Banking Stress: Extensive discussion of Silicon Valley Bank’s duration mismatch, bank run dynamics, and the Fed’s lender-of-last-resort role with limited but real contagion risk to regional banks.
Deep Value: The guest emphasizes a deep value, survival-first approach grounded in ergodicity, patience, and portfolio construction to endure drawdowns and compound long term.
Quality Compounders: He outlines “Invincibles” (durable moats, high ROIC, resilient margins) as targets only at attractive valuations, echoing a Buffett-style discipline.
Energy: Bullish on long-term energy needs, noting society will rely on fossil fuels for an extended period and likely nuclear later, while warning not to overpay for commodity cyclicals.
Coal Exposure: He explicitly notes owning coal, highlighting ongoing demand and underinvestment as reasons to maintain targeted exposure despite sector cyclicality.
Gold’s Role: Physical gold is debated as collateral and a store of value in crises; useful for resilience though not his primary allocation preference.
Risk Management: Cautions on moral hazard and black-box financials, prefers avoiding sectors with outsized regulatory/reputation risks (e.g., cigarettes, casinos) while staying valuation-driven.
Transcript
[Music] hello and welcome this is the Mutiny investing podcast this podcast features long-form conversations on topics relating to investing markets risk volatility and complex systems Tobias Carlisle just plug away right at the top and see if for those watching we can see a choir response on the step and repeat behind you but plug away Reds top where can people find you what's the best spot for them to go to my mid-cap Lodge Cap Fund is zig acquires deep value fund and my small and microfund is deep Roundtable acquires deep value fund I have a website acquiresultable.com I'm on Twitter at Greenback g-r-e-n-b-a-c-kd and I've got a heap of books on Amazon under my name Tobias Kawa acquire as multiple as the last one Jesus there's so many things I want to dig into there but also I brought Toby on today because uh topical news is svb you know we're having a Silicon Valley Bank kind of collapse here and and Toby's an expert on Bank collapses so I'm just joking with you I just want to see your face when I started with that normally I have an answer yeah okay yeah well we haven't uh you know we scheduled this week's before so we didn't know this was going to happen but at the same time um you know everybody I don't normally like to talk about things topical and everybody comes out of the woodwork as an expert but you do happen to be a value investor with a with a law background so I'm curious what your hot take is the reason I have an answer is because I was watching uh I subscribed to a few channels on YouTube and mid favor popped up on one of them and mid's explanation as to what I'm going to give you so neb said this is what I've been telling everybody who asks my wife and so on neb said Silicon Valley Bank put too much money into assets that went down when interest rates went up and when interest rates went up there are the assets traded verbally the liabilities and uh then you crystallize some of those losses when you have to when you have a little Bank Run and and you're gone I guess that's that's that's like I'm no expert but that's that's all investing right matching you matching your assets to your abilities well yeah it was it actually Sparks an interesting conversation into my household over the weekend where my girlfriend was like now explain to me simpler now explain to me Simply Now explain to me simply right now I know I was like I kept trying to understand but I was like it was interesting because you know she is I guess millennial generation and she was like I've been told my whole life to just put my money in the Banks Banks are safe you know don't put it on your mattress as soon as you make some money like on your minimum wage job put it in a bank and everything and she was saying that nobody really taught us in school or anything that you know banks are not necessarily safe right that that our deposits are liabilities and they're going to lend out against those right and it's fractional reserve on those lending up to 250 Grand I mean how successful are you being straight out of school this year well that's that's favorite response I wish I would come up with that one because I think that just like most of the things they they teach us in school it applies to most people that work nine to five jobs right and that would be yeah the fairness on that would be who's really got a quarter million in cash in the bank so most congrats first of all yeah more than the quarter million to lose but presumably by the time you get to that kind of level of cash you've also got some other assets so that represents some portion of your assets but not not all of them yeah I I don't know I've just um I've always thought I think everything's shaky all the time I just think everything's a chance of blowing up that I'm talking about guys so you probably yeah probably further along this is why we like hanging out and then she was like yeah the most of the conversation over the weekend was like this is why we have cockroach for this very reason like so we could sleep at night when these things happen but she was also sending me this morning um I like mab's description but she was also even sent me this morning I think it was like a congressman on Tick Tock was basically saying you know about the emergency overnight and but he said um in his explanation Silicon Valley Bank lost a lot of money and I'm like yeah I think we need to explain things simply but I think if people could just understand a duration next mismatch right is they take in short-term deposits as a liability and then they lend out on long-term assets and it's not like they uh they they did lose money you know marked you know Mark to Market and also marked a model but at the same time it was more of a duration mismatch and if they didn't have a run in the bank they're usually fine and so to your point it's like we all live under this fiction that as long as normal withdrawal rates are within a normal band of what's expected then banks are fine and then this soon as we have like a run on the bank you find out that they're using Leverage is that like the banks uh Banks uh definitionally insolvent all the time right they can't meet all of that money right positive which is the function of the Federal Reserve is supposed to be to create a window where if they get that run they can access liquidity on the other side that restores confidence obviates the need for the run but I think the interesting thing to think about are the implications for so we've had now this uh this marked model has become more of a pressing concern so if you're a director of a small Regional Bank or anything that has this sort of exposure you've now got to start thinking about do we need to raise some more Capital do we need a cushion here and I think that that's why you don't really see Bank runs very often you don't really see credit crises very often but when you do see them they tend to Cluster together because all of the banks now will start thinking everybody who's got this kind of exposure needs to start thinking about it and that will that will dry that will suck up some liquidity which is kind of I I think this is like one of the other classic stages in these long this is a long slow train wreck crash but I don't think this is completely I think this is totally expected in the context of what we've been going through for the last it's almost two years now and we really haven't seen it since like the SNL crisis right I mean it's been a long time for people to see well I think the GFC was kind of a that was a big one I don't think this is the GFC I think banks are much better capitalize now than they were then might be a Regional Bank thing could be could be the reason how do you think about that how do you think about that contagious because like as a Californian you know we're out here and we we all of our friends Bank like I've seen some horror stories like people just closed down their houses Silicon Valley Bank they had all their savings there now it's all gone like I mean it's just some nightmare scenarios I heard over the weekend but like how do you think about that like is this a California regional thing or does this contagion because like you just said most of the people have been saying and you know and far better experts than I that the banks are well capitalized but then like how much is this contagion like you're saying banks are technically insolvent at all times so how do you how would you think about the contagion effect I I think that there will be some I think that there will be some contagion I don't think it'll be anywhere near as bad as 2007 2000. I think that there's always a little credit component to every crash like there needs to be some that liquidity needs to dry up for the crash to progress and it always happens it's just hard to figure out where it's going to come from I don't think it's going to be like 2007 where it's like a systemic credit crisis that the very impacts the very biggest banks but I do think it's more like a valuation type story where it doesn't surprise like the Silicon Valley part of Silicon Valley Bank might be the bit that is more important to the story than the fact that it's a bank it's just in an area where you know they had a really good time up until kind of February 2000 and as a 2020s at the 2021 when did Arc top out February 2021 yeah so they're now two plus years into their drawdown and if you go back and look at any of those kind of classic uh collapses of the stock market because that's but I'm I'm the the the credit crisis is is kind of secondary to my interest in the matter is I want to know how the credit crisis impacts the stock market because that's where right that's where I'm focused so if you look back at say uh any of the earlier collapses they they all sort of seem to follow the the valuation type collapses rather than a credit type collapse which is a 2007-2008 was a real credit event 2000 2002 was more over valuation from speculation in the stock market that created sort of it's a little bit self-reinforcing I guess it's a little bit of that Soros reflexivity where the market goes down people are on Leverage forces them to sell it creates this Cascade of selling so I think I topped out February 2021 they're two years into their drawdown the rest of the stock market didn't find out about it really until the start of last year first day first day of last year we started selling off and we've been kind of selling off basically since then although we've had little rallies but you would always say a year into the sell-off you can go back and look at 2007 2009 2000 2002 not much had really happened by this point in the proceedings because the Market's off a little bit but it tends to follow this pattern where two-thirds of the time there's about one-third of the sell-off and then the last third of the time is the two-thirds in terms of the depth of the sell-off so I think we're coming into now that and you know combining with other things like the 10 3 inversion and just general weakness across you know inflation supply side issues I kind of think we're getting to the business end now it's either you know marched to kind of August I think it's sort of when you see that the action if it doesn't happen in that period Then I don't really know where it's not that kind of environment I think it's I think we've really got a six months of complete fireworks to come though and as long as we've been like tracking the books and everything I think it's the Russell Rhodes have said too like that we haven't really hit the bottom of the session for me to turn around until vix has peaked over 45 so and I'm but that just because that's that's just a few that's a handful of data points though I wouldn't take that seriously like it could potentially be a slow grind down recession a slow climb back up I mean that's possible but it's interesting like you're saying it was like that final capitulation usually has to take effect and how much is that behavioral or people and there's so many things you said in there one I want to pull on is like the the idea too of like 2000 to 2002 was like Silicon Valley right an equity bubble like there's no real debt involved and it was just you know really an equity implosion in the VCS and startup space what's interesting like you said is like how Silicon Valley Bank is really a Rorschach bot for people's political views right and everybody we found out like I like some of the stuff on Twitter it's like we found out how much everybody hates Silicon Valley and wants it to burn to the ground basically but at the same time like all this speculation is like oh they were they were lending to startups they were buying MBS you know like it could be as simple as no they actually had great you know long long journey Asian treasury assets it's just a duration Mr match and they had a bank run I mean granted they're sure I'm sure when we eventually dig through it we and we won't even have perfect hindsight is like I'm sure there's some MBS in there lending to startups but that has been interesting though that they do lend to startups but what I but what I would really want to point out that you are talking about is with with Arc and everything else it's like the VC and and the PE world has just been marking the model right and they just like play this game to keep marking it up marking it up and you know many people great people said you know volatility doesn't get destroyed it gets transmuted or transferred right and it just so came out of Silicon Valley Bank they're basically like hey these startups have no cash left like and we're in a we're in a pickle here and so finally somebody had to admit that these these marks are wrong is that like a fair way of looking at it well I think that's my understanding of what has happened with the the bank that as far as I'm aware it's not investing in excessively risky assets it's just investing in they've had this enormous flood of money go into them to make them from basically nowhere into the 16th biggest bank in the states they've put that into treasuries when treasuries were trading very very like near zero percent interest rates very very tight in the treasuries and just interest rates have moved against them and so they've been beaten up in their book so it really is just you know but then you could have been in just about any asset it didn't really matter where you were I don't know why they were the first impact that I guess they've got they've also got problems on there on their bot they may have some problems on there that the people who they ever went to there must be some issues there as well can you imagine like that's to me it's so many interesting things like you said it's like they allegedly didn't hedge their treasury treasury rate risk uh you know rates rising and then I don't know how much the lending to startups is in there but that's it's kind of amazing that like but they go but then they get warrants I'm like yeah that's basically a VC like there's no reason for banks to be doing this kind of man it seems the equities it seems the equity's got some value right if the warrants the warrants are like an upside that's not downside protection that's just upside return if it works the other part of it is um I don't know if you've ever done this but maybe a decade ago I spent years trying to figure out like if it was possible to create a bank that didn't lend that basically just retained all those deposits right and basically there's besides I mean you can make a little bit of money like you could take a little bit of risk and maybe overnight lending rates bank to bank that sort of thing to maybe try to make uh the business profitable obviously you'd have to run it like a non-profit or a community bank or Co-op but the other part of it is like I think the only way to make it work is people would have to pay a monthly fee so it's just like if we buy physical gold right you have to wait right that's what I'm saying they don't like people don't realize everything everybody wants everything for free and it's like it's not free right that's my point so like have you ever looked into like trying to start a bank or what a bank would look like if it was actually secure and is there is there a viable option for that in like the modern economy so I haven't that but I do think that's a good question I think the problem for these Banks problem for the regional Banks is that the lines make up such a big portion of their book whereas the bigger banks have lots of other sources of income for the regional Banks it's all about wines that they make that's that's where they make their money as you point out there's there's not very much money with the cash on deposit that they have to kind of be lending it out to earn a decent return so they are really subject to the business cycle we just haven't seen much of a business cycle for a long time so I guess you get things like Silicon Valley Bank where they're not thinking about what happens if the rates go the other direction they did they had some other problem where they had a risk officer they lost their Chief risk officer or something like that 12 months ago I'm not I haven't really followed it that closely this is a this is a casual conversation between you and in the context of it's an equity investor talking about not a not a bank specialist we are not Specialists no I tend to I own I hold very few Banks I hold across 130 positions across two fronts 30 in the big one and 100 in the smaller one I hold very few financials for this reason they just saw little black boxes you can't get a good read on what's going on inside them it Bank experts get caught get blindsided all the time like the bank expert funds are deep in all of this stuff so it's makes it tough to invest in that was part of uh trying to figure it out myself was like this is a terrible business like why would you want like everybody's like one thinks they want to be a banker and be Bank like it like during risk on times it's a great business but during risk off you don't have a lot of Leverage you can pull so that's what was the interesting the other interesting part about like to do it properly like as like a non-profit it's like a co-op bank it's like what was interested in the little anecdotes that are interesting is you have to have like a loose assemblage of like membership that's like semi-related so I was like people with Facebook accounts like this is back in the day right or like Twitter accounts like so you you can have that loose assemblage that way and then what's interesting is like the co-ops can also tap into all of their ATM banking networks so you could tap into like 60 000 ATMs and offer like free ATM withdrawals if you're part of like the co-op banking Network these are just some some random things there that I thought that I thought were interesting that's all technology cash yeah yeah you're not gonna need to take cash out future well that was the problem when people went to take the cash out of Silicon Valley bank account check it out this is the future there's no cash exactly Welcome To The Future so part of that though I so then you go into the secondary effects right this is what I thought has been interesting over the weekend well then one I want to point out again we are not experts but what I love about our industry is how uh especially on the this is my deep level Global macro everybody has a hot take about everything and also in their experts it's like they're such unbelievable experts on such a pan and play of topics that they apparently have never even looked up the word dilaton like it's amazing right like everybody comes out of the woodwork uh it's amazing like on the Ukraine on banking everything so you and I are just two more on shooting this [ __ ] except for you know a lot more than I do so that's true we'll put a caveat there at least in general like in life in general but again myself that's true so here's the one that I find that can write so we're here on uh Monday the 13th and you know the government's gonna backstop Silicon Valley Bank right so depending on what political beliefs you are and everything this is where I vacillate between my my libertarianism and socialism is like what do you do in this situation right like everybody like your libertarianism says like just let them fail let the dust settle this is what we have to do this is risk taking and people are going to find out if they have over 250k in there that this is the risk that you are taking and you should have been aware of those risks that's what like say a Libertarian would say and then the other side of it is like well there's a Cascade of consequences here not just across Silicon Valley businesses but across all of their vendors and their vendors vendors and the cascaded consequences like this hurts the person on Main Street but then the bailout does it come from the FDIC insurance but then comes from the taxpayer like you see what I'm saying like I'm curious how you like would walk through this conundrum in your own mind whether it's in your industry or not like versus like a bailout versus you know saving the actual system yeah it's a sickening thought I saw there are a whole lot of uh payroll that wasn't going to get sent out right if it if it didn't happen so it sucks when little people who've they've taken no risk they're just trying to do the right thing and put their money in a bag and they get hurt by it um I I don't know the banks are it seems to me that it's it's bare knuckle capitalism on the way up and you get as much as you possibly can in terms of calm and then when it goes the other direction you just get a boiler there's got to be whatever the decision is like if we're going to decide to bail these guys out every single time which we are because it seems you don't want the little people getting hurt the big guys have to eat some of the pain the people who are in there have to eat the paint too they have to go first it can't be you get paid or all of the comp that you've had for all those other years that's that's in a locked box somewhere you can't touch that yeah we keep increasing the moral hazard but like we haven't set the parameters for how to rectify the moral hazard is that kind of what you're saying it's like obviously like we're going to keep bailing it out because like you're just in a terrible situation like right do you want people to learn their lesson or these people like you said they can't make payroll by the way people don't even know that uh Silicon Valley Bank has a wine division there's 400 wineries around me that like use Silicon Valley Bank that just got the third assets Frozen they can't make payroll and some of those people are like the cleaners that clean the wineries so it's like it's a tough call like I don't like so how do you do you have any thoughts on how do you maintain that more like that moral hazard like do you do clawbacks of their salary or like how would you think about that well I'm talking about the very senior Executives who are most directly responsible for this yeah I think you should do something like that they should have their comp should be paid out over a period of time five years or something like that you can't have this it's just it's asymmetric where your upside is uncapped and you're down to you know your upside as you become Jamie Diamond and you're a multi-billionaire having never started a business just being an employee the whole way through in an industry that gets bailed out when when something bad happens I mean I don't know if that I don't know if that works I think that's going to encourage the wrong Behavior at every step of the way I I don't know about the like the the bow that's that's a question for politicians but I hate seeing little people get hurt but there has to be some way of stopping the problem before we get to this point run yeah but it's a conundrum that I've been mulling overall weekend yeah it's like what do you do because you know your heart wants to save like the people that are you know not necessarily involved that are tertiary you know shrapniling consequences of it but the academy you maintain that people just don't take these inordinate risks and we keep having this moral hazard over and over and over I think it's a problem it's a problem with the system right the system doesn't work like this the system where they can borrow from the fed and lends and lend multiples out that doesn't work we need a different system to that is there Bitcoin Bitcoin solves this what are the Bitcoin gots oh man crypto solstice oh God right well and you could in hindsight we might go back and it was like the the demise of silvergate that led to the demise of silica like that was like the camel that broke the straws back is like crypto actually crypto Banks were the one that comes yeah crypto crypto broke the bags um because there's so many like I just like and then moving forward yeah like I don't know what we do um yeah it's just I I I struggle to really to really this one really it really boggles my mind with the moral hazard versus bailout issue and and how do you actually set this up system up but part of it too is like don't you think like the okay so this is a good question then to what what steps can you do it's kind of arbitrary that FDIC insurance is up to 250k right yeah it's such an arbitrary number but like you said you've been 250 for a long time yeah so it's clearly it should be index to inflation or something right and so but even an individual it's a sizable number right but what if you're running a business what do you do with your cash that's like so like let's start with there like how do you think about that like obviously we buy um t-bills and we can use t-bills as collateral we also buy like some physical gold just in case things like this happen that's not somebody else's liability um you know we have different banks that we use uh but if you have a banking system collapse like there's it's really hard to think through this because this is to me a problem I've been thinking about for two decades is like what is money I you know it becomes it becomes it's not it's not a it's not a completely abstract philosophical problem it is somewhat concrete you know policy question about how you run the banks Banks aren't necessary there's no reason why banks are set up the way that they are with the Federal Reserve able to you know the Federal Reserve has two mandates both of which are silly you know they're supposed to keep the money supply you know keep inflation under control so we've got a stable money supply and full employment the FED can't do anything about employment they can putting interest rates up has some sort of um statistical association with employment going down because you choke off liquidity and it leads to lower growth and vice versa but I don't think they should have the two mandates I think that's silly I think they should be what they were set up to be which in 1913 and they're pretty there were examples before then where when there was a bank run they were the last stop for liquidity and the liquidity should be expensive it should be like going to see Warren Buffett you can get the money from him but it's very very expensive money and so with that in mind you're always thinking well I should run more of a buffer I should I should run less optimized profit and I should run more for survival and durability do you know what I mean like there should be safeguards built in for the business there should be safeguards built in at every stage and the problem is you just you're not paid regularly enough to do that I mean that's why the Cockroach fund exists that's what volatility strategies exist because there are people out there who ignore all of the risk at all of the time you know the guys who are piling into the riskiest stuff right at the very top of the market and they look smart for 12 or 18 months or two years everybody else who's had it before sort of stands back a little bit you know tries not to get blown up and then those are the guys who get wasted and the volatility guys who've been picking up those you know five cent out of the money fixed calls get paid with some regularity once but it's every seven years so it's not so regular that if you've only been in the market for five you haven't seen them before and I think this is unusual because we had until until the market kind of took its dive in 2021 it had been a very long time I guess we had 2020 we've had sort of crashes but every single crash has been we've recovered so rapidly from even even 2009 was a we got down to the long run mean for the shillipere you could say the filippi is a flawed measure but it wasn't like we got cheap you can go back through history and see we've got much much cheaper than you can at least look at the trend line the shallow P you can argue about the actual if the multiples are correct but at least the trend is gives you an idea more expensive right we're very expensive and we're expensive then and it's so I I think that there's a there's a reasonable risk that um interfere too many times in the market you lose that that business cycle I think the business cycle is kind of almost a natural phenomenon it's not something that it's an emergent property of a dynamic system which is just what it's one of those things that happens where people get too excited if you go back pre-federal reserve and you go back pre-suit or the interventions there were many many more um short-term sort of recessions and depression to happen with some frequency and since we've got rid of and since we've introduced the Federal Reserve and they manage it they become much less frequent but much bigger in terms of the magnitude so I think that what we've done is you know as Corey might say we haven't eliminated the risk we've just transformed it into this other form that seems to be more disruptive and requires more intervention so maybe we would be better off going back to one where we we have these little hiccups every now and again but everybody knows how you've got to run sufficiently liquid and sufficiently solvent so when that happens you see the other side now there's this is kind of a perfect question for you so part of the part of the discussion with my girlfriend over the weekend was also like yes this is why I've been yelling from the rooftop for years about cockroach run for these very scenarios that we can't predict but like you can prepare for but at the same time like what you also drift for reference is like March 2020 we would have thought was one of those events but like you just said we we v-shaped or k shape recovery so quick people didn't get scared enough right and then same thing with I was like look everybody was scared on Friday here but like now on Monday like ever nobody cares again and so it's like yeah maybe over the weekend you're worried about where your money is but now like you don't care like because the government's got your back and so you as a as a deep value guy so to speak like you can feel my pain is like how do you just like trudge along when like you know nobody seems to care about like I I'm sure you've just been ripping your hair out for a decade just going like value actually matters but there's nobody like until you know and or it doesn't during risk on until it does during risk off like how do you how do you just sustain yourself through these periods I think that that's the answer that it always matters and you just know when it matters so you have to always be prepared for it to matter you know there's the you know the idea of Ergo this city there's a book about ergoticity really beautifully written basically it's path dependency it's the idea that whatever your long run returns could be if they get truncated in the interim you don't get those long run returns so if you understand if you're in the market and you have a little Edge which we all think that we do but we've got this little air I I think I have this little statistical Edge in the market for a variety of reasons some of them are very simple and boring and some of them are a little bit more esoteric but I think that I do so given that I think that I do the thing that I'm trying to avoid most and foremost is losing it all because if I do that then I can't show this little Edge over time so I have to run so I look at the individual positions and I make sure individual positions can survive I make sure I'm not too invested in any individual position because even doing that analysis there are things that happen they have black swans there are things that happen that you just can't foresee and so I think at every single stage of the process how do I make sure that I see the long run so I always think about it do they have cash in the balance sheets do I have enough cash can the business survive can the funds survive will the economy survive are there other existential risks out there that I need to think about I think that that's a healthy thing for everybody to think about to think in those terms but people definitely don't and there are periods of time in the market where thinking like that hurts you and with the more a bullish the market gets and the more there seems to be no risk in the market the more that kind of position hurts you because you lose assets people don't want to be with the guy who's always complaining about always saying hey you know this this party could nobody likes that guy at the party says the hangout is going to be bad the next day you know over like the Cassandra at the party but everybody lets it go um but there's so many things like that one is uh so the point of air conditioning economics the way I try to simplify it is just time right and if we think about time over time your Investments over time that's compounding right and that's right points like volatility tax or losing everything means you can't play anymore but also uh I was talking about this over the weekend is like think about the banks in the scenario this is why Olay Peter is from iridocious economics would say that modern economics is flawed because it doesn't take into account time and to your point like the banks were solvent if we don't factor in time right and duration mismatch right if people want their money today they got a problem but in general most people don't want their money today so otherwise they don't have a problem they're solvent they have plenty of assets but that's why like Erica Disney is all about time and path dependency and that's exactly what we find out with like a bank run it changes the path dependency they just don't have enough time to realize those assets or liquidate those assets to be fair though this was coming it's this like the big move in interest rates clearly that's impacted asset values I mean it should impact that it's it's you can see it most directly in bonds because there's sort of mathematical calculation there's a little bit of there's a little bit of like speculation or there's a little bit of trading built into the price but it is mostly a mathematical computation about what the thing's going to do through to there's a risk in other factors but it's mathematical for equities it's like you can kind of ignore it a little bit for equities for a short period of time it absolutely matters it matters just as much as it does for for bonds as it does for equities it's just that it's a little bit more abstract and so that extra step seems to be the thing that means that people can argue with a straight face that it doesn't matter although it eventually it does so all of those assets with interest rates going up all of the assets which you which were you know very very low yielding Assets in a higher yield environment become worth much much less and that's what happens when asset values happen when that happens to asset values if you've got a matching liability you've got a little bit of trouble because you've got this liability that's so much bigger than your assets you have to resolve that at some point you can hold the maturity if you can but this is the ergodicity but if you get called in between you've got a real problem all the banks have went long have borrowed long borrowed shortland long and that's what happens yeah I think it's nasty Mike Green describes it well I think with bonds he's like it's like a football you know what your payoff is in Terminus but the ups and downs to get there that's like you're saying that path dependency where you can get smoked as a Silicon Valley Bank did the other thing you brought up though is kind of behaviorally about people doing risk on versus risk off times and I'm curious because um you know shout out to Corey you know we just talked about this on our last episode of Pirates of Finance it's like um you know thinking about is behavioral Finance is interesting and I am empathetic to the people are like behavioral Finance is [ __ ] because you can't replicate it but at the same time behavioral is everything because it's human beings interacting in a market so to me it's like almost like water it's both everything and nothing at the same time it's how do you think about behavioral as relation to like value investing but that's the that's the opportunity for Value in business I believe that the behavioral stuff influences Everything But ultimately it is the underlying economics of the business that determines what you earn so you take advantage of the behavioral thinking that you'll get the the quantitative return on the other side the the big the big risk for um for Value investors is that the future doesn't look like the past and that's true for just about every human endeavor you know all of our all of our philosophy and science and medicine is built on the future looking like the past so that's kind of a risk that I acknowledge that it is real and it's and it might be more real in relation to some businesses you know buggy whip type manufacturing businesses you know I I've been I've invested in CD um businesses City making businesses because they had too much cash on the balance sheet you can make money in businesses that are in Decline provided that you pay are cheap enough price for them so it's not necessarily what the business is doing it's what you're paying for the business but let me ask you let me ask you one question here is it more pretentious to say Finance or Finance oh okay so this is a good question so this is so you obviously didn't get what we said call it Pirates of Finance and it's well because it's parts of parts of Penzance I guess exactly and then do you remember the part from uh Pretty Woman and she goes oh my God I enjoyed it so much I don't peed my pants and in the old days like what'd she say and he goes she said she enjoyed it more than Pirates of Penzance so it's like it's like a double yeah it's like a double so it just makes Corey and I laugh so it's not pretentious I think the name is brilliant I just but I worry because I say finance and I've seen occasionally there's a Twitter poll that goes around how do you say it is it Finance or finance and I don't know is it a regional thing do you think I think yeah I think at this country it's Finance but we just say it Finance because it reminds us of panz answer and I think it's funny but that it is funny it's great it's hilarious that's that's the only way yeah because every time somebody asked me about it I had to think of pretty woman so it makes me laugh and I peed my pants so like that's that's the other reason why but um I want to go back to this idea though of like okay say you're fortunate you run a business and you've got over 250k in cash like what do you think one should do with that I don't think you necessarily I mean business making payroll with 250 000 like that's not a particularly big business you know what I mean like that's that's medium-sized like a great so what do you do payroll it's like what is that four million dollars am I out of my mind here so right three million dollars yeah of payroll a year like that's not that that's not that much in pain I don't know that's that's a that's a tough question I don't know that that well you the the answer is you either invest in in big the bigger Banks but that's not a protection either or you have it with bigger Banks I think that probably from a policy perspective bailing out Silicon Valley banking or their deposits at least is a good thing for regional Banks because if they didn't do it there's just no reason to put your money in a regional bank right we're just taking downside risk so the fact that they've done this means that it probably saves all the regional Banks in the concept now is like the the bigger Bank sort of like basically their government back Banks right there so that would just wipe out the entire Regional banking industry right and then what do you think of yeah there's there's other companies I've looked at before that were like the algorithmically like Cascade your deposits into like dozens of banks so you stay under 250k like dozens of banks yeah that would be the solution yeah I try to find one of those for the show notes but then you know that can only be so much size like look at some of these tech companies sitting on these War chests like you gotta probably just buy like 90 day T bills but then I you know people don't realize even in 90 day T bills you're still lending to the US government and the US government will be the first one in history to pull off a non-monetary collapse if that happens I mean we don't just don't we just don't know when it's gonna happen right it's eventually going to happen I mean I think it's interesting that they uh who knows whether j-pal actually means what he says but they kind of asked him like to what extent you know when you put these rates up like this you know this makes much more expensive for the treasury to borrow to what extent does that enter into your calculation and he said none at all we don't think about that at all that's not our concern and I thought that's the correct answer that's the that's the that's the correct policy answer I mean that's that's what's written into their documents that's true that's the case but you know the bank of Japan was in exactly the same position and that was a big like the big Catalyst a few years ago I don't know if you remember this but there was going to be this point in time where be there just weren't going to be enough buyers of jgps and I was going to need someone needed to step in and the question was will it be the boj and everybody said no it's not in their net they won't do it it's not their Mandate of course they did you're only in you're not independent when you're staring at Oblivion I guess you stare into the void you're no longer independent so does power blink as well does power blink that's my question do we get to that point probably I like also that everywhere I can't say what everybody says that too about like the fact it's like it's not in their mandate and if you I study the history of the bylaws and everything like a stroke of a pen changes that immediately like I just love people they can't do that it's illegal oh watch they'll just change it now it's legal you're well it is true that yeah that's that's right they're not allowed to do it but they'll still do it when it's the end of the world what are you gonna do you're just gonna you're gonna follow what's written in your your documents your nerd or are you going to go and solve for you know save the world you're going to go save the world they all want to write the Bernanke book the courage to act yeah I don't think they're volcker too like yeah it's just like and people forget about how many times that was tried before volcker and Volker is just one of four people that tried like it just doesn't like it's just the the Serendipity of it he only lived he just lit the he let them just roll off didn't he didn't even like intervene that much you just sort of letting letting them mature and that just psyched up a whole lot of the record a lot of people think he exacerbated inflation but and it rolled off on its own but that's a whole lot that's a whole other story that's beyond both your and I uh pay grade but I was thinking though go ahead sorry I was just gonna say that's the cool thing about macro it's not there's nothing scientific about it oh it's just politics you can just argue politics all that long just throw out my nonsensical hot takes all day long um but I was thinking if I put like my Tony deedon hat on for a second what I did think may be interesting is like um Tony Dean Switzerland and I think it's Edelweiss whatever they hold he holds almost all his cash in like gold I think it's his gold positions like 50 60 of his fund and then he just tries to find you know these deep value like family-run companies around the world that he thinks will he'll just be in Forever kind of almost like a semi you know uh Buffett model but what I was wondering going Beyond just holding gold that's not somebody else's liability but then you have to deal with the variances of gold and that's that's tough to kind of to deal with at that large position size of maybe 50 60 if it is that high but the second part is I wonder though if you buy if you actually get the certificates of stock in the company is that a form of collateral that's better than like like so for example as most like deep value algorithm like you know people trading in in value stocks is that really being held at the bank that they're working with as their prime or like can you get the actual stock certificates and is that a more pristine form of collateral for lack of a better phrase 100 it is I was surprised that it's hard to get you yeah um certificates out of right the prime out of the system but that's not in Australia where I come from that's not the case like you just don't hold you would never leave your certificates on deposit with the prime broker that's Insanity because what happens if something happens to the prime broker and they haven't right what do they call it they've re-hypothecated your certificates remember that word yeah we're going to relearn that word again I'm guessing sometime soon rehypothecation so if you go through that process or is that two that gives a system set up to make it too difficult yeah it's too hard it's too hard that's too foreign if you're like I like the I don't know what happens to Gold over the next five years or ten years could have or double or triple or third or whatever I have I have zero idea but it is also true that in a thousand years time you know they dig up a Roman treasure box in in Britain from Roman times and it's filled with gold that still spent you know you could you really can use that stuff in the future I don't know like I I really like didn't's approach and I've read all those letters and he's had a few he's you know it's very similar he thinks a little bit like Buffalo he's taking a few shots at Buffett more recently you know for some of Buffett's inconsistencies I like the way they think I I don't know if gold is where I would do it but I understand the rationale for doing it that way I I can't fault them for doing that I can't argue against them is it if I'm honest like I still don't understand gold like I think like you said you can go back Millennia and it seems to maintain purchasing power but very it's variable right like not in the interim period like when you need it in any specific year it might be like this everybody sold the baby with the bathwater like March 2020 and it's not providing that value you need it for so it's like over the long run yes and then it's just Lindy effect right and you're like how will this work in the future I don't know but it's worked in the past like you're saying that rear view mirror aspect earlier and then I was talking about over the weekend to me it's like it's for it's more for like these interim periods of liquidity or when the system gets shaking uh shaken up a little bit because it's not like we we own physical gold with like our funds but like am I gonna go to the Vault and then shave off gold for this like no it's like it's for having something that's not somebody else's liability and then the price should spike in reflection of that and then hopefully you maintain your purchase power parity that's like all you're hoping for and it's just during this interim thing of like who has collateral it's like well we have this other thing that can be used as collateral you're not using it to actually pay for anything though the long-term argument for gold is like a history of gold thing where it's like the It doesn't Decay it's infinitely divisible it's not used in really very many commercial applications so it's not like silver where there's a supply and demand thing going on all the time for silver that makes it much more less like money like gold is useless other than in kind of jewelry which is why it's useful I guess as money and for those other reasons I I wouldn't do it that way but then if I was Tony didn't and I was in Switzerland and I was looking to hold family businesses and run this thing for a thousand years that that that may be what I would do I think maybe that would be a good idea I don't know but then you've got to have it there's no point having it on in a vault somewhere now you've got to have it you got to hold it in your own thousand year Vault you know there's a whole lot of There's real costs involved in something like that yeah and I've talked to everybody in the industry whether you know and Brent Johnson's gone way deep down this rabbit hole we talked about like initially we were looking at like Global diversification of vaults right but nobody figured out March 2020 then you can't move the gold around like entering covenants it's still there but like you couldn't move it around but I could give you a note like I can have a note that says that I own it I can give you a note and say hey you know I've transferred ownership of it remotely well that's what I'm saying I think it's just pristine collateral during interim periods when markets become dislocated or shut down or there's a run on banks like that's what it's there for you get that there's a great line at the bottom of the Great Depression when um John Maynard Keynes was he was managing these two funds and one as an insurance company and the other one was an endowment and when the market went down that much everybody said we've got to get out of equities this is and he said you can't sell out of equities at this point that because this sort of introduces this if if it's all if we stay here and it's all over then it doesn't matter that we continue to hold them but if we sell out and it rallies then we'll miss this this massive rally and I think gold is a little bit like that too like physical gold you're going to need in the after period when Master Blaster runs by the town and it's Mad Max and you get a motorcycle and shotgun and stuff like that but there's a period in the yeah as you point out like there's right up to that point you find having you could have a gold ETF like at least you get the you get the performance in your portfolio you won't be able to take it into the next world you have to become a warlord in the next World to get access to but that's what's going to happen anyway if the guy who's got the guns and the biggest gang he's gonna have all the gold yeah similar to Tony didn't this is what we think about it's like how do you manage money over hundreds of years and I think that there's only like once every 100 years probably that like you need this physical gold for anything and like you said it's like an intervening period like uh like I think about it when you have these shimmies and shakes like kind of in the global market during risk on times when all sudden people start questioning what is money and what's collateral that's what it's good for but like you said we go to the Mad Max side you want guns and butter or I always say like I just want to be friends with CEO Blackwater like because like the idea too that like people are gonna store all their stuff it's like he's gonna help me yeah whatever militia comes through your town it's taking all of your protein sources and your water sources so I'm just like I'm cozy enough I'm gonna be like the court jester for like the black one but Blackwater changed their name too I can't even keep track of all of that stuff too yeah they're too smart to keep the same name all the time right it's just like the tobacco companies now it's under a different name now it does it doesn't really matter uh related to that stuff I'm gonna get this wrong which is great because then I'll give you a chance to correct me but would you call them indestructible Industrials or what invincibles Invincible Invincible yes so give me the give me the Spiel on invincibles just the idea is that I when the world sort of collapsed through uh 2020 you know like six months into it sort of somewhere in September 2020. I had been reading uh you know I like to read old literature that's kind of what I might and stuff that's available for free on the internet and there are all of these you know terrible things have happened throughout history and typically when something really bad happens somebody has written a book about it so you know there's the the history of the Peloponnesian War written in 430 BC by facilities is it is a Athenian strategory which is one of the 10 Generals who's elected to fight so Athens was a little walled City um but they were becoming more prominent probably on the on the edge of Empire they'd figured out how to use their Navy and a few other things the Spartans get upset with them Spartans want to go to war with them so I had read that and that sort of the the the the terms of the engagement is known as Grand strategy the decisions that you make when you so you know Athens famously huddles inside the walls while the Spartans go and destroy the um the current the countryside the Athenians get the plague it kills their their main leader um and then the war goes on for 30 years so it's devastating World War for them that engulfed everything and I I read that and then I read uh The Art of War that which I've read I read it in high school I've read it every five years or so since I've never got anything out of it really like there's lines in there like if you find yourself in a salt marsh get up against them get your back against the trees I just never use that in my day-to-day life you know when I Traverse the salt marshes taking my kids to school with my big sword drawn but I read I started reading through it and there are several different translations of it there's one by Giles who was the first in 1910 and there's a Patrick Cleary one which came out uh this is the one that I read in high school and there are lots of others they all get because it's written in ancient Chinese it's written with this full of analogies and it's like they talk about the swoop of a falcon or the bending of a bow all this sort of thing so the thing that really stood out to me was that he talks about you know make yourself Invincible first like that should be the first thing that you do make sure that you don't make mistakes he goes through this whole process for preparing yourself for conflict or preparing yourself for Very Bad Things there's always a possibility that this stuff could happen you have to know what your know the designs of your neighbors know what your allies are planning know what your enemies are trying to do know the territory no the seasons I haven't no Earth and he goes through this list of things and I thought this sounds incredibly like Buffett this is the way Buffett thinks and I think that it's all just trying to deal with ergonicity it's all trying to deal with that risk of a truncation of a very long so Buffett would call it compounding over a very long period of time you've got to look out for these downside events and the way that you look at and you have to get the fragility out of whatever you're doing or find ways of protecting yourself and I just it just occurred to me and I've read this now many other variations of this philosophy but I think it's sort of it's come down through history it's a very well-known kind of approach to basically dealing with air conditioning so taleb would say that his approach to it is he bets on the fact that it's going to happen and everybody else undervalues it because they because they just don't it doesn't happen frequently enough for them to understand it's going to happen so tell their bets on it he takes calls out of the money on the vix so he takes out of money puts on the index so there's a various ways of expressing how does Buffett deal with it because he's on the long side well he looks at the individual companies that he invests in make sure they have a durable business good balance sheet and it's one but it's run by sort of competent honest and sensible managers who've got reasonably good character and temperament that's one of the things that comes through all of it like there is this psychological element to it know yourself know your enemy um and there's a character element to it too which is you you would rather associate with people who basically do what they're going to say and you know how they're going to behave under various conditions and I I think that all of that stuff together is it all Rhymes I think Sun suit and Buffett rhyme I think there are lots of other guys in between who have said exactly the same thing and it expresses itself in lots of different ways and expresses itself as like gambler's ruin over betting ergoticity we have the mathematics to back this stuff up but I don't think that the mathematics is particularly interesting I think that the the history and the philosophy of it is more interesting but I think the fact that it's supported by the mathematics sort of indicates that there is something rigorous to it so that's basically the idea it's just trying to find Buffett style stocks I just described in the context of of Sun Tzu and more interesting sort of events rather than business but that's the idea well it's really smart of you because quite frankly we uh traffic a lot near godicity and as soon as people hear the word their brain shuts down their eyes yeah narratives work a lot better and that's a good point is like historical narratives work work best um but part of the invincibles okay it's one thing to understand that narrative and the idea like how do you find them so there's there are indications in their financial statements that they are that way one of them is that they earn a lot of money so they have to have some protection hit Buffett would call it a moat uh some sort of competitive Advantage but it's not protection for everybody the modes get crossed all the time it's just the idea that you can earn a super normal return on your assets because the nature of capitalism competition is for most businesses that earn super normal return that just attracts entrance to them we see this all the time oil and gas will be drained of capital for a long period of time oil price will Spike there'll be a rush back into oil field services and those businesses will go well for a while but there's no protection it's just a man in a truck and a your oil field services guy but there are businesses that can withstand competition for years and years and years and they tend to be you know not particularly high-tech businesses like Coca-Cola people just prefer Coca-Cola over store brand sodas it's all that kind of stuff it's just behavioral type stuff so it's reflected in the financial statements over time they should earn super normal they should earn pretty good margins that should earn better returns and invest Capital than other businesses and they should be able to there shouldn't be that much volatility in their returns because they can control basically what they earn over time so it's identifying those kind of businesses if you do that you don't necessarily get the best returns because this this kind of idea in the markets that you don't get paid um for taking for buying something that is good you know you get paid for taking on risk you get paid for finding things that are undiscovered so often you earn a slightly lower return with these things which would be fine if you just bought them as a as a basket you would expect and probably a sub Market return because you have to overpay for them so Buffett's innovation has just been he's got a small there's 300 businesses or something like that in the state so that he wants to own and he just Waits until they get cheap enough to give him a 10 return and when he does when they do that he puts a whole lot of money into them and then he just continues waiting you know which is very much like that's again that's the sun suit type of approach to this stuff where you just you know that most opportunities aren't going to be good enough you just have to sit there and wait and wait and wait until you finally see something that you just can't figure out what's wrong with it and it's like this reverse process of analyzing things you're not trying to find the good things you're trying to find the things that don't have any problems with them like just the the perfect egg and so he sits there and he waits until that turns up and then he then he then he buys it so there's there's two things in there I want to start with that I just I wrote down a list of questions but uh one is sub-market returns and I think that this is once again an ergot to see problem let's call it a Time problem it's like or a volatility tax problem sub market returns um people just look at the the average annual returns and they're not even thinking about the downside risk right what's their Max drawdown so if you can actually have sub you know s p returns but your drawdown's cut in half or a third like that's a much better risk profile and you're going to compound more effectively and efficiently over time but everybody just looks at the Top Line number that's all anybody cares about and they don't think about what is my drawdowns and that's why you're finding better companies so like that's the whole point is like you're reducing if you hold the whole 300 without regard to valuation you would you would expect to earn some market returns but if you're prepared to wait until you get a valuation that doesn't doesn't uh acknowledge the valuation that you that you're buying into then you can get sufficiently good returns and so Buffett's approach has been to wait until the Ford returns are about 10 percent and then because the markets tend to recover faster and you you earn he's he's judging that Ford returns based on price to what the underlying business can earn and then he's not he knows that over a long enough period of time your own return profile starts looking like the return on invested Capital profile of the business so because these are super earners you should earn more it's just that for the most part they trade expensively which everybody's already realized that they're super earned so they traded a price that takes away that possibility of you know now they sort of a have to be super earned it's just to earn a market return the other thing related to time in that though too is like you're talking about an incredible amount of patients and that's really hard for people so like do you just think at like 65 70 is when you're going to get Vindicated and you're willing to wait that long and beat your head against the wall like how do you think about that I think that the Vindication comes over time right but I I feel I in some respects the you know you're you're captive to when you start a fund like you start a fund so my deep value fund started in February uh 2020 sorry so that's sorry June 2020 we took it over and then October 2020 we turned it into a smaller microcap fund and it caught the bottom and the returns were pretty good for that fund my Zig started in May 2019 so it started at the wrong time of the cycle so it it got crushed at the start and it's outperformed since sort of September 2020 as well so the return profile looks pretty similar to the other fund it's just at the timing issue make means one looks very good and one looks like it's less good but it's the same strategy in both I know that I have a small advantage or I think that I have a small advantage over time at some point the external matches the internal so I'm not I'm not too worried about it at all provided you know there's always a business risk and they have to perform at some point through there but I'm I I'm I think honestly I think so far in the future that I I that's not a brag it's like I'm trying to think I'm doing it on purpose I'm forcing my Horizon out as far as I possibly can it's this this is this great idea which I get this from Jake Taylor and he got this I think it comes uh from poor Charlie's Almanac or um Peter Kaufman who's the gentleman who who wrote poor Charlie's Almanac he calls it Galilean relativity and this is the idea when you were 16 the first time he was 16 you weren't very good at being a 16 year old because it was the first time you did it by the time you were 30 you had some great advice for you as a 16 year old right but at 30 it's the first time being a 30 year old by the time you're 40 you're back in your 30s and you think yeah there's clearly a whole lot of things that I should have done and all of life is like that except you get to this point where it's happened enough times to you that you should start thinking like you're Now 50 or 55 or 60 or 65 as you say so I put myself all the way out at the very end of that Nest let's say I'm lucky enough to live to 80. what what should I be doing now what would my 80 year old self tell my 43 year old self to do and so that's what I try to do that's Galloway and relativity and once again the intestinal fortitude you have is is mind-boggling to me because like you said it's like the conundrum is usually you have to make a lot of mistakes to realize like those things that Charlie's talking about right and by then you're too old for like compounding to take effect because like you're in your 40s and you might you're probably gonna die by 70 or 80. so it's like that's hard to deal with a long time left right it's still a long time but it's just like it's hard because I think the one of the Eternal conundrums is like our present self-ears to shoot yourself right and you're somebody like you're saying that could put yourself into rewarding your future self and at the cost of your present self and I think without those are the things that we are always like fighting is how much do I want to reward my present self versus My Future Self when the future self is kind of an abstraction but that's the that's the thing we have the human animal of our present self and we have the societal animal of the future self and those two are kind of like always in conflict with each other well the nice thing about the business that we are both in is it really does reward patience and a long-term perspective really more than anything else like there's no other business like this so I I think that that is the single most important thing and then everything else flows backwards from that so once you can program yourself to do that once you can force yourself into that Galilean relativity and start thinking in those terms everything else follows along you start thinking about ergonicity when you think about the world in those terms you start thinking about like I'm sure that the Cockroach fund is a result of you thinking in these very long terms there are lots of ways I could I could use I could be I could Market much harder on short-term things that get a lot more attention and raise much more money doing that but I don't want to do that at all I just don't want to live my life like that I think that there's a way that you can have this like peaceful calm relatively peaceful calm existence and you know it it gets rid of that feeling of fomo for me I I don't you know people are doing really well should have been in these things I don't it's just a different game that's not the game that I'm playing I'm playing my own game over a very long period of time and that there are certain rules and there's certain dictates that flow from that and so I'm not hurting anybody else but myself and I don't follow my own rules but there's so many things really like I you know we I broke my own rule today we talked about something topical with Silicon Valley Bank because at the same point you're saying is like I don't think it behooves us to talk about short-term or topical things because that's not aligned with the philosophy of our funds so subconsciously you're you're telling your clients that like I'm focused on short term but no you should be just everything should be about long term so you should say like this doesn't matter this too shall pass like that's the way you should really kind of focus on it is like not not talking about the topical at all but like I say potentially view these events like the fact that I'm not impacted by this is a result of decisions that I made previously and those were good decisions and I should continue to make good decisions like that I like I could go I don't really I don't think I need to see the news at all I get plenty of newsflow from Twitter but I don't I could live without the news I think you can go back and it's it's crazy to go back and read ancient literature that's like two and a half thousand years old they're dealing with exactly the same problems that we are over exactly the same time frames it's all unexpected for them they're famous events now but nobody knew it was a famous event going into it and they kind of talk about them you know the the Peloponnesian War Between the Athenians and everybody that went for 30 years and the plan at the start was to hide inside the walls of the city which was clearly not going to work for a 30-year War but I don't think it's a bad solution for the first whatever period of the war but it's just funny like that we now know that that was the wrong thing to do but at the in the moment they had no idea and I don't even know if that was the wrong thing to do it's just that that's what happens but it's it's sort of regarded in in the people who are philosophers of grand strategy that that was the wrong thing to do so I think you've got to explain hindsight bias yeah with with two and a half thousand years of Hunter you're able to say that's the wrong thing to do I think there's this um we tend to overreact to to events that we see and so it's good to you know either ignore them or just or under react to them let everybody also react but the also the other thing is that we under react to longer term high impact events so you know to live this a little bit like talib's idea but there are it's actually Cardinal Durant says the guy who said this but he said everybody's too worried about their present day troubles they're not worried about the things in the future in the far future and I I try to reverse that that's one of the nice things about the idea sorry to keep from going back to this Galilean relativity but it really is like it's a big ergodicity is a big part of of that process there are big we don't know that the stock market is going to crash now but the stock market is going to crash in the future we do know that that's going to happen so why not just be prepared for it now and we don't know when it's going to happen but it's the same thing that you know the Earth has been struck by meteors many many many times like the Earth is covered in media craters we are going to be struck by another like civilization ending meteor at some point possibly today possibly tomorrow hopefully not for thousands and thousands of years I don't know if you can prepare for them but there are things that are absolute certainties over a long enough time frame and you should think in terms of surviving certain events over a long time perhaps like when they could come tomorrow I think about I can't remember Whose Line it was but it was basically like we live in a convertible right and that just it sits with me every day right that the world is convertible and like you said these meteorites yeah it's like uh it's tough to think about but to your point like our original working title before we started any funds was the The Firm was called ataraxia which is like ancient Greek for unperturbed by external events so that's like you said we had the forethought to build it so like when Silicon Valley Bank happens I'm like I just shrug my shoulders like yeah it wasn't that specific one expected but I expect Banks to fail banks have failed historically and so it's like I wonder though if we just become like these hardened and bitter grisly vets were just like oh yeah shrug it off like these things happen and like you just become kind of like so jaded but at the same time like let's be honest like you're an entrepreneur so how do you how do you manage your shiny object syndrome though while you're just waiting on these funds to pay out over time I I have there are a few things that I do but I I know that I'm have some advantage in I don't have a lot of advantages in a lot of things so I have a few things that have an advantage and one of them is that I'm just like congenitally built this way I I am risk aware like that's one of the things I'm risk first guy and I have this expectation that things that have happened in the past will happen in the future and I think that everybody should like to me there's just some all those things seem to be completely logical that should be the way that you're behaving and I can't understand people who don't behave this way but you know that most of the rest of the world doesn't but judging by the way that they invest when I look at when I look at the stuff that people are piling into particularly the way the attitude that people had when they were piling into this stuff that this is a new paradigm you don't understand it you're too risk-averse but that's one thing and you have the you have the sucker of like Buffett monger and all that stuff with that but going back to ergonicity in the meantime let's say exogenous of your investing Styles like you have a family that has needs and those time durations are mismatched so it's like do you see what I'm saying like life gets in the way of maybe your investing style sometimes true I've got I've got a wife and three kids so it hasn't really it hasn't held me back that much I I don't I I don't think that you know to the extent that the business is kind of carved off from well that's that's that's that's that's a good question so how do I deal with that the business has to be able to sort of survive on its own defeat it has to be cauterized and carved off from everything else so the business sort of exists us outside the the family environment like my kids my kids don't really understand what I do I kind of explain it to them we rang the bell the New York Stock Exchange so that was like a tangible event where they saw that something was happening but they still didn't really like I try and tell them that it's just too it's too abstract for them but I but I I feel that given that I have studied history enough and then there's nothing it's not you don't have to go back and read ancient history to do this you could have just like the last 20 years in the stock market would probably be enough to tell you that or maybe the last 20 years you know that's 23 is you need to capture capture.com bust capture 2007 2009 look at the performance of value stocks through their value stocks had that first great decade had a second bad decade that's that's all of the things that can happen in the stock market to my business the stock market can can collapse and my strategy can underperform so those are the two worst things that can happen if you can survive those things you're going to be okay and so that's what I'm survival first organicity is the the collapse is the enemy of of of my strategy so that's the thing that I spend the most time kind of kind of worrying about and once I know that I'm going to survive those things there's this is the only thing that I really know how to do like outside of that I'm not going to be I'm not going to be I'm not a great I'm not going to be able to advise people on marketing or or legality I don't really you know I I as much as I'd like to run something like buff it does look I don't think I have the I don't have the skills to run something that scale like this thing that I run is is complex enough and it's that's enough for me and there's there's so many things in there um but I want to like touch on a few other quick topics because I've already gone beyond time so I want to be honest you're fun um so going back to the the invincibles um I was thinking like besides are you sector agnostic I mean besides maybe staying away from like Banks or financials there's like we have so we could could like lvmh and like Hermes are those like great invincibles or like at the right price or how would you think about those like more like because luxury and brand are seeing sometimes things that people don't understand and can't quantify yeah absolutely yeah that's potentially the source of it I think there's this um I think of those companies not so much as being luxury or brand but as being uh that quality brand middle stand which is this idea um that they're these they found particularly in Europe that these basically family-owned businesses that um they just take a long time to create the product and the product is an exceptional quality and there's a finite limited run of whatever the product is and every year they basically set their price for the product and everybody pays it and they all sell out and then the next year because capacity is still really constrained they put the price up a little bit more and it all sorts up I think that's what really the lvmh is even the sum of it's like I know some it's faster moving fashion and there's a lot of other stuff in there but the the quality portion of it is that quality brand middle stand so those are certainly potentially Invincible businesses the longer that's a that's a great mode if it takes 25 years to grow your cork tree not the Cork's a great one but yeah you know what I mean like 25 years to make your scotch or whatever it is then or it's a it's a leather handbag that it just requires a level of detail and precision and and craftsmanship that it's hard to replicate and hard to create that trust in the marketplace that they're great businesses their potential invincibles and then I hope you disavow me of this because it just seems to me like you're almost you segued me perfectly into this is like when I look at a lot of these businesses that are great cash flowing business and invincibles but they're maybe in a dirty commodity business is now the children of these Boomers do not want that business and it just seems like there's a tremendous opportunity there but am I am I not seeing things clearly in Commodities commodity businesses yeah like for example it doesn't need to be necessary I mean obviously the kids uh uh or no wouldn't take over our lvmh like that's obvious but like if somebody like is running like some sort of like I don't know like a a steel galvanizing facility in Buffalo New York or something like the kids don't want to take that over and so there's like opportunity seems like for Boomers this is more on I guess the private side than the public where there's just not a lot of succession planning just be the way the society is structured these days it could be a good thing I I love that I've been there's this idea of a search fund you've probably heard of search funds where people raise money but raising the money to do the search I think is kind of that's that's whatever that's maybe that's important maybe it's not the important part of it is potentially you get people who are first year MBA or people who've just graduated from mbas or they've got Consulting background or an investment banking background so they're used to working long hours they are very smart they've got a lot of energy and they come into some of these older businesses where there's no succession plan where you don't need to be a great genius to run it but it would help if someone was young and energetic and had an MBA and had some ideas for these things I think that there'll be a lot of that there'll be a transition from Boomers to um Millennials or gen Z or whatever happens to be who've got that energy I think that that's potentially a very good thing that could happen important and then on the public side like how do you start to screen to find these invincibles like do you uh screen for cash flow but then at the same time like do you want it under a certain percentage of cash flow because you know how everybody else is creating Chris data so it's like a it's like a beauty pageant contest it's like secondary tertiary effects like you want to you want a nice compounder but like that nobody else notices you're trying to traffic in maybe like a eight to eleven percent free cash flow or like how do you think about that I think that for the most part the the safest way of investing in value is just to buy things that are pretty cheap if you look at like what is predictive so there's very very little that's predictive as a sort of quantitative indicator of how a business is going to do and certainly once you get past five years valuation is not predictive anymore either valuation is very very useful in the first year we're so in the second year asymptotically Trends towards Zero by about five years and then return on invested capitalist variable all these things it's very very hard to predict so I think given that it's so hard to predict my Approach is less like Buffett's where Buffett is like Buffett has this incredible understanding of everything that's going on in the economy because he reads a lot because he's got BNS surf he's got these other businesses in there that give him feedback about those things if you didn't have that kind of certainty about what you're buying a better approach would be to take to do what I do which is more of a portfolio construction approach where I say I'll buy enough of these things that with which have those good cash flow characteristics which have good reinvestment type characteristics which earn reasonable returns which seem to be you know bottoming out in their business cycle rather than topping out in their business cycle and um knowing that over time we can adjust and we can keep on iterating and we'll move away from things that aren't working and move towards the things that aren't working and I think that that's sort of my you know I I can't see the future I don't know what's going to happen but I like the I like the invincibles but I don't really trust them either because everything can get everything every remote gets crossed every everything that's every big business is eventually a commodity like there's no there's there's nothing that resists the Market's eventual sort of trend towards commodification of business so you want to be careful overpaying for for businesses is the main lesson so you want to pay less for them however you define that and I Would by the way I would happily argue that uh Buffett actually uses a portfolio construction techniques similar to yours as well as like as you know if you study his history like the amount of folly with his companies and everything that he's invested in are pretty tremendous but everybody only looks at the upside over time and people don't really realize all the ones that like kind of fell apart or they had to get really Hands-On that they didn't want to be in like but that's the great skill of it but right even making mistakes this is this is what I when I think about it like that's part of my sort of invincible philosophy is this you're going to make mistakes like that's absolute certainty too so how do you not blow yourself up with mistakes I'll try I'll try to find any source of risk and I include myself as like the first source of risk and then I work out outwards from that and so that's that's kind of that That's essential you have to survive your own mistakes like that's that's that's the first place you know know yourself is that that's the first thing that Sun Tzu and Buffett would say as well well that's why yeah people that need to study buffer better realize they're not batting a thousand too it's like they're like like to your point but like do you think that I'm curious and I don't want to make an assumption because I hate assuming anything but like I would think that if you're screening and figuring out the invincibles how I would I would assume a good chunk if not the majority of the portfolio you end up in like quote unquote sin companies or non-esg companies yeah how do you think about that I look at businesses from the perspective of risk and so one of the risks that they can have is reputational risk or they can have um regulatory risk where there's no regulation impacting them now but there will be some regulation impacting or they can have they can be sued all of those things are genuine risks it leads me to this slightly differentiated it's not an ESG approach necessarily because I own some things like owner I don't worry I'm at coal I own things like that that I because I think that you know we if if we want civilization to continue to grow we are just going to need a whole lot of energy if we are going to reverse course in Civilization then we won't need as much energy but those are the choices it's not less energy it's not it's not going to be all clear energy it's we're going to be stuck on fossil fuels for a very long period of time and ultimately we probably have to be on nuclear or something like that so I think that you just can't you can't avoid that stuff and so you need some exposure to it um but I look at things like cigarette companies like cigarette companies earn a lot of money on invested Capital uh they've got pretty good margins and they're available pretty cheaply but I just personally don't want to own them because I think that every now and again they're going to be whacked with the the stick like a pinata because they pay out they've got the money to pay out and I you know I just think that's a bad business to be in where you're killing your clients over time so I would avoid those type of sync companies I don't own I don't own any casinos in in Zig because casinos have terrible casinos are if you look at the long-term performance of casinos they're like leveraged real estate plays and when you go through bad times they look nasty the worst sort of sin company to own alcohol you know who knows with alcohol type businesses but they seem to be pretty good businesses there's a death rate attached to them as well but it seems to be doesn't necessarily kill you to drink alcohol so I think that's okay in the portfolio at the moment but I wouldn't be surprised if over time alcohol sort of um starts looking a little bit more like cigarettes I don't know there's a lot of there's a lot of different things in there I think that I you know there's this rule in um in sort of applying it quantitative or systematic approach that you don't interfere with the output of the the system because you haven't tested those parameters where you interfere outside of the system but I still think that there's always this risk in a purely quantitative system that it winds up concentrated on a whole lot of things that have these it's not even an off balance sheet risk but have just metaphysical risk in them and so I try to avoid I that's the only time I exercise any discretion to go through and just remove things that I think have metaphysical risk or balance sheet risk it's not captured in the system so that's kind of the way that I I think about it but in terms of like things that are actually Invincible I think it's very very hard to find them so I think you have to assume that almost nothing possesses it be very careful paying it for things that you think that do the things that have earned more on their assets do warrant a higher you know that if I have earned that in the past it looks like I can continue to do with the future they should be earning more if they're more consistent commodity businesses I'm not like that because commodity businesses there'll be more Supply when the demand goes up there'll be a lot more Supply there's all as the price goes up all the marginal Minds become more valuable their margins don't actually go up much over the cycle because everything gets more expensive the inputs get more expensive but you know when they're under invested which they seem to have been for a long period of time you know the market doesn't if you're a value investor and you're contrarian when the market is not putting Capital into something you should be putting Capital into it and vice versa when the Market's throwing Capital it's something you should be pulling your Capital out of it just like Buffett and Munger all these things are easy to say but hard to do and that's why it's fascinating for me whenever I talk to you evaluation you know they are very hard to S to do but valuation should drive a lot of what you do when things get cheap on the historical numbers you should be attracted to them and looking at them I don't worry so I've sort of trained myself enough now that the fact of that shitness is the thing I think that will make them work in the future and you just you wind up in these things that that they are hated and you just have to know that everybody's overreacting or expect that everybody's overreacting even when they're not you're still sort of paid to be in these things because if they're not overreacting you've already sized like it's a donor if it doesn't work you haven't lost that much if they are overreacting it recovers then you get and you get and you get paid that's a that's value investing I also love the uh the bifurcated duality of like searching for invincibles but then being dubious if any of them are invincible so it's like you're like constantly conflict with each other like trying to find it yeah so the uh the other thing you brought me up a few times I I would give a shout out for Matt because I definitely I think I stole this from him we were we're all at lunch together a few weeks ago but the idea of like in this business surviving is only success so we've been talking about ergoticity and everything that's it surviving is the only success and you know you've been around before the other thing Corey and I often talk about is like it's hard for us I think in this industry uh you know industry and quotes is you know everybody wants a hot take or a tip right and to us to me all of us are in like the stay Rich business where a lot of the industries in the get-rich business and everybody wants that hot hot take hot tip and so like it's a very weird space where we be in but like once again we're we're trying to just you know survive um so you know related to that I also owe you uh a thank you because people like mabs podcast your podcast viewer value after hours podcast especially resolve riffs the writh hold screw they paved away for all of us to be able to do these more off the cuff you know more enjoyable podcasts to talk about other things that necessarily hot takes or Hot Tips or a global macro thing so I really always appreciate what you started with value after hours and all the content you constantly put out but my last question is Great White Cafe in Venice California is is it the best Australian Cafe in America and therefore you would argue the best cafe in America I do love great white I love that little um I love their logo too I've tried to rip off their logo and stick it on shirt for myself yeah I I do like that Cafe it's great last time I was there I saw um uh she's the the actress um ah now I can't think what her name is she was in oh I'm so bad at actresses names and movies that people are in you're probably gonna have to edit this photo but the who cares like you said yeah yeah anyway they moved on from like the acai bowls to like the blueberry bowls to like you get like yeah it's just like it's a it's a cool spot in Venice if you ever get a chance check out uh Great White Cafe but it's always that argument you know Australians think that they're the best at coffee and cafes now or something I think that Australians are the best coffee and cafes there you go you heard it here first but like uh let's plug away again at the at the end here I like to do at the top and at the end you know tell everybody like if there's a lot of places they could find you so so run down the list again so my main my um my first fund is acquires uh deep value sorry so I've lost my mind completely so Zig Zig uh is acquires um the acquires fund deep is the acquirer's Deep value fund that's a smaller microphone um I have a website acquires multiple and I have some books uh the last one was the acquirers multiple and I'm on Twitter at greenback.com I took a Greenback GRE and b-a-c-k-d haven't done this sign up for a little while and then what's the um and then you have two podcasts though right you have value after hours and then you don't have an acquires podcast as well well I had the the acquires podcast was where I was interviewing I was doing individual interviews I've just done fewer of them um recently we just tend to do this value after hours which is the three of us but we've been um sort of expanding it out to get uh other people into it so there's sort of the two are merging a little bit the last one we had was Porter Collins and Vinnie Daniel who uh um they're both characters in The Big Short they were played in The Big Short uh because they're in the they're in Steve Carell's firm in The Big Short were they um you know they have all the great scenes where they're quizzing uh Ryan Gosling about about the short so they were on the podcast it's always fun chatting to those guys because they're they're kind of deep value guys but they've got a little bit more of a macro credit bent to them as well and um you know I like I like bear porn talking talking bearish stuff with with guys so it's funny one of the because we do it live one of the comments and the things wise to buy it's always so bearish like well I've been running this thing from 2000 you know the podcast came out in 2019. I wasn't I wasn't very early on I think I remember Meb doing his and thinking geez it's so late mid was really really early yeah but yours is they're doing value after hours different more of that like topic Roundtable I mean I think you guys still have like kind of brackets you try to put it in but it's more free-flowing than doing an interview podcast to be fair I stole it I think I stole it from the rich old scars yeah no we great artists deal and then they said they stole it from SportsCenter or something like that like it's yeah everybody's stealing from somebody else all the way along and they still live for people around the campfire but either way at the end of the day everybody run out subscribe to Value after hours and uh Toby thanks for coming on I always enjoy talking to you likewise Jason thank you for having me man it's always fun thanks for listening if you enjoyed Today's Show we'd appreciate if you would share this show with friends and leave us a review on iTunes as it helps more listeners find the show and join our amazing Community to those of you who already shared or left a review thank you very sincerely it does mean a lot to us if you'd like more information about Mutiny fund you can go to mutinyfund.com for any thoughts on how we can improve the show or questions about anything we've talked about here on the podcast today drop us a message via email I'm Taylor at mutinyfund.com and Jason is jason.com or you can reach us on Twitter I'm at Taylor Pearson in E and Jason is at Jason Mutiny to hear about new episodes or get our monthly newsletter with reading recommendations sign up at mutinyfund.com newsletter foreign [Music] for informational purposes only and should not be relied upon as legal business investment or tax advice all opinions expressed by podcast participants or certainly their own opinions and do not necessarily reflect the opinions of mutual fund their Affiliates or companies featured due to Industry regulations participants of this podcast are instructed to not make specific trade recommendations nor reference based or potential profits listeners are reminded that managed features commodity trading Forex Trading and other alternative Investments are complex and carry a risk of substantial losses as such they're not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such Investments visit mutinifine.com disclaimer for more information foreign
What is Money? – Tobias Carlisle
Summary
Transcript
[Music] hello and welcome this is the Mutiny investing podcast this podcast features long-form conversations on topics relating to investing markets risk volatility and complex systems Tobias Carlisle just plug away right at the top and see if for those watching we can see a choir response on the step and repeat behind you but plug away Reds top where can people find you what's the best spot for them to go to my mid-cap Lodge Cap Fund is zig acquires deep value fund and my small and microfund is deep Roundtable acquires deep value fund I have a website acquiresultable.com I'm on Twitter at Greenback g-r-e-n-b-a-c-kd and I've got a heap of books on Amazon under my name Tobias Kawa acquire as multiple as the last one Jesus there's so many things I want to dig into there but also I brought Toby on today because uh topical news is svb you know we're having a Silicon Valley Bank kind of collapse here and and Toby's an expert on Bank collapses so I'm just joking with you I just want to see your face when I started with that normally I have an answer yeah okay yeah well we haven't uh you know we scheduled this week's before so we didn't know this was going to happen but at the same time um you know everybody I don't normally like to talk about things topical and everybody comes out of the woodwork as an expert but you do happen to be a value investor with a with a law background so I'm curious what your hot take is the reason I have an answer is because I was watching uh I subscribed to a few channels on YouTube and mid favor popped up on one of them and mid's explanation as to what I'm going to give you so neb said this is what I've been telling everybody who asks my wife and so on neb said Silicon Valley Bank put too much money into assets that went down when interest rates went up and when interest rates went up there are the assets traded verbally the liabilities and uh then you crystallize some of those losses when you have to when you have a little Bank Run and and you're gone I guess that's that's that's like I'm no expert but that's that's all investing right matching you matching your assets to your abilities well yeah it was it actually Sparks an interesting conversation into my household over the weekend where my girlfriend was like now explain to me simpler now explain to me Simply Now explain to me simply right now I know I was like I kept trying to understand but I was like it was interesting because you know she is I guess millennial generation and she was like I've been told my whole life to just put my money in the Banks Banks are safe you know don't put it on your mattress as soon as you make some money like on your minimum wage job put it in a bank and everything and she was saying that nobody really taught us in school or anything that you know banks are not necessarily safe right that that our deposits are liabilities and they're going to lend out against those right and it's fractional reserve on those lending up to 250 Grand I mean how successful are you being straight out of school this year well that's that's favorite response I wish I would come up with that one because I think that just like most of the things they they teach us in school it applies to most people that work nine to five jobs right and that would be yeah the fairness on that would be who's really got a quarter million in cash in the bank so most congrats first of all yeah more than the quarter million to lose but presumably by the time you get to that kind of level of cash you've also got some other assets so that represents some portion of your assets but not not all of them yeah I I don't know I've just um I've always thought I think everything's shaky all the time I just think everything's a chance of blowing up that I'm talking about guys so you probably yeah probably further along this is why we like hanging out and then she was like yeah the most of the conversation over the weekend was like this is why we have cockroach for this very reason like so we could sleep at night when these things happen but she was also sending me this morning um I like mab's description but she was also even sent me this morning I think it was like a congressman on Tick Tock was basically saying you know about the emergency overnight and but he said um in his explanation Silicon Valley Bank lost a lot of money and I'm like yeah I think we need to explain things simply but I think if people could just understand a duration next mismatch right is they take in short-term deposits as a liability and then they lend out on long-term assets and it's not like they uh they they did lose money you know marked you know Mark to Market and also marked a model but at the same time it was more of a duration mismatch and if they didn't have a run in the bank they're usually fine and so to your point it's like we all live under this fiction that as long as normal withdrawal rates are within a normal band of what's expected then banks are fine and then this soon as we have like a run on the bank you find out that they're using Leverage is that like the banks uh Banks uh definitionally insolvent all the time right they can't meet all of that money right positive which is the function of the Federal Reserve is supposed to be to create a window where if they get that run they can access liquidity on the other side that restores confidence obviates the need for the run but I think the interesting thing to think about are the implications for so we've had now this uh this marked model has become more of a pressing concern so if you're a director of a small Regional Bank or anything that has this sort of exposure you've now got to start thinking about do we need to raise some more Capital do we need a cushion here and I think that that's why you don't really see Bank runs very often you don't really see credit crises very often but when you do see them they tend to Cluster together because all of the banks now will start thinking everybody who's got this kind of exposure needs to start thinking about it and that will that will dry that will suck up some liquidity which is kind of I I think this is like one of the other classic stages in these long this is a long slow train wreck crash but I don't think this is completely I think this is totally expected in the context of what we've been going through for the last it's almost two years now and we really haven't seen it since like the SNL crisis right I mean it's been a long time for people to see well I think the GFC was kind of a that was a big one I don't think this is the GFC I think banks are much better capitalize now than they were then might be a Regional Bank thing could be could be the reason how do you think about that how do you think about that contagious because like as a Californian you know we're out here and we we all of our friends Bank like I've seen some horror stories like people just closed down their houses Silicon Valley Bank they had all their savings there now it's all gone like I mean it's just some nightmare scenarios I heard over the weekend but like how do you think about that like is this a California regional thing or does this contagion because like you just said most of the people have been saying and you know and far better experts than I that the banks are well capitalized but then like how much is this contagion like you're saying banks are technically insolvent at all times so how do you how would you think about the contagion effect I I think that there will be some I think that there will be some contagion I don't think it'll be anywhere near as bad as 2007 2000. I think that there's always a little credit component to every crash like there needs to be some that liquidity needs to dry up for the crash to progress and it always happens it's just hard to figure out where it's going to come from I don't think it's going to be like 2007 where it's like a systemic credit crisis that the very impacts the very biggest banks but I do think it's more like a valuation type story where it doesn't surprise like the Silicon Valley part of Silicon Valley Bank might be the bit that is more important to the story than the fact that it's a bank it's just in an area where you know they had a really good time up until kind of February 2000 and as a 2020s at the 2021 when did Arc top out February 2021 yeah so they're now two plus years into their drawdown and if you go back and look at any of those kind of classic uh collapses of the stock market because that's but I'm I'm the the the credit crisis is is kind of secondary to my interest in the matter is I want to know how the credit crisis impacts the stock market because that's where right that's where I'm focused so if you look back at say uh any of the earlier collapses they they all sort of seem to follow the the valuation type collapses rather than a credit type collapse which is a 2007-2008 was a real credit event 2000 2002 was more over valuation from speculation in the stock market that created sort of it's a little bit self-reinforcing I guess it's a little bit of that Soros reflexivity where the market goes down people are on Leverage forces them to sell it creates this Cascade of selling so I think I topped out February 2021 they're two years into their drawdown the rest of the stock market didn't find out about it really until the start of last year first day first day of last year we started selling off and we've been kind of selling off basically since then although we've had little rallies but you would always say a year into the sell-off you can go back and look at 2007 2009 2000 2002 not much had really happened by this point in the proceedings because the Market's off a little bit but it tends to follow this pattern where two-thirds of the time there's about one-third of the sell-off and then the last third of the time is the two-thirds in terms of the depth of the sell-off so I think we're coming into now that and you know combining with other things like the 10 3 inversion and just general weakness across you know inflation supply side issues I kind of think we're getting to the business end now it's either you know marched to kind of August I think it's sort of when you see that the action if it doesn't happen in that period Then I don't really know where it's not that kind of environment I think it's I think we've really got a six months of complete fireworks to come though and as long as we've been like tracking the books and everything I think it's the Russell Rhodes have said too like that we haven't really hit the bottom of the session for me to turn around until vix has peaked over 45 so and I'm but that just because that's that's just a few that's a handful of data points though I wouldn't take that seriously like it could potentially be a slow grind down recession a slow climb back up I mean that's possible but it's interesting like you're saying it was like that final capitulation usually has to take effect and how much is that behavioral or people and there's so many things you said in there one I want to pull on is like the the idea too of like 2000 to 2002 was like Silicon Valley right an equity bubble like there's no real debt involved and it was just you know really an equity implosion in the VCS and startup space what's interesting like you said is like how Silicon Valley Bank is really a Rorschach bot for people's political views right and everybody we found out like I like some of the stuff on Twitter it's like we found out how much everybody hates Silicon Valley and wants it to burn to the ground basically but at the same time like all this speculation is like oh they were they were lending to startups they were buying MBS you know like it could be as simple as no they actually had great you know long long journey Asian treasury assets it's just a duration Mr match and they had a bank run I mean granted they're sure I'm sure when we eventually dig through it we and we won't even have perfect hindsight is like I'm sure there's some MBS in there lending to startups but that has been interesting though that they do lend to startups but what I but what I would really want to point out that you are talking about is with with Arc and everything else it's like the VC and and the PE world has just been marking the model right and they just like play this game to keep marking it up marking it up and you know many people great people said you know volatility doesn't get destroyed it gets transmuted or transferred right and it just so came out of Silicon Valley Bank they're basically like hey these startups have no cash left like and we're in a we're in a pickle here and so finally somebody had to admit that these these marks are wrong is that like a fair way of looking at it well I think that's my understanding of what has happened with the the bank that as far as I'm aware it's not investing in excessively risky assets it's just investing in they've had this enormous flood of money go into them to make them from basically nowhere into the 16th biggest bank in the states they've put that into treasuries when treasuries were trading very very like near zero percent interest rates very very tight in the treasuries and just interest rates have moved against them and so they've been beaten up in their book so it really is just you know but then you could have been in just about any asset it didn't really matter where you were I don't know why they were the first impact that I guess they've got they've also got problems on there on their bot they may have some problems on there that the people who they ever went to there must be some issues there as well can you imagine like that's to me it's so many interesting things like you said it's like they allegedly didn't hedge their treasury treasury rate risk uh you know rates rising and then I don't know how much the lending to startups is in there but that's it's kind of amazing that like but they go but then they get warrants I'm like yeah that's basically a VC like there's no reason for banks to be doing this kind of man it seems the equities it seems the equity's got some value right if the warrants the warrants are like an upside that's not downside protection that's just upside return if it works the other part of it is um I don't know if you've ever done this but maybe a decade ago I spent years trying to figure out like if it was possible to create a bank that didn't lend that basically just retained all those deposits right and basically there's besides I mean you can make a little bit of money like you could take a little bit of risk and maybe overnight lending rates bank to bank that sort of thing to maybe try to make uh the business profitable obviously you'd have to run it like a non-profit or a community bank or Co-op but the other part of it is like I think the only way to make it work is people would have to pay a monthly fee so it's just like if we buy physical gold right you have to wait right that's what I'm saying they don't like people don't realize everything everybody wants everything for free and it's like it's not free right that's my point so like have you ever looked into like trying to start a bank or what a bank would look like if it was actually secure and is there is there a viable option for that in like the modern economy so I haven't that but I do think that's a good question I think the problem for these Banks problem for the regional Banks is that the lines make up such a big portion of their book whereas the bigger banks have lots of other sources of income for the regional Banks it's all about wines that they make that's that's where they make their money as you point out there's there's not very much money with the cash on deposit that they have to kind of be lending it out to earn a decent return so they are really subject to the business cycle we just haven't seen much of a business cycle for a long time so I guess you get things like Silicon Valley Bank where they're not thinking about what happens if the rates go the other direction they did they had some other problem where they had a risk officer they lost their Chief risk officer or something like that 12 months ago I'm not I haven't really followed it that closely this is a this is a casual conversation between you and in the context of it's an equity investor talking about not a not a bank specialist we are not Specialists no I tend to I own I hold very few Banks I hold across 130 positions across two fronts 30 in the big one and 100 in the smaller one I hold very few financials for this reason they just saw little black boxes you can't get a good read on what's going on inside them it Bank experts get caught get blindsided all the time like the bank expert funds are deep in all of this stuff so it's makes it tough to invest in that was part of uh trying to figure it out myself was like this is a terrible business like why would you want like everybody's like one thinks they want to be a banker and be Bank like it like during risk on times it's a great business but during risk off you don't have a lot of Leverage you can pull so that's what was the interesting the other interesting part about like to do it properly like as like a non-profit it's like a co-op bank it's like what was interested in the little anecdotes that are interesting is you have to have like a loose assemblage of like membership that's like semi-related so I was like people with Facebook accounts like this is back in the day right or like Twitter accounts like so you you can have that loose assemblage that way and then what's interesting is like the co-ops can also tap into all of their ATM banking networks so you could tap into like 60 000 ATMs and offer like free ATM withdrawals if you're part of like the co-op banking Network these are just some some random things there that I thought that I thought were interesting that's all technology cash yeah yeah you're not gonna need to take cash out future well that was the problem when people went to take the cash out of Silicon Valley bank account check it out this is the future there's no cash exactly Welcome To The Future so part of that though I so then you go into the secondary effects right this is what I thought has been interesting over the weekend well then one I want to point out again we are not experts but what I love about our industry is how uh especially on the this is my deep level Global macro everybody has a hot take about everything and also in their experts it's like they're such unbelievable experts on such a pan and play of topics that they apparently have never even looked up the word dilaton like it's amazing right like everybody comes out of the woodwork uh it's amazing like on the Ukraine on banking everything so you and I are just two more on shooting this [ __ ] except for you know a lot more than I do so that's true we'll put a caveat there at least in general like in life in general but again myself that's true so here's the one that I find that can write so we're here on uh Monday the 13th and you know the government's gonna backstop Silicon Valley Bank right so depending on what political beliefs you are and everything this is where I vacillate between my my libertarianism and socialism is like what do you do in this situation right like everybody like your libertarianism says like just let them fail let the dust settle this is what we have to do this is risk taking and people are going to find out if they have over 250k in there that this is the risk that you are taking and you should have been aware of those risks that's what like say a Libertarian would say and then the other side of it is like well there's a Cascade of consequences here not just across Silicon Valley businesses but across all of their vendors and their vendors vendors and the cascaded consequences like this hurts the person on Main Street but then the bailout does it come from the FDIC insurance but then comes from the taxpayer like you see what I'm saying like I'm curious how you like would walk through this conundrum in your own mind whether it's in your industry or not like versus like a bailout versus you know saving the actual system yeah it's a sickening thought I saw there are a whole lot of uh payroll that wasn't going to get sent out right if it if it didn't happen so it sucks when little people who've they've taken no risk they're just trying to do the right thing and put their money in a bag and they get hurt by it um I I don't know the banks are it seems to me that it's it's bare knuckle capitalism on the way up and you get as much as you possibly can in terms of calm and then when it goes the other direction you just get a boiler there's got to be whatever the decision is like if we're going to decide to bail these guys out every single time which we are because it seems you don't want the little people getting hurt the big guys have to eat some of the pain the people who are in there have to eat the paint too they have to go first it can't be you get paid or all of the comp that you've had for all those other years that's that's in a locked box somewhere you can't touch that yeah we keep increasing the moral hazard but like we haven't set the parameters for how to rectify the moral hazard is that kind of what you're saying it's like obviously like we're going to keep bailing it out because like you're just in a terrible situation like right do you want people to learn their lesson or these people like you said they can't make payroll by the way people don't even know that uh Silicon Valley Bank has a wine division there's 400 wineries around me that like use Silicon Valley Bank that just got the third assets Frozen they can't make payroll and some of those people are like the cleaners that clean the wineries so it's like it's a tough call like I don't like so how do you do you have any thoughts on how do you maintain that more like that moral hazard like do you do clawbacks of their salary or like how would you think about that well I'm talking about the very senior Executives who are most directly responsible for this yeah I think you should do something like that they should have their comp should be paid out over a period of time five years or something like that you can't have this it's just it's asymmetric where your upside is uncapped and you're down to you know your upside as you become Jamie Diamond and you're a multi-billionaire having never started a business just being an employee the whole way through in an industry that gets bailed out when when something bad happens I mean I don't know if that I don't know if that works I think that's going to encourage the wrong Behavior at every step of the way I I don't know about the like the the bow that's that's a question for politicians but I hate seeing little people get hurt but there has to be some way of stopping the problem before we get to this point run yeah but it's a conundrum that I've been mulling overall weekend yeah it's like what do you do because you know your heart wants to save like the people that are you know not necessarily involved that are tertiary you know shrapniling consequences of it but the academy you maintain that people just don't take these inordinate risks and we keep having this moral hazard over and over and over I think it's a problem it's a problem with the system right the system doesn't work like this the system where they can borrow from the fed and lends and lend multiples out that doesn't work we need a different system to that is there Bitcoin Bitcoin solves this what are the Bitcoin gots oh man crypto solstice oh God right well and you could in hindsight we might go back and it was like the the demise of silvergate that led to the demise of silica like that was like the camel that broke the straws back is like crypto actually crypto Banks were the one that comes yeah crypto crypto broke the bags um because there's so many like I just like and then moving forward yeah like I don't know what we do um yeah it's just I I I struggle to really to really this one really it really boggles my mind with the moral hazard versus bailout issue and and how do you actually set this up system up but part of it too is like don't you think like the okay so this is a good question then to what what steps can you do it's kind of arbitrary that FDIC insurance is up to 250k right yeah it's such an arbitrary number but like you said you've been 250 for a long time yeah so it's clearly it should be index to inflation or something right and so but even an individual it's a sizable number right but what if you're running a business what do you do with your cash that's like so like let's start with there like how do you think about that like obviously we buy um t-bills and we can use t-bills as collateral we also buy like some physical gold just in case things like this happen that's not somebody else's liability um you know we have different banks that we use uh but if you have a banking system collapse like there's it's really hard to think through this because this is to me a problem I've been thinking about for two decades is like what is money I you know it becomes it becomes it's not it's not a it's not a completely abstract philosophical problem it is somewhat concrete you know policy question about how you run the banks Banks aren't necessary there's no reason why banks are set up the way that they are with the Federal Reserve able to you know the Federal Reserve has two mandates both of which are silly you know they're supposed to keep the money supply you know keep inflation under control so we've got a stable money supply and full employment the FED can't do anything about employment they can putting interest rates up has some sort of um statistical association with employment going down because you choke off liquidity and it leads to lower growth and vice versa but I don't think they should have the two mandates I think that's silly I think they should be what they were set up to be which in 1913 and they're pretty there were examples before then where when there was a bank run they were the last stop for liquidity and the liquidity should be expensive it should be like going to see Warren Buffett you can get the money from him but it's very very expensive money and so with that in mind you're always thinking well I should run more of a buffer I should I should run less optimized profit and I should run more for survival and durability do you know what I mean like there should be safeguards built in for the business there should be safeguards built in at every stage and the problem is you just you're not paid regularly enough to do that I mean that's why the Cockroach fund exists that's what volatility strategies exist because there are people out there who ignore all of the risk at all of the time you know the guys who are piling into the riskiest stuff right at the very top of the market and they look smart for 12 or 18 months or two years everybody else who's had it before sort of stands back a little bit you know tries not to get blown up and then those are the guys who get wasted and the volatility guys who've been picking up those you know five cent out of the money fixed calls get paid with some regularity once but it's every seven years so it's not so regular that if you've only been in the market for five you haven't seen them before and I think this is unusual because we had until until the market kind of took its dive in 2021 it had been a very long time I guess we had 2020 we've had sort of crashes but every single crash has been we've recovered so rapidly from even even 2009 was a we got down to the long run mean for the shillipere you could say the filippi is a flawed measure but it wasn't like we got cheap you can go back through history and see we've got much much cheaper than you can at least look at the trend line the shallow P you can argue about the actual if the multiples are correct but at least the trend is gives you an idea more expensive right we're very expensive and we're expensive then and it's so I I think that there's a there's a reasonable risk that um interfere too many times in the market you lose that that business cycle I think the business cycle is kind of almost a natural phenomenon it's not something that it's an emergent property of a dynamic system which is just what it's one of those things that happens where people get too excited if you go back pre-federal reserve and you go back pre-suit or the interventions there were many many more um short-term sort of recessions and depression to happen with some frequency and since we've got rid of and since we've introduced the Federal Reserve and they manage it they become much less frequent but much bigger in terms of the magnitude so I think that what we've done is you know as Corey might say we haven't eliminated the risk we've just transformed it into this other form that seems to be more disruptive and requires more intervention so maybe we would be better off going back to one where we we have these little hiccups every now and again but everybody knows how you've got to run sufficiently liquid and sufficiently solvent so when that happens you see the other side now there's this is kind of a perfect question for you so part of the part of the discussion with my girlfriend over the weekend was also like yes this is why I've been yelling from the rooftop for years about cockroach run for these very scenarios that we can't predict but like you can prepare for but at the same time like what you also drift for reference is like March 2020 we would have thought was one of those events but like you just said we we v-shaped or k shape recovery so quick people didn't get scared enough right and then same thing with I was like look everybody was scared on Friday here but like now on Monday like ever nobody cares again and so it's like yeah maybe over the weekend you're worried about where your money is but now like you don't care like because the government's got your back and so you as a as a deep value guy so to speak like you can feel my pain is like how do you just like trudge along when like you know nobody seems to care about like I I'm sure you've just been ripping your hair out for a decade just going like value actually matters but there's nobody like until you know and or it doesn't during risk on until it does during risk off like how do you how do you just sustain yourself through these periods I think that that's the answer that it always matters and you just know when it matters so you have to always be prepared for it to matter you know there's the you know the idea of Ergo this city there's a book about ergoticity really beautifully written basically it's path dependency it's the idea that whatever your long run returns could be if they get truncated in the interim you don't get those long run returns so if you understand if you're in the market and you have a little Edge which we all think that we do but we've got this little air I I think I have this little statistical Edge in the market for a variety of reasons some of them are very simple and boring and some of them are a little bit more esoteric but I think that I do so given that I think that I do the thing that I'm trying to avoid most and foremost is losing it all because if I do that then I can't show this little Edge over time so I have to run so I look at the individual positions and I make sure individual positions can survive I make sure I'm not too invested in any individual position because even doing that analysis there are things that happen they have black swans there are things that happen that you just can't foresee and so I think at every single stage of the process how do I make sure that I see the long run so I always think about it do they have cash in the balance sheets do I have enough cash can the business survive can the funds survive will the economy survive are there other existential risks out there that I need to think about I think that that's a healthy thing for everybody to think about to think in those terms but people definitely don't and there are periods of time in the market where thinking like that hurts you and with the more a bullish the market gets and the more there seems to be no risk in the market the more that kind of position hurts you because you lose assets people don't want to be with the guy who's always complaining about always saying hey you know this this party could nobody likes that guy at the party says the hangout is going to be bad the next day you know over like the Cassandra at the party but everybody lets it go um but there's so many things like that one is uh so the point of air conditioning economics the way I try to simplify it is just time right and if we think about time over time your Investments over time that's compounding right and that's right points like volatility tax or losing everything means you can't play anymore but also uh I was talking about this over the weekend is like think about the banks in the scenario this is why Olay Peter is from iridocious economics would say that modern economics is flawed because it doesn't take into account time and to your point like the banks were solvent if we don't factor in time right and duration mismatch right if people want their money today they got a problem but in general most people don't want their money today so otherwise they don't have a problem they're solvent they have plenty of assets but that's why like Erica Disney is all about time and path dependency and that's exactly what we find out with like a bank run it changes the path dependency they just don't have enough time to realize those assets or liquidate those assets to be fair though this was coming it's this like the big move in interest rates clearly that's impacted asset values I mean it should impact that it's it's you can see it most directly in bonds because there's sort of mathematical calculation there's a little bit of there's a little bit of like speculation or there's a little bit of trading built into the price but it is mostly a mathematical computation about what the thing's going to do through to there's a risk in other factors but it's mathematical for equities it's like you can kind of ignore it a little bit for equities for a short period of time it absolutely matters it matters just as much as it does for for bonds as it does for equities it's just that it's a little bit more abstract and so that extra step seems to be the thing that means that people can argue with a straight face that it doesn't matter although it eventually it does so all of those assets with interest rates going up all of the assets which you which were you know very very low yielding Assets in a higher yield environment become worth much much less and that's what happens when asset values happen when that happens to asset values if you've got a matching liability you've got a little bit of trouble because you've got this liability that's so much bigger than your assets you have to resolve that at some point you can hold the maturity if you can but this is the ergodicity but if you get called in between you've got a real problem all the banks have went long have borrowed long borrowed shortland long and that's what happens yeah I think it's nasty Mike Green describes it well I think with bonds he's like it's like a football you know what your payoff is in Terminus but the ups and downs to get there that's like you're saying that path dependency where you can get smoked as a Silicon Valley Bank did the other thing you brought up though is kind of behaviorally about people doing risk on versus risk off times and I'm curious because um you know shout out to Corey you know we just talked about this on our last episode of Pirates of Finance it's like um you know thinking about is behavioral Finance is interesting and I am empathetic to the people are like behavioral Finance is [ __ ] because you can't replicate it but at the same time behavioral is everything because it's human beings interacting in a market so to me it's like almost like water it's both everything and nothing at the same time it's how do you think about behavioral as relation to like value investing but that's the that's the opportunity for Value in business I believe that the behavioral stuff influences Everything But ultimately it is the underlying economics of the business that determines what you earn so you take advantage of the behavioral thinking that you'll get the the quantitative return on the other side the the big the big risk for um for Value investors is that the future doesn't look like the past and that's true for just about every human endeavor you know all of our all of our philosophy and science and medicine is built on the future looking like the past so that's kind of a risk that I acknowledge that it is real and it's and it might be more real in relation to some businesses you know buggy whip type manufacturing businesses you know I I've been I've invested in CD um businesses City making businesses because they had too much cash on the balance sheet you can make money in businesses that are in Decline provided that you pay are cheap enough price for them so it's not necessarily what the business is doing it's what you're paying for the business but let me ask you let me ask you one question here is it more pretentious to say Finance or Finance oh okay so this is a good question so this is so you obviously didn't get what we said call it Pirates of Finance and it's well because it's parts of parts of Penzance I guess exactly and then do you remember the part from uh Pretty Woman and she goes oh my God I enjoyed it so much I don't peed my pants and in the old days like what'd she say and he goes she said she enjoyed it more than Pirates of Penzance so it's like it's like a double yeah it's like a double so it just makes Corey and I laugh so it's not pretentious I think the name is brilliant I just but I worry because I say finance and I've seen occasionally there's a Twitter poll that goes around how do you say it is it Finance or finance and I don't know is it a regional thing do you think I think yeah I think at this country it's Finance but we just say it Finance because it reminds us of panz answer and I think it's funny but that it is funny it's great it's hilarious that's that's the only way yeah because every time somebody asked me about it I had to think of pretty woman so it makes me laugh and I peed my pants so like that's that's the other reason why but um I want to go back to this idea though of like okay say you're fortunate you run a business and you've got over 250k in cash like what do you think one should do with that I don't think you necessarily I mean business making payroll with 250 000 like that's not a particularly big business you know what I mean like that's that's medium-sized like a great so what do you do payroll it's like what is that four million dollars am I out of my mind here so right three million dollars yeah of payroll a year like that's not that that's not that much in pain I don't know that's that's a that's a tough question I don't know that that well you the the answer is you either invest in in big the bigger Banks but that's not a protection either or you have it with bigger Banks I think that probably from a policy perspective bailing out Silicon Valley banking or their deposits at least is a good thing for regional Banks because if they didn't do it there's just no reason to put your money in a regional bank right we're just taking downside risk so the fact that they've done this means that it probably saves all the regional Banks in the concept now is like the the bigger Bank sort of like basically their government back Banks right there so that would just wipe out the entire Regional banking industry right and then what do you think of yeah there's there's other companies I've looked at before that were like the algorithmically like Cascade your deposits into like dozens of banks so you stay under 250k like dozens of banks yeah that would be the solution yeah I try to find one of those for the show notes but then you know that can only be so much size like look at some of these tech companies sitting on these War chests like you gotta probably just buy like 90 day T bills but then I you know people don't realize even in 90 day T bills you're still lending to the US government and the US government will be the first one in history to pull off a non-monetary collapse if that happens I mean we don't just don't we just don't know when it's gonna happen right it's eventually going to happen I mean I think it's interesting that they uh who knows whether j-pal actually means what he says but they kind of asked him like to what extent you know when you put these rates up like this you know this makes much more expensive for the treasury to borrow to what extent does that enter into your calculation and he said none at all we don't think about that at all that's not our concern and I thought that's the correct answer that's the that's the that's the correct policy answer I mean that's that's what's written into their documents that's true that's the case but you know the bank of Japan was in exactly the same position and that was a big like the big Catalyst a few years ago I don't know if you remember this but there was going to be this point in time where be there just weren't going to be enough buyers of jgps and I was going to need someone needed to step in and the question was will it be the boj and everybody said no it's not in their net they won't do it it's not their Mandate of course they did you're only in you're not independent when you're staring at Oblivion I guess you stare into the void you're no longer independent so does power blink as well does power blink that's my question do we get to that point probably I like also that everywhere I can't say what everybody says that too about like the fact it's like it's not in their mandate and if you I study the history of the bylaws and everything like a stroke of a pen changes that immediately like I just love people they can't do that it's illegal oh watch they'll just change it now it's legal you're well it is true that yeah that's that's right they're not allowed to do it but they'll still do it when it's the end of the world what are you gonna do you're just gonna you're gonna follow what's written in your your documents your nerd or are you going to go and solve for you know save the world you're going to go save the world they all want to write the Bernanke book the courage to act yeah I don't think they're volcker too like yeah it's just like and people forget about how many times that was tried before volcker and Volker is just one of four people that tried like it just doesn't like it's just the the Serendipity of it he only lived he just lit the he let them just roll off didn't he didn't even like intervene that much you just sort of letting letting them mature and that just psyched up a whole lot of the record a lot of people think he exacerbated inflation but and it rolled off on its own but that's a whole lot that's a whole other story that's beyond both your and I uh pay grade but I was thinking though go ahead sorry I was just gonna say that's the cool thing about macro it's not there's nothing scientific about it oh it's just politics you can just argue politics all that long just throw out my nonsensical hot takes all day long um but I was thinking if I put like my Tony deedon hat on for a second what I did think may be interesting is like um Tony Dean Switzerland and I think it's Edelweiss whatever they hold he holds almost all his cash in like gold I think it's his gold positions like 50 60 of his fund and then he just tries to find you know these deep value like family-run companies around the world that he thinks will he'll just be in Forever kind of almost like a semi you know uh Buffett model but what I was wondering going Beyond just holding gold that's not somebody else's liability but then you have to deal with the variances of gold and that's that's tough to kind of to deal with at that large position size of maybe 50 60 if it is that high but the second part is I wonder though if you buy if you actually get the certificates of stock in the company is that a form of collateral that's better than like like so for example as most like deep value algorithm like you know people trading in in value stocks is that really being held at the bank that they're working with as their prime or like can you get the actual stock certificates and is that a more pristine form of collateral for lack of a better phrase 100 it is I was surprised that it's hard to get you yeah um certificates out of right the prime out of the system but that's not in Australia where I come from that's not the case like you just don't hold you would never leave your certificates on deposit with the prime broker that's Insanity because what happens if something happens to the prime broker and they haven't right what do they call it they've re-hypothecated your certificates remember that word yeah we're going to relearn that word again I'm guessing sometime soon rehypothecation so if you go through that process or is that two that gives a system set up to make it too difficult yeah it's too hard it's too hard that's too foreign if you're like I like the I don't know what happens to Gold over the next five years or ten years could have or double or triple or third or whatever I have I have zero idea but it is also true that in a thousand years time you know they dig up a Roman treasure box in in Britain from Roman times and it's filled with gold that still spent you know you could you really can use that stuff in the future I don't know like I I really like didn't's approach and I've read all those letters and he's had a few he's you know it's very similar he thinks a little bit like Buffalo he's taking a few shots at Buffett more recently you know for some of Buffett's inconsistencies I like the way they think I I don't know if gold is where I would do it but I understand the rationale for doing it that way I I can't fault them for doing that I can't argue against them is it if I'm honest like I still don't understand gold like I think like you said you can go back Millennia and it seems to maintain purchasing power but very it's variable right like not in the interim period like when you need it in any specific year it might be like this everybody sold the baby with the bathwater like March 2020 and it's not providing that value you need it for so it's like over the long run yes and then it's just Lindy effect right and you're like how will this work in the future I don't know but it's worked in the past like you're saying that rear view mirror aspect earlier and then I was talking about over the weekend to me it's like it's for it's more for like these interim periods of liquidity or when the system gets shaking uh shaken up a little bit because it's not like we we own physical gold with like our funds but like am I gonna go to the Vault and then shave off gold for this like no it's like it's for having something that's not somebody else's liability and then the price should spike in reflection of that and then hopefully you maintain your purchase power parity that's like all you're hoping for and it's just during this interim thing of like who has collateral it's like well we have this other thing that can be used as collateral you're not using it to actually pay for anything though the long-term argument for gold is like a history of gold thing where it's like the It doesn't Decay it's infinitely divisible it's not used in really very many commercial applications so it's not like silver where there's a supply and demand thing going on all the time for silver that makes it much more less like money like gold is useless other than in kind of jewelry which is why it's useful I guess as money and for those other reasons I I wouldn't do it that way but then if I was Tony didn't and I was in Switzerland and I was looking to hold family businesses and run this thing for a thousand years that that that may be what I would do I think maybe that would be a good idea I don't know but then you've got to have it there's no point having it on in a vault somewhere now you've got to have it you got to hold it in your own thousand year Vault you know there's a whole lot of There's real costs involved in something like that yeah and I've talked to everybody in the industry whether you know and Brent Johnson's gone way deep down this rabbit hole we talked about like initially we were looking at like Global diversification of vaults right but nobody figured out March 2020 then you can't move the gold around like entering covenants it's still there but like you couldn't move it around but I could give you a note like I can have a note that says that I own it I can give you a note and say hey you know I've transferred ownership of it remotely well that's what I'm saying I think it's just pristine collateral during interim periods when markets become dislocated or shut down or there's a run on banks like that's what it's there for you get that there's a great line at the bottom of the Great Depression when um John Maynard Keynes was he was managing these two funds and one as an insurance company and the other one was an endowment and when the market went down that much everybody said we've got to get out of equities this is and he said you can't sell out of equities at this point that because this sort of introduces this if if it's all if we stay here and it's all over then it doesn't matter that we continue to hold them but if we sell out and it rallies then we'll miss this this massive rally and I think gold is a little bit like that too like physical gold you're going to need in the after period when Master Blaster runs by the town and it's Mad Max and you get a motorcycle and shotgun and stuff like that but there's a period in the yeah as you point out like there's right up to that point you find having you could have a gold ETF like at least you get the you get the performance in your portfolio you won't be able to take it into the next world you have to become a warlord in the next World to get access to but that's what's going to happen anyway if the guy who's got the guns and the biggest gang he's gonna have all the gold yeah similar to Tony didn't this is what we think about it's like how do you manage money over hundreds of years and I think that there's only like once every 100 years probably that like you need this physical gold for anything and like you said it's like an intervening period like uh like I think about it when you have these shimmies and shakes like kind of in the global market during risk on times when all sudden people start questioning what is money and what's collateral that's what it's good for but like you said we go to the Mad Max side you want guns and butter or I always say like I just want to be friends with CEO Blackwater like because like the idea too that like people are gonna store all their stuff it's like he's gonna help me yeah whatever militia comes through your town it's taking all of your protein sources and your water sources so I'm just like I'm cozy enough I'm gonna be like the court jester for like the black one but Blackwater changed their name too I can't even keep track of all of that stuff too yeah they're too smart to keep the same name all the time right it's just like the tobacco companies now it's under a different name now it does it doesn't really matter uh related to that stuff I'm gonna get this wrong which is great because then I'll give you a chance to correct me but would you call them indestructible Industrials or what invincibles Invincible Invincible yes so give me the give me the Spiel on invincibles just the idea is that I when the world sort of collapsed through uh 2020 you know like six months into it sort of somewhere in September 2020. I had been reading uh you know I like to read old literature that's kind of what I might and stuff that's available for free on the internet and there are all of these you know terrible things have happened throughout history and typically when something really bad happens somebody has written a book about it so you know there's the the history of the Peloponnesian War written in 430 BC by facilities is it is a Athenian strategory which is one of the 10 Generals who's elected to fight so Athens was a little walled City um but they were becoming more prominent probably on the on the edge of Empire they'd figured out how to use their Navy and a few other things the Spartans get upset with them Spartans want to go to war with them so I had read that and that sort of the the the the terms of the engagement is known as Grand strategy the decisions that you make when you so you know Athens famously huddles inside the walls while the Spartans go and destroy the um the current the countryside the Athenians get the plague it kills their their main leader um and then the war goes on for 30 years so it's devastating World War for them that engulfed everything and I I read that and then I read uh The Art of War that which I've read I read it in high school I've read it every five years or so since I've never got anything out of it really like there's lines in there like if you find yourself in a salt marsh get up against them get your back against the trees I just never use that in my day-to-day life you know when I Traverse the salt marshes taking my kids to school with my big sword drawn but I read I started reading through it and there are several different translations of it there's one by Giles who was the first in 1910 and there's a Patrick Cleary one which came out uh this is the one that I read in high school and there are lots of others they all get because it's written in ancient Chinese it's written with this full of analogies and it's like they talk about the swoop of a falcon or the bending of a bow all this sort of thing so the thing that really stood out to me was that he talks about you know make yourself Invincible first like that should be the first thing that you do make sure that you don't make mistakes he goes through this whole process for preparing yourself for conflict or preparing yourself for Very Bad Things there's always a possibility that this stuff could happen you have to know what your know the designs of your neighbors know what your allies are planning know what your enemies are trying to do know the territory no the seasons I haven't no Earth and he goes through this list of things and I thought this sounds incredibly like Buffett this is the way Buffett thinks and I think that it's all just trying to deal with ergonicity it's all trying to deal with that risk of a truncation of a very long so Buffett would call it compounding over a very long period of time you've got to look out for these downside events and the way that you look at and you have to get the fragility out of whatever you're doing or find ways of protecting yourself and I just it just occurred to me and I've read this now many other variations of this philosophy but I think it's sort of it's come down through history it's a very well-known kind of approach to basically dealing with air conditioning so taleb would say that his approach to it is he bets on the fact that it's going to happen and everybody else undervalues it because they because they just don't it doesn't happen frequently enough for them to understand it's going to happen so tell their bets on it he takes calls out of the money on the vix so he takes out of money puts on the index so there's a various ways of expressing how does Buffett deal with it because he's on the long side well he looks at the individual companies that he invests in make sure they have a durable business good balance sheet and it's one but it's run by sort of competent honest and sensible managers who've got reasonably good character and temperament that's one of the things that comes through all of it like there is this psychological element to it know yourself know your enemy um and there's a character element to it too which is you you would rather associate with people who basically do what they're going to say and you know how they're going to behave under various conditions and I I think that all of that stuff together is it all Rhymes I think Sun suit and Buffett rhyme I think there are lots of other guys in between who have said exactly the same thing and it expresses itself in lots of different ways and expresses itself as like gambler's ruin over betting ergoticity we have the mathematics to back this stuff up but I don't think that the mathematics is particularly interesting I think that the the history and the philosophy of it is more interesting but I think the fact that it's supported by the mathematics sort of indicates that there is something rigorous to it so that's basically the idea it's just trying to find Buffett style stocks I just described in the context of of Sun Tzu and more interesting sort of events rather than business but that's the idea well it's really smart of you because quite frankly we uh traffic a lot near godicity and as soon as people hear the word their brain shuts down their eyes yeah narratives work a lot better and that's a good point is like historical narratives work work best um but part of the invincibles okay it's one thing to understand that narrative and the idea like how do you find them so there's there are indications in their financial statements that they are that way one of them is that they earn a lot of money so they have to have some protection hit Buffett would call it a moat uh some sort of competitive Advantage but it's not protection for everybody the modes get crossed all the time it's just the idea that you can earn a super normal return on your assets because the nature of capitalism competition is for most businesses that earn super normal return that just attracts entrance to them we see this all the time oil and gas will be drained of capital for a long period of time oil price will Spike there'll be a rush back into oil field services and those businesses will go well for a while but there's no protection it's just a man in a truck and a your oil field services guy but there are businesses that can withstand competition for years and years and years and they tend to be you know not particularly high-tech businesses like Coca-Cola people just prefer Coca-Cola over store brand sodas it's all that kind of stuff it's just behavioral type stuff so it's reflected in the financial statements over time they should earn super normal they should earn pretty good margins that should earn better returns and invest Capital than other businesses and they should be able to there shouldn't be that much volatility in their returns because they can control basically what they earn over time so it's identifying those kind of businesses if you do that you don't necessarily get the best returns because this this kind of idea in the markets that you don't get paid um for taking for buying something that is good you know you get paid for taking on risk you get paid for finding things that are undiscovered so often you earn a slightly lower return with these things which would be fine if you just bought them as a as a basket you would expect and probably a sub Market return because you have to overpay for them so Buffett's innovation has just been he's got a small there's 300 businesses or something like that in the state so that he wants to own and he just Waits until they get cheap enough to give him a 10 return and when he does when they do that he puts a whole lot of money into them and then he just continues waiting you know which is very much like that's again that's the sun suit type of approach to this stuff where you just you know that most opportunities aren't going to be good enough you just have to sit there and wait and wait and wait until you finally see something that you just can't figure out what's wrong with it and it's like this reverse process of analyzing things you're not trying to find the good things you're trying to find the things that don't have any problems with them like just the the perfect egg and so he sits there and he waits until that turns up and then he then he then he buys it so there's there's two things in there I want to start with that I just I wrote down a list of questions but uh one is sub-market returns and I think that this is once again an ergot to see problem let's call it a Time problem it's like or a volatility tax problem sub market returns um people just look at the the average annual returns and they're not even thinking about the downside risk right what's their Max drawdown so if you can actually have sub you know s p returns but your drawdown's cut in half or a third like that's a much better risk profile and you're going to compound more effectively and efficiently over time but everybody just looks at the Top Line number that's all anybody cares about and they don't think about what is my drawdowns and that's why you're finding better companies so like that's the whole point is like you're reducing if you hold the whole 300 without regard to valuation you would you would expect to earn some market returns but if you're prepared to wait until you get a valuation that doesn't doesn't uh acknowledge the valuation that you that you're buying into then you can get sufficiently good returns and so Buffett's approach has been to wait until the Ford returns are about 10 percent and then because the markets tend to recover faster and you you earn he's he's judging that Ford returns based on price to what the underlying business can earn and then he's not he knows that over a long enough period of time your own return profile starts looking like the return on invested Capital profile of the business so because these are super earners you should earn more it's just that for the most part they trade expensively which everybody's already realized that they're super earned so they traded a price that takes away that possibility of you know now they sort of a have to be super earned it's just to earn a market return the other thing related to time in that though too is like you're talking about an incredible amount of patients and that's really hard for people so like do you just think at like 65 70 is when you're going to get Vindicated and you're willing to wait that long and beat your head against the wall like how do you think about that I think that the Vindication comes over time right but I I feel I in some respects the you know you're you're captive to when you start a fund like you start a fund so my deep value fund started in February uh 2020 sorry so that's sorry June 2020 we took it over and then October 2020 we turned it into a smaller microcap fund and it caught the bottom and the returns were pretty good for that fund my Zig started in May 2019 so it started at the wrong time of the cycle so it it got crushed at the start and it's outperformed since sort of September 2020 as well so the return profile looks pretty similar to the other fund it's just at the timing issue make means one looks very good and one looks like it's less good but it's the same strategy in both I know that I have a small advantage or I think that I have a small advantage over time at some point the external matches the internal so I'm not I'm not too worried about it at all provided you know there's always a business risk and they have to perform at some point through there but I'm I I'm I think honestly I think so far in the future that I I that's not a brag it's like I'm trying to think I'm doing it on purpose I'm forcing my Horizon out as far as I possibly can it's this this is this great idea which I get this from Jake Taylor and he got this I think it comes uh from poor Charlie's Almanac or um Peter Kaufman who's the gentleman who who wrote poor Charlie's Almanac he calls it Galilean relativity and this is the idea when you were 16 the first time he was 16 you weren't very good at being a 16 year old because it was the first time you did it by the time you were 30 you had some great advice for you as a 16 year old right but at 30 it's the first time being a 30 year old by the time you're 40 you're back in your 30s and you think yeah there's clearly a whole lot of things that I should have done and all of life is like that except you get to this point where it's happened enough times to you that you should start thinking like you're Now 50 or 55 or 60 or 65 as you say so I put myself all the way out at the very end of that Nest let's say I'm lucky enough to live to 80. what what should I be doing now what would my 80 year old self tell my 43 year old self to do and so that's what I try to do that's Galloway and relativity and once again the intestinal fortitude you have is is mind-boggling to me because like you said it's like the conundrum is usually you have to make a lot of mistakes to realize like those things that Charlie's talking about right and by then you're too old for like compounding to take effect because like you're in your 40s and you might you're probably gonna die by 70 or 80. so it's like that's hard to deal with a long time left right it's still a long time but it's just like it's hard because I think the one of the Eternal conundrums is like our present self-ears to shoot yourself right and you're somebody like you're saying that could put yourself into rewarding your future self and at the cost of your present self and I think without those are the things that we are always like fighting is how much do I want to reward my present self versus My Future Self when the future self is kind of an abstraction but that's the that's the thing we have the human animal of our present self and we have the societal animal of the future self and those two are kind of like always in conflict with each other well the nice thing about the business that we are both in is it really does reward patience and a long-term perspective really more than anything else like there's no other business like this so I I think that that is the single most important thing and then everything else flows backwards from that so once you can program yourself to do that once you can force yourself into that Galilean relativity and start thinking in those terms everything else follows along you start thinking about ergonicity when you think about the world in those terms you start thinking about like I'm sure that the Cockroach fund is a result of you thinking in these very long terms there are lots of ways I could I could use I could be I could Market much harder on short-term things that get a lot more attention and raise much more money doing that but I don't want to do that at all I just don't want to live my life like that I think that there's a way that you can have this like peaceful calm relatively peaceful calm existence and you know it it gets rid of that feeling of fomo for me I I don't you know people are doing really well should have been in these things I don't it's just a different game that's not the game that I'm playing I'm playing my own game over a very long period of time and that there are certain rules and there's certain dictates that flow from that and so I'm not hurting anybody else but myself and I don't follow my own rules but there's so many things really like I you know we I broke my own rule today we talked about something topical with Silicon Valley Bank because at the same point you're saying is like I don't think it behooves us to talk about short-term or topical things because that's not aligned with the philosophy of our funds so subconsciously you're you're telling your clients that like I'm focused on short term but no you should be just everything should be about long term so you should say like this doesn't matter this too shall pass like that's the way you should really kind of focus on it is like not not talking about the topical at all but like I say potentially view these events like the fact that I'm not impacted by this is a result of decisions that I made previously and those were good decisions and I should continue to make good decisions like that I like I could go I don't really I don't think I need to see the news at all I get plenty of newsflow from Twitter but I don't I could live without the news I think you can go back and it's it's crazy to go back and read ancient literature that's like two and a half thousand years old they're dealing with exactly the same problems that we are over exactly the same time frames it's all unexpected for them they're famous events now but nobody knew it was a famous event going into it and they kind of talk about them you know the the Peloponnesian War Between the Athenians and everybody that went for 30 years and the plan at the start was to hide inside the walls of the city which was clearly not going to work for a 30-year War but I don't think it's a bad solution for the first whatever period of the war but it's just funny like that we now know that that was the wrong thing to do but at the in the moment they had no idea and I don't even know if that was the wrong thing to do it's just that that's what happens but it's it's sort of regarded in in the people who are philosophers of grand strategy that that was the wrong thing to do so I think you've got to explain hindsight bias yeah with with two and a half thousand years of Hunter you're able to say that's the wrong thing to do I think there's this um we tend to overreact to to events that we see and so it's good to you know either ignore them or just or under react to them let everybody also react but the also the other thing is that we under react to longer term high impact events so you know to live this a little bit like talib's idea but there are it's actually Cardinal Durant says the guy who said this but he said everybody's too worried about their present day troubles they're not worried about the things in the future in the far future and I I try to reverse that that's one of the nice things about the idea sorry to keep from going back to this Galilean relativity but it really is like it's a big ergodicity is a big part of of that process there are big we don't know that the stock market is going to crash now but the stock market is going to crash in the future we do know that that's going to happen so why not just be prepared for it now and we don't know when it's going to happen but it's the same thing that you know the Earth has been struck by meteors many many many times like the Earth is covered in media craters we are going to be struck by another like civilization ending meteor at some point possibly today possibly tomorrow hopefully not for thousands and thousands of years I don't know if you can prepare for them but there are things that are absolute certainties over a long enough time frame and you should think in terms of surviving certain events over a long time perhaps like when they could come tomorrow I think about I can't remember Whose Line it was but it was basically like we live in a convertible right and that just it sits with me every day right that the world is convertible and like you said these meteorites yeah it's like uh it's tough to think about but to your point like our original working title before we started any funds was the The Firm was called ataraxia which is like ancient Greek for unperturbed by external events so that's like you said we had the forethought to build it so like when Silicon Valley Bank happens I'm like I just shrug my shoulders like yeah it wasn't that specific one expected but I expect Banks to fail banks have failed historically and so it's like I wonder though if we just become like these hardened and bitter grisly vets were just like oh yeah shrug it off like these things happen and like you just become kind of like so jaded but at the same time like let's be honest like you're an entrepreneur so how do you how do you manage your shiny object syndrome though while you're just waiting on these funds to pay out over time I I have there are a few things that I do but I I know that I'm have some advantage in I don't have a lot of advantages in a lot of things so I have a few things that have an advantage and one of them is that I'm just like congenitally built this way I I am risk aware like that's one of the things I'm risk first guy and I have this expectation that things that have happened in the past will happen in the future and I think that everybody should like to me there's just some all those things seem to be completely logical that should be the way that you're behaving and I can't understand people who don't behave this way but you know that most of the rest of the world doesn't but judging by the way that they invest when I look at when I look at the stuff that people are piling into particularly the way the attitude that people had when they were piling into this stuff that this is a new paradigm you don't understand it you're too risk-averse but that's one thing and you have the you have the sucker of like Buffett monger and all that stuff with that but going back to ergonicity in the meantime let's say exogenous of your investing Styles like you have a family that has needs and those time durations are mismatched so it's like do you see what I'm saying like life gets in the way of maybe your investing style sometimes true I've got I've got a wife and three kids so it hasn't really it hasn't held me back that much I I don't I I don't think that you know to the extent that the business is kind of carved off from well that's that's that's that's that's a good question so how do I deal with that the business has to be able to sort of survive on its own defeat it has to be cauterized and carved off from everything else so the business sort of exists us outside the the family environment like my kids my kids don't really understand what I do I kind of explain it to them we rang the bell the New York Stock Exchange so that was like a tangible event where they saw that something was happening but they still didn't really like I try and tell them that it's just too it's too abstract for them but I but I I feel that given that I have studied history enough and then there's nothing it's not you don't have to go back and read ancient history to do this you could have just like the last 20 years in the stock market would probably be enough to tell you that or maybe the last 20 years you know that's 23 is you need to capture capture.com bust capture 2007 2009 look at the performance of value stocks through their value stocks had that first great decade had a second bad decade that's that's all of the things that can happen in the stock market to my business the stock market can can collapse and my strategy can underperform so those are the two worst things that can happen if you can survive those things you're going to be okay and so that's what I'm survival first organicity is the the collapse is the enemy of of of my strategy so that's the thing that I spend the most time kind of kind of worrying about and once I know that I'm going to survive those things there's this is the only thing that I really know how to do like outside of that I'm not going to be I'm not going to be I'm not a great I'm not going to be able to advise people on marketing or or legality I don't really you know I I as much as I'd like to run something like buff it does look I don't think I have the I don't have the skills to run something that scale like this thing that I run is is complex enough and it's that's enough for me and there's there's so many things in there um but I want to like touch on a few other quick topics because I've already gone beyond time so I want to be honest you're fun um so going back to the the invincibles um I was thinking like besides are you sector agnostic I mean besides maybe staying away from like Banks or financials there's like we have so we could could like lvmh and like Hermes are those like great invincibles or like at the right price or how would you think about those like more like because luxury and brand are seeing sometimes things that people don't understand and can't quantify yeah absolutely yeah that's potentially the source of it I think there's this um I think of those companies not so much as being luxury or brand but as being uh that quality brand middle stand which is this idea um that they're these they found particularly in Europe that these basically family-owned businesses that um they just take a long time to create the product and the product is an exceptional quality and there's a finite limited run of whatever the product is and every year they basically set their price for the product and everybody pays it and they all sell out and then the next year because capacity is still really constrained they put the price up a little bit more and it all sorts up I think that's what really the lvmh is even the sum of it's like I know some it's faster moving fashion and there's a lot of other stuff in there but the the quality portion of it is that quality brand middle stand so those are certainly potentially Invincible businesses the longer that's a that's a great mode if it takes 25 years to grow your cork tree not the Cork's a great one but yeah you know what I mean like 25 years to make your scotch or whatever it is then or it's a it's a leather handbag that it just requires a level of detail and precision and and craftsmanship that it's hard to replicate and hard to create that trust in the marketplace that they're great businesses their potential invincibles and then I hope you disavow me of this because it just seems to me like you're almost you segued me perfectly into this is like when I look at a lot of these businesses that are great cash flowing business and invincibles but they're maybe in a dirty commodity business is now the children of these Boomers do not want that business and it just seems like there's a tremendous opportunity there but am I am I not seeing things clearly in Commodities commodity businesses yeah like for example it doesn't need to be necessary I mean obviously the kids uh uh or no wouldn't take over our lvmh like that's obvious but like if somebody like is running like some sort of like I don't know like a a steel galvanizing facility in Buffalo New York or something like the kids don't want to take that over and so there's like opportunity seems like for Boomers this is more on I guess the private side than the public where there's just not a lot of succession planning just be the way the society is structured these days it could be a good thing I I love that I've been there's this idea of a search fund you've probably heard of search funds where people raise money but raising the money to do the search I think is kind of that's that's whatever that's maybe that's important maybe it's not the important part of it is potentially you get people who are first year MBA or people who've just graduated from mbas or they've got Consulting background or an investment banking background so they're used to working long hours they are very smart they've got a lot of energy and they come into some of these older businesses where there's no succession plan where you don't need to be a great genius to run it but it would help if someone was young and energetic and had an MBA and had some ideas for these things I think that there'll be a lot of that there'll be a transition from Boomers to um Millennials or gen Z or whatever happens to be who've got that energy I think that that's potentially a very good thing that could happen important and then on the public side like how do you start to screen to find these invincibles like do you uh screen for cash flow but then at the same time like do you want it under a certain percentage of cash flow because you know how everybody else is creating Chris data so it's like a it's like a beauty pageant contest it's like secondary tertiary effects like you want to you want a nice compounder but like that nobody else notices you're trying to traffic in maybe like a eight to eleven percent free cash flow or like how do you think about that I think that for the most part the the safest way of investing in value is just to buy things that are pretty cheap if you look at like what is predictive so there's very very little that's predictive as a sort of quantitative indicator of how a business is going to do and certainly once you get past five years valuation is not predictive anymore either valuation is very very useful in the first year we're so in the second year asymptotically Trends towards Zero by about five years and then return on invested capitalist variable all these things it's very very hard to predict so I think given that it's so hard to predict my Approach is less like Buffett's where Buffett is like Buffett has this incredible understanding of everything that's going on in the economy because he reads a lot because he's got BNS surf he's got these other businesses in there that give him feedback about those things if you didn't have that kind of certainty about what you're buying a better approach would be to take to do what I do which is more of a portfolio construction approach where I say I'll buy enough of these things that with which have those good cash flow characteristics which have good reinvestment type characteristics which earn reasonable returns which seem to be you know bottoming out in their business cycle rather than topping out in their business cycle and um knowing that over time we can adjust and we can keep on iterating and we'll move away from things that aren't working and move towards the things that aren't working and I think that that's sort of my you know I I can't see the future I don't know what's going to happen but I like the I like the invincibles but I don't really trust them either because everything can get everything every remote gets crossed every everything that's every big business is eventually a commodity like there's no there's there's nothing that resists the Market's eventual sort of trend towards commodification of business so you want to be careful overpaying for for businesses is the main lesson so you want to pay less for them however you define that and I Would by the way I would happily argue that uh Buffett actually uses a portfolio construction techniques similar to yours as well as like as you know if you study his history like the amount of folly with his companies and everything that he's invested in are pretty tremendous but everybody only looks at the upside over time and people don't really realize all the ones that like kind of fell apart or they had to get really Hands-On that they didn't want to be in like but that's the great skill of it but right even making mistakes this is this is what I when I think about it like that's part of my sort of invincible philosophy is this you're going to make mistakes like that's absolute certainty too so how do you not blow yourself up with mistakes I'll try I'll try to find any source of risk and I include myself as like the first source of risk and then I work out outwards from that and so that's that's kind of that That's essential you have to survive your own mistakes like that's that's that's the first place you know know yourself is that that's the first thing that Sun Tzu and Buffett would say as well well that's why yeah people that need to study buffer better realize they're not batting a thousand too it's like they're like like to your point but like do you think that I'm curious and I don't want to make an assumption because I hate assuming anything but like I would think that if you're screening and figuring out the invincibles how I would I would assume a good chunk if not the majority of the portfolio you end up in like quote unquote sin companies or non-esg companies yeah how do you think about that I look at businesses from the perspective of risk and so one of the risks that they can have is reputational risk or they can have um regulatory risk where there's no regulation impacting them now but there will be some regulation impacting or they can have they can be sued all of those things are genuine risks it leads me to this slightly differentiated it's not an ESG approach necessarily because I own some things like owner I don't worry I'm at coal I own things like that that I because I think that you know we if if we want civilization to continue to grow we are just going to need a whole lot of energy if we are going to reverse course in Civilization then we won't need as much energy but those are the choices it's not less energy it's not it's not going to be all clear energy it's we're going to be stuck on fossil fuels for a very long period of time and ultimately we probably have to be on nuclear or something like that so I think that you just can't you can't avoid that stuff and so you need some exposure to it um but I look at things like cigarette companies like cigarette companies earn a lot of money on invested Capital uh they've got pretty good margins and they're available pretty cheaply but I just personally don't want to own them because I think that every now and again they're going to be whacked with the the stick like a pinata because they pay out they've got the money to pay out and I you know I just think that's a bad business to be in where you're killing your clients over time so I would avoid those type of sync companies I don't own I don't own any casinos in in Zig because casinos have terrible casinos are if you look at the long-term performance of casinos they're like leveraged real estate plays and when you go through bad times they look nasty the worst sort of sin company to own alcohol you know who knows with alcohol type businesses but they seem to be pretty good businesses there's a death rate attached to them as well but it seems to be doesn't necessarily kill you to drink alcohol so I think that's okay in the portfolio at the moment but I wouldn't be surprised if over time alcohol sort of um starts looking a little bit more like cigarettes I don't know there's a lot of there's a lot of different things in there I think that I you know there's this rule in um in sort of applying it quantitative or systematic approach that you don't interfere with the output of the the system because you haven't tested those parameters where you interfere outside of the system but I still think that there's always this risk in a purely quantitative system that it winds up concentrated on a whole lot of things that have these it's not even an off balance sheet risk but have just metaphysical risk in them and so I try to avoid I that's the only time I exercise any discretion to go through and just remove things that I think have metaphysical risk or balance sheet risk it's not captured in the system so that's kind of the way that I I think about it but in terms of like things that are actually Invincible I think it's very very hard to find them so I think you have to assume that almost nothing possesses it be very careful paying it for things that you think that do the things that have earned more on their assets do warrant a higher you know that if I have earned that in the past it looks like I can continue to do with the future they should be earning more if they're more consistent commodity businesses I'm not like that because commodity businesses there'll be more Supply when the demand goes up there'll be a lot more Supply there's all as the price goes up all the marginal Minds become more valuable their margins don't actually go up much over the cycle because everything gets more expensive the inputs get more expensive but you know when they're under invested which they seem to have been for a long period of time you know the market doesn't if you're a value investor and you're contrarian when the market is not putting Capital into something you should be putting Capital into it and vice versa when the Market's throwing Capital it's something you should be pulling your Capital out of it just like Buffett and Munger all these things are easy to say but hard to do and that's why it's fascinating for me whenever I talk to you evaluation you know they are very hard to S to do but valuation should drive a lot of what you do when things get cheap on the historical numbers you should be attracted to them and looking at them I don't worry so I've sort of trained myself enough now that the fact of that shitness is the thing I think that will make them work in the future and you just you wind up in these things that that they are hated and you just have to know that everybody's overreacting or expect that everybody's overreacting even when they're not you're still sort of paid to be in these things because if they're not overreacting you've already sized like it's a donor if it doesn't work you haven't lost that much if they are overreacting it recovers then you get and you get and you get paid that's a that's value investing I also love the uh the bifurcated duality of like searching for invincibles but then being dubious if any of them are invincible so it's like you're like constantly conflict with each other like trying to find it yeah so the uh the other thing you brought me up a few times I I would give a shout out for Matt because I definitely I think I stole this from him we were we're all at lunch together a few weeks ago but the idea of like in this business surviving is only success so we've been talking about ergoticity and everything that's it surviving is the only success and you know you've been around before the other thing Corey and I often talk about is like it's hard for us I think in this industry uh you know industry and quotes is you know everybody wants a hot take or a tip right and to us to me all of us are in like the stay Rich business where a lot of the industries in the get-rich business and everybody wants that hot hot take hot tip and so like it's a very weird space where we be in but like once again we're we're trying to just you know survive um so you know related to that I also owe you uh a thank you because people like mabs podcast your podcast viewer value after hours podcast especially resolve riffs the writh hold screw they paved away for all of us to be able to do these more off the cuff you know more enjoyable podcasts to talk about other things that necessarily hot takes or Hot Tips or a global macro thing so I really always appreciate what you started with value after hours and all the content you constantly put out but my last question is Great White Cafe in Venice California is is it the best Australian Cafe in America and therefore you would argue the best cafe in America I do love great white I love that little um I love their logo too I've tried to rip off their logo and stick it on shirt for myself yeah I I do like that Cafe it's great last time I was there I saw um uh she's the the actress um ah now I can't think what her name is she was in oh I'm so bad at actresses names and movies that people are in you're probably gonna have to edit this photo but the who cares like you said yeah yeah anyway they moved on from like the acai bowls to like the blueberry bowls to like you get like yeah it's just like it's a it's a cool spot in Venice if you ever get a chance check out uh Great White Cafe but it's always that argument you know Australians think that they're the best at coffee and cafes now or something I think that Australians are the best coffee and cafes there you go you heard it here first but like uh let's plug away again at the at the end here I like to do at the top and at the end you know tell everybody like if there's a lot of places they could find you so so run down the list again so my main my um my first fund is acquires uh deep value sorry so I've lost my mind completely so Zig Zig uh is acquires um the acquires fund deep is the acquirer's Deep value fund that's a smaller microphone um I have a website acquires multiple and I have some books uh the last one was the acquirers multiple and I'm on Twitter at greenback.com I took a Greenback GRE and b-a-c-k-d haven't done this sign up for a little while and then what's the um and then you have two podcasts though right you have value after hours and then you don't have an acquires podcast as well well I had the the acquires podcast was where I was interviewing I was doing individual interviews I've just done fewer of them um recently we just tend to do this value after hours which is the three of us but we've been um sort of expanding it out to get uh other people into it so there's sort of the two are merging a little bit the last one we had was Porter Collins and Vinnie Daniel who uh um they're both characters in The Big Short they were played in The Big Short uh because they're in the they're in Steve Carell's firm in The Big Short were they um you know they have all the great scenes where they're quizzing uh Ryan Gosling about about the short so they were on the podcast it's always fun chatting to those guys because they're they're kind of deep value guys but they've got a little bit more of a macro credit bent to them as well and um you know I like I like bear porn talking talking bearish stuff with with guys so it's funny one of the because we do it live one of the comments and the things wise to buy it's always so bearish like well I've been running this thing from 2000 you know the podcast came out in 2019. I wasn't I wasn't very early on I think I remember Meb doing his and thinking geez it's so late mid was really really early yeah but yours is they're doing value after hours different more of that like topic Roundtable I mean I think you guys still have like kind of brackets you try to put it in but it's more free-flowing than doing an interview podcast to be fair I stole it I think I stole it from the rich old scars yeah no we great artists deal and then they said they stole it from SportsCenter or something like that like it's yeah everybody's stealing from somebody else all the way along and they still live for people around the campfire but either way at the end of the day everybody run out subscribe to Value after hours and uh Toby thanks for coming on I always enjoy talking to you likewise Jason thank you for having me man it's always fun thanks for listening if you enjoyed Today's Show we'd appreciate if you would share this show with friends and leave us a review on iTunes as it helps more listeners find the show and join our amazing Community to those of you who already shared or left a review thank you very sincerely it does mean a lot to us if you'd like more information about Mutiny fund you can go to mutinyfund.com for any thoughts on how we can improve the show or questions about anything we've talked about here on the podcast today drop us a message via email I'm Taylor at mutinyfund.com and Jason is jason.com or you can reach us on Twitter I'm at Taylor Pearson in E and Jason is at Jason Mutiny to hear about new episodes or get our monthly newsletter with reading recommendations sign up at mutinyfund.com newsletter foreign [Music] for informational purposes only and should not be relied upon as legal business investment or tax advice all opinions expressed by podcast participants or certainly their own opinions and do not necessarily reflect the opinions of mutual fund their Affiliates or companies featured due to Industry regulations participants of this podcast are instructed to not make specific trade recommendations nor reference based or potential profits listeners are reminded that managed features commodity trading Forex Trading and other alternative Investments are complex and carry a risk of substantial losses as such they're not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such Investments visit mutinifine.com disclaimer for more information foreign