Podcast #28: Growing as an Investor with Sullimar Capital’s Bill Brewster
Advisor: Matthew Cochrane
Almost all investors evolve. This is partly due to market changes, different macro conditions, and new technologies. But it can also come about because of an investor’s own personal growth. One need to look no further than Warren Buffett, who transitioned from “cigar butt-style” value investing to an approach that favored quality and economic moats over the course of his illustrious career.
Portfolio manager Bill Brewster joined 7investing in an exclusive interview this week to walk through his own investing journey. Brewster says:
“So I don’t think that my principles, like from a high level if we were just talking in a room, I don’t think that I would say much different to you that I said three years ago. I think what I have begun to understand is … there is a lot of merit to valuing growth and paying for that growth.”
While he fully acknowledges there is a lot he still doesn’t know, he appreciates a lot more nuance and wisdom from the investing greats than he did when he was younger.
“[W]hen I was younger, you know, I listened to Buffett like over and over and over and over again. And it’s a little bit for me like going to my financial church. And I think that something that could be similar in that is sometimes you read the same words and hear completely different things or listen to the same message and it applies in a different way because of where you are in your life and I just understand a lot more than nuance that those guys talk about than I used to. And I think that in the past, I was young and thought I had all the answers, and I was ignorant. And now I think at least I acknowledge that there’s a fair amount of things that I don’t know.”
Of course, we couldn’t talk to Bill without discussing his now infamous bet with 7investing lead advisor Austin Lieberman, so Bill talks through his thoughts on Zoom Video Communications (NASDAQ:ZM) and FOMO and why he believes Qurate Retail (NASDAQ:QRTEA) can return excess capital to shareholders over the next several years. He also offers thoughts on balancing value versus growth when investing, the merits of long-term buy-and-hold investing, and his bull case for Wells Fargo (NYSE:WFC).
00:30 “Value After Hours”: Podcast Bill co-hosts
01:00 How Bill got into active investing and managing his family’s money
05:00 The importance of investor behavior
08:00 Bill’s thoughts on the current state of stock market indexes
09:20 How Bill’s investing process has changed with more experience
11:00 How Bill thinks about “value” vs “growth” investing
14:00 Staying within circle of competence vs expanding it
16:00 Bill’s portfolio structure and why he is more confident than ever before. Qurate Retail (QRTEA), Transdigm (TDG), Charter Communications (CHTR), Berkshire Hathaway (BRKB), Wells Fargo (WFC)
18:00 Bullish thesis on Qurate Retail (QRTEA)
18:45 Irrational market behavior that’s making Bill nervous about the market
19:30 Bill’s 2.5 year suicide prevention charity bet with Austin on which company will provide better shareholder returns Qurate Retail (QRTEA) vs Zoom (ZM)
30:00 Bullish thesis on Wells Fargo (WFC)
33:30 “Long term buy and hold” vs “buy low sell high”
39:25 Tips for teaching kids about finance and investing
41:00 Find bill @billbrewsterSCG on Twitter
Publicly-traded companies mentioned in this interview include Qurate Retail, Wells Fargo, and Zoom Video Communications. 7investing’s advisors and/or guests may have positions in the companies that are mentioned.
This interview was originally recorded on August 28, 2020 and was first published on September 3, 2020.
Matthew Cochrane: Greetings fellow investors. I’m Matthew Cochrane a lead advisor at 7investing, where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone.
Listeners, today, I am very excited to introduce Bill Brewster who acts as the portfolio manager for his family. He is also a CFA, though he doesn’t talk about that much. He can be found co-hosting the Value After Hours podcast with Tobias Carlisle and Jake Taylor. I listen to a lot of podcasts, almost all of them investing related and I speak the truth Value After Hours is one of my favorites. If you listen to just one investing podcast, make it 7investing. But if you listen to more than one Value After Hours definitely belongs on your playlist.
He is one of the most entertaining and provocative follows on Fintwit and can be found @BillBrewsterSCG. He blogs, when it strikes his fancy, at https://sullimarcapital.group. Bill, welcome to the show.
Bill Brewster: Nice to be here. Thank you for giving us the recommendation as the, the second in line. I appreciate that. I was wondering where you’re going to go with the intro and I like how you did that.
Matthew Cochrane: All right, Bill, why don’t you start off by telling us how you first got into investing and what led to your current position and what you do.
Bill Brewster: Uh, I sort of found investing in a very similar way to a lot of people. My grandma’s friend had sent me a couple Bogle books and in-between he slid in the Intelligent Investor by Ben Graham and I don’t know if that was some sort of sick joke or whatever but, you know, that I think the point he was trying to drive home to me was not the one that I took from the whole lesson. And I sort of ended up as an active person.
Matthew Cochrane: How old were you when that when all that was going down?
Bill Brewster: Oh, that was that was sometime around law school, so I would say that, I don’t know, maybe 23, 24.
Matthew Cochrane: So your family thought you were going to be a lawyer and like, they sent you some Bogle-head books and you turned out to be an active investor?
Bill Brewster: I guess I think it was closer to I was pretty lost in my early 20s and I didn’t know where I was going to certain things I had actually tried to be a small business owner for a little bit and it was pretty obvious that I was going to be able to make like just a little bit of money with all that stress as opposed to, you know, it would have been a lot to turn it around. It was a franchise and with the franchise structure you’re paying a lot of money off the top and it just didn’t make sense to continue to invest the time or money in the business. So as I was winding that down. I sort of revisited what he had sent and then, you know, I thought a little bit differently after going through that process. So that was that’s more or less what it is.
And then I was at a bank. I was at Bank of Montreal, well BMO Harris, for five years and I underwrote commercial credit and then, just the way that my personal situation is, I ended up talking to my wife after I got my CFA designation. And I said, you know,it’s sort of the way that my family is structured if I got control of a fair amount of money and didn’t know what I was doing, and then I sold at a bottom, like March, right? Let’s say I didn’t understand what I own and what I was actually doing and I capitulated in March. That would have cost me much more than whatever I could have made at the bank.
And I said at the time, like, I’ve got to be able to know the strategy that I’m running and believe in it enough to stick with it through the hard times. And I think that’s going to have a lot more to do with sort of our family’s ultimate outcome, then, you know, whether or not I’m decent at underwriting loans. And she sort of said, “Well, you know, why don’t you try to go do it.”
And here I am. I just, you know, run my own capital. Nothing I say here is investment advice. Seek your own, you know, do your own due diligence, seek your own advisor, all those disclosures. But that’s sort of where I’m at. I’m considering maybe opening an advisory service, you know, in a little while. But, for now, I don’t have much upside to doing it and I tend to get a lot of doubt or …
I’ve derived a ton of benefit from Fintwit. And one of the things I associate with that is, I don’t have an advisory and I have the freedom to just be completely free. And I know a lot of people deal with, you know, compliance and all that stuff. And I’m not sure, but I think I might be giving up a little bit too much to actually start a business, which is sort of an odd thing to say.
Matthew Cochrane: Sure, sure. And I get that. Let me pick at something a little, you just said, like you said, like you wanted to have enough conviction to like hold through the down times. Like no matter what kind of investor you are, how important is just nailing that part of it. Like knowing when your style might be taking a hit. But you’ve got to hold through it as opposed to … Like, how important is that compared to just like, I guess your investing style, like value versus growth or whatever, like that temperament to know I actually understand why it’s down and I believe like this won’t be a sustained downturn and to be able to hold through that, or even add as it goes down.
Bill Brewster: Yeah, I mean, I think that’s everything, right? I mean, if you look at any study of like even the great mutual funds, right, the average investor in the fund rarely gets the returns of the fund. So, you know, my personal opinion is, yeah, I just think that if you don’t know the strategy that you’re running and you’re listening to other people for, you know, a buy recommendation or something and you don’t I mean, I’ll just personalize everything, rather than saying you and like I don’t do the work, right? I mean, I learned from watching guys that I thought were really awesome. And I’d have the 13-F open and I’d follow them into position. And then the position would go against me a little bit and I have no idea if I’m wrong. At that point, right, like I’m waiting for their next 13-F wondering, Oh my goodness. Have they sold? Have they changed their mind?
And as I’ve done this, you know, I guess, it’s going on, five years now. You know,there’s so many different incentives, when you’re looking at somebody’s 13-F. People are thinking, different things for different reasons. Like you’ve got to be able, in my opinion, to know what you own.
Because you own it right and not because somebody else does. So, I think that’s everything. And then at the end of the game, you sort of figure out if you were any good at it. I mean, one of the scary things about this game is your next bet is probably, you know, assuming you’re getting wealthier over time, the next bet’s the most important always. So you sort of can’t ever sleep on your process.
Matthew Cochrane: You have to kind of love it, right? I mean, because if you don’t love it, passive is probably the way to go, right? And I say that running an active stock recommendation service. But if you don’t love it, it can be a scary proposition. Like when something like March happens and your positions are down 30% and if you’re just borrowing conviction from like a 13-F or from a recommendation service even, that’s a scary proposition. You kind of, you really have to know why you own what you own.
Bill Brewster: Yeah, that’s right. And like, I personally have … There are pockets of the market right now that make me confused, right? At a minimum, I can say that the entire market is not trading in a depressed state of mind. If I saw the entire market in a depressed state of mind, I think I would trust an index, a little bit more. Right now part of the problem is I fundamentally don’t trust the index. And maybe that’s like overconfidence bias on my part, and whatever.
But if March had happened and I was in an index product. There’s a decent chance I would have sold. Now I own some stuff that would make other people puke. But it didn’t make me, but so that’s what I’m saying. Like even if I underperform the index, which I think I have a reasonable shot at outperforming here. I’m pretty pleased with where things are right now but even if I, theoretically, I’m going to underperform, if I was not willing to hold the index through March, and I would have bought in May, my realized returns would be junk relative to even a suboptimal performance or portfolio. So I just think there’s so much that a textbook may get right, but money is so behavioral that I think you’ve got to do what’s right for you. Because at the end of the day, like we’re all just trying to have enough to retire on and walk the path that we need to walk to get there.
Matthew Cochrane: Right, so I actually, I want to like talk about it seems like your investment process has evolved over the last year or so. Like on your blog you write, “Throughout this process I will try to avoid labels like value or growth because I deemed them hazardous to people’s investment health. In order to be successful investor one mustn’t worry about his or her label. The most important thing to remember is you’re buying an asset and your goal is to buy it a at a substantial discount to what you think it is currently worth or buy at a substantial discount to what you think it will be worth.”
So let’s not use those labels, because probably we use them too much as shortcuts, but it seems you’ve been undergoing a bit of an evolution in your investment process. How have your or have your underlying investment principles changed in the last year or so?
Bill Brewster: I don’t, I guess that this is sort of interesting. So I don’t think that my principles, like from a high level if we were just talking in a room, I don’t think that I would say much different to you
that I said three years ago. I think what I have begun to understand is, I’ve removed some stupidity from my life, is there is a lot of merit to valuing growth and paying for that growth. And I think, you know, when I was younger, you know, I listened to Buffett like over and over and over and over again. And it’s, it’s a little bit for me like going to my financial church. And I think that something that could be similar in that is sometimes you read the same words and hear completely different things or listen to the same message and it applies in a different way because of where you are in your life and I just understand a lot more than nuance that those guys talk about than I used to. And I think that in the past, I was young and thought I had all the answers, and I was ignorant and now I think at least I acknowledge that there’s a fair amount of things that I don’t know.
Matthew Cochrane: That’s like a perfect transition to this. So like Warren Buffett famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” So obviously growth and quality is integral to even Buffett’s process but quote unquote growth investors can’t ignore valuations and value investors can’t ignore quality. How, how do you weigh a company’s valuation to its growth and economic moat when studying it. Like this is my personal biggest struggle in today’s market and I have a hard time balancing these things. How do you balance these two characteristics when investing?
Bill Brewster: Um, you know I wish that I could tell you that there’s some scientific process. I look for things that make sense to me. And that, I mean, that’s really what I look for. So if you look at my portfolio. Right now, there’s some like higher quality names that, like Charter Communications (NASDAQ:CHTR) is one. That was a business that I had to get myself to stretch on a little bit. But I really understood the strategy, I understood what they were trying to do, their backgrounds, and they were going through an integration issue and the stock had sold off really hard. And I think that there are some things that I bought, Microsoft for the same exact reason that I’m about to tell you, when that stock sold off, my evaluation was like, theoretically, a little lower. But then I had to look myself in the mirror and say, “What’s the probability that my precise estimate is correct here versus what’s going on in the market, why I think people are selling, and what I think the true merit of the story is.” And I just determined I was wrong. And as I’ve learned more, I realized why I was wrong.
But I’m not … I guess, what I would say is, I respect what the market is telling me enough to realize that there are situations that will be presented to me that maybe are worth rethinking whether or not I’m the right one or not. And then there are other situations, like a lot of these really growthy names, that I just don’t know a lot about, right? So, so when we’re talking about terminal economics and TAM, and what the competitive position is, I have no confidence to assess any of that in a lot of these names and I just can’t play a game that I don’t know anything about it. I wish I could, especially right now but, you know, I’m betting like my family’s money. I’m looking at my kids every night. I can’t lose it, because I got some gamble in me and stray from, you know, what I understand.
Matthew Cochrane: So how, how do you weigh like just staying within your circle of competence and then, I guess, trying to expand your circle of competence so that you understand the other names.
Bill Brewster: Yeah, I mean, so I guess a … One, I guess if I had a mentor that was sort of on my arm, that was you know that just screamed at me — and this — We can start talking about ideas pretty soon, I think it’s a relatively good segue — Like I’m interested in Qurate Retail Group (NASDAQ:QRTEA) right now. It’s QVC and Home Shopping Network. Right. I mean, to me the time that I have spent on that idea, in theory, probably could have been spent elsewhere with a much higher return on time. On the other hand, the reason I’m interested in the idea is some of the time that I’ve spent researching other stuff and looking at other situations and learning from things.
And I think I see a situation that could have a lot of upside with low downside that very few people either care to bet on or are willing to bet on or something. And it’s all the time that I put in before and some of what I think I’m exploiting some emotional biases in other people here.
So I guess, do I wish that I was studying like you know Fastly (NYSE:FSLY) and some of these other stocks that are like, you know, Shopify (NYSE:SHOP) and all that, like, Yeah, I do. I think that that would probably be a higher return on time, long term. But I think I see money, like real money, right in front of me right now. So to just walk past that is uncomfortable for me.
Matthew Cochrane: Alright, so let’s go there. I’m not familiar at all with this stock, except for your tweets within the last week maybe, so let’s …
Bill Brewster: Subscribers don’t don’t turn off right now, I assure you. It’ll get better!
Matthew Cochrane: It’s Qurate Retail.
Bill Brewster: Yeah, it’s Qurate right. Like a curation machine is what they’re trying to make a play on.
Matthew Cochrane: Gotcha. So we have Qurate Retail. So, like, a week ago, I think you tweeted something like “I’m more confident in my portfolio than ever before, because I…”
Bill Brewster: Oh no, no, not “because” I said “and.” I have Wells Fargo (NYSE:WFC) and Qurate, as core positions, not “because of.”
Matthew Cochrane: Maybe “despite.” So, all right. So you have Wells Fargo and Qurate Retail as your core positions and you’re still confident in your portfolio. And then yesterday…
Bill Brewster: To be fair, hang on, hang on. I gotta back up so that the listeners don’t all turn off. My portfolio is full. Like I own Transdigm Group (NYSE:TDG)in size. I own Charter in size. I have a big allocation to Berkshire Hathaway (NYSE:BRK.B), which if you think Apple (NASDAQ:AAPL) is somewhat close to reality in this valuation, like Berkshire is screamingly cheap to me. That’s not like a recommendation to buy or anything, but when you think about that entity. If this valuation for Apple sticks that that stock is too cheap. So the tweet was a little click baity, right?
Matthew Cochrane: From you? From you? What?
Bill Brewster: I try not to. I try not to. But you know, I do, I do. I’m trying to be thought provoking in what I say, right, like it’s not you know, do I think Match Group (NASDAQ:MTCH) has a better future than Qurate? Yeah, for sure. I think the equity slice of Qurate’s capital structure right now is ridiculously cheap. And I think you have really, really good capital allocators there that have just refinanced the debt that was due in 2022, they pushed it out to 2028. That’s going to give them some flexibility.
If they take the shot. They just, I mean, I’ll take a step back here. But I mean, ultimately what this is, is a thesis that they could eat the entire company back in buybacks in five years, and hopefully, people keep under appreciating the story, because if the cash flows stick and it remains this hated, I’m going to end up with a lot of money.
Matthew Cochrane: So let’s let’s let’s set this up a little bit and then we’ll go into your thesis, a bit more. So, yesterday you got into it with my colleague Austin Lieberman.
Bill Brewster: That’s because he was trolling me. I didn’t get in! So I will set up. I was on the phone with two real estate investors who are very savvy. And what they said is, they said to me, I don’t trust the stock market. I don’t trust public equities. I don’t trust anything but we, we, you know, sort of took a flyer on Zoom Video Communications (NASDAQ:ZM). And my comment was, this is a group of people that are telling me that like they fundamentally don’t trust the stock market, and they happen to buy Zoom like right here. I just think that there are, there is behavior going on where people are seeing a lot of fast money being made, and it’s making it hard for them to stay in the lane that they believe in and has made them successful.
Matthew Cochrane: A lot of FOMO. A lot of FOMO.
Bill Brewster: That’s correct, yeah. Yeah, that was his and I sort of started debating the merits of Zoom and I kept saying like, Dude, I don’t know about Zoom. Like, I have no idea what this company is going to be. That’s part of why I don’t own shares in it. Like I just don’t understand where they go in the future. Why they can defend themselves from Microsoft? Why Google Meets doesn’t take some share? Why it’s the best tech? Like I just don’t get it. So I just don’t invest in it. After a day, I said, “Fine, put your chips on the table.”
Matthew Cochrane: And so I believe the bet, correct me if I’m wrong starts today. Well, we’re recording this on Friday, August 28 it starts today. It goes for two and a half years and Austin took that Zoom will provide better total returns to shareholders and you were saying Qurate Retail would provide better total returns to the shareholders. So what’s your thesis for Qurate over the next two and a half years.
Bill Brewster: So basically, I think that with QVC, it’s hard to argue that you don’t have a legacy sales distribution mechanism selling almost I mean, I’m not gonna say overwhelmingly because of the stats that they cite, but I think that it’s not a stretch to say that you’re selling products to old ladies. And you know they have said in the past that I think 40 or, I think they said 51% of their users were between the ages of 35 and 60. I think last year, they said 44% were between that age. So you know, I read that and I think, Okay, well, what are they not saying? They’re probably saying that 50% of their users are over 60 years old. Right? Or maybe it’s even 65. But at the end of the day, the equity on a pro forma basis… So today, it trades at $4.5 billion. I’ve watched this company for like two years and I’ve always been intrigued by, like, Oh, how does this continue to make money. It’s bizarre to me it, feels like a cockroach, you know, because everybody’s saying it’s gonna die forever and like it just lives.
Matthew Cochrane: I remember growing up and just like my dad like just being completely puzzled about this like whole entire business model. Like who buys these things from this TV channel?
Bill Brewster: That’s right. Like John Malone was writing an investor letter in 2001, it was making roughly $800 million in operating cash flow. And today, it makes roughly a billion dollars in operating cash flow. Like this thing just for some reason won’t grow and won’t die.
I think some of its the variable cost structure nature. And I think some of it is, you know, they were they were acquiring customers easier when they had legacy TV, and then the way that their customer base tends to work, is it tends to, I’m just going to say season, right, women season into the the buying habits and then they sort of like stay as they’re older. Right.
So the equity’s $4.5 billion today, free cash flow to common equity today is right around, I think normalized, you can call it anywhere between $800 million, $1 billion. I don’t think that you can really be too precise with it. In the past, they had been running a leveraged buy back strategy, which is fairly typical of Malone companies. And I think it was in Q4, it might have been in Q3 last year, the stock just kept declining, and the CEO of Liberty Media Greg Maffei came out and he said, you know, we’re gonna we’re going to pause the buybacks here. We’re going to see how else we can give capital back to shareholders. We realize the market is telling us that the terminal values declining. We think that, you know, the markets over done on this particular assessment, but we don’t disagree that, you know, the terminal value is opaque, at best, right?
So I thought that that was interesting because if you look at what other companies have done like Bed, Bath and Beyond (NYSE:BBBY). For instance, the amount of value that they have eroded by just like stubbornly doing a buyback into the market is maddening from a shell shareholder perspective.
So then I’m sitting in my house. And I’m like, I wonder what Qurate did last year or last six months, right? Like we’re all sitting at home. I wonder what happened. And I picked up the 10-K, or 10-Q, and I saw a billion dollars of operating cash flow in the first six months and I was shocked. Like almost fell off the chair. Now, a lot of that was working capital benefit and that’s going to reverse. So let’s just call it $500 million. Yet another year goes that they keep printing the money.
So I said, All right, well, what is Maffei saying, like I just sort of interested in the call. And I started listening to the call and what he said is, he said, Okay, our shares are roughly $10.50 share today. We realized that the market doesn’t like this story. We’re going to give you a $1.50 in cash and a $3 preferred dividend. The $3 is going to have a 10 year maturity and it’s going to pay 8% per year. And then the stub will be a leveraged equity. So the remaining equity is going to be a levered equity strategy.
And I got to thinking I was like this is actually a very creative capital return that is not a buyback and it’s going to give the investor base that doesn’t trust the duration of this asset, the ability to buy a 10 year coupon that yields 8% and then those that sort of want to take a little bit more risk, they’re going to probably turn the buyback machine back on for the levered equity.
And I’m looking at a stub value of $2.5 billion. And I think the levered equity is going to be able to repurchase somewhere between $200 – $400 million of equity pretty comfortably consistently. And if you run the math on that, years five and six gets super interesting. If the stock price doesn’t increase at all. Eventually the float’s just going to be squeezed. But let’s say all the, let’s say their entire customer base is 65 year old women sitting at home. The average life expectancy now is at least 79 and the equities priced for a six year life.
So, to me, the math just doesn’t add up. And I don’t think it’s going to be some massive grower, but I would happily lose my bet to Austin if they could continue to print this free cash flow and just eat themselves. Because I think in four or five years, either the stock goes up or you’re just going to collect a lot of special dividends, because I think these guys are really smart with what they do. I don’t think they’re going to use today’s free cash flow to destroy value.
Matthew Cochrane: I mean, it makes sense. It makes sense. I, it’ll be interesting to see how that bet. Turned out like I think I, I was running a poll on it and it was almost 50-50…
Bill Brewster: I was shocked.
Matthew Cochrane: Yeah.
Bill Brewster: I was sure Zoom would win that!
Matthew Cochrane: And then I tweeted something like this tweet features one of the companies that’s probably the most insanely valued ever. And then another company I don’t know anything about. So it’ll be interesting to see where that turns out in two and a half years.
Bill Brewster: And look, you know, I don’t, I don’t know. Right. It’s hard to look at a TV selling distribution platform and be like, I know for sure the cash flow is going to be there.
Matthew Cochrane: I think that’s part of the problem.
Bill Brewster: Right and and what I think that they have consistently said, and if you read the filings, you’ll see. I mean, the cost structure is very variable.
They had a good year in the face of all this cord cutting. I mean, all the cord cutting that happened in the first half of the year. And these guys killed it. Now, yeah, people were stuck at home, but on one hand, we’ve got everybody arguing that like, oh, look at what coronavirus pulled forward. Here’s another company that introduced a ton of customers to their platform that they didn’t have before. Can they keep them? I don’t know. We’ll see.
Matthew Cochrane: Yeah, is that habit forming, you think, or is it a like a one-time shot?
Bill Brewster: That’s the thing that’s tough to handicap, right? And I don’t think anybody trusts that it’s habit forming, the way the business works. It’s a weird business.
Matthew Cochrane: Do people still call in and buy stuff? Like call this number and blah blah blah…
Bill Brewster: Well, the answer is yes. There are some that do but
I mean, they call it e-commerce. I’m sure it’s people that see it on TV and route the order through the internet. I think that’s like 60% of the business now and then of the, I mean the way that they frame it tells you all you need to know, like of the e-commerce 50% happens on mobile. So that’s like 30%, you know, it’s probably just a QVC app.
Matthew Cochrane: That’s how you got to hype it, you got to say like I found an undiscovered e-commerce gem.
Bill Brewster: Yeah, yeah. Well, then it’s a platform right? Like it is something that brings a seller and a buyer together, so you know an undervalued e -commerce platform, that’s right, with network effects.
Matthew Cochrane: Exactly.
Bill Brewster: Exactly. But you know when when I say that someone in jest. No one right now can fathom a scenario where this company can grow. I would not bet on growth at all. Sure. But if we’re five years out, and somebody says, Hey, you know what happened in coronavirus was the Macy’s and Bloomingdale’s of the world completely collapsed. Direct to Consumer came out, everybody was buying a bunch of stuff on Facebook, realized it’s a really hard business. Turns out, QVC actually has scale to buy some ads and they’re pretty good at featuring products. And they became sort of like an aggregator of a certain niche for the market and used Facebook Live as their distribution or customer acquisition strategy. That’s not unfathomable to me. I wouldn’t bet it, but if it happens there’s going to be a lot of upside here.
Matthew Cochrane: Sure, yeah. Absolutely. Absolutely. So, uh, another company if you’re not exhausted about talking about Wells Fargo. Why don’t you give us your quick pitch for Wells Fargo.
Bill Brewster: Well, I look so you and I had talked about this, I, I’m trying to create a cash flow stream for my family off of an asset base. So that’s, I think it’s important to contextualize why even on a bank. And I’ve read a lot of stuff about Wells Fargo, I understand, you know, it’s a terrible bank that everybody hates and no one’s going to bank there in the future, but I don’t think the data supports that thesis. And yes, the data is somewhat backwards looking but whatever complaints are lobbed at Wells Fargo, no one ever goes at their credit culture.
And what I have found from talking to people over there is, I think it’s a reasonably good bet that when they got in trouble. And they weren’t allowed to grow loans, they focused on their best relationships. I think their most profitable relationships that they tend to focus on have over $100 million in revenue. I think it’s plausible that through coronavirus the businesses that are going to survive and have more market share on the back end are those with access to capital. I think it’s plausible that those businesses have more than $100 million in revenue. And I think that combined with what I know about their credit culture makes me think that it’s plausible that they perform quite a bit better than people think they will. And you’re buying into like 70% of tangible book value. And they know how to underwrite loans, you’re flying in the face of a ton of NIM pressure, but I don’t know how regional banks. And even forget about regionals, like there’s gonna be this section of banks that this interest rate policy kills and those deposits have to go somewhere. And like banking, isn’t that easy of a business to disrupt. I mean, I agree that fintech is coming for it.
But there is a lot that goes into banking, especially on the commercial side. And I think that a lot of fintech can actually help banks get more efficient, but I don’t know that it’s going to displace them. So, you know, we will see.
Matthew Cochrane: Sure. So this is kind of an unfair question but like if you were, you know, your bet with Austin for for QA retail was was two and a half years. If you were going to put a timeline on this, like, how do you, how long do you think this takes to play out.
Bill Brewster: I have no idea. That’s why I wouldn’t bet it on a timeline.
Matthew Cochrane: Yeah.
Bill Brewster: I will tell you if they can’t, the asset cap, I mean, for those that don’t know, they are like heavily in the penalty box. And the reason that they’re heavily in the penalty box, in my opinion, is not because of what they did, it’s what they didn’t do to fix it. And if they don’t fix it. There’s, I mean, you’re at risk of the government breaking whole bank up. So it’s important for them to do that. And I, if I don’t see any type of sign, like if there’s any signs that that is going sideways or, you know, whatever. That’s the risk that would keep me up at night. Or, you know, sort of does, but I think they’ve got the right plan in place. So I would like to see that. Remove the asset cap removed within two years. If it’s not, I said that I was selling. Okay.
Matthew Cochrane: All right. Um, so, like, how do you, I think. So, on one level, I think you’re doing the right thing because you’re looking for, I guess, like losers in this market that aren’t going to be like ultimate losers. Or like, you know, that can that have been beaten up too much.
On the other hand, though, like, so my personal leanings and the way we do it at 7investing, is we just look for really long term opportunities where you can buy and hold for the long term and I’ve seen you go back and forth, in a very cordial way I mean, but back and forth with like JerryCap on Twitter and others like, who you know they do the #neversell. Like for retail investors like do you think it’s better to like … I guess like, what do you think? To me it’s just better to look for those opportunities, even though I admit, almost all of them are very pricey at the moment. We could look at Microsoft (NASDAQ:MSFT), which I know you’ve owned and I think you’ve been trimming a bit. I don’t know if you still own a position.
Bill Brewster: Yeah, I do.
Matthew Cochrane: I think it’s almost at 40 times earnings, which is it’s expensive. There’s, there’s no way around it, that you can’t you know, say it’s not expensive, but at the same time, I feel like you can hold that for the next decade. And in a decade, I think even from this valuation, like you’re going to do just fine with it, beating the market even. Like how do you think people should weigh these opportunities, like the buy low, sell high versus the #neversell, the long term buy and hold.
Bill Brewster: I mean, I don’t have a good answer for this, you know. I think that if you look at a guy like Chuck Akre, it’s impossible to argue that he hasn’t built his career on that. Tom Russo has had a hell of a career doing something similar. But he, you know, I mean he just sold, you know, Wells Fargo and I think he trimmed something else. You know Buffett says that he wants to be never sell, but he’s selling some financials right now. I think that you could look at Coke, and like what he had in 99, he objectively should have sold. And I think he would have if he was a retail investor, I just don’t think you can within the entity that’s Berkshire, it just gets way too complicated. And once you get that well known. So look, I mean, I think that the truth is somewhere in between the two things. I just think that there’s a lot of evidence out there that people tend to buy into narratives, and narratives can be overdone, and when you’re buying something that implies a lot of growth in the future you I think also, if you’re going to never sell it, have to have a view on why they can continue to defend themselves, because I think you really get crushed when you pay up for a growthy asset and it doesn’t grow.
And you know the the downside of, you know, the traditional value idea is, you know, like you buy something like Qurate and it erodes under your feet and it’s got a bunch of debt. Now it’s a zero. So you know, both both approaches have trade offs. I am not a never seller. I do think that there’s some merit in it for sure. And I’m like, I’m friends with Jerry, so I’m not when he and I go at each other, it’s, it’s all in jest
Matthew Cochrane: No, of course, of course. Yeah, I tried to suggest otherwise.
Bill Brewster: Yeah, I mean, look, I just think I guess what I’d say is right now. It’s hard to argue, to me at least in certain parts of the market, there’s not some froth and people are saying never sell. I mean, that’s sort of what you’d say close to top right. I mean, this is how tops are formed, like psychologically. They’re not formed when people are saying, Oh, you’ve got a never sell, you know what I mean, like in ’08 no one was saying never sell. They’re saying, Where do I need to run to?
Matthew Cochrane: Yeah, what’s that like, the saying, like when the valuations are high, the outlook is always like into infinity. And when valuations are getting hammered, you know, the outlook is like tomorrow.
Bill Brewster: Yeah. Well, think about March, right? Like, I mean until the Fed came and the government bailed everybody out, everybody’s worried about tomorrow. Forget about you know what the world is going to look like in 20 years right so if you’re buying today in the next 20 years there could be a war there could be a, you know, another pandemic, like, who the hell knows? So you just really have to have a view on whether or not you want to own the asset for that long. And that’s where someone like me needs to do a lot of work to understand why the assets can continue to grow through that, and you know I see a lot of these young companies and I see the growth and like, by definition, they should be growing quickly. It’s early adopters. It’s, you know, supposedly these huge TAMs, I don’t know when to these guys start bumping into each other.
I’m more suited to, like, I understand owning Salesforce. I understand owning even something like SAP, somebody like Accenture, sort of the arms dealers of the game. And the people that can buy and plug. I don’t have a strong view on the smaller players and how the ecosystem is going to form.
Matthew Cochrane: Sure. It’s definitely a higher risk, higher reward scenarios with those.
Bill Brewster: Yeah.
Matthew Cochrane: Like the younger SAS players, no doubt.
Bill Brewster: And they’re awesome businesses like, I get it, I just, you know, they say, if you don’t know who’s the patsy at the table is, it’s you. I mean, I know I’m the patsy at that table.
Matthew Cochrane: Okay, fair enough. Uh, how about one last question before we wrap this conversation up. One thing are some investing advisors have talked a lot about both on Twitter and on this podcast is teaching our kids about personal finance and investing.
I know you’re a father that cares deeply for your children. What tips would you give fellow parents about educating their children on financial matters?
Bill Brewster: I mean, I think, you know, from I can just talk about what I did. I mean, I used to be long the airlines, my kids really like planes, you know, and it sounds sort of silly, but I’d talked to a four year old about what the load factor needed to be in order for us to be making money on that flight. And he knew. You know, and I don’t know that he actually knew, but we were walking through the airport and it was jam packed. I mean, this is
He was like, “Dad, we’re making money right now you know and like he internalized what I was teaching him and you know they own shares in Disney and I tried to tell them, like when you turn on Disney+ you get a small small fraction of a penny. But everyone around the world that’s turning on Disney+ is putting some small small amount into your pocket and they really like that.
My one kid had to pay taxes last year and he was all he was ranting about the tax man in April, which is sort of funny. But, you know, I’ve got them in, I mean, they, they basically have a three stock portfolio and it’s it’s more or less what I have.
So like one of the companies is Transdigm, and I tell them, like every time a plane flies around that needs replacement parts and you sell them those replacement parts and I just tried to talk to him about that stuff.
Matthew Cochrane: That’s great. Thanks for sharing. Uh, let’s wrap up our conversation there. Bill, where can people find you if they’re interested in following you.
Bill Brewster: I’m always on Twitter @BillBrewsterSCG you’ll probably see me interacting with Matt or Austin. I’ll be I’ll be trolling him depending on or I’ll just be laughing at myself because I bet on QVC, we’ll see which one it is.
Matthew Cochrane: All right, Bill Brewster, ladies and gentlemen, thank you so much for coming on today discussing investing with us again I’m Matthew Cochrane, lead advisor with 7investing and we’re here to empower you to invest in your future. Have a great day everyone.