We Study Billionaires - The Investor’s Podcast Network - TIP 115 : Value Investing and Special Situations w/ Toby Carlisle (Investing Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 115 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:31 This is Preston Pish, and I'm your host, for The Investors Podcast, and as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. Today, we have one of our favorite guests back on the show, and that is Toby Carlisle. And we just wanted to do an episode to talk about current market conditions, everything that's going on in the world right now. We've got a new president-elect, all sorts of changes in the markets, and we think that it's probably wise just to talk about all these things that are going on. So I want to open up the show. And welcome to the show, Toby.

Starting point is 00:01:04 Always a pleasure to have you back on. Thanks. Always a pleasure to be here. All right. So I want to open up the show with this idea that back in the 9th of March, 2009, the Dow Jones Industrial average closed at 6,500. And then this week in November, 2016, and we're recording this on the 23rd in November, the Dow has passed 19,000.

Starting point is 00:01:34 And when you think about going from 6,500 to 19,000 on the Dow, and we've only had one rise in interest rates, the Federal Reserve has only raised interest rates one time through that entire 300% gain. And then let's add this in there. the one time that they did raise the interest rates, they did it at 0.25%. So I'm starting to feel like I'm the crazy person in the room. Dig and I talk about it.

Starting point is 00:02:09 We've been talking about it for two years. And I'm starting to feel like I'm the person who is totally missing something here. What are your guys' comments? I mean, for me, I can't even wrap my head around this. I'm at that point where I'm like George Costanza in that Seinfeld episode where he just does the opposite of everything he thinks is going to work and it leads him to getting the really beautiful girlfriend and then he gets a job with George Steinbrenner. I'm like that. Whenever I think something, I just do the opposite and that seems to be working really well. Yeah, I really can't

Starting point is 00:02:40 make any sense of this. I feel like clearly we're not near the Japanese territory from 86 to 91, but I mean, at the beginning that on the middle of that, you were saying, oh, there's a P.E. 30 and then you're saying, wow, there's a P.E. of 50. It can't go any higher. And then it just still skyrocketed up to 100. I mean, I don't know how long this can go on, but it definitely has to end. And I think now we're talking about that before, but I remember a quote from Toby. And now I'm really putting him on the spot here, and we're talking about the valuation of the S&P 500. And we just said back then, Toby, I think it was probably a year ago, something like that. You said, well, I know I sound crazy, but if I had to come up with a fair valuation of SNP, it might be around 1,100 or

Starting point is 00:03:24 1200. And I got to tell you, ladies and gentlemen, we are far from 1,100 to 1,200 on the S&P 500. And I would still say, I don't know exactly where it is at the moment, but it's probably around that level. That's probably in a normalized interest rate environment too, which we're a very long way away from now. And the market has spent decades soaring above fair value. So valuation is not a great way of determining what the market's going to do anytime in the next two, three years in the short term, which is still like years and years, you know, it's sentiment or momentum or something else like that that drives it. Guys, let me run some of my logic past you here. So leading up to the election, we saw that

Starting point is 00:04:09 Donald Trump's numbers started to become more realistic like he was going to win. And when we saw that, we saw the market, literally it was, how many days in a row was it? Was it eight or nine days in a row that the market was down whenever it looked more probable that Donald Trump was going to win? Nine, I think. Yeah. It was nine days in a row of the market was down. It was a record that hadn't been reached in years. Well, he wins, and he makes this 30-second speech about increasing fiscal spending, and the markets absolutely go bananas.

Starting point is 00:04:46 they go nuts. Now, the thing that I find most surprising about all this is the idea that the bond market is having a massive explosion. You're seeing people jumping out of the bond market left and right. Bond prices are going to the floor. The yields are screaming higher because now that he's talking about this fiscal spending, everyone's like, oh, well, inflation's going to start coming in. So I guess this is me walking the dog on the logic here.

Starting point is 00:05:18 So just hear me out on this. So if people think inflation's going to go up and they're jumping out of the bond market and yields are going higher, why in the world would an expense of stock market go even higher as interest rates are going up? Help me understand what's going on here. It's not a mathematical equation, is it at all of that. sentiment. I'm not entirely sure that presidents have a huge influence on stock markets. I'm sure that policies do over the longer term, but I don't really think they do. I remember vividly that nine-day drawdown because it got to a point where we would ordinarily put on a hedge.

Starting point is 00:05:59 It was close. It wasn't quite there. And we were worried because it was the Friday before the Tuesday election. We weren't entirely, or maybe it was the Thursday before. We were worried that we were going to put on the hedge. We thought Clinton was likely to be elected because that's what the poll said and we thought the market was likely to recover when Clinton was elected. And so we thought we're going to be in this terrible position where we put on the hedge and we get turned upside down straight away. But we didn't have to make the decision because we weren't quite at that point yet, but we were thinking we're getting ready to do it. And then we'd recover it from that point. And I think that was our low for the year and recovered from that point and sort of started

Starting point is 00:06:33 getting away from the hedge. But on the night of the election when Trump came in, the market was off gigantically like 600, 800 points. And we thought we're fools for not putting the hedge run in time. Yeah, it was really a roller coaster ride. And the interesting thing was that clearly when all polls come in and the market were closed and it appears that Trump would win. The future market for S&P 500 just fell off a cliff. And it was almost looking like they could be halted because it were near a 5% drop.

Starting point is 00:07:04 And Niki at some point was minus 6%. And then when the market's open, and like everyone has apparently slept on it. It was like, yeah, let's just leave the market around flat anyway. It was just such a weird experience. And it just shows that what you said before, Toby, that there was a lot of psychology in it. Like, fundamentally it's probably not that big of a difference, at least not in the short term. That's not what we're seeing at all.

Starting point is 00:07:28 I looked this up recently today or yesterday. Earnings topped out at $107 for the S&P 500 as a whole, $107 in late, 2014 and earnings have fallen since late 2014 to $87 now. So they've come off $20, which is close to kind of 20%, which is a pretty big drop in S&P 500 earnings. And over that period, the market has actually advanced. The P on the market has got even higher. I'm at the point where the market is just impossible to forecast. And I'm kind of with Buffett in the sense that I can speculate about what's going to happen, but time that you spend trying to figure out what the it's going to do is sort of a little bit of wasted time. You could be doing things that you have,

Starting point is 00:08:13 not more control over, but, you know, I can look at individual stocks and I can see that they're cheap. There's a great quote, and I forget the exact quote and the provenance of it, but it's like the Portuguese biscuit maker doesn't worry about interest rates and the dollar and all of those sort of things. He just worries about selling more biscuits than the guy down the road. And I think that's kind of, you can kind of get, there are some businesses that they are, they are simple enough, you can value them. And when they're out, a huge discount to what you think is fair value, you can put them on. I think that works. So Toby, I love your optimism and how you're viewing this. And I totally agree with the

Starting point is 00:08:48 comment that you just made about trying to focus on what it is that you do know and which direction you can go with based on the conditions that you've been served. So when you say that there's decent companies out there, give some of the people in the audience an example of what you're talking about. This is a funny time to be talking about it because that furious rally that we've seen that started sort of just before the election and it continued on even today for us. I have seen all of the positions that I have in the portfolio and that I've been tracking for a long time. A lot of the discount has been juiced out of the whole thing. It's been kind of, it's great when you capture it.

Starting point is 00:09:28 But it's sort of, it's left the cupboard a little bit bareth and new positions. The thing that I was talking about last time was Humana, which has the takeover bid and they're going to court in a couple of of weeks. So that was, I forget exactly where that was trading, but that was 160 or 170. So it's way, it's over $200 now. It's $207. That was a very big position for us. We've had a lot of these merger arbitrage positions on that have sort of closed up. So the things that we're looking at now tend to be literally like off the run, just undervalued securities. So just to throw one out there that I like is Greenbriar, which is the tickers, GBX. They make rail cars and things like. like that, there's a lot of people who will tell you why rail cars are really ugly at the moment.

Starting point is 00:10:13 Partially, it's energy's getting hurt, so there's not as much energy being shipped. There's just a slowdown generally. So not as many rail cars are being made, and you can see it. A lot of the companies in the industry have gone the same way. We put on Greenbrier earlier in the year, and it's run up a lot over the course of the year, but it still continues to be one of the cheapest stocks in our portfolio, and it's cheap on almost every metric. The thing that I love about it is it's buying back stock.

Starting point is 00:10:40 It's got about a 7% buyback yield. And we've been buying the equity and we've been selling just out of the money, put options, a few sort of quarters out. We hold the equity because that's the most tax-efficient way of doing it and the equity's cheap. But we also are trying to, assuming that it's sort of a market that just traded sideways, which is what it has been for most of the year until more recently. In the event that it just trades sideways, if you're selling the options, you're at least generating a little bit of yield on those positions.

Starting point is 00:11:10 If the position moves against you, you're then automatically buying a little bit more equity, which is good behaviorally if you're a value investor. So that's one that I have liked all year and continue to like now. I think that it's not as interesting as it was six months ago. Ticket's GBX if anybody wants to look at it. And we talk about specifically about GBX or just catalyst in general, because that's one of the things that all value investors, and I guess all investors are really looking for,

Starting point is 00:11:36 because clearly you're buying into this equity, Toby, because you think that it's undervalued. Now, what you want to see as a catalyst for it to approach is intrinsic value. Greenbra is closer to being something that's just merely undervalued where it really is just going to be passage of time, improvement in the industry, and that can take a very long period of time. But the one thing that does stand out for me is that is the buyback. 7% is an unusually large buyback yield. And what that means is that if the stock falls a little bit, the company itself is in there buying its own shares back. And if it's undervalued, so buybacks typically are associated with value destruction because managers tend to buy more stock at the top of the market and less stock at the bottom of the market. But good managers buy the bulk of the stock back when the stock is undervalued.

Starting point is 00:12:24 Greenbriars undervalued in my estimation. And that buyback yield 7% is substantial. So that's one thing that can cause the price to move closer to the intrinsic value. At the same time, the intrinsic value is being improved. So that's one thing that I like. And the way that we're kind of generating a little bit more yield, we're generating our own catalyst in it, is by selling the put option. So if we're selling out of two or three quarters,

Starting point is 00:12:51 we're getting very substantial yields on it, sort of 15% profit. And then that sort of annualizes out to a number that's like 45 or 50%. And just to follow a question to this, because I'm really curious about the concept of opportunity cost here, because clearly it also depends on your conviction of this peg or any pick for that matter. But when do you think that, hmm, I hold onto the stock for X number of years? Now it seems to be what we call a falling knife that is probably not really going to materialize the value that I'm seeing. How do you identify, yes, this is, I need to get out of this stock, because it's not going to materialize. And when do you simply hold on and wait?

Starting point is 00:13:32 We have a valuation. So we have an idea about what we think it's worth. And that's updated every time they produce new numbers. So on a quarterly basis, we update our valuation. And we can see, because we have a system that's looking at all of these stocks and it's tracking all of them at the same time. So we can see if something, you know, the best case scenario is something stays undervalued for years and years and years.

Starting point is 00:13:55 So Humana was one of those stocks that it was undervalued for six years. it was one of the cheapest stocks in my portfolio. And every year, it was up like 15, 17, 20%, which is an ideal situation. It's just one of those stocks. Even though it was huge, it was kind of hated. Conversely, the worst type of situation is when you have a stock that's got a deteriorating valuation.

Starting point is 00:14:16 And we would try typically to avoid them unless it's very, very undervalued. And you can see some short to medium term event that's going to prevent that from happening. And so the sort of things that I would look for is, has an activist filed a 13D notice, which means that they've bought 5% of the stock and they want the company to buy back stock or they want the fire the managers or they want them to sell the company. That's the best way to generate return. Absent those things, it's not a nice place to be. At some stage, you have to say the valuation has deteriorated to the point where this might continue on. the discount is still substantial, but there are better opportunities that we can find. Because we find a valuation, valuation changes slowly, but there are other stocks getting

Starting point is 00:15:04 shocks and coming in and out. So at the start of this year, the cheapest stock in the screen, it was Hewlett-Packard, the hardware spin-out, HPQ. And that's been, it was one of those stocks that I've got no particular insight into HPQ, but the two things that we liked was the cheapest thing in the screen that was improving over the course of the year. the options in it again were sort of very rich so we could sell the options in it by the equity. And that's something that it's now sort of the fifth or sixth cheapest stock in the little universe.

Starting point is 00:15:33 And that's sort of what I like to see. It's sort of moving away. And it'll get to the point where it's sort of 15 or 30 or something like that in that universe. And we'll say, well, are there better cheaper opportunities for us? And that's a good time to kind of get out. I don't think that HPQ is a great business. But, you know, it's sort of at a massive discount of valuation. They have a huge buyback going on as well.

Starting point is 00:15:52 that's one of those things that at least management doing something on your behalf. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the

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Starting point is 00:20:25 elaborate on which type of skill set one would need to acquire to take advantage of special situations and how to obtain such a skill set? The best book on it, well, the best book that I have ever read is Greenblatt's yellow book, which is called You Can Be a Stock Market Genius. He goes through all of these scenarios and how you can find them. I know that it's a reasonably complicated book as a friend of mine who was very smart. I think this could be 10 years ago, maybe even longer than that.

Starting point is 00:20:52 He came to me and he said, there's this investment strategy and it's just super complicated. And the way that you make money is you just, you read these filings that nobody else would read, and that's kind of your advantage. I think that a lot of these things are complex, that first blush,

Starting point is 00:21:08 but once you sort of understand the mechanics of them, they are actually pretty simple. But getting through that first, there is a steep learning curve initially. I have an advantage because I've been an attorney and I did mergers and acquisitions for a long period of time. So I've drafted these documents and I understand the mechanics internally. Before I invested in them, I'd spent a decade kind of familiarizing myself with them. And I've seen some of the thought processes when directors are trying to fight off activists

Starting point is 00:21:37 or deciding to pay a dividend. And so I'm sometimes looking for those things where the special situation hasn't manifest yet. I haven't declared it, but I can see it sort of it's coming because the stock's so undervalued, but they've got the cash there to do something. And they're typically being good managers in the past. So that's a sort of long way of saying that I have an advantage of because I've been an attorney, but you don't need to have done that. Greenblatt's book is the best place to start.

Starting point is 00:22:03 So I'm really happy that we got to talk about special situations. Tobiasian can probably hear because one of the things that we talk a lot about here on the podcast that Warren Buffett and we have talked a lot about a lot of his newer investments is always sparks for a good discussion. And for one thing, I can't wait for the mastermind discussion that we'll soon have and we'll be talking about his latest picks, which is completely another ballgame. But let's actually talk about where he started because he actually started with a very different type of investing. And this is the special situations that we've been talking about. Because before he started Berksa Helloway, he actually had a very impressive record.

Starting point is 00:22:44 Because over 12 years, he recorded more than 29.5% in the stock market. Very impressive. And this was not in his successful investments in Coca-Cola, American Express, as he will later have with Berksa-Halloway. This was something completely different. So Toby, could you please tell us a story about one of Warren Buffett's special situations in his early career, and perhaps more importantly, what is it that he could see which other people couldn't? Buffett's investment strategy when he first came out was very like Benjamin Graham's, in the sense that he was looking for stocks that were undervalued on a balance sheet, and then he's looking for the more liquid part of the balance sheet, which is the cash of the inventory.

Starting point is 00:23:27 So he was trying to find these stocks that basically the earnings were so bad, that they had traded down below liquidation value. And sensibly, most people are frightened away by those sort of, you know, if you think something's in financial distress, if you think it's heading towards bankruptcy, the instinct is not to want to buy it. But you can train yourself to sort of start seeing those as opportunities if you're looking for that balance sheet value. So that's one of the first places that I look.

Starting point is 00:23:57 What does the balance sheet look like? And that was what Buffett was doing when he found this. company called Dempster. They made components for windmills, which is not a very sexy business, and they had built up a gigantic inventory of them, which they didn't seem to be able to sell. And so they had declining sales. And so the stock was sort of valued on the basis of the income statement, which is not uncommon. And the market seemed to have ignored what was on the balance sheet. So Buffett saw the balance sheet value, figured that he could come in and he could sell off the inventory. He didn't count on the fact it was really in distress. It was within days of bankruptcy.

Starting point is 00:24:39 And he had this fixer by the name of Harry Bottle. And he got Harry, that was the sort of first time that you meet Harry Bottle in any of the books about Buffett Bottle came in. And I think I heard recently he literally like drew a line in their warehouse. And he said, you just got to sell everything on the other side of this line. It's a fire sale. You just got to get it out now. Whatever price you can get just so they could raise the cash so they could survive. And then after a while, what they had done is they turned all of this pretty useless inventory into cash. And Buffett's a great investor. So he was able to sort of turn that into the business doesn't ever really get great, although the business did improve, but all of a sudden it's a liquid balance sheet.

Starting point is 00:25:18 It's got cash. It's the sort of thing that you would want to buy. And he did very well. So that was sort of a semi-activist type approach that he took looking at any kind of like partially liquidated with the help of Harry Bottle and he was in a control position, which is very different from the sort of the way that he invests now. But it's been a great investment strategy for lots of guys. So Greenblatt was doing exactly the same thing, probably not to the point where he was activist or where he was getting control. I'm not sure exactly what he did because sort of no one's really canvassed it. The book that made Greenblatt famous was the magic formula book, the blue book that he wrote. And I read that when it came out in 2006. And I didn't realize that he

Starting point is 00:25:59 had also written the yellow book. And I just read the blue book and I love the blue book. And then somehow I saw the yellow book and that was at the point that I realized that it was the same guy who'd written both books. Because the strategy is so different in the returns that Greenblatt puts in his blue book where he was sort of doing 40%. Greenblatt generated those returns as a special situations guy. The problem with it and the reason that everybody sort of moves on is that there's a finite amount of capital that you can invest in these type of situations. I think it's a lot. It's still like hundreds of millions to maybe a billion dollars, that sort of number. But it's not as scalable as the other stuff. Yeah. And Toby, I think it's really natural.

Starting point is 00:26:40 Like you hear about, call it 29% for Buffer or 40% for Greenblatt and you're thinking, I should do some of that too. And I find this great stock and it's trading well below book value. There must be some value here. Now, there's this difference, right? Because if you have to take $10,000, you're usually not able to take over the company. Like, you can't necessarily be the catalyst yourself. So if you are a small-time investor, is there any way that you can actually be an activist without actually being an activist but still get some of the same returns? The two things that you can do, you can follow an activist.

Starting point is 00:27:18 So this is one thing that I used to do. When I started writing my blog Greenbacked 2008, what I was looking for was something that was something that I would buy, I would try to buy outright, and I'd look forward deeply undervalued on a balance sheet basis, sort of sub-liquidation value. They all had really ugly businesses. And I'd tell people that I was buying these things and I'd describe the business for them and they were overcome with sort of disgust. You know, people used to leave these comments on the blog sort of trying to tell me, this is just crazy, you know, this sort of stuff that you're buying. It's very risky. I was sort of relying on the balance sheet value.

Starting point is 00:27:52 But the other thing that I was relying was that every single one of those positions had a 13D notice filed, which is the filing that the activist has to make. And I could go in and I could read their, they describe their strategy in those 13D notices. And if it made sense to me, I'd have the position. And it's extraordinary the number of times that either management listens to what the activists say. And so they sell the underperforming part or they pay some money out or they buy some stock back or they sell the entire company or the activists get on. board and they do the same thing. So that's called coat tail writing and that's one thing that Buffett used to do. Buffett used to ride on the coattails of other investors before he was sort of big enough to be the prime mover. The other way is rather than trying to get control, you're sort

Starting point is 00:28:37 of trying to, I call it synthetically recreate a catalyst for yourself and you do that with options. It's a little bit more sophisticated. I'm not pretending like you need a master's in finance or anything to do that, but you need a way, you need an unusual way of valuing the options. where you need an unusual way of valuing the equity, which is just to sort of work at what you think the company's worth. If the equity is at a big discount to what you think it's worth, and then at the same time, the options are very rich. Now, I do this valuation where I say,

Starting point is 00:29:07 if I sell this option here, which is the same as buying the equity, it's a little bit difficult to kind of visualize, but you just have to trust me that selling an option is like buying the equity. Your downside profile looks like you've bought the equity, because if the market goes against you, you get the stock put to you, own it long. So selling an option is like buying equity. You just have to remember that. But the upside is capped at the amount of premium that you get. So a lot of people say, why would you do that?

Starting point is 00:29:32 Why would you go and cap your upside? The reason is that you get all of your upside immediately. So if it's a $10 stock, say it's trading at $10, and I can sell the $9 option. And the $9 put expires, say it expires in March next year. So I've got about four months to run on that option. If I can get a dollar for that option, then I've actually, if the market goes against me, then I've only paid $8 for that stock because I've got a $9 put. Stock's at 10. It's a $9 put, and I've got a dollar for it. So if it moves against me, I have to pay $9, but I've already got that $1 in the door. So I've effectively paid $8 for that stock that's trading at $10. So the way that I think about it is I have a

Starting point is 00:30:21 a 20% discount before I have to buy that stock. The other way of thinking about the upside is I've got a dollar and I've effectively got to pay $8. So my dollar return on the $8 stock is 12.5%. It's $1 on the $8. And then I've only got to have that for four months. So if I annualize that number, it's getting up towards sort of 37, 38%. That's a good position to put on.

Starting point is 00:30:48 If you put on lots of positions like that and the, The company is undervalued. That's crucial because you want positions where you want to buy the stock. So if it goes against you when you buy the stock, you're sort of excited about the fact that you got a 20% cheaper than you otherwise would. If you're doing it with expensive stuff, then you don't want to buy the stock and so it doesn't really work. But you want to buy the stock.

Starting point is 00:31:09 So it's a way of getting into positions more cheaply. It's a way of generating return if it doesn't get put to you. I think it's just a great little kind of simple thing that individual investors can do. It is a little bit confronting the first time you sort of come across it. But there are lots of websites that will describe how to do it. Greenblatt will describe how to do it too in his book. Do you have any articles that you've written, Toby, that we can link to if people want to mimic that approach?

Starting point is 00:31:34 I haven't because it's my super secret strategy that I just told everybody how to do there. Of course, if you don't like the idea of selling the put and then you're sort of, you're getting long the equity. The other thing that you can do is buy a call that has a lot of time to run on a it. So, you know, you might, you might be able to find January 2019 calls. That's another interesting thing to do. So if you're worried about the stock, so we prefer to put on positions where it's very undervalued, but it's also very safe. We don't think that there's much downside in there. All right, Toby, fantastic information. One of the things that Stig and I wanted to do with you

Starting point is 00:32:09 is play a question from our audience and kind of get your feedback as you respond to one of the audience members. So we're going to play a question from Soham. And we really appreciate Soham for sending this question in. So here we go. Hi, Preston, today. Great show. Thank you for all the work that you do. My question is, what advice would you give to a recent college grad who wants to make a career at a value investing? What steps would you tell them? What books should you read? What courses should you take? Things to that nature. Wow, So Ham, great question. Toby, would you take the first hack of this one? There are two sort of ways of going about doing it. There's the classical way that if you get into Columbia

Starting point is 00:32:51 business school and you go to the value investing course taught by Bruce Greenwald, then you do very well in that course and then you come out and you'll find a job in a value investing hedge fund or a value shop. So that's one way of doing it. The universe of people who are going to be able to follow that path is very small because it's hard to get into Columbia or one of those sort of equivalent ivies.

Starting point is 00:33:13 So the other way of doing it is the way that I did it, which a lot of other guys have done. you need to be able to set up your own account and trade your own account in a value style. And one thing that I found was very effective is you write down in a diary or you write it down in a blog, which is kind of a public document. You can do it anonymously or you don't have to make it available to everybody. You write down why you're putting on your positions. Now, I advocate doing it publicly because if you do well enough after a period of time,

Starting point is 00:33:45 And people will start to be attracted to why you're putting this position on. You'll improve because you get feedback from lots of people. Some of it will be brutal. Some of it will be very helpful. And you'll improve very rapidly. For two reasons. One is that you have a record of why you did something. So if it goes wrong, you can find out what you were thinking at the time and why that

Starting point is 00:34:05 thinking was wrong. And the other thing is that you interact with the value community, which is big and it's great. and they're always on the lookout for new ideas and new kind of thinking. So that's a very effective way of doing it, running your own portfolio and writing about it publicly. If you don't want to be, you don't want to attach your name to it, just do it anonymously, just come up with a generic value name and just interact with other guys and you'll find that, you know, if you've got some talent, you'll develop a following.

Starting point is 00:34:35 In terms of the books to read, you can't go past the classics like security analysis, which is a really tough book to read, but it's excellent. You should also read The Intelligent Investor. You should read Joel Greenblatt's books, both of them, the yellow book and the blue book. So you can be a stock market genius as the yellow book, and the little book that beats the market is the blue book. I also love books like Jim O'Shauner sees what works on Wall Street, because you can go through and you can see what value metrics do.

Starting point is 00:35:03 Jim's a quant, so he writes about other things like Momentum, which are less interesting to value guys, but they definitely work. The other thing that I found this book recently, just because I hunt around for unusual stuff on Amazon, and I found this book on Special Situations by Maurice Schiller. And this is kind of a cool story. So Schiller was this guy in the 50s and 60s, and he wrote these series of books that have become, they're not famous, but they're sort of well known to value guys. Graham didn't really ever write about special situations.

Starting point is 00:35:34 He didn't write about it until his 1950 edition of his book, which might have been the third or fourth edition of security analysis. And the only reference to it is like this note buried on page 729 right at the very back of the book where he reproduces this article that he wrote where he describes what special situations are, which is basically that it's a corporate event, there's a fixed price that you're going to get paid at a known date in the future. And you can calculate your profit and you can calculate an annualized return for that profit. and the stock is undervalued. Those are the criteria for a special situation.

Starting point is 00:36:10 And so Graham just sort of refers to it. He writes a few pages and then he moves on. This guy, Maurice Schiller, actually dug into the thing. He wrote these five books, the most famous of which is fortunes in special situations in the stock market. So I was sort of, I was looking around for this book. Coincidentally, at the same time, I was contacted by an investor and author Tom Jacobs, who asked me to write the four word to the, these books are going to be re-reported. produce. So Tom tracked down this gentleman's children who are now, or maybe even grandchildren,

Starting point is 00:36:43 who are in their 80s. And he got the rights to these books and he's found all of this sort of fascinating biographical detail on the guy. And he's going to reproduce these books. The first one comes out next year and he's going to do it over the course of the year, produce five books. So I've written the four word. Chiller is like a Graham Greenblatt kind of figure. He's become unknown because the books have been out of print, but when they come back in is sort of the towering genius, we recognize once again. Those books are like all of these books reasonably difficult to, and some of the situations that he describes don't exist anymore, but if you read them, you'll understand the philosophy of special situations and tells you how to be sort of flexible

Starting point is 00:37:22 and what to look for in different things in the future. So that's something that I'm sort of, I'm personally involved in, and I recommend Schiller's books, the first one of which will come that sort of January 2017, and then the rest of them will emerge after that. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA

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Starting point is 00:40:50 This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. So Sohom, Stig and I are not going to provide any additional comments because we don't want to taint Toby's response in any way because that was such a fantastic response to your question.

Starting point is 00:41:12 So Toby, thank you for supplying that. Sohan, for providing your question to Asktheinvestors.com, we're going to give you a free subscription to Stig's video tutorial course that takes you chapter by chapter through the intelligent investor, which was one of the books that Toby had recommended that you read. So we're going to give that to you completely for free. And for anybody else out there that wants to get their question played on our show and potentially get a free subscription to one of our paid courses, go to Ask theInvesters.com and you can record your question there. So before we conclude this episode, we want to give Toby Carlow a chance to give you a handoff to some of his websites and services and anything that he wants to promote. Thank you so much for coming on the show, Toby, and the floor is yours. Jets, thanks very much for having me as always. If anybody wants to get in contact with me, Greenbacked, which has got a funny spelling, g-r-e-en-B-B-A-C-D.com is a blog, Acquirersmultable.com.

Starting point is 00:42:11 I sort of put some of these little deep value stock picks up and there's some screeners on that. My firm Carbon Beach offers the special situation strategy in managed accounts and we'll also be subadvising to a mutual fund that'll be launching closer to the end of this year. We can provide some links in the information under the podcast or you can come through to the site and we can provide some more information there. Very much appreciate you guys having me on. All right. So at this point in the show, we're going to do something that's a little bit

Starting point is 00:42:41 different and something that we haven't really ever done on the show before. And I want to bring on two of my very close friends, and that is Brett and John, to show you guys something that is going to be the coolest thing ever. And this has to do with artificial intelligence and programming. And it's something that they have done specifically for the investors podcast. And we actually just talked about this before the show. So we have a European currently here in Asia. For the show with Toby, we have an Australian living in California. And then John, he's actually in Lima, Peru. So this is just the awesome thing about the internet and the Masters podcast that we're literally all over the world.

Starting point is 00:43:25 So Preston, go ahead and tell the story of how you met, John Brett. So in mid-September, we had an event in Baltimore, Maryland where a bunch of the people from the community got together. and we went down to a Baltimore Orioles baseball game. We went out to some bars. We went to the game. We just had a blast. It was the best night ever. And so one of the individuals who attended was Brett.

Starting point is 00:43:50 And Brett and I started talking and he's doing all sorts of things. It's amazing all the stuff that Brett's doing. But he went to UPenn for his undergrad. Then you went to, was it UCLA for your master's for your MBA, Brett? Yeah, that's correct. He went to UCLA. And so then we started chatting some more. So he's done venture capital stuff.

Starting point is 00:44:10 He's been a lot in the media space and in the marketing space. And so we just had a great time when we were at this live event. And so after it was over, Brett shot me a message. And he said, hey, Preston, I have this idea that we'd like to try out. We do some programming work with Amazon's Alexa capability, which is their AI capability with their Amazon Echo. And he said, we'd like to try to do something with the Investors podcast. if you guys would let us tinker around with some of the episodes.

Starting point is 00:44:37 And, you know, I was kind of like, that sounds amazing. So, Brett, tell our audience what it is. You guys are going to get the biggest kick out of this because this is the coolest thing ever. Brett, tell our audience a little bit about the idea that you threw past me of what you guys were going to do with the show. Well, it was really a pretty simple equation for me. I'm a fan of the Investors podcast. I'm a heavy user of Amazon Alexa. And I happen to work with Zab Media, which helps media.

Starting point is 00:45:04 properties and brands to develop these Amazon Alexa skills so the consumers can access the content through these Amazon Echo. And so for us, it was pretty simple. I said, hey, we would like to do this with somebody. You guys are my favorite podcast of the moment. And I wanted to be able to listen to you on Alexa. So it was a simple thing. We talked to you.

Starting point is 00:45:26 I talked to John about how we could enable it. And the other thing that had come to mind was John and I had been talking about the fact that the way people were starting to enable podcasts on Alexa wasn't a great user experience. And John's team had some ideas and how they could make it a really good user experience. So I thought you guys would be perfect. So talk to our audience about how this Alexa AI kind of works because I didn't know anything about this. You guys started teaching me about it. I just find it fascinating.

Starting point is 00:45:58 So just give our audience a little glimpse, the top level view of what's going on behind all this and why it works so well. So just so people understand, the echo is the tower and then Alexa is the voice and the artificial intelligence behind the tower that you interact with. And so you can teach Alexa's skill. And that's what we did for the Investor's podcast. By teaching it a skill, really John programmed some things and was able to interact with the learning module and the intent module that they have for Amazon.

Starting point is 00:46:28 And that's what really brings the Investors Podcast to life through Amazon Alexa. So, guys, I don't own one of these things, but I find this just to be so cool. And this was so much fun to do this with you guys. But if, say somebody has one of these things in their house, how would they enable this application that you guys built? It's just a matter of saying, enable we study billionaire. So that's all you'd say. You'd just go up to this thing and you'd say enable we study billionaires and then this application that you'd program would just start working? That's right.

Starting point is 00:46:57 Yes. All right. Show the audience. Demo this for people. Now, John has this sitting next to him. So the audio quality might not be the best because it's going through a couple different feeds here. But, John, show our audience what you're talking about because this is just amazing. Okay.

Starting point is 00:47:12 Now, so I already have enabled that. But after that, I say, Alexa, open. We study billionaires. We study billionaires and this is the investors podcast. Our show is all about studying the most important books and ideas that billionaires say influence them the most. Thanks for joining us. Navigate the show, you can say play, scan titles, and we're about the show. Play.

Starting point is 00:47:38 Study billionaires, and this is episode 113 of The Investors' podcast. Today's episode is brought to you. So that sounds great. You can do simple stuff, like navigate through the episode, so I'll say Alexa, play next. Billionaires, this is episode 112 of The Investors' Podcast. So it's broadcast from Bel Air, Maryland. Alexa, pause. So it's going from the most recent episode and then back, as one would expect.

Starting point is 00:48:08 That navigation right there is very intuitive for users, and that's a lot of what people want. But we saw a chance to do something that we think is really neat, which is this scan titles feature. I'll show you guys. Alexa, tell we study billionaires to scan titles. At any time, just say Alexa playing next to jump into a podcast. Episode 113. Jim Richards in The Road to Ruin, Part 1. So we get a little snippet, and then there's silence, and we have a chance to respond.

Starting point is 00:48:39 Episode 11, good and great a review of Jim Collins. Alexa, play next. You go in there, and this is episode 11 of The Investors Podcast. Alexa, stop. If the audience could see the grin on Stig in my face, it's just, we're dying. I don't know how anybody goes about programming something like that, but it's absolutely astounding. And this is what our audience doesn't realize is John and Brett literally just came to us and like, hey, we'd like to do this for you guys. And they literally did this

Starting point is 00:49:15 completely for free for us. That is the power of our audience. And we are so blessed to have people like Brett and John in our audience to do the coolest things ever for us, because this is just amazing. This is absolutely astounding. So guys, like seriously, I don't even know how to even begin to repay you or thank you for what you guys have done. But this is, this is phenomenal. And I know anybody who has one of these Amazon echoes out there and are hearing this, this is amazing. You're helping them out too. So thank you guys so much. This is unbelievable. Well, we love what you're doing. And the other thing I'll tell you is, so I'm a listener of the show. we met up in Baltimore, so we had a connection.

Starting point is 00:49:58 What I realized afterwards is John also had a connection, because I think you've had his cousin on the show before. Yeah, yeah. So when we were talking about the development of this, John and I started chatting, and your cousins with Colin Roche, who we've had on the show two times, and is, you know, an amazing guest,

Starting point is 00:50:16 insanely intelligent. So we had another connection there. It's just absolutely wild. I mean, that was another reason why we're very happy to do this for you guys. You know, we built this because we really wanted to show off a lot of the neat things that you can do with the echo device. And so we hope that that you guys and the listeners are as excited about it as we are. And we know you guys are excited. So guys, the least we can do is allow you to have a little handoff here and talk about ZAP Media because what you guys do is absolutely amazing.

Starting point is 00:50:46 So talk to our audience about what it is that you can do potentially for them if they're listening to this. And maybe they have something similar that they want to do with their own business. All right, well, I can start, and John can fill in any of the gaps that I miss. I think at our core, ZAP media is focused on giving brands a voice. So there's millions of Amazon Alexa users, as we've talked about. Google Home recently came out with a competing product. Siri isn't quite as smart as these services today, but we expect something good to come from Apple eventually. And consumers really love these devices.

Starting point is 00:51:18 So there's no doubt that they're helpful in the kitchen. When you have your hands full, they're really the height of convenience. However, the internet today is a visual web. So the things you take for granted when browsing on a screen simply can't be done through a voice interface. So what products like Alexa are introducing is this concept of the voice web. What we need is we need content that was formerly visual to be made available through a voice interaction. And even a podcast, which already has audio content, needs a way for users to navigate by voice, start an episode, pause, it, skip, take other actions as you heard John do. That's exactly what Zab Media does.

Starting point is 00:51:55 John's team has deep experience. We've worked with mobile audio apps like Flacker and MPR and those types of things in the past. We've taken some of that learning and that deep expertise and applied it to these new voice assistants, which you've really just come on to the scene in Google's case a month ago. Alexa's been out for about two years. So this is relatively new cutting edge stuff, but consumer adoption is tremendous. And so John's team has deep experience in voice engagement and has developed a number of tools used to build great user experience. and do it very quickly.

Starting point is 00:52:27 Well, guys, we can't thank you enough. I really mean it. This was just the awesomest display of talent, programming talent I think I've ever seen. But John, Brett, thank you so much. This is just awesome. That's great. Hey, thanks a lot. We love the podcast.

Starting point is 00:52:43 And we're really happy to be able to be on and to provide this service to your users. And so, as John said, anybody who has an Amazon Echo or Amazon Alexa available to them, you know, today or right now, they should actually walk over to it and say, Alexa, enable, we study billionaires, and they'll be able to access everything right off of Alexa, and not be totally beholden their mobile phone every time they want to listen to it. So awesome. Thank you so much, guys. And for the audience listening, we're going to have a link to their site in our show notes.

Starting point is 00:53:17 If you guys want to learn more about both of these two, which these guys are so bright. It's crazy. So go into our show notes. check out their site and see what else they're up to. It's pretty amazing stuff. Okay, guys, that was all that we had for this week's episode. We will see each other again next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. www.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.com. If your question is answered during the show, you

Starting point is 00:53:54 will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 115 : Value Investing and Special Situations w/ Toby Carlisle (Investing Podcast)

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