Modest Proposal – Value is Dead, Long Live Value - [Invest Like the Best, EP.95]

Episode Summary

Executive Summary: Patrick O’Shaughnessy interviews anonymous investor “Modest Proposal” on how market efficiency, tech disruption, and human overreaction create episodic value opportunities. He argues traditional value is harder, but mispricings persist where narratives outrun fundamentals, especially in media, e-commerce, retail, and platforms.

Main Topics: Value investing’s evolution (Priority: 10/5): Traditional deep value became harder as more capital and quant screens crowded the factor. Overreaction as the durable anomaly (Priority: 10/5): The best opportunities come from human linear extrapolation, not from spotting static cheapness. Tech vs. old-line industries (Priority: 9/5): He focuses on where technology collides with legacy sectors and expectations get mispriced. Media and cord-cutting (Priority: 9/5): Linear TV is in structural decline, but sports rights and owned IP can still matter. Consumer internet and aggregation (Priority: 8/5): Attention aggregation created winners, but niches can still beat giant platforms in focused use cases. Retail, malls, and hybrid physical brands (Priority: 8/5): Pure retail is poor business, but high-quality malls and hybrid online-offline brands can work. Capital allocation and active management (Priority: 7/5): Buybacks, patience, and discipline matter more than empire-building or constant action.

Key Arguments: Value works when fundamentals recover after overreaction; it is now harder and more efficient. Market inefficiency mostly survives through human behavior, not structural anomalies. Best opportunities are episodic: wait with deep prep, then act when narratives overshoot. Media tied to linear TV is challenged; sports and strong owned IP have better futures. Online customer acquisition is expensive, making many e-commerce models structurally weak. Amazon and Facebook can enter niches, but focused specialists often outperform on execution. Buybacks are good only when stock is cheap; offsetting dilution is not a real rationale. Active management should be patient and selective; day-to-day alpha is increasingly hard.

Data Points: Value-report length: 50-page report - He says his team published a report on value factor investing. Pay TV monthly fee: $7 a month - Disney/ESPN historically received this from households. Households paying for TV bundle: 100 million households - Legacy linear TV economics depended on this scale. Disney cable networks share of OI: 65% - He says this may once have been as high as 65% of operating income. Disney cable networks share of OI: 20% - He says cable networks are now down to probably 20% of segment operating income. Netflix subscriber expectation: 250 million, 300 million, 350 million worldwide subscribers - He says the market is pricing in this range. Netflix margin assumption: 30% margin - Used in his back-of-envelope valuation for Netflix. Online travel CAC: 40% to 50% of revenue - He cites this as the customer acquisition burden in online travel. Free cash flow yield: 5% to 8% - He describes the yield range he likes in distrusted companies. Mall occupancy peak: north of 96% occupancy - Best U.S. malls were above this in 2014-2015. Mall occupancy current: 94% to 95% - He says top malls’ occupancy had fallen from 96%. Mall occupancy earlier: 92% to 93% - He cites this as typical occupancy in the 2000s. Facebook user base: over 2 billion users - Used to illustrate scale-driven attention aggregation. Google product scale: six products, seven products with a billion - He notes Google’s massive platform reach. Instagram user base: about to cross a billion - Used to show scale in attention markets. Prime households: 60 million households - He references Amazon’s Prime base when discussing add-on services. Consumer cohort decline: 25% to 30% - He says third-party data showed 18–30-year-olds’ time spent on Facebook declined by this amount. Malls in U.S.: 1,200 malls - He breaks down the mall universe before narrowing to top assets. Mall value concentration: 900 of them make up maybe 10% of sector value - He argues most malls are low-value and can be ignored. Mall value concentration: 300 malls make up 90% of the industry value - He says this value is held by only five public companies. Stock target: down 25% - He notes some mispricings appear after sharp post-earnings drops. Online company reaction: 25% sell-off - He contrasts this with more prosaic sectors where sell-offs are smaller. Phase of investor behavior: 100%, 0%, 100% - He cites Josh Wolfe’s framing of certainty, uncertainty, then conditional certainty.

Pivotal Quotes: "the last sort of remaining anomaly is human behavior" — Modest Proposal: He explains why active management can still work despite market efficiency. "I'm betting that the future may come a little slower than everyone else." — Modest Proposal: He describes how he invests in technology-driven disruption. "if your stock is reasonably discounted to what you think you or a private market buyer would pay for it, buy it back." — Modest Proposal: He defines his framework for buybacks and capital allocation.

Implications: The key unresolved question is which legacy businesses can survive long enough for fundamentals to reset; investors must keep waiting, studying, and being selective.