0:00:02.2 Tim Melvin: Hey guys, Tim Melvin here. It's Christmas Eve just coming to you here. My wife is out in the kitchen. You can smell all the kind of cookies coming through. She just came up with some new espresso cookie this year. It's unbelievable. We've got chocolate chips and shortly one of the world's two greatest granddaughters, cutest, greatest, most fun, best looking, will be by and we're gonna make some Christmas sugar cookies with all the appropriate decorations. I will win the award for ugliest cookie. I always do. But it's gonna be a great day and of course cooking right into Christmas tomorrow. Now, just found out Substack has the ability to do a podcast and video. So, I wanna give this a try and see how it turns out. So, let's give her a whirl. I keep seeing these ads all across the internet. I've got an AI that trades stocks. There's an AI that predicts the stocks X days in advance. It's gonna tell you what all the markets are gonna do using artificial intelligence. That is hysterically funny.

0:01:08.3 TM: Guys, AI is real. It's going to happen. It's going to do all of the things that they say that it's going to do. It's not going to do them yet, particularly where markets are concerned. There's no AI program that's going to pick stocks or tell you what markets are going to do. There's the same old data mining database programs that have been around forever, the same pattern recognition stuff. I've known guys using it since the '90s. It's not new. It's not cutting edge. It's not breakthrough. Somebody that tells you that they've got a cutting edge AI that's gonna pick stocks and make it, it's just guys, it's another marketing gimmick. It's crap. Okay? It's absolute pure garbage. There is really high end AI stuff being done to trade stocks, to do research, to manage investment portfolios. It's done at levels way, way above our poor little pay heads. We're talking the upper levels of Goldman Sachs. We're talking Jim Simons at Millennium... At Renaissance, I'm sorry. Yes, it's coming. I mean if you consider, look, 80% of all trading is already done by computers and algorithms. And that's just machine learning stuff.

0:02:22.2 TM: That's not a true AI. AI today, it's the E-Trade baby. Okay? Artificial intelligence, as far as trading is concerned, is the E-Trade baby, very cool, but it's gonna puke a lot on the way between here and actually growing up and looking like something how the supercomputer from 2001 A Space Odyssey. Now, when we get to the point where there is real AI trading the markets, and it's not as far away as I'd like it to be. And it will resemble at that point, how from 2001 A Space Odyssey, ruthlessly efficient. All of the things that we know and believe about the market when it comes to trading and some aspects of investing are going to go away. Right? You're going to have dueling supercomputers. And I'm always reminded when I talk about this stuff, that being in Blair Hull's Office and giving a tour back in the 1990s by a friend in Chicago who knew Blair, we there she had to pick up something. I forget. It doesn't matter now. It's... That's not important to the story, but it was around this time of year.

0:03:33.6 TM: And they actually had special air conditioners in the building to cool off the computer room that held the computers that were used to price options for the traders down on the floor. And they would send regular updates. It's what kind of broke me of my conviction of... That I really thought I might want to be a serious option trader. You can't be off the floor and compete against what he was doing. Today, you can't be not in a market making operation or not sitting right on the desk at Citadel and watching the order flow by the millisecond and compete against those guys. Now, give them real honest to God artificial intelligence that some factor more powerful than the machine learning programs that they're using now.

0:04:25.0 TM: And all the stuff that we use, chart patterns gone, they'll be arbitraged out of existence. It'll be one of the very first things to go. They'll recognize that dummies are trading on that stuff. The computers will come in, swoop, gone. News trading, no, it's, they're gonna get there before you. They're gonna get there faster and more efficiently than you do. So, you just... They'll buy at 10, you'll buy at 12. You'll never beat them in this game. So, if you can't beat them, you're not going to be able to beat the market 'cause they're going to be the market. It's 70% to 80% or more on an average day that is currently algorithm trading. You'll be at 90 to 100 of liquid stocks at that point.

0:05:05.8 TM: There'll be very little hands-on actual trading of stocks. If I was a Wall Street research analyst who just signed a 30-year mortgage, I'd be a tick nervous, to be honest. Same with if I was a prop desk trader at a hedge fund, 'cause a lot of these, I'm not even gonna call them anomalies, they're distortions, patterns. They're going to go away. So, short-term and swing trading, probably not going to work. It's not going to work. First off, it doesn't work for most people now. I mean we see a lot of talk about it. We sell a lot of copy about it. Most people don't make money at it. I mean that's the dirty little secret. I was talking to a friend about it the other day who pointed out that, look, when you look at all of the big asset management operations, they have like maybe 1%.

0:05:58.5 TM: That's what we call prop trading, aggressive trading, trying to earn very high rates of return. Most of those desks fail. And that's with professionals and tons of research and all that. They have them. They don't do well. The rare guy that does do well is a superstar, he does not sell you his secrets for $14.99 a year. It doesn't happen 'cause he's making a gazillion dollars a year on Wall Street. So, we devote all this time and energy to stuff that even 98% of Wall Street says, we can't do it. Now you're gonna have machines that are faster, smarter, and more efficient than anything that's out there today competing against you. Your odds are small. They're gonna be microscopic.

0:06:46.6 TM: Once AI really gets in control of the markets, they're gonna be really efficient, ruthlessly efficient. So, trading is gonna... And a lot of traditional investment research, a lot of it is passive today. And you see this with the ETFs and all. Now put an AI in charge of all these ETFs. And first off, it's gonna cause consolidation in the ETF industry in a big way 'cause it's gonna be hard to differentiate. There's gonna be very few people that are gonna be able to stand out. And it's gonna be in less efficient, less liquid markets. Jay Hatfield at ICAP comes to mind with his preferred stock fund, PFFA.

0:07:27.7 TM: He's doing some things that the computers probably couldn't do 'cause he's dealing in less liquid stocks. That's gonna be where the human opportunity comes in. Charlie Munger was asked several years ago, and rest in peace, Charlie passed away here recently, December 1st, I believe it was, one month before his 100th birthday. Munger was asked, could he beat the market today? And he said, no. He said, look Warren and I had all these headwinds economically coming out of World War II, everything there was growth in society, the rebuilding of the middle class. Everything that happened was just this tremendous tailwind for markets and for the economy and for Munger and Buffett. And then there was the fact that when they started in this, stocks were not popular. They were considered a businessman's risk. The safe money was in bonds. Stocks actually, for the most part, yielded most in bonds, more than bonds for your blue chip issues. The world has changed over that point in time. The relationship between stocks and bonds has changed. But there were fewer eyes looking at each individual stock. So, there were more opportunities. There were uncovered situations.

0:08:40.5 TM: There were situations where stocks would fall out of favor and trade at six, seven, eight, nine times earnings in spite of being also having a 6 P/E, trading at 60% a book with a 6% dividend. John Spears at Tweedy Browne called those triple sixes, and they made a lot of money off those back in the day. You don't see those anymore. But he said, no, we couldn't beat the market with large sums of money. If you gave me $2 billion and said, here Charlie, go beat the market, I probably couldn't do it. Maybe, maybe by a tiny little edge, but probably not. Now, if you're competing against market that's primarily managed by AI, that becomes impossible. All right? So, where do you go? Munger said, you find a niche market where you can gain some expertise that's very inefficient, and then you'll be able to beat the market.

0:09:30.6 TM: The opportunity system set is gonna shift here, folks. It's gonna go to, for individuals like you and I, it's gonna go to illiquid, deep value stocks. And we're gonna get into a situation, this is what I've done my entire career, just because it fits my personality. I would... Don't want to be a trader, don't want to be tied to the screen, love finding kind of the gems in the coal pile, love doing the research, the looking, the digging, and love being just continually and constantly out of step with the markets in the world. But this is gonna become the only way for individuals to really outperform the market on a huge basis. There's gonna be two ways that work. Deep value is one of them. When we get to this, more than anything else on the planet, what's gonna be important is credit analysis. All right?

0:10:06.5 TM: If you get the credit equation right, this is true for the small banks that I love so much, you gonna have the credit part of that equation correct. You have to know that you've got a bank that in spite of underperforming and being undervalued for a period of time or being ignored by the market, that it's gonna survive, right? That it's gonna be able to keep the lights on. It's gonna be able to keep its people paid. It's gonna be able to do all of the things involved in keeping the business growing. You're gonna want to find companies that have great credit, sparkling outstanding fundamentals that are doing everything right, earning high returns on capital, making a profit, you got to avoid all the garbage that's in the small cap land 'cause there always has been, always will be, and will probably be even more in the future garbage among the small illiquid stocks.

0:11:13.8 TM: Matter of fact, the only way to get garbage deals done in an AI future is gonna be doing it in the small stocks away from the overview of AI 'cause AI will throw the garbage can. So, credit analysis is gonna become incredibly important in that future if you want to be in the business of making money in the stock market. Otherwise, you're in some variation of an index fund because again, put 500 competing AIs and everything's gonna revert back towards that middle. The standouts will be arbitraged out of existence quickly by the other AIs. The reversion to the mean will be impressive to say the least. So, deep value, illiquid, totally... I'm reminded of the researcher Davidson years ago, liquidity is an asset class. Everybody pays attention to the liquid growth stocks. That's where all the headlines are.

0:12:09.8 TM: All the returns are in illiquid value stocks. That's gonna become more pronounced and more the case in the future. And it's really where you need to be looking. Inefficient, illiquid markets that are not gonna provide the type of volume that will attract the attention of the artificial intelligence programs that because the fee base will continue to declining, they'll need to manage large sums of money in order to turn a profit for their investors. So, it's gonna be those smaller, less liquid segments of the market that provide opportunity. That's where I've lived for decades and will continue to live.

0:12:49.5 TM: So, we'll continue to suggest some ideas and strategies that we think can help you to succeed in the new brave world of artificial intelligence that is coming at some point in time. For now, keep in mind, the E-Trade baby is gonna puke a lot. There's gonna be some opportunities from that puking for us to make some money. We're gonna be on top of those until AI gets to the ruthless efficiency level. The other thing that's gonna work, and it's, I'm always amazed. All these people with these super secret trading systems and this system and it does this and it does that. You can make millions of dollars by next Tuesday, blah, blah, blah, blah, blah. And look at all the big, wild, successful traders. I'm talking the Soros. Don't turn it off. I'm not getting political. Soros, Paul Tudor Jones, Druckenmiller, Tepper to a very large degree.

0:13:45.3 TM: No trend followers of one degree or another. Trend can't, literally can't go away. Trend following has to always work with the caveat that remember, any trend following system is probably a really good trend following system wins half the time. The thing is you lose really small and you win really big over time. So, if you win half the time, you make just unbelievable money if you get that risk control portion correct. But trend is from economic developments. It's from fundamental business conditions. It's from business growth. It's from GDP change, it's from political changes, it's from central bank activities. It's things from the human condition, basically from the business environment, from the growth of humanity, the changing in the way we get energy. All of these things create and end trends. So, trend following is still going to work.

0:14:47.8 TM: Caveat with trend following always will be your loss control must be exquisite. One of my favorite quotes of all time they, asked Paul Tudor Jones how he was so great at picking bottoms and he said, you know, this really has to do with the headlights. He says, because Paul Tudor Jones catches the exact bottom in bonds is such a great headline compared to on his fifth try. Paul Tudor Jones catches the bottom in bonds. You have to have that risk control. You gotta be just incredibly disciplined. But if you do that, trend will still work regardless of what AI does because industries will come, industries will go, nations will rise, nations will ebb. So, central banks, there will be inflation, there will be deflation, there will be all of these cycles. They're part of the human condition. They're going to happen. Trend following will pick them up.

0:15:45.5 TM: So, if you learn the rules of trend following and it's something that I've really been doing a lot of work on, then I think that, you will in fact, be able to do it very well. So, the real focus that if you're looking to make money over the next, over a longer period of time, decade or more, you've really got to be focused on trend following. And you've got to be focused on illiquid value opportunities with a credit price based approach to the markets. That's where the real opportunity in the future is gonna be. Alright, quick 'cause it is Christmas Eve, just a Christmas Eve, Eve-ish kind of thought. We were watching movies the other night and The Bishop's Wife came on. Fantastic movie. David Niven, Cary Grant. I love the movie. Always have. So we watched it and we just kinda watched it and when it ended, my wife said, you know, they could never make that movie today. And if they did, if they made it and they were lucky, that would be one of the low grade late night fillers on the Hallmark Channel.

0:16:45.5 TM: Just really not popular themes, if you will, hope, redemption, big sprinkling of non-megachurch religion, shall we call it? No commercials, no rock and roll bands, themes of kindness basically, that play in the late night version of Hallmark. As well as a key reminder for something that, for those of you that remember Glengarry Glen Ross, where the big ABCs, the secret to selling always be closing. Well, you know what? A, B, C is also, as the movie reminds us, the secret to marriage always be courting. That theme comes across real hard in that movie. And again, probably not gonna sell out, the theater with the lean back seats and the 19 gallon buckets of popcorn on a Saturday night.

0:17:46.7 TM: But it is a great movie and it does remind us, secret to marriage always be courting and that hands on kindness is still kind of important and it's very easy to make the donations and send them to lands far, far away. My father used to get so incensed at the idea of the ladies stepping out of the church. And as they walked to the car in the fur coach getting into their Lincoln, they would step over four or five homeless people on the way feeling really good about the fact that they just sent a cheque for a $1000 to build an orphanage somewhere in Africa or on the other side of the planet while there was plenty of work to do right there at home. So, with that thought in mind, there's an organization down here in southwest Florida that's very cool.

0:18:33.6 TM: It's called FK Your Diet. Now, it's a restaurant. And first we thought it meant exactly what you thought FK Your Diet and indeed the restaurant will FK Your Diet. It's large portions of great food. But the FK doesn't stand for what you think it does. It stands for foster kids. The owner Doug of the place was a foster child and he came up rough. I mean, just everything that you've heard about happened to Doug it seems. And as he made his way through life, he and his wife, they did, they had some success in life. So, they sort of retired and moved down here from up north. And they open FK Your Diet and they give a portion of their money to foster kids all the time, which is in and of itself, we got a great, very cool story about a great guy who's practicing kindness. Then the hurricane, okay? Ian hits, knocked, it came over his house, it came over my house, it came over to his restaurant, came over that whole community in Fort Myers where he lives with thousands of people. They had no power, they had no food, they had no money, they had no gasoline.

0:19:41.1 TM: It was pretty brutal down here, guys for 10 to 14 days depending where you live, Fort Myers beach, still is not fantastic. Driving down the beach is, it still looks like a war zone to be honest with you. I'm gonna film it next time I go down, and will post it they set up operations, they fed thousands of people a day. They had mobile kitchens and so they set those up and they got food out to people and people came by to eat and they took donations and they gave them too, furniture, clothes, whatever, people needed, diapers... We ran up there. I had a bunch of cash that I took out before the storm hit and after about a week or so, we didn't need it anymore, we had a bunch left. I just went up and I said, look, do what you can with it.

0:20:25.1 TM: 'Cause he was doing stuff that, hands on helping people. They're still doing it today. So, they did just tons and tons and tons of things for people for Christmas, toys for tots, furniture for families, whatever it was that they needed. And they were giving gift cards and the stockings for everybody. So, we took a bunch of gift cards up yesterday as a matter of fact, and dropped them off. And as we're coming out, there's a lady coming out with her child with a stocking full of stuff and toothpaste and toys and that may well be the only thing that child got this Christmas and it wasn't 'cause they threw toys in a container at the local bar, anything like that. Doug got hands on, he collected the stuff and he personally delivered it.

0:21:10.2 TM: And that's the kind of stuff that it may not sell in The Bishop's Wife, in the local theater, but it is something in this world, if you think about it. You turn the TV on the news, it sucks, for lack of a better phrase. It's hostile, it's angry. There's a lot of back and forth and political sniping and war in the Middle East and war in Ukraine. And the news is as bad as it's been since the 1960s and years as I could tell, when you add the political element in and we tend to forget, there's still a lot of really good people doing really great stuff all over this country. So, this next year, let's all try to be one of those really great people. So, anyway, Ruthless Efficiency is coming, trend deep value. Married folks always be courting in 2024 is a new year. Let's try, let's practice all of us, trying to be one of those hands-on kindness kind of people. Hey, Merry Christmas everybody, I gotta go, the espresso cookies are calling my name. So, Merry Christmas, happy prosperous new year. We'll be back and trying to make some money together. And thanks for being with me on this journey and we'll see exactly how far it goes. Have a great holiday weekend, everybody.