GMO’s Last Dance – VALUE: After Hours

GMO’s Last Dance – VALUE: After Hours
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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed GMO’s Last Dance. Here’s an excerpt from the episode:

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Q3 2020 hedge fund letters, conferences and more

GMO’s Last Dance

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Structured ValueValueWalk’s Raul Panganiban interviews Thomas Cole, CFA, CEO and Co-founder of Distillate Capital. In today’s episode we discuss value investing in the current environment and why you should look internationally. Q3 2020 hedge fund letters, conferences and more International Value with Thomas Cole, CFA, CEO and Co-founder of Distillate Capital

Tobias: It’s called our Waiting for the Last Dance referencing the MJ documentary, which was excellent. He says that all of the quantitative signs are there. The overvaluation, like we’ve just had overvaluation for a long period now, so overvaluation doesn’t count for much. He says the qualitative signs are there, all of the speculation, market’s rocketing up, you get that ramp up the last stage of the ball. Then you get a lot of retail participation. A lot of new issuance including the SPACs, all of the new IPOs do very well. He says it’s one of the great bubbles of our time. So, 1929, 2000, 2007, and 2021, I guess. I enjoyed the piece. I don’t know that it’s that different from anything else that he’s been saying.

I love reading Hussmann too. Every time I read Hussmann, I’m like, “Holy shit.” Then I go back and look at some of the other ones, and I realize it’s the same message. I don’t think it’s wrong. All I would say is that the market is extremely expensive, there’s no question about that. Rates are pinned really low, so there’s nothing else. There is no other alternative. We’re at expensive on the cyclically adjusted P/Es, expensive on market cap to GNP, Tobin’s Q, all of those sort of measures are really expensive. The big difference, I think, the only thing to bear in mind really is that Japan got a lot more expensive before it finally collapsed and ruin a generation or two of investors. So, you can go from 30 times CAPE to 100 times CAPE, China did the same thing. You can get to 100 times CAPE. I think if you’re hanging your hat on that, then good luck to you. I think the market is expensive. [crosstalk]

Bill and I, we all have different opinions. Bill’s a fan of the third or fourth inning. What inning are we in today, Bill?

Jake: Yeah, where are we at?

Bill: I don’t know. We’re still playing ball.

Jake: [laughs] Are the starters still in or are we into the bullpen yet?

Bill: I think the starters are still in.

Jake: Hmm. Ouch. What’s the pitch count?

Tobias: The only other thing that I would say– I don’t know.

Bill: Like 40.

Jake: [laughs] Get out of here.

Bill: [chuckles] Yeah, they’ve been pitching a good game.

Jake: Yeah. No-hitter.

Tobias: Do you think it’s helpful to focus on this kind of stuff? Do you think it’s useful?

Bill: Not really. I’ll tell you what I [crosstalk] think it’s useful at. I was looking at my allocation and the way that stocks have run, I am way overallocated right now to stocks. Relative to what I’d like to be. It is not easy to reduce risk right now for me emotionally, and risk management probably shouldn’t feel very easy, but that’s probably when you should be doing it. I don’t know.

Tobias: The thought I always have is when you look at 2000, if you were thinking about the level of the market, you’re out, and that was a bad decision if you’re a value guy because you had two of the best years that you could have possibly had. I think these are always interesting. I like reading them. I’m a fan of base rates. I think it’s worth remembering what is going on around you. But I also think that it’s not helpful when you’re constructing a portfolio. If the market is nosebleed expensive, but you find Microsoft trading on a 10% free cash flow yield, I’ll just buy that all day long. I’ll fill a portfolio full of that. I don’t know that it’s that useful, but I like reading them because it does sort of reinforce my bias that the market is expensive. [crosstalk] Yeah, reinforced my price.

Jake: [chuckles] Yeah, I think you’re right. You’re pointing out the important thing is that you can have a very expensive market, but a very rich opportunity set still of hunting ground for whatever your approach is. So, maybe not worrying so much about the macro. Although they tend to go together, like, really cheap markets, when rates are high, when valuations are low, when sentiment is low, when profit margins are low, that’s where you get a 10-, 15-year bull market setup. I don’t see that right now. It seems like we’re the opposite of all of those. So, I don’t quite understand how people get to the roaring 20s kind of thesis.

Tobias: I can get you– what part of the roaring 20s we had? That might be a better what year– [crosstalk]

Jake: Well, the part where we’re going to have a decade of just– Yeah, is it 19–?

Tobias: Not 21. It’s 2028 or 2029.

Jake: Right now? Well, that’s what– But no, but people are acting it’s like ‘23 or something, and we’re going to have mostly the rest of the decade as like, all aboard, here comes another generational bull market. I’m a little pessimistic about that. But if there is a value opportunity there, boy, you don’t want to miss it sucking your thumb because you’re macro calling.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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