Value Investing is BACK - with Tobias Carlisle

People invest in what, what has been working. And the moment that that breaks down, the money will go somewhere else.

So I know, I know we're kind of early on beating this drum and what we beat it through all the way through the, the tough times too, but, you know, hopefully people can take away some insights here from you. And, maybe before we get started, for those of you who may not know you, Toby, maybe give us a little bit of your history, how you came to this point. I mean, going from, uh, A lawyer down in Aussie to a value funds manager in California.

Maybe map it out for us and bring everybody else up to speed who might not know yet.

I started in April 2000, which was the very top of the dot com 1. 0 boom and saw that all collapse, and then saw the rise of activism and private equity through those early 2000s.

And, at the same time as I was sort of, you know, Papering these private equity acquisitions, which is a lot of work, you know, there's lots of different layers of capital, debt, equity, prefs, whatever might be in there, plus the acquisition and just there's so much contracting, you'd end up with a tower of paper at the end of it and it would cost millions of dollars of legal fees. At the same time, you can buy exactly the same business for cheaper on the stock market.

And at the time it was 8 a trade. I don't know what it is now, but it was 8 for me to trade by the, by the same business for half the price. And then if you make a mistake two days later, you can tip it out for another 8 round trip. And I had read enough sort of, Buffett and Graham by that point to know that these things happen. You, you find, Pieces of businesses that aren't trading for the full negotiated price on the stock market, even though they might be worth more.

And I just kind of fell in love with it. It was fun. And it was a good period for value. It was easy to buy things who were undervalued and they just run almost immediately. And so I spent the first sort of five years or so of my investing career. Doing pretty well with deeply undervalued stuff. And that all sort of collapsed in, in 2009, but I decided I wanted to go and try and do it professionally at that point.

So I set up a little fund in Australia, had some pretty good returns out of the gate, but just was never going to be a structure that could raise money in the States. My wife has, American we met when I was working in San Francisco as a lawyer. And so we moved back to have kids and I started the business here. And, it's been a tougher run for value as everybody well knows.

Those starting in, depending on how you measure it, starting in 2010 or 2015, somewhere in that period of time, value really started underperforming. And I've got a friend, Mikhail Samonov, he's done this analysis. He, he called it 200 years of value. And he said, this was the, you know, that period through 2020 was the worst underperformance of value in 200 years of value. Clearly as you go back in time.

The, the data is not as good, but what is pretty clear from it is that you get these often associated with some sort of technological boom. So the telegraph, the invention of the telegraph was a big one. steamships was another big one and so on over the last sort of 200 years where every time there's been an electronics boom in the 60s, the dot com 1. 0 boom, Whatever it was that sort of com 2. 0 social kind of boom that we had through 2020.

And I guess now we've got a little micro boom going on with the AI, but whenever we have these things, it tends to be the story stocks that don't have a lot of fundamental value run and it draws money away or it sort of leads the rest of the market to underperform. So that's, that's what I've invested through. And I know we're going to talk about this a little bit, but I've definitely had to adapt from a more traditional value to sort of a A different sort of style of value to that practice now.

And, and, you know, maybe you're alluding to that sort of thing in your own journey as you have been, you know, managing value assets in, in what has been a. It's been, you know, obviously there's lots of stuff around this value, but if no one else is, is realizing that and kind of beating a path to that door, it leaves you with, you know, lots of value for a period of time that is less comfortable than having the realization right away.

And so I saw like lots of extra hits on my websites podcast and my social media grew really quickly, even though I'm a value guy and I was well out of all of those names, I'm still involved in the stock market. And so I was getting attention for that reason. And the stuff that I would just wouldn't touch with a 10 foot pole was the stuff that was running it. The stuff that I was holding was suffering as a result.

It wasn't clear, you know, everybody knows these things are cyclical, but it's hard to believe that it's cyclical in the moment. I thought, what if this does go along forever? And I was listening to some of the other smarter value guys who are a little bit more growthy than me, listening to what they were saying. One of the criticisms that they have had of the very deep value. So I would characterize myself as deep value, which is I, I, tend to buy less good businesses at a big discount.

That's sort of my, Objective rather than a really great business at a fair price, which would be the way that Buffett characterizes what he does. So I thought one of the criticisms that was valid of what I did was that, aren't you just really relying on price action? To be the thing that bows you out. 'cause we all know that if you form a value portfolio, the market expects the earnings to fall or not perform as well as the market earnings. And that tends to be what happens.

It's just that they have overestimated, how bad the returns are gonna be, and then the stock price recovers as a result. So it's this funny kind of behavior where the, the earnings are actually going down, but the stock price is going up because of the, the little window when you own the stock. And the reverse is true for the growthy stuff. The market expects the earnings to go up and they do on average go up. It's just that they disappoint the market and the multiple comes down.

But somebody said, you know, aren't you just relying on price action here? And that's not very, that's not very value like, is it? That's not very fundamental because that's not what fundamental value guys do. And I thought that was a fair point. So I went back and I retooled what I did and I looked at it and I made this assumption, what if we had to. Invest with no price performance. What will we be doing then? We're purely relying on fundamental performance. What, what would I construct then?

And so it made me, I leaned a little bit more into quality. I made sure that when we bought something, we'd get some compounding out of the reinvestment. So you need a reasonable return on reinvestment, reasonable prospects for compounding reinvestment, returns over a period of time. And then also for some yield. So some shareholder yield, which is. Dividends, buybacks, you know, hopefully buybacks for undervalued things, but not not every management team does that.

And I, I feel like I, I now think in 2 distinct terms of value sources when I buy something, we're going to get a return out of the yield. We're going to get a return out of the compounding. I don't rely at all on the price action. I assume that price action is going to catch up to us over time. And I think that's a pretty safe assumption, but I don't expect it to at all. And I'd be quite happy for my entry multiple and my exit multiple to be the same.

And I'm purely rely on the fundamental performance of the business over that period. So I think that that's a pretty big change that I have built in. and I think that it's sort of yielded results and I expect it to over time. So we, when the fund, when Zig first launched, it was a long short fund. It 130 percent long, 30 percent short, 30 names long, 30 names short. So a long name was 4%, short name was 1%, rebalanced regularly without fear or favor, because the shorts can be a problem.

Shorts have got leverage in them. They can run the wrong way. You can get hurt. I invested through that period where Melvin Capital blew up. I thought we did pretty well through that period, but we were all, had, my great fear was always that we were going to get caught in something that ran. So I'd make sure there was no momentum in the stock. And I think that that's sort of for the really growthy names that is there. That's their rocket fuel. Their mojo is all of that momentum.

The moment the momentum gets out of those stocks, the people aren't interested in playing with them anymore. It's like the toy just gets discarded. So you can look at the charts as soon as the momentum goes in beyond or Peloton or any of those kinds of names, they just disappear for a variety of not very interesting kind of technical custody reasons we couldn't get as long as I want it to be. And so we were sitting at a hundred long 30 short through.

The beginning of 2020. So that helped us on the way down and protect us a little bit, hurt us on the way back up in that mania. So 2020 wasn't a great year for Zig. And then in 2021 converted to long only because I thought that there's some existential.

Metaphysical risk with the shorts, like even if they never actually blow up, there's always a risk that they do kind of hope that the fund gets big enough one day that, you know, it's, it's a big fund and then it's harder to short at that kind of size. So I thought, I'm going to take this medicine at some point. It doesn't really align philosophically with the way I am. So I'm going to change to long only, which happened in 2021.

So since 2021, 2021 was a good year, cause that was sort of the end of the, uh, The stock market run up 22 was the kind of, I thought it was the beginning of a big bust, but ultimately it didn't turn out that way. And then 23, we had a really good year. I would not have expected it at all. I thought that the, all of the macro economic indicators were terrible and really the lesson that I've learned is I know nothing about macro and I'm just going to shut up about macro and ignore macro forever.

I think the market can fall over 50 percent at any given point in time and you should be able to survive it. But aside from that, macro is just a waste of time. So I'm a long only value investor, bottom up. I'm about as plain vanilla as they come these days.

Whether to have more cash in the sidelines than one normally would or not, or to invest more or not, which is a form of timing. It's just timing by a slightly different nature. So I'm glad you highlight that. That's kind of an, it's always kind of a funny thing that I

Morphed and you've been alluding to some of the ways in which you've adapted your style over the years to, to sort of account for these changes. But I'm wondering, does it even matter to your style? But have you gone down the rabbit hole and trying to understand what are some of the mechanisms, structural mechanisms that have led to this underperformance and this bifurcation and does it begin with this passive eats the world sort of thesis?

What tends to happen is there's a little bit of mean reversion in business performance as well, that I think a lot of people miss. Things just don't go to zero. When oil was trading at a negative number, that's not a, that's not a signal to sell oil, if anything, that's a signal to buy oil at that

So I just, I'm a I bet on mean reversion, not extrapolation. And I think that, if you looked in 2015 at value, the difference between the best businesses and the worst businesses, that was, that was so squashed together because valued had such a great run through the two thousands, everybody was trying to buy the undervalued stuff. And for a little bit of a premium, you've got a much better business.

And I think that that's why from 2015 until sort of the Today or the last few years, the better businesses, the growthier stuff, the Nasdaq stuff has all had a great run because they were too cheap and value was too expensive. And I think now the spread is very, very wide and the spread has been closing, but the spread is still very unusually wide. It's still as wide as it was in 2000, wide as it was in 2009 at the bottom, both of which went on to have very good value runs.

I think that That is really what has driven the underperformance of value. It got too expensive in 2015. It's been working off that being too expensive. And now the trend, now that the trend keeps on going all the way to the point that value is undervalued and growth is overvalued. So I think that we probably see some mean reversion over the next decade here. That would be my bet.

As to the, passives eating the world, I think, I think at the margin, I think that's probably what happens in any bull market. People go with what's been working and the S& P 500 is the best performed asset class. Or asset in the world over that sort of period of time. You can get it for nine basis points. It's got Sortino ratio that look like a hedge fund. You know, it's an incredible run for that and it can soak up a lot of assets, but I think that this is true at every bull market.

People invest in what, what has been working. And the moment that that breaks down, the money will go somewhere else. In any case, I don't care because I'm not investing as we just, that discussion that I had earlier about the, you know, not, not relying on the price performance. If I was an investor in the value stuff. And they bought back shares and they're all cheap. They would, you know, axiomatically, they must perform better. Like the cheaper they get with the buyback mechanism.

And I'll be the last person with owning those stocks. Like if there's no bid and I own all of those stocks, I'm an incredibly wealthy man, but there's no longer any bid on the market. And so passive is eating the world, but I've made a whole lot of money. It just doesn't like, it doesn't logically, it can't work. I'm picking the pocket of those big funds if they're, if they're not doing the fundamental diligence that I'm doing. I'm picking the pocket of SPY.

Like anything they're leaving behind is something that's worth owning. So I don't believe in, I think. Flows affected in the short term, but ultimately in the long run, fundamentals are the thing that drive the market.

You know, gold breaking out to all time highs, you know, the materials world sort of again, you know, highs not seen for 15 years. And everyone is still myopically focused on the market cap weighted stocks of the United States, which are, you know, obviously victims or, they also take advantage of the extreme momentum that comes from a market cap weighting system.

So I think under the surface, there's still enough active managers Where money is, flowing under the surface on a longer term timeframe to where it's being treated best on a return, whether it's cash flow or some sort of more fundamentally driven, higher probable event that, treats the money better, if you will.

And so, you know, if we look at those moments in your career that you outlined earlier, Toby, and talking about 2000 easy, easy times, you know, 2010, a little harder times, You know, it seems as though easier times are upon us and, it's probably going to be, if you zoom out and look at quarterly and annual data, you're going to see it and you're going to see the outperformance, but over a day, a week, a month, it's going to be shrouded in noise.

I'm going to be happy owning the things that I own.

Is the stock screening an initial filtering and then do you overlay with some discretionary or are there other elements to that that you can tell us about?

I'm not a, I don't have a, PhD from Booth or from Wharton or like, I'm not a, I'm not a Chicago quant in that sense. I'm just a quant in the sense that I prefer the financial statements to the story that people tell themselves about these businesses.

So I think that all of the questions that you have about a business or about management can be answered in the financial statements and so we look at a series of financial statements for every company and we try to figure out what's happening, how much money are they making, what are their prospects for growing, what are their prospects for paying out pretty good shareholder returns. Try and find the best risk adjusted opportunities from the set that have no blow up risk.

So we're trying to take all the blow up risk off and that's, that's a quite a few tests, but that's like, you know, looking at statistical tests of fraud and earnings, manipulation and financial distress and using all those sort of standard tests and then looking at various other things just to see how management treats the financial statements. So once we've narrowed it down to, uh, an investable universe for both of the funds, so ZIG is 30, DEEP is 100. names.

Then among those names, we go into a forensic diligence, which is just does the financial statement match the economic reality of the business? Because there's a lot of discretion. For managers to make decisions, two perfectly reasonable people can come to, can create two different financial statements for the same business. Over time, they should largely balance out, but you look at accruals of different assets and the way that they depreciate and so on.

You know, if you're an owner operator style manager, you're probably running it to minimize tax when that means minimizing reported earnings. If you're a public company CEO, whose compensation is based on stock options and all of that sort of stuff, you're trying to maximize earnings. And they're Two different styles of running a business. My preference is that I want to be with the owner operator type guy. And so we, know, the system is set up to try and find investors and managers like that.

And then, I'm doing a diligence where I'm actively looking at how far away is what I would think that the earnings should be from what the actual reported earnings are. And is there a trend in there? Do they tend to be consistently and growing over reporting of earnings? Or is it the other way around? Are they consistently under reporting earnings? Some of that is answered in the cash flow statement.

And then we form a portfolio based on what I think are the best risk adjusted opportunities with no blow up risk. And that's, that portfolio is then rebalanced on a quarterly basis.

But, you know, ultimately that was an act of the administration to kind of wipe them out. And so if you invest in the for profit colleges, there was no recovery from those investments. So I'm always conscious of that possibility being out there. And I never know if I'm looking at something is the reason, you know, and that could be insurers. When Obamacare was coming in, you had United as the most as the biggest and the other four, we're trying to combine together.

How big a bet do you want to take in that? How, what will be the impact of Obamacare? I don't know at that point in time, but I want some exposure to the industry. Cause I thought they were cheap and I also thought there were opportunities in the merger arms going on there. So I try to limit the exposure to any industry to 20 percent of the book. So we have a limit, which is six names out of a 30 name portfolio and 20 names in a two in a 100 name portfolio. So we're always limiting and then.

We are equal weighting at each rebalance point. So I've done a lot of research in different ways of weighting using Kelly or, you know, all of the different things that you can do. And I wrote a book called Concentrated Investing, which is largely about that, trying to figure out how concentrated or otherwise you want to get. I kind of found that for the ease of calculation, 30 names is a good, is sufficient diversification. I think that the efficient market guys come out at 30.

They're trying to create a portfolio that matches the market portfolio as cheaply as they possibly can. Graham says 30 names, all of these, I think when you do the work somewhere between 20 and 30 names, you get rid of all of your non diversifiable risk. And it's just asymptotically trending towards the market. The question is, how can you outperform? How can you deviate from the market? So you're not randomly picking names, you're picking them according to some system value or whatever.

So 30 value names out of a universe of 1, 000 for Zig, and it's a universe of 2, 000 for Deep, because it's roughly Russell 2, 000, roughly Russell 1, 000 universes. 30 names for the Russell 1, 000, 100 names for the Russell 1, 000. 2000 is 3 percent of names or, uh, sorry, 0. 3 percent of names or, or 0. 5 percent of names. So I think that you're already very concentrated, equal weight in that group ease of calculation. And I, I've found that, that, that works perfectly well.

It's really been a large over small market rather than a sort of growth over value or however you want to characterize expensive and value. It's been a large, not small market. Smalls have been absolutely smoked. And so the portfolio was, was a 40 million median about three years ago. And it's something like eight in Zig at the moment.

So that the market caps have come in dramatically in Zig and also in Deep, which is Russell 2000, the Centroid sits right off the bottom of the Morningstar Square. Like you can look at that box. it's in small and micro because, and that's where I think the opportunities are all small and value, but particularly the size for whatever reason that spiking interest rates sort of let all of these smaller businesses, cause they don't have the same.

They haven't termed out their debt as well as the mid and large cap companies. So they, their debt is all, they've already started paying the higher rates where the middle large cap companies haven't had to roll some of their debt yet. They haven't had the bullets come through. Whereas and micro have, so they're paying like 10 percent rates to borrow if they can get the debt. And so I think that's why they've really stumbled and you can see it in their earnings reports.

You can see that large cap earnings have largely recovered. S& P 500 earnings have recovered and have gone above their 2022 peak. Whereas mid and large are still trading below their 2022 peak and their multiples are much compressed as a result. S& P 400, S& P 600, which is mid and small trading at about 15, 14 times depressed earnings. Whereas the large caps are at like 20, 21, 22 times pretty extended earnings.

So to me, that says that if you believe in mean reversion, the opportunities in the small and mid, and if you look back, small and mid have traditionally traded at a small Earnings, multiple, premium to large. And now they're at a big discount. So I think that'll flip over the next few years. And that's, that's where the opportunity is small and value particularly.

Or are we just at one of those extremes where it's going to revert and, go back to where it was?

So I think that my, my deep fund, because it's cheaper, has a higher expected return at this point than Zig, which is, can only choose from a slightly bigger universe, even though it's exactly the same process in both funds. They're just selecting from different universes. So I did really think that the opportunities in small and value than, and then the smaller is better than the bigger.

And so it has to qualify on two different measures. So all of the names that are in the fund qualify on those measures. And, you know, you're probably leaving some return behind by not being able to pick up the really small, really liquid stuff. But you know, there's a, there's some risk being in that stuff if you're in a publicly traded

How do you think about that problem?

So we're continuing to examine either financial statements still supporting us being in this position or have, what's the market, right? Because that's, that's the way I think about it. We're, we're not, You know, it's, there's some arrogance in saying the market is totally wrong about this because of course the earnings and the underlying business can deteriorate. In which case, we've made a mistake. We've paid too high a price for a business that's deteriorating.

And that's what the market is often doing. It's forward looking. They know that these events are coming and they're not yet reflected in the financial statements.

So the way that I think about it is we're either paying a price that reflects those worse expectations, in which case we're probably, you know, if it, if it does manifest that they're getting worse and now the opportunity doesn't look as great, we just take the position off and move on to something else or the market has overestimated, it's over extrapolated and there's a pretty big recovery when the next print comes in and it's not as bad as everybody was expecting.

And then, and then you're off to the race and that's sort of what we're trying to achieve. but you know, I'm, I'm always, I'm very aware there's a lot of avenues for making mistakes and for blowing up in this business. And that's really the thing that I'm most focused on. I just want to survive because there's always another cycle coming. There's always a better cycle coming.

You know, when lumber had that crazy run through, through COVID, all of the housing builders got smashed to pieces. And I, thought the housing builders were way, way too cheap. They were also in a market where there was a lot of under building. Because of the GFC, more than a decade ago, we just haven't built as many homes in the States. And so there's going to be demand for homes. Housing bills are cheap, lumber being too expensive.

That's clearly a short term problem that's going to resolve itself over time. And the home builders went on a pretty good run.

I didn't foresee that sticking up interest rates as rapidly as they did would make the premium between new homes and, you know, Existing homes so much smaller, or in fact, it would flip over where people would be, it would be cheaper to buy a new home than it would be to buy an existing home because the homebuilders could give you the rate buy downs and all that sort of stuff. And so those homebuilders have had this sort of generational little problem. Period of trading.

But that's one of the nice things about value. I didn't see any of that happening. I just thought, well, home builders are too cheap, but then of course, it's all of the macro that drives all of the craziness that goes on. And I just, I just don't think. It's not that I'm ignoring it. I'll I'll watch it and I'm naturally bearish. So I've. You know, I can see that there's a yield curve inversion out there and, you know, there's a war going on in Russia and there's some conflict in Gaza.

There's, there's always conflict and there's lots of good reasons to be nervous about stocks. It's just that I can go back over the last decade cause I have been bearish over the last decade and I can go through all the things that I was bearish about, that none of which manifested into, you know, anything that happened in the stock market. So I just think macro is so hard. It's not that it's wrong and it's not that it's worth paying attention to. It's just that it's so important.

Impossible to predict the third or fourth derivative knock on effect and how that will impact the stock market that the energy devoted to it is just a little bit of a waste of time. So I'm a beneficiary. I think sometimes that something gets cheap for a macro reason and I'll buy it for the macro reason. And I'm probably a beneficiary on the other side, bailing me out of the position and making it work, but I'm largely just ignoring it and saying, well, it's cheap now and now it's less cheap.

And I'm a buyer. And now it's less cheap. That's how I think about it.

You, you wait, for a long time until the waiting mechanism of the stock market finally leans in the direction and you have whatever catalysts are going to drive, the price up and you're going to realize that value in the business that you've, uh, or the businesses that you have been, selecting in your portfolio, which kind of jives a little bit with the experience that CTAs and trend followers have had, which is kind of our side of the ledger here, where oftentimes you do get these lumpy return

profiles. How do you think through that behavioral challenge for yourself as a manager, but also for some of your stakeholders and your investors when you're talking to Some of your, to your allocators and you're, you're, you're pitching them this fund, you account for that, behavioral, difficulty and, and, and, and sort of the, the, the fortitude that one must have in order to stick to, because, uh, I find that value.

is one of the more intuitive things one can get behind on from an investing standpoint. You buy something that is below its intrinsic value, and then you wait for that value to realize. But you know, a quarter goes by, a couple years go by, and it's still not happening. And, and with our attention spans growing shorter and shorter with, with all the social media and all these apps, how do you think through all that?

Back page of the paper thereafter. And if you can just not participate in it for the first three months, then it looks silly. Like in the fourth month, you look back and you think, how did people get so, get into this. And then I look at, I look at names like, so Dillard's, Ted Weschler's one of Warren Buffett's investing. Lieutenants. hasn't done, hasn't, he's underperformed the stock market since he started investing for, for Buffett. But he, he's had a couple of very good picks.

And one of them was Dillard's DDS, which is still out there. And it's one of the companies that I hold now as well. Dillard's is a retailer, retailer got, all the retailers got smashed to pieces over the last five or 10 years. Dillard's was one of them. Dillard's got way too cheap. It was in all of my screens. and I'd buy it and sell it. And buy it again and sell it again. Cause you know, just as it sort of bounced around a little bit, but it didn't really go anywhere for five or six years.

And then through COVID, whatever it was, the stimulus, whatever it was, it took off and it 10 bagged in about a year. And now it's up about 18 times from where he put it. I think he doesn't have it anymore, but that 6 percent stake that he bought is worth like 360 million and it's an 18 bagger since he put that position on. And all of it happened in a very short period of time. So the compound annual growth rate for the holding period or the IRR for the holding period is like 36 percent plus.

Over the seven years, but it's really like only a handful of years that have delivered the return. So I'm just, I see those things and I think that's a good, that's a good reminder just because the market doesn't recognize this. Initially, what we're focused on is the fundamentals. And I, at the, at the beginning of this, I sort of started talking about that a little bit, but that's sort of what it means.

Like ignore the price action, stay completely focused on the underlying fundamental performance. And if the fundamental performance is trending in the right direction, then everything's good. Just. Just. stay cool. And so I've definitely found myself, I've, I've stepped back from social media a fair bit. There's not a lot of utility in it for me because it's just way too short term focused. So I put the positions on, we rebalanced in a quarter, which means I'm going to get another quarters.

Financial statements, we'll update all of our models, we'll form up our ideal portfolio, and then at the end of the quarter, we'll look at the differences between the ideal portfolio and what we're currently holding in Zig, and we trade to make the Zig's portfolio look like the ideal portfolio. And that's the process. So it's not a lot of, um, it's not a lot of opportunity for me to overtrade or anything like that. I, I sort of just stick to the process and I don't worry about it too much.

'cause now I, I, I trust it too. I've been doing it for long enough that I know that if we buy cheap and good, it will work out over time. Even though, you know, you can have a look at the returns. In 2021, it was like a, it was a pretty big year. It was like a 37% year, but then in 2022 it was like a down 70% and 23 is like an up 30% year. And then this year's like up six or something like that. And we're underperforming a little bit, but that's what happens. It's, it's clumpy get.

Even though the portfolio is going forward all the time, it's only reflecting the stock price sort of in fits and starts. That's okay.

But you also got that, you know, Corey Hofstein had that great, paper where he identified all of that timing luck, all of that rebalancing luck. And I had been aware of that as a You know, anybody who does a lot of backtesting, you become aware that if you start the portfolio in one January and you rebalance yearly in one January, you get much better returns.

And if you started in September and you rebalance it in September without sort of knowing why, and if you started in March and you get a rebalance, it's really close to that 2009 low, the returns are like twice as good as if you rebalance in September. So there's clearly, I want to be able to. eliminate as much of that timing rebalance luck as I can without incurring all of those additional sort of frictional trading costs.

And I think quarterly, you know, you probably don't need to trade quarterly, probably yearly is enough, but it just, it captures that timing rebalance luck sufficiently that I think quarterly is okay. Quarterly is the number.

What are some of the things that if you were inclined to sin a little, like as a value investor, looking at all these companies and looking at the opportunities from a cyclical standpoint, you just, described yourself as excited or growing the, becoming more excited with the opportunities, but the forthcoming opportunities for, value as a whole, what are some of the things that are getting you excited?

So I have managed to kind of train myself to feel better when returns are worse because the forward returns are better. And so I think the forward returns are better now. We've got to concentrate, you know, we just tend to be buying lots of We're deep value. So it means we're always going to be in, we're going to be in steel. We're going to be in coal. We're going to be in oil and gas and energy. Um, we buy little busted industrials that I think can do a little bit better.

I have a little bit of trouble distinguishing between them, honestly, because they all have idiosyncratic problems. And the reason that they're in the portfolio is because they have idiosyncratic problems and they work their way out. If I was going to sin and be discretionary, I'd be much more in things like probably I'd look at something like, um, Starbucks or something that's, you know, had a pretty big stumble, but ultimately, you know, that's a pretty Good business.

I like businesses like Shopify. I think Shopify is an incredible business. I mean, I'd be out there buying all those kinds of names, knowing that the way to own these things is to buy a little bit now and just, you just don't even worry. That's like a 10 year position, 10 year plus position and you just let them run and let the underlying business kind of figure itself out. But I would like, you know, really good businesses after they stumble.

I don't, I'm not so much of a speculator that I'd go in and, you know, I wouldn't be trying to like, Time oil or time coal or anything like that.

And it tends to be, it's heavily concentrated in the things that are work. But if you start with 30 names, heavily concentrated might be a 5 to 8 percent position, which I would think is a. If a position has worked its way up to that, it may have earned that right to be that sort of size in the portfolio and it'll all be stuff that's worked. So your positions will, it'll be Apple, Microsoft, Starbucks.

You have this portfolio that looks like a Kelly betting value investors portfolio, even though it's just completely, you know, the system has selected these names and it's just allowing time to work. Means that the ones that compound are the better businesses. And the ones that don't work just disappear. You know, they're rounding areas, rounding areas or they're trivial. The interesting thing is how much capital they throw off.

So buying on a free cash flow basis, holding for five, you know, the yield across the portfolio could be 10 or 15 percent at inception. You hold that for five years, half of that comes back, half of it Gets reinvested in the businesses. You find that you've got like a third of your portfolio capital back after five years and you've got to reinvest it anyway.

So I think that you end up being quite it's a Buffett's you're kind of imposing this Buffett's style, cadence and, investment style on yourself just by virtue of the fact that you have this never sell and own cheap quality stuff. You,

And so they might in relative terms be outperforming the S& P or some of your other benchmarks in a downturn. But do you think about some complementarity, on a style basis, you know, other diversifiers, anything along those lines?

I think if we got massive outperformance for an extended period of time, then it would be okay to take some of that off and, and mess around with some other things, just to try to be a little bit more established and careful for my family. But at this point it's, I feel like I should be eating the dog food. Not that I need any more focus on it than I already have, but I just feel like I should be participating along with everybody else.

I think that the prospects for these companies are always pretty good. I look back through, you know, we've, we can run this data back through 1963. It's not forever. There's lots of other period things that have happened outside of that, but even through the seventies these things did okay because it's, this is the kind of strategy that does do well for, for more inflationary period like that.

That's not to say you can't have some sickening drawdowns through that period of time, but I do have some cash that I would. Opportunistically deploy. I'll just tell my wife that we're, we're going to be investing in the, in the market. It's not a lot where we're going to be buying something right now. So we can't do anything else for a little while. She's all right with that. She understands.

And then he had Greg Abel, who's the chief executive officer, who's also taken over the equity portfolios. And so it wasn't the two other guys who had been sort of tagged at the moment, it looks like. The CEO of who he was Mid-American, but now he's CEO of the whole thing. And he's also looking after the equity portfolio. He seems to me like he's very smooth, very controlled, very high EQ kind of guy.

And he, he concluded one of the things that he had said with, uh, nothing further to add, which was a very famous Charlie Munger one. He always used to say that, which the crowd loved. So I thought. I think they're doing the transition. I think there's probably a transition going on now from Buffett to Abel. Buffett's, you know, phenomenally articulate and thoughtful 93 year old man. But at 93, you can hear how fast he used to talk when he was in his 60s and younger than that.

You know, he sounds like you're listening to a podcast on 1. 5 times speed. And now he doesn't speak as fast as that and it takes some diversions to make the point. So I thought from that perspective, there's, there's a transition going on. That was what I took away. But the other, just outside of that, I think that, there are principles of investing, that I learned from them that I think I've only grown to appreciate why they're so important over time.

And one of them is, and I've, I've written a book. I've given this, it's with, uh, it's with a publisher now to decide whether we do it or not, but it's basically looking at some of the underappreciated aspects of what they do. And I think that one of them is this idea of, you know, they, they'd look at character as one of the elements of people who they do business with. It's hard to understand why as a younger, or I just didn't really understand why it was so important.

I mean, it's just, you're looking for opportunities wherever you can get them when you, when you're young and hustling. And. It's only after you've been burned a few times that I think that you realize how important character is in business partners and other things like that. So that was a, that's an interesting one. And the other one is just that you cannot blow up.

You just have to be able to survive every single market environment that you see, because you get, you know, Berkshire has famously underperformed for long stretches of time and they haven't done very well. In others, there's always a magazine cover that will let the world know at the time Buffett's lost it. And then it's often, you know, it's close to their bottom. They're just about to go on a really great run just after that. And I think that's true of most strategies.

A lot of the ways that my, fund works is we're in a industry that's beaten up and some of the people in the industry leave because it's just, they've either got too much leverage and they can't, they can't make it or business is just too tough. There's easier money elsewhere and they move away and then they get these super normal returns in the industry. And that's what I'm trying to capture the super normal returns. It's true. Also, investing in a value portfolio, you get these, you pay.

You blow up, you miss the bit that comes afterwards. So I think that that has been their sort of underappreciated strength that they just muddle through in the bad times, do really well in the good times. And I think for me, those are the, those are the things that I really take away. Those two sort of principles, do good, do, with good people and, and survive for a bad time. So you come out on the other side,

The contract says, so you just, and those assessments, I don't know how you make those assessments other than just dealing with people a lot over an extended period of time and seeing how they operate. Getting older, I think probably helps.

There's a, there's a, I think it's his name, Poorish, the Indian guy who, you know, emulates a lot of the stuff he's, you know, been on record as saying that being one of the more important factors of, you know, you should fit it on one page because you, you can't contractually obligate people away from bad behavior. If you have a bad actor, you have a bad actor.

You know, you see that all the time in the small and micro world where they get these big slugs of options and they move all of the timing of it around. That behavior, you know, technically it's legal, but don't want to be in business with a dude. Is someone who's doing that? Probably not. Now I want someone who wants to make money with the shareholders as well. And that's sort of, that's, that's where it's really important.

Which I think you can, all of that is observable in the financial statements and the proxies and things like that. I don't think you, you need to do any like psychological analysis of the, the management or anything like that. I just think you look at the financials and it tells you, you, don't have to listen to what they say.

That's the.

And we're all sealed into that with Musk as he flies it into the sun or whatever he was planning to do. But at some point he changed his mind and decided that he's going to go turn it into cash flow generation and pay a dividend. it worked out okay.

15, 30, 40, deuce, add, nuts, doesn't make any sense

So, I mean, there's gotta be some fantastic, East Eastern wisdom coming out that you could, that you could share with everybody that's going to change their lives.

What I found is that there's the original one, which was, um, written in 1910, is probably the one that most people have read. And I think that's probably the best one, but there's also. One that came out in 1989, which is looking at the Taoist influence of the Art of War. And I think that, and I had never really had any exposure to that so I went and read the Tao Te Ching and the I Ching and the Zhuangzi and a few of those other things.

And I was kind of blown away by the, there's some interesting wisdom in those things. And a lot of it is about patience and letting things sort of unfold the way that they should unfold. And I think that that's very apt for investing. And one of them, one of them that stands out for me that Richard sort of alluded to it earlier, but you should, you should.

Have a good enough understanding of your subject matter and what's going to happen in this sort of engagement when you're putting these positions on that you should be able to read the signs of it going badly or going well, which is distinct from what the stock price is doing. Cause the stock price is a little bit misleading. I think that's how other people feel about it. What's actually happening in the business is revealed internally. And that's what the Dow and Sun Tzu would say as well.

You look internally, ignore the surface. I think that The Tao begins, the Tao begins something like, caught in the, caught in desire. You, you see only the, you know, you see only the surface, but if you can see the mystery and you, you sort of, if you can see inside, you can see the mystery. And that's what I, that's what I want. I want to see the mystery, you know, I want to see what's going on.