Like nothing different. Yeah, you spent a lot more to live exactly this. Oh, Billy fell out. We've just gone live. And we're live. See if we can get him back in. This is Value After Hours. I'm Spice Carlisle. This is Jake Taylor, where short, the prodigal son, he'll be back in a moment. Perfect technical difficulties for our 200th episode on brand, totally I'm gonna have to use the prodigal son returns. He's on mute. There he is. He's back. I'm happy
that happened. It would be a shame if given you imagined no technical difficulties. Yeah, it would be, it would be us. It would not be us at all. Billy's broadcasting from New Digs, the prodigal son. That's right. Returns. Where are you now? I'm, I'm, I'm my crib, man. So I'm in, I'm in the office. Beautiful. Let's get to see it. My man. It's nice to be here. I was, I was making my cider jokes. I was cracking me up last week, man. I guess
that's a real drink in Florida or in Australia, Dick and Cider. Yeah, but the, the joke can't first. Yeah, no doubt. But it's a three star drink. So people buy it and they say it's a reasonably decent out of how many stars. No, it's a good, good question. Anyway, yeah, I don't know. Nice to be here. So I thought I was gonna be on last week and then I, I signed on. I was like, oh my God, I don't know what's going on. And then I saw the tweet that John
was on. I said, oh, that's good for the fans. They can wait one more week, but where they have to have me. Yeah, keep them hungry. And J2's just come back from Colombia in New York. Yeah, no, not, not for guitar Colombia, but yeah, Columbia University noted. I want to go to Columbia, Columbia. What was the event? It's the like a student investment association C Simpson or whatever. Yes, this one that they do. Who's talking? Any, any could speak
for you? Yeah, you had John Griffin from Blue Ridge. He's kind of one of the ex-tiger guys. They've been pretty successful. Mo Boasin did an interview with him. Who else? Oh, gosh. Sally Krochuk. Is that I think how you say her last name? She's been in a lot of different finance positions over the years. She was, she came in over a Zoom that was was was pretty, I felt like she was pretty candid and forthright about her career. That was interesting. Yeah,
I had to duck out for a little while. So I missed some of the stuff. But you know, kind of with some old friends and it's good to, could to kind of be in the value community. Sort of where I feel like that's a little bit ground zero in a lot of ways where Graham was was teaching many, many years ago. Any good takeaways? Any good learnings make benefit glorious nation of value after us? Yeah. I know you're sworn to secrecy in the room.
But yeah, you know, I mean, it's it's all the same stuff guys. I mean, we're you're not missing anything. I guess. Right. Yeah. By cheap to understand what you're buying. Grab the ankles, have patients. All the same stuff. It's been a it's been a pretty good run for growth over value since the start of the year and or and you know, the year before that and the decade before that. But I thought we had a little bounce yesterday. But then I
switched the machine and more. Yeah. Yeah. Why is a why does a CPI print that's a little hot come right after you if you're a value? What's the where's the connection there? Yeah, I can't figure it out either. It seems like good news is good for growth and bad news is bad for value. And I don't know. I think. I think that value from what I have seen lately is screening a little bit more industrial. So maybe if there's hot CPI, the theory is
the Fed doesn't cut and things slow a bit. Maybe. But I don't know that I believe that. But that's that would be what I would think. I would think that longer term longer dated cash flows that might be more representative of a glamour basket would be a little bit more interest rate sensitive if you imagine that rates were going to be moving up. Maybe I don't the the S&P I would argue probably has more pricing power. So I'm not sure. My
official position on the S&P is that I don't think it like is objectively bubbly. I don't think you can own it and expect more than one to 3% real. But like if you're living in an existence where wealth disparity is as big as it's ever been, you only have to get wealthy ones. If you want to protect it, I can understand being in the S&P. I just don't think you're going to like do what you did. Yeah. Toby give me an update on where profit
margins are these days. I think we saw. Well, there's little there's a little chart out. I think they picked at 13.1%. I think 2021 I should have a quick look at that. But they are main reverting. It's the slowest mean reversion in the series. Well, dude, even if they're I mean, even if I found it like 10 right? Yeah, I don't. 10. Where were they in 2019? So here we go. I have it up. This is from Charlie, but where low? So they
got to 12.1. That was sort of late 2018 early 2019 fell to 5.9 at the the trough of the COVID. We can look through that. That's the look through the peak though, too, because 13.5 was the new peak post. That was the. And so now we're back to 10.7, 8.9 being a long run average going back to well 2000. Well, one to 10.7 that matters. Yeah. 13.5 to 10.7. I mean, if you're if you're more on your way to six, that's really going to matter. Well,
I've got nine. The new normal since 2000. Yeah, I still I know. This is an intangibles returns of scale. We've had all these arguments already before and tax cuts. I think corporate America is taking a pretty good bite out of the total pie at the moment. And that's, yeah, who knows? We'll see. Yeah, do the does labor get its get us due. It seems like an employment is pretty tight. Yeah, you get any movement in the other direction that would seem to be
bad for labor, wouldn't it? And it depends on robots. Hey, hey, higher interest rate costs have taxes move the other way potentially for you. Maybe back up to 20, 23 again or three. What is going to do that though? I don't know. You've got you've got I don't think this is controversial to say neither party. I think is really willing to take pain unless they absolutely have to and then they can come together and they seem to get stuffed on it in
crises. But like, Biden could come back in and say we're running massive deficits. These are unsustainable. The top end of town has to do its part. We're going to increase taxes on corporates and high income. And aren't the think tanks in his party basically saying we're running massive deficits and inflation's not a real problem. So we can continue to do it. Like isn't isn't that the intelligentsia right now? Is that M.M.T. like kelton and those guys? Yeah. I don't really
follow. I don't understand how that stuff works. I don't either. If you did, we'd have to question your saying that if you're not you don't know what's going on. Hans party first in the house. Petite Tickfah Israel. Happy 200th. Thank you. Toronto, Miami dead cat galley. New South Wales. Me too, brother. Happy 200th fellas. Birmingham, Alabama, not England, Norberg, Sweden, Valparaisa, Cote tour Montenegro, Grimsby, Ontario.
Monterey, Mexico. Santa Monica, Jupiter, Florida. What's up? It's nice and Jupiter. Shout out to Jupiter. King's place. Cussell for England. Seven Lina Finland, Poland, Cleveland, Tennessee, Canisore, Georgia. London, Tulsa, Oklahoma, Winter Park, Florida, Tallahassee. Oh my God. Dimey Pivo, Pogelin. Bowe. Look a bit of a go away pipe, the drink. Brookings set the cat a hot and popular. No, I hope you're good. Chapel Hill, what's up? Durham,
Coddough, Wales. Keep this going. We'll be right there. I'm going to feel it. Yeah, let me know when you're done. I'll be good. I'm all. I could get a more. Longville, Scotland, or the British, the scary off to. Did get a shot at those calves though on the way out the door. She did show off the cows. We're going to have to mark this one, not for kids. Yeah, not safe. Those are. What are you and Winnipeg? Sorry,
Miss you guys. I don't believe it's back with a dog. He's brought a dog back. That's good. Yes, so here's a good question. I've been thinking about this one a little bit. I don't have an answer, but I'll throw this question out to you guys. I forgot. Yeah. Oh, you got the glasses. Actually, I have some. I got my hundreds too. Ah, still here. Yeah. Yours is probably in a box somewhere, Billy, since you moved. I know. So.
Here's a good question. I like this one. Do you guys have any hypothesis for what the effect of the bifurcation between monetary policy, tight and fiscal policy loose could have on different sectors of the economy? I've been thinking about this a lot. I still don't have an answer, but I think it's a good question. It's a very good question. That's a good question. I wish nobody would have a good and appropriately strong answer to that. Meadful at the Jamaica. All right. Well, so I think
here's my answer. Is it? I think that that fiscal or monetary policy is able to get into the nooks and crannies of the the economy more through the transmission of interest rates. And that and that, but it's also much more broad based. It's like a it's like taking a antibiotics pill as opposed to a topical application, which I think the fiscal policy is a little bit more targeted, but also probably more susceptible to crony capitalism as well, where the first pigs at
the trough get to get those dollars before anyone else. And so you get those cantillion effects, where you get the dollar before it gets weakened. So there's there's a political element to it there, but I would say that yeah, there's probably the arguments that that same thing happens with the fiscal side or the monetary side as well, where the banks are the first ones at the trough at the
feds, you know, when they're dumping, you could basically borrow money for free, buy treasuries, get collect the spread, and we just like sort of give resources away, but yeah, I think probably banks benefit more from the monetary and then the subsidy truffle hounds get more at the from the fiscal side of things. What do you guys think about that analysis? That's a good answer. That's a good answer. It's just off the top of my head. I don't know that I agree that banks benefit the
most, but I don't disagree. I just think about it from loose monetary policy. Yeah, I don't know. Banks are first in line. He's saying we're tight monetary policy and fiscal spending is going to be the truffle hounds. Yeah, the subsidy truffle hounds. Yeah, it can be. I don't know what that is. I the thing that keeps me up, well, I'm not actually staying up thinking about this, but the thing that I wonder a little bit is our current, it seems to me, the current iteration of our economy
is fairly strong data with tight monetary policy. It is unclear to me why if I were at the fed, I would cut until like the until jobs started to crack a little bit. And I kind of wonder a lot of this inflation data has a lot of benefit of rent that's flowing through. And if you look forward to 2026 and 2027, there's not a lot of real estate that's being developed today that's
going to deliver then. And I just kind of wonder if it's going to stay high then. Well, if rates don't come down right now, I mean, if you read like the earnings calls of any of these reeds, they're just supply supply supply supply supply. Well, I mean, that's a product of the zero interest rate environment of two years ago, three years ago, right? Because you're building huge buildings. So rates stay higher. I don't know. I mean, I kind of wonder what shelter looks like
in three years. I can't help but think if you think rents are high now, they may go a lot higher. You're not too damn high already. That's what I'm saying. So I don't know, it's going to be interesting because I don't know how you're going to get. Maybe we don't need more housing. I mean, maybe that's the answer. But I don't know the I don't think housing starts look very good. But maybe I'm wrong. Good answer here from Adam Jones. He says, pal guy, the answer in 60 minutes will protect
against recession at the risk of high inflation. Yeah, well, we're not like there yet. No, I mean, that would be well, I guess I don't know that that would be my answer. I mean, that kind of talked to me sounds like subprime is contained and permanent new high plateau. To think that, well, we just got we could just control all this very easily. But I think what he's saying is that even though inflation is running hot and they're going to
keep writes up the moment that there's any kind of correct. I'll cut to zero. Well, certainly the market feels like it's kind of sussed that out or at least leaning that way. He's also saying that. But he's also saying that after a period where I think he possibly deservedly can take a little bit of a victory lap on squashing inflation. So I don't know. We'll see. I guess what I'm really saying is it's easy to say that now and I understand why maybe he would
say that. But what if all this fiscal spending actually has an inflationary problem even in some sort of recession? I don't know the answer to this question. You guys talk macro. I know. This is never anything. Well, it bothers me that the country's being run like a leverage buyout. And I, you know, this is like this old Charlie Munger show me where I'm going to go to die. So I don't go there. This is like one of those things that I think I don't know that we need
to push it so far to figure out where the problem point is. Yes. I agree with that. And they were talking at the 2000 meeting about, you know, borrowing money as a country. And what does that mean? And what do you do with that money? And it really does matter what you
do with it. Like they were saying, and when I say they, I mean, Buffett Munger in the Berkshire AGM if I wasn't clear before, that if you're borrowing to like spend money on infrastructure that's going to create, you know, the ability to run a society at a much higher level for 30 years, like that might make sense. Like there's, there's sort of this, I think there's not all Keynesian
deployment is the same. Like what you do with the money matters too. But if you're, if it's all just for like consumption or to buy like, you know, stuff you're going to throw in the garbage in a month from China or whatever, like maybe that doesn't pencil out from, from a societal deployment of, of resources. And so I think maybe we're, we're doing ourselves a disservice not to like differentiate a little bit more as to like, what are we spending money on? We haven't even hit the wave of
entitlements. And this is like, deal, look, you could take eternal leverage, you can take two turns of leverage, you could probably take three turns of leverage, probably take four. I don't know, there's comes a point where, yeah, sorry, it was three, we overshot, yeah, found out the hard way.
So, oh, I hope it's all under control. It'd be good for us all if it is such a bummer that they found that hard-coded cell in that Ken Rogoff thing where he did higher interest rates at some point, I'm sorry, high debt loads at some point, hard-coded government debt loads are bad. Which just seems like axiomatic. Well, that's just common sense, is this? Yeah, yeah, obvious. But then they, but that's, that's anti kind of Krugman's worldview. So they found, and they found
the hard-coded cell in the end. So they just said, no, it's just, it doesn't count, yeah. Well, when you don't have much debt, Krugman's point of view where you could take more. Okay, it's true. Yeah, you're right. I don't know that you want to mess around with finding the edge of this. Yeah, no, I agree. I'm a little worried that we've all sort of said, oh, the edge doesn't matter. It just hasn't yet. I, but that's, we haven't found it yet. We haven't found it yet.
We haven't found it yet. Until it does. Until it does. Yeah. Yeah. Mr. Ocean, old ocean, Texas in Fort Lauderdale. What's up? Giving everybody a shout out today. Could you imagine, though, if, if we had a complete, like 180 from the existing sort of stance of like, well, you know, it doesn't really matter, what if the US was actually like a bastion of like, we're going to have a very sound currency. We're going to help facilitate trade around the world. We're going to use our navy to make sure
that that trade happens freely. I mean, really, in a lot of ways, it's sort of like the martial plan over again. But imagine if that, we had the discipline. I don't know. I think we're that now. I just think we're teetering on fucking it up. Yeah. I mean, everyone that's in pure use from our leadership is not of we need to set a good example monetarily, fiscally. And we're going to be like a very good neighbor about these kinds of things. We're not going to
create this, I mean, we've exported a lot of inflation all over the world. And we're, we're abusing our monetary reserve currency status, I think. And you can only do that for so long. Yeah. You need a good military. That you need. You will, you will take these pieces of paper. That's correct. Let's do enough macro bullshit. Einhorn is finkle. Einhorn. Did you guys listen to Einhorn? Yeah. I listen to Einhorn. Einhorn says the market is broken. Passive has broken the
market. I'll tell you what pisses me off about Einhorn. And I say this is someone who does not deserve to have this opinion. But when I listen to his argument, it sounds a lot like I used to be better at the Keynesian beauty contest than everybody else. And now I've found religion. And if I buy businesses that are returning capital to me, that's how I'm going to win. And I just don't understand why you didn't start there. But he's also David Einhorn and I'm me. So I just, I don't
know that I understand like, you know, I can't flip it to people anymore. So therefore, market structures messed up. Yeah. I more understand like, I now, because market structures messed up, I look for C Corp conversions are going to have index buying. I look for index inclusion that I can flip it to somebody I buy cheap stocks that are flipping momentum because Algos are just going to buy it. Like that to me is is make some sense. But the buy cheap stocks that are returning
capital is kind of just like owning businesses. That's that's like Buffett 101, I think. Yeah, I think that's fair. Like the, uh, where's my greater full rewriting? How do you're not doing that Eddie Boer for me? Yeah. And he's complaining that that's gone away. And it's kind of like, well, maybe the greater fuel fool has just been killed. Where are all the Dennis that were supposed to take this off my hands that are unreasonable price?
Wouldn't, uh, wouldn't passive breaking the market be the best thing ever for value investors? This is what I don't understand. The first time I heard Michael Greins argument, I just thought, this is, if this is true, this is the best thing ever before the money rushes to the beginning of town depends when that's exactly right. What's the question? What's the conversation that we're really having here? Because I think this is important. Is it do I want to make the most
money in a forward return basis? Or is it do I have to justify to outside investors why the S&P is kicking my ass? Yeah, because I think that's a different question. Yeah, that's fair. Yeah. Yeah. I think it's the best market for the fact that value is so beaten while the rest of the market's expensive is great. That's a gift, particularly if some of these companies are buying their stock. I don't need the return of capital, but like concentrate the value. Let's go.
Yeah. Yeah. It's it's flows versus fundamentals. It's, you know, voting machine, be a, be a flows momentum versus weighing machine eventually. And if it takes longer, that's just kind of the price that you have to pay for, for this new world. But I agree. It seems like the disconnection there should create extreme valuation opportunities to take advantage for the discerning buyer who is actually like looking at businesses and the quality of the business.
That should be true. I mean, I was looking at the S&P and I guess somebody said it's trading at like a 2.8% current free cash flow multiple or something like that. Cheing. And I'm thinking to myself, okay, well, you know, if I want to preserve wealth and I, and I got a 10-year duration, I can take the S&P or the 10 year that's going to give me four. And I've got to take on the some of the currency things that we've identified. Yeah. Maybe the S&P gives me some earnings power.
Should it should it re-rate down? I need to know the scenario that it does, but the companies, if they can protect some of their earnings power buying and shares. So like over time, I think that 2.8% will grow. Well, if I can like talk myself into why that's rational here, I'm sure you can just extend it and say, well, at 1.4% it works. That's up 100%. Yeah. Like, I don't know that value outperforms that re-rating. At some point over the future, you would think your
entry fee cash will yield should matter. So like, yeah, I think, you know, this is company I follow. OEC, if people want to take a look and tell me why it's stupid, let me know. But they're guiding the like 500 million in mid-cycle cash flow. It's a $2 billion company. It makes rubber black. Like, it's terrible in it. Like, it's like a, not a terrible industry, but it's not something people are going to enter. You know, I don't know. The S&P probably kicks it to ask for a while.
Eventually, I think that's like that payoff. But you can't control them. You can't control the multiple. You can't control the multiple re-rating either for your own stocks or for the rest of the market. So there's no point worrying about it. What you can control is how much value you get when you buy. And the value that you get is the yield plus the reinvestment rate. You don't need multiple re-rating. It's nice if you get it. And I would like some. I don't like the headwind all the time.
I'd like a tailwind. But you can make money just on the yield and the reinvestment. And even if you get a little bit of a headwind, then over time, eventually, it all works out. I think that's exactly what Ironhorn's saying. I don't think he's actually complaining too much.
I think he's saying, he's just saying he don't think about it in terms of getting the, don't buy something that's cheap relative to the index, expecting it to catch up to the index part because it's genuinely undervalued and you're getting a return at the moment that you bought it. But I think that he keeps on coming out and saying it and it sounds like he's complaining a little bit about it. Sounds like he is. The Fed ate my homework. Yeah, it does.
It just sounds a lot to me like we used to identify opportunities before the market saw him and we'd flip him to people who probably underperformed. If he's outperforming doing it, they're probably underperforming. He's doing it during a time when the S&P went on an insane run. With a value factor, value in a run, the same run. Well, but I'm saying the last 10 years that he's saying that things are broken. Yeah. I mean, a lot of those people that were buying this stuff from him,
they weren't doing an attacks advantage wrapper. A lot of them were old school shops. I mean, I don't know. Those people going away, is that the market broken or is that just kind of capital markets iterating? I think the advent of ETFs to do some of this stuff makes a ton of sense that put a lot of pressure on those people that probably would be buying that. Do I think value ETFs existing have distorted market structure? No, I don't.
So I just don't know. There's a little bit of exogenous things happening to there where you have the perhaps adverse selection bias of PE kind of sucking out maybe the better companies, potentially. I mean, we've seen some measurements of like the Russell 2000's business quality has deteriorated. So that might be PE driven. And then secondly, you have big pools of capital who have looked for liquidity in places to meet their private investment obligations,
capital calls in PE and VC. And where do they get the money from? Well, let's sell these, you know, this dog or let's redeem this dog manager. And it tended to be probably the, on the more value end of the spectrum over the last 10 years. And you have this sort of reinforcing momentum of that where this guy stinks now. He doesn't know what he's doing. Let's redeem from him. He has to sell those stocks. They go down. It just drags in other value investors that might have
held it as well. And then you, you know, you kind of get these these feedback circular self reinforcing loops that can go on for longer than you, you would probably hope as a manager who's trying to just be rational. He doesn't seem to have a lot of impact on the Russell 2000. If anything, they're at the low end of the Russell 2000. The small end rather.
Russell 2000's quality, I think, is largely driven by, you know, when the market gets, when it's easy to raise money, you go a lot of the biotechs and the, you know, the things that they don't have any revenue, they've just, the app comes public. Yeah. The dogs are quacking. You got to feed the ducks. I think that's what it looks like now. And I, there's a good question here, which would come to an a bit, but the question is, do you think the, it's germane to this one
from Tyler again? Do you think the underperformance of the value factor in the recent past is partly explained by Zurb and Baylor. That's preventing consolidation of industries from low return and invested capital firms to high return and invested capital firms? I do a little bit. Is that so that Japan had this problem where they had these zombie companies that they just never declared bankruptcy. They're able to stumble from, you know, their
business. Yeah. Yeah. Yeah. With no lack of enthusiasm, no loss of enthusiasm. What's the definition of value? Yeah. Well, we're not defining it for these purposes. You submit your own low P, low PB. Yeah, low PBs tough. Because some of the best firms in the world have no B. Right. So for sure. Even cigarette companies have no B, right? They just bought it all in. Yeah. So you almost have to do like a price to assets on some of those businesses.
Or add a bunch of leverage that can take your book value to nothing. Yeah. I don't know. You know, like Greenbrick has worked great and the stock is worked as the business has worked. It doesn't seem like a broken market. But he's a lot smarter than I am. Yes. All right. Let me let me let me throw out another one. Tyla's got a couple of good ones here. It's all fired today. Yeah. Do you guys think the value factor will perform better with a period
of sustained higher rates? It's above my pay grade Toby. You tick this one. Yeah. That's an interesting question. It doesn't really make sense that higher rates should help equities. But I think that if your high rates certainly hurt firms that have got backended cash flows, so the growth you're stuff that isn't doing anything now and things that are highly levered, which might be you could maybe say value firms tend to be more highly levered.
I don't know. It's hard. You know, that the Buffett said following the last big period of inflation, whether it was 70s or 80s or something like that, that he would have rather been in the asset light businesses that had pricing power than in the received wisdom. The common wisdom was that you want to be in the asset intensive stuff because the assets go up in value, ignoring the fact that you have to periodically replace the assets, which means that you've got to stump up. You
got to find the money to buy them at a higher price than you bought them previously. So you might earn money on your assets for a period of time, but then it's a luxury because when you go to buy you got to pay more. That's a tough one. Right. Certainly low rates didn't help. But let's try hard right since you would have. Well, look, I think like to the extent that that rates would cool the labor market and the extent that labor runs through value firms,
income statements, I think it could help. Like I noticed Met Cole is in some value screens. Met Cole seems to me to be a big beneficiary of fiscal stimulus. If rates stay high, I could see an argument why you wouldn't build more sort of facilities and you may not expand your operations. So I think that the combination of fiscal spending and high rates could help some of these value stocks a lot because I think it may restrict supply from coming on. Well, Cole said a pretty good
run over the last 12 months. Yeah. But I'm just thinking the same thing. I kind of have this theory that high rates might actually create inflation. And I think it's because it may reduce aggregate supply. And I think that may help value. But maybe not. What about giving all these savers a little bit more spending power to and like grandma's savings account now gives her four before that she can go buy things with that she wasn't when it was at zero. Yeah. It depends a
little bit on the composition of the economy. Like if it's mostly net savers versus maybe that doesn't work out. Maybe you have to have maybe the savings has to equal the the borrowings. I don't know. I don't know. I think the composition of the economy is maybe one one reason to be a little less scared of oil than we were in the 70s, right? It's not a soil going higher will actually do wonders for Texas, which not was not historically the case. It didn't used to bring much money into
the US economy now. Now it could. Yeah. And the the the sensitivity to oil the the oil with the word. A amount of oil concentration required to run the economy has has come down quite a bit. Just efficiencies more service than heavy labor or heavy production. EVs. EVs saving the I'm not sure that applies here. That's sort of energy intensity. Maybe that was the word I was looking for. Yeah. I remember when you did that
segment. I was actually on that show where I was watching. I don't think I was here. I blacked out. What if it hopes commodities and value tends to be concentrated more in commodities. Yeah. As long as it doesn't hit the income statement, right? As long as it doesn't impact your cost more than you revenue, there's the easy answer. Yeah. Well, if you're selling the Eurocade, but yeah. Which is not buy a new machines.
Right? The capital is already in the ground and the price goes up and you don't have to put a bunch of maintenance cap X in. Then yeah, it should work. I think it's a chart crime. I don't know exactly why it's a chart crime. It always gets pulled up by the guys who call out the chart crimes. But the comparison like the S&P 500 to a basket of commodities, that relationship, you know, in 2000 was stretched the way it is now in favor of equities over commodities in 2010
or whatever. Well, the other 20, 20 was stretched in the other direction and it's still sort of stretched that way. So it's like a, you're better off buying commodities rather than equities here. Yeah. What'd you say though that one like one is a bet against human ingenuity and the other one is a bet for human ingenuity. Over the long run, you want to be for human ingenuity. Yes. That might be why it's a chart crime. It's not a mean reverting series. There's maybe there's a drift.
We're certainly the stationarity in the data. Energy intensity is just one. I mean, probably find the intensity of all. Yeah. That's all. Everything is we're using less of a more efficient digitization removes a lot of material out of your economy. I, I, I've brought mostly a paperless office like that was that was a big deal at one point. We're going to be a paperless office. I can't function without paper. I'm straight up Boomer. I hate when I have to print something out. It's the worst.
Shall we do some vegetables? Yeah, let's do some veggies. Top of the out. Let's do it. What do veggies cost these days? It's a lot. The kind of expensive, yeah, surprisingly. Given that it has it has it taken you longer to do veggie segments with inflation or not so much. Does that not apply? You know, there's a little bit of inflation. It's just purely ego. I think is the input cost is low relative to the what he sells them for good marketing.
Productivity increased. You know what it is? There's diminishing marginal utility from them as I scrape the bottom of the barrel for ideas. Yeah, you're learning about the oil industry. You've mind your good wells first. Yeah, I'm definitely. I don't know. That's not sure. You come up with good stuff. So let's, let's get it. Let's get it. This is, this is called the farmer's fable and it's a story about a farmer named Bill and in a good season, he'll harvest 150 seeds for every
100 seeds that he plants. So it's a 50% growth rate. Not bad. And if if Bill plants these seeds every year, this business will grow exponentially. But alas, farming is not so easy and sometimes there's a bad harvest. And when that happens, Bill only gets 70% of his original seed count. So it's a 30% loss. So where Bill lives in Florida, you know, it's random. You should have given me a trigger warning, sir. I'm not going to. I wanted to get you off your like on tilt here.
So where he lives in Florida, it's a random coin flip between a good season and a bad season. So we're still looking at it like a pretty good bet with a positive expected outcome. It's, you know, half the time it's plus 50%. The other half of the time it's minus 30%. On average, we can expect a 10% outcome. And Bill has an edge here. Given all this, we could run simulations on what Bill might expect to happen over the next 100 years of his farming. And in the first run
that I did of this, Bill fared pretty well. Things started choppy, you know, good season, bad season, back and forth. And but then he had a run of good luck and he ended up with over 100 X his original seed count. He's the man. And then the next time I ran it, he started with a run of bad luck and he lost 90% of his seeds before bouncing back and finishing with 10 times the original mount after 100 years. That build in he didn't stick with it. That bill blew out at the bottom
after 90% drawdown started selling his self on the corner. He did broke the next time I ran it, Bill started hot, but then he hit a rough patch, lost his confidence and he finished with actually less than he started with, which is bad luck. And so even with an average of a 10% expected return, Bill ended up with 100 X in the first scenario, 10 X in the next and then a loss in the last one. So there's a lot of luck involved here. And so maybe farming maybe isn't as good
a business if it's so random, right? But here's where things start to get interesting. Bill has his friend named Toby and he's also a farmer and they happen to live on opposite sides of the country from each other. So their weather is completely unrelated. And it's it's random who will have a good year and who will have a bad year. So let's run another 100 year simulation with
both Bill and Toby farming alone. This time Bill ends up with a relatively lucky outcome and he has 16 times as original seeds and Toby's unlucky and he ends up at just barely break even. So maybe Toby is a bad farmer, I don't know, but, uh, but however, what if these friends decide to make a deal and at the end of every season Bill and Toby agree to rule their harvest and then split it equally. So here's a little math behind it and it's actually quite counterintuitive.
So I would urge you, if you're listening to this, to go to farmersfable.org, which is where I got this from and click through the little animations that it has and that's fable with an f, right? It's not table. Um, like through the animations yourself to follow along and honestly like I've had to run this multiple times before it really made sense to me. It's that counterintuitive. But eventually I've kind of started to wrap my mind around it and honestly it's a like kind of
blosure mind a little bit and so that's why I'm sharing it with you guys now. So I'll try my best here to keep it simple of what's what's going on. But so imagine that Toby starts with with we're going to change it to like one bundle of wheat, okay? And in the first harvest, it's a great year and Toby triples his bundle to three. All right, awesome, right? Then he has a second harvest, but it's not so good and he merely breaks even. So Toby finishes after two years with three bundles
of wheat. All right, we're following along so far. At the same time running along with this Bill also starts with one bundle of wheat. He breaks even in his first year and then triples in his second. So both Bill and Toby started with one bundle and finished with three after after two runs of the simulation, right? Simple enough. Now let's imagine that they pooled and shared. But it and it's the exact same weather patterns held over this. Just like in the first example in the first year, Bill
finished or sorry, Toby finished with three and Bill finished with one, okay? But before we move to the second season to run it, they pool their bundles and then split them up. So three plus one totals to four, they split it and they now they each have two for the next harvest season. In this next season, Toby breaks even and keeps his two, Bill triples his two and which then takes him to six, okay? What a stud. They pool again and split it and this time at six plus two
equals eight. So they split it in half and now they arrive at each at four bundles. So that's one more each than when they were farming by themselves. So there's like this, there's actually this like free lunch that occurs from diversification and pooling and that's maybe what everyone's been talking about when they talk about this free lunch. So anything that grows exponentially like this in a multiplicative series, there's an advantage to sharing and it pays to redistribute after each
step moving forward because you only take a partial step backwards when you share. And so this like luck then becomes what was it like luck becomes more of a certainty over the long run with this pooling and sharing. And so it you're actually interestingly reducing risk and increasing the growth for everyone involved because it's reducing the fluctuations, right? It's this variant strain
that we've talked about. And you know, you can even there's actually ways you can demonstrate this mathematically that that someone who's objectively better farmer than the person that they're pooling with will benefit from a pooling arrangement. Although there are some limits to it, right? Like you can't if you if I was paired up with Warren Buffett of farming and then I was like, you know, totally
dead weight for them, that would not be a good arrangement. But but there is allowance for a little bit of Delta there. So it really shows you the importance of going of avoiding those big downs that the variance drain as much as possible, which of course is is why probably Buffett has rule number one is don't lose money, right? So and this whole Farber's Fable was inspired by a 2019 research paper from from Ole Peters and Alexander Adamo, I believe is how it's said called an
evolutionary advantage of cooperation. If you wanted to like read the more scientific treatment of it, but they're they're basically able to prove that this cooperative transactions in a multiplicative series where you have to like multiply things out like geometrically, there's there's a real
advantage to be had for for pooling arrangements. So I find that to be very interesting. And if you click through the fit that farmersfable.org, it'll help do a better job of what I just, you know, said in an orally, which is, you know, not as good of a way of teaching this is probably looking at little bundles of wheat. Yeah, good good good. Cool. Talfar Scott there again with Shannon's Damon before he before he got very far into that story again. Correct. Shannon's Damon is a great example
of that, which is why you want the uncorrelated or anti correlated. You know, Radalia says get 10 uncorrelated series. That's a good way of doing it if you can find them. Yes, that that diversification of being able to limit the downside and which allows you to catch that bigger upside with a larger full of capital. Evidently, we've crashed farmersfable.org. That we dozens of people went there and think about that. Sorry guys. Why roll up math makes sense. You know, you add some
things across you get geographic diversification. It's actually worth more. Interesting. I have a lot of the role of civil work. Some, I don't know that the base rates are great. What goes wrong there? I don't know. I would I suspect if you were to study it that you'd probably find incentives are squarely in the middle and you probably have to be fairly decentralized to do them really well. I would think I'm in a good roll up study despite wanting to. When they're
thematic, they start with lots of little ones and then they get to move the needle. They get bigger and bigger. So their biggest mistake is always, well, their mistake that they finally make is always the biggest mistake they make. The ones that were like, you know, constellation or virtue. That's small. You used to be 3G, but well, valiant. Remember valiant. Yeah, that was a roll up. I'm always I have some problems. I've got to imagine some overconfidence creeps in when you've
done a bunch of small ones. You're like, hey, we're pretty good at this. Let's take a bigger bite of the apple and then you get clobbered. Yeah, you start believing that you're actually worth the multiple that people are giving you and get a little bit of the God complex. I can see that. Constellations managed to keep the acquisition size incredibly small. I'm definitely small. I can't like, I almost don't believe them. It's so impressive.
It's distributed acquisitions all the way to the edge of the network, rather than having to rely on the dirt in the middle coming up with all the ideas. It's a good way of doing it. Yeah, you need the right kind of leader in that, right? Like, that's a guy that I suspect doesn't require all the attention. And maybe the opposite is trying to avoid all the attention. Yeah. It could be something to learn there. They have podcasts.
Okay, keep your podcasts very small. Yeah. That's why we're doing it. That's why we keep it small and intimate. Yeah. Do you guys want to do predictions for 2024? Haven't we already done those? Yeah, but I just mean generally what's going to happen? Oh, God. I don't know. Can you just just beat me with a stick instead, Toby, and we'll just call it even. I certainly can. Next time I see you, Danaheer. That's good. There's a good roll up.
Big sell off today because we got a hot CPI print. Does that make sense? I'm not looking for a reason to sell off. I don't know. Lots of people seem to be commenting on the Twitter machine for whatever that's worth. That things are really heated. I look. I just think that some of these like just middle of the road, old economy businesses don't seem crazy to me. I bet if you own a me-do okay, maybe you got to live through a little bit of a recession in the meantime. But the prices
aren't indicating you for you, at least as I see it. Then again, who the hell knows? I can be blind. What kind of multiples are you seeing? Well, I mean, you know, like what, OEC, I mean, look, you got it. They have to bring this, this Laporte plant on. But I mean, you know, what, four times forward EBITDA in 2025? That's not crazy. Okay, how much is DNA? Call it maybe, I don't know, 90 million or so. Let's say 500 million is 300 million in free cash to equity.
You're two times levered. I mean, obviously, it's a commodity. So who the hell knows what's actually bankable. But you're looking at equity value of 1.3 billion, I don't know, four and a half times free cash. Maybe that's peak. So maybe it's 100 million. Okay, well then you're 13 times cash. Well, as I checked, that's still like 7% return. Right. You got to own it though. I mean, you know, if a cycle goes against you and you puke it at the bottom, you screw it. Look, I just described
charter for me. No, I can't. I puke to the little higher. I do think it is all but impossible to time these kinds of things. We really don't know when the worm will turn. I don't think. So I think, like, let me try to make it more concrete. Do you think you could have timed the 2000 to 2007 value renaissance? No, but do you think at some point the valuation spread does get a little too big where it's like value probably does well. I think the harder question is after it does well,
I don't know when I'd sell it. But you have a sip that waive all the way to the beach Billy. Yeah, I don't know what that means. It just like saying crash it onto the rocks. Dig that nose into the sand at the bottom. Fairfax short report. Yeah. It's interesting. Any thoughts on that? It seemed like a funny. I mean, all the things in the out there that might be Fugazi and you're going after Fairfax. Well, they have they have a historically people that know insurance
some have had some questions about their underwriting, I think. If you believe publicly reported data, I think those questions, I mean, I was just looking at it. What, like, their last 10 years of combined ratio is like 97 or so or 96 seems like there could be worse than that. Then what? You've got acquisition accounting and you've got a stock that's been on a hell of a run.
So if you wanted to scare people, I think it could make some sense to write a report like that and you get some some shake out and then you close your short and then you move on. Yeah. I don't like the idea publicly shorting, man, especially Prem. I think Prem has come after people in the past and I think he would not be afraid to do it again. If you did not have pure motivations, I think you better be fucking right on your analysis if you come after a guy like
Prem. My interpretation of money waters complaints were mostly like we don't like the way IFRS accounts for things. It's like, well, yeah, fine. I mean, you don't like the way that it was marked to market for something, like say like digit, for instance. Well, that was like a, what, Sequoia led that round and that was the price that they marked the equity at. Like, what do you want them to do? That's just sort of how it works. Like, make your own adjustments.
No one's saying accounting gives you the exact answer. These are all just abstract approximations of reality at the end of the day. You need to make your own adjustments, but that doesn't mean that it's fraud. So I don't know. I found it rather unconvincing myself, but. The question that I had, by the way, is I believe that Prem sued Roddy Boyd if I could be wrong. I believe there was a lot of there was a big short interest in what was like 2005,
6 timeframe for Fairfax, if I remember right? Yeah, I may be wrong on that, but I'm just saying, like, you know, he seems like he's, they released the response, they released a response to the response. You know, I actually talked this weekend to a guy who was a short seller who found himself the subject of an investigation. And, you know, his side of the story is he was just doing good work. And, you know, he wrote a public short report. And the amount of heat that came on him,
you know, even if you're right, the legal bills are a lot. I just don't, I don't understand the risk of words, you know, the only, the only way it makes sense is if you're running a firm and you want to attract assets and you think it's worth all the headache, but man, be in public in short, I commend the guys that do good work and do it. It doesn't sound like a fun existence. It sounds like even when you're right, you can put yourself through hell.
Oh, God, the ironhorn entire book about shorting allied was like, if you read that before you ever even think that you might want to do it, because that probably scares you straight. All right. Here's a good question. Riffing on Buffett's chat. What do you think some of the few companies are going to be better businesses and earning more five years from now with 90% confidence. That's from Tyler Faras. They are fourth, how producer Tyler Faras is responsible for 90%
of this episode. Yeah, it's interesting. That came from I think Todd Combs talking about what him and Buffett talk about on Saturday afternoons. And they're basically mostly just talking about businesses that fit that criteria. Is that a correct answer? Yeah, do we have a price on this? Are we limited to the 15 times earnings thing? Yeah, that makes it a little harder, doesn't it? Yeah, there wasn't a limit on this. So I guess you can swing away. Anything.
What about Mag 7? I don't think I'm dead against it. Yeah. I mean, all of the big growthy companies from 2000, they all compounded away from 2000, 2015. Price didn't go anywhere, but the business has certainly got bigger over their period. This isn't a unique thought given where it trades, but I think the one that would make me the most
nervous is Google. I just don't know. Yeah, I don't even know that it's like AI. It's just like they've made so much money for so long that I just wonder if something were to compete with their economics. Do they even have the muscle to learn how to pivot? It's like, first generation makes it second generation spends it, third generation's got nothing again. What generation are we in? I don't know. In generations. It's been interesting to watch meta when it was smashed like a year ago,
eight months ago, whatever was the bottom. It was like half Google on my buy the screen on the acquires multiple website with a little bubbles and meta was half Google for a while. And now it's more expensive than Google. Yeah. That's because Suck went, he's like time to get hardcore. Suck's out there. Comslapped. And all I know. You jitsu and massaging his cows and feeding him macadamia, not some beer. I want to be one of
Zuck's cows. Copy Tick-Tot figured that out pretty nicely. Pay himself a big fat dividend living in the bunker room. You know why? He's got a fear that... How come Zuck's not demanding 25% of the company be given to him? Oh, I actually think that this is... I'm actually sort of on T. Meelon here. All right. Break that down for me. All right. So to the extent that you are, or would be a shareholder, right? So you're already signed up on T. Meelon. Like,
he wants to build a robotics company. He is building a robotics company. He refers to it as a robotics company. But to... I think I think out of all the people that are actually like kind of worried about artificial intelligence, I actually kind of like resonate the most with what he says. And I kind of see if I were him being like, look, if I'm going to unleash this beast, I want to control where it goes. I don't think that that's necessarily... If anybody's going to make the
monster that destroys humanity, it's going to be me. It's not going to be somebody else. Yes. And you don't have to say that it can be him. By the way, right? Like, that's fine. If you say no, it's not you or it's not in this entity. Let's get that AI into some of those bots, give them guns. Let's see what happens. Well, I think he... I mean, look, I think he thinks he wouldn't. But I don't mind the man asking. We'll see. Well, he got approved by the shareholders for the last
log. So the people who really can't buy it for it. And then the court said, no. Yeah. Well, yeah, it could be not. It could just be voting shares. It doesn't even have to be the economics. I don't understand. I need to realize why the court said no. That doesn't seem American to be on its face. I feel like if shareholders are going to give you that much money, they should be allowed to. Yeah. It's a big shareholder by this. Yes. What's the people in there? What's the fiscal to get an injustice?
Christ, it turns over a million times a year or two. So whoever just rented it most recently. Hey, man, don't hate the player. Hate the game. That said, I don't like his securities fraud or my perspective or my perception of it that that is always bothered me and always will. He's a complicated figure. I think he'd be good to do without the means in his life. The dopamine and the ketamine, I think he could get off of. It's probably fair for all of us.
I've tried to reduce the dopamine. I mean, it's better. All right, fellas. That's 200 episodes in the bag. Wow. Congrats, boys. I'm proud of you. Well done. Thanks everybody for sticking with us. Happy Valentine's for tomorrow. Play this for your significant other. Show them how much you love them. I remember when I got my dog and she was a puppy on this show. She's now 80 pounds and sleeping just a fat beauty. She learned to switch. Hey now.