Charles Lemonides - ValueWorks

Ladies and gentlemen, welcome to the Business Brew. I am your host Bill Brewster. This episode features Charles Lemonadeus of Value Works. Charles and I have a conversation about his investment philosophy. He is obviously considers himself a value person considering the fact that he named his firm Value works. I enjoyed speaking with him because he's got a very diverse

take on investments. And, you know, the comment that that sort of stood out to me is he said something along the lines of, you know, it's your job as a portfolio manager to put together a series of uncorrelated bets. And I don't think that that is something that is or different. That's right. And I don't think that's necessarily something that is groundbreaking, but I think it's

good to hear. And I think that as you hear him talk about the different names in his portfolio, you will see that he tries to implement what he's saying in a way that he understands. So I hope that you take some learnings out of this conversation. And it is a conversation that I didn't exactly expect to have when I researched his portfolios. But as we got into it, I found it fascinating. Hope you enjoy. As always, nothing in the show

is financial advice. Please consult an investment advisor before making investment decisions. Everything in the show is for entertainment purposes and educational purposes. And do your own due diligence. All right, ladies and gentlemen, thrilled to be joined by Charles Lemonidas today of VALUE Works. Charles, how you doing? Good, good, good. Nice to be here with you, Bill.

Well I appreciate your time. I know that you said that your background is not too exciting or whatever, but I was curious if you could let people in a little bit of background always help start the conversation and level set on where we all are. Well, that's our that's a picture of these, the Empire State Building punking through the clouds in Midtown. We are right now coming to you from One World Trade Center on the 84th floor. Let's see if we give you a

picture outside. I doubt it'll show much, but yeah, yeah, you can see there's a horizontal bridge in the distance and the whole team out there plug it away. You started value works. How did you get into all this? Why is the firm name value works? How'd you get into value investing and and how'd you cut your teeth in the industry? Well, you know, I started out thinking that that a career on Wall Street would be exciting and fun and good for my skill set.

I did some work on trying to figure out what career paths were. I started in a research department doing the most mundane research humanly possible but learning a lot, and was lucky enough to to have a couple of mentors who were really really good at assessing businesses and investments and didn't end up starting Value Works for another. I started in 86 after graduating College in 84 and started Value Works sort of in 99 in 2001. That's a good time to start something value based, right?

Well, you know, I never liked the term value investor historically because to me it connoted low quality businesses at at cheap prices. There's a an article I read some fabled value guy said well, value had a bad year last year because financials and tobacco stocks did badly. Tobacco stocks and financials aren't definitionally value. Value is in the real world. There's something worth more money than than than I'm paying when I buy this security.

And to me it it occurred to me that value is not buying low priced businesses cheap, but rather caring about price when you start your investment process and saying look what are the assets underneath this investment worth in the real world? And am I paying more for the more when I buy this stock or less than that amount? And that to me is value. I would agree with that

definition. I think a quant might take a might might argue, but I would say that they're probably, they're playing a slightly different game than what we're talking about, right? Yeah. Look, it's a philosophical approach of how you look at investments. It's not. It's not purely metric driven. Any metric could show it that an instrument is not a value that is not priced according to a value metric, but a different metric might say it is.

And if you're just using a metric, you're not getting the whole picture. Yeah, I would agree with that. Do do you specialize in certain types of companies or industries? You know, how do, how do you think about where you'll go as an investor?

What I find the best investment opportunities are where you can find something that is a real growth opportunity and it's trading at a value price. And the key to our success over the years is building portfolios with a lot of those in there. And so that and they're all different from each other so that in any given period, one or two of them can come into favor and that carries the whole portfolio.

So our portfolios will have 2530 long names in them, but within those 2530 names, there are really 15 that are very, very different from each other. Yeah. And I and I had noticed just based on your 13 F, it seems to me that you currently have a, a bit of a concentration and energy though I was going through your, your historical 13 FS and it looks like that is more of a growing into a concentration than than something that you necessarily

put on at cost, if I can say. That you have that exactly right, Bill. We had an amount of energy exposure coming into the COVID meltdown. But in that COVID meltdown of a three years ago, I guess, you know, oil prices went negative and security prices on energies, everything in the energy complex became completely divorced from

long term values. And so we ended up buying four or five really, really low priced instruments that we were confident were were the right place in the capital structure. So you'd come out the other side and I don't think we put 8% of the portfolio into those four or five names because they were so volatile and had so much upside. And those names have just, they've gone up, you know, 5X to TO25X. And so, yeah, our challenge now is scaling those back.

Yeah, I was. So I, I was just going to ask that how do you think about sizing, you know, sizing a position like that in the beginning and then how do you think about scaling them back? Like how do you think about the

portfolio management when a position grows that large just sort of conceptually? Well, you know, we talk about starting our position sizing at 3 to 6% and that's a central place for us. But essential investment for us is pretty stably valued. You know, some of our core investments include Comcast and Goldman Sachs. You know, these these names can earn us great rates of return, but they're stable and solid names.

When things get really dislocated, we'll tend to buy more names in a space at smaller percentages, really thinking of them as almost one investment or two investments. So a year ago this month, I guess or last month when the retail, the regional banks, you know, and all their securities started collapsing. I think we bought four or five different instruments of three or four different companies preferred stocks and debt that we're at anywhere from 35 to to

60% of the face amount. Each one of them. We, we did the analysis that the underlying these businesses were going to be solvent and, and well capitalized. And we thought there was a, a disconnect in the market, but we ended up buying, you know, four or five individual investments in this and we size them all the individual one small, but the aggregate was, was a very heavy weighting for an investment.

And so when two or three investments are really, really similar, we think of them as not two or three investments, but maybe 1 1/2 or two investments and size them accordingly. And then when they get big, look, our, our you know, we sell things when we think they're fairly priced.

And even though these and, and so some of our energy investments we've sold and no longer own, but some of them are only expensive relative to where they used to trade, not relative to what their underlying assets are worth.

And so those, you know, we scaled them back and we have two different portfolios. We, we manage two composites, the capital appreciation one and a more aggressive portfolio. The more aggressive portfolio, we'll let names be 1520% of the equity of the portfolio in the capital appreciation, more conservative portfolio. If something gets up to be mid teen digit percentages, we're scaling it back.

Said differently, the the capital appreciation might be a stay rich idea where the more aggressive one may enable you to compound a little bit quicker. That's right. And if you look at our website, yeah, you'll see the marketing material for both of them, They're both doing very well over extended periods. I think that capital appreciation has basically kept up with the S&P since 1996, which for a value guy is probably much, much, much better

than average. The the more aggressive portfolio has done basically two times the S and P / 20 years. So why is that? I guess I obviously you're letting your winners run more, but do you think that as far as compounding at high rates goes, is there something about letting winners run that is inherently sort of superior from a compounding standpoint, do you think? No, not necessarily, Bill. And I'm not sure that's the biggest driver of the difference in performance.

I think the biggest driver in the difference of performance is how aggressive we get during periods of dislocation when things become really cheap on the capital appreciation composite. You know, or if our rule is we build positions of three to 5% and if it goes down in price, we don't let the market tell us we were wrong and sell it. But we also don't add to the position.

So we have, you know, plenty of times names have gone down by 80% in price and a 4% stake has become a .8% stake in the capital appreciation deposit. You know, if, if it turns out our thesis was right in the 1st place and it goes up five fold to our cost and then exceeds that and double S again, we'll have it that a 10% gain in the portfolio from a 1% position.

And that's good in the cap in, in the more aggressive portfolio, we will add to names when they go down and we will get more aggressive in periods of uncertainty and, and, and turmoil. That's the, the biggest driver I think of, of the relative performance and, and the, and the more aggressive portfolio also has a shorting component to it. So, so we have 2030% of the portfolio short and we end up with more than $1.00 for dollar

long. So we, we, we look for a central place to be 125% long and 25% short in the more aggressive portfolio. And so those two things, the portfolio rules mostly on adding and the the leverage and the ability to get short, which takes gives you an ability to get more aggressive when things go down in price. Because in at the bottom of market declines, we have historically had very, very trivial short exposure.

So we're functionally getting more long, but not having any short and then and then we've had more torque on the upside as a result. That makes sense. You know, a younger me would say, well, why don't you just add to the capital of like, why aren't you allowing yourself to add in the capital appreciation portfolio? The older me thinks I know the answer, but I'm going to ask you

the question and let you answer. But I respect risk management a lot more than I used to. So I I will toss it to you. You know, I don't know if you could tell by the look at things here, but yes, I've been at this long enough to know the single most important thing is to stay at the table and not to get wiped out. And look, our, our, our aggressive portfolio has been around for 25 years and hasn't

gotten wiped out. But the, the capital appreciation portfolio is designed for someone's nest egg assets and a large part of someone's, you know, investable assets. And so it just has more conservative rules. And if we put 5% of someone's portfolio at risk in a name and it goes down 2% of the portfolio, it's designed to be defend the, the conservatively

structured portfolio. So we don't just add to it and add to it. And look, ultimately investing is tricky and you're going to get some things wrong. And you know, you can't build a 2530 stock portfolio and have it invested over time and time and time and not have some things ultimately be wrong soup to nuts and, and get it wrong. And you know, we're not willing to burn down the portfolios because for any anyone name. I have a lot of respect for

that. I think that there's, John Hampton Once Upon a time wrote a piece about not doubling down into losers and whatnot. And people can go read that. But that was, it's funny. I think that, you know, they're the younger me used to say, well, if it's down 50% and you're right, why in the world would you not buy more or, or said differently, if you're not wrong or you don't think you're wrong, why would you not buy more?

Older me realizes that maybe you were wrong even though you didn't realize you were wrong, right? That's right. So, you know, you do want to, you want to exercise caution when you do it. We do it in an assertive portfolio and we don't do it in another portfolio because they're both good strategies for different investors and different and different risk tolerances. And and, you know, the the more aggressive strategy has had higher returns, but it's been

more aggressive, yeah. Interesting, I really like how you said that that makes like perfect intuitive sense to me. So you know, it's it's funny, like I learn from reading Buffett, right. I have a lot more to learn probably by rereading Buffett and and and thinking more about it. But you know, I hear one of the quotes that he says, you know, as I'd have 50% my best idea. And I think about like how I used to interpret that and how I

do now. And boy, is it changed with age and, and my definition of what my best idea would have to look like in order to have that kind of a position. It would. I haven't seen one in my life, I don't think. You know, the notion of having 50% of an investment portfolio and, and a name I, you know, I, I, I, I don't think that that's the good portfolio structure.

Yeah, I don't have the stomach for it, but I, I think sometimes value people because of, and I, and I don't mean to lay the blame at, at certainly not at the church's feet, but because of of Monger and Buffett. I think there's some sort of pride in concentration. And, and I don't necessarily when I was young, I felt it. And maybe I'm just internalizing, but I, I think like I said, as I've grown

older, I've got children now. Like I'm not trying to take a hero shot at something and blow it up. So if you're if you had a vehicle that you're saying is for the people's nest egg, I fully respect rules around it. Right. And and look, our job is to build a diversified portfolio, not bet the portfolio on one or two ideas. Yeah, yeah.

Were there, did you see something in your younger years that that made you sort of lean this way from building a firm perspective, or was this something that kind of inherently made sense to you? When I started out investing, I tried to make sense of, you know, what worked as an investment and what didn't work as an investment. And it was really challenging because there didn't seem to be a lot of correlation between any particular facts and the near

term movement of any security. And you know, people were judging success based on three and six months. And you know, when when you're starting out, two years is an awfully long time. It's hard to know that things are going to work out well over two or three years. So what I was able to do is find a bunch of securities that I was pretty sure you'd get the rate of return that they were offering because they were able to pay their bills.

So I started out as a high yield bond analyst and my my first investment was a Pan Am equipment trust certificate. There was a plan in the world that had a $30 million value, 18,000,000 of the bonds outstanding trading at a discount. I was paying $15 million to get a $30 million airplane, OK, I'm paying $30 million, the $15 million, the planes worth $30 million and I'm getting that's an 11 1/2% coupon training at whatever price, a discount to

par. And then I like, OK, this, this company has these bonds outstanding. This is the cash flow they're generating. It's super stable. It's going to grow at these rates. This is the free cash flow. This is how they're going to deliver over time, OK? And this is the rate of return you're getting. The business can sustain that valuation.

And then I was lucky enough to have the fellow running the risk arbitrage research effort leave the firm and ultimately help Leon Cooperman build Omega Advisors. And when Charlie left, I took over his mandate to do research on risk arbitrage names. And he had a list of about 15 securities that were in some state of either being bought out

or going through reorgs. And in each of them, the the modus operandi was that something was going to happen where an economic participant was going to take control over these entities and you were going to get some rate of return. And so you had to decide whether that buy was a good buy for the buyer and if so, how big a spread you were going to get and what your rate of return was going to be. So it was all about saying

asking yourself what price will a rational buyer pay for this asset? And, and it was a really diversified group of assets. So it gave me a quick learning curve on valuing a bunch of different things, from bankruptcies to financial companies to supermarkets to all sorts of stuff. Yeah, that's neat. Now that you've been doing what you've been doing for a while, have you figured out a little bit better what, what makes an investment work, quote UN quote, from those that don't?

I mean, are there any commonalities that you've seen that you, you know, somebody pitches you something and you're like, I don't know about that. I've seen enough of those not work. It's good to always keep an open mind. The thing that I do super consistently is, all right, like, what? What do these pairs have and why do I think that's worth more than I'm paying? We bought Rivian this week. Oh yeah, yeah, yeah. You know what they have? Well, they got a hell of a brand.

They have a hell of a brand and they've got a truck that is put together. My understanding is that the components in that truck are like I think they have McLaren brakes in that. That's that's the rumor that I heard. So I think that the the probability that it's a solid, solid product is quite high. Outside of that, I don't know where where you're going with it. Well. Right. They have a great brand. They've spent a lot of money building the infrastructure to

get a product to market. They have a very solid anchor client in Amazon. And they have $9 billion worth of cash and it's an $8 billion equity valuation with a couple of billion dollars worth of debt. So you're getting the $10 billion that they've invested in building their business and the share price and cash money. And yeah, the product I think is great. And I think it's, frankly, I think it's as as good a vehicle

as you could buy. And I hope I'm right 'cause I just bought 1. I know a couple people that have them that rave. And and look, I think electric E VS are the future and I think that there will only be a couple of stand alone EV companies. I think you know, having a startup EV company is really, really hard.

I think that Tesla will probably be around, but I think the other EV companies, you know, one of them went bankrupt in the process of spinning out of control Right now, Fisker and they're not it. It's highly unlikely that they have a going business that there's a Fisker out there a year from now. And that means that anyone who bought that car is going to have a doozy of a time finding service, which the knock on is going to be to any other stand

alone EV maker. You know it's going to scare buyers. Yeah, you would think. The notion they may not be around, I think Rivian will be around because they have that big pile of cash and because they have Amazon as one of their bigger shareholders and a core client of theirs who is committed to buying a certain number of trucks over an extended period. So I think they'll be around and I think their product is great and I'm getting it at cash on the balance sheet basically.

Yeah, with so, so the market's telling you they're gonna burn it and burn the cash and the entity is not economic, right. And that becomes what where you focus on. Is this a true implied assumption that the market's telling me that? That that's right, that's right. And they look, that's, that's a very legitimate perspective. And there are other EV companies that I don't think will make it. And so, yeah, cash or not cash and not enough cash and not happening. And so the devil is in the

details for sure. And, and it's their judgments and, and questions involved. But the soft details around Rivian are pretty good. The Amazon backing them is an idea. They, to my mind, have as good a product as is out there. And yeah, I mean, I say that as a consumer now, you know, I, I felt confident buying their truck because they seem to spend 150 grand on building it and I don't get 100 grand. That's what I was gonna go.

But now this is where the business concern comes from, right though is that if you were to disassemble the truck, my understanding is that the cost that they have in the truck exceeds the retail price. Well, that's right. And that makes it a good buy for me, yeah. You're correct. But I don't think that math stays true over time. You know, this company started producing cars, trucks two years ago, three years ago. You know, they're ramping up production.

They're doing. Yeah, the run rate is 50,000 trucks a year, 5760 thousand trucks a year. You know, that's not scale. And the prices of the inputs that they contracted for early days were high numbers. But I'm pretty sure that electric vehicles are fundamentally cheaper to build than internal combustion vehicles. That over time, the simplicity of the electric motor compared to an internal combustion motor is just really, really different.

And the battery technology, you know, at today's level is a viable technology. And so the only input, the only pricing driver on the battery is the commodities that go into it. And those commodities have been volatile in price, but they're not inherently rare commodities. So and and some lithium companies obviously have had huge margins and the negative

margins are blah, blah. But the battery prices, because they're driven by commodities that are becoming that are highly likely to become cheaper, those prices go down. So the EV vehicle will be the the cheaper vehicle to build for this, for apples to apples and, and, and people who build them will probably earn a positive rate of return on them if you have a brand value and efficient manufacturing operations. And I think these guys have those things.

So you know, when, when the the equity was valued at $30 billion, we're like, yeah, well, maybe that'll work, but seems like a lot of risk in it when it's at $9 a share and $9 billion, right? And a half billion dollars and there's 9 1/2 billion dollars of cash. The risk reward is just really different and and all the soft facts around it are really positive. I think they're the best management going. I think it's a really, really well billed car.

I think the brand management has been spot on. You know, Mr. Bezos has sort of done a good job building businesses over time. I'm happy to have him in yeah, be on his side of the table. When I look at Amazon, it's a it's not a cheap stock. When I look at Rivian, it's a very cheap stock. You said like it's important to keep an open mind here. You know, I'm looking at your portfolio. I was like, I got to figure out energy questions. Now we're discussing Rivian.

Blows my mind. You know, one of the things we do really well is build a very diversified portfolio and it's not diversified with 200 names that are all the same, but it's diversified with 25 investments that are all really different. What's the same always is the underlying assessment like, So what do they have and what's it worth? And yeah, who do they owe and how much? And what am I paying to get at when I buy this instrument? Yeah, I love it. I love it.

What do you think about Comcast? I'm somebody who does follow cable reasonably well. It has been punch after punch,

although Comcast has weathered the storm quite a bit better, in part, I think because of the parks business and their leverage is quite a bit less aggressive than some of the peers. So I think they've and and arguably their operations are better. But curious when, when you see maybe underlying signs that things are going well, but the stocks, whether it's because the sector or whatever remain weak. How do you think through that?

I, I believe it patience, you know, time goes by and you don't know when like the truth will out, whether it's this month or three years from now. I think what's good about Comcast is they generate huge amounts of cash flow. Their businesses are for the most like, you know, they're in transition, but they're not in decline. The management's been better than any other management.

I think that's comparable and that's evidenced by, you know, where they are as, as in terms of scale and scope in that space. They're they're big and competitive and strong. The underlying assets you could easily make a case of worth 50% more than today's share price, if not more if you start doing your sum of the parts, etcetera. The stock's been dead money for two lifetimes. It has felt like that. It's been dead money for two

lifetimes. But you know, look, it's one stock out of 25 that's been dead money. You know, when will it double? Maybe in the next 12 months, maybe in, in, in two years, the values are creating day in and day outlook. They're they're, they're generating value from owning high quality assets. And so you know, if, if that value is growing by 10% a year or 7% a year or 14% a year, something like that. And so the longer it stays at this price, the cheaper it gets.

And you know, we've seen that happen before and that and then you get a catch up and the catch up is profound and you just never know when it's going to happen. But you want to be in a bunch of different things so that any one of them could be doing that on a given day or month. And, and OK, so you know, we've talked about a, a few different concepts. I would I would characterize Comcast as a fairly stable earnings stream today.

I would say energy generally certainly looks a lot better post 2020 than it did pre 2020. And maybe that sticks, maybe it

doesn't. You know, the history of commodity companies makes me a little bit skittish. And then you've got Rivian where the earnings stream is, is on the com. Do you manage those types of investments differently? Do you compare, you know, do you have a model that's sort of the flight path and you're comparing results to the model? Like how do you manage thinking in so many different ways? You know, part of it is that after we have a thesis and an understanding, we stop thinking

about it too much. I mean, we'll revisit the numbers and we'll look at it again and ask ourselves if we're wrong. But yeah, I haven't spent that much time thinking about Comcast over the past couple of years. A little bit here and there. But I'll, you know, I think I know what the driver, the drivers are and I, I think out monitoring them and I think I'm waiting for, for that to play out. And then we own air Lease, which, you know, owns a fleet of aircraft and leases them out.

And the planes are worth probably 50 to 70% more than the share price of then the enterprise value, which means a lot more to the equity because there's torque there. And so, you know, the work of this job is looking for new ideas and understanding where the opportunities are being

created today. And because we tend to hold things for in a year, two years, three years, four years, you could spend a lot of time looking at different things and and have really diversified exposure because the the investments tend to be long lived. I'm more asking this is I'd love to just pick your brain and learn when, when do you think about revisiting a thesis, right? Do you have sort of key metrics

that you're tracking? And if this is off base, then maybe I need to revisit like, because there's a fine line between over tinkering and then being like overly lazy, right? So I haven't quite figured that out. I I tend to tinker more than I should. Yeah, I hear what you're saying. There are times when I feel the most important thing we could do is sit on our hands and make

sure we don't touch anything. But when it comes to revisiting theses, it has to be really organic because, you know, any given measure has its flaws. You know, you revisit it when it goes down price by 20 percent, 30%. You know, if it's not going down in price but things are going wrong, you know, it's a really good time to get out of it. Probably just as important to be aware of exactly how the

investment is playing out. When it's stable in prices, when it's gone up or down, 'cause you know to get out without any damage. When you got it wrong, it's a beautiful. Place that's called luck and we can all pay more. Or paying attention. Or tinkering too much. Yeah, well, sometimes it works, sometimes it doesn't, right. Right.

But look, that's where, that's where, you know, some people execute well and others, you know, they have all the data, they just aren't, you know, don't pull the trigger at the right moment. Well, I know I've been a pretty good seller. The holding part I could work on, but I don't know, maybe I'm not sure that that says I'm a good investor at all, but I'm always working on it, trying to get better. So over time, hopefully.

Well, that's right. And it's, you know, the nice thing is it's a thinking man's business. Yeah, just can't overthink it, you know? But but in our background, you had mentioned that you had a view that we were sort of approaching sort of AI guess you, you'd said an overextended bull market peak. You said we're likely to get there, but we're not there yet. And I'm curious to hear you riff on that and and talk about why you think that. Sure.

Well, you know, the, the, the simple reason why I think we'll get to a bull market cyclical peak that's overextended is because I, I think we, that market cycles exist and that we're in a market cycle and exuberant tops happened and I have happened in the past and I think it'll happen again. Why do I think it's, it's three to five years in front of us, which is a yeah through two years, six years, eight years.

Well, because these cycles tend to be long lived and you know the the market through was let me look at the calendar 2024, 2008 we're a number of years into an advance. So you would not, you would not reset on the COVID pull back.

No, no, absolutely not. You know, if if you look at the market advance from 1978 to 2000, which was 22 years, you know, you had the market break of 87 and then the recession of 91. Those two things, you know, gave you corrections over a 20 year period and and big ones, you know, 30 ish percent whatever. I see COVID as more of that sort of phenomenon within a longer term advance. And obviously we're at higher levels than we were before COVID. So the advance is intact.

Now then the question is OK, like so why do I think that this is not the top right And the answer there is because the there's froth in this market in certain places and areas. But the amount of froth relative to global GDP in 1999, two thousand is just orders of magnitude different than the

amount of froth today. And I'm not a quant, I'm not going to prove that to you mathematically, but I was there and I saw the numbers in terms of total market caps of very, very small businesses and they were really big relative to US and global GDP, not relative to a $2 billion revenue based business. And and so I don't think the level of extension today is anything like it was in 2000. And I and because I think there were cycles, I think we'll get

there. And I think there are a lot of, you know, sort of anecdotal pieces of data that suggest we're we're sort of on the way. What? What would those be? Well, you know, there's, there are exciting new technologies that are driving innovation in the year 2024. You know, I don't know where the blockchain goes, but in 1992 I didn't know where networking technology was going to go. It gave us the Internet five years later, whatever and it was happening.

AI obviously it is going to have a big impact on the world. The electrification of transportation is a major transformative phenomenon that's going to play out over 20-30 years. Those kinds of things. And and what's happening in medical technology is just

amazing right now. I mean, the, the pace of new things that are coming out of labs that are curing cancers and fixing obesity are just, it's just there's a lot of technological innovation happening and that tends to create, you know, a bit of a gold rush and we're investing. Plus a lot of stimulus. Plus a lot of stimulus. No, no lack of stimulus. In the next several years. We've adjusted to to higher interest rates.

So yeah, we might have a bump in the next six months, but I don't see why we wouldn't go to an exuberant peak. What's, what's the argument against that? That this is the top it it's not extended like other tops have been extended. That's just probably easy to demonstrate mathematically. Yeah. Well, so the other thought that you had that I I thought was very interesting was that the go. So the sentence that you wrote was go, go. Growth names bring you to the ultimate top.

Less exciting companies don't participate. The key is to buy true growth stocks trading at value prices,

which you had said earlier. If you simply buy cheap stocks, they will underperform into a major top. I was curious as to why you said that. Well, the cheap stock part, well, they get left behind for sure. You know, being an exuberant top, what's what people buy is what's fun. You know, people talk about stocks at cocktail parties. They talk about getting rich on this crazy new company. Yeah, the shoeshine boy gives you tips.

He doesn't give you a tip that, you know, Bank of America is at that at points the one and one and 1/4 times book and and and JP Morgan's at 1.7 times book. So he's like these guys are are going to have helicopters that are going to travel around the world. And so, yeah, it's and look, it's it's the gold rush stuff that gets everyone's attention. And yeah, other investments that are stayed and boring get.

Get left on the sidelines and you know, in 1999, two thousand value managers were just quitting that they had underperformed dismally. 2000 came and 2001 came. 2002 came and value managers didn't see the same declines as the growth guys. But you had to still have a portfolio to have had it mattered and an awful lot of people. And and what happens in those excited moments, I think is that people stop doing the boring stuff and switch into the exciting stuff.

And that's what makes it a bubble and that's what makes it a top. And and you know, you ask me like, why do I think we're not there yet? There are moments where there's a lot of invest where the public is interested in investing. But yeah, the, the degree to, of interest in investing today is not consistent with the shoe shine guy giving you stock tips. And and I think you'll get there because I believe in cycles. Yeah. Well, if you'd asked me in 20/22 was 2021 the top, I would have

said yeah, maybe. I would have said probably like 70% sure, but now I don't think that's necessarily true. You've seen a lot all these well, you've seen a lot of companies sort of pop whether Zoom or whatever, but the bull market runs on and you know, at least for at least for good quality companies and and the value factor is outperformed since 2020. So you know, there's a lot of there and there's still a lot of cheap stocks out there.

I think I may be wrong when I say that, but I believe that to be true. No, I think you're right. And and the the stocks that are richly priced or richly priced for very good reasons like Nvidia's a very, very expensive stock and probably it and it'll take 20 years for that company's business to grow into that market cap. But they're a really well positioned company that is doing a fantastic job and arguing that it's frothy a little, but not a

lot. And you look at the places where there are companies, you know, that are consequential market caps that are really, really frothy. Yeah, yeah, that's, that's part of the the, I guess the Mag 7 debate, for lack of a better term, that I find a little bit like makes me want to yawn is exactly what you're saying.

I mean, if you look at a lot of the, a lot of the Bag 7 at least you know, specifically Microsoft, Google, Facebook, Amazon, I mean just the sheer amount of compounding of wealth like true economic value that they have done is incredible. Global scale dominate important businesses disrupted the world. These are real. Like, you know, you could argue whether the PE is right or wrong, but you can't argue that that that they are not exceedingly valuable businesses.

Yeah, Well, I I think about it sometimes, like baseball, eventually you're the team that overpays Albert Pujols. But you know, the teams that that rode that wave up it, it carried them for a very long, well, one team we carried the Cardinals for a very long time, right, so. I'm going to agree with you, I have no idea what you're talking about. Well, he's he was very, very good, very good. But but eventually somebody. Signs players. Paying. Oh, I'm sorry, off of professional sports.

I'm sorry, I, I, I saw a little video the other day. It was like game six and it was and no one was in the stands and somebody just said like this about right. But hopefully, hopefully their their fortunes turn at some point. Interesting. So what do you get excited to come to work to do? I mean, are you somebody that just like loves learning and

then the investment ideas flow from that or do you, I mean, do you enjoy being the entrepreneurial side of of building the business like what gets you going at this stage? I I love finding great ideas that I find really, really compelling. I mean, that's to me the best when you trip across something and you first see it, you're like, yeah, whatever. And then when you turn it over and turn it over and turn it over and be like, wow, this is

great. Like I don't know if I'll make money for sure, but it's highly, highly likely. Yeah, that's totally motivates me, finding those, those, those good opportunities and getting confidence that they are good opportunities, long or short. Yeah. And I like it when they work out, it's much more pleasant. Indeed it is for everyone involved. That's right. I, I, I mean, I guess the short side less for everyone involved, but I would argue it's good for the market to have shorts be right.

You know, look, sometimes companies get too frothy and they're they're scams and shams and it's better that they get identified sooner rather than later. And you know you're only making money on a short if something's wrong. And so you know, identifying something wrong sooner is better than later.

In your experience, does shorting a company that has things going in the correct direction but is frothy, is that that that strikes me as a much more scary proposition than looking for the ones that are truly have like deterioration under the hood and sort of pressing those? Yeah, To, you know, I, I think of it as the, the inverse of a

value trap. You know, when you have a business that is declining in value and declining in value and declining in value, you know, you might buy it cheap, but you're going to sell it cheaper. You know, shorting a great company whose business is growing, the underlying value is growing just because it's too expensive is, is a very foolish idea for two reasons. One, because ultimately the tide is against you, right, because they're growing in value.

And two, the fact that you figured out that's overpriced, so has everybody else. Like everyone knows it's expensive, but expensive stocks can get much more expensive. And they're expensive in part because they get culty and gets, they generate an investor base that that have passion around them and those go to high prices. So, you know, you the upsides risk is not that it, you know, goes to to 50% over value, but that goes to 4X or 5X over

value. And you know, if you're starting at 3X overvalued and you're growing a 5X overvalued, it's not a good place to be, especially when the value is growing over time. And look, we don't always get it right when we look for those things. And sometimes we think business conditions are deteriorating and they're not really, but, but our effort is to find things that can't last and, and investors are sure they will last. Yeah. Who do you look for an analyst?

Do you like to hire somebody young and train them up, or do you prefer to hire somebody that's got some experience? My my move has always been to hire novices and let them grow into learning the process. I have a mindset and and a strategy of how we look at investments and I'm not really looking for someone to come in with a different strategy that that I learned from. I I strongly prefer to to have people fresh to the business to grow into responsible rules.

Yeah, that makes sense, especially given I think your path in. Yeah. Yeah, cool. Well, I got to tell you, man, I've enjoyed this. This has been I, I can't, I racked my brain. I said, all right, how am I going to talk to him about energy? Because it's not something that I really know about. And it's, it's stuff that other people really know about. And here we are. We talked about everything but energy except for that you, you accumulated it when it was very

asymmetric to the upside. And and that makes a lot of sense to me. That's right. And and look, we have some energy names. We're short today because the valuations don't make sense relative to the underlying assets and and you know, we have a lot of long exposure which is going to go down if energy prices go down South. We're happy to have some short exposure so that if energy prices do go down, we make money

on those. Yeah. The, the thing that that I get hung up on is just the and, and it's probably a mental block and maybe it's changed, but it's an industry that tends to not have the best capital allocation histories. But maybe, maybe that's maybe that's an assumption. No, you're right and you're wrong. You're very right. For the period from 2000 until 2000, whatever 2016, you know, not so much for the path or whatever it was 2000.

It's been a while since energy companies have been profligate. There was a long time that energy companies were profligate and it part of that was around the Shell innovation, you know, that they figured out how to get energy out of formations that we knew was there, just couldn't come out. Then they figured it out and it drove a lot of investment and they got exuberant and too much capital went in and returns went

negative for a really long time. You know, by the time we really built our exposure in 2021, I guess we've got a long time of under investing in energy and everything was idle. You know, all the offshore rigs were idle, all the land rigs were idle and it had been a long slog down. And you know you talked about, you made a comment about commodities going down in price over time.

And I was on ATV program in 2000 or so and I was on with Jimmy Rodgers, who started with with George Soros in the 1960s, one of the best investors going for a long, long time and investing powerhouse. And it's like, yeah, it's, you know, buying commodities. They've underperformed for a long time. Like, come on, they haven't gone anywhere in 20 years. Look at the commodity index and like, it has a base value from 19, whatever. And it was 100. And by the way, The thing is 105

now. So, you know, I don't have to be that good of the math to see they've gone nowhere. And he's like, yeah, but these are long cycles. And, you know, the next eight years, man, was he right and was I wrong. So yeah, sometimes they're just long cycles. And sometimes. And look, energy has been a good investment, you know, over many, many long periods of time. And it went for an extended period where you're right, it was terrible.

But that's one of the important things to think about in terms of what you are willing to look at and what you're none. Because in 2000 I was like, yeah, commodities. And I was like, well, wait a minute. Turns out that that that was wrong for an extended period, so. Yeah, no, I, I, I'm, I'm trying, right? I, I'm, I'm open, I've done work on, on energy, I've been surprised at some of the results. And the one I'm kind of kicking myself for is I should have bought Valero a couple months

ago, but alas, I did not. And we'll see. I've I've done it long enough to know that there's a good chance the shares come down to where I didn't buy them and. Maybe you'll see if and you won't buy them again. That's probably true. You're not wrong. So, all right, cool. Well, thank you so much for your time. I appreciate it. I hope it was enjoyable for you. Yeah, you've made it really, really pleasant. Thank you very much for spending the hour with. Me.

All right. Well, take care of yourself. You too. Thanks.