. And then Argentina had some big, big charges with their devaluation. And outside of that, it wasn't a bad quarter with some of that. So it wasn't a good quarter, though, either. The new CEO, I mean, she's not new. She's been there a couple of years now. But she took on a tough job. They had a major restructuring.
They've done a lot of the work. So this is the year where you should see an inflection and cost the cost curve start to go down. So it kind of reminds you of Wells Fargo a couple of years back when Charlie Scharf took over and they had the regulatory issues. They went on some pretty aggressive cost cuts. I think cities in a similar space.
Really for me, it's not that I love the business. It's not a great business by any means. But I mean, the stock trading, you know, around 52, 51 and some change. And you know, you got a tangible book value at 86. They think they're going to earn, you know, 11 to 12% on tangible capital in a few years. Maybe, you know, can they earn 10% again? Yeah.
You know, and I think capital markets will be a lot better. There's a lot of pen up demand. So, so we'll see. But, but yeah, it's, it's, I think it's attractive. I understand people not liking it. What did net interest margins look like these days right now in the big banks? For cities got international scope. So there's is holding up a little bit better than some of the other ones. I think the expectation is that net interest margins and net interest income peaked in 2023.
We'll see, you know, I mean, I mean, is the, is the, is the yield curve correct right now? I mean, I mean, I really think it could go either way. I mean, if you said, look, we have a supply issue in the Middle East that's increasing inflation. And rates aren't going to go as fast aggressive as down as quickly. I would understand that. And if you said, look, the economy is kind of falling apart. And rates are going to go down a lot more aggressively. That wouldn't shock me either.
So I try to be somewhat agnostic there. Neither one of those sound like that good a scenarios. That's my mentality right now. I'm not, I'm not the most optimistic. I've ever been in the world. How do you see their inflation or, or depression? Those are our paths. Yeah. Let's let's say we have the wish. Yeah. Yeah. Yeah. What about financials banks in general financials generally same same deal?
Well, I think I think like insurance companies have done really well. So like big positions for us for a long time for many years. We're like a shared guarantee municipal bond insurance company. You know, AIG was a big one fair facts, Berkshire, you know, some of those some of those high end the mortgage insurers. I mean, all of those are have rocketed higher.
And you know, perform really, really well. I mean, really it's just kind of even though they're highly regulated. They're not in the spotlight as much as the bank. So I think that that's kind of an advantage. You know, nothing's really as bad as the banking industry. It seems as far as just regulation and sentiment and volatility economic stress.
But yeah, so those have been good. You know, but we're we're we're selling into this. I mean, you know, we've seen a big rally on those names. So I think it's a good time to take some profits there.
It's hard to sell isn't it tough to sell a fair facts still like at book value. No, fair facts is one I'm not I'm not selling. Okay. Yeah, to be and and I would put Berkshire in a similar class as that. But those are I think better. I mean, better business especially Berkshire and I like fair facts a lot too. There.
I think I think they're capable of generating a better return on equity than than some of the other ones. The mortgage insurance space. I mean, we bought those at big discounts to book, you know, now a lot of them are at premiums to book. And I don't know. I don't know how I feel about housing. I have some concerns. I mean, they might be totally wrong. But but I don't need to own those up here.
Yeah, you guys don't have a diversion opinion on fair facts to you both. Same thing. I think we're both like it a lot. I'm the prem water. Yeah, I mean, it's well, obviously it was easier to buy it. Whatever 60 cents on the dollar book value like that felt like it made sense.
But thankfully, it's never really run up past book to like really, you know, force my hand and make me feel like I needed to sell. So I've been able to enjoy the rising interest income without Mr. Market testing me too much. So they still have all the hedges and things in there that they sort of they made their made a pretty good name for themselves in 2008, all the hedges, but is that less still on the.
Didn't work out so well for the 20, 20, yeah, 2015 to 2019 period with the driving around with the brakes on did work out, but no, I don't I don't believe that they have the. I think there's actually still some leftovers like yeah, like they have some swaps that are. I don't know they're probably written down to practically nothing at this point, but I think they're still on the books.
Yeah, on the subject of fair facts, there's one stock that they own quite a bit of it. They're one of the largest shareholders, if not the largest on Kennedy Wilson. It's that real estate company. They're based out of Los Angeles and. And you know, the equity I think is challenged like a lot of a lot of the space they have a little bit of office exposure in Europe, mostly some in the US, they have an asset management business, they have really good multi family.
They they they acquired a lot of this stuff via like distress loans during the financial crisis and then took took on the loans when they when they defaulted and then built stuff up. So they have some really done amazing stuff in Dublin, but right now they're their capex they were in a big swing of spending a lot and now that's going down.
And the debt I think is an interesting play. So we've been able to buy those bonds at double digits, you know, even as high as I did 12 12% I believe was around kind of the high that we got in at and I think now it's still probably around nine and a half. And so it's interesting just because you know, Fairfax has been a large sponsor. They even did a preferred stock issuance to Fairfax. So just on that topic, I think that's an interesting way to play.
How do you feel about that sort of ongoing debacle in offices that over. Oh, it's not over man. It is not over. It's a nightmare. I mean, I mean, it's so bad. The occupancy levels are are are so weak in most areas. Now Europe's kind of a different environment. They didn't work from they're not doing as much work from home as they are in the United States. But just not working at all.
Yeah, yeah, no, no, but I don't see that. I don't see that situation. You know, office is just tough. Man, I went I wouldn't want anything that's, you know, individual office at the right price though. I mean, we actually did do some stuff with the Vornado and SLG when they got really, really depressed last year, but that was more of a trade than I'd say a long term, long term investment. There's going to be some risk that a lot of those can't meet their dead obligations when they fall.
That's and that's more of like a 2024 2025 issue is not a 20. Yeah, on the property level. Yeah, on the property level exactly a lot of them are going to give back the keys, you know. And so, so it just has to prices have to come down to to where demand is and I think big companies they still want to to be more office oriented. But it's just it's a long haul. There's just too much there's too much supply and a lot of the big cities like Los Angeles and San Fran.
I mean, I mean, when those things are our defaulting, you know, it's huge, but to be clear, that's much more of an issue for the some regional banks. And it's not I don't even think it's going to be devastating for regional banks, but definitely the big banks and stuff like that. It's was totally overblown. It's the blind for the big banks. Oh, yeah, for sure on office. Yeah, their exposure is not that huge at all.
And they've reserved a lot. I think Wells Fargo, it was like at 11% reserve for office. So I mean, if you think about what that entails, that's huge, you know. I think commercial, how I got interested in real estate investment trust last year was that, you know, I was looking at at interesting areas in commercial real estate because a lot of that stuff came down 50% 40% 30% and a lot of those.
You know, the triple net leases, a lot of those companies are doing really well, really high occupancy, some like 98, 99, I think apartments are pretty interesting. So there's various spaces there that I think are attractive. So I don't think you need to, you know, speculate with office, especially a lot of that's about a huge run to like, Renato and SLG, they ran up a lot from their lows. And what do you see that sort of all looking like as we go through this 2024 get through an election cycle.
Oh gosh, I don't know. I mean, pick your poison. There's so many. I mean, especially with Davos going on now, it's always a weird agenda there. And then you have all the geopolitical issues. So I'm not, I'm not optimistic on a lot of stuff.
So that's why if I could get double digits this year. And even if the market was up 20% if I was only up 12% or 14% I'd be very happy with that, especially if that's at the cost of if the markets down 15, you know, being down five or flat, I'd be very happy with that type of outcome. So I don't think it's a year to be super aggressive in my opinion. I might be totally wrong.
Toby, did you get your Davos invite or do they get lost in the mail again? I did, but the, you know, the jets in the in the garage. I couldn't. I'm not going to fly commercial. You don't like commercial to Davos. That continued the new Argentinian guy did. I was impressed by that. Oh, is that right? Millie? Yeah. Yeah. Yeah. At least respect that. I love it. Yeah. Yeah. Invite you to run around with a chainsaw, pretending like you're cutting all the red tape and then fly private to Davos, right?
No, you can't. I'll be curious if he really gives them hell or not. We'll see. I feel like I feel like everyone kind of conforms there, but I hope I hope to heck he does. Outside of outside of financials and rates. What else are you finding that's interesting? I think energy is interesting. I mean, I mean, it's, you know, they took down the strategic strategic petroleum reserve to such low levels and they've started to put that back a bit. And then you have incredible geopolitical strain.
But, you know, the US did produce a record amount last year and other countries are producing quite a bit too. So I see the bull and the bear argument for it for us. It's kind of valuation. I mean, a lot of that stuff, I think, is pretty attractively valued. And so on dips, especially with our tactical strategies, you know, selling puts to own the stocks at cheaper levels, I think is isn't attractive avenue there.
And some of the dividends on stuff like Devon or Chevron even are pretty attractive. So if you sell puts and then get exercised and finally that into a covered car or stuff like that, I think I think there's, you know, a lot to be done there. What do you feel like? Well, I don't think you feel like your kind of your strategy is good for choppy markets.
Yes. Yeah, totally. I was thinking that this reminds me a lot of kind of kind of, I'd say like going from 2009 to 2012 a little bit just like there's a lot of. Yeah, couldn't find a direction. Yeah, yeah. And I mean, even stuff like like MLPs, you know, if you can get 7% plus a little extra, you know, on, I'd be very happy to get. Double digit returns over the next decade on average, like I just I have a tough time believing the indices are going to do that again.
I know that's like people are baking into their financial plans, but to me that just seems crazy, given where valuations are at a lot of stuff price for perfection in my opinion. Yeah, yeah, well, where's it going to come from? Is it revenue? Which that, you know, that's typically GDP, is it going to come from profit margin expansion off of already very, very profitable companies?
Is it going to come from share count reduction kind of already pulled that lever with basically LBOing the S and P 500 over the last decade? Or is it going to come from dividend yield or is it come from valuation changes multiple changes and you're already starting pretty expensive there. So tell me which tell me what's of those five levers can be pulled to produce a 10% annualized over the next decade.
Well, that's interesting. I mean, the the bulls would say AI, you know, will transform, you know, margins for at least the largest and it's like higher. I don't know. I mean, I mean, you look at an avidian. I mean, that that one quarter they had, I think it was their second quarter or something like that was like one of the best quarters I've ever seen.
And if you do look, it's interesting because the multiple has come down a lot based on current earnings, but, you know, semiconductor has always been a very cyclical industry. So I mean, what does the E look like next year and two years from now and three years from now? I just don't know it's in the too hard pile for me, especially with where the value is that currently. So not a player in some of those names. Yeah, for sure.
It's it's hard to pick. How do you how do you think about the economic environment? Is that important for energy and for financials? Like if you get a screen really do get soft sensitivity to economic cycles. Yeah, I mean, I mean, I mean, absolutely. And I don't think you want to just own the banks out right here. I think it's kind of stock specific.
You know, I like I like a couple of them that are really cheap somewhere in Europe, somewhere in the US. I think, but, but they're always going to react. I mean, like you saw March, if there's any pickup in the economy, you know, they always kind of overact, which is frustrating, but, but the reality is there's probably the cheapest sector on a normalized earnings basis.
So I think you have to watch that, but I think most people are more constructive on the economy than I might be or maybe you guys might be. And so if we do see a decent economy or a soft landing and rates start to go down a little bit, I think that would be a lot, you know, there'd be a lot of deal activity. Probably pretty good for growth. So we'll see what happens, but I like the valuations. I think you have a good margin of safety. You've got a big fat dividend on almost all those names.
So that gives you a little bit of cushion, but I'd just be very, you know, valuation focus for sure. I think it's a tough environment to sort of find your way through because I think many of the, I think a lot of the economic data is ugly. And the 10th three is still massively invert. Like I've just stopped talking about it. Mostly I took, I took a vow of, I don't want to say poverty, but I decided.
Not so I was here, but I think I decided not to not to pay as much attention to the macro. Maybe it's a problem because a podcast is, it's really all we can talk about. Well, well, fix that, sir. Yeah, I think I think I looked at the economic data was so bad last year. And it just looked to me like, imminent destruction. I don't actually think that that much has changed. It's just that I think the risk is that you get to deter or I get to deterministic.
Should try and be a little bit more probabilistic about it. And there's lots of different things that can happen in any given year. To what extent do you think that the economy has any impact at all on what happens? Like I would have thought last year should have been a terrible year. Well, I mean, starting valuations and one of the good things about you is that you're, you stayed invested, you know, and you had a great year, even if you're, you know, even if you're
scared shit. Let's. Yeah, exactly exactly. And I mean, same thing here. I mean, I am not like an optimistic person on, on a lot of the stuff going on right now. But I'm not not invested. I think there's great opportunities and bonds. I mean, a lot of, a lot of my clients are retirees or people closer retirement. And, and I tell them, look, I mean, we haven't had interest rates like this in 20 years.
So take advantage of that. You finally are being rewarded for being a saver. And you don't need to take all the equity market risk. You know, I mean, take your 7% dividend. I mean, when that banking stuff went down last year, we were buying a lot of investment grade credits at, you know, 8 to 13% yields. Some of those were like a Comerica, you know, so in the spotlight a little bit. But, but now you look at those and they might be five or six. I mean, it's much, much lower.
So they were just no brainer double digit, you know, earning rich investments and the only way I went to work is if it would have gotten, you know, hell hell would have taken over. Then you lever that up about 10 times. Then your LTCM. Yeah, exactly. I think that was like 30 times. You couldn't get enough. I'm sure. Yeah, couldn't get enough leverage in the maybe is 100 times something crazy.
Well, they were getting like a, you know, 50 bit or, you know, 100 bit type of spread differences and then leveraging that up 30 times. I think is the book goes on. They said they were the they wanted equity like volatility. And so they were just trying to try to do stuff that was risky to increase the volatility. So it in the end they were doing stuff like VC and you get big enough you just do everything you do whatever you want.
Yeah, well, it's like it's like what you learn in economics. I remember in college just learning, oh, you know, the higher the volatility, the higher the expected returns are supposed to be and I don't know. It's nothing that tries to work at the way I never I never think about that stuff when I'm actually investing money.
I think Eric Falkenstein has a paper that shows it's the other way around low volatility. It's the higher returns, which, you know, I think that should get on a him a Nobel prize in economics at some point. Yeah, no kidding. I was going to say if it didn't exist on right, you know, just so I could get one out there.
I wasn't yeah, last decade. Sorry, Jake. Quality's been quality's been so good. You know, I mean quality stocks have done so much better than, then, you know, the more deep value stuff. But maybe that's different over the next decade who knows. Yeah, I mean, wasn't that the I forget who wrote the paper, but wasn't it just buff it was levered quality lever. That's one of a QI's papers. Yeah, he's 1.7 times the quality factor. Give the man a Nobel. Yeah. Yeah, got got got got smart, got lucky.
Or by design, I'm sure. Yeah, over 50, 50 years, 60 years, however long he's been. Yeah, he said now what like they were saying he was like a one sigma event and then two. And now I think they got up all the way to six, which is, you know, one time in the known universe should this ever happen. But now it's must be even higher at this point.
Well, I was I was like the paper Jake. I'm sure both you guys are familiar with it. But it was I believe it was called the super investors from grams to Dodd'sville where, you know, he's like, okay, if this was if if I was the only one or something like that, but they're so and so and so and so. And he lists all these people that all had similar philosophies, but differently done who had the best long term track records.
And you know, it's it's not going to resonate with a lot of people based on, you know, the last 10 years, the way markets have unfolded, but, but, you know, looking at things over a hundred years, I think it's as strong as pointing as ever. I think you nailed it. I mean, that's. There's the world of the last 10 years and everything that worked.
And if you use that as your base rate, then you could construct a very different portfolio than if you think if you look back at the last hundred years and then ask what worked. I mean, just night and day differences. I mean, that's been my experience. I sort of started looking at it in the late 1990s and I wanted to be a valley guy in the late 1990s.
And so I remember reading these fortune articles about valley guys who, you know, they had his business that's got, you know, modestly growing top line, pretty good returns and equity, buying back stock, got a dividend. And it's trading, you know, out of massive discount to all this other stuff that was like that, like that.
Com type stuff that we have today. And then that got increasingly crazy until 2000. So the decade before then was all growth. And so from 2000 to really only probably 2007. Maybe it was 2010. It was more value. And then value got really overvalued and then 2010 to 2020. Probably it was growth again. I think it's been valuable since about late 2020. But we've last year was a little bit anomalous.
Yeah, last year, I mean, value was having the worst year since 2020 except 2020 was the only other one where it was like that where just value got crushed. But then the last two months was just so good for value. I mean, I mean, even owning a lot of bonds, you know, still being able to put mid double digits, you know, high double digits type type type returns from stuff like that was was great.
So we'll see one big difference though. And I think if you look at like Cisco in 2000 and I don't even know what the P was. I don't remember like 145 something crazy like that. And then you look at Microsoft and if if earnings are what they are, what's the 4p like 28 or 32 somewhere in that range. Maybe it's not, you know, it's not 75.
Yeah, and I mean, if you look at like who's in the best place business wise, you know, you'd think them as one of them. So it's I don't it's just hard. It's it's not for me, you know, it's not for me to invest in that. I don't I don't feel a margin of safety in it. But I also don't know that I would say, okay, this is the biggest bubble in that name or a few of those other names ever either.
Yeah, I mean, incredible businesses also that's the other. I mean, the there was at one point I believe that the during the dot com bubble the most expensive desial had a lower ROE than the cheapest desial. So you had like, you know, sort of better quality businesses actually that were obviously much cheaper, which is a very, very rare occurrence. I mean, they talk about just a perfect setup for a value of opportunity set.
I remember talking with you guys about it before and you're exactly right. I mean, when Microsoft was trading at 12 times free cash flow. I remember Johnson and Johnson trading at, you know, like 13 or 12 times earnings. So, so yeah, Proctor and Gamble was cheap. Like a lot of those. It was too easy. It was too easy. Yeah, I got to get more clever than that if I'm going to make money.
I mean, that was a funny thing about that everybody remembers the 2000s being a dot com bubble, but really it was a large company bubble. And it was everything from like Walmart, Microsoft, Cisco, you know, take your pick of all of those really big high quality kind of in French businesses. They just got too far over the skis. Yeah, exactly. Yeah, Coke. I think the good example took GE, although GE seems to have deteriorated a fair bit, but GE was like very highly regarded.
And they all did pretty well from 2000, 2015, but the stocks just went down every single year. And I remember it was one of the in 2015 I was looking at. Warm up all those sort of names like they had. You could get leaps on them for just about nothing because there was no volatility in the stock. There's no expectation that they were going to go up even though the underlying businesses have been compounding at pretty high rates like 20% a year, something like that.
It's kind of amazing. They just get cheaper and cheaper, but you didn't want to buy a leap because you did not focus going to go up in two years. Yeah, hadn't gone up in 15. So why would the next two? It's dead money, right? Right. I know I was looking at I was looking at John Deere and you know a home depot I've looked at and caterpillar. And if you look at just the earnings growth that those companies have seen over the last let's say five years, it's it's unbelievable.
And the stocks, you know, reflect that they're not like super overvalued if those earnings, you know, can keep growing. It's just it's amazing what they've been able to do. Well, there was so much cat X that was put out in the well 50 years, I guess, but even let's say a lot the 10 years before that. And with home depot, for instance, like they slowed down store growth and focus more on driving profitability. And then I think retiring shares as well.
So EPS just you had all this cat X that started just showing up on the bottom line free cash flow. And then less shares across that. And you just, I mean, just explosion. True. No compounding machine for sure. JT is the top of the out. You want to do you? I would love to. It'd be my honor. Fitchies. So this is a perfect segue since we were just talking about obvious things to do. And I think I believe this is the book that that Toby was referencing about. I think we did that offline.
Yeah, we did. So the name of this book that we're going to do a little book report on is called obvious atoms. And it was recommended by me to me from my friend Dan she and so thanks Dan. And it's a fun little read like you can do it and well under an hour. It's super super quick. But I thought you know, or you could just listen to this segment if you want instead. But so this was first published as a short story in the Saturday evening post in 1916. So it's quite old.
More than 100 years old by my math. The story is about this poor young man who wants to get into the advertising business after hearing this spell binding talk from the president of a famous advertising agency. And the only trouble is this guy atoms this kid is completely unremarkable. He's just average in every way. And to be a successful ad man, you have to be rather clever right. And so he to get into advertising, he makes an appointment with the president.
And the president, he, you know, talks his way past the secretary gets in and talks to the president. And the president asks him some questions and determines like there's nothing. This kid isn't bright. Like there's nothing we can't do anything with this. And then Adams, you know, takes that nicely enough when the president tells him this and he, and he simply says, I've decided that I want to get into the advertising business and I want to work for you.
And I thought the obvious thing to do was to come and tell you so. So don't. Don't seem to think you don't seem to think that I could make good on this. So I will set out to find some ways to prove it to you. And I'll call on you again when I have found them. Thank you. Goodbye. And he walks out and just leaves. And the president, you know, is dumbfounded and he sits, you know, he spends all even and thinking about this kid and their interaction.
And he realized we could use somebody around the office that has sense enough to just do the obvious thing and then like not make it more complicated than it has to be. So the next morning he sends for this kid and he offers him a job. And Adams comes in, he starts doing this little menial job. And he has some suggestions about obvious improvements to do his job that increased his productivity. And eventually he tells his boss that someone could be doing my job for half of the salary.
And so they end up promoting him and someone else takes that job. And he actually gets into like starting to write copy. And so his ad work was focused on, he just goes and talks to the companies that he's doing the ad work for. And to understand what are they doing? Like what makes their product special? He gathers the facts and they spends a lot of time just thinking about them. And he determines the essential points and then puts them down clearly into ad copy. And that's it.
And it worked like a charm. And he became one of the most sought after admin from just basically discovering the obvious thing to do. Hence the name obvious Adams. So when asked why don't more people do what's obvious? He replies, thinking is the hardest work many people ever have to do. And they don't like to do any more of it than they can help.
They look for a royal road through some shortcut in the form of a clever scheme or stunt, which they call the obvious thing to do, but calling it doesn't make it so. They don't gather all the facts and then analyze them, deciding what is the obvious thing. And therefore they overlook the first and most obvious of all business principles. And then at the end of the book, the author gives you five tests of obviousness in the appendix, which I will share with you now.
Number one, and this came from Charles Kettering of GM, who is like a pretty famous CEO of GM way back in there. Hey, and he had it placed on the wall of the GM research building. And this little plaque said, the problem when solved will be simple or said in another way. The solution when found will be obvious. Number two, does it check with human nature?
If your idea or plan can't be understood and accepted by your mother, wife, brother, friend, gardener, all these people, etc. It's probably not obvious. Human nature makes or breaks any plan. And the public's mind is simple, direct and unsophisticated. Number three, put it on paper. Write it out like you were explaining it to a child. Can you do this in two or three short paragraphs? If the explanation is long and complicated, it probably isn't obvious.
Number four, does it explode in people's minds? If people say, now why didn't I think of that? Of course. That's obvious. Yeah, then you're probably on the right track. If it doesn't explode in the mind and it requires lengthy explanations and hours of argument, it probably isn't obvious. And number five is the time right. Sometimes the windows pass for an obviously good idea. One is reminded of the quote, what the wise do in the beginning, fools do in the end.
And sometimes the idea is ahead of its time, which then calls for patience and alertness. So I think if you take these five kind of obvious principles and apply them to your investing, you hopefully can recognize a Microsoft in 2012 at a 10 PE and not try to over complicate things and think about, you know, I got to be more clever than that.
Anybody could buy Microsoft. So I think, you know, when you look at Buffett's record and the way that he's able to boil things down, and when he explains it, it's like, oh, well done. That's so obvious and it's a smart thing to do. Oh, the KPI for Coca-Cola is unit cases sold per share. And if I just keep an eye on that, if both of those things are going in the right direction, this is going to work out just fine.
I mean, being able to boil it down and become your own obvious atoms, I think, is might be one of the, like, untapped potentials in this entire business. We like to make it so complicated. Yeah, Jake, Jake's sent it through to me. And I had already through it and I worked out seven words per line, 21 lines in the book, I per page, and then I now forget the number of pages. But it worked out to about 8,000 words. It's a very quick read. He can like, which is now. 40 pages. 40 pages.
Look how thin this is. This is it. It's a pamphlet practically. Great book. He tells a great story about being tasked with going and figuring out why a hat store wasn't selling. The two hat stores and one was selling a lot. And when he tried to find the second hat story, he couldn't find it because it was hidden down in the alleyway. And you were coming up to a busy intersection, trying to figure out why he'd cross over. And he's like, there's the answer. It's too hard to find.
Yeah, and the sign I guess was kind of obscured. And no one would have been looking up because they were worried about crossing the street there. Makes sense totally. Yeah, good little raid. I think that's right. I think that's like the best investment decisions are often in stuff. It's just obvious. And I think Buffett's Apple is also another obvious one in 2016, where it was just over earning. Everybody had an Apple phone.
There's a there's a ladder of like, you have to keep on buying every few years. So you you phone don't work no more. Yeah, or the battery. You'll just start training mysteriously. And then you get that's right. That's right. You get a whole ecosystem of Apple TV and Apple computers and Apple funds and Apple Watch. You're locked in. No one's no one's getting outside of that ecosystem any any time soon. Oh, I'm a I'm a Android person. So everyone makes one. I'm on the text messages and stuff like.
He's a non Apple. It was the green green guy. Yeah. Once you walk. Oh, sorry, go ahead. No, you're fine. I was going to say once you walk into the pixel, it's hard to get out of that. So I'll get a pixel. Oh, yeah. So I have to I have the foldable one. I love it. Oh, yeah. Yeah. But but no, it's the simplistic explanations for investment makes total sense. That's kind of like my premise on city group. It's it's look the stocks at 52. The tangible book values 86.
I think that they can get a 10% ROTCE. You know, and I do know a lot of details obviously of the business in the industry. The capital levels are good and stuff like that. So it's a pretty simple simple thesis. You know, another one I thought was interested in your guys opinion on this. What do you guys think, you know, from a fundamental value play, you know, China would be really interesting. But I got burned a little bit on I own some of that Russian ETF. As the war in Ukraine took off.
And so that just went to zero. So I'm too scared to touch China. But but from a fundamental standpoint, like I think it's it would be a no brainer outside of that massive potential issue. That might be one limitation of that sort of obvious stuff is that in this two obvious answers that one is that yeah, it's all really undervalued and they're all really obviously good businesses to some of them. So they're going to be much, much bigger in 10, 20 years time.
But then you've got some China regulatory issues there might might be hard to collect as an outside investment. Whichever one of those turns out to be the pivotal decision you look back and say, well, that was obvious. Exactly. Exactly. Yeah, but can't you. It's obvious like, okay, well, yeah, I was going to say so using.
Let's say that you were of that mind and that persuasion that both of those things were obvious that there's obvious existential risk and that these are obviously cheap good companies. So what then. Yeah, it's a position sizing question that you put some you put some in there and but you don't make it too big because it's also obvious that zero is in in the cards. And you don't want to necessarily wipe out a huge percentage of your capital with that.
Yeah, but but give me, you know, give me 25 similar looking non correlated versions of that. And I think you end up doing okay. Yeah, I thought I was being smart with Russia and instead of picking like an individual company, I thought, oh, you know, just. Yeah, I didn't expect a whole stock index to be valued at zero. I mean, it's all it was all just gas and banks anyway. So it wasn't like he needed to go special, you know, hunting through there.
True, true. Yeah. Yeah, it was always is a cheap stock market for a while. I remember a Mibfavor has that one of his one of his ETFs has got some exposure to Russia. Yeah, G. Val. Yeah. I think he looked at like what I think it works up. It looks at what's a cheap index on a Kate basis and then it says what's a cheap what are the cheapest companies in here. And that's how I figured out what it's owned and Russia was cheap Russia is being cheap for more than a decade now. I think.
Yeah. I guess it's like any of those economies, any of those stock markets and Australia and Canada, I guess I like this where it's it's largely commodity based. And then they've often got big banks is sort of a big part of the index to they've struggled a lot like they're struggling in these kind of markets. I don't know what what characterizes these markets, but it's been by far and away sort of US decade and the rest of the world has suffered.
You know, in absolute terms and also in comparison. 100% yeah, I mean, Japan that a great year last year, but that's after you know decades of underperformance and Europe has just been a basket case. So we'll see international so much cheaper. I definitely own some some international stocks and an optimistic that they'll have their way in the sun, time in the sun.
The US is sort of singular in producing those gigantic consumer discretionary type businesses like Google and Facebook and Microsoft, all sorts of stuff is unique to the US. It doesn't seem to exist all while China does seem to have its sort of analogous. Yeah. I don't know where this Europe doesn't seem to produce them. But they have a sml right in the Netherlands that semiconductor company and an artist has done just just my gosh.
Yeah, I know that'll be interesting to see how that whole trend you know plays out for sure, but he said he said. The white was yeah, the white stuff. I mean, they're that's part of it, but they're also I mean, they. It's been a pretty well run company. If it's good, if it's been a good industry, the like returns on capital when a farmer works or they're pretty exceptional. Well, yeah, and those and those weight loss drugs. I mean, I see it down here.
I'm sure you guys do too, but just like I'll go to the gym in Orange County and you see like the. They're just giving you as you come in the door. Yeah, pretty much. You know, you see the dramatic weight loss and it's I mean, I don't know what the long term impacts are. I wouldn't do it myself, but that I can understand the logic and the appeal for people. We'll see.
Yeah, I do wonder if farmers got a liability there that's matching the hidden matching contingent hidden matching liability seems like they find their way out of liability. Yeah, they do. Yeah, they do. Yeah, but we have doing that lever. I think you just pay enough money to the you put sin enough. Well, it's not not a bribe. What's it called lobbying?
Yeah, the biggest advertisers to so so the biggest advertiser as well, who's going to criticize it 75% of TV road ad revenue or something comes from. That's crazy. Oh, yeah. Yeah, the 25% selection advertising kind of makes you sick, doesn't it? It's going to be a long year. It's going to be a long 2024. I think it's a miss the days when it was, you know, beer commercials with dogs and girls eating hamburgers on the top of cars and the bikinis. Like that was those were the good old days.
Yeah, they're all cool. So cancel. Yeah, sorry. No, yeah, that was exploitive. I didn't mean to pour cold water. I keep going. I didn't mean to say I was just taking sure that the cancellation was yours. Yeah, thanks. I'll, I'll wear that one. Yeah, it's tough. I think. I think this market is particularly tough because I see a lot of there's a lot of risk. But I don't think there's a lot of, it's not obviously cheap. When is it easy to be? I keep waiting for this.
You keep telling me it's tough, but I'm waiting for that time where you say it. This is easy. Well, I, you know, I tend to like, I tend to like crashes because things get cheap. And then I think you know that you front it. You know, I don't like crashes because they're nerve, they're nerve-wracking to go through. But you get, you get really good prices at the bottom. And that's the time that I feel best. That's the time I feel most confident. Did you feel excited in 2020?
We'll go back and we got the tape. Review the tape. Yeah, we got receipts. I think I remember some of that tape. I'm pretty sweaty. Yeah, it's very sweaty. Yeah, I mean, that's why bonds. I think bonds are pretty attractive. You know, I mean, I mean, obviously they were more attractive, you know, in October of last year before the big rally. But if you can get high single digit yield of maturities on good credit quality, like I don't think that's the worst place to be in the world.
Plus, you have convexity if interest rates decline from here. So I don't think that's the worst, you know, pooled of swimming. Tim, what would you, would you be worried about? I don't know. Let's just say like some geopolitical event, supply, chain, snarled, we're back to 10% inflation again. And no one was ready for that. Everyone was already cheering that we'd put the inflation genie back in the bottle. That's your downside, right? Yeah, I think absolutely.
And so the stuff going on in the Middle East, I mean, people should, you know, pay some attention to that for sure. And God knows what else is going to come this year. But yeah, I mean, I mean, that would be your biggest downside. But, you know, depending on, that's why building a bond ladder is important. So there's stuff where you have floating rate bonds, like some really good ETFs that you can use that trade at discounts to net asset value.
And then, you know, just build that bond ladder with different durations. And I don't think you have to reach too much in terms of credit risk. But that's, that would be my best answer to it. Yeah, there's some pretty good, like they're relatively cheap now for the, the rolling over of the bonds that they do for you now in some of these ETFs. Like it's, it's so much better than trying to do it yourself anymore. I kind of feel like for a lot of the stuff.
Yeah, I'm trying to go buy individual treasuries yourself over and over again. That's like, that's real work. Do you feel that they, that's in inflation risk in bonds? That, I mean, there's definitely more technical, you know, depends on depends on, that's why it's important to have kind of the bond ladder. You know, I mean, I don't want to be a Silicon Valley bank and buying, you know, 20 or mortgages or 30 or mortgages, you know, at one and a half percent.
But also, that's where, you know, having some yield and having some floating rate exposure can be, can be really, really helpful here. And I mean, I remember what was 10 year treasuries that in 2000? Wasn't it like 6% 6% 7% you and I just remember, you know, hindsight being 2020. It's like, gosh, man, if we could have gotten 6 and a half percent, you know, on, I mean, that's treasuries. But maybe just take that to the bank, you know, and, and you miss that whole 80% decline in the NASDAQ.
Elections 6% from the beach. Yeah. That's right. That's right. So a lot of deflationary factors out there too. I mean, you look at used auto or used cars, you know, some of the housing, the way that that stuff's calculated, you know, we'll see. And I still have a tough time believing housing affordability is, I just can't imagine prices aren't going to.
I just think they have to go down a little bit. It doesn't make sense like the rent to own equation right now does not look very good for home buying.
There's a little stimulus at the other massive like that inflation reduction act is massively stimulatory. We're running deficits though like 8 to 10%, which is just massive on historical basis, particularly when the times and they normally run them are closer to the bottom of a, you know, when there's a collapse like we're running this like a, a D. I don't know really know what the best economy ever.
So you're right. You're right. That's the whole story of the macro economy economy is that you have the huge deficits like a World War II type deficit. And then you have you have the the reshoring. So manufacturing, you know, in, in, you know, Arizona or, or, you know, Tennessee or whatever. A lot of those cheaper states, Texas, you know, it's just booming. And so it'll be unemployment.
I mean, what's going to what's going to cause the Fed to cut? It's got to be unemployment increasing. You know, and if it doesn't increase, then I can't see them cutting. But it's still at historically low levels right. Yeah. Although almost every single people make this point, they're almost every single recession naturally occurs out of a very, very tight labor market.
And then he has one way to go on it when it turns around at accelerates very, very quickly that hop sort of seems to happen very quickly. But it's, it's later in the cycle is that help. Yeah, I'm just forgetting is Michael Cantro has that hope framework, just housing, whatever it is, what is profitability and what the ego's last.
It's been kind of amazing to watch like how long this thing has dragged on, particularly the 10th, 3rd version, which you know, historically has been 12 months is the average. And we're at October 20, 2022. When our January, so this would be the longest period of time before seeing any sort of action was still like deeply, deeply inverted. Yeah, yeah. And to the front end, did all those other inversions have, you know, 8% deficits. I don't know.
Does that just sort of like this unusual deficit by time for hope just extended pretend. I don't know. I'd say it's what it feels like it feels like a lot of extended pretend and then every, every jobless number was like revised last year. I mean, there's a lot of stuff and it's an election year. I mean, there's a lot of factors, you know, like that that, you know, have to be considered. I remember foil hats on.
I remember 2007 being being at my old company and they'd have the TV on in the background CNBC and it was Larry Cudlow. This is a Goldilocks economy. It's, you know, this is perfect. This is exactly what you want. And then even as even 20th 2008 that continued until, you know, you started seeing the funds freezing up and you see those catalysts. January of 2008, like 91% of analysts had, I forget what it was just like positive expected returns for for everything.
Probably the same as this year. I think most people are bullish, at least going to the year before the last couple of weeks. I mean, there was optimism was so darn high. Yeah. To be fair, but it was pretty bullish in 2007 too. He was a big bullish America guy, you know, like always been on America was I always kind of took. I think that he spread that a lot which certainly wasn't bullish on housing.
I remember him talking in like the 2006 meeting about like housing is the media and income to median price had gotten pretty far out of whack. He pointed it out. I think he said something similar last year, didn't he? I recall I recall it being there's something similar, a similar exchange last year. As well, I remember that one, so from 2006, I think that a lot of his early stuff was if you look at greenbacked emissions and all of that sort of early stuff.
Yeah. I think his tune changed a little bit as he sort of became more of a. He's more of a student. Don't you dare call him a political animal? No, no, I was going to say more of a steward of the system, right? Like he's kind of assumed that role of like, you know, Morgan back in the day where. Yeah. That's a really good analogy actually. They want him to come.
They want him to be a calming influence rather than he's just he's not out for himself and but she's just telling you what he actually think is going to happen. He's trying to get everybody to come back. He's a shock absorber now. Yeah. Which is probably why you can discount a little bit of that kind of commentary. Yeah, he's not writing how inflation swindled the equity investor today. Although I think he's pretty blunt about when he discusses it at the meetings.
I don't think he's sort of gilded at all the meetings. It's just when he's on us some sort of. When in an interview, he's much more upbeat than he sounds at the meetings. And then he'll revert to something like which which is all true, which we would all agree with like. And over the very long term, it doesn't really matter anyway. It will work so. He does a lot of caveating to like. Like the market is just reasonably priced.
If race stay this low and returns on equity, stay this high, then the market is fairly priced. Right. I mean, you find his pretends an equity the most mean reverting. Series and finance are they? Yeah, it seems not maybe maybe not. I don't know. They were. It's been amazing. It's been quite an extraordinary period. Yeah, it really has. It has just like the tech tech was and I'm not they're not the same or anything like that. But yeah, it's always surprising how long stuff can can go on.
And I mean, it's been weird. You had 2020, which was just such a bizarre year. You had the huge euphoria with like the AMC and all that stuff. You've had a lot. You had like the pseudo banking crisis last year. And now you have, you know, the geopolitics and an election year. And we've never had an election like this is going to be after the last one. You know, I mean, it's not at least in the modern era. It's going to be different. Like I'm not someone that dwells too much on the macro.
I don't let it dictate my decision making, but I think you can expect a wide ride. What do you think that let's put the history? We open up the history book in 2050. And what does it say about like the markets of this tough today? That's such a good question. I think it would be, you know, I mean, people thought earnings were going to keep growing. You know, at the same rate, it would be that type of thing where you have high valuations.
You don't have mean reversion, which you should expect mean reversion. That's one of the things that Toby does a great job talking about in his books is that you should expect some type of mean reversion. That's been wrong. Yeah. We've identified the problems. Yeah. Maybe it's, we'll be idiots for not jumping on China. You know, who knows? I hope that is the case. I hope that is the case instead of like, well, people didn't jump on it because, you know, that situation got a lot worse.
There's a lot of that in the world. Where you get right one times in a row. Like if there's, we've acknowledged that there's some serious risk with China, but someone could set up a fund. Just plow everything into China. Have it come true. They're a genius because they've ignored the one risk that everybody else was ignoring. Or it doesn't work out in the other way around. They get a big short on or something like that. I mean, I think that's the same thing Paulson had that.
He had that trade on where he was long over CFDs. Whatever they were, long over the CDS, where insurance. Yeah. And it didn't eventually bother. There'd be other people who'd had that trade on for a long time. Yeah, went bust before it could pay off. Yeah. Well, there's a little bit of dependency on this stuff a lot of times that. Yeah. There's people that all have multiple funds too. And then it's like one of, and this is bigger in some like like the, the, the, the.
See it, the see it, manage future space and stuff like that. Where they have all these different strategies. And then they only really market the one that hits our own run. Yeah. You run three times long in one and three times short in the other. And the one that works, he changed the name to like your flagship fund. And the one that doesn't work, he just memory hole that one. Yeah. Speaking of levered long, I saw that there was like a, like one and a half or two times.
In video ETF. So it's just purely single stock levered long ETF. What a, that's kind of reminded of Keynes is what did he say something about when, when markets become, you know, speculative. They don't become very good at allocating capital. Market can remain insane longer than you can remain sane. Yeah. Very true. Well, you know it's big now too, or those like covered quality Tfs and stuff like that, which got some. Feel like I missed the boat on that one.
Like I wish I would have set up a game for them to do that. Yeah, seriously. I've been preaching that for a long time. But, uh, but yeah, those are pretty popular now. It's called with this paper years ago now when Japan, you know, after Japan had had no like returns in their stock market for a long time. And there was nothing really going on. They started selling a whole of these things called Eurodashy notes in the function of a Eurodashy note was it basically sold vol.
So it's sold upside, vol and downside, vol. And so it's a way of generating yield where there's nothing happening in the markets. But the problem is that. The moment that volatility returns, you get knocked out one way or the other really easily. Yeah. And so when it was like that XIV. Yeah. When you put in like an afternoon. Yeah. Yeah. When you put in like an afternoon, yeah, when that's like very similar to the to labs turkey. As soon as you see those those yield strategies emerge something.
The yield. Ready to kill them. Yeah. Yeah. Low volatility environment is over. Oh, you're right. I know we're coming up on time. But I worked at a firm for that was doing that for a long time. And that's kind of like where I learned options. And so they were doing iron condors and stuff like that on the indexes. And this was kind of like prior to 2008. So like 2000 to two or like maybe like 2003 to 2007. They were the index squad.
Yeah. And then of course, you know, that strategy ended up blowing up. And so I want to make clear to people when I talk about options, I'm only talking about them to. Generate income and reduce risk. I don't we don't do any speculations on options. So I'm definitely not advocating on that. They're not suitable for everybody. Hey, Tim, we are coming up on time. Yeah. Folks want to get in touch with you or follow along with what you're doing. What's the best way to do that?
Sure. Our website is www.ptvalueinvesting.com. And then my Twitter handle, I think, is Tim Travis' value belief. Cool. Yeah. Well, Tim, that's always good to have you on. Thanks so much for having back. Thanks a lot. And then onto the distant future. Cool. And thanks everybody. We'll be back next week. We got Dan Rasmussen. He's coming on to a set of soul straight. Yeah. Yeah. He's going to give us whatever one's doing wrong. He's very good at that. So he'll be. He'll be. He'll be.