VALUE: After Hours (S07 E23): Zeke Ashton on Buffett, the Post-Value Era, UnitedHealth $UNH and his Four Decision Factors

Transcript

Tobias: I think we’re live. This is Value: After Hours. I’m Tobias Carlisle. Joined as always by my cohost, Jake Taylor. Our special guest today is Zeke Ashton. Ashton Total Return Fund these days, Zeke?

Zeke: That’s Ashton Capital.

Tobias: Ashton Capital.

Zeke: Not supposed to be naming the fund according to people.

The Post-Value Era and Buffett’s Legacy

Tobias: I see.

Jake: We didn’t do that.

Zeke: No, we didn’t. [Jake laughs] So, Ashton Capital is the name of the firm. But yeah, great to be back. Thanks for having me again.

Jake: Good to have you back, Zeke.

Tobias: Yeah, great to have you back, Zeke. Just before we came on, we were discussing the end of an era with Buffett stepping down. You say it’s a post-value era. What is that? What’s happening?

Zeke: Yeah, I don’t know what that means. It just sounds–

Jake: It’s provocative.

Tobias: Provocative.

Zeke: Yeah. But I do think it’s an interesting historical time in the markets. I think it does represent the passing of the baton from, this maybe a world that existed somewhat more in nostalgia than in reality where this notion of somebody who’s very patient, who just studies businesses, swings the bat every couple of years, finds a great business at a really good price and then holds on for 10 or 15 or 20 years as it compounds away.

Can that still work? My gut tells me it can, but it’s just harder now in a certain way simply because I just think the structure of the market has changed so much with all the passive flows and all that. So, certainly you’re unlikely to be able to catch it with really big stocks.

On the other hand, I think that human nature won’t really change and I do think that it can be done. I will be interested though in terms of who the next generation of value investors are and what they’ll represent. All I can hope for, is that– Obviously, Warren Buffett has represented the tribe of value investing in just a terrific way. Not just in terms of how he’s performed, but also, I think his views on how to conduct yourself, how to behave in public, how to communicate with people. I just think those are things to really be admired. If he’d only compounded at 10% a year instead of 20%, you’d still admire those things, because that seems to be a bit of a dying art as well.

Jake: Now, it’s all SPACs and fraud coins and– [crosstalk]

Zeke: Yeah. There’s a lot of promotion out there, for sure. Certainly, the Twitter wars that we see now, billionaires having with each other all the time. It’s hard to imagine Warren Buffett engaging with the world in that way. I do think that he’s certainly taught me a lot about how to communicate with your peers, and also just– Even as smart as he is, and perhaps some of that humility is affected, but he certainly never comes across as if he thinks he understands everything in the world and he can solve all of our problems.

Jake: It’s crazy to think like, what’s the inverse of having retail end up holding a bunch of SPAC bags for you? I’m not going to name names, but the inverse of that is Buffett running Berkshire for 60 years for literally zero economic value for himself. He bought those shares. He never sold a single share the whole time to buy a house, or a mansion, or a sports car or anything.

Lived off of his PA, had $100,000 a year salary and then gives it all away at the end. So, literally no economic benefit. Built all of these fortunes for so many people and provided this guiding light for how to conduct yourself in the world. That, to me, is incredible and the inverse of SPAC grabs.

Zeke: Yeah. I also think as he became more widely followed and more successful and obviously as Berkshire accumulated so much more capital, I think he played an important role in almost the J. P. Morgan of stepping into market crises, and perhaps averting worse crisis by projecting a needed vote of confidence into the world.

Jake: You mean, J. P. Morgan the man in 1910? Yeah.

Zeke: J. P. Morgan, for sure.

Jake: Right.

Zeke: Obviously, that’s a very rare thing as well. So, looking back in some of the dark times of the GFC, I think him stepping in and again, injecting not only confidence but calmness into a market where there was just a frenzy of a fear and doubt. It certainly did feel like it could be the end of the world at that moment in time. So, yeah, it’s just an interesting time. I do have a lot of hope, there’s–

Obviously, he’s influenced so many of us that– I think that influence will continue to spread out there. And I certainly think Berkshire will continue to be run with those ideals in mind, although I can’t imagine that it will be run quite as well, because certainly he’s a generational talent in every respect.

Tobias: Who steps into that role of the J.P. Morgan, Buffett in 20 years’ time?

Zeke: It’s an interesting question. Maybe it’s not a person. Maybe it’s a Blackstone, or BlackRock or one of these enormous institutional asset vacuums.

Tobias: Let’s hope not. Let’s hope not. [laughs]

Jake: Oh, God.

Zeke: So, I don’t know.

Jake: 2 in 20 on-

Zeke: Yeah.

Jake: -saving the world. [chuckles]

Zeke: Yeah. So, I don’t know. I don’t know if there will be another one. Maybe it won’t be needed. We can always hope. We can always hope.

Jake: The AI overlords will step in and-

Tobias: There we go.

Jake: -cure all the–

Tobias: There we go.

Zeke: That’s right. Yeah.

Mispriced Small-Caps and Market Structure

Tobias: We’ve been talking about the difficulty of finding opportunities historically. But like you, I think that there’s been an enormous amount of opportunity around in small and mid-cap, particularly. Maybe late 2022 type opportunity set. Not a 2009 type opportunity set or a 2020 opportunity set, but a 2022 opportunity set. I think that flows going to the big end of town has left this very large part of the market that’s largely ignored. You said that you’ve had a similar experience?

Zeke: Yeah, I do. This does feel like a combination, a little bit of 2021 and maybe 2001, where it feels like on the one side, there’s this frenzy of risk taking. I’m talking about things like the 58th bitcoin treasury company or [Tobias laughs] anything with quantum in its name, regardless of whether they’re doing anything quantum related. And of course, you mentioned SPACs, again. I think the frenzy is off a little bit of the SPACs, but of course, they’re coming back as ways to raise capital, because the market seemed to be open to that.

On the other side, I would say there are more companies today that are publicly traded that seem obviously mispriced to me than there have been in a very long time. But what you say is exactly right. They tend to be in the smaller market caps. They often tend to be without a lot of support from large indexes or anything like that. I think that’s really good for those of us who can buy them and hold them. The problem is, is that there’s no reason they should go up tomorrow, because I do think we’re past the midway point of this long transition from active to passive. I still think that there are active managers that are having to sell small-cap stocks.

But also, small-cap stocks in the US have not really participated in this late bull market. I think the Russell 2000 is very close to where it was in 2021. And so, that’s four years. Even on the big stocks we talked about how– If they’re big, widely held stocks that you would think that they would not be mispriced. But I think they still can be.

What I think is very interesting is when a big stock puts out something that is unexpectedly good or unexpectedly bad, I think what you find is, because the passive indexes don’t respond immediately to that, because it just depends on whether they got a flow yesterday or not, the active investors who are left, there tends to be much bigger air pockets now, either on the upside or the downside.

I think we saw that recently– UnitedHealth, which full disclosure, we have a position in it now. This is an enormous company. I think it’s the fourth largest company in the United States by revenue. It was a $600 stock during the tariff sell off. Two weeks ago, it was a $300 stock. And so, a lot of things happened and a lot of really bad sounding things certainly did happen. But to have a stock that is that widely held and that larger constituent in the S&P 500, to have it drop in half is pretty remarkable.

The other thing I’ve noticed, is that these movements will happen, they’re very violent and then they’ll fill in as the flows catch up to them. So, even if the news was really bad– It’s interesting that the stock will sell off and then it will recover a lot of the lost ground simply because if there’s flows coming in, it will catch its share of those flows, even if they’re a smaller proportion than they used to. So, it’s just a really–

The market structure today is quite puzzling to me. It’s really fascinating. I wish I could get my head around it better. But I think one of the reasons that I’m doing what I’m doing now and the way I’m going about it the way I am, is I feel like it’s okay for me to just buy really good assets at a clear discount to what those assets would be worth to a private all cash buyer who is intending to hold those assets and literally earn his return from the production of economic value from those assets.

The problem is I cannot count on keeping up with any index. I can’t count on getting a return at any given time. It may sit there for a year, two years, three years and then I expect I would wake up one day and that stock’s been taken over by a larger company, taken out by private equity. Some massive corporate change has happened.

I think we spoke about this a little bit. Last time I was on the podcast when we talked about David Einhorn’s conversations about a broken market. I guess I would say I’m happy that it’s broken this way. Whereas in 2016, I literally could not find anything that I wanted to buy at those prices. The stuff that I did own, there were things that I was owning mostly, because I felt like I needed to own something.

Jake: [chuckles]

Zeke: Whereas today, I’m quite happy to own what I own. I find myself going back and looking to make sure, double checking and triple checking to make sure that I’m not missing something. I’m pretty confident that I’m not, but I do believe that the market just does not care about a lot of these things.

Narratives, Flows, and Broken Markets

The other thing I will mention is it’s a game of narrative now. I think narrative is more important. I think that the evolution of social media and now AI, every step along that chain I think has simply magnified the power of narrative, because it has amplified the voices. You can get a stock to move– If you have a lead steer out on X or gives a presentation at a widely followed value conference or something, not a value conference, but just a conference.

[crosstalk]

Jake: Nobody’s going to that. Yeah.

[laughter]

Zeke: There’s nobody at the value conferences. I don’t know if there are any conferences. But yeah, it’s just interesting. I guess I would say I’m trying to really look at the happy side of this equation and go, “Well, isn’t this great that I don’t have a lot of competition for these fairly unique, very interesting assets that I would love to own the entirety of that business?” I wouldn’t want to run most of them, because I’m not a business manager. I’ve become a lazy equity investor. But I do like being able to buy things that I think are just clearly too cheap and safe, I think.

Patience, Repricing, and the Dillard’s Effect

Jake: Zeke, over your entire career, I’m sure there’s always probably been this growing concern of like, “Gosh, what if the markets get so efficient that I’m never going to find a deal on anything really? Everything’s going to be pretty fairly valued. Everyone’s doing all the work. We’ve got 10 million CFAs out there analyzing every company to within an inch of its life.” And yet, where do we find ourselves today?

Zeke: No, I think it’s very interesting. I think that that concern that I had was quite misplaced. Now, that has been replaced with a different concern, which is-

Jake: No one’s doing any work. [laughs]

Zeke: -what’s going to make the market see the value? What’s going to force the market to reprice my security? I am taking a little bit on faith that, hey, if you just buy a good business run by good people or it’s a unique asset that if there’s competent management in place, they will find a way to get that return just as if you owned a private business.

But I will say it is quite daunting when you believe you have a great portfolio of securities, you keep looking at them, you like what you own and it just doesn’t necessarily participate in broad market moves as much as. And that is the price that you pay. So, you do have to have a lot of patience. Historically, I was not as patient. And now, I’m just resigned to the fact that, look, these guys could put out three quarters, four quarters in a row, that might be great-

Jake: No one’s going to care. [laughs]

Zeke: -and I might not benefit immediately from that. And so, I think it’s important to have a strategy that when you communicate your strategy, you say, “Hey, this is the kind of thing that can happen.”

Jake: My hunch is, is that this used to be more of a rolling thing where like, you’d buy something at 5 times earnings, it would re-rate within six months or a year to 10 times earnings, you feel like, “Yeah, making good progress all the time.” It’s possible that now it’s more of a punctuated kind of experience. Thinking of something like Dillard’s, for instance, where-

Zeke: Yes.

Jake: -you go sideways forever. It looks like nothing’s happening, like you’re poking the dead horse with a stick. But meanwhile, things are going pretty well internally. They’re retiring a ton of shares and then the market wakes up to it and it’s like, I don’t know, whatever, it did a 10x in 6 months or something. So, it’s possible you just have to be even more patient than ever before.

Zeke: Yeah, I think that’s right. That has not historically been my strength, because I just got very spoiled and used to the notion, if I discover a big mispricing, the market is going to be fairly quick to tell me I’m right or wrong. Generally, obviously, you put a lot of work into this stuff, you hope you’re going to be right more often than you’re wrong. But typically, within 18 to 24 months, you’re going to figure this out. The market will have figured it out.

I don’t think this market can be counted on necessarily to give you that feedback with any real fidelity. It will give you feedback, but it may be a lot of false feedback. It may be based on, as I say flows out of this, some investor has pushed a button and they’re selling 400 of these shares and they’re buying 300 of those and they don’t know what the stocks are necessarily. And so, I just think that’s quite interesting. But as I say, I’m excited about it, because I feel like there’s opportunity to buy really legitimately good companies at really good prices that I have not seen in a long time.

The other side of it, of course, we have more uncertainty than we’ve ever had from a macro standpoint. I think we talked about this earlier. I am very, very surprised that the market has recovered its losses from the tariff sell off. Particularly when you follow that up with yet another war. Every war can spin off into all kinds of other things. If history has shown us anything, wars have some of the most crazy butterfly to hurricane effects you’ll find in the world, because you just never know what the second and third order effects are going to be. I don’t think anybody really thought that whatever was it happened in 1916 that kicks off World War I–

Jake: Yeah. Some Butler made a wrong turn in Sarajevo, [chuckles] and 20 million people died.

Zeke: Yeah, for sure. But I think as I say, I like to look at the glass half full right now, because it is really fun showing up to work every day going, “Wow, here’s another interesting idea.” And then the next day, “Here’s another interesting idea.” Obviously, not all of them end up in the portfolio and many of them end up being either statistical, mirages or you just find out once you’ve done the work that there’s some risks that you’re not super comfortable with. Yeah, I think it’s a great time to be a value investor.

Tobias: I’ve been posting these charts showing mid-cap indices against the S&P 500 or small-cap indices against the S&P 500. And they both topped out around 2011. They’ve been falling pretty consistently at an increasing rate since 2011. There was a little bit blip, like a little heartbeat in 2020, where it recovered a little bit, but we’re well and truly– [crosstalk]

Jake: It’s a small-cap premium, like gone into the–

Tobias: It’s a small-cap discount.

Jake: Yeah.

Tobias: The mid-cap discount. I found the statistics. This is the mid-cap index, so this is still a market capitalization weighted, flow adjusted, all that sort of stuff. But there’s no value tilt or anything like that to it. It’s currently cheaper and growing faster. And then, that’s true more so for the small cap there. They’re cheaper again, and growing faster again and yet can’t catch a bid. Although, today, there does seem to be– There’s this massive levitation in everything in my portfolio today for no reason that I can see other than today’s the 1st of July.

Jake: Yeah. Everyone’s rebalanced it at the end of the quarter.

Zeke: Yeah. My guess is it has something to do with Russell 2000 rebalance and quarter two to quarter three, that really incredibly important day. [Jake laughs] June 30th to July 1st, and everything starts over. I don’t understand it, but again, this is the type of thing where–

I think there were times when I thought, hey, there’s got to be a logical explanation for these things. And oftentimes, there was. And now, I’m more focused on how are the assets performing. If the market doesn’t reward good performance at the business level, I’ll just continue to average down or whatever it is that I choose to do.

I will say that the other aspect of this that I think is more challenging than ever is the short side. Having come back as a private investor for a couple of years, I was not on the short side. Am I on the short side again? Man, I think there are some crazily– There are some businesses that literally do not deserve to exist that have multiple billion dollar market caps. That’s always been the case. I just think it’s really interesting now.

Tobias: Is it quantum? Is that the sort of thing you’re looking at?

Zeke: Certainly, it is. I’m not saying that all of those quantum businesses are bad businesses. I’m not a physicist, so you’re going to lose me once you get past the word quantum. [Jake chuckles] But I do know that there are many businesses that are in the quantum space that are publicly traded that don’t have a business now and probably don’t have a high probability of a business or at least not to the extent that they can justify the current market caps. What you see is just they all move together on an update. So, if there’s some news in the quantum space where–

I think the most recent big one was, I think– Jensen Huang of NVIDIA did a 180 on, “Hey, quantum is 20 years away. No, maybe there’s a few things that might happen.” I think he probably recognizes that NVIDIA has a lot of potential to be an arms dealer to those things whether they happen or not, but all the quantum stocks went up. Some businesses that have quantum in the name, but literally have nothing to do with–

Jake: Quantum sanitary. [laughs]

Zeke: Exactly. Anyway, it’s an interesting time. I have less faith than I did that the market will do its job of valuing businesses. But I guess I would say I don’t believe it’s ever been the market’s real job to value businesses. I think it’s the market’s job to provide liquidity. I think the market’s doing that job more or less as it always has. I just think that narratives are driving price movements. Narratives and flows are what’s driving price moves all the time. So, it’s interesting.

[crosstalk]

Jake: Yeah, go ahead.

Tobias: Let me give a quick shoutout, and then let’s talk a little bit about your process, Zeke.

Zeke: Sure.

Tobias: Petah Tikva. What’s up? Bixby, Oklahoma. Bendigo. Early stuff for you. Dubai. Lausanne. Valparaiso. Whoa, big jump. Tomball. Toronto. Tampa. Bremerton. Where are you based, Zeke?

Zeke: I’m in South Lake, Texas, just outside of Dallas-

Tobias: Tejas.

Zeke: -from DFW Airport.

Tobias: Someone gave us a question someone asked. Brandon, Mississippi. Portsmouth. Madeira Island, Portugal. Jupiter, Florida. Southlake, Texas. Ludwigsburg, Germany. Highland Park, Illinois. Bushehr, Iran. Breckenridge, Colorado.

Macro Uncertainty and Portfolio Construction

Jake: So, Zeke, on the investment process side of things, how do you untangle and underwrite what to me feels like a very, very wide possible range of outcomes that we currently are looking at between all the macroeconomics that seems like a lot of those data points are not the most encouraging to AI, to wars, to where’s oil going. I mean, there’s like so many. It’s a crazy world right now. How do you try to wrap your mind around that to underwrite what your businesses might do?

Zeke: Yeah, it’s a very challenging time, as you say. I guess I’ll preface my comments by saying, there’s only really two times in my career that I have not run into the fire to buy stocks when it was very clear the market was panicking. One time was in September of 2008, because I felt like I understood why it was panicking and I felt like one needed to be measured. And as it turned out I was still a little early.

And then, the second time was just recently with the tariffs. I am probably trained the way Pavlov’s dogs were trained [Jake laughs] to– When I’m seeing the CNN fear greed meter at three, and it’s my everything is red–

Jake: Time to get a little longer.

Zeke: Yeah, I’m going to go buy something. If I can’t think of something immediately, I’ll just buy whatever’s got the closest ticker, I guess. This is one time I didn’t do it. One of the reasons I didn’t do it is I think it was very hard to predict. In hindsight, it seems very easy to predict that there would been some backtracking and that it was a bit of a shock and awe to get countries to the table or whatever. I still don’t agree with it as an approach. Even if one thinks that we need to do something about trading balances, I don’t think the way to do it is that way.

But I also felt like, hey, until we get a little bit of clarity, it’s just really hard for me to underwrite my businesses. Like, I don’t know what these stocks– I don’t know what these businesses can do in this environment. And so, what we did basically was consolidate exposure into the things that we had the most confidence in. I think that’s one of the things that past crises, I will call it, has taught me is get to the stuff that you feel the strongest about but don’t basically shed exposure necessarily.

Jake: That’s interesting. So, I think a textbook would tell you, like if you’re feeling risk averse you need to diversify more and yet you went the other direction and sounds like concentrated onto the things you felt like you knew the best.

Zeke: Yeah. I think that’s always sort of been my approach to dealing with it. Sometimes you inevitably make mistakes by doing that, as it turns out, because what you feel best about is the stuff that is probably furthest away from the fire or whatever. But generally, what I find is that maybe the performance isn’t better off, because you did that, but you certainly do catch the benefit of– You understand which names you have conviction in and which names you don’t.

Jake: And you can sleep a little easier.

Zeke: Sure. If that situation had carried on for more than it did, I certainly would have been better off. So, that’s how I feel about it.

Yeah, as far as underwriting things now, we are underwriting things with a bigger margin of safety than we would have in the sense that we want better clarity that we understand the business. We want a sense of, hey, these products or services are pretty indispensable or we just think the company’s got some competitive advantage. In some cases, we’re just looking at unique assets that can’t be replicated. And so, eventually, there will come some, I think, equilibrium with the tariffs. And then, once we know what it is–

But you can’t wait for a certain world, because the world’s never going to be certain. But I think what surprised us all was the war in the Middle East that seemingly came up over a weekend, that is also very difficult to underwrite. We’re already seeing interesting things happen.

So, when it comes to diversity though, I think your point is still a good one. I don’t consolidate to the point where I’m holding six stocks or eight stocks. I mean, we get down to the 15, 20 core ones that we really like. And if we don’t like the prices we’re seeing, we don’t sell those. Even if we have less conviction in the idea, at some price, we just like, “Hey, we’re going to take our chances.” [crosstalk] Yeah.

Tobias: It is amazing how quickly the market shrugs off bad news. The tariff news is gone. There was a credit downgrade there-

Jake: What tariffs?

Tobias: -as well.

Jake: Yeah. [laughs]

Tobias: Moody’s downgraded the US Credit. [chuckles] It hasn’t done anything.

Zeke: Yeah. I think that’s interesting as well. I wrote about it, actually, in my last monthly letter. I didn’t want to let it go by, because Moody’s was the last ones hanging on to this notion of there are AAA credits out there. [Jake chuckles] I didn’t think that it would happen in my lifetime where I’d look up the 12 countries that are rated with the equivalent of AAA debt ratings, and now, we’re down to 11 and the US is not one of those. I think it’s a pretty damning observation. I think Moody’s is probably five years too late, right?

Tobias: Yeah. I was going to say, it’s not unfair.

Jake: The horse left the barn already.

Tobias: Yeah.

Zeke: Look, I try not to think too much about the deficit, because it makes my head hurt. I like to listen to my friends who say, “Hey, we’ll muddle through somehow.” But my view is, is that the deficit can’t continue to grow in excess of what the economy can support forever. And so, I was hopeful that this administration would push it towards a better trajectory. I think what that Moody’s downgrade was, was the last shot that said, “Hey, there’s a time element here that this has to be confronted.” But unfortunately, I’m assuming it’s going to be for a future administration– [crosstalk]

Jake: Big and beautiful problem still?

Zeke: Yeah. When I say administration, I don’t just mean the Blue Team or the Red Team. This is one of those things that everybody on those teams has to at some point go, “Okay, we are no longer on Team Red or Team Blue. We’re now on Team Red, White and Blue, and good for the future of our country.” I’d like to see that happen soon. But for now, I do think it’s very interesting that if you want a AAA rated sovereign debt, you got to go to Norway or some of those places.

Jake: Yeah, I think we’re down at look with Spain or Greece or something, aren’t we in the–

Zeke: Yeah, I don’t know.

Jake: I think the CDSs were something like that. I was like, “Really?”

Zeke: Oh, yeah, yeah. I did Hear that the CDSs for the US briefly were higher priced than the CDS of Italy and Greece.

Tobias: Should have got away with the hundred-year bond.

Zeke: Yeah.

Jake: Oh, my God.

Zeke: I will say that I–

Tobias: [crosstalk]

Zeke: I do think that America has incredibly unique position in the world. We have incredible advantages, and I hope that will continue and I think it will. But I just think that every once in a while, you come to these moments where you have to choose the right path. And so, hopefully we will.

But yeah, as far as underwriting businesses and stocks, we’re looking for things that say, “Hey, when we look at risk, we’re just kind of having to be a little bit more,” I would say, “creative than we were.”

Jake: Yeah.

Zeke: Being like, “Hey, this company competes with that company and that company who’s better.” Now, you have to think about things like, “Hey, are people abroad going to want this American brand as much as they did in the past?” If everybody’s spending 5% or 10% of GDP on defense, will there be money left for these other things? But that brings me to where we’re seeing things in the market.

On UnitedHealth and PayPal Narratives

I was mentioning healthcare in the US, I think that’s interesting. Obviously, I talked about UnitedHealth. This feels a little bit like maybe British Petroleum back in 2015 when it was still [Jake laughs] petroleum. I don’t know if it was 2015, but it was back when they did the oil spill. It was just terrible front-page news. It seemed like weeks on end.

At the end of the day, it felt like BP could go away. And it didn’t. If you did step in there and buy it at the worst possible time, I’m sure it was some harrowing moments. But that’s how we feel about UnitedHealth, is we feel like UnitedHealth is going to survive this current difficult period. I can’t imagine a stock that has a worse narrative around it right now. But if you take the time to go in there and understand the business– [crosstalk]

Tobias: What’s the narrative?

Zeke: Well, it’s not every day the CEO of a public company’s division gets shot in cold blood on the street, because people are so unhappy with–

Jake: And people cheer.

Zeke: Yes. That’s the interesting thing is.

Jake: Jesus.

Zeke: More on the side of– [crosstalk]

Jake: Team Luigi or whatever the–

Zeke: Yeah. I would say this, I think UnitedHealth, they need to do better. They need to do better in terms of making sure that their services are easy to understand. But they’re in a tough business. I would argue that anybody else that was in their business would also have the same tough hand to play.

But we think UnitedHealth is an excellent business and I do think that they will be forced to improve certain things about their business where it touches on patient lives. It is very frustrating, I’m sure, to deal with insurance companies when your family’s having health issues.

But I do think it’s a terrific business, and I think it will be a good business in 5 or 10 years, although it may not be as good as it has been in the past, because I think that they will probably have to earn a little less in order to get the goodwill back that they need to continue to provide the healthcare to this huge number of people that they provide it to. So, it’ll be interesting to see how he goes. But that’s one of those where the narrative is awful. But I think the business is still pretty good, and I think they will understand the position they’re in and try to make improvements. So, that’s one.

I do want to come back to PayPal, which we talked about last time I was on, which was I guess 14 months ago or so. PayPal is another interesting business that I think the narrative continues to be fairly poor. What we saw last year was the narrative really improved with the performance of the business and the stock went from $60 to $95. And now, the stock’s back to, I think, $75, but it got as low as $70 recently when all the stablecoin announcements came out, about the new stablecoin, the regulatory system around it.

What I think is interesting that nobody has brought up is that PayPal was the first consumer finance or Fintech company to introduce a stablecoin with PayPal USD, which I think was in 2023, which was two years ago. But of course, PayPal stock sells off on the stablecoin news, because people just assume that PayPal is not a 21st century, or 22nd century or whatever it is Fintech. I think that they are doing all the right things.

Venmo is doing very well. Since I spoke to you, guys last, the business generated another $6 billion in free cash flow. They bought back another 7% or 8% of the stock, and here it is again trading it roughly ten times this year’s free cash flow. So, we like it. It is also a very difficult one. The payment space is evolving seemingly every day, certainly, with the legitimacy of crypto and stablecoins and all this stuff. There’s going to be parts of that business that become more competitive, but we still believe that PayPal is a very unique asset, and we think it’s one of the better, more misunderstood stocks out there. So, we still own it and we feel reasonably good about it.

Tobias: Thanks for that, Zeke. Jake, do you want to do your-

Jake: Vegetables?

Tobias: -vegetables, make benefit glorious nation of Value: After Hours?

Carthage vs Greece: A Cultural Lens on Geopolitics

Jake: Yes, sir. Let’s do it. All right. So, we’re going to do a little history lesson here. If you’re a history buff, if I were to say to you, salting the soil, there’s probably one particular place that comes up, one particular civilization that comes to mind, and that’s the story of Carthage.

So, after Rome, the city of Carthage was destroyed. This was, what was this, 146 BC. The legend goes that they salted the earth, so that nothing would ever grow there again. This probably wasn’t true in a literal sense, but symbolically, it ended up being quite accurate. Carthage was not just defeated, it was deleted.

A little background on them. They were a very powerful Phoenician city state that was located in what’s now modern-day Tunisia. It was founded by settlers from Tyre around the 9th century BC. So, you’re looking at 800-ish years maybe of being a dominant maritime and commercial empire, and controlling a bunch of trade throughout the western Mediterranean. What are we at the US? Not even a quarter of that or roughly a quarter of it.

So, then Carthage influence really peaked right before the Punic wars, which they were ultimately destroyed by Rome. Strangely, not all defeated civilizations disappear. Now, why is that? Ancient Greece was also conquered by the Romans, no less. And yet, Greece lives on inside our language, our political systems, our schools, our aesthetics. Greek architecture is coded into our courthouses. Socrates is still whispering in our textbooks.

Rome beat Greece militarily, but spiritually, they lost. Roman elites read Greek. Their Roman children had Greek tutors. Roman gods were just Greek ones with Latin names. Greece’s legacy survived, because it embraced and retold even by its conquerors, actually. So, here’s the mystery. Why does one fallen civilization become the intellectual father of the modern world in the west, really, and why does the other vanish into a brief footnote?

If we can extend this a little bit right now, which of the two modern giants, America and China, who are wrestling on the world stage, years from now, so say 500 years from now, who gets remembered as the Greece of our era and who maybe becomes the Carthage? So, let’s see if we can unpack this a little bit. This is a little bit more of a poll than it is– I’m not going to tell you the answer because I don’t really know what it is.

So, ancient Greece and Carthage were both these thriving superpowers in the Mediterranean. One focused more on ideas, art, democracy, debate. And the other was much more commercially minded. Navigation, pragmatic governance. It’s a cultural difference. One is immortally mythologized and the other one disappears.

So, let’s entertain two different frames of what we can think about. The frame number one is, US is the Greece and China is Carthage, okay? I’m not putting any judgments in here, so don’t send me hate mail. [chuckles] So, America, we export dreams, The Hollywood, the iPhone, Ivy League Education, all these things that the rest of the world really wants.

TikTok might be Chinese owned, but it spreads Western memes. The US tells stories about freedom, and rebellion and innovation. These Horatio Alger stories of lifting yourself up by your plucky blue straps. People might be driving Chinese made cars potentially, but they’re dreaming American dreams.

And then, China on the other hand, right now, is merchant powerhouse. Trade routes, infrastructure, belt and road, very dominant in hard power, but I think perhaps lacking in soft power and stickiness and storytelling. Toby, you can fill in some color there on our trip if you want. [laughs] But their global image kind of still struggles with a lot of control and censorship. Their stories don’t seem to travel in the same way around the globe the way the US ones do.

So, unless you think this is all very simple and obvious, let’s try flipping this around now and let’s frame China as Greece and US as Carthage. China has these very deep philosophical roots, Confucius, Sun Tzu. It’s one of the rare continuous civilizations from antiquity. They really focus on harmony, and meritocracy and strategic patience. These ideas run thousands of years deep.

America by contrast, maybe where the new Carthage– It’s hyper commercialized, a naval superpower defined by trade and global bases. I guess let’s open up to you, guys, like, which of these two framings do you find more compelling? Whose story do you think will be written for the 21st century?

Zeke: I’ll let Toby go first.

Jake: [laughs]

Tobias: China’s old world. So, it’s been around for thousands of years. There’s written Chinese documents that I think 6,000 years old. So, if you Lindy China, then we’re halfway. And the US is 250 years old, but built on some philosophical traditions that are much older than that, and that have been good for the world. So, it’s a hard one. It’s a hard one, I think.

I think they’re both likely to survive probably in their present form for a long time in the future would be my guess. Probably, I think there’s a good comment here that said, “US is Rome, UK is Greece, USSR is Carthage.” That’s probably where I fall, Something like that. I know that was option C, that was not our option.

Jake: Yeah. Totally. Reject your premise and substitute my own. Zeke, what do you think?

Zeke: This is a really interesting topic, I guess I would say. I think I have a personal blind spot a little bit when it comes to China, because I don’t travel there. And so, I’m not sure that I have a really good perception of what goes on the ground there from day to day. I do think that one of the things that we have in the US is we export our culture for good or for bad, and we have been very successful at doing that.

I think that there are far more places you go in the world, where if you get off the plane and you walk up and order a cup of coffee in English, they’re going to give you a cup of coffee. Whereas if a Chinese tourist comes to the rest of the world, I think they would not probably be able to order a cup of coffee in Chinese. I think that’s probably the difference. I think that the world accepts our language, and I think in many cases our norms.

Jake: Our dollar.

Zeke: Yeah, the dollar being obviously the reserve currency. I think that’s a big one. While China is, of course, as you mentioned, very old and has, in many ways, a really fascinating history and legacy, the United States has probably been the more stable country for the last 250 years. And so, I think that as long as we have that, as long as we have a stability– Of course, the natural resources, that we have the benefit of.

But I think it’s the cultural resources, and I think there’s also this nature that in the US, we still have the ability to say to somebody with a straight face, “Hey, if you are motivated and talented and you get out there, you can literally turn into the next Jeff Bezos or Elon Musk.”

I think it’s very interesting that the people who come to this country to do that, whether it’s Steve Jobs, or Elon Musk or whomever, they invariably come to the US to create their companies. I think that as long as that is true, I think the US will be more of the Greece.

Tobias: Let me just play a little devil’s advocate there, because there’s definitely a view in China that you should work extremely hard, and try and make as much money as you can do the 6-6-9. Six days a week.

Jake: 9-9-6.

Tobias: 9-9-6?

Jake: Yeah. 09:00 AM to 09:00 PM, six days a week.

Tobias: Six days a week. Okay. Thank you. I was going to say 06:00 AM to 09:00 PM, [Jake laughs] six days a week.

Jake: They might have upgraded it, since we were there.

Tobias: 9-9-6. Okay, 9-9-6.

Jake: Yeah.

Tobias: They have this enormous manufacturing base now where they can pump out goods to the rest of the world, and they are doing that. And then, there was this view while we were there that the China hadn’t been– Some of these people that we talked to said that China hadn’t been great at telling its story globally, which is funny because that’s not the perspective that I get. If you watch kids’ television, if you watch kids’ movies, there’s an enormous number of cartoons that have been dubbed from Chinese that tell Chinese stories in English. They’re targeted at kids seven, eight, nine-year olds and below.

So, I think that China’s getting much, much better at telling its story. I don’t know if they were ever bad at it. I think they’re pretty good at it and I think that they’re targeting our kids anyway with their stories.

Zeke: Yeah, I did see a news story about what the latest toy craze is a Chinese plush toy that’s taking over the world, apparently. So, I do think–

Jake: Is that what you have on bookshelf up there in the back?

Zeke: No. That’s from the old Motley Fool Day.

Jake: Yes. [laughs]

Zeke: Yeah. But yeah, I do think it’ll be an interesting– It’s my hope that the two countries, in their striving for superiority or whatever it is they’re doing that they actually elevate humankind altogether just because competition does tend to bring out the best in everybody, regardless of why you’re doing it. So, hopefully, that’ll be the case.

No, I have not spent as much time thinking about China, certainly not on the ground in China, but I certainly respect some of those companies like BYD, is an amazing company. I think there’s many, many companies in China that would be– If they did have the chance to tell their story, it would be comparable to Tesla or the Waymo’s of the world and certainly some other ones. Maybe in the AI world, for sure.

Tobias: You want to finish it off JT, or you– [crosstalk]

Jake: No, that’s probably enough navel gazing for one day. But it’s fun to think about the– I mean who knows what it’s going to be 500 years from now, but hopefully, we’re all around to find out.

Tobias: Who knows what it’ll be 50 years from now. [Jake laughs] But you could even have a short-term China victory, US loss. I still don’t think that’s the end of the story. I mean, short-term being like [crosstalk] the next hundred years– [crosstalk]

Jake: Sure. It could be setbacks and reversals.

Tobias: There are certain geographic advantages that the US has.

Jake: Huge. Huge [crosstalk] space.

Tobias: China has some of them too. I think probably the world just continues on how it has been. It’s hard for anybody to overcome the other just because of the nature of the oceans in between and the size of the land mass, I think.

Zeke: I do think it’s interesting that China tends to have the reputation of being able to see further out in time, like where they’re making 20-year plans and 50-year plans. And of course, in the US, we’re really thinking from mostly election to election. That’s the difference in time horizon. So, that’ll be interesting to see if that plays out.

Tobias: That was what they said about Japan in the 1980s and 1990s that Japanese think 100 years out, whereas America’s only thinking quarter to quarter. But then, maybe you got to iterate. Maybe you need change quarter to quarter.

Jake: Boy you need to think 100 years out when you don’t make new highs for 100 years.

[laughter]

Zeke: Yeah, that’s probably true.

Jake: Oh, man.

The Four Controllables in Investing

Zeke: So, Toby, coming back to the investment process, I do want touch one thing with the few minutes of time we have left. This was something that I thought about probably about seven, eight years into being a professional investor. When I just took a step back and I said, “Well what are the things, what are the decision factors that I can control as an investor, and how can I get a little bit better at each of those and what are they?” It took me an embarrassingly long time to think about it, but I think the conclusion I came away with was there’s really only four things I can control when you’re talking about individual securities and decisions around them.

The first one is, what security should I buy? What should I own? The second one is, what price should I pay? And then, the third one, obviously, if it’s not at that price or below, then you don’t really have a choice of whether to buy it, unless you want to overpay. But the third one is, how big of my bankroll or my portfolio to make it? We discussed a little bit about bankroll management and portfolio management through the lens-

Jake: Kelly.

Zeke: -the Kelly formula last time we spoke. And then, the last one, which took me a long time to figure out, was on the sell side. I only have the choice to sell at today’s price or not, or hold on and hope I get a better price.

What I tried to do is, I had some very interesting insights when I wrote those four things down, because what I realized was paying the right price was usually not the make it or break it with a good investment or a bad investment. It was getting the right asset, buying an asset. About 90% of the time, it was making sure that I understood it really well enough and understood that it almost every time where I got sucked into buying an asset just because of the price. I got many good outcomes doing that, but I tended not to have the great outcomes. I had to be very quick to get out of the casino, if you want to call it that, before– This is more of the cigar bud type approach, the Ben Graham approach.

And then, the position sizing was an interesting one too. I have discovered there that I tend to not flex up and down position sizes maybe as much as I should when new information becomes available. I get incremental conviction one way or the other.

I think the part of that everybody struggles with more than anything is the selling. When do you sell businesses? When do you sell your stocks? This, I still don’t get it right a lot of the time. What I’ve come down to though, is that basically, if I was there for the price, primarily, if I was there because I thought I was getting a bargain security, then I need to get out when I get my price. If I’m really primarily there for the business, because I like the business, I have an affinity for the business and the management and I’m convinced they can continue to create value, then I actually need to let it go further and maybe even into the slightly overvalued realm before I sell it. So, I’ll leave you a little bit with that. We can jump off from there if you’d like and see where that goes.

Tobias: Yeah. That’s always been the difficulty for value guys, figuring out when to sell because you want to be conservative. So, when you see it getting closer to value, you feel like that’s the time to– At fair value, you’re saying you can get equivalent returns from something that is risk free, like you stick it into cash and you should be okay at that point.

But the reality, is that you buy these things, and then they start going up and so they get a little bit of momentum and you’re selling them right at the point that they’re getting maximum momentum or they’re about to have a really good year or so. And so, after doing all of the work and suffering through the sucky period, now that it’s come back and everybody loves it and it’s running, you’ve sold out and you’re gone, you moved on.

Zeke: Yeah. I think the other element of that is this is where the narrative transition takes place oftentimes. When you go from, “Oh, it’s cheap,” but everybody knows it’s cheap because it’s not very good to, “Oh, wait a minute, it’s a little better than we thought.” And then, “Oh, wait a minute, it’s pretty good.” We’ve probably seen this.

Again, really big stocks can do this, Walmart did it. Microsoft, probably the best example. It’s hard to look at Microsoft now and remember a time when people thought Microsoft was old tech and was really not relevant when you look at how dominant they are today.

And then, there are some things, like I think many of your guests have talked about Costco and how expensive that stock appears. I would argue that it’s simply being giving a huge premium for the fact that it’s just performed so well for so long, and it’s reached the point where people are saying, “Hey, there’s not really a price that’s too high to pay for that kind of quality,” whereas I would argue there is a price that’s too high to pay.

I think Costco is probably to the point where, “Hey, if you’ve owned it for a long time, you don’t want to take a tax gain on it,” sure, but if you were buying a stock today, I think you’d more likely be disappointed if you bought Costco at today’s price, but that’s just my view of that situation.

I do find that having gone through this exercise and realizing just how few points of control I really have made me want to get better control of those decision points and think about those things. I think the process of doing that made me a better investor. It certainly identified to me where some of my weaknesses are.

Selling, Round-Trips, and Behavioral Tactics

I’ll just share one of them with you just because I think it might be instructive for some people is I have a terrible fear of round tripping ideas.

So, I have friends that say, “I round trip stocks all the time.” I’m like, “I have almost never round trip to stock.” [Jakke laughs] What I have done though is made a nice double in five years and sold only to watch that stock go up five times in the next 10 years. Or, sold and made a nice 30% return in 8 months or 12 months or 15 months, and then watch the stock continue to go up for a good while after that.

And so, I think that it’s very interesting that depending on how you’re wired, what I recognize though is this fear of having a stock round trip on me was probably keeping me from staying in longer as long as I should. What I decided to do was where I would normally start getting the temptation to sell the stock and maybe even the entire position, I make myself sell a little tiny bit of stock just to satisfy that urge, and then go sleep on it and then see how I feel the next day.

What I found is that even just doing a small action that may not have a material monetary sort of thing, it was a psychological release valve for me. And it enables me to then stay with it, because even if it does round trip all the way, I’ll have clipped this little tiny bit of profit. And so, I don’t know if you guys have any similar– [crosstalk]

Tobias: What about on the other side? Do you have a mirror to that where you say, “I like this stock, but it’s too expensive probably. So, I’m just going to buy like a fractional position, like less than a percent, just so I can keep an eye on it”? Do you ever do that?

Zeke: No, I don’t buy a stock that I know is overvalued or I believe is overvalued. I will now take a starter position in a stock before I have reached this 100% clarity that we don’t have the 30-page internal document that we normally would like to have/ Because sometimes when you’ve spent, I don’t know, 50,000 hours doing this, at some point you go, “Look, I’ve got to have learned something in that time. I know all the major pieces are there. Let me get started on it.” And so, I will have 1% or 2% starter positions, and then just try to get smarter and learn more about that stock as time goes by.

Whereas in the past, I would not even buy one share until I knew exactly what I thought that stock was going to be for me. I don’t know if that’s a big difference either, but that’s a little thing that I will do. But no, I still have not yet brought myself to say, “Oh, I need to own this stock even though it’s overvalued.” [crosstalk]

Margin of Safety vs Momentum

Jake: One thing that friend of the show Chris Bloomstran does that I always thought was pretty clever, is when he’s selling something, he will leave a small token amount of it still in the portfolio if it’s a business that he likes and wants to keep following it and he just doesn’t really like the price right now, because it is psychologically quite a bit easier to add to half of a percent position than to reinitiate off of zero completely.

There’s something about the human psyche that it’s really hard to get back in after you’ve already sold all of it. It just makes it easier to then ramp it back up if the price comes back to you. So, it’s close to buying, but instead it’s just a holding of a small piece to kind of keep your foot in the water.

Zeke: I love that idea. And I think that would help me, because one of the things I do like is closure.

Jake: Yeah.

Zeke: I like to be able to say, “Hey, we bought this stock in whatever four years ago and we paid 13 times free cash flow. And now, I’m selling it four years later and the free cash flow’s gone up by 50%, and now I’m selling it 18 times free cash flow,” which is fair value, and then, boom, it’s done.

Jake: Right. It feels good to close the book on it, like there’s something– [crosstalk]

Zeke: Yes, it feels great to close the book on it. It’s interesting that you would say that. By the way, I think Chris is a brilliant investor. I’m sure he’s had wrestled with things like that. I’m sure he has come up with that technique in order to overcome some psychological bias that he recognized that he had. But I’m going to actually write that down. If I get a chance to talk to Chris about it, I will ask him about it, because I think that’s really useful. But I’d be curious if either one of you has a psychological wiring to you that you feel like you need a little technique to override like that, or whether you think that–

Tobias: My whole process is built to override my urges to do anything. I’m prevented from doing anything.

Jake: Yeah. Toby’s pretty well tied to the mast. Graham had that idea of two years or 50% up, whichever came first for a net-net, I believe, if I’m recalling correctly, which I always thought was a pretty good idea.

Tobias: It just truncates your winners. The only problem is it just doesn’t work. It’s suboptimal.

Jake: Well, that whole continuous return versus the punctuated, I think it was easier back in the day to keep that motoring return going. You know related to this though, long time ago, I did a little– It was just in an Excel. It was very back of the envelope. But I took all of the studies that I could find, the value studies. These are the tweedy brown magic formula, etc., you’d know all of them. I plotted out all those returns in the year that they were recorded. And then, I went and found as many of the value investing gurus that I could and I plotted out their returns over that same kind of time period. So, it was temporarily matching studies versus gurus.

The finding was that the studies completely trounced the gurus, which is interesting, because the gurus also trounced the market. But my hypothesis as to why the studies did so well was that the gurus participate on that downside irrationality. They’re buying when everyone else is irrationally despondent about a business, and then they sell when it gets up to fair value, as you described, Zeke.

And then, perhaps, the studies were participating on that downside irrationality, because they are buying cheap. And then, they might have captured some of the upside irrationality as well as it moved into a momentum stock. They just didn’t sell, because it was programmatically a timing thing and it was two years later you sell, and that’s just what it did. And then, it is able to get both sides of the humanity being wrong in either direction.

Zeke: Yeah.

Tobias: There’s also that idea that golden rule that humans tend to underperform simple statistical-

Jake: True.

Tobias: -algorithms and simple statistical algorithms outperform the cohort.

Jake: Even when the experts have access to the models. [chuckles]

Tobias: That’s it. That’s it. The theory is that you should apply the model without messing around with it too much. We’ll see.

Jake: Zeke, what do you think about that? Does that ring true for you at all?

Zeke: In terms of models outperforming humans?

Jake: Well, yeah. You were saying that you felt like you weren’t capturing any of the upside irrationality.

Zeke: Yes.

Jake: Enough of it. Yeah.

Zeke: Yeah. I will say too, that I don’t know which is the greater sin. When you’re in a bull market, not capturing that irrational upside-

Jake: Exactly right.

Zeke: -turns out to be a big sin. On the other hand, coming back to the very first topic we talked about, which is the post-value era now, I think that there’s this margin of safety concept that has slowly been getting diluted amongst value investors. The reason is if you’re really focused on margin of safety, you really probably have not kept up with what’s been going on in terms of market performance. You haven’t been able to own some of the big winners. I just think that’s the nature of it.

And so, combining that margin of safety with catching the upside that comes when the narrative has taken a positive turn or simply the momentum of a stock that is going up will likely continue to go up, I do think that is even more magnified now with the passive flows, because as new money comes in, it will go to a stock that’s higher, and then that stock moves higher, and then the next flow will come in and it will go to that stock again higher. And so, I think that the momentum factor may be more durable now than it’s been in the past, if you’re in the– [crosstalk]

Tobias: Statistically that is true.

Zeke: Yes.

Tobias: It has more evidence for it, stronger evidence for it.

Zeke: Whereas let’s say, you are equally weighted between margin of safety and trying to capture upside. I think the margin of safety piece will come in earlier than it would for many and it will truncate some part of your upside. I think value investing probably does truncate some of the upside, because it used to be traditionally value investors really outperformed the market in the down markets.

And in fact, it became a source of capital into the market to prevent stocks from going further down, because they were the ones that had the cash and they were the ones that didn’t participate in the bubbles. I don’t think that’s as true as much anymore either. I don’t think– [crosstalk]

Jake: We’ve got central bankers for that now. You don’t need value guys.

Tobias: [unintelligible 01:01:15] us with no capital.

Zeke: Yeah. I do think that there are other mechanisms that provide that, I’ll call it that service to the market, whatever it may be. I think there’s also a lot of ETFs now that are designed to take advantage of price weakness as well. But for whatever reason, yeah, I do think that margin of safety is still very important, but I think it’s becoming more challenging to know where to incorporate that in terms of on the sell discipline, particularly.

Tobias: I think that as soon as that the small factor and the value factor start outperforming and they’ve been underperforming since 2011, I think we revisit this conversation and I think that you’ll be proven right.

Jake: No motivated reasoning there.

[laughter]

Tobias: It can’t go on forever. Maybe you can. We’re at time. Zeke, if folks want to follow along with what you’re doing or get in contact with you, what’s the best way of doing that?

Zeke: Yeah, there’s a couple ways. First of all, if you’re a financial professional or you’re an accredited investor and you’re interested in what we’re doing, you can email ir@ashtoncap.com, or you can just go to ashtoncap.com, go to contact us. If you convince us that you’re a human being by filling in the little thing, we will respond to you.

By the way, I do appreciate last time I was on the podcast, I got a number of very nice, very interesting people reaching out to contact me, to talk about investing or value investing or whatever. So, some very, very nice connections that were made. So, I appreciate that. You guys really have cultivated a great value investing community.

Jake: All 10 of the listeners reached out?

[crosstalk]

Jake: [laughs]

Tobias: Zeke Ashton, Ashton Capital, thanks so much for coming and spending some time with us. We’ll have you back again in the future.

Zeke: Thanks, gents.

Jake: Yeah, thanks, Zeke.

Zeke: See you next time.

Tobias: Oops. Don’t do that.

VALUE: After Hours (S07 E23): Zeke Ashton on Buffett, the Post-Value Era, UnitedHealth $UNH and his Four Decision Factors

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