TIP 091 : Mastermind Group 2Q 2016 (Business Podcast)

Episode Summary

Executive Summary: The episode is a Berkshire/market-state roundtable focused on whether investors can still find value in an expensive market. The group debates Apple, Amazon’s disruptive power, and how much liquidity matters when quality businesses are hard to find. The second half dissects Monish Pabrai’s new ETF framework—buybacks, 13F cloning, and spin-offs—and contrasts it with Toby Carlisle’s proposed deep-value, catalyst-driven ETF with tactical hedging.

Main Topics: Expensive market and the search for safety/liquidity (Priority: 5/5): Hari frames the discussion using Schiller’s idea of a 'new normal boom,' where post-crisis relief, loose money, and career anxiety push investors into assets for safety. The panel struggles to identify obvious bargains and suggests liquidity may be the best asset to hold. Apple as a cheap but fragile franchise (Priority: 5/5): The group debates whether Apple is a bargain or a value trap. They agree it is cheap on earnings, but worry about slowing top-line growth, the need to reinvent itself, and whether its moat is durable without Steve Jobs. Amazon as a disruptive force and valuation problem (Priority: 5/5): Buffett/Munger’s reverence for Bezos becomes a springboard for discussing how to value companies that can crush competitors through scale and willingness to sacrifice margins. The panel agrees Amazon is formidable, but notes that its competitive strength does not necessarily justify any price. Monish Pabrai’s ETF strategy (Priority: 4/5): Stig explains Pabrai’s ETF, which allocates mainly to three Munger-inspired factors: aggressive buybacks, trusted managers’ 13Fs, and spin-offs. The panel largely agrees the process is sensible, while questioning cost and implementation details. Buybacks, shareholder yield, and capital allocation quality (Priority: 4/5): The speakers discuss whether share repurchases signal undervaluation or simply reflect pro-cyclical management behavior. They highlight James O'Shaughnessy-style research, the importance of shareholder yield, and the need to distinguish good and bad buybacks. Toby Carlisle’s deep-value ETF with hedging (Priority: 5/5): Toby outlines a yet-to-launch ETF that would buy the most undervalued names with takeover potential and use a tactical hedge based on the 200-day moving average to reduce drawdowns. He argues this could create catalytic returns less tied to market direction.

Key Arguments: Current markets feel expensive, so the best immediate 'safe haven' may be liquidity rather than concentrated equity bets. Apple remains cheap on traditional multiples, but growth deceleration and the need for repeated innovation create real long-term risk. Amazon should be viewed as a business-model disruptor whose competitive power affects rivals more than its own valuation. Valuing Amazon is difficult because its willingness to reinvest and undercut competitors changes competitive dynamics, but not fundamental valuation laws. Aggressive buybacks can indicate strong cash flow and possible undervaluation, but they can also be badly timed if companies repurchase most when multiples are high. Shareholder yield is a broader and often better signal than buybacks alone because it includes dividends and other capital returns. 13F cloning can work because skilled managers often keep outperforming, but the biggest holdings in those portfolios may underperform as crowded positions mature. Spin-offs often outperform because they become more focused, less researched, and are sold indiscriminately after separation. Deep-value investing can still make sense even in expensive markets because relative cheapness and takeover catalysts can produce idiosyncratic returns. A tactical hedge can reduce the pain of major drawdowns and may improve investor behavior by avoiding catastrophic losses. Launching a deep-value product is as much a timing and client-behavior decision as it is an investing decision; managers worry about being forced out during drawdowns.

Data Points: Podcast episode: Episode 91 - Opening intro for The Investors Podcast Recording date: May 15, 2016 - Preston notes the session is being recorded before publication Pabrai ETF buyback allocation: 75% - Portion of the ETF dedicated to companies that repurchased shares aggressively Pabrai ETF 13F/value-manager allocation: 20% - Portion allocated to selected holdings from trusted managers' 13Fs Pabrai ETF spin-off allocation: 5% - Smallest allocation bucket in the ETF strategy Buyback study period: 1964 to 2009 - O'Shaughnessy/Jim Shawnise-style research cited on aggressive repurchases Buyback outperformance: +3.8% - Most aggressive buyback decile outperformed the market by this margin Share issuance underperformance: -4.1% - Companies issuing shares underperformed by this amount Apple valuation: P/E below 10 - Used to argue Apple is cheap despite revenue concerns Apple buyer: Swiss central bank - Mentioned as a buyer of Carl Icahn's sold Apple shares Pabrai ETF market-cap filter: Over $1 billion - Minimum market cap for buyback and manager-holding screens Spin-off market-cap filter: Excess of $500 million - Minimum market cap for the spin-off sleeve Spin-off lookback window: 12 to 84 months - Pabrai's spin-off screen excludes the first year after separation Hedge fund threshold discussion: 200-day moving average - Toby's proposed tactical hedge trigger Typical maximum cash exposure cited: 50% - Tom Gayner's remark about the highest cash level he would carry ETF management fee: 75 basis points - Fee discussed for Pabrai's ETF Estimated ETF operating cost: About $150,000/year - Toby discusses costs of running an ETF Pabrai ETF universe size: 100 securities - Combined basket across the three strategies Toby's proposed portfolio size: 30 stocks - Concentrated deep-value portfolio in his planned product Toby's ETF weighting: 3.33% each - Equal-weight target for 30-stock portfolio Market drawdowns referenced: ~50% - Toby cites two major post-2000 drawdowns of this magnitude Value strategy drawdown: More than 20% - Value blend fell into bear-market territory Value strategy recovery level: Down almost 14% - Current state of the blended value basket at the time of discussion

Pivotal Quotes: "the value here is liquidity, folks, because there's nowhere really to hide" — Preston: Discussing how to position in an expensive, uncertain market "They need to reinvent themselves all the time" — Hari: Explaining the central risk to Apple's long-term growth story "I would much rather just be the farmer who sort of sits on his property and doesn't do anything until there's sort of blood in the streets" — Toby: Describing why he is hesitant to launch his ETF immediately in a highly valued market

Implications: Listeners should take away that valuation discipline still matters, but in a richly priced market, process, liquidity, and drawdown control become more important. The episode suggests special situations and disciplined factor screens may offer the best opportunities.