Ladies and gentlemen, welcome to The Business Brew.
I'm your host, Bill Brewster. This is Matthew Sweeney, intro
V3 for those that know what I'm talking about.
So I'm just going to rip this one out and we're going to see
how it goes. This episode obviously features
Matthew Sweeney of Laughing Water Capital.
I really enjoyed a lot about this episode, but Matt pinged me
after something I said on value After hours he said hey, we
should talk. So I said yeah, we should.
And I've known Matt for a few years, but mostly sort of casual
knowing sense. And this was I think one of our
first real solid conversations and I really enjoyed it.
He's a good guy. I think one of my favorite parts
of the conversation is he talks about how he got in the business
and his early starts in finance. I love his philosophy.
He's he's somebody that's definitely worth your time.
Now I will say, and you're not supposed to point out some
issues in in a recording, but I I care about you as a fan and I
want you to know what happens. Matt and I talked about some
fairly personal things throughout the conversation.
He and I weren't 100% comfortable releasing all of it.
So there are parts of the conversation that get a little
choppy. And for that, we both hope that
it doesn't detract from your audio experience.
But frankly, our conversation was a little bit more important.
It was nice. We were getting into the meat of
life, and maybe someday that stuff will come out, but not
today. That day is not today.
Anyway. Standard disclaimers apply.
Laughing Water may own a position in the securities
discussed. Investing involves many risks,
including the risk of the loss. Standard disclaimers apply.
I don't know if I already said that I'm rambling, so I'm just
going to get on to the episode and let that delupereed start
and enjoy. This episode is sponsored by De
Lupa. De Lupa is founded by a former
hedge fund analyst to bring simplicity into the investment
process. De Lupa offers an AI driven
single source for all company reported data and allows for
investment teams to make the most informed decisions in the
shortest amount of time. De Lupa scales the velocity of
an investment team's idea generation.
Analysts spend less time locating and manually inputting
meaningful disclosures into Excel and more time synthesizing
in the minutes after the print. Delupa captures data from all
company reported sources including from footnotes, mdnas,
and investor presentations. Delupa's data sheets include gap
to non gap adjustments, guidance and all company specific APIs.
Each data point is auditable to the source for easy verification
and accuracy. Delupa's Excel plugin can also
update your existing models for the latest quarter in just a
single click bulge bracket. Banks and major multi managers
are trusting the loop of further use in initiating coverage,
building and maintaining industry dashboards, and keeping
their models up to date. Visit delupa.com/business Brew
to create a free account and learn more about how de Lupa can
increase your team's speed to differentiated insight.
As always, nothing in the show is financial advice.
Please consult an investment advisor before making investment
decisions. Everything in the show is for
entertainment purposes and educational purposes and do your
own due diligence. Ladies and gentlemen, Matthew
Sweeney here of Laughing Water Capital.
We were talking offline, so we're just going to continue it.
Matt said that he's generally suspicious of anything that is
optically cheap and we were talking about just value as a
factor. So that's where you're coming
in. So you want to rehab the
conversation about things that are optically cheap?
Because I think that's interesting.
Yeah. I guess what I mean when I say
that I'm generally suspicious of things that are optically cheap
is that in today's world, literally everybody with a
smartphone or a computer can see it if it's optically cheap.
And I always think of there was a piece from JP Morgan back in
2019 that kind of laid it out. They said that by their
estimation, 80% of the investing world is based on either
quantitative strategies or index strategies or ETFs or something
like that, where they're basing their entire investment decision
process on observable inputs. And if you think about that and
then think about what was cheap in Buffett's day, like profits
early day, it's totally different.
Like you could go read the Snowball, for example, and talk
about him going like door to door and knocking on people's
doors and literally telling them like, hey, you own a stock and
it's cheap. And these people, they don't
even know that it was cheap. I mean we, I don't remember this
specific example, but it was something like, you know some
company trading at $0.20 on the dollar and Buffett knocking on
the door and being like I'll pay you $0.50 on the dollar.
And that's a fantastic return for these people who didn't even
know what they owned. And then there's today's world
where if it's cheap, like literally everybody knows, if
the numbers, if the numbers say it's trading at a whatever, PE
of eight or whatever, the entire world knows.
And if any sort of quant strategy, which is some huge
percentage of the market, they see that it's cheap.
And of course, there's all sorts of different quants and there's
momentum quants and whatever. But just on a fundamental quant
basis, like they're going to see that it's cheap and fundamental
quants would typically have some sort of, you know, attribution
to the value factor. So they would say, OK, this is
cheap. I have to buy it.
So if there's some huge portion of the market that has to buy it
and it's still cheap, I don't know, maybe it's cheap for a
reason, right? Like is it isn't that kind of
where you have to wind up? So that's how I think about it.
And when I look at my own portfolio and my own investments
and I guess my own like view of the world we live in, I think
maybe what you want to be looking for sometimes is things
that are not optically cheap, right?
If they're optically expensive, but an intelligent business
person would look at it and say, oh wait, the numbers are
misleading, the actual business is cheap.
But that sounds more interesting to me at least.
I think the problem you run into is that eventually you need that
incremental buyer to come along, right?
Like, so in a long enough timeline, the only thing that's
going to matter is the quality of the business or the
performance of the business, the fundamentals of the business.
But day-to-day, month to month, quarter to quarter, even year to
year, like what matters is the incremental buyer and
opportunity cost is real. So you don't want to just own
something forever saying like, oh, it's cheap and it's cheap
forever, like that's called the value trap, right.
And we don't want to be in value traps.
So I don't know you have to weigh all these things and going
back to that 80% of the market that is basing their investment
decisions on the quantitative inputs.
I think an interesting way to approach it is to look at things
that are quantitatively not cheap today, understand what is
going on internally with the business that makes it look not
cheap, but it actually is cheap. And then have a view on how that
is going to change over the next.
I mean for me, I always think in three to five year blocks like
over the next three to five years, how is the value going to
surface so that it will be in the numbers and then the quants
will see it and the quants will buy it and that's your
incremental buyer and that's what makes the stock go up
independent of the fundamentals. I mean you want the fundamentals
improving all along also, but you don't want to be in a
situation where the fundamentals are improving but nobody notices
forever. And going back and we, we were
emailing earlier about kind of David Einhorn and what he's been
saying about the market being broken.
Look, I am nobody to criticize David Einhorn.
I just don't really agree with the view like the market is
broken. It's kind of like saying I don't
know like the earth is broken or like the world is broken.
Like it is what it is. It's not, it's neither broken
nor correct. It just it is the reality that
we are living with. So you kind of have to adjust to
it and Einhorn's approach has been to focus on return of
capital stories, which is totally valid approach.
But I think another valid approach is to kind of
understand what the quants look for and how you're going to get
in front of those quant buyers. And it's probably the most
tortured analogy and certainly my most hated analogy in
finance. But it's like, you know, where's
the puck going? And it goes.
Skate to where the puck is going.
Just understand what the quants are looking for.
But what is not in that bucket yet?
And then how is it gonna get in that bucket?
That's how I'm thinking about things.
I get the other. I'm rambling but.
No, no, you're not this. I'm smiling because this is like
exactly what I said on value after hours when I was recently
on. Yeah, well, I was.
I was listening and. 'Cause I was like, 'cause I was
kind of like, OK, I mean, one, I don't know how many businesses
are out there truly trading at five times free cash flow that
are buying in all their shares. But to your point, like, that is
super valid. And if you can find them, I
think owning those makes a lot of sense.
Yeah. And the ones that are out there
that like Einhorn for example, I think he's on some coal stocks
and stuff like that and they're trading at, you know five times
free cash flow and I think that's because the market is
telling. Now.
What's that? They're like 10:00-ish now.
It's been a hell of a run. Yes, of course.
But when they're trading at that five times level, they're saying
like the markets like these earnings are not going to be
here forever, right. So I think Einhorn's point is
you're cheap, you're five times, so that's cheap.
But if you're not, if the company is not acting on that,
it's going to stay cheap because everyone thinks those earnings
are going to fall off a Cliff. So if you're at the point then
where you're either in a value trap or worse, you're in a
company where you know you're at peak earnings or whatever it
might be. So you need something to kind of
close the gap and I think earlier in Einhorn's career,
well, I mean it's a fact that I don't think it is a fact that
earlier in Einhorn's career and you can look at the flows data,
there was a lot more, you know, active investors out there,
right. So much of the world has gone
passive. You could look at the amount of
money that has left active strategies have gone to passive
strategies. And certainly in small cap, it's
just been a complete extinction event in small cap active.
So it used to be that there would be enough people out there
to do the work, take the fundamental view, the
intelligent business persons view and make a decision and
possibly close the gap. But that incremental buyer, I
don't want to say they've gone away completely, but it
certainly seems like there's less of those fundamental
incremental buyers and now it's just the quant incremental buyer
or the Einhorn argument is you need the company to be the
incremental buyer because otherwise it's just going to sit
there. Yeah, I mean, you've been doing
this for how long? Just past eight years on the
track record. So do you find that the
opportunity set today is like more attractive, less
attractive? Do you have any sense of whether
or not all those people leaving the market has created a more
like a better opportunity set out there or have they left for
a reason? It's.
It's an interesting question to phrase it that way.
The way I look at it, I think there are a ton of cheap stocks
out there right now. But I think the other part of it
is not just are they cheap, but again like how long are they
going to be cheap or what is going to cause them to no longer
be cheap. And looking at my own portfolio
and I think I know another's of a pint on this, it's not enough
to just execute as a business unless you have an infinite
timeline and then at the end of that infinite timeline then you
get your RE rating. Like I don't think you can only
be betting on a RE rating which was kind of the the earlier
earlier in Einhorn's career that was a big part of what I think
he was doing. Like you get the RE rating, you
get the next person to come along and like you can't bet on
the RE rating anymore. So I think in general if RE
rating is part of your thesis, you really have to stretch your
timeline. Like you really have to be
thinking not just like a mean reversion type RE rating, you
have to think of a RE rating through the numbers, meaning
that the the incremental buyer IE the Quan will take notice of
what's happening. So and again I starting with me
or my approach taking a three to five year view, it's feels like
a really long time right now. It didn't used to feel like
three to five years was so long because somewhere along that
three to five year period if you were right that would kind of
get pulled forward. And I don't know how much of
that was, you know, the interest rate environment and just people
being quicker to pull the trigger on things.
I can't really explain that part of it.
But in today's world or at least maybe the last two years call
it, it feels like three to five years is very long.
Because at least for me, when I'm starting with a three to
five year thesis and the rest of the market is only thinking
about what's going to happen next month with inflation or
interest rates, you kind of have to sit there and say the
market's going to care eventually about fundamental
improvement. But right now the market is only
caring about interest rates and inflation and fundamental
improvement that is not showing up in the numbers yet.
There's nobody to care. And yeah, yeah, it's frustrating
when you own businesses that you feel like you can look at them
and you can talk to the people, you can talk to the competitors,
you can talk to the customers. You could start to see it in
what they say that everything is going in the right direction.
But maybe it's not in the numbers yet.
You just you have to wait because there's not enough
people. In theory there's not enough
people that are looking past the numbers and taking the
intelligent business persons approach, especially when
everyone else knows that it's a short term game these days and
you know everything from the interest rates and that sort of
thing at the macro concerns. But also Bill and I were talking
before we turn the camera on about pod shops and like if
you're a pod shop, I mean you're playing the quarter to quarter
game, that's all you're doing. I mean another one that's kind
of mind blowing to think about. If you think of the guys at
Renaissance, the best performing fund, I think it is it the
medallion funded Renaissance. I believe so, yeah.
Literally the best performing fund in the world over the
however long it's been now and if you read the book, he says
he's like he literally does not care what these businesses do.
Like it's literally just short short term price movement and
it's kind of hard to get your head around that.
People like me who spend so much time thinking about the
businesses and the people and the competition and and then
there's a whole other group of people that just don't even
care, does not even matter. And you know they're winning.
They're doing a great job. So it's more and more people
taking that view, or more and more computers taking that view.
It's harder to understand how you get paid unless you're
taking an even longer timeline than historically was necessary,
I think. Yeah, I I looking at my phone
because last night I was on the Twitter machine and somebody
tweeted out, is it really tough for hedge funds to raise money
right now? Ricky Sandler, a guy who has a
fairly long track record in this industry, says for a single
manager, non market neutral, it's as bad an environment for
holding and raising assets as I can remember in my 29 years in
the business. I think that's interesting,
right? I don't know what to take from
it. I've done a few episodes
recently that will be coming out sort of.
These conversations are not perfectly aligned with the
editing process. But anyway that I espoused the
merits of ETFs for their tax efficiency.
And I've said like maybe I've in the past, I've said I'm I'm
probably going to index. That's not precisely correct.
I I may try to use more ETFs, but then there's the part of me
that's like, dude, if everyone is going to one side of the
boat, it is the wrong time to go to that side of the boat.
And I I don't know how to hold those two thoughts in my head at
the same time. Yeah, I mean it it's hard, I
don't know that there is a perfect answer except to say
that you can look historically the way these things work, you
know, value invest in, which is a term that I I don't really
love that term because it means certain things to some people
and something else to other people.
But historically with these things like you can go sideways
for a long time and then have a huge rereading really quickly
once it comes together and that that's kind of on the index
level or you know, the factor levels, the small cap factor
level. But even with individual
companies, it has been my experience that if you're buying
something that is truly cheap, I don't know, I want to take that
back because I don't start with how cheap something is.
I'd start with like, how can earnings power improve over
time? And then if it's also cheap,
well, then that's a winning combination.
But if you have something that's truly going to increase its
earnings power over time and you're not paying a crazy price
going in like you're going to be, you're going to be rewarded
eventually. We don't know when And what
often happens, and what I feel like is happening with a lot of
cheap names that do not appear cheap right now is they're doing
all the right things. There are thousands of hundreds
of thousands of people or whatever it is out there that
are going to work every day at these businesses and moving the
business forward and everything isn't going the right direction.
Most things are going in the right direction.
Of course they all have their own individual struggles, but if
they are doing the right thing and if the thesis behind the
business proves itself out over time, you're going to get paid.
It's just possible that it goes sideways for like two or three
years. And of course opportunity cost
is real and I think that also contributes to more people kind
of leaving small cap land is the opportunity cost is real.
When you can look at the mega caps or whatever it might be and
say why be patient on a small cap when I could just buy NVIDIA
and it goes up 100% every six months or whatever it is like.
Seems like it's a lot more fun to have something that goes up
every six, 100% every six months.
It definitely would be more fun. Yeah, rather than, you know,
sitting in a corner by yourself saying no, the fundamentals are
improving. It's frustrating, it's hard, but
eventually you get paid. And that's I think the biggest
thing is like having to stick with it, stick with the process
for extended periods of time when so many others are
abandoning the process, especially when the abandoning
of the process is often happening at the agent level,
the allocator level rather than the practitioner level.
So you're not even, you don't even get to have a conversation
with people about why that's happening.
Like it's out of the practitioners hands.
So you kind of just have to wait.
But again, if you're buying things that are going to be at 5
times free cash flow in two or three years and it's going to
show up in the financial statements, you're going to get
paid. Just so I understand what you're
saying, when you say that it's happening at the agent level,
you're saying that that the allocators generally, whether
that's institution, retail, whatever are choosing to go to
the products that are working or more SPY or whatever, right?
Yeah, and to be clear, there's a lot of valid reason to do that.
But among those valid reasons, valid at the individual level is
like is job security, right? I mean, if you're an allocator
and you're saying no, no, no, no, let's stick with this, even
though it's not working, eventually you don't have your
job anymore, right? Like, you have to go.
You have to do what's working. And it's a hard problem to solve
except to continue to believe that if you have businesses,
good businesses run by good people that are generating a lot
of cash, eventually someone, somewhere will care.
I just think you have to wait a little bit longer to get to that
point today because if that cash is completely apparent today,
going back to where we started, if that cash is completely
apparent today, well then it's not cheap because there's 80% of
the market or whatever that is just focused on that.
If that cash flow is 2 years from now or whatever it might
be, that feels like 1,000,000 miles away in a market that
right now is just month to month macro.
And then there's been numerous articles lately about the rise
of pod shops or multi manager platforms and how they're just
market neutral quarter to quarter backdrop.
Also with less and less people on the institutional research
side spending time in small cap while spending time anywhere but
especially spending time in small cap, you'd have to be more
patient. And that's another thing to
think about with the the sell side in small caps and going
back to the idea that so much of the market is powered by quants
now. So another way that I think
about it. And to be clear, I'm quite
certain that quants are infinitely more sophisticated
than I will ever realize, but. If you really boil it down for
fundamental type quants, they're only have two inputs, right?
One is the rearview mirror and the other is the windshield.
And we just talked about the rearview mirror and how if
you're looking at things that in the rearview mirror look cheap,
well, I think you should be suspicious.
And if you're looking at things in the rearview mirror that are
pretty ugly, maybe that's interesting, maybe not.
I mean, you have to do the work, but looking through the
windshield, there's not really many cell side firms that are
doing a great job on small caps. And in many cases there's
interesting small caps that have no research at all.
So then if you take a company like in my like my kind of best
case scenario for an idea that I think is interesting is the
trailing financials are meaningless because the
company's gone through some sort of fundamental change, business
transition, whatever it means, whatever it might be.
So looking backwards doesn't really tell you the truth about
what's actually happening. And then looking forward, maybe
there's nothing there for the quants to focus on because
there's either no research coverage or you know, two or
three small cap analysts that cover 40 names and they
essentially regurgitate the press release and call it a a
research report that should be an opportunity.
But again, you need that incremental buyer, you need the,
the in this case the theory is that the quant is the
incremental buyer. So you're not going to get that
incremental buyer though until it's in the trailing numbers.
Like, there's no way to even look forward like the, the
Druckenmiller quote of think of like what?
Where you're going to be in 18 months.
The quants have no idea where they're going to be in 18 months
because they literally don't have forward inputs.
So like, they're then talking about not 18 months, but add 12
on to that called a year for it to get through with the
financials before anyone might care.
So you got 2 1/2 years, assuming that the business quickly gets
to where it should be, where in reality it'll start to show up
in the numbers a little bit, then a little bit more and then
a little bit more, and it could take years.
And it's frustrating time, I think, for a lot of active
managers to own businesses and say, wow, like they are really
executing. And in theory, if a business is
executing, it is not a value trap.
But it certainly feels like a value trap when the stock is
just standing still. Yeah.
Anyway, I was having a conversation with somebody
that's got an SPV and I believe the company is executing.
I'm not the one that runs the SPV.
So, but the story is that it's executing, but the SPV investors
are getting impatient, right, 'cause it's like taking a little
bit longer. And to your point on opportunity
cost, I do think it's very hard to say, OK, look, maybe on a
spreadsheet it was supposed to take nine months and maybe now
it's taken 15 months, but there is true development that's going
in the right way here. Meanwhile, these stocks are
flying all around you right up, and they're getting vacuumed up
by the incremental flows and whatnot.
Whether whoever that buyer is, it's just very hard to stay the
course. Yeah, there's no question it's
challenging and I kind of think of it as the biggest risk for
people in my seat or LP's or allocators who are invest with
people like me. The biggest risk is deciding
it's time to chase performance and you know switch up a process
that that works and assuming the process is executed properly,
it's, I believe it's something that will always work right.
If the general thesis is earnings power goes up over
time, the stock will go up over time unless you way over pay
going in like I think that is always going to be true.
Sometimes it doesn't feel that way.
Yeah, Well, yeah, that's right. I was just writing down as you
were saying that. Do you mind it?
Like, you know, I read your Grandma Doddsville interview.
Do you mind talking a little bit about how you view LP selection
and lock UPS 'cause I thought that that was a nice
conversation on like looking at a lock up as an alignment
function as opposed to a restrictive thing.
Sure. Yeah.
So I guess the way I always explain it to people, and I
don't know what I'm allowed to say here, 'cause I don't want
this to be a marketing thing for me.
So like for funds in general, we're not talking about what my
fund has, but for funds in general if they have a lock up,
One way to look at it and the way that I look at it is the
lock up is not meant to keep people in.
The lock up is meant to keep the wrong people out.
And that's how I think about it because central to my strategy
which we kind of talked about already is a three to five year
view. And there's nothing scarier to
me than a potential LP who misses more on the the retail
side than the institutional side, but like a potential LP
who is maybe, you know, living in like a third tier city and is
locally wealthy and therefore thinks he knows a lot about
investing. And maybe he does, right?
Like you could totally have a great LP like that.
But there's nothing scary to me than taking money from an LP
like that. And then, you know, it's a year
or eighteen months later or whatever it might be.
And they say where's the performance, what what's
happening here? And then I have to explain to
them, well look we've hit some bumps in the road or the
businesses are executing, but the market is focused more on
macro or whatever it might be. That's just a bad use of time
from my perspective to deal with people that are going to get
panicked. So like I think if you want to
invest in a small cap concentrated portfolio, you need
to take a multi year view or it's just not worth your time.
You know you should be doing your indexing or whatever it
might be. But if you want to get the
potential upside that could come from a smaller cap focus, more
concentrated portfolio, you have to understand these things don't
come in a straight line and you have to be patient and wait for
it. So I don't think I've ever
talked to a potential LP that said that they were not super
long term focused. All of them are when they say it
right. I don't think I've ever submit
an investor in any case has said like, Oh no, I'm only here for
next quarter. That's crazy, right?
That doesn't exist. So everybody says it.
But if you really say it and you really mean it, you should be
comfortable with taking a longer lock up period.
Understanding that it's it's not to keep you in, it's to keep the
wrong people out. Because some people will look at
it right away and say, oh, I I can't do that.
You know, three years is too long.
And I'm saying, well, it's if you look at the history of
public market investings, 3 years is not too long.
And the data is very clear that if you, if you invest, I'm sure
you've seen these tables where it's like the average
performance. If you hold a stock for one
year, it's kind of a coin flip and then if it's three years,
it's like you win. I don't know I'm making these
numbers up, but like 65% of the time and then five years it's
75% of the time and then over any 10 year period you're like
pretty much guaranteed to have a a decent result.
That should temper the word. Guaranteed, guaranteed.
But yes, I understand. What guarantees?
But like, the odds swing more heavily in your favor the longer
your timeline like that, I don't think.
There's ever been a 20 year period where the S&P has lost
money. Yeah, I don't.
I I mean, I can't. Think that I don't think that
that's true. I I might what would 2021 or the
COVID crash I that would have had to be above 99 I think.
Anyway, I'm almost certain that that's a fact.
Yeah. So since I've since I've said
that, I'm 70% certain when I say I'm certain.
Take that for what it's worth. Perfect.
Yeah. I think it just comes down to
the, the idea that, like, if you're going to invest in
anything public markets, I mean, start with Charlie Munger, like
you need to be ready for that 50% drawdown.
And the biggest determinant of success over time is like, are
you able to stay invested? And the way I think about it
from my own fund, which we're not really talking about, South
funds, like mine will say, if you really believe it, then you
should be comfortable committing to it and that's fine.
If you're not, there's plenty of other options for you.
But for me personally, like I am, I am almost 100% invested in
my own fund. Like, I have very, very, very
few, sparingly few assets that are not invested in the fund.
So I take it seriously, like who the partners are.
I wanted to be a true partnership, people who
understand what we're doing and are here for the long term.
And there's nothing more dangerous to me and my own
personal performance. This is me being being straight
up selfish. There's nothing more dangerous
to my own personal performance than having partners that are
going to panic at the wrong time or, you know, act responsibly at
the wrong time, whatever it might be.
So I'm happy to try to put something in place that I think
is to the benefit of everybody, but not everybody views it that
way that some people think, no, this is bad for me, and OK,
that's all right. Yeah.
Well, that's a very good screening mechanism.
That's what I'm trying to do, yeah.
It's I guess the way I always think about it is for most
people, for most people, what you were talking about, like
investing in ETFs or index funds or whatever it might be, it's
it's probably best, right? And this is not.
I'm not trying to put myself on a podium or anything like that.
It's just a genetic biologic thing.
Like, people are most comfortable in the herd for lots
of evolutionary reasons, and there's absolutely nothing wrong
with that. But the rewards are substantial.
If you're able to step away from the herd, you just have to make
sure you're really able to step away from the herd.
And you don't just think you could step away from the herd.
Because if you think you can and then all of a sudden you're not
in the herd and you panic, well, you know, that's that's where
you go to die sort of thing. Yeah.
You know, the other thing is I'm just thinking about what you're
saying and the hot money. I've been thinking a lot about.
Like, I found Ackman's interview to be pretty good.
Well, very good, at least the investing portion of it.
And then I've been thinking about like, what made Buffett so
resilient. And I I thought it was kind of
interesting. Ackman said that he didn't think
that he was born with the emotional I I'm gonna say
apathy. I don't know if apathy is the
right word, but like not getting impacted by volatility and he
had to learn it and he talked about like you've got to have
income coming in, right, or be like financially secure and then
you've got to be able to be, you know, contrarian in spots,
right. And if you run a fund and then
you've got people that are coming in and out it, it kind of
like I would imagine it impacts the income that's coming into
you. It also takes away from the time
that you should be spending doing other things.
And it's probably not for the LP that you you want anyway, right?
It's like a massive distraction in many different ways.
Yeah, I have the Ackman, it could be in my queue.
I haven't listened to it yet. But yes, it, I mean the way I
think about it is just like let's say it's, I don't know,
COVID lows or 2009 or whatever it is and like that is the whole
world is panicking. That is the time as an investor
you need to be most excited. You need to be trying to buy as
much as you can or think the most clearly.
And it's very hard with one hand to be saying like, oh, I want to
be buying and researching, with the other hand saying I'm going
to be selling to redeem somebody like you can't.
At least my, I don't think my brain could handle that very
well. I'd rather be solely focused on
making the investments at that difficult period that are going
to reward us for the next 3-5 or ten years or whatever it might
be not worrying about, well let's buy some, but then we have
to sell it because we have redemptions and I think very
challenging both intellectually and emotionally to have to deal
with that. So I think it's a much better
structure and I think of it as a huge competitive advantage as an
investor to have a sort of semi permanent capital base where you
know that everyone who's one of your partners is truly a long
term thinker and not only do they say it, they have put their
name down and signed the line to prove.
It, yeah. It's funny because you know in a
private vehicle like a lock up is the expectation, right?
Yeah, it's 1010 years or two years options that they have and
then there's probably a continuation option at this
point that that they can have and people don't give a shit,
right? But you put it in a public
wrapper and people start to care.
Yeah. I mean, this is what Cliff
Asness has talked about a lot of times over at AQR with, you
know, basically volatility laundering is what he calls it.
He's just put it in private and then it doesn't matter if it
goes up or, you know, if the economy goes up or down or
whatever, mysteriously, the marks do not appear.
So you're fine. Yeah, yeah, it's interesting.
I was able like it was like a lunch or whatever that Steve
Schwarzman talked at yesterday and he was talking about there
was a real estate deal that he did.
I think it was the 90s. The government was selling a
bunch of real real estate and banks weren't lending on it at
the time. And he found out by talking to
somebody in the government that this is happening.
And he said, well, who's able to buy this?
And the guy said it's basically dentists and doctors.
It's people that have some cash flow outside of the property
that they can lever and then they can buy the property
because they can see through to the upswing.
And the way he told the story is he he partnered with Goldman to
bid on a portfolio of this stuff and he set the price at 16%
entry, free cash flow yield. And Goldman was like, well, no
one's bidding. Like you don't need to buy
there. And he said, look, this is like
good enough, right? We're going to do fine.
And it was a massive win. And I asked him later, I said,
you know, where did 16% come from?
I don't think that's possibly just some random number.
And and I said what, how are you thinking of opportunity cost to
capital? And he said, I don't ever really
think that way. And I said, well, I'm more mean
it in like the Charlie Munger way, right.
What was your next best idea? And he said, well look, this is
how I see it. It was an asset that was going
to be there. The earnings power was going to
improve, right? They were going to get rents,
were going to stabilize. It was a panic.
And I paid 6 times EBITDA minus cash flow.
And he's like, if you can get those three things together,
you'll never go wrong. And I thought it was a really
interesting story. And I I've just been trying to
think about like those kind of bets and where I think you need
to be personally to be able to go against the crowd in that
kind of way. There's a lot that I've been
noodling on. I I think a lazy personal
balance sheet is important. I think the right partners is
important, whatever that is, whether that's, you know, I
mean, I'd even define like AETF as a partner, right?
It's somebody that you've decided to give your money to.
That hood should give back over time and then and then
temperament. I don't know.
It's it's interesting the way you phrase it though I think you
said that that he described it as you know the 60% was good
enough and good enough is something that I think about a
lot. I've I've written about in a
couple of my letters because in a in a crazy world with the
macro and everything else, like you don't know what's going to
happen. And a lot of people get scared
away, I think from good investments that are good enough
because they're waiting for them to be better.
But what that really means is like they're scared of them
because even though they're good, like what if they go down,
you know, then they'll be better if they go down rights.
But I try to frame it as if we're buying, I mean I'm almost
never buying like you know a free cash flow yield today
that's like a 20% free cash flow yield, but if you're looking.
At it doesn't really exist, right?
I mean, it does, it does. But.
If it does, you need to be very suspicious of it, right?
Like I often feel like I'm buying a 20% free cash flow
that's maybe 2-3, four years away.
And importantly, it's not like Herculean assumptions to get us
there. If the management team pulls a
couple like easily identifiable levers, we should get there and
20% of free cash flow yield is very attractive.
But what if it goes to like a 25% free cash flow yield?
Should we be, should we be upset that the stock went down or just
say it's OK like stocks go up and down if the business
executes, if they get the earnings power to where I think
it's going to go, it's going to be fine.
It's not going to matter, and it's very much like not focusing
on the bumps of the journey, but very much focusing on the
destination. And if you're right about the
destination, the bumps don't matter.
You're going to get there and you're going to be fine.
Yeah, that I mostly agree with, though I have to juxtapose it
with the idea of and and I think the answer by the way is the 20%
free cash flow yield. But sometimes I think like floor
and decor is something that I've been racking my brain to try to
understand the valuation on. And it's like, man, it could get
good, it could work right. It probably will.
I mean there's tons of smart people that like it, Charlie
Munger included. But man, that thing just that
appears rich to me. So I think, OK, well if you can
get like even 10 or 15% from here, might you have a path that
includes a fairly big drawdown along the way.
That said, things trading here and housing has stopped.
So this is probably a reasonable support, but I I don't know I'm.
Yeah, but I think so. I mean I haven't done the work
on Florin Decor personally, but I guess I think of it as
analogous to maybe Walmart or Home Depot or something like
that in like the 70s. And at the time you could look
at those companies and say like there is a reason that these are
going to take over America like they have real competitive
advantages. And then you have inflation and
you have recessions and you have whatever and the Walmart had I
think a couple multi year periods where earnings went you
know sideways to flat and people sold and like I've heard it said
many times like the only people that didn't sell were the
Waltons, right. So it's easy to get sucked into
that because opportunity cost is real and you know it stinks to
own a good business that is going nowhere where the stock is
going nowhere for you know a more extended period of time.
So something like floor and decor which I think is probably
trading again, I don't follow, but you know what, is it 40 or
50 times PE or something like that?
Yeah, I think that's probably right.
I think 60. Yeah, so I mean.
But that's current, right? The a huge number and but this
goes back to understanding like how is earnings power going to
improve over time and you know this one the your only option
here when it's that big of a PE to grow into it has to be growth
obviously it's like they're going to cost cut their way down
to a reasonable. I don't want to use the word
reasonable to a more palatable multiple, like they have to
grow. That's fine.
Like that could be value, even though it looks like it's 50
times or 60 times PE, whatever. Like it could certainly be value
if you're that confident that they have a better mousetrap and
that I don't know what their door count is right now or.
But you know if you say, well they're going to easily put this
many boxes out there and at that time they're going to be earning
this well, like that's a totally valid approach.
I think what's harder for me in situations like that and
probably harder for most people that try to be more critical is
are there competitive advantages?
Truly something like that cannot be recreated.
And I think in today's day and age where information flow is
instantaneous, it's probably harder to be.
I mean, go back to Home Depot, you know, like Lowe's figured it
out, right. But at that time, I think it
took longer to do it. And Walmart, other people have
figured it out not to the same scale.
I don't want to say definitively like, well Walmart's Edge is
that they were first mover advantage, Like they got so much
bigger that they got all the purchasing power, you know, able
to pass on the savings to consumers and all that.
Like I think they probably had arguably a couple decades where
they were doing that and nobody else had, you know been able to
do that. I think in today's day and age
it's so much faster and access to capital is so much easier
that new entrants could probably come a lot faster.
They did in the past, which may be then makes it more difficult
for foreign decor. And I think I don't know the
answer to any of those things. I think those are harder
problems to figure out. I'm looking for way, way simpler
problems. Yeah.
Well, I'll tell you what, John Huber did a podcast with the
Andrew Walker and I I think he's got it.
I I like the way he thinks about it.
Basically it's a single focus and the amount of working
capital that you'd have to invest in a concept like that in
order to compete is substantial. Makes me a little nervous the
amount of private equity money on the sidelines.
But I think building it is probably harder than a
spreadsheet might suggest. But it's really interesting,
man. I don't know.
As we were talking earlier, I said that that I feel like when
I was on value after hours, people used to to comment that
I'm not a value guy, but I tend to agree with you and the cheap
stuff. This Adam Robinson quote keeps
coming back to me. You got to look at things that
make no sense or things that make perfect sense.
And I think when I see an A multiple that appears very
expensive, I I I benefited more from turning my brain into OK,
this makes no sense. That probably means that I don't
understand the way the world works.
As opposed to I'm right and this actually makes no sense.
Yeah, I mean it. Which is not to say it's cheap
or whatever, I'm just it's just a comment on thinking, right?
Yeah, no, of course. I mean, in terms of like, people
criticizing you that you're not a value guy.
And I think I said this earlier in the show, too.
Like value just means different things to different people.
I think the right way to think about it is getting more than
what you pay for and you can get that value in a couple different
ways. Like one way is like a super low
multiple or discount to book value or whatever it is and
another way is you're getting growth for and not paying for it
all that much. The harder part on the the
growthy side of value, I think is like knowing how much is too
much to pay. Because again, like you going
back to Walmart in the 70s, like I saw the analysis at one point,
I didn't do it myself, but it was something like, you know,
you could have paid 40 or 50 times earnings for Walmart in
the 70s and then brought it forward to today and still got
in like a 15 or 17% annualized return.
You know, and there's nothing wrong with that.
Like if I could sign up for a 15 or 17% return right now, for the
next 5 decades, I would sign up right away.
Yeah, especially if you end up with a dominant business at the
end. That's not a bad problem to
have. Exactly, exactly.
But it's I think for a lot of people.
I myself am am guilty of this to some extent, but a lot of people
that view themselves as quote value investors started in the
the traditional value investing like the Ben Graham value
investing where it really was of all about how cheap it was.
But I just don't think that's the way the world works anymore.
And Ben Graham's day, like, you could find things that were
crazy cheap, and you could look in the mirror and have an honest
conversation with yourself and conclude, like, it's cheap.
It's this cheap just because literally nobody even knows
about it. And think of, you know, the
stories of Buffett going down to the floor of the Stock Exchange
or whatever and pulling the annual reports in paper form.
And he was literally the only person doing that.
Or maybe it was Standard and Poor's office and, like, pulling
annual reports in paper form and nobody else was doing that.
So he was finding these things. But today's world, it's not how
it works if it's cheap. Literally everybody knows.
So I think you have to be more suspicious.
And that's when you have to get more comfortable paying for
things that are more expensive. And then the job like the actual
craft of the investment is figuring out like is it actually
more expensive or does it just look more expensive and maybe it
just looks more expensive because of future growth like
the floor and decor example, like how many boxes can they put
out there. I think of that as being a
harder analysis, but maybe it's looks expensive because of some
sort of, you know, internal project or something like that
that is temporarily weighing on margins.
But it then it becomes like, is this project going to last
forever or is it really just temporary?
And in the best cases you can answer those kind of questions
by looking at incentives, right? And I mean it's the example I
always think of and I feel like I've used this example and
everyone I've ever talked to about investing is it's just
good Co, bad Co. It's one business or, you know,
one stock that has two business lines.
And if one of them earns a dollar and one of them loses
$0.50, on a net basis, the company makes $0.50 and then the
market puts a multiple on that. And if you're thinking about it
as like, oh, I need earnings power, future earnings power to
go up, Well, one way to get future power, future earnings
power to go up is just kill off that $0.50 losing business.
Like literally just shut it down.
It's not that clean. In the real world you have
severance costs and runoff costs and everything else.
But you can look at it and say if this is a business where the
Board of directors or the management team, they have a lot
of skin in the game. They are incentivized to not
burn $0.50 a year forever. Well, then they're not going to
burn $0.50 a year forever. And as soon as they shut it
down, well then earnings power double S and you're going to do
well in the stock of earnings power double S And in better
case scenarios like they don't shut it down and better case
scenario, you don't have to shut it down because the business
hits some sort of inflection point.
And then you have two business lines, one of which is earning a
dollar and one of which is maybe now break even and then maybe
it's earning $0.50. And then you go on from there
and you start to get credit for that sort of thing over time.
But I spend more of my time on those sort of situations where I
think it's an easier analysis to just look at it and say are the
people incentivized to pull the easily identifiable levers that
will lead to higher earnings power over time rather than
trying to do the whole growth analysis and competitive
dynamics and real real things like that is, is more difficult.
With Good Co, Bad Co, do you find that?
How do I want to ask? This is bad Co when the
situation works? Is bad Co more often like an
internal project that they're working on that has momentum
that's going to grow and then you're going to see it.
So it's not really bad Co. It's more like earnings drain as
opposed to a part of the business that's not working.
You know what I'm saying? Yeah, that seems like a little
bit more stable environment to live in.
Yeah. I mean, there's no typical,
right? They're all different.
But in those best cases, like at some sort of temporary project
that is maybe sucking up some capital and weighing on earnings
and something like that. In the best case, it's because
you have a founder with a vision that thinks like I'm going to
make an investment over the next couple years and this is
probably going to work and it's going to contribute to earnings
power going forward. I've had other successful
investments, though, where, I mean, there's one in particular.
I didn't learn this till after the fact, but I learned after
the fact. There was literally one guy on
the board who had been there forever and held outsized
influence, and he kind of had a pet project that was unrelated
to the main business. And it wound up destroying a lot
of capital over time. But eventually they killed it.
You know, like, I don't think it at the time they started it, it
made sense. Like when I was doing my
analysis, I was like OK, it's a bit of a Lotto ticket, but I
think this makes sense that you would divert some of your
capital and some of your resources to this.
And then over time as it became clear, it was more difficult,
you know it it required some some nasty letters and some,
some public letters and stuff. But eventually they killed it.
And then you just have your, you know, the remain Co in that
instance and that's fine, but it's never as clean as just good
Co, bad Co. It's always what is it that is
temporarily weighing on earnings and it could be anything from
the government. This is, you know, years ago
now. But the the greeting company,
The greeting card company, what is it?
American Greetings. Like at the time the earnings
were all messed up. This is probably like 2010.
I don't even remember. But there are a couple things
that were happening but like e-mail and the Internet, like
people were getting away from writing cards and that was a
very easy to believe story. And then they also spent a lot
of money building a glamorous headquarters, which I would not
argue was a good a good use of capital.
Like, it's kind of ridiculous and.
We're a greeting card company, folks, Yeah.
The story was that greeting cards are going away because of
e-mail and the Internet and the financials look terrible.
But the actual truth was the the business was OK.
It was just margins were screwed up because they spent a ton of
money on this I didn't remember I want.
To say it was like beautiful HQ. Yeah, like it was something
crazy like that. The global headquarters of
American Greetings. Yeah.
And and that introduces a different risk, right.
Like then you're saying, do you really want to partner with
these people that want to build this ridiculous headquarters
building? Then the answer is maybe no, but
maybe that can be solved by price.
But the analysis really came came down to is it true that
greeting cards are just going away or is it that the
financials are temporarily screwed up because of some
capital allocation decisions that will not last forever?
And it turns out, I mean there's I read an article not long ago
and to be clear, I not invested in this.
It was. This is more than a decade ago,
but millennials and even younger are actually huge on greeting
cards, but not like Hallmark cards that are 599.
They buy like $12.00 cards. Oh like dude, the card game has
gotten out of control. Yeah, it's crazy, but it's
hugely. Profitable.
What is it, Papyrus or whatever? Oh my.
Something like. That, yeah, yeah.
But it actually my yeah, it's. Hugely.
It's a hugely profitable business that at the I think if
I remember correctly, American Greetings was bought by private
equity. But the story, if you will, that
greeting cards are going away was totally wrong.
Yeah. Yeah.
And believable, to your point, because of something in the
financials that would be a tough situation for me to get my head
around because I'd worry that it's kind of like Empire
building and how can you trust the management team to not do
the same thing again. I guess I could probably get
over it if they would commit to like buybacks and return a
capital so that we get some parameters around how they
spend, what they spend. Yeah, I I was fortunate at the
time that I was on the sell side, so I was unable to make
the decision if I actually wanted to own it.
I just got the pitch at the people without have to putting
anything on the line but your. Experience on the sell side, do
you mind talking about how you got into the industry and what
that was like learning? Yeah.
So I have like the most backwards entry to the industry
ever. And it was completely
accidental. I didn't know anything about
stocks growing up, really. I never even thought about a
career in finance or anything like that.
But I grew up in a town that maybe 30 minutes outside of New
York City, and a lot of people in my town worked in Manhattan.
And I was basically out of college and spinning my wheels
for a year because I was going to go to law school but had
taken a year off, like a gap year kind of thing, which is a
whole different story. But in any case, when 911
happened, there were 26 people from my hometown killed,
including a couple people that worked at Cantor Fitzgerald.
Two of them. That's crazy that there was that
kind of concentration, I guess, I mean.
Well, I mean not in the. Northeast, but man.
It was. Think of it.
It was. I forget how many people, but
almost if it was a 2000 or 3000 people, but all of them within a
commutable distance, right. So yeah, in any case, two of
those people that died were people I knew from high school,
buddies of mine from high school.
They worked at Cantor Fitzgerald.
And then there was a third guy who survived and he kind of knew
that I was out of college, You know, smart guy, but not really
doing anything with my time. I was actually working in my
uncle's bar bartending and he kind of tracked me down and was
like, look, we need help. There's no easy way to say this,
but almost everybody can if it's child was killed and we need
help, can you help? And I said, yeah, of course.
I showed up at the disaster recovery zone in Connecticut
like a week later and got a job or my first job.
I had previously worked at a company called Pergamon, which
is kind of like a smaller version of Home Depot.
But at Perkin, one of my jobs was like building the desks for
the floor models. And like, I showed up and
they're like, do you know how to build desks?
I was like, actually, I. I'm very good at this.
So the interview process, it was for like AI don't.
It was for like a do everything job.
A part of it was like middle office type role and with the
middle office role like I didn't need experience in finance or
education and finance. What I did need at that time was
the ability to like build desks. So I literally built desks for
like the first week or whatever it was.
If I remember correctly, on September 10th, the Darien,
Darien office had like 20 people in it and then a week later
there were like 85 people on it. So it was like people on top of
each other. But in any case, like, you know,
the desks got built in a week or two and then I was like, all
right now what? And it was a middle office role
on the equity sales trading desk, institutional desk.
And then from there, yeah, I guess I've gotten comfortable
saying it over the last two decades.
But like, the reality is when everybody in front of you is
dead, you can climb the ladder pretty quickly.
So I just took the attitude of, like, all right, I'm going to be
the first one in and the last one to leave.
And when somebody asks me to do something, I'm never going to
tell them that I have no clue, even though I literally had no
clue. I'm going to tell them yes and
then I'm going to go figure it out And that that was kind of my
attitude and that led me to climb the the ladder pretty
quickly where I was on the sales desk, sales and trading desk
within like 6 months. And again like no idea what I
was doing except I passed the Series 7 which was the box
checking exercise. But in theory you learn
something from that and then it was just answering the phone and
trying to help out wherever I could.
But whenever people would ask me a question, just same attitude
like say yes and then figure it out.
And what that meant for me was, you know, finding the right
people to ask the question too. And then also spending a lot of
time on Investopedia, the website Investopedia, which is
all finance terms. And like I would hear a term, I
didn't know about it and I would click on Investopedia and read
about it. And then the way the articles on
Investopedia worked is there be whatever, seven more linked
articles and you just go down the rabbit hole just learning as
much as you can. And I put together enough of
the, I guess, the vocabulary to make it on the trading desk
where the job was calling institutional clients.
So hedge funds, mutual funds and very much a Commission
generating role. And Cantor at the time did.
We didn't have any sort of banking effort or research
effort. It was very much a third market
firm and this doesn't even really exist anymore.
But at the time the idea was if you have small cap stocks or you
know less liquid stocks, you need to trade it in the third
market, meaning I'm a natural buyer, call a broker.
The broker then calls all of the other holders and says hey do
you want to sell it and that was the business.
You wanted to trade a million share block of a stock that
rarely trades. You need that third party broker
to 3rd market broker rather to find the stock and cross it
another market. But the business model
day-to-day was very much, you know have an excuse to talk to
your client and then maybe they'll tell you that they're
looking to buy XYZ or sell XYZ. So The Morning Call was
typically like calling all your clients and saying, you know,
oh, did you see the so and so missed earnings by a penny or
did you see that Goldman Sachs downgraded XYZ or whatever it
might be and really just generating noise on the trading
side. And as a 22 year old or 23 year
old with no idea what was really going on, it was a lot of fun.
It was exciting. It was heavy on entertainment.
It was heavy on, you know, take the corporate card and floor
seats at the Knicks and then the steakhouse and everything else.
And I was pretty good at that, but I also was not great at
that. And there are guys that you meet
in that business that are just like unbelievable personalities,
just larger than life personalities.
And then there's also a lot of people you meet in that business
that it just so happens that, you know, their best friend from
college or whatever it is now, hedge trader at a hedge fund and
guess who they got all their business from.
And you know, it's a relationship business.
And that was never me. I never had those kind of
relationships. So I eventually grew pretty
disenchanted with the whole experience, just kind of
realized like, this is ridiculous.
I secretly know that I know nothing.
While on the outside I'm able to like, speak the language because
I've been reading Investopedia. Like I really don't know what's
going on here. I'm just making noise and going
to Knicks games and IA pined on that to somebody who was
actually my partner at the time. He covered the Royce Funds small
cap value mutual fund, a pine to somebody that worked at the
Royce Funds. Like, I don't really get it.
I'm 23 years old. I have no idea what's going on,
but I'm calling guys who are like twice my age, and they
manage a billion dollars. And I tell them that the company
missed earnings by a penny. And then they decide to sell up
500,000 shares of a stock. Like, how does that make any
sense? Like, who cares if they missed
earnings by a penny? And certainly don't care when
I'm the one telling you because I don't even know what that
means. And that guy basically told me
he's like, wow, I remember he said it in like a really
condescending way. He was like, wow, Like, I never
would have guessed this, but I think you actually might have a
brain in your head. And I was like, thanks.
I was like, thanks. But he said he's like, look, if
you have a brain in your head, go home and start reading.
Read everything Warren Buffett ever wrote.
Read Ben Graham, read Joel Greenblatt, Read, read, read,
read, read, read, read. And that's what I did.
And having not grown up around the stock market and having
never taken a finance class or an accounting class, I took one
microeconomics class in college. Like, I never took business.
I never did anything like that. It kind of blew my doors off
when I started reading all that stuff.
And it's kind of cheesy. But Buffett has said it's like
an inoculation. Like you either get it right
away or you never get it. But for me, I started reading
and I was like, Oh my God, I can't believe I've been missing
all this my whole life. It's just kind of like, you
know, problem solving combined with odds making and you can
also get paid on the way like this seems like a good fit for
me. So I pretty much like dedicated
myself entirely to getting up the learning curve which I was
way behind on. And that was everything from
going home after work and instead of going out
entertaining clients all night but cracking 10 KS.
But also like the CFA program and teaching myself accounting
and all that that sort of stuff where it eventually got to the
point I was doing my own write ups and instead of calling
clients in the morning and trying to you know squeeze
commissions out of them, I was trying to find people that would
maybe hire me on as an analyst. So if you think about it on the
Commission side, your best client is maybe they have a
billion dollars under management or a couple billion dollars
under management. Maybe they own 300 stocks and
they're trading all the time that that generates a whole lot
of commissions. But if you think about on the
making money as an investor side, that is not a great model
at all. That is a great model to collect
management fees, but it is not a great model to outperform.
So I started really focusing on potential Commission generating
clients that were smaller funds concentrated portfolio, did not
trade a lot terrible from a Commission generating basis.
But would be you know great for me with how I was thinking about
the world and thinking about investing and hopefully somebody
would eventually hire me. And that's where, you know, the
American Greetings pitch came in and I was doing the work on
American Greetings and then you know, shopping that whatever, 15
or 20 small funds that I thought might be interested in that sort
of quirky special situation type type investment.
And I did that for a number of years.
And for a number of years guys were telling me like this is
great, keep the ideas coming, you know, maybe someday I'll be
the right fit. But these are primarily like one
man and two man, maybe three man shops.
And if you're a small single operator or even a two person
investment shop, like the decision to bring on a third
person or even a second person, like that's a huge decision.
Like the economics of that model breakdown pretty quickly if
you're determined to stay small and give yourself every
advantage you could have in the investing world.
So it never really worked in terms of nobody ever said hey
you know, leave Cantor, come here.
But eventually Cantor came to me and said, hey, leave Cantor
because the reality. Is you're not generating any.
Look at the reality is when you're no longer, you're no
longer trying to generate commissions.
You're trying to enjoy the process of investing and get
into the investing side that that was not the business model.
I can or the business model was generate commissions, but I was
not trying to generate commissions.
I was trying to improve myself and build the relationships and
everything. So, yeah, I don't know the exact
number, but my commissions were down like approximately 70% like
I really it was like. Clearly, clearly had mailed it
in. There, well, to be fair, there
were a couple things happening in the background which also
accelerated my decision to try and get to the investing side
rather than the sales trading side.
And a lot of that was just the evolution of the world we live
in going back to where we started earlier, like quants
were coming up, ETFs were coming up.
So you could think about it. When I started in 2001, there
weren't really these niche ETFs. It's like if you decide you want
healthcare exposure and then you're going to go out and buy a
basket of 25 healthcare stocks and there's a lot of commissions
attached to that. And at the time, commissions
were still five and six cents a share because electronic trading
hadn't really started. Like my my first job, middle
office, or really my second job after building desks was taking
paper tickets and inputting the paper.
The trader would get a call from the floor of the New York Stock
Exchange and it would be like you bought 100 shares at $20,
you bought 100 shares at $20.01, you bought 200 shares at $20.02,
and you have to input each one of those into computer because
it was all paper ticket tickets still, which makes me feel like
I'm super old. But that's how it was.
It wasn't that long ago and electronic trading was like only
just beginning to be a thing, like it hadn't been there yet.
So commissions were still, you know, five and six cents a
share. So you're talking about a basket
of 25 stocks at $0.05 a share and moving to a world where
instead it's one ETF at a half a penny a share.
Like, you know, commissions were drying up really fast.
And I was aware of that and there were a number of guys, you
know, older guys, we've been there for a while and he's
incredible personalities, incredible entertainers.
And they always said we've been through cycles like this before
commissions go down and they always come back.
And I was like, I don't think so.
I think commissions maybe came down after the tech bubble crash
because volumes were down. But like the fundamental
structure of the market and the fundamental technology behind
paper tickets and electronic trading like that was not part
of it. That was just a macro thing.
Then the macro could swing back and forth, but we're now talking
about like a fundamental shift in the entire landscape of how
the the sales and trading brokerage business works.
So part of it was that fundamental shift driving
commissions down. And part of it was, you know, me
making an active decision, saying like the ship is sinking
here. And to be clear, there's still
guys that are in that business and do very well.
But like my personal ship I felt like was sinking and I felt like
I was young enough and hungry enough that I could recreate
myself in a way that would benefit me till to where I am
and now. So the reality though was I was
making the active decision to stop focusing on funds that I
would never want to work at because they generate a lot of
commissions and their returns stink like good.
The Commission side is great, but that's not what I care
about. I care about returns.
So I really just started focusing on, you know, potential
potential places that would maybe hire me one day that were
terrible customers on a Commission basis.
But they were knocking it out of the park because they own 10 or
12 or 15 stocks and they were doing quirky, weird Special
Situations. And they were not getting shaken
out by the guy who calls them up and says, Oh my God, they missed
earnings by a penny. Like, call them and say that
they'd slam the phone on me. Like, call them and say, hey,
did you see American Greetings? There's some really weird things
going on under the surface here. I think you should take a look.
They're interested. In any case, none of those guys
were ever able to hire me. I wound up leaving Cantor at
their suggestion, which I was very complicit.
And I was kind of waiting for it to happen because if I had quit,
I would not have gotten paid out on my partnership interest.
But because they kind of asked me to leave, I got paid out on
my partnership interest and that kind of gave me a little bit of
ground to build a business on top of.
I mean, there's multiple other steps in between there, but it
was just an active decision to pursue the craft of investing in
a concentrated small cap manner that I'm still doing today.
That's awesome. Did did the conversations that
you were having, I mean how much did that help your knowledge
acceleration? Huge.
Right. Because then you start to back
and forth ideas with people that you respect.
Yeah, it was huge and it also ties into what we talked about a
little while ago about what value investing actually means.
We're on one side, it's like low PE, low price, the book,
whatever it might be. And on the other side of the
spectrum, it's maybe underappreciated growth
potential. But I was doing write ups and
then sending them to 10 or 15 different PMS and some of those
guys were more traditional value and some of those guys were more
traditional growth And I was getting feedback from all of
them to trying to help me shape the way I was thinking because I
was literally starting from from nothing.
I cannot overstate how under informed I was to the point
where I don't think I'd ever seen a balance sheet in my life
until I was like 23 years old. I just didn't know I was not
exposed to it. So I was literally starting from
nothing and then I was able to get exposure to a lot of high
performing investors with a variety of styles.
And I was able to kind of you understand the nuances between
their different styles and see which parts of their style
worked for me. And take something from one guy
and take something from another guy and then come up with my own
style versus a lot of people who they maybe.
I guess the typical path is probably like Ivy League
undergrad. Then you work in a big bank for
two year training program and then if you go to a fund or you
go to Business School 1st and you go to a fund but then you
get molded in that the model of that one fund.
So you're kind of taught their process and then that can become
your process, of course. But that was different than my
experience where like I was able to develop my own process with a
lot of different inputs and it it truly is my process, which
means it's the right fit for my personality and you know, my
emotional makeup, however you want to think of it.
Then those things, those things are important in the investing
world, especially when things aren't going right.
It's I think it's the the fundamental key is sticking to a
process over time or even when it's not working.
As long as you're executing it properly, even if it's not
working, you should stick to it. But it's a lot easier to stick
to it when it actually is your process and not the process that
was beaten into you by your boss.
That's cool, man. Good for you.
That's a nice story I like. It was it was a bumpy road and I
get a lot of emails and questions from other emerging
managers, people that are trying to figure it out and you know,
how did you make it work? And in in the early days, I I
mean I was doing anything I could do to extend the runway.
That's what it's all about. Like I running the the business
where I didn't really have many outside investors at the time,
but I was, you know, working as much as I could on nights and
weekends. Because sometimes during the day
I would be taking like a random consulting gig that I like would
talk myself into. Or sometimes I was doing
contract analyst work for other managers.
You know, anything I could to just extend the runway.
We, Bill and I were talking about this when the camera was
up, but you know, including tempering expectations from my
now wife who at the time was my girlfriend.
I was like, but the the belt is going to be real tight around
here for a while because I'm taking a chance on myself.
This is a couple years ago now, but I remember on Twitter
somebody had posted like, I don't understand why an analyst
would leave a job where they make, you know what, I forget
the number. I think it was like $300,000.
Why an analyst would leave a job where they're getting paid
$300,000 and try and start their own fund.
It's like it just doesn't make any sense.
And I totally get that if you're only thinking about it in terms
of the money. But I was never thinking about
it in terms of the money. I was always thinking about it
like the risk is not walking away from the job you have.
The risk is waking up one day when you're 70 years old and
looking in the mirror and saying, I can't believe I never
took my shot. Like, that is the real risk.
So it's worked out for me. It doesn't work out for
everybody, but it's it's worked out for me.
Well said, well said. My buddy owns a Chick-fil-A
around here, and in order to get it, he had to take it was like a
mall location. And he was behind, you know,
he's the chief cook and bottle washer, whatever.
He's behind the cash register. And my other buddy who had grown
up with him but didn't talk to him for like, you know, 15 years
or whatever, was walking through the mall And he sees his
childhood friend behind the cash register at the Chick-fil-A.
And he turned to his wife and he's like, what should I do?
I should I go see him? Like, I feel so bad for the guy.
And he walked up and he asked him, he said, like, are you, are
you now like the cashier here? And he was going to give him 50
bucks to help him out or whatever.
And my buddy was like, no, I own the place.
And I got to come in and I basically had to fire everybody,
turn the culture around. And now he actually got his
second Chick-fil-A, which they don't do very often.
I mean, he's really built it into something pretty, pretty
incredible to watch. But I was talking to him about
that time of his life and just, you know, he had like, just had
a kid. He's at this, you know, shitty
mall location. He was like, man, I never want
to go back there. I mean, you know, he doesn't
have to, right? But he was talking about, to
your point on adjusting expectations, you know, his wife
was, I think at a couple times she questioned what the heck are
we doing here. But they have a strong faith and
I think that brought them through.
But it's I love those stories. Yeah, that's it, man.
You know, it's there's nothing better than being your own boss,
right? It's not easy, though.
Like, you have to you have to pay dues along the way.
You have to make sacrifices along the way.
But if you're able to make it work, I don't know if this is
true for your buddy. Maybe it is.
But like for me, I'm one of the few people in the world that is
able to make a career out of what they love doing.
So I always think it's like me and like rock stars and movie
stars and not many other people, right?
Like, maybe it's your Chick-fil-A buddy, too.
I don't know how passionate he is about, you know, washing the
bottles and cleaning the grease traps, but maybe he is
passionate. I think he likes building teams
and he gets to coach the kids that he hires and stuff.
I think. I think he quite likes.
Chip Play is obviously like the fantastic brand and they're
known for their values and known for incredible service, and I
totally see how you could be super proud of that.
Yeah, I I think it's cool. I'm trying to learn something
from him about motivating groups I had.
I coached a basketball team with him and it opened my eyes to how
much I need to work on my coaching.
Like the it's it's it was a fun experience 10 so they were they
were old enough to start to grasp concepts.
I've only coached like quite a bit younger, which is like
herding. Cats, I'm about to start.
I guess it's two weeks from now. Start as coaching 8 year old
lacrosse, which, yeah, we'll see how that goes.
It'll be interesting. I've got AUA team on the
assistant, but I didn't play growing up so I don't really
know what I'm doing. So I'm mostly the guy that I try
to make sure that when we're running a four on 4 drill, the
other kids are passing each other and improving their stick
skills and staying busy rather than hitting the each other in
the head because that's what boys like to do.
That's a big part of it for sure, yeah.
It makes no sense. I'm like, guys, stop.
But it's been one of the great joys in my life, man.
I hope you. I hope you like it, because it's
it's. Fun I'm I'm looking forward to
it. I'm I'm actually really excited.
I I. Don't know what else to talk
about, man. I've really enjoyed this part of
the the pod has grown to a point where sometimes it feels like
it's like almost a marketing platform, and it's so refreshing
to just talk to somebody. But like, I I feel like I've
heard you say things like that in the past, but you're not
selling anything. No, I know.
But sometimes I feel like I'm like, like like other people's
house. It's not totally fair because
they're all conversations that I want to have, but it's part of
why I have not, like, I mean, there's going to be a lot of
recurring guests. It's 'cause I I'm going to do it
with people that I like and if I get introduced to other people,
then I'll do that. But I I don't want to cold call
people and try to be like, hey, you know let's come on And then
the other issue and it's really fun to have, you know, like like
Sanjay Air was amazing from WCM. But once you start to get to
that level of firm, there's steps that you got to work with
within, like what they'll allow you to talk about.
Not WCM, they were not that way, but other people have been and
it it gets a little bit like, what are we doing?
Here. But yeah, well, the what are we
doing here? I get it.
But I guess my impression has been that you're doing this for
your own development, right? Your own enjoyment, right.
So that's what's better than that.
It's been great. I would argue the only thing
that might be better is having a job that was paying me while I
was doing my own research and talking to people and getting a
feedback right. But this is how I've been doing
sort of my version of what you did, and it's been hugely,
hugely rewarding and very fun. Like the ultimate outcome here
is that you lever this into a career somehow or?
Well, yeah, I got to do something.
I'm not going to open up a fund. I don't see any scenario where
that's the outcome. I could see a scenario where I
do some sort of financial advising.
I could see a scenario where I try to raise capital for people.
That is probably where my life goes.
But honestly, my my job was making sure that my grandma
could die in peace for a little while.
And now that that's kind of over, I'm at a bit of a midlife
crossroads. Well, it's interesting because,
you know, I don't think I ever missed an episode when you were
on Toby's show or whatever value after hours.
But like, I have not listened to all of your episodes.
So I feel like I've gotten like a good chunk of your your back
story and your life story, but not all the pieces.
So I mean, just right there what you just said, you're like, I
need to do something. Like I didn't know if that was
the case. I was like maybe you don't.
Maybe you have money and you're kind of kicking at.
Me, I wouldn't be happy not doing anything, man.
And I want to be a productive member of society.
I'm not trying and and frankly we I don't have enough to not do
anything nor do I want the pressure.
Like dude, I don't like living off of a balance sheet.
It's not something that I enjoy very much and I don't know what
am I going to do like play golf all the time.
Fuck that shit. I want to do stuff.
It's funny that, like, I do know.
I just want to do something I enjoy that's rewarding.
I do know guys that are totally happy.
The young guys, how old are you? I'm 45.
Guys that are like our age and like they're totally happy just
playing golf. And I would lose my mind.
I would absolutely. Lose my can't do it.
Yeah, I couldn't do it. The only the only time that I am
purely happy not doing something work related is when I'm with
the kids and and my wife. I mean I I really like my family
that that I'm building. But outside of that I I need to
do something. Idle hands are terrible.
You know, an interesting guy I talked to just last week who I
don't think he would ever come on the show because he's very
private, but just like an interesting guy to talk to and
maybe I could facilitate it. And we didn't talk specifics,
but I'm pretty sure he's like self-made, worth like 50 or 100
million bucks. And we didn't, he didn't want to
get into too many of the specifics, but he basically said
he's started by, you know, like a small business in high school.
And by the time he was done with high school, that was like Jet.
That business was generating like $1,000,000 a year in cash
flow. And his parents were like, this
is not a real career. You have to stop with this.
You have to stop. Maybe it was 100, maybe it was
$1,000,000 in revenue. It might have been $1,000,000 in
revenue, But either way like call it 10%.
Margins like. You know it's like a real thing
his practice like you have to get rid of this and go to
college. So you could be I think they
want him to be a doctor. So he wound up selling it and I
think he it must have been $1,000,000 business or
$1,000,000 like EBITDA line because he sold it for something
like 5 or 6,000,000 bucks. Then went to college and like
started Med school and just hated it.
But was investing in public markets at the time and wound up
like doubling or tripling his money over, you know, in a seven
or eight-year period like something not too hard to
believe. But then has done a couple other
things since then where it's basically like small business
roll ups, you know, like finding some weird niche small business.
And one of the ones you talked about, I think it's like a water
purification business. But there's like three of these
businesses in this one like not too large geographic area.
And you buy one, you learn the business and then you approach
the other guy and then you have two and you have three and you
just levy your costs and you get some scale and the increase in
multiple you get from buyers and just with just a little bit of
scale is huge. So you could buy it at like you
know, three or four times cash flow and sell it at 8 or 9 times
cash flow after it's two or three times bigger.
Like the returns are ridiculous. And he's just done it a couple
different Times Now with, you know, small businesses.
Just get a couple. He works very hard.
He described it as like 16 hours a day at times to when you're
getting your people up the curve, kind of like you know,
you're you're Chick-fil-A guy. Like you have to be in there
doing it. But then you get to the point
where you get the right managers and you kind of sit back and
watch the cash flow and start thinking about what you could
sell it for and then start looking for the next one and
that's it. Yeah, the so easy.
There was a guy why did? Everybody do it.
Yeah, that's exactly right. There was a kid at Capital camp
that I talked to. Kid, he's probably like 32, but
he's doing the same thing. And he said to me, he's like,
I'd never go on a podcast, 'cause I don't want other people
to learn what I do. But he does something similar.
He buys industrial companies and he was telling me like one, He
basically, you know, so the balance sheet was so lazy that
he basically bought it and then put a revolver in place and
sucked all his capital out within six months.
And he had this business, like basically free.
Unbelievable. Yeah, it's wild.
Are you going to always stay small cap and like if so why as
opposed to maybe going up to like 5 billion in market cap?
Yeah, It's an interesting question.
And the the way I think about it is as an investor, I want every
possible competitive advantage, right.
And like, look, I'm a reasonably smart guy, but I know that I'm
not the smartest guy in the world.
And I know that this is not a business where being the
smartest guy is what you need. And it's like Buffett 101.
It's not a game where the guy with the 150 IQ beats the guy
with the 1:30 IQ. But I do think the competitive
advantages matter. And there's just right now it
feels like a negative. But there's just not as much
competition in small cab, especially today, which I used
to think about that as a huge competitive advantage.
Now I think about as well, there's no incremental buyers.
It kind of stinks sometimes, but it's just more fun for me.
And I'm really looking for the one foot hurdle and it's harder
to find the one foot hurdle in for example Apple.
I think there's 50 full time sell side analysts that cover
Apple like I don't want to compete with those guys in small
cap in theory you can get some edge.
Now the way I've thought about it over time maybe it started to
evolve because even with so I've never done super small, I've
never really do anything like less than 100 million.
So I'm not doing like the $20 million market caps, but even
the difference between the quality of a management team
like a $500 million company and $100 million company is huge.
It's like I have moved on market a bit and I top of my head, I'd
say my average market cap right now is like a billion and that's
still very small. It doesn't scale for oh.
That makes sense. But it's a much better that
makes sense, much better quality experience.
The only time I think about going larger is based on the
opportunity set like what I like if large cap all of a sudden got
super cheap because we have a you know the pendulum swings
like well then maybe it makes sense.
I don't know. But for me, what I'm doing stuff
where there's not as many people competing with it and I don't
have to worry about that angle of it as much.
I don't know. It's kind of a lazy answer, but
that's just kind of where I wound up.
It's not lazy at all. That's that's actually the
professional management teams was a lot of what I was actually
getting at. I had a conversation with Jeff
Graham Once Upon a time and I asked him if he were me, what
would he focus on And he's like I would not go too much below
800 million for the exact reason that you said.
He's like, unless you really want to get your hands dirty and
like really get in there and whatnot, but he's like that
around that market cap. Now I'm gonna, I'm gonna butcher
what he said. So just consider it my words at
this point. But around that market cap is
inefficient enough that that you can find real pockets, but big
enough to demand professional management.
That makes sense. That's a good way to think about
it. I think and and the the other
piece of it too is like when you have that weaker management
team, you really have to be thinking like when am I gonna
sell this? And I have more evolved into
wanting to own better businesses with the potential to own them
for longer times. So like for me best case
scenario is like a special situation that could actually
turn into a compounder. Like it has a special situation
price. But this is a business you could
own for a long time. And I have found with the
smaller cap stuff, like you really don't, you don't want to
like the Super small. Like you don't want to own it
forever. Like there's a reason that
they're so small in public and meaning, like if they were a
great business and they were small, well then private equity
would scoop them up, right. And if they're still that small
and they've been public for a while, well, then, you know,
they're not getting the right returns on capital or they're
not compounding or whatever it might be.
So I don't know. I don't.
I don't think there's a right answer.
Yeah, that's that's the old no, no business aims to stay small,
right? Well, I mean, yes, except for
like my business aims to stay small.
I think so. It it's very, very hard for me
to think that. I I mean, you're sitting there
in a room full of people and like, look, Schwartzman's got a
great pitch for Blackstone products.
If they're levered and the economy grows, you're gonna do
better than the public markets. Like yeah, you know, probably
because you're using more leverage.
On the other hand, nobody in that room is thinking critically
about whether or not people are over allocating to private
equity right now. It's just like a given that it's
going to outperform and it's like this guy is fucking telling
you he got rich paying 16% free cash flow entry fee on real
estate. You guys are allocating to
private equity at the time where they're flipping stuff to each
other for 14 times EBITDA? Like.
I don't know. I don't get it either.
But again, the volatility laundering, right?
If you're in the allocator seat, you get to tell your boss or you
know your whatever, your institution, your hospital, your
college is down and you tell them like, Oh yeah, we're flat.
The S&P is down 30% and we're flat.
And you say with a straight face, oh, that's great, that's
great. Let's build that new building we
need to build. That's.
What else? What else was said yesterday?
Oh, somebody was like, well, they marked B REIT down like 8%
last year. I was like, they fucking should
have. It's real estate.
Yeah, of course they marked it down.
No. It's crazy.
It's just, you know, it reduces
career risk for people as they go private equity.
For now, but but I say that it can be another 10 years before
you even realize that that was the wrong idea, right?
To allocate. So I I think to your point, by
then you're gone. Your kids have already graduated
college and like, what the hell do you care, right, if you're an
allocator? So.
I don't know. Well, it sounds like we see the
world very similarly. Yeah, I think so.
I feel like. I feel like you just put your
radio voice back on. No, no, I didn't mean to.
I I just I do think that we see the world pretty similar.
I think so. I gotta learn what to look for
in some smaller stocks. I may bounce some ideas off if I
work harder than I have been lately.
I'm happy to. I do.
That's one thing I have to say that I know you've been big with
like the the cable names and stuff like that, and I get it.
But don't you feel like there's a million people looking at the
cable names? Yeah, I thankfully sidestep this
last leg down. Yes, I do think that way.
And now that I have sold them and look I got into like I think
I made a mistake that I hope I don't repeat.
I got into Charter when they had merger integration issues and
they were integration issues that I could really understand
and the business was on a side of free cash flow in our
inflection that I could understand.
And and it worked and it works so well that even when it was at
like 800 a share, I was like, I remember I was talking to my
friends, I was like we can't make more than like 4 or 5% on
this anymore. Like we just can't.
And I ended up trimming that. And then I went into Altice
which is lower quality. And I thank God I was watching
the conference call And when this the guy got on the Dexter,
when he got on that Goldman conference call, I texted my
friends. I was like this dude looks like
he just cheated on his wife and he's got to come out and tell us
all. And I was like, I'm out.
Like I I do not like this body language one bit.
And to be fair, I listened to what he said before I sold, but
I sidestepped a big drawdown in that and and I got hurt, don't
get me wrong. And then Charter was sitting
there and I think that it was an, you know, it was a business
that I had already made money on and knew pretty well.
And I just, I completely underestimated the CapEx cycle
and the threat from fixed wireless.
And I don't know if it was lazy thinking or what, but I I don't
have like this massive desire to go back into it at all.
Like I I kind of talk about it with my friends now 'cause I
still follow cable, but you know it, I think they probably do
well here. I mean just a simple Dan
Rasmussen, this is a levered, you know, just like a levered
equity. But at this point, I think you
put like a group of those on and the group probably does fine,
basically private equity in public markets.
But yes, I think I should be looking.
I should look at stuff like Thrive more.
Yeah. I mean, I guess the way I think
about it is, it's just a fact that how you get paid is, is
really three things, right? One is earnings power goes up,
two is multiple expansion. And then three is like return of
capital dividends, however you want to think about it.
But the earnings power part is out there and it's out there for
anybody to see whether or not the earnings power is going to
prove like you can do your work on that independent of the
multiple, independent of that multiple expansion.
But the multiple expansion piece, a big part of that is
just there's value in the discovery process.
Like if you're looking at something that nobody else is
looking at and then more people start looking at it, it pulls
forward returns. Like if you know that return
comes forward before the earnings power shows up and when
you have a stock that everybody's already looking at
that, that doesn't tend to happen unless it's already like
they are performing like they are executing and then you're
seeing it and that's fine too. But anytime you could pull
forward the multiple, I think it's a bonus.
Yeah, I think that that's a very, a very astute comment.
The problem again back to what we were saying earlier, I feel
like a couple years ago it would be like a small cap stock and
like a couple people start talking about it on Twitter or
it's written up on Victoria or whatever it re rates pretty
quickly. And now it's like I mean Thrive
is an example, the Thrive last year customer counted Thrive was
up 29%. If you do some work around what
is their runoff marketing business worth versus their
debt, you could kind of say that the debt is probably cancelled
out maybe a little bit more. And if you do that on an
enterprise value to revenue basis, it's trading at like I
don't know two times adjusted enterprise value backing out the
the debt and the runoff business and the average software company
at that size and that margin profile and that growth is
trading at like 6 times revenue. So you know it's super cheap,
right. And they're executing I I grew
customer account by 29 percent or something like that.
But then you look at it and they also have floating rate debt.
That is a death sentence in this market.
Oh, this is this is what you're saying that that people just
don't want to touch it because they're like, I don't know
where? It's going, I mean the trends
that are driving the business. So like the the, the major trend
there is the idea that small businesses are not yet running
their business in the cloud the way all big businesses are.
So your local plumber or whatever is probably running his
business right now on the spreadsheet and some sticky
notes and that's not going to be like that forever.
At some point all of that, you know, every small business like
that, they're also going to have some software that helps make
their lives better. And I don't think there's
anything that stops that trend now.
It doesn't mean that thrive wins that trend.
I do think they have a huge competitive advantage in that
they have this stack of, I think it's down to maybe 350 or
330,000 customers at this point that's still advertised like via
their old business, the Yellow Pages business essentially.
And I think it's probably hard for anyone who's like an analyst
to understand this. But if you're the person who's
running the firm like me or your friend of Chick-fil-A or
whatever, like the amount of inbound stuff I get from
compliance consultants and a new operating system for my trading.
And, you know, any legal advice? Like I get emails like that all
day long, every day, and I ignore all of them.
Now there are a lot of people out there that are trying to
make software for small and medium businesses and they're
all sending emails to these small and medium businesses
saying, look at me, look at me and all those emails are getting
ignored because nobody looks at those emails.
But then you have Thrive and they have 15 on average.
Their average customer has been with them for 15 years.
Their emails don't get ignored because for 15 years they've had
the relationship. They've been, you know, the
small business owner has been sending a check to Thrive.
So Thrive is contacting them. They say, oh wait, what's this?
I should pay attention. It is like a huge competitive
advantage when it comes to customer acquisition.
And if you look at their, their intermediate term plan and you
do the math around where they think they can get on revenue
and ARPU, they're basically suggesting that they could win
less than 2% of their addressable market.
That does not sound ambitious to me.
That is not a winner take all kind of situation.
It's like you could get there a couple different ways.
It's like if 50% or it's actually less than 50%, it's
probably like 40% of their existing marketing customers
transition to software side. Well, then they did it like that
shouldn't be that hard because they already have the customer
relationship, like they already have the emails that get opened.
Or another way to think about it is that if you're like in a
three plumber town and one plumber gets thrive and all of a
sudden you have 3 plumbers and one of them is going to tell
you, yeah, I'll be there on Tuesday between 8:00 and 4:00.
And the other one said is texting you every hour with an
update on when they're going to be there and then they text you
your invoice afterwards so you're not waiting in the mail
and you could pay them right through your phone.
That is such a better customer experience that the other two
plumbers now have a problem. And you can see this in their
numbers. It's like 40% of their new
customers come to a referral where it's like 1 plumber gets
thrive and the next plumber is like oh I got a problem, I need
to get it. So then they get it too.
So like none of this means it's going to work.
It just means that one quants can't see it because it's a
curve crowd cross story. You have a declining business
that's the old marketing business and that's polluting
the financials. Then you have the the new
business which is accelerating but until those curves cross the
gap financials are immense. And then it's you know trying to
think of they can succeed. Like I really think it's a true
competitive advantage to own the customer relationship rather
than cold calling. And then I really think it's a
true competitive advantage that they even this other, this other
business is in decline. It's spinning off a ton of cash.
So in a world where you know three years ago money was free,
every software company out there that was trying to get into this
market had access to free money but they don't have free money
anymore. So being able to internally
finance is a huge deal, but they have some floating rate debt and
IT rates went up last year and despite the fact that they're
executing, the stock was flat on the year.
But you have to look at it and say like all right, they have
floating rate debt. I think it's at like 350 million
right now. They just reported yesterday's,
I don't remember the updated number, I think it's 350
million, but that's down from a billion a couple years ago.
Like there is clear evidence they were paying that debt down.
They just paid off 120 million this last year.
You know, it's going to be gone in a couple years or if not,
gone down to a level where they could easily refinance it based
on the SAS business they're building and not based on the
declining Yellow Pages building. So they'll come out clean one
way or another. And I think when that happens,
then the market has to care. Like the market has to say, oh,
wait a second, the debt's not a problem anymore.
And the market has to say the curves have crossed.
So now everything is inflected in the right way.
And if you're a quant, it's Oh my God, wait a second.
Now it's looks like it's trading at two times sales and
everything else is trading at six times sales.
Not to mention that it's not even qualified as a SAS business
under the GIG system like the industry classification system,
it's classified as a marketing business.
So like when the curves cross, then it'll be reclassified as a
SAS business. And any computer out there that
is only following the rule set will say, wait a second, this is
now in my SAS bucket, wait a second, It's trading at two
times revenue. Everything else is trading at
six times revenue. Maybe we should buy this 'cause
that's what the rules say, I don't know.
And that's how the stock goes right now.
It's at like 19 or something. That's how the stock goes from
19 to 60. I think if I'm right, but yeah,
you know right now it has floating rate debt and that is a
no, no. Yeah.
And a declining business, to your point.
And like the Gap financials suck, right?
Or they don't suck, but you have to put time and effort into
actually. Yeah.
I mean the, the ick factor if you will is, is off the charts.
It's like, oh, they have the software business and this other
business, what's the other business?
It's the Yellow Pages. What who still has a phone book?
And the answer is, you know, people in area that live in area
maybe connecting back to Charter or Altis, but people who live in
areas where there's not good Wi-Fi connectivity or there's
not good Internet and it's, you know, those people in Appalachia
and places like that, like the phone book still is, is a thing
and it's a still totally valid customer acquisition tool for
them. It's not going to be there
forever, but I can't think of a management team that has been
more transparent when discussing the decline of that business and
how they're going to handle that decline.
They're totally open and it is dying and it is spitting off a
ton of cash as it dies. Huh.
That's what you want it. Whenever Jake and Toby and I
would talk about value and some of these like declining
businesses, I'd always be like, you just got to tell me what
they're going to do with the cash, right?
And investing in a growth business while also paying down
debt are two things that makes sense to me as to what they're
doing with. The return, the returns on them
are are very clear and not only that the CEO chairman like he's
putting his money where his mouth is.
He could do the math and on an after tax basis, he's investing
more than 100% of his salary into buying shares in the public
markets. Wow.
The after tax is like a little quirky like I happen to be able
to figure out the prop some of the real estate he owns and what
the taxes are on that. So it's like truly after tax
it's not just like what the government takes on the income
but still like he's out there in the market.
I we'll see, right. They reported yesterday so I'm
sure that the window is probably closed for him until Monday or
Tuesday. We'll we'll see if he buys again
because the stock got hit on on the earnings so.
Do you run background checks and stuff on people?
I wouldn't say I do that. I'm pretty good at finding
somebody who knows people and just kind of connecting the dots
on that. But like I've never hired the
background check firm. I tend to focus on the 1 foot
hurdles and what are the levers the management team pulls and
you know back to thrive. Like, I don't know.
I think less than 2% market share, when you own a customer
relationship like that doesn't strike, see strike me as super
crazy. It doesn't strike me as a
promotional, to your point, right?
It's not promotional. And if they're transparent on
the business, it's declining. Those are people that you could
probably trust. Whether or not the projection
becomes reality is sort of how life works, right?
But at least you're not, like, set up with a person that's
trying to, like, get you to buy into a story that's unrealistic.
That makes sense. That makes sense.
Interesting, huh? I'm going to listen to these
calls. That's what I'm going to do for
tonight. Put my kid down and go listen to
thrive. Yeah.
Well, it's so they reported yesterday.
I have a call with them actually in 45 minutes because there's
some things from the their report last night that were, I
don't know if they're concerned like it was a mixed, it was a
mixed bag and there's a couple things I was like, I don't know
if that makes sense. All right man, I'm going to let
you go. I really, I've enjoyed this,
thank you. The whole reason that I left
everything recording by the way, is so that when we do this
goodbye is because I didn't want to re record.
I've been thinking the whole time I'm like, do we have enough
to like just walk away or do we need to?
Yeah, no, I I just, I wanted to say thank you very much for
coming on and I look forward to the next time that we.
Can let me know if you want to go to Omaha and I'll do the same
and maybe we'll yeah, we'll shoot it over there for a
little. Bit all right.
Sounds good all. Right.
Take care, man. I appreciate it.