Value Investing is BACK - with Tobias Carlisle

In this episode, we delve into the world of value investing with Tobias Carlisle, the founder of The Acquirer's Multiple and author of the book 'The Acquirer's Multiple'. From his journey from a lawyer in Australia to a value funds manager in California, to his unique approach towards value investing, this conversation is a treasure trove of insights for anyone interested in the financial markets.

Topics Discussed

Tobias Carlisle's journey from a lawyer in Australia to a value funds manager in California
A discussion on the performance of Carlisle's ETF ZIG and its outperformance of S&P over the last three years
The challenges and rewards of being a value investor in a market dominated by growth investing
Insights into Carlisle's investment strategy, including his emphasis on fundamental performance over price action
The role of patience and behavioral fortitude in value investing
Carlisle's views on the future opportunities for value investing, particularly in the context of sector diversification
Reflections on the recent Berkshire Hathaway annual meeting and the lessons learned from Warren Buffett and Charlie Munger
Carlisle's personal investment mantra and his advice for navigating the ups and downs of the investing world

This episode is a must-listen for anyone interested in value investing. Tobias Carlisle's insights, drawn from his extensive experience and unique approach to investing, provide valuable strategies to navigate the financial markets. Whether you're a seasoned investor or just starting out, this conversation is sure to provide you with plenty of food for thought.

This is “ReSolve’s Riffs” – published on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

Transcript

Tobias Carlisle: 00:00:00

As to the passives eating the world, I think at the

: 00:00:03

margin, I think that's probably

what happens in any bull market.

: 00:00:08

People go with what's been

working and the S& P 500 is

: 00:00:11

the best performed asset class.

: 00:00:13

Or asset, in the world over

that sort of period of time.

: 00:00:16

You can get it for nine basis points.

: 00:00:18

It's got Sortino ratio that

look like a hedge fund.

: 00:00:22

You know, it's, it's an incredible

run for that and it can soak up

: 00:00:25

a lot of assets, but I think that

this is true at every bull market.

: 00:00:29

People invest in what,

what has been working.

: 00:00:32

And the moment that that breaks down,

the money will go somewhere else.

: 00:01:45

Mike Philbrick: All right,

welcome to another Resolve Riffs.

: 00:01:48

Today we have an old friend with us,

Toby Carlisle from The Acquirer Funds

: 00:01:53

and from The Acquirer's podcast and

blog and, I know you call it Value After

: 00:02:01

Hours, your, your, uh, YouTube show.

: 00:02:03

I like to, I like to think

of it as Value After Hours.

: 00:02:06

Because your voice is just so calming

and, uh, and so value after dark.

: 00:02:13

Like I think you might, you know,

I, I would contemplate submit to

: 00:02:16

you for a name change to, value

after dark with Toby Carlisle

: 00:02:20

Tobias Carlisle: Yeah, we might do that.

: 00:02:21

Richard Laterman: has to be the accent.

: 00:02:23

Mike Philbrick: yeah, so, so

congratulations on a fantastic

: 00:02:26

year and last three years for

your ETF ZIG outperforming S&

: 00:02:31

P on both of those timeframes.

: 00:02:32

Fantastic work.

: 00:02:34

Still flying under the radar though, as

many assets and, and geographical regions,

: 00:02:39

whether it's gold, whether it's Argentina,

whether it's value, so many places are

: 00:02:43

actually doing well and outperforming

S& P providing great diversification.

: 00:02:49

Yet most people aren't, you know, really

allocating in any significant way there.

: 00:02:53

So I know, I know we're kind of early

on beating this drum and what we beat it

: 00:02:56

through all the way through the, the tough

times too, but, you know, hopefully people

: 00:03:00

can take away some insights here from you.

: 00:03:02

And, maybe before we get started, for

those of you who may not know you,

: 00:03:06

Toby, maybe give us a little bit of your

history, how you came to this point.

: 00:03:10

I mean, going from, uh, A

lawyer down in Aussie to a value

: 00:03:14

funds manager in California.

: 00:03:15

Maybe map it out for us and

bring everybody else up to

: 00:03:18

speed who might not know yet.

: 00:03:19

Tobias Carlisle: Yeah, I started out.

: 00:03:20

Thanks for that's very

kind introduction, Mike.

: 00:03:22

Thanks very much for that.

: 00:03:23

I always good chatting to you with a

big, the big lead in the big buildup.

: 00:03:27

Uh, yeah, I was a lawyer.

: 00:03:28

I was a mergers and acquisitions attorney.

: 00:03:30

I was corporate advisory

is what we call it.

: 00:03:32

So we did everything from capital

raising to acquisitions to board

: 00:03:36

papers to like just whatever was

needed for mostly publicly listed

: 00:03:40

companies, big, big private companies.

: 00:03:42

I started in April 2000, which

was the very top of the dot com 1.

: 00:03:48

0 boom and saw that all collapse,

and then saw the rise of activism and

: 00:03:53

private equity through those early 2000s.

: 00:03:55

And, at the same time as I was sort of,

you know, Papering these private equity

: 00:04:00

acquisitions, which is a lot of work,

you know, there's lots of different

: 00:04:03

layers of capital, debt, equity, prefs,

whatever might be in there, plus the

: 00:04:08

acquisition and just there's so much

contracting, you'd end up with a tower

: 00:04:12

of paper at the end of it and it would

cost millions of dollars of legal fees.

: 00:04:17

At the same time, you can buy

exactly the same business for

: 00:04:20

cheaper on the stock market.

: 00:04:23

And at the time it was 8 a trade.

: 00:04:25

I don't know what it is now, but it

was 8 for me to trade by the, by the

: 00:04:28

same business for half the price.

: 00:04:31

And then if you make a mistake

two days later, you can tip it

: 00:04:33

out for another 8 round trip.

: 00:04:35

And I had read enough sort of,

Buffett and Graham by that point

: 00:04:40

to know that these things happen.

: 00:04:41

You, you find, Pieces of businesses

that aren't trading for the full

: 00:04:45

negotiated price on the stock market,

even though they might be worth more.

: 00:04:49

And I just kind of fell in love with it.

: 00:04:51

It was fun.

: 00:04:52

And it was a good period for value.

: 00:04:53

It was easy to buy things

who were undervalued and they

: 00:04:55

just run almost immediately.

: 00:04:58

And so I spent the first sort of five

years or so of my investing career.

: 00:05:02

Doing pretty well with

deeply undervalued stuff.

: 00:05:05

And that all sort of collapsed in, in

: 2009

: 00:05:09

and do it professionally at that point.

: 00:05:11

So I set up a little fund in

Australia, had some pretty good

: 00:05:13

returns out of the gate, but just

was never going to be a structure

: 00:05:16

that could raise money in the States.

: 00:05:18

My wife has, American we met when I was

working in San Francisco as a lawyer.

: 00:05:22

And so we moved back to have kids

and I started the business here.

: 00:05:26

And, it's been a tougher run for

value as everybody well knows.

: 00:05:29

Those starting in, depending on how

you measure it, starting in: 2010

: 00:05:33

2015, somewhere in that period of time,

value really started underperforming.

: 00:05:39

And I've got a friend, Mikhail

Samonov, he's done this analysis.

: 00:05:42

He, he called it 200 years of value.

: 00:05:44

And he said, this was the, you

know, that period through: 2020

: 00:05:47

was the worst underperformance

of value in 200 years of value.

: 00:05:50

Clearly as you go back in time.

: 00:05:52

The, the data is not as good, but

what is pretty clear from it is that

: 00:05:56

you get these often associated with

some sort of technological boom.

: 00:06:00

So the telegraph, the invention

of the telegraph was a big one.

: 00:06:04

steamships was another big one and so

on over the last sort of 200 years where

: 00:06:09

every time there's been an electronics

boom in the 60s, the dot com 1.

: 00:06:13

0 boom, Whatever it

was that sort of com 2.

: 00:06:17

0 social kind of boom

that we had through: 2020

: 00:06:20

And I guess now we've got a little

micro boom going on with the AI, but

: 00:06:23

whenever we have these things, it tends

to be the story stocks that don't have

: 00:06:27

a lot of fundamental value run and it

draws money away or it sort of leads

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: 00:06:33

the rest of the market to underperform.

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: 00:06:35

So that's, that's what

I've invested through.

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: 00:06:37

And I know we're going to talk about

this a little bit, but I've definitely

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had to adapt from a more traditional

value to sort of a A different sort of

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style of value to that practice now.

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: 00:06:47

Mike Philbrick: Well, even I think

that was interesting in the, in

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the, I know you make the pilgrimage

to Omaha each year and, you know,

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the Berkshire annual meeting.

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And so we're looking forward

to get some tidbits from that.

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But even in that, you know, I heard.

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: 00:07:01

A lot of that, the evolution of

Warren's thinking, because they paid

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so much time to Charlie, and you know,

Charlie's thinking was a little bit less

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value oriented than Warren's thinking.

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: 00:07:12

And, and, you know, maybe you're alluding

to that sort of thing in your own journey

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: 00:07:16

as you have been, you know, managing

value assets in, in what has been a.

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: 00:07:22

It's been, you know, obviously there's

lots of stuff around this value, but if

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no one else is, is realizing that and kind

of beating a path to that door, it leaves

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you with, you know, lots of value for a

period of time that is less comfortable

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than having the realization right away.

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Tobias Carlisle: Well, I actually

think that's an interesting point.

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Cause I, I think that if you're relying

on, that was one of the big changes that

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I made was that through through really

it was through: 2020

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2020 out of that sort of COVID low.

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Through until the end of 2020,

that was a very strange time.

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Everybody was at home with nothing to

do speculating on the stock market.

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And so I saw like lots of extra

hits on my websites podcast and my

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social media grew really quickly,

even though I'm a value guy and I was

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well out of all of those names, I'm

still involved in the stock market.

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And so I was getting

attention for that reason.

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And the stuff that I would just

wouldn't touch with a 10 foot pole

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: 00:08:16

was the stuff that was running it.

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The stuff that I was holding

was suffering as a result.

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It wasn't clear, you know,

everybody knows these things are

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: 00:08:23

cyclical, but it's hard to believe

that it's cyclical in the moment.

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I thought, what if this

does go along forever?

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: 00:08:29

And I was listening to some of the

other smarter value guys who are

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: 00:08:32

a little bit more growthy than me,

listening to what they were saying.

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One of the criticisms that they

have had of the very deep value.

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So I would characterize myself as deep

value, which is I, I, tend to buy less

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good businesses at a big discount.

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: 00:08:44

That's sort of my, Objective rather

than a really great business at a fair

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price, which would be the way that

Buffett characterizes what he does.

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So I thought one of the criticisms that

was valid of what I did was that, aren't

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you just really relying on price action?

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To be the thing that bows you out.

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: 00:09:02

'cause we all know that if you form

a value portfolio, the market expects

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: 00:09:06

the earnings to fall or not perform

as well as the market earnings.

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And that tends to be what happens.

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: 00:09:12

It's just that they have overestimated,

how bad the returns are gonna be, and

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: 00:09:16

then the stock price recovers as a result.

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: 00:09:18

So it's this funny kind of behavior

where the, the earnings are actually

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: 00:09:21

going down, but the stock price is

going up because of the, the little

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: 00:09:24

window when you own the stock.

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: 00:09:26

And the reverse is true

for the growthy stuff.

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: 00:09:29

The market expects the earnings to

go up and they do on average go up.

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: 00:09:33

It's just that they disappoint the

market and the multiple comes down.

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But somebody said, you know, aren't

you just relying on price action here?

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: 00:09:41

And that's not very, that's

not very value like, is it?

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That's not very fundamental because

that's not what fundamental value guys do.

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: 00:09:49

And I thought that was a fair point.

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So I went back and I retooled what

I did and I looked at it and I made

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: 00:09:54

this assumption, what if we had to.

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Invest with no price performance.

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What will we be doing then?

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We're purely relying on

fundamental performance.

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What, what would I construct then?

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: 00:10:04

And so it made me, I leaned a

little bit more into quality.

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: 00:10:06

I made sure that when we

bought something, we'd get some

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: 00:10:09

compounding out of the reinvestment.

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: 00:10:11

So you need a reasonable return on

reinvestment, reasonable prospects

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: 00:10:14

for compounding reinvestment,

returns over a period of time.

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: 00:10:18

And then also for some yield.

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: 00:10:20

So some shareholder yield, which is.

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Dividends, buybacks, you know, hopefully

buybacks for undervalued things, but

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not not every management team does that.

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And I, I feel like I, I now think

in 2 distinct terms of value sources

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when I buy something, we're going

to get a return out of the yield.

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We're going to get a return

out of the compounding.

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I don't rely at all on the price action.

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I assume that price action is

going to catch up to us over time.

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And I think that's a pretty

safe assumption, but I

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: 00:10:46

don't expect it to at all.

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And I'd be quite happy for

my entry multiple and my

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exit multiple to be the same.

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And I'm purely rely on the

fundamental performance of

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the business over that period.

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So I think that that's a pretty

big change that I have built in.

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: 00:11:01

and I think that it's sort of yielded

results and I expect it to over time.

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So we, when the fund, when Zig first

launched, it was a long short fund.

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It 130 percent long, 30 percent

short, 30 names long, 30 names short.

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So a long name was 4%, short

name was 1%, rebalanced regularly

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without fear or favor, because

the shorts can be a problem.

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Shorts have got leverage in them.

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They can run the wrong way.

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You can get hurt.

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I invested through that period

where Melvin Capital blew up.

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I thought we did pretty well through

that period, but we were all, had, my

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great fear was always that we were going

to get caught in something that ran.

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So I'd make sure there was

no momentum in the stock.

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And I think that that's sort of for

the really growthy names that is there.

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That's their rocket fuel.

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Their mojo is all of that momentum.

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The moment the momentum gets out

of those stocks, the people aren't

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interested in playing with them anymore.

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It's like the toy just gets discarded.

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So you can look at the charts as

soon as the momentum goes in beyond

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or Peloton or any of those kinds

of names, they just disappear for

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a variety of not very interesting

kind of technical custody reasons we

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couldn't get as long as I want it to be.

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And so we were sitting at a

hundred long 30 short through.

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The beginning of 2020.

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So that helped us on the way down

and protect us a little bit, hurt

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us on the way back up in that mania.

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So 2020 wasn't a great year for Zig.

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And then in 2021 converted to

long only because I thought

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that there's some existential.

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Metaphysical risk with the shorts,

like even if they never actually blow

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up, there's always a risk that they

do kind of hope that the fund gets

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big enough one day that, you know,

it's, it's a big fund and then it's

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harder to short at that kind of size.

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So I thought, I'm going to take

this medicine at some point.

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It doesn't really align

philosophically with the way I am.

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So I'm going to change to long

only, which happened in: 2021

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So since 2021, 2021 was a good year,

cause that was sort of the end of

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the, uh, The stock market run up 22

was the kind of, I thought it was

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the beginning of a big bust, but

ultimately it didn't turn out that way.

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And then 23, we had a really good year.

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I would not have expected it at all.

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I thought that the, all of the macro

economic indicators were terrible

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and really the lesson that I've

learned is I know nothing about

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macro and I'm just going to shut up

about macro and ignore macro forever.

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I think the market can fall over 50

percent at any given point in time

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and you should be able to survive it.

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But aside from that, macro

is just a waste of time.

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So I'm a long only value

investor, bottom up.

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I'm about as plain vanilla

as they come these days.

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Mike Philbrick: I love it.

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: 00:13:24

You hit on, you've hit on just one last

thing, Richard, and I'll let you jump in.

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But you hit a, you've hit on a point

that I have always kind of giggled at

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as I've heard various value investors

like Warren or others, you know, say

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market timing is not a thing you can do.

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And at the same time, they use

value sort of fundamentally driven,

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mechanisms in order to decide whether

to have cash on the sidelines or not.

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Whether to have more cash in the

sidelines than one normally would

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or not, or to invest more or

not, which is a form of timing.

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It's just timing by a

slightly different nature.

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So I'm glad you highlight that.

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That's kind of an, it's always

kind of a funny thing that I

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Tobias Carlisle: They might

say valuing rather than timing.

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They're valuing the market,

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Mike Philbrick: Fair enough,

which is a, an exposure mechanism

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Tobias Carlisle: I don't do that, but,

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but I'm just

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Mike Philbrick: totally get it.

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: 00:14:13

Totally.

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And you've, you've, you've,

you've answered the question

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too, for the, for the ZIG funds.

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: 00:14:17

Now, Richard, you've been,

you've been waiting patiently.

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You've got some things to say.

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So let me shut up now and let you, uh,

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Richard Laterman: I

have some things to ask.

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No, I'm just very curious.

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we hear about a lot about this

narrative that, you know, passive

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is eating the world and that that

might be one of the main reasons

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why there's been this incredible

bifurcation that's been lasting, guess,

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a couple of decades now with this

underperformance of value versus growth.

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So, I'm wondering, do you

subscribe to any of that?

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Do you see other reasons,

for this underperformance?

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Obviously, you've.

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: 00:14:47

Morphed and you've been alluding

to some of the ways in which you've

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: 00:14:50

adapted your style over the years to,

to sort of account for these changes.

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But I'm wondering, does it

even matter to your style?

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But have you gone down the rabbit hole

and trying to understand what are some of

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the mechanisms, structural mechanisms that

have led to this underperformance and this

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bifurcation and does it begin with this

passive eats the world sort of thesis?

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Tobias Carlisle: I am not a subscriber

to the passive eats the world thesis.

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: 00:15:14

And I will talk about that.

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: 00:15:15

But the first, just let me say

that the reason that I think that

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value has underperformed, you can

look at the relative value of value

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: 00:15:21

and growth as another alternative.

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So let's just say that quality

or growth, better businesses

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should command a premium price.

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: 00:15:29

Worst businesses should

command a discounted price.

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If everything was fair, that

would be what would happen.

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What tends to happen is there's

a little bit of mean reversion

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: 00:15:38

in business performance as well,

that I think a lot of people miss.

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Things just don't go to zero.

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: 00:15:42

When oil was trading at a negative

number, that's not a, that's not

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: 00:15:45

a signal to sell oil, if anything,

that's a signal to buy oil at that

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Richard Laterman: Don't

extrapolate at the extremes.

290

: 00:15:52

Tobias Carlisle: That's right.

291

: 00:15:52

And there's, there's, that's the original

paper, the Le Connachic Schliefer and

292

: 00:15:56

Vishny paper from 1994, which is the

sort of alternative to the, efficient

293

: 00:16:01

market theory, Fama French paper,

which is that all value is risk.

294

: 00:16:07

The, behavioralist guys say,

no, no, no, it's not all risk.

295

: 00:16:10

There's a behavioral thing going on.

296

: 00:16:11

There's extrapolation.

297

: 00:16:12

They extrapolate at the top.

298

: 00:16:13

They extrapolate at the bottom and

mean reversion is a better bet.

299

: 00:16:17

So I just, I'm a I bet on mean

reversion, not extrapolation.

300

: 00:16:20

And I think that, if you looked in 2015

at value, the difference between the

301

: 00:16:27

best businesses and the worst businesses,

that was, that was so squashed together

302

: 00:16:30

because valued had such a great run

through the two thousands, everybody

303

: 00:16:33

was trying to buy the undervalued stuff.

304

: 00:16:36

And for a little bit of a premium,

you've got a much better business.

305

: 00:16:40

And I think that that's why from 2015

until sort of the Today or the last

306

: 00:16:44

few years, the better businesses, the

growthier stuff, the Nasdaq stuff has

307

: 00:16:48

all had a great run because they were

too cheap and value was too expensive.

308

: 00:16:52

And I think now the spread is very, very

wide and the spread has been closing, but

309

: 00:16:56

the spread is still very unusually wide.

310

: 00:16:58

It's still as wide as it was in

: 2000

311

: 00:17:02

the bottom, both of which went

on to have very good value runs.

312

: 00:17:05

I think that That is really what has

driven the underperformance of value.

313

: 00:17:09

It got too expensive in 2015.

314

: 00:17:11

It's been working off

that being too expensive.

315

: 00:17:13

And now the trend, now that the

trend keeps on going all the

316

: 00:17:16

way to the point that value is

undervalued and growth is overvalued.

317

: 00:17:20

So I think that we probably see some

mean reversion over the next decade here.

318

: 00:17:23

That would be my bet.

319

: 00:17:24

As to the, passives eating the

world, I think, I think at the

320

: 00:17:28

margin, I think that's probably

what happens in any bull market.

321

: 00:17:32

People go with what's been

working and the S& P 500 is

322

: 00:17:35

the best performed asset class.

323

: 00:17:37

Or asset in the world over

that sort of period of time.

324

: 00:17:39

You can get it for nine basis points.

325

: 00:17:42

It's got Sortino ratio that

look like a hedge fund.

326

: 00:17:46

You know, it's an incredible run

for that and it can soak up a lot

327

: 00:17:49

of assets, but I think that this

is true at every bull market.

328

: 00:17:53

People invest in what,

what has been working.

329

: 00:17:55

And the moment that that breaks down,

the money will go somewhere else.

330

: 00:18:00

In any case, I don't care because I'm

not investing as we just, that discussion

331

: 00:18:03

that I had earlier about the, you know,

not, not relying on the price performance.

332

: 00:18:07

If I was an investor in the value stuff.

333

: 00:18:09

And they bought back shares

and they're all cheap.

334

: 00:18:13

They would, you know, axiomatically,

they must perform better.

335

: 00:18:16

Like the cheaper they get

with the buyback mechanism.

336

: 00:18:19

And I'll be the last person

with owning those stocks.

337

: 00:18:21

Like if there's no bid and I

own all of those stocks, I'm an

338

: 00:18:24

incredibly wealthy man, but there's

no longer any bid on the market.

339

: 00:18:27

And so passive is eating the world,

but I've made a whole lot of money.

340

: 00:18:29

It just doesn't like, it doesn't

logically, it can't work.

341

: 00:18:32

I'm picking the pocket of those big funds

if they're, if they're not doing the

342

: 00:18:36

fundamental diligence that I'm doing.

343

: 00:18:38

I'm picking the pocket of SPY.

344

: 00:18:39

Like anything they're leaving behind

is something that's worth owning.

345

: 00:18:42

So I don't believe in, I think.

346

: 00:18:43

Flows affected in the short term, but

ultimately in the long run, fundamentals

347

: 00:18:47

are the thing that drive the market.

348

: 00:18:49

Mike Philbrick: Money goes

where it's treated best.

349

: 00:18:51

Richard Laterman: Yeah.

350

: 00:18:51

Voting machine versus waiting

machine, I guess, is the, uh,

351

: 00:18:54

is ultimately where you fall on.

352

: 00:18:56

And so, yeah.

353

: 00:18:58

And

354

: 00:18:58

Mike Philbrick: just look, just

look at, look at oil, right?

355

: 00:19:00

Right.

356

: 00:19:00

Richard, just as a point, 2008 oil, the

energy sector of the S and P is 16%.

357

: 00:19:07

It then bottoms at 2 percent

in: 2020

358

: 00:19:13

So underneath the surface, and this

is what I was alluding to earlier,

359

: 00:19:16

there are changes going along.

360

: 00:19:18

If you look in the resource space,

if you look in the emerging market

361

: 00:19:21

space, look in the value space.

362

: 00:19:23

You know, gold breaking out to

all time highs, you know, the

363

: 00:19:26

materials world sort of again, you

know, highs not seen for 15 years.

364

: 00:19:32

And everyone is still myopically focused

on the market cap weighted stocks of

365

: 00:19:38

the United States, which are, you know,

obviously victims or, they also take

366

: 00:19:42

advantage of the extreme momentum that

comes from a market cap weighting system.

367

: 00:19:47

So I think under the surface, there's

still enough active managers Where money

368

: 00:19:51

is, flowing under the surface on a longer

term timeframe to where it's being treated

369

: 00:19:57

best on a return, whether it's cash

flow or some sort of more fundamentally

370

: 00:20:02

driven, higher probable event that,

treats the money better, if you will.

371

: 00:20:06

Tobias Carlisle: I think the

of: 2020

372

: 00:20:11

I think it's already happened.

373

: 00:20:12

I think people who are waiting for it to

happen are completely missing the boat.

374

: 00:20:15

The train is leaving

the station right now.

375

: 00:20:19

It's already left.

376

: 00:20:19

I mean, I think that's why I think

it's a little bit funny having these.

377

: 00:20:23

These conversations, because I've been

living in a world where value has been

378

: 00:20:25

up before for the last three years,

379

: 00:20:27

Mike Philbrick: Yeah,

380

: 00:20:28

Tobias Carlisle: know?

381

: 00:20:29

Mike Philbrick: it's okay.

382

: 00:20:29

I just, just to, to, you

know, put a point on that.

383

: 00:20:33

I don't think we should

suggests the train has left.

384

: 00:20:36

Usually these, these very large secular

movements are very large ships turning.

385

: 00:20:43

And so, you know, if we look at those

moments in your career that you outlined

386

: 00:20:48

earlier, Toby, and talking about 2000

easy, easy times, you know,: 2010

387

: 00:20:54

a little harder times, You know, it

seems as though easier times are upon

388

: 00:20:59

us and, it's probably going to be, if

you zoom out and look at quarterly and

389

: 00:21:04

annual data, you're going to see it and

you're going to see the outperformance,

390

: 00:21:08

but over a day, a week, a month,

it's going to be shrouded in noise.

391

: 00:21:13

Tobias Carlisle: Or even since the start

of this year, you would say this year has

392

: 00:21:16

been more of a, that AI that kicked off

NVIDIA and AI has certainly reinvigorated

393

: 00:21:22

all of that, the growthy stuff.

394

: 00:21:24

And they've had a phenomenal year, many

of those guys and value has sucked wind

395

: 00:21:27

a little bit this year, to be fair.

396

: 00:21:29

Mike Philbrick: But that's what I mean.

397

: 00:21:30

On a longer basis, step back, look

at a few quarters, look at annual,

398

: 00:21:34

and you know, it's just there.

399

: 00:21:37

Try to talk to people about it.

400

: 00:21:38

My goodness, forget about it.

401

: 00:21:40

Japan, you know, Argentina, these, you

know, significant outperformance of U.

402

: 00:21:46

403

: 00:21:46

equities and people are like, don't care.

404

: 00:21:49

and this is sort of indicative

of that: 2000

405

: 00:21:52

This is not, this is not new

406

: 00:21:54

Tobias Carlisle: No, well

that's to be expected.

407

: 00:21:56

Mike Philbrick: from history,

408

: 00:21:57

Tobias Carlisle: People, people

tend to look through the rear vision

409

: 00:21:59

mirror when they're investing.

410

: 00:22:00

They look at things that have already

happened, extrapolate that forward.

411

: 00:22:04

Fundamental investors are just looking at

the underlying fundamental data and trying

412

: 00:22:08

to figure out what's going to happen.

413

: 00:22:09

Are we getting a good deal buying

now without really knowing,

414

: 00:22:12

expecting what, what can happen?

415

: 00:22:14

That's sort of the way I think about it.

416

: 00:22:15

I'm, I'm, whatever happens in

the market, I don't really mind.

417

: 00:22:18

I'm going to be happy owning

the things that I own.

418

: 00:22:21

Richard Laterman: so let's pull

on that thread a little bit.

419

: 00:22:22

You're, you're alluding

to the, the, fundamentals.

420

: 00:22:24

So you run a few, = stock

screening, processes.

421

: 00:22:28

I know that you have a

service that you offer that.

422

: 00:22:30

So I would imagine that does permeate

through your process, your investment

423

: 00:22:33

process for your, , actively

managed stuff to some degree.

424

: 00:22:35

What else goes into that process?

425

: 00:22:37

Is the stock screening an initial

filtering and then do you overlay

426

: 00:22:42

with some discretionary or are

there other elements to that

427

: 00:22:46

that you can tell us about?

428

: 00:22:49

Tobias Carlisle: So we look at the

domestic US equity market only.

429

: 00:22:52

we got North America, so we pulled some

Canadian data as well, but it's, it's,

430

: 00:22:56

well, the funds are only invested.

431

: 00:22:58

Uh, Canadian data is excellent.

432

: 00:23:00

And I think that value

really works well in Canada.

433

: 00:23:02

Mike Philbrick: it really does.

434

: 00:23:04

Tobias Carlisle: I don't know

why it works so well there.

435

: 00:23:05

And it works better in Canada

than it does in the States.

436

: 00:23:08

Mike Philbrick: Maybe all

the resource stocks that get

437

: 00:23:10

their, their value upside down.

438

: 00:23:11

Yeah.

439

: 00:23:12

Tobias Carlisle: or they're just, they're

just not as picked over, but the, The US

440

: 00:23:15

market is where I invest in for the funds.

441

: 00:23:17

So I don't, don't buy, I only buy

US listed companies for the funds.

442

: 00:23:20

And so I can scan all of the companies

for the amount of money that they're

443

: 00:23:25

making, you know, the amount of

money making that relative to what

444

: 00:23:28

they've got invested in the business.

445

: 00:23:30

and so I, I am purely focused

on the financial statements.

446

: 00:23:34

When I say I'm a quantum, I'm a lawyer.

447

: 00:23:36

I'm not a, I don't have a, PhD from

Booth or from Wharton or like, I'm not

448

: 00:23:41

a, I'm not a Chicago quant in that sense.

449

: 00:23:44

I'm just a quant in the sense that

I prefer the financial statements

450

: 00:23:48

to the story that people tell

themselves about these businesses.

451

: 00:23:52

So I think that all of the questions

that you have about a business or

452

: 00:23:56

about management can be answered in the

financial statements and so we look at a

453

: 00:24:00

series of financial statements for every

company and we try to figure out what's

454

: 00:24:03

happening, how much money are they making,

what are their prospects for growing,

455

: 00:24:07

what are their prospects for paying

out pretty good shareholder returns.

456

: 00:24:12

Try and find the best risk

adjusted opportunities from the

457

: 00:24:17

set that have no blow up risk.

458

: 00:24:19

So we're trying to take all the blow up

risk off and that's, that's a quite a

459

: 00:24:22

few tests, but that's like, you know,

looking at statistical tests of fraud

460

: 00:24:26

and earnings, manipulation and financial

distress and using all those sort of

461

: 00:24:30

standard tests and then looking at various

other things just to see how management

462

: 00:24:34

treats the financial statements.

463

: 00:24:36

So once we've narrowed it down to,

uh, an investable universe for both of

464

: 00:24:42

the funds, so ZIG is 30, DEEP is 100.

465

: 00:24:45

names.

466

: 00:24:45

Then among those names, we go into

a forensic diligence, which is just

467

: 00:24:49

does the financial statement match

the economic reality of the business?

468

: 00:24:54

Because there's a lot of discretion.

469

: 00:24:56

For managers to make decisions, two

perfectly reasonable people can come

470

: 00:24:59

to, can create two different financial

statements for the same business.

471

: 00:25:03

Over time, they should largely

balance out, but you look at accruals

472

: 00:25:08

of different assets and the way

that they depreciate and so on.

473

: 00:25:11

You know, if you're an owner operator

style manager, you're probably

474

: 00:25:15

running it to minimize tax when that

means minimizing reported earnings.

475

: 00:25:19

If you're a public company CEO,

whose compensation is based on stock

476

: 00:25:23

options and all of that sort of stuff,

you're trying to maximize earnings.

477

: 00:25:27

And they're Two different

styles of running a business.

478

: 00:25:30

My preference is that I want to be

with the owner operator type guy.

479

: 00:25:34

And so we, know, the system

is set up to try and find

480

: 00:25:38

investors and managers like that.

481

: 00:25:40

And then, I'm doing a diligence

where I'm actively looking at how

482

: 00:25:44

far away is what I would think that

the earnings should be from what

483

: 00:25:47

the actual reported earnings are.

484

: 00:25:49

And is there a trend in there?

485

: 00:25:51

Do they tend to be consistently and

growing over reporting of earnings?

486

: 00:25:55

Or is it the other way around?

487

: 00:25:56

Are they consistently

under reporting earnings?

488

: 00:25:59

Some of that is answered

in the cash flow statement.

489

: 00:26:01

And then we form a portfolio based on

what I think are the best risk adjusted

490

: 00:26:06

opportunities with no blow up risk.

491

: 00:26:08

And that's, that portfolio is then

rebalanced on a quarterly basis.

492

: 00:26:12

Mike Philbrick: How do you account for

the, you know, sectors and subsectors and,

493

: 00:26:15

and sort of the value, being all in one

sector or largely in a couple of sectors.

494

: 00:26:20

How do you go through that?

495

: 00:26:21

Tobias Carlisle: Yeah,

496

: 00:26:21

that's, that's,

497

: 00:26:22

Richard Laterman: sizing, if

you can add that, how do you

498

: 00:26:24

think about position sizing?

499

: 00:26:25

Is it conviction weighting?

500

: 00:26:27

How do you think about those?

501

: 00:26:28

How do you think about

502

: 00:26:28

Tobias Carlisle: yeah, so

that's a great question.

503

: 00:26:30

So the thing about value is that

sectors and industries all get cheap.

504

: 00:26:35

Everything in the industry

gets cheaper once.

505

: 00:26:37

And if you're just purely trying

to maximize returns, you want to

506

: 00:26:40

be fully invested as much as you

possibly can in that industry.

507

: 00:26:44

There is the problem though, that

every now and again, you get things

508

: 00:26:46

like for profit colleges where

for profit colleges all got cheap.

509

: 00:26:50

But, you know, ultimately that

was an act of the administration

510

: 00:26:53

to kind of wipe them out.

511

: 00:26:55

And so if you invest in the for

profit colleges, there was no

512

: 00:26:57

recovery from those investments.

513

: 00:26:58

So I'm always conscious of that

possibility being out there.

514

: 00:27:01

And I never know if I'm looking

at something is the reason, you

515

: 00:27:04

know, and that could be insurers.

516

: 00:27:06

When Obamacare was coming in,

you had United as the most as

517

: 00:27:11

the biggest and the other four,

we're trying to combine together.

518

: 00:27:13

How big a bet do you want to take in that?

519

: 00:27:15

How, what will be the impact of Obamacare?

520

: 00:27:18

I don't know at that point in time, but

I want some exposure to the industry.

521

: 00:27:22

Cause I thought they were cheap and I

also thought there were opportunities

522

: 00:27:24

in the merger arms going on there.

523

: 00:27:27

So I try to limit the exposure to any

industry to 20 percent of the book.

524

: 00:27:31

So we have a limit, which is six names

out of a 30 name portfolio and 20

525

: 00:27:36

names in a two in a 100 name portfolio.

526

: 00:27:38

So we're always limiting and then.

527

: 00:27:40

We are equal weighting

at each rebalance point.

528

: 00:27:44

So I've done a lot of research in

different ways of weighting using

529

: 00:27:48

Kelly or, you know, all of the

different things that you can do.

530

: 00:27:51

And I wrote a book called Concentrated

Investing, which is largely about that,

531

: 00:27:54

trying to figure out how concentrated

or otherwise you want to get.

532

: 00:27:58

I kind of found that for the ease

of calculation, 30 names is a good,

533

: 00:28:02

is sufficient diversification.

534

: 00:28:03

I think that the efficient

market guys come out at 30.

535

: 00:28:06

They're trying to create a portfolio

that matches the market portfolio

536

: 00:28:09

as cheaply as they possibly can.

537

: 00:28:11

Graham says 30 names, all of these, I

think when you do the work somewhere

538

: 00:28:15

between 20 and 30 names, you get rid

of all of your non diversifiable risk.

539

: 00:28:19

And it's just asymptotically

trending towards the market.

540

: 00:28:23

The question is, how can you outperform?

541

: 00:28:24

How can you deviate from the market?

542

: 00:28:26

So you're not randomly picking

names, you're picking them according

543

: 00:28:28

to some system value or whatever.

544

: 00:28:30

So 30 value names out of a universe of

1, 000 for Zig, and it's a universe of 2,

545

: 00:28:37

000 for Deep, because it's roughly Russell

2, 000, roughly Russell 1, 000 universes.

546

: 00:28:42

30 names for the Russell 1, 000,

100 names for the Russell 1, 000.

547

: 00:28:46

2000 is 3 percent of

names or, uh, sorry, 0.

548

: 00:28:50

3 percent of names or, or 0.

549

: 00:28:52

5 percent of names.

550

: 00:28:54

So I think that you're already

very concentrated, equal weight

551

: 00:28:57

in that group ease of calculation.

552

: 00:28:58

And I, I've found that, that,

that works perfectly well.

553

: 00:29:02

Mike Philbrick: And that's the

difference, just to, so ZIG is more

554

: 00:29:05

mid cap, large cap, and DEEP is

more maybe mid cap, small cap, or

555

: 00:29:11

Tobias Carlisle: So that,

556

: 00:29:11

Mike Philbrick: would you, is

that the main difference, or,

557

: 00:29:13

Tobias Carlisle: That's also quite

an interesting question, but it's,

558

: 00:29:15

it's Russell 1000 roughly for Zigg.

559

: 00:29:17

So it's the largest 1000, which is

mid and large, but at the moment

560

: 00:29:20

Morningstar has it as a small, that

the centroid is over the small.

561

: 00:29:25

And the reason is through no, like I

haven't directed the portfolio to do this.

562

: 00:29:28

It's just that as the market has got

more expensive, it seemed to get more.

563

: 00:29:32

I really think the last few years of

rather than being sort of a value, market.

564

: 00:29:36

It's really been a large over small

market rather than a sort of growth

565

: 00:29:39

over value or however you want to

characterize expensive and value.

566

: 00:29:42

It's been a large, not small market.

567

: 00:29:45

Smalls have been absolutely smoked.

568

: 00:29:47

And so the portfolio was, was a 40

million median about three years ago.

569

: 00:29:53

And it's something like

eight in Zig at the moment.

570

: 00:29:56

So that the market caps have come

in dramatically in Zig and also

571

: 00:30:01

in Deep, which is Russell 2000,

the Centroid sits right off the

572

: 00:30:05

bottom of the Morningstar Square.

573

: 00:30:07

Like you can look at that box.

574

: 00:30:09

it's in small and micro because, and

that's where I think the opportunities

575

: 00:30:12

are all small and value, but particularly

the size for whatever reason that

576

: 00:30:18

spiking interest rates sort of let

all of these smaller businesses,

577

: 00:30:21

cause they don't have the same.

578

: 00:30:23

They haven't termed out their debt as

well as the mid and large cap companies.

579

: 00:30:26

So they, their debt is all,

they've already started paying

580

: 00:30:29

the higher rates where the middle

large cap companies haven't had

581

: 00:30:32

to roll some of their debt yet.

582

: 00:30:33

They haven't had the bullets come through.

583

: 00:30:35

Whereas and micro have, so they're

paying like 10 percent rates to

584

: 00:30:40

borrow if they can get the debt.

585

: 00:30:42

And so I think that's why they've

really stumbled and you can see

586

: 00:30:44

it in their earnings reports.

587

: 00:30:46

You can see that large cap

earnings have largely recovered.

588

: 00:30:48

S& P 500 earnings have recovered

and have gone above their: 2022

589

: 00:30:53

Whereas mid and large are still trading

below their: 2022

590

: 00:30:58

are much compressed as a result.

591

: 00:31:00

S& P 400, S& P 600, which is

mid and small trading at about

592

: 00:31:04

15, 14 times depressed earnings.

593

: 00:31:07

Whereas the large caps are at like 20,

21, 22 times pretty extended earnings.

594

: 00:31:14

So to me, that says that if you

believe in mean reversion, the

595

: 00:31:17

opportunities in the small and mid,

and if you look back, small and mid

596

: 00:31:21

have traditionally traded at a small

Earnings, multiple, premium to large.

597

: 00:31:27

And now they're at a big discount.

598

: 00:31:28

So I think that'll flip

over the next few years.

599

: 00:31:30

And that's, that's where the opportunity

is small and value particularly.

600

: 00:31:34

Mike Philbrick: Yeah, when you hear

about the demise of the, uh, premium

601

: 00:31:38

for small caps in, in the research.

602

: 00:31:41

That takes a good solid, you know, decade

or more of, of underperformance to get

603

: 00:31:48

that headline that, Hey, the large cap

or small cap value premium is dead.

604

: 00:31:54

Or that market cap premium for

investing in smaller companies is dead.

605

: 00:31:57

I kind of always, when I hear those,

you know, the data is changing.

606

: 00:32:01

We have a hundred years of

data and it's now changing.

607

: 00:32:02

I'm like, is it?

608

: 00:32:05

Or are we just at one of those

extremes where it's going to revert

609

: 00:32:08

and, go back to where it was?

610

: 00:32:10

Tobias Carlisle: I agree with you that

there's highly likely to be a mean

611

: 00:32:12

reversion in there, but I think that even

if you just look at the, if you look at

612

: 00:32:16

the expected returns for the prices that

you're paying, the returns are higher in

613

: 00:32:21

small and And mid than they are in large,

that I think they're considerably higher.

614

: 00:32:26

So I think that my, my deep fund, because

it's cheaper, has a higher expected

615

: 00:32:31

return at this point than Zig, which

is, can only choose from a slightly

616

: 00:32:35

bigger universe, even though it's

exactly the same process in both funds.

617

: 00:32:39

They're just selecting

from different universes.

618

: 00:32:40

So I did really think that

the opportunities in small and

619

: 00:32:43

value than, and then the smaller

is better than the bigger.

620

: 00:32:47

Mike Philbrick: Now, how do you, how

do you trade some of that smaller

621

: 00:32:49

micro and small cap, those positions

is it's probably not an issue now as

622

: 00:32:55

the funds are sort of smaller and, and

they're, in their infancy and growing,

623

: 00:33:00

but is there, is there a point at

which, you know, you're going to reach

624

: 00:33:04

capacity in that, in that domain?

625

: 00:33:06

Tobias Carlisle: Certainly,

it's going to reach capacity.

626

: 00:33:07

I don't know where that level is.

627

: 00:33:10

That's going to be an ongoing thing,

but that's, that's why it's 100 names.

628

: 00:33:13

Um, so they're, they're

all fairly small positions.

629

: 00:33:16

There's also, you know, if you're

running an ETF, you have Liquidity

630

: 00:33:19

Risk Management Program and you also

have an NYSE market capitalization

631

: 00:33:24

cut off of about 75 million.

632

: 00:33:26

So it has to be a market cap

bigger than 75 and it has to be

633

: 00:33:29

sufficiently liquid to trade.

634

: 00:33:31

And so it has to qualify

on two different measures.

635

: 00:33:34

So all of the names that are in

the fund qualify on those measures.

636

: 00:33:37

And, you know, you're probably

leaving some return behind by

637

: 00:33:40

not being able to pick up the

really small, really liquid stuff.

638

: 00:33:44

But you know, there's a, there's

some risk being in that stuff

639

: 00:33:47

if you're in a publicly traded

640

: 00:33:49

Mike Philbrick: Oh yeah.

641

: 00:33:49

And there's costs where you've got, you've

got slippage in those that is, that is

642

: 00:33:53

not, yeah, it's, it's, it's significant.

643

: 00:33:56

The bid ask spreads are large and

acquiring and disposing of have

644

: 00:34:02

some significant slippage that

often will eat significantly into

645

: 00:34:06

what can be actually realized.

646

: 00:34:08

so you have to, you know,

it's a slower approach.

647

: 00:34:10

It's a, uh, it's a slightly

different game to think through.

648

: 00:34:14

and some

649

: 00:34:14

Tobias Carlisle: moves in

those little fellas are crazy.

650

: 00:34:17

I just, every now and again,

I check in just to see what

651

: 00:34:19

those hundred names have done.

652

: 00:34:21

And it'll be, you know, a few names that

are up 15 or 20 on the day and a few

653

: 00:34:24

names that are down 15 or 20 on the day.

654

: 00:34:27

And that's probably just, you know,

that's, that's not, there's no news.

655

: 00:34:30

There's no event.

656

: 00:34:31

That's just somebody trying to trade them.

657

: 00:34:33

Mike Philbrick: Bob wanted

a boat and he's selling

658

: 00:34:36

Tobias Carlisle: it.

659

: 00:34:36

Mike Philbrick: some shares.

660

: 00:34:38

Tobias Carlisle: it.

661

: 00:34:39

Richard Laterman: alluded to a moment

ago about, sectors often becoming cheap

662

: 00:34:44

altogether because of some sort of macro

catalysts or something along those lines.

663

: 00:34:49

but you also said that you're, you're,

you're done or you, you, you, you try

664

: 00:34:52

to shoot from, from making any macro

predictions because that's not your game.

665

: 00:34:56

How do you account for trying to

diversify within the portfolio and

666

: 00:35:01

not have overly, overly concentrated

positions on any single sector?

667

: 00:35:05

Do you impose any constraints,

uh, from a sector perspective?

668

: 00:35:08

How do you think about that problem?

669

: 00:35:09

Tobias Carlisle: Yeah.

670

: 00:35:10

There's a, there's a sector constraint.

671

: 00:35:11

There's a industry sector constraint,

which is, and it depends on how we're

672

: 00:35:15

defining industries and sectors,

but where it's no more than 20

673

: 00:35:20

percent of the book in any industry.

674

: 00:35:22

So that gives me enough exposure, I think.

675

: 00:35:25

But it also protects us in the, in

the instance that it's all for profit,

676

: 00:35:29

for profit colleges, for example,

which there's no recovery from.

677

: 00:35:33

And then we're updating

on a quarterly basis too.

678

: 00:35:35

So we're continuing to examine

either financial statements still

679

: 00:35:39

supporting us being in this position

or have, what's the market, right?

680

: 00:35:42

Because that's, that's

the way I think about it.

681

: 00:35:44

We're, we're not, You know, it's,

there's some arrogance in saying the

682

: 00:35:47

market is totally wrong about this

because of course the earnings and the

683

: 00:35:50

underlying business can deteriorate.

684

: 00:35:53

In which case, we've made a mistake.

685

: 00:35:54

We've paid too high a price for

a business that's deteriorating.

686

: 00:35:57

And that's what the market is often doing.

687

: 00:35:59

It's forward looking.

688

: 00:35:59

They know that these events are

coming and they're not yet reflected

689

: 00:36:02

in the financial statements.

690

: 00:36:04

So the way that I think about it is

we're either paying a price that reflects

691

: 00:36:07

those worse expectations, in which case

we're probably, you know, if it, if it

692

: 00:36:13

does manifest that they're getting worse

and now the opportunity doesn't look as

693

: 00:36:16

great, we just take the position off and

move on to something else or the market

694

: 00:36:20

has overestimated, it's over extrapolated

and there's a pretty big recovery when

695

: 00:36:25

the next print comes in and it's not

as bad as everybody was expecting.

696

: 00:36:28

And then, and then you're off

to the race and that's sort of

697

: 00:36:29

what we're trying to achieve.

698

: 00:36:32

but you know, I'm, I'm always,

I'm very aware there's a lot of

699

: 00:36:35

avenues for making mistakes and

for blowing up in this business.

700

: 00:36:38

And that's really the thing

that I'm most focused on.

701

: 00:36:41

I just want to survive because

there's always another cycle coming.

702

: 00:36:44

There's always a better cycle coming.

703

: 00:36:46

Mike Philbrick: a war of

704

: 00:36:46

Tobias Carlisle: is to, Yeah.

705

: 00:36:47

you've got to be there.

706

: 00:36:48

You've got to be there

for the good cycles.

707

: 00:36:49

I mean, at some point we're going to

have a value cycle like we had in the

708

: 00:36:53

early 2000s and it would just be a crying

shame to have missed out on it because

709

: 00:36:57

the growth cycle beforehand was so

brittle and you didn't make it through.

710

: 00:37:00

Right.

711

: 00:37:01

But I think we're getting

close to a big value cycle.

712

: 00:37:03

So I'm pretty excited.

713

: 00:37:05

Mike Philbrick: Is there, is there any,

I know you mentioned that, you know,

714

: 00:37:07

you're not really paying attention to

the global macro side of things, but

715

: 00:37:11

are there any potential sort of risks

or opportunities that you see the sort

716

: 00:37:16

of the pricing mechanisms where you're

like, okay, This group is really cheap

717

: 00:37:23

or, you know, my, my screens are focused

over here and you can sort of see the

718

: 00:37:28

macro overlay that would lead to that.

719

: 00:37:32

Tobias Carlisle: I think that value, when

things get very cheap, that's a good time

720

: 00:37:36

to be looking in that sector because it

says that the big macro event has happened

721

: 00:37:40

and everybody's aware of it right now.

722

: 00:37:43

Oil goes, oil goes negative.

723

: 00:37:46

All of the oil may just get smashed

to smithereens or, you know,

724

: 00:37:50

housing was another interesting one

before housing kind of took off.

725

: 00:37:53

The thesis, what lumber

got very expensive.

726

: 00:37:56

You know, when lumber had that crazy

run through, through COVID, all of the

727

: 00:37:59

housing builders got smashed to pieces.

728

: 00:38:01

And I, thought the housing

builders were way, way too cheap.

729

: 00:38:06

They were also in a market where

there was a lot of under building.

730

: 00:38:09

Because of the GFC, more than a

decade ago, we just haven't built

731

: 00:38:13

as many homes in the States.

732

: 00:38:14

And so there's going

to be demand for homes.

733

: 00:38:17

Housing bills are cheap,

lumber being too expensive.

734

: 00:38:20

That's clearly a short term problem

that's going to resolve itself over time.

735

: 00:38:23

And the home builders

went on a pretty good run.

736

: 00:38:25

I didn't foresee that sticking up

interest rates as rapidly as they did

737

: 00:38:29

would make the premium between new

homes and, you know, Existing homes so

738

: 00:38:34

much smaller, or in fact, it would flip

over where people would be, it would be

739

: 00:38:38

cheaper to buy a new home than it would

be to buy an existing home because the

740

: 00:38:41

homebuilders could give you the rate

buy downs and all that sort of stuff.

741

: 00:38:44

And so those homebuilders have had this

sort of generational little problem.

742

: 00:38:48

Period of trading.

743

: 00:38:49

But that's one of the

nice things about value.

744

: 00:38:51

I didn't see any of that happening.

745

: 00:38:52

I just thought, well, home builders

are too cheap, but then of course,

746

: 00:38:55

it's all of the macro that drives

all of the craziness that goes on.

747

: 00:38:59

And I just, I just don't think.

748

: 00:39:01

It's not that I'm ignoring it.

749

: 00:39:03

I'll I'll watch it and

I'm naturally bearish.

750

: 00:39:05

So I've.

751

: 00:39:06

You know, I can see that there's a

yield curve inversion out there and, you

752

: 00:39:09

know, there's a war going on in Russia

and there's some conflict in Gaza.

753

: 00:39:13

There's, there's always conflict

and there's lots of good reasons

754

: 00:39:16

to be nervous about stocks.

755

: 00:39:17

It's just that I can go back over

the last decade cause I have been

756

: 00:39:21

bearish over the last decade and I

can go through all the things that I

757

: 00:39:24

was bearish about, that none of which

manifested into, you know, anything

758

: 00:39:28

that happened in the stock market.

759

: 00:39:29

So I just think macro is so hard.

760

: 00:39:31

It's not that it's wrong and it's not

that it's worth paying attention to.

761

: 00:39:34

It's just that it's so important.

762

: 00:39:36

Impossible to predict the third or

fourth derivative knock on effect and

763

: 00:39:41

how that will impact the stock market

that the energy devoted to it is

764

: 00:39:44

just a little bit of a waste of time.

765

: 00:39:46

So I'm a beneficiary.

766

: 00:39:47

I think sometimes that something

gets cheap for a macro reason and

767

: 00:39:50

I'll buy it for the macro reason.

768

: 00:39:51

And I'm probably a beneficiary on the

other side, bailing me out of the position

769

: 00:39:55

and making it work, but I'm largely

just ignoring it and saying, well,

770

: 00:39:59

it's cheap now and now it's less cheap.

771

: 00:40:01

And I'm a buyer.

772

: 00:40:02

And now it's less cheap.

773

: 00:40:03

That's how I think about it.

774

: 00:40:05

Richard Laterman: It really does,

seem, I mean, historically, at

775

: 00:40:08

least in the last couple of years,

it has been really a patience game.

776

: 00:40:12

to be a value investor, which comes

with its own behavioral challenges.

777

: 00:40:16

I mean, you end up having these

lumpy returns at times, right?

778

: 00:40:19

You, you wait, for a long time until the

waiting mechanism of the stock market

779

: 00:40:24

finally leans in the direction and you

have whatever catalysts are going to

780

: 00:40:27

drive, the price up and you're going to

realize that value in the business that

781

: 00:40:32

you've, uh, or the businesses that you

have been, selecting in your portfolio,

782

: 00:40:36

which kind of jives a little bit with the

experience that CTAs and trend followers

783

: 00:40:40

have had, which is kind of our side of

the ledger here, where oftentimes you

784

: 00:40:43

do get these lumpy return profiles.

785

: 00:40:46

How do you think through that behavioral

challenge for yourself as a manager,

786

: 00:40:49

but also for some of your stakeholders

and your investors when you're talking

787

: 00:40:53

to Some of your, to your allocators

and you're, you're, you're pitching

788

: 00:40:56

them this fund, you account for that,

behavioral, difficulty and, and, and,

789

: 00:41:02

and sort of the, the, the fortitude

that one must have in order to stick

790

: 00:41:05

to, because, uh, I find that value.

791

: 00:41:08

is one of the more intuitive

things one can get behind on

792

: 00:41:11

from an investing standpoint.

793

: 00:41:12

You buy something that is below

its intrinsic value, and then you

794

: 00:41:15

wait for that value to realize.

795

: 00:41:16

But you know, a quarter goes by, a couple

years go by, and it's still not happening.

796

: 00:41:21

And, and with our attention spans

growing shorter and shorter with, with

797

: 00:41:24

all the social media and all these

apps, how do you think through all that?

798

: 00:41:28

Tobias Carlisle: I, I think that again,

that's, the single most important

799

: 00:41:31

question to answer as an investor.

800

: 00:41:33

I think the more time that you spend in

the market, the more you realize, and I

801

: 00:41:37

talk about this with Jake Taylor, who's

my co host on Value After Hours, it's

802

: 00:41:42

amazing how many of these little stock

market bubbles, these little things

803

: 00:41:47

occur and they're just, everything gets

so hot and everybody's so interested in

804

: 00:41:51

this one thing for about three months.

805

: 00:41:53

And then it's just, you

know, completely back.

806

: 00:41:55

Back page of the paper thereafter.

807

: 00:41:58

And if you can just not participate

in it for the first three

808

: 00:42:01

months, then it looks silly.

809

: 00:42:02

Like in the fourth month, you

look back and you think, how did

810

: 00:42:04

people get so, get into this.

811

: 00:42:06

And then I look at, I look at names

like, so Dillard's, Ted Weschler's

812

: 00:42:10

one of Warren Buffett's investing.

813

: 00:42:11

Lieutenants.

814

: 00:42:12

hasn't done, hasn't, he's underperformed

the stock market since he started

815

: 00:42:16

investing for, for Buffett.

816

: 00:42:17

But he, he's had a couple

of very good picks.

817

: 00:42:21

And one of them was Dillard's

DDS, which is still out there.

818

: 00:42:24

And it's one of the companies

that I hold now as well.

819

: 00:42:27

Dillard's is a retailer, retailer

got, all the retailers got smashed to

820

: 00:42:31

pieces over the last five or 10 years.

821

: 00:42:34

Dillard's was one of them.

822

: 00:42:35

Dillard's got way too cheap.

823

: 00:42:36

It was in all of my screens.

824

: 00:42:38

and I'd buy it and sell it.

825

: 00:42:40

And buy it again and sell it again.

826

: 00:42:42

Cause you know, just as it sort of

bounced around a little bit, but it didn't

827

: 00:42:44

really go anywhere for five or six years.

828

: 00:42:47

And then through COVID, whatever it was,

the stimulus, whatever it was, it took

829

: 00:42:52

off and it 10 bagged in about a year.

830

: 00:42:55

And now it's up about 18

times from where he put it.

831

: 00:42:57

I think he doesn't have it anymore, but

that 6 percent stake that he bought is

832

: 00:43:03

worth like 360 million and it's an 18

bagger since he put that position on.

833

: 00:43:08

And all of it happened in a

very short period of time.

834

: 00:43:11

So the compound annual growth rate for

the holding period or the IRR for the

835

: 00:43:15

holding period is like 36 percent plus.

836

: 00:43:17

Over the seven years, but it's

really like only a handful of years

837

: 00:43:20

that have delivered the return.

838

: 00:43:22

So I'm just, I see those things

and I think that's a good, that's

839

: 00:43:25

a good reminder just because the

market doesn't recognize this.

840

: 00:43:29

Initially, what we're focused

on is the fundamentals.

841

: 00:43:32

And I, at the, at the beginning

of this, I sort of started talking

842

: 00:43:35

about that a little bit, but

that's sort of what it means.

843

: 00:43:37

Like ignore the price action,

stay completely focused on the

844

: 00:43:41

underlying fundamental performance.

845

: 00:43:43

And if the fundamental performance

is trending in the right

846

: 00:43:46

direction, then everything's good.

847

: 00:43:48

Just.

848

: 00:43:49

Just.

849

: 00:43:49

stay cool.

850

: 00:43:49

And so I've definitely found

myself, I've, I've stepped back

851

: 00:43:52

from social media a fair bit.

852

: 00:43:54

There's not a lot of utility

in it for me because it's just

853

: 00:43:56

way too short term focused.

854

: 00:43:58

So I put the positions on, we

rebalanced in a quarter, which means

855

: 00:44:01

I'm going to get another quarters.

856

: 00:44:03

Financial statements, we'll update

all of our models, we'll form up our

857

: 00:44:07

ideal portfolio, and then at the end

of the quarter, we'll look at the

858

: 00:44:10

differences between the ideal portfolio

and what we're currently holding in

859

: 00:44:14

Zig, and we trade to make the Zig's

portfolio look like the ideal portfolio.

860

: 00:44:18

And that's the process.

861

: 00:44:19

So it's not a lot of, um, it's

not a lot of opportunity for me to

862

: 00:44:24

overtrade or anything like that.

863

: 00:44:26

I, I sort of just stick to the process

and I don't worry about it too much.

864

: 00:44:29

'cause now I, I, I trust it too.

865

: 00:44:31

I've been doing it for long enough

that I know that if we buy cheap and

866

: 00:44:34

good, it will work out over time.

867

: 00:44:36

Even though, you know, you can

have a look at the returns.

868

: 00:44:38

In 2021, it was like a,

it was a pretty big year.

869

: 00:44:40

It was like a 37% year, but then

in: 2022

870

: 00:44:47

and 23 is like an up 30% year.

871

: 00:44:50

And then this year's like up

six or something like that.

872

: 00:44:52

And we're underperforming a little

bit, but that's what happens.

873

: 00:44:54

It's, it's clumpy get.

874

: 00:44:56

Even though the portfolio is going forward

all the time, it's only reflecting the

875

: 00:44:59

stock price sort of in fits and starts.

876

: 00:45:02

That's okay.

877

: 00:45:03

Mike Philbrick: The, the idiosyncratic

lightning strikes a few spots

878

: 00:45:06

of the portfolio, creates some

returns or rebalancing happens.

879

: 00:45:10

Then, then, uh, you know, you're

waiting for For those, those

880

: 00:45:13

lightnings in a bottle again.

881

: 00:45:14

And, so when you're doing it though,

are you sort of at the end of each

882

: 00:45:17

month, looking back at the quarter,

whatever, whoever reported in that

883

: 00:45:20

particular quarter and updating

there, or is it just literally, you

884

: 00:45:23

know, four times a year type thing,

885

: 00:45:25

Tobias Carlisle: Now it's the, the

portfolio, the, there's a model

886

: 00:45:28

portfolio that's updated all the time.

887

: 00:45:30

It's pulling in all of the new reporting.

888

: 00:45:33

and at the end of the quarter,

the model portfolio will have

889

: 00:45:35

deviated from what it was.

890

: 00:45:37

Zig holds because there's some,

it's just turnover in the positions.

891

: 00:45:40

It's force ranking all the

positions all the time.

892

: 00:45:42

And so we'll trade to make the

Zig's portfolio or Deep's portfolio

893

: 00:45:46

look like the model portfolio.

894

: 00:45:48

Richard Laterman: Oh, so it

is a quarterly rebalancing.

895

: 00:45:50

So you are only rebalancing

896

: 00:45:51

Tobias Carlisle: yes, yeah, yeah.

897

: 00:45:53

And I tested that.

898

: 00:45:54

I've tested, you know, the more

you rebalance, you, you, you're

899

: 00:45:57

getting a lot more friction, you're

getting a lot more costs and you

900

: 00:46:00

find that there are things that they

just move in and out all the time.

901

: 00:46:02

So you buying and selling this

one thing over and over again,

902

: 00:46:05

that still happens on a quarterly

basis, just less, less regularly.

903

: 00:46:08

But you also got that, you know,

Corey Hofstein had that great, paper

904

: 00:46:11

where he identified all of that timing

luck, all of that rebalancing luck.

905

: 00:46:15

And I had been aware of that as a

You know, anybody who does a lot of

906

: 00:46:17

backtesting, you become aware that

if you start the portfolio in one

907

: 00:46:21

January and you rebalance yearly in one

January, you get much better returns.

908

: 00:46:24

And if you started in September and

you rebalance it in September without

909

: 00:46:27

sort of knowing why, and if you started

in March and you get a rebalance,

910

: 00:46:30

it's really close to that 2009 low,

the returns are like twice as good

911

: 00:46:34

as if you rebalance in September.

912

: 00:46:36

So there's clearly, I want to be able to.

913

: 00:46:39

eliminate as much of that timing

rebalance luck as I can without

914

: 00:46:44

incurring all of those additional

sort of frictional trading costs.

915

: 00:46:47

And I think quarterly, you know,

you probably don't need to trade

916

: 00:46:51

quarterly, probably yearly is

enough, but it just, it captures that

917

: 00:46:55

timing rebalance luck sufficiently

that I think quarterly is okay.

918

: 00:46:58

Quarterly is the number.

919

: 00:47:00

Richard Laterman: And stepping away

a little bit from the, the systematic

920

: 00:47:04

process and, and just kind of putting

your, your discretionary hat on a

921

: 00:47:07

little bit, what are some of the

things that are gotten you excited on

922

: 00:47:10

a, on a micro level or sector level?

923

: 00:47:12

What are some of the things that if

you were inclined to sin a little,

924

: 00:47:15

like as a value investor, looking

at all these companies and looking

925

: 00:47:19

at the opportunities from a cyclical

standpoint, you just, described yourself

926

: 00:47:23

as excited or growing the, becoming

more excited with the opportunities,

927

: 00:47:27

but the forthcoming opportunities for,

value as a whole, what are some of the

928

: 00:47:30

things that are getting you excited?

929

: 00:47:32

Tobias Carlisle: Well, one of the

things that I do is I track the book.

930

: 00:47:34

So I know what the book is.

931

: 00:47:36

You know, I know what the expected

return is across the book.

932

: 00:47:38

Cause I have a calculation for

each name where I know what the

933

: 00:47:42

fundamental expected return is.

934

: 00:47:44

So when the fundamental expected

returns going up, I feel better when

935

: 00:47:48

it's going down, I feel worse, but when

it's going down, it's outperforming.

936

: 00:47:51

And when it's going up,

it's underperforming.

937

: 00:47:53

So I have managed to kind of train myself

to feel better when returns are worse

938

: 00:47:59

because the forward returns are better.

939

: 00:48:00

And so I think the forward

returns are better now.

940

: 00:48:03

We've got to concentrate, you

know, we just tend to be buying

941

: 00:48:05

lots of We're deep value.

942

: 00:48:06

So it means we're always going to

be in, we're going to be in steel.

943

: 00:48:10

We're going to be in coal.

944

: 00:48:11

We're going to be in

oil and gas and energy.

945

: 00:48:15

Um, we buy little busted industrials

that I think can do a little bit better.

946

: 00:48:20

I have a little bit of trouble

distinguishing between them,

947

: 00:48:22

honestly, because they all

have idiosyncratic problems.

948

: 00:48:25

And the reason that they're in

the portfolio is because they

949

: 00:48:27

have idiosyncratic problems

and they work their way out.

950

: 00:48:29

If I was going to sin and be

discretionary, I'd be much more in

951

: 00:48:33

things like probably I'd look at

something like, um, Starbucks or

952

: 00:48:37

something that's, you know, had a

pretty big stumble, but ultimately, you

953

: 00:48:41

know, that's a pretty Good business.

954

: 00:48:43

I like businesses like Shopify.

955

: 00:48:44

I think Shopify is an incredible business.

956

: 00:48:46

I mean, I'd be out there buying all those

kinds of names, knowing that the way to

957

: 00:48:50

own these things is to buy a little bit

now and just, you just don't even worry.

958

: 00:48:54

That's like a 10 year position,

10 year plus position and you just

959

: 00:48:58

let them run and let the underlying

business kind of figure itself out.

960

: 00:49:01

But I would like, you know, really

good businesses after they stumble.

961

: 00:49:03

I don't, I'm not so much of a speculator

that I'd go in and, you know, I

962

: 00:49:08

wouldn't be trying to like, Time oil

or time coal or anything like that.

963

: 00:49:13

Mike Philbrick: it's a little bit

more opportune quality type stuff, a

964

: 00:49:17

little bit more in the direction of,

965

: 00:49:19

Tobias Carlisle: Probably Buffett.

966

: 00:49:20

Yeah.

967

: 00:49:20

Episode 202

17th May 2024

Value Investing is BACK - with Tobias Carlisle

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