Chit Chat Stocks - BONUS: Quantitative and Quality Investing with Tobias Carlisle

Episode Date: February 23, 2022

Tobias Carlisle runs a deep-value firm called Acquirers Funds. He has a number of books about deep-value investing and Tobias hosts The Acquirers Podcast. Listen in to hear Tobias describe how he got into investing and how he got to where he is now. Enjoy the show! We will conduct Bonus Interviews periodically whenever Brett and Ryan are eager to speak with a certain guest but know that the discussion wouldn't fit our traditional show format. Want more of Tobias Carlisle? Follow him on Twitter here: https://twitter.com/Greenbackd?s=20&t=hl4CYo1_XReTZZzCEBjCDQ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Why Investing? | (2:30) Quantitative vs. Qualitative | (25:36) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today, we have a bonus interview with Tobias Carlyle. If you listen to Value After Hours, you may recognize his voice. You may know who he is. We have been listening to that show for a really long time, and so we're excited to get him on. It's kind of a broad ranging discussion. There wasn't any one particular focus, but did you have any highlights, I guess, from the interview? Yeah, I'm excited about his new book that's coming out. I don't know if it's coming out. He said it might take him a few years, but he's working on it. It's a comprehensive comparison between business history, what makes a business durable, what makes a business leader durable, or an investor, and then comparing that to war generals, conquerors, all that type of

stuff, historical stuff as well. That's going to be a fun book. He teased it a bit, which was fun. So that was my favorite part. And when we started the interview, I got the ETFs wrong. It's Deep and Zig are the two ETFs that he manages. And it's D-E-P and then Z-I-G. And if you want to check out his stuff, go to acquiresfunds.com. We'll try to link it in the show notes. Without further ado, let's get to the interview.

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation.

Now, please enjoy this episode. Okay. Today we are welcomed by Tobias Carlyle. He's the principal of Acquirers Funds and he's the manager of the Deep and Seek ETFs. I think I'm getting that right. Is that correct? Deep and Zig. Z-I-G. Like Zig when the market zags. Oh, okay. And Deep. So Zig is mid and large cap value stocks in the US and Deep is small and micro value stocks in the US. Okay. And Brett and I have been long-time listeners to Value After Hours. So we're familiar with hearing your voice, but this is the first

time talking with you. So I wanted to start kind of just way back when, I guess, with your career. I know you had a background in law, if I'm not mistaken. So why did you end up choosing investing as a career path? I wanted to be an investor. I didn't know what I wanted to do when I was university i'm australian at uni as we call it um didn't know what i wanted to do i grew up in a little country town so like i thought that you could be an accountant a doctor or what else was there a vet maybe like the professional jobs that you could get maybe a lawyer as well and i didn't want to deal with blood so vet and medicine were out there were lots of vets in my country town because it was like big beef cattle country and accounting looked really boring, which is kind

of funny because that's basically what I do all the time now. And yeah, law looked like the best job of all of them. So when I went to uni, then I went into law school. And so I started practicing law and I got into a big firm in Australia. But before that, yeah, when I was at uni, a friend of mine gave me uh he said you know the richest man in the world is warren buffett and um he's he runs an insurance company i thought well that's a really boring job too and then he gave me the like the 1934 edition of security analysis which is you know secure even like the sixth edition is better because it's got those inserts at the start where you can kind of read a little story it's unreadable if you're young it's it's unreadable it's unreadable even now like i

look at it now and i'm like how did how did anybody get through this but it's because it's like valuing railway bonds you know like when do you ever need to value a railway bond and so i i the one thing that did help though is i bought that roger lowenstein book um the making of the american capitalist and i read it and i thought there's things that i really like in here and that's one of them is you get to sit down and do some thinking and do some research on businesses. And I was kind of interested in businesses. I just like that, you know, like the contraption idea of you build it

and then it just keeps on going after you build it. And then I sort of read what value investing was, understanding it from that Roger Lowenstein book. And it just appealed to me, like it just made sense that you can calculate these things. You can find them trading at a discount to it. and if you're careful about the balance sheet and the quality of the business then over time it'll work and so that was sort of the appeal it took me a long time to transition over because I

was with law you're working very long hours and I got transferred to the states went back to Australia to work for a company that I had listed as their internal council as general council and that eventually got bought out and I had known a guy who invested in this company while it was listed on the stock exchange and he was a professional investor who managed to fund just like he was a it was him and his compliance officer in a little office and I said you know you're missing out on some of the stuff that you could do which I can show you as a lawyer and you teach me the other stuff. And so we did that for about two years

and then the fund got wound up. And so my wife's from Los Angeles. So we came back here. And so that's how I got to the States and that's how I'm a value investor. All right. And you've written a lot of books. I don't know the exact number.

I think I've read the one that's Concentrated Compounding. I should have the name, but if that's- Concentrated Investing. Concentrated Investing. I've read that one. But you said a few times that you're working on a new book right now.

So what is the kind of topic of that book and what inspired that to happen? So when I moved to the States, because my degrees are all Australian, nobody recognizes the university that I went to. It's a good university in Australia for what it's worth, but it's like just not recognized here at all. And it's just impossible to raise money if you're not. I would have loved to have just, I'd have been happy to be an analyst in somebody else's firm too,

but I couldn't get one of those jobs either. So I had this little blog called Greenback where I was just writing about net-nets and activist sort of situations. And I knew Wes Gray through that website. And so I just talked about wanting to put some more rigor into the investment process, like what has traditionally generated returns. And so we found every bit of industry and academic research we could find on fundamental investment. And the result of that was a book called Quadricity of Value.

And in the process of doing it, there are some weird things that happen when things get very cheap. The world gets turned upside down a little bit. So in net-nets, for example, a dividend-paying net-net tends to perform less well than one that doesn't pay dividends. a profitable net net tends to do less well than an unprofitable net net doesn't really make any sense but deep value is sort of this topsy-turvy world and that that sort of phenomenon exists as you go up through so i use the acquirer's multiple which is like a the way that activists and private equity investors approach a business looking at what sort of operating income is throwing off and then what are you paying for the the entirety of it which is the enterprise value which is the

market cap plus the debt and any sort of minority interests and anything else in there and that performs quite well the cheaper the better typically and so the result of that bit of research was a book called deep value that came out in 2014 and then um i wrote a book called concentrated investing because i got to partner with some guys who are investors and they had contact they had uh they had met and they interviewed charlie munger and a few other of these big investors christian cm he's like the the nordic warren buffett and um uh lou simpson who ran geico's book and i just turned those interviews into into a book about what it takes to sort of concentrate your portfolio and whatever what you should be doing when you're thinking

about concentration and then i wrote a book called the acquirer's multiple which is just a very simple sort of distillation of all of those other books you can read it in two hours and it's written to a fifth grade reading level and it sort of tries to be jargon free or to explain the jargon when I use it. I wrote, it came out in about 2017. And the reason for that was just to explain what I do in the funds so people can understand the sort of the approach to distinguish it from like a franchise value or the much growthier forms of value that are more popular today. So I have this sort of pretty conservative traditional method of valuing stuff and, you know, it hasn't hadn't worked particularly well over the recent years until sort of the last few years,

it seems to have come back to life. Through all of this, I've sort of learned a lot managing money and, you know, being in business. And one of the things that I realized was that the key to sort of making it in this business and the key for any business that you invest in is you just want it to survive from one cycle to the next. That really is the key. Like you're going to have good cycles and bad cycles and you need to be able to survive the bad cycles um so when you're when when it's running with you you'll you'll do much better so the book is really about surviving the bad cycles and what um what it takes and people who've been able to do it but i do it as sort of that you know charlie munger quoting carl jacoby always says invert

so i i've done it in this inverted way where i've looked at who are these people who've been spectacularly successful and then had this gigantic collapse. And what was it that sort of – and often what I'm interested in is the thing about them that made them successful is often the same thing that led to their collapse. You know, it's just because they're hyper-aggressive or, you know, they get lucky or lots of other little things. They've got a lot of leverage or they've got something that's got

a lot of operating leverage. you know so a lot of the commodities type guys um they run up hugely and then they run back down and they've got leverage in there and it just blows them up so that's sort of the idea of the book it's it's written looking at historical figures rather than investors uh just because i think it's sort of more interesting to look at a broader range of things that's that's the idea basically it's it's a long way from being finished it's a it's it's a lot of work is there any characters can you choose any characters in there or people yeah so what i'm sort of using i'm using so i use um you know alexander the great is sort of

regarded as the greatest conqueror of all time but you know alexander the great got a little bit lucky because his dad was philip of macedon and he did a lot of the heavy lifting for alexander the great and then alexander the great died and his empire was ripped to pieces and his kids were all murdered so that's i don't know if you regard him as a particularly successful we're successful at his job whereas his dad sort of handed on an empire and the means to take over the whole world to his son so i think that his dad who no one ever no one knows who philip of macedon was but he did a much better job and so i found lots of examples of that of um conquerors and their fathers or conquerors and their children who've managed to hand it on and uh and ones who've

blown up. So Hannibal is another one. We don't even know what Carthage is these days. I certainly didn't even know what it was until I was writing this book, but Carthage ruled the Western Mediterranean for like a thousand years. And then Rome came along and they clashed with Rome and Carthage is now gone. But the Carthaginian, I don't know how you say it, General Hannibal was the one who sort of fought them all, pushed them all the way back, made it all the way to the gates of rome and he just couldn't stop and he uh he was destroyed as a result and there are these so sun tzu um is this uh author or general who wrote philosopher wrote this book the art of war that came out in uh 300 bc something like that around about the same time that a lot of this

stuff was happening in the mediterranean he gives all these rules and it's funny if these generals had followed these rules, they might have had a better, they might have had more success doing what they're doing. And I look at what Buffett does and I think that there's a lot of what Buffett does in what Sun Tzu says. And it's funny, like I had this idea of Sun Tzu. There's this edition of Sun Tzu, the Giles edition of Sun Tzu that came out in like 1910.

It opens with this story of Sun Tzu telling some king to get his two concubines to cut each other's heads off. It's this very weird story and it coloured everybody's opinion of what Sun Tzu was really about. And the funny thing is that that story is not part of Sun Tzu's Art of War. That was just added in there by this bloke Giles in 1910. Later editions of it are much better and they get this idea

that it comes from this Taoist worldview where the Taoists have this idea that you have to become in sync with reality. You have to become quite objective about what is happening around you. And then once you sync up with reality, you're in the state of what they call wu-wei, which is basically effortless action. And you can think about it like if you go to the beach and the tide's running one way, if you swim with the tide,

you're going to go really far, really fast. If you're swimming against the tide, you're working really hard and you're not going to go anywhere. And so Sun Tzu actually uses these ideas in there. And then there's other stuff as well. You need to be – the key thing is to become harmonious with – that means being a good ruler, looking after your subjects and not sort of encouraging people to attack you.

And I use this idea all the time. And I look at cigarette companies. That's not a particularly harmonious thing to do, and they're often attacked. I think that things like Facebook, that might be the new sort of that social media definitely has a negative impact on people, and that might be a new avenue of attack. So it's just trying to take these abstract philosophical ideas

that have been applied where there's conflict and where there's competition and seeing if we can use them in a modern context. That's what the book is. It's heavy going and I'm trying to make it fun. So that's a bit of a challenge, but I think the stories are interesting and I think the ideas are very powerful. Interesting. So pivoting away from the books, I guess, towards the funds,

you said, I don't know if you said this before we started hitting record, but you set them up in 2019, I think. why uh and if we ask anything you can't answer just let us know but why did you choose to go with an etf over a private partnership yeah there's a few different reasons um the the structures that i have used in the past and considered limited partnership mutual fund and managed accounts or an etf the the disadvantage of an etf to the manager is that they're expensive to set up and they're expensive to operate so it's hard for a small businessman which is all I am, just some small business guy running one of these things to manage them.

On the upside, they have this incredible tax efficiency that the other three don't have. What that means is that when I trade inside the ETF, we use this create-redeem function in the backend that nobody who's an investor in them ever knows about. What it allows us to do is to get rid of the capital gains on positions that we sell. So one of the problems that you have when you own, for example, a mutual fund, your manager might have owned Apple since 2002 and decided this year that they want to sell it. And then you get your pro rata share of that capital gains put to you when they make that sale. And you have to report that and pay capital gains tax on that, even though you may not have been a beneficiary of the run-up. That's true also in a managed account and in a limited partnership.

This doesn't happen in an ETF. So that's the main thing. There's also just the liquidity of it. It's like a stock. If you decide that you don't want to be in there anymore, you just sell it out on the day and you're completely done. But it has the advantage that you can just put it into your account. There's also some technical stuff in the background that's good for managers, I think. So mine's an active ETF. It's managed like anything else. But in the backend, what happens is when I decide to buy or sell something, it's not dependent on what happens with the flows. So if you have a mutual fund, you get flows at the end of the day and you have to decide

where to allocate those flows. What happens is I have a trade desk sub-advisor and they manage the portfolio that I set. So when the flows come in, they just go pro rata over my existing holdings rather than having to decide and vice versa when things come out rather than having to decide, do I want to sell this or do I want to buy this? It's always, the portfolio is always constructed to the, it's always where I want it to be. So even if flows come in, it doesn't impact anything. If flows go out, it doesn't impact the shape of the portfolio.

And that's really useful. If you're a manager and you've dealt with flows, it's one of the things that makes life a lot simpler and easier. So the tax is huge for investors. The liquidity is huge for investors. and there's stuff in the back end that makes it easier. The only downside is it's expensive to operate. Okay.

Yeah, I guess with the tax benefit, then it allows you to kind of be more active then. Am I thinking about that right? Yeah, that's right. So you can leak out short-term capital gains through this create redeem function and not pay them. I try not to be too active, But one of the things about the style of investment that I have tends to be sometimes the businesses aren't the best.

I'm just buying them because they are at a big discount. And if they run up, then I will sell them. If I get the value that I'm looking for, I punch out of them. Having said that, the portfolio is not all like that. Some of the portfolio is stuff that I do think will perform. It just takes a long time for it to really, for the market to recognize the value. And I think some of these things are massively discounted to where the market thinks that they're worth. And it's just that, let's go back to Facebook for an example.

So Facebook at the moment, there's only two real outcomes with Facebook at the moment. It's either if it can sustain what it has done in the past, and that's a big if, that's the only if really. But if it can sustain what it's done in the past, it's massively, massively undervalued. And so the price is wrong right now, one way or the other. The other possibility is the price is an accurate reflection of what's going to happen in the future to the fundamentals of that business, that they are going to deteriorate to the point where the price is right. But it just means that either the fundamentals as they exist in the past don't accurately reflect what will happen in the future or the price is wrong. And so there's other considerations that go into it. But I think, for example, I don't own Facebook and I may end up buying in the future or I may not.

I don't know yet, but I think it's a good example of if you buy Facebook and it works, let's assume that it does continue to look like it did in the past, it will take a long time for the price to catch up with what it's worth. And then you've got a growing value that should grow pretty rapidly or should throw off a lot of cash. So in that instance, there'd be no reason to sell that quickly. So that's sort of how some of the positions in there are going to be like that, where really it's going to take a long time for the value to be realized and for there to be any need to sell. How many positions do you tend to hold in the funds?

I like 30. There's 30 in Zig. Deep has more because they tend to be, Deep is small and micro. They tend to be smaller companies and much more illiquid. and they don't have professional managers and they tend to have weaker balance sheets and they're just not as, you know, they've got one line of business or one product. So they just need to be smaller positions for the, you know,

for my approach, which is largely systematic quantitative just because I think that there's always a risk for these little ones that there's some, you know, undiscovered fraud or they're just a little bit weaker. So I'm just, I just sized them smaller, but 30 in Zig and 30 is what I would run in a, in a, in an ordinary portfolio. Okay. And Deep is the one that, is that partner with Roundhill in a way? Yeah. Yeah. Okay. That's right. So Deep, what happened with Deep? So I started Zig myself. I launched that in 2005, in 2019. Deep was, it used to be DVP. It was the Deep Value portfolio,

did the deep value etf and uh the the firm that was running it didn't want to run it anymore and so we took it over and transitioned it from a large cap value fund to a small and micro value fund and round hill um you know they've got they do different things they did lots of different thematic type etfs and they just wanted exposure to this and i i wanted exposure to to small and micro and want to manage so we partner they're great partners happy to happy to be with those guys all right on uh i want to talk about value after hours because as i mentioned earlier brett and i are avid i guess brett's more of a viewer i'm more of a listener i uh watching us on the roku uh each week every week yeah yeah i got the tv the smart tv not live usually uh but recorded

sometime once a week so yeah i mean i'm usually podcast format but i guess what was the inspiration there. Why, why'd you end up starting that, uh, that show? I had, I had another, I had a podcast, the Aquarius podcast, where I was interviewing other managers because I'm interested in what other people are doing too. And that's been, that was a great process because it's always good to hear what somebody else does. And then I'd steal the best ideas and the best process ideas and try to build them into my own process. Um, but I wanted this less formal, you know, when, when the three of us get together and which we did in Omaha and various other places and talk like any managers get together we talk shop we talk positions you know gossip about what's going

on in the market and uh it's fun and I always wanted to sit over somebody else's shoulder you know when I was younger or when I was outside I wanted to hear what other people talked about and I just thought it'd be fun to sort of share what those real conversations sounded like i think we're probably you know a little bit more restrained than we might be in private but not much like it's pretty i think we're you know if we get upset if we get upset with each other we get upset with each other a lot yeah yeah i can say what uh has it have you felt any benefits from it in terms of like your actual process like has it helped you with your business side?

Yeah, definitely having a podcast out there means that people, at least if you're an investor in the funds, you know what I'm thinking week to week, month to month, year to year. And you can see how I'm thinking when the market's low, how I'm thinking when the market's high. And I think that that is useful if you're an investor to know what's happening. because it's just it's hard to compliance is tough to get anything through it's expensive

for me to get something through compliance and then you know it's all it's hedged and you've got to be very careful about the way that you say things in relation to funds on value after hours because i'm not promoting the funds there's no association between the podcast and the funds i can say whatever i want and so i'm open and i think that you know for better or for worse what you're getting is the way that i actually think about the world and i think that that people at least it's authentic you know whether you agree or disagree at least you know where i stand on a lot of issues right okay should we hit an ad break brett before we yeah i think that's right it'll be a transition and then we'll talk about portfolio you know more portfolio management

stuff okay sounds good let's take a quick break this episode is brought to you by lakinta by windham here you are miles from home and ready to start your vacation good thing you're staying at La Quinta by Wyndham. They have free high-speed Wi-Fi to stream all your favorite movies. And in the morning, get fresh waffles with their free bright side breakfast. Or squeeze in a workout at their fitness center. Either way, you're ready to conquer the day. Tonight, La Quinta.

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All blocked thanks to advanced security included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Okay, welcome back in. Brett, I've been talking a lot, so why don't you ask the questions you have? Yeah. So you talk a lot about quantitative value overlaying it with a quality business. That's kind of the two main factors that you talk about. Now, you do talk about sometimes it might be a deep value. It might be something that's a net-net. But overall, you're kind of looking for value and quality. The broad question here is what makes a quality business? yeah so the quality analysis so when we wrote quantitative value that was 2012 and i don't know that quality was really i certainly didn't know about quality as a factor then i think that

aq i wrote it's qmj quality minus junk paper and i think that came out in 2013 so what we had defined as quantitative value has subsequently been defined as quality metrics but i sort of think it's a silly and i've said this you know jim i was on stage with jim o'shaughnessy a few years ago at a conference in new york and we were talking about a little bit there i i i don't i mean i understand why they are separated out as different factors from the perspective of a quant investor that does make sense like value if you're defining value is like cheap on a multiple and uh quality is like other analysis of the fundamental of the financial statements then i understand why they're separated but i don't separate them in my own mind and i don't think

they're distinct i think you you can't have value without the quality you know that's i don't think there are many value investors who disagree with that to be fair you know and all that i would say so that there are different aspects of quality one is the quality of the business like to what extent does the revenue translate into cash flow for the business that's sort of the primary analysis of the business from my perspective because there we talked about offline we were talking about Enron earlier you know Enron was a classic example of one that you could have found by using that kind of analysis if the revenue is not turning into cash flow which it wasn't in Enron's case then something else is going on something weird is happening or it's just not

a very good business, which often is more likely the case, but it's worth looking at. And so we're looking at from the perspective of the business and then how big are the margins? Bigger margins are better. It shows that they can control what they pay on one side and what they earn on the other side. So big margins are an indicator of a high quality company. And then you've got other analysis, the sort of downside analysis. When you're looking at the balance sheet, to the extent that you can, you want more cash than debt, or at least a very liquid balance sheet or not very much debt in relation to the the cash flow generation then like the the the product of all of that analysis is does it generate does the whole

business generate a very good return on its invested capital or its assets or its capital or its equity like whatever metric you prefer because ultimately that the businesses that generate the most money on the money invested in them are the better businesses There's no question about that. The question is always, is that sustainable? And you can go and run a screen at any given time and you can see all the businesses that are generating lots of returns on invested capital.

And there'll be a hodgepodge of stuff that's in there and it'll be stuff that some of it's, you know, the energy companies are going to have very good returns on invested capital probably over the next few years. They're probably going to look like really good businesses. But we all know that they can't control their costs and they can't control what they sell it for either. So their costs will go up and at some point oil will come back down and they'll look like vastly different businesses.

What we want to find is a business that actually can control what it earns and control what it pays. And then the symptom of that is a high return on invested capital. And so that's sort of the way that I think about it because the main argument that I have made is that return on invested capital tends to be highly mean reverting. And so you need to find other things that protect you against that mean reversion. That's a great overview. For a lot of the listeners here, they're probably retail investors and they have no experience with shorting. And to be honest, for a lot of investors, shorting is a giant mystery.

As we've seen, it can turn into a conspiracy theory too over the last few years. But you have experience with shorting. What do you think the benefits of that are and the downsides to it? Because I know you've kind of changed your philosophy as we were talking about offline. Well, I haven't so much changed the philosophy, but there've been some changes to the regulatory regime for shorting in ETFs that just make it,

it just makes it too hard for me. And I, you know, part of that, you know, writing that book and talking about harmony and those sort of things, I just realized I didn't want to be out in front of, you know, to promote the funds. I've done little hits to TV and to Yahoo Finance and other things like that.

And I'm out there shorting somebody's business. and I just don't like it hurts people's feelings when you short their business and I don't want to be doing that anymore I'd much rather be on the other side talking about the long stuff however there are some very big benefits to shorting and let's do the risks first though the risks are that you blow up completely because you can get short something that AMC or GameStop we saw what that did to Melvin Capital they were too short too big and that stuff, the short went against them. The short is like infinite leverage and you run until your prime broker says you've got a margin call and you're out and then you don't get to play

anymore. And I just want to keep on doing this for as long as I possibly can. But I already had, so one of the things that if you're short, you don't want to be short the most heavily shorted stocks. That's pretty well established for short sellers. Stay away from the stuff it's heavily shorted. And then you don't want to be short anything that's got good fundamentals going up really, really quickly, even if they are really expensive. Because David Einhorn has this great line where he says, what's the difference between a company that's two times overvalued and three times overvalued? And the answer is there's nothing. There's no difference because two times overvalued is as silly as three times overvalued or 10 times overvalued or 20 times

overvalued. And if you're short on the basis of valuation, you're going to be on the wrong side So the stuff that I used to like to short, very junky balance sheets, negative cash flow, had a need for capital in the near future and was going to either have to raise some debt or sell some equity, both of which are sort of catalytic events to collapse the stock price. And then you're looking for things that don't have any momentum in them because if the people who are speculating in this stuff need the action, they want the price action. and if this so i looked for stocks that basically weren't up over 12 months and had all the other junky things in them and then i had reasonable success shorting it and i was shorted very small too so like never more than one percent of the book i don't do that anymore but uh you know it's fun to do while i was doing the advantage is um you can generate alpha in the shorts for the most part that that it does it does pretty well um it also offers this protection if the market goes down

um the shorts that sort of highly levered junky short stuff becomes toxic waste and people sell out of as fast as they possibly can and so you're protected you know more than the weighting so it might be a 30 percent weighting in the book but you might be protected like 40 or 50 percent of your long book is protected because the shorts go down so much faster than everything else. So that's the, that's the theory. As I said, I don't do it anymore because it's just, it's just it's bad juju. It's bad karma. Yeah. It's been a wild world and in short in the last few years.

And more risky than it's been yet. So like GameStop was cheap at one point. GameStop was like in my screens as a deep value stock. So I would never have been shorted, but AMC, like that's another tough one. And it's potential that, you know, I wasn't, but you could have been short something like AMC and other companies that could be short. And then if the meme stock crowd decided that they want to own it, you know,

do you remember for a while there, they were buying stuff that had anything that had a Q at the end of its name, like Hertz because it had a Q, like had this massive run up. I tried to start a few of those, a few grassroots Qs for our holdings. It's just terrifying, right?

I was like, I hope they don't get a hold of Altria or something like that. yeah ultra ultra is ultra is looking cheapish isn't it yeah it's it always seems cheap i feel like it always gets what's the dividend yield there like nine percent something like that yeah i haven't looked at it a little bit but i think uh well it's done really well in spite of and really the same as it's done like i saw his tweet the other day or maybe it was today that during the dot-com crash uh the cigarette companies or tobacco companies were up a hundred percent not relative like they were actually up total return 100 percent and altria has started

on that trajectory it's up quite a bit so i think the yield is down um to like seven percent but i mean that's still that's that's a lot a lot of deep value is just buying those companies that have got some ick on them like that so you know altria and facebook and you know the vice type stocks yeah do you uh do you still use screeners like actively yeah i like screening um i know that a lot of people are very anti-screening but i think that it's a it's a good way of getting some um structure around what you do and i do think that the screen you know the reason screening became very unpopular for a while there is because the fundamental stuff just wasn't working fundamental analysis wasn't working so in 99 2000 the same thing happened where basically the better

something was on a fundamental basis the worst it performed in the worst it performed in the market and in 2019 and 2020 the same thing happened again it's just the market goes through these periodic paroxysms of speculation and when that happens you know fundamental analysis and screening doesn't work that well but for the most part it works fine you want to buy something cheap people like to go then beyond that analysis and find reasons to buy stuff and i sort of think i'll just buy it small and and you i can go and find any number of analyst write-ups on the stuff that i own that gives me warm fuzzy feelings for owning the stuff that i own um but i don't know that it adds anything i think that screening kind of gets you 99 of the way there and then beyond that it's

there's luck and randomness in it. Yeah. Right. That makes sense. Here's a fun question. You guys have been debating this, I think, on Value After Hours a lot, you, Jake, and Bill, and is that the reversion of the mean for average corporate profit margins? And I think from my perspective, maybe as someone that's younger, if you didn't look at history at all, you would look at today and you would say all the fastest growing companies are higher profit margins. So you would think that it would expand. But if you look at history, it would tell you it would revert back to, I forget what the exact number is, 6% or 9%. I can't remember exactly what it is. So what are your thoughts on that? And does that factor into your process at all? Yeah. I think that mean

reversion is a very powerful phenomenon that really does. Mean reversion is what drives up the prices of undervalued companies and drives down the prices of overvalued companies. And it works on businesses and economies as well, where economies that are going through bad periods tend to do better subsequently. Economies that are going through good periods tend to do worse subsequently. Profit margins is one of the most, according to Jeremy Grantham, John Hussman, and Warren Buffett, it's one of the most mean reverting series in finance. And the long run average has been about 6%. We've been way above that for a very long extended period of time. Now, the reasons why we're just speculating about the reasons why at the moment could be too low interest rates.

There's a lot of money being printed consistently. There's 40% of all dollars outstanding have been printed in the last few years. The Federal Reserve has been around since 1913. 1913 to 2013, that was half of all dollars printed. and then half of all dollars in existence have been printed since then. And that has had an impact on stock prices and on profit margins. There's all this recursive stuff that happens where VC funds invest into companies that sell advertising and a lot of the advertising

is paid for by other companies that are invested in by VC funds. Now, there's no iron law that it has to go back to 6%. It just has tended to do that historically because when companies earn super normal profits, other companies come in and try to compete for those super normal profits. And that competition, for whatever reason, seems to drive profit margins back to 6%. Having said that, it hasn't happened for a really long time. So it's possible we live in a brand new world, but I'm just always very wary of that, it's different this time kind of argument. I think probably we've got to go down a little bit on the other side.

And then I think if you see that happen, then companies are going to look more expensive and they will tend to trade down and it sort of becomes a self-reinforcing cycle. And we may already be in it now. The bear markets tend to be characterized by multiple rallies that are ultimately sold to lower lows. And last time it happened, there were 18 or 19 of these rallies that were sold to lower lows. And I think that could be what's happening now. And that's sort of how the mean reversion in profit margins comes about.

Yeah. As a recording, it seems like we just hit a lower low. It's not very, a lower low and we had a higher or a lower high, excuse me, like a week ago. so you know it's that's kind of reading the tea leaves but um that's not what's been happening over the last few years yeah much to it much 2020 it was like a flash crash i think didn't feel like a flash crash at the time felt felt like the real thing the real bear markets go on for 18 months and they they and you just feel dumb because everything you buy goes down you know you do all this work find something that's cheap buy it goes down and um and you have to keep on rolling

the portfolio too, because there's other stuff that gets cheaper than the things that you bought. So you sell stuff for lower than you bought it, even though it's still undervalued. It's not nice. And no one's seen one for a really long time. I was very lucky that I started working in March 2000, so April 2000, saw the whole crack. And 2007 was really when I had enough money for the first time to invest in the stock market. So I was all in at the very top and waxed like 60% of it by the March, 2009 bottom. So I've got a bit of scar tissue on me and I've seen two of them before. Was that your first, so 2000 was like your first period in investing? I was just working. Yeah, I was working. I just started working and I was working

in corporate advisory. I thought I was going to do VC type investing, VC law, and that all dried up very quickly. And it turned into this like the other side, where you're liquidating and you're pulling apart putting things through bankruptcy and you know defending against activists and all that sort of stuff what's been the most enjoyable period in the market over the time that you've been in for me it was um uh like march 2009 until about june 2010 that was that was really fun i hope we get to see one of those again value just ripped it was like 250 i think there's a good chance at some well at some point at some point i mean it happens every so often ever so often i think we'll get a big bust i mean this is just speculating i don't

i don't i got no idea what's going to happen but i think what happens here is we we get lower lows for 18 months and then value gets a good rip out of the bottom and it'll be a nice 18 months or two years in about in about six to twelve months it's been what about a a year now in like a tech drawdown am i kind of yeah i think it's x-fang x-fang i think the arc complex topped out february 12 2021 so it's just past a year for that so arc is like a representative of all the stuff that's like ARK style companies, they have remarkably similar charts. They all look like ARK itself. When did someone start at an inverse ARK ETF?

Do you know when that started? It's recent. It's only the last few months. Okay. I think we might be coming up close on time here. So I have one more question and I think Brett might as well. But for me, a wrap-up question that we've tried to ask investors before for a piece of advice.

So for anyone that's entering the world of investing or considering a career in investing, what advice do you have for them? Yeah, I always say you need to open your own brokerage account, invest your own money, do some analysis, read whatever, read lots of different books about investing and find a style that suits your personality. And then when you're thinking about entering

into a position, write down your reasons for doing that. and what would cause you to sell it, what would cause you to buy some more, get all of that sorted out before you put the position on. Because it's hard to remember two or three years down the track if you hold something for as long as that,

why you initially got into it. And you'll improve really rapidly over that period of time. You look back at your reasons for buying something and cringe at why you bought something. And that's a good process. That's how you learn. It accelerates the learning process.

And that's the hard thing about is investing. the hardest thing is that the it takes so long to figure out whether you're right or wrong on something and on the style so you need some record of what you're doing and then if you go to get a job you've got this written record of what you've been doing and you've been running a portfolio and you can talk about these things and you have ideas and all of that is the sort of stuff that that people are looking to hire for right just don't start with security analysis yeah that'll break your heart if you start there you'll never you'll never make you'll never make it. You're not going to make it. All right, Ryan, I don't have anything else if we want to wrap up.

Okay. For any listeners that want to, I guess, follow you, follow the portfolios, what's the best place to do that? So I have a website called acquirersmultiple.com, which has got some screens. We're building out the website. We're rebuilding it now. It hasn't been updated for a few years. So it's going to change rapidly over the next month or so. That's got screeners and it shows you how we think about investing and I have a podcast, as you mentioned, Value After Hours, where it's similar to this, just having a chat with two friends of mine. And I've written some books.

The books are all on Amazon if you search my name. And the fund, the funds are Zig and Deep. And if you go to the acquirersfunds.com or acquirersfund.com, you can see links out to those other funds and it describes the process and the theory behind it. And you can download all the files and you can see the holdings. If you go to acquirersfund.com, you can download all of the holdings that we have and see what style of fund

it is. And you're on Twitter, correct? And I'm on Twitter. I should have mentioned that greenback, G-R-E-E-N-B-A-C-K-D, funny spelling. Perfect. All right. Well, thank you for coming on the show. We want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or

recommendation. We are, however, general partners at Arch Capital. also clients may have positions in the securities discussed in this podcast. Thank you all for listening. We'll see you next time.