Gary Mishuris on $PHIN and $WBD, options and intrinsic value investing | S08 E01
Summary
Value Approach: The guest emphasizes predictable businesses, wide margins of safety, and the mental model that the price asks the question, focusing on 3–5 year horizons where change is observable.
PHINIA (PHIN): Pitched as a mispriced spin-off auto supplier with significant aftermarket profits, limited leverage, and resilient cash flows despite EV fears, initially bought around six times earnings.
EV vs ICE: He argues realistic EV penetration over a decade caps around mid-range levels and that self-driving impacts are long-dated, making ICE-linked aftermarket cash flows attractive at low entry prices.
Warner Bros. Discovery (WBD): Framed as a good co/bad co separation where declining cable networks are carved out, leaving valuable studios and HBO assets likely to re-rate; interest from multiple bidders adds upside optionality.
Catalysts Matter: Drawing on Klarman’s duration point, he prefers portfolios mixing uncatalyzed holdings with catalyst-driven names, distinguishing hard (bond-like) from soft (corporate actions/restructurings) catalysts.
Using LEAPS Selectively: In rare cases he uses long-dated call options when options are more mispriced than equity and a timing catalyst exists, creating convex payoff profiles with defined downside.
Risk and Process: Highlights updating theses with new information, avoiding automatic averaging down, and recognizing auction dynamics can push deal prices beyond intrinsic value, while maintaining prudent concentration.
Transcript
looks 50. >> Yeah. Well, it's funny. My my >> We're live, fellas. We're live. We're live. This is Value After Hours. I'm Tobias Carile, joined as always by my co-host, Jake Taylor. Our special guest today is Gary Murus of Silver Ring Value Partners. How are you, Gary? Good to see you. >> Good. Thank you for having me. It's been a while. Good to catch up. >> It has been a while. For folks who didn't catch the first one, don't know who you are, give us a brief rundown of your strategy and philosophy at Silver Ring. >> Yeah, absolutely. Well, as we were just talking, I'm originally from the former Soviet Union. That's where the accent comes from. Uh from Leningrad, um you know, came when I was a kid, grew up in New York, started investing when I was at MIT, and uh Warren Buffett came to speak on campus and that was my first introduction to value investing. got lucky to get a job at Fidelity in equity research where I had a great mentor Joel Tillingast who managed the low price stock fund and that really kind of gave me my initial kind of direction as an investor I would say you know predictable businesses run by honest people you know with a big margin of safety and that I would say still probably captures like 80% plus of what I do so silver ring is a partnership it's a long only um concentrated probably between 10 and 15 investments most of the time and um you know I am very focused on quality in the sense of being able to predict what the business looks like over the long term roughly obviously and uh you know I still demand a large value of you know margin of safety to the intrinsic value you know it's probably evolved a bit in the sense that I'm not saying you know it has to be under 12p or it's terrible or anything like that But I'm not new age enough where it's like, hey, it's 50p. It's but it should be worth 75 and therefore it's a great value. Not saying that's wrong. That's probably true for a small subset of companies, but that's just not my circle of confidence. >> Can you give us an example of a holding that you have or something that you've owned in the past that sort of illustrates your strategy? Yeah, I mean I think uh you know there have been a number of these kind of you know little companies uh and I'll give you quick recent example. There's a recent spin-off that I bought uh a year or two ago I forget exactly called Finineia. He was an automotive uh supplier right during the peak scare of you know electric vehicles that internal combustion engine companies were all going to die and the stock was very very cheap. It was probably trading I want to say six times earnings or free cash flow. You know you know the research calls I read on expert networks you know suggested management was both honest and competent which is always good. you know, they had a very large, you know, what FineA did is they basically did um, you know, gasoline direct injection uh, stuff, you know, so directly related to the ice engine. So, obviously people thought, hey, this is a dying business, but I think what they were missing was number one, uh, that more than half the profits came from the aftermarket business is a very steady, predictable business. um you know low growth, moderate growth, but you know much more immune to changes in kind of where you know new vehicle sales are going in terms of electric versus not and the actual you know threat to the older business the actual new parts business was a lot less in my view than was perceived. So you had a business run by good people, limited financial leverage. I thought was probably a single digit growth business longterm. Plus, I thought the management had some nice tuck in capital allocation opportunities to add value and you could get it for basically, you know, 15% free cash flow yield and so forth. Now stock has rerated quite a bit. Um but you know I would still you know uh I still own a small position but that that's a good example where there's just a different I have a variant perception about the long-term cash flow stream of the business. So that that's one maybe another complete you know happy to go in any direction but another quick one. Well, just before you go, let's just talk a little bit about >> EVs versus ICE and [snorts] >> and then uh maybe self what self-driving does to to that market. So, let's start with what's your take on the evolution of that industry, electric vehicles versus internal combustion. >> Yeah. So, you know, look, obviously I didn't know and I don't know, right? So you kind of look at intrinsic value as a range as I'm sure you guys know. So I ran you know different you know when I kind of underwrote my intrinsic value range I said okay you know maybe the range of penetration is you know over the next 10 years is 30 to 50 or something like that and we were starting sub 10 I think at the time. Um, and I think I think it's important like I mean this is like if you're listening to this like one important idea is that something can be true but not material to your investment thesis at a certain price. So like when you're paying six times earnings, you're not so much worried about year 25, you know, or even year 20 because if you're roughly right that earnings are not shrinking, you're going to get all your money back and then some much sooner than that, right? So I don't know and I didn't know what you know year 20 you know electric vehicle penetration looks like but I was fairly confident that just mathematically it would be almost impossible for it to be much more than 50% over say a decade time frame um and uh by that point the rest was upside and as far as self-driving I think look it's a risk but it's in that same category right where sure you know self-driving if it's successful ful reduces vehicle utilization. So presumably it decreases number of you know the car park shrinks presumably right I would imagine but again is that in the next 10 15 years maybe it starts to kick in you know towards the second part of that range but again if you're buying an investment with a big enough margin of safety I don't think you have to answer those kind of tough questions because let's be honest like what do I know about EVs or you know self-driving that you or anyone else doesn't Yeah, it's a question. It's an it's an interesting question, but I like the I like the way you frame that. If you're paying six times, you don't need to think out much more than six or so years into the future because you get your money back in the short term. >> I mean, this is like a mental model that really hit me over the head probably. So, I've been doing this for 25 years now. About 10 years into this, I had this like realization which is kind of like shouldn't be like it's like an embarrassing realization because it's like, well, Gary, why didn't you realize like this day one? But the realization was the price asks the question. And so like I teach a value seminar you know uh at Babson and I always I go through this example with them and I say look okay you have a company it's uh you know it's been earning a dollar a share right being given you giving you a quarterly dividend of 25 cents. Okay let's say the stock is at 25 cents. What is the question the price is asking? And a lot of times students are like, "What do you mean? What kind of question?" The price isn't asking. It's silence. It's just a number. But the price is asking basically will this company survive long enough to pay one more dividend. Right now you bump the price up to a dollar. Well, it's, you know, it's saying, well, will survive for a year. You bump it up to $10. Now the price is asking maybe something like will this business ever grow again, right? 10 times earnings. you know, if it's if the company grows, it probably should be worth more than that. And now you bump it up to $20. Now it's asking, will this company grow double digits for five to 10 years? So at each level, right, the question, the price is asking is very different, but the company hasn't changed. Same company, right? But the question being asked of you as an investor changes quite a bit. And so I think this is kind of an important mental model that you know you have to answer a certain number of questions to be correct on investment but those change and as Buffett says like it like a investing is like a multiple choice test but you get no penalty for passing on as many questions as you want to pass on until you find one or two or three you're like yeah I'm pretty darn sure I have a good answer to this one. That's I think Pineia for me was that like I don't know the answers to the tough questions that you're asking which are legitimate at a higher price but at that price I didn't need to know that. >> Yeah. So you're >> do the questions get harder or easier over longer time horizons. So I'm thinking you know um if you could say you know the culture of a company is leading it in the right direction and like 10 years from now you know it's going to be a better business than it was today because that's all the momentum are in place and it's easier to make that bet maybe sometimes than what's next quarter going to look like >> you know so this is like an awesome point you bring up because I've seen this chart uh floating around you probably seen it too where it's like as time arise and approaches infinity like basically the only question you need to answer is management right >> you know and essentially like if you are thinking about a intermediate time frame let's say 3 to five years which is a lot of value investors I think you know focus on that time frame you know and I think rightfully so because it's long enough to get past most people's kind of like the most competitive part of the market which is 0 to 12 months so I think like you know 24 to month two years to 5 years is pretty good for like special situations reversion to the mean all those kinds of patterns if you will then the question you're asking is well is it easier to say okay I can't answer the path there but I see this is an amazing culture it's getting better and therefore I know the destination right I don't know exactly how it's going to wiggle there but I can just kind of you know I I think the answer is yes but I uh I suspect the degrees of difficulty is very very high and I think there's a couple of things involved to unpack that. is so I I was mentoring one of my interns and we were reading rereading Nick Lee's letters right they're kind of classic now you know as he you know like many investors he transitions from this like cigar butt approach to hey Costco Amazon Berkshire you know shared economy scale great culture big mode fire and forget right and what I try to and I think that's amazing great skill kudos no criticism whatsoever the challenge is how how many false positives are you going to have along the way, you know, right? Um, and that's going to vary by whether you're Nick Leap or, you know, me or someone else, right? Um, and also like everything looks more obvious in hindsight and could go and find a whole bunch of articles that were saying how amazing Kmart was and how Walmart would Walmart survive or something like that, right, in the early days, right? So I think I worry that your insight is exactly right. I think that and I think the huge wins like the 100x returns probably or 50x returns over decades probably come from or have to come from that kind of insight. But then the challenge is a is with is it within your circle of competence or you know your being whoever is doing the investing and also how many other ones are you going to pick thinking that they're Costco but it turned out maybe they're BJ wholesale or whatever right or thinking you have a Rio Automotive and you get advanced auto parts right um and also what kind of price are you paying for that meaning when you're wrong on that inside what's how much money do you lose right if you're paying 40 50 times earnings like whatever Costco is at today you know and you turn out to be wrong either about the magnitude of the investment opportunities or the culture changes over time or whatever right um how much are you losing on the ones you're wrong so I think the answer is yes true but I always encourage like people I mentor my stu students is like don't try to copy people or clone people. Figure out your strengths and weaknesses and figure out what's within your circle of competence, learn from a bunch of other people, but then put it through that filter of what can you do really well. So, I'm not sure I can do that really well, but I respect people who can. >> I think it's a great just that just that it's so competitive from zero to 12 months, but then also like it's there's no quantitatively there's nothing predictive beyond 5 years. I can't find anything that works in years six and seven and beyond. Like you get the bulk of the prediction is sort of in the early part out to five years. So that's a it's a good little I think two or three to five is the is the right sweet spot. Sorry >> JT. And I think the p it depends on like so I kind of have a collection if you will of investing patterns like uh that I try to find and I think the time horizon would probably match the pattern and like so to use an example that's like if you use a turnaround as an example like and I I don't say I specialize in turn turn around but it's one of the patterns I'm comfortable with and I've made a lot of mistakes and learned through those mistakes and the turnarounds kind of follow this arc where you know new co comes in assesses the problem formulates the plan begins implement you know like blah blah blah blah blah and there is a certain natural timing to those steps that doesn't matter if you have AI and robots or not the human component of that of changing culture changing behavior changing incentives there just a human element that paces that and I think that is a beautiful pattern because the turnarounds for example what I found is you don't do anything in the early kind of 0 to 24 months. Most of the time you wait for the implementation. You wait for early evidence that it's you know tracking and usually that means you have to monitor KPIs before they hit the bottom line. So you're not looking for EPS change you or free cash flow change necessarily. You're looking for whatever the intermediate metrics which going to lead down the road to bottom line success. And then you your probabilities shift drastically because you know most turnarounds 2/3 plus don't turn once turnarounds start to turn very few of them go back down and so in that sense you can actually sorry I know it's like I'm being like very wordy here but you can shorten your time horizon give up some of that initial upside because the stuff will be higher somewhat once you see that initial evidence but the beauty is that your probability I believe through experience strongly adjusts much higher than what you lose on that initial stock movement and your IRRa is much better. So that's an example where you're probably shrinking your time horizon because you're waiting for evidence because in the early part of my career I would confuse the possible with the likely and say oh management is forecasting this turnaround this is what they're going to earn $3 I'm going to take $3 multiply by some multiple 15 times 45 stock is at 20 awesome yeah but that's a lot of times the best case and most of them never make it sometimes it makes sense to shrink the time horizon Again, not into the like a three-month window where you're trading, you know, noise trading, but in a very concrete way of where you have specific I don't say catalyst, but sometimes catalysts, sometimes business progress, sometimes, you know, actual events, you know, whether it's, you know, reorganization, whatever, where you are shrinking the time horizon and that event acts as the catalyst to shorten the horizon. JT, do you want to continue on? >> Oh, I was just going to make the that we've joked before and we were talking about, you know, Nick Sleep and all these uh everyone not doing enough of their own matching of what fits their strengths and weaknesses. Um, but we've joked before that there's likely to be more money lost trying to find the next Amazon than there ever was made on the original Amazon. >> Yes. But >> well you know I a few years ago before you know like AI was the hot thing you know I would give uh my students like the description of two companies and I would say okay so you have these two companies one uh and let's say it's 1999 you know one is a oldline retailer selling clothing and related soft goods no internet presence and no intent to have an internet presence the other provi is making kind of the plumbing of the internet you know switches routers and so forth. Uh, and let's say you know that the internet is going to take off. You know that you know e-commerce is going to be amazing. Which of these companies do you think would make a better stock? And you know they kind of suspect it's a trick question. Obviously it's a trick question otherwise why would they be asking but they still don't like and of course most people say well like the router company and it's not even a valuation thing. So the the router company is JDS Unifase um and the clothing company is Ross Stores, right? >> Mhm. >> You know, and again you have this boring mundane business where you who who could have thought, right, that this is going to not only survive but thrive. But nevertheless, right, you have, you know, kind of a business that is been able to compound capital for a long time despite all these secular changes around it. So, I think like again playing your own game like it's like in poker, right? You know, like you see, you know, like unless some people are experts at all forms of poker, but I used to play poker semi- seriously, it's like, okay, I knew two forms of poker, you know, Texas hold and pot limit. So I'm not going to go play seven card stud you know because I just don't know the game and and then I think in investing what happens is well there's some guru you know that you know you know happens to come around they have ginormous returns for some three to five year period um you know that probably means their style is in favor you know they get on on you know they write a book they do interviews and they say a look at me I'm so amazing I figured this out this is so simple if only you do these simple things like a lot right now it's like hey buy good companies managed by good people um and just hold them hold them never sell them right something like that and everyone goes rushes out and copies them but two things one is even if this person is truly skilled and telling you how they're actually doing it doesn't mean that you are going to be able to replicate that because your skills are different right and number two is there's a very good chance that this person is just on a hot street and everybody is ascribing you know some mix of some maybe some skill but a whole lot of luck over that period of time and calling it all skill and the crowd saying it must be all skill because look he wrote a book he wrote this he has this you know and of course you know expost antie and you know you go and you look at their returns and not only the returns bad but the asset weighted returns >> awful they're like negative you know I'm not going to mention anyone by name but you know I'll I'll imply you know I think Buffett always says criticize by category ategory and praised by by name. But back in the internet bubble days to get us away from the current set of folks in that category, you know, there was a there was a firm that was based in know Silicon Valley and their claim to fame in investing was that hey, they were closer to where you know the tech revolution was happening. So they had like an edge figuring out these technology companies. Yeah. No, I'll cover all the magazines yada yada yada. of course, you know, haven't heard from them for a while after the, you know, the bubble pop. So, I think the message is like just try to be a better version of yourself, not a secondary version of someone else. >> Gary, you were going to mention a second name. Do you want to take us through that second name? >> Yeah, I mean, Warner Brothers is a current example. Um, and I think it's relevant because catalysts are important. Um and I used you know like I which is interesting because I used to I used to think catalysts are for momentum people you know like cuz like when I used to hear the word catalyst and I used to associate with hey someone needs expects the company to beat the quarter and that's going to be the catalyst but that's not what I mean because like you don't know if they're going to beat the quarter even if they beat the quarter you don't know what was expected that's a different game that's in that zero 12 month kind of trading game that I'm I would be the pads at and I don't know what to do. Um, I think there's a category of catalysts and actually Seth Clarman made a good point in one of his letters several years ago and [snorts] he wrote something along the lines of like a a fully uncatalyized portfolio of equities has a very long duration and then he went on to explain certain implications of that. So if you think about you know equities as bonds right with no with variable coupons and no maturity like you know duration of a bond right it's kind of the center of mass of those cash flows right for a bond it's obviously heavily weighted by when you know the bond matures that's the biggest cash flow for most of the bonds for equities it's there's no maturity so it's like you know the cash flows and you kind of figure out where they are weighted so the central mass of a uncatalyzed equity portfolio is very far away and they had from the point current point in time. If you have a and his point was a better portfolio would be yes some maybe some in that category but some in the cataly catalyze category uh where there's going to be you know a reason for the rerating or even better actual event that forces your thesis to be you know put to the test gain a and like probably the simplest example of that you know is a bond let's say you buy a distress bond let's say it matures was at 18 months you buy it at 50 cents on the dollar thinking it's money good market says not really it's that's why it's at 50 cents on the dollar 18 months comes around and again I'm simplifying there probably some in between cases where you have some debt for equity swaps or whatever but let's just say there's two scenarios either the bond they pay back or they don't and and that's a very hard concrete catalyst hard I mean it truly will like you're either get your money back or you will not you'll know if you will, right? And then there's the second category of catalysts which are much more common in equities which are these I call like non-h hard catalyst. And so Warner Brothers was an example of that. So had a long history with Warner Brothers back to when it was Discovery Communications before they did the merger with Warner Brothers that been a disaster. Which by the way, as a quick side note, you know, you know, you know, there's a lot of hate in the stock when some Gatfly shareholder is like screaming at how management is overpaid at a, you know, annual meeting, you know, which did happen here. It's one of the signs. But she was probably right. Yeah. [laughter] >> Yeah. A little egregious there, wasn't it? >> No, it is. It is. But the point is, if things are going well, nobody is going to bring that up, right? It's only brought up when people are like frustrated, the stock is down, everyone hates what happened, what's happening here. So, um, so there's a a few mental models came together and I think like Charlie Mer likes to talk about La Palooa effects in the sense that if you combine multiple mental models and they all align, you get these like multiplicative effects, right? That all uh multiply the outcome many times. There were a few things like one common pattern that I common but intermittently common pattern that I found is there's good company bad company combination right which is what we had here like the simple way to think about it is let's say you have a company it has two divisions A and B A is earning $2 B is losing a dollar the company is has EPS of a dollar overall the market doesn't look too closely assumes nothing is going to change and it says dollar times 15 times you get $15 share price. Good luck. Go back into the market. And let's say hypothetically the company just shuts down the money losing business and all of a sudden it's earnings double. Go from $2 minus $1 to just $2. And if the multiple doesn't change, presumably it shouldn't or go up with anything because the better business is what's left behind. All of a sudden you have a $30 stock, right? So that's a simple kind of model that I've seen time and time again. So you had that here because Warner Brothers was a collection of a few assets. You know the bad assets were the declining cable networks which we all know people are cutting the cord. They're switching to data only plus Netflix or something like that and they're canceling their cable bundle subscription. And so that business had you know high single digit topline decline in recent years. So the market assigned at very low value right and then you had very valuable businesses. um the Warner Studios, the HBO HBO brand and the libraries attached to those and those businesses had huge modes. And one good way of thinking about it from Buffett is just asking how much time and capital would it take someone who had abundance of both of those things to make something a bad business, right? And so here if like Microsoft or whoever has the most money today uh Nvidia I don't know who it is these days you know decided they're going to enter this business from scratch and they're going to make this you know a tough business uh for Warner Brothers what could they do and the answer is not much or at least it would take them you know 10 20 30 a long long time before they could make it then right and even then there's no guarantee that they would be successful so that's one way like just a sand checker to set a business so they want to hide growth business but a very durable mode very long kind of early in my kind of origin story I talked about Joel and you know Chillingass and Fidel and predictable businesses so these are very predictable businesses not in a single year because the studio hit rate varies but on some kind of rolling five-year basis you can pretty much say hey these businesses are going to do roughly X and the market was focusing on the negatives and not giving much credit to the positives um and then you the company announced to reorganization and they basically said, "Okay, we're going to actually spin off the batico or I think people use the less polite term starts with an S, ends with a T." I'm not this is a family show so I don't want I don't know I don't know how all the folks are listening so I'm not going to say it but I think you can imagine uh you know what's in between the S and the T. and uh they're going to get rid of the bad co and just keep the good co and they said and that like light went on okay this is a catalyst you had this potential energy right or what is the business theoretically worth that didn't matter because the market is like I don't care what you theoretically worth nothing is changing no one is forcing me to value it differently so I Mr. market will value it however the heck they want and right now I'm mad at the management I hate the industry they're in I hate the decline in the cable network I'm going to value it like low you know and you can't do anything about it management well actually we can we're going to do it and so they announced these plans and that plan you know again I would say it's in a kind of soft catalyst category because it's not a hard catalyst like when the separation happens the market doesn't have to change the price right it's not like a return of capital or something like that. But it was a pretty good bet that once the main reason for the hate and negativity was going to be, you know, spun off separately with the love that by the way um that the main co or the good co would be valued a lot differently or perhaps would be attractive to other to a different set of shareholders and if nothing else the cash flow stream from that you know company would be very valuable and they could just return it and not if that valation didn't change they could buy back shares. In this case you had Dr. Malone on the board, you know, so you had a pretty good guess that they were going to be smart about capital allocation, not just going to blow it. So you kind of put all those things together. And the last thing, I'm always hesitant to mention this because, you know, when I'm going to mention this, you know, people are going to think like this, you know, Gary sits and does this all the time. This is the exception, not the rule. you know, caveat mtor, you know, buyer beware, whatever, like yellow triangle warning attached, but occasionally, this might be heresy, like value investors can use options within a long-term value strategy. And again, when I started investing, I used to think all options were complete gambling. And I, by the way, think that if you never touch an option in your life, you probably are fine. You know, you can still do very well as an investor. But there are times um you know there probably four or five different patterns where you can use them well with an intrinsic value framework especially if your discipline have intrinsic value ranges and have processes and position sizing and all of that kind of dialed in. In this case there [clears throat] was an accelerated time horizon and uh which kind of made sense uh to align with option strategy because like what's the biggest downside of options? It's like time, right? You know, as an investor, you ideally want time on your side. So like the number one, two, and three terrible thing about like buying a call option is time is against you. Like if something doesn't happen within the time frame of the option, you basically get nothing even if you're right eventually in your insight as opposed to holding the equity, right? And like how do you offset that huge disadvantage? Occasionally the option is much much more mispriced than even the equity. And in this case my my rough estimate was the option was trading below 10 cents on the dollar of fair value for that option. And so you had like a catalyst. You had a pattern for where value is likely not guaranteed to be unlocked. You had this good cob badco situation. And so I actually expressed that position in um in options because I thought that was the most mispriced kind of security related to this event. So again hesitant to mention it because you know I don't want the blurb to be Gary trades zero day options. You know I don't I really don't. But once in a while this is maybe the second or third time in 10 years I've done this. you can have a very big mispricing stacked on top of a already big mispricing. >> So you bought a call. Is that the >> Yes. And so the other thing the other thing I should have mentioned is I bought LEAPS, right? So So LEAPS, you know, if you're listening, you're not sure, it's like just longer term call options, right? So in the US they probably go up to 30 months, but definitely 20 you can get them 24 months out. And so if you think about [laughter] how options are priced, you know, they're in the market priced by something called the black schles uh formula, right? And that assumes basically, you know, random movement around the current price with a drift term at the risk-free rate. Uh meaning that the the price moves in time forward, you know, at whatever, let's say 4% the current risk free rate. That's about right for like a shortterm option. The longer the time frame of the option, the more wrong that becomes. But that's still how it's priced. And so the longer options are partially mispriced based on that. I don't want to geek out, but essentially, you know, you it should be moving forward in time by, you know, something like 10% if they're not paying a dividend, not by 3 4%. Right? So that spread added up over time. Um and also market makers who sell you these options, they're not sitting there and looking at fundamental events, right? So if you have this, you look at black trolls, you have this normal distribution, right? Assume um and promise this is the most math I'm going to use in this conversation mostly because I'm despite my MIT background, I'm not that good at math. Um but here you have kind of a binary event that changes the probability distribution and you have this very binary uh situation where you could have a much higher price but that's not priced in. So there's a couple of these mechanics which makes essentially the way the market prices options in this case much less align with their fundamental fair value. I don't want to say intrinsic values because in options intrinsic value has a very specific meaning. So just using fundamental value. So in this case, I bought leaps. They're probably on average like 18 months or so. Um, and normally I wouldn't be very uncomfortable with that because my time horizon is much longer than 18 months. But again, the event was supposed to be 9 to 12 months away. I had an extra cushion of six more months if they like the spin-off would be were delayed or if the reating would take time. And again, the price asked the question. I bought them between eight and 10 uh% of the of my intrinsic value. So I need to be right less than 10% of the time to break even. Right. And if I'm right right and I think you know I I can make many multiples of of my capital with a very precisely defined downside risk. So again for consenting adults only I would not recommend this to most people but occasionally if you know what you're doing I think there is extra value to be added in that area which I think is pretty inefficient and rarely talked about. And in the spin did you take the spin cur or did you take the uh >> So the spin hasn't happened you know so what happened was you know so so normal so norm in a normal situation I think you just want to reassess because like I everything is a price and a declining cash flow stream while it's hard to value and [clears throat] there all kind of reasons for why you know to avoid declining businesses but if it's absurdly price again that old example if it's price of one times earnings and I just need to know that they'll survive for a year I can maybe underrite like that and be comfortable with that. So, normally you want to see where the prices land, figure out which is the most the piece that's still the most mispriced and reassess. Right? In this case, you the catalyst not only attracted you know public market interest but also you know the strategic value I talked about of these com these modes these irreplaceable uh assets um attracted biders. So you had Netflix come in, you had Comcast come in and you had um you know Paramount Sky Dance come in. Now when I wrote my letters to my partners about this position, so this is not like Monday morning quarterbacking. I literally wrote that that is a very strong positive optionality in the sense that these assets should generate an auction and they should be very strategically valued. Now I didn't know it was going to be Paramount Sky Dance, but that's not important. The important thing is it was very obvious that these are assets that are scarce and multiple people would want them. It doesn't mean that there would definitely be a bid, but that's a scenario as you're thinking about the probability distribution of outcomes that makes the right tail better and probably truncates to some degree some of that left tail. So you have this auction dynamic and auctions are amazing because you know we all think of like rational investing and numbers. Auctions are like so irrational. So when I was a young analyst, if it >> you're on the right side of the auction, it's amazing. >> Yes. Well, so so I tell you this quick story. So I was a young analyst. I convinced them to pay whatever three grand to send me to Harvard's behavioral finance seminar. And I was like 22. Everybody that else is there like like me. I'm 46 now. So they're like my age. I'm half their age. And one of the Harvard professors uh Max Baserman did this uh auction I will never forget. and he took a $20 bill and he sold it at auction for $23 in front of us to like some grizzled investing veter. And I was like, WTF? What just happened? So I came up to him after class. I said, "Professor, was this just like a trick? Like is it like only you can do like how?" He's like, "No, I've done this hundreds of times to MBAs to, you know, experienced professionals. It always works." And you know there I wrote about in my Substack article. You can check out the mechanics of the auction if you want why it works. But the point is, you know, it always works. And then years later, I was a speaker at an investing conference like on a big stage in Vegas. I was invited to give a talk and, you know, inflation. So, I took a $100 bill and I sold it for 120. I was a little nervous. I'm like, "All right, >> Benjamin, don't let me down here." >> You know, so yeah. And and the thing is auctions frequently don't have a stable Nash equilibrium. You know, again, geeks speak for they keep going, right? And I think in this case, the mental model is that so I'm a big fan of, you know, like intrinsic value is my true like north true north. I get it. But there but I think again this might be sacrileged to some, but it's not the only model for markets, right? I'll give you another very legitimate counter example George Soros and theory of reflexivity right and you know intrinsic value says okay there's this correct value the private v value of this business it acts as the source of gravity pulls the price towards it right that's the intrinsic value model the George Soros says well no no value doesn't p drive price there are cases where price changes value and you first hear about this you're like what that makes no sense how price change value. Well, perfect example was bear turns uh during the great financial crisis, right? So, you had this company, you know, there was some concern about it, you know, viability. Stock went down. Okay, stock went down. People noticed the stock went down. You know, some more clients left that caused the stock to go down further and that spiral continued until they eventually were acquired for a pittance by JP Morgan. So in this case the price was the mechanism that changed the value because it was a feedback loop. Again doesn't apply all the time but there's a subset of situations like allow run the bank kind of situations like bear turns where it does apply. So an auction model is a different model from intrinsic value because you no long the question is these guys are no longer sitting there the biders saying what's the DCF intrinsic value of Warner Brothers? That's not I mean yes that kind of someone is doing that but they're saying we're alpha billionaires. We've publicly committed we want to buy this thing. We are not used to hearing no uh for an answer you know or to quote Tony Soprano like please like you know but like they're used to hearing like yes sir right and and they're no longer buying just a casual stream. They're buying, you know, redemption for their ego so they can look a certain way to others and have the assets they want so forth. So I'm not suggesting you should gamble and say, "Hey, if we get intrinsic value and just hope that the auction price will go insanely high, but it is just the reality of it is it changes the probability distribution of outcomes for prices." And if you just ignore it and say I'm going to sit in library tower and say no I'm just going to run theoretical DCFS okay but then you know the scenar the situation has changed and I think you what I did you know when it happened very specifically is I'm very risk averse I have most of my c family's capital in the partnership you know uh I'm not fooling around so I took most of the profits from the investment but what I did is I kind of created upside optionality through a tail position which was a relatively small amount of capital but very convex to the auction playing out and that was proved very successful because it's been playing out now was that lucky of course you know like any good outcome has a component of luck like anyone who says that there's zero luck in anything is just lying or selling but was a random luck like a lottery ticket no it was I thought I think it was a favorable probability ility distribution that happen to hit as opposed to just blind luck. So again, there are kind of if you combine enough mental models and you overlay it with your circle of competence of what you're good at and comfortable with, I think you can do fairly well much better than just kind of trying to copy whatever is working lately. >> Good one. Um JT, you got some uh vegetables for us? >> I do. And uh this is the you know we had a little break and we're back with is it season 8 Toby? Is I am I right on that? >> You must be. Yeah. >> I agreed everyone >> I agreed to do uh five episodes uh back in 2019. What the hell happened? Uh so first veggies of the season 8, the new year. Um so hopefully these are I'm setting the bar high for myself for the rest of the year. But uh so today's episode starts with a random question that I was pondering one day as as one does. Are there any examples of the farmer's fable that are actually found in mother nature? So if you remember, you know, longtime listeners will remember our segment we did on the farmer's fable, which is basically that one farmer can have a great year and then a brutal one, and it's all based on luck. But if you add a second farmer with a different luck uh and you pull the harvest uh you can then end up uh shrinking the swings that happen and that and this you get the same average but much less variance on the luck and if you add that second uh it's almost like magic like you get a better geometric compounding return uh or harvest um and you you're able to limit the downside through sharing. So I was wondering, mother nature surely has discovered this uh this and you know uh transformed random individual uneven outcomes into collective stability. And of course the answer is yes, she has. Uh and it's it's in ant colonies. And we've done lots of you know ant-based veggies over the years. So how about how about one more? Uh so [clears throat] it actually led me to a new term I hadn't heard before which is trophylaxis. T R O P H A L L A X I S. And it's the mouthto-mouth sharing of food among ants. So >> here's the strategy. Like everything, ants live in a world of uneven outcomes. And one may may find a sugar cube when he's out wandering that you dropped at the picnic. Uh another may find nothing. Another might be come lunch for an ant eater while it's trapesing around. Uh it's the same asymmetric return patterns that our farmers might face. When a forager ant finds food, they don't store it in their own personal hiding place. They return to the nest and share it through trophylaxis, these tiny droplets mouthtomouth with their nest mates. And those nestmates then share it with others and so on. So it's it's really this variance reduction algorithm. It's nature's way of averaging. Um so you might be wondering why mouthtomouth? Why don't they just dump everything into a big central vat? That's what I was wondering. Uh wouldn't that be a lot more efficient? Uh but there must be a good reason why they don't do that, right? Uh and there is a good reason. It's that a central vat actually destroys information. So when a forager ant shares a droplet of food, she's not just feeding someone, she's also sending a a little data packet to them. And that droplet carries chemical signals. How dense the food is, how fresh it is, how clues about where it came from. In other words, they're not just moving calories, they're also moving information when they do that. So, uh, if they were when it passes from ant to ant, the signal strength gradually fades, but that fading itself also has some information in it. And so, if it was all homogenized into a big vat, you end up losing that nuance. Uh, and so highquality nectar is would be blended with the lowquality nectar, fresh environmental cues mixed with old ones, and now the ability to infer what's happening outside of the the nest would start to collapse. Um, plus there's the the risk of that's magnified of contagion risk. Uh, if you are putting everything into the same vat. So you could think of this as like a kind of a risk architecture principle. You know, the network is modular and localized failures and then you have centralized uh would be globalizing that risk, right? And I'll let you guys kind of make your own analogy and jokes about central bankers creating fragility here. Uh but [laughter] so what what takeaways can we borrow from this as investors? Let's see if we can try to land this. I I'll offer four simple suggestions. Uh one, maintain a forager network and feed it small steady packets. So keep a a lightweight habit of swapping tiny idea droplets with a network of trusted people. You can help feed each other, which is essentially, you know, it's quite helpful when you're running low on targets. Uh you know, the goal isn't to outsource your thinking. It's to keep your pipeline non- empty and let the network's uneven discovery rate kind of smooth out the dry spells of your own uh your own search through good inbound ideas. Two, share signals, but not full vat conclusions. So, ants don't pour everything into one soup. They pass these packets along that that still carry a lot of context. You can copy that. Uh when you share, capture the source of new ideas and timestamp them plus where you uh where you got them from. Uh and and journalytic, by the way, is just put a plug in for that is great for this. Um it but it keeps information from getting homogenized and will help your future analysis of networks that you should trust more or potentially ignore. Three, build modularity so that bad ideas don't go qu colonywide. So don't blast every idea that you ever have to everybody. test it in like a small pod first, one or two people who think differently uh before you kind of bring it globally. Uh and this this preserves the independence and kind of localizes contagion of stupid ideas. You know, bad thesis can die in a corner instead of becoming this like group's shared delusion. Uh and four, use a a quorum rule before an idea graduates. So the idea behind this is that you know ant colonies don't commit until there's enough independent ants reinforcing the same trail. And so you can copy that by limiting your deep dives until you maybe you've had two or three independent pings, different people, sources, angles pointing at the same name or theme. So you know, this can kind of filter out a lot of noise without maybe killing the serendipity. You only have so many deep dives that you can do in a in a given year. So you want to make them count. Uh and so so to wrap things up, yes, mother nature has solved the farmer's fable. Uh ants pull this upside and then they limit this centralizing risk. They share in packets, keep information intact, stop single failures from going colonywide. Uh, and so you could take some inspiration for how you designed your idea flow network to more resemble the the evolutionary wisdom of ant colonies that's been honed for more than 100 million years at this point. >> Good one, JT. >> Thanks. >> Um, Gary, do you know anything about the Magnum ice cream spin? haven't been following it. >> I've eaten a lot of Magna bars. Does that count for anything? >> Yeah. No, primary research doesn't count in this case, I suppose. Um, so the short answer is I it's on my radar screen, but it's obviously not at the top of my list. I don't have anything useful to say. >> Okay, there was there was a question about that from the from the comments. So, what was it like uh working for Joel Tilling? What did you what did you learn from from him? >> Yeah, and again, not to overstate, you know, like I worked in the research pool. just that Joel happened to kind of click. Joel and I clicked and he became my mentor. I'm in touch with him to this day. Um I mean, well, a few things from Joel. He was super hardworking. Like I was there on Saturdays. Uh probably to the detriment of my relationship at that time. Well, definitely to the detriment. And he was there on Saturdays reading annual reports and 10Ks. But that was really I don't say inspiring, but kind of inspiring as opposed to this like hierarchy of like I'm senior, you're junior, I'm partying, and you doing grunt work. he was there rolling up his sleeves doing reading 10ks reading and reports. Um I also just uh thought that he was one of the few very few so I had about 45 PMs that the central research pool supported at the time domestic PMs they were more internationally he was one of the few probably a single digit number uh that were actual intrinsic value investors. So I think like it gave me the confidence that worked because he was a successful investor with a very rational approach um that worked and that used the intrinsic value framework that I was like this passionate young analyst. I just heard Warren Buffett. I've been going to Brookshire meetings and it gave me that push kind of in the sea of you know I don't want to say anything bad about anyone but a lot of the PMs there were you know let's say time horizon and more he had different styles definitely not intrinsic value oriented let's put it that way >> um and I think the other thing that stuck with me Joel once told me were at lunch and he's I said I asked him how did your style how did you formulate your investing style and one of the things he told me that resonated because he just said I wasn't sure if I'm a good stock picker. So, I wanted the style that worked with it. I'm like, wait, what do you mean? Isn't that what we do, stock picking? But I think I understand what he meant, which is he's not he doesn't consider himself particularly good at figuring out what new thing is going to go to the moon or what's going to be the new this time is different kind of situation. He so he wants businesses that don't change for the worse and that you can take where they've been and use as a reasonable prologue to where they're going to be that and that resonates to this day. >> Did that lead to more or less uh concentration in names then? >> Well, concentration is probably a topic a long topic. I wrote an article for CFA magazine a while back on that. But I think it's a natur it's an outcome of your other dimensions of investing style. For instance, like Joel had this cartoon in his PM presentation where a guy walks into a store and says to the storekeeper, I want high quality and low price and the shopkeeper says, "Sure, I have both. Which one do you want?" [laughter] The joke being obviously that you can't most of the time you have to pick in market. It's like do you buy some secularly challenged overlevered POSOS you know uh garbage or do you buy buy you know the company that everyone is saying is amazing compounder but at 50 times earning right you know and once in a while you have some dislocation some insight some situation some c whatever where you can have things that meet your quality and also have a price margin of safety the overlap between those is not frequent or large. So if you want to maintain that overlap, you almost have to be a concentrated investor, right? And then there is degree of concentration. Um again, if you are following a Ben Gramian strategy of pure aversion to the mean or more pure version to the mean, let's say you're buying I know netn nets aren't the thing anymore for the most part, but let's say you were buying a bunch of nets. You want to package them in a large group, right? a large bundle because some of them won't work out at all but on the average there's probably excess return to be had there. If you if you're buying Philisher style compounders where the point is you want you know before we start we're talking about amazing cultures and you know how you know things evolving you know right uh you know culturally in the right direction that's very rare. So if you want to escape from the mean in this rare situation where there's a large reinvestment opportunity, great management, great culture and a big competitive advantage, you're going to naturally have a lot fewer investments, right? So I think it's a it's a combination of things plus overly how much do you care about losing versus winning? Like I grew up poor. I'm an immigrant, you know, came here when I was 10. My mom, you know, uh raised me as a single mother. She stared welfare for a couple of months before she found her first job. So I'm just naturally very risk averse. So that probably makes me a little more diversified. If I were, you know, purely saying, well, Kelly criteria, this is what I should be doing. I should have these huge positions. You know, I've seen people have half of their portfolio in the stock and use Warren Buffett partnership days as justification. And I can tell you, you are not Warren Buffett and chances are this is not American Express during the salad oil days. So before you put half of your money like your portfolio into one investment, just be realistic, right? So anyway, >> long answer to a short question. >> I might be misremembering this, but I thought I read the update to uncommon stocks that's written by with the intro by his son and I think he said that he had something like 800 positions when he died. Do you guys remember the intro like there's a the preface to uncommon stocks? >> I don't remember. I will check that. That's not what because most of his returns came from a very small handful >> no doubt but >> all a couple few others >> the you know the you get that long right tail of performance and so you can put on lots of small positions and or over the lifetime you accumulate positions >> you can but then the the challenge becomes how do you manage that and I think this is very like again very fascinating topic because I've been thinking about the last few years is about how do you react to change in investing too Like I think value investors are terrible at updating their thesis to new information, me included. And I've been working on myself on like frameworks and mental models to force myself to be more attentive to change. Like especially if something is changing for the worse like I used to like automatically I bought a stock it got cheaper price drop. I'm like man yeah I'm going to show the market. I'm going to buy some more. Look at me. >> Look at my conviction. >> Yeah. Terrible way. terrible way to invest because you have to compare the new price to the new circumstances and know there was an perhaps apocryphal joke with Fidelity going around how a PM lost a quarter of his portfolio in a single stock you know it never having been more than a 5% position or something like that and it's like how do you do it well you like goes down you reap it goes down you reap you know like and so I think that to your right tail to your 800 you know stocks kind of thing is if you are kind of as Petelinch put watering the flowers uh but then cutting or reversing what he said watering the flowers but then cutting the weeds then yes you could start with a very wide field but perhaps it's it's create like a detection mechanism for these truly exceptional outliers and once you get incremental evidence you kind of bet more I'll tell you will do who's the one of the other amazing investors I had the privilege of working with at Fidelity once told me he's like I was watching Will and he was doing the opposite of what value investor was supposed to do. He would sell a stock when earnings were bad and the stock was down and he would buy more when the stock was up because earnings were good. And I'm like didn't say that. I'm like bro what are you doing? It's like calling momentum stuff like should work like why? And kind of I politely asked him about it in the hole one day he kind of turned to me said well Gary you play poker. I'm like a little bit. He's like well what do you you know when I get two aces I bet right? I'm like, "Yeah, well, when I get a third ace come, you know, I bet more." Right? And that that stuck with me because it's like, okay, you can't have a static view of value, right? Value is an estimate, number one, and a range. So, and it changes, right? So, you think something is worth a 100red. It not that's not the truth. It's your estimate. There's a range. Maybe it's 50 to 150. And that value can also change through events, right? competitors acting, you know, management acting, whatever. And so I think reacting to changes in value or events that could inform the value changing super important. So yeah, if you're going to do that, sure, start with 800 stocks. But if you have a portfolio equal weight of 800 stocks, you you're not doing the Philisher approach. I can almost guarantee you that. Um, >> at some point you have to have concentration in the in the winners because these are power law distributed type of investing approaches, right? Like BC >> VC is great by the way because you start with a very broad fund, right? But you feed the winners and you starve the losers, right? >> Gary, what was the the name of the ticker of the first the first stock that you were discussing with us? >> Vignia. P H I N. and um just we're coming up on time so let the folks know uh where they can get in touch with you or how they can follow along with what you're doing. >> Yeah, absolutely. Well, first of all, thank you for having me. But uh my Substack is a great place. So, I write the behavioral value investor on Substack, you know, basically talking about the intersection of long-term value investing and behavioral finance and how to use the two to become a better long-term investor. And I'm pretty active on LinkedIn, so happy to connect there as well. you know, just look for my name, Gary Mashurus, and you know, happy to connect that way as well. So, if you want to reach out, you know, please do. Happy to hear from you. >> Uh JT Journalytic, any updates there? Anything you want to >> Yeah. >> the folks know about? >> Two asks, uh, one, today is the sevenyear, if you can believe it, anniversary of the Rebel Allocator. So, that was >> Whoa. >> I know a long long time ago. um different person wrote it I think but [clears throat] uh so that's kind of fun and then uh second thing is journal related and we need UI developers so if you or somebody you know is a is a UI developer and loves investing even better um check out I we have a LinkedIn post for or a hiring post for it so uh please send them our way they're they will be put to good use and Um it's a great team to join and uh we're building some really cool stuff that's going to come out this year that's going to be really awesome. So so more stay tuned for that. >> Good one. Thanks folks. Gary Mashurus, Silver Ring Value Partners. Thank you very much for being with us today. >> Thank you guys. appreciate >> and we'll see everybody uh same bat time, same bat channel
Gary Mishuris on $PHIN and $WBD, options and intrinsic value investing | S08 E01
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Transcript
looks 50. >> Yeah. Well, it's funny. My my >> We're live, fellas. We're live. We're live. This is Value After Hours. I'm Tobias Carile, joined as always by my co-host, Jake Taylor. Our special guest today is Gary Murus of Silver Ring Value Partners. How are you, Gary? Good to see you. >> Good. Thank you for having me. It's been a while. Good to catch up. >> It has been a while. For folks who didn't catch the first one, don't know who you are, give us a brief rundown of your strategy and philosophy at Silver Ring. >> Yeah, absolutely. Well, as we were just talking, I'm originally from the former Soviet Union. That's where the accent comes from. Uh from Leningrad, um you know, came when I was a kid, grew up in New York, started investing when I was at MIT, and uh Warren Buffett came to speak on campus and that was my first introduction to value investing. got lucky to get a job at Fidelity in equity research where I had a great mentor Joel Tillingast who managed the low price stock fund and that really kind of gave me my initial kind of direction as an investor I would say you know predictable businesses run by honest people you know with a big margin of safety and that I would say still probably captures like 80% plus of what I do so silver ring is a partnership it's a long only um concentrated probably between 10 and 15 investments most of the time and um you know I am very focused on quality in the sense of being able to predict what the business looks like over the long term roughly obviously and uh you know I still demand a large value of you know margin of safety to the intrinsic value you know it's probably evolved a bit in the sense that I'm not saying you know it has to be under 12p or it's terrible or anything like that But I'm not new age enough where it's like, hey, it's 50p. It's but it should be worth 75 and therefore it's a great value. Not saying that's wrong. That's probably true for a small subset of companies, but that's just not my circle of confidence. >> Can you give us an example of a holding that you have or something that you've owned in the past that sort of illustrates your strategy? Yeah, I mean I think uh you know there have been a number of these kind of you know little companies uh and I'll give you quick recent example. There's a recent spin-off that I bought uh a year or two ago I forget exactly called Finineia. He was an automotive uh supplier right during the peak scare of you know electric vehicles that internal combustion engine companies were all going to die and the stock was very very cheap. It was probably trading I want to say six times earnings or free cash flow. You know you know the research calls I read on expert networks you know suggested management was both honest and competent which is always good. you know, they had a very large, you know, what FineA did is they basically did um, you know, gasoline direct injection uh, stuff, you know, so directly related to the ice engine. So, obviously people thought, hey, this is a dying business, but I think what they were missing was number one, uh, that more than half the profits came from the aftermarket business is a very steady, predictable business. um you know low growth, moderate growth, but you know much more immune to changes in kind of where you know new vehicle sales are going in terms of electric versus not and the actual you know threat to the older business the actual new parts business was a lot less in my view than was perceived. So you had a business run by good people, limited financial leverage. I thought was probably a single digit growth business longterm. Plus, I thought the management had some nice tuck in capital allocation opportunities to add value and you could get it for basically, you know, 15% free cash flow yield and so forth. Now stock has rerated quite a bit. Um but you know I would still you know uh I still own a small position but that that's a good example where there's just a different I have a variant perception about the long-term cash flow stream of the business. So that that's one maybe another complete you know happy to go in any direction but another quick one. Well, just before you go, let's just talk a little bit about >> EVs versus ICE and [snorts] >> and then uh maybe self what self-driving does to to that market. So, let's start with what's your take on the evolution of that industry, electric vehicles versus internal combustion. >> Yeah. So, you know, look, obviously I didn't know and I don't know, right? So you kind of look at intrinsic value as a range as I'm sure you guys know. So I ran you know different you know when I kind of underwrote my intrinsic value range I said okay you know maybe the range of penetration is you know over the next 10 years is 30 to 50 or something like that and we were starting sub 10 I think at the time. Um, and I think I think it's important like I mean this is like if you're listening to this like one important idea is that something can be true but not material to your investment thesis at a certain price. So like when you're paying six times earnings, you're not so much worried about year 25, you know, or even year 20 because if you're roughly right that earnings are not shrinking, you're going to get all your money back and then some much sooner than that, right? So I don't know and I didn't know what you know year 20 you know electric vehicle penetration looks like but I was fairly confident that just mathematically it would be almost impossible for it to be much more than 50% over say a decade time frame um and uh by that point the rest was upside and as far as self-driving I think look it's a risk but it's in that same category right where sure you know self-driving if it's successful ful reduces vehicle utilization. So presumably it decreases number of you know the car park shrinks presumably right I would imagine but again is that in the next 10 15 years maybe it starts to kick in you know towards the second part of that range but again if you're buying an investment with a big enough margin of safety I don't think you have to answer those kind of tough questions because let's be honest like what do I know about EVs or you know self-driving that you or anyone else doesn't Yeah, it's a question. It's an it's an interesting question, but I like the I like the way you frame that. If you're paying six times, you don't need to think out much more than six or so years into the future because you get your money back in the short term. >> I mean, this is like a mental model that really hit me over the head probably. So, I've been doing this for 25 years now. About 10 years into this, I had this like realization which is kind of like shouldn't be like it's like an embarrassing realization because it's like, well, Gary, why didn't you realize like this day one? But the realization was the price asks the question. And so like I teach a value seminar you know uh at Babson and I always I go through this example with them and I say look okay you have a company it's uh you know it's been earning a dollar a share right being given you giving you a quarterly dividend of 25 cents. Okay let's say the stock is at 25 cents. What is the question the price is asking? And a lot of times students are like, "What do you mean? What kind of question?" The price isn't asking. It's silence. It's just a number. But the price is asking basically will this company survive long enough to pay one more dividend. Right now you bump the price up to a dollar. Well, it's, you know, it's saying, well, will survive for a year. You bump it up to $10. Now the price is asking maybe something like will this business ever grow again, right? 10 times earnings. you know, if it's if the company grows, it probably should be worth more than that. And now you bump it up to $20. Now it's asking, will this company grow double digits for five to 10 years? So at each level, right, the question, the price is asking is very different, but the company hasn't changed. Same company, right? But the question being asked of you as an investor changes quite a bit. And so I think this is kind of an important mental model that you know you have to answer a certain number of questions to be correct on investment but those change and as Buffett says like it like a investing is like a multiple choice test but you get no penalty for passing on as many questions as you want to pass on until you find one or two or three you're like yeah I'm pretty darn sure I have a good answer to this one. That's I think Pineia for me was that like I don't know the answers to the tough questions that you're asking which are legitimate at a higher price but at that price I didn't need to know that. >> Yeah. So you're >> do the questions get harder or easier over longer time horizons. So I'm thinking you know um if you could say you know the culture of a company is leading it in the right direction and like 10 years from now you know it's going to be a better business than it was today because that's all the momentum are in place and it's easier to make that bet maybe sometimes than what's next quarter going to look like >> you know so this is like an awesome point you bring up because I've seen this chart uh floating around you probably seen it too where it's like as time arise and approaches infinity like basically the only question you need to answer is management right >> you know and essentially like if you are thinking about a intermediate time frame let's say 3 to five years which is a lot of value investors I think you know focus on that time frame you know and I think rightfully so because it's long enough to get past most people's kind of like the most competitive part of the market which is 0 to 12 months so I think like you know 24 to month two years to 5 years is pretty good for like special situations reversion to the mean all those kinds of patterns if you will then the question you're asking is well is it easier to say okay I can't answer the path there but I see this is an amazing culture it's getting better and therefore I know the destination right I don't know exactly how it's going to wiggle there but I can just kind of you know I I think the answer is yes but I uh I suspect the degrees of difficulty is very very high and I think there's a couple of things involved to unpack that. is so I I was mentoring one of my interns and we were reading rereading Nick Lee's letters right they're kind of classic now you know as he you know like many investors he transitions from this like cigar butt approach to hey Costco Amazon Berkshire you know shared economy scale great culture big mode fire and forget right and what I try to and I think that's amazing great skill kudos no criticism whatsoever the challenge is how how many false positives are you going to have along the way, you know, right? Um, and that's going to vary by whether you're Nick Leap or, you know, me or someone else, right? Um, and also like everything looks more obvious in hindsight and could go and find a whole bunch of articles that were saying how amazing Kmart was and how Walmart would Walmart survive or something like that, right, in the early days, right? So I think I worry that your insight is exactly right. I think that and I think the huge wins like the 100x returns probably or 50x returns over decades probably come from or have to come from that kind of insight. But then the challenge is a is with is it within your circle of competence or you know your being whoever is doing the investing and also how many other ones are you going to pick thinking that they're Costco but it turned out maybe they're BJ wholesale or whatever right or thinking you have a Rio Automotive and you get advanced auto parts right um and also what kind of price are you paying for that meaning when you're wrong on that inside what's how much money do you lose right if you're paying 40 50 times earnings like whatever Costco is at today you know and you turn out to be wrong either about the magnitude of the investment opportunities or the culture changes over time or whatever right um how much are you losing on the ones you're wrong so I think the answer is yes true but I always encourage like people I mentor my stu students is like don't try to copy people or clone people. Figure out your strengths and weaknesses and figure out what's within your circle of competence, learn from a bunch of other people, but then put it through that filter of what can you do really well. So, I'm not sure I can do that really well, but I respect people who can. >> I think it's a great just that just that it's so competitive from zero to 12 months, but then also like it's there's no quantitatively there's nothing predictive beyond 5 years. I can't find anything that works in years six and seven and beyond. Like you get the bulk of the prediction is sort of in the early part out to five years. So that's a it's a good little I think two or three to five is the is the right sweet spot. Sorry >> JT. And I think the p it depends on like so I kind of have a collection if you will of investing patterns like uh that I try to find and I think the time horizon would probably match the pattern and like so to use an example that's like if you use a turnaround as an example like and I I don't say I specialize in turn turn around but it's one of the patterns I'm comfortable with and I've made a lot of mistakes and learned through those mistakes and the turnarounds kind of follow this arc where you know new co comes in assesses the problem formulates the plan begins implement you know like blah blah blah blah blah and there is a certain natural timing to those steps that doesn't matter if you have AI and robots or not the human component of that of changing culture changing behavior changing incentives there just a human element that paces that and I think that is a beautiful pattern because the turnarounds for example what I found is you don't do anything in the early kind of 0 to 24 months. Most of the time you wait for the implementation. You wait for early evidence that it's you know tracking and usually that means you have to monitor KPIs before they hit the bottom line. So you're not looking for EPS change you or free cash flow change necessarily. You're looking for whatever the intermediate metrics which going to lead down the road to bottom line success. And then you your probabilities shift drastically because you know most turnarounds 2/3 plus don't turn once turnarounds start to turn very few of them go back down and so in that sense you can actually sorry I know it's like I'm being like very wordy here but you can shorten your time horizon give up some of that initial upside because the stuff will be higher somewhat once you see that initial evidence but the beauty is that your probability I believe through experience strongly adjusts much higher than what you lose on that initial stock movement and your IRRa is much better. So that's an example where you're probably shrinking your time horizon because you're waiting for evidence because in the early part of my career I would confuse the possible with the likely and say oh management is forecasting this turnaround this is what they're going to earn $3 I'm going to take $3 multiply by some multiple 15 times 45 stock is at 20 awesome yeah but that's a lot of times the best case and most of them never make it sometimes it makes sense to shrink the time horizon Again, not into the like a three-month window where you're trading, you know, noise trading, but in a very concrete way of where you have specific I don't say catalyst, but sometimes catalysts, sometimes business progress, sometimes, you know, actual events, you know, whether it's, you know, reorganization, whatever, where you are shrinking the time horizon and that event acts as the catalyst to shorten the horizon. JT, do you want to continue on? >> Oh, I was just going to make the that we've joked before and we were talking about, you know, Nick Sleep and all these uh everyone not doing enough of their own matching of what fits their strengths and weaknesses. Um, but we've joked before that there's likely to be more money lost trying to find the next Amazon than there ever was made on the original Amazon. >> Yes. But >> well you know I a few years ago before you know like AI was the hot thing you know I would give uh my students like the description of two companies and I would say okay so you have these two companies one uh and let's say it's 1999 you know one is a oldline retailer selling clothing and related soft goods no internet presence and no intent to have an internet presence the other provi is making kind of the plumbing of the internet you know switches routers and so forth. Uh, and let's say you know that the internet is going to take off. You know that you know e-commerce is going to be amazing. Which of these companies do you think would make a better stock? And you know they kind of suspect it's a trick question. Obviously it's a trick question otherwise why would they be asking but they still don't like and of course most people say well like the router company and it's not even a valuation thing. So the the router company is JDS Unifase um and the clothing company is Ross Stores, right? >> Mhm. >> You know, and again you have this boring mundane business where you who who could have thought, right, that this is going to not only survive but thrive. But nevertheless, right, you have, you know, kind of a business that is been able to compound capital for a long time despite all these secular changes around it. So, I think like again playing your own game like it's like in poker, right? You know, like you see, you know, like unless some people are experts at all forms of poker, but I used to play poker semi- seriously, it's like, okay, I knew two forms of poker, you know, Texas hold and pot limit. So I'm not going to go play seven card stud you know because I just don't know the game and and then I think in investing what happens is well there's some guru you know that you know you know happens to come around they have ginormous returns for some three to five year period um you know that probably means their style is in favor you know they get on on you know they write a book they do interviews and they say a look at me I'm so amazing I figured this out this is so simple if only you do these simple things like a lot right now it's like hey buy good companies managed by good people um and just hold them hold them never sell them right something like that and everyone goes rushes out and copies them but two things one is even if this person is truly skilled and telling you how they're actually doing it doesn't mean that you are going to be able to replicate that because your skills are different right and number two is there's a very good chance that this person is just on a hot street and everybody is ascribing you know some mix of some maybe some skill but a whole lot of luck over that period of time and calling it all skill and the crowd saying it must be all skill because look he wrote a book he wrote this he has this you know and of course you know expost antie and you know you go and you look at their returns and not only the returns bad but the asset weighted returns >> awful they're like negative you know I'm not going to mention anyone by name but you know I'll I'll imply you know I think Buffett always says criticize by category ategory and praised by by name. But back in the internet bubble days to get us away from the current set of folks in that category, you know, there was a there was a firm that was based in know Silicon Valley and their claim to fame in investing was that hey, they were closer to where you know the tech revolution was happening. So they had like an edge figuring out these technology companies. Yeah. No, I'll cover all the magazines yada yada yada. of course, you know, haven't heard from them for a while after the, you know, the bubble pop. So, I think the message is like just try to be a better version of yourself, not a secondary version of someone else. >> Gary, you were going to mention a second name. Do you want to take us through that second name? >> Yeah, I mean, Warner Brothers is a current example. Um, and I think it's relevant because catalysts are important. Um and I used you know like I which is interesting because I used to I used to think catalysts are for momentum people you know like cuz like when I used to hear the word catalyst and I used to associate with hey someone needs expects the company to beat the quarter and that's going to be the catalyst but that's not what I mean because like you don't know if they're going to beat the quarter even if they beat the quarter you don't know what was expected that's a different game that's in that zero 12 month kind of trading game that I'm I would be the pads at and I don't know what to do. Um, I think there's a category of catalysts and actually Seth Clarman made a good point in one of his letters several years ago and [snorts] he wrote something along the lines of like a a fully uncatalyized portfolio of equities has a very long duration and then he went on to explain certain implications of that. So if you think about you know equities as bonds right with no with variable coupons and no maturity like you know duration of a bond right it's kind of the center of mass of those cash flows right for a bond it's obviously heavily weighted by when you know the bond matures that's the biggest cash flow for most of the bonds for equities it's there's no maturity so it's like you know the cash flows and you kind of figure out where they are weighted so the central mass of a uncatalyzed equity portfolio is very far away and they had from the point current point in time. If you have a and his point was a better portfolio would be yes some maybe some in that category but some in the cataly catalyze category uh where there's going to be you know a reason for the rerating or even better actual event that forces your thesis to be you know put to the test gain a and like probably the simplest example of that you know is a bond let's say you buy a distress bond let's say it matures was at 18 months you buy it at 50 cents on the dollar thinking it's money good market says not really it's that's why it's at 50 cents on the dollar 18 months comes around and again I'm simplifying there probably some in between cases where you have some debt for equity swaps or whatever but let's just say there's two scenarios either the bond they pay back or they don't and and that's a very hard concrete catalyst hard I mean it truly will like you're either get your money back or you will not you'll know if you will, right? And then there's the second category of catalysts which are much more common in equities which are these I call like non-h hard catalyst. And so Warner Brothers was an example of that. So had a long history with Warner Brothers back to when it was Discovery Communications before they did the merger with Warner Brothers that been a disaster. Which by the way, as a quick side note, you know, you know, you know, there's a lot of hate in the stock when some Gatfly shareholder is like screaming at how management is overpaid at a, you know, annual meeting, you know, which did happen here. It's one of the signs. But she was probably right. Yeah. [laughter] >> Yeah. A little egregious there, wasn't it? >> No, it is. It is. But the point is, if things are going well, nobody is going to bring that up, right? It's only brought up when people are like frustrated, the stock is down, everyone hates what happened, what's happening here. So, um, so there's a a few mental models came together and I think like Charlie Mer likes to talk about La Palooa effects in the sense that if you combine multiple mental models and they all align, you get these like multiplicative effects, right? That all uh multiply the outcome many times. There were a few things like one common pattern that I common but intermittently common pattern that I found is there's good company bad company combination right which is what we had here like the simple way to think about it is let's say you have a company it has two divisions A and B A is earning $2 B is losing a dollar the company is has EPS of a dollar overall the market doesn't look too closely assumes nothing is going to change and it says dollar times 15 times you get $15 share price. Good luck. Go back into the market. And let's say hypothetically the company just shuts down the money losing business and all of a sudden it's earnings double. Go from $2 minus $1 to just $2. And if the multiple doesn't change, presumably it shouldn't or go up with anything because the better business is what's left behind. All of a sudden you have a $30 stock, right? So that's a simple kind of model that I've seen time and time again. So you had that here because Warner Brothers was a collection of a few assets. You know the bad assets were the declining cable networks which we all know people are cutting the cord. They're switching to data only plus Netflix or something like that and they're canceling their cable bundle subscription. And so that business had you know high single digit topline decline in recent years. So the market assigned at very low value right and then you had very valuable businesses. um the Warner Studios, the HBO HBO brand and the libraries attached to those and those businesses had huge modes. And one good way of thinking about it from Buffett is just asking how much time and capital would it take someone who had abundance of both of those things to make something a bad business, right? And so here if like Microsoft or whoever has the most money today uh Nvidia I don't know who it is these days you know decided they're going to enter this business from scratch and they're going to make this you know a tough business uh for Warner Brothers what could they do and the answer is not much or at least it would take them you know 10 20 30 a long long time before they could make it then right and even then there's no guarantee that they would be successful so that's one way like just a sand checker to set a business so they want to hide growth business but a very durable mode very long kind of early in my kind of origin story I talked about Joel and you know Chillingass and Fidel and predictable businesses so these are very predictable businesses not in a single year because the studio hit rate varies but on some kind of rolling five-year basis you can pretty much say hey these businesses are going to do roughly X and the market was focusing on the negatives and not giving much credit to the positives um and then you the company announced to reorganization and they basically said, "Okay, we're going to actually spin off the batico or I think people use the less polite term starts with an S, ends with a T." I'm not this is a family show so I don't want I don't know I don't know how all the folks are listening so I'm not going to say it but I think you can imagine uh you know what's in between the S and the T. and uh they're going to get rid of the bad co and just keep the good co and they said and that like light went on okay this is a catalyst you had this potential energy right or what is the business theoretically worth that didn't matter because the market is like I don't care what you theoretically worth nothing is changing no one is forcing me to value it differently so I Mr. market will value it however the heck they want and right now I'm mad at the management I hate the industry they're in I hate the decline in the cable network I'm going to value it like low you know and you can't do anything about it management well actually we can we're going to do it and so they announced these plans and that plan you know again I would say it's in a kind of soft catalyst category because it's not a hard catalyst like when the separation happens the market doesn't have to change the price right it's not like a return of capital or something like that. But it was a pretty good bet that once the main reason for the hate and negativity was going to be, you know, spun off separately with the love that by the way um that the main co or the good co would be valued a lot differently or perhaps would be attractive to other to a different set of shareholders and if nothing else the cash flow stream from that you know company would be very valuable and they could just return it and not if that valation didn't change they could buy back shares. In this case you had Dr. Malone on the board, you know, so you had a pretty good guess that they were going to be smart about capital allocation, not just going to blow it. So you kind of put all those things together. And the last thing, I'm always hesitant to mention this because, you know, when I'm going to mention this, you know, people are going to think like this, you know, Gary sits and does this all the time. This is the exception, not the rule. you know, caveat mtor, you know, buyer beware, whatever, like yellow triangle warning attached, but occasionally, this might be heresy, like value investors can use options within a long-term value strategy. And again, when I started investing, I used to think all options were complete gambling. And I, by the way, think that if you never touch an option in your life, you probably are fine. You know, you can still do very well as an investor. But there are times um you know there probably four or five different patterns where you can use them well with an intrinsic value framework especially if your discipline have intrinsic value ranges and have processes and position sizing and all of that kind of dialed in. In this case there [clears throat] was an accelerated time horizon and uh which kind of made sense uh to align with option strategy because like what's the biggest downside of options? It's like time, right? You know, as an investor, you ideally want time on your side. So like the number one, two, and three terrible thing about like buying a call option is time is against you. Like if something doesn't happen within the time frame of the option, you basically get nothing even if you're right eventually in your insight as opposed to holding the equity, right? And like how do you offset that huge disadvantage? Occasionally the option is much much more mispriced than even the equity. And in this case my my rough estimate was the option was trading below 10 cents on the dollar of fair value for that option. And so you had like a catalyst. You had a pattern for where value is likely not guaranteed to be unlocked. You had this good cob badco situation. And so I actually expressed that position in um in options because I thought that was the most mispriced kind of security related to this event. So again hesitant to mention it because you know I don't want the blurb to be Gary trades zero day options. You know I don't I really don't. But once in a while this is maybe the second or third time in 10 years I've done this. you can have a very big mispricing stacked on top of a already big mispricing. >> So you bought a call. Is that the >> Yes. And so the other thing the other thing I should have mentioned is I bought LEAPS, right? So So LEAPS, you know, if you're listening, you're not sure, it's like just longer term call options, right? So in the US they probably go up to 30 months, but definitely 20 you can get them 24 months out. And so if you think about [laughter] how options are priced, you know, they're in the market priced by something called the black schles uh formula, right? And that assumes basically, you know, random movement around the current price with a drift term at the risk-free rate. Uh meaning that the the price moves in time forward, you know, at whatever, let's say 4% the current risk free rate. That's about right for like a shortterm option. The longer the time frame of the option, the more wrong that becomes. But that's still how it's priced. And so the longer options are partially mispriced based on that. I don't want to geek out, but essentially, you know, you it should be moving forward in time by, you know, something like 10% if they're not paying a dividend, not by 3 4%. Right? So that spread added up over time. Um and also market makers who sell you these options, they're not sitting there and looking at fundamental events, right? So if you have this, you look at black trolls, you have this normal distribution, right? Assume um and promise this is the most math I'm going to use in this conversation mostly because I'm despite my MIT background, I'm not that good at math. Um but here you have kind of a binary event that changes the probability distribution and you have this very binary uh situation where you could have a much higher price but that's not priced in. So there's a couple of these mechanics which makes essentially the way the market prices options in this case much less align with their fundamental fair value. I don't want to say intrinsic values because in options intrinsic value has a very specific meaning. So just using fundamental value. So in this case, I bought leaps. They're probably on average like 18 months or so. Um, and normally I wouldn't be very uncomfortable with that because my time horizon is much longer than 18 months. But again, the event was supposed to be 9 to 12 months away. I had an extra cushion of six more months if they like the spin-off would be were delayed or if the reating would take time. And again, the price asked the question. I bought them between eight and 10 uh% of the of my intrinsic value. So I need to be right less than 10% of the time to break even. Right. And if I'm right right and I think you know I I can make many multiples of of my capital with a very precisely defined downside risk. So again for consenting adults only I would not recommend this to most people but occasionally if you know what you're doing I think there is extra value to be added in that area which I think is pretty inefficient and rarely talked about. And in the spin did you take the spin cur or did you take the uh >> So the spin hasn't happened you know so what happened was you know so so normal so norm in a normal situation I think you just want to reassess because like I everything is a price and a declining cash flow stream while it's hard to value and [clears throat] there all kind of reasons for why you know to avoid declining businesses but if it's absurdly price again that old example if it's price of one times earnings and I just need to know that they'll survive for a year I can maybe underrite like that and be comfortable with that. So, normally you want to see where the prices land, figure out which is the most the piece that's still the most mispriced and reassess. Right? In this case, you the catalyst not only attracted you know public market interest but also you know the strategic value I talked about of these com these modes these irreplaceable uh assets um attracted biders. So you had Netflix come in, you had Comcast come in and you had um you know Paramount Sky Dance come in. Now when I wrote my letters to my partners about this position, so this is not like Monday morning quarterbacking. I literally wrote that that is a very strong positive optionality in the sense that these assets should generate an auction and they should be very strategically valued. Now I didn't know it was going to be Paramount Sky Dance, but that's not important. The important thing is it was very obvious that these are assets that are scarce and multiple people would want them. It doesn't mean that there would definitely be a bid, but that's a scenario as you're thinking about the probability distribution of outcomes that makes the right tail better and probably truncates to some degree some of that left tail. So you have this auction dynamic and auctions are amazing because you know we all think of like rational investing and numbers. Auctions are like so irrational. So when I was a young analyst, if it >> you're on the right side of the auction, it's amazing. >> Yes. Well, so so I tell you this quick story. So I was a young analyst. I convinced them to pay whatever three grand to send me to Harvard's behavioral finance seminar. And I was like 22. Everybody that else is there like like me. I'm 46 now. So they're like my age. I'm half their age. And one of the Harvard professors uh Max Baserman did this uh auction I will never forget. and he took a $20 bill and he sold it at auction for $23 in front of us to like some grizzled investing veter. And I was like, WTF? What just happened? So I came up to him after class. I said, "Professor, was this just like a trick? Like is it like only you can do like how?" He's like, "No, I've done this hundreds of times to MBAs to, you know, experienced professionals. It always works." And you know there I wrote about in my Substack article. You can check out the mechanics of the auction if you want why it works. But the point is, you know, it always works. And then years later, I was a speaker at an investing conference like on a big stage in Vegas. I was invited to give a talk and, you know, inflation. So, I took a $100 bill and I sold it for 120. I was a little nervous. I'm like, "All right, >> Benjamin, don't let me down here." >> You know, so yeah. And and the thing is auctions frequently don't have a stable Nash equilibrium. You know, again, geeks speak for they keep going, right? And I think in this case, the mental model is that so I'm a big fan of, you know, like intrinsic value is my true like north true north. I get it. But there but I think again this might be sacrileged to some, but it's not the only model for markets, right? I'll give you another very legitimate counter example George Soros and theory of reflexivity right and you know intrinsic value says okay there's this correct value the private v value of this business it acts as the source of gravity pulls the price towards it right that's the intrinsic value model the George Soros says well no no value doesn't p drive price there are cases where price changes value and you first hear about this you're like what that makes no sense how price change value. Well, perfect example was bear turns uh during the great financial crisis, right? So, you had this company, you know, there was some concern about it, you know, viability. Stock went down. Okay, stock went down. People noticed the stock went down. You know, some more clients left that caused the stock to go down further and that spiral continued until they eventually were acquired for a pittance by JP Morgan. So in this case the price was the mechanism that changed the value because it was a feedback loop. Again doesn't apply all the time but there's a subset of situations like allow run the bank kind of situations like bear turns where it does apply. So an auction model is a different model from intrinsic value because you no long the question is these guys are no longer sitting there the biders saying what's the DCF intrinsic value of Warner Brothers? That's not I mean yes that kind of someone is doing that but they're saying we're alpha billionaires. We've publicly committed we want to buy this thing. We are not used to hearing no uh for an answer you know or to quote Tony Soprano like please like you know but like they're used to hearing like yes sir right and and they're no longer buying just a casual stream. They're buying, you know, redemption for their ego so they can look a certain way to others and have the assets they want so forth. So I'm not suggesting you should gamble and say, "Hey, if we get intrinsic value and just hope that the auction price will go insanely high, but it is just the reality of it is it changes the probability distribution of outcomes for prices." And if you just ignore it and say I'm going to sit in library tower and say no I'm just going to run theoretical DCFS okay but then you know the scenar the situation has changed and I think you what I did you know when it happened very specifically is I'm very risk averse I have most of my c family's capital in the partnership you know uh I'm not fooling around so I took most of the profits from the investment but what I did is I kind of created upside optionality through a tail position which was a relatively small amount of capital but very convex to the auction playing out and that was proved very successful because it's been playing out now was that lucky of course you know like any good outcome has a component of luck like anyone who says that there's zero luck in anything is just lying or selling but was a random luck like a lottery ticket no it was I thought I think it was a favorable probability ility distribution that happen to hit as opposed to just blind luck. So again, there are kind of if you combine enough mental models and you overlay it with your circle of competence of what you're good at and comfortable with, I think you can do fairly well much better than just kind of trying to copy whatever is working lately. >> Good one. Um JT, you got some uh vegetables for us? >> I do. And uh this is the you know we had a little break and we're back with is it season 8 Toby? Is I am I right on that? >> You must be. Yeah. >> I agreed everyone >> I agreed to do uh five episodes uh back in 2019. What the hell happened? Uh so first veggies of the season 8, the new year. Um so hopefully these are I'm setting the bar high for myself for the rest of the year. But uh so today's episode starts with a random question that I was pondering one day as as one does. Are there any examples of the farmer's fable that are actually found in mother nature? So if you remember, you know, longtime listeners will remember our segment we did on the farmer's fable, which is basically that one farmer can have a great year and then a brutal one, and it's all based on luck. But if you add a second farmer with a different luck uh and you pull the harvest uh you can then end up uh shrinking the swings that happen and that and this you get the same average but much less variance on the luck and if you add that second uh it's almost like magic like you get a better geometric compounding return uh or harvest um and you you're able to limit the downside through sharing. So I was wondering, mother nature surely has discovered this uh this and you know uh transformed random individual uneven outcomes into collective stability. And of course the answer is yes, she has. Uh and it's it's in ant colonies. And we've done lots of you know ant-based veggies over the years. So how about how about one more? Uh so [clears throat] it actually led me to a new term I hadn't heard before which is trophylaxis. T R O P H A L L A X I S. And it's the mouthto-mouth sharing of food among ants. So >> here's the strategy. Like everything, ants live in a world of uneven outcomes. And one may may find a sugar cube when he's out wandering that you dropped at the picnic. Uh another may find nothing. Another might be come lunch for an ant eater while it's trapesing around. Uh it's the same asymmetric return patterns that our farmers might face. When a forager ant finds food, they don't store it in their own personal hiding place. They return to the nest and share it through trophylaxis, these tiny droplets mouthtomouth with their nest mates. And those nestmates then share it with others and so on. So it's it's really this variance reduction algorithm. It's nature's way of averaging. Um so you might be wondering why mouthtomouth? Why don't they just dump everything into a big central vat? That's what I was wondering. Uh wouldn't that be a lot more efficient? Uh but there must be a good reason why they don't do that, right? Uh and there is a good reason. It's that a central vat actually destroys information. So when a forager ant shares a droplet of food, she's not just feeding someone, she's also sending a a little data packet to them. And that droplet carries chemical signals. How dense the food is, how fresh it is, how clues about where it came from. In other words, they're not just moving calories, they're also moving information when they do that. So, uh, if they were when it passes from ant to ant, the signal strength gradually fades, but that fading itself also has some information in it. And so, if it was all homogenized into a big vat, you end up losing that nuance. Uh, and so highquality nectar is would be blended with the lowquality nectar, fresh environmental cues mixed with old ones, and now the ability to infer what's happening outside of the the nest would start to collapse. Um, plus there's the the risk of that's magnified of contagion risk. Uh, if you are putting everything into the same vat. So you could think of this as like a kind of a risk architecture principle. You know, the network is modular and localized failures and then you have centralized uh would be globalizing that risk, right? And I'll let you guys kind of make your own analogy and jokes about central bankers creating fragility here. Uh but [laughter] so what what takeaways can we borrow from this as investors? Let's see if we can try to land this. I I'll offer four simple suggestions. Uh one, maintain a forager network and feed it small steady packets. So keep a a lightweight habit of swapping tiny idea droplets with a network of trusted people. You can help feed each other, which is essentially, you know, it's quite helpful when you're running low on targets. Uh you know, the goal isn't to outsource your thinking. It's to keep your pipeline non- empty and let the network's uneven discovery rate kind of smooth out the dry spells of your own uh your own search through good inbound ideas. Two, share signals, but not full vat conclusions. So, ants don't pour everything into one soup. They pass these packets along that that still carry a lot of context. You can copy that. Uh when you share, capture the source of new ideas and timestamp them plus where you uh where you got them from. Uh and and journalytic, by the way, is just put a plug in for that is great for this. Um it but it keeps information from getting homogenized and will help your future analysis of networks that you should trust more or potentially ignore. Three, build modularity so that bad ideas don't go qu colonywide. So don't blast every idea that you ever have to everybody. test it in like a small pod first, one or two people who think differently uh before you kind of bring it globally. Uh and this this preserves the independence and kind of localizes contagion of stupid ideas. You know, bad thesis can die in a corner instead of becoming this like group's shared delusion. Uh and four, use a a quorum rule before an idea graduates. So the idea behind this is that you know ant colonies don't commit until there's enough independent ants reinforcing the same trail. And so you can copy that by limiting your deep dives until you maybe you've had two or three independent pings, different people, sources, angles pointing at the same name or theme. So you know, this can kind of filter out a lot of noise without maybe killing the serendipity. You only have so many deep dives that you can do in a in a given year. So you want to make them count. Uh and so so to wrap things up, yes, mother nature has solved the farmer's fable. Uh ants pull this upside and then they limit this centralizing risk. They share in packets, keep information intact, stop single failures from going colonywide. Uh, and so you could take some inspiration for how you designed your idea flow network to more resemble the the evolutionary wisdom of ant colonies that's been honed for more than 100 million years at this point. >> Good one, JT. >> Thanks. >> Um, Gary, do you know anything about the Magnum ice cream spin? haven't been following it. >> I've eaten a lot of Magna bars. Does that count for anything? >> Yeah. No, primary research doesn't count in this case, I suppose. Um, so the short answer is I it's on my radar screen, but it's obviously not at the top of my list. I don't have anything useful to say. >> Okay, there was there was a question about that from the from the comments. So, what was it like uh working for Joel Tilling? What did you what did you learn from from him? >> Yeah, and again, not to overstate, you know, like I worked in the research pool. just that Joel happened to kind of click. Joel and I clicked and he became my mentor. I'm in touch with him to this day. Um I mean, well, a few things from Joel. He was super hardworking. Like I was there on Saturdays. Uh probably to the detriment of my relationship at that time. Well, definitely to the detriment. And he was there on Saturdays reading annual reports and 10Ks. But that was really I don't say inspiring, but kind of inspiring as opposed to this like hierarchy of like I'm senior, you're junior, I'm partying, and you doing grunt work. he was there rolling up his sleeves doing reading 10ks reading and reports. Um I also just uh thought that he was one of the few very few so I had about 45 PMs that the central research pool supported at the time domestic PMs they were more internationally he was one of the few probably a single digit number uh that were actual intrinsic value investors. So I think like it gave me the confidence that worked because he was a successful investor with a very rational approach um that worked and that used the intrinsic value framework that I was like this passionate young analyst. I just heard Warren Buffett. I've been going to Brookshire meetings and it gave me that push kind of in the sea of you know I don't want to say anything bad about anyone but a lot of the PMs there were you know let's say time horizon and more he had different styles definitely not intrinsic value oriented let's put it that way >> um and I think the other thing that stuck with me Joel once told me were at lunch and he's I said I asked him how did your style how did you formulate your investing style and one of the things he told me that resonated because he just said I wasn't sure if I'm a good stock picker. So, I wanted the style that worked with it. I'm like, wait, what do you mean? Isn't that what we do, stock picking? But I think I understand what he meant, which is he's not he doesn't consider himself particularly good at figuring out what new thing is going to go to the moon or what's going to be the new this time is different kind of situation. He so he wants businesses that don't change for the worse and that you can take where they've been and use as a reasonable prologue to where they're going to be that and that resonates to this day. >> Did that lead to more or less uh concentration in names then? >> Well, concentration is probably a topic a long topic. I wrote an article for CFA magazine a while back on that. But I think it's a natur it's an outcome of your other dimensions of investing style. For instance, like Joel had this cartoon in his PM presentation where a guy walks into a store and says to the storekeeper, I want high quality and low price and the shopkeeper says, "Sure, I have both. Which one do you want?" [laughter] The joke being obviously that you can't most of the time you have to pick in market. It's like do you buy some secularly challenged overlevered POSOS you know uh garbage or do you buy buy you know the company that everyone is saying is amazing compounder but at 50 times earning right you know and once in a while you have some dislocation some insight some situation some c whatever where you can have things that meet your quality and also have a price margin of safety the overlap between those is not frequent or large. So if you want to maintain that overlap, you almost have to be a concentrated investor, right? And then there is degree of concentration. Um again, if you are following a Ben Gramian strategy of pure aversion to the mean or more pure version to the mean, let's say you're buying I know netn nets aren't the thing anymore for the most part, but let's say you were buying a bunch of nets. You want to package them in a large group, right? a large bundle because some of them won't work out at all but on the average there's probably excess return to be had there. If you if you're buying Philisher style compounders where the point is you want you know before we start we're talking about amazing cultures and you know how you know things evolving you know right uh you know culturally in the right direction that's very rare. So if you want to escape from the mean in this rare situation where there's a large reinvestment opportunity, great management, great culture and a big competitive advantage, you're going to naturally have a lot fewer investments, right? So I think it's a it's a combination of things plus overly how much do you care about losing versus winning? Like I grew up poor. I'm an immigrant, you know, came here when I was 10. My mom, you know, uh raised me as a single mother. She stared welfare for a couple of months before she found her first job. So I'm just naturally very risk averse. So that probably makes me a little more diversified. If I were, you know, purely saying, well, Kelly criteria, this is what I should be doing. I should have these huge positions. You know, I've seen people have half of their portfolio in the stock and use Warren Buffett partnership days as justification. And I can tell you, you are not Warren Buffett and chances are this is not American Express during the salad oil days. So before you put half of your money like your portfolio into one investment, just be realistic, right? So anyway, >> long answer to a short question. >> I might be misremembering this, but I thought I read the update to uncommon stocks that's written by with the intro by his son and I think he said that he had something like 800 positions when he died. Do you guys remember the intro like there's a the preface to uncommon stocks? >> I don't remember. I will check that. That's not what because most of his returns came from a very small handful >> no doubt but >> all a couple few others >> the you know the you get that long right tail of performance and so you can put on lots of small positions and or over the lifetime you accumulate positions >> you can but then the the challenge becomes how do you manage that and I think this is very like again very fascinating topic because I've been thinking about the last few years is about how do you react to change in investing too Like I think value investors are terrible at updating their thesis to new information, me included. And I've been working on myself on like frameworks and mental models to force myself to be more attentive to change. Like especially if something is changing for the worse like I used to like automatically I bought a stock it got cheaper price drop. I'm like man yeah I'm going to show the market. I'm going to buy some more. Look at me. >> Look at my conviction. >> Yeah. Terrible way. terrible way to invest because you have to compare the new price to the new circumstances and know there was an perhaps apocryphal joke with Fidelity going around how a PM lost a quarter of his portfolio in a single stock you know it never having been more than a 5% position or something like that and it's like how do you do it well you like goes down you reap it goes down you reap you know like and so I think that to your right tail to your 800 you know stocks kind of thing is if you are kind of as Petelinch put watering the flowers uh but then cutting or reversing what he said watering the flowers but then cutting the weeds then yes you could start with a very wide field but perhaps it's it's create like a detection mechanism for these truly exceptional outliers and once you get incremental evidence you kind of bet more I'll tell you will do who's the one of the other amazing investors I had the privilege of working with at Fidelity once told me he's like I was watching Will and he was doing the opposite of what value investor was supposed to do. He would sell a stock when earnings were bad and the stock was down and he would buy more when the stock was up because earnings were good. And I'm like didn't say that. I'm like bro what are you doing? It's like calling momentum stuff like should work like why? And kind of I politely asked him about it in the hole one day he kind of turned to me said well Gary you play poker. I'm like a little bit. He's like well what do you you know when I get two aces I bet right? I'm like, "Yeah, well, when I get a third ace come, you know, I bet more." Right? And that that stuck with me because it's like, okay, you can't have a static view of value, right? Value is an estimate, number one, and a range. So, and it changes, right? So, you think something is worth a 100red. It not that's not the truth. It's your estimate. There's a range. Maybe it's 50 to 150. And that value can also change through events, right? competitors acting, you know, management acting, whatever. And so I think reacting to changes in value or events that could inform the value changing super important. So yeah, if you're going to do that, sure, start with 800 stocks. But if you have a portfolio equal weight of 800 stocks, you you're not doing the Philisher approach. I can almost guarantee you that. Um, >> at some point you have to have concentration in the in the winners because these are power law distributed type of investing approaches, right? Like BC >> VC is great by the way because you start with a very broad fund, right? But you feed the winners and you starve the losers, right? >> Gary, what was the the name of the ticker of the first the first stock that you were discussing with us? >> Vignia. P H I N. and um just we're coming up on time so let the folks know uh where they can get in touch with you or how they can follow along with what you're doing. >> Yeah, absolutely. Well, first of all, thank you for having me. But uh my Substack is a great place. So, I write the behavioral value investor on Substack, you know, basically talking about the intersection of long-term value investing and behavioral finance and how to use the two to become a better long-term investor. And I'm pretty active on LinkedIn, so happy to connect there as well. you know, just look for my name, Gary Mashurus, and you know, happy to connect that way as well. So, if you want to reach out, you know, please do. Happy to hear from you. >> Uh JT Journalytic, any updates there? Anything you want to >> Yeah. >> the folks know about? >> Two asks, uh, one, today is the sevenyear, if you can believe it, anniversary of the Rebel Allocator. So, that was >> Whoa. >> I know a long long time ago. um different person wrote it I think but [clears throat] uh so that's kind of fun and then uh second thing is journal related and we need UI developers so if you or somebody you know is a is a UI developer and loves investing even better um check out I we have a LinkedIn post for or a hiring post for it so uh please send them our way they're they will be put to good use and Um it's a great team to join and uh we're building some really cool stuff that's going to come out this year that's going to be really awesome. So so more stay tuned for that. >> Good one. Thanks folks. Gary Mashurus, Silver Ring Value Partners. Thank you very much for being with us today. >> Thank you guys. appreciate >> and we'll see everybody uh same bat time, same bat channel