Episode #475: Short Seller Bill Martin Bet Against Silicon Valley Bank in January. Here’s Why
Guest: Bill Martin leads Raging Capital Ventures (RVC), his private investment office, which is primary focused on partnering with great entrepreneurs and investors.
Date Recorded: 3/31/2023 | Run-Time: 1:17:26
Summary: Today’s episode starts off with a Twitter thread from Bill on January 18th which said there were bigger problems at Silicon Valley Bank than just their large exposure to the stressed venture world. Bill gives his view on how the situation has unfolded and the implications for both the banking and venture capital ecosystem.
Then we spend some time on the convergence of public and private markets, something Bill has been at the forefront of. He also shares some high level thoughts on the markets, including some areas he sees opportunities on both the long and short side.
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Meb Faber’s the co-founder and chief investment officer at Cambria Investment Management. Due industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
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Meb:
What’s up my friends? We got an especially timely episode today with returning guests podcast alum Raging Capital Ventures, Bill Martin. Bill was way ahead of the implosion of Silicon Valley Bank. On January 18th, he penned a tweet thread detailing there were bigger problems at the bank than just their large exposure to this stress venture world. Bill gives us his view on how the situation is unfolded and the implications for both the banking and venture capital ecosystem going forward. We then spend some time on the convergence of public and private markets, high level thoughts on all the stock markets, what’s going on, including some areas he sees opportunities on both the long and short sides. Some fun names in there. Please enjoy this episode with Raging Capital Ventures’ Bill Martin. Bill, welcome back to the show.
Bill:
It’s great to be here. Thanks so much for having me, Meb.
Meb:
I can’t believe it. Listeners, if you want the full Meb-Bill background story, you go back to episode 170. We’ll put it in the show note links. But it’s been three years, man. It’s been quiet three years, nothing been going on.
Bill:
I knew you went. Congrats on all your success and the growth of the podcast. It’s amazing.
Meb:
Yeah, man. Well, I think you, I can’t say retire because you’re more active than ever, but you decided to get rid of OPM, other people’s money. You’re now running family office. But I look back over the last three years and damn, man, you’ve been active. You just had a new kid. You went viral on Twitter. I mean, I thought this was going to be more of a mellow period and it’s like the exact opposite.
Bill:
Well, it’s like the Godfather, you try to get out and they keep pulling you back in.
Meb:
So listeners, Bill is one of my favorite entrepreneur investors, which is really the best type of investor because you understand all the agony and ecstasy and what it means to run a company. And if you want the background, again, check out the last episode, but we’re going to dive into a lot of new territory today. And I feel like we got to start with the most obvious jumping off point, which is a tweet that you had, that went totally viral, that was talking about Silicon Valley Bank. Obviously this is the biggest story of the year so far. And you were ahead of the trend back in January, I think, right? When were you tweeting away? And by the way, the Twitter handle was what, raging?
Bill:
@RagingVentures.
Meb:
@RagingVentures. So give us the story.
Bill:
Yeah. I was following Silicon Valley Bank quite closely last year with the idea that it could be an interesting short because of all their venture loan exposure and saw firsthand all the issues in the Valley and what was going on there. But as I dug in, realized quickly that the bigger problem was just an enormous amount of fixed rate, long duration mortgage exposure that they had bought at the top of the market in 2021, and they had not marked through the balance sheet of the book value. And so I ended up coming into earnings in January. In January 18th, I did a lengthy thread on the situation and the way I saw it, I thought management was going to have to come clean with earnings and guidance for the year, and it turns out they didn’t. But I put my thoughts out there and it’s amazing how quickly things have unfolded,
Meb:
Yeah. But also how long it took to unfold because it was January and you feel like the earnings, you’d expect to start to see the story get picked up and it took a few more months. I wonder how much of it the executives were like, “Man, we got to do some Hail Mary, raise some equity.” But the story was actually simple. Anyway, walk us through, so what happened? Give us the expert summary of what happened and any eventual takeaways. I was getting ratioed for one of my takeaways on Twitter on the topic too, so love to hear what you think.
Bill:
Yeah. Well, you’re right. I mean, I think management was trying to whistle past the graveyard and I think they were praying for a Fed pivot. And I don’t think they would’ve done anything, frankly, if it wasn’t for Moody’s threatening a credit downgrade. I actually had puts that were expiring in February that expired worthless, so it was a very profitable short for me. But I put that thread out there in January and the stock quickly moved 20, 25% in my face, so that’s how they go. But rewinding a bit, I think the story of it was we had a five to 10 years of really, really low interest rates and management got complacent around that, and then you had the venture bubble in 21 and 20 and huge amounts of money came into these venture companies and they showed up on the deposits at Silicon Valley Bank. And they were basically paying nothing for it.
And they were complacent and they got a little greedy and they decided they were going to buy long duration mortgages to pick up two percentage points or one and a half percentage points. Ridiculous stuff in retrospect, but that was a situation then. What was interesting from a short point of view was… Because there’s a lot of banks that have this type of exposure, most of them not on the scale of Silicon Valley Bank obviously, but what was really interesting from a catalyst point of view was the fact that their customers, all those venture backed companies, were burning cash and the venture markets were closed. And so all that money that had come in was also weaving, and I thought that was going to be the issue that they were going to have to face this year.
Meb:
So it was such a basic fundamental error. It’s odd that there’s no… You spend a lot of time on boards, you’re on a couple boards, you’ve done activist campaigns in the past. Do you think this is a board oversight issue? Do you think it’s just a failure at the C-level? Because presumably there had to have been 5, 10, 20, 50 people that this should have crossed their desk and they said, “Okay, hold on a second. The one thing we have to do is not get this wrong. You don’t even have to get it right, you just can’t get it wrong.” What do you think that the major failing was?
Bill:
Yeah. You’re right. I mean the speed no one could have predicted that. I mean, that was remarkable and was certainly not what I foresaw happening. In terms of who’s at fault, I mean I think it’s on the laps of a lot of folks. Obviously management’s running the company and they got greedy and complacent and they were inept to some degree, but I think customers are responsible. I’m sympathetic to the startup CEO. Does he really have time to analyze bank balance sheets? Probably not. But if you’re the CFO of Kleiner Perkins or Andreessen Horowitz, I think your job is to evaluate and diligence counterparty relationships. And the work here was not that difficult, man. They should have been doing this work. They should have been asking these questions.
And I think it goes beyond that. If you look at the top three shareholders of the company, they were all passive holders. And so they were concerned about ESG and diversity and climate and all those “risks”, but they weren’t really focused on basic rudimentary financial risk. And of course regulators, they were out to launch, but let’s be honest, regulate regulators regulate to the last crisis. And interest rates did move quickly here. And the nature of held-to-maturity accounting is that you can kick the can. If this was a hedge fund and you had $10 billion of equity and you bought a $100 billion of 2% mortgages, you would’ve gotten a margin call probably last September or August. So it’s a confluence of things.
Meb:
One of the things that was crazy to me, you mentioned, okay, individual depositors, that’s one thing. Roku, Circle, literally public companies. But there was some stat that it was the top 10 depositors had 13 billion. And if those are only two public companies, that means the other 10-ish are either private individuals or funds or something. And my goodness, what are they thinking? You’re putting your entire life at risk, not doing a little bit of homework. And maybe it’s a sign of the times. I don’t know.
Bill:
Yeah. Look, again, as you know, I spent 15 years running a hedge fund, so I was well-versed with short selling. We understood financial statements and balance sheets. We understood banks. And so had a little bit of advantage there, but this was not difficult. I mean, you could look at their balance sheet and they disclosed the whole, it was right there in plain sight, that I think it was irresponsible of these customers not to pay attention. And I think also to some extent, a little bit of a failure of imagination. I warned a number of my friends, not that I thought the bank was going to implode but I said, “Hey, I know you do a lot of business with these guys. Make sure you have backup credit lines and make sure you have a plan.” And people poop at it because they just couldn’t imagine something like that happening.
Meb:
Yeah. So the main takeaway listeners is follow Raging Ventures on Twitter because he was a warn to you. How much of this was informed… The nice thing about being an investor, particularly through multiple cycles, look, you buy your first dock at 10. You were like me probably trading from the Virginia campus in the late nineties boom. You were involved with the first Reddit before it was Reddit, or Yahoo message boards, even Raging Bull. But you were involved shorting regional banks back pre GFC, a couple names, Bank of the Keys, Silver State. Was that a similar situation or totally different? How much of that was informed you keeping an eye on it to today?
Bill:
Yeah. So Raging Capital, I mean we managed a deep and diverse short book often with 60 or 70 individual names and a lot of different thematic bets. So over the years we were short everything from Insys Pharma to Valiant to unfortunately some Tesla along the way and a number of other names. Coming into ’08, we were short a number of the subprime originators. We were short a lot of regional banks had specific construction lending exposure and some exposed markets. And I’ll tell you that those shorts took a lot longer to play out. And what really was remarkable here was how quickly this unfolded. It didn’t take 9, 12, 18 months. And so it’s even been challenging, like once you have a short working, you’re trying to find similar profiles and similar names and press those shorts too. And this has just played out so super quickly that it’s been hard to get the exposures on even.
Meb:
So obviously some of the bank ETFs just got absolutely pummeled. We’ve seen a couple other bodies flow to the surface. How, and I think the question for everyone over the past few weeks has been, is this systemic? Does this affect a lot of banks? Or is it just a couple of people behaving foolishly on the periphery?
Bill:
I mean, you and I both know probably a lot of people who got those great mortgages, they brag about the two and a half percent 30 year mortgage they have. And so that’s good for that real estate owner. It’s not so good for the bank on the other side of that trade. And there’s a lot of those loans out there. That said there’s not a lot of banks that look like Silicon Valley Bank in terms of just the outsized exposure and the percentage of uninsured depositors and what have you. So it’s I think much more spread out through the system. But yeah, if you look at the public markets, I think they done a pretty good job.
You can see stocks like First Republic and you can see Schwab over the last couple weeks. There are certain stocks that have these exposures. And the market knows that and is reflecting that. I think broadly though, what’s going to happen is, particularly now that the regulators and rating agencies are focused on this and investors are focused on this, is that there’s just going to be a broad period of de-risking and raising capital. And so just broadly, it’s a regime change for the industry and I think you’ll see lower returns on equity moving forward because of that.
Meb:
Yeah. Let’s say Biden read your tweet, loves the Meb Faber Show, gives you a call and says, “Bill, all right, you clearly saw around the corner some of this dumbery.” He’s like, “I want to improve this system and make… We get the diagnosis some of these sub $300 billion banks or suspect. And I want to make the system better for depositors.” What would you say? There seemed to me that there could be some potential fixes for the way that it’s set up today. You got any ideas?
Bill:
There’s a good argument that the deposit insurance level should be raised, but I certainly don’t think it should be unlimited. I think there’s significant moral hazard. And if you think there’s issues here, you can’t imagine in a banking world where all deposits are insured. You’d have mayhem.
Meb:
Why not just charge for it though, right? You’d be like, “All right, look, you want 250K. Fine. So be it.” That protects a lot of the average depositor. But, “Hey, you want a million, 5 million, 10 million, 50 million, 100 million. That’s fine. You’re just going to pay an insurance fee for it.” Whether that’s 10 basis points. I don’t know what the math would work out to. I think many would be totally happy to pay for that. You think that’s a solution? I mean, it seems so simple.
Bill:
It’s an interesting idea. I think the real solution though is to let the free market do the work. And a big part of the reason we’re in a situation is because rates were repressed for so long and there was no yield. And so people had to go out on the curve to try to find any yield whatsoever. And it wasn’t just bad behavior of banks. You could look at major governments too. A lot of the spending was enabled by rates at zero. And you think we had problems in the United States, in Europe, rates were negative in a lot of markets. And we worry about banks in the US who are sitting on the other side of that two and a half percent mortgage. Question I asked is, who’s on his side of those Greek bonds and Italian bonds and Spanish bonds that have zero risk weights?
Meb:
That was a weird time. And looking back on that, sometimes you see things in markets. When you’re in the middle of it, you’re like, “Huh. Okay, this is a little funky.” And then looking back on it you’re like, “Wow, that really was a weird time.” So many experiences we’ve had. We graduated during the internet boom, then the financial crisis, negative sovereigns all around the world. That was super weird. To me, and listeners, a big takeaway from this is so basic. We did a podcast recently with MaxMyInterest. But we ask people, we say, “Do you know what your savings checking account yields? And if so, how much?”
And the vast majority of people either don’t know or it’s like zero. Like Bank of America, you’re getting 20 bits or something, but you can very easily today, this moment, go out and open an account in 10 minutes that will give you like $5 million FDIC and pay you 4%. So listeners, if you’re not doing that, you’re just lazy. Hit pause, we can listen to Bill and Meb a little more, but protect that. It’s just a basic table stakes for your hard-earned cash. You can worry about all this alpha later. Anyway, that’s my advice for the morning.
Bill:
Well, you have the, along those lines… I took some of those CFOs or those VC shops to holding their feet to the fire, but you have to ask why they were sitting in zero interest deposits too. Why aren’t they picking up four points in their money?
Meb:
Well, I think we’ve seen, unfortunately, there’s definitely some conflicty sort of benefits from a lot of the VCs that got a lot of extra benefits. And whether they forced their companies or people to have to bank with Silicon Valley, then I think that’s going to be problematic for them if they find out they have all these limitless benefits because it feels just gross. Anyway.
Bill:
I think that’s a very good point and my friends on the west coast, I’ve shared that view with them. First Republic in particular was known for providing very generous mortgage terms to their best clients. And having come out of a very regulated hedge fund industry, the idea that in return for priming at Goldman Sachs, but they would give me a favorable mortgage on the side as part of their full service, the regulators certainly would not have looked very friendly on that, nor would it my investor.
Meb:
Meanwhile, I had the a hell of a hard time getting a mortgage because every time I went through a three month process, I mean it took forever as a business owner. They’d get to the end and be like, “Oh wait, you run a hedge fund?” I’m like, “I don’t run a hedge fund. I don’t. Come on.” I’d say, “I have much simpler plain vanilla business.” They’re like, “No, you’re a head fund manager. We don’t trust you. Sorry.” All right. I see I’ve seen you tweet. Okay, so most banks probably are doing okay. You’ve also mentioned some that are stand out on the opposite side. Any thoughts come to mind or any names you think are or the bombproof will benefit from this.
Bill:
In terms of long ideas, you mean?
Meb:
I think you were saying some got it right. I think we were talking about maybe Fairfax. Who else were you talking about? I can’t even remember.
Bill:
Yeah. I mean certainly I’ve been more focused on the short side and I think we’re pretty early in the cycle in terms of that playing out. Obviously a lot of names dropped very quickly and probably in a lot of cases, maybe a little bit of an overreaction. But just structurally there’s going to be short opportunities here because these banks need to de-risks and need to raise capital, and I think that’s going to be a really good theme for a while to come. On the long side, I have not bought any banks long. But yes, I do own some Fairfax and I own another insurance company. That’s a special situation.
Fairfax is a great example. This is run by Prem Watsa, he’s the Canadian insurer. And Prem took a lot of heat because he had a $35 billion fixed income portfolio. And for basically a half a decade he was sitting in one-year treasuries earning almost nothing. And last year while all of his insurance company peers took massive balance sheet hits because of their bond exposures on their portfolios, Prem was busy rolling his one-year treasuries into two-year treasuries of making four and 5%. And that’s not only great from a net income point of view in terms of earnings from the portfolio, but it’s enabled him to play offense in the insurance market because a lot of his competitors just can’t write business because their balance sheets are smaller.
Meb:
Yeah, makes sense. All right. So let’s rewind a little bit. We had you on 2019. You’ve had a lot going on last few years. This pandemic in between. Decided to convert to a family office, which I feel is very trendy. You’re on the forefront of the trends. You sold one of your companies and still involved in a ton of ventures. So let’s just pick and choose some of these ideas that, I mean I really love InsiderScore concept. Would love to dig into that too and hear about the exit there. But let’s begin any of those topics. What’s the last few years been like for you, buddy?
Bill:
Well, I mean it’s been an interesting few years for all of us I think. But I think for me, a number of projects that I had spent a good chunk of my career on came to maturity and I’ve got a little bit more of a clean slate moving forward. And yes, I now manage my own capital under the Raging Capital Ventures umbrella, so trendy as that is. Talking about InsiderScore first, that was a business that I co-founded with a partner way back in 2004, focused on at first insider trading data, tracking what corporate insiders did and trying to find a needle in the haystack in terms of the best and most notable transactions to pay attention to.
And over the years built out a wonderful data business, wrapping money flow data, and institutional data, and stock buyback data, and a variety of other research and analytics around that core. And built a really nice business servicing 60 to 70 of the top a hundred asset managers and several hundred hedge funds and mutual funds. And we’re fortunate in 2020 a great market for recurring subscription based businesses. We decided maybe not a bad time to think about selling and we had a private equity by the firm and combine it in with another asset in the space. So it was a really nice close of that chapter.
Meb:
Tell me a little bit about what are the main insider takeaways as a PM and you’re looking at these stocks. People love to talk about buying and selling. And I feel like there’s a lot of misconceptions about what people are doing. Silicon Valley Bank famously. Insiders were selling some in the period running up to their demise. But what are some takeaways and also misconceptions when, because people love to talk about insider buying, selling.
Bill:
Yeah. It’s a dataset I’m obviously passionate about and that was the genesis of the original idea for the service. I think the buy side is well studied from an academic and practical point of view. If people are putting up real dollars, it’s worth paying attention to that, although they’re exceptions where people are trying to paint the tape and insiders make mistakes too.
Meb:
You can say Elon. You can say Elon. Just keep going.
Bill:
I’ve actually found, and I think with InsiderScore, one of the areas we really pioneered was actually paying attention to selling behavior, which a lot of investors tend to write off because people sell for a lot of reasons. They might be buying a new house or putting their kid in college or they might just have too much exposure to that particular investment. But paying attention to certain screens like CFOs who are having options that expire early and exercising them prior to the ordinary expiration even when the stock’s down. Picking out some different behaviors that are really interesting.
And then from a short perspective, I actually found it interesting paying attention to a lot of the 10b5-1 activity. Now these are the planned program trading that insiders can enter into. The SCCs actually been scrutinizing them quite a bit and is looking to actually change the rules around that because there has been apparently some abuse. I actually paying attention to 10b5-1 selling activity or lack thereof, particularly at stock option and stock comp heavy companies like tech companies, where you rarely see an insider buy at a Google or a Toast. But it’s very interesting where they stop selling, and paying attention to those signals can be really interesting both on an individual company level as well as a broader sector level.
Meb:
How much of this can be quantified? And how much of it is, it just gives you the broad landscape and you really got to dig in? Is there any just simple takeaways on how to approach this? Because so many people love to focus on a one-off like, “So-and-so just bought or so-and-so just sold,” without knowing the general landscape it seems.
Bill:
Look, I think in the early days there was a lot of alpha to be had, particularly tracking by transactions. These forms used to be paper filed and so there was an edge to getting some of the early filings. Like anything else, those things get arbed out over time and I think that markets are a lot more efficient. And I think InsiderScore played a role in that. I mean we have data feeds into a number of the leading quantitative firms out there, so they’re paying attention to that. For me as an investor, as a hedge fund manager, I used it to screen ideas. For example, if I’m interested in bank shorts right now or if I was looking for bank longs, I might go and there’s hundreds of bank stocks, but I might break the short list to start from looking at interesting outlier behavior on the insider side.
Meb:
Yeah. I think the old phrase “success leaves traces” is true on both the positive as the negative too tracking and following the terrible operators and CEOs as well as what they’re up to can be equally as informative as tracking the good ones.
Bill:
Yeah. We used to have a list at our fund of, we call them “bad actors” and they were a lot of them.
Meb:
Were they all based in Utah and Vancouver and Jersey? There’s like, there’s certain pockets where the CEO happens to be from. It’s like a pink flag, maybe not a red flag, just like a pink flag.
Bill:
Boco was a popular… It didn’t lie. If you saw one of those guys join a board or a crony of his get involved with the company, they don’t usually change their skins.
Meb:
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Yeah. As we look at the tapestry of markets, you’ve been involved one foot in starting companies, another in funding private companies, investing in public ones. It’s become a bit of a blur over the past 20 years. I think there’s been a lot of these crossover funds. Any general takeaway is the last three, five years on how you think about the private and public side because I feel like I exist mostly in the public world, but I spend a lot of personal time on the private side. And I feel like vast majority of my public only friends are missing out on a lot. What’s your general thoughts on the blending and merging and what’s going on with private and public?
Bill:
Yeah, well certainly private markets have developed a lot. Some of that was a function of easy money and was a bit of a blowoff. But the fact is capital formation has gotten a lot easier on a private side and that market’s got much more well developed. And companies are staying private a lot longer. And it’s much more attractive. And it’s more expensive than it used to be to go public. There’s real public company costs and there’s real hurdles and distractions associated with it. So it’s a bonafide asset class and it’s been interesting watching that mature. Interestingly though, I agree there’s a lot of really super cool companies on the private side, particularly in technology and more entrepreneurial ventures. That said, we’ve been in a two-year bear market and all those tech companies that went out via FAX and IPOs, they’re all down 80%.
And so I would actually argue today the relative value is in the public markets. I mean a lot of those are not great companies, but there are and I’m happy later on, but there are some needles in the haystack there. I’ve also found from myself as an investor. I’ve grown to appreciate the differences and benefits of private versus public investing and specifically on the private side. It really because of the illiquidity, which a lot of people view as a disadvantage, the upside of that is it forces you to be patient and take a very long-term time horizon. And there’s just been so many companies like a Toast for me or Gerson Lehrman for me, that if it was public, I’m not good at sitting my hands if I look at a stock price every day. And I would’ve sold Toast 20 times over if it traded in the public markets, but because I was stuck in a private, that forcing mechanism was actually very, very good for me.
Meb:
This is a huge point. And we’ll drill into this a little bit and I was going to give you a little bit of shit because the example I was going to give you is say, “Look, on one hand, amazing, you were in at Facebook at a $6 billion valuation. But Bill, to be clear, it’s a multi hundred billion dollar company now and I don’t think you’ve held it the whole time.” So why are we such a piker in Facebook? This is a good example. It’s like public market investor. You see something like five, 10 bagger, you’re like, “Oh my god. Hallelujah.” But just think of what if you had just held that, you’d be like a Winklevoss now.
Bill:
I’ve realized as an investor, generating ideas is something I do with ease. I don’t have a problem generating ideas. You put me in front of a screen and I come to work every day, I will find things to do and that’s a strength and a weakness at the same time. And I’ve grown to value and appreciate that there’s a certain bucket of investments that the hurdle rate has to be a lot higher going in because you are a liquid and you’re committed to that, but that is a really good vehicle for those businesses that you think can really grow and be entrepreneurial over time. Whereas the public markets, I’m not good at watching a high multiple tech stock, even if it could be a 50 bagger over the next 10 years. If I’m looking at a trade every day, I am not good at being patient and sitting on that. You give me a value stock, that’s totally fine. I’m happy being as patient for very, very long periods of time.
Meb:
Yeah. As recently at a conference in Park City. So shout out to the WallachBeth crew, they put on a great event. But for some reason they put me on the private markets panel. And I was talking to everyone and this is a very ETF-centric crowd. And the ETF crowd nowadays loves to make fun and joke about the early days of ETFs. You’d go meet with people and they would say, “What’s an ETF? ETF, I don’t really understand.” And nowadays everyone knows what it is. And they were talking about that and I said, “First of all, of this couple hundred people in the audience, how many of you know what QSBS is?” And there was zero hands went up. There was one hand, it was Jason Buck, and he’s a friend of mine, and I was talking to him about it the night before so he doesn’t count. So literally zero people.
And I said, “Look, there’s five reasons in my head,” we’ll see if I can remember them, “of why every single one of you in the audience who’s a public markets person should be spending time, not a full-time but at least spending some time in the private market space. The first one was liquidity.” So what you just said is this… I’m not talking about the illiquidity, liquidity discount. Valuations go back and forth. Sometimes private stuff’s cheap, sometimes it’s expensive. You look at a lot of the LBOs they used to be at six times. They’re talking about some of the multiples now they’re at 12. But the point you made about being stuck in a position I’ve totally changed my mind on. I think it’s the biggest benefit of being a private market long-term investor. Let me list off the other four and you can tell me if you agree or disagree.
Second was access. And I don’t mean, “Hey, can you get into Sequoia or something,” but, “Hey, do you even see opportunities?” And in some cases entire asset classes like Farmland you can’t really invest in easily publicly with the exception of Acre Trader and others Brett. So as a quant, I love lots of choices. And I think there’s a couple thousand stocks in the US, but there’s like 15,000 VCs funded deals like per year and there’s millions of private companies. So it’s like, oh, just way more choices. How many is that? Three.
Four was taxes. So we talked about QSBS. Listeners, we’re not going to spend any time on it, but Google it. And then fifth, and I had to be careful saying this because we were in public market group, I said, “Public markets, you can’t act on inside information.” In private markets, there’s only inside information. And then everyone’s like, “Whoa, whoa, whoa. Meb, we got to…” Inside information is probably the wrong way to describe it. We don’t want to pick up any red flags here, but saying is like you get to look around a corner when you see some of the information that you would otherwise be ignoring in only public markets. Anyway, any thoughts?
Bill:
All great points. To emphasize the last point, there is no Reg FD with private companies. And we saw that firsthand with some of our private investments at Raging Capital. We actually had an investment, it was a building related company that had come out of bankruptcy and restructured and was private. And having the ability to see their financials and trends in the business informed our view on a bunch of public names including Builders FirstSource, which was our largest position for a number of years and a great investment.
Meb:
And the best part about it also is that it’s extremely optimistic and inspiring, versus public markets, which are almost always negative news. You’re talking to entrepreneurs and people trying to change the world. It’s a much happier place to be than hanging out in public markets, which are almost all negative. But you talk about this, I’ve heard on another show where you said, “Look, one of the benefits also of investing in VC companies is the ability to do co-investing deals too.” And so getting to see opportunities you just wouldn’t see otherwise.
Bill:
The public markets are inherently short-term-oriented. One of my favorite examples is we were invested in a company called Shape Security for probably five or six years and they ended up selling for a billion dollars to F5 networks and it was a fantastic investment. I was a board observer and I would go out to Palo Alto for meetings. And I think Shape in five or six years maybe hit 25% of their budget numbers. And I couldn’t imagine owning that stock and having to be an analyst or PM and sit in investment meetings and be like, “Oh, they missed another quarter. What now? Why do we still IN this stock?” And yet they kept blocking and tackling and building. And it was directionally correct. It wasn’t perfect every quarter, but they were building something very valuable and moving the ball down the field steadily.
Meb:
Yeah. Let’s talk about one of your big private investments that you have held onto, that’s done well, which is Toast. For the listeners, I don’t know if anyone may or may not know what Toast is. I just gave, by the way, my wife For Valentine’s Day, this goes to show where we are in our years of being married in a relationship. It’s like all she wanted was these butter crocks that actually sit on the counter and there’s like water in them. So the butter stays room temperature. I know all my European listeners already are like, “You Americans, what are you talking about? We already put butter in on the counter.” But it’s like the coolest thing ever. But okay, so Toast, tell us about what was the original story behind you getting involved, because I know you were an early investor and then walk us through what’s transpired with that company since.
Bill:
I like how you tied the butter to the Toast there. That was really creative.
Meb:
Yeah. Well, I’m trying to eat less bread anyway. But it’s hard because of French, we have a new office in Manhattan Beach and directly across the street is a new French bakery. And every morning they have a hundred pastries. Not just four or five, it’s like a hundred. And so it’s going to be a challenge with keeping my weight and glucose levels in line. But anyway, let’s hear about Toast. What do they do?
Bill:
Yeah. So one of our great investments still own. It was a QSBS investment.
Meb:
Oh man.
Bill:
So even better. As you mentioned, I have an entrepreneurial background. And I’ve been fortunate as an entrepreneur. Like I’ve made relationships with a lot of other entrepreneurs. I’ve been able to connect with them. I can offer something to them in terms of value of my experience and some of the wisdom that I have. So that’s been a big part of us, and for me personally, sourcing those type of venture opportunities is leveraging those entrepreneurial connections. And a number of years back, I was introduced to one of the most impressive entrepreneurs I’ve ever run across. A gentleman out of Boston named Steve Papa who had started and sold a company called Endeca to Oracle for about a billion dollars. And had taken all the money that he made on Endeca, which was a project that started in I think ’99 or early 2000. So it was a 10 year project for him.
But basically took all that money and invested and seeded roughly six other companies, which were in most cases guys coming out of Endeca with new ideas. And I met Steve through a mutual connection here in Princeton because he was down at the university. He’s speaking a lot. And we hit it off and I realized I just wanted to be in business with Steve. I actually thought one of his other ideas was potentially the big idea. And Toast came along and they were focused on building a point-of-sale solution for restaurants, which from a high level is even today a very crowded space. There’s a lot of players, both legacy and modern. But they had built out an amazing engineering team and were very early at spotting the opportunity around being cloud based.
And the traditional VCs weren’t interested in funding them because there just literally were too many players and they couldn’t figure out who was going to win. And for me it was a bet on Steve. I just wanted to be in business with Steve, and it was a bet on the team thinking that they could attract the best engineering talent in Boston and they were just going to iterate the products faster than everyone else in the market and win. And it’s turned out to be far more than that. Today the company is worth around $10 billion. They’ve got a billion dollars of cash in the balance sheet. They’ve got a billion dollars plus of revenue. And they have 75,000 restaurants around the United States that use their solution. And it’s just been an amazing story and very proud that we were the first institutional investor in the company.
Meb:
So we did a Twitter poll as I love to do. And I asked people, I said, “Do you establish any sell criteria when you initiate a position in a fund or a security?” Then obviously it’s like 90% don’t. Like they buy something and they just wing it. And we say this is often important to think through ahead of time. Usually everyone thinks because of the stuff that goes wrong or it goes bad. “I buy a stock at a hundred, it goes down to 80, it goes down to 60. What do I do?” But also you got to think about it for the stuff that goes way right.
So you got to double a 10 bag or whatever it may be the criteria. But every 50 bagger was once a 10 or a five bagger. And so not so specific because obviously you hold it, but for winners and things that are going right, that you can sell, so if you’re locked up, doesn’t matter. You Don’t have a choice. But for public stocks or whatever, how do you think about that? If something becomes a larger part of your portfolio for investors. Maybe a five or 10% position all of a sudden becomes 20, 30, 50. Do you have any hard advice or is it a little more, it depends on the situation? How do you think about it?
Bill:
Great question. Yeah. When we ran the hedge fund, we obviously were very disciplined around portfolio construction and sizing. And we had limits that our investors expected us to stay within. For the most part as a very good healthy forcing discipline in a few outliers, you mentioned Facebook early on, one of the reasons we were big sellers of Facebook was it just went up too much. And in retrospect, I should have side pocketed some of those assets and just allowed investors to opt in and keep the ride going. So on a personal level, the risk tolerance is different. I’m comfortable having fewer eggs in the basket and watching the basket more closely, but at the same time it’s my family and it is my net worth and it’s my kids’ future.
And so that risk, that hurdle rate is very high too. And so in the case of Toast, that was an outsized winner and I’ve sold some of that because it was just too big. But I’ve really worked hard, even though I’ve want to trade it, I’ve worked hard to hold it because I’m a believer in the company. And over the last year or two since we distributed the stock from the fund, I’ve actually been using covered calls quite actively to trade around it, capture some of the ball while keeping that core position with my core fundamental view on the company.
Meb:
I think my personal approach to this, and it doesn’t sound that scientific from a quant, but is all about mental health optimization, or I guess Bezos would call it “regret minimization”, but thinking about an investment that goes wild to the upside. Everyone wants to think in binary terms, “Should I sell it all? Should I keep it?” And we always talk about going have these or scaling in and out. And it never feels satisfying because people they want cheer for the Broncos or they want to cheer for what’s happening. The who’s. Just pour a little out for this tournament performance. My goodness, Virginia.
But they want to cheer for something, right? And it feels very unsatisfying to say, “Oh, just peel off 10%. Then if it goes up some more, you can sell another 10%. It goes up some more, you can sell another 10%.” Because people always look back with hindsight bias and be like, “Oh my God, I shouldn’t have sold that Facebook.” But there’s a great Jim Simons from Renaissance, the mathematician and hedge fund manager is a quote where he says, “I can make the cliche either way.” And for those of us who have been done this long enough, you can look back and we have examples on both sides where he said, “Well, I should have held that or I should have sold it.” But the outcome, you never know. Future’s uncertain
Bill:
For every person who held Facebook or Bitcoin from the beginning. There’s a lot of securities that haven’t done so well, but they’ve held hoping it’s the next Facebook, and probably a lot of money and opportunity costs has been lost there. I’m a big fan of feeding the birdies. You sell when you can, not when you have to. And when things are really good, you feed the birdies a little bit, sell a little bit of stock. And you can always, like you said, split the baby. If you’re facing a really tough decision, then sell a quarter of it and think about it again in a month. You don’t have to be a hundred percent on everything.
Meb:
Yeah. People beat themselves up so much about it. And when you see with our funds too, more people, as much as I hate to say it, listeners, I think the pros are just as bad as the individuals on chasing performance. So we see it in all of our funds sadly as well on both sides. All right. Well, let’s talk about the world today and walk through the past few years, COVID shenanigans, Silicon Valley Bank. We’re writing the books, closing the books on first quarter in about an hour. So listeners recording this last day of March. What’s the world look like to you today? A lot of opportunity, a lot of danger, minefields. Where are you looking?
Bill:
Yeah. Rewinding back to 2022, got hit a bit early in the year. Then I figured out what was going on in the markets and was much more disciplined in terms of making sure I had some shorts on, making sure I was writing covered calls or flipping the winners when you get those rallies. And I’ve just been really playing it in bear market mode and that’s my mindset. I continue to think valuations are relatively high across the board and we continue to face headwinds in terms of the economy rolling over and recession at some point. There’s just a lot of money still floating around out there.
So that’s been my mindset. That said, particularly for a long-short investor, it is an environment with increasing dispersion and I think that’s good for opportunities. If you think about certain sectors like technology and healthcare and biotech specifically, A lot of those sectors have been in bear markets for almost two years now. I mean a lot of them peaked out in early ’21. And so there’s a lot of, at least for guys like me who like to dumpster dive, there’s a lot of beaten down stuff too that you can go hunt through and look. And then yet on the flip side, there’s a lot of pockets of the market, late cycle industrial type companies, construction type companies that haven’t felt any pain.
Meb:
So to the extent, you’re willing to, now that you don’t have any OPM, what are some ideas you can start on the long or short side? I like following you because often my favorite fund managers to follow typically are the ones where I look at some of the names, I’m like, “I haven’t even heard of any of these names.” But you want to start on the long or the short side? Where do you want to begin?
Bill:
I’ll take some longs. Again, I like small mid-caps and I’m an entrepreneur by nature, so a lot of my investing is through that lens. But two names that fit into that broken stock category are SomaLogic and Alpha Wave, which trades in London. SomaLogic was a SPAC $10, today trades around two and a half. They raised over $500 million of cash. They trade below cash today. And they have a platform for proteomics research, have great people around the organization, they have a critical mass of revenues, they’ve got a good runway with the balance sheet. They’ve got great customers like Novartis and Amgen. And I think long term proteomics is the next frontier and they have a leading edge platform and have an opportunity to be one of the big winners. Near a term, what’s exciting to me is they partnered with Illumina last year and they’ve been developing a module that will Illumina plans to launch broadly later this year, early next year that is based on SomaLogic system. And so that has a potential to be a really big driver of the business and visibility for SomaLogic.
Meb:
One of the things you’ve talked about over the years that I found very interesting as a former reformed biotech guy, that’s what I was, I was a biotech engineer in Virginia. But you for many years had been a participant in biotech, but often from the short side. And so that almost venture in many cases, it seems like in many of these companies, almost like very binary outcomes and many of them, much like venture numbers fail. What’s your approach to sourcing the ideas here? Because as a self-proclaimed non-bio scientist, but you guys had a very strong track record historically with finding opportunity and shorting names too. How do you think about this space?
Bill:
Yeah. Well specifically, SomaLogic is not a biotech. It’s a toolmaker for proteomics research. So very, very different business model. Does not have that binary risk, although the technology is rapidly evolving and so there is technology risk in the market for sure. But agree with you. On the biotech side if you want to focus on frauds and low quality companies and low probability type opportunities, there’s a very long tail out there. And we generated an enormous amount of alpha over many years shorting some of those lower quality names.
Meb:
And why? I mean that seems like such a strange, on first glance, such a strange place if you’re going to do fraud and just make things… But is it because you can get away with not anyone understanding what you’re talking about if you’re like going to try to be a huckster? Why would people gravitate towards this part of the world or sector industry?
Bill:
Yeah. You build a narrative and there’s a lot of single molecule companies, and unlike the big diverse pharmaceutical companies that have big diverse pipelines who will look at a molecule objectively. And if it doesn’t have a chance, they will shoot it and they’ll shoot it quickly and move on because it’s a waste of their time and resources. But these single molecule companies, the board’s making money, management’s making money, everyone is wed to keeping that story alive. And it’s unfortunate and there’s a lot of retail investors and also passive money out there that just buys a lot of these stocks blindly on the hope because a lot of the ideas do sound amazing, right? I mean it’s an area where you can build a lot of SAX into your pitch.
Meb:
Yeah, there’s the old book, I think I may have read it, even in Virginia, called The Billion-Dollar Molecule that was about Vertex I think. And Vertex I think has been a 30 bagger since then. But a fun story on, I mean it’s really outdated ’cause the world’s changed a lot in 20 years, but was a fun look inside that whole drug discovery process in one of the early golden age of that industry.
All right. So SomaLogic, the SPAC, we did a post as SPAC started to take off and said, “Look, this is just a structure, but historically speaking it’s been a structure that doesn’t have a great track record. And LUZ Hold had a chart, some of our favorite quants from Minnesota and they looked at the historical SPAC return, it was like minus 70% on average. So not even flat or whatever it was. It was just like absolutely one of the best cash incinerators in the world. And this cycle sadly seems to be in line with that. But as you mentioned, we’re on the other side of that and there is some opportunity and ones that have just been destroyed and left for dead.
Bill:
It’s not traditionally been a great sector. We just had money raining from the skies there in 2021 and it had to go somewhere, I suppose. But I’ve been shocked because I have a list five, 600 names. And I’ve been shocked that how few names meet even a low bar. There’s maybe a dozen or two names on that list that I think are interesting. So many of them are science projects and just not right for the public markets. SomaLogic we’ll see, but it has a lot of attributes that to me make it one of the more interesting ones.
Meb:
I remember back in the day, again, this keeps rewinding me back many years, but biotech in that broad industry in general, so medical technology, can often go through about a three, four year cycle booms and bust just on the sector in general. And times you have entire baskets of companies that are trading at or below cash and people always scratch their head and they’re like, “Well, why is that?” It seems like a free call option, and it can be in some scenarios. But in some scenarios they just burn so much money that it’s, yes, you’re at cash, but there’s not going to be any more cash in a year or two. To finding ones that do have a potential runway and exit I think could be hugely profitable. And it’s a good screen to start thinking about in general, unless you have any more ideas on this one, let’s hear about another one.
Bill:
Sure. Well, the second one I was going to talk about in similar LP is Alpha Wave, which is a London-traded company. They went IPO in 2021, which was not a great time. They’re down probably about 70% from that peak. They have solutions that enable connectivity at the leading edge for semiconductor makers. And as Moore’s law runs into headwinds increasingly, the techniques that semiconductor makers are using, things like chiplets and memory pooling all rely on having faster connectivity at the dye level. And this company, Alpha Wave, is one of the few companies that has leading edge technology there. It’s around $300 million of revenues growing at a very fast rate, it’s profitable, they have fantastic customers, work with a lot of the hyperscale guys. And it’s just an example of another name that I think is really well positioned from a secular point of view long term, but has just been left for dead in this market over the last year.
Meb:
Both these have something I love. Despite being a quant, I still have a very soft spot. I love things that are down a lot. We did some old research. And then I know it’s probably not the best place too for me to screen. Historically, momentum tends to do better than the stuff that’s down a lot on average, but if there tends to be a lot of very fertile ground to sift through the wreckage in the detritus. But we did an old study that looked at buying sectors in industries that were down I think 70, 80, 90%. And on average you close your eyes, hold your nose and hold it for three, five years. It tends to be positive alpha largely because of I think career risk and people saying, “I don’t want to show anyone that I own this after it’s down 80%.” But on the individual stock levels, I love looking for these. But it also has got a great ticker, AWE. AWE, that’s a good ticker. I’m a ticker fan, so well done.
Bill:
We’re trying to find the next momentum stocks for you. They have to start somewhere. On the short side, I think a name that could go down a lot is Coinbase, which is a bit of a lightning rod, but excited to chat about that one.
Meb:
Yeah. Well, you’re a short seller. You guys are always lightning rods. I mean, come on, man. That’s part of the job description.
Bill:
I haven’t done a lot in crypto, but I’ve followed it and obviously there’s been a lot of heat around it in recent years. I think there’s been a lot of debate over the last couple of years, what is the government’s policy on crypto going to be? And when Gary Gensler first came in the SEC, he had been teaching a class at MIT about crypto. People thought he’d be sympathetic to crypto and that this was going to be a great opportunity where we have regulatory clarity.
And I think as we’ve seen things play out, it’s actually going the other direction. I’m not sure how closely you’re about Coinbase just in recent weeks, but they’ve run into a number of issues. Namely Silver Gate and Signature Bank were two important partners for them to access the US dollar base banking system. Both have been shut down. And so that’s just a significant issue for the crypto industry broadly and Coinbase specifically. And then secondly, last week Coinbase received a Wells notice, which I know a lot of the crypto retail guys don’t know what a Wells notice is, but Meb, I know you’ve been around a block.
Meb:
I know it’s not good. And saying not good is an understatement, right?
Bill:
Yeah. For a broker dealer, a Wells notice is like a death note. And it’s not good news. And I think importantly what it says is that for the SEC to send a Wells notice to Coinbase, Gensler would’ve had to sign off on that. Gensler likely consulted with treasury and Janet Yellen before sending something of that magnitude. And my guess is consulted with the broader Biden administration. And so I think you’re seeing what the government’s policy on crypto is, which is to really, really tighten it up. And effectively, Coinbase is at war with the SEC and the government today and what the prevailing policies are. And I don’t think that’s a good place to be for a shareholder.
Meb:
What’s the bull case? Is it that it’s the least awful place to put your crypto if you’re… I mean, seeing Fidelity come out seems to me like a huge competitive risk for someone like Coinbase because Fidelity as we know is like a giant of… When I think of safety and security and old boring, also high fee funds, but we’ll ignore that part, but just old boring brokerage I want to trust with my money, I feel like people think of Fidelity. And maybe doesn’t attract the younger cohort as much, but older cohort has more money. So, what’s the bull case? Is it just like they’re the big name in the crypto bull?
Bill:
Besides the obvious crypto bull case, the recent argument of the bulls is that, “Oh, this is actually good because the company will have an opportunity to get visibility on what the regulatory framework’s going to be.” I can see that argument. I just would counter and say, “This is going to take a lot of time, a lot of energy, and multiple years most likely to play out. And there’s a lot of risks there.” And so the company has a big market cap. They’re burning cash. The balance sheet’s okay but deteriorating. I think there’s a lot of risk there. And frankly, I’m just a believer that a lot of the activity we saw in crypto was a speculative blowoff, and a good portion of their business was tied to that. And the other reality is geopolitics have shifted a lot in a very short period of time also. And there’s a lot of scrutiny and focus on the US dollar reserve status and potential risk around that. And I just think all those things tie into the policy is being clarified in a way that is not good for these companies, particularly Coinbase.
Meb:
Still like a $15 billion market cap. One of the things we spend a little more time on the last chat, listeners, so go back and pair it with this one about the mechanics of short selling. Short selling for most people is really hard like you mentioned even on Silicon Valley Bank. But other names, you can be right, but you got to think about timing, you get these face rippers so position sizing is really important. But also you have things like the cost to borrow the shares or even finding them. For most of the time these days, are you doing outright shorts or express it through options or is it both?
Bill:
Well, managing my personal capital, I have graduated to a much simpler and smaller short book, which is good for the stress level. It’s good for the family. So I might be short half a dozen or a dozen names at a time. Back when we were running the fund, we would have 50 or 60 or 70 shorts because to your point, we needed to have a lot of diversity and really tightly manage those position sizes from a risk point of view. So I spend time on it, but it’s not what it used to be.
Meb:
Yeah. We often talk about shorts get such a bad rep. Even though I’m not a short seller, I try to defend them all throughout my career. And we’ve had a lot of short sellers on the podcast. I love them because they’re all got a screw loose somewhere. You have to, to be a good short seller. So what would be your advice to the listeners other than just, “Don’t do it. It’s too much work.” The short sellers in my mind are like the immune system of remarkets. They find the bad actors, they get rid of them. And if you don’t, you’ve seen people call this the golden age of fraud the past number of years with easy money. So if you didn’t have the short sellers, the amount of corporate shenanigans that’d be going on would just be limitless. What’s your advice to somebody who’s on here, who’s not a pro, who’s been doing it for 10 years?
Bill:
Well, it’s been nice so far that even the politicians this time around, we’ve gotten some positive shoutouts on Capitol Hill talking about Twitter users and short sellers who identified Silicon Valley Bank from public filings, whereas the regulators totally missed it. So yes, to your point, they serve a valuable role in the ecosystem. And you’d asked in prep for this interview, what are some non-consensus views you have? And I would say that, “I would focus on short selling.” I do think there is a lot of market inefficiency there and there’s an opportunity to build a nice business and to make nice profits, but I realize most people aren’t going to short stocks. But I think just from a investing discipline point of view, I think it’s important even for long-owned investors to short their stock here or there, be able to articulate the bear case and even in some cases put it to work. I think it will make you a better long investor having that discipline and that ability to be intellectually honest and flexible.
Meb:
I think what you just described is one of the most important points of this entire podcast where we talked earlier, we said, “Look, you should be involved in private markets. Listeners, go sign up for every syndicate on AngelList.” You don’t have put any money to work. Just review them and you’ll learn a lot and start to understand and get informed and look around the corner. But also on the short side, keeping you honest, it’s such a good point where so many people, we know the psychology of this. The old famous, “Who’s going to hold up a mug?” I don’t know if it was Kahneman, Bursky, whoever it was, Taylor. I think it was Taylor maybe. He’s coming back on the podcast in about two weeks. But they were talking about like, what you would pay for a mug and then once you have the mug, well how much would you sell it for?
Or what would you pay it for then? Right? It’s a totally different psychological attachment. And it happens with stocks of course. And so being able to think, “Hey, a good analyst 101 is your longest stock. Okay, well what’s the bear case? Can I at least mentally understand it?” But we had a good podcast with short seller Marc Cohodes where he told a story about a stock. He was short, wrote it down, sold it, but eventually sat down with the CEO. And the CEO was explaining to him some part of the business that was neglected but had a lot of potential. And he is like, “Oh wait, I didn’t even see this part. This is actually, if they’d go this route, like a great long.” And then eventually flipped and became a long only shareholder. I think it’s really important and I don’t think enough people do it for a lot of obvious reasons, but it’s hard. It’s a lot of fun though too. It’s way more fun to get a short ride than to get a long I think.
Bill:
Yeah, I’m not sure I’d describe short selling as fun, but it’s something to do.
Meb:
‘Cause I only do with imaginary money. I don’t do real money. I love exposing the bad actors in the asset management world on Twitter and elsewhere. But individual stocks, it’s the two hard pile for me is the quant. So let’s talk about one more name. We got a few minutes before I let you into the Friday evening happy hour on the East Coast. Any other names that are popping up? I know you talked about a few. What do you got?
Bill:
I’ll talk about one more long for you. Liberty Sirius, which is a more traditional deep value play. It’s part of the Liberty Media complex. So it’s a tracking stock that controls an 82% interest in SiriusXM and a 30% plus interest in Live Nation. We think it’s really interesting here. It’s really trading at a double discount in my mind. The first discount is Sirius Stock has been down a bunch this year. They’ve been suffering because our sales have been down advertising’s under pressure. They also are going through a CapEx cycle, which is temporarily depressing free cash flows. But we think that business is really at attractively priced here and you’re able through Liberty Sirius to buy that stock effectively at a 35% plus discount.
And so we think that’s really interesting. And moving forward, we think there’s a number of catalysts who start to shrink that discount and ultimately eliminate it. Liberty will be spinning out Live Nation in this quarter most likely, which should help to narrow that discount. And ultimately we expect the two entities to be collapsed, meaning you’ll just get serious shares directly, which when that happens, that discount will go to go away altogether. And years ago, I used to own another Liberty entity that owned DirecTV. And in the morning when that was collapsed into one entity was a very nice day.
Meb:
I was on satellite radio this week. It was actually a fairly poor performance on my part. It was very early in the morning, which I don’t do a good job with. Is the bear case that everything is going digital podcast, straight to your phone, what’s the bear case for the stock?
Bill:
I’d say the primary bear case is the longer term obsolescence around having a mobile phone and being able to stream your own Apple Music or stream podcasts. I think there certainly has been fragmentation of the landscape. I spend a lot of time listening to podcasts like yours, Meb. So that’s time away from SiriusXM. But that said, I think SiriusXM really understands the long tail in a fantastic way, not dissimilar to the early days of the cable industry where they have these little affinity groups, whether it’s the community around Bruce Springsteen or Dave Matthews, which are both channels that I love listening to. And you can’t get live concerts and you can’t get that content anywhere else. And they literally have a hundred plus channels like that. And so I think it’s a very persistent business. Churn rates have been extraordinarily low. There’s a tremendous amount of cash flow and operating leverage in the business. And they are developing the streaming side. They have an app. They’re actually one of the largest podcast ad sellers and they own a lot of podcasts outright. So yeah, there’s a whole platform there as well.
Meb:
Here was my billion dollar idea that I proposed to them, not directly, but through a host, Jeremy Schwartz, who’s CIO at WisdomTree, has a show on their platform. And I said, “Jeremy, I don’t understand why they don’t reach out to the top 500 podcast, top thousand podcasts, whatever it is, and say, ‘You know what? We’re going to have a whole handful of theme channels. So it could be an investing channel, it could be a real estate, women’s fashion, whatever, all these verticals.’ And we’re going to reach out to the podcast and say, ‘Hey look, I don’t even think they’d have to pay them.’ I think they’d just say, look, we’ll repurpose your podcast. It’ll increase your reach massively. Maybe we’ll give you, I don’t know, 10% of the ad revenue is like a goodwill or something. And they could curate the top shows from the podcast space. And I think most of the hosts would be totally happy to do it now, the Rogan’s and the Ringers or The World, maybe not.”
And he said, “That’s a great idea. I’ll tell them.” This is like five years ago. And I don’t know. So now there’s your catalyst. You can tell them they could have a whole podcast series of channels. And they don’t have to pay the host, that’s the big part. They just say, “Look, we’ll do a partnership. We’ll give you 10% of revenue or something.” I guarantee they’ll do it. Anyway. When you do an activist campaign, you can say, “Call it the MEB Idea.” So that’s interesting. And that whole Liberty group I feel like has been a one to follow over the years as well.
We’re starting to get along in the tooth here. I want to hear, I know last time we asked you, we said, “What’s your most memorable investment?” But your fun letter from 2020, you had a list of some highlights over your career on the long short side. I’d love to hear about one or two or three. How many of you want to talk about, some of these ideas that were particularly memorable. I mean, some of these involve murder, some of them involved bribing doctors with fentanyl. I mean, you need your own documentary series just on some of these companies like “Diary of a Short Seller”. What are some of the most memorable ones that you can recall?
Bill:
Well, certainly, I mean, we touched on Facebook and we touched on Toast today. I mean, they were great winners and we worked really hard to get an edge on those type of opportunities and were able to stick with them. And in a lot of cases, particularly with Facebook, we came back to the well multiple times over many years and traded it well. Valiant definitely sticks out there just because it was such a high profile like a Silicon Valley bank. We weren’t on Twitter back then cause we had compliance issues, but we were short that from $170 down. And it was actually a good example. People say, “Well, you can only make a hundred percent shorting of stock. It can only go to zero.” And it actually prove that you can short value at 170. You can short some more at 120, you can short some more at 70, you can short some more at 35, and you might still be able to be short to stock today.
Meb:
But that’s a big misconception that listeners, people always say, “You can only make a hundred percent.” But actually the way the math works, you could absolutely short more as the position goes down.
Bill:
So that was a fun one. Insys Pharma was a really profitable short, but just what a travesty. They were a company that was basically proved in court and the management team and a lot of the top salespeople went to jail for a long time, but it took the wheels of justice a long time for this to happen. But they were effectively bribing doctors to prescribe fentanyl. And we now know today how dangerous fentanyl it is. It’s a massive problem for the country. But seven or eight years ago, fentanyl was really for cancer breakout pain. It was prescribed to a small number of folks and these guys working to commercialize it and make it more broadly available. And again, bribing doctors and a lot of those patients ended up with terrible addiction problems and in a lot of cases they died. And it’s just some of the worst actors that you can come across.
Meb:
Yeah. I mean, again, when people think of short sellers is like think about who’s going to unearth this. It’s never the regulators. And so these stories in many cases can be not just like, “Haha. Funny. It’s a crappy company. Their product sucks.” It’s actually very real world life and death impact.
Bill:
Both with that one and other ones. I mean, we would share our work with… We attempted to share it with regulators obviously, but reporters and investigative journalists. And we would try to get the word out. And number of instances where, like you said earlier, that’s a really healthy part of the ecosystem.
Meb:
Yeah. We’ve been at this for a while, man. I’ve had a blast catching up with you. Do you have any other thoughts, things we didn’t cover today where you’re like, “You know what, Meb, we got to include this because we didn’t touch on it.” Anything come to mind?
Bill:
Well, it’s interesting. I’ve been reading a great book that pulls together a lot of things that I’ve, as I’ve gotten a little older, I’ve been thinking about. There’s a book by Rick Rubin, the music producer, called The Creative Act. And he spent seven or eight years writing about it, writing this book. He’s done a couple podcasts on it if you don’t want to read the book. But the book is beautiful. It’s got 76 really short little chapters that are really easy to read and enjoyable to read. And it’s all about the artistic and creative process, and specifically getting outside of yourself and just being at one with the nature and world and your body and your mind. And it’s such an interesting book. And it really to me connects back to being an entrepreneur and an investor.
I think about George Soros talking about how over time he would start listening to his body when he had a trade on. And if his back started to hurt, he knew that maybe he should be covering part of it because there was something going wrong. And just being able to listen to other parts of your body. And that’s certainly something, again as I’ve gotten older, I try to think about things over multiple days. I try to sleep on things. I try to let that sub mind do work, and I try to listen to my body. And one of the benefits of not having a hedge fund is, I’m in the office a lot, but I don’t have to be in the office. And so just trying to tap into that other layer where, “There’s something happening here. There’s something going on. I should be in the office working on this. Or you know what, today’s a better day to go catch up on podcasts and go for a walk.” I don’t need to push it, right?
Meb:
Go hang with my four-month-old. Congrats, Mazel tov, by the way.
Bill:
Thank you. Anyway, I’d recommend that book. It’s a fascinating and very quick read.
Meb:
There’s an old Rick Rubin interview. I think he did it with Tim Ferris, but they literally record it from a sauna, I think. And I may be getting this wrong, but I think I’m directionally correct. The best part about Rick, I say that as if I know him, but Rick he would ask him a question and you would just hear this, “Hmm.” And then it’d be like a ten second pause, which most people are very uncomfortable with. They’d start jabbering, but then he’d just like, he would take time to think. And it’s just like such a different mind he has.
So I just queued up the book on Amazon. I may do it as a audiobook. I don’t really do audiobooks, but I think he would be a fun one to listen to if he’s the reader. I’ll check it out. All right. Well, listeners, @RagingVentures on Twitter, Raging Capital Ventures online. Any other places to find you? You have a new series where you’re writing some interviews with other entrepreneurs as well.
Bill:
Yep. I just check out the Twitter feed and the website. Thank you so much for having me today, Meb.
Meb:
Bill, it’s been a blast. Thanks so much. Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.
