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Bill Brewster's Revue - Issue #10

Bill Brewster
Bill Brewster
Mo’ Confusion, Slightly Less Money

Not going to lie, I’d prefer to be Biggie Smalls. Mo Money Mo Problems is more fun than confused and griding about. But, the portfolio appears set up for solid long term results. cc @bagholderquotes
This one will be long. Feel free to skip around. Apologies for any typos. This is my long form Twitter.
Good Ole Macro
I’m still confused on the big picture. The good news is I am not alone. See https://twitter.com/JulianMI2/status/1509519144437399552?s=20&t=xJ-ODrSLjq57dxu0NgbKew. Moreover, a decent amount of bad still appears priced in. Famous last words….
Meanwhile, withholding and payroll taxes continue to be strong https://fsapps.fiscal.treasury.gov/dts/issues/2021/2?sortOrder=desc#FY2021Q2. If Darden Restaurants Inc has any pulse on the economy don’t expect that trend to stop soon:
-“Hourly wage inflation during the quarter (call was on 3/24/2022) was just over 9%.”
-“But one of the things that gives us confidence around pricing, increasing the pricing level to 6% is that wage rate at the lower end are increasing higher than that. So we’re seeing almost double digit when you looked at our direct labor. So we believe that wage inflation throughout the country is rising at a pretty rapid rate. And so we believe that the consumer can handle that right now.”
-“This environment seems to be very different than a lot of other environments we’ve operated in the past, where we’ve got a lot of things impact – a lot of headwinds impacting the consumer, but wages are increasing rapidly and especially more so on the lower end.
OTOH, inflation in key commodities remains a very real concern. It’s such a concern that even Larry Summers is worried. See https://www.nytimes.com/2022/03/29/podcasts/transcript-ezra-klein-interviews-larry-summers.html. Yes, I missed the inflation problem. No, I am not convinced it’s a huge long term problem. Yes, it could derail things in the next 2-3 years. More confusion…
The only thing I think I am certain of is a way to gain wealth (I define this as relative purchasing power) is to be hyper disciplined about spending over the next 3 years.
My Takeaways From Expert Interviews This Week
First, thank you to Stream by AlphaSense for allowing me to join the team as someone that helps build the transcript library.
I’ve used that approval to do a little research project on streaming this week.
I am pretty sure no one knows what’s happening. That said, my interviews would indicate that Disney is in the strongest position. Mostly because they have a suite of apps and understand monetizing content.
Netflix is consistently #1 or #2 among the interviewees. That said, there seems to still be some general questions around Netflix’ ability to monetize. Idk, maybe they should check out Note 11 of the 2018 10-K to see Domestic monetization. Or sub to @TSOH_Investing substack.
That said, there are some sharp analysts who call streaming economics into question. So maybe I am wrong to look at that 2018 data and extrapolate. And I think there are legit questions about SVOD TAM.
I look forward to seeing how the world plays out with a worse and worse bundle vs. everyone’s best content on their own platforms. Will we see rebundling? Who knows? It seems like it would be the most rational thing to do. But, Netflix outflanked everyone and now they are all catching up.
Private Pod(s)
I am really pumped to hear how a private pod I did works out. It’s part of the marketing for an SPV. The idea is good (pairs trade with clear catalyst and management team that is very strong at execution) and I think I did a good job facilitating the conversation. I’d like to do more of those if the pod helps the SPV be successful.
As a side, I think it would be cool/fun to help firms resurface old memos/ideas. I am sure there is a lot of institutional knowledge that gets filed away and never looked at again. If you think a podcast might help your firm resurface some good thoughts then holler at ‘chaboi. I’ll fly in and record in person. Obviously all IP would remain with the firm.
The Business Brew
Good episode this week (I think they all are though). I like the idea of impact investing through a Jobs, Security, and Growth lens. I also very much enjoyed hearing about Stephen and Dan’s experience at Treasury in 2020. It’s worth the listen.
Value After Hours
I hope my attitude has been noticeably better on Value After Hours. I was in a place earlier that was…not great. Most of the problem was me. So, I apologize if I interfered with people’s listening experience.
In an effort to be more interactive I got caught up in some of the live comments. And some comments got under my skin. And, I got tired of talking about factors every week. Add it up and I should have been more professional.
Anyway, the past couple weeks I’ve led the news and I’m proud of that. I’ll try to keep it up.
RH’s Earnings Call - A Must Listen
See also Restoration Hardware’s earnings call. In an attempt to clear up some #fakenews, I’ll point out that this may have been my favorite RH earnings call ever. Why? Because it confirmed some of my priors; obviously.
Joking aside, Gary Friedman (who I often am highly skeptical of) either put on one of the best marketing performances ever or was honest. Either way, I appreciated his comments. I will share some snippets below but I highly recommend listening to the call (on the Quartr app https://quartr.com/) to get a sense of his tone. In short, he’s very confident but very uncertain. Some highlights to below:
Where RH is Trying to Go
To begin, RH is no longer a premium furniture company. It’s morphing into a “world class hospitality organization.” At least according to Gary.
What will your RH membership get you access to? How about a G650 to fly you to the New York Guesthouse. Guesthouse is marketed to be a hospitality experience with privacy at the center of the value proposition. Not enough for you? Pop over to RH Paris for caviar and champagne while looking at the Eiffel Tower. Too crowded? How about checking out RH3, RH’s luxury yacht.
Needless to say, RH has a lot going on. Will it work? Your guess is as good as mine. I give RH props for repositioning the brand. I remain highly skeptical of positioning the brand to be like LVMH, Hermes, or any other true luxury company. I view it as the Starbucks of furniture. Not luxury and also not a bad business. At all.
Relevant Business Trends
On Supply Chains
Q: Has the current supply chain environment impacted product lauches?
A: What do you think? Of course it has…I mean the supply chain, I think many of us thought it would have been – we’d have been caught up by now. I mean we’ll be lucky to be caught up by the end of the year. And because it’s just hitting everybody from all angles, all the raw materials, all the transportation issues, not just the transportation getting it to us. Our vendors having to get all of their components from all over the world shipped to them. So you just have this compounding supply chain kind of puzzle happening…
…So we’re kind of slowing things down a bit. We’re trying to be more thoughtful. We’re trying to make fewer, bigger, more important moves. And that’s – yes, that’s just our view. And everybody else is approaching things, but that’s our view. We tend to spend a lot of time here thinking very deeply about a few big moves. This is a year where we’ve got a lot of big moves, because they all kind of got backed up. And so, we don’t want to create more chaos in our world and our customers’ world…
…I think there’s a lot of – everybody thinks supply chains are getting better. I don’t think we’ve gotten better at all. I mean it’s – it is what it is. I mean product is on the water for a long time, getting ships into port. It’s taken a long time. We’ve got generally about five extra weeks in our supply chain right now. That’s a lot of time. It’s a lot of money. And that’s the average. So that means some steps coming on time and some steps 10 weeks to 12 weeks behind…
On Inflation
Now I was telling people, when Yellen said, we’re going back to 2%, we were just signing our new freight contracts, ocean freight contracts. I just wonder if anybody, the Fed has picked up the phone and called a business person and said, hi, what do you think is happening with inflation? How is ocean rates? How is this? How is that?
I mean I think – I don’t think anybody really understands what’s coming from an inflation point of view, because either businesses are going to make a lot less money or they’re going to raise their prices. And I don’t think anybody really understands how high prices are going to go everywhere. In restaurants, in cars and everything. It’s – and I think it’s going to outrun the consumer. And I think we’re going to be in some tricky space. So everything is kind of happening at once….
…So – but if everything, if the war in Ukraine ends and inflation slows down some miraculous way, I don’t know, everybody can sign new freight contracts because, I mean, most of the world all signed new freight contracts. Two years ago, price of a container for us went from 2,400 to 4,800? Yes, yes, it’s doubled. I’m not going to tell you what it just went to. But just let’s say that looked like a nice increase.
On Housing
What’s – you say what’s happening in the housing market is a really good thing. When things get too hot, they usually get cool. So again, I don’t want to scare people. I’m just trying to tell you, I mean, you can see the numbers that we see. The last time houses had multiple bids like this, the last time prices went up like this, not – there wasn’t a great other side to it.
On Buying Stock
In our company you’ve got – I’ve got expiring options that’s putting me in a position to have to sell roughly 1.2 million shares of stock. All those things, you can’t have too many things happen at one time and have conflicts happening. It’s probably not appropriate to be buying back your stock when the CEO is selling the stock, right?
On Moving Slow and Thinking Long
…And the supply chain, everything else, you just have to navigate in the best possible way or you can kind of screw up your business model and make some strategic mistakes. It’s one thing – we’re all going to make a lot of mistakes. And I tell everybody in the company, the only difference between their mistakes and my mistakes is my mistakes and it costs the company a lot more money than their mistakes. So, collectively, as a leadership team, we have thousands of people in this company that their livelihood is determined on our decisions. And we want to make great long-term decisions. We’re not here for a short period of time. I’
On The Current Environment
I mean, again, look, this – the war could end, things could get better, our business could bounce back, but there’s a lot of things that are sitting out there. Rising interest rates is never a great thing. Now, it might be three years away before rising interest rates really take a big hit out of the economy; I don’t know. But there’s always patterns and we’ve looked at all the patterns. We’ve got all the graphs. We’ve laid over all the graphs of all the interest rates like look, the last 20 years in the U.S. the average interest rate was 2%. You go push it out 30 years, it’s 3% of federal funds rate. When’s the last time it’s looked like that? The 1950s to the 1970s, okay? That’s the last time.
How old was everybody in this call in 1980 when the federal funds rate was 20%? I’m not trying to scare anybody. But almost everybody on this call, look, in 1980, like I was a kid, I didn’t know what I was doing. I didn’t have wisdom then. I just don’t think there’s a lot of people in business today, except for Warren Buffett and Charlie Munger and I don’t know, George Soros and there’s a handful. If you had wisdom in 1980, you kind of get into your years of wisdom in your ‘50s and start to get wise. I look back and go, in my 30s, I really didn’t do anything. I just like worked really hard. In my 40s, I just got better. I could get shit done and kind of see a bigger picture. In my 50s, I started seeing a much bigger picture. And in my late 50s and 60s, I think I’ve kind of gained a lot of wisdom, and I can see a much bigger playing field than I could.
If somebody with 50 years old in 1980, they’re 90 years old today. So, I just think a lot of people haven’t seen this. When’s the last time anybody here has seen interest rates go up two years in a row and six or seven times this year and four-five times next year? Nobody has seen that. Nobody has seen a lot of things that are happening today. So, I’m just saying, look, I’m just trying to be completely honest.
Anyway, listen to the call. It’s great stuff. And I am predisposed not to trust Gary because I think he is a little overly promotional and runs the entity with too much operating leverage. But, he’s him, I’m me, and that was the best call I have heard in a long time.
Carl Icahn Doc
I watched the Carl Icahn Documentary on HBO. It was great. A few thoughts stuck with me:
  1. “You have to buy things when people think you are silly to do so.” For the record, I am not sure I agree with this. I am also not sure I don’t agree. If you think I have answers then you aren’t paying attention. The more I learn the more questions I have and the fewer answers I have.
  2. “I’m so rich because the system is so messed up.” This one stuck with me. And, given where society is I suspect a lot more people are going to make a whole lot more money profiting from a messed up system. Hopefully it is the “right” people and not those that benefit from malfeasance. The past few months have tested people’s resolve. I do not think they have cleansed some of the excess that has gone on over the past 10 years. I look forward to finding out what the future holds. Perhaps it holds an older me asking the younger me why I was such a skeptic.
Space with Akram’s Razor and Trend Whizo
I had a great time talking to @akramsrazor and @trendwhizo on Tuesday evening. At one point Akram asked me if we were at “peak founder worship.” My sense is we are probably closer to the peak than not. But I also think we might have crossed the peak.
How’s that for a nonanswer? End of the day, I just can’t figure out where I stand on valuations and how monetary policy has impacted them. I know the answer here is “just do a DCF and don’t worry about that kind of thing.” Fine. But also, I think about it. A decent amount.
As always, I look forward to the future. Today will look obvious in retrospect. It doesn’t look obvious at the moment.
My Consistent Comments About Indexing
The index is a monster. It morphs, it’s tax advantaged, and it destroys most active managers. Tough not to like that.
Moreover, I’m as good as I’ve ever been. So if I don’t perform over the next 2 years then Imma fold it up and index. Now, if the businesses I own do well but the stocks don’t then I’ll revisit my comment.
But for years I’ve been wondering what would happen to the indexes if hypergrowth crashed. Well, it did. And the indexes plowed through it. For now at least.
Seems like I should probably update my priors given new info.
That’s this week in Revue. Have a good one.
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Bill Brewster
Bill Brewster

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