1 00:00:00,920 --> 00:00:03,240 Ladies and gentlemen, welcome to the business Brew. 2 00:00:03,320 --> 00:00:06,480 I'm your host, Bill Brewster. This episode features Mark 3 00:00:06,480 --> 00:00:11,960 Cooper of Mac Alpha Capital. Mark is a former teacher of 4 00:00:11,960 --> 00:00:13,760 applied value investing at Columbia. 5 00:00:14,320 --> 00:00:20,200 He has a focus right now on international small cap value, 6 00:00:20,600 --> 00:00:25,360 but he's a go anywhere investor and I think quite a good guest. 7 00:00:25,360 --> 00:00:26,840 You can tell he's got some teacher in him. 8 00:00:26,840 --> 00:00:29,680 He's got some chutzpah and some charisma. 9 00:00:29,680 --> 00:00:31,640 So I think it's a great episode to listen to. 10 00:00:31,640 --> 00:00:34,760 I hope you all enjoy it. This episode is sponsored by 11 00:00:34,800 --> 00:00:40,200 Fiscal dot AI. You guys should have listened to 12 00:00:40,200 --> 00:00:44,240 the episode with Braden Dennis. 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They got KPI segment data 26 00:01:43,080 --> 00:01:46,840 anyway, look at it, check it out, use my affiliate link 27 00:01:46,840 --> 00:01:49,920 fiscal dot AI forward slash brew for a discount. 28 00:01:49,920 --> 00:01:54,680 You get 15% off any paid plans and I would really appreciate 29 00:01:54,680 --> 00:01:56,400 you checking it out would help me in a big way. 30 00:01:58,080 --> 00:02:02,600 Only nothing in this in in this program is investment advice. 31 00:02:02,800 --> 00:02:05,400 Do your own due diligence, consult your financial advisor 32 00:02:05,400 --> 00:02:08,960 before making investment decisions and enjoy the show. 33 00:02:10,520 --> 00:02:12,840 The information presented in this podcast is for 34 00:02:12,840 --> 00:02:15,760 informational purposes only and should not be construed as 35 00:02:15,760 --> 00:02:20,080 investment advice or research. It is not a solicitation of any 36 00:02:20,120 --> 00:02:24,400 offer to buy or sell any security or instrument and it 37 00:02:24,400 --> 00:02:27,360 has not been updated since it was originally presented. 38 00:02:27,720 --> 00:02:30,320 Any projections, outlooks or estimates should not be 39 00:02:30,320 --> 00:02:33,360 construed to be indicative of the actual events which will 40 00:02:33,360 --> 00:02:55,080 occur. All right. 41 00:02:55,080 --> 00:02:57,440 Ladies and gentlemen, thrilled to be joined by Mark Cooper. 42 00:02:58,920 --> 00:03:01,120 Mark, how you doing today? Good. 43 00:03:01,120 --> 00:03:04,200 Bill yourself. I'm good, little, little 44 00:03:04,200 --> 00:03:06,640 technical difficulties getting started, but I think now we're 45 00:03:06,640 --> 00:03:08,920 we're off to the races. Yes. 46 00:03:10,000 --> 00:03:13,120 This this will be this should not be too unfamiliar to you. 47 00:03:13,480 --> 00:03:16,480 You teach at Columbia. Am I correct or have taught? 48 00:03:16,600 --> 00:03:21,680 I did teach the a second year course, Applied Value Investing 49 00:03:21,680 --> 00:03:24,600 at Columbia Business School for 21 years, but I stopped teaching 50 00:03:24,920 --> 00:03:26,520 my last class. I thought it was last fall. 51 00:03:26,520 --> 00:03:29,600 So this is the first time in quite a long time and I haven't 52 00:03:29,600 --> 00:03:34,240 been teaching. And you did what with the the 53 00:03:34,240 --> 00:03:37,160 new value investing book it did. Do you co-author it? 54 00:03:37,160 --> 00:03:38,800 Did you help write it? How did? 55 00:03:38,800 --> 00:03:42,040 What's the official title? Yeah, Well, they, they, it's the 56 00:03:42,320 --> 00:03:46,440 updated version of Bruce Greenwald's value investing 57 00:03:46,440 --> 00:03:50,280 book, From Graham to Buffett. Beyond the Second edition, which 58 00:03:50,280 --> 00:03:55,000 came out to think about this about five years ago or so, 59 00:03:56,360 --> 00:03:59,120 there were two of the original authors, Jed Con and Bruce 60 00:03:59,160 --> 00:04:03,200 Greenwald authored again and three other Columbia professors 61 00:04:03,200 --> 00:04:07,680 including myself, Aaron Belissimo and Tano Santos as 62 00:04:07,680 --> 00:04:09,720 well. So we are the five of us kind of 63 00:04:09,720 --> 00:04:12,480 co-authored the book, but it's not a significant update from 64 00:04:12,480 --> 00:04:16,440 the book from like 20 years ago. Yeah, yeah, I I liked 65 00:04:16,440 --> 00:04:20,160 competition demystified too. But Once Upon a time, I was in 66 00:04:20,160 --> 00:04:22,520 like a little executive class that Bruce taught and he said 67 00:04:22,520 --> 00:04:24,720 that one's perfect. It doesn't need to be updated, 68 00:04:25,200 --> 00:04:27,360 which is a nice that way to feel about something that you've 69 00:04:27,360 --> 00:04:29,160 done. I've I've yet to feel like I've 70 00:04:29,160 --> 00:04:33,400 done something perfect. Yeah, I think he's correct. 71 00:04:33,400 --> 00:04:35,880 I think that that's a phenomenal book and definitely has a lot of 72 00:04:35,880 --> 00:04:38,320 influence on the way we think about the world and how how we 73 00:04:38,320 --> 00:04:39,680 think about investing in companies. 74 00:04:39,680 --> 00:04:41,040 So. Yeah. 75 00:04:41,040 --> 00:04:43,120 So, so that's a natural transition. 76 00:04:43,120 --> 00:04:45,120 I mean do you want to talk a little bit about yourself and 77 00:04:45,120 --> 00:04:47,760 your firm and what y'all do? Sure. 78 00:04:47,760 --> 00:04:52,520 Happy to do that. So Mac Alpha Capital was founded 79 00:04:52,520 --> 00:04:55,960 almost six years ago, January 2020 and we launched with 80 00:04:56,080 --> 00:04:58,760 outside capital in September 2020. 81 00:04:59,160 --> 00:05:03,680 We have two main strategies, 1 is long only and one's long 82 00:05:03,680 --> 00:05:07,040 short. Our long only strategy focuses 83 00:05:07,040 --> 00:05:12,560 on international small cap stocks and our long short can 84 00:05:12,560 --> 00:05:15,120 really go anywhere, do anything very different than many of 85 00:05:15,120 --> 00:05:16,760 their long short strategies. We can talk about it in more 86 00:05:16,760 --> 00:05:21,440 detail later, but we really are focused on international small 87 00:05:21,440 --> 00:05:25,160 cap value stocks on the long side because as we'll talk as 88 00:05:25,160 --> 00:05:28,360 well, we think it's the best opportunity in the world right 89 00:05:28,360 --> 00:05:31,880 now by far and the best that we've seen in that space in at 90 00:05:31,880 --> 00:05:36,520 least 50 years. And then we are also short some 91 00:05:36,520 --> 00:05:40,600 stocks in the long short strategy where we are trying to 92 00:05:40,600 --> 00:05:44,920 take advantage of what we think is exceptionally high valuations 93 00:05:44,920 --> 00:05:47,680 of companies that historically have not earned their cost of 94 00:05:47,680 --> 00:05:50,320 capital and don't exhibit any characteristics of having 95 00:05:50,320 --> 00:05:52,960 competitive advantage. And those are primarily in the 96 00:05:52,960 --> 00:05:56,400 United States and primarily in the small cap growth area. 97 00:05:59,240 --> 00:06:01,400 That makes some sense. I could argue that some people 98 00:06:01,400 --> 00:06:03,960 would say that there's some large cap growth that fits that 99 00:06:05,440 --> 00:06:09,840 as well. As well we we tend to stay away 100 00:06:09,840 --> 00:06:12,320 from that area and we you know part of what we think is our 101 00:06:12,320 --> 00:06:15,240 competitive advantage is being in the small cap space where we 102 00:06:15,240 --> 00:06:17,640 don't have to compete with the likes of the big multi Strat 103 00:06:17,640 --> 00:06:22,920 shops and try to kind of out guess or out predict the 104 00:06:22,920 --> 00:06:26,120 quarter. So we use our smaller size and 105 00:06:26,120 --> 00:06:28,320 longer time horizon as competitive advantage and and 106 00:06:28,320 --> 00:06:32,480 really try to go where there is less competition, but an area we 107 00:06:32,480 --> 00:06:35,880 do think is ripe for generating alpha through deep fundamental 108 00:06:35,880 --> 00:06:40,400 research. So do you mind talking a little 109 00:06:40,400 --> 00:06:47,160 bit about, I realize being focused on small is part of what 110 00:06:47,160 --> 00:06:49,960 makes you different, but do you want to go into a little bit 111 00:06:49,960 --> 00:06:54,000 about what you do that is proprietary or unique to you? 112 00:06:54,960 --> 00:06:58,600 Sure. So yeah, I mean we, we chose 113 00:06:58,600 --> 00:07:02,560 small caps because we do see a once in a generation if not 114 00:07:02,560 --> 00:07:04,520 significant longer opportunity in the space. 115 00:07:04,520 --> 00:07:08,200 So that we did have that option really with our strategies to to 116 00:07:08,200 --> 00:07:12,640 look in different areas. But we do think it's an area 117 00:07:12,640 --> 00:07:15,080 that's that's right for generating exceptional risk 118 00:07:15,080 --> 00:07:18,800 adjusted returns. So I mean talk a little about 119 00:07:18,800 --> 00:07:21,000 the firm. So again, we were founded six 120 00:07:21,000 --> 00:07:24,640 years ago. We have 3 fundamental analysts 121 00:07:24,640 --> 00:07:29,040 in addition to myself, the three partners that founded the firm. 122 00:07:29,040 --> 00:07:31,320 We all met at MIT over 35 years ago. 123 00:07:31,320 --> 00:07:32,880 So we've known each other for quite a long time. 124 00:07:33,360 --> 00:07:38,200 And Tom and I worked together at JP Morgan in the 1990s. 125 00:07:39,400 --> 00:07:42,040 His background is much more fixed income and risk focused. 126 00:07:42,080 --> 00:07:45,760 He was primary previously Chief Risk Officer at Alpha Dyne Asset 127 00:07:45,760 --> 00:07:49,120 Management, which is a $10 billion global macro hedge fund. 128 00:07:50,560 --> 00:07:53,960 You know, I think we I got a very unique education at MIT and 129 00:07:53,960 --> 00:07:57,160 the background is interesting and it goes to really understand 130 00:07:57,160 --> 00:08:00,240 how we think about managing the portfolio and portfolio 131 00:08:00,240 --> 00:08:03,280 construction and risk management very different than a lot of we 132 00:08:03,280 --> 00:08:05,040 think long only and long short managers. 133 00:08:06,680 --> 00:08:10,680 But. So in terms of when I started my 134 00:08:10,680 --> 00:08:15,480 career, so Tom and I met in a finance course at MIT in 135 00:08:15,480 --> 00:08:19,080 19891990, which was Andy Lowe's first class. 136 00:08:19,080 --> 00:08:22,240 He taught at MIT at the graduate level and Tom was getting his 137 00:08:22,240 --> 00:08:26,800 PhD in physics and I was an undergrad and we met in that 138 00:08:26,800 --> 00:08:29,280 class and, and one of the things that was kind of unique in MIT 139 00:08:29,280 --> 00:08:32,520 at the time, pretty much every class in my mind was really 140 00:08:32,520 --> 00:08:34,080 fixed income or derivatives oriented. 141 00:08:34,280 --> 00:08:36,799 There really weren't any classes geared towards the equity 142 00:08:36,799 --> 00:08:39,559 market. And while I was an undergrad, I 143 00:08:39,559 --> 00:08:43,000 was in ROTC. So I was in ROTC to pay for 144 00:08:43,000 --> 00:08:46,960 college. I graduated and spent some time 145 00:08:46,960 --> 00:08:48,880 in the active duty and then the reserves. 146 00:08:48,880 --> 00:08:52,160 But I went to, came to Wall Street to work at JP Morgan. 147 00:08:52,600 --> 00:08:56,000 Not surprisingly, I, I'd known about equities and I'd, I'd read 148 00:08:56,000 --> 00:08:58,240 about Warren Buffett and I'd been investing in equities a 149 00:08:58,240 --> 00:09:01,240 little bit as a teenager with money I'd save from kind of 150 00:09:01,240 --> 00:09:04,280 mowing lawns and shoveling snow and driveways and bailing hay 151 00:09:04,280 --> 00:09:07,160 and summer jobs, etcetera. And invested a little bit at 152 00:09:07,160 --> 00:09:12,080 that time and knew a little bit about kind of Ben Graham and the 153 00:09:12,080 --> 00:09:14,200 value School. But I did read Intelligent 154 00:09:14,200 --> 00:09:17,880 Investor in 1991 when I was at my Officer Basic course in the 155 00:09:17,880 --> 00:09:21,960 military and continued to kind of focus on equities. 156 00:09:22,400 --> 00:09:26,440 But my day job at JP Morgan was I was a portfolio manager in 157 00:09:26,440 --> 00:09:30,400 fixed income originally. And it was really proprietary 158 00:09:30,400 --> 00:09:32,880 trading initially. So trading the bank's capital to 159 00:09:32,880 --> 00:09:36,040 make money for the bank and kind of asset and liability 160 00:09:36,040 --> 00:09:40,320 management. And so that changed a little bit 161 00:09:40,320 --> 00:09:42,880 about how I think or have thought sense about portfolio 162 00:09:42,880 --> 00:09:45,960 construction because I was dealing with at the time fixed 163 00:09:45,960 --> 00:09:48,640 income markets were were pretty liquid even given our size. 164 00:09:49,000 --> 00:09:51,240 But after a couple years I moved to the commodities department 165 00:09:51,680 --> 00:09:54,920 and was focused on precious metals primarily and then 166 00:09:54,920 --> 00:09:57,200 eventually currencies. But it was, it was fixed income, 167 00:09:57,200 --> 00:09:59,280 commodities, currencies and derivatives all that. 168 00:09:59,880 --> 00:10:03,560 But it, it really made me think a lot, the asset and liability 169 00:10:04,280 --> 00:10:08,560 business made me think a lot about duration mismatch and the 170 00:10:08,880 --> 00:10:13,640 basically, you know, we invest in liquid securities for the 171 00:10:13,640 --> 00:10:15,240 most part, even a small cap space. 172 00:10:15,560 --> 00:10:18,120 But we think a lot about the horizon and our investment 173 00:10:18,120 --> 00:10:21,120 horizon tends to be on the long side, about three to four years. 174 00:10:22,120 --> 00:10:24,840 But we also know there's a lot of investors out there who were 175 00:10:25,080 --> 00:10:28,200 willing to invest like that and then provide daily liquidity to 176 00:10:28,200 --> 00:10:30,880 their investors. We think that is a recipe for 177 00:10:30,880 --> 00:10:32,440 disaster. Eventually it works really well 178 00:10:32,440 --> 00:10:34,640 till it doesn't, right? So your investors come calling 179 00:10:34,640 --> 00:10:37,320 for liquidity and they need short term liquidity. 180 00:10:37,840 --> 00:10:40,040 The analysts will no longer have a three or four year time 181 00:10:40,040 --> 00:10:42,600 horizon. So that's one way we kind of 182 00:10:42,600 --> 00:10:45,720 structured the firm differently as opposed to a daily liquidity 183 00:10:45,720 --> 00:10:47,800 vehicle, right. But having a longer term time 184 00:10:47,800 --> 00:10:50,240 horizon, not having to out compete those multi strap firms 185 00:10:50,280 --> 00:10:52,920 is one of our choices. We make the other. 186 00:10:52,920 --> 00:10:57,120 How do you structure that like you know, quarterly redemptions 187 00:10:57,120 --> 00:11:00,760 or lock up? So we, we have an initial 15 188 00:11:00,760 --> 00:11:03,720 months off lock up and then quarterly redemptions with 189 00:11:03,720 --> 00:11:08,320 quarterly notice. And you know, so it, it, it 190 00:11:08,320 --> 00:11:12,880 definitely will try to prevent any issues where we want to make 191 00:11:12,880 --> 00:11:15,680 sure the analysts are thinking long term all the time. 192 00:11:16,040 --> 00:11:18,640 And you know, as as many firms and I've worked at some 193 00:11:18,640 --> 00:11:21,360 exceptional firms, you know, the time horizon gets pretty short 194 00:11:21,360 --> 00:11:22,760 around now, right. People are starting to think 195 00:11:22,760 --> 00:11:25,760 about the next 45 days or so. They're not too much worried 196 00:11:25,760 --> 00:11:27,800 beyond that. We want the analysts thinking 197 00:11:27,800 --> 00:11:31,640 all the time about long term as opposed to worrying about a 198 00:11:31,640 --> 00:11:33,720 great idea. But maybe I'm concerned it's 199 00:11:33,720 --> 00:11:35,720 going to get marked to market against us the next two or three 200 00:11:35,720 --> 00:11:39,240 months, you know, or the next two weeks or a month. 201 00:11:39,240 --> 00:11:41,320 How's it going to affect my bonus this year, things like 202 00:11:41,320 --> 00:11:43,480 that. So we we think about those 203 00:11:43,480 --> 00:11:46,360 structures and how to make the firm better from a cultural 204 00:11:46,360 --> 00:11:50,000 perspective. But that's the other big thing 205 00:11:50,360 --> 00:11:52,840 we learned at JP Morgan was performing construction risk 206 00:11:52,840 --> 00:11:55,720 management really mattered because we had leverage and 207 00:11:55,720 --> 00:11:58,520 concentration in these other asset classes and we were quite 208 00:11:58,520 --> 00:12:00,920 large relative the size of the market, especially in the 209 00:12:00,920 --> 00:12:03,840 precious metals market. So given the factor commodity 210 00:12:03,840 --> 00:12:06,280 positions were so large, you really had to do your deep 211 00:12:06,280 --> 00:12:08,600 research ahead of time because you couldn't change your mind 212 00:12:08,600 --> 00:12:11,200 and do a 180. And just get out, right? 213 00:12:11,200 --> 00:12:14,240 And and get out and, and do it efficiently without being very 214 00:12:14,240 --> 00:12:18,560 expensive. So even going back over 30 years 215 00:12:18,560 --> 00:12:20,760 ago, I was really thinking long and hard about doing the 216 00:12:20,760 --> 00:12:23,520 research ahead of time and recognizing that we had to 217 00:12:23,880 --> 00:12:25,800 because the structure of portfolio had to do things 218 00:12:25,800 --> 00:12:29,200 differently than many. We couldn't, we, we couldn't be 219 00:12:29,200 --> 00:12:30,960 a short term trader in that regard. 220 00:12:30,960 --> 00:12:35,560 It was not going to work. That's a that's a bit of a 221 00:12:35,560 --> 00:12:38,560 structural disadvantage now, in a way. 222 00:12:40,360 --> 00:12:42,600 Versus being able to. Yeah. 223 00:12:43,160 --> 00:12:45,520 I mean, given, given the choice, you'd rather be nimble, right? 224 00:12:45,520 --> 00:12:47,480 But I'm sure that there was. Some benefits, absolutely. 225 00:12:47,480 --> 00:12:52,360 You'd rather be nimble and, and we are today, but at the time we 226 00:12:52,360 --> 00:12:54,120 were so large, you couldn't be that nimble. 227 00:12:54,120 --> 00:12:55,840 And yeah, it's a structural disadvantage. 228 00:12:56,200 --> 00:12:59,760 But I do definitely believe that we've used the, you know, we 229 00:12:59,760 --> 00:13:02,920 kind of used the longer term time horizon as an advantage 230 00:13:03,160 --> 00:13:08,320 where myself and the analysts aren't so focused on, OK, how 231 00:13:08,320 --> 00:13:11,080 much money did we make today or lose today or this month or this 232 00:13:11,080 --> 00:13:13,160 quarter? Try to do the right thing long 233 00:13:13,160 --> 00:13:16,080 term, because I think it does, is I think that more and more 234 00:13:16,080 --> 00:13:18,800 investors and the data is I think pretty clear on this, 235 00:13:18,800 --> 00:13:20,600 right? The holding periods for equities 236 00:13:20,600 --> 00:13:22,000 have gotten shorter and shorter over time. 237 00:13:22,480 --> 00:13:24,840 You know, time horizons used to be measured years and now 238 00:13:24,840 --> 00:13:27,320 they're in months. And with more and more trading 239 00:13:27,320 --> 00:13:31,920 volume going shorter and shorter term, we choose not to compete 240 00:13:31,920 --> 00:13:34,680 in that space. And traditionally, I think we 241 00:13:34,680 --> 00:13:36,720 tend to be on the other side of many of those trades, right? 242 00:13:36,720 --> 00:13:39,440 So we tend to be buyers when things are selling off and 243 00:13:39,440 --> 00:13:40,800 selling when things are going up. 244 00:13:41,120 --> 00:13:44,680 So hopefully we end up paying less in bit offer and crossing 245 00:13:44,680 --> 00:13:46,880 those spreads and trading against the market as opposed to 246 00:13:46,880 --> 00:13:48,840 with it on a short term basis and try to use it 247 00:13:48,840 --> 00:13:51,640 opportunistically. Yeah. 248 00:13:51,640 --> 00:13:59,800 How, how have you, what have you seen the evolution of the 249 00:13:59,800 --> 00:14:03,760 market? I, I mean, I'm hearing what 250 00:14:03,760 --> 00:14:06,240 you're saying. I'm curious how you've, how 251 00:14:06,240 --> 00:14:08,520 you've seen it evolve over your career. 252 00:14:08,520 --> 00:14:10,760 Does it feel different these days? 253 00:14:11,160 --> 00:14:13,560 I was talking with somebody on Tuesday that said, you know, 254 00:14:13,560 --> 00:14:16,160 it's still kind of easy to buy things, but selling things 255 00:14:16,160 --> 00:14:20,080 sometimes is very liquid and you almost have to like, I don't 256 00:14:20,080 --> 00:14:22,840 know, go to lunch at lunch hour because the volume is just kind 257 00:14:22,840 --> 00:14:25,760 of not there. Curious for your thoughts on 258 00:14:25,760 --> 00:14:27,680 that. Sure. 259 00:14:27,680 --> 00:14:30,000 I'll, I'll share my perspective and I think it's, I think it's 260 00:14:30,000 --> 00:14:32,400 kind of human nature that we all like to complain like it's so 261 00:14:32,400 --> 00:14:33,760 much harder today than it used to be. 262 00:14:33,760 --> 00:14:37,000 It was always easier before. So it gives us all excuses when 263 00:14:37,000 --> 00:14:39,080 things aren't better. But I do think there is some 264 00:14:39,080 --> 00:14:42,760 reality to that, right. So the increased, the increased 265 00:14:42,760 --> 00:14:45,720 amount of quad, the increased amount of passive investing, I 266 00:14:45,720 --> 00:14:49,560 do think has changed it, right. And maybe I'll address it 267 00:14:49,560 --> 00:14:51,400 slightly differently than the, the conversation we had earlier 268 00:14:51,400 --> 00:14:53,720 this week. But we do think that, you know, 269 00:14:53,720 --> 00:14:57,120 traditional value investing and, and we are value investors and I 270 00:14:57,120 --> 00:15:00,440 believe that, but there's a unique aspect of the way we do 271 00:15:00,440 --> 00:15:02,360 it. Value has not worked pretty much 272 00:15:02,360 --> 00:15:07,960 for the last 1518 years, right? It used to be, I think in, you 273 00:15:07,960 --> 00:15:11,480 know, maybe what was even taught at Columbia a long time ago, you 274 00:15:11,480 --> 00:15:14,600 like a stock, you think it's worth 100, it trades at 70. 275 00:15:14,600 --> 00:15:16,520 That meets kind of your margin of safety. 276 00:15:17,080 --> 00:15:19,760 You just buy it and you buy kind of a full position there. 277 00:15:20,040 --> 00:15:22,600 What I think happens now, I think the market tends to trend 278 00:15:22,600 --> 00:15:25,840 a little bit more short term. So maybe you want to buy it at 279 00:15:25,840 --> 00:15:29,680 70, but it might matter how it got to 70, right, If it went to 280 00:15:29,680 --> 00:15:33,320 70 kind of slowly over time or kind of straight down, maybe the 281 00:15:33,320 --> 00:15:36,080 shorts are pressing a little bit more, maybe the trend following 282 00:15:36,080 --> 00:15:39,680 maybe the the algos, etcetera, the the quads are pushing it. 283 00:15:40,160 --> 00:15:42,080 So maybe you want to buy it at 70. 284 00:15:42,400 --> 00:15:45,600 But one thing we've gotten, I think we've changed a little bit 285 00:15:45,600 --> 00:15:48,080 the way we enter and exit positions because what I think 286 00:15:48,080 --> 00:15:50,240 you see is the short term momentum matters more. 287 00:15:50,680 --> 00:15:54,160 So while I'd be heavy buying the whole position at 70, you know, 288 00:15:54,160 --> 00:15:56,880 I used to kind of, this is a a question I used to ask all my 289 00:15:57,120 --> 00:15:59,640 students at class. So you're in your first job, you 290 00:15:59,640 --> 00:16:01,520 recommended stock, same situation. 291 00:16:01,520 --> 00:16:03,160 You think it's worth 100, It trades at 70. 292 00:16:03,160 --> 00:16:05,800 You recommend buy it. It goes from 70 to 60. 293 00:16:05,800 --> 00:16:08,200 What do you do? Most people kind of reflexively 294 00:16:08,200 --> 00:16:10,480 answer, buy more goes from 60 to 50. 295 00:16:10,480 --> 00:16:12,080 What do you do? Most people will still say buy 296 00:16:12,080 --> 00:16:13,280 more. Maybe a couple people at that 297 00:16:13,280 --> 00:16:15,480 point are going well, I recheck my analysis. 298 00:16:15,520 --> 00:16:17,280 I recheck my analysis. Yeah. 299 00:16:17,280 --> 00:16:19,080 As a value investor, you say you want to buy more. 300 00:16:20,440 --> 00:16:23,840 That works in theory. I think depending on where 301 00:16:23,840 --> 00:16:28,600 you're working, if you're at a faster money hedge fund or maybe 302 00:16:28,600 --> 00:16:32,160 even a lot of lawn only firms, you do that your first, you 303 00:16:32,160 --> 00:16:33,840 know, that's your first recommendation, you might be out 304 00:16:33,840 --> 00:16:37,200 of a job pretty quickly if that stock ultimately goes to to 305 00:16:37,200 --> 00:16:38,920 31st. And you might be right and I'm 306 00:16:38,920 --> 00:16:41,680 not saying the analysis is not right, but the mark to market 307 00:16:41,680 --> 00:16:43,000 could be pretty severe in the short run. 308 00:16:43,000 --> 00:16:46,000 And if you bought a full position at 70, you know if you 309 00:16:46,080 --> 00:16:49,360 be feeling pretty bad a month or two later if it's down another 310 00:16:49,440 --> 00:16:54,600 3040% or more. Yeah, yeah, it's, you know, the 311 00:16:54,600 --> 00:16:58,640 longer I have these conversations, the more it, it 312 00:16:58,640 --> 00:17:01,360 may sound silly to say out loud, but the more I realize that 313 00:17:01,360 --> 00:17:04,119 there are a lot of institutional imperatives that stand in the 314 00:17:04,119 --> 00:17:07,640 way of what is otherwise theoretically good behavior. 315 00:17:07,640 --> 00:17:12,800 So setting a business in a firm up to be able to take advantage 316 00:17:12,839 --> 00:17:14,680 of the correct behavior. Right. 317 00:17:15,040 --> 00:17:17,960 Seems to be important. And Bill, we think that's very 318 00:17:17,960 --> 00:17:19,880 important. We, we, we focus a lot on the 319 00:17:19,880 --> 00:17:21,760 culture of the firms we invest in, but we think having the 320 00:17:21,760 --> 00:17:23,359 right culture in our firm is important. 321 00:17:23,960 --> 00:17:28,440 And a long after I graduated in Columbia over 20 years ago, 322 00:17:28,440 --> 00:17:31,520 early in my career, I started kind of keeping a list of things 323 00:17:31,520 --> 00:17:33,880 that I thought, you know, basically I call them problems 324 00:17:33,880 --> 00:17:36,360 to solve. And it was a basically an Excel 325 00:17:36,360 --> 00:17:39,640 sheet thinking about issues we saw in the markets. 326 00:17:40,080 --> 00:17:43,320 But you know, I know you're also kind of a fan of Charlie Munger 327 00:17:43,320 --> 00:17:45,160 and he's been a big influence on the way we think. 328 00:17:45,520 --> 00:17:48,160 You know, we're not, we don't get paid for difficulty, right. 329 00:17:48,520 --> 00:17:52,120 But my view was if we could think about how to improve the 330 00:17:52,120 --> 00:17:56,320 firm structurally, reduce what I call friction cost or alpha 331 00:17:56,320 --> 00:18:00,000 drags within the firm, if we could do that from a structural 332 00:18:00,000 --> 00:18:02,640 perspective, from the way the incentives are aligned and the 333 00:18:02,640 --> 00:18:06,920 way people are treated and the behavior you incentivize, maybe 334 00:18:06,920 --> 00:18:08,800 we can generate extra alpha that way. 335 00:18:09,280 --> 00:18:12,280 And in my mind, that's also, I mean, it's, it's important 336 00:18:12,280 --> 00:18:16,000 because I'd prefer to be working with people who are aligned more 337 00:18:16,000 --> 00:18:18,880 directly. But I think you get, if you can 338 00:18:18,880 --> 00:18:23,960 do that structurally, maybe that alpha of 25 basis points a year 339 00:18:23,960 --> 00:18:26,320 or ten basis points a year or whatever we're talking about, 340 00:18:26,640 --> 00:18:28,880 maybe it can become more permanent if you will. 341 00:18:29,360 --> 00:18:33,000 And so part of our desire and and Tom and Gemma and I talked a 342 00:18:33,000 --> 00:18:35,640 lot about this as as well as the other analysts who set the firm 343 00:18:35,640 --> 00:18:39,400 up, is that something we want to do and we want to eliminate as 344 00:18:39,400 --> 00:18:42,960 much as possible those friction costs that occur at most firms. 345 00:18:45,840 --> 00:18:49,680 Yeah, that makes sense. How much does does do technicals 346 00:18:49,680 --> 00:18:52,440 work into your process given that you're sort of an ex 347 00:18:52,440 --> 00:18:54,000 trader? Do you do you look at those at 348 00:18:54,000 --> 00:18:58,880 all or not really? I we pay attention to the 349 00:18:58,880 --> 00:19:02,440 markets and technicals, but we don't, there's not, we don't 350 00:19:02,440 --> 00:19:05,240 make decisions based on them. We're aware of what's going on. 351 00:19:05,240 --> 00:19:08,160 I'm aware of kind of the price movement in stocks. 352 00:19:08,160 --> 00:19:13,200 I care, we care a lot about absolute valuation, just kind of 353 00:19:13,200 --> 00:19:16,720 thinking if, if we buy a firm and the valuation is X, what are 354 00:19:16,760 --> 00:19:19,760 what's our expected return look like over the next, you know, 355 00:19:19,760 --> 00:19:24,000 full cycle. But we, we also pay attention to 356 00:19:24,240 --> 00:19:27,240 absolute in the market relative to the market relative to the 357 00:19:27,240 --> 00:19:29,800 sector relative where the stock's been historically. 358 00:19:30,080 --> 00:19:32,920 We want kind of as much information as possible to frame 359 00:19:32,920 --> 00:19:35,040 our decisions right. And they, I think kind of the, 360 00:19:35,840 --> 00:19:37,560 and maybe I think I got this from Howard Marks, but you 361 00:19:37,560 --> 00:19:40,040 really want to know the environment you're investing in, 362 00:19:40,040 --> 00:19:42,720 right? So how you behave might be very 363 00:19:42,720 --> 00:19:46,720 different today than what it would have been, you know, 10 364 00:19:46,720 --> 00:19:51,760 years ago or 50 years ago. So an awareness of that history 365 00:19:51,760 --> 00:19:53,360 is important. We like, we tend to own 366 00:19:53,360 --> 00:19:54,760 companies and have a lot of history. 367 00:19:55,080 --> 00:19:57,360 We've got some companies that go back in the portfolio that have 368 00:19:57,360 --> 00:20:00,760 been around their origins of at least 100 years ago or older. 369 00:20:02,160 --> 00:20:04,600 And so, you know, and a lot of our companies have been public 370 00:20:04,600 --> 00:20:07,040 for. At least 10 to 20 years. 371 00:20:07,040 --> 00:20:09,840 So we got a lot of financial history and we want to see how 372 00:20:09,840 --> 00:20:13,360 companies have behaved through cycles because we we're strong 373 00:20:13,360 --> 00:20:16,360 believers in history. But the one thing we think 374 00:20:16,520 --> 00:20:19,920 hasn't changed, we think our change very little is we think 375 00:20:19,920 --> 00:20:23,480 human nature is very slow to change. 376 00:20:23,880 --> 00:20:27,200 And why is that important? We believe that most of the 377 00:20:27,200 --> 00:20:29,480 financial mistakes that have happened historically, and I'm 378 00:20:29,480 --> 00:20:31,880 talking about the extreme mistakes, the bubbles, the 379 00:20:31,880 --> 00:20:35,160 crashes, etcetera, that we've, you know, that we've all read 380 00:20:35,160 --> 00:20:38,880 about over the last 500 years or longer will likely happen 381 00:20:38,880 --> 00:20:41,680 through our lifetime. So we don't think that the human 382 00:20:41,680 --> 00:20:44,280 beings, if we were sitting here having this conversation 2000 383 00:20:44,280 --> 00:20:47,200 years in Roman times, people would still be driven by those 384 00:20:47,200 --> 00:20:50,720 same desires that they had then. People want to be famous, they 385 00:20:50,720 --> 00:20:53,000 want to be thought of as being an expert on something. 386 00:20:53,000 --> 00:20:55,320 They want, you know, they want, they want to be wealthy. 387 00:20:55,320 --> 00:20:58,680 They, you know, the desire for love, recognition, whatever that 388 00:20:58,680 --> 00:21:02,320 hasn't changed. And so I think that leads to 389 00:21:02,320 --> 00:21:05,800 cycles rhyming pretty significantly, right? 390 00:21:05,800 --> 00:21:08,960 Cycles repeat for a reason. And, and we think it's because, 391 00:21:09,280 --> 00:21:11,880 you know, the, the, the instruments are which people are 392 00:21:11,880 --> 00:21:17,400 investing in change, but the desire to avoid pain and, and 393 00:21:17,400 --> 00:21:20,200 get rich quick really hasn't changed pretty much for the most 394 00:21:20,200 --> 00:21:23,320 part, we don't think. So if I'm, I'm going to set you 395 00:21:23,320 --> 00:21:26,080 up with a hypothetical and let's see, let's see how you answer 396 00:21:26,080 --> 00:21:29,280 this. So hypothetically, let's say 397 00:21:29,280 --> 00:21:36,160 that, but there were 7 to 8 stocks that were driving most of 398 00:21:36,160 --> 00:21:39,440 the market. And historically, they were some 399 00:21:39,440 --> 00:21:41,760 of the best businesses that people have ever seen. 400 00:21:42,400 --> 00:21:47,720 And people that avoided them generally sort of lost assets 401 00:21:47,720 --> 00:21:49,840 under management. And then there was another 402 00:21:49,840 --> 00:21:53,640 basket of stocks that was trading pretty cheap, but it's 403 00:21:53,640 --> 00:21:56,800 really hard to raise assets buying those. 404 00:21:57,640 --> 00:21:59,360 Do you think it might be possible that people would 405 00:21:59,360 --> 00:22:03,280 overstay their welcome in the first basket and avoid the 406 00:22:03,280 --> 00:22:06,600 second basket and or do you think that you want to keep 407 00:22:06,600 --> 00:22:10,760 dancing in the first basket? I mean, I think that. 408 00:22:10,760 --> 00:22:14,360 This is all hypothetical. Hypothetically, of course, I 409 00:22:14,360 --> 00:22:18,400 think that is a real problem. And I think that pretty much 410 00:22:18,560 --> 00:22:21,440 every professional investor probably struggles with that, no 411 00:22:21,440 --> 00:22:25,400 matter kind of, you know, and, and, and we know, right, if, if 412 00:22:25,400 --> 00:22:29,960 you haven't owned a good chunk or at least a few of those names 413 00:22:29,960 --> 00:22:33,920 in the first basket, you're getting pressure to own them. 414 00:22:33,920 --> 00:22:36,040 Why didn't you own this? You know, and I, and I hear it 415 00:22:36,040 --> 00:22:39,560 from some of our investors who, you know, institutional 416 00:22:39,560 --> 00:22:41,840 investors, they talk about the same issues they get. 417 00:22:41,840 --> 00:22:46,360 Or if you have wealth management firms or Raas who have clients 418 00:22:46,360 --> 00:22:50,440 who, you know, they, they want to be, you know, everybody wants 419 00:22:50,440 --> 00:22:53,080 to be, yeah, you know, have the popular conversation at the 420 00:22:53,080 --> 00:22:55,400 cocktail party, right? And they want to have owned 421 00:22:55,600 --> 00:22:59,400 what's been working. And while we understand that, 422 00:22:59,400 --> 00:23:01,880 and we're not immune to that, let me be clear, right? 423 00:23:01,880 --> 00:23:05,000 But we are acutely aware of it. We try to study behavioral 424 00:23:05,000 --> 00:23:08,760 finance a lot and try to, again, put up organizational processes 425 00:23:08,760 --> 00:23:11,920 to minimize the risk that we will do something that we think 426 00:23:11,920 --> 00:23:13,920 ultimately we're going to regret, like following the herd 427 00:23:13,920 --> 00:23:19,560 in that situation. It, it does, you know, it, it's 428 00:23:19,560 --> 00:23:22,400 hard to resist, it's absolutely very hard to resist. 429 00:23:22,720 --> 00:23:26,360 But when things get to be as extreme as they are in certain 430 00:23:26,360 --> 00:23:28,640 areas of the market today, we definitely think it's best to 431 00:23:28,640 --> 00:23:31,640 avoid that. You know, and, and you're, 432 00:23:31,640 --> 00:23:34,640 you're seeing some of that come out and just in the last few 433 00:23:34,640 --> 00:23:37,320 weeks a little bit more. You know what really sucks? 434 00:23:37,320 --> 00:23:40,480 It sucks to stay at the party too long, but it really sucks to 435 00:23:40,480 --> 00:23:43,200 leave the party early and be able to look in the window and 436 00:23:43,200 --> 00:23:46,880 see everybody continue to party. Yeah, that hurts. 437 00:23:46,880 --> 00:23:48,880 Yeah, that that. Then you want to walk back in 438 00:23:48,880 --> 00:23:52,320 the party at the wrong time. Yeah, Well, again, I I'll go 439 00:23:52,320 --> 00:23:54,200 back to Charlie Munger, Right. What's he say? 440 00:23:54,200 --> 00:23:58,160 He he talks about envy as it's the worst of the deadly sins, 441 00:23:58,160 --> 00:23:59,560 right. It's one of the seven deadly 442 00:23:59,560 --> 00:24:02,080 sins, and he says it's the worst one because it's the only one 443 00:24:02,080 --> 00:24:03,160 you can't have any fun with. Yeah. 444 00:24:04,760 --> 00:24:07,400 That's right. And you know, and, and 445 00:24:07,400 --> 00:24:15,000 obviously, you know, being really smart is no, no panacea 446 00:24:15,000 --> 00:24:17,520 here, right? We know that Isaac Newton lost a 447 00:24:17,520 --> 00:24:20,440 lot of money in the South Sea and the Tula Bulmania. 448 00:24:21,880 --> 00:24:25,480 You know, a lot of people don't like to see others doing really 449 00:24:25,480 --> 00:24:30,960 well and, and not be involved. You know, I from our 450 00:24:30,960 --> 00:24:35,560 perspective, we have, we have a specific mandate for our 451 00:24:35,560 --> 00:24:37,080 international small cap strategy. 452 00:24:37,080 --> 00:24:40,960 So that's pretty clear. And I think our investors, our 453 00:24:40,960 --> 00:24:43,760 institutional investors and our individual investors would 454 00:24:43,760 --> 00:24:46,240 eventually not like it if we strayed too far from that 455 00:24:46,240 --> 00:24:48,360 mandate. But we're, we're, I think we're 456 00:24:48,360 --> 00:24:51,680 staying well within our, our lane there, if you will. 457 00:24:51,920 --> 00:24:55,480 We do have the ability to go in our long short strategy kind of 458 00:24:55,480 --> 00:24:57,120 anywhere we want and do anything we want. 459 00:24:57,760 --> 00:25:00,360 We haven't changed our view where we think the best 460 00:25:00,360 --> 00:25:04,360 opportunity is on the long side over the last few years, despite 461 00:25:04,600 --> 00:25:06,760 it being a very difficult environment for what we're 462 00:25:06,760 --> 00:25:10,160 doing. And we haven't, you know, you, 463 00:25:10,280 --> 00:25:13,560 you kind of alluded to the fact or mentioned, you know, could we 464 00:25:13,560 --> 00:25:17,320 be short some of the larger companies that we don't think 465 00:25:17,320 --> 00:25:21,040 have a competitive advantage? Yeah, I mean that that could be 466 00:25:21,040 --> 00:25:24,800 possible, but we've chosen not to not to stray to that area. 467 00:25:24,800 --> 00:25:26,360 We think there's a a better environment. 468 00:25:26,360 --> 00:25:30,000 And historically we've got a lot of data to back up what we're 469 00:25:30,000 --> 00:25:32,240 doing and how we search for our ideas on the short side. 470 00:25:32,600 --> 00:25:35,040 And we think we're in an area that ultimately will be right 471 00:25:35,040 --> 00:25:38,160 for poor performance. And as I like to say, if a 472 00:25:38,160 --> 00:25:41,640 company's going to go to 0 eventually, if it starts out big 473 00:25:41,640 --> 00:25:43,800 enough, it's kind of got to go through maybe 10 billion, five 474 00:25:43,800 --> 00:25:48,760 billion, 1,500,000,000 market cap on its way to zero and, and 475 00:25:48,760 --> 00:25:52,000 we do believe. Well, it's dying smart. 476 00:25:52,200 --> 00:25:55,800 And what we think, we definitely know that, you know, in times of 477 00:25:55,800 --> 00:25:57,920 stress in the market, liquidity dries up. 478 00:25:57,960 --> 00:26:01,440 And if companies have traditionally more difficulty 479 00:26:01,440 --> 00:26:04,920 accessing liquidity, which small companies traditionally do, and 480 00:26:04,920 --> 00:26:06,880 that affects how we think about buying our long positions. 481 00:26:06,880 --> 00:26:08,680 We want to make sure they generate free cash flow 482 00:26:08,680 --> 00:26:11,120 throughout a cycle because they can't be dependent on 483 00:26:11,120 --> 00:26:15,080 governments to lend them money or bail them out when things get 484 00:26:15,080 --> 00:26:15,720 bad. If you've got. 485 00:26:15,880 --> 00:26:18,960 How this is fake news, you got to ask Sam Altman. 486 00:26:18,960 --> 00:26:21,120 Man, you can spend a couple trillion and the government's 487 00:26:21,120 --> 00:26:24,240 the insurer last resort. Yeah, that's, that's the latest 488 00:26:24,240 --> 00:26:26,600 I I saw that in the last 24 hours as well. 489 00:26:26,600 --> 00:26:29,120 So. I'm just saying if that if the 490 00:26:29,120 --> 00:26:32,160 top happened when he said that, it would be poetic. 491 00:26:32,480 --> 00:26:34,080 Right. Well. 492 00:26:34,080 --> 00:26:36,160 Not not that. Not that I'm trying to make you 493 00:26:36,160 --> 00:26:38,000 call tops or anything. And it's. 494 00:26:38,000 --> 00:26:39,680 Interesting to look at what's going on. 495 00:26:39,680 --> 00:26:42,840 When we, when we talk about all this, I want to be clear, I 496 00:26:42,840 --> 00:26:45,680 don't want what I what I think is going to happen. 497 00:26:46,280 --> 00:26:49,720 I don't want to happen because I think what happens is not good 498 00:26:49,720 --> 00:26:51,680 for the country as a whole. I think it's bad for the 499 00:26:51,680 --> 00:26:52,960 economy. I think it's bad for a lot of 500 00:26:52,960 --> 00:26:54,600 individuals. A lot of people are going to 501 00:26:54,600 --> 00:26:58,680 lose a lot of money. If we're correct that this what 502 00:26:58,680 --> 00:27:00,720 we think is a bubble. And I mentioned this, I was at a 503 00:27:00,720 --> 00:27:04,080 conference early this summer, I had a family office event and I 504 00:27:04,080 --> 00:27:07,360 mentioned a bubble. And people looked at me like I 505 00:27:07,360 --> 00:27:09,040 had three heads. They thought I was crazy. 506 00:27:09,560 --> 00:27:12,080 And now it's like, it seems like every day I'm seeing multiple 507 00:27:12,080 --> 00:27:13,520 instances of people calling it a bubble. 508 00:27:13,520 --> 00:27:16,680 So it feels like things have changed a lot that are they the 509 00:27:16,680 --> 00:27:20,840 recognition of maybe there's a bubble has definitely changed a 510 00:27:20,840 --> 00:27:25,520 lot in the last six months, but but we don't want it to happen. 511 00:27:25,520 --> 00:27:28,560 But again, what we want and you know, it's like, I want certain 512 00:27:28,560 --> 00:27:30,280 things to be different, but we have to invest in the 513 00:27:30,280 --> 00:27:31,720 environment we're in. We can't change it. 514 00:27:31,720 --> 00:27:35,200 So we want to do the best we can for our investors. 515 00:27:35,200 --> 00:27:38,880 And, and we think that there's clearly some bubble 516 00:27:38,880 --> 00:27:41,560 characteristics, you know, and we can talk about that more, but 517 00:27:41,560 --> 00:27:45,280 we see a lot of this in the small cap space where the 518 00:27:45,280 --> 00:27:47,920 valuations of some small cap companies that have never earned 519 00:27:47,920 --> 00:27:49,720 their cost of capital, that don't generate a lot of free 520 00:27:49,720 --> 00:27:54,720 cash flow trade well in excess of what they did 25 years ago in 521 00:27:54,720 --> 00:27:57,520 March of 2000 at the peakofthe.com bubble. 522 00:27:58,880 --> 00:28:02,440 And they are more levered today. So for example, in March of 523 00:28:02,440 --> 00:28:06,440 2000, there were, according to our data, there were about there 524 00:28:06,880 --> 00:28:11,000 were 400 companies in the United States that traded over 10 times 525 00:28:11,000 --> 00:28:13,480 sales. And I don't know if you remember 526 00:28:13,480 --> 00:28:16,800 the famous Scott Mcneely quote about 10 times sales about the 527 00:28:16,800 --> 00:28:19,920 implications of that. And I'm, I'm happy to read it if 528 00:28:19,920 --> 00:28:22,840 you want for the for the listeners because it's pretty 529 00:28:22,840 --> 00:28:25,040 shocking. And he said it pretty well about 530 00:28:25,040 --> 00:28:27,880 the implications of when you pay 10 times sales for a business. 531 00:28:27,880 --> 00:28:30,480 What does it really mean? Yeah, sure, read it. 532 00:28:30,600 --> 00:28:34,080 So, so Scott Mcnealy was the CEO of Sun Microsystems, which was 533 00:28:34,080 --> 00:28:36,400 one of the, you know, the darlings of the Internet bubble. 534 00:28:36,640 --> 00:28:39,040 Eventually I think they got bought by Oracle, I believe. 535 00:28:39,600 --> 00:28:44,840 But at at the peak valuation around, you know, early 2000, 536 00:28:44,840 --> 00:28:46,880 the the stock hit over 10 times sales. 537 00:28:47,400 --> 00:28:50,280 And a couple years afterwards, I think he was quoted in I think 538 00:28:50,280 --> 00:28:53,400 Bloomberg or business week or whatever saying the following, 539 00:28:53,800 --> 00:28:58,440 at 10 times revenues to give you a 10 year payback, I have to pay 540 00:28:58,440 --> 00:29:01,560 you 100% of revenue for 10 straight years in dividends. 541 00:29:02,280 --> 00:29:04,320 That assumes I can get that by my shareholders. 542 00:29:04,840 --> 00:29:08,200 That assumes I have 0 cost of goods sold, which is very hard 543 00:29:08,200 --> 00:29:12,240 for a computer company. That assumes 0 expenses, which 544 00:29:12,240 --> 00:29:14,720 is really hard with 39,000 employees. 545 00:29:15,320 --> 00:29:18,040 That assumes I pay no taxes, which is very hard. 546 00:29:18,320 --> 00:29:20,960 And that assumes you pay no taxes on your dividends, which 547 00:29:20,960 --> 00:29:24,480 is kind of illegal. That assumes with 0 R&D for the 548 00:29:24,480 --> 00:29:27,920 next 10 years I can maintain the current revenue run rate. 549 00:29:28,520 --> 00:29:32,240 Now having said that, would any of you liked about my stock at 550 00:29:32,240 --> 00:29:34,960 64? Do you realize how ridiculous 551 00:29:34,960 --> 00:29:38,240 those basic assumptions are? You don't need any transparency. 552 00:29:38,480 --> 00:29:41,120 You don't need any footnotes. What were you thinking? 553 00:29:42,760 --> 00:29:44,640 Was he he should have been issuing equity? 554 00:29:44,640 --> 00:29:46,760 Was he issuing equity while this was going on? 555 00:29:47,280 --> 00:29:50,320 I don't know. I don't know if he if he did 556 00:29:50,320 --> 00:29:52,200 the. Purpose of at the at the market 557 00:29:52,200 --> 00:29:54,600 offerings, right? Like you might as well just flip 558 00:29:54,600 --> 00:29:56,400 it to the to people that'll buy it. 559 00:29:57,600 --> 00:29:59,960 We'll talk about this later. I just had a discussion with 560 00:30:01,040 --> 00:30:03,840 another company in October row 8th that had a significant row 561 00:30:03,840 --> 00:30:05,280 in their stock. I told them they should issue 562 00:30:05,280 --> 00:30:08,320 equity and they told me I didn't understand finance. 563 00:30:09,400 --> 00:30:12,080 I said, I said, you know, and you might think Scott Mcneely's 564 00:30:12,080 --> 00:30:15,840 comments are disingenuous to say after the fact that he said it 565 00:30:15,920 --> 00:30:18,480 two years later. He didn't say it before, right? 566 00:30:20,040 --> 00:30:22,800 But in fact, the math is valid, right? 567 00:30:23,320 --> 00:30:27,360 He, he, you know, obviously to generate any kind of return, 568 00:30:27,560 --> 00:30:31,000 real return paying that kind of multiple, the business is going 569 00:30:31,000 --> 00:30:35,160 to grow substantially and. I mean, that's, that's what 570 00:30:35,160 --> 00:30:37,000 people are betting on, right? And they're betting on, but 571 00:30:37,000 --> 00:30:40,960 they're betting on growth rates, which historically have not ever 572 00:30:40,960 --> 00:30:44,200 occurred or you know, the base rate would be extremely 573 00:30:44,200 --> 00:30:46,880 different than their their basic assumption, right? 574 00:30:47,280 --> 00:30:48,560 And it's. Actually tough thing about the 575 00:30:48,560 --> 00:30:52,320 Mag 7 is they have they have defied the base rates at massive 576 00:30:52,320 --> 00:30:53,840 scale. Absolutely. 577 00:30:54,880 --> 00:30:57,840 And it's not that different for what Sam Altman said recently. 578 00:30:57,840 --> 00:30:59,760 So he was raising money. They're raising money for open 579 00:30:59,760 --> 00:31:01,240 AI recently, right? I think their most recent 580 00:31:01,240 --> 00:31:05,200 valuation was 500 billion. And according to Verge, he told 581 00:31:05,200 --> 00:31:07,680 reporters he said something that he said, you know, people are 582 00:31:07,680 --> 00:31:12,200 over excited about AI models and someone will lose a phenomenal 583 00:31:12,200 --> 00:31:15,840 amount of money. And then last week he was 584 00:31:15,840 --> 00:31:17,520 interviewed and was asked a question about how you going to 585 00:31:17,520 --> 00:31:19,960 pay for this stuff, which is a question we asked in our most 586 00:31:19,960 --> 00:31:22,520 recent letter. And where's the money come from? 587 00:31:22,960 --> 00:31:25,320 And he didn't really answer the question. 588 00:31:25,320 --> 00:31:28,440 And then this week we're talking about a government backstop for 589 00:31:28,640 --> 00:31:32,880 funding, right? So he, he will be able to look 590 00:31:32,880 --> 00:31:35,040 back and say, I told you some people are going to lose money 591 00:31:35,520 --> 00:31:38,680 if that in fact occurs. But the last week he seemed to 592 00:31:38,680 --> 00:31:41,240 take instant, you know, with the short sellers or, or in fact, 593 00:31:41,240 --> 00:31:44,360 it's a, it wasn't public and he wishes it was public so short 594 00:31:44,360 --> 00:31:46,480 sellers could lose money. And again, you know what what 595 00:31:46,480 --> 00:31:49,400 we're talking about, though, in my mind, this is not PhD level 596 00:31:49,400 --> 00:31:52,560 finance. It's common sense and basic 597 00:31:52,680 --> 00:31:56,400 arithmetic, right? The, the, the base rate 598 00:31:56,400 --> 00:31:58,840 expectations when you own a company that has that high of a 599 00:31:58,840 --> 00:32:03,600 valuation isn't good, surely, just like in 2000. 600 00:32:03,600 --> 00:32:06,680 So the basket I talked about in 2000, there were 400 of those 601 00:32:06,680 --> 00:32:09,360 companies. The median return of that basket 602 00:32:09,360 --> 00:32:13,480 from March OO to March O one was down 79%. 603 00:32:14,760 --> 00:32:17,000 The average return over like the next three years was down like 604 00:32:17,000 --> 00:32:20,200 90. And a few of those companies did 605 00:32:20,200 --> 00:32:24,360 survive and became very good stocks for the next 10 or 20 606 00:32:24,360 --> 00:32:28,200 years, right? But on average, they went down, 607 00:32:28,680 --> 00:32:36,560 you know, 8090% first, right? You know, and today we see a 608 00:32:36,560 --> 00:32:38,560 basket. The basket's a little smaller, 609 00:32:38,560 --> 00:32:41,880 but probably a lot of the listeners know that the number 610 00:32:41,880 --> 00:32:43,880 of public companies, United States is about half of what it 611 00:32:43,880 --> 00:32:46,280 was in 2000. So there's. 612 00:32:47,120 --> 00:32:49,240 Yeah, I thought this is an interesting way of thinking when 613 00:32:49,240 --> 00:32:50,560 you said this to me the first time. 614 00:32:50,560 --> 00:32:53,000 Yeah, a percentage. Versus how many are listed. 615 00:32:53,320 --> 00:32:55,120 Yeah. So now there's about 300 616 00:32:55,120 --> 00:32:56,600 companies that trade over 10 times sales. 617 00:32:56,600 --> 00:32:58,280 And again, 10 times sales is the minimum, right? 618 00:32:58,280 --> 00:33:01,480 The the high could be thousands of times, right. 619 00:33:02,160 --> 00:33:06,720 But today the average valuation of those three, those that 620 00:33:06,720 --> 00:33:10,160 basket of 300 is 3X what it was in 2000. 621 00:33:10,920 --> 00:33:12,360 And they have a lot more leverage. 622 00:33:12,360 --> 00:33:14,080 They've got 50% more leverage on average. 623 00:33:14,480 --> 00:33:19,400 So all I'm arguing is from a purely data perspective, from 624 00:33:19,400 --> 00:33:23,480 math perspective, the current starting conditions is a lot 625 00:33:23,480 --> 00:33:26,880 more favorable than they were 25 years ago at the prior 626 00:33:26,880 --> 00:33:30,080 peakofthe.com bubble. Yeah, you know. 627 00:33:31,080 --> 00:33:36,560 Yeah, the, the, the, the thing about the, the big cash flow, 628 00:33:36,560 --> 00:33:40,360 generative mega cap tech that are investing. 629 00:33:41,640 --> 00:33:44,200 I, I think it gets tougher because you, you can have a 630 00:33:44,200 --> 00:33:47,320 legitimate argument about like how much should you capitalize 631 00:33:47,320 --> 00:33:49,800 the spend? Because if they're sort of 632 00:33:49,800 --> 00:33:52,320 overspending, does it really matter if they cut it off and 633 00:33:52,320 --> 00:33:54,920 it's two years and the numbers are kind of nuts, but the amount 634 00:33:54,920 --> 00:33:58,760 of money they make is nuts. Part of me though looks at, at 635 00:33:59,080 --> 00:34:02,520 what you're saying about and not you, but but the fact pattern 636 00:34:02,920 --> 00:34:08,159 around open AI and the fact that so much private money is willing 637 00:34:08,159 --> 00:34:17,000 to fund CapEx on what appears to be non unproven economics. 638 00:34:17,480 --> 00:34:23,280 Though I, I did hear that a model is the, the argument was 639 00:34:23,280 --> 00:34:25,800 the model is profitable after a year. 640 00:34:25,800 --> 00:34:28,920 The the issue is you have to spin up a new model every year. 641 00:34:29,159 --> 00:34:31,960 But that reminds me a lot of the the textile mills of Berkshire 642 00:34:31,960 --> 00:34:35,440 Hathaway, right? So I don't know, man, it's going 643 00:34:35,440 --> 00:34:37,960 to be an interesting time. And, and there's questions 644 00:34:37,960 --> 00:34:40,000 regarding, you know, the depreciation rates for the 645 00:34:40,000 --> 00:34:41,760 chips. And I think Microsoft had a 646 00:34:41,760 --> 00:34:45,520 quote this week saying something about they've got data centers 647 00:34:45,520 --> 00:34:48,159 they can't use because they, they're basically just have, you 648 00:34:48,159 --> 00:34:50,639 know, chip sitting idle and, and rock sitting idle because they 649 00:34:50,639 --> 00:34:54,080 can't get the power. We, we do think, I mean, we're 650 00:34:54,080 --> 00:34:55,480 happy to talk about that as well. 651 00:34:56,320 --> 00:34:57,960 Oh, it's not, it's not our primary focus. 652 00:34:57,960 --> 00:35:01,040 We do think there's some issues there, you know, and again, you 653 00:35:01,040 --> 00:35:06,200 know, I hope that AI does a lot of beneficial things for society 654 00:35:06,200 --> 00:35:12,120 and and I kind of think it will, but it doesn't necessarily mean 655 00:35:12,120 --> 00:35:15,760 that investors today are going to get a great return on 656 00:35:15,760 --> 00:35:19,080 investing those companies. My issue generally, and again, 657 00:35:19,080 --> 00:35:23,320 we do not have positions long or short in any of the MAG 7 or the 658 00:35:23,320 --> 00:35:28,280 leaders of, you know, the kind of the AI spend, right? 659 00:35:29,600 --> 00:35:32,800 What we do believe though is our companies being a customer of, 660 00:35:32,920 --> 00:35:35,400 you know, if three companies are competing to produce the best 661 00:35:35,400 --> 00:35:37,520 model and maybe only one of them wins. 662 00:35:37,520 --> 00:35:40,200 So it's great for them and maybe it's bad for everybody else in 663 00:35:40,200 --> 00:35:44,080 theory, but the customers probably benefit across the 664 00:35:44,080 --> 00:35:45,680 board. So can we buy businesses that 665 00:35:45,680 --> 00:35:47,400 are going to benefit no matter who wins, right? 666 00:35:47,400 --> 00:35:49,880 Because I think it's very difficult, at least for us, we 667 00:35:49,880 --> 00:35:52,880 don't think choosing the winner is, is possible. 668 00:35:52,880 --> 00:35:54,800 And I don't think there's, you know, when you get massive 669 00:35:54,800 --> 00:35:58,200 change like this in a business, it is extremely difficult to 670 00:35:58,200 --> 00:36:00,760 pick the next winner, right? That's, that's, you know, a 671 00:36:00,880 --> 00:36:03,320 little bit of the crux of what Bruce talks about, right? 672 00:36:03,320 --> 00:36:06,360 We don't have any historical examples of understanding what 673 00:36:06,360 --> 00:36:08,160 the competitive advantage is and who does win. 674 00:36:08,840 --> 00:36:10,640 And I'm sure we don't know how to do that. 675 00:36:10,640 --> 00:36:13,840 So we will try to stay within our circle of confidence and 676 00:36:13,840 --> 00:36:16,560 stay out of that, trying to make that bet because I don't think 677 00:36:16,560 --> 00:36:17,920 we can do it any better than anyone else. 678 00:36:18,320 --> 00:36:20,440 Yeah, no, that makes sense. And I didn't. 679 00:36:20,440 --> 00:36:23,280 I didn't mean to make this conversation a negative Mag 7. 680 00:36:23,440 --> 00:36:26,640 I actually happen to think the to the extent that you think of 681 00:36:26,640 --> 00:36:29,040 them as a planet. The moons around the planet are 682 00:36:29,040 --> 00:36:32,480 where a lot of the froth is, more so than the big boys seems 683 00:36:32,480 --> 00:36:35,440 to me. And I think I mean from from our 684 00:36:35,440 --> 00:36:39,680 perspective too, it does look like, you know, yes, some of 685 00:36:39,680 --> 00:36:41,520 those companies are spending, talking about spending a lot of 686 00:36:41,520 --> 00:36:44,200 CapEx it relative to what they used to. 687 00:36:44,200 --> 00:36:47,320 So their free cash regeneration may be very different than it 688 00:36:47,320 --> 00:36:49,000 has been historically. Returns on capital might be 689 00:36:49,000 --> 00:36:50,240 different. They may be much more capital 690 00:36:50,240 --> 00:36:53,680 intensive. But what we look at at a high 691 00:36:53,680 --> 00:36:56,960 level, there's companies that are much smaller in nature who 692 00:36:56,960 --> 00:37:00,720 were much more questionable in terms of do they have any 693 00:37:00,720 --> 00:37:03,400 competitive advantage and are they likely to be a winner at 694 00:37:03,400 --> 00:37:06,120 least the the most of them. MAG 7 as you mentioned, you know 695 00:37:06,120 --> 00:37:10,200 they have generated a lot of cash flow in the past and you 696 00:37:10,200 --> 00:37:14,120 know don't look like they get based on current earnings and 697 00:37:14,120 --> 00:37:16,320 cash flow generation don't look as expensive. 698 00:37:16,880 --> 00:37:18,360 Yeah. And they have, they have like 699 00:37:18,360 --> 00:37:22,440 tangible distribution advantages that you that you can actually 700 00:37:22,440 --> 00:37:24,800 articulate, right. I I think some of the other 701 00:37:25,640 --> 00:37:30,920 things that have like AI in the name or were AI enabled, some of 702 00:37:30,920 --> 00:37:32,880 that stuff seems kind of nuts to me. 703 00:37:33,000 --> 00:37:35,760 But what when we look at it and we look at a lot of history and 704 00:37:35,760 --> 00:37:38,280 I talk about this more, but we see a big opportunity, 705 00:37:38,280 --> 00:37:42,360 international small cap value and we look back to kind of the 706 00:37:42,360 --> 00:37:46,040 the biggest 10 of the biggest companies around March of 2000. 707 00:37:46,040 --> 00:37:48,640 We do think there's a lot of parallels to the2000.com bubble. 708 00:37:48,760 --> 00:37:54,080 Obviously, yes, AI is different than the Internet, but you know, 709 00:37:54,520 --> 00:37:55,880 AI is probably not that different. 710 00:37:55,880 --> 00:37:57,640 We could have had the same conversation about railroads 711 00:37:57,640 --> 00:38:01,680 probably 150 years ago and radio and autos 100 years ago. 712 00:38:01,680 --> 00:38:04,520 And you know, with the story of the graduate was plastics, 713 00:38:04,520 --> 00:38:06,080 right? I mean that, you know, and, and 714 00:38:06,080 --> 00:38:09,240 it was the Internet and, and maybe this is faster, not sure, 715 00:38:09,680 --> 00:38:12,560 but some of you know, those, those great companies and some 716 00:38:12,560 --> 00:38:14,480 of them were great businesses in 2000. 717 00:38:15,080 --> 00:38:17,480 You know, the average return from the peak, most of them were 718 00:38:17,480 --> 00:38:22,480 down 50 to 50% or more after three years and at some point 719 00:38:22,480 --> 00:38:24,120 traded down much more significant than that. 720 00:38:24,600 --> 00:38:28,400 So you know, and and we've talked to investors who listen 721 00:38:28,400 --> 00:38:30,440 to what we say about international small cap value 722 00:38:30,440 --> 00:38:33,320 when they see the opportunity. But like you said, they are, 723 00:38:33,360 --> 00:38:35,480 they're afraid to leave the party early, right? 724 00:38:35,600 --> 00:38:38,080 And you started. Hurts, man, everybody else is 725 00:38:38,080 --> 00:38:42,160 having fun you're sitting out there, you're. 100% correct. 726 00:38:42,160 --> 00:38:43,840 It's, you know. Hopefully you're not as hungover 727 00:38:43,840 --> 00:38:45,120 at the end. Right. 728 00:38:45,800 --> 00:38:49,480 But but it's, it definitely makes it difficult for people to 729 00:38:50,640 --> 00:38:53,640 make that switch and the and the pushback we've gotten for 730 00:38:53,920 --> 00:38:56,040 probably a better part of a year or so as well. 731 00:38:56,040 --> 00:38:58,600 When it turns, then I'll do it. But they want to wait till it 732 00:38:58,600 --> 00:38:59,920 turns. We started to see international 733 00:38:59,920 --> 00:39:01,920 work, right? Yeah, well that's what I was 734 00:39:01,920 --> 00:39:03,680 going to say. The turn that no ones paying 735 00:39:03,680 --> 00:39:07,920 attention to is actually international value as a factor 736 00:39:07,920 --> 00:39:10,520 has done reasonably well over the last five years. 737 00:39:10,720 --> 00:39:13,320 Yeah. And it it and we're seeing, you 738 00:39:13,320 --> 00:39:14,720 know we're seeing it start to work. 739 00:39:14,720 --> 00:39:18,200 And according to our data, we've got a long term history. 740 00:39:18,440 --> 00:39:21,560 We have charts on each of the factors, international, small 741 00:39:21,560 --> 00:39:25,760 and value that go back. The minimum is almost 50 years, 742 00:39:25,760 --> 00:39:28,200 the longest is 55 years. And and that's where we think 743 00:39:28,200 --> 00:39:29,440 the data gets a little questionable. 744 00:39:29,440 --> 00:39:32,360 So we don't go back further, although I've seen other 745 00:39:32,360 --> 00:39:34,400 people's work that are similar to what we do. 746 00:39:34,880 --> 00:39:38,000 And it would suggest that going back to the depression, you'd 747 00:39:38,000 --> 00:39:40,000 get the same results. We've got an outlier. 748 00:39:40,000 --> 00:39:44,080 We got outliers today where international relative to the US 749 00:39:44,560 --> 00:39:49,080 is the cheapest it's been in 55 years at least maybe well, not 750 00:39:49,080 --> 00:39:51,080 quite as cheap as it's been because it's rallied a little 751 00:39:51,080 --> 00:39:53,280 bit this year. So it, we're just a little bit 752 00:39:53,280 --> 00:39:57,440 off the lows of, of where we've been for the last 55 years. 753 00:39:57,440 --> 00:40:01,200 So we're probably, you know, in the the cheapest 1 percentile 754 00:40:01,200 --> 00:40:05,200 for international stocks, right? And a lot of US investors, and 755 00:40:05,200 --> 00:40:07,640 there's a lot of other very smart people who've written 756 00:40:07,640 --> 00:40:11,320 about this as well, you know, have said, you know, 757 00:40:11,320 --> 00:40:14,720 international diversification hasn't worked for most of the 758 00:40:14,720 --> 00:40:18,520 last 30 years. But does that mean international 759 00:40:18,520 --> 00:40:22,040 diversification is not? A good thing to have over time 760 00:40:22,040 --> 00:40:25,160 and you know, I, I'm a big sports fan and a big hockey fan 761 00:40:25,160 --> 00:40:27,880 and I like the the Wayne Gretzky quote you skate to where the 762 00:40:27,880 --> 00:40:30,680 puck is going so we can talk about what's happened the last 763 00:40:30,680 --> 00:40:34,280 year or two or longer. But investing and I think Bill 764 00:40:34,280 --> 00:40:36,560 Miller's had a very similar comment to this too, is, you 765 00:40:36,560 --> 00:40:39,280 know, all the analysis, all the data you've got as fact as 766 00:40:39,280 --> 00:40:42,120 history and all the values derived by what's going to 767 00:40:42,120 --> 00:40:44,120 happen in the future, right. So we want to skate to where the 768 00:40:44,120 --> 00:40:48,280 puck is going and we it's not about calling the top. 769 00:40:48,280 --> 00:40:51,640 It's not about saying you might not make money in some of those 770 00:40:51,640 --> 00:40:54,520 businesses, but we think the asymmetry for where we're 771 00:40:54,520 --> 00:40:57,680 looking at and where we're investing is much better than 772 00:40:57,680 --> 00:41:00,600 that, where the downside seems to be extremely, extremely 773 00:41:00,600 --> 00:41:03,160 limited and the upside could be quite large. 774 00:41:03,440 --> 00:41:07,760 And that's that's international. The value factor as we look at 775 00:41:07,760 --> 00:41:13,960 it is the cheapest it's been in 50 years and small versus large 776 00:41:13,960 --> 00:41:18,240 is also quite interesting. Our analysis there, we actually 777 00:41:18,240 --> 00:41:21,600 use US small versus large. We just get better data that way 778 00:41:21,600 --> 00:41:24,560 versus looking at it from a international perspective. 779 00:41:25,000 --> 00:41:28,120 Cause a lot of the, even the international small cap indices, 780 00:41:28,360 --> 00:41:31,280 MSCI has one that's only been around for less than 20 years. 781 00:41:31,280 --> 00:41:34,320 So it's really hard to get good historical data. 782 00:41:35,000 --> 00:41:38,760 But we that would show the international, sorry, small caps 783 00:41:39,080 --> 00:41:41,600 are not the cheapest they've ever been relative to large caps 784 00:41:42,280 --> 00:41:46,760 using U.S. data. But again that chart use so it 785 00:41:46,760 --> 00:41:52,280 says that around 2000 small caps were a little bit cheaper than 786 00:41:52,280 --> 00:41:54,560 they are today. We think there is a problem 787 00:41:54,560 --> 00:41:57,040 because the data series is different now what I pointed out 788 00:41:57,040 --> 00:42:00,600 before about the extremes today because you have a greater 789 00:42:00,600 --> 00:42:03,200 percentage of companies that trade it much more extreme 790 00:42:03,200 --> 00:42:05,400 levels that skews the whole data. 791 00:42:05,400 --> 00:42:08,760 So the the data set, so the average today doesn't look as 792 00:42:08,760 --> 00:42:11,520 cheap as it did before. That makes sense. 793 00:42:11,920 --> 00:42:14,200 Yes, that does make sense, but I follow. 794 00:42:14,440 --> 00:42:18,640 If you can buy. So we also believe that these 795 00:42:18,640 --> 00:42:22,560 time series valuation again is not a short term signal. 796 00:42:22,560 --> 00:42:27,160 Most people know that, but we do think it's a good indicator of 797 00:42:27,160 --> 00:42:31,440 long term future returns. And if you look today, you can 798 00:42:31,440 --> 00:42:37,920 see that the Schiller PE for the S&P 500 is about as high as it's 799 00:42:37,920 --> 00:42:42,120 ever been, right around 1999 levels at somewhere around 4544 800 00:42:42,120 --> 00:42:48,120 times cyclically adjusted earnings for the S&P 500 that 801 00:42:48,120 --> 00:42:50,080 would be anywhere near those levels. 802 00:42:50,080 --> 00:42:52,760 And even the only times it's been near these levels were 803 00:42:52,760 --> 00:42:57,560 around the peakofthe.com bubble from like 97 to O2 is suggestive 804 00:42:57,560 --> 00:43:02,080 that the S&P 500 will return close to 0 total return over the 805 00:43:02,080 --> 00:43:05,160 next 10 years. And I've had investors say to 806 00:43:05,160 --> 00:43:07,120 me, well, that's OK if I get 0 the next 10 years. 807 00:43:07,120 --> 00:43:09,480 And so that I asked him, I said, well, it's if it's zero from 808 00:43:09,480 --> 00:43:12,320 here and it doesn't change at all, you might be OK with your 809 00:43:12,320 --> 00:43:14,920 allocation. What if it goes down 50 or 80% 810 00:43:14,920 --> 00:43:16,760 first? That usually gets people's 811 00:43:16,760 --> 00:43:19,760 attention, right? It's it's 0 might be OK. 812 00:43:20,320 --> 00:43:23,160 Yeah, well, it's a long duration 0 and you don't know the path. 813 00:43:23,360 --> 00:43:28,520 But it, but if it goes down 405080 in the meantime, that's a 814 00:43:28,520 --> 00:43:30,960 lot more concerning to people from, you know, and Speaking of 815 00:43:30,960 --> 00:43:34,960 somebody who lived through it, you know, it's definitely 816 00:43:35,320 --> 00:43:37,480 something that worries us. And, and we look at it. 817 00:43:37,480 --> 00:43:42,320 And so we look at kind of the environment we're in today where 818 00:43:42,320 --> 00:43:45,080 we think we ultimately get meaner version in these factors. 819 00:43:45,840 --> 00:43:47,680 We see no reason why we will not. 820 00:43:48,600 --> 00:43:51,160 And we think that that gives a massive tail when what we're 821 00:43:51,160 --> 00:43:53,800 doing. And if we go back to 2000, the 822 00:43:53,800 --> 00:43:58,720 other kind of parallel is one of our advisors to our firm, one of 823 00:43:58,720 --> 00:44:02,800 my mentors, the legendary value investor Jean Marie Aviard, who 824 00:44:02,800 --> 00:44:05,720 is I mean such a fine gentleman, but he was a great phenomenal 825 00:44:05,720 --> 00:44:08,040 investor. For people who don't know when 826 00:44:08,040 --> 00:44:11,600 he was at Sock Gen. before in the Seventies, 80s and 90s and 827 00:44:11,600 --> 00:44:16,360 then first Eagle from the late 90s on, you know, we we saw a 828 00:44:16,360 --> 00:44:19,200 long period of underperformance leading up to the.com bubble 829 00:44:19,200 --> 00:44:24,280 peak for international small cap develop stocks and his 830 00:44:24,280 --> 00:44:30,000 performance from 2000, 2002 as the NASDAQ was losing 73% of 831 00:44:30,000 --> 00:44:33,640 your money. Cumulatively, he outperformed 832 00:44:33,640 --> 00:44:39,160 by, I think 45% a year. So a small allocation to away 833 00:44:39,160 --> 00:44:42,200 from what everybody loved into something that was unloved at 834 00:44:42,200 --> 00:44:45,920 the time because he he had made money through his investors all 835 00:44:45,920 --> 00:44:49,040 the way through the 90s, but he was lagging the performance of 836 00:44:49,040 --> 00:44:51,240 the S&P and the NASDAQ, which is what you kind of talked about 837 00:44:51,240 --> 00:44:53,520 right at the beginning. Everybody watching the, you 838 00:44:53,520 --> 00:44:55,840 know, the party go on and on, right. 839 00:44:55,840 --> 00:44:58,440 And, and Jean Marie is famous for saying I would rather lose 840 00:44:58,440 --> 00:45:01,320 half of my investors because he had a lot of investors leave and 841 00:45:01,320 --> 00:45:03,840 the capital went down. But I don't lose half my 842 00:45:03,840 --> 00:45:05,840 investors than half of my investors money. 843 00:45:07,200 --> 00:45:10,440 This episode is sponsored by fiscal dot AI. 844 00:45:10,800 --> 00:45:14,200 Please use the code fiscal dot AI forward slash brew. 845 00:45:14,280 --> 00:45:17,000 Again, that's fiscal dot AI forward slash brew should you 846 00:45:17,000 --> 00:45:22,000 want to try out the product for two week free trial and get 15% 847 00:45:22,000 --> 00:45:26,400 off any paid plans. You may have listened to my 848 00:45:26,400 --> 00:45:28,680 episode with Braden. If you have not, please go 849 00:45:28,680 --> 00:45:31,240 listen to it. It's the one. 850 00:45:31,240 --> 00:45:35,160 It's a very good episode 2. It's the actual pitch for fiscal 851 00:45:35,160 --> 00:45:41,800 AII can give you what I would been sort of told to read or not 852 00:45:41,800 --> 00:45:44,520 told, but you know, we discussed it and they were like, hey, you 853 00:45:44,520 --> 00:45:46,520 should talk about this. So what should I talk about? 854 00:45:46,520 --> 00:45:50,480 Fiscal dot AI forward slash brew is the complete modern data 855 00:45:50,480 --> 00:45:54,000 terminal for global equities. The fiscal dot AI forward slash 856 00:45:54,000 --> 00:45:57,320 brew platform combines a powerful user user experience 857 00:45:57,320 --> 00:45:59,800 with all financial data capabilities that professionals 858 00:45:59,800 --> 00:46:01,840 need. Users get up to 20 years of 859 00:46:01,840 --> 00:46:04,560 historical financials for all stocks globally that they can 860 00:46:04,560 --> 00:46:07,440 easily chart, compare, or export into their own models. 861 00:46:07,720 --> 00:46:11,000 And unlike late legacy data terminals where it can take 862 00:46:11,000 --> 00:46:15,440 hours or even days, Fiscal dot AI's data is updated within 863 00:46:15,440 --> 00:46:20,080 minutes of earnings reports. Long story short, it's a it's a 864 00:46:20,080 --> 00:46:23,360 great retail and prosumer product. 865 00:46:23,800 --> 00:46:27,640 They also have enterprise level data that you can plug in if 866 00:46:27,640 --> 00:46:30,320 your organization needs access to data. 867 00:46:30,760 --> 00:46:35,160 Braden has told me that it is a substantial discount to what you 868 00:46:35,160 --> 00:46:39,480 may be paying from the higher level of service providers and 869 00:46:39,480 --> 00:46:42,000 your data quality will be accurate. 870 00:46:42,000 --> 00:46:49,080 So check them out again, fiscal dot AI forward slash brew And my 871 00:46:49,080 --> 00:46:53,040 two cents is I enjoy the product, I enjoy the KPISI, 872 00:46:53,040 --> 00:46:54,760 enjoy how you can chart things easily. 873 00:46:54,760 --> 00:46:59,840 I enjoy the chat feature, which seems to bring back more 874 00:46:59,840 --> 00:47:02,680 accurate, relevant financial information to me. 875 00:47:03,000 --> 00:47:05,120 So check it out, see what you think. 876 00:47:05,200 --> 00:47:07,720 If you don't like it, feel no obligation to stay. 877 00:47:07,760 --> 00:47:10,960 But if you are in the market and looking, I would appreciate if 878 00:47:10,960 --> 00:47:13,840 you used fiscal dot AI forward slash brew to check it out. 879 00:47:15,080 --> 00:47:17,760 Right, he was making people money, but they were, they saw a 880 00:47:17,760 --> 00:47:21,800 better get wit get rich quick scheme somewhere else or they 881 00:47:21,800 --> 00:47:25,120 thought, and it worked until the peak of 2000. 882 00:47:25,800 --> 00:47:31,560 And then, you know, he was up 150% or so and the market was 883 00:47:31,560 --> 00:47:35,480 down 75%. And trying to, you know, part of 884 00:47:35,480 --> 00:47:38,320 the reason we are, we structure the proper way we do and choose 885 00:47:38,320 --> 00:47:41,120 the companies we choose as we try to minimize the downside 886 00:47:41,120 --> 00:47:44,280 risk because we just believe the math of coming back from 887 00:47:44,600 --> 00:47:46,400 significant losses is very difficult. 888 00:47:46,920 --> 00:47:49,280 So it's psychologically damaging to the analyst. 889 00:47:49,280 --> 00:47:51,800 It's, it's hard to be a portfolio manager and it's hard 890 00:47:51,800 --> 00:47:53,760 for the investors, right? Because investors can say they 891 00:47:53,760 --> 00:47:57,440 have a long time horizon, but inevitably something comes up 892 00:47:57,440 --> 00:47:58,720 and they might need the money sooner. 893 00:47:58,840 --> 00:48:00,960 So the path of returns matters as well. 894 00:48:01,400 --> 00:48:04,080 Yeah, no doubt and so. Well, it matters the compounding 895 00:48:04,080 --> 00:48:06,800 too, the math of the returns. Matters, but but recovering from 896 00:48:06,800 --> 00:48:10,760 those losses, right? So if you go down 75% versus 897 00:48:10,760 --> 00:48:15,440 someone like John Marie who made 100% or whatever at that point 898 00:48:15,440 --> 00:48:20,640 in time, trying to, to catch him over that period of time and 899 00:48:20,680 --> 00:48:24,000 over the next 5-10, fifteen, 20 years is extremely difficult. 900 00:48:24,360 --> 00:48:26,520 He's got such a massive head start, right? 901 00:48:26,920 --> 00:48:28,480 And it's, it's better for your investors. 902 00:48:28,480 --> 00:48:30,400 And I, you're probably familiar with Dalbar. 903 00:48:30,400 --> 00:48:32,840 Dalbar is an institute which does a lot of studies on 904 00:48:32,840 --> 00:48:35,640 individual investor behavior. And they've done studies that 905 00:48:35,640 --> 00:48:39,680 show that most, you know, most investors massively underperform 906 00:48:39,680 --> 00:48:43,520 their underlying investments, Meaning, you know, they buy a 907 00:48:43,520 --> 00:48:45,760 fund after it's done well, sell it after it's done poorly, 908 00:48:45,760 --> 00:48:49,000 right? And so they typically the long 909 00:48:49,000 --> 00:48:51,520 term studies I've seen, I think they get maybe 1/3 of the 910 00:48:51,520 --> 00:48:54,040 underlying performance. So let's say the index does X, 911 00:48:54,520 --> 00:48:59,600 the manager does X and the investor does 1/3 of X, right? 912 00:48:59,600 --> 00:49:05,600 And so the managing that path, I think helps us, allows us to 913 00:49:05,600 --> 00:49:07,800 sleep better at night, allows our investors to be comfortable 914 00:49:07,800 --> 00:49:11,000 with what they own and hopefully they stick with us through 915 00:49:11,000 --> 00:49:14,520 inevitable bad period, which will obviously happen, happens 916 00:49:14,520 --> 00:49:21,000 to nearly everyone, right? But that path does matter and 917 00:49:21,160 --> 00:49:22,480 hopefully it allow them to stay the course. 918 00:49:22,480 --> 00:49:25,360 So if we achieve X, we want our investors to get X. 919 00:49:25,600 --> 00:49:27,760 Will be very disappointed if they come in and leave at the 920 00:49:27,760 --> 00:49:30,000 wrong times. Ended up much worse than that. 921 00:49:31,520 --> 00:49:34,960 Now why? Why can I not, you know, 922 00:49:34,960 --> 00:49:38,840 passive, Passive is the rage. Why do I need an active product 923 00:49:38,920 --> 00:49:41,760 in international small cap value? 924 00:49:41,760 --> 00:49:43,440 Why? Why is there no ETF that 925 00:49:43,440 --> 00:49:49,880 satisfies us? The well, I'll bet you in the 926 00:49:49,880 --> 00:49:53,640 next 5 years there will be an ETF that satisfies that today. 927 00:49:53,680 --> 00:49:57,320 I'm not aware of one that does there. 928 00:49:57,320 --> 00:50:01,160 Are there variation? There's not a lot of liquidity 929 00:50:01,160 --> 00:50:05,400 or a lot of volume at trades in kind of ETFs that are even the 930 00:50:05,400 --> 00:50:07,400 space, but they don't really focus on value. 931 00:50:07,400 --> 00:50:12,280 Maybe they're international small, you know, and not 932 00:50:12,280 --> 00:50:15,440 surprisingly, it hasn't been an area that has generally worked 933 00:50:15,760 --> 00:50:19,520 globally for the last 1718 years. 934 00:50:19,880 --> 00:50:23,640 So you haven't had the demand from investors historically. 935 00:50:24,240 --> 00:50:26,360 We're starting to see kind of some of the interest change 936 00:50:26,360 --> 00:50:28,640 whatever from just from our perspective for us. 937 00:50:29,160 --> 00:50:31,520 So if I can extrapolate that to the broader market, I'm sure 938 00:50:31,520 --> 00:50:33,160 there's a lot of interest more broadly. 939 00:50:34,720 --> 00:50:37,360 And as you see money flows and as it worked better, I wouldn't 940 00:50:37,360 --> 00:50:42,560 be surprised to see that happen. But even versus kind of the 941 00:50:42,560 --> 00:50:45,440 other benchmarks, we've tried to structure a portfolio that is 942 00:50:46,360 --> 00:50:49,760 traditionally in a long way portfolio, much lower 943 00:50:49,880 --> 00:50:53,280 volatility, lower beta, lower correlation, right. 944 00:50:53,280 --> 00:50:55,160 With lower Vol and lower correlation, you end up with 945 00:50:55,160 --> 00:50:58,600 lower beta to the market. So that in bad prays to the 946 00:50:58,600 --> 00:51:01,960 market, whether we're talking about like the draw down in late 947 00:51:01,960 --> 00:51:07,160 2018 or 2021, we've tended to lose a lot less than the market. 948 00:51:07,160 --> 00:51:10,480 And that's our goal, right is in those environments, we try to 949 00:51:10,480 --> 00:51:13,600 lose a lot less. And so we can compound ultimate 950 00:51:13,600 --> 00:51:17,400 higher rates is, is the desire. But I don't think there's a lot 951 00:51:17,400 --> 00:51:19,160 of there's not a lot of investors around. 952 00:51:19,160 --> 00:51:21,720 I think a lot of big firms are not in the space. 953 00:51:21,720 --> 00:51:24,720 Another reason we like the area because there's not as much 954 00:51:24,720 --> 00:51:29,800 competition because as you all know, right, most people you 955 00:51:29,800 --> 00:51:32,960 know, if they can scale their business and can be larger, the 956 00:51:32,960 --> 00:51:35,960 incremental cost of running a $10 billion fund versus A $1 957 00:51:35,960 --> 00:51:39,880 billion fund or not that much higher or 100 billion versus 10, 958 00:51:40,200 --> 00:51:44,560 right? So most firms pushed to go 959 00:51:44,560 --> 00:51:46,960 larger and larger, if they at all can, right. 960 00:51:46,960 --> 00:51:49,320 And it it makes sense from their economic perspective, you 961 00:51:49,320 --> 00:51:51,360 understand their incentives. It goes back to their 962 00:51:51,360 --> 00:51:53,800 incentivize to do that. And I think fewer and fewer 963 00:51:53,800 --> 00:51:57,240 people have invested in the space. 964 00:51:58,120 --> 00:52:00,520 And so a lot of the managers who traditionally have been in the 965 00:52:00,520 --> 00:52:03,360 space have struggled and it's been difficult for them and 966 00:52:03,360 --> 00:52:05,800 assets have gone away. Doesn't mean they've lost money, 967 00:52:05,800 --> 00:52:08,280 doesn't mean they're, you know, and you know, and some of the 968 00:52:08,280 --> 00:52:09,960 investors are closed. But I think it's just, it's, 969 00:52:10,160 --> 00:52:14,200 it's hard to, it's been a hard place to be for some time. 970 00:52:15,160 --> 00:52:17,000 Yeah. Well, to your point on sort of 971 00:52:17,000 --> 00:52:19,400 catching up, I mean, that's a that's a bit of the dilemma that 972 00:52:19,400 --> 00:52:23,080 value as a factor has over the past not and probably since 973 00:52:23,080 --> 00:52:24,520 2020, it's probably outperformed. 974 00:52:24,520 --> 00:52:27,840 I haven't looked recently, but the 10 years leading up to it, 975 00:52:27,840 --> 00:52:29,680 it was tough. A lot of people got bled out. 976 00:52:30,120 --> 00:52:33,400 Yeah, we, we still show the way we look at it, we still show 977 00:52:33,400 --> 00:52:38,560 value is still underperforming. So I'm not saying that's the 978 00:52:38,720 --> 00:52:41,280 only way to look at this. That's our data and the way we 979 00:52:41,360 --> 00:52:45,000 define value, but you know, and our portfolio. 980 00:52:45,000 --> 00:52:46,800 How do you define it? Yeah. 981 00:52:46,800 --> 00:52:50,920 So when when we do the long term charts from a relative 982 00:52:50,920 --> 00:52:54,440 performance basis value, we look at value versus growth. 983 00:52:55,720 --> 00:52:58,840 And one of the ways we look at is we'll look at like Russell 984 00:52:58,840 --> 00:53:04,360 1000 value versus Russell 1000 growth in, in our approach, we 985 00:53:04,360 --> 00:53:08,040 are much more quality investors. We tend to focus on again not 986 00:53:08,040 --> 00:53:10,760 surprising given the the influence by Bruce Greenwald, 987 00:53:11,120 --> 00:53:15,040 you know being taught by MTA and for him being hired by him, 988 00:53:15,040 --> 00:53:17,600 working with him. We focus a lot on competitive 989 00:53:17,600 --> 00:53:20,040 and that's the number one thing we focus on, which is more it 990 00:53:20,040 --> 00:53:21,640 leads us to higher quality businesses. 991 00:53:21,640 --> 00:53:25,640 So our businesses, we are value investors, but our portfolio 992 00:53:25,640 --> 00:53:28,320 does not look like a statistically cheap value 993 00:53:28,320 --> 00:53:31,320 portfolio. And if we had, I would argue the 994 00:53:31,320 --> 00:53:34,240 results would be a lot worse over the last 10 years or so 995 00:53:34,520 --> 00:53:38,200 because statistical value hasn't worked very well, right? 996 00:53:39,080 --> 00:53:42,560 But so, so we focus on competitive advantage, number 997 00:53:42,560 --> 00:53:46,280 one, capital allocation #2 and culture of the firms we're 998 00:53:46,280 --> 00:53:49,120 investing in. And so focusing on those areas 999 00:53:49,440 --> 00:53:52,120 leads us to owning better company. 1000 00:53:52,120 --> 00:53:53,480 How much higher quality companies. 1001 00:53:53,480 --> 00:53:56,240 And everything I would say is currently, we think the 1002 00:53:56,240 --> 00:53:59,640 differentiation between the best businesses and the worst 1003 00:53:59,640 --> 00:54:04,240 businesses is pretty narrow. So the way I'd like to describe 1004 00:54:04,240 --> 00:54:06,520 it is if you, you know, if you were trying to buy 2 products, 1005 00:54:06,520 --> 00:54:08,360 you're trying to buy, you're trying to buy a car. 1006 00:54:08,800 --> 00:54:11,240 And again, I don't really want to offend anybody, but you say, 1007 00:54:11,240 --> 00:54:13,360 you know, historically probably know he's driving one anymore. 1008 00:54:13,360 --> 00:54:16,080 You could you could buy a Pinto for the same prices you could 1009 00:54:16,080 --> 00:54:19,600 buy, you know, a Cadillac, right? 1010 00:54:19,600 --> 00:54:21,440 We'll keep it all American and whatever you. 1011 00:54:21,440 --> 00:54:23,280 Know yeah, you'd rather not blow up if it's. 1012 00:54:23,280 --> 00:54:26,760 The same price you probably want, most people probably want 1013 00:54:26,760 --> 00:54:28,320 to buy the Cadillac, right? You want, you want the higher 1014 00:54:28,320 --> 00:54:30,240 quality product at the same price. 1015 00:54:30,240 --> 00:54:32,880 If you got to pay up, you know, if you got to pay 10 times more 1016 00:54:33,400 --> 00:54:35,120 than maybe you're making a different decision. 1017 00:54:35,400 --> 00:54:38,560 But what we see is the valuation compression where we look at 1018 00:54:38,560 --> 00:54:42,040 some, what we think are great businesses that are still 1019 00:54:42,040 --> 00:54:45,640 extremely cheap on an absolute basis relative to their own 1020 00:54:45,640 --> 00:54:48,240 history, relative to the market, relative to the sectors, 1021 00:54:48,560 --> 00:54:51,640 etcetera. But we think that the asymmetry 1022 00:54:51,640 --> 00:54:54,720 is quite good because we're we're starting to see and, and 1023 00:54:54,720 --> 00:54:56,960 there's been, I mean there's been clear evidence of this and 1024 00:54:56,960 --> 00:55:00,040 there's been talk about it, but there's more active private 1025 00:55:00,040 --> 00:55:04,040 equity involvement globally than there has been a long time. 1026 00:55:04,520 --> 00:55:06,880 And so there's a lot more capital earmarked for 1027 00:55:06,880 --> 00:55:11,000 international private equity. It's already been raised right. 1028 00:55:11,360 --> 00:55:14,160 We know there's issues with private equity markets, but you 1029 00:55:14,160 --> 00:55:17,800 know, Steve Schwarzman said recently they plan to put 500 1030 00:55:17,800 --> 00:55:19,720 billion into Europe in the next 10 years. 1031 00:55:20,440 --> 00:55:24,080 And then you've got long only managers that have also talked 1032 00:55:24,080 --> 00:55:28,000 about investing significantly in other areas where we we see a 1033 00:55:28,000 --> 00:55:31,480 lot of opportunities in the UK, for example, the UK market is 1034 00:55:31,520 --> 00:55:33,880 has some very high quality business, we think and stocks 1035 00:55:33,880 --> 00:55:37,480 are very cheap. Where we've seen one of the 1036 00:55:37,480 --> 00:55:39,560 biggest wealth management firms in the world and one of the 1037 00:55:39,560 --> 00:55:42,240 biggest Canadian pension plans have also talked about putting 1038 00:55:42,240 --> 00:55:45,400 significant increases into that country because we see 1039 00:55:45,400 --> 00:55:46,840 opportunities, we think they do as well. 1040 00:55:47,240 --> 00:55:50,360 But the, the private equity money has started to flow. 1041 00:55:50,360 --> 00:55:53,280 We've seen it. We've seen take outs in Japan at 1042 00:55:53,280 --> 00:55:56,680 100% premium. We've seen that in the last 1043 00:55:56,680 --> 00:55:58,000 year. We've seen a lot with a lot of 1044 00:55:58,000 --> 00:56:00,160 strategic buyers. Strategic buyers have a lot of 1045 00:56:00,160 --> 00:56:03,160 cash too. And one thing we do believe is, 1046 00:56:03,160 --> 00:56:07,760 you know, as growth slows down, people look to deploy that cash 1047 00:56:07,760 --> 00:56:11,680 and look to to buy growth and that the corporate balance 1048 00:56:11,680 --> 00:56:14,480 sheets, according to our data, they got the most cash they've 1049 00:56:14,480 --> 00:56:17,440 ever had extra financials. If you took all the the 1050 00:56:17,440 --> 00:56:21,560 companies outside the financials in the MSCI world, they got the 1051 00:56:21,560 --> 00:56:24,600 most cash they've ever had. And part of The thing is, you 1052 00:56:24,600 --> 00:56:29,000 know, international small cap value stocks are so cheap that 1053 00:56:29,400 --> 00:56:32,040 they've got a lot of cash. And you know, when you know, we 1054 00:56:32,040 --> 00:56:35,000 know that, you know, the market cap of NVIDIA now is $5 1055 00:56:35,000 --> 00:56:38,120 trillion. It's bigger than I think. 1056 00:56:38,120 --> 00:56:40,320 You know, it's bigger. Maybe it almost as big as Japan. 1057 00:56:40,320 --> 00:56:42,760 Maybe it's, you know, it, it's as big as most every country in 1058 00:56:42,760 --> 00:56:46,800 the world except a couple. You know, the entire market cap 1059 00:56:46,800 --> 00:56:51,200 of like the EFA small cap index is around 4 trillion. 1060 00:56:51,840 --> 00:56:54,840 So if you, and you've got a, you've got a couple trillion in 1061 00:56:54,840 --> 00:56:57,160 private equity coffers ready to go and you've got another 10 1062 00:56:57,160 --> 00:56:59,840 trillion in cash and the balance sheets of a lot of companies who 1063 00:56:59,840 --> 00:57:03,360 want to buy growth. We're starting to see flows into 1064 00:57:03,360 --> 00:57:04,840 the space. We're starting to see interest. 1065 00:57:05,040 --> 00:57:08,720 You know, our, our flows have been strong this year with new 1066 00:57:08,720 --> 00:57:10,920 investors. We're starting to see it from RF 1067 00:57:10,920 --> 00:57:13,080 PS pick up. We're starting to see people 1068 00:57:13,080 --> 00:57:16,480 talk about it. So a small movement in dollars 1069 00:57:16,880 --> 00:57:20,320 into the space, could it be relatively important to changing 1070 00:57:20,320 --> 00:57:22,960 the direction of some of these companies in the overall 1071 00:57:22,960 --> 00:57:26,880 industry levels? And, and importantly we've seen 1072 00:57:27,200 --> 00:57:30,480 and we've seen it from kind of all from wealth management firms 1073 00:57:30,480 --> 00:57:32,880 to a pension plans to endowments, foundations, 1074 00:57:32,880 --> 00:57:35,480 etcetera. But we've also seen sovereign 1075 00:57:35,480 --> 00:57:38,520 wealth funds say they've never invested in the space, but 1076 00:57:38,520 --> 00:57:42,960 they're looking now because they see the opportunity is, in their 1077 00:57:42,960 --> 00:57:46,480 minds, pretty, you know, pretty astronomical. 1078 00:57:48,720 --> 00:57:54,480 It's interesting how when you look across, you know, the, the, 1079 00:57:55,680 --> 00:57:59,080 the common refrain, and I think there's a grain of truth to it, 1080 00:57:59,080 --> 00:58:03,080 but maybe not more than a grain, is that the businesses in the 1081 00:58:03,080 --> 00:58:06,880 United States are on average better than international 1082 00:58:06,880 --> 00:58:09,960 businesses. Do you think that is a accurate 1083 00:58:09,960 --> 00:58:14,080 statement or do you think that's colored by Valuations are 1084 00:58:14,080 --> 00:58:17,360 somewhere in between? Price tends to drive narrative. 1085 00:58:17,720 --> 00:58:21,040 Sure, I, I think there's some truth to that. 1086 00:58:21,320 --> 00:58:23,440 We do think there's a lot of high quality businesses in the 1087 00:58:23,440 --> 00:58:31,720 US and maybe it's our natural bias, you know, to be patriotic. 1088 00:58:31,720 --> 00:58:34,840 I mean, I served in the military and, you know, and, and I think 1089 00:58:34,840 --> 00:58:36,760 a lot of things good about the US, but I, you know, there's 1090 00:58:36,760 --> 00:58:41,240 also been some studies recently. And I think, I think GMO did a 1091 00:58:41,240 --> 00:58:43,600 study recently saying that the argument that fundamentals have 1092 00:58:43,600 --> 00:58:46,680 been better in the US over the last like 10 or 15 years is 1093 00:58:46,680 --> 00:58:48,920 actually, according to their data in a piece they put out, I 1094 00:58:48,920 --> 00:58:51,480 think American unexceptionalism they put out in the last few 1095 00:58:51,480 --> 00:58:53,680 months argues that Japan's actually been better from a 1096 00:58:53,680 --> 00:58:56,360 fundamental perspective. So it's, I think it's hard to 1097 00:58:56,360 --> 00:59:01,760 argue that. I don't it it matters for an 1098 00:59:01,760 --> 00:59:05,520 investor if you know, so you could say if you believe the US 1099 00:59:05,520 --> 00:59:10,160 is better fundamentally, you should pay a premium for U.S. 1100 00:59:10,160 --> 00:59:12,440 companies. I can't dispute that. 1101 00:59:13,000 --> 00:59:16,080 But I do believe strongly that you know, the most dangerous 1102 00:59:16,080 --> 00:59:19,720 words in finance are it's different this time or and 1103 00:59:19,720 --> 00:59:23,080 everybody seems to want to the the narrative always supports 1104 00:59:23,080 --> 00:59:26,280 the view people have. I think that the discrepancy in 1105 00:59:26,280 --> 00:59:31,400 valuations on average and again the average kind of tells us 1106 00:59:31,400 --> 00:59:32,640 where to look a little bit, right. 1107 00:59:32,640 --> 00:59:36,040 But we still do deep fundamental work on companies and we own 1108 00:59:36,040 --> 00:59:38,000 some great businesses within the United States. 1109 00:59:38,000 --> 00:59:41,080 So I'm not saying they're all expensive or they're all bad. 1110 00:59:41,080 --> 00:59:43,480 There's a lot of very good business we don't own because of 1111 00:59:43,480 --> 00:59:46,520 valuation, but there's a lot of really good businesses we do own 1112 00:59:46,520 --> 00:59:49,760 and we think they're cheap. But I think that the, the 1113 00:59:49,760 --> 00:59:54,120 disconnect today between, you know, perceived quality, real 1114 00:59:54,120 --> 00:59:57,320 quality and evaluations is significant. 1115 00:59:57,680 --> 01:00:02,200 And I think for a long time, Japan got a bad rap for the 1116 01:00:02,360 --> 01:00:04,400 returns on capital of the businesses, right? 1117 01:00:04,400 --> 01:00:07,720 And, and a lot of Western investors looked at it and if 1118 01:00:07,720 --> 01:00:10,120 they didn't make any adjustments to the balance sheet, yes, the 1119 01:00:10,120 --> 01:00:13,240 Roe is low because they've got way too much cash in the balance 1120 01:00:13,240 --> 01:00:15,560 sheet. Well, you can adjust for that, 1121 01:00:15,560 --> 01:00:18,120 right? Now as an investor, do you think 1122 01:00:18,120 --> 01:00:19,880 you're going to ever seen in that cash or not? 1123 01:00:19,880 --> 01:00:21,160 Maybe you're never going to see it. 1124 01:00:21,400 --> 01:00:23,160 And so you want to you want to adjust for that. 1125 01:00:23,560 --> 01:00:27,480 But I think when you do the aggregate analysis, we think 1126 01:00:27,480 --> 01:00:29,280 that can be quite misleading at times, right. 1127 01:00:29,280 --> 01:00:31,280 From that perspective, if you just look across the board and 1128 01:00:31,280 --> 01:00:34,600 say the average are we is, you know, it's, you know, let's say 1129 01:00:34,600 --> 01:00:37,280 it's 7 for them and it's 15 for the US. 1130 01:00:37,560 --> 01:00:41,560 But the US companies have 40% net leverage and the Japanese 1131 01:00:41,560 --> 01:00:45,400 companies are, you know, 20% net cash, right, you can make up. 1132 01:00:45,640 --> 01:00:48,600 With US, companies have been buying in shares their equities 1133 01:00:48,600 --> 01:00:52,200 artificially depressed. That said, there is very real 1134 01:00:52,480 --> 01:00:56,040 rebuttal. I mean, until Japan sort of got 1135 01:00:56,040 --> 01:00:59,240 on the companies to return the cash as a minority shareholder, 1136 01:01:00,160 --> 01:01:04,320 it's all illusory cash flow until it's not. 100% And I mean 1137 01:01:04,320 --> 01:01:06,040 I can. I've had a long experience 1138 01:01:06,040 --> 01:01:09,360 investing in Japan. When I was at Pequot Capital as 1139 01:01:09,360 --> 01:01:13,400 an analyst, I over 20 years ago to 25 years ago, I wrote a 1140 01:01:13,400 --> 01:01:15,280 report saying we were looking at, I was looking at the big 1141 01:01:15,280 --> 01:01:18,680 auto companies and we were generally at the time long the 1142 01:01:18,680 --> 01:01:21,080 Japanese and short the American auto companies. 1143 01:01:22,440 --> 01:01:24,840 But the idea I said, I wrote a report and said something about 1144 01:01:24,840 --> 01:01:28,720 the fact that the problem is, is our time horizon is so much 1145 01:01:28,720 --> 01:01:31,000 shorter than theirs. They're thinking that this 1146 01:01:31,000 --> 01:01:35,120 Toyota thinking decades out and we were worried about the next 1147 01:01:35,120 --> 01:01:38,040 calendar year Max for the most part, right. 1148 01:01:39,040 --> 01:01:42,880 And we saw it again when, when Abe came back into power in 1149 01:01:43,240 --> 01:01:47,760 2014, maybe you know, you, you saw the, the Japanese Stock 1150 01:01:47,760 --> 01:01:51,280 Exchange create the index that, you know, basically you had to 1151 01:01:51,280 --> 01:01:53,680 have 10% ROV to be part of the, the club. 1152 01:01:54,280 --> 01:01:56,360 And so there was a push to get your ROV to that level. 1153 01:01:57,840 --> 01:02:00,880 But we try to have a lot of thoughtful long term discussions 1154 01:02:00,880 --> 01:02:03,040 with the companies we own. And we we have significant 1155 01:02:03,040 --> 01:02:04,680 exposure there and we've talked to a lot of them. 1156 01:02:04,720 --> 01:02:07,600 Again, we do it all privately. We're never public about it. 1157 01:02:09,040 --> 01:02:12,680 But we had a company said, you know, told me it was a, the son 1158 01:02:12,680 --> 01:02:14,200 of a founder running the business. 1159 01:02:14,520 --> 01:02:17,520 The company been in existence since 61. 1160 01:02:18,200 --> 01:02:20,240 He was talking about, he wanted to do what was right for 1161 01:02:20,240 --> 01:02:23,760 Japanese society and they had pretty low returns on capital 1162 01:02:23,760 --> 01:02:26,080 and a great business. I thought at the time, I still 1163 01:02:26,080 --> 01:02:30,360 think it's a great business. And I said, I said to him, I 1164 01:02:30,360 --> 01:02:33,920 said, what if you want to do the best for Japanese society? 1165 01:02:34,240 --> 01:02:38,200 They had a lot of employees that I thought were extraneous here. 1166 01:02:38,520 --> 01:02:41,000 A private equity firm would go in and fire 95% of their 1167 01:02:41,000 --> 01:02:43,320 employees and just move on. He, he was not going to do that. 1168 01:02:43,960 --> 01:02:48,640 I said, well, in my mind what you can do if, if you can 1169 01:02:48,640 --> 01:02:52,120 improve your returns on capital and improve your free cash flow 1170 01:02:52,120 --> 01:02:57,040 generation, you can afford the luxury of having extra fat in 1171 01:02:57,040 --> 01:02:59,320 your organization, right? If you think that you don't 1172 01:02:59,320 --> 01:03:01,520 really need, you automated your factory so you don't need these 1173 01:03:01,520 --> 01:03:04,320 200 workers anymore, but you don't want to fire them. 1174 01:03:04,320 --> 01:03:06,880 You want to let them retire with dignity or, or whatever your 1175 01:03:06,880 --> 01:03:11,080 kind of perception is there. My point to him was the best 1176 01:03:11,080 --> 01:03:15,200 thing you can do to have control of your company and to do best 1177 01:03:15,200 --> 01:03:18,520 for Japanese society, if that's your goal is to make it a Better 1178 01:03:18,520 --> 01:03:21,400 Business. If you can go from being a 5% 1179 01:03:21,400 --> 01:03:24,480 ROV business to a 20% ROV business with significant 1180 01:03:24,480 --> 01:03:28,000 improvement in free cash flow, you will have the flexibility to 1181 01:03:28,000 --> 01:03:32,000 make that decision. But if you have 5% ROV, we know 1182 01:03:32,240 --> 01:03:34,880 you also can't grow that business at 15% a year either, 1183 01:03:35,240 --> 01:03:36,800 right? Without borrowing money you 1184 01:03:36,800 --> 01:03:39,880 cannot do that self funding. Yeah, that, that makes sense 1185 01:03:40,000 --> 01:03:43,200 because you can only grow as much as your ROV times how much 1186 01:03:43,200 --> 01:03:45,320 you can deploy, right? Reinvestment rate, right. 1187 01:03:45,320 --> 01:03:48,240 So, so that was kind of the discussion we had. 1188 01:03:48,240 --> 01:03:49,920 There with. How interesting, that's a smart 1189 01:03:49,920 --> 01:03:51,720 way to frame it. It, it wasn't. 1190 01:03:51,720 --> 01:03:57,040 And, and I think a lot of those companies have been approached 1191 01:03:57,040 --> 01:04:00,720 by Western hedge funds, you know, buy back stock, do this, 1192 01:04:00,720 --> 01:04:02,720 whatever. And then they're renting the 1193 01:04:02,720 --> 01:04:05,680 company for three months or six months or a year and stock goes 1194 01:04:05,680 --> 01:04:09,160 up and then they're gone and the company has to live with the 1195 01:04:09,160 --> 01:04:11,280 long term ramifications. Interesting. 1196 01:04:11,280 --> 01:04:13,600 So wait, just going back to that, what you said to him is 1197 01:04:13,600 --> 01:04:17,600 you said if you want to do the best for society, let's say you 1198 01:04:17,600 --> 01:04:22,280 can grow 10 but your RO ES only 5, you need to borrow the 5% 1199 01:04:22,480 --> 01:04:24,440 that you would need to otherwise. 1200 01:04:24,920 --> 01:04:28,080 And if you really think that you can grow 10% and your company is 1201 01:04:28,080 --> 01:04:31,520 great, get your RO E to the point where you can, where it 1202 01:04:31,520 --> 01:04:36,280 supports your growth and then you can maximize utility. 1203 01:04:36,480 --> 01:04:39,000 Yeah, and it's smart, man. I like that way of framing it. 1204 01:04:39,280 --> 01:04:42,240 And this thank you. But this was a company that we 1205 01:04:42,240 --> 01:04:44,840 thought had a lot of untapped pricing power, right? 1206 01:04:44,840 --> 01:04:47,960 Because it go back, you know, you know, again, when were the 1207 01:04:47,960 --> 01:04:51,680 last time international stocks were expensive was around 1990, 1208 01:04:51,680 --> 01:04:53,960 around the peak of the Japanese bubble, right? 1209 01:04:54,080 --> 01:04:55,520 They've been in a bear market for a long time. 1210 01:04:55,520 --> 01:04:58,360 There's been very little you've seen mostly disinflation or 1211 01:04:58,360 --> 01:05:02,280 deflation, outright deflation there for the last 30 years. 1212 01:05:02,800 --> 01:05:05,080 But they have a product, they were, you know, they were 20 1213 01:05:05,080 --> 01:05:06,800 times bigger than their nearest competitor. 1214 01:05:06,800 --> 01:05:09,480 They had significant cost advantages. 1215 01:05:10,200 --> 01:05:13,200 And so I was suggesting they consider raising prices again, 1216 01:05:13,200 --> 01:05:14,680 right. You want to, you know, what's 1217 01:05:14,680 --> 01:05:16,520 going to flow. How do you improve the bottom 1218 01:05:16,520 --> 01:05:19,800 line most effectively? If you can raise prices by a 1219 01:05:19,800 --> 01:05:23,040 small amount, still much cheaper than any of your competitors. 1220 01:05:23,040 --> 01:05:25,360 I just was saying don't give it all away to your customers. 1221 01:05:25,640 --> 01:05:28,920 If you keep some for yourself, then you can do with the company 1222 01:05:28,920 --> 01:05:33,360 what you want to do. And and that's, you know, try to 1223 01:05:33,360 --> 01:05:36,480 solve that problem, but it wasn't, you know, it would never 1224 01:05:36,480 --> 01:05:40,360 work if we went and told them do this, do AB and CI don't know 1225 01:05:40,360 --> 01:05:42,040 how to run their business better than they do, right? 1226 01:05:42,040 --> 01:05:44,400 We try to, we try to partner with companies and talk to them 1227 01:05:44,400 --> 01:05:47,640 about their strategy and try to understand if we had the same 1228 01:05:47,640 --> 01:05:52,720 information they had, would we make good the similar decisions, 1229 01:05:52,720 --> 01:05:53,800 right. And we have some operating 1230 01:05:53,800 --> 01:05:55,440 experience of people in our company today. 1231 01:05:55,440 --> 01:06:00,760 We have people that worked at, you know, GE and AT Carney and 1232 01:06:00,840 --> 01:06:03,120 Colony and Hawaiian Airlines. We've got some operating 1233 01:06:03,120 --> 01:06:05,240 experience, but we don't pretend to think we can run their 1234 01:06:05,240 --> 01:06:07,240 businesses better than they do, right? 1235 01:06:07,600 --> 01:06:09,720 But we can. And we have helped many 1236 01:06:09,720 --> 01:06:14,200 companies from companies that are in the mag seven dozen years 1237 01:06:14,200 --> 01:06:17,680 ago about capital allocation to the smallest companies we own 1238 01:06:17,680 --> 01:06:21,400 today. That's interesting. 1239 01:06:21,400 --> 01:06:24,400 How many, how many companies are in the portfolio at any given 1240 01:06:24,400 --> 01:06:24,920 time? Yeah. 1241 01:06:25,920 --> 01:06:29,400 Broadly, we're around 80 companies on the long side in 1242 01:06:29,400 --> 01:06:34,080 the portfolio and our long short, we have a similar number 1243 01:06:34,080 --> 01:06:37,520 of a little bit less, but for today we probably have 6065 1244 01:06:37,520 --> 01:06:40,200 shorts. How do you talk to 80 companies? 1245 01:06:41,200 --> 01:06:46,320 It's it's difficult. So are, are not, I'm a kind of a 1246 01:06:46,320 --> 01:06:48,560 process guy, maybe not surprising kind of given the 1247 01:06:48,560 --> 01:06:52,640 quantitative background. I have always believed in doing 1248 01:06:52,640 --> 01:06:54,760 things, trying to be more efficient with how we do things, 1249 01:06:54,760 --> 01:06:56,520 right. And we have a small team. 1250 01:06:57,320 --> 01:07:00,560 The, the way we go about it is we try to take a universe down 1251 01:07:00,560 --> 01:07:04,840 in small caps, which is probably about 20,000 companies truly 1252 01:07:05,040 --> 01:07:09,440 down to about 5000 very quickly. And then from 5000 to a watch 1253 01:07:09,440 --> 01:07:11,680 list on the long side of maybe 4 or 500. 1254 01:07:12,160 --> 01:07:16,560 How do we talk to 85 companies? Well, half the companies we own 1255 01:07:16,560 --> 01:07:19,880 today, I believe, I say, I think we're still above half. 1256 01:07:19,920 --> 01:07:23,720 We've owned or done significant research on at some point in the 1257 01:07:23,720 --> 01:07:26,320 last 20 something years. We have companies and portfolio 1258 01:07:26,320 --> 01:07:28,880 today. We had one taken out a couple 1259 01:07:28,880 --> 01:07:31,120 years ago, but let's see 1 today. 1260 01:07:31,120 --> 01:07:37,640 I know I first visited in 2003, aerospace and defence supply 1261 01:07:38,000 --> 01:07:40,440 supplier. So I've been through multiple CE 1262 01:07:40,440 --> 01:07:42,680 OS with that company. Think it's a great niche 1263 01:07:42,680 --> 01:07:45,320 business. I've been following them for a 1264 01:07:45,320 --> 01:07:46,560 long time. So we've got a lot of experience 1265 01:07:46,560 --> 01:07:48,800 with a lot of companies. Historically, we've travelled to 1266 01:07:48,800 --> 01:07:50,640 meet a lot of companies. We've done a lot of travel. 1267 01:07:51,080 --> 01:07:53,880 I used to travel 4 * a year to Asia and probably 6 times to 1268 01:07:53,880 --> 01:07:55,720 Europe. So we do visit companies. 1269 01:07:56,160 --> 01:08:00,120 But going back to your question, how do we do it, We really try 1270 01:08:00,120 --> 01:08:05,000 to use technology to be very efficient, to minimize the time 1271 01:08:05,000 --> 01:08:09,440 spent in gathering information and have time for the analyst to 1272 01:08:09,440 --> 01:08:13,640 think about what the data tells us and, and to do our analysis 1273 01:08:13,640 --> 01:08:16,560 and do our primary research. So we really, you know, some, 1274 01:08:16,640 --> 01:08:19,319 some firms brag about, I look at 100 stocks and then we choose 1275 01:08:19,319 --> 01:08:22,560 one. We, we kind of probably do as 1276 01:08:22,560 --> 01:08:25,960 well or more because we end up buying kind of less than 1/2 of 1277 01:08:25,960 --> 01:08:29,279 1% of the universe. But our idea is we don't want to 1278 01:08:29,279 --> 01:08:31,160 spend a lot of time looking at most of those businesses. 1279 01:08:31,160 --> 01:08:33,880 So businesses have characteristics that we're not 1280 01:08:33,880 --> 01:08:37,880 going to like, IE we don't think we can predict, you know, that 1281 01:08:37,880 --> 01:08:39,880 this is under massive change. We can't predict what it's going 1282 01:08:39,880 --> 01:08:41,880 to look like in the future. Businesses haven't earned their 1283 01:08:41,880 --> 01:08:44,399 cost of capital, businesses that have a lot of leverage, 1284 01:08:44,960 --> 01:08:48,439 businesses that have opaque balance sheets or maybe off 1285 01:08:48,439 --> 01:08:50,880 balance sheet liabilities which we can't really evaluate. 1286 01:08:51,160 --> 01:08:53,640 We tend to stay away from those. We stay away from kind of pre 1287 01:08:53,640 --> 01:08:56,960 production mining companies or pre production biotech 1288 01:08:56,960 --> 01:09:00,279 companies, right. So we're eliminate, we do our 1289 01:09:00,279 --> 01:09:04,000 first filtering is to eliminate a lot of the universe and then 1290 01:09:04,000 --> 01:09:06,279 really only focus on the tails, right. 1291 01:09:06,279 --> 01:09:08,240 And we want to be in the the tail where we get the 1292 01:09:08,240 --> 01:09:13,720 combination of a great business at an exceptional valuation 1293 01:09:13,720 --> 01:09:16,640 opportunity and, and we, we tend to watch those until they become 1294 01:09:16,640 --> 01:09:18,680 attractive. But we do deep fundamental 1295 01:09:18,680 --> 01:09:20,240 research on all of our companies. 1296 01:09:20,240 --> 01:09:24,279 We've got extensive models. We talked to companies, we 1297 01:09:24,279 --> 01:09:28,319 talked to people in our networks quite a bit to understand 1298 01:09:28,319 --> 01:09:32,760 suppliers and customers and competitors to get a real good 1299 01:09:32,760 --> 01:09:36,560 view of the landscape. Do you want to talk a little bit 1300 01:09:36,560 --> 01:09:39,720 about portfolio construction? I know it's a a topic you're 1301 01:09:39,720 --> 01:09:42,080 passionate about. Sure. 1302 01:09:42,760 --> 01:09:46,040 So from portfolio construction perspective, we, we do think we 1303 01:09:46,040 --> 01:09:50,240 do it differently than most. And and why do I say that when I 1304 01:09:50,240 --> 01:09:55,320 talk to other adjunct professors at Columbia or whenever I'm in a 1305 01:09:55,320 --> 01:09:59,440 Columbia event, a lot of people will come up to a lot of value 1306 01:09:59,440 --> 01:10:01,840 investors, fundamental investors and the first questions like 1307 01:10:01,840 --> 01:10:06,200 what's your best idea? And while we think that's 1308 01:10:06,200 --> 01:10:10,400 necessary, like you, you want to have a best idea, but the best 1309 01:10:10,400 --> 01:10:14,200 idea is not that important to us in somebody else's portfolio, in 1310 01:10:14,200 --> 01:10:16,960 a portfolio traditionally like a Bill Miller portfolio where he 1311 01:10:16,960 --> 01:10:21,160 had 20% of his portfolio in one name, best idea might be really 1312 01:10:21,160 --> 01:10:24,560 important. Our best idea tends to be much 1313 01:10:24,560 --> 01:10:28,200 smaller in nature. You know, our, our biggest 1314 01:10:28,200 --> 01:10:31,640 positions tend to be in the three to 4% range depend on the 1315 01:10:31,640 --> 01:10:34,640 fund. So you know, in our average 1316 01:10:34,640 --> 01:10:38,800 position is today, you know closer to like 1 1/4% in that 1317 01:10:38,800 --> 01:10:41,520 range on the for the long always strategy and they're a little 1318 01:10:41,520 --> 01:10:42,880 bit bigger on the long short side. 1319 01:10:42,880 --> 01:10:46,440 But, but in that order of magnitude, we believe our 1320 01:10:46,440 --> 01:10:49,680 process works really well and we believe we can identify value. 1321 01:10:50,480 --> 01:10:53,600 We don't necessarily believe we can identify a catalyst. 1322 01:10:53,600 --> 01:10:55,800 Do we think a lot of people saying there's a catalyst, it's 1323 01:10:56,240 --> 01:10:59,320 like they're trying to create a story around what they want to 1324 01:10:59,320 --> 01:11:01,800 happen. But but we can, we can use the 1325 01:11:01,800 --> 01:11:05,280 data to identify value. When we think about portfolio 1326 01:11:05,280 --> 01:11:07,560 construction and again, this does go back to the days of JP 1327 01:11:07,560 --> 01:11:10,320 Morgan being concentrated levered portfolios. 1328 01:11:11,000 --> 01:11:14,080 We, we think about and I, I thought about this a lot from 1329 01:11:14,080 --> 01:11:17,000 those days and I think I learned a lot from the quads at that 1330 01:11:17,000 --> 01:11:20,160 period of time from the CTA is trying to think about how to 1331 01:11:20,160 --> 01:11:22,840 manage risk. And I think I've always thought 1332 01:11:22,840 --> 01:11:25,320 about it differently from a portfolio perspective as an 1333 01:11:25,320 --> 01:11:28,000 equity investor, as an equity investor over the last 25 years 1334 01:11:28,440 --> 01:11:31,520 to say, you know, can we add a stock to the portfolio, even a 1335 01:11:31,520 --> 01:11:33,320 long one portfolio? Can you add a stock to the 1336 01:11:33,320 --> 01:11:35,160 portfolio that actually reduces your risk? 1337 01:11:36,000 --> 01:11:39,840 Most people say that's not possible, but I'll give you a a 1338 01:11:39,840 --> 01:11:41,680 simple example. Well, if you're, if you were 1339 01:11:41,680 --> 01:11:44,280 long a lot of Japanese exporters and they benefit from a 1340 01:11:44,280 --> 01:11:47,800 weakening yen, if you actually were also long a Japanese 1341 01:11:47,800 --> 01:11:51,880 importer that benefited from a strengthening yen, you might 1342 01:11:51,880 --> 01:11:55,440 actually owning those two stocks might reduce your currency risk 1343 01:11:55,440 --> 01:11:57,440 there, right? Does that make sense? 1344 01:11:58,720 --> 01:12:02,640 Yeah, for sure. So, and, and we think a lot of 1345 01:12:02,640 --> 01:12:05,480 investors do the traditional well, what's your, what are your 1346 01:12:05,480 --> 01:12:07,160 sector weights? What are your country weights? 1347 01:12:07,160 --> 01:12:10,040 That's your exposure. We're willing to be very 1348 01:12:10,040 --> 01:12:12,400 different than the benchmark and we pride ourselves on this and 1349 01:12:12,400 --> 01:12:14,360 we believe in this. I think Peter Bernstein said the 1350 01:12:14,360 --> 01:12:18,080 quote right. The only way to be different in 1351 01:12:18,080 --> 01:12:20,760 the long run and produce superior returns in the long run 1352 01:12:20,960 --> 01:12:23,560 is by willing to be different and look stupid in the short 1353 01:12:23,560 --> 01:12:25,840 run, right? So we are, we're benchmark 1354 01:12:25,840 --> 01:12:27,280 aware. We know what the benchmarks 1355 01:12:27,280 --> 01:12:30,160 doing, but we never have a discussion about, oh, I like 1356 01:12:30,160 --> 01:12:32,040 this stock, the weight, the benchmarks are 1%. 1357 01:12:32,040 --> 01:12:34,320 We like it supposed to be 1 1/4 or 1 1/2. 1358 01:12:34,880 --> 01:12:37,080 That never comes up. I couldn't tell. 1359 01:12:37,360 --> 01:12:39,920 Maybe once a quarter if I see like the top ten names of the 1360 01:12:39,920 --> 01:12:43,840 benchmark, I can tell you, but I can't tell you I would doing the 1361 01:12:43,840 --> 01:12:45,840 bad. I can't name one of the the any 1362 01:12:45,840 --> 01:12:48,920 of the top ten stocks in our benchmark because I don't really 1363 01:12:48,920 --> 01:12:51,280 care. I don't I don't know it, it 1364 01:12:51,280 --> 01:12:53,040 matters. It matters to somebody else if 1365 01:12:53,040 --> 01:12:54,880 they want to look at us relatively speaking in the short 1366 01:12:54,880 --> 01:12:57,360 run. But there are sectors we're 1367 01:12:57,360 --> 01:13:01,120 likely to be underweight pretty much systematically. 1368 01:13:01,120 --> 01:13:03,720 We have been for a long time and like I'll mention a couple 1369 01:13:04,520 --> 01:13:08,720 financials, real estate and utilities and and why might be 1370 01:13:08,720 --> 01:13:10,040 that. That's your underweight. 1371 01:13:10,200 --> 01:13:12,920 We're underweight, traditionally very underweight those spaces. 1372 01:13:12,920 --> 01:13:15,440 Why is that? And some value investors, a lot 1373 01:13:15,440 --> 01:13:17,160 of value investors like financials, they like real 1374 01:13:17,160 --> 01:13:20,000 estate. Well, go back to what's our big 1375 01:13:20,000 --> 01:13:21,160 focus. Our number one focus is a 1376 01:13:21,160 --> 01:13:24,160 competitive advantage. I don't believe that there's a 1377 01:13:24,160 --> 01:13:28,920 lot of competitive advantage in small cap financial companies, 1378 01:13:29,200 --> 01:13:31,600 real estate or utilities. Most of them haven't earned 1379 01:13:31,600 --> 01:13:33,120 their cost of capital. Most of them have a lot of 1380 01:13:33,120 --> 01:13:35,280 leverage. We don't like the valuations of 1381 01:13:35,280 --> 01:13:36,800 real estate overall. That's another reason not to 1382 01:13:36,800 --> 01:13:39,400 like real estate. And there are exceptions, right? 1383 01:13:39,400 --> 01:13:43,800 But traditionally we're very underweight those areas because 1384 01:13:44,360 --> 01:13:47,520 again, you know, as a former JP Morgan employee, I'll say, you 1385 01:13:47,520 --> 01:13:49,720 know, I think JP Morgan, I respect him a lot as a bank. 1386 01:13:49,920 --> 01:13:53,280 If you want to go borrow money for your Business Today, and JP 1387 01:13:53,280 --> 01:13:56,920 Morgan offers to lend you money at X, and you go to a bank 1388 01:13:56,920 --> 01:14:00,880 that's not quite as perceived to be as high quality, and they 1389 01:14:00,880 --> 01:14:03,680 offer to lend you that same amount of money, same terms, but 1390 01:14:03,840 --> 01:14:07,040 the rate is half of X, I'm willing to bet you and most 1391 01:14:07,040 --> 01:14:09,440 everybody else will go borrow money from somebody else. 1392 01:14:09,640 --> 01:14:12,120 Now, JP Morgan is a lot more than lend money like that, but 1393 01:14:12,120 --> 01:14:15,120 you get the idea, right? They're lending a commodity. 1394 01:14:15,600 --> 01:14:17,800 That commodity is the same no matter who it is, right? 1395 01:14:17,800 --> 01:14:22,480 And small banks especially, so, you know, we tend to stay away 1396 01:14:22,480 --> 01:14:24,320 from that. We think the opportunity set is 1397 01:14:24,320 --> 01:14:26,480 much bigger and broader in small caps. 1398 01:14:26,680 --> 01:14:28,160 We're not forced to own those names. 1399 01:14:28,160 --> 01:14:31,280 Yes, some of them are quote UN quote cheap and we've seen it in 1400 01:14:31,280 --> 01:14:32,920 for a while. There's been cheap European 1401 01:14:32,920 --> 01:14:37,160 stocks for a while. It concentrated a lot in the 1402 01:14:37,160 --> 01:14:39,840 financial area and that's just not an area we ended up owning 1403 01:14:39,840 --> 01:14:43,040 financial services or companies that are, you know, supply them 1404 01:14:43,040 --> 01:14:46,400 with product, but not traditional banks, if you will. 1405 01:14:46,680 --> 01:14:49,720 So it does lead to a slightly different focus in a portfolio 1406 01:14:49,960 --> 01:14:52,120 from a construction perspective. That's number one. 1407 01:14:52,680 --> 01:14:56,200 Number two, when we launched the firm, Tom and I, so again, Tom 1408 01:14:56,200 --> 01:14:59,320 is another part of the firm who is Chief Risk Officer at Alpha 1409 01:14:59,320 --> 01:15:01,480 Diet. We talked a lot about how much 1410 01:15:01,480 --> 01:15:05,320 we're willing to risk on being wrong and you know, we believe 1411 01:15:05,320 --> 01:15:09,840 we've got, you know, a very good process, one of the best 1412 01:15:09,840 --> 01:15:13,920 processes to identify value. The risk is that you don't you 1413 01:15:13,920 --> 01:15:17,760 can't see the idea to fruition because you run into bad luck in 1414 01:15:17,760 --> 01:15:20,480 the short run. And I think that a lot of people 1415 01:15:20,800 --> 01:15:22,880 you know they they believe in concentration. 1416 01:15:22,880 --> 01:15:25,320 And this is 1 where I probably differ from a lot of kind of 1417 01:15:25,400 --> 01:15:30,200 Columbia associated professors where I believe there you do 1418 01:15:30,200 --> 01:15:32,800 have benefits of diversification that people do not truly 1419 01:15:32,800 --> 01:15:34,560 appreciate. Jean Marie Aviard did appreciate 1420 01:15:34,560 --> 01:15:36,000 it. On the other hand, one of my 1421 01:15:36,000 --> 01:15:39,160 other mentors, Bruce believes strongly in concentration as do 1422 01:15:39,160 --> 01:15:43,520 a lot other portfolio managers. But we think we get the benefit 1423 01:15:44,040 --> 01:15:47,720 of a broader portfolio that's diversified that allows us to 1424 01:15:47,720 --> 01:15:51,400 have lower correlations to the market, lower volatility, while 1425 01:15:51,400 --> 01:15:53,640 not impacting our ability during alpha. 1426 01:15:53,680 --> 01:15:58,240 If we had 1000 companies with the alpha go down, yes, that's 1427 01:15:58,240 --> 01:16:00,680 too big. The the analysis we've done in 1428 01:16:00,680 --> 01:16:03,040 our history over the last 25 years would suggest we think 1429 01:16:03,040 --> 01:16:06,720 somewhere around 80 is fine. And there's a little, there's 1430 01:16:06,720 --> 01:16:08,960 some arguments coming out now in the academic community arguing 1431 01:16:08,960 --> 01:16:13,200 that number should be bigger, but especially in small caps, if 1432 01:16:13,200 --> 01:16:17,200 you had a 10 or 20 stock portfolio, in my mind, you 1433 01:16:17,200 --> 01:16:19,600 really can't have a real institutional quality business, 1434 01:16:20,200 --> 01:16:21,960 right? It's, it's too volatile. 1435 01:16:22,280 --> 01:16:24,760 But you know, we think we get the benefit. 1436 01:16:24,760 --> 01:16:28,480 So we, we put together a portfolio that for our time here 1437 01:16:28,480 --> 01:16:32,840 and at our previous firm has about 80 companies, 80 long 1438 01:16:32,840 --> 01:16:36,440 companies are all small caps. Most people would agree that 1439 01:16:36,440 --> 01:16:38,680 small cap companies are more volatile than large caps. 1440 01:16:38,920 --> 01:16:42,600 You look in the US, the S&P Vol probably is somewhere between 1441 01:16:43,280 --> 01:16:45,760 historically somewhere between 17 to 20%. 1442 01:16:46,520 --> 01:16:49,960 The Russell 2000 Vol with over 2000 companies small cap 1443 01:16:49,960 --> 01:16:55,280 companies is probably 25 to 30% volatility, if not more. 1444 01:16:55,400 --> 01:16:57,280 The NASDAQ is kind of in that range. 1445 01:16:57,760 --> 01:17:02,400 We put together a portfolio of 80 small caps with a volatility 1446 01:17:02,400 --> 01:17:07,240 historically of somewhere between 10 and 13 by and we're 1447 01:17:07,240 --> 01:17:09,760 again, we're willing to be more concentrated in sectors than 1448 01:17:09,760 --> 01:17:11,080 some. So we're not just trying to 1449 01:17:11,080 --> 01:17:13,000 again, not, we're not trying to minimize volatility, but it's 1450 01:17:13,000 --> 01:17:16,120 the nature of the companies we choose and the way we think 1451 01:17:16,120 --> 01:17:18,640 about their interaction and their correlation, how they fit 1452 01:17:18,640 --> 01:17:21,320 the portfolio. And, and that's one thing I 1453 01:17:21,320 --> 01:17:24,360 think we do differently. We, I did it intuitively before 1454 01:17:25,440 --> 01:17:28,720 at previous firms, but we've been able to adding Tom to the 1455 01:17:28,720 --> 01:17:32,760 team here has allowed us to quantifiably analyze this and 1456 01:17:32,760 --> 01:17:35,920 we've reduced our correlations of volatility with the 1457 01:17:35,920 --> 01:17:39,400 portfolio. So what's led to historically 1458 01:17:39,400 --> 01:17:41,800 the firm I was at previously we tended to own have a lot of 1459 01:17:41,800 --> 01:17:43,680 cash. That was kind of a nature of the 1460 01:17:43,680 --> 01:17:47,200 firm desire to have a lot of cash as a reserve. 1461 01:17:48,320 --> 01:17:52,040 What we've been able to do here is take the cash down in our 1462 01:17:52,040 --> 01:17:54,400 long way portfolios. We're much more fully invested 1463 01:17:54,760 --> 01:18:00,920 say close to 100% ninety 9798 versus historically 75, but we 1464 01:18:00,920 --> 01:18:03,920 still show as low a beta as we did prior. 1465 01:18:04,480 --> 01:18:06,440 Yeah. So what it allows us to do is 1466 01:18:06,440 --> 01:18:10,080 suck upturns but but still preserve more capital on the 1467 01:18:10,080 --> 01:18:10,880 downturns. Sorry. 1468 01:18:10,920 --> 01:18:14,480 Yeah, no cash drag sucks. Yeah, absolutely. 1469 01:18:15,160 --> 01:18:17,640 That's, I mean, that's probably. In the environment where we 1470 01:18:17,640 --> 01:18:22,200 think that the the ability to compound at you know, we, we 1471 01:18:22,200 --> 01:18:25,000 think ultimately our you know our companies will grow value 1472 01:18:25,440 --> 01:18:28,760 because of the the free cash they generate due to revenue 1473 01:18:28,760 --> 01:18:31,960 growth margins etcetera. Oh and the returns on capital 1474 01:18:31,960 --> 01:18:36,800 and reinvestment at a very high rate, kind of worst case 1475 01:18:36,800 --> 01:18:41,280 probably low to mid teens plus we get set worst case. 1476 01:18:41,360 --> 01:18:44,960 We think worst case from here crazy is is crazy. 1477 01:18:45,040 --> 01:18:48,440 But then you add in the fact of the money flows, we talked about 1478 01:18:48,440 --> 01:18:51,840 the meaner version evaluations, you kind of get Charlie Monger's 1479 01:18:51,840 --> 01:18:53,800 Lollapalooza effects, you get some crazy returns. 1480 01:18:53,800 --> 01:18:57,600 So from our viewpoint, we don't want to be, we don't want to 1481 01:18:57,640 --> 01:18:59,760 have any cash. We think that cash drive will be 1482 01:18:59,760 --> 01:19:02,600 significant. In fact, when we we look at our 1483 01:19:02,600 --> 01:19:06,440 long short portfolio, we actually have managed that more 1484 01:19:06,440 --> 01:19:09,360 recently, not throughout our entire history, but this year 1485 01:19:10,080 --> 01:19:15,080 being over 100% net long. But even, but even in that 1486 01:19:15,080 --> 01:19:17,280 situation with a little bit of leverage because our companies 1487 01:19:17,280 --> 01:19:20,920 tend to be very under levered. Our shorts are so unique and 1488 01:19:20,920 --> 01:19:27,440 different that our beta to the S&P has been somewhere under .1 1489 01:19:27,440 --> 01:19:30,800 this year and our beta, the NASDAQ has been zero and beta 1490 01:19:30,800 --> 01:19:35,000 like bitcoins negative. So it it'll our, our structure 1491 01:19:35,000 --> 01:19:37,280 of our long short portfolio is very different than most long 1492 01:19:37,280 --> 01:19:40,600 short funds. So we we managed to a higher net 1493 01:19:40,600 --> 01:19:43,640 exposure or lower gross. Yeah, OK. 1494 01:19:43,880 --> 01:19:48,160 But it's but it's very different than anything we've ever seen. 1495 01:19:48,360 --> 01:19:50,360 Oh, a higher net and a lower gross. 1496 01:19:50,360 --> 01:19:52,760 Interesting. But it allows us to take our 1497 01:19:52,760 --> 01:19:55,240 long ideas which we think are kind of it up, you know once in 1498 01:19:55,240 --> 01:19:58,040 a lifetime opportunity, get a little bit more leverage to make 1499 01:19:58,040 --> 01:20:01,000 more money there. But we think our shorts are kind 1500 01:20:01,000 --> 01:20:05,080 of once in 25 year opportunity to make significant absolute 1501 01:20:05,080 --> 01:20:06,360 returns on the short side, right. 1502 01:20:06,360 --> 01:20:08,120 It's been very difficult for people to make money in short 1503 01:20:08,120 --> 01:20:12,440 side for the last 25 years. You know, there's been periods 1504 01:20:12,440 --> 01:20:14,600 of time where they've been able to do it, but not consistently. 1505 01:20:14,960 --> 01:20:17,240 And obviously the environment's changed a little bit now where 1506 01:20:17,240 --> 01:20:19,000 you can earn a short stock rebate etcetera. 1507 01:20:19,000 --> 01:20:22,840 But that allows us a different approach from that perspective. 1508 01:20:23,440 --> 01:20:26,400 Yeah, but, and I would I mean, we can talk more about the 1509 01:20:26,400 --> 01:20:28,440 portfolio construction. I'll just say one other thing 1510 01:20:28,440 --> 01:20:31,080 and I'll stop. But it it's, you know, when we 1511 01:20:31,080 --> 01:20:35,560 start looking at new ideas, we do independent risk analysis to 1512 01:20:35,560 --> 01:20:37,320 understand how they will fit in the portfolio. 1513 01:20:37,320 --> 01:20:41,800 So if an analyst wants to look at stock A or stock B, we before 1514 01:20:41,800 --> 01:20:44,320 they do any work, we can understand quickly how is the 1515 01:20:44,320 --> 01:20:46,520 stock behaved in the past, how does it fit with our existing 1516 01:20:46,520 --> 01:20:49,720 portfolio. And that understanding we think 1517 01:20:49,720 --> 01:20:52,720 helps Lee has LED us to a portfolio that's very different 1518 01:20:52,720 --> 01:20:55,120 than other investors in our space. 1519 01:20:55,120 --> 01:20:57,280 So we're very different than even other small cap 1520 01:20:57,480 --> 01:21:00,080 international investors. But more importantly, for a 1521 01:21:00,080 --> 01:21:03,840 broader portfolio, it's a great, you know, effectively we think 1522 01:21:03,840 --> 01:21:06,480 we're a positive expected tail hedge for most people because we 1523 01:21:06,480 --> 01:21:08,680 think we won't make positive returns. 1524 01:21:08,920 --> 01:21:11,120 So it's the insurance policy that will pay you at the end of 1525 01:21:11,120 --> 01:21:14,040 the day because it behaves so differently than everybody else. 1526 01:21:15,920 --> 01:21:18,560 But it's, it's not, you know, so it doesn't have the same 1527 01:21:18,560 --> 01:21:20,360 characteristics of going up and down with the market like 1528 01:21:20,360 --> 01:21:24,400 everybody else. Well, that's interesting man. 1529 01:21:24,400 --> 01:21:28,000 If if people listen to this and are interested, how can they 1530 01:21:28,000 --> 01:21:32,440 reach out to you? Sure, we have a website 1531 01:21:32,760 --> 01:21:36,800 somacalphacapital.com. Mac Alpha Capital is the name of 1532 01:21:36,800 --> 01:21:41,440 the firm. They can, they can e-mail me or 1533 01:21:42,680 --> 01:21:45,280 e-mail the firm and and we will be happy to get in contact with 1534 01:21:45,280 --> 01:21:46,320 them. But thank you very much. 1535 01:21:47,160 --> 01:21:50,000 Yeah, well, hey, thank you. Thank you for for chatting. 1536 01:21:50,000 --> 01:21:55,240 This is enjoyable. And I don't know it's it is an 1537 01:21:55,240 --> 01:21:56,840 interesting environment to look at. 1538 01:21:56,840 --> 01:22:01,360 And statistically, it is hard to deny that international looks a 1539 01:22:01,360 --> 01:22:04,160 lot cheaper than the US, though that the equal weight S&P 1540 01:22:04,160 --> 01:22:07,120 doesn't look like crazy crazy, but it doesn't look crazy cheap 1541 01:22:07,120 --> 01:22:08,440 either. Right. 1542 01:22:09,280 --> 01:22:12,440 So, all right, thanks again. Thanks for your time. 1543 01:22:12,560 --> 01:22:14,160 Thank you, Bill, and thanks for everybody listening. 1544 01:22:14,160 --> 01:22:16,000 Appreciate it. All righty, take care. 1545 01:22:16,000 --> 01:22:16,800 Thanks. Bye. 1546 01:22:54,680 --> 01:23:26,840 None. Music.