In today's dismal market, value stocks remain a beacon of hope for investors... And there's no one better suited to discuss this topic than recurring Investor Hour favorite, Tobias Carlisle.
Tobias is the founder and managing director of deep-value investment firm Acquirers Funds, which is centered around his trademarked valuation tool – the Acquirer's Multiple. Simply put, it's a "valuation ratio used to find attractive takeover candidates"... and is favored by many activists and buyout firms. On top of creating a proprietary metric, Tobias has also written several books, including The Acquirer's Multiple, Concentrated Investing, Deep Value, and Quantitative Value.
So, what does Tobias have to say about the slump we're in?
It's not really a question of where you think the market's going to go because you're invariably going to be wrong... The best return you're going to get is by being fully invested.
He says "names that can survive a nuclear winter" are the keys to surviving this bear market. To Tobias, that means focusing on deeply undervalued companies – ones that are buying back shares, are cheap, and are growing at a reasonable pace. He also breaks down the art of valuation – including his Acquirer's Multiple measure – and how to identify the right time to buy or sell.
Founder and Managing Director of Acquirers Funds
Tobias Carlisle is founder and managing director of Acquirers Funds, LLC. He serves as portfolio manager of the firm's deep value strategy.
Tobias is the creator of The Acquirer's Multiple. He is also the author of the books The Acquirer's Multiple, Concentrated Investing, Deep Value, and Quantitative Value.
Tobias has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Today, we'll talk with my good friend, Tobias Carlisle. He is a true-blue value investor and I'm going to find out how he is handling the market downturn. In the mailbag today, questions and comments about platinum, gold, silver, Hugh Hendry, and a cautionary tale from listener Greg M. Remember, you can call our listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my opening rant this week, let's talk about valuation and market bubbles. That and more right now on the Stansberry Investor Hour.
Valuation and market bubbles. What in the world is he talking about? Well, it's simple. We are at the point right now where of course the big indexes are all down – S&P 500, Nasdaq, Russell 2000, Dow Jones Industrial. It's feeling very much like a bear market, although by the typical benchmark only one of the indexes, the Nasdaq, is in that territory. S&P 500 isn't quite there yet, but it's trading like a bear market and lots of stocks, especially in the Nasdaq, are down 50%, 60%, 70%, or more. The thing is at this point down 70% doesn't mean it won't be down 70% more.
I know it sounds crazy. You're like, "Wow. Down 70%, 80%, and it's not a bargain?" Yeah. That is exactly what I'm saying. I think a good example is the Ark Innovation Fund. That thing is down 70% and I think it could easily drop – it could fall in half or another 70% from here. It's loaded with garbage that has never been consistently profitable. Most of it doesn't have – most of it burns cash and makes no profit whatsoever. They lose money, those companies mostly.
So you can't – here's the problem and here's my message for today. You can't reference any kind of valuation meaningfully by looking at the last, especially, five years. What happens in a bubble or even just – it doesn't even have to be a bubble, just a big bull market. The valuations near the top of it just get so stretched out of shape, it's like looking in a fun-house mirror. The problem is investors are looking in this fun-house mirror and you're really five feet tall and you look like you're 10 feet tall in the mirror. You start to forget that that's not reality. You think that's the new reality. I'm 10 feet tall. Then one day somebody shows you a real mirror and you're five feet tall again and you're like, "I'm not that short. I'm 10 feet tall. I've learned that I am 10 feet tall over the last five years."
So your point of reference gets all skewed out of shape. Wall Street analysts look at stocks and they go, "Well, this stock was trading for 70 times sales last month and now it's only 50 times sales. We think it should trade at 60 times sales." It's just crazy. The threshold for what's – I call it the "what were you thinking threshold" because of a quote from a guy named Scott McNealy, who was the CEO of Sun Microsystems back in the dot-com era. In 2002 after the bubble had burst, he came out in a Bloomberg interview and he said, "Look, what were you thinking? You didn't need financial analysis. You didn't need anything to tell you that paying" – and at that, he said 10 times sales at the peak in 2000, Sun Microsystems were $64 and I think it bottomed out at $2 or $3 or something.
He says, "What were you thinking? At that price to get your money back in 10 years, we'd need no expenses, no taxes, no anything, and just pay out all our sales in dividends to you every year for 10 years." So it's just – you just have no idea how distorted your picture of market valuations is at this point. So people start to say, "Hey, man. This stock is down 50%, 60%, 70%. It's got to be a good buy at this point, right?" Well, if you're talking about Costco or Berkshire Hathaway or even Starbucks or whatever, I don't know, McDonald's maybe, something like that, maybe. But even they could have more downside because as a bear market progresses people have sold everything they felt like they had to, everything that underperformed, let's just say, all the garbage.
They sold all the garbage and then after a while things keep going down. They panic and they're like, "I have to sell what I can now because I can't sell this other stuff. It's already down 80%, 90%." So they start selling the good stuff. I don't think we're quite there yet. We're starting to get there though. So you get this view of things like well, if stocks are down 50%, 60%, 70%, I can buy them, but you can't. You're still looking in the fun-house mirror. That is the thing that trips people up. I think it probably accounts for the face-ripping rallies that you tend to get in bear markets where the market is up 50% real quick after it's dropped 30% or just crazy numbers.
The market drops 30% and then it rallies back 20% or something like that, whatever. In the end, it's like Jim Rogers used to say. I don't even have to know the exact quote because he's said it so many times. It's like, "Markets can go higher than you would ever imagine and they can fall farther than you would ever dream." So the thing to do, oddly enough after the big indexes are down at this point, just like 10%, 15%, 20% or so, is not to start looking for bargains necessarily. If you find them, great.
You know me. I've always said this, no matter what the market is doing, if you find a really attractive long idea, good business, you think it's way too cheap, you really have little choice but to buy it. We have found in Extreme Value for the May issue coming out this Friday, we actually have found one that I think people are going to keep going to this business and buying their products no matter what. In fact, I think they might even buy them more just because that's the way it works in a recession. When you can't afford to do one thing you'll do another. This stock is the other that people will do.
I don't want to give too much away obviously because my paying subscribers don't even know what it is yet. But that's my message today. If you just look at a chart just to try to put some numbers to this, I've got a chart of the S&P 500 price to sales ratio back to 1990. There was a recession in 1990, 1991, and it went down to just call it 0.7. I'll do round numbers – 0.7 times sales. Then from there through to the top of the dot-com bubble, it ran up to 2.3, just call it, times sales. Then in the financial crisis, it fell to again around 0.7, just call it. It spent most of its time while we weren't in a bubble between 1 and 2 times sales most of the time.
Then of course around 2017, 2016 started getting up to 2 times sales. Then crashed in 2018... crashed in the COVID crash of March 2020, down to 1.6 and down to 1.8 or so in the December 2018 time frame. But then what happened? Full-blown, post-COVID crazy bubble valuation. Peaked up at 3 – just call it 3.2 times sales. Never been this high in its history from the beginning. Effectively, this is the most observed stock index in the world. You can say U.S. stocks have never – were never this expensive. Where is it today? Two and a half. That's still in major higher than any previous high. Higher than the dot-com high. Higher than the high in February 2020.
We're still – we've come off that much and we're still above those all-time peaks. So that gives you a little flavor of what I'm talking about. There's still all kinds of downside left even though the valuation has come off quite a bit. So don't get too excited. Be careful. I'm not telling you not to buy stocks. If you find a good deal, you should buy it. What I'm telling you is that if you're looking at something that was 40 or 30 times sales and now it's like 20, be careful. Certainly, if you're looking at the crazy software type or just meme stock in same valuations, be really careful. Don't buy that stuff. Your frame of reference is off. What were you thinking territory in those tech stocks. It's like 10 times sales. Then we're 50, 60, 70, and maybe they're only 20 or 30 now and they look cheap, but they're not. They're not.
Be careful. Try to – this is the problem. In a bubble, your frame of reference just goes bananas. You don't have one anymore and you don't realize that you don't have one. Try to understand the degree to which our human flawed ability to perceive these things has been just horribly distorted by the biggest bubble in the history of markets, in my opinion. All right. I'm going to leave it there. That's the message. Now let's check in with a guy who knows all about valuation and who only buys stocks when they get good and cheap, Tobias Carlisle. Can't wait to talk to him. Let's do it right now.
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Time for our interview. I'm really looking forward to this. We haven't had Tobias Carlisle on the program in quite some time and it's really good to have him back. Tobias Carlisle is the founder and managing director of Acquirers Funds, LLC. He serves as portfolio manager of the firm's deep value strategy. Tobias is the creator of the Acquirer's Multiple. He is also the author of the books, The Acquirer's Multiple, Concentrated Investing, Deep Value, and Quantitative Value. Tobias has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. That is a mouthful. That's a lot of stuff for one guy.
Tobias Carlisle: That's a long bio. How are you, Dan?
Dan Ferris: Good to have you back.
Tobias Carlisle: The one thing that I should mention too, I manage two ETFs, the Acquirers Fund, which is ticker ZIG, and the round to Acquirers is deep-value fund, which is a small and micro fund. Ticker is DEEP, D-E-E-P.
Dan Ferris: Got it. Do I dare ask how they're doing this year?
Tobias Carlisle: They're down a bit with the market, but not as badly beaten up as everything else is. Because I tend to buy higher-quality value that has excluded energy, and likely everybody listening to this knows that energy is the only thing that's worth this year. So it hasn't worked.
Dan Ferris: Right. OK. Fair enough. So I've got my phone here and I'm just noticing that the only green on it is VIX, bonds, and gold, and all the rest is red. I don't know if you can see that. It's all red, red, red, red.
Tobias Carlisle: You're a sicko if that's your portfolio.
Dan Ferris: Not my portfolio. That's my watchlist. That's watching all the markets fall and fall and fall. So Tobias, what I am doing is I am gathering various perspectives on this, this state of affairs that we find ourselves in with all the big indexes down and some names down 70%, 80%... huge amounts. Safe names like Netflix or whatever are down quite substantially. So I'm talking to traders and macro guys and everybody and I was like, "I know who I need. I need Toby Carlisle on here to talk about value and find out how he is weathering this growing storm." So how do you feel? What are you doing and how are you doing and what do you got for us in this mess?
Tobias Carlisle: I don't think it was completely unforeseeable. I think nobody knows what the market is going to do and today could be the low... could rally 30% from here... it could fall 30% from here, but I think over the last few years it was clear that those techy growth names and all the beneficiaries of the pandemic shut down. They all mooned, as the kids say. They went to the moon. Now they've all safely made it back to earth. Some of them did it with an impact. Reminds me of that joke of Elon Musk where he says, "I want to die on Mars, just not on impact." I think a lot of them have come back to earth. Some of them are pretty high impact. I don't think there have been any fatalities just yet, but all of our pandemic names have come back. I think that was inevitable that that was going to happen eventually.
Last year was a better year for value than we've seen for quite a while because that was the beginning of that reversal. I think probably Ark, Cathie Woods... ETF complex is the poster child for that moonshot and then return to earth. Now she's underperforming the S&P 500 and Buffett and various others, which is heartening for a value guy like me. I've been saying for a while I thought the market was – the market is expensive and if you look at the ratio that I prefer is what I call the Acquirer's Multiple. That's why all of my stuff is called Acquirers, which is basically operating income versus what you pay for the whole enterprise.
So that's the market capitalization, plus any debt that you've got to take on, and then you get the advantage of any cash that you hold. So that's what you're paying. Compare that to your operating income. The things that are cheap on that basis still remain exceptionally cheap relative to the market. In fact, there is wide now relative to the market as there has been at any point through the entire data series that I have going back to 1992. That includes the dot-com peak, which is extraordinary. So we're at this exceptionally widespread to the market and what happens in the past when that has reversed course. It's been a very good time for strategies like mine and investors like me who favor that flow.
So I'm incredibly optimistic about the next one, three, five years. At some point we'll find a little bit of traction here. So right now what I'm doing is just going through finding all of the names that I think can survive a nuclear winter because I think that what they – I think the techy names are now waking up to this. It takes a long time for the private stuff to get marked to where the public stuff is. So the VCs haven't had to mark their books to the public stuff, but I hear rumors and I see on Twitter that that seems to be starting to happen. So they wouldn't be able to raise capital. So that will be true for everybody else as will the public markets will be closed.
So you need to be able to generate your own free cash flows. You need cash on the balance sheet and you need to be trading it at a reasonable valuation. You need a business that can survive through this what we're going to go into. That's exactly my bread and butter. I cannot wait for what's going to happen. So I'm just trying to find all the things that can do those things right now.
Dan Ferris: You mentioned the VCs, the venture capital world, and I'm just looking on Twitter. I saw this Jesse Felder posted a Financial Times chart of this venture capital monthly returns of the Refinitiv venture capital index. It's just been brutalized. It's like minus 24% in April. Just getting destroyed. You can see it's minus double digits three of the last four months. It's hard to see the data point but I think it's three in the last four months, minus double digits, and April being the worst of them. So yeah. I hear you on that one.
Tobias Carlisle: I was just going to say, I think you and I have fairly similar strategies. I think we're both hunting for the same kind of stuff. Sorry. I didn't mean to cut you off there.
Dan Ferris: No. That's right. We are, but I think we're – to your point about venture capital, I think we take some of the same queues too because it's like you go back a year ago or so, right after the Ark Fund peaked, and you saw a lot of these things just coming unglued. Everywhere you look all the bubbles were popping, SPACs and cannabis and the growth of the Ark thing.
Tobias Carlisle: NFTs.
Dan Ferris: NFTs. Yeah. There's the funniest article on NFTs in Wall Street Journal as we speak. I think the first sentence is like, "Many NFTs are simply not worth what they were when they first came out." It's just like, no kidding. No kidding. NFTs are – even many cryptos in general. That's the one we'll look back on. It's like the many dot-com businesses that did die on impact. You were talking about that.
Tobias Carlisle: The NFTs were technology looking for an application, looking for a use case, and I don't think there was much intrinsic value in the JPEG itself. What that Ponzi-scheme-style thing needs is a whole lot of new willing participants coming in the front door. If you look at the Google search trends for NFTs, it peaked at 100 in November last year, and it's at 23 right now. So that's gone away. So in some sense, I think that game is over. I just wanted to see the audit trail on [inaudible] sale because he sold that $69 million JPEG, which kicked this whole thing off. I'll bet you that there were two parties who knew each other and just cross that on the tape. Then that's ignited this whole NFT silliness for the last year or so.
Dan Ferris: Yeah. And that wasn't the only one he made millions on or that sold for millions. I'm not sure he made millions every time. Crazy, crazy business. It's funny because there's always some – these bubbly, crazy things don't happen just because people are crazy. There's the speculation is rooted and the enthusiasm and the soaring valuations, it's rooted in some truth. Like the dot-com bubble was people getting excited about the Internet, which is really a super exciting thing that happened to us. It's just a matter of making money with it and being a disciplined investor, it just makes all that more difficult. But as far as the technology goes, it is exciting to watch.
Tobias Carlisle: I was in Omaha over the weekend for the Berkshire annual meeting and it was interesting hearing Buffett talk about the night that he – he was on his honeymoon and he drove with his wife from Omaha to Vegas. It's that famous story where he walks on to the floor and he sees people have spent lots of money and they've flown from long distances. People fly in from Australia to go to Vegas, fly 20 hours to get to Vegas just so they can go and play games that don't make any kind of economic sense. If you play long enough you're basically guaranteed to lose. He turned to his wife and he said, "I'm going to make a lot of money." If you can just be a little bit economically rational when everybody else is being irrational, at least you're not going to lose any money. That much I can say.
Dan Ferris: Yeah. I was talking with my friend, Greg Diamond and he's a trader. We were – we always get back to that, especially with the traders, don't lose money. Don't lose money. Risk management. Risk management. What is – so maybe tell our listeners what risk management means for a guy like you? If you're Buffett and you're walking into the casino you know you're going to make a lot of money and part of that is because you know you're not going to lose the way those gamblers are losing, losing, losing. How do you know that? What do you do to prevent that?
Tobias Carlisle: First, that's my entire process really. That's the very first part of the process and that is the idea that we're really looking for things that we can't lose on. So I think for many prospective investments, really what you're looking at is that's the first stage. How much money can I lose in this investment? I think that excludes the very vast majority of things that I would consider. There are lots of ways that you can lose money. One of them is just paying too much for something.
So you and I would go through and do valuation and we would have a valuation range for what something might be worth. Probably I might distinguish myself from other value investors in that I would look at the most conservative end of that valuation range. I had previously been a liquidation-style investor and I'm not a liquidation value investor anymore. I'm prepared to look at the operating business and come up with a value for the operating business. That's the first thing is this thing trading at a discount to a really conservative estimate of its value. If it is, then I would go on and look at does it have a balance sheet that can survive whatever happens in the future. Basically, does it have too much debt?
If it's got too much debt then that's another way that you can die. Is it a business that's the equivalent of taking all of the down – riding naked puts... Does it have that downside risk where – so for example, like credit-card companies famously tend to go through these periods of time where people can't repay their credit cards. That's a bad business to be in particularly at the top of the cycle and the problem is they often get really cheap right at the top of the cycle because everybody else knows what's coming too. So there's lots of business.
So that's the process is first of all that is the first part of the process and then I make sure the valuation is right. I make sure the balance sheet is right. I make sure it has that business model that can't survive. I want to make sure that the management is the kind of management that's not trying to gauge your eyes out. They're the ones who are on your side. When the market falls over what they're going to do is buy some stock rather than – or repurchase stock for the business more importantly.
So they're not the kind of management who will try and take it private when it gets beaten up, the kind of management who will help you out as much as they'll help themselves out. Really, if you apply that filter, there's not a lot of stuff that gets through the filter. Those are four pretty simple things. You just want someone who's going to reasonably honest management. That alone excludes about 95% of businesses that are out there, I think. You look at the salaries that some of these guys are on. I looked at the – you know that the Twitter, the lady who does the Twitter, the censorship at Twitter, she's paid $17 million a year. I was blown away by that. That's a big number. That's CEO money. That's quarterback money.
Dan Ferris: That's quarterback money. Yeah. It seemed crazy to me too, but I don't know. You're right. Once you start going down that pathway you are excluding a lot of public companies, a lot of them because it just – it snowballed. People started giving stock away as compensation. So the compensation at the top just has mushroomed into this gigantic, in my opinion, dramatically overdone thing for what are overwhelmingly just professional managers for hire. Chris Mayer would call them owner operators. Chris Mayer, another value investor we've had on the show.
Tobias Carlisle: Right. I love those owner operators.
Dan Ferris: Yeah. There aren't many of those around.
Tobias Carlisle: No. There aren't. I wonder if that $17 million for the Twitter censor, I wonder if they could have got someone for $9 million? Just chop it in half. I'll do it for $9 million. I'll have a go at it for $9 million. I couldn't do a worse job.
Dan Ferris: That's right. I know. Never mind the amount. Let's look at the nature of the work that you're being paid $17 million for. It's a little bizarre. It borders on Orwellian, in fact.
Tobias Carlisle: Oh, goodness.
Dan Ferris: So what do you think though? Do you think Elon will actually make the changes that he wants to make? And I think more to the point, will Twitter become a better business? Will they see growth in revenue per daily active user?
Tobias Carlisle: I don't think Twitter could become a worse business. So I think that he's starting from the absolute bottom of the barrel. I've said to lots of people, if you would just – halfway sensible. If you had any common sense at all you could run this business really well. This business just needs clear rules about what you can say and what you can't say that doesn't favor one political persuasion or another. Just make the algorithm public, which is what Musk has said that he will do. Then work on the advertising side. So he's buying – I think did he bid $45 billion, was that the final, or $48 billion? Something like that.
Dan Ferris: I think it winds up being right around $44 billion, but yeah. Ballpark, yeah.
Tobias Carlisle: Forty-four billion dollars. OK. So then you compare that to Facebook, for example. So Facebook is a $500 billion enterprise down from $1 trillion enterprise. So he's got lots of headroom. You really don't – I don't think you have to do much. He could double the value of that thing with very little effort and it would still be undermonetized or undervalued. I think that Twitter, in some sense, is a more valuable asset than Facebook because I think that it is more likely to survive.
Everybody has got that ick about Facebook that they've shared too much over the years. I don't go on to the blue app anymore. I haven't gotten on the blue app for five years. I have no idea what's in there, but I'm on Twitter every single day because I use it for my business. It's the best news feed in the world. It's a great way to market your business. I've got my own podcast. So I do a lot of – you want to hear about something Orwellian that happened. So YouTube –
Dan Ferris: Good. Yeah.
Tobias Carlisle: because I publish my podcast on YouTube. YouTube sent me a note saying, "You're not allowed to talk about the Ukraine, Russia conflict and suggest that the Ukraine invited" – and they used these words. They said, "You're not allowed to victim blame the Ukraine." You ever heard that term used in relation to a country before?
Dan Ferris: No. I've never heard the term "victim blame" like that as one, but this is insane.
Tobias Carlisle: It's crazy. Putin is a bad guy. I'm not saying Putin's not a bad guy, but it just seems crazy to me that they're taking sides. You can't narrate that problem at all? You can't even discuss the issue?
Dan Ferris: That is crazy. I read something else that got a little more scary to me today. It was this article about PayPal and how PayPal – it's by Matt Taibbi, so it's going to be –
Tobias Carlisle: I saw that one. Yeah.
Dan Ferris: Yeah. So PayPal decided that this company, Consortium could not use PayPal anymore because it didn't – really, what it amounted to in Taibbi's opinion, PayPal didn't like Consortium's politics anymore and it shut down their account and there was $9,000 left in it and PayPal took the money as damages. No judge, no jury, no judgment, no anything. They just took the money. I was like, wow. The slipperiness. We're not walking around slipping. We are on our ass sliding down the hill.
It really – I talked about this with Kevin Duffy too. Maybe you feel the same way. Let me know. I used to think, "Well, we're sliding down that hill." It's made for a war of words. It's not like – when I go there I'm clicking off all the ads. I'm like, "Get this ad out of my face. I came here to tell my enemies they're stupid." How's that ever going to be a better business?
Tobias Carlisle: It's sad. It's sad because we've had this well-established principle through western liberal democracies that the process was the most important part or whatever you felt. Clearly there's at least two sides to every – there's at least two political persuasions out there. There are many, many more than two, but there's at least two dominant ones. Each one vehemently disagrees with the other one. The only way we're able to live together is if we have this process, we have this very clear rules of the road. We just seem to be overriding those to make sure that our particular morality is the one that succeeds and I think that's an extremely dangerous slope.
Dan Ferris: Corporations, they have to say what they need to say.
Tobias Carlisle: Well, engagement is great for the algorithm. So they don't mind people being angry with each other. I turned on all the safety stuff. So if someone doesn't follow me and they leave a comment, I don't even see it. So nobody can do the drive-by strafing and just keep on going. They get to say their piece, but I don't see it. So I don't really mind because I found that there was quite a lot of that going on there.
There are people who must have some sort of search on for some form of words and when you use those words they comment on that. It's a bot or something like that and the bot has their little bit of vitriol loaded up, to say. So I don't find it particularly helpful or useful. It's not a great format. It's whatever it is, 280 characters for expressing nuanced views. That's always going to be fairly tough. But I agree with you. Just it seems that there's – I don't understand why these companies feel the need to descend into the political discussions particularly given that most of these things have at least two sides to them.
Each side can have an honest principle. They can have good reasons for why they believe what they do even though they each disagree with each other. There are lots of – I don't want to raise any of the debates on this show, but there are lots of debates going on right now that are particularly sensitive. I just wouldn't want to be on one side or the other. I just think it's craziness.
Dan Ferris: It is crazy. I was going to say, you sound so rational.
Tobias Carlisle: Do you think I should go and apply for that job, Twitter censor?
Dan Ferris: Yeah. Right. No. They'd be like, "You're way too rational, dude. You're too reasonable about this. We need hard-core. We pay $17 million for hard-core, anti, whatever it is." These days I think it's anticonservative. It'll change, believe me. That's another thing.
Tobias Carlisle: Well, that's the risk. You get someone in there who's got control of it, who's got a set of views that agree or disagree with you. That would make me scared. If the person on there was saying everything that I really wanted to hear and censoring every other point of view, it would occur to me that somebody else could get in there and change that around, which you would think that that would concern them a little bit. Evidently not.
Dan Ferris: And you would think that these corporations that we're talking about would be concerned about alienating half of their customer base. They don't seem concerned about that. I find it – in the beginning, like I said, well, they just want to not offend. So they're not really – they are expressing the view. Maybe it's a little sort of a liberal or progressive view, but they're just doing it to make sure everybody understands that they're OK with whoever you are. But now it's gone so far, I feel like they're in danger of alienating swaths of their customer base, huge swaths.
Tobias Carlisle: Well, I think they've already done that. I think Netflix is a good example of that. I think that there are lots of people who don't have a Netflix account because they don't like the politics of the shows that Netflix runs. I have one because my kids watch their cartoons, but aside from that, I don't really spend a lot of time watching it because I just don't like any of the shows. The shows just aren't very good. When Netflix got cut in half, my activist proposal to Netflix would be just go and make some shows that people want to watch. That's bold.
Dan Ferris: That is bold. You're saying a lot of bold, reasonable stuff here. How is a bold, reasonable fellow like you able to make a living in this kind of a world?
Tobias Carlisle: You got to keep it all to yourself, Dan. That's the key. Got to have that disciplined Twitter account.
Dan Ferris: It makes sense that you're a value guy too.
Tobias Carlisle: To be fair, the very fast majority of people are right in the middle there and do think that all of this is pretty silly. When the pandemic was at its peak and all of that silliness that they were carrying on, that ahistorical, anti-science, quasi-Marxist stuff that they were carrying on with, most of the conversations that I had with people were, "This is crazy." You couldn't say anything on Twitter or YouTube or any of those places because you'd be demonetized or excluded from the public square, which is do we really want – does the Republic really want that sort of stuff happening?
This has been one of the great experiments in western liberal democracy that the world has ever seen. You can go back thousands of years to ancient Athens, the birthplace of democracy, and other places like that. Here we have this incredible experiment. We're really going to let some tech companies from San Francisco mess the whole thing up in the course of five years?
Dan Ferris: Apparently we are. I don't know. I hope not. I certainly hope not.
Tobias Carlisle: It does seem that way at the moment.
Dan Ferris: Yeah. It does. All right. So maybe we'll –
Tobias Carlisle: We should talk some investing, Dan.
Dan Ferris: Yeah. I was going to say, let's shift this thing into another gear. So maybe I could get you to – I'm very curious with each guest at this point. What does your portfolio look like? Is there more cash in it than usual? Is there something different that you're doing now that you don't do most of the time in response to the way markets have behaved so far this year?
Tobias Carlisle: I don't really know what the market is going to do. So let me get that out first. So I think I said earlier, I don't know if it's going to rally 30 or fall 30 from here. I've done enough testing, trying just about everything I can think of moving averages and valuation changes and all these different ideas that I can get into the portfolio to test whether I can find an optimal cash to equity allocation. I've never been able to find one. All I've been able to do is what I have found is the best strategy has always been to remain fully invested.
So asset allocation is a question for where you are in your investment in your own life cycle, your own career, how close you are to the end. That should dictate how much cash you hold, your risk tolerance. It's not really a question of where you think the market is going to go because you're invariably going to be wrong. You just can't pick it enough times and get it right enough times. The best return you're going to get is being fully invested. What that means is you get more volatility, but you get better returns over the long run.
So I'm fully invested. That's not hard for me right now because I think that value is in – the kind of companies that I'm looking for have never been this cheap relative to the market and I'm talking about a dot-com peak as well. The market is likely to come back a lot. Probably that's the case. I don't know. I don't actually know. I think that probably when you – the historical methods like using the Shiller PE or that Buffett metric where he looks at the size of the stock market relative to GNP or the Tobin's q one where you look at the replacement value of assets versus the market value of those assets – they all seemed to indicate very substantial overvaluation.
The problem with that is, and to be fair, that's where my bias goes. I do feel that we're very overvalued, but the argument on the other side is when you go and look at the composition of the index, there's Google. It's the top-weighted companies in the index. It's Google, Microsoft, Amazon, I think it's still Netflix, Facebook. There's a list of those top 10 stocks.
Dan Ferris: And Apple.
Tobias Carlisle: And you look at those companies, they really – we've never really seen anything like that. They earn gigantic returns on investment. They grow incredibly rapidly. There's a range of valuation there. Microsoft is probably more expensive than the rest, but they're reasonably valued. You couldn't – you wouldn't be – you couldn't hang a man for holding those names right now in the proportion that they appear in the index. You would think that's a pretty good portfolio I think to hold some of those names. So I could make a case that the index is close to being reasonably valued.
Now if interest rates – if the 10-year goes from 3% to 6% from here that may change some things, but where else are you going to hide in the event that that occurs? So all of that means that there are some companies in that that are out there that I think are deeply undervalued, throwing off plenty of cash. They don't need to go to the markets to get any financing for the business. If anything, what they're doing is they're taking advantage of the fact that they're so deeply undervalued.
They've heard the message from the market, which is when you are deeply undervalued you should liquidate. That's what the market is telling you you're too big. The way that you liquidate is by buying back stock. So that's what they're doing. That's what I love to see. So if I can find a company that's buying back stock, it's too cheap and it's still growing reasonably, it's not going to need outside financing. Then I can fill a portfolio of those now. I can fill two portfolios of those right now. So I'm fully invested long through the mid-cap, large-cap, small, and micro, both sides of that index and I'm very happy with those portfolios. I think that the full returns from those portfolios are about as good as I've seen.
Dan Ferris: Yeah. Any kind of measure of value to growth that I've seen or that I've made myself, you're back to at least 1999ish as far as the attractiveness level of it goes. It's better than it's been in a long time. It's a relative assessment.
Tobias Carlisle: That spread is wild.
Dan Ferris: It's a relative assessment though. I feel like we have more absolute cheapness in those stocks 23 years ago or so than we do today, but I don't know if it matters because the businesses are still great. Money is going to go somewhere. Like you said, they're buying back. They're cheaper than ever. It's a fantastic setup. It's all across commodities versus stocks, value versus growth, emerging markets or ex-U.S., really, versus U.S. That whole other stuff versus dollar is just – it's more attractive than it's been in a long time. I think – but you said you don't buy – I wanted to touch on this. You said you don't buy the oil companies. So you don't go for the commodity-based businesses?
Tobias Carlisle: It's not that I don't buy them. It's just that the metric that I favor is that Acquirer's Multiple, which is an operating income to enterprise value metric. So what that means is that I won't buy them until they start cash flowing. I think that the best time to buy the energy companies was probably when oil went negative, negative $37 a barrel was a pretty good contrary indicator to load up on energy, but I had owned a little bit of energy before that. They all looked pretty gnarly through that. I don't really know – oil is incredibly difficult to forecast.
Even Warren and Charlie were saying they're the two worst oil investors around, which is Charlie – Warren bought China National and I think he's six-bag on that one, and now he's bought OXY. So there's some pretty good indicators that probably energy is too cheap. There is some energy – when I will likely be buying some energy in the near future. So I haven't bottom ticked that one, but that's just because I require them to start flowing before I buy it because who knows? Negative $37, that was crazy, but there's nothing to say that that wasn't going to continue.
As we continue along the theme that we've been discussing this, that anti-ESG attitude toward oil and energy, I don't really know. I'm just not entirely sure what the impact of this is. Probably when anti-ESG attitudes toward energy at the peak and oil went negative, that was a very good end time to buy. I think now that we're all stepping back a little bit from that because we recognize that you need energy to power the entirety of the economy and you need cheap energy to do it. We're seeing right now the consequences of underinvesting in energy because energy is up a lot and that seems to be the thing that's spiking the whole of the economy. That's why everything else is down. Cheap energy would be a great thing to have right now, lots of it.
Dan Ferris: Right. And the more you target – we talked about this actually with Hugh Hendry. Because of the political targeting of the fossil fuels has taught those companies to say, "Maybe we get a dollar of capital instead of digging a hole in the ground." It's like I think we mentioned Rio Tinto yielding 11%. Not in interest commodities. This is not like marginal lithium demand.
Tobias Carlisle: I do think it's funny that all those energy companies try to paint themselves as something other than energy companies like when British Petroleum started calling itself Beyond Petroleum. Like what do you do? We pump oil. What are you calling yourself? Something else.
Dan Ferris: Yep. Little crazy. So your portfolio is fully invested. You've got enough names to fill two portfolios you say.
Tobias Carlisle: I could – because it's pretty small. I do 3% positions. I just find it hard to tell which one is going to be the better one. So I tend to size to three and I rebalance back to equal weight on a regular basis. So that means I can find 60 names easy, easy 60 names. I've got a hundred names in the small and micro portfolio.
Dan Ferris: I'm glad you made that point about that equal position sizes because it's a very popular thing, isn't it, especially among value people that we take larger positions in our best ideas. Well, you may think it's your best idea, but you don't know which one is going to generate the highest return now, do you?
Tobias Carlisle: That's it. I don't know. Like I've got this quantitative bent. One of the books that I wrote was Quantitative Value and I've written another one called Concentrated Investing. Concentrated Investing was an investigation of concentration. It's right there in the title and diversification. I was trying to figure out what was the best way to form a portfolio. There are lots of different ways that you can do it. Very popular one, popularized by Buffett is this idea of "Kelly waiting," which is edge over odds. So you figure out what odds the market is giving you for this business. Then you think what's your private information. What have you figured out that nobody else knows?
It's a great way of doing it if you can foresee the future. Unfortunately, I can't do that. So I have to – I use the one where I just, equal weight, say I don't know. Every time I form a portfolio, I feel better about some of the names than I do about other ones. I've never been able to pick which one was going to work more than the other ones would. So I've just taken away the right of mine to size up the best ones.
Dan Ferris: I've come to hearing that whenever somebody says, "Kelly, the Kelly formula, we do Kelly formula." As soon as someone says that I just nod and, "I have to go to the bar. Excuse me," and I'm moving on because it's a fatal conceit I think for most people. We've seen people – I guess it's easy to pick on Bill Ackman. Just Valeant and Netflix and just these huge bets. Target.
Tobias Carlisle: Target.
Dan Ferris: Vaporizing billions of dollars. Yeah. Netflix.
Tobias Carlisle: Netflix.
Dan Ferris: Just –
Tobias Carlisle: The list goes on.
Dan Ferris: Right. So nobody knows.
Tobias Carlisle: The thing is, just to go back to what – one of the first things we discussed and that's "what is your objective?" My objective is to survive. The very first thing I think about is risk management. My objective is to survive every single cycle so I can come to the next cycle and then to survive that one too. That's – if I keep on surviving for a long period of time, everything else takes care of itself.
Dan Ferris: Yes.
Tobias Carlisle: One of the ways that you can kill yourself – this is not the shot selection. So we talked before making sure that the position is right. This is a portfolio manager selection. Just size too big into something. I see it all the time. I talk to these guys. They're like, "I got a 22% position." Like at inception or you've let it grown that big? Either way, that's too big. My apologies to anybody out there listening. I understand if you're – look, that's – it's courses for courses. I understand.
Buffett has got quite a big concentration in Apple as a portion of the equity portfolio is of his insurer. I'm not Buffett. Most of us aren't Buffett and Buffett's got other cash flows from other things that it doesn't really matter how big that share is because he's got a hundred billion dollars coming in over the next few years that he's going to redeploy and it's going to wash that away a little bit. I think the best way to survive is just to keep your mistakes small. There's that great book, Winning the Loser's Game. I think that's really the key. Keep your mistakes small. That's what I try to do.
I just don't know what's going to happen. So I try not to lose too much money in the stuff that – we're already saying these things are undervalued for a reason. There's part of the market, a very big part of the market that thinks that there's a problem with it. For all I know, they're right. I literally think that it's a coin flip. It's about 51% in my favor, 49% against me. It's just that the things that work a little bit more than the things that don't work. That seems to be what generates the return some of the time. So it would just be arrogance to say that I can figure out which one is which and I can't. So I know that half are going to be mistakes. Half are going to work. The ones that are mistakes, we're going to rebalance out of them. We're going to lose a little bit of money, but as little as possible.
Dan Ferris: Those are beautiful words, actually. They really are because like I said, too many people, and like we said, many of whom have come to the market the last couple years, too many people are going at this like it's some kind of a lottery ticket or something. It's so easy to open a brokerage account. It's easy to click buy. It's easy to overallocate to a single position. It's easy to make mistakes. It's easy to make big mistakes and making small mistakes is such – you're so reasonable. How did you get so reasonable? You look too young to be this reasonable? I'm serious. You look too young to be that reasonable.
Tobias Carlisle: I've been a value investor my entire investing life. So I've been beaten up so many times that I just try to walk that very fine line.
Dan Ferris: He's callused. He's hardened, folks.
Tobias Carlisle: I think that one of the things you really have to watch out with those managers who have a mistake, they size something up and make a mistake. It's the next thing that they do because everybody wants to dig themselves out of the hole with the very next shot. So often you see guys who have lost a lot of money have a gigantic swing at the next one so they can catch back up. That's – I think even if you see someone size it up like that, I think that that's time to go. It just shows you that they're no longer risk managers. They're playing some other game.
Ackman's a classic example of that. Ackman just sizes up this. I think he's one of the world's great analysts. I just don't think he's done that well as a portfolio manager. The Netflix trade was a crazy one. He was in that big when it was riding really high. Then when it got beaten up, when it's sort of 6 times EBITDA to EV, so not my favorite metric, EBIT, but EBITDA. He's out. I thought, "Well, now it's interesting. Now that it's really beaten up, maybe it's worth taking a look at." I don't know if you want to reflexively punch out of something at that level, but [inaudible] feasibly.
Dan Ferris: That's right, which suggests that becoming a billionaire is about other things maybe than the things we're talking about.
Tobias Carlisle: I can't think of anything worst. I don't want that burden.
Dan Ferris: I agree. I think most people overwhelmingly will handle it poorly. I think most people will handle great wealth very poorly. People wish that they win the lottery and they go into the market hoping to make a lot of money in stocks real quick, but the truth is, I think that if they succeed it would be worse than if they fail because it'll teach the wrong lesson.
Tobias Carlisle: I get to do what I love all day, every day. If I'm sensible about it I get to keep on doing it every day until they carry me out in a box. So that's my objective, just to keep on doing it. That's why I like Charlie and Buffett, Charlie Munger and Warren Buffett, so much because what those guys really have done is they've gotten to do what they really like doing their entire lives, in their very long lives. Ninety-one for Buffett and ninety-eight for Charlie. That sounds like a pretty good deal to me. If I can – I don't need to live that long, but if I can keep on doing it when I'm there, then that's a gigantic win.
Dan Ferris: Yeah. Wow. Ninety-eight, Munger is. And he went to Omaha?
Tobias Carlisle: And he is razor sharp.
Dan Ferris: He flew to Omaha? Wow.
Tobias Carlisle: Yeah. He did. Yeah. It was fun for the Berkshire meeting. Charlie still has all the best one-liners that I've ever heard. He's such a lad. He said, "Warren figured out that he could only ever work for the man he shaved."
Dan Ferris: Yeah. He tosses out several of those in every meeting. All right, man. We've actually been talking for a little while here it looks like. I want to address my final question to you because I suspect that – I don't know. I've gotten a good answer from you before. So I'm going to do it again. Same question for every guest, same final question no matter what the topic and you can answer any way you like. It doesn't even have to be about investing. So the final question is simply if you could leave our listeners with a single idea today, what would it be?
Tobias Carlisle: Well, I'm working on a new book. So this is front of mind for me at the moment, and this is the entire purpose of the entire book and it follows along with what we've been discussing all day long. So the idea is really that the objective of the game is to survive. So if you think that what I need to do is survive to the next period, then I think that really simplifies everything that you do. Rather than trying to maximize your rate of return, maximize your likelihood of survival.
That means you're going as fast as you can as safely as you can, but with the emphasis on the safety. I think that it's been interesting. It's influenced my entire life. I've started driving more slowly in the far-right-hand lane so that – I put on my reggae music and just drive along totally blissed out and totally zenned out as I'm driving around. People are whizzing by on the left. It doesn't bother me at all. So I think really that's the key. Part of the last few years just so crazy watching everything run away and then watching everything come back, really reinforced it for me that the name of the game is to survive to the next period and just to keep on doing that one foot in front of the other over and over again. And if you do that, I think you're going to be OK.
Dan Ferris: Excellent. Survival. That survival lesson came to me sometime I guess in the past few years I realized how important survival was as a goal. So thank you for that really. Thanks for being here.
Tobias Carlisle: My pleasure.
Dan Ferris: It's always great to talk to you, man.
Tobias Carlisle: Thanks for having me, Dan.
Dan Ferris: Yeah. We'll –
Tobias Carlisle: Likewise. Love chatting to you.
Dan Ferris: Let's not wait so long next time.
Tobias Carlisle: Wow. That sounds good to me.
Dan Ferris: All right. So I guess it's bye-bye for now and thanks again, man. Always a pleasure to talk with Tobias Carlisle, a fellow value practitioner and always an experience in which we get wisdom from him. We get, like he said, a guy who's been in the trenches. He's been a value guy his whole career. He's been beat up. He survived and therefore has learned the value of survival and learned the value of risk management. Maybe we should just call the podcast the "Stansberry Risk-Management Hour" because we always wind up here, don't we? I think I'll just leave it at that.
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In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected]. I read as many e-mails as time allows and I respond to as many as possible. You can also call our listener feedback line, 800-381-2357. Tell me what's on your mind and hear your voice on the show. First up this week I want to relate a cautionary tale sent in by Greg M. He actually sent it in through the regular Stansberry feedback, but it's worth listening to and he said feel free to share it if you think it's worthy. It is worthy, Greg, I promise you.
So it's a little longer than our usual e-mail, but just slightly. All right. He says, "Hey, Dan. I was thinking about the Musk Twitter deal. It reminds me of similar events in my life. I thought I might share with you. As a young man in my 20s and 30s, 1980 to 1990, I was extremely successful and was a millionaire before reaching the age of 30. It seemed I could do no wrong. All of my businesses were flourishing and I was doing very well in real estate as well. I never paid attention to the markets as my little world was all under my direct control. Then my black swan event happened. My father passed away leaving his business in disarray."
"I stepped in at the wishes of the estate, family, and bank. I had no doubt in my mind that I could turn the place around. I just needed a little time, estimated two years. Initially, everything went as planned. Times were tough, lots of elbow grease, but the business was turning the corner. In the midst of it all, the bank blindsided me and demanded collateral to support the business. On top of that, the estate was leaning on the business to keep it liquid during the roll-up. All still manageable and reluctantly I gave the bank the security they required. After all, I knew I could get this all turned around."
"Then the unexpected happened, the recession of 1990 and '91, and the bank called the companies line after only two months." Their line of credit is what he means. "I immediately faced a quote, 'margin call,' end quote, throwing a huge wrench into my carefully executed business plan. The bank began seizing and selling off my assets. Cash flow was destroyed and my whole empire crashed and burned. I tell this story only because it sounds familiar today. Musk has been extremely successful, sometimes walking the tight rope, but successfully navigating while his plans were under his control."
"My gut tells me that Twitter will become his black swan event and the lenders will most likely pull the rug out from under him when least expected. And I think this will have an impact on Tesla shares, the collateral. I actually feel sorry for Musk. I understand completely why he does not see this possible outcome down the road. It's pretty easy to become overconfident by basking in the success of the past." Then he just says, "Ego?" I think you're right, Greg.
And Greg finishes up. He says, "I was quite fortunate and managed to bounce back. I have never trusted nor dealt with banks since and the event shaped my investment and business approach and most likely an overly conservative and defensive manner. Only time will tell how this unfolds for Mr. Musk. In the meantime, I'm looking at some bear put strategies on Tesla to take advantage of what I see is inevitable. Sincerely, Greg M." I'm going to let Greg's story speak for itself. Sophist to say actually that I have pointed out that this could be Elon Musk's Eike Batista or Aubrey McClendon moment. Both of those guys were billionaires who crashed and burned because they got too levered up and too confident.
Next is Christopher D. "I thoroughly enjoyed the recent episode on precious metals, but have a question. What about platinum? I'd love to hear your thought. Historically platinum has been more expensive than gold, but not in recent years. When I look at its fundamentals it screams extreme value to me. It's rarer than gold. It's harder to extract than gold and it's undoubtedly more useful than gold. Plus, as a bonus, it's less likely to be illegalized or confiscated. I know the changes in automotive technology in recent years have sharply reduced demand, which is at least partially responsible for its relatively low price. But long term it seems like a solid bet and its current, relative low price creates a nice buying opportunity, but I'm no expert on precious metals. So maybe I'm missing something." Christopher D.
Christopher D., I would not necessarily sell myself as an expert on precious metals, although I do know lots of folks in the mining industry and I've made a lot of recommendations. Well, I've made the same few recommendations repeatedly in the mining and metal space. So what I will tell you though, as an investor I see no problem with having a little bit of platinum in your precious metals portfolio. So if you want to hold gold, silver, platinum, palladium, rhodium, a little bit of all of them, I would just remember that they're not as liquid – they're not going to be as liquid as gold and silver. So be ready just to hang on to them and maybe not ever sell them is really how I view precious metals in the first place.
So sure. Why not have a little platinum in your physical precious metals holding? I see no problem with that at all and I don't think you need to do a lot of too fancy analysis about it because the point is to have hard assets and not sell them. It's not to try – if you want to try to trade platinum and buy it at the bottom and sell it at the top, good luck to you. I'm not into that, not in this context, but sure. Why not hold a little platinum?
Next is RWR and RWR says, "I'm an Alliance member for seven or eight years now. I listen to every podcast. I really enjoyed your interview with Hugh Hendry. I agree that he has a unique perspective." Then he gave me some quotes that he liked. Everybody liked the "wear comfortable clothing" quote from Hugh Hendry. "He's just really insightful and always entertaining to listen to Hugh. My question, what are the market forces suppressing the price of gold and silver, hedge funds, the government, international demand? I don't understand why the rally in precious metals seems very slow." RWR.
I hear this a lot and to me the way I look at the physical precious metals, I don't quite get this. They are fantastic long-term holdings. They have done a pretty darn good job, as we've talked about on previous episodes of anticipating and continuing to protect against increased inflation. And the fact that they don't go up every time the CPI goes up just means nothing to me. I'm not going to sell them. So far gold is a 50-bagger since 1971 when it was completely untethered from the U.S. dollar and it's beat the S&P 500 so far in the 21st century. In the shorter term, it's done fine. It's in the $1,800s. That's fine.
I don't have the same problem that other people have with gold not being up 30%. It just doesn't bother me at all. What bothers me more is what Hugh Hendry talked about, that bitcoin correlates perfectly with the Nasdaq. I'm still long bitcoin, but it bothers me more and more the more I think of it. When is bitcoin going to become untethered from Nasdaq? When is it going to start exhibiting store-of-value value characteristics? Sooner would be a lot better for us than later. So it's a good question though, RWR. It's asked often and I hope my answer isn't too unsatisfactory for you.
Finally, this week Isaac B. from Twitter sent me a direct message. He says, "For my money, feel free to interview Hugh every week," Hugh Hendry. "One of the few who sets aside his agenda to tell the truth." So Hugh doesn't have this biased political idea where he always has to be betting on gold or he always has to be betting on stocks or he always has to be betting on bonds. He really sizes up the situation and he's one of the more objective thinkers when it comes to what is going on in the world, in the macroworld. So he's always dealing with those big assets like bonds and other large asset classes.
Thank you, Isaac. I'm glad you said that and I'm happy to share that thought. Last time Hugh was on the show, a couple years ago or something, people wrote in and they said, "I don't understand that guy. I can't follow him." And this time Isaac sent me a direct message and of course we just had another favorable comment this week from RWR. So I'm glad to hear that. I'm glad to hear that you're all getting on the Hugh Hendry train, because he's definitely worth listening to. Well, that's another mailbag and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did.
We provide a transcript for every episode. Just go to InvestorHour.com, click on the episode you want, scroll all the way down, click on the word transcript, and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or InvestorHour.com. Do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram – our handle is @InvestorHour. On Twitter, our handle is @Investor_Hour. Have a guest you want me to interview? Drop me a line at [email protected] or call the listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show. Until next week, I'm Dan Ferris. Thanks for listening.
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