In this week's episode of Stansberry Investor Hour, Dan welcomes back esteemed value investor Tobias Carlisle, who shares some insightful observations about today's investment landscape and the current state of value trading.
But before the interview, Dan discusses the concept of "Mr. Market" versus the "smart money," citing a widely misquoted idea from legendary value guru Ben Graham. He shows that Graham actually said something very different from the misquoted version, and then he talks about the implications.
After that, Dan introduces his guest Tobias, and the two delve into energy. It's a promising sector, partly because of the unrealistic expectations surrounding the transition to electric vehicles and solar energy. Tobias even argues that a complete shift to nuclear energy wouldn't solve all of our problems.
Then, the conversation moves to the financial and banking sector. Tobias notes that a famous U.K. investor who's known for his banking analysis doesn't have any banks in his portfolios... because it's so difficult to determine their asset values. As he states...
Banks are sort of like a black box. You don't really know what their assets look like.
Finally, Tobias explains why he prefers investing in businesses that are down on their luck rather than solely focusing on investing in excellent companies available at fair prices. He also points out that many value investors have shifted their focus to compound and growth stocks, leaving few who are still dedicated to value investing.
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 and The Ferris Report, both published by Stansberry Research. Today, we'll talk with dyed-in-the-wool value investor, Tobias Carlisle. He's been on the show before. We have to check in with him. We'll also talk about Mr. Market versus the smart money. If you want to talk to us you can e-mail us at [email protected], and tell us what's on your mind. That and more right now on the Stansberry Investor Hour.
Mr. Market versus the smart money. What in the world am I talking about? Well, it was partially the subject of a recent Stansberry Digest, which I write once a week usually on Fridays. It started because I wanted to look up this one quote by the very famous value-investing guru. He is known for his tutelage of Warren Buffett among other things, Benjamin Graham. Very famous. The guy who basically gave birth to value investing and I wanted to look up this one quote because it is very often that people will say, "Ben Graham said the stock market is a voting machine in the short term and a weighing machine in the long term."
I hadn't read this part of the book in many years and the book is Security Analysis. It was first published in 1934. I went and looked it up. I thought, "I really should get the quote from the original source," and it doesn't say anything like that. In fact, I'll read you the quote and then we'll talk about it. It says this, "In other words the market is not a weighing machine on which the value of each issue is recorded by an exact and impersonal mechanism in accordance with its specific qualities. Rather should we say that the market is a voting machine where on countless individuals register choices, which are the product partly of reason and partly of emotion."
So he says it. The market is not a weighing machine. It's just a voting machine all the time, short term, long term, all the time. I think people use that short-term, long-term thing because the tendency is to think that over the long term, the value of a business, the business underlying the stock will be reflected in the market price of the stock. Our friend, Whitney Tilson, does this among other people. I've seen he puts up a slide now and then that tracks his estimate of the intrinsic value of Berkshire Hathaway and the shared price of Berkshire Hathaway. The core of the method for value and Berkshire Hathaway comes from Warren Buffett. He's told you how to do it many times of the years. Then Whitney adds his own changes to that.
So they track each other over time. They say, "See that. Over time the market is a weighing machine weighing the real value, reflecting the real value of the business." I think that's an unusual case. I think there are a lot of businesses whose value doesn't change not nearly as much, not nearly as much as the stock market says it does. Not only that, but if you look at these episodes that I've been talking about a lot in the past year from 1929 to 1954 throughout the – from late '60s to early '80s, the Nasdaq from 2000 to 2015, the stock market went sideways in all those cases. It just went into a multiyear decade plus, two decade plus funk.
I don't think the evaluations – if you look at the evaluations in the '70s, for example, it's an anomaly. If you get a chart of the S&P 500's price to earnings ratio, the '70s are this cheap period that's below 15 times earnings and all the rest of it is above 15 times earnings. So where was the value of those businesses? You can say, "Well, inflation adjusted," blah, blah, blah, blah. It was much more complicated than that. It was inflation from late '60s, early '70s, then it was a recession. Stock market crashed in '74 and then away we went with more inflation and then of course Paul Volcker took the fed-funds rate up to 20%.
There were all these huge changes. I think the voting machine, what happens is the voting machine gets ahead of itself. You have these huge run-ups, late '60s, early '70s and then boom, crash in 1974. Late '90s, boom, crash starting in March of 2000 through late 2002, etc. Then the market – the fear is not easily removed because people got so, so optimistic in all those cases in 2000, 1929, and in late 2021, early 2022 when the current market peaked. Really all throughout 2021 it was just amazing. One thing peaked after another. People were just so elated to have all these assets and then they started falling apart. Then what comes after that is it takes a while to get all that optimism beaten out of people and then the market goes sideways for many, many years.
So you get this brutal bear market and then sideways action. I'm not saying it's definitely going to happen because nobody knows the future, but I think it's highly likely that that's the outcome we're looking at. I look at the market and I say it's just reflecting people's emotions. It's not reflecting – it's not weighing each business. It's not weighing the intrinsic value of these businesses. So it's a very emotional mechanism. There's another quote from another Ben Graham book, The Intelligent Investor, which first came out in 1949, I think. He described the stock market as Mr. Market.
Here's a quote about that. He says, "Imagine that in some private business you own a small share that cost you a thousand dollars. One of your partner's named Mr. Market is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore, offers to buy you out or sell to you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often on the other hand, Mr. Market lets his enthusiasm or his fears run away with him and the value he proposes seems to you a little short of silly."
So two traits define Mr. Market, which is the stock market. This mechanism that he says is basically a voting machine based on people's emotions. Two things define Mr. Market. He's very obliging indeed, meaning he's a very active trader and he is manic-depressive. Sometimes he's on an emotional high like in 2021 and then sometimes the lows get the better of him like the bottom in 2002 or the bottom in early 2009, those times. So he's basically an overactive manic-depressive trader.
Now you can probably agree with me about this. Obviously the stock market is just – it soars and crashes or rather it rises and falls and sometimes it soars and crashes based on headlines which are often just plain wrong let alone irrelevant to a particular business. It's clearly an emotional rollercoaster. That is an easy enough thing to understand, but it doesn't square. The reason it irritates me is it doesn't square at all with this other view of the stock market which is that it's a discounting mechanism. It's looking forward and it's thinking about how all the current events are going to affect all the companies in the market. It is discounting that likely future. It's forward looking.
Surely you've heard this before. People talk about the market as a future discounting mechanism and discount is finance jargon. It just means – in this case it means something like it predicts the future. It discounts the future. You got it? So do you really think that an overactive, manic-depressive trader is good at seeing the future? Maybe some kind of crazy savant sitting in a room somewhere, but I don't think the stock market is that. I don't think it really knows anything about the future. It's not discounting reality.
At the peak in February 2021 when Cathie Wood's ARKK innovation ETF had just gone up 350% or some crazy amount, something like that. It was crazy amount in a very short time, 11 months or something. What was being discounted then? It seems to me like miracles happening. Unreality. All these cash burning businesses, most of which aren't going to exist in a few years, were being assessed by this overactive, manic-depressive trader to be the greatest thing in the world worth more than you would ever dream they would be worth. It's insane. I think it happens all the time. I think that's the way the market mostly is. It's mostly a little crazy.
I'm just left – I'm left thinking about the bond market too because the bond market is called the smart money. These are people who they're senior to all the equity holders in the world. Bonds get paid before – bond interest gets paid before anything is paid out to any equity holders. That's the way it always is. So they're the smart money. They know and we know what they're thinking because a lot of them go into the future's market and they hedge interest-rate risk and do all kinds of smart things.
If you go in the futures market and look at the spread of the fed-funds futures, this is the most watched interest rate in the world just about next to the 10-year Treasury maybe. Everybody on earth wants to know what the Federal Reserve is going to do with the fed-funds rate. When they say the Fed's raising rates or cutting rates or whatever, they mean the fed-funds rate. There's a whole futures market. It has the name future in it that is devoted toward figuring out what the price is going to be, what the rate is going to be in months and months from now.
So I recently looked at the spread between the April contract and the December contract this year. It looks like something a toddler drew on the refrigerator with a sharpie when his mom wasn't looking, just scribbles, meaning the chart is all over the place. It plunges and it soars and it plunges again. It's insane. The market doesn't know. It's not discounting anything. So when people say, "Well, the market seems to be telling us this," or "The market seems to be telling us that," I guess that's an honest way to put it. Seems to be telling us because it's not really telling us anything except what everybody feels like right now.
Everybody feels like the fed-funds rate is going to go up or down. Everybody feels like the stock is worth this and that stock is worth that. It's not an objective assessment at all. It's emotional. It's based on all kinds of things. People buy and sell for all kinds of reasons. I just think that there are people who make a lot of money doing a lot of fancy math on securities prices and commodity prices and things. God bless them. I'm not a physicist. I don't know how to do that work and I know few, few people. I don't know that I've ever actually met anyone. Maybe one guy. Well, we had Mike Harris on the show, didn't we, recently. He knows how to do that kind of stuff. He wouldn't tell you it's easy, I'll tell you that.
He's constantly pointing out that all the folks who are supposed to know how to do this stuff, they aren't making a lot of money lately. There's a firm here and there like Renaissance Technology. You've probably heard of them. They've made something – in one of their accounts they made something crazy like 80% a year for a long time. Maybe you heard of Jim Simons, the guy who found it that firm. Well, that's one. That's one. See if we can find another one. The point is you're not going to predict, you're not going to use current stock prices to predict anything. You think you are, but you're probably not.
This goes back to my basic advice that I've been hammering on for the last couple of years, prepare, don't predict. Mr. Market is too emotional and he's too irrational. I've even heard people recently say this market is too crazy to trade. I hear a lot of traders saying this is a little bit too crazy to trade. I had heard that. I had heard people say that in the past. I feel like I'm hearing it more now than I did in the past. I've heard it a lot lately. I've even heard it many times over the years. So it happens. Really, really good traders can look at a market and say, "There's nothing to do here," or "This action is too crazy. My system or my methods or whatever don't really do anything for me here."
So you got to be careful out there. Try not to trade too much. I think it's a disadvantage. We disadvantage ourselves by trading too much. It's better, I think, to prepare rather than try to predict and trade on your predictions. So you prepare by doing what? Well, in your equities portfolio you buy really good businesses and you hold on to them for a long time until maybe you've made a lot of money and you're older and you want to enjoy your money or maybe you need the money for a surgery or something or maybe your kids going to college, some reason like that after you've compounded for many, many years or maybe you were wrong and the business is all of a sudden not so great.
I don't think the difficult part is identifying the great businesses. I really don't. I think the difficult part is hanging on to them through volatile, difficult times. So in your equities, hang on to great businesses for a long time. Then the rest of it, I think you really need to hold some gold, probably gold and silver. I think that you need to hold plenty of cash. Cash is an option. It's a call option on all the stuff you're going to buy, all the stuff you're waiting to get dirt-cheap and really attractive or whatever you're waiting for. Some people are waiting for downtrends to turn into uptrends.
Steve Sjuggerud has this mighty triumvirate that he's used for decades now, cheap, hated, and in an up friend. So he would be a guy who would be holding his cash waiting for that moment to arrive. Whatever it is you're looking for, the only way you're going to take advantage of it is if you have enough cash on hand to do it. So you hold plenty of cash. Aside from that, it's all you, man, whatever you got. If you're a guitar collector and you think you can add a lot of value to your portfolio by buying a bunch of guitars or fancy cars or art or any of that crazy stuff, that's up to you. That's based on your knowledge.
I think your core is really good businesses in your equities, plenty of cash, and some gold and silver for reasons that we've discussed here today because you don't want to trust an overactive, manic-depressive trader with your money. A very rational guy is our guest today, Tobias Carlisle. He is a dyed-in-the-wool value investor. We'll talk about his methods and the screen that he uses and all kinds of good stuff and whatever he likes today and we'll do it right now. Let's do that. Let's talk with Tobias Carlisle right now.
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Tobias Carlisle: Thanks for having me, Dan. Good to see you again.
Dan Ferris: You too. I feel like if I haven't checked in with you, I'm not doing my job. There aren't a lot of real value folks left. That's good because it's easy to keep track of every single one of you.
Tobias Carlisle: It's definitely true. There aren't very many left. I think that period through '19 and '20 was so painful for many value guys. You just can't help but drift toward the "growthy" stuff, the compounded-type stuff. It's always the way. The opportunities are always where everybody is not looking, which is value investing, which is why you got to be careful not to drift particularly as a value investor. You want to be at the least attractive, including the strategy, the least attractive part of the strategy. So it's no surprise.
Just as everybody hates oil and gas and energy. Oil goes negative on the day. You remember that, when the barrel of oil traded negative? Probably the best time to buy oil, energy stocks in long period of time. Here we are, we're still underinvested in the sector... still a pretty good time to buy them in my opinion.
Dan Ferris: I agree. I actually – I tried to go long oil in the futures market that day, but they wouldn't take the order.
Tobias Carlisle: Really?
Dan Ferris: Yeah. Well, I was trying to go long that contract. So that was – I think that was the last day of that contract maybe. So I was really – I was like how could this possibly go wrong, getting paid to hold a barrel of oil?
Tobias Carlisle: You have to stick in a facility, a regulated facility. I thought the same thing, stick in the pool.
Dan Ferris: So borrowing that kind of eventuality, where else might one look today if one is a real – an honest to goodness value guy like yourself?
Tobias Carlisle: I think you always want to look where – well, my approach to it is completely ad hoc and bottoms up. So I'm just looking for the cheapest – I just screen for the cheapest stuff in the market and my screen requires multiple, which is on one side it's looking at enterprise value, which is market capitalization plus debt. So it includes all of the liabilities that you should look at when you're buying a company because you can find some companies that have got huge amounts of debt on the balance sheet and you're not getting – you may not be getting compensated for taking on that debt risk.
Then on the other hand I want to see how much I'm earning in terms of operating income, which is pretty much close to the top. That's rare news. Then you take out cogs. That gives you gross profits. Then you're looking for operating income, which is just taking out a few other bits and pieces at the top. So you're basically looking at – it's the accounting version of cash flow, essentially cash from operations. I prefer that you're counting version to the actual cash flow I measure because that's reconstructive from your counting version anyway by adding back in various things.
So I just use those two metrics and I just look for which things are you paying the least for to get the most out of. When you do that process and you look through those screens, every single one of the names in the list has a very substantial problem that everybody is aware of which is why they get so cheap of course. For a long time it was energy. It still continues to be energy and oil and gas even though they've had a pretty good run.
The sector as a whole is underinvested for a variety of reasons. Some of them are ESG related, but there are so many people – funds that are just divested completely from the sector, which if you're a capital cycle theory person, as I am, it just stands to reason. If energy needs are – you can look back 10 years and see how much energy we were consuming, have a look how much energy we're consuming now. Talk about 70%. Look how much we're going to be consuming in the future. It's growing parabolically. At some point we're probably going to run out of oil. I hope it doesn't happen during my lifetime, but at some point that happens. I hope it doesn't happen during my kid's lifetime either.
Dan Ferris: I wouldn't worry too much about it.
Tobias Carlisle: We are massively underinvested in that sector and it's going to need a lot of investment. So often people will say, "Look at what happened in 2008 to energy." Energy – there was an energy spike in – there was an oil spike in 2007 that spiked the entire economy. That's what kicked us off into this mess – into that mess. Then energy didn't perform very well through it, but it was a completely different scenario because it had been a decade or more of pretty heavy investment into energy. It was overinvested. They were spending way too much money. All those sort of things that happen at the top of the cycle. This is the other end of the cycle. We're at the bottom. We've only just started investing more. As a portion of the entire market it's still very small relative to what it has been on average. So I think energy is one of the more obvious places at the moment.
Dan Ferris: I completely agree and all the same things. I made a list of all those reasons why energy continues to be a good vet despite the really nice run that it's had already. I feel like we got a little bit of conformation from this move across the OPEC countries recently, but I don't count on anything like that. To me that's not a big fundamental driver. The fundamental driver, I totally agree, is the underinvestment in supply and then the ongoing demand. Especially this idea we're all going to be driving electric vehicles and we're all going to be using solar panels and all that thing. I think it's just so dramatically overstated. The expectations are off the charts compared to what's actually required to make all that happen.
Tobias Carlisle: Undeniably true, but also at the very beginning of – the Malthusians got laughed at. Thomas Malthus, I'm saying Thomas. I'm not sure if that's true, but Malthus in 1798 he says energy consumption growing geometrically at the rate at which we're growing food, growing arrhythmically because it's just surface area of the ground, when you look at the reasons why we've been able to grow the amount of food that we do and keep up with consumption it's because we got so much better at sticking fertilizer into the ground at the beginning of the process.
What's the key ingredient in fertilizer? Well, it's nitride that comes out of natural gas. That's one of the all-time great advances in human technology was figuring that out. So we're going to pull that out of the food supply. There's not going to be very many of us here. We can do all of those things that they're saying. Just we can't do it with 8 million people in the world. We can do it with many, many fewer.
Dan Ferris: Right. If you were my down the rabbit hole of conspiracy theorist guests we might talk about people who really would like to see that reduction, but I don't know. We probably shouldn't go there.
Tobias Carlisle: I think lots of people are trying to do the right thing. They're told that all of these things are a threat, but they haven't thought through to the end point of it, which is that there have got to be lots and lots fewer people. If that's the case, then I say you go first. Then I'll reassess it after you're gone. I don't mean you personally. I mean people making that up, the argument. They can go first and the rest who are still here, we'll assess what's important.
Dan Ferris: Yeah. So along these lines, speaking of dramatic trend of underinvestment and much more demand, what about mining, things like copper? We just haven't found big new copper mines and if the electric-vehicle folks get their way, if the projections come anywhere near true we're going to be needing a brand-new Escondida copper mine, biggest copper mine in the world at least every year, every few years or something starting within the next decade.
Tobias Carlisle: Another great point. Look how much earth we shift now as a result of fossil fuels, dwarfs what we used to do in the past. All of those things, iron or copper, any – just take your pick. All of them are just shift huge amounts of earth to yield a tiny little bit of the metal at the end of it. So what we're saying is we're not going to do that anymore. All of these things are achievable. It's just that there are going to be many fewer of us living at a much lower level of civilization.
Dan Ferris: Well, I certainly don't want that.
Tobias Carlisle: Me either. I like what's going on now.
Dan Ferris: Maybe there's another trend we can talk about that –
Tobias Carlisle: I'm a value guy too, by the way. These are big macro issues. I just have to investigate these things and think about them because they influence everything that we do. We're not getting off any of that – really there's no way. Even going completely nuclear, which there doesn't seem to be much – nobody really wants to do that. I think that's probably a great idea. It's probably necessary that we do go heavy nuclear. That doesn't solve most of the problems. Oil and gas are used for other things throughout the economy. It solves some of the energy problem. It gets clean water because we've got these desalination plants. We can pair our houses and our factories, maybe pair our cars. Planes probably won't fly. Energy density of a battery relative to what it lifts, the technology is just not there. It's miles and miles away.
Dan Ferris: Right. I just recently read up on a little bit of this and I was shocked at the amount of – the weight of batteries needed to get an electric aircraft off the ground for a commercial airliner, not doable. It's just not doable. So let's talk about something folks don't seem to want to own recently, banks. Banks look rough to a lot of people of course because a couple of them failed recently.
Tobias Carlisle: Banks are tough. So let's talk about banks a little bit. Joel Greenblatt, who did some analysis on quantitative investment strategies excluded banks, excluded financials and utilities from his analysis, utilities because they can play with your earnings. If you start over earning they just cut back the amount that you're earning. Financials the problem is that it's essentially a black box. You don't really know what their assets look like because they could be – the big problem in the states at the moment relative to where we were pre-pandemic, office occupancy is 50% what it was.
So office has – commercial real estate office has two problems, one is secular and one is cyclical. The secular one is more and more people want to work from home and I can't blame them. People want them back in the office. People don't want to go. There will be some tension there and it'll be resolved at some point, but it's hard to see how we get from 50% to a 100%. That's a pretty big gain and we're pretty well post the worst of the lockdowns and so on. So it's now a choice. It's not mandated.
The other one is a cyclical component where we're probably close – well, we're closer to the end of the business cycle and I think we've actually seen the recession yet, but all of the indicators that I look at tell me that either right in it or all of the leading and coincident indicators tell me that we're right in it. The lagging indicators haven't fallen over yet, but they wouldn't have if it was 2008 either. So we're not quite there. When that happens then they're going to be layoffs. There are going to be – there's going to be less commercial real estate and offices required. All of those assets have backing debt against them. All of that debt is held by regional banks.
So you've got to be very, very careful when you're looking through regional banks what the composition of their loan books looks like. The other thing is just a general philosophical point. I like Terry Smith, Fundsmith in the U.K., very well-known, quality investor. Was the best banking analyst in the U.K. for 12 years running. He doesn't have a single bank in his portfolios. He says the two things aren't unrelated. He actually understands them. So he finds them hard to invest in. I don't hold any at the moment. I think there will come a time, but I think I just want to see the cycle flush probably before we get to the other side and have a look. Do you hold some?
Dan Ferris: Makes sense. No. I'm thinking about it, but I just – I don't know. I don't see it right now. I've always – I've long had the black-box issue. Our other guest recently on the podcast was Kevin Duffy and he says it's OK to run a levered hedge fund, but don't call it a bank.
Tobias Carlisle: That's the best way to do it. You get bailed out by the government when you go wrong. Whoops
Dan Ferris: That's right. Whoops and we still get paid. My way of looking into banks lately, I thought let me take a look at the list of domestic, systemically important financial institutions and see what's on there.
Tobias Carlisle: Which one's the cheapest?
Dan Ferris: Yeah. See if M&T Bank is on there. They've been pretty well run over the years.
Tobias Carlisle: That's right.
Dan Ferris: There are a few others. So I was like well, if that's what I need to make the bet in the first place, maybe not such a great bet.
Tobias Carlisle: M&T is a great example of a good bank. I think Jamie Dimon runs a good bank too. All of those – many of those guys who have survived 2008 that are able to think about the downside risks and seem to have prepared for them a little bit and M&T have done a great job too according to their most recent annual reports they released. You can look at many of the other ones and I can't blame them for this either because it wasn't that long ago that we were talking very seriously about negative rates in the states being a possibility because there's $20 trillion of negative rates around the world.
All of the leading developed countries around the world seem to be close to negative rates. So when they're getting a little bit of yield considering that we might go negative, those did seem like pretty attractive. The true blame for those lies at the feet of the Fed and I don't think it's the current guy either. I think he's doing the best with what he can. I think it's the two priests, Yellen and Bernanke, just pinning rates at zero for way too long has created all of this silliness. Jay Powell's hands are tied. He's got to get those rates up before they lower them again. That's got to happen too.
Dan Ferris: Right. He's barely back to something, that we could consider historically anyway, normal.
Tobias Carlisle: Not even the long run average hit.
Dan Ferris: That's right. We're not at 6%. I agree. When you look at it that way, when you take a long view of it, it looks a lot different. I totally agree. We've been talking about this recently how Warren Buffett says you learn who's been swimming naked when the tide goes out, but it's not the tide's fault. It's the swimming naked that got you in trouble. They were always like that. They were always swimming naked. That was one of the things M&T avoided was loading up on securities at literally the lowest interest rates in recorded history.
Tobias Carlisle: That's tough though because I can see it from their perspective. I do understand it from their perspective, but they're getting flushed out now.
Dan Ferris: They are getting flushed out. I appreciate the perspective too. It's like we're paid to dance, in Chuck Prince's old formulation of that attitude. We're paid to dance. We got to get up and dance as long as the music is playing. Well, the music stopped. There's no more of that anymore. It's a tough one. I agree. Banks are a tough one. I sort of did that to you on purpose, I admit.
Tobias Carlisle: I have held them in the past and I don't have anything against them. I'm not quite as anti them as Terry Smith and Greenblatt and some of those guys are. I just look for really offside opportunities I'm really confident that there's no zero risk there and that the upside is over compensated. For me at the moment it's just knowing what the composition of loan books in aggregate looks like and the problems with particularly commercial real estate and I'm sure coming up soon residential real estate.
When you think about where all of those lines are held, all of those, the regional banks are the ones that are most dependent upon those ones. That's except the bulk of their loan books. So those are the ones that are being most dangerous. I agree. Before you said it, I was just about to say I would go through – I would be more inclined to look at the bigger ones right now than the lower ones if you had to, than the small ones. I don't have any – they're just not coming into my screen, the universe at the moment. So I'm not worrying about them too much.
Dan Ferris: Fair enough. Actually, I'm happy to hear it. So let's see. We've covered – we've been through banks and mining...
Tobias Carlisle: How about just the economy generally? What about – so I think one really important metric that I like looking at is the yield-curve inversion. So Cam Harvey wrote his PhD dissertation in 1986. He didn't have much history to go back on. He had four recessions before he wrote his PhD in 1996. Each of those recessions was preceded by a yield-curve inversion. So ordinarily, the yield curve, the shorter-dated Treasurys, so the three-month trade with a small coupon trade with a lower interest rate relative to the 30-year backdated Treasurys have a high interest rate to compensate you for inflation risk, just the risk that the government goes bankrupt, all of those other just general economic risks.
So ordinarily, the yield curve is lowest at the front and highest at the back. So this time around because we've gone through an inversion, it's basically in contango, which means at the front of the yield curve, people are more worried about immediate issues than 10 years out. So they're demanding more of a premium for short-term money than they are for 10-year money. It's called an inversion. We are at the steepest inversion we've ever seen. When I say ever, this data only goes back to 1980 that I can find on the SEC's website, on the free data website.
Since Cam Harvey wrote – so Cam Harvey has picked every single recession and he's never had a false positive in the data to 1986. Since 1986 it's picked every single recession. It's never had a false positive including the 2020, the March 2020 recession. There was a lot of weakness around and the yield curve was indicating that there was an issue and sure enough it happened. The catalyst was probably COVID, but there was clearly some weakness in the system before that happened. Here we are again with this incredibly steep inversion. The curve inverted on October 25, 2020.
In Cam Harvey's analysis he says that the shortest period of time from an inversion to the declaration of a recession, because that's the official purpose is it doesn't happen until it's declared, was seven months. The longest period of time was 15 months. The average is 12 months. So if you think about what that means this time around, that means a recession could be declared any time from May 25 at the earliest, October 25 this year on average, and January 25 at the latest. So January 25, 2024. So I think that if you look at all of the leading and coincident indicators they also agree with that.
So the ISM Manufacturing came out today. It shows a contraction. Orders seem to be indicating some sort of contraction. We've seen housing go. Orders have gone. P for profitability is the next one and then employment is the final lagging indicator. Typically when employment cracks that's closer to the bottom. That's a good time to get long because the market is a forward-looking discounting machine. So I think we're standing right on the precipice of some declaration about the recession. I think that will impact the stock market when it happens. Then we might have three to six months of carnage and hopefully near toward the end of the year we'll probably find a bottom bounce. So that's my rough guess for what happens over the course of this year because of the underlying weakness in the economy. How do you feel about that?
Dan Ferris: I don't think we disagree much there, but I want to get to a specific question about this because Mr. Bottom-Up Value Guy, who we're all forced to think about these macro things. But Bottom-Up Value Guy, I need to ask you, you've given me your view, but are you allocating capital based on any of this or do you just stick to your guns? You don't worry about your macro forecast. Do you actually do anything with this macro forecast with real dollars?
Tobias Carlisle: Very fortunately for me I don't do any asset allocation. I'm only in the stock-picking business. Asset allocation, I can't figure out how to do it with any kind of consistency or certainty. So no. I'm always fully invested long in my value strategies and I don't really worry about what happens. I just talk about it because it saves me from talking about what's in the portfolio all the time because I have my own little podcast and I have to talk about something on a weekly basis.
That, I think, is an interesting – it's an interesting thing to consider because there's this idea in a lot of the social sciences research that simple statistical models, simple quantitative models outperform experts and that continues to be true even when experts get the output from the simple quantitative models. I just think it's interesting to see the success that this thing has had. Fair enough it's only had a handful of opportunities. It's got the "n is equal to eight." There have only been eight recessions in a period of time that Cam Harvey examined and since he published his research in '86 there have been another four.
So it doesn't happen very often, but it doesn't invert very often either. So I think it's interesting that the moment that it inverts, every single commentator on the economy says, "Now you can ignore that one safely." Here are the reasons why that's not going to work this time around. It happens every single time and I just find it interesting that it has such a great record and everybody is so anti. I don't think you can ignore it. I think you have to look at it and say, "What is the impact that this will have on each of my holdings? What will it do to their businesses?" I don't think you can necessarily escape the business cycle in your businesses. I think that they're subject to it as much as anything else there.
That was the argument for a while that the FAANG were going to be able to skate over the top of the business cycle. I think they're subject to it. I think we're slowly seeing that they're subject to it. Earnings are going to come down at the S&P 500 over the next few quarters at least. I think a lot of the reason, the triggering point is it's not the 10/3 inversion. The triggering point is just general slowing in the economy which will maybe turn up as a recession. Not that there's anything magical about a recession either. It's just – the definition used to be two quarters of negative growth. I guess the definition has changed to something else now.
Dan Ferris: I know.
Tobias Carlisle: When that happens there's nothing magic about that. We've clearly got a slowing economy. I think most people can feel it. How does that turn up in my portfolios? Only in my examination. So I try to avoid things that are too economically sensitive and there are lots of business models like that that are very, very sensitive to a downside of the cycle including financials.
Dan Ferris: And to be fair commodities, oil, etc.
Tobias Carlisle: True.
Dan Ferris: Those things are sensitive. I've tried to make it clear to my listeners and subscribers that I'm bullish on those things longer term, but shorter term, get ready for a rocky ride because there's never any other kind of –
Tobias Carlisle: It's really –
Dan Ferris: Yeah. That's right. It's never any other kind of ride with those stocks. So you don't want to talk about what's in your portfolio, but I guess we've covered some sectors that you like.
Tobias Carlisle: I can talk about some things. So I bought Facebook, I don't know exactly how long I've held it for, but maybe not quite a year, coming up on that period of time because I only look at the financial statements. So I don't spend a lot of time – I think that businesses are to some extent unpredictable and better businesses that look like they're better businesses, there's a lot of competition for those extra returns. So Meta just seems to me like one of those businesses where it has been very dominant for a very long period of time, but clearly TikTok, the Chinese spy app, is quite good at attracting attention from kids, where the attention goes, the advertising dollars goes. That's bad for Facebook if that happens.
So I'm aware that that is happening. I see Meta got very cheap as a result by someone's historical performance. So when I looked at it I saw that users are still growing, revenues are still growing. The bottom line is looking a little bit ugly because they've been investing huge amounts of money into the metaverse and all of the, whatever that investment entails, lots of servers and so on, lots of space. I think that that spooked the market when they saw the numbers that were coming out. So Twitter got sold off very, very heavily and I have bought it on the way down purely for the reason that I think it's way too cheap.
If you can continue to own what it has been in the past, it's way too cheap even if it diminishes a little bit over the next few years. It's still way too cheap. It's basically a bet that the past looks more like the future than what everybody else expects the future to look like. So I think Meta is one that I have owned. I still think it's still too cheap. I think it was about half price when I bought it. It probably traded down to one third of what I thought it was worth by the time it actually – I think it was worth about $300. I think I bought it at $150. I think it traded under $100 for a period of time there. So I still think it's too cheap where it is, but I think Meta is a good example of the kind of things we will buy that are a little bit, not so much unknown, but disliked for the obvious reasons. You got any Facebook? You don't like the mind-control machine?
Dan Ferris: I do like the mind-control machine. I think – in fact, I think it's indisputable that these advertising-based businesses, Facebook and Google are some of the most incredible businesses that have ever been created in all of history. The way they gush cash earnings over almost any period of time is just your dream. That's why we want to own assets because they gush lots of excess cash. These do it like few, if any others. They're like a royalty on the economy, on people buying stuff, on spending. So yeah. I think they're pretty incredible.
I don't expect the government to do anything about them. There's a lot of talk about they're monopolies and social media is bad for kids in the case of Meta because my view of that is that it's like when Microsoft was having that problem of including the browser back in, what was that, 1998 or something? It was a long time ago. I thought – well, that's the one that taught me actually. I didn't think of it at the time, but that's the one that taught me well, when they start coming after you for these market-controlled complaints, that's when you know you've got a phenomenal business. It's like – and the master settlement agreement too in the tobacco companies telegraph the same thing and gave them an advantage to continue to enjoy.
Tobias Carlisle: Made it impossible to compete with them.
Dan Ferris: Absolutely impossible. That's right. You don't start a new tobacco company, a new cigarette company in the United States of America. You just don't.
Tobias Carlisle: If Google could get some antitrust against it, then it's an absolute walk.
Dan Ferris: That's right.
Tobias Carlisle: They keep on threatening.
Dan Ferris: It's an absolute – yeah. Lots of threats I notice, but nothing with any teeth in it and no action really despite some fines here and there. So yeah. I agree. They're pretty incredible businesses.
Tobias Carlisle: Another one that I own that's always a little bit – I think it's just a weird one is Domino's, Domino's Pizza, I own. When you look at Domino's, what it earns on assets it earns more than Google, which that doesn't really make a lot of sense that a company like that can do that, but of course it's because it's a franchiser and you don't have to have a lot of capital tied up in a franchise business. When I think about transient society, I don't see pizzas – I don't see people eating fewer pizzas in the future than they do today. I think we're going to keep on eating more pizzas.
Domino's is very consistent. You get the same product essentially from any single store that you go to. My kids love it. They can have pizza for lunch and I'll say, "What do you what for dinner?" They'll say, "Pizza from Domino's." That would be the absolute pinnacle of – that would be the peak of their day if we could do that again. There's clearly demand for it out there. It's the cheapest way to feed a family of four. I have a family of five. I assume it's probably the cheapest way to feed a family of five as well. I think it's one of those – it's a small – it's a $14 billion market cap.
So it's not a very big company. They spend a lot of money buying back stock, but they've got some debt on their balance sheet as a result of doing that. I do think they can carry it. They've got lots of issues with inputs because when the Ukraine, Russia war kicked off that's one of the sources of grain for the world. Flour became expensive and they've got inflation problems. It's hard for them to get drivers, all these sort of things going on in that business. I think that's why it's a good opportunity to buy it now. They take advantage of the weakness and the shared price to buy back lots of stock and it's a very good business under the hood. I think it's too cheap and it's safe and the downside is very low.
So Domino's is another one that I like to hold. I have a fairly eclectic mix, but I tend to be at the more broken-down end than at the really great business available at a fair price. I'm more of a not so great business available at a very cheap price kind of investor.
Dan Ferris: Wow. OK. Is there one of those that you can talk about?
Tobias Carlisle: Just the – so I buy into coal companies, archery sources and I think that everybody knows the issues with coal. When it's burned it releases carbon dioxide, so the ESG guys don't like it. We're not getting away from coal any time soon either. I don't think there are many coal mines that are going to be opened up. So the ones that already have them are pretty good bit and they're over earning. You get them for one or two times operating income at the moment. So I think they're very cheap.
So I put them with my energy companies there. I know what the problem is with them. Everybody knows what the problem is with them. They're overearning. They're earning more than they were. I think they're not overearning yet, but I think they'll over earn at some point in the cycle and I think they'll get a multiple to match when they over earn. So I think they're reasonably safe bets, energy and those resources companies. Just look up – I can't believe I can't think of that name. It's – oh, Warrior Met.
Dan Ferris: Warrior Met. And Met Coal is a different animal. Well, cool. We've actually been talking for a while here. So maybe I'll just get on to my final question, which is the same for every guest no matter what the topic. I think this is the third or fourth time that you're answering this. This question is simply, if you could leave our listeners with a single thought today, what would it be?
Tobias Carlisle: I think value has had a very rough run, an unusually rough run for the last 10, 12 years. I think that – I said value. The less-good businesses that you have to buy at a big discount, that handicap type investment rather than ones where you buy and you're expecting them to be so much bigger and to grow so substantially into the future that you can just about pay any price. I think that that style of investment has suffered over the last decade and I think that the conditions are very good right now for that style of investment into the future.
I think if you look at historical periods of time that have looked like this one we're going into, I think that's like a '66 going into the '70s or '69 going into the '70s, '99 going into the early 2000s, I think that a fundamental, old school value investment is just about to have – it's about to show everybody why it's such an endearing strategy because it has these periods of massive outperformance when there's basically no other options around. So I'm very excited for it and I think folks should pay attention to it, get on it as early as they can.
Dan Ferris: Well said. Listen, thanks for being here, man.
Tobias Carlisle: I'm talking my book.
Dan Ferris: Of course.
Tobias Carlisle: My book is where it is because that's what I think and not the other way around.
Dan Ferris: There you go. Of course. I want you to talk your book of all people. Of course. Yes. Thank you for it, man. Thanks for being here again. I always enjoy talking with you.
Tobias Carlisle: Likewise, Dan. Thanks so much for having me. It's always a pleasure.
Dan Ferris: Many mainstream analysts are predicting that stocks will recover soon, but I say we'll instead witness a cash frenzy unlike we've experienced in 21 years before stocks recover. I'm urging Americans not to buy a single stock until they see it. I predicted the Lehman Brothers crash in 2008 and I called the top of the Nasdaq in 2021, but this, this is the No. 1 most important thing to pay attention to for 2023. I'm not talking about another market crash or politics or inflation or any of these other things.
As all this unfolds, the financial consequences of what I'm talking about could last for several decades if you don't understand what's happening. There will be winners and losers and now is the time to decide which one you'll be. This is why I strongly encourage you to read about my warning totally free today. It's all spelled out in a free report we've put together. Get the facts yourself. Go to StockDeadZone.com to get your free copy of this report. You can learn how to get my four steps to prepare for what's coming. Again that's StockDeadZone.com for a free copy of this new report.
Well, I always enjoy talking with my friend, Tobi Carlisle, partly because I know that he is a very strict bottom-up value oriented kind of a guy especially when things are changing a lot and markets are changing. Of course we've had what I believe is the beginning of an ongoing bear market. Some people think the bear market is over. I always want to know, have you changed anything? Are you doing anything different? He's not. He just sticks to his guns because he knows he's in it for the long term and he knows the strategy works long term. So I always want to know what he's got to say. I like his views on oil. I like his views on coal.
On the banks, we're pretty close, I think. I think we would both buy them under certain circumstances and right now it's just not quite good enough. It's time to start looking at them. I want to – for example, we mentioned M&T Bank. I want to start looking at them now and hopefully things get – this is terrible to say, but hopefully things get worse and if we're right about a recession coming and if just people stop borrowing – I mean, if people stop spending or slow down in their spending it means they slow down on their borrowing too. So banks could potentially get cheaper and more attractive. Anyway, great guy, smart guy, highly disciplined, value-oriented investor. He's going to be a regular feature on this show every several months or so. So get used to hearing from him. I really enjoy just talking with him anyway because he's a great guy.
So, that's another interview, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy.
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