Ladies and gentlemen, welcome to the Business Brew.
I am your host Bill Brewster. This episode features Charles
Lemonadeus of Value Works. Charles and I have a
conversation about his investment philosophy.
He is obviously considers himself a value person
considering the fact that he named his firm Value works.
I enjoyed speaking with him because he's got a very diverse
take on investments. And, you know, the comment that
that sort of stood out to me is he said something along the
lines of, you know, it's your job as a portfolio manager to
put together a series of uncorrelated bets.
And I don't think that that is something that is or different.
That's right. And I don't think that's
necessarily something that is groundbreaking, but I think it's
good to hear. And I think that as you hear him
talk about the different names in his portfolio, you will see
that he tries to implement what he's saying in a way that he
understands. So I hope that you take some
learnings out of this conversation.
And it is a conversation that I didn't exactly expect to have
when I researched his portfolios.
But as we got into it, I found it fascinating.
Hope you enjoy. As always, nothing in the show
is financial advice. Please consult an investment
advisor before making investment decisions.
Everything in the show is for entertainment purposes and
educational purposes. And do your own due diligence.
All right, ladies and gentlemen, thrilled to be joined by Charles
Lemonidas today of VALUE Works. Charles, how you doing?
Good, good, good. Nice to be here with you, Bill.
Well I appreciate your time. I know that you said that your
background is not too exciting or whatever, but I was curious
if you could let people in a little bit of background always
help start the conversation and level set on where we all are.
Well, that's our that's a picture of these, the Empire
State Building punking through the clouds in Midtown.
We are right now coming to you from One World Trade Center on
the 84th floor. Let's see if we give you a
picture outside. I doubt it'll show much, but
yeah, yeah, you can see there's a horizontal bridge in the
distance and the whole team out there plug it away.
You started value works. How did you get into all this?
Why is the firm name value works?
How'd you get into value investing and and how'd you cut
your teeth in the industry? Well, you know, I started out
thinking that that a career on Wall Street would be exciting
and fun and good for my skill set.
I did some work on trying to figure out what career paths
were. I started in a research
department doing the most mundane research humanly
possible but learning a lot, and was lucky enough to to have a
couple of mentors who were really really good at assessing
businesses and investments and didn't end up starting Value
Works for another. I started in 86 after graduating
College in 84 and started Value Works sort of in 99 in 2001.
That's a good time to start something value based, right?
Well, you know, I never liked the term value investor
historically because to me it connoted low quality businesses
at at cheap prices. There's a an article I read some
fabled value guy said well, value had a bad year last year
because financials and tobacco stocks did badly.
Tobacco stocks and financials aren't definitionally value.
Value is in the real world. There's something worth more
money than than than I'm paying when I buy this security.
And to me it it occurred to me that value is not buying low
priced businesses cheap, but rather caring about price when
you start your investment process and saying look what are
the assets underneath this investment worth in the real
world? And am I paying more for the
more when I buy this stock or less than that amount?
And that to me is value. I would agree with that
definition. I think a quant might take a
might might argue, but I would say that they're probably,
they're playing a slightly different game than what we're
talking about, right? Yeah.
Look, it's a philosophical approach of how you look at
investments. It's not.
It's not purely metric driven. Any metric could show it that an
instrument is not a value that is not priced according to a
value metric, but a different metric might say it is.
And if you're just using a metric, you're not getting the
whole picture. Yeah, I would agree with that.
Do do you specialize in certain types of companies or
industries? You know, how do, how do you
think about where you'll go as an investor?
What I find the best investment opportunities are where you can
find something that is a real growth opportunity and it's
trading at a value price. And the key to our success over
the years is building portfolios with a lot of those in there.
And so that and they're all different from each other so
that in any given period, one or two of them can come into favor
and that carries the whole portfolio.
So our portfolios will have 2530 long names in them, but within
those 2530 names, there are really 15 that are very, very
different from each other. Yeah.
And I and I had noticed just based on your 13 F, it seems to
me that you currently have a, a bit of a concentration and
energy though I was going through your, your historical 13
FS and it looks like that is more of a growing into a
concentration than than something that you necessarily
put on at cost, if I can say. That you have that exactly
right, Bill. We had an amount of energy
exposure coming into the COVID meltdown.
But in that COVID meltdown of a three years ago, I guess, you
know, oil prices went negative and security prices on energies,
everything in the energy complex became completely divorced from
long term values. And so we ended up buying four
or five really, really low priced instruments that we were
confident were were the right place in the capital structure.
So you'd come out the other side and I don't think we put 8% of
the portfolio into those four or five names because they were so
volatile and had so much upside. And those names have just,
they've gone up, you know, 5X to TO25X.
And so, yeah, our challenge now is scaling those back.
Yeah, I was. So I, I was just going to ask
that how do you think about sizing, you know, sizing a
position like that in the beginning and then how do you
think about scaling them back? Like how do you think about the
portfolio management when a position grows that large just
sort of conceptually? Well, you know, we talk about
starting our position sizing at 3 to 6% and that's a central
place for us. But essential investment for us
is pretty stably valued. You know, some of our core
investments include Comcast and Goldman Sachs.
You know, these these names can earn us great rates of return,
but they're stable and solid names.
When things get really dislocated, we'll tend to buy
more names in a space at smaller percentages, really thinking of
them as almost one investment or two investments.
So a year ago this month, I guess or last month when the
retail, the regional banks, you know, and all their securities
started collapsing. I think we bought four or five
different instruments of three or four different companies
preferred stocks and debt that we're at anywhere from 35 to to
60% of the face amount. Each one of them.
We, we did the analysis that the underlying these businesses were
going to be solvent and, and well capitalized.
And we thought there was a, a disconnect in the market, but we
ended up buying, you know, four or five individual investments
in this and we size them all the individual one small, but the
aggregate was, was a very heavy weighting for an investment.
And so when two or three investments are really, really
similar, we think of them as not two or three investments, but
maybe 1 1/2 or two investments and size them accordingly.
And then when they get big, look, our, our you know, we sell
things when we think they're fairly priced.
And even though these and, and so some of our energy
investments we've sold and no longer own, but some of them are
only expensive relative to where they used to trade, not relative
to what their underlying assets are worth.
And so those, you know, we scaled them back and we have two
different portfolios. We, we manage two composites,
the capital appreciation one and a more aggressive portfolio.
The more aggressive portfolio, we'll let names be 1520% of the
equity of the portfolio in the capital appreciation, more
conservative portfolio. If something gets up to be mid
teen digit percentages, we're scaling it back.
Said differently, the the capital appreciation might be a
stay rich idea where the more aggressive one may enable you to
compound a little bit quicker. That's right.
And if you look at our website, yeah, you'll see the marketing
material for both of them, They're both doing very well
over extended periods. I think that capital
appreciation has basically kept up with the S&P since 1996,
which for a value guy is probably much, much, much better
than average. The the more aggressive
portfolio has done basically two times the S and P / 20 years.
So why is that? I guess I obviously you're
letting your winners run more, but do you think that as far as
compounding at high rates goes, is there something about letting
winners run that is inherently sort of superior from a
compounding standpoint, do you think?
No, not necessarily, Bill. And I'm not sure that's the
biggest driver of the difference in performance.
I think the biggest driver in the difference of performance is
how aggressive we get during periods of dislocation when
things become really cheap on the capital appreciation
composite. You know, or if our rule is we
build positions of three to 5% and if it goes down in price, we
don't let the market tell us we were wrong and sell it.
But we also don't add to the position.
So we have, you know, plenty of times names have gone down by
80% in price and a 4% stake has become a .8% stake in the
capital appreciation deposit. You know, if, if it turns out
our thesis was right in the 1st place and it goes up five fold
to our cost and then exceeds that and double S again, we'll
have it that a 10% gain in the portfolio from a 1% position.
And that's good in the cap in, in the more aggressive
portfolio, we will add to names when they go down and we will
get more aggressive in periods of uncertainty and, and, and
turmoil. That's the, the biggest driver I
think of, of the relative performance and, and the, and
the more aggressive portfolio also has a shorting component to
it. So, so we have 2030% of the
portfolio short and we end up with more than $1.00 for dollar
long. So we, we, we look for a central
place to be 125% long and 25% short in the more aggressive
portfolio. And so those two things, the
portfolio rules mostly on adding and the the leverage and the
ability to get short, which takes gives you an ability to
get more aggressive when things go down in price.
Because in at the bottom of market declines, we have
historically had very, very trivial short exposure.
So we're functionally getting more long, but not having any
short and then and then we've had more torque on the upside as
a result. That makes sense.
You know, a younger me would say, well, why don't you just
add to the capital of like, why aren't you allowing yourself to
add in the capital appreciation portfolio?
The older me thinks I know the answer, but I'm going to ask you
the question and let you answer. But I respect risk management a
lot more than I used to. So I I will toss it to you.
You know, I don't know if you could tell by the look at things
here, but yes, I've been at this long enough to know the single
most important thing is to stay at the table and not to get
wiped out. And look, our, our, our
aggressive portfolio has been around for 25 years and hasn't
gotten wiped out. But the, the capital
appreciation portfolio is designed for someone's nest egg
assets and a large part of someone's, you know, investable
assets. And so it just has more
conservative rules. And if we put 5% of someone's
portfolio at risk in a name and it goes down 2% of the
portfolio, it's designed to be defend the, the conservatively
structured portfolio. So we don't just add to it and
add to it. And look, ultimately investing
is tricky and you're going to get some things wrong.
And you know, you can't build a 2530 stock portfolio and have it
invested over time and time and time and not have some things
ultimately be wrong soup to nuts and, and get it wrong.
And you know, we're not willing to burn down the portfolios
because for any anyone name. I have a lot of respect for
that. I think that there's, John
Hampton Once Upon a time wrote a piece about not doubling down
into losers and whatnot. And people can go read that.
But that was, it's funny. I think that, you know, they're
the younger me used to say, well, if it's down 50% and
you're right, why in the world would you not buy more or, or
said differently, if you're not wrong or you don't think you're
wrong, why would you not buy more?
Older me realizes that maybe you were wrong even though you
didn't realize you were wrong, right?
That's right. So, you know, you do want to,
you want to exercise caution when you do it.
We do it in an assertive portfolio and we don't do it in
another portfolio because they're both good strategies for
different investors and different and different risk
tolerances. And and, you know, the the more
aggressive strategy has had higher returns, but it's been
more aggressive, yeah. Interesting, I really like how
you said that that makes like perfect intuitive sense to me.
So you know, it's it's funny, like I learn from reading
Buffett, right. I have a lot more to learn
probably by rereading Buffett and and and thinking more about
it. But you know, I hear one of the
quotes that he says, you know, as I'd have 50% my best idea.
And I think about like how I used to interpret that and how I
do now. And boy, is it changed with age
and, and my definition of what my best idea would have to look
like in order to have that kind of a position.
It would. I haven't seen one in my life, I
don't think. You know, the notion of having
50% of an investment portfolio and, and a name I, you know, I,
I, I, I don't think that that's the good portfolio structure.
Yeah, I don't have the stomach for it, but I, I think sometimes
value people because of, and I, and I don't mean to lay the
blame at, at certainly not at the church's feet, but because
of of Monger and Buffett. I think there's some sort of
pride in concentration. And, and I don't necessarily
when I was young, I felt it. And maybe I'm just
internalizing, but I, I think like I said, as I've grown
older, I've got children now. Like I'm not trying to take a
hero shot at something and blow it up.
So if you're if you had a vehicle that you're saying is
for the people's nest egg, I fully respect rules around it.
Right. And and look, our job is to
build a diversified portfolio, not bet the portfolio on one or
two ideas. Yeah, yeah.
Were there, did you see something in your younger years
that that made you sort of lean this way from building a firm
perspective, or was this something that kind of
inherently made sense to you? When I started out investing, I
tried to make sense of, you know, what worked as an
investment and what didn't work as an investment.
And it was really challenging because there didn't seem to be
a lot of correlation between any particular facts and the near
term movement of any security. And you know, people were
judging success based on three and six months.
And you know, when when you're starting out, two years is an
awfully long time. It's hard to know that things
are going to work out well over two or three years.
So what I was able to do is find a bunch of securities that I was
pretty sure you'd get the rate of return that they were
offering because they were able to pay their bills.
So I started out as a high yield bond analyst and my my first
investment was a Pan Am equipment trust certificate.
There was a plan in the world that had a $30 million value,
18,000,000 of the bonds outstanding trading at a
discount. I was paying $15 million to get
a $30 million airplane, OK, I'm paying $30 million, the $15
million, the planes worth $30 million and I'm getting that's
an 11 1/2% coupon training at whatever price, a discount to
par. And then I like, OK, this, this
company has these bonds outstanding.
This is the cash flow they're generating.
It's super stable. It's going to grow at these
rates. This is the free cash flow.
This is how they're going to deliver over time, OK?
And this is the rate of return you're getting.
The business can sustain that valuation.
And then I was lucky enough to have the fellow running the risk
arbitrage research effort leave the firm and ultimately help
Leon Cooperman build Omega Advisors.
And when Charlie left, I took over his mandate to do research
on risk arbitrage names. And he had a list of about 15
securities that were in some state of either being bought out
or going through reorgs. And in each of them, the the
modus operandi was that something was going to happen
where an economic participant was going to take control over
these entities and you were going to get some rate of
return. And so you had to decide whether
that buy was a good buy for the buyer and if so, how big a
spread you were going to get and what your rate of return was
going to be. So it was all about saying
asking yourself what price will a rational buyer pay for this
asset? And, and it was a really
diversified group of assets. So it gave me a quick learning
curve on valuing a bunch of different things, from
bankruptcies to financial companies to supermarkets to all
sorts of stuff. Yeah, that's neat.
Now that you've been doing what you've been doing for a while,
have you figured out a little bit better what, what makes an
investment work, quote UN quote, from those that don't?
I mean, are there any commonalities that you've seen
that you, you know, somebody pitches you something and you're
like, I don't know about that. I've seen enough of those not
work. It's good to always keep an open
mind. The thing that I do super
consistently is, all right, like, what?
What do these pairs have and why do I think that's worth more
than I'm paying? We bought Rivian this week.
Oh yeah, yeah, yeah. You know what they have?
Well, they got a hell of a brand.
They have a hell of a brand and they've got a truck that is put
together. My understanding is that the
components in that truck are like I think they have McLaren
brakes in that. That's that's the rumor that I
heard. So I think that the the
probability that it's a solid, solid product is quite high.
Outside of that, I don't know where where you're going with
it. Well.
Right. They have a great brand.
They've spent a lot of money building the infrastructure to
get a product to market. They have a very solid anchor
client in Amazon. And they have $9 billion worth
of cash and it's an $8 billion equity valuation with a couple
of billion dollars worth of debt.
So you're getting the $10 billion that they've invested in
building their business and the share price and cash money.
And yeah, the product I think is great.
And I think it's, frankly, I think it's as as good a vehicle
as you could buy. And I hope I'm right 'cause I
just bought 1. I know a couple people that have
them that rave. And and look, I think electric E
VS are the future and I think that there will only be a couple
of stand alone EV companies. I think you know, having a
startup EV company is really, really hard.
I think that Tesla will probably be around, but I think the other
EV companies, you know, one of them went bankrupt in the
process of spinning out of control Right now, Fisker and
they're not it. It's highly unlikely that they
have a going business that there's a Fisker out there a
year from now. And that means that anyone who
bought that car is going to have a doozy of a time finding
service, which the knock on is going to be to any other stand
alone EV maker. You know it's going to scare
buyers. Yeah, you would think.
The notion they may not be around, I think Rivian will be
around because they have that big pile of cash and because
they have Amazon as one of their bigger shareholders and a core
client of theirs who is committed to buying a certain
number of trucks over an extended period.
So I think they'll be around and I think their product is great
and I'm getting it at cash on the balance sheet basically.
Yeah, with so, so the market's telling you they're gonna burn
it and burn the cash and the entity is not economic, right.
And that becomes what where you focus on.
Is this a true implied assumption that the market's
telling me that? That that's right, that's right.
And they look, that's, that's a very legitimate perspective.
And there are other EV companies that I don't think will make it.
And so, yeah, cash or not cash and not enough cash and not
happening. And so the devil is in the
details for sure. And, and it's their judgments
and, and questions involved. But the soft details around
Rivian are pretty good. The Amazon backing them is an
idea. They, to my mind, have as good a
product as is out there. And yeah, I mean, I say that as
a consumer now, you know, I, I felt confident buying their
truck because they seem to spend 150 grand on building it and I
don't get 100 grand. That's what I was gonna go.
But now this is where the business concern comes from,
right though is that if you were to disassemble the truck, my
understanding is that the cost that they have in the truck
exceeds the retail price. Well, that's right.
And that makes it a good buy for me, yeah.
You're correct. But I don't think that math
stays true over time. You know, this company started
producing cars, trucks two years ago, three years ago.
You know, they're ramping up production.
They're doing. Yeah, the run rate is 50,000
trucks a year, 5760 thousand trucks a year.
You know, that's not scale. And the prices of the inputs
that they contracted for early days were high numbers.
But I'm pretty sure that electric vehicles are
fundamentally cheaper to build than internal combustion
vehicles. That over time, the simplicity
of the electric motor compared to an internal combustion motor
is just really, really different.
And the battery technology, you know, at today's level is a
viable technology. And so the only input, the only
pricing driver on the battery is the commodities that go into it.
And those commodities have been volatile in price, but they're
not inherently rare commodities. So and and some lithium
companies obviously have had huge margins and the negative
margins are blah, blah. But the battery prices, because
they're driven by commodities that are becoming that are
highly likely to become cheaper, those prices go down.
So the EV vehicle will be the the cheaper vehicle to build for
this, for apples to apples and, and, and people who build them
will probably earn a positive rate of return on them if you
have a brand value and efficient manufacturing operations.
And I think these guys have those things.
So you know, when, when the the equity was valued at $30
billion, we're like, yeah, well, maybe that'll work, but seems
like a lot of risk in it when it's at $9 a share and $9
billion, right? And a half billion dollars and
there's 9 1/2 billion dollars of cash.
The risk reward is just really different and and all the soft
facts around it are really positive.
I think they're the best management going.
I think it's a really, really well billed car.
I think the brand management has been spot on.
You know, Mr. Bezos has sort of done a good job building
businesses over time. I'm happy to have him in yeah,
be on his side of the table. When I look at Amazon, it's a
it's not a cheap stock. When I look at Rivian, it's a
very cheap stock. You said like it's important to
keep an open mind here. You know, I'm looking at your
portfolio. I was like, I got to figure out
energy questions. Now we're discussing Rivian.
Blows my mind. You know, one of the things we
do really well is build a very diversified portfolio and it's
not diversified with 200 names that are all the same, but it's
diversified with 25 investments that are all really different.
What's the same always is the underlying assessment like, So
what do they have and what's it worth?
And yeah, who do they owe and how much?
And what am I paying to get at when I buy this instrument?
Yeah, I love it. I love it.
What do you think about Comcast? I'm somebody who does follow
cable reasonably well. It has been punch after punch,
although Comcast has weathered the storm quite a bit better, in
part, I think because of the parks business and their
leverage is quite a bit less aggressive than some of the
peers. So I think they've and and
arguably their operations are better.
But curious when, when you see maybe underlying signs that
things are going well, but the stocks, whether it's because the
sector or whatever remain weak. How do you think through that?
I, I believe it patience, you know, time goes by and you don't
know when like the truth will out, whether it's this month or
three years from now. I think what's good about
Comcast is they generate huge amounts of cash flow.
Their businesses are for the most like, you know, they're in
transition, but they're not in decline.
The management's been better than any other management.
I think that's comparable and that's evidenced by, you know,
where they are as, as in terms of scale and scope in that
space. They're they're big and
competitive and strong. The underlying assets you could
easily make a case of worth 50% more than today's share price,
if not more if you start doing your sum of the parts, etcetera.
The stock's been dead money for two lifetimes.
It has felt like that. It's been dead money for two
lifetimes. But you know, look, it's one
stock out of 25 that's been dead money.
You know, when will it double? Maybe in the next 12 months,
maybe in, in, in two years, the values are creating day in and
day outlook. They're they're, they're
generating value from owning high quality assets.
And so you know, if, if that value is growing by 10% a year
or 7% a year or 14% a year, something like that.
And so the longer it stays at this price, the cheaper it gets.
And you know, we've seen that happen before and that and then
you get a catch up and the catch up is profound and you just
never know when it's going to happen.
But you want to be in a bunch of different things so that any one
of them could be doing that on a given day or month.
And, and OK, so you know, we've talked about a, a few different
concepts. I would I would characterize
Comcast as a fairly stable earnings stream today.
I would say energy generally certainly looks a lot better
post 2020 than it did pre 2020. And maybe that sticks, maybe it
doesn't. You know, the history of
commodity companies makes me a little bit skittish.
And then you've got Rivian where the earnings stream is, is on
the com. Do you manage those types of
investments differently? Do you compare, you know, do you
have a model that's sort of the flight path and you're comparing
results to the model? Like how do you manage thinking
in so many different ways? You know, part of it is that
after we have a thesis and an understanding, we stop thinking
about it too much. I mean, we'll revisit the
numbers and we'll look at it again and ask ourselves if we're
wrong. But yeah, I haven't spent that
much time thinking about Comcast over the past couple of years.
A little bit here and there. But I'll, you know, I think I
know what the driver, the drivers are and I, I think out
monitoring them and I think I'm waiting for, for that to play
out. And then we own air Lease,
which, you know, owns a fleet of aircraft and leases them out.
And the planes are worth probably 50 to 70% more than the
share price of then the enterprise value, which means a
lot more to the equity because there's torque there.
And so, you know, the work of this job is looking for new
ideas and understanding where the opportunities are being
created today. And because we tend to hold
things for in a year, two years, three years, four years, you
could spend a lot of time looking at different things and
and have really diversified exposure because the the
investments tend to be long lived.
I'm more asking this is I'd love to just pick your brain and
learn when, when do you think about revisiting a thesis,
right? Do you have sort of key metrics
that you're tracking? And if this is off base, then
maybe I need to revisit like, because there's a fine line
between over tinkering and then being like overly lazy, right?
So I haven't quite figured that out.
I I tend to tinker more than I should.
Yeah, I hear what you're saying. There are times when I feel the
most important thing we could do is sit on our hands and make
sure we don't touch anything. But when it comes to revisiting
theses, it has to be really organic because, you know, any
given measure has its flaws. You know, you revisit it when it
goes down price by 20 percent, 30%.
You know, if it's not going down in price but things are going
wrong, you know, it's a really good time to get out of it.
Probably just as important to be aware of exactly how the
investment is playing out. When it's stable in prices, when
it's gone up or down, 'cause you know to get out without any
damage. When you got it wrong, it's a
beautiful. Place that's called luck and we
can all pay more. Or paying attention.
Or tinkering too much. Yeah, well, sometimes it works,
sometimes it doesn't, right. Right.
But look, that's where, that's where, you know, some people
execute well and others, you know, they have all the data,
they just aren't, you know, don't pull the trigger at the
right moment. Well, I know I've been a pretty
good seller. The holding part I could work
on, but I don't know, maybe I'm not sure that that says I'm a
good investor at all, but I'm always working on it, trying to
get better. So over time, hopefully.
Well, that's right. And it's, you know, the nice
thing is it's a thinking man's business.
Yeah, just can't overthink it, you know?
But but in our background, you had mentioned that you had a
view that we were sort of approaching sort of AI guess
you, you'd said an overextended bull market peak.
You said we're likely to get there, but we're not there yet.
And I'm curious to hear you riff on that and and talk about why
you think that. Sure.
Well, you know, the, the, the simple reason why I think we'll
get to a bull market cyclical peak that's overextended is
because I, I think we, that market cycles exist and that
we're in a market cycle and exuberant tops happened and I
have happened in the past and I think it'll happen again.
Why do I think it's, it's three to five years in front of us,
which is a yeah through two years, six years, eight years.
Well, because these cycles tend to be long lived and you know
the the market through was let me look at the calendar 2024,
2008 we're a number of years into an advance.
So you would not, you would not reset on the COVID pull back.
No, no, absolutely not. You know, if if you look at the
market advance from 1978 to 2000, which was 22 years, you
know, you had the market break of 87 and then the recession of
91. Those two things, you know, gave
you corrections over a 20 year period and and big ones, you
know, 30 ish percent whatever. I see COVID as more of that sort
of phenomenon within a longer term advance.
And obviously we're at higher levels than we were before
COVID. So the advance is intact.
Now then the question is OK, like so why do I think that this
is not the top right And the answer there is because the
there's froth in this market in certain places and areas.
But the amount of froth relative to global GDP in 1999, two
thousand is just orders of magnitude different than the
amount of froth today. And I'm not a quant, I'm not
going to prove that to you mathematically, but I was there
and I saw the numbers in terms of total market caps of very,
very small businesses and they were really big relative to US
and global GDP, not relative to a $2 billion revenue based
business. And and so I don't think the
level of extension today is anything like it was in 2000.
And I and because I think there were cycles, I think we'll get
there. And I think there are a lot of,
you know, sort of anecdotal pieces of data that suggest
we're we're sort of on the way. What?
What would those be? Well, you know, there's, there
are exciting new technologies that are driving innovation in
the year 2024. You know, I don't know where the
blockchain goes, but in 1992 I didn't know where networking
technology was going to go. It gave us the Internet five
years later, whatever and it was happening.
AI obviously it is going to have a big impact on the world.
The electrification of transportation is a major
transformative phenomenon that's going to play out over 20-30
years. Those kinds of things.
And and what's happening in medical technology is just
amazing right now. I mean, the, the pace of new
things that are coming out of labs that are curing cancers and
fixing obesity are just, it's just there's a lot of
technological innovation happening and that tends to
create, you know, a bit of a gold rush and we're investing.
Plus a lot of stimulus. Plus a lot of stimulus.
No, no lack of stimulus. In the next several years.
We've adjusted to to higher interest rates.
So yeah, we might have a bump in the next six months, but I don't
see why we wouldn't go to an exuberant peak.
What's, what's the argument against that?
That this is the top it it's not extended like other tops have
been extended. That's just probably easy to
demonstrate mathematically. Yeah.
Well, so the other thought that you had that I I thought was
very interesting was that the go.
So the sentence that you wrote was go, go.
Growth names bring you to the ultimate top.
Less exciting companies don't participate.
The key is to buy true growth stocks trading at value prices,
which you had said earlier. If you simply buy cheap stocks,
they will underperform into a major top.
I was curious as to why you said that.
Well, the cheap stock part, well, they get left behind for
sure. You know, being an exuberant
top, what's what people buy is what's fun.
You know, people talk about stocks at cocktail parties.
They talk about getting rich on this crazy new company.
Yeah, the shoeshine boy gives you tips.
He doesn't give you a tip that, you know, Bank of America is at
that at points the one and one and 1/4 times book and and and
JP Morgan's at 1.7 times book. So he's like these guys are are
going to have helicopters that are going to travel around the
world. And so, yeah, it's and look,
it's it's the gold rush stuff that gets everyone's attention.
And yeah, other investments that are stayed and boring get.
Get left on the sidelines and you know, in 1999, two thousand
value managers were just quitting that they had
underperformed dismally. 2000 came and 2001 came. 2002 came
and value managers didn't see the same declines as the growth
guys. But you had to still have a
portfolio to have had it mattered and an awful lot of
people. And and what happens in those
excited moments, I think is that people stop doing the boring
stuff and switch into the exciting stuff.
And that's what makes it a bubble and that's what makes it
a top. And and you know, you ask me
like, why do I think we're not there yet?
There are moments where there's a lot of invest where the public
is interested in investing. But yeah, the, the degree to, of
interest in investing today is not consistent with the shoe
shine guy giving you stock tips. And and I think you'll get there
because I believe in cycles. Yeah.
Well, if you'd asked me in 20/22 was 2021 the top, I would have
said yeah, maybe. I would have said probably like
70% sure, but now I don't think that's necessarily true.
You've seen a lot all these well, you've seen a lot of
companies sort of pop whether Zoom or whatever, but the bull
market runs on and you know, at least for at least for good
quality companies and and the value factor is outperformed
since 2020. So you know, there's a lot of
there and there's still a lot of cheap stocks out there.
I think I may be wrong when I say that, but I believe that to
be true. No, I think you're right.
And and the the stocks that are richly priced or richly priced
for very good reasons like Nvidia's a very, very expensive
stock and probably it and it'll take 20 years for that company's
business to grow into that market cap.
But they're a really well positioned company that is doing
a fantastic job and arguing that it's frothy a little, but not a
lot. And you look at the places where
there are companies, you know, that are consequential market
caps that are really, really frothy.
Yeah, yeah, that's, that's part of the the, I guess the Mag 7
debate, for lack of a better term, that I find a little bit
like makes me want to yawn is exactly what you're saying.
I mean, if you look at a lot of the, a lot of the Bag 7 at least
you know, specifically Microsoft, Google, Facebook,
Amazon, I mean just the sheer amount of compounding of wealth
like true economic value that they have done is incredible.
Global scale dominate important businesses disrupted the world.
These are real. Like, you know, you could argue
whether the PE is right or wrong, but you can't argue that
that that they are not exceedingly valuable businesses.
Yeah, Well, I I think about it sometimes, like baseball,
eventually you're the team that overpays Albert Pujols.
But you know, the teams that that rode that wave up it, it
carried them for a very long, well, one team we carried the
Cardinals for a very long time, right, so.
I'm going to agree with you, I have no idea what you're talking
about. Well, he's he was very, very
good, very good. But but eventually somebody.
Signs players. Paying.
Oh, I'm sorry, off of professional sports.
I'm sorry, I, I, I saw a little video the other day.
It was like game six and it was and no one was in the stands and
somebody just said like this about right.
But hopefully, hopefully their their fortunes turn at some
point. Interesting.
So what do you get excited to come to work to do?
I mean, are you somebody that just like loves learning and
then the investment ideas flow from that or do you, I mean, do
you enjoy being the entrepreneurial side of of
building the business like what gets you going at this stage?
I I love finding great ideas that I find really, really
compelling. I mean, that's to me the best
when you trip across something and you first see it, you're
like, yeah, whatever. And then when you turn it over
and turn it over and turn it over and be like, wow, this is
great. Like I don't know if I'll make
money for sure, but it's highly, highly likely.
Yeah, that's totally motivates me, finding those, those, those
good opportunities and getting confidence that they are good
opportunities, long or short. Yeah.
And I like it when they work out, it's much more pleasant.
Indeed it is for everyone involved.
That's right. I, I, I mean, I guess the short
side less for everyone involved, but I would argue it's good for
the market to have shorts be right.
You know, look, sometimes companies get too frothy and
they're they're scams and shams and it's better that they get
identified sooner rather than later.
And you know you're only making money on a short if something's
wrong. And so you know, identifying
something wrong sooner is better than later.
In your experience, does shorting a company that has
things going in the correct direction but is frothy, is that
that that strikes me as a much more scary proposition than
looking for the ones that are truly have like deterioration
under the hood and sort of pressing those?
Yeah, To, you know, I, I think of it as the, the inverse of a
value trap. You know, when you have a
business that is declining in value and declining in value and
declining in value, you know, you might buy it cheap, but
you're going to sell it cheaper. You know, shorting a great
company whose business is growing, the underlying value is
growing just because it's too expensive is, is a very foolish
idea for two reasons. One, because ultimately the tide
is against you, right, because they're growing in value.
And two, the fact that you figured out that's overpriced,
so has everybody else. Like everyone knows it's
expensive, but expensive stocks can get much more expensive.
And they're expensive in part because they get culty and gets,
they generate an investor base that that have passion around
them and those go to high prices.
So, you know, you the upsides risk is not that it, you know,
goes to to 50% over value, but that goes to 4X or 5X over
value. And you know, if you're starting
at 3X overvalued and you're growing a 5X overvalued, it's
not a good place to be, especially when the value is
growing over time. And look, we don't always get it
right when we look for those things.
And sometimes we think business conditions are deteriorating and
they're not really, but, but our effort is to find things that
can't last and, and investors are sure they will last.
Yeah. Who do you look for an analyst?
Do you like to hire somebody young and train them up, or do
you prefer to hire somebody that's got some experience?
My my move has always been to hire novices and let them grow
into learning the process. I have a mindset and and a
strategy of how we look at investments and I'm not really
looking for someone to come in with a different strategy that
that I learned from. I I strongly prefer to to have
people fresh to the business to grow into responsible rules.
Yeah, that makes sense, especially given I think your
path in. Yeah.
Yeah, cool. Well, I got to tell you, man,
I've enjoyed this. This has been I, I can't, I
racked my brain. I said, all right, how am I
going to talk to him about energy?
Because it's not something that I really know about.
And it's, it's stuff that other people really know about.
And here we are. We talked about everything but
energy except for that you, you accumulated it when it was very
asymmetric to the upside. And and that makes a lot of
sense to me. That's right.
And and look, we have some energy names.
We're short today because the valuations don't make sense
relative to the underlying assets and and you know, we have
a lot of long exposure which is going to go down if energy
prices go down South. We're happy to have some short
exposure so that if energy prices do go down, we make money
on those. Yeah.
The, the thing that that I get hung up on is just the and, and
it's probably a mental block and maybe it's changed, but it's an
industry that tends to not have the best capital allocation
histories. But maybe, maybe that's maybe
that's an assumption. No, you're right and you're
wrong. You're very right.
For the period from 2000 until 2000, whatever 2016, you know,
not so much for the path or whatever it was 2000.
It's been a while since energy companies have been profligate.
There was a long time that energy companies were profligate
and it part of that was around the Shell innovation, you know,
that they figured out how to get energy out of formations that we
knew was there, just couldn't come out.
Then they figured it out and it drove a lot of investment and
they got exuberant and too much capital went in and returns went
negative for a really long time. You know, by the time we really
built our exposure in 2021, I guess we've got a long time of
under investing in energy and everything was idle.
You know, all the offshore rigs were idle, all the land rigs
were idle and it had been a long slog down.
And you know you talked about, you made a comment about
commodities going down in price over time.
And I was on ATV program in 2000 or so and I was on with Jimmy
Rodgers, who started with with George Soros in the 1960s, one
of the best investors going for a long, long time and investing
powerhouse. And it's like, yeah, it's, you
know, buying commodities. They've underperformed for a
long time. Like, come on, they haven't gone
anywhere in 20 years. Look at the commodity index and
like, it has a base value from 19, whatever.
And it was 100. And by the way, The thing is 105
now. So, you know, I don't have to be
that good of the math to see they've gone nowhere.
And he's like, yeah, but these are long cycles.
And, you know, the next eight years, man, was he right and was
I wrong. So yeah, sometimes they're just
long cycles. And sometimes.
And look, energy has been a good investment, you know, over many,
many long periods of time. And it went for an extended
period where you're right, it was terrible.
But that's one of the important things to think about in terms
of what you are willing to look at and what you're none.
Because in 2000 I was like, yeah, commodities.
And I was like, well, wait a minute.
Turns out that that that was wrong for an extended period,
so. Yeah, no, I, I, I'm, I'm trying,
right? I, I'm, I'm open, I've done work
on, on energy, I've been surprised at some of the
results. And the one I'm kind of kicking
myself for is I should have bought Valero a couple months
ago, but alas, I did not. And we'll see.
I've I've done it long enough to know that there's a good chance
the shares come down to where I didn't buy them and.
Maybe you'll see if and you won't buy them again.
That's probably true. You're not wrong.
So, all right, cool. Well, thank you so much for your
time. I appreciate it.
I hope it was enjoyable for you. Yeah, you've made it really,
really pleasant. Thank you very much for spending
the hour with. Me.
All right. Well, take care of yourself.
You too. Thanks.