[00:00:50]Mike Philbrick: All right, welcome to another ReSolve Riffs. Today we have an old friend with us, Toby Carlisle from The Acquirers Funds and from The Acquirers Podcast and blog, and I know you call it Value After Hours, your YouTube show. I like to think of it as Value After Hours because your voice is just so calming and, uh, and so value after dark. Like, I think you might, I would contemplate, submit to you for a name change to Value After Dark with Toby Carlisle.

[00:01:27]Tobias Carlisle: Yeah, we might do that.

[00:01:30]Richard Laterman: Has to be the accent.

Backgrounder

[00:01:31]Mike Philbrick: Yeah, so, so congratulations on a fantastic year and last three years for your ETF ZIG, outperforming S&P on both of those timeframes. Fantastic work. Still flying under the radar though, as many assets and geographical regions, whether it’s gold, whether it’s Argentina, whether it’s value, so many places are actually doing well and outperforming S&P, providing great diversification. Yet most people aren’t, you know, really allocating in any significant way there. So I know we’re kind of early on beating this drum, and what we beat it through, all the way through the tough times too, but you know, hopefully people can take away some insights here from you. And maybe before we get started, for those of you who may not know you Toby, maybe give us a little bit of your history, how you came to this point. I mean, going from a lawyer down in Aussie, to a value funds manager in California. Maybe map it out for us and bring everybody else up to speed who might not know yet.

[00:02:29]Tobias Carlisle: Yeah, I started out – thanks for, that’s a very kind introduction, Mike. Thanks very much for that. It’s always good chatting to you with a big, the big lead in the big buildup. Yeah, I was a lawyer. I was a mergers and acquisitions attorney. I was corporate advisory, is what we call it. So we did everything from capital raising, to acquisitions, to board papers, to like, just whatever was needed for mostly publicly listed companies, big, big private companies. I started in April 2000, which was the very top of the dot com 1.0 boom, and saw that all collapse, and then saw the rise of activism and private equity through those early 2000s. And at the same time as I was sort of, you know, papering these private equity acquisitions, which is a lot of work, you know. There’s lots of different layers of capital, debt, equity, prefs, whatever might be in there, plus the acquisition, and just, there’s so much contracting. You’d end up with a tower of paper at the end of it and it would cost millions of dollars of legal fees. At the same time, you can buy exactly the same business for cheaper on the stock market.

And at the time it was $8.00 a trade. I don’t know what it is now, but it was $8.00 for me to trade, buy the same business for half the price. And then if you make a mistake two days later, you can tip it out for another $8.00 round trip. And I had read enough sort of, um, Buffett and Graham by that point to know that these things happen. You find, you know, pieces of businesses that aren’t trading for the full negotiated price on the stock market, even though they might be worth more. And I just kind of fell in love with it. It was fun. And it was a good period for value. It was easy to buy things who were undervalued, and they just run almost immediately.

And so I spent the first sort of five years or so of my investing career doing pretty well with deeply undervalued stuff. And that all sort of collapsed in 2009. But I decided I wanted to go and try and do it professionally at that point, so I set up a little fund in Australia, had some pretty good returns out of the gate, but just was never going to be a structure that could raise money in the States. My wife has American, we met when I was working in San Francisco as a lawyer. And so we moved back to have kids and I started the business here. And it’s been a tougher run for value, as everybody well knows, those starting in, depending on how you measure it, starting in 2010 or 2015, somewhere in that period of time, value really started underperforming.

And I’ve got a friend, Mikhail Samonov, he’s done this analysis. He called it 200 years of value, and he said, this was the, you know, that period through 2020 was the worst underperformance of value in 200 years of value. Clearly as you go back in time, the data is not as good, but what is pretty clear from it is that you get these often associated with some sort of technological boom. So the telegraph, the invention of the telegraph was a big one. Steamships was another big one, and so on over the last sort of 200 years where every time there’s been an electronics boom in the ‘60s, the dot com 1.0 boom, whatever it was, that sort of  dot com 2.0, social kind of boom that we had through 2020. And I guess now we’ve got a little micro boom going on with the AI, but whenever we have these things, it tends to be the story stocks that don’t have a lot of fundamental value run, and it draws money away, or it sort of leads the rest of the market to underperform.

So that’s what I’ve invested through. And I know we’re going to talk about this a little bit, but I’ve definitely had to adapt from a more traditional value to sort of a different sort of style of value to that practice now.

Value Investing

[00:06:16]Mike Philbrick: Well, even I think that was interesting in the, I know you make the pilgrimage to Omaha each year and, you know, the Berkshire annual meeting. And so we’re looking forward to get some tidbits from that. But even in that, I heard a lot of that, the evolution of Warren’s thinking, because they paid so much time to Charlie, and you know, Charlie’s thinking was a little bit less value oriented than Warren’s thinking.

And, maybe you’re alluding to that sort of thing in your own journey as you have been managing value assets in what has been a, it’s been, obviously there’s lots of stuff around that’s value, but if no one else is realizing that and kind of beating a path to that door, it leaves you with lots of value for a period of time, that is less comfortable than having the realization right away.

[00:07:10]Tobias Carlisle: Well, I actually think that’s an interesting point, because I think that if you’re relying on, that was one of the big changes that I made, was that through, really it was through 2020 and 2021 when, well, 2020 out of that sort of COVID low, through until the end of 2020, that was a very strange time.

Everybody was at home with nothing to do, speculating on the stock market. And so I saw lots of extra hits on my website’s podcast and my social media grew really quickly, even though I’m a value guy and I was well out of all of those names, I’m still involved in the stock market. And so I was getting attention for that reason. And the stuff that I would, just wouldn’t touch with a 10 foot pole was the stuff that was running it. The stuff that I was holding was suffering as a result. It wasn’t clear, you know.

Everybody knows these things are cyclical, but it’s hard to believe that it’s cyclical in the moment. I thought, what if this does go along forever? And I was listening to some of the other smarter value guys who are a little bit more growthy than me, listening to what they were saying. One of the criticisms that they have had of the very deep value, so I would characterize myself as deep value, which is, I tend to buy less-good businesses at a big discount. That’s sort of my objective, rather than a really great business at a fair price, which would be the way that Buffett characterizes what he does.

So I thought one of the criticisms that was valid of what I did was that, aren’t you just really relying on price action to be the thing that bows you out, because we all know that if you form a value portfolio, the market expects the earnings to fall or not perform as well as the market earnings, and that tends to be what happens. It’s just that they have overestimated how bad the returns are going to be, and then the stock price recovers as a result.

So it’s this funny kind of behavior where the earnings are actually going down, but the stock price is going up, because of the little window when you own the stock. And the reverse is true for the growthy stuff. The market expects the earnings to go up and they do on average go up. It’s just that they disappoint the market and the multiple comes down. But somebody said, you know, aren’t you just relying on price action here? And that’s not very, that’s not very value-like, is it?

That’s not very fundamental because that’s not what fundamental value guys do. And I thought that was a fair point. So I went back and I retooled what I did and I looked at it and I made this assumption. What if we had to invest with no price performance. What will we be doing then? We’re purely relying on fundamental performance. What would I construct then? And so it made me, I leaned a little bit more into quality. I made sure that when we bought something, we’d get some compounding out of the reinvestment. So you need a reasonable return on reinvestment, reasonable prospects for compounding reinvestment returns over a period of time, and then also for some yield, so some shareholder yield, which is dividends, buybacks, you know, hopefully buybacks for undervalued things. But not every management team does that.

And I feel like I, I now think in two distinct terms of value sources when I buy something. We’re going to get a return out of the yield. We’re going to get a return out of the compounding. I don’t rely at all on the price action. I assume that price action is going to catch up to us over time. And I think that’s a pretty safe assumption, but I don’t expect it to at all. And I’d be quite happy for my entry multiple and my exit multiple to be the same. And I’m purely relying on the fundamental performance of the business over that period. So I think that that’s a pretty big change that I have built in, and I think that it’s sort of yielded results, and I expect it to over time.

So we, when the fund, when ZIG first launched, it was a long/short fund. It was 30 percent long, 30 percent short, 30 names long, 30 names short. So a long name was 4%, short name was 1%, rebalanced regularly without fear or favor, because the shorts can be a problem. Shorts have got leverage in them. They can run the wrong way. You can get hurt.

I invested through that period where Melvin Capital blew up. I thought we did pretty well through that period, but we were all, I had, my great fear was always that we were going to get caught in something that ran. So I’d make sure there was no momentum in the stock, and I think that that’s sort of, for the really growthy names that is there, that’s their rocket fuel. Their mojo is all of that momentum. The moment the momentum gets out of those stocks, the people aren’t interested in playing with them anymore. It’s like the toy just gets discarded.

So you can look at the charts as soon as the momentum goes in beyond, or Peloton or any of those kinds of names, they just disappear for a variety of like not very interesting kind of technical custody reasons we couldn’t get as long as I want it to be. And so we were sitting at a hundred long 30 short through the beginning of 2020. So that helped us on the way down and protected us a little bit, hurt us on the way back up, in that mania. So 2020 wasn’t a great year for ZIG. And then in 2021 converted to long-only because I thought that there’s some existential metaphysical risk with the shorts. Like, even if they never actually blow up, there’s always a risk that they do kind of hope that the fund gets big enough one day that, you know, it’s a big fund and then it’s harder to short at that kind of size.

So I thought, I’m going to take this medicine at some point. It doesn’t really align philosophically with the way I am. So I’m going to change to long-only, which happened in 2021. So since 2021, 2021 was a good year, because that was sort of, the end of the stock market run up ‘22 was the kind of, I thought it was the beginning of a big bust, but ultimately it didn’t turn out that way. And then ‘23, we had a really good year. I would not have expected it at all. I thought that all of the macroeconomic indicators were terrible, and really the lesson that I’ve learned is, I know nothing about macro and I’m just going to shut up about macro and ignore macro forever. I think the market can fall over 50 percent at any given point in time and you should be able to survive it. But aside from that, macro is just a waste of time. So I’m a long-only value investor, bottom up. I’m about as plain vanilla as they come these days.

[00:13:18]Mike Philbrick: I love it. You hit on, you’ve hit on just one last thing, Richard, and I’ll let you jump in. But you hit a, you’ve hit on a point that I have always kind of giggled at, as I’ve heard various value investors like Warren or others say market timing is not a thing you can do. And at the same time, they use value, sort of fundamentally driven mechanisms, in order to decide whether to have cash on the sidelines or not, whether to have more cash on the sidelines than one normally would or not, or to invest more or not, which is a form of timing. It’s just timing by a slightly different nature. So I’m glad you highlight that. That’s kind of an, it’s always kind of a funny thing that I…

[00:14:01]Tobias Carlisle: They might say valuing rather than timing. They’re valuing the market.

[00:14:05]Mike Philbrick: Fair enough, which is an exposure mechanism.

[00:14:09]Tobias Carlisle: I don’t do that, but, but I’m just…

[00:14:11]Mike Philbrick: Totally get it. Totally. And you’ve answered the question too, for the ZIG funds. Now, Richard, you’ve been, you’ve been waiting patiently. You’ve got some things to say. So let me shut up now and let you…

[00:14:20]Richard Laterman: I have some things to ask. No, I’m just very curious. We hear about a lot about this narrative that passive is eating the world and that that might be one of the main reasons why there’s been this incredible bifurcation that’s been lasting, I guess, a couple of decades now, with this underperformance of value versus growth. So, I’m wondering, do you subscribe to any of that? Do you see other reasons for this underperformance? Obviously, you’ve morphed and you’ve been alluding to some of the ways in which you’ve adapted your style over the years to sort of account for these changes. But I’m wondering, does it even matter to your style?

But have you gone down the rabbit hole, and trying to understand what are some of the mechanisms, structural mechanisms that have led to this underperformance and this bifurcation, and does it begin with this passive eats the world sort of thesis?

[00:15:10]Tobias Carlisle: I am not a subscriber to the passive eats the world thesis, and I will talk about that. But the first, just let me say that the reason that I think that value has underperformed, you can look at the relative value of value and growth as another alternative. So let’s just say that quality or growth, better businesses should command a premium price. Worse businesses should command a discounted price. If everything was fair, that would be what would happen. What tends to happen is there’s a little bit of mean reversion in business performance as well, that I think a lot of people miss. Things just don’t go to zero. When oil was trading at a negative number, that’s not a signal to sell oil. If anything, that’s a signal to buy oil at that…

[00:15:51]Richard Laterman: Don’t extrapolate at the extremes.

[00:15:54]Tobias Carlisle: That’s right. And there’s, that’s the original paper, the Lakonishok, Shleifer and Vishny paper from 1994, which is the sort of alternative to the efficient market theory, Fama/French paper, which is that all value is risk. The behavioralist guys say, no, no, no, it’s not all risk. There’s a behavioral thing going on. There’s extrapolation. They extrapolate at the top. They extrapolate at the bottom and mean reversion is a better bet.

So I just, I’m a, I bet on mean reversion, not extrapolation. And I think that if you looked in 2015 at value, the difference between the best businesses and the worst businesses, that was so squashed together because value had such a great run through the two thousands. Everybody was trying to buy the undervalued stuff. And for a little bit of a premium, you’ve got a much better business. And I think that that’s why from 2015 until sort of today, or the last few years, the better businesses, the growthier stuff, the NASDAQ stuff has all had a great run because they were too cheap, and value was too expensive. And I think now the spread is very, very wide and the spread has been closing, but the spread is still very unusually wide.

It’s still as wide as it was in 2000, wide as it was in 2009 at the bottom, both of which went on to have very good value runs. I think that that is really what has driven the underperformance of value. It got too expensive in 2015. It’s been working off that being too expensive, and now the trend, now that the trend keeps on going all the way to the point that value is undervalued and growth is overvalued.

So I think that we probably see some mean reversion over the next decade here. That would be my bet. As to the passives eating the world, I think at the margin, I think that’s probably what happens in any bull market. People go with what’s been working and the S&P 500 is the best performed asset class or asset in the world, over that sort of period of time. You can get it for nine basis points. It’s got a Sortino Ratio that looks like a hedge fund. You know, it’s an incredible run for that and it can soak up a lot of assets, but I think that this is true at every bull market. People invest in what has been working. And the moment that that breaks down, the money will go somewhere else. In any case, I don’t care because I’m not investing as we just, that discussion that I had earlier about the not relying on the price performance, if I was an investor in the value stuff and they bought back shares and they’re all cheap, they would axiomatically, they must perform better. Like, the cheaper they get with the buyback mechanism, and I’ll be the last person with owning those stocks. Like, if there’s no bid and I own all of those stocks, I’m an incredibly wealthy man, but there’s no longer any bid on the market. And so passive is eating the world, but I’ve made a whole lot of money.

It just doesn’t like, it doesn’t logically, it can’t work. I’m picking the pocket of those big funds if they’re not doing the fundamental diligence that I’m doing. I’m picking the pocket of SPY. Like anything they’re leaving behind is something that’s worth owning. So I don’t believe in, I think flow’s affected in the short term, but ultimately in the long run, fundamentals are the thing that drive the market.

[00:19:15]Mike Philbrick: Money goes where it’s treated best.

[00:19:18]Richard Laterman: Yeah. Voting machine versus waiting machine, I guess, is the, uh, is ultimately where you fall on. And so, yeah. And…

[00:19:26]Mike Philbrick: Just look at oil, right? Richard, just as a point, 2008 oil, the energy sector of the S&P is 16%. It then bottoms at 2 percent in 2020 and it’s now 5%. So underneath the surface, and this is what I was alluding to earlier, there are changes going along. If you look in the resource space, if you look in the emerging market space, look in the value space. You know, gold breaking out to all time highs. The materials world sort of again, highs not seen for 15 years. And everyone is still myopically focused on the market cap weighted stocks of the United States, which are obviously victims or they also take advantage of the extreme momentum that comes from a market cap weighting system. So I think under the surface, there’s still enough active managers where money is, flowing under the surface on a longer-term timeframe to where it’s being treated best on a return, whether it’s cash flow or some sort of more fundamentally driven, higher probable event that treats the money better, if you will.

[00:20:41]Tobias Carlisle: I think the trend turned in Q3 or Q4 of 2020. I think it’s already happened. I think people who are waiting for it to happen are completely missing the boat. The train is leaving the station right now. It’s already left. I mean, I think that’s why I think it’s a little bit funny having these conversations, because I’ve been living in a world where value has been up before for the last three years…

[00:21:03]Mike Philbrick: Yeah,

[00:21:04]Tobias Carlisle: …know?

[00:21:06]Mike Philbrick: It’s okay. Just to put a point on that, I don’t think we should suggest the train has left. Usually these are very large secular movements, are very large ships turning. And so now if we look at those moments in your career that you outlined earlier, Toby, and talking about 2000, easy times, you know, 2010, a little harder times, you know, it seems as though easier times are upon us and it’s probably going to be, if you zoom out and look at quarterly and annual data, you’re going to see it and you’re going to see the outperformance, but over a day, a week, a month, it’s going to be shrouded in noise.

[00:21:51]Tobias Carlisle: Or even since the start of this year, you would say this year has been more of a, that AI that kicked off NVIDIA and AI has certainly reinvigorated all of that, the growthy stuff. And they’ve had a phenomenal year, many of those guys, and value has sucked wind a little bit this year, to be fair.

[00:22:09]Mike Philbrick: But that’s what I mean. On a longer basis, step back, look at a few quarters, look at annual, and you know, it’s just there. Try to talk to people about it. My goodness, forget about it. Japan, you know, Argentina, these, significant outperformance of U.S. equities and people are like, don’t care. And this is sort of indicative of that 2000 period too, right? This is not, this is not new…

[00:22:36]Tobias Carlisle: No, well that’s to be expected.

[00:22:38]Mike Philbrick: …from history,

[00:22:39]Tobias Carlisle: People tend to look through the rear vision mirror when they’re investing. They look at things that have already happened, extrapolate that forward. Fundamental investors are just looking at the underlying fundamental data and trying to figure out what’s going to happen. Are we getting a good deal buying now without really knowing, expecting what can happen? That’s sort of the way I think about it. I’m, whatever happens in the market, I don’t really mind. I’m going to be happy owning the things that I own.

[00:23:04]Richard Laterman: So let’s pull on that thread a little bit. You’re alluding to the fundamentals. So you run a few stock screening processes. I know that you have a service that you offer that. So I would imagine that does permeate through your process, your investment process for your actively managed stuff to some degree. What else goes into that process? Is the stock screening an initial filtering, and then do you overlay with some discretionary, or are there other elements to that that you can tell us about?

[00:23:35]Tobias Carlisle: So we look at the domestic U.S. equity market only. We got North America, so we pulled some Canadian data as well, but it’s, well, the funds are only invested. Canadian data is excellent, and I think that value really works well in Canada. It’s…

[00:23:50]Mike Philbrick: … really does.

[00:23:51]Tobias Carlisle: I don’t know why it works so well there. And it works better in Canada than it does in the States.

[00:23:56]Mike Philbrick: Maybe all the resource stocks that get their value upside down. Yeah.

[00:24:00]Tobias Carlisle: Or they’re just not as picked over, but the U.S. market is where I invest in for the funds. So I don’t, I only buy U.S. listed companies for the funds. And so I can scan all of the companies for the amount of money that they’re making, you know, the amount of money making, that relative to what they’ve got invested in the business. And so I am purely focused on the financial statements. When I say I’m a quant, I’m a lawyer. I’m not a, I don’t have a PhD from Booth or from Wharton or like, you know, I’m not a Chicago quant in that sense. I’m just a quant in the sense that I prefer the financial statements to the story that people tell themselves about these businesses.

So I think that all of the questions that you have about a business or about management can be answered in the financial statements, and so we look at a series of financial statements for every company and we try to figure out what’s happening, how much money are they making, what are their prospects for growing, what are their prospects for paying out pretty good shareholder returns. Try and find the best risk adjusted opportunities from the set that have no blow up risk. So we’re trying to take all the blow up risk off and that’s a quite a few tests, but that’s like, you know, looking at statistical tests of fraud and earnings, manipulation and financial distress and using all those sort of standard tests, and then looking at various other things, just to see how management treats the financial statements.

So once we’ve narrowed it down to an investable universe for both of the funds, so ZIG is 30, DEEP is 100 names, then among those names, we go into a forensic diligence, which is just, does the financial statement match the economic reality of the business? Because there’s a lot of discretion for managers to make decisions. Two perfectly reasonable people can come to, can create two different financial statements for the same business. Over time, they should largely balance out, but you look at accruals of different assets and the way that they depreciate and so on. You know, if you’re an owner/operator style manager, you’re probably running it to minimize tax, when that means minimizing reported earnings. If you’re a public company CEO, whose compensation is based on stock options and all of that sort of stuff, you’re trying to maximize earnings. And they’re two different styles of running a business.

My preference is that I want to be with the owner/operator type guy, and so we know the system is set up to try and find investors and managers like that. And then, I’m doing a diligence where I’m actively looking at how far away is what I would think that the earnings should be, from what the actual reported earnings are. And is there a trend in there? Do they tend to be consistently and growing over-reporting of earnings, or is it the other way around? Are they consistently under-reporting earnings? Some of that is answered in the cash flow statement. And then we form a portfolio based on what I think are the best risk adjusted opportunities with no blow-up risk, and that portfolio is then rebalanced on a quarterly basis.

[00:27:20]Mike Philbrick: How do you account for the sectors and subsectors, and sort of the value being all in one sector, or largely in a couple of sectors? How do you go through that?

[00:27:29]Tobias Carlisle: Yeah, that’s, that’s…

[00:27:30]Richard Laterman: Sizing, if you can add that, how do you think about position sizing? Is it conviction weighting? How do you think about those? How do you think about…

[00:27:36]Tobias Carlisle: Yeah, so that’s a great question. So the thing about value is that sectors and industries all get cheap. Everything in the industry gets cheaper once. And if you’re just purely trying to maximize returns, you want to be fully invested as much as you possibly can in that industry. There is the problem though, that every now and again, you get things like for profit colleges, where for profit colleges all got cheap. But, you know, ultimately that was an act of the administration to kind of wipe them out. And so if you invest in the for profit colleges, there was no recovery from those investments. So I’m always conscious of that possibility being out there. And I never know if I’m looking at, something is the reason, you know, and that could be insurers.

When Obamacare was coming in, you had United as the most, as the biggest and the other four we’re trying to combine together. How big a bet do you want to take in that? How, what will be the impact of Obamacare? I don’t know at that point in time, but I want some exposure to the industry because I thought they were cheap, and I also thought there were opportunities in the merger arms going on there. So I try to limit the exposure to any industry to 20 percent of the book. So we have a limit, which is six names out of a 30 name portfolio, and 20 names in a 100 name portfolio. So we’re always limiting, and then we are equal weighting at each rebalance point. So I’ve done a lot of research in different ways of weighting using Kelly or, you know, all of the different things that you can do.

And I wrote a book called Concentrated Investing, which is largely about that, trying to figure out how concentrated or otherwise you want to get. I kind of found that for the ease of calculation, 30 names is a good, is sufficient diversification. I think that the efficient market guys come out at 30. They’re trying to create a portfolio that matches the market portfolio as cheaply as they possibly can. Graham says 30 names, all of these, I think when you do the work, somewhere between 20 and 30 names, you get rid of all of your non-diversifiable risk. And it’s just asymptotically trending towards the market. The question is, how can you outperform? How can you deviate from the market?

So you’re not randomly picking names, you’re picking them according to some system value or whatever. So 30 value names out of a universe of 1,000 for ZIG, and it’s a universe of 2,000 for DEEP, because it’s roughly Russell 2,000, roughly Russell 1,000 universes. Thirty names for the Russell 1,000, 100 names for the Russell 1,000, 2,000 is 3 percent of names, or sorry, 0.3 percent of names, or 0.5 percent of names. So I think that you’re already very concentrated, equal weight in that group, ease of calculation. And I, I’ve found that that works perfectly well.

[00:30:18]Mike Philbrick: And that’s the difference, just to, so ZIG is more mid cap, large cap, and DEEP is more maybe mid cap, small cap, or…

[00:30:27]Tobias Carlisle: So that…

[00:30:27]Mike Philbrick: … would you, is that the main difference, or…

[00:30:29]Tobias Carlisle: That’s also quite an interesting question, but it’s Russell 1000 roughly for ZIG. So it’s the largest 1000, which is mid and large, but at the moment Morningstar has it as a small, that the centroid is over the small. And the reason is through no, like I haven’t directed the portfolio to do this. It’s just that as the market has got more expensive, it seemed to get more. I really think the last few years of rather than being sort of a value, it’s really been a large over small market, rather than a sort of growth over value, or however you want to characterize expensive and value. It’s been a large, not small market. Smalls have been absolutely smoked. And so the portfolio was a $40 million median about three years ago. And it’s something like eight in ZIG at the moment, so that the market caps have come in dramatically in ZIG and also in DEEP, which is Russell 2000, the centroid sits right off the bottom of the Morningstar square.

Like you can look at that box. It’s in small and micro because, and that’s where I think the opportunities are, all small and value, but particularly the size, for whatever reason, that spiking interest rates sort of let all of these smaller businesses, because they don’t have the same, they haven’t termed out their debt as well as the mid and large cap companies.

So they, their debt is all, they’ve already started paying the higher rates where the middle, large cap companies haven’t had to roll some of their debt yet. They haven’t had the bullets come through, whereas small and micro have, so they’re paying like 10 percent rates to borrow, if they can get the debt. And so I think that’s why they’ve really stumbled, and you can see it in their earnings reports. You can see that large cap earnings have largely recovered. S&P 500 earnings have recovered and have gone above their 2022 peak, whereas mid and large are still trading below their 2022 peak, and their multiples are much compressed as a result.

S&P 400, S&P 600, which is mid and small, trading at about 15, 14 times depressed earnings, whereas the large caps are at like 20, 21, 22 times pretty extended earnings. So to me, that says that if you believe in mean reversion, the opportunities in the small and mid, and if you look back, small and mid have traditionally traded at a small earnings, multiple premium to large. And now they’re at a big discount. So I think that’ll flip over the next few years. And that’s where the opportunity is, small and value particularly.

[00:32:57]Mike Philbrick: Yeah, when you hear about the demise of the premium for small caps in the research. That takes a good solid decade or more of underperformance to get that headline, that hey, the large cap or small cap value premium is dead, or that market cap premium for investing in smaller companies is dead. I kind of always, when I hear those, you know, the data is changing, we have a hundred years of data, and it’s now changing, I’m like, is it? Or are we just at one of those extremes where it’s going to revert and go back to where it was?

[00:33:36]Tobias Carlisle: I agree with you that there’s highly likely to be a mean reversion in there, but I think that even if you just look at the, if you, if you look at the expected returns for the prices that you’re paying, the returns are higher in small and mid than they are in large. I think they’re considerably higher. So I think that my DEEP fund, because it’s cheaper, has a higher expected return at this point than ZIG, which is, can only choose from a slightly bigger universe, even though it’s exactly the same process in both funds. They’re just selecting from different universes. So I did really think that the opportunity’s in small and value than, and then the smaller is better than the bigger.

[00:34:14]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind listeners that while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast, and we try to do this by providing cutting edge, globally diversified, and systematic investment strategies that are designed to be broadly non-correlated to traditional equity and bond portfolios.

So we actually manage private and public funds, as well as bespoke separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we’ve been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

[00:34:57]Mike Philbrick: Now, how do you trade some of that smaller micro and small cap, those positions? Is, it’s probably not an issue now as the funds are sort of smaller, and they’re in their infancy and growing, but is there a point at which you’re going to reach capacity in that domain?

[00:35:18]Tobias Carlisle: Certainly, it’s going to reach capacity. I don’t know where that level is. That’s going to be an ongoing thing, but that’s why it’s 100 names. So they’re, they’re all fairly small positions. There’s also, you know, if you’re running an ETF, you have Liquidity Risk Management Program and you also have an NYSE market capitalization cut off of about 75 million. So it has to be a market cap bigger than 75 and it has to be sufficiently liquid to trade. And so it has to qualify on two different measures. So all of the names that are in the fund qualify on those measures. And, you know, you’re probably leaving some return behind by not being able to pick up the really small, really liquid stuff. But you know, there’s a, there’s some risk being in that stuff if you’re in a publicly traded…

[00:36:00]Mike Philbrick: Oh yeah. And there’s costs where you’ve got, you’ve got slippage in those that is not, yeah, it’s significant. The bid/ask spreads are large and acquiring and disposing of have some significant slippage that often will eat into, eat significantly into what can be actually realized. So you have to, you know, it’s a slower approach. It’s a slightly different game to think through.

[00:36:30]Tobias Carlisle: … moves in those little fellas are crazy. I just, every now and again I check in, just to see what those hundred names have done, and it’ll be, you know, a few names that are up 15 or 20 on the day and a few names that are down 15 or 20 on the day. And that’s probably just, you know, that’s not, there’s no news. There’s no event. That’s just somebody trying to trade them.

[00:36:50]Mike Philbrick: Bob wanted a boat and he’s selling some shares.

[00:36:56]Richard Laterman: You alluded to, a moment ago, about sectors often becoming cheap altogether because of some sort of macro catalysts or something along those lines, but you also said that you’re done ,or you try to shoot from making any macro predictions because that’s not your game. How do you account for trying to diversify within the portfolio and not have overly, overly concentrated positions on any single sector? Do you impose any constraints from a sector perspective? How do you think about that problem?

[00:37:28]Tobias Carlisle: Yeah, there’s a, there’s a sector constraint. There’s a industry sector constraint, which is, and it depends on how we’re defining industries and sectors, but where it’s no more than 20 percent of the book in any industry. So that gives me enough exposure, I think. But it also protects us in the instance that it’s all for profit colleges, for example, which there’s no recovery from. And then we’re updating on a quarterly basis too. So we’re continuing to examine, either financial statements still supporting us being in this position or have, what’s the market, right? Because that’s the way I think about it.

We’re not, it’s, there’s some arrogance in saying the market is totally wrong about this, because of course the earnings and the underlying business can deteriorate, in which case, we’ve made a mistake. We’ve paid too high a price for a business that’s deteriorating. And that’s what the market is often doing. It’s forward looking. They know that these events are coming and they’re not yet reflected in the financial statements. So the way that I think about it is we’re either paying a price that reflects those worse expectations, in which case we’re probably, you know, if it does manifest that they’re getting worse, and now the opportunity doesn’t look as great, we just take the position off and move on to something else, or the market has overestimated, it’s over extrapolated and there’s a pretty big recovery when the next print comes in, and it’s not as bad as everybody was expecting.

And then you’re off to the races, and that’s sort of what we’re trying to achieve. But you know, I’m always, I’m very aware there’s a lot of avenues for making mistakes and for blowing up in this business. And that’s really the thing that I’m most focused on. I just want to survive because there’s always another cycle coming. There’s always a better cycle coming. You’ve got to be there. You’ve got to be there for the good cycles. I mean, at some point we’re going to have a value cycle like we had in the early 2000s and it would just be a crying shame to have missed out on it because the growth cycle beforehand was so brittle and you didn’t make it through, right? But I think we’re getting close to a big value cycle. So I’m pretty excited.

[00:39:31]Mike Philbrick: Is there any, I know you mentioned that you’re not really paying attention to the global macro side of things, but are there any potential sort of risks or opportunities that you see, the sort of the pricing mechanisms where you’re like, okay, this group is really cheap, or my screens are focused over here, and you can sort of see the macro overlay that would lead to that?

[00:39:59]Tobias Carlisle: I think that value, when things get very cheap, that’s a good time to be looking in that sector because it says that the big macro event has happened and everybody’s aware of it right now. Oil goes negative. All of the oil may just get smashed to smithereens, or, housing was another interesting one, before housing kind of took off. The thesis, what, lumber got very expensive. You know, when lumber had that crazy run through COVID, all of the housing builders got smashed to pieces. And I thought the housing builders were way, way too cheap. They were also in a market where there was a lot of under-building, because of the GFC, more than a decade ago. We just haven’t built as many homes in the States. And so there’s going to be demand for homes. Housing builders are cheap, lumber being too expensive. That’s clearly a short-term problem that’s going to resolve itself over time. And the home builders went on a pretty good run.

I didn’t foresee that sticking up interest rates as rapidly as they did would make the premium between new homes and existing homes so much smaller, or in fact, it would flip over, where people would be, it would be cheaper to buy a new home than it would be to buy an existing home, because the homebuilders could give you the rate buy-downs and all that sort of stuff. And so those homebuilders have had this sort of generational little problem period of trading.

But that’s one of the nice things about value. I didn’t see any of that happening. I just thought, well, home builders are too cheap, but then of course, it’s all of the macro that drives all of the craziness that goes on. And I just don’t think, it’s not that I’m ignoring it. I’ll watch it, and I’m naturally bearish. So I’ve, I can see that there’s a yield curve inversion out there and, you know, there’s a war going on in Russia and there’s some conflict in Gaza. There’s always conflict, and there’s lots of good reasons to be nervous about stocks.

It’s just that I can go back over the last decade, because I have been bearish over the last decade, and I can go through all the things that I was bearish about, that, none of which manifested into anything that happened in the stock market. So I just think macro is so hard. It’s not that it’s wrong and it’s not that it’s worth paying attention to. It’s just that it’s so impossible to predict the third or fourth derivative knock-on effect, and how that will impact the stock market, that the energy devoted to it is just a little bit of a waste of time. So I’m a beneficiary.

I think sometimes that something gets cheap for a macro reason and I’ll buy it for the macro reason. And I’m probably a beneficiary on the other side, bailing me out of the position and making it work, but I’m largely just ignoring it and saying, well, it’s cheap now and now it’s less cheap, and I’m a buyer. And now it’s less cheap. That’s how I think about it.

[00:42:39]Richard Laterman: It really does seem, I mean, historically, at least in the last couple of years, it has been really a patience game to be a value investor, which comes with its own behavioral challenges. I mean, you end up having these lumpy returns at times, right? You wait for a long time until the waiting mechanism of the stock market finally leans in the direction, and you have whatever catalysts are going to drive the price up, and you’re going to realize that value in the business that you’ve, or the businesses that you have been selecting in your portfolio, which kind of jives a little bit with the experience that CTAs and trend followers have had, which is kind of our side of the ledger here, where oftentimes you do get these lumpy return profiles.

How do you think through that behavioral challenge for yourself as a manager, but also for some of your stakeholders and your investors, when you’re talking to some of your, to your allocators and you’re pitching them this fund, you account for that behavioral difficulty, and sort of the fortitude that one must have in order to stick to, because I find that value is one of the more intuitive things one can get behind, on from an investing standpoint. You buy something that is below its intrinsic value, and then you wait for that value to realize. But you know, a quarter goes by, a couple years go by, and it’s still not happening. And with our attention spans growing shorter and shorter with all the social media and all these apps, how do you think through all that?

[00:44:07]Tobias Carlisle: I think that again, that’s the single most important question to answer as an investor. I think the more time that you spend in the market, the more you realize, and I talk about this with Jake Taylor, who’s my co-host on Value After Hours, it’s amazing how many of these little stock market bubbles, these little things occur and they’re just, everything gets so hot and everybody’s so interested in this one thing for about three months. And then it’s just, you know, completely back page of the paper thereafter.

And if you can just not participate in it for the first three months, then it looks silly. Like in the fourth month, you look back and you think, how did people get so, get into this. And then I look at names like, so Dillard’s, Ted Weschler’s one of Warren Buffett’s investing lieutenants. Hasn’t done, hasn’t, he’s underperformed the stock market since he started investing for Buffett, but he’s had a couple of very good picks. And one of them was Dillard’s, DDS, which is still out there. And it’s one of the companies that I hold now as well.

Dillard’s is a retailer. Retailers got, all the retailers got smashed to pieces over the last five or 10 years. Dillard’s was one of them. Dillard’s got way too cheap. It was in all of my screens, and I’d buy it and sell it, and buy it again and sell it again, because you know, just as it sort of bounced around a little bit, but it didn’t really go anywhere for five or six years. And then through COVID, whatever it was, the stimulus, whatever it was, it took off and it 10 bagged in about a year. And now it’s up about 18 times from where he put it. I think he doesn’t have it anymore, but that 6 percent stake that he bought is worth like 360 million and it’s an 18 bagger since he put that position on. And all of it happened in a very short period of time.

So the compound annual growth rate for the holding period or the IRR for the holding period is like 36 percent plus, over the seven years, but it’s really like only a handful of years that have delivered the return. So I’m just, I see those things and I think, that’s a good reminder, just because the market doesn’t recognize this. Initially, what we’re focused on is the fundamentals. And I, at the beginning of this, I sort of started talking about that a little bit, but that’s sort of what it means. Like, ignore the price action, stay completely focused on the underlying fundamental performance. And if the fundamental performance is trending in the right direction, then everything’s good. Just stay cool.

And so I’ve definitely found myself, I’ve stepped back from social media a fair bit. There’s not a lot of utility in it for me because it’s just way too short-term focused. So I put the positions on, we rebalance in a quarter, which means I’m going to get another quarter’s financial statements, we’ll update all of our models, we’ll form up our ideal portfolio, and then at the end of the quarter, we’ll look at the differences between the ideal portfolio and what we’re currently holding in ZIG, and we trade to make the ZIG’s portfolio look like the ideal portfolio. And that’s the process.

So it’s not a lot of opportunity for me to overtrade or anything like that. I sort of just stick to the process and I don’t worry about it too much, because now I trust it too. I’ve been doing it for long enough that I know that if we buy cheap and good, it will work out over time. Even though, you know, you can have a look at the returns. In 2021, it was like a, it was a pretty big year. It was like a 37% year, but then in 2022 it was like a down 70% and ‘23 is like an up 30% year. And then this year’s like up six or something like that. And we’re underperforming a little bit, but that’s what happens. It’s, it’s a clumpy get. Even though the portfolio is going forward all the time, it’s only reflecting the stock price sort of in fits and starts. That’s okay. That’s the way…

[00:47:54]Mike Philbrick: The idiosyncratic lightning strikes a few spots of the portfolio, creates some returns, or rebalancing happens. Then, you’re waiting for those lightnings in a bottle again. And so when you’re doing it though, are you sort of at the end of each month, looking back at the quarter, whatever, whoever reported in that particular quarter, and updating there, or is it just literally, you know, four times a year type thing?

[00:48:18]Tobias Carlisle: Now it’s the, the portfolio, there’s a model portfolio that’s updated all the time. It’s pulling in all of the new reporting, and at the end of the quarter, the model portfolio will have deviated from what it was. ZIG holds, because there’s some, it’s just turnover in the positions. It’s force ranking all the positions all the time. And so we’ll trade to make the ZIG portfolio or DEEP’s portfolio look like the model portfolio.

[00:48:42]Richard Laterman: Oh, so it is a quarterly rebalancing. So you are only rebalancing four times a year.

[00:48:46]Tobias Carlisle: Yeah, and I tested that. I’ve tested, you know, the more you rebalance, you’re getting a lot more friction, you’re getting a lot more costs and you find that there are things that, they just move in and out all the time. So you’re buying and selling this one thing over and over again. That still happens on a quarterly basis, just less regularly. But you also got that, you know, Corey Hoffstein had that great paper where he identified all of that timing luck, all of that rebalancing luck. And I had been aware of that as a, you know, anybody who does a lot of back-testing, you become aware that if you start the portfolio in one January and you rebalance yearly in one January, you get much better returns.

And if you started in September and you rebalance it in September without sort of knowing why, and if you started in March and you get a rebalance, it’s really close to that 2009 low, the returns are like twice as good as if you rebalance in September. So there’s clearly, I want to be able to eliminate as much of that timing rebalance luck as I can without incurring all of those additional sort of frictional trading costs. And I think quarterly, you know, you probably don’t need to trade quarterly, probably yearly is enough, but it just, it captures that timing rebalance luck sufficiently that I think quarterly is okay. Quarterly is the number.

[00:49:58]Richard Laterman: And stepping away a little bit from the systematic process, and just kind of putting your discretionary hat on a little bit, what are some of the things that have gotten you excited on a micro level, or sector level? What are some of the things that, if you were inclined to sin a little, like as a value investor, looking at all these companies and looking at the opportunities from a cyclical standpoint, you just described yourself as excited, or growing the, becoming more excited with the opportunities, but the forthcoming opportunities for value as a whole. What are some of the things that are getting you excited?

[00:50:32]Tobias Carlisle: Well, one of the things that I do is, I track the book. So I know what the book is. You know, I know what the expected return is across the book, because I have a calculation for each name, where I know what the fundamental expected return is. So when the fundamental expected return’s going up, I feel better. When it’s going down, I feel worse, but when it’s going down, it’s outperforming. And when it’s going up, it’s underperforming. So I have managed to kind of train myself to feel better when returns are worse because the forward returns are better. And so I think the forward returns are better now. We’ve got to concentrate. We just tend to be buying lots of, we’re deep value.

So it means we’re always going to be in, we’re going to be in steel. We’re going to be in coal. We’re going to be in oil and gas and energy. We buy little busted industrials that I think can do a little bit better. I have a little bit of trouble distinguishing between them, honestly, because they all have idiosyncratic problems.

And the reason that they’re in the portfolio is because they have idiosyncratic problems, and they work their way out. If I was going to sin and be discretionary, I’d be much more in things like, probably I’d look at something like Starbucks or something that’s had a pretty big stumble, but ultimately, you know, that’s a pretty good business. I like businesses like Shopify. I think Shopify is an incredible business. I mean, I’d be out there buying all those kinds of names, knowing that the way to own these things is to buy a little bit now and just, you just don’t even worry. That’s like a 10 year position, 10 year plus position, and you just let them run and let the underlying business kind of figure itself out. But I would like, you know, really good businesses after they stumble. I don’t, I’m not so much of a speculator that I’d go in and, you know, I wouldn’t be trying to like, time oil, or time coal or anything like that.

[00:52:19]Mike Philbrick: It’s a little bit more opportune quality type stuff, a little bit more in the direction of…

[00:52:24]Tobias Carlisle: Probably Buffett. Yeah, more in the direction of Buffett, because I do think that that’s one of the things that I just, as I’ve tested, I just turned off my sell rules and so just buy, and just see what happens over a full period of time. And it’s kind of, it’s interesting the way that these things, they get. You start with 30 names and you can look forward 25 years of these 30 names and you end up with this portfolio at the end. And it tends to be, it’s heavily concentrated in the things that are work. But if you start with 30 names, heavily concentrated might be a 5 to 8 percent position, which I would think is a, if a position has worked its way up to that, it may have earned that right to be that sort of size in the portfolio, and it’ll all be stuff that’s worked.

So your positions will, it’ll be Apple, Microsoft, Starbucks. You have this portfolio that looks like a Kelly betting value investors portfolio, even though it’s just completely, you know, the system has selected these names and it’s just allowing time to work. Means that the ones that compound are the better businesses, and the ones that don’t work just disappear. You know, they’re rounding errors, or they’re trivial. The interesting thing is how much capital they throw off.

So buying on a free cash flow basis, holding for five, you know, the yield across the portfolio could be 10 or 15 percent at inception. You hold that for five years, half of that comes back, half of it gets reinvested in the businesses. You find that you’ve got like a third of your portfolio capital back after five years and you’ve got to reinvest it anyway. So I think that you end up being quite, it’s a Buffett’s, you’re kind of imposing this Buffett’s style cadence and investment style on yourself, just by virtue of the fact that you have this never sell, and own cheap, quality stuff.

[00:54:05]Mike Philbrick: You beat your winners to death, which is what you’d be doing here. You’d be saying, well, I’m not going to sell my losers either, but they are asymptotically going to approach zero or hit zero, leaving the successful pieces of the portfolio, which were just well timed purchases of what happened to be successful companies, because you bought them with that, those characteristics.

[00:54:26]Tobias Carlisle: That’s right.

[00:54:28]Mike Philbrick: Yeah. Yeah. Keep your winners people, beat the hell out of those. Sell your losers.

[00:54:34]Tobias Carlisle: That’s not what ZIG does though.

[00:54:36]Mike Philbrick: No, I understand. Yeah.

[00:54:39]Tobias Carlisle: Sorry.

[00:54:40]Richard Laterman: Thinking through on a sort of longer term hold and your two strategies in the deep value space, do they comprise a hundred percent of what you’re investing for yourself personally? And the reason for why I ask is, how do you think about dealing with like a 1970s sort of scenario, or scenarios that are difficult for stocks as a whole, even though you might be, you might have a large margin of safety for some of the businesses that you’re holding, and so they might in relative terms be outperforming the S&P, or some of your other benchmarks in a downturn. But do you think about some complementarity, on a style basis, other diversifiers, anything along those lines?

[00:55:25]Tobias Carlisle: I have a lot of cash because I need a lot of float in my business. And so I need, because I’m a small business guy, no other source of income, I have float in the business and I have a float personally as well. So that’s a lot, I have a lot of cash, relative to the assets that I have, but I have all of my investable assets in ZIG and DEEP because I just think that a manager should do that.

And I think that, that won’t always be the case. I think if we got massive outperformance for an extended period of time, then it would be okay to take some of that off, and mess around with some other things, just to try to be a little bit more established and careful for my family. But at this point it’s, I feel like I should be eating the dog food. Not that I need any more focus on it than I already have, but I just feel like I should be participating along with everybody else. I think that the prospects for these companies are always pretty good. I look back through, you know, we can run this data back through 1963. It’s not forever.

There’s lots of other period things that have happened outside of that, but even through the seventies these things did okay because it’s, this is the kind of strategy that does do well for more inflationary periods like that. That’s not to say you can’t have some sickening drawdowns through that period of time, but I do have some cash that I would opportunistically deploy. I’ll just tell my wife that we’re going to be investing in the market. It’s not a lot where we’re going to be buying something right now. So we can’t do anything else for a little while. She’s all right with that. She understands.

[00:56:52]Mike Philbrick: Love it. The value investing life is a critical,  critical component of investment.

[00:56:57]Tobias Carlisle: She really is. She really is. She knows what she got into though. She understood. I was, I’ve been doing this before I knew her.

[00:57:08]Mike Philbrick: I love it. I’m wondering now if we could maybe switch gears over to Omaha, but Richard, before we do that, do you have any final thoughts of, because you were pulling some threads there. So I want to make sure you’ve…

[00:57:18]Richard Laterman: No, let’s go forward. Let’s go to Nebraska.

[00:57:21]Mike Philbrick: Yeah. So you usually go down and attend the pilgrimage to the Berkshire annual meeting, and I understand you did this year as well. How was it Toby? And what was, what’s the good, the bad and the ugly?

[00:57:36]Tobias Carlisle: Well, this was the, Charlie Munger passed away at the start of the year, so it was the first year without Charlie. So that was kind of poignant. He, Buffett did turn and say, you know, he often gets Charlie to chime in on something. He said, he turned and he said Charlie at one point. So he said, I’ve been, I’ve done, I’ve gone to do that two or three times. But that’s, it kind of slipped out.

And then he had Greg Abel, who’s the chief executive officer, who’s also taken over the equity portfolios. And so it wasn’t the two other guys who had been sort of tagged at the moment, it looks like, the CEO of, who he was, Mid-American, but now he’s CEO of the whole thing.

And he’s also looking after the equity portfolio. He seems to me like he’s very smooth, very controlled, like very high EQ kind of guy. And he concluded one of the things that he had said with, nothing further to add, which was a very famous Charlie Munger one. He always used to say that, which the crowd loved. So I thought. I think they’re doing the transition. I think there’s probably a transition going on now from Buffett to Abel.

Buffett’s a phenomenally articulate and thoughtful 93 year old man. But at 93, you can hear how fast he used to talk when he was in his 60s and younger than that. You know, he sounds like you’re listening to a podcast on 1.5 times speed. And now he doesn’t speak as fast as that, and it takes some diversions to make the point. So I thought from that perspective, there’s a transition going on. That was what I took away. But the other, just outside of that, I think that there are principles of investing that I learned from them, that I think I’ve only grown to appreciate why they’re so important, over time.

And one of them is, and I’ve written a book. I’ve given this, it’s with a publisher now to decide whether we do it or not, but it’s basically looking at some of the underappreciated aspects of what they do. And I think that one of them is this idea of, you know, they’d look at character as one of the elements of people who they do business with.

It’s hard to understand why as a younger, or I just didn’t really understand why it was so important. I mean, it’s just, you’re looking for opportunities wherever you can get them when you, when you’re young and hustling, and it’s only after you’ve been burned a few times that I think that you realize how important character is in business partners and other things like that.

So that was a, that’s an interesting one. And the other one is just that you cannot blow up. You just have to be able to survive every single market environment that you see, because you get, you know, Berkshire has famously underperformed for long stretches of time and they haven’t done very well. In others, there’s always a magazine cover that will let the world know at the time, Buffett’s lost it.

And then it’s often, you know, it’s close to their bottom. They’re just about to go on a really great run just after that. And I think that’s true of most strategies. A lot of the ways that my fund works is, we’re in an industry that’s beaten up, and some of the people in the industry leave because it’s just, they’ve either got too much leverage and they can’t, they can’t make it, or business is just too tough.

There’s easier money elsewhere and they move away and then they get these super-normal returns in the industry. And that’s what I’m trying to capture, the super-normal returns. It’s true. Also, investing in a value portfolio, you get these, you pay, you blow up, you miss the bit that comes afterwards. So I think that that has been their sort of underappreciated strength that they just muddle through in the bad times, do really well in the good times.

And I think for me, those are the things that I really take away. Those two sort of principles, do good, do business with good people and survive for a bad time, so you come out on the other side.

[01:01:13]Mike Philbrick: I’m interested, as a lawyer, that you didn’t pick up on that earlier. I mean, given that the other parts of the firm may have been involved in the negotiations between those who lack character in certain business…

[01:01:25]Tobias Carlisle: We, you might think that you can paper over it. Like, I wouldn’t have thought you, some people regard the contract as like the ticket to the fight. You know, that’s like, that’s where we’re getting started. Some people are trying to find their way through it as you’re drafting, and other people are like, well that’s the spirit of the agreement. We’re going to follow through with it regardless of what the contract says, so you just, and those assessments, I don’t know how you make those assessments other than just dealing with people a lot over an extended period of time, and seeing how they operate. Getting older, I think probably helps.

[01:01:55]Mike Philbrick: Yeah, it is. It is a pretty consistent theme, even though they reiterated it this year. I think that’s been a fairly consistent theme through the years, not only from them, but from others who are sort of the various lieutenants, like …. There’s a, there’s a, I think it’s his name, …, the Indian guy who, you know, emulates a lot of the stuff. He’s been on record as saying that being one of the more important factors of, you know, you should fit it on one page because you, you can’t contractually obligate people away from bad behavior. If you have a bad actor, you have a bad actor.

[01:02:33]Tobias Carlisle: I mean, it’s certainly true in small cap world, right? There’s a lot of small cap managers who are, you know, owner/operator is great, unless the owner is sort of making all of his returns through salary and option grants and things like that. Ideally you want, you know, so Tesla is a good example. Like Musk’s packages, Musk’s pay package is huge.

That’s like 50 billion kind of option grant, which has been turned down. You know, you see that all the time in the small and micro world where they get these big slugs of options and they move all of the timing of it around. That behavior, you know, technically it’s legal, but don’t want to be in business with a dude, someone who’s doing that? Probably not. Now I want someone who wants to make money with the shareholders as well. And that’s sort of, that’s where it’s really important, which I think you can, all of that is observable in the financial statements and the proxies and things like that. I don’t think you need to do any psychological analysis of the management or anything like that. I just think you look at the financials and it tells you. You don’t have to listen to what they say.

[01:03:34]Mike Philbrick: Love it. So anything else from, was it noticeably different, given that it was televised for the first time. Did you see any other, you know, sort of…

[01:03:43]Tobias Carlisle: It’s been televised before. It was very full, it was a very full year. Last year was less full. I like doing it because it’s the one place where all the value guys who I know all gather together in one place, so we all catch up and have dinner and drink and a few things like that. That’s sort of the interesting one. My wife doesn’t care if I go to this thing. It’s just, it’s all very, very nerdy dudes.

[01:04:06]Mike Philbrick: She went once and she’s like, never…

[01:04:08]Tobias Carlisle: I should never go. No chance.

[01:04:11]Mike Philbrick: Everyone commiserating about, oh, I bought my Berkshire back in 1982. When did you buy?

[01:04:16]Tobias Carlisle: A big part of it. That’s a big part of it.

[01:04:18]Mike Philbrick: I love it. What a wonderful tribe created, on that, you know, sort of buy and die type of framework of ownership.

[01:04:28]Tobias Carlisle: Yeah. it’s a good, it’s a good crew. It’s a good group of people.

[01:04:32]Mike Philbrick: So you got, you’ve intimated you’ve got a book maybe coming, so I don’t know, if it doesn’t go with the publisher, maybe you should self-publish.

[01:04:39]Tobias Carlisle: Well, I have self-published.

[01:04:40]Mike Philbrick: … book.

[01:04:41]Tobias Carlisle: I self-published the last one. I’ve got no problem self-publishing. I just think this one needs a little bit of help. So I’m trying to find a publisher who can actually edit it a little bit. So it’s with Harriman. Probably it’s going to be with Harriman, unless that falls over, in which case I’ll self-publish.

[01:04:56]Mike Philbrick: Nice.

[01:04:56]Richard Laterman: What’s the theme of the new book? What are you focused on?

[01:05:00]Tobias Carlisle: So it’s Sun Tzu and Warren Buffett. The overlap between the two philosophies. It sounds crazy, but I do think there’s a lot of overlap and Graham as it…

[01:05:08]Mike Philbrick: I…

[01:05:09]Tobias Carlisle: There’s a lot of overlap. I think Sun Tzu is a little bit under appreciated. You know, Sun Tzu talks about following the moral law, which is like an idea of like looking for character and trying to do the right thing. And that’s how you know you’re going to succeed, because you’re doing the right thing and ultimately the bad guys fail. That’s the….

[01:05:30]Mike Philbrick: Love it.

[01:05:30]Richard Laterman: … the battle before it’s even fought? Maybe there’s a, an analogy.

[01:05:35]Tobias Carlisle: Yeah, that’s, I mean, that’s such a big part of it, right? Like how many people buy stocks because they’ve seen it going up. And then when it stops going up, they don’t know what they’re doing. Like, that’s the idea. You figured out how this thing’s going to play out before you buy it, and you figure out how you can lose as well, and so when you start seeing the signs of losing, then you get out.

[01:05:53]Mike Philbrick: Yeah.

[01:05:53]Richard Laterman: Oh, yeah. That’s actually an interesting sort of portfolio construction question. Do you operate with any level of stop losses?

[01:06:05]Tobias Carlisle: No, I would buy them all the way down. And that happened with Meta as well. I started buying Meta at what I thought was half value, and we were still buying at a third value. And I thought that the business itself, you know, the business, again, it’s one of those hard things where the stock price was following the free cash flow generation, which was collapsing because Musk was reinvesting in the Metaverse, and we’re all sealed into that with Musk as he flies it into the sun or whatever he was planning to do. But at some point he changed his mind and decided that he’s going to go turn it into cash flow generation and pay a dividend. It worked out okay, so I…

[01:06:40]Richard Laterman: You’re talking about Meta?

[01:06:42]Tobias Carlisle: Yeah, meta.

[01:06:43]Richard Laterman: Zuckerberg,

[01:06:44]Tobias Carlisle: What did I say, Musk? Yeah, Zuckerberg, sorry. Zuck.

[01:06:47]Richard Laterman: Exactly.

[01:06:49]Mike Philbrick: I love it. So outside of finance, what any other hobbies that you’re into? That would maybe surprise people, little insight into this Australian law, former lawyer, deep value investor in the heart of California?

[01:07:04]Tobias Carlisle: I play a lot of tennis. My wife’s a former D1 tennis player. So, that’s always humbling, go and play some with her. And then, my kids play tennis as well. So we spend a lot of time at the tennis courts, playing a lot of tennis. So that’s, I think tennis is a great sport, particularly for kids, because it’s, to master the stroke is a difficult thing, mechanically. To hit a ball is a hard thing. But then it’s hard to score. The scoring is crazy. 15, 30, 40, deuce, add, nuts, doesn’t make any sense at all.

So the kids, which side of the court you stand on, who’s serving, all that stuff is complicated. And then after you’ve mastered the mechanical stuff and you’ve figured out where you’ve got to stand, Then you have to work out how to beat somebody in a point, and that’s the really hard stuff. And most people don’t get to that point. So, I’m trying, I want my kids to master it.

[01:07:53]Richard Laterman: Have you figured out how to beat her, because as a D1, former D1 player, it sounds like she would, she’d probably beat you most games. Is that…

[01:08:01]Tobias Carlisle: You can’t, you can’t rally with a D1 player. You’re just going to get pissed up. So the only way to beat a D1 player as a man is to serve and hit a hard serve. So I’m going to win the point on the first point on the first stroke, or on the third stroke when she recovers, or I’m not going to win it, and I’ve …

[01:08:16]Mike Philbrick: Love it. I serve, I return once and then I stop.

[01:08:18]Tobias Carlisle: That’s it, that’s it. I’ve sort…

[01:08:20]Mike Philbrick: … energy. Otherwise they, saved my energy.

[01:08:22]Tobias Carlisle: That’s, that’s the only way, because once you get in there, they love to rally. Like that’s what they’re, that’s what they’re brought up on. They rally all the time. They hit these crazy…

[01:08:29]Richard Laterman: Yeah. So you got to do the Pete Sampras thing.

[01:08:33]Tobias Carlisle: Serving, serve and volley. Yeah. I’m a, I say I’m a, I’m an Aussie. So I’m Pat Rafter, serve and volley style.

[01:08:42]Mike Philbrick: All right. So, I mean, that’s awesome. Little tennis. I know you were at Indian Wells. My wife was there too. I’m surprised you guys didn’t bump into each other and you didn’t know each other.

[01:08:51]Tobias Carlisle: It’s a fun, it’s, I recommend Indian Wells. It’s a real party atmosphere. One of the, there are some girls at the club, one of the girls at the club is a pro. Well, there’s a few pros of the club, but one of the pros was playing in the doubles too, and watched the doubles.

[01:09:02]Mike Philbrick: Oh, that, that’s awesome. When you’ve got someone there that you know, that’s even better.

[01:09:07]Tobias Carlisle: And doubles is, doubles is exciting.  So I don’t know, it’s like less, I’m less worried for them. It’s just, the crowd’s going bananas. It’s more like any other sort of sporting match, whereas the singles is like, they suck all the oxygen out of the room. Everybody’s very stressed and tense when the singles is going on.

[01:09:21]Mike Philbrick: No one’s allowed to say anything. You can’t even sneeze. Don’t stand up and change seats or something like that. You’re going to…

[01:09:28]Tobias Carlisle: There’s a lot of cheering in the doubles. It was cool.

[01:09:30]Mike Philbrick: Yeah, it is fun. That’s awesome. Now, what about on the personal side, any personal mantra or last bit of investment advice that you could share with everybody that’s guided you through the ups and downs of the investing world, because we’re about an hour, so we’re starting to wrap. And what are the, you’ve just penned a book with Buffett and Sun Tzu in mind. So, I mean, there’s got to be some fantastic Eastern wisdom coming out that you could, that you could share with everybody that’s going to change their lives.

[01:10:05]Tobias Carlisle: I really enjoyed, I read Graham, Intelligent Investor years and years ago. And I read Sun Tzu many, many times over the years, because I think it’s very hard to understand the way that he writes. It’s a translation from ancient Chinese, and there are lots of different translations, and the translators disagree in the best way to express some of these ideas, and they’re vastly different between the translations, the meaning.

What I found is that there’s the original one, which was written in 1910, is probably the one that most people have read. And I think that’s probably the best one, but there’s also one that came out in 1989, which is looking at the Taoist influence of the Art of War. And I think that, and I had never really had any exposure to that, so I went and read the Tao Te Ching and the I Ching and the Zhuangzi and a few of those other things, and I was kind of blown away by the, there’s some interesting wisdom in those things, and a lot of it is about patience and letting things sort of unfold the way that they should unfold.

And I think that that’s very apt for investing. And one of them, one of them that, uh, that stands out for me that Richard sort of alluded to it earlier, but you should have a good enough understanding of your subject matter, and what’s going to happen in this sort of engagement when you’re putting these positions on, that you should be able to read the signs of it going badly or going well, which is distinct from what the stock price is doing, because the stock price is a little bit misleading. I think that’s how other people feel about it. What’s actually happening in the business is revealed internally. And that’s what the Dow and Sun Tzu would say as well. You look internally, ignore the surface.

I think that the Tao begins, the Tao begins something like caught in the, caught in desire. You see only the,, you see only the surface, but if you can see the mystery and you, if you can see inside, you can see the mystery. And that’s what I, that’s what I want. I want to see the mystery, you know, I want to see what’s going on.

[01:12:15]Mike Philbrick: All the answers lie.

[01:12:15]Tobias Carlisle: … the surface. That’s it.

[01:12:17]Richard Laterman: Very poetic way to end. I want to see the mystery. I like that. That’s a great phrasing.

[01:12:22]Tobias Carlisle: I think it’s reality. You want to see reality. You want to see the mystery, the generator.

[01:12:27]Mike Philbrick: Well, everyone, that’s another hour on ReSolve Riffs. Toby Carlisle, Acquirers Funds, ZIG, DEEP. Those are the tickers. They are smashing it. This hour went, flew by. Tobias, always a pleasure catching up with you and sitting and chatting. And thanks so much for taking the time.

[01:12:47]Tobias Carlisle: Yeah, thanks for having me, gents. Thanks Richard. Thanks Michael. It’s really, it’s always great catching up with you guys. Good seeing you.

[01:12:54]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind our listeners that the team works really hard on these podcasts. We spend a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we’re asking the right questions. So if you do have a second, just do hit that Subscribe button, hit that Like button, and Share with friends if you find what we’re doing useful.