Value After Hours S06 E02: Tim Travis on options, energy, financials, including $C, $BRK, and $FFH

Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, and Jake Taylor. See our latest episodes at https://acquirersmultiple.com/podcast

We are live every Tuesday at 1.30pm E / 10.30am P.

About Jake: Jake is a partner at Farnam Street.
Jake’s website: http://farnam-street.com/vah
Jake’s podcast: https://twitter.com/5_GQs
Jake’s Twitter: https://twitter.com/farnamjake1
Jake’s book: The Rebel Allocator https://amzn.to/2sgip3l

ABOUT THE PODCAST
Hi, I’m Tobias Carlisle. I launched The Acquirers Podcast to discuss the process of finding undervalued stocks, deep value investing, hedge funds, activism, buyouts, and special situations.

We uncover the tactics and strategies for finding good investments, managing risk, dealing with bad luck, and maximizing success.

SEE LATEST EPISODES

The Acquirers Podcast

SEE OUR FREE DEEP VALUE STOCK SCREENER

Screener

FOLLOW TOBIAS
Website: https://acquirersmultiple.com/
Firm: https://acquirersfunds.com/
Twitter: https://twitter.com/Greenbackd
LinkedIn: https://www.linkedin.com/in/tobycarlisle
Facebook: https://www.facebook.com/tobiascarlisle
Instagram: https://www.instagram.com/tobias_carlisle

ABOUT TOBIAS CARLISLE
Tobias Carlisle is the founder of The Acquirer’s Multiple®, and Acquirers Funds®.
He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, the Amazon best-sellers Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014) (https://amzn.to/2VwvAGF), Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012) (https://amzn.to/2SDDxrN), and Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (2016) (https://amzn.to/2SEEjVn). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.

Prior to founding the forerunner to Acquirers Funds in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam.

He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).

And we are live this is value after hours I am Tobias car joined as always by my co-host Jake Taylor our special guest today is Tim Travis how are you Tim I’m good thanks for having me guys appreciate it welcome back Tim good to see you I always characterize you as a value

Guy he’s got sort of a specialization in uh sort of options and financials is that fair uh I think it’s somewhat fair you know definitely a value guy I think that uh we’re a little different and that and that we use a a lot of tactics so we’ll

Do covered calls cash secured puts we’ll do that type of stuff um with options for our clients to add a little income and reduce the risk a bit uh so I think that that’s kind of a unique Niche uh but yeah financials are definitely a space we’re we’re confident in uh

Insurance banking uh but but we also do a lot in real estate and and energy and stuff like that so wherever there’s value and and we’re constantly working to increase you know our circle of competence that’s a big big Focus as a options guy what do you think

The impact of the zero day to expiry options has been have you noticed any change in the not a ton to be honest yeah not a ton I mean I mean maybe I mean volatility has been pretty low you know the volatility index has been pretty low

Most of the ways that we use options are longer term so like maybe like six to 9 months uh 12 months even uh you know an example would be like uh I I like the real estate investment space right now Real Estate Investment Trust I think

There’s some value there in some of the the uh triple net names and so you know a lot of those are paying dividends of five and a half percent and they’re growing uh their earnings even in kind of the difficult rate environment and so

You might layer on a call you know 105 % above the the market price and add another four or five% and you’re getting kind of double digit yield plus retaining some upside uh so things like that is how we do it we don’t do the zero day ourselves I think obviously

That’s kind of the Robin Hood uh 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 selling 10 or 15% if you get a 10 or 15% rise in the price you’d be happy with

That so in this environment yeah I mean yeah I’m sure we’ll touch on that but yeah in this if you can get a double digit yield with the dividend plus the the call Premium and then still have you know 15% upside on the stock or even 12

Uh that that’s pretty attractive in 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 right 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 uh you know meta and and Google and Amazon uh going into last year you know after they had sold off so aggressively in 2022 and so we cap some of our upside on

A few of those names we still did really really well you know and they were big positions uh but you know that’s also the discipline and and it’s helped us like you know stocks that haven’t done great over the last decade kind of you know doing some selling some puts here

Selling some calls you know even like a stock back City Group which has been just a total dog and a pain own but if you’re selling puts you know at certain prices and then using covered calls and then collecting the yield uh 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 uh you know going into 2023 I feel like so many people there were such an impetus on okay look you

Can get yield in CDs you know or or high yield savings deposit 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 was kind of a a hoam year and then and then the last few months small cap and value ripped uh bonds ripped uh so I think going into this year there’s a lot of optimism and so uh you know I think just

That complacency you know reduces volatility uh still a lot of money you know out there uh 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 uh so I I would

Expect we’ll have a a March type event like we had last year for instance any uh any reason not to look at the news is is a good reason not to look at the news I just I just ignore it completely these days totally let me give a shout out to

All of the uh the callers we got Santa dominga in the House Miami Pittsburgh Miami again P for Israel bassing Stoke tring UK dos in Townsville what’s up Malaga espia Cleveland vavia Alabama Brandon Mississippi Toronto brisy Land good job what’s that Nei I don’t know Australia somewhere Nano someone’s gonna

Have to help me out with that one Springfield Alabama Edmonson lman Norwich Tallahasse Sugarland sack toown Gothenburg London this is just fun if if Toby can pronounce different words L sh Santa Monica what’s up good spread uh someone wants to hear you talk a little bit about City what what’s

What’s going on with City uh 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 uh Surplus charge so the big banks are having to pay for you know the the the

VC back 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 AR yeah yeah that’s what they had it’s do based off size really right and then

Uh Argentina had some big big uh charges with their devaluation uh so outside of that it wasn’t a a bad quarter with some there it wasn’t a good quarter though either the the new CEO I mean she’s not new she’s been there a couple years now

But she took on a tough job they had major restructuring they’ve done a lot of the work so this is the year where you should see an inflection and cost uh the cost curve start to go down uh so it kind of reminds me of Wells Fargo a

Couple years back when Charlie sharf took over and they had the regulatory issues and then they they they went on some pretty aggressive Cost Cuts I think Ci’s 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’s trading you know around 52 uh 51 and some chain 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 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 pinup demand uh so so we’ll see but but yeah it’s it’s it’s I think it’s attractive I understand people not liking it what a net interest margins look like these days right now in the big banks for

City’s got International scope uh so there’s is holding up a little bit better than some of the other ones I I think the expectation is is that net interest margins uh and net interest income peaked uh in 2023 uh 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 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 aggressiv as down as quickly I would understand that

And 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 of 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 feel either inflation or or depression those are our two paths yeah let’s let’s we have the chice yeah yeah uh what about financials so banks in general financials generally same deal well I think I think like Insurance

Uh companies have done really well so like big positions for us for a long time for many years were like assured guarantee Municipal bond insurance company uh you know AIG was a big one Fairfax Berkshire you know some of those some of those High and the mortgage

Insurers I mean all those are are have rocketed higher uh and you know have performed really really well I mean really it’s just kind of a 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 advant vage

You know nothing’s really as bad as the banking industry it seems as far as just regulation and sentiment and volatility economic stress uh but 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 kind of hard to sell isn’t it tough to sell Fairfax still like at Book value no Fairfax is one I’m not I’m not selling so yeah to be and and I would put Berkshire in similar classes that

But those are I think better I mean better business especially Berkshire and I like Fairfax a lot too they’re uh I think I think they’re capable of generating a better return on Equity uh than than some of the other ones uh 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 I have some concerns I mean they might be totally wrong but uh but I don’t need to own those up

Here yeah you guys don’t have a Divergent opinion on fairfx D you both same I think we’re both like it a lot and Prem Wata yeah I mean it’s well obviously it was easier to buy at whatever 60 cents on the dollar Book value like that felt

Like it made sense um but it 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 uh testing me too much do they still have

All the hedges and things in there that they sort of they they made their made a pretty good name for themselves in 2008 with all the hedges but is that they still on or they didn’t work out so well for the yeah 2015 to 2019 period with the

Driving around with the brakes on didn’t work out but no I don’t I don’t believe that they have the I think there’s actually still some leftover 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 uh they’re one of the largest shareholders if not the largest on Kennedy Wilson uh it’s that real estate company they’re based out of Los Angeles and and uh 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 uh some in the us they have an asset management business they have a really good multif family uh they they they they acquired a lot of this

Stuff via like distressed 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 they’ done amazing stuff in Dublin uh 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 uh those bonds at double digits uh you know even as high as I think 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 uh so just on that topic I think that’s an interesting way to

Play how do you feel about uh the sort of ongoing debacle in office is that over Best Yet to Come not over man I it is not over it’s a nightmare I mean I mean it’s so bad the occupancy levels are are are are so weak in in most areas

Now Europe’s kind of a different environment uh they didn’t work from they’re not doing as much work from home as they are in the United States uh but just not working at all or yeah yeah no no but but I I don’t see that I don’t see that situation you know office is

Just tough man I I wouldn’t I wouldn’t want anything that’s um you know individual off 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 got to be some risk that a lot of those can’t meet their debt obligations when they fool you that’s and that’s more of like a 2024 2025 issue isn’t it than a 202 the property level yeah on the property level exactly a lot of them are

Going to give back the keys you know um and so so it 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 in office oriented uh but it’s just it’s a long

Haul there’s just too much there’s too much Supply in a lot of the big cities like Los Angeles and San Fran I mean I mean when those things are are are defaulting you know it’s huge but to be clear that’s much more of an issue for

The some Regional Banks uh 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 overblown for the big Banks oh yeah for sure on office yeah their exposure is not that huge at all

Uh but uh and they’ve reserved a lot I think Wells Fargo uh it was like at 11% reserve for office so I mean if you think about what that entails that’s huge you know um I think commercial how I got interested in Real Estate Investment Trust uh 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 uh uh you know the the tripl net leases a lot of those companies are doing really well really

High occupancy some like 98 99 I think apartments are pretty interesting uh so there’s various spaces there that I think are are attractive so I don’t think you need to you know speculate with office especially a lot of that stuff had a huge run too like vernado

And SLG they ran up a lot from their load and what do what do you see that sort of all looking like as we go through this uh 2024 go through an election cycle oh gosh I don’t I don’t know I mean pick your poison there’s so

Many I mean especially with Davos going on now it’s 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 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 uh especially if that’s at the cost of if the Market’s down 15 you know being down five or flat I’d be very happy with that type of outcome um so I 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 did it get lost in the mail again I did but the you know the Jets in the uh in the garage so okay I couldn’t I’m not going to fight commercial you you don’t fight

Commercial to Davos that Argentinian the new Argentinian guy did I was impressed by that oh is that right milu FLW yeah yeah yeah I at least I at least respect that I love it yeah yeah in invite well you can’t 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 the heck he does um outside of outside of financials

And uh rates what what else are you finding that’s interesting I I think energy is interesting I mean I mean it’s you know they took down the street strategic uh petroleum Reserve to 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 and other countries are producing quite a bit too so I see the bull and the bear argument for for us it’s kind of valuation I mean a lot of that stuff I think is pretty

Attractively valued uh and so on dips especially with our tactical strategies you know selling puts to own the stocks at cheaper levels I think is is an attractive Avenue there and some of the dividends on stuff like Devin or Chevron even uh are pretty attractive so if you

If you sell puts and then get exercise and paray that into a covered call or stuff like that uh I think I think there’s you know a lot to be done there you feel like uh well do you feel like your kind of your strategy is good for

Choppy markets yeah totally I I was thinking this reminds me a lot of kind of a kind of a 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 and I mean even

Stuff like like MLPs you know if you can get 7% plus a little extra you know on on I’d be very happy to get double digit returns over the next decade on average like I just I 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’s priced 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 L booing the S&P 500 over the last decade or is it going to come from

Dividend yield or does it come from valuation changes multiple changes and you’re already starting pretty expensive there so tell me which tell me which of those five levers can be pulled to produce a 10% annualized over the next decade well that’s interesting I mean the the the Bulls would say AI you know

Will transform you know margins uh for at least the largest it’s higher I don’t know I mean I mean you look at Nvidia and 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 it’s interesting because the multiple has come down a lot based on current earnings but you know uh semiconductors has always been a very cyclical industry so I mean what does the E look like next year in 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 that currently so not a player in in some of those names yeah for sure yeah it’s it’s hard to pick how do you how do you think

About the uh the economic environment is that important for energy and for financialist like if you get a if we really do get soft sensitivity to to economic Cycles yeah I mean I mean I mean absolutely and I don’t think you want to just own the banks outright here

I think it’s kind of stock specific you know I like I like a couple of them that are really cheap uh some are in Europe some are in the US I think but but they’re always going to react I mean like you saw March if there’s any pickup

Uh in the economy you know they always kind of overreact which is frustrating but but the reality is they’re probably the cheapest sector uh on a normalized earnings basis uh so I think you have to watch that but I think most people are more constructive on the economy than

Than I might be or maybe you guys might be and so if if we do see a decent economy and or a soft landing and rates start to go down a little bit I I think that would be a lot you know there’d be a lot of deal activity probably be

Pretty good for growth uh so we’ll see what happens but I I I like the valuations I think you have a a good margin of safety you’ve got a big fat dividend on almost all those names uh so that gives you a little bit of cushion

Uh but I’d just be very you know valuation focused for sure I think it’s a tough environment to sort of uh find your way through because I think many of the I think a lot of the economic data is ugly and the 103 is still massively inverted

Like I’ve just stopped talking about it mostly I took I took a valve I don’t want to say poty but I decided not tacy either but I think I decided not to um not to pay as much attention to the macro maybe I’m you know it’s it’s a problem because a

Podcast is it’s really all we can talk about but we we’ll fix that sir yeah I think I think I looked at the the economic data was so bad last year and it just looked to me like emminent destruction I don’t actually think that that much has changed it’s just that I

Think the the risk is that you get too DET or I get too 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 like to to what extent do you think that the the economy has any

Impact at all on on what happens like I would have thought last year should have been a terrible year well I mean starting valuations and and one of the good things about you is that you’re you stay invested you know and you had a great year even if you’re you know even

If even if you scared shitless yeah even if 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 uh but I’m not not invested I think there’s great opportunities in

Bonds I mean a lot of a lot of my clients are retirees or people close to 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% uh dividend I mean when when that banking stuff went down last year we were buying a lot of investment grade credits at you know 8 to 133% yields uh some of those were

Like a Comerica you know so in the in the spotlight a little bit but but now you look at those and they might be five or six I mean it’s it’s much much lower so they were just no-brainer double digigit you know earning uh investment

And the only way it 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 and uh then your ltcm yeah exactly I think that were like 30 times you couldn’t get I’m sure couldn’t get enough leverage in the

Maybe was 100 times or something crazy in that well they were getting like a you know 50 bit or you know 100 bit type of spread differences and then Levering that up 30 times I think as the book goes on they said they were the they wanted equity like volatility and so

They were just they trying to they were trying to do stuff that was riskier to increase the volatility so in the end they were doing stuff like VC in 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 and yeah I don’t know it’s nothing that drives I never I never think about that stuff when I’m actually investing money I think Eric falc constein has a paper

That shows it’s the other way around lower volatility learns to higher returns which you know I think that should Garner him a Nobel Prize and economics at some point yeah no kidding I was gonna say if it didn’t exist I’d write it you know just so I could get

One out there yeah last decade sorry Jake uh quality’s been quality’s been so good you know I mean quality stocks have have done so much better than than 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 lqr yeah that’s one of aqr’s papers yeah he’s 1.7 times the quality Factor give the man a nobell yeah yeah he got got got smut got lucky or all by the sign I’m sure yeah

Over 50 50 years 60 years however long he’s been doing he said now what like they were saying he was like a one Sigma event and then two and now I think I think they got up all the way to six which is you know one time in the known

Universe should this ever happen uh but now it’s must be even higher at this point well I was I always like the paper Jake I’m sure both of you guys are familiar with it but it was I believe it was called the super investors from Grahams to doddsville where you know

He’s like okay if this was if if I was the only one or something like that but there’s so and so so and so and a list 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 uh the way markets have unfolded but but you know looking at things over a hundred years uh I think it’s as as strong as poignant as ever I think you nailed it I mean that’s

There’s the world of the last 10 years and everything that worked yeah and if you use that as your base rate then you 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 right just night

And day differences I mean that’s been my experience I I sort of started looking at it in the late 1990s and I wanted to be a value guy in the late 1990s and so I remember reading these Fortune articles about value guys who you know they had his business that’s

Got you know modestly growing Topline pretty good Returns on Equity buying back stock got a dividend and it’s trading you know at a massive discount to all this other stuff that was like the like the do 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 2 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 value 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 uh returns from stuff like that was was great so we’ll see one big difference though and I think it’s you

Look at like Cisco in 2000 and I don’t even know what the PE 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 what’s the 4p like 28 or 30 somewhere in

That range maybe it’s not you know it’s not 75 you know and I mean if you look at like who’s in the best place business-wise you know you’d think them as 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 like 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.com bubble the most expensive desile had a lower Roe than the cheapest desile so you had like you know sort of better quality businesses actually that were obviously much

Cheaper uh which is a very very rare occurrence I mean they talk about just a perfect setup for a for a value opportunity set we I remember talking with you guys about it before and and you’re 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 uh so so yeah Proctor and Gamble was cheap like a lot of those quality it was too easy too obvious easy it was too easy yeah I gotta I gotta get more clever than that if I’m gonna make money

Right I mean that was the funny thing about the everybody remembers the 2000s being a.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 entrenched businesses they just got too

Far over their skis yeah cocaa exactly yeah Coke another good example took GE although GE seems to deteriorate a fair bit but GE was like regard very highly regarded and they all did pretty well from 2 2015 but the stocks just went down every single year and I remember it

Was one of the in 2015 I was looking at Walmart and all those sort of names they had you could get leaps on them for just about nothing CU there was no volatility in the stock there’s no expectation that they were going to go up even though the underly 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 didn’t know if it was going to go up in two years yeah hadn’t gone up in 15

So why would the next that’s dead money right right I know I was looking at I was looking at John Deere and uh you know a Home Depot I’ve looked at and 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 you know it’s it’s unbelievable and and the stocks you know reflect that they’re not like super overvalued if those earnings you know can keep growing uh it’s just it’s amazing what they’ve been able to do well there was so much capex that was

Put out in the well 50 years I guess but even let’s say lot the 10 years before that and then with home for instance like they slow down store growth and focus more on driving profitability and then I think retiring shares as well so EPS just you had all this capex 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 it’s the top of the hour you want to do your I would love to it’d be my honor VI

So this is a a perfect segue since we were just talking about obvious things to do and uh and I think I believe this is the book that that Toby was referencing uh about I think we did that offline but yeah we did um so the the

Name of this book that uh we’re g to do a little book report on is called obvious Adams and it was recommended by me uh to me from my friend Dan shean so thanks Dan uh and it’s a fun little read like you can do it in well under an hour

Uh it’s super super quick but I thought you know or you could just listen to to this segment if you want instead uh but so this was first published as a short story in the Saturday evening Post in 1916 so it’s it’s quite old uh more than

100 years old by my math uh the story is about this poor young man who wants to get into the advertising business after hearing this spellbinding talk from the president of a famous advertising agency and the only trouble is this guy Adams this kid is completely unre remarkable

He’s just average in every way and to be a successful adman 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 he you know talks his way past the SEC the secretary gets in and talks to the

President and 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 uh don’t seem to think uh 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 uh the president you know is dumbfounded and he sits you know he spends all evening thinking about this kid and their interaction 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 that increased his productivity and eventually he tells his boss that someone could be doing my job for half of the salary uh and so they end up promoting him and some you know someone

Else takes that job uh 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 what are they doing like what what’s makes their product special

He gathers the facts and he spends a lot of time just thinking about them and he determines the essential points and then puts them down clearly into ad copy that’s it uh and it worked like a charm and he became one of the most sought-after admin uh from just

Basically discovering the obvious thing to do hence the name obvious Adams so H 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 uh and then at the end of the book The the author gives you five tests of obvious in this appendix which I will share with you now uh number one and this came from Charles kening of GM uh who was like a

You know pretty famous CEO of of GM way back in the day in their Heyday uh and he had it placed on the wall of the GM research building and it this little plaque said the problem when solved will be simple or said another way the solution when found will be

Obvious number two does it check with human nature if if your idea 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 then obvious yeah then you’re probably on the right track if it doesn’t explode in the mind and it requires lengthly explanations and hours of argument it probably isn’t obvious and number five is the time ripe sometimes the windows pass for an Obviously good idea one is reminded of

The quote what the the wi’s do in the beginning fools do in the end uh 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 uh you hopefully can recognize

Uh a Microsoft in 2012 at a 10p and not try to over complicate things and think about you know I got to be more clever than that anybody could buy Microsoft you know um so and I think you know when you look at Buffett’s record and the way

That he’s able to boil things down in when he explains it it’s like oh well duh that’s so obvious and and a smart thing to do oh uh 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 atams I think is uh might be one of the like untapped Potentials in this entire business we like to make it so

Complicated yeah Jak Jake sent it through to me and I I had to read through and I worked out at seven words per line 21 lines in the book per page and then I now I forget the number of pages but it worked out to about 8,000 words it’s a

Very quick read you can like literally half hour 40 pages 40 pages this look look how thin this is this is it it’s 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 there were two hat stores and

One was selling a lot and one wasn’t and when he tried to find the second hat store he couldn’t find it cuz it was hidden down an Alleyway and you were coming up to a busy intersection trying to figure out why he’d cross over ever 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 read I I think that’s right I think that’s like the best investment decisions are often and 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 was a there’s a uh matter of like you have to keep on buying every few years so your phone don’t work no more yeah or the

Battery will just start draining mysteriously I mean yeah that’s right that’s right you get a whole ecosystem of Apple TV and Apple computers and Apple phones and Apple watch you’re locked in no one’s no one’s getting outside of that ecosystem any anytime soon oh I’m a I’m a Android

Person so everyone hates when I’m on the text messages and stuff like who’s the who’s the non-apple the green greeny yeah that oh sorry go ahead no no you’re fine I was gonna say once you lock into the pixel it’s hard to get out

Of that to I get a pixel oh yeah that’s what I have too I have the foldable one I love it oh yeah yeah but uh 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 Stock’s at 52 the tangable book value is 86 I think that they can get a 10% rce you know and I do know a lot of details obviously of the business and the industry uh the capital levels are good and stuff like that so it’s a

Pretty simple simple thesis uh you know another one I thought was interested in your guys opinion on is 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 I owned some of that Russian

ETF uh as the war in Ukraine took off and so that just went to zero so I I I’m too scared to touch China uh but but from a fundamental standpoint like I 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 there’s two obvious answers there one is that yeah it’s all really undervalued and they’re all really Obviously good businesses too 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 investor and whichever one of those t 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 obv like well yeah I was gonna 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 uh yeah it’s a position sizing question then like 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 um 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 ETF I didn’t you don’t expect the 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 you needed to

Go special you know hunting through there true true yeah but yeah it was always it it was a cheap stock market for a while I remember uh Med Faber has that uh one of his one of his ETFs has got some exposure to to Russia yeah gal

Yeah I think he looked at like what’s I think it works it looks at what’s a cheap index on a cap basis and then it says what’s a cheap what are the cheapest companies in here and that’s how it figures out what it’s owns and and Russia was cheap Russia’s been cheap

For more than a decade now I think yeah I guess it’s like any of those any of those economies any of those stock markets in Australia and Canada I guess are like this where it’s it’s largely commodity based and then they’ve often got big Banks as sort of a big part of

The index too they’ve struggled a lot like they struggling in these kind of markets I don’t know what what characterizes these markets but but it’s been by far in a way a 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 had a great year last year but that’s after you know Decades of of underperformance and and Europe is just been a basket case so so we’ll see International is so much cheaper um I I definitely own some some International stocks and I’m

Optimistic that they’ll have their way in the sun time in the Sun us is sort of singular in producing those gigantic consumer discretionary type businesses like Google and Facebook and Microsoft all that sort of stuff is unique to the US it doesn’t seem to exist although

China does seem to have its sort of analog yeah I don’t know where it is Europe doesn’t seem to produce them but they have asml right in the Netherlands that semiconductor U company and and noo Nordisk has done just just fine oh gosh yeah I know that’ll be interesting to

See how that whole Trend you know plays out for sure but is that is that uh the wh yeah all the Whit less 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 Health good Healthcare has been a good industry the like

Returns on Capital when the Pharma works are 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 as you come in the door yeah pretty much oh 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 but I can understand the logic and the appeal

For people we’ll see yeah I do wonder if ‘s got a liability there that’s matching the hidden matching contingent hidden matching liability seems like they find their way out of liability quite a bit they do yeah they do quite good they have a way of doing that

Clever I think you just pay enough money to the you s enough it’s not not a bribe what’s it called lobbying aren’t they the biggest advertisers too so so they’re the biggest advertisers as well so who’s going to criticize it 75% of TV re ad revenue or something comes from

Crazy oh yeah the other 25% is election advertising oh kind of makes you sick doesn’t it it’s gonna be a long year it’s gonna be a long 2024 I think I missed the days when it was you know beer commercials with dogs and girls eating hamburgers on the top of car and

Their bikinis like that was those were the good old days yeah good old Coca-Cola oh sorry yeah that was exploitive oh I didn’t mean to pour cold water I keep going I didn’t mean to I was enjoying it I was just making sure that the cancellation was yours alone yeah thanks

I I’ll wear that one yeah it’s tough I I think I think uh this Market is particularly tough because I see a lot of uh there’s a lot of risk RIS but I don’t think there’s a lot of I don’t it’s not obviously cheap when is it easy Toby I keep waiting for

This you keep telling me it’s tough but I’m waiting for that time where you say this is easy well I you know I I I tend to like I tend to like crashes because things get cheap and I think you you know that you front you know I don’t

Like crashes because they’re ner 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

The tape we got receipts I think I remember some of that tape pretty sweaty yeah it was 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 uh before

The big rally but if you can get high single digit yield to 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 if uh interest rates decline uh from here so so I don’t

Think that’s the worst you know pool to women 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 for yeah yeah I think I think absolutely and so the 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 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 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 uh and I don’t think you have to reach too much in terms of credit risk uh 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 you’re trying to go buy individual treasuries yourself over and over again

That’s like that’s real work do you feel that the there’s inflation risk in the bonds I mean definit 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 bu you know 20 year mortgages or 30y year mortgages uh you know at one and a half% but also that’s where you know having some yield and having some floating rate exposure uh can be can be really really helpful here and I mean I remember what was 10year treasuries at

In 2000 wasn’t it like six% six and a half% seven and I just remember so you know hindsight being 2020 it’s like gosh man if if we could have gotten 6 and a half% you know on I mean that’s treasuries but maybe just take that to

The bank you know know and and you miss that whole 80% decline in the NASDAQ colle 6% from the beach yeah that’s right it’s a lot of deflationary factors out there too I mean you look at used auto or used cars uh you know some of the housing the way that that stuff’s

Calculated you know we’ll see and I still have tough time believing housing affordability is I just can’t imagine prices aren’t going to I I just think they have to go down a little bit it doesn’t make sense like the rent to own equ right now does not look very good for home

Buying there’s a lot of stimulus out there the massive like that inflation reduction Act is massively stimulatory we’re running deficits so like 8 to 10% uh which is just massive on a historical basis particularly when the times and they normally run them are closer to the bottom of a yeah when

There’s a collapse like we’re running this like at the I don’t know really know what we’re the best economy ever no you’re right you’re right that’s the whole story of of the macroeconomy it economy is that you have the huge deficits like a a World War II Type

Deficit and then you have uh you have the the the reshoring so manufacturing you know in in in you know Arizona or or you know Tennessee or or whatever uh a lot of those cheaper States Texas uh you know it’s just booming and so it 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 I really can’t still at historically low levels right if you look back although almost every single people will make this point that almost every single recession naturally

Occurs out of a very very tight labor market and then it only has one way to go and it when it turns around it accelerates very very quickly that pop sort of seems to happen very quickly but it’s it’s later in the cycle is that um hope yeah I’m just forgetting Michael

Cantro has that hope framework housing whatever it is profitability employment emplo the ego last it’s been kind of amazing to watch like how long this thing has dragged on particularly the 103 inversion which you know historically has been 12 months is the average and we’re at October 25

2022 we’re now January so this would be the longest period of time before seeing any sort of action we’re still like deeply deeply inverted yeah yeah front end all those other inversions have you know 8% deficits I don’t know does that just sort of like this an unusual deficit buy

Time for Hope just extend and pretend I don’t know it’s what it feels like it feels like a lot of extend and pretend and then every every uh 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 of

Factors you know like that that that you know have to be considered fo hats on I remember 2007 being being at my old company and and they’d have the TV on in the background CNBC and it was Larry cudow this is a goldilux economy it’s you know this is perfect this is exactly

What you want and then even as even 20 2008 that continued until you know you started seeing the the funds freezing up and you see those catalysts like January of 2008 uh like 91% of analysts had uh I forget what was just like positive expected returns for

For everything probably the same as this year I think most people are bullish at least going into the year before the last couple weeks I mean there was optimism was so darn High yeah to be fair Buffett was pretty bullish in 2007 too he he was a big bullish America guy

You know like always bet on America uh was I I always kind of took I think that he he spread that a lot which he certainly wasn’t bullish on housing I remember remember him talking in I think the 2006 meeting about like housing is the uh median income to

Median price had gotten pretty far out of whack he he pointed it out I think he said something similar last year didn’t he I I recall it being there’s something similar a similar exchange last year as well I remember that one too from 2006 I

I think that a lot of his earlier stuff was if you look at you know uh Greenback emissions and all of that sort of earlier stuff yeah I think his tune changed a little bit as he sort of became more of a he’s more of a St don’t

You dare call him a political animal no no no I was gonna say more of a steward of the system rather like he’s he’s kind of assumed that role of like um you know Morgan back in the day where yeah that’s that’s a really good analogy actually

They want him toal they want him to be a calming influence rather than he’s just he’s not out for himself and bur she just telling you what he actually thinks is going to happen he’s trying to get everybody to Cal down he’s a shock absorber now yeah

Which which is probably why you can discount a little bit of that kind of commentary yeah he’s not 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 sort of guilded at all at the

Meetings it’s just when he’s on 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 which is all true which we would all agree with like and over the very long term it doesn’t

Really matter anyway we works that he does a lot of caveat too like like the market is is reasonably priced if rates stay this low and Returns on Equity stay this High then the market is fairly priced right and you find is return returns in equity the most me

Reverting Series in 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 bubble 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 and I mean it’s been weird you had 2020 which was just such a bizarre year you had the huge Euphoria uh with like the the AMC and all that stuff you had a lot you had like the pseudo

Banking crisis last year and now you have you know the geopolitics and in an election year and 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 like dictate my decision- making but I think you can expect a wild ride what do you think that let’s let’s put the history we opened up the history book in 2050 and what does it say about like the markets

Of of this of today that’s such a good question I 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 that type of thing where you have high valuations you 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 I mean lately yeah we’ve identified the problem yeah maybe it’s we’ll be idiots for not

Jumping on China you know who knows may I I hope that is the case I hope that is the case instead of like we all people didn’t jump on it cuz you know that situation got a lot worse there’s a lot of that in in investment where you get

Right one times in a row like if there’s we 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 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 that Paulson had that he had that trade on where he was long all the cfd or whatever they were

Among all the CD squ Insurance yeah yeah and it didn’t eventually bow up but there’ been other people who had that trade on for a long time and it yeah went bust before it could pay off yeah half 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 uh C the C manage future space and stuff like that where they have all these different strategies and then they only really Market the one

That hits a home run you know yeah you run three times long in one and three times short in the other and the one that works you Chang the name to like your Flagship fund and the one that doesn’t work you just ex memory hole that one yeah speaking of lever long I

Saw that there’s like a like one and a half or two times uh Nvidia ETF so it’s just purely single stock levered long ETF what a that’s kind of reminded of kanes as uh what did he say something about when when markets become you know speculative and they don’t become very

Good at allocating Capital Market can remain insane longer than you can remain same yeah very true well you know what’s big now too are those like covered call ETFs and stuff like that which gosh feel like I missed the boat on that one like I wish I would

Have set up damn fun to do that yeah serious I’ve been preaching that for a long time but uh but yeah those are pretty popular now R CED 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 Euro dashy notes and the function of a Euro dashy note was it basically sold Vol so it sold upside VA and downside VA 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 so it was like that xav went Kut in like an afternoon yeah when like very similar to the to tb’s Turkey as as soon as you as soon as you

See those those yield strategies emerge something’s the ready to kill them yeah yeah low the low low volatility environment is over oh you’re right I I know we’re coming up on time but but I worked at a firm for that was doing that uh 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 uh so like 2000 to two or like maybe like 2003 to 2007 there was lot yeah and then of course

You know that strategy ended up blowing up and so I want to make clear to people when I’m talk about options I’m only talking about them to generate income and reduce risk I don’t we don’t do any speculation on options so I’m definitely not advocating on that they’re not

Suitable for everybody yeah hey Tim we are coming up on time yeah uh if 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 our uh website is uh www. PTV valueinvestingpro you back in the not too distant future

Cool and uh thanks everybody we’ll be back uh next week we got Dan rasm he’s coming on to uh set us all straight thank God yeah he’s gonna give us uh what everyone’s doing wrong he’s got he’s got fun to so he’ll uh he’ll