VALUE: After Hours (S08 E01): Why the Hunt for the Next Amazon Loses More Money Than It Makes

During their recent episode, Taylor, Carlisle, and Gary Mishuris discussed Why the Hunt for the Next Amazon Loses More Money Than It Makes. Here’s an excerpt from the episode:

Jake: Oh, I was just going to make that we’ve joked before and were talking about Nick Sleep and all these, everyone not doing enough of their own matching of what fits their strengths and weaknesses. But we’ve joked before that there’s likely to be more money lost trying to find the next Amazon than there ever was made on the original Amazon.

Gary: Yes. Well, a few years ago before AI was the hot thing, I would give my students the description of two companies and I would say, “Okay, so you have these two companies and let’s say it’s 1999. One is old line retailers selling clothing and related soft goods. No Internet presence and no intent to have an Internet presence. The other probably is making kind of the plumbing of the Internet switches, routers and so forth. And let’s say that the Internet is going to take off, that E-Commerce is going to be amazing, which of these companies do you think would make a better stock?” And they kind of suspect, that’s a trick question. Obviously, it’s a trick question, otherwise why would I be asking? But they still don’t–

And of course, most people say, “Well the router company,” and it’s not even a valuation thing. So, the router company is JDS Uniphase and the clothing company is Ross Stores. And again, you have this boring mundane business where you, who could have thunk that this is going to not only survive but thrive, but nevertheless you have kind of a business that has been able to compound capital for a long time despite all these secular changes around it. So, I think again, playing your own game, it’s like in poker. You see unless– Some people are experts at all forms of poker, but when I used to play poker semi-seriously, it’s like, “Okay, I knew two forms of poker, Texas Hold’ Em and Pot Limit Omaha. So, I’m not going to go play seven card stud because I just don’t know the game.”

And then, I think investing what happens is, well, there’s some guru that happens to come around. They have enormous returns for some three-to-five-year period. That probably means that style is in favor, they get on, they write a book, they do interviews and they say, “Oh, look at me, I’m so amazing. I figured this out. This is so simple. If only you do these simple things–” Right now it’s like, “Hey, buy good companies managed by good people and just hold them, never sell them,” something like that. And everyone goes and rushes out and copies them.

But two things, one is even if this person is truly skilled and telling you how they’re actually doing, it doesn’t mean that you are going to be able to replicate that because your skills are different. And number two is there’s a very good chance that this person is just on a hot streak and everybody is ascribing some mix of maybe some skill, but a whole lot of luck over that period of time and calling it all skill. And the crowd saying “Must be all skill. Because look, he wrote a book, he wrote this, he has this.” And of course, ex-post ante, you go and you look at their returns and not only the returns bad, but the asset weight returns awful, they’re like negative.

I’m not going to mention anyone by name, but I’ll imply– I think Buffett always says criticized by category and praise by name. But back in the Internet bubble days, to get us away from the current set of folks in that category, there was a firm that was based in Silicon Valley and their claim to fame investing was that, “Hey, they were closer to where the tech revolution was happening, so they had an edge figuring out these technology companies.” Cover all the magazines, yada, yada. Of course, haven’t heard from them for a while after the bubble popped. So, I think the message is like, just try to be a better version of yourself, not a secondary version of someone else.

Tobias: Gary, you were going to mention a second name. Do you want to take us through that second name?

Gary: Yeah, I mean, Warner Brothers is a current example. And I think it’s relevant because catalysts are important. And I used– It is interesting because I used to think catalysts are for momentum people, because when I used to hear the word catalyst and I used to associate with a, someone needs come, expects the company to beat the quarter and that’s going to be the catalyst, but that’s not what I mean, because like you don’t know if they’re going to beat the quarter. Even if they beat the quarter, you don’t know what was expected, that’s a different game. That’s in that zero-to-twelve-month kind of trading game that I would be the path yet and I don’t know what to do.

I think there’s a category of catalysts and actually Seth Klarman made a good point about his letters several years ago and he wrote something along the lines of a fully uncatalyzed portfolio of equities has a very long duration. And then he went on to explain certain implications of that. So, if you think about equities as bonds with variable coupons and no maturity duration of a bond, kind of center of mass of those cash flows for a bond, it’s obviously heavily weighted by when the bond matures because that’s the biggest cash flow for most of the bonds. For equities there’s no maturity, so it’s like the cash flows and you kind of figure out where they are weight. So, the center of mass of an uncatalyzed equity portfolio is very far away from the point current point in time. If you have a–

And his point was a better portfolio would be yes, some, maybe some in that category, but some in the catalyzed category where there’s going to be a reason for the rerating or even better actual event that forces your thesis to be put to the test yay, nay. And probably the simplest example of that is a bond. Let’s say you buy a distressed bond, let’s say it matures in 18 months, you buy the 50 cents on the dollar thinking it’s money good. Market says not really, that’s why it’s a 50 cents on the dollar. 18 months comes around and again, I’m simplifying, there are probably some in between cases where you have some debt for equity swaps or whatever.

But let’s just say there’s two scenarios. Either the bond they pay back or they don’t. And that’s a very hard concrete catalyst. Hard, I mean it truly will, like you’re going to get your money back or you will know if you were right. And then there’s the second category of catalysts which are much more common in equities, which are these I call “non-hard catalysts.” And so, Warner Brothers was an example of that. So had a long history with Warner Brothers back to when it was Discovery Communications before they did the merger with Warner Brothers that’s been a disaster. Which by the way, as a quick side note, you know, there’s a lot of hate in the stock when some gas fly shareholder is like screaming at how the management is overpaid at annual meeting, which did happen here. It’s one of the signs, by the way, she was probably right.

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VALUE: After Hours (S08 E01): Why the Hunt for the Next Amazon Loses More Money Than It Makes

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