Long-Term Investing Ideas in a Volatile Market
Simon recently spoke with a $35 billion global asset manager about how they're navigating the market volatility. The key takeaways are to think long term, tune out the noise...
7investing lead advisor Matt Cochrane discusses Berkshire Hathaway, generating alpha, and long-term investing habits with Farnam Street CEO Jake Taylor.
February 14, 2023 – By Simon Erickson
Jake Taylor is a man that wears many hats. He is the CEO of Farnam Street, the founder of the new Journalytic app, the author of The Rebel Allocator, and the co-host of the Value After Hours podcast. Somehow amid his busy schedule, he recently found time to sit down with 7investing lead advisor Matthew Cochrane to talk about these roles and dive deep into the inner workings of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B).
Their conversation begins with Taylor explaining to Cochrane the genesis of the idea for Journalytic, a journaling tool designed specifically for investors. Taylor says that one of the most challenging aspects of investing is that the only thing the individual investor has control over is their process, so he searched for an existing tool that could help him improve his investing process. When Taylor couldn’t find anything, he decided to design something they could use in-house at Farnam Street and wield it as an advantage over other investment shops. This was before he decided to open Journalytic to everyone.
Cochrane shows Taylor how he used sprawling Word documents for each stock he owned for years before it grew too tedious and cumbersome to continue. Taylor believes Journalytic can help investors organize data and opinions on stocks. By using it, he believes investors can improve their buying and selling processes by journaling their thoughts as they make investment decisions. Recording their thoughts and feelings as they own a company should help investors push back against many of the behavioral biases that have traditionally haunted investors and not let emotions overwhelm them in the heat of the moment.
When Taylor wrote The Rebel Allocator, he started by writing a non-fictional thesis on capital allocation. He says it was so dry and dull that he could not envision anyone reading it. Taylor scrapped the non-fictional piece and started from scratch. He takes the same investment lessons he wanted to communicate in the earlier work and weaves them into a fictional story. The story follows a college graduate’s journey into young adulthood, as the protagonist meets a fast-food mogul who takes him under his wing and teaches him the secrets to his business success. Meanwhile, the young hero falls in love, gets a promotion at work, and generally matures in his worldview as he learns about life.
Taylor and Cochrane end their discussion by discussing Berkshire Hathaway, Warren Buffett’s conglomerate that owns everything from Dairy Queen and GEICO Insurance to a significant stake in Apple (NASDAQ:AAPL). Taylor discusses the advantages of holding a Berkshire position, including the ethos with which Buffett has run the business. Taylor believes the company’s culture, including its decentralized structure, will long outlast Buffett’s and Charlie Munger’s tenure.
Taylor believes Buffett made one investment that encapsulates some of his best teachings. Berkshire acquired See’s Candies for $25 million in 1972. Before acquiring See’s, Buffett made “cigar butt” type investments, buying companies well below their book value. At this point, See’s Candies has paid back Berkshire Hathaway about $2 billion, illustrating how time is on your side when buying great businesses.
Matt Cochrane, Jake Taylor
Matt Cochrane 00:06
All right, 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 Jake Taylor. Jake is a man of many hats.
Matt Cochrane 00:36
He is the CEO of Farnam Street. He’s the founder of the new journalistic app. He’s the author of the rebel allocator, one of the CO hosts of value after hours, where he serves a large offerings of debris every week. We’re going to talk about many of these things today. Jake, welcome to the show.
Jake Taylor 00:55
Thanks for having me on, Matt. Appreciate it. Of course. So,
Matt Cochrane 00:58
Jake, why don’t you just briefly share, like how you got interested in investing and your journey in life that is taking you to where you are now?
Jake Taylor 01:07
Sure, I’ll give the kind of quick diversion because I’ve talked about this on other podcasts before. So my undergrad I got my undergrad degree in economics, I got a job running the power grid out of school a terrific place to work love the people felt like I was doing something good for society by keeping the lights on. But while I was in running the grid, I went back for nights and weekends MBA program at UC Davis. And I ended up winning this lottery in my first year in the program that allowed me to travel back to Omaha and have lunch with Warren Buffett. And he’s done these student things, you know, for years. So this isn’t like that special of a thing. Although felt pretty special to me at the time. Sure, sure. Sure. And I came to realize like, wow, like how, one How does this guy have a such a thought, a thoughtful, smart answer to every single question that was asked of him and just like blew me away. So I wanted to figure out how he knew so many things. And then to, like, how did he get so rich and like what, you know, I’m interested in having more wealth than I had at that time. And that seemed like a good idea. Like, this guy seems to have figured some stuff out. So after I started digging in and learning about him, I realized, oh, okay, he just likes to get a good deal on things like I’ve I’ve been doing that also in other contexts of my life, I just didn’t know that when you did it in, like, in buying partial ownership of businesses in public markets, they call it value investing. So it was like, take a duck taking the water, like it made perfect sense to me. Not that necessarily that my execution of it was was always that great at the beginning, but but the ethos made sense to me. So I actually I worked in both the power grid and setting up an investment shop. And I did both of them for several years, while I was figuring out how to grow that business enough to be able to leave, and eventually I did and left and I was able to focus on Farm Street, and then it round to call it 2017 ish 2018, you know, markets were, I thought pretty expensive, I wasn’t finding a ton of things to work on. And I rather than kind of talk myself into some marginal investment ideas, I had been wanting to write this book for a while. And so that’s what I, you know, I focused some of my efforts there was on writing the rebel allocator. And then kind of a similar story. You know, a couple years later, I was, there were all these things I wanted to know about my investment process that I’ve been thinking about, and I knew they were important on the front end of, you know, if I could understand them, that they would they would meaningfully improve my results on the back end. And that’s, that’s the difficult thing about the investment world is that you only think you can control is your process, the outcomes are going to be what they’re going to be. And if you could just get a little bit better at your process every single day and be mindful of it, then I think you have a shot at doing even better on your outcome. So you know, being very process oriented, there were all these things I wanted to know. And I went looking for a tool that would help me to kind of keep track of them and measure stuff and helped me understand myself better. And really close the feedback loop between my effort and the eventual outcome. And so I could learn faster. And there wasn’t really anything out there like that. And, you know, I eventually it was like, well, maybe I’ll just build something for myself to use internally at Farnam Street just to like, kind of create an edge honestly. And after working on it, I realized man this might be helpful for other investors too. And I probably shouldn’t be so selfish and try to just keep it in my own shop and maybe there’s some actually a commercial application to this where you know, other people would would get so much value from it that that there could be software that we could provide that’s what Charlotte was born and you know, it would have it would have died on the vine a long time ago if not for my two other amazing co founders who have our you know better than being like a million different ways that really helps to, to keep that boat running. But now we’ve got a handful of employees working on it. And we just launched in November, an open version of it. Finally, we’ve been running a closed version for a while to, to really like figure out, okay, what do people want us to build for them? What can we add? But yeah, it’s, it’s been launched and been pretty popular, kind of surprisingly popular actually, in my opinion. And, yeah, we’re off to the races. And I think we’re gonna build a lot more cool stuff for people. And I’m excited to kind of get the word out, because I think we’re gonna help a lot of people.
Matt Cochrane 05:33
Yeah, that’s awesome. So actually, like, that was kind of the catalyst for our conversation today, even though I’ve been meaning to have you on for a long time. So I wanted I wanted to show you something and ask you, so like this, this is a Word document. Okay. I used to have, or I, yeah, I used to keep, like Word documents of every single like investment I did, because I didn’t know a better way to keep track of everything, right. So like, like, I won’t pay pal, like, almost since it was spun off from eBay. And like, so I keep track of the revenues and the EPS, and like, and then like, every, every trailing 12 months period, you know, I would do like the the revenue and the revenue growth year over year and the EPS growth. And then like, under that it was like the, the, like the key performance metrics from that quarter. And then like all the KPIs and the historical track records, you know, and I was just like, but I had to do a Word document for this every time and it was like, it’s, it was really tedious, you know, and if you have, you know, 25 positions, you know, earnings week, I was trying to write like articles on companies update these word documents and everything like that. And then like, so, like, so these are just like, historical track record. So like the so like, I would have the P E ratio for every quarter, you know, when it reported earnings, you know, and yeah, like that. And then, like, you’d be scrolling down, like, and so on to organize. But it kind of makes sense in my own head, but like, but I just didn’t know a better way to do it. I had conference call nodes and like, in things from it. And so like, yeah, why don’t you like, so let’s talk about your analytics, because I’m very interested in this, you know, and so like, I kind of eventually I stopped with the Word documents, like, so they’re not up to date anymore. But just because like, when I write so much, I just kind of started using my own articles as like, like, going back to like, Okay, this is what I was thinking when, yeah,
Jake Taylor 07:24
he reported a couple of kind of real time journaling as it is with your articles,
Matt Cochrane 07:28
right, but like, but like, for a long, long time I was doing in a Word document, and it was unorganized. It was tedious. So yeah, like, let’s, let’s talk about journalists, because I’m interested in this, like, you know, I don’t think I’ll be writing forever, and I want something to keep track of my investments.
Jake Taylor 07:47
You touched on a couple things there that resonated with me, the first one was just getting organized. And that was a big part of it. Like I also had notes all over the place, and I was more of a physical note taker. So I’d have yellow scratch pads, all over the office. And when we wanted to go find a note, it was almost impossible to know where I put it, which was kind of drove me crazy. And I knew it was slowing me down. And I was just less efficient. And I probably wasn’t connecting dots between my notes because they were living in separate locations. So now having it all in one place, one repository, lets me search across. And let’s be put in like tags. So like, you know, being able to hit like hashtag and then something, whatever it is, like a, like, you know, Cap allocation, for instance, or, you know, red flags, or green flags, like there’s a billion different ways to use tagging, to kind of organize your thoughts, and then to be able to just click on any of those tags and see every single time that I use that and then connect, you know, ideas between tags, it’s really powerful. The second thing that you mentioned, was that, you know, I want to be doing this for a really long time. And something I you know, I’m we’re probably going to like, I’m going to foreshadow a little bit of our conversation with talking about Berkshire but, you know, I’m a big fan of, of Warren and Charlie obviously, and listening to their, I’ve listened to their the annual meetings that are available online, or an add on podcast, I think it started 1994. And then they go forward, and I’ve listened to them. I’m not gonna say how many times because it’s a lot, but it’s, it’s like my and you know, I do it pretty much daily. I’ll listen to some of it. And what I noticed, you know, from the 9094 to today is just there, they’re just as sharp, like they’re just as smart, but they’re slower. And what I what it did, actually that did was it scared me a little bit about like, if I want to be doing this when I’m you know, 80 years old. God, wouldn’t it be nice if I had this accumulated second external brain that I could lean on, if I could use technology actually, to enable myself to age gracefully, and I put in that work, which I was going to be doing anyway, right? Like I’m going to be taking notes right, right. Do it in a way that will give me benefits. Increasingly, as I get older, it’ll become more and more powerful as I as I age. And so I just feel like I’m getting a much higher return on investment over a longer duration for my efforts of note taking.
Matt Cochrane 10:16
Yeah, I think this is like, or, like, I don’t know, like, I feel like this is important for individual investors. Because one, like right now, like, your service is free, right? There’s, there’s no charge. And like, like, like, being a retail investor, like, you know, tools like this are often very lacking, like, you know, like, Motley Fool used to have something where like, you could say, up or down on a stock, and then like, write a quick reason for why it was going. And then it would track that one time decision against the s&p 500. You know, but there’s no way to, like, add to a position because there’s no way to do anything beyond that, like, add to a position or drawdown or trim or, or whatever is just up or down at one point in time. And you could never do that company again, unless you, like sold the original position or close it out or something. But like, yeah, so there’s often there’s so many limitations to like, these types of things. So like, like, I’m very interested in this tool, like, what in you know, like, your, your image of like being at, you know, and just like, imagine you like being an old man, like, you have like 80 million yellow legal pads around the office trying to find something you wrote, like years ago, or something like that. leveraging technology is certainly like something like that’s lacking in this area.
Jake Taylor 11:33
Yeah, and, you know, we’re, I think, what, what makes it us journalistic special is that, all the other note taking apps right now that people use, they start with a very general purpose note taking, and then people have kind of shoehorn them into, okay, here’s how I can try to use my investment process into that, like, just like your Word doc that you just showed, I mean, that’s, that was probably not the ideal, you know, interface. And it was not, it was not, it’s a little cumbersome, right. And that’s, that’s just an artifact that no one had built anything that we started from the investment process, and then work towards, okay, what can we do to make it easier to accomplish all these things that you want to get done, so you don’t have to shoehorn as much in and then it just lowers the frictional costs of recording all this stuff. And that’s really, at the end of the day, like creating these data about your process, so that you can understand yourself is the key to learning. And that’s, that’s what we’re trying to make it easier for everyone to be able to learn about themselves.
Matt Cochrane 12:32
And I just feel like so many individual investors, like make impulsive decisions, and then they have or not even impulsive, but like, they make a you know, they make a purchase, or they buy a stock for a reason. But they don’t write that down. They don’t keep track of it. And then a year later, it’s, you know, it’s, it’s, you know, it’s down 5% in the markets up 10%. And you’re like, why did I buy this piece of drunken? You know, and you don’t, you don’t review why you bought it, you know, they maybe make an impulsive sell decision, actually, you know, like, usually the buy decisions are, in my, in my experience are more reasoned than sell decisions, because you can get so emotional, about a position where you’re like, you know, you’re frustrated in the moment, you never review the bull case, you just sell it, you know, it’s so easy now to sell a position. So something like this is definitely can be very handy for that.
Jake Taylor 13:21
I think you’re 100%, right, that you’re, we live in an amazing time where the ability to buy or sell a piece of a business and the liquidity that’s available and the ease of transaction is this incredible tool that you could build wealth and owned businesses. I mean, put yourself back into the 1800s, let’s say, and there was a you know, Commodore Vanderbilt is selling his chips. And, you know, like at the end, you see that his business is going well. And you want to participate in that somehow you’d love to be an owner, but there’s no mechanism in which to change ownership. But now today, it’s so easy, you can do it on your phone in two seconds, right? I mean, it’s amazing. Well, this is like any tool like, you know, a scalpel can be used to perform life saving surgery. But it can also be used to you know, disfigure someone if we’re just if we’re gonna be gross. So, but it’s the same tool. And we have the same issue now with I think the ability to transact is that it can be this amazing life saving tool. But if you’re not careful with it, you can really hurt yourself as well. And so we just have to be very mindful of these things and recognize that our psychological wetware our brains, evolved for a much different environment in compared to what we’re operating in, and that your impulses are often probably going to be dangerous to your wealth and that we just have to take measures to control them and, you know, one of the even for professionals, I think it’s kind of think it’s okay to say this. professionals will have read a lot about the behavioral biases. They’ll read Kahneman and Tversky. They’ll read Phil Tetlock, they’ll they’ll read At Duke, they’ll read Michael Mobizen. And that’s great. It’s a good start. But just because you’ve read about, it doesn’t actually mean that you’re taking steps to neutralize some of those behavioral biases. And that’s a lot of what the software that we’re working on is trying to help people to recognize those biases and then counteract them. So building it into the architecture to start to slow down some of these, you know, system one versus system two thinking that Kahneman talks about, I mean, this is, it’s a, I think we’re, we’re gonna be really helping a lot of people when it comes to just making better decisions at the end of the day. And that’s really what this game is all about is, I think whoever makes the best decisions is the one who’s going to end up winning.
Matt Cochrane 15:40
Sure, sure. Yeah. I agree with that. And, you know, your your example about Commodore Vanderbilt is great, right? But it’s not even you don’t have to go nearly that far back. I mean, you can go back to the 70s or 80s. And, you know, our fathers, you know, they wanted to buy a position, they had to buy 100 stocks of it, like right around lot of it. And yeah, because they chose $100, and you had to go into the office. So it was only after you save the good bit of money, like you wanted to buy 100 shares of Coca Cola or 100 shares of McDonald’s, like, you know, you, you saved up for that position for a long time you considered it Yeah, had to consider it. And the commission fee was so expensive, you know, in the process, like going into the office and making the order or, or calling up online and paying, like, even a higher fee. Like that was, it was it was it created enough friction where you had to consider it, right? Yeah, I do. Yeah. And, and now, like you said, I mean, it’s just, it’s so in so incredibly easy. I mean, you can get like, pop up notifications on your phone, that you’re, you know, a stock is down 5% that you own and you know that like, you know, like, you’re just allows your emotions to just almost take off, right, and the overwhelm your, your reasoning ability.
Jake Taylor 16:49
Yeah, I mean, confetti shooting up, you know, yeah, when you
Matt Cochrane 16:56
are on Twitter, and everybody’s bashing, you know, whatever it is, you have a position in Google and Google’s about to be disrupted from this, you know, or that or it’s too expensive. And, you know, you just start, it can get, it can get overwhelming at times.
Jake Taylor 17:12
I think you’re exactly right, man. I mean, the, the, there’s an absolute flood of information that, especially in the last, I mean, 20 years with the internet, but even more, so I mean, it just keeps getting bigger. And that is, is amazing, and that you have access to all of these data, all this information. And to a lot of it’s free. And that is like it’s a I think it’s a boon to, to civilization, to have that much information around and sharing. And you know, in more mundane context, I’m thinking about, like, you know, the other day, I was like, how am I like a little part of my fridge was broken. And I like, I don’t really know how to fix that. I go on YouTube, and like, it’s my fridge, and there’s a guy fixing it. And he’s showing me how to do it step by step. And it’s like, that’s amazing. It’s amazing. It’s amazing. It’s amazing. But it also leads to you can find data to support any harebrained idea that you have, right? Like, yeah, if you search hard enough, like the ability to confirm your biases has never been easier and larger. So I think we just have to be very careful about these new tools that are that we’re we’re operating in,
Matt Cochrane 18:17
for sure. So like before we move on, like, if people should check out this tool, like usually at the end, like I asked, you know, where are you but like, let’s what we’re talking about, if people want to check this out, where do they go? Yeah,
Jake Taylor 18:30
if you just go to journalistic.com, you should probably be able to find it on a search engine. And at this point, I was
Matt Cochrane 18:36
I mean, I think it was the first result for me. Yeah, when I searched for it, and, you know, it is, like I was, you know, I’m just getting started with it, like I’ve signed up and like just kind of fooling around with it. But it does seem to be like a great tool. If you’re, you know, I think most of our listeners are individual investors, retail investors. And if you’re listening to this, like, I would strongly urge you to check it out. I think it’s a great tool. There’s no fee, and just, you know, play around with it. And in fee if it does help you organize your like, it’s almost like an investment journal. I guess it’s a good way to put it.
Jake Taylor 19:11
It is yeah, it’s a journey. It’s journaling based. Little bit of a funny story on that we, we built an original version of this before it came out and it was very process oriented. It was okay, you know, the new idea comes in, here’s what you should do think about this. And then okay, right before you’re ready to buy here are things to think about. And then, you know, you sold it, here’s, you know, here’s run this post mortem. And we brought people in to look at it and like it didn’t register at all. They’re like, well, this isn’t my process. This isn’t how I do it. Right. I’ve discovered how idiosyncratic the investment process is across the spectrum. And it was very humbling for me because I thought I was presenting like, this is like the golden path. Like here’s an amazing way to do this. I’m telling you how to do it right guys? Yeah, it didn’t resonate at all. So we had to actually strip back we started over and we discovered that journaling as the interface with the brain was the the magic ticket to help people. And now a lot of those same structures that were on a track before, you can choose your own adventure and pop them up within and get the same results get the same, you know, accomplish the same thing. But you can do it on your own kind of timeline and when you want to do it. So my recommendation would be once you get in there and created an account, just go and record one feeling about a any investment that you’re you’ve been thinking about and what you know, I chose feeling because there’s going to, you’re going to be having a feeling no matter what at some point about some whatever you’ve been thinking about and record that feeling. And then go navigate to that company ticker. And look at that. And you’ll see that we will have overlaid that feeling onto a price chart. And what that’s going to show you over time, if you keep recording your feelings, you record your decisions, you record your notes on it, those will start to be overlaid on that price chart. And you can see how your experience of ownership of thinking about of an investment, how that’s been changing over time, and also how price has been dictating how you feel about it, which is, I think what a lot of us will discover I know, I’ve discovered this, you know, price, nothing changes sentiment, like price,
Matt Cochrane 21:21
price drives sentiment, like you want to tell yourself, that’s not what drives your sentiment, but 100%. For me, it does, and I have to like fight that so much. Yeah, I
Jake Taylor 21:33
have the same problem. And I found that overlaying it on a price chart and letting me see that, oh, I you know, why this is so important is that the next set of numbers about that company are going to come out. And if you if the price has been going down, you’re gonna look at all those numbers with a negative lens, and you’re gonna be like, Oh, I see all the problems now. Well, that is the exact opportunity because everyone is feeling that way. And if you could take that lens off, and just look at the numbers in a clean way, you might find an insight that no one else is that and that’s where this you know, I mean, that’s what alpha is like, that’s where winning is, is having a contrarian opinion and being right about it. And so the closer that you can get to reality and not have those biases that price is generating for you, the better off you’re going to be.
Matt Cochrane 22:18
So, let’s, let’s shift gears a little bit. You wrote a book called The rebel allocator. I don’t know a few years ago, yeah, came out in 2019. Okay, so a couple of summer. A couple of summers ago, we were on a family road trip and I had the audiobook version of your book on and it wrapped just enough fiction in it to keep my wife like saying like, okay, we can listen to this because I couldn’t normally like listen to it investment book. Yeah, I appreciated that aspect. But basically, like, you know, you have like, you’ve wrapped investment lessons in this, like, fictional story of like, a young adult. Like as he graduates college, and he he meets this like mogul, like, like, similar to how you get Warren Buffett, you know, oddly enough, and like, who like this fast food mogul who takes him under his wing, and teaches them like secrets to his business success. And meanwhile, the protagonist, he falls in love gets a promotion at work, and just generally matures in his worldview as he learns about life. What? So what was the inspiration for this story? What made you think to incorporate investing lessons into a fictional story?
Jake Taylor 23:30
Well, first of all, that was an amazing synopsis of it. Like, I should probably steal that and put it on the back of the book. I think it’s better than what’s on there right now. Yeah, I mean, so what? There were several things that I was hoping to accomplish with the book. And, you know, the first was, I recognized like, gosh, I would go and study these companies. And I’d look at the cash flow statement. And I would say, like, why are these? I know, these people are smart, who are running these companies? Why do they make these kinds of boneheaded decisions regularly when it comes to capital allocation and managing their business? And I realized, okay, it’s probably that they are mostly trying to follow the herd to not get in trouble basically, like that’s, you know, it’s that institutional imperative that is often comes up. And what I was hoping was that if I could provide a set of tools and a way to think and really it’s not me, like I basically just taking a lot of Buffett and mongers ideas about this and some other people and mixing them together into sort of a best practice. And try to build up from the starting layer of like the individual unit economics and customer interaction, and working my way all the way up to corporate finance of, you know, buybacks and dividends and how should you think through that and provide a framework that then business leaders could use to Elise, calm cocked? Just think for those, that’s what it at the end of the day was just Just think for yourself and do what you think is right and don’t just follow the herd. And if there were enough people who were inspired by that I’d felt like that would be a pretty good contribution. Now, the other thing I was hoping to accomplish was, you know, around that time, and probably still today, I felt like there was a little bit of an under appreciation for the everyday miracles that capitalism provides for us. I mean, it’s growing the pie for everyone. And like, we’ve just like, humanity has never seen this kind of ease of life that we have. And it’s better all the time. And you know, it’s better around the world, it’s obviously very amazing in the United States to be born here. But around the world, it’s getting better. And a lot of that is due to capitalism and harnessing human creativity and energy in a way that actually makes the pie bigger for everybody. And, you know, that, I think that that’s such a powerful force, like, I wanted to highlight that. And so I chose a younger protagonist. So that one, he had a lot to learn, which is nice, he can travel the furthest arc to kind of grow, and to, you know, he can hopefully experience at sea like, wow, there’s all these little everyday miracles that are happening due to capitalism, and, and have a better appreciation for that. And, you know, hopefully, maybe a young person might read this book and be like, ah, you know, I kind of thought about it that way. And I, it’s a little more nuanced than I thought, at least. So that was what I was hoping to accomplish with all of this. And, you know, that’s, I probably was trying to stick too much, you know, 10 pounds of manure into a five pound sack by, you know, serving multiple stories, but But yeah, I, and why was it a story, like, I actually sat down to write a book that was nonfiction originally about CAP allocation. And, you know, tell like business stories within it, like you would like a, you know, Malcolm Gladwell or something, right. I got a book offer, like from a publisher to do it, and I started working on it, and it was, it was gonna be so dry and so boring. And about capital
Matt Cochrane 26:50
allocation, it’s hard to believe I know. So
Jake Taylor 26:53
you know what else it was like, I felt like there were all these nudges at that time telling me like, gosh, you have to tell a story. If you want it to resonate, and you want it to stick. If you want people to remember what you’re telling them, it has to be in a story. That’s just how the human brain is wired. So I went back to the drawing board, and I actually, I thought, like, gosh, how, who tells good stories, like I don’t even know how to tell a good story. And so actually read a couple books on screenplay writing, and like, so I actually, like I marked it out as if it was a movie. And I went like, beat by beat scene by scene and had that all laid out. And then I laid the lessons within those scenes, and I basically like, it’s basically Karate Kid. But with, you know, Mr. Miyagi is now like a warren buffett character. And that’s it. Like, it’s almost identical to that, like, that’s the secret of the story. So that’s, that’s the, that was how the rebel allocator came about. And I was, there’s like this saying that everyone wants to have written a book, but no one actually wants to write a book. And I found that to be very true. It’s a painful process. But you’re very happy when it’s done. Sure, sure.
Matt Cochrane 27:59
I can imagine I can imagine. Now, like something you said is interesting, like you said, like, in your right, like, I mean, telling a story is a great way to, like get your lessons across. Now. So in this book, and on the on your podcast that you did after hours as a as a co host, you will serve veggies, right. And so like, that’s kind of like you take this the nun investment lesson and it can be about, like, very diverse, like, topics, from, from Wales, to Brito principle to biological baggage to like pine cone strategies. I mean, you always have like, a to skiing or baseball, you know, you always have like, like, none investment lessons, and then you try to like tie it back to like things how you can apply it to investing? Like, what, what draws you I guess, to, to, to the, to that model, because obviously, you used it a lot in the book and use it a lot on the pod. I mean, that’s what you’re known for. I mean, I think like, you know, I think that’s why they have you on right to like, like the bring the veggies every week. So, but like, like, why are you drawn to that?
Jake Taylor 29:11
Yeah, it’s certainly not not invited for my radio voice. But you know, what, there’s a common theme throughout all of my projects that I work on. And it’s their forcing functions for me to learn. And so, you know, go back to we didn’t talk about it, but I taught a class once I’d graduated it at UC Davis on value investing for four years and that class was an amazing forcing function to learn like force myself to have to do the work to show up every week with something smart to say with like, you know, discerning smart students who are going to call me out and like challenge me. Amazing learning experience for me, maybe not for them. They paid money to be there. You know, I probably the one who walked away with the education, but so I’m forcing myself there like right writing the book was a bit of a forcing function of just like deep deep dive into cap allocation and how could like strip it down to the very basic nuts and bolts and then build it back up in how I can understand it, you know, journalistic is a is an exercise in a forcing function of if I could have a magic wand to try to make some, you know, a totally brand new first principles way of doing the investment process and force myself to understand it at a atomic level. Okay, like, this is a good way to do that, you know, and value after hours for me serves that function of, I read very widely, and I, you know, I always had, but when I know that I have to deliver a little talk about it, you know, even, you know, five to 10 minutes in a segment, I’m just I’m reading with a lot deeper level, like seeking to understand it at a deeper level. And, and it forces me to just be more engaged with the things that I’m reading, because I know, I might write it up later and give a talk about it. So they’re all actually secretly self serving in that, like, I just want these forcing functions to keep me working hard on things. Otherwise, I will just be so lazy. And I’ll, you know, I won’t take any notes. I won’t. I’ll just like riff through. So write write.
Matt Cochrane 31:10
Writing, like, like, you know, if I have to write about something like I have to know it, because, you know, you can’t you can’t coach your way through that.
Jake Taylor 31:18
No. And like you, I really, I don’t know what I think about a topic until I have to write about it. And the writing about it is what how I discover what I actually believe about something.
Matt Cochrane 31:28
And it’s like, it’s like my thought process. Yeah,
Jake Taylor 31:32
sometimes I think it’s one way and then I’ll have to go right about it. And I realized, Oh, my God, I’m actually the like, opposite. Like, this is I was my first version was the exact 180 degrees out of phase.
Matt Cochrane 31:44
Right, right. So uh, so look, like, I’ve listened to you a lot. I’ve listened to your book. But I still feel like when it comes to your investment philosophy, I know you lean towards value, but that’s really all I can say. It’s almost like I know more about what you don’t like than what you do, like. So how would you describe your investment philosophy? What do you look for when you look for an investment?
Jake Taylor 32:10
Yeah, I mean, I’m, I’m glad you picked up on that, because I actually, I tried not to talk much about individual names in public. And I try not to, I would rather try to provide teach someone how to fish rather than give them a fish. And I know, no one wants that, like, everyone wants to just like, give me the Give me this winner that’s gonna 20% for 20 years, I don’t have to, I can go to the beach. One day, come on. I know, I get it. Like, listen, I want that same thing. But that’s not repeatable for someone. And, and here’s the problem with that is that I could tell you an idea, but I can’t give you my conviction around it. The conviction comes from doing the work on the name, and when and your conviction Will 100% be tested by Mr. Market at some point. And this is where the psychology is the real advantage of investing like and so I, if I tell you the name, and you don’t have the conviction, you will be spooked out of it at some point, and it will probably be at the worst time to sell. And I will have done you no favors at that point, like I will have hurt you. You can’t borrow conviction. You can’t borrow conviction, you know. So that’s why I don’t speak much publicly about individual names. And also, it’s actually for my protecting myself from confirmation bias. You know, if I talk about a name in public, and now like, Oh, he’s associated with that name, and now I have to sort of live up to that. And, you know, my, I think it clouds my thinking about that name, if I publicly committed to it. So that’s, that’s a large reason why I don’t. So. But so what does that mean, then, like, I will describe in a little bit more detail, like how I approach it. Yeah. Number one, I think that the investment, the market in general is actually crazy efficient, I think most of the time, the price of the security is very, very close to probably what its intrinsic value is, you know, it’s up, it’s too high, a little bit, it’s too low a little bit, but there aren’t huge spreads most of the time, I believe. And that’s, you know, that’s a testament to how much good work gets done by individuals like these are very, very smart people. Coordinating unknowingly, often in a market to figure out and reveal what the right price is like, I think efficiency is actually quite strong. I’m not like in the full, but it’s not fully efficient. And there’s a night and day difference between those two things. Okay, the market was 100% Strong efficiency. You would it would tell you then that there’s no point in trying to understand any of these companies, and that you should probably just index and go do something else. I don’t believe that to be the case. And in fact, I think every once in a while, there are these huge disconnects in a company that are just so blindingly obvious, if you can be patient and wait for them, that that you can take advantage of them and have the conviction to do it that you can do really well and you actually don’t have to be a suit Per amazing analyst. And this just means like you have to stay within the things that you understand so that you can recognize when that disconnect is real. And you have to have that that mental fortitude to be able to go against the grain, because that’s usually what’s happening is that everyone hates it for some reason, and you through some, you know, insight of your learning, you understand why that that is not the case. And that it’s actually like, it’s better than everyone thinks. Or maybe it’s just not quite as bad as everyone thinks, that’s often what happens. So. So I am basically I would describe my investment style as opportunistic, and most of the time, there’s nothing for me to do, there’s very little happening, and I’m just reading about businesses, I’ve tried to figure out what they’re worth. And most of the time, they’re pretty close to what they’re priced at. And in fact, most of the time, they’re like a little bit more expensive than what I would say is a reasonable price, and are good enough, right? It could be a little bit of recency bias happening there. Because just you know, we’ve had relatively expensive markets for quite a while, if you’re looking at, there have been lots of other times in history where markets have been less favored. And that’s, that’s just the nature of things. Lower interest rates will do that high, high returns on equity that corporate America has experienced will do that. So. So I’m basically just looking for very, very simple, obvious ideas that pop up occasionally, and taking advantage of them. And but most of the time, there’s nothing happening. And it’s very boring, it doesn’t fit into more any Morningstar style box, you know, large, small, I don’t care, it’s just what is, to me seems like an obvious disconnect on the value of a company based on what I think it could be, you know, worth in a year or two, three, and what is it trading at today, and recognizing that I’m probably, you know, it’s probably gonna get cheaper on me when I buy it. And that’s okay, like, that’s just a natural thing that happens. And I’m probably going to sell a little bit early. Because, you know, I’m kind of of the opinion that there’s a certain amount of gain that I’m entitled to just based on my understanding of it. But then once it gets above a certain point, now I’m starting to be much more speculative. And I’m, I’m going against what I understand and like, I don’t deserve those gains above that. So if I sell at some point, and it continues to run up, that’s okay. That was I don’t deserve those gains that were above that, and I deserve the ones that were from the lower level to that level, but I don’t, I don’t deserve the ones above.
Matt Cochrane 37:21
It doesn’t like when a company below its intrinsic value, you know, you’re comfortable buying it with a margin of certain margin of safety. But once it gets within that margin of safety, that’s when you are, correct me if I’m wrong, but like, this is my maybe interpretation of what you’re saying, once it gets within that margin of safety, that’s when you’re like, Okay, time for me to let it go. And whatever does beyond this point, it is what it is,
Jake Taylor 37:45
I was definitely of that mind early on in my career, and always try to trade up into the next thing that was further dislocated. That, unfortunately, around 2017, that led me to selling a lot of my portfolio and not being able to find as many replacement things that I thought were cheap, and all of a sudden, you end up with a large cash balance that you didn’t really intend. And, okay, well, now, what do you do, like, you’re gonna go buy back those things that are higher than what you sold them for? That’s really mentally difficult to do. And you ended up kind of like, I got myself boxed into a corner in a way, because I was trying to be disciplined, right. And so, you know, I’m a little bit more, especially on a company that I feel like I know, well, and that is, I think, has long term reasonably good prospects. I am a little, I tried to drag my feet on selling and those kinds of situations. And, you know, like, it’s a little bit like what Ben Franklin said about marriage that you should have your eyes wide open going in, and then have your eyes a little bit closed once you’re there. So that or as another friend of mine says it like he tries to be a value buyer and a growth holder. So okay, let things grow a little bit and maybe ignore a more expensive valuation and not let that force you out necessarily. I mean, don’t test me on that. Right. Like, if it gets too egregious, you know, I’m very likely to sin in that direction. But, but that’s, that’s where my style has kind of gotten more to these days is, you know, if I feel like, you know, what the ideal scenario is, is that I buy it cheap, it stays relatively cheap. But then the underlying business the returns on equity of the business compound in such a way that Mr. Market never forces my hand to sell, and then I just enjoy the ownership of the business on an upward return on equity path. And I don’t have to be cute on my buying and selling like, that’s ideal. It’s, that’s what I’m actually aiming for. But you don’t always get what you want.
Matt Cochrane 39:44
Sure, sure. Of course, so. So let me if I can try to clarify this. So you said a lot. A lot of times you’re not doing anything, you’re opportunistic. So when you’re not doing anything, are you holding these types of like companies you’re more comfortable with like that, you know, well, that Do you believe how good long term prospects are used like sitting in cash more? Like what what is like these long periods of not doing anything look like?
Jake Taylor 40:09
The answer is like all of the above the holding ones, I tend to actually gravitate towards capital allocators. So I tried to find cap allocation talent in the C suite, and then back those people by being an owner of that business. And, of course, you know, you can’t overpay for their talents. And, you know, they’re, it’s a it’s kind of a multivariate problem in that there’s like, How much am I paying for their talent? how talented do I think they are? How big of a university they have to work within? So you know, think about Berkshire, for instance, all time great capital allocator. Like this is as good as it gets, doesn’t get any better, doesn’t get any better. But the universe for them is relatively small. So that’s, you know, that’s a constraining factor. And then you also have, you know, the price of it at different points. You know, it’s Berkshire is a pretty easy buy at lower price to book levels, and it gets a little bit harder to buy it, you know, when you’re up above 1.5 1.6, maybe price to book and that’s kind of where we are today, but and I think it’s sort of revealed, actually, like in Buffett’s buybacks like he’s, he’s probably not doing a lot of buybacks today at today’s prices. We’ll see soon. But anyway, like, so looking for good cap allocators. And really, I think about it to go back to that ability to like, you know, Commodore Vanderbilt that we were talking about earlier, I can, I can outsource a percentage of my empire to people who I can recognize are very talented at this, and I let them run part of my empire like so Buffett runs some of my empire, you know, from Watsa, at Fairfax runs a little piece of my empire. And that’s how I think about it. Like, I put these guys in charge, and they’re making their own decisions as to what they’re going to allocate capital to, how much cash levels are they going to have? And, you know, I have that decision at the upper level of how much do I want to allocate to them? And how much cash do I want to carry? But like some of that I like diluting my own decision making into them, and letting them decide also, when do they think it’s a good time to be buying things?
Matt Cochrane 42:12
Okay, so that makes sense. I like how you put that is, is Berkshire a good investment today?
Jake Taylor 42:21
Well, again, I should caveat that it’s, you know, it’s, it’s not, it’s not cheap, it’s also not very expensive, it’s kind of the right price right now. So I wouldn’t, you know, if you want to just I would say as just buy it and hold it for a very long period of time, I think you will do just fine. You know, Berkshire it has within it right now, these a few magical engines, that they have the ability to put back in large sums of money, and it will then turn into bigger sums later. And so let’s be more concrete. Their insurance operations are world class, and they are typically aiming for about, you know, a 90% combined ratio. So let’s that implies about a, you know, 10% profit margin there. Berkshire energy is a world class utility. There, they are structured to get roughly 10% Return on equity return on invested capital of their regulatory assets. So they go build a windmill, or a solar panel, and they are going to get roughly 10% return on their their investment in that that infrastructure, just based on the regulatory environment with the you know, their their deal with the US government is we’ll build these things. And this is the return they’ll get their railroad is going to also get a roughly eight to 10% return on its laid out capital. And all three of those things have huge appetites for capital. So they’ll be able to put tons of money into this and get 10% return their investment portfolio, they’re typically buying with a probably about a 10% return projection on, you know, the whole basket of securities that they own. So I don’t know if you notice, but I said 10% like four different times, they have all of these different places where they can put money in. So I would, as the owner, expect to earn what the Capitol is earning, which is probably going to be in the 10 percentage neighborhood if I had to look over a long period of time. And of course, you could do a little bit better if you’re buying that 10% yield at a cheaper price. And you’ll probably do a little worse than that if you’re buying it at the more expensive end. So just keep that in mind as you as you look at Berkshire almost as a 10% bond. That’s that’s one way to think about it like it’s it’s not a bond it’s an equity but they’re the certainty of the payment and the growth and the the 10% return is damn near bond like in my opinion.
Matt Cochrane 44:47
How How should investors think of Berkshire like is it more GEICO or Apple? Is it more railroad or Dairy Queen? Like how like I like how should investors like rap There had around so many diverse holdings.
Jake Taylor 45:02
I mean, one way to think about it is that it’s a, I think, a little bit of a supercharged s&p 500 Because it’s so US centric. And it’s the cap allocation is what creates that, that supercharging. And actually, the, the leverage from the float of the insurance business adds a fair amount of juice to the, to the returns. I saw one study that, and this is kind of old now. So I’m sure it’s decayed, and it’s not as good because they just gotten bigger. But at one point, I think, you know, they were compounding book value in the 23% CAGR, you know, neighborhood. And I think like 10% of that had come from just the the leverage that the the float of owning, owning assets within the insurance company, adding to the earnings of the business was generating an extra 10%, over and above the, the other 13% that they were getting from kind of more traditional business operations. So it’s obviously harder to do that when you get bigger sums of money, and it will not compound anywhere near the growth rates of the previous, you know, 50 years that it’s done. It’s just too big to do that. But of course, but when it comes to corporate governance, when it comes to treating shareholders, like partners in a business, when it comes to stellar capital allocation, when it comes to being a clean shirt, in the UN, in a relatively dirty shirt world, when it comes to principal agent problems for management, you know, not treating shareholders correctly. This is about as good as it gets. It’s a gold standard and public markets. And, you know, I would aspire for all of the businesses that I own to have be run with the ethos that Berkshire is run with.
Matt Cochrane 46:49
So, I mean, you know, it’s obviously no secret. I mean, Buffett, I mean, look, one of the greatest capital allocators of all time, one of the greatest investors, no question. Charlie Munger, too. I mean, just fantastic. But like, they’re obviously, you know, they’re not going to be around forever. Right. Sure. To put it mildly.
Jake Taylor 47:09
So I mean, Charlie just turned 99. A couple of weeks ago, right? buffets. 99? He’ll be 93. This year, I think 93? Two? So these are these aren’t? These aren’t young chickens here?
Matt Cochrane 47:24
So how does how does this company look when they’re gone?
Jake Taylor 47:30
Well, I mean, time will tell but it the, I believe that the culture of, of Berkshire and what these guys have built, and the decentralized nature of the operations, make it a much less fragile to a single person, you know, being a key man, that would bring the whole thing down, if they were to not be around. Granted, whoever is next in line, and the person after them will never be as good as Buffett was when it comes to cap allocation. When it comes to probably getting sweetheart deals on private businesses. Berkshire is the buyer of some businesses, where they are the only buyer who could ever get that business just because of reputation. There are some business owners who would who will not sell to anyone except to Berkshire. And that is a huge advantage. When when you’re a single better and any, you know, type of operation, what an advantage that will likely dissipate. Because you’re just you know, and and also, you know, if you’re, if you’re running a business, you founded it, let’s say or maybe you’re like third or fourth generation, and you’re deciding, okay, I want to sell my business. My kids don’t want to run it. Like there’s lots of reasons why you might want to sell a business. It’s really hard to get that person who’s already very wealthy, by the way, by building that business to one sell, and then keep working hard. Like why would they want to keep showing up every day and grinding? And Buffett has been able to inspire these already wealthy people to sell him his their business and then keep working as hard as they were before. Right? I think it’s really hard to expect that of the next generation of Berkshire to get that same kind of loyalty, that same sort of, gosh, I want to, like kill it, because I want to impress Warren Buffett. That’s, that’s that’s very unlikely. But the decentralized operations, the the ability to deploy capital, the gold standard of, of corporate ethos, and, you know, creating shareholders, right, I think all of that stuff stays intact. And I think it’s still going to be an amazing place for quite a bit longer than I think what you might expect or the traditional person might expect.
Matt Cochrane 49:38
Sure. So let me ask you, let me ask you another question. Because you I know you’ve studied Buffett and you I believe, I don’t know this, but you’ve probably been an investor in Berkshire for a long time. What if somebody wanted to study like one investment decision Buffett made that just like really like to really learn like, I guess Like a lot of the investment lessons he’s given in his letters over the years, but what was like one that really sticks out where you’re like, this is like the perfect example of a good Buffett investment. I mean, I think, you know, Tobias Carlyle has talked about how his Buffett’s investment in Apple just a few years ago was in pure dollar amounts was one of the greatest investments of all time, you know, but like, what would you point to somebody wanted to learn more about Buffett? And obviously, look, obviously, if you have not read Buffett’s letters, go and read Buffett’s letters, you know, there’s some great books on Buffett. But like, if there’s like a single investment or something like that really encapsulates his thought process. Whoo, how, what would you say?
Jake Taylor 50:43
I would probably rewind the tape much further back and go and point to actually like the See’s Candy purchase, for a number of reasons. And what, number one, it showed a willingness to learn and grow? And I think that’s like, been the ticket. And
Matt Cochrane 51:00
when you when was, when did they do that? Do
Jake Taylor 51:02
you know 1972, I believe aren’t they paid, they paid $25 million. For See’s Candy. And before that Buffett had been just buying what he called the cigar butts like they were net nets, net working capital, very, very cheap, but not very good businesses. And, you know, typically, he was trying to either liquidate them or get the price to run up before the company had to liquidate itself, right. Like he’s buying it for literally, the inventory in the business. So and he was doing very well with that, right. And it would have been super easy for him to just keep doing what he was doing. But he recognized that he was going to run up against constraints of capacity for that strategy, like you just couldn’t get big, because there just weren’t that many of those around and they’re even less today. But I mean, back then there were at least some like he could have gone for quite a bit longer. But he recognized through the help of both Phil Fisher and probably more Charlie Munger, that, if you can buy a great business, then time is very much your friend. So imagine that he paid $25 million in 1972. And at this point, I think the the amount of cash that has been sent to him from the ownership of this business is in the neighborhood of $2 billion. So good. I mean, this decent these, it’s okay, right? So if you can have one See’s Candy in your life, and you find it, and you hold on. Boy, what an amazing thing. The other part of it that is that I think it was he, he bought a private business at this with this point, like, so he owned the entirety of it. And that was a bit of a, he had already done that with national indemnity with the insurance company that really started insurance operations within Berkshire. But this was kind of the first you know, more publicly facing kind of business that he owned privately. And that that trajectory, really changed how Berkshire like to be able to own both public and private businesses within Berkshire, like totally opened up the universe for them to go in a bunch of different places. And actually, for them to be associated with, with a lot of very high quality people. And I think Buffett said lots of times that his his entire quality of life has been so much happier, so much more interesting, because of the people that he’s been able to meet and get to know and become friends with in the private business ownership space, rather than just purely trading, you know, public equities like he was early on. So that was a pretty big, you know, aha for him, I think and led to a big difference in his life outcome. So I think that that path of growing and learning and demonstrating that has been actually is the secret sauce of Buffett at the he’s just this learning machine and so that shows up later in you know, buying different businesses at different points buying a railroad buying an energy company buying Coca Cola in 1987 Because See’s Candy had shown him what a good brand can do he was comfortable to buy Coke at that point. So you know all the returns they’ve gotten on coke from then were largely attributable to what he learned in See’s Candy Apple later you know, 35 years later is exactly the same like he kept learning this whole time right and that’s that’s the real key. So that’s that’s why I chose CS as that that defining moment is because it was this he showed the ability to evolve and get better and I think we all have to recognize that we’re if you want to compete in this game, you have to be always learning you have to always be getting better you have to be evolving and so stationary like state stasis is death
Matt Cochrane 54:33
that’s a I think that’s probably a great way great place to end it. I think I’ve kept you long enough. Jake if people want to find more out find out more about you where can they go? We’re
Jake Taylor 54:45
sure Well, it kind of choose your own adventure here with whatever resonates with you but investment shop is Farnham dash street.com You know our my the podcast I do with the guys billon Toby, as is value after hours, it’s on YouTube or anywhere you get podcasts. The journalistic is journalistic.com Rebel allocators on Amazon. Both print digital and the audio. And then lastly, I’m on Twitter at at Farnham Jake one, if you want to follow along there, which I post stuff occasionally and probably spend just a little bit too much time there. Little sub optimal about me. It is. It’s, it is so but yeah, that’s there’s it’s not hard to find me these days. All over the internet.
Matt Cochrane 55:39
All right, perfect. Well, Jake, thank you so much for coming on today.
Jake Taylor 55:42
Thanks for having me, Matt. It’s a real pleasure.
Matt Cochrane 55:44
That’ll wrap it up. If you’ve enjoyed this podcast, give us a review on Spotify or wherever you listen to podcast. If you’re watching on YouTube, give us a like and follow our channel. I’m Matthew Cochrane, a lead advisor at 7investing where it is our mission to empower you to invest in your future. Have a great day everyone.
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