Tobias Carlisle  5:40  

It’s not a mathematical equation, but it’s all sentiment. I’m not entirely sure that presidents have a huge influence on stock markets. I’m sure that policies do over the longer term, but I don’t really think they do. I remember vividly that nine-day drawdown because it got to a point, where we would ordinarily put on a hedge. It was close. It wasn’t quite there, and we were worried because it was the Friday before the Tuesday election. We weren’t entirely (*inaudible*) or maybe it was the Thursday before. We were worried that we were going to put on the hedge. 

We thought Clinton was likely to be elected, because that’s what the polls said. We thought the market was likely to recover, when Clinton was elected. And so, we thought we were going to be in this terrible position, where we put on the hedge, and we got turned upside down straight away. We didn’t have to make the decision because we weren’t quite at that point yet, but we’re thinking we’re getting ready to do it. 

And then, we’d recovered from that point. I think that was our *inaudible*. We recovered from that point and sort of started getting away from the hedge, but on the night of the election, when Trump came in, the market was off. It was gigantically off like 600-800 points, and we thought, “We’re fools for not putting the hedge down in time.”

Stig Brodersen  6:45  

Yeah, it was a really a rollercoaster ride. And the interesting thing was that clearly when all polls came in and the market was closed, and it appeared that Trump would win, the future market for S&P 500 just fell off a cliff, and it was almost looking like it will be quickly halted because we’re near a 5% drop. Nikkei at some point was -6%. 

And then, when the markets open and everyone has apparently slipped under it, and [people] were saying, “Yeah, let’s just leave them. The market is around flat anyway.” It was just such a weird experience. It just shows what you said before, Toby, that there’s a lot of psychology in it. Fundamentally, it’s probably not that big of a difference, at least not in the short term. That’s not what we’re seeing at all.

Tobias Carlisle  7:28  

I looked this up recently, today or yesterday, *Annie’s topped out at $107 for the S&P 500 as a whole. $107 in late 2014, and earnings have fallen since late 2014 to $87. Now, they’ve come off $20, which is close to kind of 20%. This is a pretty big drop in S&P 500 earnings. And over that period, the market has actually advanced. The P/E on the market has got even higher. 

I’m at the point where the market is just impossible to forecast. And I’m kind of with Buffett in the sense that I can speculate about what’s going to happen, but time is spent trying to figure out what the markets going to do is sort of a little bit of wasted time. You could be doing things that you have more control over. I can look at individual stocks, and I can see that they’re cheap. 

There’s a great quote. I forget the exact quote and the provenance of it, but it’s like the Portuguese biscuit maker doesn’t worry about the interest rates and the dollar and all of those sorts of things. He just worries about selling more biscuits than the guy down the road, and I think that’s [practical]. You can get that. There are some businesses that are simple enough. You can value them. Also, when they’re at a huge discount to what you think is fair value, you can put them on. I think that works.

Preston Pysh  8:43  

Toby, I love your optimism and how you’re viewing this, and I totally agree with the comment that you just made about trying to focus on what it is that you do know and which direction you can go with it based on the conditions that you’ve been served. So, when you say that there’s decent companies out there, give some of the people in the audience an example of what you’re talking about.

Tobias Carlisle  9:04  

This is a funny time to be talking about it because that furious rally that we’ve seen and started sort of just before the election, and it continued on even today for us. I have seen all of the positions that I have in the portfolio and that I’ve been tracking for a long time. A lot of the discount has been just out of the whole thing. It’s great when you capture it, but it sort of left the cupboard a little bit bare for new positions. 

The thing that I was talking about last time was Humana, which has the takeover bid, and they’re going to court in a couple of weeks. I forget exactly where that was trading, but that was $160 or $170, so it’s way over $200 now. That’s $207 that was a very big position for us. We’ve had a lot of these merger arbitrage positions that have sort of closed up, so the things that we’re looking at now tend to be literally like off the run. They’re just undervalued securities. 

Just to throw one out there that I like is Greenbrier, which has a ticker: GBX. They make rail cars and things like that. There’s a lot of people who will tell you why rail cars are really ugly at the moment. Partially, its energy’s getting hurt, so there’s not as much energy being shipped. There’s just a slowdown generally, so there are not as many rail cars being made, and that you can see that a lot of companies in the industry have gone the same way. 

We put on Greenbrier earlier in the year and it’s run up a lot over the course of the year, but it still continues to be one of the cheapest stocks in our portfolio, and it’s cheap on almost every metric. The thing that I love about it is it’s buying back stock. It has about a 7% buyback yield. We’ve been buying the equity, and we’ve been selling just out of the money and put options these few quarters out. We hold the equity because that’s the most tax efficient way of doing it, and the equity is cheap. 

We also are trying to…,assuming that it’s sort of a market that just traded sideways, which is what it has been for most of the year until more recently. In the event that it just trades sideways, if you’re selling the options or at least generating a little bit of yield on those positions, and if the position moves against you, you then automatically are buying a little bit more equity, which is good behaviorally if you’re a value investor. So, that’s one that I have liked all year and continue to like now. I think that it’s not as interesting as it was six months ago. Ticker is GBX if anybody wants to look at it.

Stig Brodersen  11:26  

We’ve talked specifically about GBX or just catalysts in general, because that’s one of the things that all value investors and I guess all investors are really looking for. Clearly, you’re buying into this equity, Toby, because you think that it’s undervalued. Now, what do you want to see as a catalyst for it to approach its intrinsic value?

Tobias Carlisle  11:46  

Greenbrier’s closer to being something that’s just merely undervalued, where it really is just going to be a passage of time, improvement in the industry, and that can take a very long period of time. But the one thing that does stand out for me is the buybacks. 7% is an unusually large buyback yield, and what that means is that if the stock falls a little bit, the company itself is in there buying its own shares back and if it’s undervalued. 

Buybacks are typically associated with value destruction because managers tend to buy more stock at the top of the market and less stock at the bottom of the market, but good managers buy the bulk of the stock back, when the stock is undervalued. 

Greenbrier is undervalued in my estimation, and that buyback yield of 7% is substantial. So that’s one thing that can cause the price to move closer to the intrinsic value. At the same time, the intrinsic value is being improved, so that’s one thing that I like. 

And the way that we’re kind of generating a little bit more yield, we’re generating our own catalyst in it is by selling the production. So, if we’re selling at two or three quarters, we’re getting very substantial yields on it, sort of 15% profit, and then that’s sort of annualized to a number. It’s like 45% or 50%.

Stig Brodersen  13:01  

Just a follow up question to this. I’m really curious about the concept of opportunity cost here because it clearly also depends on your conviction on this pick or any pick for that matter. When do you think, “Hmm, I hold on to the stock for X number of years. Now, it seems to be what you’d call a falling knife. That is probably not really going to materialize the value that I’m seeing.” How do you identify, “Yes, this is a [problem]. I need to get out of this stock because it’s not going to materialize?” Also, when do you simply hold on and wait? 

Tobias Carlisle  13:33  

We have a valuation, so we have an idea about what we think it’s worth. That’s updated every time they produce any new numbers. On a quarterly basis, we update our valuation. Also, we can see because we have a system that’s looking at all of these stocks, and it’s tracking all of them at the same time, so we can see if something [changes]. 

The best case scenario is something stays undervalued for years and years. Humana was one of those stocks. It was undervalued for six years. It was one of the cheapest stocks in my portfolio. Every year, it was up like 15%, 17%, 20%, which is an ideal situation. It’s just one of those stocks, even though it was huge. It was kind of hated. 

Conversely, the worst type of situation is when you have a stock, and it’s got a deteriorating valuation. We would try typically to avoid them unless it’s very, very undervalued. Also, you can see some short to medium term events that are going to prevent that from happening. 

And so, the sort of things that I would look for are [cases with] an activist filing a 30-day notice. That means that they’ve bought 5% of the stock, and they want the company to buy back stock, or they want to fire the managers, or they want them to sell the company. That’s the best way to generate returns. Absent those things, it’s not a nice place to be. 

At some stage you have to say the valuation has deteriorated to the point where this might continue on. The discount is still substantial, but there are better opportunities that we can find because we found valuation changes slowly. There are other stocks getting shocks and coming in and out, so at the start of this year, the cheapest stock on the screen was Hewlett Packard. The hardware spin out, HPQ. 

It was one of those stocks that I’ve got no particular insight into HPQ, but the two things that we liked were the cheapest thing on the screen and were improving over the course of the year. The options in it again were sort of very rich, so we could sell the options in it by the equity. That’s something that it’s now sort of the fifth or sixth cheapest stock in the universe, and that’s sort of what I like to see

It’s sort of moving away, and it’ll get to the point where it’s sort of 15 or 30 or something like that. And the universe will say, “Well, are there better, cheaper opportunities for us?” And that’s a good time to kind of get up. I don’t think that HPQ is a great business. It’s sort of at a massive discount to valuation. They have a huge buyback going on as well. That’s one of those things that at least management’s doing something on your behalf.

Stig Brodersen  15:56  

One thing, Toby, I can’t help to think of is that when you talk especially about situations, and we mentioned a few examples here, it seems to be, I guess, for a lot of investors to be a very complicated investment strategy. You’re talking about different type of instruments, not only just buy and hold. This is the most common approach, but could you elaborate on which type of skill set one would need to acquire to take advantage of special situations? And how to obtain such a skill set?

Tobias Carlisle  16:22  

Well, the best book that I have ever read is Greenblatt’s yellow book, which is called, You Can Be a Stock Market Genius. He goes through all of these scenarios and how you can find them. I know that it’s a reasonably complicated book because a friend of mine who was very smart, and I think this could be 10 years ago, maybe even longer than that. He came to me and he said, there’s this investment strategy, and it’s just super complicated. 

The way that you make money is just you read these filings that nobody else would read, and that’s kind of your advantage. I think that a lot of these things are complex at first blush, but once you sort of understand the mechanics of them, they are actually pretty simple. Getting through that first [hurdle], there is a steep learning curve, initially. I have an advantage because I’ve been an attorney, and I did mergers and acquisitions for a long period of time. I’ve drafted these documents, and I understand the mechanics internally. Before I invested, I’d spent a decade kind of familiarizing myself with them. 

I’ve seen some of the thought processes when directors are trying to fight off activists or deciding to pay a dividend. And so, I’m sometimes looking for those things when the special situation hasn’t manifested yet. They haven’t declared it, but I can sort of see it’s coming because the stocks are so undervalued. However, they’ve got the cash there to do something, and they’re typically been good managers in the past. That’s a sort of long way of saying that I have an advantage because I’ve been an attorney, but you don’t need to do that. You can [check out] Greenblatt’s book. This is the best place to start.

Stig Brodersen  17:54  

I’m really happy that we got to talk about special situations, Toby, as you could probably hear, because one of the things that we talk a lot about here on the podcast is Warren Buffett. Also, we have talked a lot about his newer investments, which always spark good discussions. One thing I can’t wait for is the Mastermind discussion that we’re soon having. We’ll be talking about his latest picks, which is completely another ballgame. But let’s actually talk about where he started, because he actually started with a very different type of investing. This is the special situation that we’ve been talking about. Before he started Berkshire Hathaway, he actually had a very impressive record. 

Over 12 years, he recorded more than 29.5% in the stock market. Very impressive. This was not in his successful investments in Coca-Cola, American Express, as he will later have with Berkshire Hathaway. This was something completely different. So Toby, could you please tell us a story about one of Warren Buffett’s special situations in his early career? And perhaps more importantly, what is it that he could see, which other people couldn’t?

Tobias Carlisle  19:02  

Buffett’s investment strategy when he first came out was very like Benjamin Graham’s in the sense that he was looking for stocks that were undervalued on a balance sheet. And then, he’s looking for the more liquid part of the balance sheet, which is the cash or the inventory. Thus, he was trying to find these stocks that are basically whose earnings were so bad that they had traded down below liquidation value. And sensibly, most people are frightened away by these sorts of [stocks]. If you think something’s in financial distress and it’s heading towards bankruptcy, the instinct is not to want to buy it. 

However, you can train yourself to sort of start seeing those as opportunities if you’re looking for that balance sheet value. That’s one of the first places that I look at: What does the balance sheet look like? Also, that was what Buffett was doing when he found this company called Dempster. They made components for windmills, which is not a very sexy business, and they had built up a gigantic inventory of them, which they couldn’t seem to be able to sell. And so, they had declining sales. 

The stock was sort of valued on the basis of the income statement, which is not uncommon. The market seemed to have ignored what was on the balance sheet. Thus, Buffet saw the balance sheet value. He figured that he could come in, and he could sell off the inventory. He didn’t count on the fact that it was really in distress. It was within days of bankruptcy, and he had this fixer by the name of Harry Bottle. He got Harry. That was sort of the first time that you meet Harry Bottle in any of the books that Buffet-Bottle came in. 

I heard recently that he literally drew a line in their warehouse, and he said, “You just got to sell everything. On the other side of this line, it’s a fire sale, so you just got to get it out now. Whatever price you can get.” [He said this] just so they can raise the cash and they could survive. And then after a while, what they had done is they turned all of this pretty useless inventory into cash. 

Buffett’s a great investor, so he was able to sort of turn that into a [success story]. The business doesn’t ever really get great. Although, the business did improve. But all of a sudden, it’s a liquid balance sheet. It has cash. It’s the sort of thing that you would want to buy, and he did very well. That was sort of a semi-activist-type approach that he took, looking at any kind of like partially liquidated, with the help of Harry Bottle. And he was in a control position, which is very different from the sort of the way that he invests now. But it’s been a great investment strategy for lots of guys. 

Greenblatt was doing exactly the same thing. Probably not to the point where he was an activist or where he was getting control. I’m not sure exactly what he did because no one’s really canvassed [his actions]. The book that made Greenblatt famous was the magic formula book, [a.k.a. The Little Book That Beats the Market]. It’s the blue book that he wrote. I read that when it came out in 2006. 

I didn’t realize that he had also written the yellow book because the strategy is so different. I just read the blue book, and I loved the blue book. And then somehow I saw the yellow book, and that was at the point that I realized that it was the same guy who’d written both books. In the returns that Greenblatt puts in his blue book, he was sort of doing 40%. Greenblatt generated those returns as a special situations guy. 

The problem with it and the reason that everybody sort of moves on is there’s a finite amount of capital, which you can invest in these type of situations. I think it’s a lot. It’s still like hundreds of millions to maybe a billion dollars. That sort of number, but it’s not as scalable as the other stuff.

Stig Brodersen  22:28  

Yeah. And Toby, I think it’s really natural to hear about, call it 29% for Buffet or 40% for Greenblatt, and you’re thinking, “I should do some of that too. I found this great stock, and it’s trading well below book value. There must be some value here.” 

Now there’s this difference, right? Because if you have say, $10,000, you’re usually not able to take over the company. You can’t necessarily be the catalyst yourself, so if you are a small time investor, is there any way that you can be an activist without actually being an activist, but still get some of the same returns?

Tobias Carlisle  23:05  

The two things that you can do is [first], you can follow an activist. This is one thing that I used to do. I started writing my blog, Greenbacked 2008, what I was looking for was something that I would try to buy outright. I’d look for deeply undervalued [stocks] on a balance sheet basis, a sub liquidation value. 

They’re really ugly businesses, and I tell people that I was buying these things. I described the business for them. They’ll be overcome with sort of disgust. People used to leave these comments on the blog, sort of trying to tell me, “This is just crazy. This sort of stuff that you’re buying, it’s very risky.” I was sort of relying on the balance sheet value. 

The other thing that I was relying on was that every single one of those positions had a 13D notice file. This is just the filing that the activist has to make. I could go in, and I could read their [notice]. They described their strategy in those 13D notices, and if it made sense to me, I have the position. 

It’s extraordinary the number of times when either management listens to what the activists say instead. They sell the underperforming part, or they pay some money out, or they buy some stock back, or they sell the entire company, or the activists get on board, and they do the same thing. So, that’s called “coattail riding.” And that’s one thing that Buffett used to do. Buffett used to ride on the coattails of other investors before he was sort of big enough to be the prime mover. 

The other way is, rather than trying to get control, you [are] trying to, I call it, “synthetically recreate a catalyst for yourself,” and you do that with options. It’s a little bit more sophisticated. I’m not pretending like you need a master’s in finance or anything to do that. 

You need an unusual way of valuing the options. You need an unusual way of valuing the equity, which is just saying, work out what you think the company’s worth. If the equities at a big discount to what you think it’s worth, then at the same time, the options are very rich. 

Now, I do this valuation where I say, “If I sell this option here, which is the same as buying the equity. It’s a little bit difficult to kind of visualize, but you just have to trust me that selling an option is like buying the equity. Your downside profile looks like you’ve bought the equity. Because if the market goes against you, you get the stock put to you, and then you own it long, so selling an option is like buying equity. You just have to remember that.

But the upside is capped at the amount of premium that you get. A lot of people say, “Why would you do that? Why would you go and cap your upside?” The reason is that you get all of your upside immediately. If it’s a $10 stock, say it’s trading at $10, and I can sell the $9 option. The $9 put, say it expires in March next year, so I’ve got about four months to run on that option. If I can get $1 for that option, then I’ve actually [won].

If the market goes against me, then I’ve only paid $8 for that stock because I’ve got a $9 put and stocks are at $10. It’s a $9 put, and I’ve got $1 for it. So if it moves against me, I have to pay $9. But I’ve already got that $1 in the door, so I’ve effectively paid $8 for that stock that’s trading at $10. The way that I think about it is I have a 20% discount before I have to buy that stock. 

The other way of thinking about the upside is I’ve got $1, and I effectively have to pay $8. So my dollar return on the $8 stock is 12.5%. That’s $1 on the $8, and then I’ve only got to have that for four months. So if I annualize that number, it’s getting up towards 37-38%. That’s a good position to put on. If you put on lots of positions like that, and the company is undervalued.

That’s crucial, because you want positions where you want to buy the stock. So if it goes against you and you buy the stock, you’re sort of excited about the fact that you got 20% cheaper than you otherwise would. If you’re doing it with expensive stuff, then you don’t want to buy the stock, and so it doesn’t really work. 

But you want to buy the stock, so it’s a way of getting into positions more cheaply. It’s a way of generating return. If it doesn’t get put to you, I think it’s just a great little kind of simple thing that individual investors can do. It is a little bit confronting the first time you sort of come across it, but there are lots of websites that will describe how to do it. Greenblatt will describe how to do it in his book.

Stig Brodersen  27:18  

Do you have any articles that you’ve written, Toby, that we can link to and if people want to mimic that approach?

Tobias Carlisle  27:23  

I haven’t because it’s my super secret strategy. [Just kidding.] I just told everybody how to do that. Of course, if you don’t like the idea of selling the put, then you’re sort of getting long [with] the equity. The other thing that you can do is buy a call that has a lot of time to run on it, so you might be able to find January 2019 calls. That’s another interesting thing to do. If you’re worried about the stock, [check us out because] we prefer to put on positions where it’s very undervalued, but it’s also very safe. We don’t think that there’s much downside in there.

Preston Pysh  27:54  

All right, Toby, fantastic information. One of the things that Stig and I wanted to do with you is play a question from our audience and kind of get your feedback as you respond to one of the audience members. So, we’re going to play a question from Soham, and we really appreciate Soham for sending this question in. And so, here we go.

Soham  28:10  

Hi, Preston and Stig. Great show! Thank you for all the work that you do. My question is, what advice would you give to a recent college grad who wants to make a career out of value investing? What steps would you tell them? What book should he read? What courses should he take? Things of that nature.

Stig Brodersen  28:30  

Wow, Soham! Great question. Toby, would you take the first hack of this one.

Tobias Carlisle  28:35  

There are two sorts of ways of going about doing it. There’s the classical way that if you get into Columbia Business School, and you go to the Value Investing Course taught by Bruce Greenwald, then you do very well in that course, and then you come out. You’ll find a job in a value investing hedge fund or a value shop, so that’s one way of doing it. The universe of people who are going to be able to follow that path is very small because it’s hard to get into Columbia or one of those sort of equivalent Ivy [League schools]. 

The other way of doing it is the way that I did it, which a lot of other guys have done. You need to be able to set up your own account and trade your own account in a value style. And one thing that I found was very effective is you write it down in a diary, or you write it down on a blog, which is kind of a public document. 

You can do it anonymously. You don’t have to make it available to everybody. You write down why you’re putting on your positions. Now, I advocate doing it publicly because if you do well enough after a period of time, people will start to be attracted to why you are putting this position on. You’ll improve because you get feedback from lots of people. Some of it will be brutal. Some of it will be very helpful. 

Also, you’ll improve very rapidly for two reasons. One is that you have a record of why you did something. So if it goes wrong, you can find out what you were thinking at the time and why that thinking was wrong.  The other thing is you interact with the value community, which is big, and that’s great. They’re always on the lookout for new ideas and new kinds of thinking. 

That’s a very effective way of doing it, running your own portfolio and writing about it publicly. If you don’t want to be [known], and you don’t want to attach your name to it, just do it anonymously. Come up with a generic value name and interact with other guys. And you’ll find that if you’ve got some talent, you’ll develop a following. 

In terms of the books to read, you can’t get past the classics like “Security Analysis,” which is a really tough book to read, but it’s excellent. You should also read “The Intelligent Investor.” You should read Joel Greenblatt’s books. Both of them. The yellow book and the blue book. 

“You Can Be a Stock Market Genius” is the yellow book, and “The Little Book That Beats the Market” is the blue book. I also love books like Jim O’Shaughnessy’s, “What Works on Wall Street: because you can go through it, and you can see what value metrics do. Jim’s a quant. He writes about other things like momentum, which are less interesting to value guys, but they definitely work. 

The other book that I found recently, just because I hunt around for unusual stuff on Amazon, and I found this book on Special Situations by Maurece Schiller. This is kind of a cool story. Schiller was this guy in the 50s and 60s, and he wrote these series of books that have become [known]. They’re not famous, but they’re sort of well known to the value guys. Graham didn’t really ever write about Special Situations. He didn’t write about it until his 1950 edition of his book, which might have been the third or fourth edition of Security Analysis. 

And the only reference to it is this note buried on page 729, right at the very back of the book, where he reproduces this article that he wrote. Herein, he describes what special situations are, which are basically a corporate event, wherein there’s a fixed price that you’re going to get paid at a known date in the future. 

You can calculate your profit. You can calculate an annualized return for that profit, and the stock is undervalued. Those are the criteria for a special situation, and Sir Graham just sort of refers to it. He writes a few pages, and then he moves on. 

This guy, Maurece Schiller, actually dug into the thing. He wrote these five books. The most famous of which is Fortunes in Special Situations in the Stock Market. So I was sort of looking around for this book, and coincidentally at the same time, I was contacted by an investor and author, Tom Jacobs, who asked me to write the foreword to these books. They’re going to be reproduced, so Tom tracked down this gentleman’s children or maybe even the grandchildren, who are in their 80s. He got the rights to these books, and he’s found all of these fascinating biographical details on the guy. He’s going to reproduce these books. The first one comes out next year, and he’s going to do it over the course of the year. He’ll produce five books, so I’ve written the foreword. 

Schiller is like a Graham-Greenblatt kind of figure. He’s become unknown because the books have been out of print, but when they come back in, the retiring genius has to be recognized once again. All of his books are reasonably difficult to handle. Some of the situations that he describes don’t exist anymore, but if you read them, you’ll understand the philosophy of Special Situations, which tells you how to be sort of flexible and what to look for in different things in the future. Hence, that’s something that I’m sort of personally involved in. I recommend Schiller’s books. The first one, which will come out around January 2017, and then the rest of them will emerge after then.

Preston Pysh  33:28  

So Soham, Stig and I are not going to provide any additional comments because we don’t want to taint Toby’s response in any way because that was such a fantastic response to your question. Toby, thank you for supplying that. And Soham for providing your question to asktheinvestors.com, we’re going to give you a free subscription to Stig’s video tutorial course that takes you chapter by chapter through The Intelligent Investor, which was one of the books that Toby had recommended that you read. We’re going to give that to you completely for free and forever. 

For anybody else out there that wants to get their question played on our show and potentially get a free subscription to one of our paid courses, go to asktheinvestors.com, and you can record your question there. Before we conclude this episode, we want to give Toby Carlisle a chance to give you a hand off to some of his websites and services and anything that he wants to promote. Thank you so much for coming on the show Toby and the floor is yours.

Tobias Carlisle  34:23  

Thanks very much for having me as always. If anybody wants to get in contact with me, Greenbacked, which has a funny spelling: G-R-E-E-N-B-A-C-K-E-D, greenbacked.com is a blog. Also, acquirersmultiple.com, where I sort of put some of these little deep value stock picks up, and there’s some screeners on that. 

My firm Carbon Beach offers the special situation strategy in managed accounts, and we’ll also be sub-advising to a mutual fund that we’ll be launching closer to the end of this year. We can provide some links in the information under the podcast, so you can come through to the site, and we can provide some more information there. Very much appreciate you guys having me on. 

Preston Pysh  35:05  

All right, so at this point in the show, we’re going to do something that’s a little bit different, and something that we haven’t really ever done on the show before. I want to bring you on two of my very close friends, and these are Brett and John to show you guys something that is going to be the coolest thing ever. This has to do with artificial intelligence (AI) and programming, and it’s something that they have done specifically for The Investor’s Podcast.

Stig Brodersen  35:29  

We actually just talked about this before in the show. We have a European currently here in Asia. For the show with Toby, we have an Australian living in California. And then John, he’s actually in Lima, Peru. So, this is just the awesome thing about the internet and The Investor’s Podcast. We’re literally all over the world. Preston, go ahead and tell the story of how you met John and Brett.

Preston Pysh  35:39  

In mid September, we had an event in Baltimore, Maryland, where a bunch of the people from the community got together, and we went down to a Baltimore Orioles baseball game. We went out to some bars. We went to the game. We just had a blast. It was the best night ever. And so, one of the individuals who attended was Brett, and Brett and I started talking and he’s doing all sorts of things. It’s amazing all the stuff that Brett’s doing, but he went to UPenn for his undergrad. Then did you go to UCLA for your Master’s or MBA, Brett?

Brett  36:30  

Yeah, that’s correct. 

Preston Pysh  36:31  

You went to UCLA, and then we started chatting some more. He’s done venture capital stuff. He’s been a lot in the media space and in the marketing space. We just had a great time when we were at this live event. 

After it was over, Brett shot me a message, and he said, “Hey Preston, I have this idea that we’d like to try out. We do some programming work with Amazon’s Alexa capability, which is their AI capability with their Amazon Echo.” He said, “We’d like to try to do something with The Investor’s Podcast if you guys would let us tinker around with some of the episodes.” And I said, “That sounds amazing!”

So Brett, tell our audience what it is. You guys are going to get the biggest kick out of this, because this is the coolest thing ever. Brett, tell our audience a little bit about the idea that you threw past me regarding what you guys we’re going to do with the show.

Brett  37:20  

Well, it was really a pretty simple equation for me. I’m a fan of The Investor’s Podcast. I’m a heavy user of Amazon Alexa, and I happen to work with Zap Media, which helps media properties and brands to develop these Amazon Alexa skills, so that consumers can access the content through this Amazon AI. And so for us, it was pretty simple. I said, “Hey, we would like to do this for somebody. You guys are my favorite podcast at the moment. And I wanted to be able to listen to you on Alexa,” so it was a simple thing. We talked to you. I talked to John about how we could enable it. 

And the other thing that had come to mind was John and I had been talking about the fact that the way people were starting to enable podcasts on Alexa wasn’t a great user experience. John’s team had some ideas on how they could make it a really good user experience, so I thought you guys would be perfect guinea pig. 

Preston Pysh  38:15  

Talk to our audience about how this Alexa AI kind of works because I didn’t know anything about this. You guys started teaching me about it. I just find it fascinating, so just give our audience a little glimpse or top level view of what’s going on behind all this and why it works so well.

Brett  38:32  

So just so people understand, the Echo is the tower, and then Alexa is the voice and the artificial intelligence behind the tower that you interact with. And so, you can teach Alexa skill. That’s what we did for The Investor’s Podcast. By teaching it a skill, really, John programmed some things and was able to interact with the learning module and the intent module that they have for Amazon. And that’s what really brings The Investor’s Podcast to life through Amazon Alexa.

Preston Pysh  38:59  

So guys, I don’t own one of these things, but I find this just to be so cool. This was so much fun to do this with you guys, but say somebody has one of these things in their house, how would they enable this application that you guys built?

John  39:12  

It’s just a matter of saying, “Enable We Study Billionaires.”

Preston Pysh  39:16  

So, that’s all you’d say? You just go up to this thing, and you’d say, “Enable We Study Billionaires,” and then this application that you’d programmed would just start working? 

John  39:23  

That’s right. 

Preston Pysh  39:25  

All right, show the audience. Demo this for people. Now, John has this sitting next to him, so the audio quality might not be the best because it’s going through a couple different feeds here. But John, show our audience what you’re talking about, because this is just amazing.

John  39:39  

Okay. Now, so I already have enabled it. But after that, I say, “Alexa, open We Study Billionaires.” 

Alexa AI  39:46  

We Study Billionaires, and this is The Investor’s Podcast. Our show is all about studying the most important books and ideas that billionaires say influenced them the most. Thanks for joining us. To navigate the show, you can say, “Play,” “Scan titles,” or “About the Show.” 

John  40:04  

Play. 

Alexa AI  40:04  

We Study Billionaires, and this is Episode 113 of The Investor’s Podcast. Today’s episode is brought to you… 

John  40:11  

So that sounds great. You can do simple stuff like navigate through the episodes, so I’ll say, “Alexa, play now.” 

Alexa AI  40:19  

We Study Billionaires, and this Episode 112 of The Investor’s Podcast. Broadcasting from Bel Air Maryland, 

John  40:28  

Alexa, pause. So it’s going from those recent episodes and then back as one would expect. That navigation right there is very intuitive for users. And that’s a lot of what people want. But we saw a chance to do something that we think is really neat, which is the Scan Titles feature. I’ll show you guys. 

Alexa, tell We Study Billionaires to scan titles. 

Alexa AI  40:51  

Anytime. Please say, “Alexa, send this and jump into a podcast.” Episode 113 Jim Rickards and The Road to Ruin, Part One. 

John  41:01  

We get a little snippet. And then there’s silence, so we had a chance to respond. 

Alexa AI  41:05  

Episode 111, Good to Great: A Review of Jim Collins’ book. 

John  41:09  

Alexa, play next. 

Alexa AI  41:11  

We Study Billionaires and this is Episode 111 of The Investor’s Podcast. Broadcasting from Bel Air, Maryland…

John  41:19  

Alexa, stop. 

Preston Pysh  41:21  

If the audience could see the grin on Stig and my face, we’re dying. I don’t know how anybody goes about programming something like that, but it’s absolutely astounding. This is what our audience doesn’t realize is John and Brett literally just came to us and said, “Hey, we’d like to do this for you guys.” 

And they literally did this completely for free for us. That is the power of our audience. We are so blessed to have people like Brett and John and our audience to do the coolest things ever for us because this is just amazing. This is absolutely astounding. 

So guys, seriously, I don’t even know how to even begin to repay you or thank you for what you guys have done. This is phenomenal. And I know anybody who has one of these Amazon Echoes out there and are hearing this, this is amazing, you’re helping them out too. So thank you guys so much! This is unbelievable.

Brett  42:18  

We love what you’re doing. And the other thing I’ll tell you is, I’m a listener of the show. We met up in Baltimore, so we had a connection. What I realized afterwards is John also had a connection. I think you’ve had his cousin on the show before? 

Preston Pysh  42:29  

Yeah. So when we were talking about the development of this, John and I started chatting and your cousin, Colin Roche, who we’ve had on the show two times, and is an amazing guest, who’s insanely intelligent. So, we had another connection there. It’s absolutely wild.

John  42:48  

I mean, that was another reason why we’re very happy to do this for you guys. We built this because we really wanted to show off a lot of the neat things that you can do with the Echo device. And so, we hope that you guys and the listeners are as excited about it as we are. We know you guys would love it.

Preston Pysh  43:04  

So guys, the least we can do is allow you to have a little hand off here and talk about Zap Media because what you guys do is absolutely amazing. Talk to our audience about what it is you can do potentially for them if they’re listening to this, and maybe they have something similar that they want to do with their own business.

Brett  43:22  

All right, well, I can start and John can fill in any of the gaps that I missed. I think in our cores, Zap Media is focused on giving brands a voice. So there’s millions of Amazon Alexa users, as we’ve talked about. Google Home recently came out with a competing product. Siri isn’t quite as smart as these services today, but we expect something good to come from Apple eventually. Also, consumers really love these devices. 

There’s no doubt that they’re helpful in the kitchen, when you have your hands full. They’re really the height of convenience. However, the internet today is a visual web. So the things you take for granted when browsing on a screen simply can’t be done through a voice interface. So what products like Alexa are introducing is this concept of the voice web. What we need is we need content that was formerly visual to be made available through voice interaction. 

And even a podcast, which already has audio content needs, a way for users to navigate by voice. Start an episode. Pause it. Skip. Take other actions as you heard John do. That’s exactly what Zap Media does. John’s team has deep experience. We’ve worked with mobile audio apps like Slacker and NPR and those types of things in the past. We’ve taken some of that learning and that deep expertise and applied it to these new voice systems, which you’ve really just come on to the scene.

In Google’s case a month ago, Alexa has been out for about two years, so this is relatively new cutting edge stuff. But consumer adoption is tremendous. And so, John’s team has deep experience in voice engagement, and has developed a number of tools used to build great user experience, and do it very quickly.

Preston Pysh  44:53  

Well, guys, we can’t thank you enough. I really mean it. This was just the most awesome display of programming talent I think I’ve ever seen. John, Brett, thank you so much. This is just awesome.

Brett  45:07  

That’s great. Hey, thanks a lot. We love the podcast. And we’re really happy to be able to be on and to provide this service to your users. And so, as john said, anybody who has an Amazon Echo or Amazon Alexa available to them, today or right now, they should actually walk over to it and say, “Alexa, enable We Study Billionaires,” and they’ll be able to access everything right off of Alexa, and not be totally beholden their mobile phone every time they want to listen to it.

Preston Pysh  45:35  

So awesome. Thank you so much, guys. And for the audience listening, we’re going to have a link to their site in our show notes. If you guys want to learn more about both of these two guys [who] are so bright. It’s crazy. Go into our show notes. Check out their site and see what else they’re up to. Pretty amazing stuff.

Stig Brodersen  45:55  

Okay, guys! That was all that we have for this week’s episode. We will see each other again next week.

Outro  46:00  

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