Ladies and gentlemen, welcome to the Business Brew.
I am your host, Bill Brewster. As always, thank you for tuning
in. This episode features Richard
Cook of Cook and Bynum. Richard is a concentrated
investor that is currently focused on EM.
He can go anywhere. He's global, but seems to me to
that the current focus is on EM. You can listen to the interview
and decide for yourself. Anyway, I have gotten to know
Richard now for, I don't know, probably close to a year, maybe
it's a little bit shorter than that, but it's been very fun
getting to know him. I hope that you are interested
in the conversation. He drops a fair amount of great
Nuggets. I don't know, I like this
conversation a lot. I hope you like it.
As always, nothing in this program is investment advice.
All of this is for entertainment purposes only.
Do your own due diligence, consult your financial advisor
before making investment decisions.
And anything that Richard said on this interview, he can change
his mind and he has no duty to update you or come on this
program to let you know. So that's that and enjoy the
show. Before this music drops, I do
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I met them. Well, I was introduced to them
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That's SPEECHDOCS. All right, ladies and gentlemen,
Richard Cook from Cook and Bynum.
Thank you very much for joining the show.
Sir, how are you doing? Great.
Great to be with you, Bill. It's nice to do this.
Last time we saw each other was in New York.
That was a a decently fun panel I think.
Oh yeah, I enjoyed it very much. Thanks for leading that.
I tried, I tried my best. There was a lot of discussion
about like governments and following election results, the
more so than I thought there might be, but I don't know if
that's just a function of what you have to follow when you're
in EM investing or not. Well, I think the course of
governments matter and I think they matter for more for some
businesses than they matter for other businesses.
I think a lot of the trading that happens in emerging markets
is shorter event driven around the elections because that's
kind of the the amount of attention and focus that people
have. And I think there's less or I
think that's attracted to us about searching for names in
emerging markets as there's less fundamental analysis and good
business analysis work happening.
But I mean, certainly governments matter.
They matter more in some countries than others.
Like a China wants to do something, they do it and Peru,
the government's pretty small and pretty ineffective.
So kind of capitalism happens regardless if the government
wants it or not. And so that there, but also we
think about the businesses we buy, we think about how
sensitive they are to a big shift to the laughter, a big
shift to the right and new administrations.
And I think that that's a important part of the
underwriting in the US as well. I think you still find the same
thing in the US, but certainly it's something to think about
when you're. Yeah.
For those that don't know, because we're jumping right into
emerging, you tend to be skewed emerging right now.
But I mean you, you have disclosed an investment in ABM
Bev that has a substantial amount of US cash flow.
So and I don't think that you started as emerging right.
So it's not necessarily by design, it's sort of an an
outcome of a process or is it by design?
Well, we've been doing good. We've had global unconstrained
go anywhere concentrated mandate since we started back in 2001.
We're coming up, our anniversary's coming up in a
couple weeks. We'll be 20-3 years in.
So we started out, of course, because that was our base of
knowledge and our circle of confidence in the USI had a
couple mentors that really encouraged us starting in 2005
to look at emerging markets because they said they're less
people with your skill set there and and that there's more of an
opportunity to have an edge if you do the type of work that we
do. So that's not sufficient.
But in that time period in the late 2000s, valuations got
pretty expensive in emerging markets relative to the United
States. So we had some positions that
worked fairly well and then our exposure shrunk.
And then maybe this has been too soon, but maybe the last five
years or so, our exposure has increased as the relative
valuations with the US have gotten more extreme.
So, but we have a, we continue to have the same philosophy, but
we continue to have a strategy that is global unconstrained.
And then we also have a flavor that is just emerging markets
excluding China. And when you, you say you said
global unconstrained and concentrated.
So that leads to two questions. Your top I'd, I'm going to say 8
holdings because I don't even know if they're 10 consist of
how much of the portfolio 100%, OK.
And how many investments have you made since inception over
your 23 years? We've made 40 investments in 23
years. So you would say you're a little
bit longer term than the street? I guess, yeah, I mean we try to
think like business owners and we approach management as long
term oriented business owners. And I think our average holding
period's been about five years and we have delivered, we've not
delivered a lot of short term capital gains to investors over
the years. We're conscious of transaction
costs, but especially if thinner things that could be smaller.
But mainly we like to buy a business, assume that it's not
going to trade again and are we happy with the result.
So then we're not in a trap of trying to guess what sentiments
going to be or who's going to buy this from us later or
whatever. We could just compound capital
with the internal rate of return of that business and you know,
this course other pieces of that, but that's our, our time
horizon as we, we go into something assuming we're going
to own it forever. Maybe best case, the stock goes
up a lot in the first, you know, 12 months in one day and then we
can sell it and then earn a much higher return than we expected.
But it could go the other way, could be that the sentiment goes
more negative, but we're, you know, we're, we're underwriting
to a cash flows or, or to owner earnings that we expect the
business to generate over time. So we were talking about before
we, we hopped on when the stock price does go the other way and,
and it's going against you. One of the things that you've
written about in the past is how powerful buybacks at levels
below intrinsic value can be over the long term.
But I thought a wrinkle that you put in your analysis that was
interesting that I'd love to hear you riff on is how a
controlling shareholder can help that situation.
Yeah, I mean I've seen a number of you know a lot of businesses
that we've owned, we own now and we've owned historically have
had controlling shareholders. I think that that suits us since
we have a long time horizon. We like if we like the partners,
we think we have to underwrite them and make sure they're
people we want to be in business with.
But if we'd like them, that could be an advantage because
they are focused on 10 year horizons and longer and not on
my stock options are expiring. I need to get the stock up to or
whatever the I think of. There's a different places, you
have different cultures around buybacks and different tax
incentives. But I can, I won't name the
company, but I can think about a conversation I had with a large
U.S. business with a controlling shareholder.
And the CEO was talking about how he's going to get his
valuation up and sort of upset that his valuation multiple
wasn't more like some of the business that he admired.
And I said to him, I said, you have a controlling shareholder
that they own almost nearly half the business.
You're buying back stock aggressively every day.
Why do you want? It's in the benefit of your
controlling shareholder if the valuation just goes down.
I mean, the multiple guys are not the intrinsic value, but the
multiple goes down. It's really powerful.
So I think the letter you're referencing, it was sort of came
out of that discussion with him. But in my mind, sort of shame on
his controlling shareholders for creating a fault, The bad
incentive for him that he wasn't focused on building intrinsic
value per share. Yeah, because that that's where
he should be when you could think about different proxies to
make that test that in your comp agreement.
But we see that all the time that we see lots of companies
buying shares above intrinsic value or trying to get their
stock up and thinking short term they'll do transactions, oh, if
we did this we'll get price more like that.
Or if we list here, we'll get this multiple instead of the
multiple we have. And a lot of time and energy and
money is wasted on things. And I'm always like, we'll just
make a better product. Satisfy your consumer, your your
customer better, you know, be more efficient, find ways to
save money. Those are the those are the
things that we're more interested in when we are
talking to management teams. Yeah.
Well, the the letter that I was actually thinking of, the
comment that you had put in that I thought was quite insightful.
And one one of those that when you read it, it's like, oh,
that's common sense. I wish that I had written that,
but it was that the controlling shareholder protects you from a
take under. Oh yeah, that's a good.
Point and well, you made it. It's very smart, right?
Yeah, it's brilliant. It's absolutely.
Brilliant, that guy who never heard television.
No, I mean, that is fair. I mean, you do deal with
companies where their stock is down and it makes them
vulnerable. But if you have a controlling
shareholder, that's not a risk. Yeah.
So that should give you more courage to, I mean, I talked to,
we'll frequently meet with companies and this doesn't sound
as quite as crazy in an emerging market as it does in the US, But
we're like, I'll ask him at the end of the meeting, why do you
have an investor relations team? What is the goal of your IR
effort? And I think usually the answer
to that is their goal is to get stock price up.
It's like a sales effort. And what we're much more drawn
to companies that have no investor relations that, you
know, don't report in English or, or that are not, I mean,
where they're there just to provide information, perhaps
they're accessing the debt market and they need to have an
investor relations team in order to improve their yields.
I mean, that's a good answer. But you know, if the IR effort
is really around not just communicating accurately with
investors, but trying to get the stock off, you can figure that
out pretty quick. And not, never would we get
involved in those companies, but it's definitely a, this
definitely means there's probably a difference in sort of
values about what their goals are from what our goals are.
What are some of the tells that you've seen over time that
investor relations is kind of there for the multiple?
Well, sometimes they'll basically will say it, Hey, do
you know any conferences we can go to or we can reach a lot of
new investors or if they're, I mean, I get emails from investor
relations teams like, hey, look at our stock.
I mean, that's just the worst kind of case.
But with the way they communicate, how frank are they
when you go back and read the way they communicated two years
ago and four years ago, how does it compare?
Or they quick to say that this or that is temporary or needs to
be adjusted out or is or whatever.
And then and maybe it does, maybe it is a one off event, but
how does that, what does that kind of sniff test say about
what the reality is? And so I don't think it's that
hard of everybody's walked in a car dealership and gotten gotten
pushed hard to buy something and other times you walk.
But we've also dealt with some really wonderful people on the
best investor relations teams. Besides just not having one.
I would say the best teams are looking for ideas.
They're accessing people that are following their industry
seriously and they're looking to gather information from you that
they can convey to their CFO or their CEO to help them better
manage the business. And I think we've had some a
number of constructive relationships like that over
time where as an investor we have access to every public copy
and industry in the world. And we will talk to them, we'll
follow them, we'll engage with them.
And sometimes they can bring competitors and peers and
suppliers and customer information to an investor
relations team and say, hey, you know, they're, they're doing
this there and it seems to be working like this is an
opportunity for you or we're seeing this trend and it may be
a headwind for you. Think about how you can get
ahead of it just sort of be a part of the cross pollination of
pitch of information. And I think with that you can
build, build a, you know, if you're useful to them, if they
view you as useful, then they'll, they'll, I, I think
that you're there more reasons for them to talk to you and you
have a better seat at the table about something else that you
want to influence. You know, in the last few,
several months, we've had two of our CE OS come to Alabama to see
us. We talked to our, our manager
teams frequently when just about without exception.
And I think because we are focused on the long run and
maybe we're encouraging them to their sort of better angels to
not listen to what some investment maker has in their
ear about the short term, but to think about the long term.
I think that the right management teams want that.
They want that feedback. And so it could be hopefully
we're able to add value that way.
Just maybe how to run this business.
Do it the way that you think it's best.
Don't ignore the noise and. So you write a lot about bias
and avoiding bias, and how do you think about the sort of
juxtaposition of getting to know a management team and the bias
that that can create and remaining rational while being
engaged? I think that gets to your
personal disposition a little bit.
I, I mean, I know investment managers that don't want to know
management teams because they sort of well management teams
are good salespeople. And I'm going to be biased.
I mean, I think it's really an important question.
I think you can. I certainly have seen investment
managers get suckered in by charismatic leaders and I can't
think of where we've done that. And I'm just thinking through
our 40 investments. But I'll probably will think,
reflect on this tonight and think of one or two where maybe
we weren't as objective as we can be.
I mean, I'm certainly, we try to avoid bias, but we're certainly
not immune. So I mean, Charlie Munger talks
about avoiding your fair share of folly.
And maybe that's a that should all be our goal, but maybe we,
whenever there's new information about a business, we try to re
underwrite it from scratch. You know, we have models, of
course, that we carry along, but I frequently will, you know,
open up a spreadsheet and sort of think about the business
totally anew. And so kind of refreshing all
the time, which is as if you didn't know anything is, is
important. I would also say that we have a
culture here that is different than a lot of other places that
I've been exposed to. And that I encourage everybody
on the team, not just the research team, but everybody on
the team to be able to say both sides of every question.
But like I'm in the context of research, you know, I don't want
us to have a pitch and defend culture where someone owns a
stock, they present a stock, they get in the portfolio, their
their bonus is tied to the results of that particular
stock. And then that creates this
incentive for them to hide information about that company
and only give you the best information.
It's really helpful if we spend 6 months on an idea and then we
find one point that makes us not want to invest like that should
be encouraged just as much. And I, I want everybody here to
be able to tell, hey, Richard, you're an idiot.
You're thinking about that the wrong way or you hadn't thought
about this or and hey, this is important, but this is also
important. They're counter to each other.
I want us to be seeking the truth wherever that is.
And that hopefully reduces some of the bias that they can creep
into any kind of investing. But it's certainly not
foolproof. But that's the best I got is to,
you know, keep, you know, it's like if you write a paper and
then you put it aside, you read it again the next day, you'll
make improvements. And so those types of ways of
tricking yourself into rethinking, well, someone else
has got a bearish view on it. Let's be able to explain the
bearish view. Why do they get to that point?
How do they think that way? Can we challenge their
assumptions? We disprove that.
And how do we rub our nose? And and then another thing we do
is kind of imagine a priori, if this is kind of our thesis about
this business, We think they're going to do this.
Let's kind of write that down, think about it, and then as
events unfold, how did it turn out if we were expecting this to
disprove our thesis, We have a test already out there, and then
that happens harder for us to stick with it.
So, and we try to do that both the opposite way too.
We actually do that with the things we don't do, which is the
long list of things we should have done that we thought about
doing that we didn't do. Oh, you mean like we were
worried? Like mistakes of our errors of
omission almost. Yeah, absolutely.
I'm constantly somebody is digging up from our teams chat
from 8 years ago where I said we were worried about this or we
thought this was going to go that way and it didn't go that
way. And this worked out better than
we thought. And sometimes it's we were
worried about something and that's exactly what happened.
But, but also sometimes it's we were worried about this and
maybe we were too worried about that.
What can we learn from that? Or is it just been lucky that it
didn't work out that way and that or hasn't worked out that
way yet? So I don't know trying to redo
decisions with postmortems is is a frequent part of our of what
we're doing. Well, I shouldn't say you make
few decisions. There is not much activity in
your portfolio. So I would think that making
sure that you're not falling in love with an investment just
because you've owned it for a number of years is a skill set
that maybe has to be developed. Yeah.
I mean, we've made some mistakes by holding on to things.
We've also made mistakes by getting rid of things.
I mean, we've lost more money by selling things too soon for
sure. Seems to be a common refrain.
It could be a comment on where we are in a market cycle.
Yeah. Well, that's true.
But I've we've been through a few cycles, so I don't it's not
just this cycle. And we, we, we first started our
business, we bought Tractor Supply Company.
Oh. Yeah, you told me.
This and it quadrupled and we sold it, thought we were
geniuses and then I think it's up more since we sold it than
the S&P or anything. Else you want to tell people how
cheap he bought it. We bought it.
I don't know the split adjusted, I can't give you all that, but
we paid about seven times earnings for it.
It was a double digit grower. The CEO owned about 15% of
business and he was buying stock in the open market they had.
So that can't do the split adjusted, but they had about 40%
of the stock, half the stock value in expanded working
capital. Basically they had put in a new
inventory system that had failed and had no idea how much
inventory was in their stores and they made the decision to
that. They didn't want their customers
to come to the store and leave dissatisfied, so they just
pushed inventory into the store. So if you went and visited the
store, they'd have 7 wooden axe handles and seven synthetic axe
handles and they probably needed one or two.
And that was true across every category.
So they knew that they needed to get a picture of their inventory
and they needed to, they needed to pull that go back to a more
normalized inventory, which I think the inventory turns to
drop to two. And they would have been 3 1/2
before. And so if you just took their
inventories back to 3 1/2, you were paying like three times
earnings. But I think we lacked, I mean,
we thought it was a decent business.
We've always skeptical of retail, although that's been a
place we've done a lot of things.
We didn't have one in Birmingham yet at that point.
We visited some in Tennessee and Nebraska and a few other places.
But we lacked, shame on us, a good lesson.
We lacked an understanding that this was a very good standalone
format. They could be near a Walmart or
near Home Depot. It could be just fine.
I think we were worried about their skews getting competed
away from them by the big boxes and that was unwarranted.
They wound up their biggest competitor went bankrupt.
They bought a hundred of their big competitor.
They they had about right around 300 stores at the time.
They bought the cherry pick, the best hundred stores from one of
the competitors and converted them to their format and went on
to have a ton of success. I mean, obviously it's been a
tremendous success story. I wish we had been a long I wish
we'd stayed with the ride because we know kind of red
stick redneck companies, Tractor Supply, really it was is a store
for people that pretend to be farmers and and you.
Know I had to go in for my dog or I had to go there for my dog.
Yeah. And so truck boxes and fence
posts and some of the things, I mean, it's definitely, you know,
but my mother certainly resembles that and I do too, is
someone that likes to be in the country.
And so it's a business we should have been able to understand
really well. I think we understood it well
and we lost a lot of money because we didn't understand it,
didn't understand their offer better.
Do you think that has anything to do with, I perceive what you
saw was a balance sheet issue and then it's sort of
transitioned to growth earnings power machine.
Do you think some of that was because you were focused so much
on the inventory sort of normalizing and once that sort
of played out, it was like, OK, well, now it's close to fair
value. So we're we're sort of done
here. Yeah.
I mean, I think we felt like we'd made the easy money and
that it was going to get harder for them because retail is hard.
And we were worried that at that point, Walmart and Home Depot
and Lowe's were still growing pretty rapidly.
And we thought as they grew that that would, I guess we did.
We lacked the imagination to see how big the white space was for
tax black company. And and in our defense, we were
23 at the time, but we were still learning, investing.
But if you have a retailer that has a pretty fast payback period
for opening a new store, 2 years, 2 1/2 years and they
have, I think they thought their estimate at the time was they
thought they had room for like 800 stores by the country.
They have way more than that now.
So they were too conservative in that number.
And I think we probably trusted that.
I don't know why we trusted it per SE, but we lacked the
imagination to see how big it could be.
They also we're very focused on the sort of upper income rural
areas. You know, they were like horse.
The count of horses was an important number for them for
locating a store because that's going to locate gentlemen
farmers. But it turns out that stores
work pretty well if it's, you know, cattle.
It's not just where you don't have a lot of horses.
Interesting. Yeah, it works pretty well and
the less sort of gentrified country areas as well.
And I'm not sure they do that yet, but they look, they did a
fantastic job of managing the business and and growing it.
And so I give them a lot of credit and I wish we'd have been
stayed on them for the ride longer.
But maybe, I don't know, maybe if we'd spent more time in
Tennessee, we could have figured that out.
Maybe if they'd had a store here, we could have figured that
out. Or maybe we were just too mature
as investors to figure that out. But a lot of good from a success
for us, a lot of good lessons. But it was fun.
I'm glad. I mean, certainly happy we had
the result we did. That was very helpful to the for
our business growing at the beginning.
I'm just thinking about, OK, well, even if you'd held Tractor
Supply Company, what would that have been like in O 8, which
gets me to what was that period generally like to manage for you
and and where were you focused at the time as a portfolio?
Yeah. So we actually did a little
better than average in O 8, which I credit to not any sort
of just because we tend to own higher quality businesses.
We tend to own businesses that are less cyclical.
And also I'd say an important thing in that period is that we
got net new money from our investors family that is our
largest investor now added money to us in the fourth quarter of
O8, the first quarter of O 9. So that's really I can't Seth
Klarman talks about how important it is to have good
investors, to be a good manager and I think that is understated
under less under understood. It's more important than people
realize. And so we've had having the
confidence and support of investors that think like
business owners and that see down drafts as opportunities is
really enabling. I reflect on that period.
My wife and I agreed to not give each other Christmas presents
that year and because we want to get every dollar we could into
the market. I mean, I think we, we
understood in real time, Dow and I did that this was a
generational opportunity and the valuations were really stupid
and that you could find businesses that we're not going
to go under because of the financial crisis and you could
buy them very attractive, very attractive.
And so we worked really hard to get our capital into things and
we did have a a very good period of nine as well.
So we did kind of over that whole cycle was a very good
period for us, but on a relative basis and not bad on an absolute
basis. And we made over that period we
did well. We, my regrets, I think we wrote
a letter at the end of O 9 where we talked about our mistakes and
despite having a really good year and I think about the
things that we thought were very cheap that we hadn't done enough
work on yet and to have the information adequacy that we
needed, I think about. And so one of our lessons of
that was keep stockpiling things that you've done the work on.
You don't know when they're going to get cheap.
You don't know because it happens.
What happened that period was fairly short period and we did
the best we could. We got our money into things
that we we're not going to invest in things we don't know
well. And we had a good result, so I'm
not. But there were other things we
thought were almost certainly going to be really good that we
didn't put our money in because we hadn't done enough work.
We hadn't been like, for example, there were a few
companies in Chile that we wanted to buy, but we hadn't
been there yet. But we've been there 10 times
since because we did want to be prepared for the next time there
was a downdraft like that. We wanted to be able to do those
things. And so we keep building our
watch list and of companies that we can get up to speed on very
quickly even if we're not following them every single day
because we want to be. If there is a panic or I think
our best performing physician in the last couple years is one
that we first met with more than a decade ago like 12-14 years
ago and it went from 30 something times earnings to
seven and then we bought it and but we talked to them several
times along the way. We visited them and you see just
never quite know when something is going to become attractive.
But if the business has got good characteristics, we could throw
it in our watch list, we can put alerts on it relative to
multiples and different things. And hopefully it will, they will
bubble back and that, that's the cumulative part of this game.
What kind of underlying series of events has a stock moved from
30 times earnings to seven? Yeah.
Maybe that's a theme that we look for sometimes.
So the company is based in Turkey.
And so Turkey went from a place that everyone was very excited
about the prospects of Turkey to total panic about and
legitimately so about Erdogan and the consolidation of power
and the hyperinflation and different things are going on
there. But one lesson we had learned in
a different situation that we kind of model that we look for
is if you have a business that's domiciled somewhere, trade
somewhere, but a majority of the businesses outside of that
country, then it could be an interesting place to when
there's panic or a little bad perceptions of the economy or
the country or the valuations or whatever you could buy, you
could pick off a company where you're, you feel like I'm buying
the international business, even if it goes to 0 here, I got
protection in the case of this company, all those international
subsidiaries roll up to Dutch subsidiaries.
So even if they were to totally steal the Turkish business from
us, which I don't think that's likely, by the way, but we still
thought it was very cheap. And so we wind up paying six or
seven times earnings for a company that's growing, probably
going to grow underlying volumes and the mid to high single
digits for a long time and probably to go profits in the
high single digits to low double digits for a couple decades.
And well run, good controlling shareholders, good governance.
And people loved it because of those fundamentals and then they
hated it because they just wanted to sell everything after
an election. And then all the way back to the
top of our conversation, I think there is frequently too much
focus on elections and sort of macro ETF trading double
country. And then maybe another thing
that we've seen is that when there's an election that move
that's more socialist leaning, that is a favorite head,
particularly Latin America where we've done a lot of things,
that's a favorite headline. The English speaking press will
run and sort of tell a Castro narratives and overlay that on
any given country. And then when it doesn't really
work out because the country and there and there's big
differences between countries in Latin America.
But if the country is actually kind of capitalist and it's root
in terms of the what the what the voters want and that
government becomes very unpopular.
They don't actually and institutions are somewhat strong
and they don't actually implement a lot of socialism.
I mean, the economy does OK. Nobody goes back and writes the
story. It's it's there in the local
press, but it's there in Spanish in that case, but it's not in,
it never comes back in the English press and investors
don't come back until like the next election when they turn
back to the to the right and then and then money will flood
in. So.
This is what a friend of the pod, Ian Bisic, was talking
about with Colombia. He was like, look, everybody
thinks that, that this president is, is a big lefty, but if you
look, he's lost the support of our country.
So he can't really do that much anymore.
And, and he can mess up some things.
I, I noticed their, their EMP company or whatever, they're
kind of driving some policy from the top to make them more ESG or
whatever. But that's, that's not a long
term issue, right? That's maybe another year and a
half issue. So what does the next 10 to 20
look like Is probably a more important question.
Yeah, I've seen this story a bunch of times.
I would stop short of predicting what's going to happen in
Colombia because I'm not quite as close to that one, but I
definitely have seen that theme. I mean, if you look at COVID, I
mean, the country, the large country that had the smallest
amount of deficit spending in order to deal with the COVID
crisis was probably Mexico. So AMLO, the socialist was more
fiscally responsible than Trump or any other government you can
find essentially in a large country.
And because he was obsessed with protecting the peso.
And so that was really, there is a kind of thread of in Latin
America, the thread of socialist leaders that will reference
communism, socialism, Bolivarianism, but they will be
governed by some practicality. And, and I certainly think AMLO
just said some things that they were very bad for Mexico.
I certainly wouldn't endorse them, but not necessarily
terrible for business and and and terrible for the people of
Mexico. If you have sort of as anchor,
I'm going to keep the peso from falling apart.
Do you think that's because they've seen other Latin
American countries lose their currency?
So it's sort of front and center.
Yeah. I mean, the Latin American debt
crisis is still in the minds of people that are over 50 in Latin
America and they they certainly are conscious of that.
That's the question. And the countries and the
companies are much more so than then to the extent that they
have leverage, it's, it's in local currency.
They're not, they'll have a whole bunch of dollarized debt
in general. And so they're better protected
from those outcomes. You also these countries, some
of these countries have 40 to 50% debt to GDP and which is not
nothing, but it's a lot lower than most of any of the Western
company countries. So I don't know.
I, I, I, I think it's good that they, if the currency is a check
on deficit spending, I think that's a really good thing for
the people in those countries and for the economies and, and
ultimately the businesses that we, that we look at.
Yeah, interesting. Is it fair to say you specialize
in bottlers or is that not? Well, it's certainly a, well,
it's an important part of our portfolio now, but it's an
industry that we've been involved with since 2006.
It's a big part of our portfolio now and one hopefully we have
some expertise. I think you do, but I I didn't
know if I should say that you specialize in it.
That might be a little bit too narrow of a word to assign.
Yes, I think specialize is too. I would, I would stop short of
saying we specialize because I do like a lot of the
characteristics of it, but I also can imagine a future where
their valuations don't support our having maybe any position at
all. So.
What do you like so much about those businesses or, or I mean
what do you like about the characteristics of it?
I shouldn't say so much, but when we talked about it once, I
thought it was very interesting, like you're, you're in the weeds
on it and it's fun to talk about.
Well, we are in the weeds, so keep me from going too deep and
and boring your listeners. But I think one thing in general
in emerging markets, Coca-Cola has a higher brand equity than
relative to competitors that it does in the US.
So you have to think about Pepsi as a bee brand in Latin America
and frequently at a 10 to 25% price discount.
I thought about you a lot, Not in a weird way, but I was in
Costa Rica and I was talking to the people down there and they
they think Pepsi's like dirt water.
Yeah, it's very different. I mean, I mean, I'm in Alabama,
which is a course close to Atlanta and where Coca-Cola
bread equity is relatively higher than if you were in New
York or somewhere where Pepsi's got more of a following or
Texas, where Doctor Pepper's got more of a following.
But the bread equity difference is bigger in Latin America.
It was wild. I I went into the little mom and
pops. I only saw one little Pepsi
stand and it wasn't even as you drink a coke.
I like it And and the Pepsi wasn't even refrigerate
refrigerated. It was just standing there in
the middle of the store. Yeah.
So I would say the other insight that we stumbled upon back in
our first trip to Mexico was that the mom and pops, the
informal market is, is a majority of the sales of Coke,
of the Coke system in Latin America.
That's true. I think in almost if not maybe
not every country, but virtually every country of Latin America.
It's also true in other parts of the world.
So that was really interesting that, but do you have 7075%
market share, which is not uncommon and you have this very
fragmented route to market? So I think at the time the
numbers we were working with was that Coke was selling about
$7500 per point of sale. And if Pepsi were, which was
like 15% market share, if they were to sell to all of those
points of sale, they'd be sub $1000 or around $1000 per point
of sale. So that math doesn't let them
get to all of those points of sale.
So you have a lot of smaller mom and pops where there is no Pepsi
available. You get to a mid size mom and
pop and Coke is put a cooler in as you witnessed, and they had
their product cold in first position and they typically have
a hot replacement shelf next to it with their products.
They're taking second position. And then Pepsi, if they have a
cooler, it's in third position, but frequently they won't have a
cooler in that in that second, that third position.
So now I'm competing with cold Coke versus hot Pepsi.
And then if I get to a large amount on top, the Pepsi is
going to be there in a cooler for sure.
But like I said, I'm in first position.
I'm I'm confronting the customers that come in.
The other piece of it is we're doing, you know, a third, let's
say in Mexico, something like a third of the business is
returnables. So I can reuse that bottle 20 to
30 times. So it allows me to price
discriminate. You know, if Bill comes in, he's
not worried, he's not work looking about to save a quarter.
He's going to buy the non returnable and walk out of there
and not worry about where he's going with it.
But if I'm, if I'm four guys on a construction crew and we're
having lunch and we're are very price conscious, I'm going to
pick up the two liter returnable.
We're going to split it with cops over lunch and then I'm
going to take it back and get my deposit back or turn it in to
get the next bottle. And so that ability to price
discriminate. I think they have about 20 skews
of Coca-Cola, just red Coke, regular sugar Coke in Juarez,
Mexico, for example, which is one of the top, maybe the top
market in the world, Dados, necros.
I think it's actually the number one city in the world for per
capita consumption. So that that return, that
ability to run a returnable offering and have that be a big
part of your volume. I can now sell that two liter
returnable at the same price point as the non returnable
Pepsi, but I got a lot more margin in or I could sell a 1
1/2 liter at the same price point.
And for the consumer that is, but it's not worried about or
need for that use case or whatever it is.
They don't. They can't handle the returnable
for that use case. And so now if I'm a consumer and
I walk in, I can say 25 pesos get a 2 liter Coke returnable or
I can get a 2 liter non returnable Pepsi, which I don't
like as much, or I can get a 1 1/2 liter non returnable Coke
depending on what my needs are. I'm sort of bracketed that
consumer's decision and I can keep people in the brand and I
can reinforce this volume, volume dominance, which allows
me to continue to control this point of sale.
So what we've found is this execution at the point of sale
for the top business of the top brands is a reinforcing.
And that's why you see such high market share in a few categories
across Latin America and really across a lot of emerging markets
in the world that have this large and formal economy.
And so we like that about the bottling system and that it has
the kind of a secondary Moat beyond the brand equity.
That is reinforcing because their ability to sell through to
this fragmented offering. Well, you write, you often write
about focusing like I don't, I don't want to put words in your
mouth, but I'm pretty sure these are accurate focusing on the
Moat from the customer's point of view.
And as I'm hearing you talk, the interesting thing is the mom and
pop gets the refrigerated offering that that they don't
have to worry about coming out of pocket for.
And then because of that, you are able to or not because of
that, but because of the scale of the bottler, you're able to
serve the end user as well in more interesting ways, right?
To to allow them to have more choice.
And as that sort of wheel reinforces itself, the the
secondary offering just kind of gets left further and further
behind unless they're willing to just lose money to try to
capture market share. But if if you're asking people
about the brand and they're telling you it's basically a non
existent thing in their head, then how many years do you have
to lose money in order to catch up?
And is it worth it to even try I?
Mean it's not worth it. And so and then I think the
interesting dynamic is that there are typically, you know,
three to five companies that have the scale to distribute to
the point to the mom and pops in a country, the Brewer or two and
the cook bottler. And then typically there's a
couple more group of bimbos is a good one in Mexico, Nutresa and
Colombia or Ali Corp and Peru. And they'll come to market with
a maybe a whole basket of different products.
So then if I'm trying to get to market and I am not at one of
those companies, I got to pay them, you know, and try to hitch
a ride on their truck. But then I don't get the same
level of attention. I don't get the same displays.
It's so frequently you're seeing Pepsi get to market on someone
else's truck. And but then that interesting
question is, OK, now I have the Coke truck or I have the NBEV
truck or or whatever. What else can I put on my truck?
And the bottlers in more parts of the world are starting to
distribute beer, particularly in Latin America where the
countries are largely Catholic. You don't have any kind of
sensitivity about alcohol distribution.
You're seeing other products try to get to market that way.
And you're also seeing right now I got this relationship with
this customer. Our bottler in Mexico has a has
put point of sale machines in these mom and pops.
So they have tablets and they're scanning goods and they're
keeping track of their inventory.
But we also have real time information now of everything
that's being sold at that store, including our competitors goods.
And hey, what problems can we solve for this mom and pop?
Wait, they'll bring a white truck and deliver other goods
for them? Or can we, you know what?
Can we help them allow their mom and pop to be access point for
the unbanked so that if they need to top up their SIM card or
they need to pay their utility bill and they have cash, can we
help provide some of the services for them to help
maintain this mom and pop? Because this mom and pop
ecosystem, of course, it's got tension with the more formalized
retail and but since it is a part of our Moat, there's good
reasons why we want to protect it and help it thrive.
So thinking about ways that we can deepen that relationship and
make that customer more money so they'll continue to favor us and
we can get access to their consumers is, you know, it's
there's a lot of pieces of this and of course, these people are
really good. I mean, it's this outstanding
management team and they're thinking about these things all
the time. Well, I have no idea if Mexico
is similar to what the, what I visited in Costa Rica, but I, I
thought what was interesting was the guy said we were on sort of
a, a tour and he pulled over and he said this is a typical Costa
Rican town. And he said we put like a, a
soccer field in the middle. Then you've got your houses and
he says there's a church and then there's a bar and then
there's like this store. And to your point, if you are
the, the point of contact for the store and then you can get
these insights into, I mean, you, you almost become like
integral to the town growing up, right?
And and if it's possible to help them succeed, it's hard to think
that they would want to tear you out of their ecosystem.
No. And frequently the Bob and Pops
are of course won by a respected member of the community in that
neighborhood. And it's usually somebody in the
neighborhood that's running the store.
It's not like it's somebody across town or someone that no
one knows. And we they're, you know, part
of the data gathering that you're getting from this now is
when you think about a mom and pop, what is the proximity of
that mom and pop to the soccer field?
Is that determined? Yeah.
If it is, then we need to have some more of our Powerade in
that store. That makes sense.
That's the mix. If we're close to a school, we'd
have more of a certain mix. If we're close to a church, if
we know there's going to be a big community event, the
concert, a football, big football match, we know we need
more inventory in that store before it.
So every time we're out of stock of something in the store that's
lost sales and every time we don't have the product that the
consumer at that store, what's the income level of that
neighborhood? Is it close to a bus stop,
whatever, then we're losing sales.
So how do we have the data to predict what would work best at
that store? And then how can we show that to
that customer? Because all of all of the
inventory is cash on delivery. So I got to convince that that
store owner that custody, we call him the customer that hey,
you, if you added energy drinks here or if you added some other
product that's maybe it's slightly down the, the one or
two percent product. We, we, we think it'll be worth
it for you. We think you'll make profits.
And so it's, they got it. You got to build that trust with
them. And then, but if you can gather
the data and and optimize that, you could.
There's more and more opportunities that way, too.
The other thing that we, that we talked about that I thought was
pretty fascinating was, and I'm, I'm going to ask you, you may
not have this off the top of your head, but when does a
country start to consume soft drinks?
Like what's the per capita GDP before people start to drink
soft drinks? Well, let's maybe let's defy it
as ready to drink, which is basically anything that's
bottled or canned or as opposed to brewing tea out of the tap or
something. And somewhere around 4 or $5000
is when we see per capita GDP is when we see people really start
to adopt ready to drink. Before that, it's too big of a
price point for most people. As long as you're not in a place
with really bad water quality or something.
And then that accelerates really to about $20,000 in per capita
GDP. And then it starts to taper off.
And then you're not going to like you're not going to see a
lot of volume growth in the United States in ready to drink.
People can afford to drink ready to drink, all kind of
categories. And so with the goal then is to
premiumize them. Yeah, you know, and Starbucks
has done a splendid job of that of not necessarily in the ready
to drink category, but who knew that everyone needed $5.00
coffee? Everyone may not, everyone may
not. We'll find out.
Well, see if the new CEO, yeah, OK, ignoring the last, you know,
couple years, it's been a remarkable story in the last 25
years. And so how do you premiumize?
And of course, the liquor makers are trying to do that, the wine
makers are trying to do that, the beer makers are trying to do
that. But there's they're not, there's
only so much liquid that humans are going to put in their
stomach. So how big of a percentage of
that can you be profitably and how profitable can you be at it?
So we look for that. They're different kind of S
curves like that for different products.
I mean, different cultures have different answers to that.
But that's something we look for if we're going to get involved
in a business and we're expecting growth and volume.
Where is this country and what is their car level of
consumption of that product, what is sort of possible.
And so that's definitely a part of our our analysis where we
also bottle Cokes and Pakistan and Bangladesh and per capita
consumption there is for in America, we're a little over
400. So the average American is
drinking a little bit more than 1/8 ounce Coca-Cola Company
product per day. And and Piedos Negros Mexico,
the last number I remember is about 1000 and obviously they're
poorer than us, but they're have about 1000.
So that's like, I guess what's possible.
Wow. Why is that?
Because the water is not good. Well, part of it's, yeah, part
of it's the water is not trusted.
That's part of it. But also just culturally.
But if you go to dinner, and I don't know if you saw this in
Costa Rica, but if you go to dinner in Mexico with Mexicans,
they will put wine and Coke on the table next to each other.
It's like it's just a culturally they think about, it's a
aspirational good still. It's absolutely embedded in what
people do in a way that maybe espresso drinking is in, in, in,
in Italy or something. But if you look at like per
capita consumption, just to kind of think about this, but I'll
give you a couple. Pakistan is is like 36.
Bangladesh is like 20. So long run, so there is.
Long runways and those are countries that were there's not
a lot of alcohol consumption either because they're Muslim.
So there's even when water quality is not always reliable,
they're hot places. So you certainly can imagine a
really long runway, first just to grow volume and then second,
hopefully it's good to countries continue to grow economically
and then there's opportunity to premise them along the way as
well. So when, when you think about, I
mean, in some of your letters, you've talked about intrinsic
value and, and how much company that can the durability of a
company impacts intrinsic value. How much more are you willing
to, to, and I, this one's going to be impossible to answer, but
just directionally speaking, how much more are you willing to pay
for a company that you feel like you have that much line of sight
into future earnings potential versus one that you don't?
And I, I don't mean to ask a leading question, but I'm a, I'm
a stop it there and see where you go.
And then I may have a follow up. OK.
Well I'm anxious for the follow up because I can't really give
you a number. I mean the math is math.
I would say as a general rule, we, we believe capitalism is
more relentless at destroying outsize returns on capital than
people expect. You can think about some
businesses. We'll go back to the 99 period
where you had like people making fiber optic cable and making
basic switches and stuff, stuff that was pretty repeatable where
there wasn't a huge technological advantage.
But because there was no, there wasn't enough supply, they made
very high returns on capital, but that wasn't durable.
And so they, some of those businesses have worked out just
fine, but they were trading at huge multiples that didn't make
sense. So it's very if a company is
making an outsides return on capital, the world is coming for
them. Absolutely the world is coming
for them and they're trying to steal those profits and less the
government is somehow preventing competition.
So if you have that company with that, with that situation, how
do you handicap how durable that is?
And if it's if they're going to make an outsize return on
capital for five years and then they're going to decay or even
be replaced, they're not worth that much.
Maybe they're worth 7 times or anything, they're worth 10 times
earnings or something. But if they're, do you think
they can reliably earn an outsized return on capital and
grow their business for, you know, the next three decades,
then they very well may be worth 20 times earnings.
So I can't, you know, without what's the growth rate?
Yeah. What's the return housing,
house, all those things. You can't quite answer it just
just hypothetically, but it's really important.
Yeah. And.
What's the leverage? And all of those things, I
remember we were talking to Dow and I were down talking to some
students in Alabama. They have a we give them a plug.
But John Heinz and Culver House Investment Management group is
something that Dow and I were involved with since this
beginning and CT Fitzpatrick created it.
But it's been fantastic to watch the growth of that and how a
great job the students are doing there and how much it's improved
and how comes. And it's really a first class
group, but I remember they were presenting to us one time pretty
standard model of we're going to project the next five years of
earnings and then we're going to put a terminal multiple on it.
And well, 76% of the value of the intrinsic value of the
business that they were estimating was in this terminal
multiple. And our bias is to be explicit
about that actually forecast all of the years with the assumption
that earnings are going to decay, that the outside's
returns are going to capital are going to decay 1st and then
ultimately the earnings are going to decay.
And so if we're if that's not our base case, we need to really
have a lot of confidence in a Moat.
And I think that you start playing with that math and start
thinking about the world that way.
And it gets harder and harder to pay 20 plus times earnings for a
lot of businesses and you have a lot of growth or that you need
to have a lot of confidence in the durability of their of their
cash flows. Tough thing about that
conclusion is it hasn't been the right conclusion looking
backwards over the past decade, right?
No question about it, no. So well, I I wish those students
well, and I tell them all War Eagle, but that is neither here
nor. There, it's odd.
No, my follow up was going to be my.
My sense is you probably just avoid the the latter scenario of
a company that you don't feel like you can forecast but.
Yeah. I mean, what that's ultimately
what happened usually the market, look, there are a lot of
businesses that we can forecast 24 months out, but they rarely
trade at two times earnings. So if we're paying 15 times
earnings, we're implicitly saying that we know something
about the next 10/12/15 years of results of that business.
So I'd like for us to know, be able to say that This is why we
think this business is going to do roughly this over the next 15
years, not over the next two, because like, how are we getting
our capital back? And then once we get our capital
back, how are we getting a return?
So I think the net effect is when you don't have that
visibility and other people may, I mean, there's lots of
businesses where someone else may have an expertise that
allows them to see much farther in the future than we can.
But we need to be able to. I want to see all our money
coming back and then I want to see the profits on the other
side of that before we invest. And that's, that's how we think
about, I mean, that's how we think about buying a private
business or some real estate or something else.
And so that's, I think that's the intelligent way to think
about public investing, public equity investing.
I mean, it's a very high bar and it should be, right?
You wouldn't you wouldn't walk around buying every business you
were offered. So you should probably treat
public markets in the same way. What it it One thing that I, I
thought was an interesting letter that you or an action
that you mentioned in a letter was when you sold craft and my
perception was that you didn't like the financial engineering
decision to separate them. And Mondelez.
The the kind of counter that I had in my head was like, well,
it was kind of a financially engineered organization to begin
with. So what what about the the spin
off transaction or the separation offended you a little
bit more than the sort of levered return aspect of that
business? I didn't like that.
I never like it when a company's doing a transaction that's
raising their costs because they because they did, they increased
their cost structure just because basically one part of
the management team didn't want to own the slow growth piece.
We don't see any numbers on Duracell anymore, but Procter
and Gamble, you know, basically gave that business to Berkshire
in exchange for a bunch of stock and because they didn't want to
own a business that was shrinking slowly.
And I just don't like that. I think you ought to be able to,
I mean, I think a good manager ought to be able to manage the
business is growing and shrinking both.
And I think if they're in roughly the same industry, which
was the case with Kraft and Mondelez, you ought to be able
to manage those together. I mean, like having more clout
with the with the grocery store chains to the supermarket chains
should be a positive even if you have Folgers next to Oreos and
one of them is shrinking and one of them is growing.
So I don't think it improved the focus of the businesses.
I don't think I just didn't really buy this was completely
engineered by an investor banker that said, hey, we can get this
big multiple and the piece of this is growing and it's got
more emerging market exposure. But I think that the the
underlying businesses were more or less in the same industry and
there was plenty of opportunities for them to cross
pollinate. If they were intelligent about
the way they did their comp structure in the way that they
did, they managed success. So they may be that Folgers
dying slowly was was the best outcome the one could hope for.
But that's worth fighting for. I mean, you certainly how long
can you keep a business profitable without injecting
more capital into it? I mean, like that's, that's a
noble goal and that's obviously worth less, but there's
something wrong with that. And I, I just this sort of
obsession with growth for growth sake or hey, we're going to get
rid of this particular division because it doesn't show growth.
I I really doesn't. I don't like that.
Well, I'm sure internally or or at least the pitch was Mondelez
will have a lower cost of capital and the aggregate will
be worth more. But I don't know.
I, I don't know that it's turned out to be a very good decision.
I I haven't really checked. Yeah, I don't know either
actually. And maybe we should run a little
post board on that. We made some money on that
investment obviously, but we sold both of them at the time,
same time actually. And we certainly interact with
Mondelez. When I do it, when I'm visiting
mom and pops around the world, I see a lot of Mondelez products
and then they are it is a Oreos in particular a nice product.
Yes, they are. They're delicious.
Yeah, they are delicious and I would I often argue to my kids
that Oreo is better than the finest dessert at the finest
restaurants. Yeah, I, I mean, I tell you what
I've been on lately is the Doritos, the Cool Ranch have
entered my house. I wish they never did.
That's like crack. Yeah, I mean that, you know, I
know it's a different company. I'm just saying those two, those
two are the perfect snack foods. Yeah, say it.
Yes, they I can't argue with that.
I kind of. I do keep them out of my house,
hopefully. I have to because.
I can't stop. You can't stop.
Well, Pringles might kind of get
us in trouble for that, but I agree with you.
You can't stop. I guess we never said you pop.
So anyway, that's neither here nor there.
OK. So something I find kind of
interesting you have disclosed and it's that you know anyone
can look you have an investment in ABM Bev and you had the craft
investment. I think the narrative on 3G is
that they cut to the bone and maybe aren't so customer focused
and you're somebody that's very customer focused.
So I'm kind of curious to hear how they how, why you're
comfortable going against the grain in that scenario?
Well, maybe I would revolve a craft of monies.
I think before 3G was involved, OK, so but with and I was about
but we certainly have not covered ourselves in glory with
that investment. We're we're close to break even
on that. So that has not been a winner
for us. So I I think what we do see
outside the US and outside of Europe in particular is that
they have a similar dominant position with the mom and pops.
For example, in Colombia, they have like 95% market share.
So they have some really dominant positions that are
really valuable and some really entrenched moats.
I think that they. With the exception of the Bud
Light fiasco, which hopefully we can skip over.
I think they have done a pretty good job with their customers,
with their consumers actually. They've innovative a lot of when
they saw the craft beer thing happening in the United States
doesn't really can't really happen in Latin America in the
same way because of the route to market.
They start innovating beer with more flavor and created a bunch
of products in a bunch of their markets have been very
successful in the sort of premium space for the customer
that wanted a different type of beer.
And I think they satisfied that consumer intelligently and well
and prevented competition that way, but not leaving crumbs out
there. I think one of the big things
they got wrong in the stock price and why, you know, part of
the reason for our result is that they thought they were
saving money by borrowing. They noticed that the euro was
correlated to emerging market currencies relative to the
dollar. So they borrowed a lot of money
in euro. They had a leveraged balance
sheet when they bought SAB obviously, and they borrowed in
euro. And I think they assumed that
that because it was historically had been correlated with the
currencies in Latin America that that would work out OK.
But then that correlation broke down and the euro strengthened a
lot against the currencies of Latin America where they had,
they were actually earning most of their profits.
And so they were effectively very short the dollar, both on
the leverage side, they were shorted on their COG side and
they were shorted on their sales when they got pulled back into
U.S. dollars. So they're all three ways they
were really leveraged short the dollar and the dollar rallied a
lot. And I think that execution
hasn't been perfect, although I think it's been pretty good.
I think they actually executed their way through COVID better
than any of the other big Brewers.
And I think that they have really terrific notes in a lot
of their markets that are quite durable and are really valuable.
I dream one day of the coke bottlers and the and the Brewers
getting together in more mergers because then you'd have sort of
50% share and and these mom and pops and you could eliminate a
bunch of costs. So I think there are a lot of
opportunities, but they're being very levered and levered short
with a mismatch on the currency, effectively short the dollar in
a period when the dollar really rallied.
I think that really hurt them. And when perhaps some of the 3G
success was less maybe than it was reported been part because
they were levered. They were also at the time kind
of leverage short the dollar when the dollar didn't do well.
And so I think that's sort of carry trade currency piece of it
is maybe was a bigger part of their success initially and
bigger headwind to their success more recently.
Then it's interesting to think about.
Well understood. My perception was that they just
kind of got to the a couple N + 1 acquisitions that just got too
big. Like if they could own Corona in
the US and they didn't have to sell that, that would be huge.
And then they had to divest to so many brands and they bought
SAB that, which is kind of and then and then you're buying
something at a premium and everybody knows you're a for
seller. And especially with Corona,
there was only like really one logical player to sell it to.
The story would be way different if they own Corona in the US.
Way different. It'd be better if they'd hold
on, held on Corona Modelo and sold by life.
But that was not obvious at the time that we years ago on
Modelo, Grupo Modelo back when it would when I was a virgin had
a stake in it. But it was a standalone company
and part of the thesis of our buying it was the growth of
Corona, particularly at the time in the United States.
This is man who's six or something so unbelievable that
Modelo is now the number one beer in the US That's a crazy
outcome. That's a good beer, though, so
and I endorse everyone drinking it whenever they're outside the
United States. But.
But here? Here by Bud Light or some random
regional craft beer that ABM had bought.
Yes, exactly. But we didn't buy it till after
that transaction. But we anyway, I look, it's,
it's been not one that we cover ourselves to glory, but I think
that most of the money that we lost and we're kind of break
even, but most of the money that we should have made has been a
result of the dollar strengthening so much and
they're being kind of leveraged short at three different.
Ways yeah well, I pitched it way higher and thankfully I sold it
a decent time I didn't get too killed on it but I, I, I, I like
the entity. I just one somebody said to me
once about the the acquisition of craft brewing companies.
He said the problem is it's kind of like when and and I know that
phase is over, but he said it's kind of like when you buy a new
car on the second that ABM bet buys a craft Brewer and kind of
like tanks in value. Now I don't I'm sure the
financials aren't this the same as the brand perception, but
craft brewing's interesting. I've, I've found it's one of
those those industries or products that there's like a
really good scale and then they get too big and it's just really
hard to make good beer at scale. I don't know.
I don't know what it is. Maybe that's just my mind.
Yeah, I would say several years ago I went to the craft beer
conference in Denver and I sort of didn't shave for a few days
and put on AT shirt and try to kind.
Of I could see you, you could like pull it off if you were
bearded. If I was beer, I tried to look
like I was interested in starting a craft beer and
basically just walked around the convention.
Floor like a Metallica shirt or something?
I had a a local craft beer shirt that friend that has a if I got
to buy all the machinery, I got to buy hops, I got to buy
barley, I got to how would I go about doing this and the yeast
and you had all the different bees and talk to them and pretty
clear. I mean, craft beer a third, but
probably 25% of American beer drinkers want to drink beer that
tastes like, you know, what I would call beer, like some sort
of European version of beer that has a lot of flavor that's maybe
it's a third or maybe it's a little less.
And no one really was was answering that demand other than
imports. So there was an opportunity
because systematically over the decades, Miller Lite, Coors
Light, Bud Light, Budweiser had gotten more increasingly bland.
That had been basically that they'd taken flavor out of the
beer for 40 years each year. And so there was an opportunity
there. It was unmet consumer demand.
And then secondly, with the way the three tier distribution
works in the US, everybody was able to piggyback off the scale
of the big Brewers to get to market.
And of course that doesn't work. That's a, you know, accident of
prohibition in the United States, that we were set up that
way in 49 states, but nowhere else in the world does that
exist. So there's not, you can't create
a craft beer in Brazil and get the market on the on the Ambab
truck or on the Heineken truck. You got to get the market
yourself, which means you can't. So you know, the craft beer was
selling at a premium. This is very profitable
initially for these distributors and there wasn't much craft
beer. So they were very happy to add
to their trucks and, and go make money on it.
But then once there are a lot of craft beer companies, then they
were no longer able to demand the pricing from the
distributors. And so basically they turned
into rest of the restaurant business.
And you can make money at your craft.
You need to be able to make money at your.
Brewery. Yep, as a bar, otherwise you
can't make it. And, and so I think that's the
future, which probably means there's less craft beers than
they are now. But and but the cost difference
is like I'm working off old numbers but I want to say it was
like 60. The large Brewers are like in
the 6060 something cents per liter and the craft beer was
$2.00. Yeah, well, the prices that you
pay as a consumer show it. Yeah, I mean the but the but
still I mean like the prices you pay as a consumer are less
different than the cost. Yeah, the margins are tighter,
no doubt. On craft, yeah.
So that makes it very, very hard.
And so I think the other cheat is that, yeah, I think this is
an interesting thing as as beer tastes are developing, it's much
harder to make a logger than it is to make an IPA.
Oh interesting, that's why there's so many IPASI guess.
That's why, yeah, I mean, with an IPA, it's sort of designed to
be able to survive in India, you know, back at 150 years ago.
So you throw a lot of hops in it basically disguise whatever
mistakes you make in the brewing process and so and there are
consumers that want. That I'm one of them.
I just didn't realize that was why.
Interesting. And so, but when you try to make
a logger, it's a much more careful about the temperatures
and the yeast and all the different pieces that go into
that. I'm not an expert, but much more
difficult to make a logger and keep it from being skunk or
something because you can't really hide it if you do.
So as this growing sort of craft beer session beers that you're
seeing, which it's harder to do that.
And so it's more likely to me that someone like Modello who's
doing that at scale is making a good session beer, is going to
grab that share at the expense of the craft beer makers they're
just set up to be. You can't just like basically
know how to make beer in the kitchen and make a good logger
Pretty tough. Session beers are a good
concept. I don't have to feel like I'm
wimpy drinking it, but it's got like the right amount of alcohol
that I can drink it, not get bombed.
Yeah, well, beer's a good, good, good idea, period.
Yeah, I tell you what, I'm kind of at the age where I can't
handle it anymore. If nothing else, my belly just
grows and grows. So, alas, opens up some
potentially dangerous, you know, can't go down a tequila path
just 'cause I can't handle beer. Otherwise things can get off the
rails. But that's neither here nor
there. Can we talk about your, your
investment in Jumbo and, and that business?
And I wish, I wish that there was a way.
I'll try to put a picture up or something.
But the way that you described like when you're going up the
escalator, how that that particular retailer has
scattered tchotchkes all up and down the escalator to, to sort
of like get your mind to impulse buy.
I love that that story of how you bought that business and
then I'm pretty sure you exited. But I I like that that
investment quite a bit. Yeah.
So when when, you know, when the Greek crisis happened back in
whether 2011 or 12, we I went to Greece, met with a bunch of
companies, try to figure out what there was anything here
that was mispriced. And it might be interesting
because the country was completely bombed out and there
was good fears about a recession and falling out of the euro and
all of those things were happening.
Jumbo was a business that we looked at then and admired.
We admired the management team. The owner is is is fantastic.
He's so awesome. And that's such an interesting
manager. And they basically just buy
their, they buy products in Asia.
And that point was mostly China. And they bring them back and put
them in a store they have. There's a toy store, but it's
more than a toy store. We don't really have an
equivalent to it in America, so I don't know exactly how to, but
seems like a really big. Well, merchandise.
Dollar Tree, for lack of a better term.
Yeah, I would say that's right. Yeah.
I was in a similar format in the UK last week that has something
similar. It's like a large format Dollar
Tree, Dollar General, Yeah, with no food that that's fair.
And yeah, and they have like escalator and they just put the
stuff. I've actually seen the same
technique in Shanghai when I was there picking.
Oh, wait, but they just there's you're on the escalator, you're
stuck there. Why not put some things there
that you can grab? Yeah.
And and you got the kids with you and of course the kids going
to grab it and now what's the mom going to do?
And so but they're. Yeah, you're not.
You're not having your kid put down the dollar toy to have them
scream for the rest of the time that's not going to happen.
Right. And, and the disorder of that is
actually part of the fun. I remember, like the original
idea of Toys-R-Us is like, let's let's put toys in the aisle and
let's let them fall. The kids knock them over.
That's like part of it. And so there's a certain aspect
of that too as well. But I love how the management,
the the the owner is so systematically conservative.
He's like, well, we don't know what's going to happen down the
road. We know this is working now.
It could get worse. And then they're like
consistently beat their kind of whatever they don't really give
guidance, whatever kind of guidance they give you, they
consistently beat it and they run with no leverage and they're
expanding in Romania and and they don't really have a lot of
competition from Amazon in that part of the world.
That's something to pay attention to.
But well, I guess 2022, the stock got backed down because
there were fears about being with COVID, they're not be able
to bring in the products from China that they were in in
Southeast Asia that where they were getting them and the cost
of bringing things in was going up.
And they're all the models permanently damaged.
So OK, well, they started a share buyback program, but this
is a very conservative management team that only is
only going to buy back stock because they think it's cheap,
not one that's just running a share buyback program.
That's what they're supposed to do.
So we started picking off some shares kind of right at a right,
slightly above the share buyback level.
And then, you know, the model still worked and they sort of
get out of the COVID inventory and supply chain issues.
And the stock was up. I can't remember, I maybe I was
up over 100% and we got to long term capital gain status and we
exited. I mean, I don't, I do think
there are some challenges. That's a lot of key man risk in
that business. But you know, the, it is a nice
niche business that works. It wouldn't, probably wouldn't
work in the US, probably wouldn't work everywhere, but it
does work in there and they're reaching quite well and, and
they're conservative about it and it's so really a nice
business and maybe we'll get a chance again, you know, so.
Yeah, you, when you sent me a, I don't know, you'd tell me like
you're right up. And then I started reading some
transcripts. That guy that runs it is like a
really cool person to read. Yeah, I just love it when you
get that level of frankness. Yes, when they this is our
problem, this is our challenge. We're not sure that how it's
going to work out. Like that's makes me want at
best, like that level of frankness from a manager is, is
something that we'd love to see. I mean, I almost want to just
close my eyes, not even look at the price and want to buy it.
But that's of course not what you do.
You do have to. I have a number of companies on
our watch list that I met with a guy and I won't reveal the name
because I do want to buy the stock at some point.
But I met with him and he said, he said, do not buy my stock.
It's too expensive right here. It's awesome.
You know, I was supposed to meet with the CFO and I, I walk in.
He came in and introduced himself.
I kind of missed his name when he walked in and he said, oh,
I'm sorry, the CFO is sick. You'll have to meet with me.
I didn't really fully understand it was ACEO until about 5
minutes in the conversation. This is the first meeting with
the company. And he anyway, but he's like,
yeah, you don't want to buy my stock.
He's like large investment banks are saying everything in Africa
is cheap. Like that's nonsense.
I've been operating in Africa for 40 years and you need to get
paid back quickly if you're investing in Africa.
Oh, interesting. Yeah.
So this is, I can't remember how long ago that was 10 years ago
or so. It's like, so don't buy my stock
now, it's too expensive. What's the stock done since?
It hasn't done that well. There you go.
He was right. I'm happy they've ably managed
it, but the the macro headwinds and and South Africa and around
their region where they were selling have been very tough.
That's sort of his. He also said yeah.
He also talked about the brain drains.
Like I, I have good people, I send them the US to get an NBA
and they never come back. Yeah.
And that's really a that's a, that was like his biggest
challenge was retaining talent in addition to the consumer, the
macro situation there. So, but I just, he didn't know.
It's interesting. A lot of times when you meet a
really good manager, they they'll reference some things
that you and I would talk about. But he didn't seem to know any
of that. He just knew how to run a
business. Like he, he had to learn that by
copying Warren Buffett or something.
He just knew it and it just was coming out of him.
And and and anyway, I regret that we've never owned it and
that we've never made any money off that.
But I every now and then you run across a manager like that,
that's, you know, what are you going to call it old school or
just like they see their business the way that as an
entrepreneur and not as the way they're supposed to package it
for theoretically house some finance person expects to
receive it. Well, I'll tell you what, what
has messed me up is I used to be the person that was like, oh,
I'm looking for people that write like Buffett.
Now if I see somebody that writes like Buffett, I'm like,
ah, this is probably a promote. I don't know.
I don't like this, which it's hard.
It's kind of like this is either somebody I really agree with and
I should listen, or it's somebody I think is totally full
of crap and I don't know. Yeah, I think you see people
that quote Buffett but don't actually write like him.
Like they're they're they're trying to tie themselves to that
brand, but they're not, they don't have the inside and they
don't have the frankness and they don't have the sort of
obvious honesty that comes through and Buffett's writing.
And so that's what I'm trying to hear when I read somewhat is,
are they quoting these ideas because they they hurt them
somewhere or do they, is it really in their bones?
Is it who they are? Does your, your travels and how
you, I, I mean, just like hearing you rattle off just in
this conversation, how many places you've been?
I mean, does putting eyes on somebody and talking to them, Is
that how you help yourself understand how they actually
think and, and are they just sort of marketing or versus do
they believe what they're saying?
I don't know any other way to do it.
I mean, maybe I think you always want to learn what the company
says is happening. And then I think you want to
find as many ways to independently verify that as
possible. And so if a company says they're
doing something, they're doing X, well, we may not be able to
test that, but if they're say they're doing Y, well, let's go
test it. I can remember I was on one of
these investor days in Eastern Europe and a company they set
up, clearly set up four stores for all the analysts to go
through. And, and I said, Oh, this is how
we do it. This is how we execute in these
stores. And look at, look at this, this
is great, you know, good. And then I went to, I went to 20
other stores and had totally different experience, actually
didn't. I thought they were executing
fine, but it was nothing like the stores that they clearly had
rigged for Analyst Day, which I don't know.
That tells you something about, you know?
Do you want to partner with that?
Yeah, maybe they weren't even, you know, in that case, I I like
the Ceoi don't think they were kind of being explicitly
dishonest, but it was definitely like a razzle dazzle share.
So we're we trust but verify or whatever.
I'd like to go back and ask them questions and maybe they have a
good answer. You know, hey, the local guy got
a little carry away. He knew the CEO was coming and
so he wanted to show off of the CEO and he got carried away.
That really wasn't a dictate for me, which is fair.
But how, what do they say? How do they say it?
How do they used to say it? I think that's something
important is to look at way they describe their business five
years ago and what they thought the challenges were.
And if it's roughly the same management team and it's not
simple, but you're trying to get at your level of confidence and
and their ability to forecast. And then I'd like to ask them
what are the things that if they went against you could really
hurt your business and what are the things that you're really
worried about? And I think I heard anecdotally
that Build a Way used to ask companies, you know, how would
you go bankrupt? I used to ask that.
I tried asking that for a little while and I got so many blank
stares. They were just confused by that.
I kind of thought maybe I was, I can ask in a different way and
without damaging and like kind of putting them on their heels
so much. But yeah, it's, it's you got to
go be there in person. You got to go into their
marketplace. You got to talk to their
customers and their suppliers and their.
Their peers around the world, their competitors in their in
their country and see if what they're saying that they're
doing matches what you're able to observe.
And frequently it doesn't, but sometimes it does.
Yeah, sometimes they're lying and sometimes they're just
fooling themselves. But the net result is the same
for you as an investor. I like that that that should be
a quote. We're, we're going to, we're
going to put that up on a, on the YouTube thumbtail or
whatever. When you said what you said
about South Africa and Greece had the, the crisis and just
what I experienced when I was in Costa Rica, it just seemed very
dependent upon tourism and sort of maybe a pro cyclical aspect
to what what's going on. How do you think about the
valuation disconnect between some of these emerging market
countries and and some more developed countries and whether
what's justified within that versus what's not justified?
I mean, surely if you look at history, I think we're like at
A50 year, you know, 50 year divergent evaluations between 11
metric I saw this week between emerging markets in the USI
think you're 1015 years on different metrics.
And we're we're not just against emerging markets, but against
the whole rest of the world. And I don't know that that's not
going to get bigger. I'm not making a forecast, but
you need to have pretty rosy assumptions about growth in the
US for it to outperform, you know, the rest of these places.
But we're we're trying to find individual businesses in a back
to owning, you know, 8 to 10 companies at a time.
I don't necessarily have to believe that coastal we don't,
we actually own a small one of our businesses as a subsidiary
in Costa Rica, but it's not that important.
But I don't necessarily have to believe that Costa Rica is going
to be really successful for us to make money.
So it's kind of like with this individual business with their
current level of profitability, what are the risks that it gets
better or worse and what are those things and how likely are
they to happen? And without buying at it four or
five times earnings, maybe there's a, there's a level of
uncertainty I'm willing to tolerate.
If I'm paying 15 or 20, I'm probably not willing to tolerate
that uncertainty. Will you hedge the currency
exposure or are you fully unhedged?
We are unhedged. We have the ability to hedge the
currency. We actually got a couple only a
couple times. We really got close to doing
that. But typically we a lot of our
companies have hedges internally.
A lot of companies have. We look at what percentage of
their COGS are in local. We also look at how they're
financed. Most of our companies have very
little leverage or no leverage when that's important too.
And then what is their pricing power?
You look at our Turkish business, we've raised prices
above inflation consistently over the last several years and
we're making record profits in Turkey.
So 70 plus percent inflation or whatever the latest numbers are
in Turkey, we've been able to, we've been able to grow profits
faster than that because we've raised revenue faster.
So should we have hedged it? I mean it's almost basically
impossible to hedge the Turkish lira.
So I think the answer to that is different for different
businesses. And maybe if a business has got
a bunch of leverage implicit in when they have a mismatch on
their current on their leverage and on where they're where
they're earning money and where they're paying debt or you
probably we tend to not want to get involved.
We prefer back to the controlling shareholder.
Usually when the business has got controlling shareholders,
there is not a lot of leverage in it because you know, if
you're learning, if you're AI don't know a Mexican investor
and you've made a lot of, you're made a lot of money, you've seen
a lot of crises. And you don't want to, you want
to, you want to go keep your seat, your chip in your chair.
And if you have a bunch of leverage, you're a not able to
survive the inevitable volatility that's going to
happen, but also you're not able to take advantage of that.
And I would say that one theme that we have maybe is kind of
thinking about being a counter cyclical investor and investing
in businesses that have a mentality where they're thinking
about how to expand their business when things are bad.
Peter Kaufman's been a tremendous mentor for us and he
always talks about how he pays his bills faster when things
slow down and he he wants to be the employer of choice for
people that are thinking start to get nervous about their job
at the competitors. Competitors, you know, when
things slow down like and he like he can afford to, he'll
make an order to be with a supplier to help that supplier
in those situations because then later when they really need the
help with that supplier, they have a very loyal relationship.
And so if you are able to the, if you have capital are able to
deploy it when there is panic that can that's a that's a
durable competitive advantage also and particularly in places
that don't have the same sort of central bank backstop that we're
used to in the United States. I like that.
I went out to see Peter once. That was fun.
I should, I should do that again.
If I ever get invited. I don't know that he'll invite
me back. We'll see.
I pushed back on something once, but it was it was it was a
friendly debate that he won. He's a remarkable guy and very
bald in a charity here in Alabama actually.
And my mom's in town, but I've known him long before that, that
he's a really an amazing manager, an amazing, amazing at
people and how to motivate them and how to make them feel loved
and how to, you know, build teams and so many things to to
learn from Peter. Yeah.
How has building an investment firm been for you?
You know, it's, it's an interesting pursuit and I, I got
to meet at least one, I think two of your team members at
Markel, but definitely one just kind of curious.
I, I just had Bruce Berkowitz on and he mentioned that that was
an area that he did not succeed in.
And I'm just kind of curious how you how you've worked on
developing your team? Well, I guess I'll go all the
way back to the maybe the beginning of the business.
Dal Bynum and I moved home from New York.
We got a three bedroom apartment and we started the business in
the third bedroom. So our mentality has always been
we're entrepreneurs and this is a startup and let's stay very
hungry. Let's think about what our burn
rate is. Let's see how how long we could
stay in business if we were to lose our biggest customer, our
two biggest customers or whatever.
And let's be really careful about every dollar we spend,
make sure we're getting a positive ROI on that.
And we've been fortunate to have wonderful people that came along
at the business with us at different points.
And our first person that ever joined us is Len OS and she's
still here and she's been a tremendous part of the team now
for, I don't know, 15 or more years, right, Maybe 18 years now
just take it back. And but we are Dal and I would
always, I think we even wrote about this one time, but we
would always question each other.
We started working on learning things together in elementary
school, really and teaching each other things and questioning
each other and challenging each other.
And we never had an argument, but we were always pushing each
other and kind of looking at things.
Oh, we could learn that and like, let's go.
Do you really know that, Richard?
And or you not know that? And so we started thinking about
institutionalizing that as a team.
We wanted to have that in the culture, you know that that
everybody have a very flat organization.
Tell people why if you if you ask them to do something, have
them give you feedback. And so I would say we've had
been very fortunate to have work with wonderful people throughout
the whole period here. So they've been very supportive
to me and difficult personal times and in difficult work
times, you want to hire smart people and you want to hire
people that think like, I think like owners and the decisions
they make, but also always put higher clients first.
That we want them to always be thinking about what would the
what's best for the client and how can we do this better for
our clients. And so you have to ask some of
them, I guess and to assess that.
But hopefully, I mean, I feel very proud of the of the people
that are here and the people that have made big contributions
here in the past. Very cool.
Well I have enjoyed getting to know you.
Shout out to our mutual friend David for the the introduction.
And that's been fun, man. I hope that this was an
enjoyable use of your time. I'm going to get you out of here
on time. And, you know, thank you very
much for joining the show. Well, thank you.
Thanks for what you're doing. Thanks to David who put this
together, owe a lot to David for sure.
And I'm hope we can talk again soon all.
Right, man, I look forward to it.
All right, take care. Bye bye.