Yet Another Value Podcast - Random Ramblings September 2024: heavy selection bias, probabilities & terminal 0's, returns on fame

Episode Date: September 24, 2024

Welcome to the September 2024 edition of Andrew's Random Ramblings on the Yet Another Value Podcast. Once a month, Andrew will share thoughts on a few topics - this episode includes: heavy selection bias, probabilities and waiting and how people value them, and returns on fame. Chapters: [0:00] Introduction to Andrew's Random Ramblings + Episode sponsor: Daloopa [1:36] What are the returns for folks focused on one company, one sector [7:25] Probabilities and terminal 0's [12:57] Returns on fame Today's sponsor: Daloopa Hey there, fundamental analysts - Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let’s talk about something that could transform your workflow—Daloopa. Daloopa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance—all at your fingertips. And here’s the best part: Daloopa updates your models in near real-time, which is especially important during earnings season, tailored to your modeling format and style. Imagine never having to update your models again. With Daloopa, you can reclaim your time and focus on what really matters—analysis and research. Want to learn more? Create a FREE account at Daloopa.com/YAV

Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that could transform your workflow, Delupa. Delupa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance, all at your fingertips. And here's the best part. Delupa updates your models in near real time, which is especially important during earnings season, and it's tailored to your modeling format and style. Imagine never having to update your models again.

With DeLUPA, you can re-clean your time and focus on what really matters, analysis and research. Want to learn more? Create a free account at dilupa.com slash y-A-V. That's DeLUPA, D-A-L-O-O-P-A- dot com slash Y-A-V. All right, hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review, wherever you're watching or listening to it.

With me today, I'm happy to have one myself for my monthly Random Ramblings podcast. Let's see. Before I tell you the topics I want to hit today and everything, let me just get started with a quick disclaimer. remind everyone, nothing on this podcast is investing advice. That's always true, particularly true today because, A, I obviously have no clue what I'm saying about a variety of topics, and B, I'm going to be going through a bunch of different topics and stocks.

I kind of, you know, I have an idea of what I want to talk about today. I don't think I'm long, any of them. I'll try to disclose if I talk about any stocks I'm long, but, you know, whether I'm long or have no position, just remember, not investing advice, consult financial advisor, you know, all of that type of stuff. So anyway, today, there are three topics I want to hit on today's random rambling. Those topics are kind of the returns, risk, perils of when you're only focusing on one stock or one industry.

That's number one. Number two is I wanted to provide some thoughts on probabilities and waiting to how people value them and terminal zeros. And then number three, I wanted to talk about the returns on fame and how they continue to increase and how I kind of think it relates to the margin of safety in a good business. In particular there, I'm thinking about sports, but then I'm also moving it over to good businesses. So let's dive in. First thing I was thinking about today, you know, there are, if you're very online, I don't consider myself very online, but you know, if you're on Twitter, if you're on Finchwit, if you're talking to a investors, you will talk to investors.

And this applies to both retail and, you know, institutional investors who kind of are just 100% devoted to one stock. or maybe one company. And, you know, on the retail side, I think of, you know, the more positive side, Constellation Software, you know, you'll hear people talking about Constellation Software Non-Stop and you'll hear people are like, oh, you know, it was partly because of compounding if you invested in Constellation 10 years ago, you've gotten there. But, you know, I know people who started buying it in 2002, 2003, and they're like, this is the next Berkshire.

It's the Berkshire of software. You know, Berkshire Hathaway is another one. And you'll talk to people who have huge percentage of their portfolio in it. And they're like, look, this is going to be a compounder for a long term. And again, consults by financial bides are not recommending anyone take huge percentage of their portfolio or anything. But there are others, right? You know, I know a group of investors who all they focus on is tobacco. Of course, energy.

You know, people who only focus on energy stocks. You know, when it comes to stocks, I think of on the retail side, the meme stock. You know, there were people who were 100% focused on AMC. For years, I knew people who, I know a lot of people who were really focused on Paramount or think of Bruce Berkowitz with Sears. he basically became a fund of one with Sears and maybe the Fannie Mae, Freddie Mac prefers for a while. I can think of these people, SoftBank. If SoftBank has a cult following, Fairfax is a cult following. Merckle has a cult following.

Obviously, Berkshire has a cult following. And these companies have a cult following, but I'm more thinking of the investors who have, you know, you're talking to like 80% of my net worth as in Berkshire. Again, not a recommendation, just saying what people do. And what I've kind of been wondering, when someone focuses that much on one company, one industry, deep water drilling, oil, tech companies, crypto, whatever it is. I wonder what the returns that are, right? My, obviously, there's going to be heavy selection bias. You know, I think of Bruce Berkowitz

with Sears. That goes not basically to zero. That did go to zero. And that's going to just find slash really impact your career. But that's a negative example. But you could think of somebody who 10 years ago went all in on Constellation Software or I know people who 10 years ago went all in on Bitcoin and they don't have to worry about anything anymore. You know, so I guess I wonder, hey, if I were to focus on this one group of investors suit, they just become obsessed with one investing topic. And they're just all, it's all they focus on. It's all they think about.

I wonder what the returns would be. Again, I think there are heavy selection survivorship biases there because if you were 100% all in on Sears 10 years ago, nobody here. from you today anymore, right? But if you were 100% all on Bitcoin, then you're retarded on a beach. So I think there's heavy selection bias, but my gut would say, I think they tend to outperform. You know, when somebody just gets so obsessed with the company and they think the opportunity is so big, it's all they think about, like, I just kind of think the incentive systems, the incentive and the conviction behind that, I think it probably means

they're on to something. But I don't know. I'd be really interested if anyone has studies or anything, but I think about this a lot. You know, I can get really obsessive with the investments I do, and I don't run clearly 100% concentrated, but you start thinking about this when you're concentrated. Like, hey, if over the past two years, let's say your best idea has performed your best over the past two to three years consistently, it's like, hey, am I pulling the Charlie Munger in diluting myself down by investing my second,

and third, fourth best idea? But what if your second and third best ideas have performed swimming? and your best idea hasn't performed. I'm just very interested. I'm interested in the conviction to get there. I'd be really interested in the returns because if you're going to invest really heavily in one company, one stock,

you're going to focus on it a ton. You're going to be digging through it. I talk to some people who I'm involved in companies where I have, let's call it a 5% position, which nobody would say a 5% position small, and they've got 100% position in it. And I would just say, like, when I talk to them, they are reading the tea leaves.

They've got the CEO's wife followed on Facebook. And if she likes something, they're thinking about how that, like, in past, like, did the CEO say, you know, if she likes something, a news article, they're like, hey, did the CEO tell her what's going on? And she's liking that news article because she knows how it's going to relate to the company and their net worth and their future and sending their kids to college. It's a really interesting thing. Now, sometimes I also think, you know, what I said just now is kind of crazy. And it's like, hey, the CEO's wife, like, she liked this purse brand. Is it because they're about to sell the company for a fortune and she'll have the money to buy a high-end purse? And you're kind of like, no, man, she just likes purses.

You know, like, there's not three there. So anyway, that's my thought. Again, this is random ramblings. I rambled a bit. But I just always wonder about that. Is there a signal? Is there noise? Like, if I know three smart investors who are all over one topic, I generally want to spend time on it.

But am I underrating that as a signal? Am I overweeting it? Just very interested there. Let's turn to probabilities and terminal zeros. One thing I, you know, you can hear it in the pod, you can hear it a lot. If I talk to an investor and I say, I think there's a 60% chance of this thing happening. And, you know, I often mean that an event-driven merger arms sense, right? There's a 60% chance of this merger going through.

But there's other ways you can imagine it on fundamentally for a lot of things. But I say 60%, I just feel like people are willing to give that thing value. If I say there's a 40% or 30% chance, I think there are a lot of people who kind of dismiss that and say, I need to get paid for that as a free option. I need to zero that. And obviously, both are, you know, if something's 51% versus 49%, they're effectively priced at the same thing. But I find if I say 51% people will give that credit because it's more likely than not

to happen. But I say 49, a lot of times they're like, oh, I kind of want that option for free. And the thing that I wonder about there is, I'd be really interested. is there any returns, is there any data on how long shots versus short shots in the stock market work? Because I would imagine that if I gave you a basket of things that I thought had a 25% probability and I gave you a basket of things that I thought had a 60% probability, imagine the 25% would be undervalued and the 60% might be slightly overvalued. Now, the reason I suspect there's not any research on that is because a lot of the percentages,

it's almost never so black and white that you can assign it, right? Like, I'm kind of putting that probability, if it's a merger arm, like, I have to say, what's the downside? And that's very suggestive. I, that's very, there's a lot of assumptions that go into that, right? If I say, hey, if the stock breaks, I think it's going to 10, I can't tell you how many times I've seen a deal break that I thought would go to 10 that touched two or that, you know, went to 20. So there's a lot of, there's a lot of assumptions in there.

But I'd be really curious because it's something I try to break, but just based on a lot of my talks, if you say something's lower probability, investors want to assign it at zero odds, and there's clearly value there. And if you say it's higher probability, investors almost start thinking like it's 100% odds, and obviously neither is correct. Look, this is not just investors. This is a very well-documented behavioral bias that humans have, but it's something I've been thinking about.

Then, you know, one way I've kind of been thinking about that there is, things that have a risk of going to a terminal value of zero. You know, the obvious ones here would be coal miners or smoking, anything that touches nicotine, right? Like, if you're making legacy cigarettes, those are getting taxed into oblivion. Your core customer base is dying. Like, it's probably a sunset industry, but as I love to say, what a beautiful sunset it can be because these things can be very profitable.

Go look at the cigarette stocks over the past 30 years. They've done great. Coal mining, same thing. But I've been really interesting, things that have high chances of being a terminal zero, like a coal or a, like a coal or smokers, they kind of, they've outperformed over the past few years. Some of that is energy policy specific, you know, when it comes to the coal miners, but a lot of sin stocks have outperformed. I suspect a reason is because it's so obvious that they have terminal value risk there that investors have kind of over-discounted them, right? I've been curious about things that have what I'll call long-shot terminal value risk. So something like an Uber is a really interesting example, right?

Self-driving comes along, and there is a very good chance that Uber is a terminal zero, right? If Tesla corrects the self-driving code, there's a very good chance that Tesla is running their own network, they're sending self-driving cars to you, Uber could be a zero in that scenario. I'm not saying it will be. There is a world where the Uber kind of customer layer and data is extremely important in a self-driving world, but there are worlds where self-driving cars take over and Uber is just instantly a zero. But because self-driving is still a long way off and we don't know how that plays off,

like you can look at Uber's price. It's not price like it's a terminal zero any time in the near future, but that's a remote risk. You know, you could think of others. Google for a while when AI was coming out, people were saying AI is going to replace Google search. I think that's gone away. I think most of those risks have gone away, but still something.

What are some others? I'm not sure. A very visible one. TV stations, you know, I've talked ad nauseum about the kind of key TV stations having the online where as more TV subs leave, the TV stations have to raise their price to justify the fixed cost of all of these big sports leagues that they've signed, which caused more people to leave. You know, at this point, legacy TV bundles is pretty widely regarded their internal decline.

So those are very obvious. They trade it, very low multiples because of that. But when it comes to probabilities, I wonder, do things with very obvious terminal value issues, very decent chances of having a terminal value of zero, are those kind of underpricing the stock market just because there are a lot of cash flows between now and then? And often, you know, you think about something like Cole, they have much longer tails than I think anybody really expressed. Are those underpriced and maybe things with that remote risk of zero, but there

is some risk, are those a little overpriced because the market says, oh, it's only 1%, so you assign it's zero, but a 1% chance of zero is a big chance of zero. So that's probability's in terminal zero, so that's been on the last thing I wanted to rant on, kind of the way these relates, I call them returns to fame and good businesses. And I'll tell you how they relate in a second. But increasingly in the world, I think you're seeing the returns to fame are increasing, right? So the place I really think about is top NBA players in the next few years, they're going to be making $100 million per year. Bottom run players will be making $10 million per year plus all of

its guarantee. These are insane amounts of money. The highest paid people in America will be NBA players in the near future. And that's happening because the NBA is taking in lots of money. And a lot of that money is coming to places. People have always loved sports. 50 years ago, sports, the only place they were getting money was people going to the stadiums, right? That's the only place they were getting money. Then I think they got radio contracts. Then you get TV contracts. And now they've got all these partnerships, data, you know, in the past five years, sports betting has come on in a big way. But I just, you've got this business that people love. And as the world goes more online, more interconnected, you know, you have more and more opportunities to monetize that. Think about your

favorite streaming artist. You know, Taylor Swift is a billionaire now. She's the first billionaire musician. And the big reason behind it, you know, I'm sure the Beatles were bigger than Taylor Swift back in the day. Michael Jackson was probably just as big. But the returns to monetizing, like she gets insane amounts of Capital One money, advertising money, her tour makes insane amounts of money, sponsorships. She can start her own businesses. You know, you think about what Rihanna did with her brands or what, like, the returns to fame continue to escalate. And it's not just that, you know, going back to sports, I think about an NFL reporter. 20 years ago, if you were the best NFL reporter, right, really the only thing you could

do was hope you got hired by ESPN. That would be the top of the job. And ESPN had a lot of market powder that, right? There was only ESPN, Fox, CBS. There were like four places that you could realistically look to get hired. And that was all you could really do. Today, if you're a really good NFL reporter or analyst or something, what can you do? It's kind of a booming market. You know, you think about podcasting. I'm podcasting right now, but podcasting. You could go start a podcast and the money and podcast is huge. It's a very competitive base because it's so easy to launch one. There are hundreds out there. But, you know, there's sports betting money. There's brand money. All this advertising looking for home. So you can do a podcast and go your own route.

You can start your own business. You know, you can start a subset newsletter. You can start your own business. And the ways you can apply your skills are not limited. You could do it on sports betting. You could do it on just general analyst. You could do it as a consultant. You know, a lot of these data teams, they get hired by the teams as a consultant. You could do it for fantasy football. You know, NBA, same thing. People want to pay. And I've just kind of been thinking, like, if you've got something that, if you're really good at something that people love, I think historically, you've probably been under monetized, but the returns to being able to be really good at something people love continue to go up. And that NFL example just really drives it home

to me. So how am I thinking about that? You know, one thing I've been thinking about a lot is if you're looking at a really good business, they just tend to have like returns and optionalities that just kind of pop up over the years that really bad businesses don't have. It's hard for me to think of one off the top of Apple, right? Think of Apple. They have this iPhone that is the centerpiece of people, that is the centerpiece of your daily life, right? And if I had been talking to you about Apple 10 years ago, I don't know, maybe some tech people way smarter than me would have been able to figure it out. But, you know, 10 years ago, I think you have the iPhone.

I don't think it's obvious, hey, we can make this huge market selling really integrated, really high-end headphones, right? I don't know if that's super obvious. hey, this huge payments opportunity with Apple cards and everything, that's going to pop up. I don't think that was super obvious. You know, if you think about something like, what else? There's a lot. Uber, I mean, it's a little bit different, but you've got this big network of drivers and everything, and you can keep tossing things on top of it.

Like, hey, it wasn't super obvious that you could do Uber eats, Uber delivered, but I think those are starting to make head wins. So, you know, you don't have the same thing when you have a lot. a coal company. Here's a great example. You have the royalties to, you'll look at companies that have coal royalties, are oil and gas royalties, and they have them on huge tracks of lanes. If they're really well located, like they just kind of keep popping up, right? Like, all of a sudden you come back and the oil wells you yield 20 years ago because you've got new technology, you go drill there. Or, hey, these are just really well located with resources, resources, tens of cluster.

There's water resources here. Or you have the rights of way access and all this sort of stuff. So you've got the best building in New York City. You know, 20 years ago, it might have been the best as an office tower. Today, it might be the best as a residential tower. But if it's really pristine location, like, it just keeps popping out optionality. You know, the best retail storefronts. Again, 20 years ago, there were tons of banks around. Banks are closing as they go more online.

It's up. But guess what? The best retail locations, things just keep popping up and wanting to do it because if you've got a lot of traffic, if you build a lot for brands, it really matters for them. So it's just one thing I've been thinking of, you know, if you showed me to $2 and one of them was trading for 60 cents and one of them was trading for 40 cents, you know, in the stock market, and the 60 cents was attached to a good business and the 40 cents was attached to kind of a worse business.

No, I think historically I would gravitate more towards the 40 cent, really cheap dollar. But that might not be right. You know, the past five years have shown with Facebook, Constellation, Google. all these guys, like, they just keep pulling out growth projects and growth capics. Like, who would have managed they're all dominating AI and everything? They just keep pulling these on nowhere. And it's just, hey, maybe I, maybe a lot of people have undervalued the optionality from buying good businesses, obviously the optionality from having great

management team, founder teams. I mean, people have espounded on that a lot. So I won't go through that there, but it's a real thing, right? Like, Zuck successfully transitioned from desktop to mobile. He's, you know, obviously I don't. think the reality labs, the AR goggles and stuff, I don't think that's gone great, but he caught the AI shift. Like he caught the Instagram shift. You bet on someone like that, they kind of pull rabbits out their hat. And it's something I've been thinking about with especially a lot of

these smaller companies I look at, you know, if you've got a smaller company that you're looking at that's worth worth worth, worth it's trading for five. You think it's worth 10. But three years ago, it was trading at 2.15 and you thought it was worth five. And the CEO's done a great job of growing value. You know, maybe one thing you need to consider is that 10 could very easy be worth 20 three years from now because the CEO pulls another rabbit out there hat or something. So anyway, I think I've been, this was probably the most rambly I've done. I think I've been rambling for about 20 minutes.

Look, as always, I appreciate everyone who's listening to this. I, you know, feedback, suggestions, everything. I'm always open to them. Shoot me an email. Drop me a comment. Any of that. I am recording this September 15th. I'm looking forward to speaking to you all at some point.

and another rambling episode mid-October. And I've got a lot of podcast lined up for you guys now and then. I think some of them are extremely good. Looking forward to releasing all of them. And hopefully you will be listening to all of them. So I'm going to go on a run, catch some football, hang with the baby. Looking forward to talking all soon. Bye.

Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that could transform your workflow, Delupa. DeLupo delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance, all at your fingertips. And here's the best part. Delupa updates your models in near real time, which is especially important during earnings season, and it's tailored to your modeling format and style. Imagine never having to update your models again. With Delupa, you can reclaim your time and focus on what really matters, analysis, and research. Want to learn more? Create a free account

at dilupa.com slash yavie. That's Delupa, D-A-L-O-O-O-P-A. a quick disclaimer nothing on this podcast should be considered an investment advice guests or the hosts may have positions in any of the stocks mentioned during this podcast please do your own work and consult a financial advisor thanks