Elliot Turner Returns

Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode features Elliott Turner of RGA Investment Advisors. Elliott is a repeat guest. This is his second appearance. You may know him from the Manual of Ideas podcast. You may know him from some of his investment commentary. I know him from a connection that I made at Manual of Ideas a number of years ago and Elliot and I have become friends I'd

like to say. And I really enjoy speaking with him and I think that he brought a good perspective to the show in this episode and I hope you all enjoy it. An additional disclosure for this episode, RGA Investment advisors may own positions in the companies discussed. Past performance is not indicative of future results. Investing involves risks, including the loss of capital.

Please remember that the securities identified and described throughout this podcast do not represent all of the securities RGA Investment advisors purchase, sold, or recommended for client accounts. As a listener, you should not assume that an investment in the securities identified was or will be profitable. As always, nothing in the show is financial advice. Please consult an investment advisor before making investment decisions. Everything in this show is for entertainment purposes and

educational purposes. And do your own due diligence. All right, ladies and gentlemen, I am happy to be rejoined by Elliot Turner. Things have changed quite a bit since our first conversation. A couple things have happened in the world, but we have seen each other in the flesh and IRL as the kids say and you know, been nice to keep in touch. Thanks for coming back on the show. Yeah, Thank you for having me. That's definitely one of the

better changes, right? Getting together in Manhattan at awesome events and it's good to have this part of our life back. Definitely. You know, some of the things that have changed since we last spoke are not for the better in terms of like my appreciation for my own ability to move through challenging market environments. But you know, we all live and learn along the way. Definitely part of the roller coaster that is life. Well, experience is what you get when you don't get what you

want. Or something like that. Exactly. And, you know, I'd always appreciated the notion that we can learn from other people's experience to try to apply it well to ourselves. But I do think, you know, given what's transpired these last few years, I don't think many people have experience that was directly relatable to what we'd all gone through. Yes, that was a bizarre time. It was. It was our time to do it on the Internet, I suppose.

Back in the old days, as my kids like to say, they asked me if I

was born in the old days. Define the old days. But anyway, I guess they had message boards and stuff in the.com bubble, but the social media element was kind of interesting. I don't know, man, what? What? What have some of your takeaways been from all that? Yeah.

I mean, you know, I think one of the biggest problems that I had is too much of the portfolio was trading exactly the same and it all became one thing and I'd recognize that, but I didn't act on it and it was something I thought about. I think it's easier to kind of act on when it's to the downside, like when markets are all getting hit and you're like, well, you know, I know my stuff's OK and I'm going to ride

out the storm. It's a lot harder to be conscious of like what you need to do to pair things back and sell things down. And I think the tax man, we've by and large invest for taxable investors, so not pensions and endowments that have the benefit of not having to think about after tax returns. And I'd started thinking a little too much about how I could maneuver around minimizing

tax over the course of time. And I think markets do what they tend to do, which is they take away your flexibility like they take away your best laid plans. You can't really think in those terms if it's something that you feel you need to do and do it. And this was the most meaningful drawdown I've experienced. And it's one thing to say you're going to hold some of these positions through drawdown. It's another thing to do it when it's like several positions all acting the same and pulling

everything down. When it's one position drawing down heavily, markets down and the rest of your book is kind of like here and there, you know some plus, some minus versus the market. That's a little easier than when it's like a lot of things at once acting exactly the same and are pretty tough. So it makes it pretty challenging and puts a different kind of stress on you

personally. And I had AI had a take myself away from the situation, like force myself to step back a little bit and view me and what I was looking at in the markets from afar as opposed to from within. And I think that really helped and got me to a much better place. One of the other ones that I've really honed in on and I think we'll probably talk about it as we get into some of the more substance substantive rather

than philosophical stuff. Resiliency, like I underrated how important resiliency was from a portfolio, but also from a business perspective. I think one of the areas where I'd really witnessed this is certain small companies in particular resiliency is just a lot more challenging than it is for really large, really diverse businesses. And I think it happens on every dimension from multiple revenue streams to multiple sources to operating in multiple

geographies. And there's no one thing that could actually take you down when you're really big and really diverse to the same degree that if you're fairly small and you're reliant on one supplier, for example, or one factory, when that particular geography that your supplier is in experiences a different kind of problem than where you're in market that you're actually selling to might have.

And that kind of resiliency created challenges for businesses where they had to focus on making things work as opposed to executing on their actual business plans. That sort of challenge has real consequences. And I was a little too willing to give certain companies. I give them the benefit of the doubt insofar as it was absolutely one of the hardest environments to make decisions

within. I don't necessarily fault people for having made bad decisions, for having assumed some degree of demand that came during COVID would stay to a greater extent than had happened. But it's also impossible not to like key in on the fact that these companies, the small ones in particular, because they had a focus on making things work as opposed to making their business as good as it could possibly be.

It's a distraction and it's something that changes the the course of the business and and what they're able to do going forward. And so it's not about whether I'm willing to give them leniency or not. It's about being realistic and acknowledging that when

challenges emerge. You got to me at least from AP Ms. perspective stress test, how many companies might face significant like they might be fine on top line but the margin pressures that they'd experienced can meaningfully change my expectations going forward, the market's expectations and what they're able to to create going forward.

So that's been that, that's been one of the ones that I one of the high level questions I've asked myself through this all is it's actually more damaging to learn the wrong lessons than to take no lessons out of a period at all. So I've asked myself to what degree is is what we just witnessed something that will never happen again that is so atypical where the lessons may be wrong ones.

But I do think you know the ones that I'm talking about here, I I really think are the right ones For me personally. I don't know if everyone would share the same ones but for me I'm I'm very confident they're the right ones. There's someones that I've mused about along the way that I don't necessarily think as I've more fully reflected on things and have a little further removal from the heat of the moment.

Like I don't necessarily think they were the right lessons, but time kind of helps give perspective. So I've been trying to take advantage of that. How did you remove yourself a little bit and step back? Yeah, I mean, part of that was I wasn't giving myself any breaks. Like I wasn't letting myself get away from first thing I'd do in

the morning was check quotes. I'd start reading like the news on specific things even when there was nothing, and trying to find explanations for why certain things were happening in terms of price, action. And I also was being like really hard on myself. Like this is the time to work, work, work. And I actually had to one.

I created a rule where I don't even look at my phone until I get downstairs and my kids are taken care of in the beginning of the day, so I have some distance before I actually start looking at things. So. Are you are you suggesting that this morning when I woke up at 4:00 AM and looked at my phone and then couldn't go back to bed, that that was maybe not the right thing to do? Yeah, yeah, that's the That's a tough thing to do, right. I'm. Pretty sure I got a 63 on my

sleep score. That's not terrible. No, it's not failing, but it's not great. Yeah, I had a hockey game last night. I got a 12 on my sleep score. It was not good. Not good. My preparedness is kind of on par with the sleep score. Good as is mine, so this should be a fantastic podcast. Yeah, exactly. I see you got the coffee. Rollings right the the 12:30 coffee. I needed it. Yeah, yeah, I hear ya. I I stopped playing some of my hockey games because I'm like, I need to work.

I need to be more focused. And actually, I thought that was a really bad thing. Yeah, in retrospect, probably got to take care of the body first. Yeah, yeah. So that was one of the commitments I made, right? I was like, when this bear market ends, I'm going to be in the best shape of my life. And I did start working out a lot more.

And you know, every day I'd sweat, I'd feel more connected to myself and to the world around me. And I thought that was one of the most effective kind of self help courses I'd taken along the way. And yeah, I'd, I'd actually encourage everyone to do that. And I definitely made myself spend more time with the family where I totally not look at my phone because I'd find myself stuck in multiple worlds. And I think part of that was a function of COVID, because my wife and I both work.

We had our kids at home during a good chunk of COVID, and I didn't really have good separation between when I was parenting, when I was having leisure time and when I was working like everything blurred together and creating more distinct silos for each I think was super helpful. But I'd totally recommend you adopt the Don't look at the phone until like plenty of life is underway in the morning, and then everything feels a lot better and it's less

reactionary. And I find also that you know there will be days where you wake up and and you're not pleased with certain things that you see in your inbox or wherever else. And it's nice to have had some lighter moments before you actually see that stuff. And I do feel you're able to deal with it better and with a clearer mind when you don't wake up with whatever negative is out there as your very first thought.

Yeah, well, Vitali would say wake up and write, you know, that's his, That's his version, I think, of getting away and getting in his head. And I I think that's whatever it is. I think getting some space between when you start to react to the world outside and when you're actually like driving the world that you want to be is probably a pretty good way to start the day. Yeah, yeah. I wish I could get myself to get

up and write. I don't remember my dreams well enough and definitely would be like a good exercise. And then the kids do wake up and it's a little too chaotic. So writing isn't the easiest, but it's in in it's good to embrace the chaos of the kids. Waking up before I deal with any even like positive stuff is great. Like, I love waking up with good news too. I I don't know why I'm honing in on the negative like. I do this giving it some long look.

It was a very interesting time. I certainly had. I mean, the cannabis stocks that I owned were objectively a bubble. They are objectively destroyed. It has not been a very fun experience. I think I made a number of errors entering something like that. I think there's a lot of areas of the market that were like that.

Thankfully, no catastrophic mistakes, but it's an interesting time to reflect on that period because I think that it is objectively true that valuations were very, very high. I also think you can go back and check the tape that at least like, that's the nice thing about doing pods for me. I can go back and check what I said a lot of the time. I felt back then, yes, I could sell what I own, but like, what am I going to do with this money, right?

It's not as if there's like a ton of real estate wasn't super cheap, other stocks weren't super cheap. You can go to cash, you can pay the taxes and you can go to cash. Historically, I don't think market timing has turned out very well if you have a long term time horizon. And maybe it was one of those times that was so objectively obvious that it was truly a bubble. I think it there's certainly

were bubbly spots, but I also can't help but think that a lot of the people that are emphatic about that it was a bubble, seemed to see 10 out of everyone bubbles, right? So I would argue some of the current valuations are as confusing to me today as they were back then and it probably just means I don't have the right mental model to understand them rather than writing it off as that's a bubble.

What I'm trying to do this time around is just a hyper focused on what I think I know and the other recent underperformance has been super fun to live through. But you know, whatever, hopefully, hopefully it changes and if it doesn't then I can always change my ways. Yeah, I think you phrased that really well, this whole idea like it, it probably was not everything as a bubble, but like

these pockets distinctly were. But I think part of the problem, one of the things maybe this this was a lesson, I don't know if it's an enduring one, but during that period I noticed a lot of people turn to just this hyper focus on 2nd derivative. And it started with the earliest months of the COVID crash when you're like looking for any pocket of anything turning upwards. And then it kind of continued as things kept getting better. They kept getting better at an

accelerating rate. But once a second derivative turned negative, then everything looked worse. You know, people talk about it in terms of comps and lapping tough comps and it started looking more challenging for some of the businesses that did really well and easier for some of the businesses that were most hurt. But I think a lot of this chasing the 2nd derivative has led to so much momentum chasing in markets.

And I think it's part of why like today, I don't know, if you ask me like are things really expensive? I feel like, yeah, there are absolutely pockets where things are really expensive, but there are also some very large park pockets where things are insanely cheap, like relatively cheap, cheap on an absolute level. And there are some really, really compelling opportunities that are lost in the muck. And I know you know it.

Mario Sabelli's been a a mentor of mine and he's talked probably a little early, but talked a lot about how this has some resemblances to 99 two thousand where a lot of people talk about it as the.com bubble. But there was also a large cap bubble. Stocks like GE and Coke traded at insane valuations and everything else that wasn't part of the zeitgeist wasn't one of these large caps that that could do no wrong. ora.com was left behind.

Berkshire was one of those kinds of stocks at the time. I don't think. Not now. No, no, no, no. No, we'll we'll see how forward returns look. But I think some of them have been pulled forward in that one and Buffett's laid off the buybacks a tad. I think he might agree with me. Yeah, and Apple's gonna become a thorny problem if it keeps performing this week. Or or or maybe they're the 'cause right 'cause they definitely were selling some shares toward the end of last year.

I would be remiss to not hear Mario's name and at least bring up because any time I ask him about this, he's like, make sure that you remember that. I think that there's a chance that big tech can continue to outperform and and they have a lot of costs that they could take out and there's a lot of different ways that they could potentially win. So I don't want anybody to hear this and associate if big tech rips don't associate anything negative with him.

And if it doesn't, I said it or whatever, I don't know. But it's fun talking to him, man. He started to agitate for change is probably the best way I know how to say it. Yeah, a couple of headlines lately and he's helped me do some work behind the scenes in a couple places as well. I think the environment's really ripe for that. I've seen other young managers who are very focused on activism.

And I think there are like numerous reasons why now is the right time, ranging from just there were so many companies that came public in 2021 and had too much cash. Like some of those companies are really interesting to companies that use 2021 and the success they'd had at the time to increase their cost base and try to capture a growth opportunity that changed once we realized COVID changes weren't permanent but haven't pared back their expenses yet.

Like, those companies need discipline and they sometimes need the cover of an activist to get it done. They're like we want to make these changes, but it's really hard because you know, we promised this great culture to our employees who we can't do that without some kind of cover.

Like I still think I look back on meta in the Q 3/20/22 report and the stock got absolutely walloped because people had hoped coming into that they'd pull back on some spend and whatnot and and the stock got walloped because they didn't. And then a week and a half later, they're like, yeah, we're cutting all these expenses and cutting Cap X and everything started to suddenly turn right. That was the worst it got.

And I, I wonder if it took the cover of a really bad day in the market in order to say like, hey, look, you know, we have this letter from prominent investor Gerstner at Altimeter had had written his letter like, we need to do this not because we think it's the right thing to do, but because we have to do it. And I think that hasn't really trickled down to some smaller companies.

I I still think some smaller companies are stuck with the bloat that that stemmed from like misshaped COVID beliefs. So that that needs some activism. And then you know, there's a certain classic company that probably shouldn't even be public, that they're in public markets, but hey, they shouldn't be there. And so someone's got to stand up and and say it's time think about something different here. Yeah, yeah.

I say this often, but I look forward to like three to five years from now seeing what happens. I mean, to your point, Costco is like the best example of something that I've never. I've always said it's expensive. I've never, you know, I've always been wrong. But I I just at some point it seems like it should matter.

But it does matter. And the fact of the matter is if you're worried about inflation, they have a they can get through it. If you're worried about protecting real wealth, is a high probability that you can over time in an entity like that, you know, will you have to incur a drawdown? Maybe. Is it a get rich stock? Probably not. Does everything need to be won? No, right? I mean, I don't know. I kind of get it it. It bugs me that I haven't owned it, but I kind of get it.

Yeah, but you know, last year at this time, stocks like Hershey's and Coke were trading at basically their highest PES in over 20 years. Yeah, that's right. And now they're at nearing their lowest PS in 20 years, right? And this all happened with the backdrop of, yeah, they're resilient. They passed on costs. So top line growth looks nice, right? It was as high as it had been in a couple years talking about like the mid to borderline high single digits, but their volumes

actually turn negative. Yeah. And it's like, oh boy, like, is that a good thing or is that not like, to a degree, you know, what on the surface looks super resilient, actually has some cracks in it. In the long run, everything's a cigarette company. Yeah, yeah, singling out the sugar companies. Sugar's definitely being perceived as the new cigarettes by some people, but. Well, I just mean declining

volumes, pushing price. But so, all right, one thing I do want to talk to you and and it's kind of hard to go to wrong lessons. Maybe let's let's put a pin in, in lessons that you thought about but decided were wrong. Because I I think that right now is a good time to bring up an interesting idea that I've been doing a little bit of work on. And I'm very interested to hear your take on it because I know how much work you've done. But we're talking Coke.

We're talking areas of the market that are cheap. There's a beverage company out there that's not named Celsius. That's kind of interesting and I think you know where I'm going with this and I'd be curious to hear what you think of a a certain London listed beverage company that's known for its mixer quality. Yeah, Fever Tree drinks, right? You know, it's a fun product to diligence. And I you know, I've gotten to know this company pretty well

over the last few years. I bought my first shares a little too early, but it definitely is 1 where I I was thinking of Fever Tree in a lot of ways when I talked about resiliency. And kind of thought you were or maybe naked. Those are the two that I was thinking that maybe you were thinking. Of. Yeah. And they're more like they're more small caps. I could name where I really felt those effects. And they're even ones in the digital world, right?

These are very physical companies and they made specific or they had specific problems that stemmed directly from how challenging the supply chain at the time was. And I I I think one of the things that really intrigues me about Fever Tree in particular is they have created a market.

There was no such thing as a premium mixer until Fever Tree came along and they basically use that to build an annuity like business in the UK. They are the tonic to go with basically any kind of gin that's not low end and they have really unique position vis A vis the incumbents in the space, the Schweppes, Seagram's of the world where those guys can't really compete with a high end natural sourced ingredient,

right. There's real quinine in it as opposed to some artificial flavor that has been pursued to optimize margin for the last 30 years. And it's something where although the product is premium, it in and of itself is not a big ticket. So for just a couple dollars, which is admittedly more than you'd pay for, not premium for like a run-of-the-mill brand, you can make yourself feel a lot better.

I'd heard of this notion called the lipstick effect, where in recessions even people still spend on women still spend a lipstick because it's something that makes them feel good, even if if it's a little expensive. You don't cut back on that sort of thing. And actually I've seen now that we've had a period of trade down in spirits which is happening in the US where you know inflation and I I think aggressive price action from some of these companies push things a little

too far. You are seeing trade down in spirit brands, but you're not seeing it in mixer. So Fever tree's doing really well. But back to like where the opportunity stems from, Fever Tree was a 50% gross margin business with 30% operating margins before COVID. Yeah, And they went to a gross margin consistent with their operating margin from like. So they went down to a 30% gross margin and a single digit operating margin in the past year.

And what happened is everything that could go wrong went wrong for them on a supply chain level. The first big problem was that they would manufacture their drinks for the US market, which was their fastest growing next biggest market to the UK at the time. Now it's their biggest market. They would they would, they would produce the the drink in the UK and ship it transatlantic to the US and those rates went sky high. Through the roof. Through the roof, no doubt.

It cost them a mid single digit percent of their margin alone, right on gross margin that flows all the way down. And they also had to build inventory because ports were backed up. So you'd have to have more bottles sitting on ships waiting just for the opportunity to be unloaded into the market. And then when the Russia war on Ukraine commenced, a European glass rates went through the

roof. The biggest input cost into glass is actually energy, natural gas in particular in in Europe. And those prices went sky high and Ukraine actually was a pretty, it still is but a pretty big source of glass into the European market. And their suppliers pulled force majeure and forced upward meaningfully their price that they paid for glass bottles. And at the time they were not exclusively but very, very heavily skewed to glass as opposed to cans.

And and that was the case globally for them. They're gonna remain that way, aren't they? I've seen they're they're bringing out some ready to drink products that are in cans, which I I initially said Self, I don't think I like this 'cause I haven't had a good one yet. And then I said, but most of the drink is the mixer, so Fever Tree might actually be perfectly positioned to do pretty well here. Yeah, yeah, you got their motto

down pretty tight, right? I looked at ABM Bev for a while and owned it for a bit, but like cut water, right, Is something that they bought. I don't know that. I mean it's it's I would need to look at reviews and do surveys and whatnot, but I think that cut water is an inferior product to a mixed drink. But I kind of wonder if it's because they're skimping a little on the mixer part of the

drink, right? And like Fever Tree, I bought the the grapefruit to try my My wife likes gin, so I helped her make a little gin drink. It's quite good. Yeah, the grapefruit's even better with tequila. I know if your wife likes it and it's hard to change it, but yeah. Well, someone you're talking to doesn't mind tequila. Yeah, It's the best Paloma that I know of. Yeah. Yeah. And I was actually introduced to that by a bartender, not a self discovery And and and it's

fantastic. It's so easy to make and I think that's been their MO. Like really simplify, having a high end cocktail at home for the average person. Well, and when I read they work with with mixologists, right, to get deep in the in the channel in bars, right? And then I guess now they're starting to get more shelf space at like in grocery, right? Shout out to my man the science of hitting. I got to give him a plug here.

I don't know if you read it. He did a a write up where he compared the price per unit between Fever Tree and Coca-Cola and and it's Fever Tree is 10X more expensive than the private label brand and it looks like 3.8% more expensive than something like Coke. And I and I was curious, I and I asked you this offline, I'll ask you again why if they're so premium, have margins been hit so bad? Because I would think if you're that premium you could push price. But I I think I was asking the

wrong question. Yeah. No, it ties into a a lot of choices that the business was faced with. There was this question whether inflation and cost pressures were structural forces or transitory forces. And forget about the actual debate. What's unquestionable is there is a degree to which fever trees cost pressures were transitory. They knew there would be a day when certain of these cost pressures would not exist in the same way.

And they tried to do things to take matters into their own hands like push more manufacturing to the US so you don't even have to think about transatlantic shipping rates. That becomes an afterthought at that point. But you know it's hard to get that done.

During COVID rolling lockdowns, UK stayed locked down longer and all these other problems and what they decided to do was they felt it was more important to pursue their growth objectives as a business than it was to optimize for margin. They cut their price in 2020 to help get more shelf space.

So they've taken down some of the premium they'd had and that earned them a lot of respect with some of the retail partners, so. You don't want to go back necessarily and say now we're raising price, right? Yeah, they didn't want to raise price. What what they didn't want to do was they didn't want to just raise price because cost had gone up and say we're covering all our cost and and we know that we could pass this through because they didn't want to raise what was only transitory.

One of the things I I remember back from the financial crisis period from from a paper on real estate was this notion that prices rise with inflation. They rise with cost pressures but they never go down when any of the pressures that push them up abate. Yeah. So you don't want to end up in a position where these transitory cost pressures are gone and you've raised your product to such a point where you then have to like go back and like cut it.

So that's that's sloppy. They wanted to see to what degree things were actually like they knew some costs were not transitory and facing pressure, so they wanted to be able to deduce which was which. And then you could take it a little further. I mean for the business they were still fairly young, fairly immature and trying to grow in the US So I I'd imagine there was a different elasticity for existing customers who love it versus trying to bring in new

customers. So if you push it too far, that's a big impediment to get new customers to come into the brand. You might do well with your existing customers, kind of like what I was talking about with Coke and Hershey's where you get this, you know, high single digit growth, but with declining volumes that that looks great superficially. But for someone like Fever Tree, who's trying to expand the number of households they reach, that's Contra what they're trying to do.

And it's not exactly what you'd want for creating long term value over the course of a decade, maybe over a course of a year or two, that would create value, but not over the course of a decade. And then the other thing is they did have this profit pool in the UK that was still doing pretty damn well. And if you'd looked at things, I think in the last year, basically 100% of their EBITDA

came from the UK market. And so that means they're losing money or break even in the US And what that did was they put their competitors entirely on the ropes. And there's a great call, Antiguas with the CEO of Q Drinks. And now I think he's a former and he talks about how Fever Trees pricing is completely irrational and it's doing crazy things for the industry.

But you know when you look at it at the time I'd spoken to someone who short the stock during that period and the contention was they're actually using the supply chain in order to mask the fact that the US growth opportunity was completely tapped out already and that there's not going to be nearly as much growth as they had been guiding to.

And now you know you Fast forward a year and it's very clear actually once the supply chain pressures abated and they got better supply back on the market, they re accelerated their growth. Their growth doubled in the US from year over year and was in the mid 20%. And they actually think their sell through was better than the headline number they were able to report in the US market.

So they took meaningful share from their competitors by putting them on the ropes in the prior couple years and it helped with their retail partners. Their retail partners love that, gave them more shelf space. Retail partners actually make more money selling Fever Tree than any other product in the category. That's a huge boon to a retail

partner. You want to get what's a high turnover but premium product on your shelves because you just get, you get better margin yourself, you make more money. So why not get Fever Tree and more space even if perhaps they should have pushed price a little more aggressively. So now you end up in. It's a little bit of the capacity to suffer type thing, right?

I was just, I was just scrolling to see if Gardner Russo was a shareholder yet maybe they never will be, but sort of sounds like the type of thing that Tom has probably studied. They have it right. I think that I'm glad you threw out capacity to suffer there because I do think you know their largest owners are their two founders, CEO is one of those two guys, Tim Warelow. And so they have meaningful skin in the game and their large shareholders support them.

Lindsay Train and Fundsmith like absolutely support them and pursuing like highest NPV strategies. They don't necessarily care about optimizing for this year and that year's margin. And I think, you know, in my conversations with them, they've been pretty candid that that they do feel like there will be a day down the line where they can optimize for margin, but they want to optimize for growth today because they think the opportunity is so damn big.

So why not attack it? You know, they still think they could more than double the US business from here based on their goals that they'd set out a few years ago. It would be nice to see them revisit exactly how big they think they could that could get. But the US market is multiples that of the UK market and they only just this year passed just last year, sorry the recent report, but in 2023 only then did the US become a bigger market than the UK.

So there should be a really good runway and I think it's smart to pursue this growth, but it's really challenging I think because especially in the UK, investors never like seeing margins go backwards and you never know to what degree. I mean there there is a case to be made that maybe the US is going to be lower margin than the UK for structural reasons. So like what does a normalized margin profile look like for

this business going forward? And they've been unwilling to kind of truly put that out, but they are guiding to double EBITDA margins this year from last and have 200 BPS of margin improvement each year thereafter over the midterm. And yet I still think because they three times the UK investor base doesn't want to buy into the fact that they have this kind of tailwind for margin going forward from here.

You know who doesn't seem to care very much is Kevin Havelock, who is on. I mean, if I'm looking at this, first of all, he's an insider. Second of all, see, it looks like he's from Unilever. If my dad is is correct. And I don't know, man, that somebody checked, I mean, if you're listening, check your own records. But the insider purchases from this guy are not small.

Yeah, they've had after each report when their quiet period ends, their insiders have been, I'd say, buying like 500 K to $1,000,000 of stock each time, yeah. I guess I yeah, I need to check it out on a currency adjusted basis, but yeah, this guy's interesting. Huh. He bought a lot of stock last year too, which is pretty damn nice. So how you know, you started out talking about resiliency and how do you think about, you know, not every idea.

First of all, not every idea has to be right in a portfolio. So how do you, how do you think about when you're looking at a name like this that's smaller but but growing like sizing just

theoretically right sizing and kind of like its role in a broader portfolio context and how resilient it is and how do you kind of weigh those in the in the PM seat? Yeah, So I think that's one of the areas I've I've, I've been revisiting a little bit. I I'd gotten a little more concentrated during the COVID period than I had been before and I really like being semi concentrated. I think that fits my personality and the kinds of companies I

look at a lot better. So that means like 25 positions or so is the central tendency. I'd pull that down to high teens partly because in COVID like coming in, I'd had like certain industries that I was like, well, I just don't want to own this if we're going back to Zerp and some of these other problems are here, so. So I'd pulled back things, but I like being in that 25 position range, which means like an average size position should be 4%, right.

And I don't like buying that full amount right away. I think I like getting comfortable with things over time and have a sense of what's really driving them. So I've really started spacing that out. I think time compressed in COVID and I've been a little quicker

to act on some of those things. So you know 4% is my central tendency on positions and I don't that doesn't mean that I like cut back on things if they start working or take a different shape in the portfolio, but it gives me opportunity to add to things too if they kind of underperform the rest of the book. I think it, I think it's a really good good round Number. So that gives you a sense of the

sizing in this position. But also like most positions and I definitely have a couple outsized positions that I'm willing to let bigger when I see a fat pitch, I'm, I'm willing to go there. And I'm also still very willing to let the ones that I think are truly special run pretty far into meaningfully bigger positions. So they're definitely some outsized positions. So that means at the end of the book there are, there are absolutely some smaller positions.

So not everything's in the 4% range, but. So when when they run though has has the 2021 period till now if it if it's multiple expansion are you thinking a little bit more of trimming or are like is that one of the law of the wrong lessons that maybe is being learned. Said said differently, like you know, I, I don't know how, how does valuation? Has that become more of a part of the process or is that not the right take away?

Yeah, I used to say I'm willing to hold things when they get overvalued, and I know that my answer is yes. I'm still willing to hold things when they get overvalued if I have a good basis. I really like the company and really believe longer term. But if that happens to like 6 positions at once, I definitely need to be saying there's something wrong here. Like it's not about holding one position through a period of overvaluation.

It's something different, fundamentally different going on in the market and by fundamentally different almost the absence of fundamentals is what's driving things. So that was something that I think was very acute in 2021. So I'm still willing to hold things through those periods, but what I'm not willing to do at all anymore, like I've been I I was very clear with myself and my investors that I thought

certain things were overvalued. And I'd even sold a meaningful slice of one of them in particular and got like, lambasted for like my tax bill's going to be way too big. I'm never going to let those kinds of concerns keep me in something that I think is overvalued and worth trimming for the sake of spreading it out. I'm just going to sell it today. I think it's overvalued and I'll live with the consequences if it keeps going up. But I think that's how I I have to do it.

Some people have argued like box it in, but then then it's like, well, you kind of have like trap capital in that case, yeah. And it's not cheap. So, yeah, that's right. And I'm not sure. I mean, I haven't done all the math on the taxes, but I don't think it's gonna be particularly tax advantage. I guess you'd you'd defer your your big liability. But I I'm just. I'm not sure that that's not one step too cute, at least for me. Yeah, I could see doing it in one position.

I can't see doing it in a handful. Yeah, if that's how you want to think about it, great. But like, one idea is you could potentially give it back who if you have only a fund. And that's one of my problems. We're doing an SMA and a fund separately. If you have only a fund, you could carve out that position and give it to investors and let them decide on their own. Oh, you distribute it in kind. Yeah.

Each person, based on their own sensitivity, can make their own decision as opposed to you having to deal with the consequences of that. Because I did have some clients who are like, yeah, I'm, I'm fine with the tax, you know, I did get lambasted by a few. But it's, you know, something where I could be very clear about what I think is the right decision, but say, hey, you know, for your own needs, make your own decision. Interesting.

Yeah, that makes sense. I haven't thought about it that way. All right. I didn't mean to cut you off. I just it was a tangent that I've been thinking more about, you know, the portfolio side given I guess what's gone on in my life. I used to be more about, like a single idea, and now I'm much less about that than I ever was. Yeah, I. Love the portfolio management tangents.

I think it's one of the biggest areas where there's a lot of value you can add, but there's no great playbook that's out there. Like you know, the buffet letters are for being a value investor and evolving over time. And you know, I think it's one of those areas that a lot of people don't like to talk or think about and it's a very soft science, but I do think you could be way more like rigidly scientific with it and and and get better.

So I try to push myself to be better and I come from a trade desk and I know people who like basically their core skill is portfolio management, not security selection at all and they do phenomenally well because that's a great core skill. So I challenge myself to be better at at it all the time. I was reading a paper on tax loss harvesting and like whether or not you can sort of outperform an index if you're if you use tax losses in the right

way. And the the fundamental issue with the paper is it assumes that the person that is reading it assumes that there is no alpha in stock picking or that their ability is nil. And I'm reading it and I'm like, well, I don't know that that's the right assumption, right? So not not to say that the assumption is invalid, but I'm not sure that the person that's running the strategy myself specifically would assume that. So, alas, it's what's been on my

mind a lot. Well, it's kind of an oxymoron. You shouldn't even be in a position a tax loss harvest if there is no alpha and buying individual positions you should just buy the index anyway. Yeah, well, that's kind of where

the paper was going. And and lo and behold, it was put forth by a Black Rock company. So who would have thought? Yeah, it's a tautological argument. Then yes, they got exactly the conclusion they wanted. This is the problem with the you know, you start saying, OK, well, who's telling me what? And you start pulling on some threads and you realize a lot of the times there's some incentives behind what you're reading. Absolutely.

It's hard. And you you do want people who are putting things forward to be like incentivized to believe what they're putting forward. So there's something that's not necessarily bad in that, but but you definitely got to ask like, is it coming from the right place? Yes, you want them to be putting something forward that they

believe in, right? Like you and you want them to have buy in, but you also don't want them to go in with like the conclusion that cannot be like some of some of the issue when I read some some things is it's like OK, well if you're if you're selling this product you can't possibly be rational about whether or not the product makes sense right. Like your livelihood depends on it, so.

Hopefully you are selling that product because you went there in the 1st place because you truly believe in it. That's correct. Definitely not categorically the case. Yes, that's correct. Yes, I agree. All right, we, I digress. My apologies. Yeah, I want to point out a paradox in in one of the things that I'm saying and thinking though, right, because I talked about resiliency and then here I am. I'm like I love Fever Tree, despite the fact that they suffered from a lack thereof.

Right. You can say. I think you're saying you respect Fever Tree. I don't know that you're saying that you love them, but yes, OK. No, I said. I love them. Well, OK. All right. Yeah, yeah, noted. I think small caps in general,

right? Like because of this period, because of their lack of resiliency, because there were so many of these esoteric problems, because of all these, because of many structural forces like the move from active to passive in the market, small caps have just become so out of favor. And so although they lack resiliency, I think it's like the most amazing pocket of the market to be hunting in right now.

I think it's part of what I was like ultimately gearing toward when I was saying the 2nd derivative stuff. Like I think a lot of the momentum in markets is like exacerbate everything good and everything bad. And small caps now are like I I think one of the most interesting setups that I've ever seen doing this professionally. Well and that's kind of why I brought up the portfolio perspective.

I mean it's you know I I can't help but see some feedback on on some ideas that come on the pod right. I it's just that's natural and I think it's important to contextualize. If somebody's saying, well I like XYZ company or in this case you know Fever Trees interest somebody, OK well, you know there's a way to build resiliency in a portfolio that doesn't necessarily have to be

in each individual position. Now each individual position should have some hurdle to get into a portfolio, but there's a lot more context around how somebody implements the idea than just this is the idea. And you know, I I think to the extent that I talked to a younger audience, I would say that a younger me would have maybe found a small cap and been like, boy, I got to be all in this thing.

And the older me has a different, potentially different set of risk factors, right, And would be more apt to tap the brakes on my excitement than than the younger me would. Yeah, yeah, There's still ways to capitalize by being small and things. And it also depends on what you're playing for. I mean if you want some things that will and and I think this gets to your feedback point on on certain things that you hear out there on the world of X or

Twitter or whatever. You know, if if if your goal is to own things that'll like give you a multiple of your initial investment over a few years. They're definitely going to be some things that don't do very well. And in periods when it's great, you're absolutely going to have, you know a few things that do pretty damn well.

And if you're doing things right the ones you get right should make up for what happens in periods when things are not going well, where you will take some like real pain in a few positions if not more. And that's something that portfolio management like with with greater diversification and with some sort of like cash buffer recycling of capital along the way could end up an enhancer of returns, not something that detracts from them. Yeah. A stock that you and I talked

about that people may have heard about is NVIDIA. And I'd like you to tell the story of how you started to follow NVIDIA, because I think it could segue into the next little segment nicely. Oh man, Nvidia's a painful one for me. I mean like 3 splits ago. The year is 2013. NVIDIA was actually a high dividend, yielding really low EV to EBITDA multiple stock. And by that, my first foray with NVIDIA was in 2008 when I literally knew nothing about markets.

I mean, I mean, I've been working on a trade desk for a little, but that still meant I literally knew nothing about markets. I did a screen for companies that were with over half cash as a percent of their market cap. And if I'm I, I may be wrong on the exact prices because I might be confusing NVIDIA with Akamai at the time. But NVIDIA was trading for, if if I'm right, it was like 6 1/2 to 7 dollars with $5 per share of cash. And so I bought that and I flipped it.

You know, obviously I was like, yes, this is, this is great because when, you know, the tide came back in. One thing I'd say that was really interesting to me at that time was NVIDIA made Lowe's in November of O8IN March of O9 when the market bottomed. It never made new lows. I found I I always found that to be interesting and a lot of like really good companies didn't do that. But I digress. Back to the like the 2013 period, NVIDIA hadn't really gone very far.

They had accreted cash each of these years. They actually instated A dividend that was growing each of these years and Novitia was like $12.00 a share. So it had doubled over the course of five years, but was also paying out like a a dividend that was like decently greater than the 10 year Treasury at the time or maybe maybe just a little bit. I think it was the Euro crisis time. So, you know, 10 year Treasury

was pretty damn low. And I'm like, wow, this company's great and I made it an average size position in My Portfolio. And you know what? What was different at NVIDIA at the time was the stock moved almost entirely on the PC cycle. They were trying to build this chip called the Tegra to get into smartphones. They'd actually built their own gaming device to showcase how good the Tegra was. They built a tablet. I still have the NVIDIA tablet in my office at home from back

in the day. They did everything possible to get the Tegra chip. And you know, you'd see underneath like, wow, this data center business is actually starting to look like a real thing. Like it's starting to be a bigger and bigger share of what

the company does. And so, you know, Fast forward to the stock, the stock like goes up 50% from 12 to 18 all the way back down to 12, from 12 to 18 again all the way back down to 12. And each earnings call was like, the only thing analysts wanted to ask about was, did you get any design wins with Tegra? Did you get any design wins with Tegra? What's happening with the PC

cycle? And meanwhile, you know, they're like, yeah, there's this thing called the data center business that's actually doing pretty well. But, you know, please ask about that. No, no, no. Just Tegra this, Tegra that. And it finally got back up to 18 the third time. And I'm like, I'm out. I'm taking my 50% gain of moving on. And what happened was they ended up shutting the Tegra and and the data center story became the big thing for the stock. And I think I have a lot of

lessons out of that. One is about how myopic Wall Street can be. They focus on what's their interest, not what's most important to the business. My impatience, like it's really hard in some of these companies, you could see where things are going, but it's really hard to withstand some of the volatility along the way. Like presumably NVIDIA should not have been all that volatile. It was a cheap stock, right. You're talking a mid single digit EBITDA multiple at the time.

That's part of what made the return thereafter so spectacular. And so a very small change in the rating was a very big change in the stock, right? Two turns of multiple was like a 30% move in this damn thing. Even though it's like growing through it. It's also one where like I have to be more mentally flexible and be willing to revisit something that I'd moved on from, even if it's at a higher price. Like I really need to be able to like get back there because I don't.

I don't a moment like three years down the line where I'm like wow, this still looks good and and I just like I wasn't able to to stomach the fact that I'd sold it at 18. You know, I was sitting there at like 50 bucks a share, not like that was that much higher. And again, I'm talking 3 splits ago. So where it is today is, is multiples of where it was back then. So it was, it was quite a quite a eye opening lesson.

And I do think it's really telling that if you go back to those early 2010's days, no one wanted to be a semiconductor investor. I remember like KLA and Lamb were trading at like 5X EBIT. A Times have changed. Yeah yeah I remembered like Tapper pitching those things and and it's like those things were so cyclical now in like the the through of the cycle and that that was when things were not troughing at all in the through of the cycle. Now these things trade at over the EBITA.

So it's it's amazing how far the whole sector had come. And I do think there's similar kinds of phenomena, not to the same degree. I think part of that was coming out of like the semiconductor sector in generalcomingoutof.com and dot bomb. There were way too many companies. You had a wave of consolidation heading into the financial crisis, which really did a

number on these companies too. So you had like 2 crises within a decade where where this area was was really troubled and it's part of how you ended up with a NVIDIA that would basically you were buying cash not company when you when you were picking up shares. It's amazing.

Yeah, it's amazing that that out of that hunting ground, this company came right. Yep. Yep, exactly, exactly. And it feels like something similar is going on in the life sciences space right now. It feels to me like COVID was kind of likethe.com moment for them in some ways. Where where like everything got so damn euphoric. But you know, they're like life, Healthcare is changing our world, biotech's changing the world, be able to spin up this vaccine so quickly, yadda yadda.

We all know the stories that happened during that time and it's something that also at it wasn't cyclical at all. Over the prior 10 years there, there was not really cyclicality. It was just biologics growing every single year and the whole industry benefiting accordingly. And then now you end up with what looks like a really severe cycle. And that's an area where I've spent like just so much of my time in the last two years, starting slow, doing a lot of learning.

And it's the third time in my career around the same time as as the NVIDIA forays. In the beginning, I just my my really dumb stuff early on worked so damn well. I followed these guys called the Baker brothers into some biotechs that were trading at or below their cash that they were buying tons of. I was like, I I'd heard that they had the best reputation in the space. I was like, well, what are they buying? A ton of bought shares in this company called Insight.

My wife still yells at me that I that I sold them, you know, it was $2.00 a share and and the thing went well past 100. Wow, yeah. You don't need many of those. I'll tell you what you do need in that instance. You need the willingness to live with concentration. Yeah, I did not but but also like, yeah, it starts as not concentrated. So you need to think more about your starting points in some ways too with that.

No doubt, no doubt. But to the extent that you care about your balance sheet, you got to be willing to look at a balance sheet that's concentrated in a position. Yeah. Yeah, you know, I mean, it's it's just something that you gotta, you gotta be able to stomach. It's part of that the game of having a, you know, 50 bagger or whatever. Yeah, I was, I was just checking out on the Delupa machine. I was just checking out NVIDIA and man, its revenue growth is

wild. Good for them, good for them, and hopefully good for humanity. Now I got to ask you about life sciences, because I was. I I've heard you now talk about this for what, 2 1/2 years? Yep. OK. What is going on in in biologics and gene therapy and do you mind setting the stage for sort of the cycle and what's gone on with the FDA as to why maybe it's a a bullwhip effect hangover of COVID or or not I I might be phrasing that wrong. Yeah.

Let me take one step upwards and speak high level of part of where my intrigue in the space stems from. And then I'll talk about the cyclical forces that are happening today and what's happening in the sector. I I read this book recently called The Cloud Revolution, How the Convergence of New Technologies Will Unleash the Next Economic Boom and I think it was a fascinating book. I think it's worth reading if you want to understand how the cloud in general changes things for technology.

And what I'm going to say has nothing to do with the cloud itself per SE. But but the author proposes this rule of three and how phase change innovations require 3 underlying the confluence of three underlying pieces in order to come to fruition. And so I think we have three

really unique forces that come together today to make life sciences an amazing. Space. Oh, he doesn't give you the three. You have to come up with your own 3. Yeah, well, he gives the three for the. Cloud. I thought it was a paint by numbers one no. Yeah, he gave the three for the cloud, but I've got my 3 for life sciences. What are the three for the cloud? Can you? I don't remember off the. Top All right, that's fine. That's fine. All right, let's go for the three for life sciences.

Actually I do know one of the three is the GPU for the cloud, so so there is that. I can't remember the other two. A confluence of three factors. That's how you get a Lollapalooza. Exactly. OK, exactly. And I've been. Shout out to Charlie, Michigan. Yeah, they use the word Lollapalooza insight mugger in in the cloud book as well as

well they should. And you know, I I mused about each of these things, but to have a framework to speak about it I think is quite helpful because these three things are profound, right? We mapped the first human genome in 2000 and we thought genomics would unleash this amazing wave of innovation. But really it's only pillar number one or you know, if you view them as like 3 overlapping circles, one one of the three pillars underlying this confluence. Lollapalooza, if you will.

So genomics like it took a long time for it to start producing results. In life sciences, it very much is today. But especially as the cost of sequencing A genome goes down, we're greatly increasing our trove of data. We didn't know what we could do with all this data. And even before AI emerged as this buzzwordy thing, machine learning, machine learning, big data slash AI, whatever you want to call it, was becoming one of these other pillars underlying what will support life sciences

for the next decade. These capabilities, computational capabilities in order to take big data sets and divine insights. They're increasingly important because the first applications of genomics were kind of like brute force figuring out one target at a time, kind of like the CPU world before GPUs were able to take this. I I'd say much more dynamic approach in order to find in connections between and amongst things.

So before you be able to identify one target at a time, do it by dumb luck and you know you you'd be able to come up with something nice for a genomics based treatment. But now you also have to increasingly focus on how different pieces of the genome interact with with one another. So big data machine learning AI super helpful. So that's number two and #3 is CRISPR.

If you go back to 2012, we the early days of 2012, we didn't even know that you could actually, we there were some people who theorized that you could do this, but we didn't know that you actually could change someone's genome. And we learned that yes, you could. And then we figured out how to apply that in other organisms. And now humans, like we're sitting here today.

Just a couple months ago was the first ever approval of a CRISPR based treatment that effectively take someone who's born with sickle cell disease and makes them free of it. That's that's amazing. We didn't even have the underlying technology to be able to do that a decade ago. But you need to be able to figure out the gene in the 1st

place you need CRISPR. And now to take it to the next level, you need big data AI. And so part of my intrigue in the space is that if you look at the last decade, we've had some of the most profound innovations ever and yet the whole space has been absolutely mauled in the Last Post COVID period. And if you go back even further, if you think about biotech as kind of the reference point for the space, it's been almost a decade of stagnation for biotech as represented by the XBI or

IBB. Those things have gone nowhere over the last decade. Now someone that I've talked to has said this an index construction issue, not so much a technology or or like certain companies within the index maybe have gone well. Is that is that a fair criticism? Sure. But that's true anytime an index goes nowhere for a long time, right? When the S&P went nowhere from 2000 through 2014, when it made new highs again, there were plenty of individual stocks that did exceedingly well.

So like, some stock pickers did really well. Some areas did horribly. I mean, if you didn't own financials, you got a better return than you did if you own the index during that period, right? But yeah, I mean, that's a fairpoint, but I don't think it's a fair critique of the fact that things really have gone nowhere for the space. I mean as you talk it, it like feels very tech bubbly and then tech went on a pretty interesting run. It'll be.

It'll be interesting to see if this is Part 2. Yeah. I mean part of what I've been thinking and saying just to like make it sound a little better, but I really do believe it is this idea that I think the life science companies, not biotech per SE, I think biotech's really

hard. But the life science tools and instrument companies that support the discovery, the research, development and manufacturing of these treatments and therapeutics and those companies I think are are set up to be kind of like the semi companies of the next 10 to 20 years. And like you could point to NVIDIA and say like they started with Nvidia's starting point multiple was considerably lower than the starting point multiple of some of these life science companies.

But at the end of the day, like you said, look at their revenue growth, their revenue growth's been phenomenal. Who cares about how much the multiples appreciated in terms of driving the total return? It's far more driven by the actual results of the business, how much they've been able to increase their scale. Yeah, that's multiples I think create multiple derangement syndrome. Yeah. So you, you asked about the

cyclical stuff, right. And that's where it gets even more challenging too because like you could point and say like oh, the multiples of some of these companies are not super cheap right now. But the fact is some of the companies that I find most interesting, they've never been cyclical in their history and they are in a really, really harsh down cycle today. And they have a lot of fixed cost. So the de levering on the, the descaling on the top line DE levers their margin so they get

hit twice. So the multiple I don't think truly represents the underlying reality of the business as things stand today. So these tools and instruments companies that help support the biotech industry from beginning to end, what's happened is during COVID because supply chains got so wonky, all these companies that are making things that are researching things started ordering extra inventory in order to have the raw material, the substrate of

everything they do available. And when you think about it, I'll, I'll give you one of the more extreme examples, but I think it's, it's very illustrative of what's happened. If you have an approved cell therapy and you're manufacturing that cell therapy as needed by patients, you're subject to periodic inspections by the FDA in your manufacturing process. And if you're not operating on the day they show up, that's a really big problem and can set you back and can take you off

market for a period of time. And so it was really important that you didn't end up any on any day without any of the key materials in order to operate your stuff. So what what what happened is if you think about industry levels of consumables, just using round numbers here, but they went something from like having six months of extra inventory on hand to 18 months in some cases of extra inventory on hand.

And that made sense at the time because you didn't know how long the supply chain problems would persist. You didn't know to what degree your business would actually grow during this period. So you had to support future scale with it. And you wanted to make sure a more frequent ordering cadence kept you higher up in the priority with the companies you were ordering from. So you wanted to make sure that you were ordering on a continuing basis even as things kept rolling.

And So what happened was once we got to a more normalized period, some of these companies were like, whoa, whoa, whoa, we're still buying, but we have way too much. Yeah. And then to make matters worse, because of the COVID, like the bubbly stuff that we talked about, there were way too many companies that raised money in biotech who didn't necessarily deserve it, that rode the zeitgeist of that brief window of time in order to raise money. So there's way too much experimentation.

And even good companies, they had so much money that they were doing more targets than they'd actually needed during that time period. And so you know, there was a bit of a, a financial force where there was too much money floating around and so that supported even more purchasing behavior. So there's 1° where you had to burn off the financial accesses and then you had to burn off the

supply chain accesses once you got to this more normal period. So venture capital funding completely dried up and companies manufacturing, they're like, well, let's go back from this 18 months of inventory to a normal six months level. And you could imagine to go from a year of extra inventory to normal levels takes more than a year to to get there. And you can't really just stop ordering. Some of these things have limited shelf life too.

So you kind of start hitting a logical limit in terms of how long you can keep it. And here we are today where you know, sometime between when we're recording this today and 3-4 months ago, we'll have been the through. And I think it's really interesting.

I reflect back on my early NVIDIA days when everyone wanted to ask about Tegra. If you look at what happens on a typical earnings call these days for one of these companies, like every question is like when will the supply chain problems be over? Like when? When are we gonna be done burning? Up. Inventory, none of the questions are about like what underlying growth looks like, where you see the industry going. In five years, Thermo Thermo,

they ask about China, right? They're like, what's going on with China, but it's within the context of burning through the what's in the system? Yeah, but like, so that's more like the PC cycle than Tegra for NVIDIA where it's like it's something that matters, but it's not the biggest thing that matters. It's not where things are going to be in a few years. And it's like it's one of the things that I, I don't know, it's almost a waste of time in some ways for a lot of these companies.

I mean the way I approach it is I assume China won't even be a market for them in five years because it is really hard to know if if it will or won't be. And I don't necessarily want to have to rely on it being a market when who knows what will happen on the policy side, even in the US we're making there's a bill out there today that might make Chinese companies incapable of selling certain key life science pieces to US and European companies. So like that street cuts both

ways. So I I definitely should be conscious of what that means and yet that China and this inventory cycle are basically like most of the questions on Turbo nowadays. Yeah, they it does seem to be what people are talking about when they ask the company questions. And they're very clear that they think that underlying industry growth hasn't changed at all through this whole period and if anything has accelerated like.

That particular management team strikes me as financially oriented, but but I don't disagree with what you're saying. Yep, Yep. And you know, I think it's interesting. One of the things I've seen is like the specialist love Thermo and generalists do find Danaher more interesting if you're going to come into the space. DBS gives you the warm and fuzzies. Yeah, the, the specialists tend not to like Danaher. Yeah, that's interesting.

Yeah. And I think Danaher is like one of the most appealing in the space they're in, like the areas that I'd most want to be exposed to in life sciences and DBS is real and it's got a proven track record and they've just created like a pureplay in life sciences coming sometime it it, it happened almost exactly aligned with the through in the space.

What do you think about there's there's a line in Mckinsey's valuation book where they say life sciences is one of those industries that's created just immense value. But a lot of it accrues to those that get acquired and not necessarily the acquirers. If you look on returns on total capital and you include intangibles, the picture is not as rosy as the return on tangible capital looks.

Yeah. Although you could see the value creation that thermos generated in the market since I I mean I read McKinsey on valuation before we. Really. This is the 7th edition. They still haven't changed the sentence. Yeah, you know, look at what Danaher's done, right? Yeah. Well, that's I'd look at the stock and then I look at that and then I look at what they're saying and I think there's like a little truth to everything.

Yeah, yeah. I mean it's definitely, I think that's probably more true and like the biotech subspace within life sciences than the tools and instruments. I think the acquirers and the acquired have cream created tremendous value and McKinsey valuation does point it as one of the highest ROIC areas. So at the end of the day, it's

persistent. Yeah, I do think some of these companies may have gone a little far out on the curve in terms of it. Let's, let's just call it spade a spade paying too much for companies during the heavier days, which meant you, you know, with lower rates, they were OK and willing to say like my ROI, my, my WAC is really low and I'm willing to take five years to get to my ROIC target, which is like WAC +2. That's not great, but you don't have to be encumbered by those decisions today.

And I do think the companies have been very clear, like the environment's changed and they definitely are accommodating it in certain ways. And they're definitely changing some of their strategies and gearing them differently. Like, I think one of the changes, I'm really intrigued to see how it plays out in Danaher. Danaher had always been a decentralized operator of acquired businesses, so they weren't relying on financial synergies.

To your point about Thermo, Thermo is very much like a financial player. Danaher today is undergoing its biggest kind of like true merger where they're taking Paul and G Bioprocessing assets and combining them into one entity called Sativa. They've never done this kind of exercise before and I think it's really interesting their investment they're they're obviously still going to be acquisitive using their framework, but they're also going to be investing in research and development in a

way with this combined asset that I don't think they really have before. And I think that's really exciting and and very interesting. And I think you know one of the things that attracts me to the space is leaving aside questions of how perfect some of these acquire acquisitive companies are at at generating returns.

Like this space has amazing structural tailwinds like starting with a growing population that is aging, like the aging population is growing faster than the population at large and people need more pharmaceutical and biological material as they get older. Like that's unquestioned and you have like a growing middle class globally. So an emergent middle class requires more for their healthcare than does a really poor populace.

So, so that this is something that's happening globally and some sovereigns are actually investing in creating some of these not not the highest value pieces but having the pieces in place to do some of this domestically themselves. And there are amazing regulatory barriers to entry like in order to be CGMP certified to reach the standards for like good manufacturing by the FDA, it's like a nine figure upfront

investment. So you can't just say tomorrow I'm going to go start something in this space. You know you need massive investment. It takes years to get in position in order to even get certified to sell into this industry And that's not even mentioning the R&D that you that you need first. That's just the regulatory barriers.

So they're immense barriers to entry and there are so many different razor and blade business models where like once you sell the instrument you get a really long afterlife of consumable pull through and the margins tend to be phenomenal. So McKinsey evaluation talks about the spaces basically the highest and most persistently high ROICROIC space there is. And I think that's that's very real like hard to argue with it. It's it's really interesting to find a lot of different

companies in the space there. There was I think in abundance of new IPOs that came public in 2021 and some of these companies ended up like way over capitalized. Some of them are like heaping piles of junk that you should absolutely stay as far away from as humanly possible and will go bankrupt and are going bankrupt. But there are some babies out with the bathwater and there's some really, really amazing

companies in there. Well, one that has a management team that I'm almost certain is ex Thermo. Like how do I pronounce it? Maravai or is it, is it Marva? Yeah, yeah, yeah. I mean, Stanaher and Thermo, they're like all all of that is there. Came out and missed and missed and missed and missed. So you know what happens in the future. To your point on being somewhat empathetic or forgiving or whatever. Like man, that was a hard time to come out and hit your your projections.

And and might people have been too rosy to raise capital? Yes. Would they be the only ones? I don't think so. Yeah, I'll say something unkind and then get kinder about Marvi first, which is that GTCR knew what they were doing when they sold that asset to the market in 2021, right. So this was a private equity owned asset. They exited, had a really good time and they did the same with Sotera Health at the same time.

And it's like, Oh, yeah, they're two healthcare slash Life science IPOs obviously have DE rated significantly. And yet there have been several junctures along the way since that DE rating started. Three specific like known instances where acquirers try to step in and buy Marvi and they're like, no, no, no, we're, we're not selling this company at all because things, you know, the pendulum goes too far in both ways, not just one way. And it's, I think, a really

interesting company. I've never seen a company lose 2/3 of their sale sales and still have 30% EBITDA margins. Like, that's insane to me, that a company could lose that much in sales and still be that profitable, which says something about how like structurally profitable their businesses and how unique it is. And you know, you might be wondering like, how on earth could a company lose 2/3 of their sales? Well, they were one of the key pieces in creating the bio N tech COVID vaccine.

And so there was obviously this frenzy of demand to get the COVID vaccine to the market. And now that's basically dried up to 0. So they have to rely on their existing underlying business and core growth. That took us there. And what they do specifically is what's called RNA capping. It's the very end piece that helps the RNA get you know, into a cell and affect its change, if you will. And they have a patent on the way to cap RNA that most closely mimics Mother Nature herself.

And so once you have this patent protection and you continuously develop and iterate your product and build a suite of services around it, that's a uniquely defensible business. And it's something that you know I think say what you will about the COVID vaccine itself, but mRNA is been proven and de risked as a platform and it could have like it.

It's one of those specific platform that like most directly relates to this three legged stool if you will the the Lollapalooza of genomics, CRISPR and big data AI. It's a way to program ourselves or to express a elicit a protein expression and it could I I think it will over the next decade be something that's like truly profound for all of us. I think one of the areas you see it being research right now is

developing vaccines for cancers. And a vaccine for cancer doesn't mean that you inject someone and they can't get cancer thereafter. It's someone who has cancer. You're able to take the cells and create a way for your body to defend and defend against it, stop its growth and and kill it.

And I think that's something that I mean say what you will about the COVID vaccine again, I think we we all could agree that something like that for cancer would would would be really welcomed and a total game changer. Yeah, One, one of the the criticisms that I've heard is most of the big diseases are already sort of solved.

I don't know how real or not that is the other, the other kind of thing that I've ruminated on a little bit is drug dealers tend to make their money on the comeback, not on the sale. And I wonder to the extent that you're curing people, the cash flow dynamics of everything, you know, that's like a big outlay up front. Does that create a problem with how our system is sort of built and are there some adverse incentives along that? But anything that I'm saying make any sense or no?

Yeah, I've heard that like the big diseases, the big stuff is all solved for for so long. And I'd say, you know, go back two years ago, think about where things were with obesity and where we are today with Lily Novartis and and GLP ones. I mean, shit, does that look solved right now? It does, But but people were saying that like all the big things were solved several years ago. And I I you know to the extent that gene editing or or something like that can can attack obesity.

I think that there are some legitimate, I mean obviously if I if you're diabetic or or truly obese, I think that the GLP ones have a lot of make a lot of sense. However, the does seem to be, you know, the loss of muscle mass or some other side effects that maybe there's a better way

to go about this. Yeah, I mean, Regeneron, which I've been involved in for a while, they think they found a better target that leads to no sarcopenia like GLP wants to, which is what you're talking about with the muscle loss where to your point, like because of the muscle loss you basically have to stay on those things forever. So the drug dealer thing is, is very much in effect Regeneron is working on this GPR 75 target that they think is going to be

even better. So I kind of think the market's proven and now there's more opportunity for people to attack obesity. I remember when obesity was kind of a wastewater in biotech like any company that did, it was thought of as a somewhat slimy company. And now it's basically the biggest product the industry's ever created. So you know I think these things come and go in waves, but there are all different kinds of problems that humans deal with that require different kinds of

treatments. And I do think there's a degree to which like the industry over focused on what they call like orphan indications. So they're super rare indications and you could get special designation with the FDA which effectively accelerates your, your path to market which means better ROI on drug development. So too much of the industry had been focused on orphan drugs for

a while. But with genomics, with this cure curative kind of treatment for some of these areas, you could attack one target after another is really what it boils down to. And yeah, it's a good thing, but it's a tough thing. You look at a company like Gilead, which effectively cured hepatitis C and they've been

stuck in the muck ever since. So, you know, I do think there, there are some questions about certain business models, but the companies who sell the pieces for it, there will be one target after another that they're going to keep selling those pieces for. And by the way, it doesn't change the germline. So just because someone with sickle cell disease is cured of it, well, they could have kids with it. So there's another generation that will that makes sense. So it's not gone forever.

And there are definitely important moral questions to ask about if and how we should be editing things in the germline. You know, there's a future where we make sure a baby's not born with it. Actually in some ways you could do that in the present, like people could artificially inseminate to avoid BRCA gene for example. So we we are and can do some of those things. So yeah, it's a really good question, but I but I think that there will always be another problem to tackle this is life

that we're talking about. It's very different and far more dynamic than everyday kind of problems. Yeah, well, I was. I was looking at Gilead stuck in the mud, which is not an untrue statement. However, stuck in the mud at 7.4 billion of free cash flow is not the worst way to be stuck in the mud. Yep. Yep, exactly right. Like exactly. Right. I wouldn't mind be showering and stick me in that mud. Well, hey, you want you want to make sure you're not paying.

You want to make sure you're not paying peak peak multiple on peak profits. But not the end of the world to be extracting that kind of cash from society and delivering a good outcome in the meantime. Yeah, yeah, absolutely. It's interesting though, I mean like one one of the fundamental realities with these companies Speaking of your, your, your point about the, the, the drug dealer point is even if they do have a recurring revenue product, you can't just slap a

terminal multiple on everything on anything in biotech for that matter. You can in the tools and instruments companies. I think it's very different there, which is part of why I like it so much. In biotech, you have to treat everything as finite duration because once your patent expires, there could be a generic and your pricing paradigm is going to change entirely and your ability to capture the market is going to

change. So you're going to get lower pricing on a smaller portion of the market. So patent Cliff is very real and and it changes the dynamics for some of these businesses. So 7 1/2 billion in cash flow, yes, but like their pipeline, you know, you you'd have to ask yourself does it look like it's the kind of thing that could maintain that that cash flow? Whereas the life sciences, what you're really hoping for is 1 indication was approved using

these tools. Therefore, it should be probably easier to get through the FDA with another as long as I'm using these tools. And what what you're hoping for is over time, there are more people trying to solve problems that use the same tools that the previous exactly. And then also when you go to generics, right, they still have to pay the tools makers for the pieces to make the generic and they're not going to give them a discount just because it's

generic. You know, it's the generic company's job in order to find a way to do it profitably. So they might pursue things in slightly different manners along the way. And I'm speaking very broadly because there are differences in the small molecule versus antibody world and I'm trying to speak paint, paint it all with one brush, but the tools maker still get to make their money even in the generic world even in the aftermarket.

Well in in in the generic world, in life, in the with the tool makers, does the generic company when they like you have to be approved to to sell the generic. Yep. So would it not make more sense to use the same tools that have been proven with the branded treatment. So even if it does go to a generic treatment the tool unless you want to run your own like full blown, I mean do they have to run phase one, phase two, phase three.

I I apologize for such a dumb question, but it it seems to me like it would be much smoother to use the same exact process than to try to introduce different variables that could throw something off. So it's even more true in biologics, in antibodies where it's called a biosimilar that you'd bring to market than than in small molecule where you can do where it's more chemistry, right, than creating like a cell and a life based process 'cause that's what antibody

manufacturing is like. You take a number of cells, you scale up the number massively and then you filter out for the protein that you want, right? That's a really complex process. And to get a biosimilar right, to have the same kind of safety profile and efficacy, you basically have to follow the same set of procedures. And following the same set of procedures, you know, they're only so many sellers into the

space in the 1st place. But to get it right and to make sure you have the same recipe like, you basically have to use

the same vendors. And in some cases, I don't know enough about the exact regulatory edifice, but in some cases you're basically required to use the same vendors for particular pieces of it. Not necessarily all of it, but for for particular pieces of it. Well, I I think even if you're not required, it seems to me if if you have to have a very close biosimilar and you have a a test and the test fails, the more variables that you introduce the harder it is to to hone in on

what is actually gone wrong. Yep. Absolutely. I if I were running that test, I would say let's let's try to control what we can control and and the way to narrow down what is an outside influence versus what we can control is to use most of the same things to the extent that it makes sense. Absolutely. And there really aren't that many vendors that you could choose from because this stuff is there's been a lot of

consolidation in the 1st place. But it like like I was saying earlier, the barriers to entry are so damn high. So like your your reason to switch might be trying to find lower cost and the only way that people have been able to find lower cost is to potentially pursue suppliers in China.

And there you're going to have to face questions about the integrity of the supply and about, you know whether you could trust your supply chain will last as is for the duration in which you expect to have this product on market. This may be current narrative, but I think it's closer to reality. I'm not sure that I would want to be doing health tests with Chinese equipment, given the distrust between two potential superpowers, yeah.

And if you're talking about injecting populations with with genomics, I'm not sure that that just seems like a risk I'd avoid. Well, and let even leave that aside, right? Because I I agree with you personally, but like, leave that aside. If you're someone who wants to like, build a resilient company and you want to manufacture therapeutic, right, you have no clue what's going to happen with US relations with China.

But you do know that in order to change the supplier for one of your critical pieces, you actually have to restart your phases. You have to like, go back to the beginning and it's insanely expensive. So why would you start with something that might have to be changed? Yeah. You're in the risk mitigation business, right? Like, why? Why introduce more risk I would think. Yeah, interesting.

I saw something about like from an operator from Merck where like with one of the CDM OS where they were manufacturing Keytruda and they're like this bag the the bags are used for single use. Bioreactors had $20 million of Keytruda in it. Like that's how much you're producing in a batch and that's how valuable what's in there is.

And the bag is basically like one of the least expensive pieces of their cogs and that's one of the most accessible areas to get from China. But like the they gave an example of like you see one black dot on the back and you have to throw out all $20 million a product. Oh, wow. So like, do you want to take a chance where like, everything's not perfect or you want to work with companies where you know everything is perfect? And yeah, it's not an area where you want to take chances.

And a lot of people get introduced to certain suppliers while they're in academia and they just like stick with them for affinity reasons. So once you start with someone, you don't ever change. Like a lot of the names for specific things come from the companies that people use and and and it becomes like colloquial in the industry. So I found that to be really interesting. That's like a very different force than happens in a lot of

other places. This is something I did not verify because I trusted the person that told me they were higher up at A at a job. But I I believe that was Henry Shines strategy to get dental tools in dental schools because once the dentist got used to the tools like they didn't want to change what they learned on and now it's like a dominant dental company. As the kid of two dentists, Like, absolutely. Like, they didn't. They didn't change anything. Yeah, yeah, I wouldn't either.

Well man, I I appreciate you coming on and this is a good follow up conversation to the Peter Mantis one that I did. I I need to I gotta I gotta I gotta sit down and and really learn this stuff. I have cursory knowledge on it. I gotta be honest man. I've I've felt like an existential meaning issue. It could be a midlife crisis I don't know if I would deem it that but I've enjoyed working.

I've questioned a lot whether or not it's worth my time to do especially on my own and not you know in a business structure and and I wouldn't say I've been demotivated but I I've had a hit an interesting patch in life man. Something wrapping up my grandma's estate has created this finality to what was very long and big part of my life and I'm I'm a little lost on where to go next.

But, you know, talking to you about stuff like this gets me excited about researching and and like the idea of things that make me excited for the future as opposed to, you know, I, I don't know. Some other things are just kind of hard to get up out of bed and do not not, you know, I'm not saying, you know what I mean. Well, First off, be kind to yourself. Like, you know, take it easy on yourself. This is not an easy area. It's like got a unique vocabulary, its own lexicon to

literally every everything. And it's an area in the markets that is dominated by specialists, which I think is part of the opportunity because all the specialists are so beaten down and money's been coming out of them for a couple years. And it's one where I think the opportunity is so open-ended over the long term that you don't have to rush your work, you don't have to get it right. I think there are going to be like numerous chances to get

there. And in the grand scheme of things like, we're both pretty young doing this, even though we turned 40 at about the same time. We're both young enough that, like, this is something that it's not going anywhere. I feel like it'll be as relevant and important a theme when we're twice as old as it is today. It might be even more personal when we're twice. As old? Yeah, that's right. I hope so. Yeah, well, hope not for as long as possible. But yeah, it it's a reality,

right? And I I also think like to the degree that it's it's hard and it's not as accessible as some other areas. I do feel like generalists, when they really want to find a way to get into areas like semis, are really freaking complex. And I know people who are like balls to the wall logs some semis. And they're like, yeah, life sciences is too hard for me. Meanwhile, you know, I mean, semis were once one of the most

cyclical industries. There is part of why Clayton Christensen used that sector to describe the innovator's dilemma is that things move so damn fast in that one area in particular. I think people forget about that. That was like the starting point of innovator's dilemma. It's like, oh, let's look at semis because they move faster than even the fastest moving pieces in tech. Semi manufacturing is insanely complex. It's almost more complex than the manufacturing of biologics.

The business models are really complex. The end markets are complex. Like you know this isn't to say don't invest in semis. It's to say that like if you put your brain to it, you can figure out why some of these tools and instruments companies are really interesting. Their business models in a lot of ways are much simpler. Some of the terms and areas you're exposed to, sure, sure they're they're a little more challenging.

But you know, I I don't. I don't think anyone needs to know circuitry to invest in semiconductors. Nor do you need to know. I don't know genomics to invest in in life sciences. Yeah, I I read the IT must have been Danaher GE, the European Commission case. And I was like, OK, this kind of hits me over the head with the business quality side of this, right. So, so then it's like OK, well now now drill down and it's, it's a matter of focus and just doing it.

So we'll see. It'll probably take a year or two or three. Yeah, some of those, like antitrust papers are some of the best. The FTC paper on the Grail merger with Illumina is awesome. They basically, line by line in very accessible layman's language, tell you in what ways Illumina's a monopoly and it's like oh wow, they just like put this all on paper for you.

This is better than any piece of sell side research I've seen on the company in explaining where they do and don't have lock in and like what they do and don't do as a business. Buffett often says I don't use private stuff. Now I think he's got enough private information from Berkshire. But I I think one of the things that people, at least I didn't hear, I'll just personalize.

It is like the government resources, right, Like like the trans dime, when you read the trans dime in front of the Congress and basically how he's like, look, if you don't like what we do, go go do it right. Like you can go do it if you want to go do it. But he lays out like why it doesn't make any sense to do it. And and they're tremendous resources if you just kind of look outside. Yeah, it's really amazing because, you know, they have to be candid and they're not being salesy.

They have to. Yeah, I mean, you're in front of Congress, right? Underoath. Yeah, yeah. So it's a different beast right off the bat. And also like, I don't know, say what you will about these congressmen, but like, there's a lot of work that goes on in the background to prepare for these things, and some more than others. But but a good chunk of them come very prepared with really good information, and they could extract really good insights

along the way. You gotta find the ones that are not political theater. Right, Yeah. It's one thing if Facebook's in front of people when they're doing their little thing. It's it's another thing if you've got some niche little topic. And like, I I remember I was, I was researching 5G and Democrats and Republicans completely agreed on a line of questioning. And I was like, oh shit, this is real. This has to be right, yeah. That's right. They don't agree on anything. This.

This has got to be legit. Yep. Yep. No, it's so true. It's so true. It is a great continuous resource. Like there's there's always something you can get from the FTC. Stuff in particular is awesome. Like these people are really expert. Yes, I agree. I think. I think sometimes it's hard to not let politics kind of color, you know, But that's the job, right? The job of figuring out the truth is to not let your personal biases get in the way of what you're seeing. Right.

So, you know, we listen to them at a conference, but they're like, it's not politics, it's marketing. And marketing isn't necessarily all that different than politics. Yeah, that's right. That is right. It actually is the same. Like political theater and marketing are exactly the same. That's what they're doing. They're marketing to their voter base. Yeah, no doubt. Well, man, as always, I enjoy speaking with you.

You've been one of one of my true joys of the investing journey has been getting to know you. So it's nice to do this likewise recorded and I look forward to the next time we see each other. Same, same sooner rather than later. No doubt. All right, take care of yourself. You as well.