The Meb Faber Show - Better Investing Folgen

In Episode 78, we welcome angel investor, Alex Rubalcava. As Meb and Alex are friends, we start with Meb recalling the first time he met Alex over some egg tacos. Alex goes on to give us more about his background, which took him from pension funds, to dot.coms to VC investing. Meb asks for more information on Alex’s group, Stage Venture Partners. Alex tells us that Stage is a classic seed venture fund. They invest in enterprise software companies that are about a year or two old. They look for companies that have a product in the market and are generating some early revenues. This dovetails into a broader discussion of how Alex landed on being a seed-stage investor, and the VC climate here in L.A. The guys talk about what Alex looks for, the size of the investment in a typical round for him, and where good ideas come from. It's not long before Meb references our podcast with angel investor, Jason Calacanis. We received a great deal of feedback after that show from listeners eager to start angel-investing. But Meb juxtaposes that interest with William Bernstein’s idea that most people shouldn’t invest their own money. Meb asks Alex if seed investing is harder than the way it’s presented. Alex responds with some interesting points about seeing the deal, understanding the deal, and winning the deal. In short, to see the right deals, you have to be in the right places, actively participating in the community. If not, you’ll never see the next Uber. To understand the deal, you must recognize what you’re seeing. Lots of people passed on Facebook, AirBnB, and Uber, because they didn’t have the vision to see what it could be. And in terms of winning the deal, often, the really great startups are oversubscribed, meaning they might need $2M of funding, but have $20M worth of interest. So it can be a challenge to convey your value to a startup to win a seat at the table. The guys then discuss how most of Alex’s deal flow comes across his desk. They discuss incubators, accelerators, going to conferences, calling people, you name it. But at the end of the day, Alex tells us he’ll look at about 1,000 start-ups this year, but will only make eight-to-ten investments. This bleeds into a conversation about the attrition rate as startups move throughout the funding process. As you’d guess, there’s a huge failure rate. The guys discuss the drop-offs through the various rounds, as well as the major reasons for them. Meb also asks when to double down on your bets? As part of this conversation, Alex tells us how attrition rates really vary by sectors. He discusses how investors in the consumer-based sector who didn’t get in on the big dogs like Facebook, Twitter, and Snapchat didn’t see anywhere near the returns that they would have otherwise. Meanwhile, other sectors have far more companies with successful exits (just not as monstrous as the Facebooks et al) – as Meb says, “more singles, doubles, and triples.” A bit later, the guys discuss the idea of “why now?” When Alex is considering an investment, the founder must be able to effectively answer “why now?” Many times, the idea is there, but the timing isn’t, perhaps due to cost, or the market simply isn’t ready. This eventually morphs into a conversation about the three biggest risks that a founder faces when starting a company: building the product, hiring the right people, and getting the customer. There’s way more in this episode, including the little-known angel-investing tax benefit that can save you millions – literally… Where Artificial Intelligence and Machine Learning are likely headed… A mnemonic Alex uses to sort through the hype… And of course, Alex’s most memorable trade. All of you would-be angel-investors will be feeling the FOMO (“fear of missing out”). What are the details? Find out in Episode 78. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 77, we welcome author and asset manager, Tobias “Toby” Carlisle. After discussing Toby’s background, including his time as an M&A lawyer and what drew him to investing, we jump into his latest book, The Acquirer’s Multiple. Toby tells us that the book describes a simple way to find undervalued companies. In essence, you’re trying to find a company trading below its intrinsic value. This is how to get a great price as a value investor. Of course, you get these prices because things don’t look too rosy with the stock – there’s usually a crisis or some hair on it, so to speak. Toby tells us “In order to find something that is genuinely undervalued…there’s always something that you don’t like.” This leads into a great conversation about what Warren Buffett seeks in a company, versus what Toby, through the Acquirer’s Multiple, seeks. While Buffett looks for wonderful companies trading at fair prices, Toby seeks fair companies trading at wonderful prices. Toby goes on to tell us that for a company, there are two sources of value – the assets it owns, and the business/operations itself. You have to look at both together. Buffett looks at wonderful companies at fair prices, and is willing to pay a premium to book value, but that’s generally because Buffett is able to ascertain that the stock is worth even more. Joel Greenblatt took this idea and ran with it in his book, The Little Book That Beats the Market. The idea relies on buying companies with high returns on investing capital (ROIC). But Toby thought “what if you can buy at the bottom of a business cycle?” You could likely get better returns by buying very, very cheap, hence his focus on fair companies at wonderful prices.  The guys then discuss the merits of a high ROIC. Toby tells us that a high ROIC is meaningless absent a moat or competitive advantage. Don’t misunderstand – a high ROIC is incredibly valuable, but it has to be protected.  Finally, we get to The Acquirer’s Multiple. Toby tell us you’re trying to find the real earnings of the business. The guys touch on lots of things here – why Buffett & Munger actually don’t prefer this multiple… a comparison between The Acquirer’s Multiple (AM) and Greenblatt’s Magic Formula… and an example from Toby about the power of the AM using the stock, Gilead. The guys eventually switch gears, and turn toward Toby’s private “special situations” fund. In essence, Toby looks for situations when there’s a corporate act, say, a board-level decision to buy or sell a company, or pay a special dividend, or buy back a material amount of stock. He then tries to arb it. He gives us any example of how he made money using the strategy back when Obama was attempted to stop corporate reverse-mergers. But in all cases, Toby is still looking for undervalued, cheap investments. There’s tons more in this episode: the “broken leg” behavioral problem… how investors trying to improve upon the Magic Formula tend to vastly underperform the Magic Formula left alone… how professional investors tend to behave just as poorly as non-professionals… what Toby is working on/excited about right now… and of course, Toby’s most memorable trade. It involves a basket of net-cash biotechs. While he made over 200%, if he hadn’t tinkered, he could have made 750%. What are the details? Find out in Episode 77. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 76, we welcome Phil DeMuth. We start with Phil’s background. It’s a fun recap, involving Phil’s clinical psychology roots, his move to LA to be a screenwriter, his experiences in the Dot Com boom with friend, Ben Stein, which led to the writing of his first investment book, which eventually resulted in his managing money. Meb dives into investing, asking for an overview of the framework Phil uses with clients. Phil seeks to construct a portfolio that matches each individual’s situation, so it’s largely bespoke. That said, in general, he starts with a global market portfolio, then adds various factors – for example small value, or momentum, or low beta… Then he’ll add bonds, some alternatives, gold, and so on – again, all relative to the individual’s needs and goals.  This leads into a great conversation on the idea of a person’s “personal beta.” This dovetails into the concept of a person’s human capital. Meb believes that adjusting a portfolio to reflect a person’s human capital is something advisors do well, giving them an advantage over robos. Phil thinks there are ways the robos can catch up here. Next up, the guys discuss the various types of investing clients – doctors, engineers, celebrities, and so on – and whether any specific type is better or worse suited for investing. Meb’s opinion is that many doctors and engineers can be challenging clients because they’re brilliant and love to tinker. They can also have some hubris – an element of “I can do better than buy-and-hold”. Phil agrees that doctors and engineers should be excellent investors. They’re so smart that they can do it all; yet in practice, they tend to stumble. This leads the guys to the takeaway that, in investing, there’s not a linear correlation between time/effort and returns. Phil notes the correlation could even be negative! Meb transitions to Phil’s newest book, which is one of Meb’s favorites: The Overtaxed Investor: Slash Your Tax Bill & Be A Tax Alpha Dog. The guys discuss how implementing effective tax strategies in investing is one of the biggest, yet underused, sources of alpha around. Phil notes that any savings in this area goes straight to the bottom line. Meb asks for specific tax strategies. You’ll want to listen to this section, which dives into some of the details of parking the right kind of assets into the right kind of accounts. This dovetails into an idea Meb loves: (and the topic of a soon-to-be-released whited paper) avoiding dividends. Phil tells us he hated the taxes he was paying on dividends and capital gains, so he got rid of everything issuing him dividends and distributions, and instead, sought quality investments that wouldn’t pay a dividend. He goes on to say how dividends are great for retirees who are intentionally spending the money, but if you’re earlier in your working career, and the government is taking 30% of your income via taxes, that’s not good at all! So, Phil wondered how he could get the dividend benefit, without the dividend. It was this idea that led Meb to do his own research on the topic (the subject of the forthcoming white paper). So Meb thanks Phil for the inspiration, then takes the handoff and discusses what he found through his own research. If you’re a dividend investor, you won’t want to miss Meb’s conclusion.  There’s way more in this great episode: additional tax tips… ETNs… tax loss harvesting… donating stocks with huge capital gains to charities rather than donating cash… wills… how Meb wants a Viking funeral (yes, you read that right)… Meb’s unexpected bill from the IRS… And of course, Phil’s most memorable trade – it involves an investment that turned out to be somewhat less liquid than Phil had anticipated. What are the details? Find out in Episode 76. Learn more about your ad choices. Visit megaphone.fm/adchoices