Ladies and gentlemen, welcome to the Business Brew.
I am your host, Bill Brewster. As always, this episode features
Adam Wilk. It is a very interesting
conversation. I hope you like it.
There is a good portion of conversation that talks about
Duolingo, which I found very interesting.
Admittedly not something that I've thought about a whole lot
in the past but have been since, and overall just an interesting
conversation on how Adam thinks and where he came from, so I
hope you enjoy it very much. As always, nothing in this
episode is financial advice. Everything is for entertainment
purposes only. Please consult your financial
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Yeah. So anyway, everyone, Adam Wilk
of Greystone, tell me, tell me the firm name.
I should know this. It is Greystone Capital
Partners. There you go.
All right. Thank you for coming on.
And you've been, you've been doing the podcast circuit
lately. Yeah.
So I've done a few and the last one I did was actually value
after hours a couple months ago. It was really weird that you
weren't on there. I'm not sure how to how to piece
that together, but I love talking to those guys.
Tobias and Jake are great. I'd met Tobias at an event years
ago. And I think, I think our mutual
friends, you and I are mutual friend Ian Castle, I think,
asked them to talk to me or something.
You know, I'm the beneficiary of people doing nice things for me.
But yeah, that was the last one I've been on.
Well, that's the goal, is to just pay the nice things
forward, right? Sure.
So what I, I apologize for not knowing this, but what you had
mentioned a couple times when we were talking that that you had a
background in professional sports.
What did you do before you were an investor?
Yeah. So, so I, like most investors, I
think I'm a Buffett acolyte. And I discovered his writings
probably 1415 years ago and sort of immediately knew I want to do
that, you know, to think the way he thinks and allocate capital
the way he does. But I took a pretty convoluted
path to get there. Before investing, I spent time
around the NBA as a scout, including in San Antonio with
the Spurs and in Houston with the Rockets.
And I had a short stint in commercial lending.
And I always get asked this question because on the surface,
basketball to investing looks like a big leap, but it actually
wasn't at all. And I've kind of always been
drawn to decision making under uncertainty and pattern
recognition kind of long before I ever owned a stock.
And I think what most people miss about an organization like
the Spurs is that it's not really about basketball.
And if you're not familiar, they have one of the most successful
organizations in all of sports. And it's not it's more of a
systems thing or a systems problem.
So I learned very quickly when I was there, you're evaluating
talent with incomplete information and you're making
irreversible decisions. You're allocating resources and
you're doing all of it under pressure and uncertainty.
And over time, you build that kind of pattern recognition in a
number of areas. And I think that I was a scout
and I worked at the analytics department and you kind of a
Jack of all trades, master of none, I would say.
And the Spurs were formative for me, not just because of the
talent evaluation piece and the culture, but because their
advantage couldn't be replicated and other teams would try to
copy their tactics and they missed that the real edge was
kind of like embedded in the system itself that was built
over years and enabled them to make better decisions.
And that idea that a durable advantage comes from systems,
culture, incentives, etcetera, rather than like surface level
stuff ended up really shaping how I think about companies.
And when this, the sort of spark faded and I had this kind of
recurring feeling that I was sitting kind of on the wrong
side of the table, which has been, I think, a theme
throughout my life and career where I was kind of close to
decisions, but not really accountable for the outcomes and
I wasn't kind of rewarded for getting them right.
I started studying public between lending and studying
public markets. It just became very clear to me
that modern capital allocation is broken in some ways and also
over optimized in other ways, whether it's short time horizons
or career risk or institutional incentives.
And I actually never set out to be a fund manager.
Greystone started as a personal playbook, like how I would
manage capital for myself and my family.
And once I realized that the way that I think kind of naturally
aligns with capital allocation, building the fund has kind of
felt less like a career decision and more like kind of the
logical endpoint of everything I've done.
So it was more of an inevitability than anything
else. But yeah, you know, again, the
sitting on the wrong side of the table thing has been I started
out working in the sports agent world and then went to the NBA
and then transitioned to the lending and then investing.
So it's been kind of a process of iteration.
I know a guy that that used to work in football agency and it's
interesting to talk to him about my perception is it, it was
super sexy and very cool. And to hear his version of
reality being that fees are getting pushed down and it's, I
mean, obviously hyper competitive, but turns out it's
not as sexy as might look from the outside looking in.
No, there's also in the agency world they, there's a, a
significant power law effect as well, like the largest agencies
that have been around the longest and have the most
clients are the most dominant. And I don't see how that changes
anytime soon for a number of reasons.
And so if unless you are with one of those bigger groups or
you have some sort of edge that allows you to get players over
them, I think it's very difficult to kind of start from
scratch nowadays. And I think those advantages
will will widen just with the reach that they have.
And now with players sort of post career endeavors starting
well before they retired, it's just a very different game now.
And so having a leg up in those areas and being able to more
resources means more players, which means more Commission
income, which means the ability to do things to to market and to
sign more players, which means getting more players in the
door. And it becomes this really
difficult flywheel to disrupt. And so I, I, my first experience
was working with a boutique agency and I learned that lesson
first hand that they were very good.
They did right by their clients and they deserved a shot more
than anybody. But the ultimate decision in
many times, many cases came down to things that didn't have
anything to do with like the representation.
It was more about the incentives and what another agency can
offer and the attention put on the, the person and that sort of
thing. So very, very difficult
industry, but if you do it well and you're you end up making it
to become one of the bigger guys, it can be very sexy.
Yeah, you got you. If you're working for one of the
bigger agencies, you got to hope that the bigger guys like to, to
disperse the, the spoils of the winds among the employees, which
can also be a bit of an issue from what I understand what of
course. So I mean, obviously, you know,
like if you're thinking about sports and, and businesses, you
have sort of the, the, the tangible things, right?
And anyone can pull up a financial, you know, historical
financials and see what a a company has done.
But getting to the core of the culture of it is, is, is
slightly different. I would think with sports
players you've got, OK, these are the, you know, the
measurements is how high somebody can jump, whatever.
And then you've got the character side of who that
person is. Are they going to work for the
team after we pay them, etcetera, etcetera.
How have those skills crossed over, or how have your sort of
younger experiences influenced what you're doing as an investor
today? In a big way.
It's really hard to evaluate those things, especially the
culture and human side. Just speaking about management,
I think. I think there are times when I
can figure it out and I can judge it.
There are other times when I'm not sure I can.
And what I'm really big on is a track record and then channel
checks and doing sort of examinations of the people in a
person's life. That was very big in the sports
world. Obviously, we spent a lot of
time just talking to the people sort of in and around the
player, and that helped paint a picture of who they were and how
hard they would work. And that's really what you're
trying to figure out. And on the management side, I'm
really looking for kind of a longer track record and people
making really sensible decisions.
And if I can find that even before I get involved, that's
usually a good sign. And one of the insights I've had
over the years, I think, and this was aided a little bit by
human talent evaluation in, in sports, is that if somebody's
making decisions from kind of a first principles, very sensible
reason based approach, that's usually a very good sign.
And on the management side, I've had, I've had managers say
things like, you know, we thought we thought the market
would have value, you know, a faster growing, you know, XYZ
segment and, and assign it a higher multiple or we made this
decision because our shareholders had asked us about
XYZ. And generally speaking, I think
those are terrible reasons to do anything.
And what you're really looking for is we evaluated this
industry and what we learned was XYZ or we, we studied this part
of this vertical and we decided to acquire this business because
here's what we learned. And it's just a more, I think
durable approach over time. When you're thinking through the
actual layers of a business and you're, you have a, a kind of
long term view about how things can turn out over time that
allows you to make decisions in that way, but also to kind of
ignore short term noise. And it's important in both
sports and, and investing in business.
And I think now I'm not saying this came directly from
basketball, but one, one of the edges I think I have is having
kind of a coherent worldview about how durable advantages are
formed within a business and using that worldview to make
kind of like fewer, higher conviction decisions.
And so I try to spend less time predicting the outcomes of
things and looking at surface level stuff and more time
understanding like the systems that produce them.
And that is a very interconnected idea with sports.
And I like to focus the work on, just like with evaluating
players, like why certain businesses get stronger over
time, not just why they're growing today.
And I like to see, you know, players and businesses to where
their advantage like compounds over time.
They get better as they work on their game through learning,
constraint system, evolution, that sort of thing.
And so on the culture side, you know, you can observe it within
a business. It's very hard to judge, but
talking to employees or former employees is a really good way
to do that. I think if you want to learn a
lot about a business, you have to talk to people and you know,
the publicly available stuff will probably get you 10 or 15%
of the way there. And getting a sense for how
people feel about the place they work and the the structure in
terms of whether it's centralized or decentralized and
what the attitude is around the company is really, really
important. I think that drives a lot of
results over time. If people care for the business
and they believe in it and want to work hard for the people that
they're working under with, that's really important.
And so there was this thing we used to pay attention to and in
basketball where they would say like within this team or this
organization, like everybody takes out the trash, so to
speak, like the GM runs the team, but the, the, there's not
a huge amount of hierarchy sort of so to speak.
And so I generally try to look for that in companies and you
know, the the capital allocator sits on top of all that.
So it is important to have somebody making those decisions.
But combined, I think that, you know, just digging into the
sports background and where I came from, I think it provided a
nice framework to just move forward on the investing side
and be able to, I think, evaluate things that way.
So how much of your time is spent like really cultivating, I
don't want to say an expert network, but some sort of
scuttlebutt network, for lack of a better term?
Like if you were to say what you allocate your time to in a given
week, I know that's kind of tough to pinpoint, but.
Most generally, most of it. So I would say between 1520%,
whether it's a new idea or something in the portfolio, I
would say between 15 and 20% is allocated to like publicly
available things. Let's take looking at a new
idea, for example. I'll go through all that stuff
and probably do what most investors do and model the
company and go through the filings and read the calls and
everything that's publicly available I'll digest.
And then the rest of the time is spent actually determining what
reality is. And to do that, I spend a lot of
time talking to people, unfortunately or fortunately, I
guess because I do think this is another differentiator for us.
But I spend a lot of time sourcing these people and the
hit rate is very low, which is why I said unfortunately.
But at the same time, it's a very manual process.
So I think it sets us apart from I think maybe the, the average
fund or who knows, it's just manual.
And so there's a lot of work involved.
And I'll, I'll generally not always come away with some
insight about the business. That's very helpful going
through that process. And a lot of times I'll run the
gamut of people, whether it's competitors, customers,
employees or former employees, suppliers or vendors or people
adjacent to the business. And like I said, what I'm really
trying to do in that process is determine what reality is, if I
think a company can grow at 15% per year and they have 20%
margins or something along those lines.
I just want to sort of baseline to that and see what other
people who operate in and around the industry or the business
think and just get a kind of more wholesome picture of a
company. And so it's become my preferred
way of learning about a business.
And it's also probably more fun than reading a 10K or so.
And so I, I spend a lot more time doing that.
And then I think over time those relationships will compounds not
only my own learning, but just pattern recognition and the idea
search because I can sometimes tap on that network when I don't
know something or revisit a prior relationship when I'm
trying to figure something out. And so that's become very
different from the early version of the fund where I think great,
the early Greystone was made-up of just statistically cheap
micro caps and spent less time doing that and less time focused
on business quality, etcetera. But that talking to people and
scuttlebutt as you mentioned, has probably become a much
bigger part of my process over the last couple of years.
Yeah. Well, and it's, it's interesting
that you've chosen to specialize in the small Cap universe, which
is not the most loved universe in the world, right.
So what about that universe sort of attracts you?
Is it, is it something inherent? Is it that you think you have a
scuttlebutt advantage or is it just kind of where the
opportunities are? Yeah.
You know, I ask myself that every day as I watch other parts
of the market, you know, socks and other areas of the market go
up every day. The short answer answer is I
think that there is more opportunity in this area.
And going back to to what I've said, what I said earlier about
modern capital allocation, I'm not the first person to say
this, but they're because of the way that because of the current
structure of the market that's made-up of mostly passive
investors and quantitative base strategies, which there are
estimates all over the the place for the percentages here.
But something around 80% or so of the market is made-up of
passive investing and quantitative based strategies.
I think JP Morgan or Goldman Sachs put out a study relating
to this fairly recently. And the remaining active
universe has changed drastically in the last couple of decade
where the industry has gotten smaller as fees have compressed
and is consolidated and active capital has moved into these
really large asset managers or pod shops as people call them
like Citadel or Bally Asney. And that is left those those
those shops have such large amounts of assets that they can
almost only focus on certain areas of the market like the
largest, most liquid companies. And that has left a sort of wide
open hole for companies in the small cap, even midcap space
where they're overlooked and under followed and are more
difficult to own. For some of these larger asset
managers, and I think in some way that provides an advantage
because there's a little bit of a, you know, information
advantage that that's mostly been arbitraged away.
There's a, a big time behavioral advantage if you're willing to
sift to this area and own stocks, view stocks as ownership
shares and businesses, which I do and own them for longer
periods of time. Sometimes a small cap company
might not work for years before it, you know, triples or
quadruples. I have this conversation with
investors all the time about about that dynamic.
And and then there's a little bit of what I think is an
interpretive advantage where by doing some of the work that
we're doing, I think there's a way to interpret what's actually
happening inside a business and distinguishing the narrative or
the surface level stuff from the reality.
And what what type of understanding how two different
financial profiles could diverge, similar financial
profiles could diverge over time.
So for example, if in the small cap space, a lot of times
businesses will be lumped into certain buckets, whether it's
cyclical or low value add or M&AS value destructive or, you
know, whatever the case may be that that mislabels a company on
the surface. And a lot of times if you do the
work and you talk to people and spend a lot of time on the
actual advantage that a business has or peeling back the onion,
so to speak, there's a, there's a way to define a differentiated
insight about what the company actually is.
And through that process, I think a lot of times you can
find a business that's much higher quality than the market
thinks it is. And there's a couple examples of
that in the portfolio right now, which we can definitely talk
about. But in the in the large cap
space, it's a little bit harder. I find that it's certainly not
impossible, but I find that it's much more difficult to find a
true mispricing outside of a systemic event because of the
amount of information flow and eyeballs on these businesses and
the liquidity profiles. And so it's a combination of
things, but I had, I'm also a little bit biased because I had
some early success in micro caps and small caps and have kind of
just leaned into that advantage. But as time has gone on, what
I've realized is that I believe that there is a, there's an
advantageous approach to finding these companies early and then
being able to hold them for long periods of time.
And you know, it's hard, not all these companies make it, but a
business that goes from, you know, a $200 million market cap
to a billion, we can own it at the $200 million level.
And then at a billion, maybe it gets added to an index or
institutional crowd starts to get involved and it becomes kind
of a different maybe liquidity story overall, But people get
more interested at that level. And whereas they weren't earlier
because the company was small or maybe it was misperceived or
mischaracterized as something else.
So it's a combination of things. But I think that I think in the
small cab area and midcap area, even like a $10 billion public
company, I would argue with small these days.
These days, I think those advantages kind of improve with
experience and they compound across decisions.
And they, I don't think it's something that can be arbitraged
away at least yet. And it doesn't require a lot of
size. And so a smaller fund that's
kind of willing to cap assets, think like a business owner own
businesses for a long term. It's a great place to to sort of
fish. And the last thing I'll say is I
think everybody read that amazing Colossus profile on
Henry Ellenbogen and I hope that's how you pronounce his
last name. I'm sorry if I butchered it.
But he's, he's talked a lot about how how finding good
companies early is a huge part of durable capital strategy and
also how companies go through multiple iterations over their
life cycle, sometimes starting out as one thing and then
evolving into a completely different thing that the market
doesn't understand. And being able to own and hold
those companies through those periods can be some of the most
lucrative investment returns because you're maybe not only
having a chance to buy it at Lowe's when the market sells a
stock off because they don't understand what's happening.
But you are able to kind of, again, sort of enact that
behavioral edge and think of stocks as as businesses as
opposed to just, you know, trading vehicles.
And so I, I couldn't agree more with what he said.
And I think this area in general is just for those reasons
provided a lot of really interesting advantages and
opportunities to sift through. The letter that you wrote about
a Moat, I'm going to butcher exactly what you said, but the
good news is you're going to be here to to correct me.
But the, the Moat is basically the output of a lot of small
decisions that that create the conditions to solve problems
down the road. I, I couldn't help.
I don't know why my mind goes here, but I couldn't help but
thinking about like there's an interview of Kobe when he's
talking about when he's young, he would work on what he wasn't
good at and the other people would work on what they were
good at. So if you were a scout and
you're watching a 15 year old game, you might see him, you
know, going left when he's better right and, and clanking a
shot that you know, the other guy is, is doing a drop step in
dunking. But Kobe's mindset was, I don't
care that you're going to beat me when I'm 15.
I'm going to kick the crap out of you when we're 22 and, and
later, right. So I get the sense that
sometimes when these companies are younger, they're still
trying to figure out where they're strong and where they're
weak and how to how to sort of become stronger and get the, you
know, find the magic somehow, right?
I mean, a lot. There's there's the concept of
overnight successes. I I think has been dispelled of,
right? It's the ten years that no one
heard of you. And then all of a sudden you're
an overnight success. And I'm just kind of curious if
anything that I said resonates with you and if you want to talk
a little bit about the thoughts that you put down on paper about
moats. A lot of what you said
resonated, and we could take that in a lot of different
directions. I'm was such a huge Kobe fan.
Yeah, I don't know. I mean this, this may be one of
the very few insights I've had over the last decade or so after
reading a book from the 70s called Systematics that was
written by a a machinist and a theorist.
Just about the book is about complex systems and mostly about
how they fail. And I just have found that to be
a really interesting, excuse me, mental model for how to think
about businesses and for generating investment ideas.
And the idea is basically that kind of in what in line with
what you're saying is that a complex system that works comes
from a very simple system that worked and you can't sort of
reverse engineer that process. And I learned that first hand in
San Antonio as we were talking about, where decades of doing
things one way made it so other teams could not replicate that
because the advantage was the system itself.
And that's a really powerful thing to look at through the
lens of business. And it it's one of those things
where I think once you see it, you can't Unsee it.
And we have a couple, excuse me, we have a couple examples of
that in the portfolio. In my last letter that I just
put out, I wrote about Shift 4. And that's a great example of a
business that has basically grown and iterated and evolved
through cumulative learning, which has made the advantage
that they have very difficult to replicate.
And there we don't have to get into the business now, but a big
part of their strategy is acquiring customers via M&A.
So they'll buy a business with an embedded software piece of
software and a customer list that they can then cross sell to
their end to end payments. And that's a very different
strategy than most of their competitors who lead with
feature rich software and point of sale systems.
And it's worked for them over time, not only because they
figured out how to do it and integrate it well and cross sell
their cross sell their payments, but also because 20 years ago
they've been, they started out in the payments ecosystem as a
simple processor, a reseller actually of processing systems.
And they've sort of evolved over time to be at the forefront of
every new development in payments.
And so they have this like 2025 year head start on all of their
competitors. And so when people say things
like the M&A is value destructive or payment
processing is commoditized or it adds no value, looking beneath
the surface would reveal something very, very different.
Not only that they, the economics of that business are a
lot better, but that their advantage from solving these
kind of like intractable problems, which is what I wrote
about, has just grown over time and it's really hard to
dislodge. Whereas if a company that has
LED with feature rich point of sale software, they can't really
just go buy, you know, full gateway capability, payment
gateway capabilities or a merchant acquirer or try to
enter into the payment space where they're capturing the full
stack of end to end payments because they lack the learning
that's embedded in the system that Shift 4 has created.
And so I think that's just a very interesting concept.
And there's a, there's a, we, we own a small position in Duolingo
also, which has been a pretty controversial business to talk
about, but it's, it's by all means an excellent business.
The stock keeps going down, which is interesting.
They've done a little bit of a strategy shift lately and, and
we can talk about that, but they, they are involved in some
of the same dynamics where the, the business didn't even really
start out as a commercial product.
And, and was, was just something that where the founder, who's
very engineer based and he's a PhD from Carnegie Mellon, was
just very interested in how you can help people learn a language
more easily or learn anything. And they were almost anti
commercial for a very long period of time since the
inception of the business. And then finally took on some
outside capital and decided to go public and saw a real
opportunity there. And it's an, it's an
unbelievable business. You know, they're growing 30% a
year. They, they've got 35% free cash
flow margins. And the interesting part about
that business is that they wouldn't have made it.
It, it's a consumer application business where they're
basically, if you're not familiar, it's an app that you
can use to learn a language. And what you see today, this
very easy to use, gimmicky, almost cartoonish sort of app is
the result of a decade plus of iteration and AB testing and
trying to solve these problems for how people learn best, how
to keep them engaged and what will keep them coming back to
this thing that is very different from a Spanish class
in high school or college or even some of the other learning
software that's out there like Rosetta Stone or Language
Transfer, etcetera. And so the answer is kind of
what people often talk about Duolingo being disrupted by AI
and how the barriers to entry are low and there's lots of
competition. But I think that misses the
point because Duolingos users solve 1.3 billion puzzles per
day on the app, which is an advantage that can't be
replicated. And they've scaled the business
to 150 million daily active users.
And there's, and they did it with almost no, no marketing
spend, like they spend like 10% of their revenues on marketing.
And so they've created this unbelievable brand, I'll call
it, but also sort of flywheel of engagement and new user growth
and people that are familiar with the business.
And they did so at such a low cost because they are, it's
really a business of engineers and they figured out how to keep
people engaged for a very low cost, a very favorable customer
acquisition and how to grow this sort of DAU flywheel that they
have over time. Like once you join the app,
you're kind of locked in, at least for the most part.
And so why is that? What's that?
Why is that? Well, there's a number of
reasons, but they have they have figured out, they have created
the most habit forming education application that I've ever seen
in my life. And their, their engagement
metrics rival that of Meta and some and Roblox and some of the
other really large consumer application businesses because
they have made the, the learning of language almost gamified.
They have created this really interesting dynamic where you
feel like you are being productive and you are, once you
Start learning a language, you, you begin a streak.
And keeping up with this daily streak has been really important
to users and you reach certain milestones.
And it's very different from all the other language apps that
I've tried and I've studied and they've, you know, it's, it's
very difficult to even explains a little bit, but it's, they've
really figured out how to keep people engaged in this app.
And they've also figured out how to do it while growing the
business. And they've run, you know, 1516
thousand or so AB tests per day about what works, what keeps
people engaged, how to limit churn, what works in terms of
monetization and just, you know, putting that all together, it
becomes outside of how fast they're growing or what
competitors are doing. It becomes a very interesting
exercise. And if you wanted to replicate
this business, you would have to figure out how to scale to that
daily active user base with very limited capital while building a
brand that people know and are familiar with and make it fun
and, and educational and gamified.
And so that people keep coming back to the app.
And so that's a very interesting sort of intractable problem that
I'll call. And it's something that they've
really figured out where the data that they're bringing in
from their application, as they learn more, their advantages get
stronger because instead of, you know, repeat integration, like
just bringing on a user in a vacuum, it's cumulative
learning, which should compound over time about what works, what
people like, what allows people to learn a language faster.
They can then translate that to other subjects, like they've
introduced music and piano lessons and things like that on
the app. Oh, interesting.
Yeah, and so anyway, I I've gone on about Duolingo, but.
No, I think that's really interesting.
I mean, I mean, to your point, I, I believe you said like the
puzzles were, were something that can't be replicated.
And my mind sort of went like, well, the puzzle itself could be
replicated right? Like that.
But that's, that's not the insight.
The insight is the, the culture of AB testing and trying to
think about what's the most effective way to help people
learn this and then developing a puzzle and then looking at how
the, the user behavior is changing.
Like, that's the stuff that's really, really easy to say can
be replicated, but really hard to actually replicate because it
requires a way of being in order to replicate it.
I agree with that. And there's also a path
dependence and kind of evolutionary selection there
too. And I feel this way with another
one of our businesses and Kits eye care is that, you know,
Duolingo was not AVC funded. Let's capture this massive Tam
of language learning and throw a bunch of money at it.
And we'll monetize the crap out of everything.
And we'll, we'll make our money back down the road when we get
the kak LTV thing, right? And we'll just again, funnel,
funnel a bunch of money into marketing and make it work.
It was the the founder of the business, a guy named Louis von
Ahn, is again APHD from Carnegie Mellon.
He founded CAPTCHA. You know the the verification
app? Yeah.
Yeah, yeah. And he sold it to Google.
I can't remember the year, but he made a bunch of money before
starting Duolingo. And then he founded the business
with one of his PhD students at Carnegie Mellon.
And so from day one he was a, he's a very long term thinker.
He's an owner operator and he wasn't worried about, I think
like what most maybe VC type of businesses are worried about,
which is monetization. It's almost like had to, I think
early backers of the company had to figure out if he was allergic
to money, so to speak. And he just what he just was
just did monetization for a very long time.
And that's very interesting to me because early constraints in
a business, I think determine what a company becomes good at
and funding is not neutral. I think it shapes behavior a lot
and V CS, VC capital or venture capital in my view.
I'm not an expert so take this with a grain of salt.
I think works best in sort of tractable, easily solvable.
We can throw money at this winner take most markets, but
something like Duolingo or integrating payments and
software and hardware or manufacturing eyeglasses for 1/3
of the price that their competitors do and still being
profitable on them, that that is an intractable problem that
funding alone can't solve. And so I like to find these
businesses where they have these constraint driven advantages
where either either self self-imposed or just because for
of resources where they're unable to spend and that forces
different solutions. And those solutions often look
inferior early or and and superior later, which is very
interesting to me. And so there's a couple
businesses that fit that theme in the portfolio.
But I think you're right, it's there's a path dependence there
that would be very difficult to replicate.
Not that people can't create another language learning app or
that AI can't help as well, but I think I see this narrative a
lot where it's like Duolingo doesn't bring you to full
fluency and that's fine, but that misses the point in my
view. I don't think that is the point.
I think the point is they figured out how to keep people
engaged in the same way that watching reels on meta all day
keeps people engaged. The utility there is.
I'm not comparing Duolingo to Meta, but the utility there is
very low in my opinion, whereas at least I think that's I think
you can. Objectively say it's low
utility. I don't know why.
I don't know that we have to call that opinion on this show.
Sure. All right.
Fair enough. We're not we're not.
We're not judging those that want to use the some of their
time in a lower utility manner. We're just saying that if you're
flipping through looking at hedonistic things, it's probably
not as good for your mental ability as learning a language.
That's that's the only comment. Correct.
You said it, not me. It's the easier to monetize
hedonism though, but that's it. That's really interesting the
your point on not not bringing people to fluency.
My kid is trying to learn a language now.
He's not going to get fluent. It's actually on Duolingo, but I
kind of view it as well. He might get fluent, but that'll
be from speaking to his mother, not the, the language.
But I, I kind of, I like that he's exercising his brain in a
way that I think builds the muscle.
I don't really care about the end outcome, you know?
Like, I mean, I don't know, eventually that muscle being
exercised will benefit him in some way, shape or form.
So that's interesting. The current I, I would agree
with that. I've put my 4 1/2 year old
daughter on to Duolingo and she loves it and it's very gamey to
her. And so that's, that's been fun
to just watch. As a side note, but to set the
stage here and and I'm not pitching the stock just to
provide some context, the sort of debate now Duolingo stock is
down significantly from last year and they were growing
really, really fast and they were Daus were, were growing
significantly during the past couple of years and they were
monetizing really nicely. And this current debate, I
believe around the business not only is that AI will kind of
disrupt their advantages, but also that they're in the middle
of a strategy shift where they are going to focus less on
monetization and more on what they call improving teaching
outcomes. And what I think is behind that
is that management has, management has incorporated AI
into the app in a big way. And what they've realized is
that as these capabilities get better over time, they have the
opportunity to do a lot more things using AI, whether that's
additional languages or improving, excuse me, additional
subjects or improving the languages that they are
teaching. And really leaning into becoming
a, an application where you can log on or you can sign on and
have AAI based tutor teaching you a language in the same way
that you would a human. Now, obviously we're not there
yet, but that's the long term vision for management.
And it's, they've sort of muddied the short term picture
in a way by saying that instead of focusing on just converting
every free user to pay that we can, we're going to take a step
back and try to make the app as as great as possible and as
useful as possible. That's interesting to me because
the majority of Duolingos users are free.
And one of the things that in terms of their advantages, one
of the things that I think is interesting is that they've
created such a great free product that you don't have to
join a paid tier to get most of the advantages of being on
Duolingo. So I would say between 75 and
80% of what a paid user gets, you can, you can get for free on
the app and that's intentional. And so right now I think it's
under 10% of their users are monetized and it was growing at
a nice clip, maybe about half a percentage point per quarter
over the last couple of years. So they've done a really good
job of monetizing and it is growing over time, but it's kind
of like a small subset of their users subsidized the remaining
users. And I, I think it will probably
be that way just given the, the demographics they target and the
countries that they're in and the wealth, the, the income
statistics in each country and how that translates to free
versus paid users. But the interesting thing there
is that they, they basically came out and said, we're going
to focus on making the app better and teaching better.
And we have these opportunities with AI to do this.
And the market kind of took that as there's a real problem here.
DAU growth is going to slow considerably.
It was in the 30 percentage range and we have a real issue
with that. And at the same time, the
business was trading at 5560 times free cash flow and it was
growing, you know, 3540% a year. But when you say 55 times free
cash flow, when you say well, growth might slow a little bit
on the DAU side. Yeah, that does matter.
People don't like that and especially when we're in a
little bit of bubbly territory. And so the stock has come down I
think from you know, 500 or so to like a 137 a share today and
trades at maybe 1314 times free cash flow.
I'm not sure. But there's still a real path
for them to grow 30% from here. That's the interesting part is
that the the CEO came out in the last call and he said we're
going to change the strategy up a bit and focus less on
monetization and people went crazy.
But then the CFO on the same call, it kind of walked it back
a little bit and was like, well, just so you know, this is a
couple quarter thing and there's not going to be a real slow down
or step change in the business and we should be fine.
And so it's an interesting dynamic to work through.
I, I really would like to see a little bit more evidence
maturity of the strategy shift and what they're doing and to
make sure that DEU growth doesn't fall off a Cliff.
But that's the current debate right now.
And I think if they get, if they end up to your point about your,
your kids, there will be a point, I believe, whether it's,
you know, 1020 years from now or five years from now, where they
can make the AI product so good that it replicates a human
being. And so then, then the, the kind
of Sky's the limit with additional subjects and that
sort of thing. And so I think that's a very,
it's a very interesting sort of long term use case and a long
longer term investment case for the business.
But yeah, there's, there's, there's certainly feeling it
right now, I think. Well, that's that's interesting
because the founder is a teacher.
Assume I I assume right? Unless he's just a researcher at
Carnegie. Mellon an engineer?
I think he's a. Teacher.
Yeah, I mean, his passion is helping people learn in this in
this endeavor. Yeah, I he according to the fact
pattern that I understand and I may be wrong, but if he's
wealthy and he's looking for the best outcomes, it's one of those
situations where, yeah, it's almost like an asset liability
mismatch potentially where the shareholder base and the the
actual controller of the entity have slightly different
incentives. But in the long term, they, they
may converge and even the, the, the medium to short term pain
may create a much better long term outcome.
But yeah, that can create some indigestion in the short term
with the stock price. But that's how, how you're
discussing this is one of those that's, that's one that I would
like to have that kind of idea on my desk.
And now I do. So thank you.
I hope you're enjoying this conversation.
I wanted to interrupt the program to give you a little
sense of what Trata may have for you and I'm going to read you a
a little excerpt of a transcript as a 1/21/26.
The analyst says. I don't think of Duolingo as an
education or an Ed tech in the traditional sense.
I think of it as a habit forming consumer platform, something
closer to Spotify or TikTok in terms of engagement, but with
very different monetization constraints.
I don't think the Moat is content to me.
The content could be commoditized, it could be built
by somebody else. Especially with generative.
AII think the Moat is admin brand and distribution.
If you line up Duolingo against other consumer apps in terms of
growth rates, user base, and engagement time, I don't know if
it has a peer in those categories.
Roblox is a really good example, but Roblox hasn't figured out
how to make money. I'm not sure.
I as a side, I'm not sure I agree with that, but I digress.
Duolingo has significant operating leverage and it's
pretty clean cash flow too. As you mentioned, if you break
that habit loop, I think the entire model degrades very
quickly. That's why I'm cautious around
what they're doing. Again, these are the kind of
insights that you can get in try at Tri Trata go to Tri Trata
forward slash brew for a free trial.
And once again, the other sponsor of the show, fiscal dot
AI Braden has been a sponsor in the past.
He was one of the OG sponsors. He's a sponsor now.
Fiscal dot AI forward slash brew gets you 15% off everything.
They offer high quality data. It's they're super fast.
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But those those are great situations, you know, because
not only that, like, I don't mean to be so I had no idea
we're going to talk about this, but I like these kind of ideas
because I do think that they have a way of making the world
better too, like in in some way, right?
And that's that's positive. I feel like having that in your
life is a good thing, especially when when you can make money
doing it. Absolutely, I am biased so I
will I will agree with that take.
But it is a very interesting like what whatever your opinion
is on the stock or, or or the product, excuse me, the it's an
excellent business. I mean, there's no denying that.
And now I've really sound like I'm talking my book, but you
know, it's a five and a half 6 billion market cap.
There's a billion dollars in cash on the balance sheet and
they're growing, you know, there's a path for that for them
to grow 30% per year from here and you know, with ridiculous
free cash flow. So the, the setup you described
earlier with the, with the found the CEO and founder, it's not my
favorite because you know, a they should be buying back stock
right now. There's there may be a sort of
short term, long term mismatch, which is OK for me just thinking
about things long term, but there are some, the reason why
it's a smaller position is there, there are some dynamics
that I would like to see play out before, you know, really
diving in here And so, but it, but it is an excellent business
and one that if you would love some pushback and criticism on.
Yeah, yeah. And to the listeners, please do
reach out to Adam with some pushback as long as it's
thoughtful. That's interesting, man.
Well, thank you for sharing that.
I like those Garpy ideas. That's that's where I've, I've
sort of morphed a little bit more to, I feel like, and this
could be wrong. I, I skimmed some of your old
letters. It seems to me that you've done
a little bit more of a cheap to quality, growthy type thought.
Is that a fair characterization of your metamorphosis as an
investor? Very.
So it's what were these lessons that the hot stoves you touched
that changed who you are? All right.
Well, how much time do you have? We have to extend the the
podcast and. We, we got all the time in the
world, but you know, like, like one that I, I thought was a, a
pretty interesting example was your Libsyn investment to be
able to, to sort of not hang on to the idea that, hey, this is a
hosting platform and podcasts are growth, you know, outlook.
Like it's good to flip on an idea when you, when you sort of
see stuff deteriorate that you didn't think.
And I don't know that that necessarily fell into your cheap
basket that that created the change.
But I remember looking at that once and I was like, man, this
looks pretty cheap for the growth that might be there.
And then it just kind of never materialized.
Spotify gobbled up a lot of share, I think.
Yeah. Wow.
That, that, that example, it's been so long.
I I haven't been close to that business in a while, so I don't
know how intelligently I can speak about it, but.
They were my first hosting platform, which is why I kind of
got interested in it. Yeah, that's interesting.
I remember there being some dynamics with the business
itself and I think I may have been wrong about the economics
or how competitive the industry was and where they would end up.
I I can't remember well you. Know what was tough?
Spotify contacted me and they said, you know, basically we're
releasing video podcasts and all you have to do in order to have
a video is move your hosting over here.
And by the way, it doesn't cost anything.
And if you don't, you can't have video.
And they I was like, all right, well, there you go.
So that's that's what stole me. And I was I went from a paying
customer to a non paying customer.
Yet I'm sure one day they will turn the screws on me.
But it was that that was a real competitive threat that I
thought changed that. Well, the industry is
interesting to me and the growth of podcast is interesting and
they had, I believe, a little bit of a competitive advantage
in some way, just with the, the platform and maybe their price
and ease of use. I, I can't remember exactly, but
I, I mean, at the end of the day, do you really care?
Maybe now you do today if you have a show like yours, but do
you really care if you're starting a podcast who the host
is? And isn't it more just about
getting the content out and they're taking a lowest price or
however that works? I'm not sure you can.
Yeah. I I would argue the lowest price
with the ability to distribute. Those are like the two things
you care about. Yeah, and I, I think I remember
that at some point every hosting platform just developed the
capabilities that Libsyn had, which maybe were unique early on
and not so much later down the road.
But again, it's, it's been a while.
I can't remember. I mean, I hot stoves, I, I've
touched a lot. And there's this entire, you
know, the past decade plus has just been a process of learning
and evolving and trying to update my views on things and
really dig into my biases and where my weaknesses are and try
to just get better at, you know, becoming a better portfolio
manager and analyst and looking at companies in a different way.
And that process has just naturally led me to higher
quality, whether it's people or business.
And it is a result of a lot of mistakes, but also the result of
just kind of soul searching about how I want to run my
manage my fund. And because it's mostly my
capital, not mostly excuse me, because a large percentage of my
net worth is in the fund and I'm one of the largest investors.
It's really important to me that as I was saying earlier that
this the capital is sort of managed in the way that I think
is correct for the next couple of decades.
And there's just so many businesses in the small cap
space, the micro cap space are just in general that can't
really hit that long term compounding escape velocity as
I'll call it. Where you can get a business to
go from you know 100 million in EBITDA to a billion or whatever
the case is where you can really get the return, the types of
returns and sort of long term out long term return profile
that I'm looking for. And so I'm looking for those
types of setups every day and trying to view the portfolio and
the businesses that we look at in, in light of that.
But that has just led me away almost not intentionally, but
it's just led me away from kind of smaller low quality things.
And I still find cheap stuff everyday.
I just found something really interesting earlier this week
that will probably, you know, 3 to 4X and but it's just a, you
know, piece of crap excuse, you know, excuse me to the people
involved, but it just doesn't interest me anymore.
And so it's more about just taking that, you know, trying to
align every piece of my temperament and fund and what
I'm trying to accomplish with the types of companies that I
think make the most sense in the portfolio.
And that's really where it's it's headed.
But yeah, certainly the result of a lot of mistakes.
And on the people side too, as I mentioned, it's just very, very
difficult to get that one right again.
Sometimes I think think I can judge it, not often, but when I
do, you know, I tend to get it very right.
And when I'm wrong, I tend to get it very wrong.
And just being more cognizant of that and trying to get behind
people who have a lot of skin in the game.
But again, also have that kind of track record of making really
sensible decisions. And so, yeah, it's it's
definitely, if you if you started at in 2020 and read
through five years of letters, you would definitely see that
shift over time. And hopefully you know what is,
what is my writing or whatever else has gotten better over time
and my I certainly feel my experience and pattern
recognition has. But yeah, you would definitely
see that evolution over time and I think it's really benefited
the portfolio today. Yeah, I I think you can see it.
And the nice thing about having writing and keeping it up, or
in, in my case, having a season, one that makes me cringe at
times, I keep it up there to sometimes listen and be like,
don't be like that guy. You know, sometimes you learn
and then you move on, right? Without, without the learning
processes, you can't be where you are.
The thing I like intuitively about the idea of looking for
higher quality, especially at reasonable valuations, is it
does seem like a situation that the natural world order should
be aligned with and reward outside of maybe like some
cyclicals that can't be levered. I think the question of like,
why is this thing public is a pretty important question to ask
yourself because you know, I don't know if it's like if it's
a reasonably good midcap something or another, there's
chance or pretty decent chance of PE fund is looked at it.
Not that they're going to buy everything, but having some
answer for why is this public and why should it grow in value?
I think is a may sound elementary, but for a long time
I didn't think about that stuff. I just thought, oh, you know
how? How cheap does it look?
Sure. When I'm asking myself that
question, it's usually, you know, looking staring at a stock
price that's down 3040% and management's not doing anything
about it and the business doesn't seem to be working or
the story is broken. But generally speaking, the best
businesses in the world are public.
And I'll hang my hat on that. I think it's a, it's a, an
aspiration to be, I think one of the best.
And a lot of the management teams that we invest behind, you
know, I, I try to look for killers sometimes and, or a lot
of the times and those people are very competitive.
And I think this is a great space to kind of exercise that.
But it has happened. I mean, I don't know, I don't
have any evidence of this to, to counter what you said about PE,
having looked at it, I'm not sure, you know, if that's true.
I think what's interesting these days is what I've found is you
mentioned paying a reasonable price for quality.
It seems like I am finding very unreasonable prices like
mispricings for quality these days just given the current
market environment. And again, there's once these
sort of narratives and stories get out about a business and
there's a mischaracterization that can be a very lucrative
source of opportunity. And I saw this in the sports
world too, where people would label a player a certain thing
because of the way they looked or, you know, how they ran or
what their skill set was at the time.
And take very little into account the future, the next
1224 months or what this player could become over time and
really kind of peel back the onion to understand that.
And that's also part of having the importance of having a great
system or a great management team is that you can have
someone in charge that ushers the business to that next step.
Or if the market is not valuing it properly, they're going to
take really big steps to fix that.
You know, I mentioned Duolingo probably should be buying back
stock in the case of shift four, They just, they just put in
place a billion dollar buyback program that could take out 20%
of the shares. They're, they've been talking
about. I, I believe they are buying
back stock now and they've been talking about doing so at an all
time low valuation relative to the business progress that
they've made. And there's other examples in
the portfolio as well that the management team isn't just
sitting on their hands. If the market isn't going to
recognize the value, they're going to take steps to do it
themselves and return a lot of capital through buybacks at
really high free cash flow yields and still be able to
operate the business and grow etcetera.
And so, yeah, it's, it's an interesting situation, but I, I
tend to find I'm staring in the face of a mistake when I'm,
whenever I'm asking that question.
And I have been involved in some kind of broken stories before
where I am like this business has lost its public market,
ruined its public market reputation and lost its
opportunity to maybe get a fair multiple.
There's a couple businesses on on my watch list right now that
are really attractive right now in terms of the price.
I'm just not sure that, you know, they've, I'm not sure
whether they have ruined their reputation yet, which is not a
great place to begin. But yeah.
So it's it's I asked myself that too occasionally, but it's
usually again staring down the barrel of a mistake.
How, how do you do the work that you do and cultivate the network
that you do and then come to a point in an investment decision
and try to remove yourself and be rational about, OK, what the
sunk cost of doing the work versus, you know, I assume as
you get better and better at this, you're finding better and
better management teams. How, how?
And I, this is where the art comes in.
So I'm not asking for a precise answer, but how do you try to
think about marrying the soft stuff with, you know, I guess
your projection of where the business is going and not
letting all the time of the research process influence
whether or not you should take a position or, or something of
that nature. Like, how do you remain rational
when your work is so scuttlebutt intensive?
I believe I've gotten better at this overtime and focusing on
just a few key variables for each business and trying my best
to ignore the noise around it has been very helpful.
And I, I live a pretty, I guess, insulated existence.
I'm off the grid most of the time.
I don't look at the news I'm on, I'm on Twitter X here and there
and I, I just try to stay focused on the portfolio and
then, you know, reading things that can help me get better and
it with what I'm doing, books or etcetera.
But for some reason, I've always been able to, I, I haven't, I,
I've never had an issue with sort of the sunk cost fallacy or
that bias where if I buy a book and three pages in, I don't like
it, I'll just stop reading. It I just did that the other
day. I was like this thing sucks.
I'm not finding out why other people like this shit.
I I don't know what that is. You sound like you have it too,
but it applies to investing as well.
And it doesn't matter to me what maybe in the past it did, but
today it doesn't matter how much time I spent on a business or
how many people I've spoken to or the work that I've done.
If I feel like disconfirming evidence has is now disproving
the hypothesis or the investment thesis I had, I'm out.
And or if management does something really dumb out of the
blue, it's very easy to part ways.
And I don't know what that is, but it's been very helpful to
develop that. I think through reps over the
years and just have what a friend of mine calls, you know,
strong opinions, loosely held. And I think that's very
beneficial on the portfolio management side, obviously
because a lot of this is about how much you make when you're
right and how little you lose when you're wrong.
And I was, I'm always very partial to holding our, I just
wrote about this in my Q4 letter.
If things are going OK and the business is working well and the
thesis is on track, I'm partial to holding our businesses and
sticking around no matter the valuation unless it's completely
egregious or if whatever the stock price is doing it.
It's it's just been easier for me to focus on the business
level, performance and metrics than anything else.
And in the within the walls of Greystone, I would say looking
at stock prices has almost 0 measurable value for what's
happening and it doesn't always feel good if I'm holding
something that's going against me, but it just doesn't.
There's no predictive value there or any sort of thing I can
hang my hat on about what's happening here.
And so I just try to again, to anchor myself to the business
performance. And that I think is the best way
for me to stay rational. And then that also helps on the
portfolio management side where if a business is drawing down
against me and things are looking very good from an
operating performance standpoint, you know, I can add
to the position and, you know, kind of do the work that I have
to do around that. But it's, it's really dynamic.
It's a really dynamic process. Like you said, this is where the
art comes in. But it's a skill I think that
has been honed over a long period of time.
And I'm still not claiming I'm perfect at it, but it's gotten a
little bit better over time to where it's a it's a lot easier
for me to suss out what matters and to kind of avoid the
remaining noise, I think. Makes sense.
Makes a lot of sense, yeah. Does that answer your question?
Yeah, I mean, I, you know, I just think it's, it's always
interesting to, you know, I mean, like, like Jake is
obsessed with this remaining rational, right and, and keeping
sound decision making it and you know, I've, I've found I was
recently at a a company kin sales investor day, you know,
and like I, I really like those guys.
I mean, I, I don't know that I love the valuation, but I think
that group of people is a unique group.
And I found myself like almost fawning a little bit in the room
and I had to be like, OK, it might be time to sit down and
write like, why I don't like this rather than, you know, sort
of just iterate, you know, cementing good thoughts in my
head. So I don't, I don't know, I
just, I find it interesting to just see, see whether or not
people have processes or kind of whether or not they suffer from
same endowment biases. I, I think we all have certain
things that we all intersect on and Charlie Munger probably
wrote about 22 of them or whatever in that one speech.
So. Well, I, I tend to stick around
too long, which is a weakness, I think.
And like I said, I, I may be overly patient at times.
And I, we just had an example in the portfolio that I something I
own for over three years and it did not, didn't work.
I was wrong and I sold it and it felt terrible and but I was
wrong about the direction of the business and the economics and
how things would unfold. And maybe it will go on to to do
OK. Actually the the CEO of that
business, I just saw a press release this morning where he
abruptly stepped down. So I have no idea.
I have no idea why and what's going on there.
And so kind of kind of glad, I guess post mortem that I that I
sold it. But yeah, you know, it's a
three-year period of just frustration and I thought things
were trending in the right direction for a long time.
And by the opportunity cost of that one decision, it was a
large position for a while was a mistake.
And there were other things that I thought about multiple times
replacing it with and this is a Better Business and that sort of
thing. And I think I was just overly
patient. And so it, it happens and the
again, the opportunity cost is large, but to what you were
talking about with Kinsale, I don't know that business, but
we, you know, I don't think as long as you don't let that
emotion guide your decision making, I'm not that I'm giving
you advice, but I think that's OK.
I mean, we spend so much time on these companies, you might as
well fall in love with some of them.
And it helps you, you know, hold them a little bit longer over
time. And if you feel that way about a
management team, that to me is a huge signal.
I mean, the last three, the last three investments that I've
made, 3 or 4 have started with me listening to an interview or
two or three from the CEO and just being really impressed.
And wow, I didn't know that this is what this business did and
that how they paint the light on that.
And obviously, you know, they're salesman and they're pitching
the company and that sort of thing.
They're just talking about the positives.
But I think that's a great place to start with people and you
know, everything else flows from there.
So I that's an interesting anecdote or thing that you
mentioned. Yeah, well, I'm happy to share
notes. Kinsale is going to be up your
alley on on things you like. What you may not like is it's an
insurance company trading at five times books so.
I do know that. That's the only thing I know.
Yeah. Well, there is a reason.
There is a reason whether or not that whether or not that is too
high of a valuation is totally debatable and understandable,
but it I bring it up a lot. Adam Robinson has this thing
where he says there's a lot of money to be made in things that
make no sense and things that make all the sense in the world.
Because if your brain is saying it makes no sense, you probably
don't understand how the world's looking at it.
And if your brain says oh this is blatantly obvious like it
probably clicks for you, I would just suggest that as it pertains
to that particular entity, I I believe the premium is assigned
to the management team for the right reason.
It's up to the stock analyst to figure out if the premium is too
high. Well, I, I just tweeted this
thread the other day about circle Buffett's circle of
competence and some stuff around that.
And insurance is so far outside of my circle of competence.
But taking my own advice, I will spend some time on it because
it's important to learn a little bit more.
And it's it's something I've never looked at before or spent
any time on, but that's. Yes.
So why did why did you you said something along the lines of
like his advice of circle of competence is some of the most I
don't I I think what you meant is investors have used it in the
most dangerous way possible or something like that.
You want to expand on that? This would be great for the
headlines. Yeah, sure.
You're. You're trying to stir up some
stuff now. Adam, Will Keats, Buffett,
that's the title, yeah. Yeah, certainly not going toe to
toe with the Oracle here. I think the advice is excellent.
The application is has been misused or misapplied.
And I think what people have taken that to mean is that if
you don't understand something immediately, it should be
dismissed as too hard or outside of my circle.
Whereas a lot of money has been made, at least from me, I guess,
in trying to understand things that weren't apparent on the
surface or that I didn't have any experience in prior.
And that's our job as investors. We get paid to learn.
And so I think it's really, really important to examine all
of your biases and all the areas in which you think are outside
of your circle of competence relative to the time you have
and your your experience and what interests you.
And just really dig into those things.
And eventually you will come across something that you
realize you can't understand. And that is not outside of your
circle of competence. I think most business models can
be understood. They're not, it's not physics,
but it's just about kind of peeling back the onion.
And so I was really just maybe trying to stir some stuff up a
little bit on Twitter, but it was more about just kind of the
misapplication of, if I don't understand this, I should just
throw it aside. And that's that they're, they're
certainly things that belong in the two hard pile.
Absolutely. But that relates more toward
assessing the probabilities of the outcome, the downside,
understanding the skew, the risk reward, the asymmetry versus
like, I just can't understand this.
You know, I, I've never spent time in semis either.
I think I could understand it after a few hours.
You know, on a surface level, maybe that's overestimating my
own ability, but that's kind of what I'm talking about, if that
makes sense. Yeah, no, it does.
And I, I, I tend to agree. I I have found there were a lot
of Buffett quotes that I read when I was young that I was
convinced that I knew what they mean.
And now that I'm older, I can see three different meanings in
a lot of them. And some of them changed for me.
And the only thing that I tell myself now is to, to realize
that his words are coming from his brain and his brain is
different from mine and probably crisper.
So, you know, figure, figure it out for yourself.
And and I guess he'd he'd the the Oracle's words, but don't
maybe maybe don't apply them literally as as I understood
them when I was young, is what I try to tell myself.
There are. That's really interesting you
said that. I just thought about this the
other day. The longer you do this, the more
his quotes make sense. Like true.
You truly understand what he meant by that.
Maybe not exactly because like you said, they came from his
brain. I mean I'm sure when I'm 60 I'm
going to look back and be like my 40 year old self didn't
understand it. Exactly, that's my, that's my
favorite part of this, this business and, and doing this job
is that there's no, as long as your brain works, you can do the
job. And unlike an athlete where, you
know, father time comes for everybody, an athlete might
retire when they're the best at their sport because their body
can't handle it anymore. But in investing, there's no
such thing. And so you should technically
get better over time. And things will start to have
much different meanings and applications from a decade or
two ago. And something you read when you
started is very different from reading that same thing today.
And the way that your pattern recognition is triggered based
on your experience is very, has been a very interesting process
to me to go back and read decade old notes and be like, oh,
that's what that means. And I didn't really understand
it at the time. And so that's been one of my
favorite parts of this, this job.
Yeah, yeah. I'll, I'll use this to segue to
maybe the final sort of part of the conversation you had.
You had mentioned NRP as something to look into.
I have looked into it. I do own it, but I am a little
bit concerned when I hear Elon Musk saying that solar could
power the entire United States with 100 by 100 miles square and
batteries can do it all. And then I hear Vaclav smell in
my ear saying this takes a lot longer than you think.
And then I have. But Elon is Elon and I don't
know that I want to bet against him.
So curious to hear you riff on it.
I was out in Houston and met with the people there and I do
think that the capital allocation, I pushed them on
buybacks a little bit. And their answer to me was,
well, if the return of the capital to you is a return of
capital, I don't know how tax advantage to buy back is.
To which I said that's a rational enough argument to me
that I can, I can live with that.
And it'd be nice if size Cam was, if I'm saying Sysicam,
Syscam, whatever, it'd be nice if that was generating some cash
again. But one day it will.
Yeah, for some reason it's pronounced shish Cam from what I
understand. I don't know why.
Yeah, that's very interesting. I had no idea.
I, I have also been to Houston and to visit with them and I had
no idea you owned it. Interesting.
So yeah, the, the one thing I would say to that is that the
majority of their volumes come from met coal.
And so there's no replacement for met coal.
And I'd imagine the world will still need lots of met coal
moving forward. That's a big thing, part of the
thesis I'm hanging my hat on. And I think the decline of
thermal coal is both priced in and also very apparent to
anybody who's involved in the space.
And so I hope that, you know, at some point there will be much
cleaner and very different forms of energy.
And so I I look forward to that. I think.
And I think before we get there, I think there's probably a very
long runway of distributions to be paid, just given kind of
where their volumes are and what's happening with pricing
and the fact that any clean energy forms will take a very
long time. I think Elon Musk get the is the
equivalent of Amazon saying they're going to enter into this
or that vertical and all the stocks, you know, getting
crushed as a result. It's very possible that they'll
find a niche or two or three or fifty that they can dominate and
do better than everybody else. And again, I don't, I would
never bet against that guy. He's he's he's incredible.
But yeah, I think there's a nice runway before we have to worry
about, you know, things being becoming obsolete.
And again, on the met coal side, I think it's a really important
thing to note is that the majority of their volumes will
come from met coal in the future.
And I I think that between shish camera, sodash recovery and
shish Cam distributions picking up and then also any efforts
around carbon capture, I think that's a very interesting offset
to the thermal coal as well. And there's a very, there's a
very good case to be made that soda ash will make up a pretty
decent amount of their distributions in the future, not
anytime soon, but in the future. And then look, I mean, you know,
mineral, rare earth minerals, I'm not going to pretend like
NRP has anything to do with that right now.
But a lot of these rare earth elements, I said minerals,
excuse me, elements are found in coal seams.
They are expensive to extract and it depends on the type of
coal, etcetera. But there's a very, very
significant potential use case that in the coal seams within
NRPS mineral mineral rights properties, there could be
additional cash flow opportunities there.
It there's nothing on the surface.
They haven't entered in any discussions.
There's no talk of this at all. I just want to be clear about
that. But it down the road at some
point I think with maybe even with government involvement did
they have 13 million acres of mineral rights And that could be
a very interesting source of maybe cheaper rare earth
elements than having to source them from China or wherever
else. And there's really only one
mine, one key mine in the US, which is in California.
And the government is already is already involved in that
project. And the importance I think of
just rare earth elements in general can't be overstated.
And so that could be an additional source of
optionality. But in the meantime, I think
there's a decent runway to collect more distributions
before any any runoff in net or thermal coal.
Yeah. For me as somebody who wants the
income, kind of nice to have an owner controller that also wants
to take money out of the entity. So I feel like there's alignment
there. And I don't know, it's been,
it's not like terrible results in a not great operating cycle
over the past 12 to 18 months. So we'll sort of see how it
goes. I think it's traditionally
thought of as a cigar, but it would be interesting if a couple
options hit. That's a, that's the beauty of
the royalty model in my view is that well, prices have actually
gone up decently over the last couple of months.
But where where we were last year, that's the beauty of the
royalty model where the business has just been stress tested
pretty significantly and is able to generate significant amounts
of cash even at low prices. And what's great about these
businesses, it doesn't have quite have the operating
leverage or torque as some of the producers do.
But you do get to benefit from any exuberance in the commodity
over time. And we saw that in 2021 or 2022
with companies like Warrior Met Coal and AMR etcetera and
Romico. And so overtime, there will be a
point in time, I don't know when, but there's a good case to
be made by the end of the decade, prices will be a lot
higher. Even if they aren't, they'll
still generate a lot of cash. But if they are, their
distributions could go go up considerably and that's a really
interesting part just given what you're paying for the Business
Today. Yeah, well, and to the extent
inflation is driving prices higher, the nice thing about a
royalty is you don't actually really care all that much.
So it'd be interesting to watch. I was, I have more knowledge
about number than I or lumber than I would care to have.
But Once Upon a time, I I read that often the the the economics
accrue to the stump. And when, when I read that, I
thought, oh, that's not too dissimilar from NRP.
So we'll see how it all turns out.
Well, it's been an interesting start to the year.
You know, the, a lot of the commodity metals mining indexes
and, and oil and gas, etcetera are up pretty significantly and
you've got tech and software and services down significantly.
It's a very interesting environment.
You know, obviously this is not my area of expertise, but people
think we're in a, you know, different monetary regime now
and the market's starting to reflect that slowly.
So it's been, you know, it's not even February yet and it's just
been an interesting, interesting start to the year.
That's right. Value investors rejoice.
Software investors cry. Value investors become software
investors. Or commodity investors, I'm not
sure. Yeah, that's right.
Well, who knows? Just make sure you stick to your
circle folks while expanding it. Anyway, man, thank you very much
for coming on. I'm glad that you're a fan of
the show. It's been it.
This is a really nice conversation and I hope I, I
know that I got something out of it.
So I'm certain some of the fans will as well.
So I I hope, I hope that we, we did a good job kind of show
showcasing how you think and, you know, maybe get a couple of
inbounds from this. I always like when that happens.
That would be great. Yeah, I I really appreciate the
opportunity and I am a huge fan and I hope that you start
recording regularly again because I really enjoy the show.
I will do it unless other things in my life are better.
Come on man, there's there's fifty $100 million deals out
here now they're handing the podcasters.
Yeah, I well, one, those podcasters aren't me.
Two, it would require me changing my life too much to
chase something that I don't. What my man Tupac said.
All I want is money. Fuck the fame.
I, I think for a little while there I had some small version
of fame with none of the money and I didn't really like that
trade off. So I kind of like how things are
now. But I am going to be recording
and thank you. Thank you for kicking off well.
Will Thompson kicked off the season.
But thank you for being guest too and I appreciate it.
Absolutely. Thank you all.
Right man, have a good one. None.
The.