Guest: Drew Dickson is the founder of Albert Bridge Capital and CIO of Alpha Europe funds.
Recorded: 1/24/2024 | Run-Time: 1:03:53 
Summary: We talk a lot about global investing on this show and wanted to talk about that with Drew given his focus on European markets. Between the end of 1979 and the end of 2009, both the U.S. and Europe were 26 baggers and roughly had the same returns. Since then? The U.S. has returned 15 percent per year while Europe has returned just 8 percent per year. We spend a lot of time on whether this will continue.
We also talk about the impact former guest and Nobel Laureate Richard Thaler had on his investment philosophy, the importance of shedding our biases to generate alpha, his valuation of Tesla, and much more.
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Links from the Episode:
- 1:32 – Welcome Drew the show
- 2:17 – Drew’s time learning from Richard Thaler
- 8:50 – Handling behavioral biases
- 11:39 – Experiencing the tech bubble in Europe
- 15:46 – Drew’s focus on investing in European firms
- 28:43 – Where Drew sees opportunity today
- 40:28 – Tesla
- 54:22 – Drew’s most memorable investment
- Learn more about Drew: Drew’s Views
Transcript:
Meb:
Drew, welcome to the show.
Drew:
Meb, it’s great to be here.
Meb:
Where do we find you today?
Drew:
You find me in sunny Naples, Florida.
Meb:
You’re not originally a Florida man, right? You got roots all over the place.
Drew:
I’m an Indiana boy, originally, went to Purdue, moved down to Atlanta, Georgia, lived there for several years, back up to Chicago for business school and then I’ve been all over. And then moved to London, England in 1999 and was there for 20 plus years and now I’m back at the behest of my wife broadly and loving it.
Meb:
You had a tie in to a former podcast alumni too, Professor Thaler. Where did you guys cross paths?
Drew:
Dick was the biggest reason why I wanted to go back to business school. I actually worked a lot after college. I was working for six or seven years and had a fascination with, I’m dating myself, but this is going back to the ’80s, and in the ’90s. I remember the article in Fortune magazine about this upstart heretical economist called Richard Thaler at Cornell talking about these things that Danny Kahneman, the name of Amos Tversky were talking about and maybe the market’s not as efficient as we think. At the same time though, I have a great respect for the rigor of Eugene Fama. And when Thaler was convinced by Eugene Fama to come to Chicago, which is a great story in and of itself. Fama’s, people give him a lot of shtick for being so ivory tower, but he’s not. He’s out there trying to poke holes in the theory all day long too.
And when he saw the work that Dick was doing, he’s like, “We got to bring him here. We need to have this debate at the University of Chicago. This needs to be the hotbed of behavioral versus efficient debate.” And he went to Merton Miller, who’s even further to the right from Fama and Nobel Prize winner as well famously said, “Well Gene, I’ll let the next generation make their own mistakes. Go ahead and hire him.” And so Gene brought Richard there. Dick calls me his almost PhD, which is a backhanded compliment, not that smart, but smart enough to pretend. I was already leaning a lot toward the behavioral explanations for why markets work the way they do. And after spending a lot of time with Thaler, that became cemented. And this was during the tech bubble. This is back in ’98, ’99, so that was particularly fun.
And Dick and I got to do some work together and we stayed close after I graduated. He likes to golf, he likes to drink wine and he likes to come over to the UK and he would do that and we might hop on the train and go up to St. Andrew’s or Carnoustie and play some golf. And we kept that up for many years. And yeah, he’s definitely been a great mentor and he is also introduced me to some wonderful people.
Meb:
He had had a comment, and I’m going to probably get it wrong, but it’s something along the lines of he is like, “The conclusion on a lot of this is not that everyone is so stupid, but rather that a lot of these decisions are actually kind of hard and our brains aren’t really set up or the computer above our neck and shoulders isn’t quite equipped for the programming decisions that come down our path every day.” And markets are not, right?
Drew:
No, exactly. And that’s when you get these windows, perhaps if behavioral stuff is correct, that’s where you get these windows to try to take advantage of that, but it’s difficult. Even economists says, “Hey, even though I know exactly what the mistakes are we make, I can’t prevent myself from making them myself.” It’s difficult.
Meb:
I got a laundry list of them. I love to look at, I think there was an old Monte and we’ll see if we can throw it in the show notes, but it was like a little class test where you go through and it’s easy to see how easy it is to get caught up and swept into some of the decisions and you look back on it and you’re like, oh, I totally have all these various biases. That would be interesting in the not too distant future. If you have a little AI assistant, like a little angel on your shoulder, that’s kind of be like, you know what the classic one, the judge who hasn’t eaten all day is harsher sentencing then is like, “Hey, it’s like you need a Snickers.” It’s like that ad, right? It’s like, “Hey, you’re going to make this trade. Here’s this behavioral thing you got to think about.”
Drew:
I mean, to me, that’s where long-term success comes in our industry. Earlier in my career, all I wanted to do was find behavioral mistakes the market was making. Hey, the market’s not paying attention to this because they’re suffering from ambiguity aversion or they’re suffering from a confirmation bias or some behavioral bias that’s making them underreact to changes in a business model. Let’s look for all that stuff, and we do that, we love that. But in the spirit of Charlie Ellis’s losers game mentality, if this business is as much about avoiding the big losers as it is about finding the big winners, that means you got to sort yourself out. Can you create a process which you’re as deep biased as you can be, but recognizing that you never really are? And so we do a few things at Albert Bridge, I do a few things personally that hopefully open yourself up to the disconfirming information, make it easier to see when it shows up.
My view is if we are lucky or good enough or a combination of both to get 60 or 65% right, we’re doing great. We’ve got a concentrated portfolio, we’re not super diversified, we hopefully are more idiosyncratic than most. And over time, if you can set up a structure where you’re getting two out of three, if you get two out of three right, you’re going to do well in this business, but that means you got to get one out of three wrong. Look at your portfolio, which of these, of your 20 stocks, which of the six or seven that are going to blow you up are going to blow you up and be looking for it? Write a short thesis for the things you want to buy so that you’re looking for the disconfirming information when it shows up.
Meb:
That’s no fun. Nobody wants to do that. The disconfirming evidence, come on, man, that’s a great exercise. And you don’t hear that many people that actually goes through that.
Drew:
We have long short roots, which helps. But I like nothing more than knowing the company well enough. And if I’m talking to one of our investors or a buddy that’s running a hedge fund and I try to give the short case for a company that I really like, and if at the end of that they’re like, “Are you sure you don’t want to be short that, that sounds terrible?” If I can get to that level of understanding of the other side of the trade, then I’m starting to solve those Kahneman problems. Even though he says you can’t do it, you just open yourself up and have a culture where it’s okay to be wrong, especially with the analysts you hire on your team like, hey, we’re not in this business to be risk ARBs getting everything right. We’re in this business to find upside that exceeds the risk we’re taking, but there’s going to be risk. There needs to be risk.
Meb:
Has that ever happened to you where you’re studying either a long and like, all right, I’m going to do the short thesis or vice versa. You’re like, “I’m short this puppy, I hate it.” And then you do the long side argument. You’re like, “Oh, wait, I just uncovered something. I’m on the wrong side of this trade.”
Drew:
Yes, that’s happened at least a half dozen times. I’ve had a reasonably long career, but I’ve gone from short to long or long to short sometimes in the space of a few months, sometimes in the space of a day when just the information that’s presented to you is completely different than whatever side you were on, but also in line with what your sell case was if you were long or your buy case was if you were short. You got to be out there willing to make mistakes and try to document how you will lose money if you do ahead of time so that if those things show up, you can manage it.
The analogy I use, I overuse it, especially with British investors who don’t know what I’m talking about, but I like using baseball analogies. One of my favorites is that, and apologies for those hearing this podcast that they’ve heard me mention this one before, but I love that Hank Aaron is second or third all-time grounding into double plays in the history of major league baseball. And that’s a risk he can mitigate if he weren’t swinging for the fences but then we don’t get 755 home runs.
Meb:
Do you have any that stick out? Do you like looking back on it where you remember you’re like, oh man, I remember studying this particular stock or investment and flip my position? You had one on Twitter I remember where you were talking about Apple, where you were, I think it was the original Steve Job’s presentation where you watched it and you’re like, “Okay, hold on.”
Drew:
That’s good, I’m glad you remembered it better than I did, Meb.
Meb:
I love digging through everyone’s Twitter history. There’s a lot of good starting points.
Drew:
Back when the iPhone was released, there was anticipation by the market ahead of time and the stock had already gotten a bit juicy. And here we are, we’re in Nokia land, right? We’re saying, “Oh, this is the 40% market share. There’s no way these guys at Apple can do anything. Let’s get short Apple.” And stock was expensive ish at the time, not compared to where it’s now, but we had a thesis that there was a bit too much hype, and then they did the presentation and halfway through the presentation, we called up our broker and covered all of our short and got long. But we even did that poorly. We were smart by covering and buying it, but at the time we’re like, “Oh, the market size is what the iPod is. How big are iPods and how many iPhones will replace the iPods? What number do you get? Okay, here’s our number for earnings next year, the year after.” And so we held it probably for a year. We didn’t hold it forever, unfortunately.
Meb:
Oh, you piker man, that’s now what, a 2, $3 trillion company to rub it in a little bit. Were you always an equity guy? You mentioned London 1999. Was the bubble as crazy over there, do you remember?
Drew:
Oh yeah, yeah. And I was covering tech stocks for Fidelity Investments, and it was the heyday. I remember, I’m really dating myself again, but everything was just over the top in ’98 and ’99, including the broker conferences. And you go to Chase H&Q’s conference or Credit Suite’s conference out in Scottsdale and you’d have Aerosmith playing or you’d have CEOs flying in helicopters. And we had a lot of access at Fidelity, which was great. I got to spend time with Larry Ellison or Michael Dell or Tom Siebel during all this period. And we had a similar froth in Europe. You change your name to something.com and the stock went crazy and it was a very similar period around the world.
Meb:
Walk us forward. You started right before GFC. Was this always equity focused, long, short, where in the world do you focus? What’s kind of your interest?
Drew:
Then some other Fidelity alumni and I started to run some money externally for what was then the Man Group, now part of GLG. And then in ’08 we started Alpha Europe and a long short focused concentrated fund focused primarily on Europe. And I had been there by that point, I’d been there eight or nine years already, and then we were bought by Perella Weinberg, New York based firm. They took us over and we rebranded the firm’s name and the fund’s name. No change to the office or anything but just rebranding. But one thing we did is made the long book investible by itself, so investors could choose, you want the long short fund, you want the long only fund. And the long only fund is what a lot of the U.S. institutions really gravitated toward.
Meb:
I was going to say, does anyone ever choose the long short? Certainly-
Drew:
Well, they used to before-
Meb:
… Anymore.
Drew:
Before 2011 they sure did. Maybe that’ll change again one day Meb, who knows.
Meb:
Well, I don’t know, man. It’s like looking at the charts of A, short selling funds and B, short sales is a percentage of market cap or whatever you want to message. It’s like both are all time trending lows to zero. I don’t know how much further than they go. And then you see stuff like Chanos, he didn’t retire, but shutting down… All the indicators you kind of see when, but I would’ve said that in the last couple of years too.
Drew:
I told Jim this after he made his announcement. This feels like a Julian Robertson moment in ’99 when he decides to get out of the business. You’ve been proven wrong for so long by being short tech stocks or not owning them and say, “That’s it, I’m done.” And here Jim’s calling it, they lose. It’s tough when you have investors and they flee. Given what his mandate was I’m very impressed by Jim’s work over many years and he’s incredibly well respected by everyone of us.
Meb:
One of the things you always hear from commentators when they’re talking about long, short, they always say one of the benefits of long versus short is you can make two, three, 500% and longs and shorts you can only make us 100%. And Jim was like, “Actually that’s not true.” He’s like, “As a short declines due to the way the margin works is you can actually double triple down on it as it goes down.” Now your exposure may or may not change and that may or may not be a good idea, but the premise that you can only make 100% is false, which is one of those interesting Wall Street maximums you hear all the time. You can only make 100% on a short seller. Well, that’s actually not true.
Drew:
That’s not true. Yeah, there’s not only leverage in the way you put the positions on, but also you might be running with 200, 250% gross exposure so you’ve got leverage on top of that as well. But broadly it is true, you’re not going to have a 50 bagger on the short side. And especially you and I have both seen this over the last few years, people will look at trying to justify their current views they have for particular companies. They will always cite the biggest winners of all time as the proxy for, hey look, well look what happened to Amazon. Look what happened to Apple. And if that happens here as if, we’re picking two of the most successful companies in the history of capitalism, as if that’s something that’s going to be repeatable by everyone else that you’re invested in, and that’s pretty silly.
Meb:
Where do we stand today? You kind of maintained a focus on Europe or where does your lens take you around the world?
Drew:
Yep. Maintain the focus on Europe. If I had in 2018 and said, “Hey, I’m going to move to Florida and invest in European companies.” My investors would’ve said, “What?” But if there’s one positive to the whole covid experience is that people are like, “Actually maybe you can pull that off.” And so no pushback at all. In fact, in some ways I think it could be argued that it’s a little bit better to do things the way I’m doing it here. A little bit more thinking time in the afternoons.
Meb:
Talk to us a little bit about European stocks. Going back to 2008, 9, there’s been a disturbance in the force where the U.S. in particularly the U.S. mega cap has just kind steamrolled everything in the world. And I actually had an email in my inbox this morning from our good friends at the Leuthold Group, a big quanti podcast alum that’s been on a bunch and they have a chart, it only goes back to ’92, but it’s the annual spread between equal weight and cap weight at S&P. And before last year, the two worst year ever for equal weight were ’98 and ’99. And then now 2023 was the second worst year ever. And that’s in the headlines, right? The Mag seven and everything else. But Europe seems to be not catching up being the wrong word, but moving in the right direction I guess.
Drew:
I saw a tweet that you’d sent out the other day, which was similar to some things that I’ve noticed in this outperformance the U.S. has had over Europe over other places is a relatively recent phenomenon. It’s 10, 12, 14 years old. Before that, we didn’t have that. It was all kind of the same performance. And I’ve done a little bit of work and certainly if you start on December 31st, 1979 and you buy the S&P 500 or you buy the MSCI Europe local currency index, edge out the dollar risk through the end of 2009, December 31st, the annualized returns of each index were precisely the same, 11.5%. They were at the same. And it makes sense, these are multinational companies selling similar products in similar regions to similar customers and then things changed. And part of that definitely has to do with the fact that we had this clustering of wonderful companies in Silicon Valley that took over the world with business models.
Part of that’s that. And in fact, I think the first, from 2011 to ’16 or ’17, a lot of that outperformance by the growthy techie companies was completely warranted, they’re just killing it. Just taking over. Fundamentals are improving. I’ve done a few posts whether it’s talking about Apple or Netflix or Amazon, about how well their stocks have done and how we didn’t own them unfortunately, but it wasn’t about buying a meme stock and just hoping for the best. It was about buying companies that were going to crush earnings way more than even the most bullish of all analysts could have imagined. The last post I did on Netflix, when looked at it’s like, well, it wasn’t about anything but where earnings were going to go. And what were earnings expectations at that time by the consensus for the year out or for two years out or what are they now?
And the increase had been like 5700% in terms of what those earnings expectations were. And the stock, no surprises, is up about 5700%. And then what we started having in 2019 and certainly post covid was this introduction, which we can talk about and I still don’t know the answer of, I’m going to argue a social media frenzied atmosphere, whether it’s from Robinhood or Reddit. But this instant information which is quickly digested in trends and then machines start following it and you get just an incredible amount of flow into certain names. Some make sense, some make no sense at all. We saw the meme, stock craze, the AMCs and the GameStop’s and the like and lesions of APEs or whatever we want to call them that believe what they’re doing is right and a good thing. And you just get incredible mispricing.
For a stock picker you look for mispricing, right? But it’s not supposed to last very long. Maybe it lasts for a day, a week, six months, maybe even a year, but not consistently, almost like a new plateau. I wonder now, and of course I would because I’m focused on Europe, but now that we’ve had 12, 13 years of U.S. outperformance pretty much versus everyone, you wonder if a lot of it is comfort. I want to buy the U.S. because look how much the S&P is worth. It’s been such a great decision to be invested in the U.S., not in Europe. Hold up guys, now hold up. Okay, you got the tech companies, but we have some too over there. We have ASML, we have ARM holdings, although they’re listed here, but no, we don’t have the tech companies. They’re 7% of our index, they’re 26% in the U.S., but for every Mandalay there’s a Nestle. For every Airbus there’s a Boeing, for every Southwest there’s a Ryan Air. There’s just as good business models in Europe as there here, great management teams, intelligent R&D groups.
This very American notion of the superiority of U.S. businesses or the U.S. investing climate or are risk taking, it’s just completely false. And we have great companies in Europe. Look at the luxury goods businesses, we do better there than they do here.
Meb:
When people started to talk about the American exceptionalism, I go, “Okay, let’s assume your argument is true.” I say, “What do you think the historical valuation premium then should be on U.S. stocks versus foreign because right now there’s a huge one?” And people hem and haw and they come up with a number, I don’t know, 10, 20, 50% or whatever. And I say, “Well, because the historical valuation premium is zero, the long-term valuation numbers for the U.S. and ex-U.S., it’s to the right of the decimal. Or it might even be like if the long-term PE ratio is 18 in the U.S. it’s like 18 and a half. Over the last 40 years, it’s closer to probably 21 and 22, but it’s negligible, it’s nothing.” So from that standpoint, you start to look at the lens of okay, what was now a permanent plateau is now a time where this is now going to exist forever and all of history has changed and competition is not going to knock this down. The old Bezos, right, your margins my opportunity, but the rest of the world likes to make money too.
And I joke, I was talking with somebody the other day who was talking about tech stocks and they say, “Meb, the rest of the world doesn’t have tech stocks.” I go, “By the way, do you know that there’s semiconductors in South Korea that have crushed Nvidia stock price performance companies and there’s other companies around the world that it’s just a very strange, we’re preaching to the choir here, but along those lines, it just doesn’t really hold water historically.” Now I would’ve said this last year and the year before and the year before as well.
Drew:
I don’t know what the time horizon is as it’s six months, is it 10 years? But eventually everything has to trade where the fundamentals go. And so in order to benefit from that, you have to have a process which recognizes that and you have to have investors who recognize that’s your process and that’s what they want.
Meb:
I can’t think of a single time in history where that has not been true eventually, and I like to point to certain markets that, from the behavioral standpoint, people have just been absolutely schizophrenic, crazy Mr. Market sort of concept like look at China. China had a long-term PE ratio when you got starting pre GFC on that 2007, 8 period, it was 60 and then it’s on occasion it goes down to the single digits and then it rips right back up and it just goes back down. And we’re now at that point where it’s back in the single digits and everyone hates it. I saw yesterday Global X was closing like a dozen Chinese funds, ETFs, which again is one of these indications that all happen, the cinnamon on the same side, but it just seems like we love to extrapolate the current situation forever. And Japan, which I’m heading to next week is my favorite example certainly from the 1980s, but nothing lasts forever, at least it hasn’t yet. Maybe the AI overlords will make U.S. stocks exceptional forever, but at least in the couple hundred years we have of markets, it’s never been the case.
Drew:
How long does it take for the market to say, “Oh geez, GameStop, that was crazy. Let’s sell it.” It didn’t happen overnight. There are arguments that there are some stocks out there where you haven’t had that correction yet. One in particular, which we might end up discussing. And I think even at the level of companies that are not as sexy or interesting, a lot of the valuey things, it’s even more interesting. I did a quick look last year just looking at this growth versus value thing in the U.S., in Europe comparing the two. And as you might’ve expected, growth stocks are killing value stocks in the U.S. since 2012, ’13, like a nice little respite last year, and sorry ’22, where things flipped, but now it’s still been crazy. And I wanted to compare that to the value versus growth phenomenon in Europe and then compare the growth in the Europe growth stocks, growth stocks in the U.S.
And what I did not expect is the growth stocks in Europe went to the same multiple on average as growth stocks in the U.S. 35 times used to be on 24, now they’re on 35 times. We don’t have as many of them. ASML is great, EUV is incredible. I think ARM holdings is much more integral than anyone realizes. As well we have the big SAPs of the world and things like that, but nothing like we have in Silicon Valley, but we’re at a tiny part of the index. So of course the U.S. is going to outperform when tech rips because it’s a quarter of the index. And of course growth will outperform value as it did. And so people start throwing, discarding the value ideas. They’re not sexy enough. I don’t want to touch that. Same thing happened in Europe. But the fact that growth stocks at both markets went to the same level was interesting.
And then value which underperformed the U.S. was I guess expected or at least it’s explainable, value in Europe was even worse. In other words, U.S. value has actually beaten European value during this period when U.S. value has struggled. European value stocks are as cheap as you like, and some of them are actually very good companies, it’s great management teams. They’re just in the businesses don’t capture the eyeballs. I have hedge fund manager buddies in London who run purportedly European focused funds that have half their book in U.S. names because that’s what’s worked. I talked to investors, try to convince them to take a little bit of money out of the U.S. and maybe sneak it over to Europe and to their credit, they’re like, “If I made that decision four years ago, I’d be out of a job or two years ago.”
U.S. has just crushed everybody but it feels so flow driven to me. And this is where people like Michael Green who have I had disagreements with, but he’s got some good points about the impact of flows and it’s just so flow led. And you see that certainly in the short term around quarters and earnings releases, try to take advantage of it, overreactions, underreactions, but it can last especially as you have this trend toward passive investing, money flowing into those things, into ETFs, out of active funds, the tail starts wagging the dog a bit. Fundamentals are going to ultimately matter, but you’ve got to make sure you’ve got your balance sheets right. You’ve got to do your work on the risk. But I think the setup is wonderful in terms of what we’re looking at and the things we’re buying.
Meb:
What rock should we be uncovering, whether it’s countries, whether it’s individual stocks in companies, any areas, sectors you think are particularly fruitful?
Drew:
I find that I want to focus on sectors where there’s more dispersion of returns within the sector. Winners and losers in industrials and technology, media, healthcare, equipment, consumer, not so much in real estate or banks or utilities, which all will have a very highly correlated return profile. That means we focus on the stock picking sectors and that’s always been our shtick since 2008 and since we launched Alpha Europe. We don’t, you asked about is there certain countries that are interesting or not, Meb, and we don’t really pay much attention to what the country exposures look like to us. A lot of our names are multinational selling all over the world, doesn’t matter where they’re headquartered.
Meb:
But is it only Europe or do you guys, is your mandate anywhere?
Drew:
It’s only Europe. I could go anywhere, but we don’t, and by Europe I mean developed Europe. We don’t do the emerging stuff, we don’t do Romania or Greece even.
Meb:
Depending on the year. Greece can be developed or emerging. It depends.
Drew:
Exactly. That just becomes very much emerging markety kind of trading and that’s not our style. It’s developed Europe. The ideas are I’m going to have a value tilt I suppose, or not a deep value, buy the hairiest, ugliest things you can, but I always want to make sure there is some hairy ugly stuff in the portfolio and if we get those things right, there’s just incredible risk reward. But broadly for us, and this is somewhere I think we’re very different than a lot of folks, a lot of my good friends who want to buy great companies hold onto them, Guy Spear, Chris Bloomstran, we don’t. We want to know where are we versus the street over the next two or three years, that’s our whole story. Is this company going to beat numbers? Is this company going to beat numbers? That doesn’t mean we have a two-year holding period.
It could, but if we see that business improving during our tenure, we can have it in the book for five or six years. We just always have to have the view the two years out. The consensus investor is going to be surprised by the fundamentals of the business and ideally, Meb, we have this behavioral kicker. It’s not just about owning a company that beats expectations, but owning a company that beats expectations where the market is for some reason biased against seeing what you think is obvious. When you look at the ideas that we have, especially the bigger ones in the book, in every case it’s something where the market is suffering from some behavioral thing that say, “I can’t own this.”
Meb:
What are the normal reasons on the laundry list, there’s a lot of them, but what do you consistently see?
Drew:
The mac daddy of all these behavioral biases is confirmation bias. When companies start to turn around and start to show things which are improving or better than they thought, everyone had a view before that it was a bad business or a bad management team and they built the reputations of their careers on that. They don’t want to see disconfirming information so they will underreact. I think that’s one of the things that causes momentum in markets. Stock doesn’t immediately price adjust to where it should be, it’s going to take time, which is why momentum marks and as we march forward, as we march toward that two and three year time horizon, we see the company start to beat numbers and we also see Mr. Market start to change its mind.
Famously for us, that was Fiat in 2014 when Marchionne comes out, Sergio Marchionne now passed away, but head of the group just embarked on this campaign of creating shareholder value. It was just wonderful. They listed their trucks business, they then listed Ferrari, they then turned… They closed their Chrysler deal and ended up just getting rid of everything except for the Jeeps and the Rams and the muscle cars and turn into a profit machine. The all-in market cap of Fiat in 2006 or 7 when John Elkann made Sergio Marchionne the CEO of Fiat was 5 or 6 billion and by the time he passed away in 2018, adding it all up, it was over 60 billion. And this is for a company that no one would say is a high quality compounder. This is just a business that the market got completely wrong because people didn’t want to see that. They wanted more sexy companies to push.
Meb:
There’s just something about car companies you’re drawn to.
Drew:
There is. Part of its experience, but part of it also is I think it’s a fascinating industry, which then leads us to discussions about I think everyone’s favorite company to talk about in the sector.
Meb:
We’ll hop over to Tesla eventually, but if I was a betting man, which I am, and you would’ve asked me the overrun of this episode at what point Tesla comes up, I think it would’ve been over. It was way later in the episode than-
Drew:
Really good. We did well by not going there.
Meb:
We’ll come back to Elon and crew, but okay, so that’s the framework. I assume you don’t own that anymore. What’s kind of looks good to y’all today? Is there anything in particular? I would assume it’s pretty fertile ground out there.
Drew:
Yeah, I think it is. In some cases we own businesses which are not necessarily value. We just think they’re going to beat numbers, the market doesn’t want to digest it. We like Evolution in Sweden, we’ve written about that. It’s on no one’s value list, but it’s an interesting business. You have management buying stock, they priced their options high enough that they really are incentivized to get it up. Fully disclosed that we do own it. And we’ve just disclosed that in our letter, which are inaugural investor letter, which we just sent out. But then on the other side, we’ll have more of this in the portfolio. It’s just things which people aren’t paying attention to yet or we think will one day. Recently we’ve been doing a lot of work on Traton. Traton is the trucks business of Volkswagen. The trucks business of Volkswagen has brands like MAN or Scania, they own Navistar and there’s other businesses like them. Volvo, Volvo trucks. Volvo doesn’t make cars.
Meb:
Spinoffs, that’s an old Joel Greenblatt sort of opportunity that creates a lot of behavioral setups.
Drew:
If we look at the Volkswagen effectively copying Marchionne and copying Fiat, spinning off their trucks business, spinning off the luxury brands business. You see them doing new things. They’re emulating a company that was focused on shareholder value. And this is a real sea change for Volkswagen, so it’s interesting. But part of these spins is that you’ve got this trucks business Traton, which no one’s really paying much attention to yet, a couple years old, similar business model, similar earnings growth, similar prospects as the Volvos and the Daimler and the PACCARs and the CNHIs of the world trading at half the multiple because it’s got a 10% free flow and Volkswagen owes 90% of it. Volkswagen just wants to have control, like Exor has control of CNHI and they could take it down to 50%. They could take it lower with the dual share class structure and keep their control.
And the fact that the management team on their recent call of indicated that, watch this space, there might be some changes there. That’s all we need to see because that’s the kind of thing that the market doesn’t want to see now. It start for some ambiguity aversion, we don’t know what’s going to happen. It start for some confirmation bias, oh no, it’s part of the old Volkswagen. We don’t want that. Okay, great. This is the setup we saw at Fiat in 2014. We like looking at things like that and doing that kind of work.
Meb:
Well, we can go two ways from here. We can either talk about any other names in Europe you’re particularly enamored with or we can talk about your favorite buddy and I don’t even know where he is located these days, Texas sometimes.
Drew:
If you’re looking at Mercedes and Peugeot now Stellantis and BMW and the European auto sector, you can’t not pay attention to what Tesla’s doing. That was the beginning of it for me and also seeing how much reverence there was between the Volkswagen and Tesla. They’re impressed and there’s a lot of things that Tesla have done over there and around the world which have been impressing the entire industry, a lot of things which haven’t as well. But with that, and it’s just been such a story. The growth particularly with the share price, but also what they’ve been able to achieve fundamentally to me is very impressive.
Meb:
Going back to your ’07 Steve Jobs’ presentation, Elon’s not quite as polished of a presenter. I remember watching the cyber truck unveiling and when they actually unveiled it, I thought that the shell that they rolled out the cyber truck, I thought that was fake. I thought they were going to lift that off and there’d be a pickup truck underneath and I’m like, “Wait, this can’t be the actual truck.” And then they tried to the unbreakable glass famously that was breakable anyway, so not quite Steve Jobs.
Drew:
He is and he isn’t, Meb. He has incredible reach and he has a similar halo, if you will, between his shareholders and himself, if not stronger. And he’s not an idiot. A lot of people like to say he is or a crook. I’ve mentioned this before. People have such different views about this man that I try to steer clear of that debate because you can’t really get anywhere with that. It’s hard to learn from somebody where you might be wrong. It’s hard to teach if all you’re doing is battling about this man’s personal character. Although some of my close friends in the industry have a very negative view of his personal character. I’m not speaking out of turn, but Chris Bloomstran with whom you’ve spoken, Jim Chanos with, you’ve spoken, they’re not big fans and I try not to go there. I try to focus more on the economic reality of auto making and the likelihood of expanding that business into other lines.
I have to say I was a bit thrown off last week when I saw that Elon was going to push his board to top and back up to 25% stake in the company, which was kind of right, something that Jim or Chris might’ve expected. I thought that was overdoing it. Elon, as you all know, as everyone knows, sold a bunch of shares to arguably finance his Twitter purchase, but he got some prices in the three hundreds, I think the average price of what he sold was at 275 bucks. We’re down at 205 or 210 now. And he is telling his board, if you don’t give me that 25% stake, I might take all the good stuff out. Do it somewhere else. The AI, the robots, the Dojo, very threatening comments.
Meb:
I don’t know if I’ve ever seen anything quite like that before.
Drew:
I hadn’t. That’s really pushing it. And when you do the math and you look at, it’s very easy on Bloomberg to go through say how many stock sales he made and what he owns, how many options he has left to exercise, what is effectively asking for. It’s almost precisely the same amount of stock he sold, about 140 million shares effectively the way it works out. And what do you do if you’re the board? That’s the bigger question. What do you do? If Tesla lost Elon Musk, that’s it. Game’s over. Share price falls in half at least, the whole halo’s gone, so you almost have to acquiesce. But that’s a big chunk of concession to make to keep this guy around. And you’d think he’d have enough incentive already given how much of a stick he already has. That was a bit of a surprise to me. That’s not why I’m short Tesla, but that certainly added fuel to the fire.
Meb:
Why should someone be short today or said differently, not be long? And is there a price, which you would be long going back to our earlier part of the discussion?
Drew:
To me it makes perfect sense, but when I mentioned it on Twitter or in our blog, I get lambasted by the faithful, but I don’t think that the car business itself is really worth that much.
Meb:
It’s just the robotaxi, it’s the what?
Drew:
What they did was incredible. The Model Y is incredible how on earth someone can come up with a car and sell more than anyone else in the world. I think they were ahead of Corolla for a few quarters. Were the Tesla investors I think mistaken. I could be wrong. I’ve tried to go through and I’ve tried to fight, where can I be wrong on this thing? What needs to happen for me to be wrong? But people say, “Oh, they’re going to sell 20 million cars by 2030,” or maybe they revise that down to 15 or 10 by now. There’s no way they’ll do either of those numbers. You don’t sell that many cars just because you hope that’s what happens. You need, I mean, auto making is a tough business. It’s tough. The two most successful in the world started in 1937 to ’38. Coincidentally, Volkswagen and Toyota both started then and after World Wars and all sorts of crises. These two have fought their way up to owning 10 or 12% market share globally in 80, 90 years. That’s how far they’ve gotten. And they’re not idiots.
Toyota’s production system basically changed the whole world of engineering. These guys have come up with great things. These are not idiots. Everyone at Tesla wants to think that everyone else is an idiot except for the folks that got jobs at Tesla. It’s just not true. If it were an industry that was prone to first mover or winner take all, then Toyota would’ve been the monopolist 15 years ago or longer. But you and I and everyone else that buys cars have a million reasons why we buy cars. Utility, the aesthetic of the car, how much it costs. There’s a million things that go into the mix of why we buy a car. And some of us want EV, some of us don’t.
As you mix all this in, you realize that Tesla doesn’t have the models. It has one that sells. Volkswagen has across its groups, over 90 different models, different brands, and they have refreshes of those models every few years to get people to come back in. We aren’t getting the same refreshes, we aren’t getting the same models. We get the cyber truck four years late and I would argue, and this is more of a personal perspective, I think it’s going to have trouble selling. They’ll sell them to the fanboys here in year one. They’re not going to sell 250,000 of those a year.
Meb:
I think them not doing a traditional pickup truck was such a whiff.
Drew:
Oh, it’s a complete whiff. The Rivian is a better truck. And I’m a Midwest boy and live down south. I have a truck, everyone I know has a truck. No one’s buying a cyber truck. Yes, some folks in California will and someone that wants to drive that thing. It’s kind of a novelty.
Meb:
Does it all hinge on the mass market Redwood?
Drew:
It does hinge on the mass market, which if we had this conversation a year ago, and I did with many, that was something expected to be news on in the first, second quarter last year. In terms of modeling what the business looks like going forward, Meb, and I have been, I think fairly objective and also fairly positive on the likelihood of EVs becoming a bigger mix of total sales. It’s nowhere close to what the fanboys expect in terms of the ICEs disappearing and it’s all driving EVs. And we’ve seen evidence of that now where firstly at all the traditional manufacturers, they’re just not getting the demand that people thought. People don’t necessarily want an EV because it’s going to show up particularly in some climates in some regions. But Tesla seeing the same thing. Starting over a year ago they had to start discounting. People don’t want to buy them anymore. The only ones that sell the Y anyway.
And so this whole notion that Tesla investors had that Tesla can make as many cars as they want at whatever price and generate whatever margins they want just in 2023, we’ve all learned that was completely wrong. They’ve had to lower prices and lower prices again and lower prices again in nearly every region geographically. Consequently, their profit margins, which people thought were sustainable at forever at 21 levels turned out to be because we’re in the middle of a chip shortage and they have the stuff and so they could sell whatever product they wanted to for whatever price. And it turns out that they’re now less profitable than three or four other automakers. Stellantis is doing 400 basis points, better margins than they are. Not the kind of thing that a Tesla shareholder wants to pay attention to.
And so what Elon is very good at is shifting their focus on something else. And that has been in ’23, it’s been AI, Dojo, robots and let’s try to come up with some other undefinable upside that can be the thing that lures folks in or keeps them around. And now, again, unlike Chris or Jim, I do think that this guy’s worth money. I do think there should be a value to the Musk option. Like what on earth? It’s incredible what he’s done, the market share he’s taken. It’s a success story. And meanwhile, he’s landing rockets on the moon and bringing them back. And who knows what’ll come up with next?
Meb:
Let’s see, stock is, let’s call it 200 and change, market cap at 650.
Drew:
Higher, you got to go dilute it.
Meb:
Okay, so down-
Drew:
A lot of diluted shares.
Meb:
Down about 50% from the peak ish. Where’s Drew a buyer?
Drew:
It’s going to depend on the day, Meb. I think that the auto business is maybe worth 50 bucks, 75 bucks a share, but I don’t think Tesla’s worth that little, because I do think there’s value to the Musk option energy, AI, Tesla bots. How do you define that? Do you pay $50 billion more in market cap because you want to own Elon Musk? You pay 5 billion. Do you pay $75 billion for something that’s not profitable yet, but it’s Elon Musk running and so it must work? And the mistake, I believe, and I’ve tried to be nice about this, I’ve tried to help people to see clearly without being offensive, but everyone wants to believe that, hey, look what Apple did. That’s what Tesla’s going to do. And they give… Apple was on its knees, they had to borrow $150 million from Microsoft in 1998.
Amazon was on its knees. It fell 95% from the tech bubble to 2003 before it changed its business model pivoted and figured that AWS might be a nice profit machine. But just because we’re citing these epically wonderful game-changing world dominating businesses, and assuming that’s going to happen to Tesla, well, that’s what the market’s done. And you can do the math on what market shares are for Tesla and how many cars are going to sell and how much that might grow or not grow and slap earnings multiples on them even in the out year. You’re not getting to a very big number in terms of what the car business is worth, which means if that car business is worth 50 or even $100 billion, which it’s not, in my view, you’re paying $600 billion for everything else that might happen. And that’s a lot of call option value.
And as we have had things happen to us, delays in FSD or launches of the cyber truck or no announcements about this Model 2 that everyone’s been waiting on, which by the way, it’s not a sure thing, it’s success, nor is this profit. It’s not going to generate the same impact on profits that people had hoped it would. We’re seeing what’s happened to gross margins and operating margins in Tesla’s since they had to cut prices to sell these cars. The fascinating thing to me, we had huge earnings downgrades from… Last year at this time, I had temporarily become constructive on Tesla because it had sold off for all the wrong reasons. He just bought Twitter. Everyone’s negative about him doing that. You get the stock pressure down, it gets down to a hundred bucks a share.
And I actually wrote for the FT, “Hey, the fraught’s gone, guys. I might think it’s worth less in many years, but it’s not worth this, it’s gone down to here and the fraught’s gone and now it’s popped back up and now it’s coming back off. It’s got a massive market cap again. People are paying five, $600 billion for the Musk option and he’s threatening to leave, take his toys and go home.”
Meb:
I think it was Elon yesterday where he said something about, I stand by my prediction that if Tesla executes extremely well over the next five years, that the long-term value could exceed Apple and-
Drew:
Saudi Aramco.
Meb:
… Saudi Aramco, which puts it the 10 trilly club. That’d be the first stock to hit 10 trillion, which-
Drew:
No, if the stock had a 50 or $75 billion market cap, and he was saying those things, those grandiose things, you say, oh, you know what [foreign language 00:48:12], he’s so smart. Let’s bid this thing up a bit, own the call option. People have effectively already given Tesla the market cap as if it’s a foregone conclusion that they will be a market dominating business without any evidence of them doing so. In fact, we’ve had contrary evidence over the last 15 months, missing earnings, missing revenues, growth has slowed. The Model 2 should have been out a year ago. Cyber truck came out finally, but even Musk himself said, “Oh, by the way, this is not going to be that profitable. We’re going to need some time to get it up to the production level that generates the profit that is required from it.” I don’t think they’re going to get there.
To me, the weird thing, Meb, is it’s obvious, and this is not insights that everyone else can have. We see that prices are being cut, we see margins are falling. We see earnings expectations are falling. If you had told me in December 31, 2022, “Hey, this stuff’s going to happen fundamentally.” I would’ve said, “Well, maybe it is worth 100 bucks.” But the stock was up over 100% in the midst of all this bad news because people started shifting their focus as Elon does very well. Oh no, it’s an AI company. Oh, okay, nevermind that they’re arguably behind Waymo and three other groups in terms of the development of FSD level five autonomous driving, which is a whole nother debate. Nevermind that there might not be the demand for these things that people think there will be. It’s hard for me to imagine [inaudible 00:49:51] have an AV, but maybe. And we have had evidence not only at traditional manufacturers, but at Tesla itself that the demand for EVs is not as robust as many had hoped.
And that sure places like Norway buy a ton of them. But that’s because everywhere doesn’t have a multi-billion dollar sovereign wealth fund that pulls oil out of the ground that they’re going to use to subsidize EV purchases like Norway does. And that’s exactly what’s happened there. You get a break on VAT, you get a break, you don’t have to pay parking, you don’t have any road tax, and you get $10,000 ish to buy the thing. Okay, I’ll have an EV. But that’s not the way the world’s going to work. And we’re seeing that people don’t want it. They’ll eventually get there.
I was mentioning earlier, I get to us up to 50% by 2030, I’ll probably start revising that back a bit because even I have been disappointed by EV growth. It’s going to be tough to see fundamental news which justifies the share price. And it’s possible to hear in ’24, we have a year with very low earnings growth if growth at all. If they have to keep cutting prices, they won’t grow earnings, but even revenue growth’s falling. So what are you going to pay for that? And in my view, you can’t get there.
Meb:
So you’re a buyer at 50.
Drew:
No, no, I think that’s what the auto business itself might be worth. Now, I do think there’s going to be value in maybe something that Elon hasn’t even talked about yet. He’s that kind of guy. I’d be careful not to be short him, but right now the assumptions are that almost for this wonderful, perfect world and the people buying the stock, they are true believers. It’s very religious. And if those are the ones making the price, I’ve tried to caution them as nicely as I can. Guys have a look at this. Or at least tell yourself what would you need to see? I’ve said this to the bears or to the bulls. Tell yourself what you would need to see to change your mind. What fundamental development. Maybe the robotaxis don’t take off, or maybe they don’t introduce a Model 2 or maybe margins go to here, or maybe sales go to whatever it is, just predefine that so if it does happen, you can exit. And those that say, no, I’m just going to own it forever. As long as there’s a contingent of folks that are still speaking like that well, the stock’s got downside.
Meb:
All right, 50 bucks, you heard it here. You never know with these sort of things, I always think about him buying SpaceX or Starlink and all of a sudden it’s this conglomerate of really incredible assets.
Drew:
Yeah. Well, this is the Musk option. He can put it all together.
Meb:
What’s been your most memorable investment? Good, bad, in between over the years, I’m sure there’s been plenty.
Drew:
Back in 2008, Meb, things were pretty crazy. As you’ll remember, we had just launched our long short fund in April that year. Every one of my friends and their brother was short the Volkswagen Ordinary shares because it looks like Porsche was trying to take it over, the Piëch family. And there was a huge disconnect between the ords and the prefs. The ords are the voting shares, that’s what you needed to own to own control the business. The prefs of the more liquid shares, they traded a discount because didn’t have voting control. Well, the ords started trading at an incredible premium to the prefs. I mean, 100% for the same company. And it became something that the hedge funds wanted to short, oh, this made no sense. It didn’t make any sense. But we try to be the hedge fund that doesn’t copy what everyone else is doing. And we didn’t see any edge, nothing novel about our work. We didn’t get short, the ords, we just watched.
And we told ourselves, if it starts breaking, we see some signs that fundamentally, this is going to correct itself, it’d be great to be short these ords along the prefs and watch them collapse, but we’re going to wait. And we waited. And sure enough, something happened in the second quarter, I think it was, and you start to see signs that this might break. We started getting short a little bit, and then there was another announcement and it start started behaving for us. The ords started falling and okay, let’s get short the ords. Let’s do it. So we’ll be like everyone else. But we felt like we were smarter about it. And on the Friday, I think this was in September, we got to our full size, I think it was a 5 or 5% short in Volkswagen, or I’ve got it written down. I think the stock price was at 200 some euros a share.
That Sunday night, I think it was Ferdinand Piëch with some representative of the family puts out a press release saying that in the spirit of full disclosure, they wanted to let people know they bought a bunch of call options, which gave them a certain amount of the share capital control of the float. And then if you added the state of Lower Saxony to that, there was no float left. And we wanted to let you this know so that you shorts have time to exit your positions. That was the actual press release. And we had just got full size that Friday, and I called my trader… And I’ve never done a market order in my life. I’m always a limit order guy. I’m going to pay 216, 60. You can have some discretion here, blah, blah, blah.
Let’s do a VWAP. Let’s do this. Let’s try to find it dark. I told my trader, I would like you to buy whatever that number was for us, 5%. I want you to buy everything. Mark it on open. I don’t care what you pay. And let’s say the stock closed at 220. Again, I’m making up the numbers that morning. It first ticked at 350. So the stock I sold the Friday before at 219, a big position. I buy back at 350 the next morning, the next business morning, stick a knife in my heart. The stock proceeded to march up to over 1,000 over the next two days, it became the most valuable company in the world as the squeeze was on it, put some hedge funds out of business. We were actually able to trade it a bit on the way up. We ended up coming out of 2008, making a little bit of money on both sides of VW.
But that day was the most intense day, actually two days I’ve experienced in capital markets and watching, this is a big company, become an even bigger company. And yeah, it had a trillion dollar market cap. This was back when no one had a trillion dollar market cap. This was-
Meb:
Was this the biggest, on market cap, this is like the big daddy of short squeezes, right?
Drew:
Yes.
Meb:
And then it was a little bit more of a European story than an American story. But I remember watching this from afar and just thinking, oh my goodness, this is astonishing.
Drew:
Yeah. No, it was. And a lot of us hedge funds were short VW ords, certainly the European ones were. And we thought we were being smart, not doing it. And of course, Murphy’s Law or Sod’s Law, as they would say in the UK the day after we got our short on the press release comes out.
Meb:
Yeah an incredible time that’s up there with Mount Rushmore of timing. I remember Jim O’Shaughnessy talking about he had a bunch of puts and sold them all the day before the ’87 crash.
Drew:
Day before. Yeah.
Meb:
Those two might win the timing award. We’ve had a couple that are up there too. Drew, this has been a blast. Where do people find your writings, your musings? What’s the best place to keep track of what’s on your brain?
Drew:
I’ll occasionally put out blog posts on our website. It’s albertbridgecapital.com, Drew’s Views, it’s called
Meb:
Drew. It’s been a grand tour. Thank you so much for joining us today.
Drew:
Meb, it’s been great. I appreciate the time and look forward to the next chat.
