Mark Cooper - Hunting Internationally for Value

Ladies and gentlemen, welcome to the business Brew. I'm your host, Bill Brewster. This episode features Mark Cooper of Mac Alpha Capital. Mark is a former teacher of applied value investing at Columbia. He has a focus right now on international small cap value, but he's a go anywhere investor and I think quite a good guest. You can tell he's got some teacher in him. He's got some chutzpah and some charisma. So I think it's a great episode to listen to.

I hope you all enjoy it. This episode is sponsored by Fiscal dot AI. You guys should have listened to the episode with Braden Dennis. If you haven't, I would really encourage you to do it. Braden is a great guy and that episode is really the pitch for fiscal AI. However, my interpretation of it and I continue to use it, I continue to like it is it's a very good platform for data, mostly equity data on a wide variety of companies. They have everything in the US that you could ever ask for

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You get 15% off any paid plans and I would really appreciate you checking it out would help me in a big way. Only nothing in this in in this program is investment advice. Do your own due diligence, consult your financial advisor before making investment decisions and enjoy the show. The information presented in this podcast is for informational purposes only and should not be construed as

investment advice or research. It is not a solicitation of any offer to buy or sell any security or instrument and it has not been updated since it was originally presented. Any projections, outlooks or estimates should not be construed to be indicative of the actual events which will occur. All right.

Ladies and gentlemen, thrilled to be joined by Mark Cooper. Mark, how you doing today? Good. Bill yourself. I'm good, little, little technical difficulties getting started, but I think now we're we're off to the races. Yes. This this will be this should not be too unfamiliar to you. You teach at Columbia. Am I correct or have taught? I did teach the a second year course, Applied Value Investing at Columbia Business School for 21 years, but I stopped teaching

my last class. I thought it was last fall. So this is the first time in quite a long time and I haven't been teaching. And you did what with the the new value investing book it did. Do you co-author it? Did you help write it? How did?

What's the official title? Yeah, Well, they, they, it's the updated version of Bruce Greenwald's value investing book, From Graham to Buffett. Beyond the Second edition, which came out to think about this about five years ago or so, there were two of the original authors, Jed Con and Bruce Greenwald authored again and three other Columbia professors including myself, Aaron Belissimo and Tano Santos as

well. So we are the five of us kind of co-authored the book, but it's not a significant update from the book from like 20 years ago. Yeah, yeah, I I liked competition demystified too. But Once Upon a time, I was in like a little executive class that Bruce taught and he said that one's perfect. It doesn't need to be updated, which is a nice that way to feel about something that you've done. I've I've yet to feel like I've done something perfect. Yeah, I think he's correct.

I think that that's a phenomenal book and definitely has a lot of influence on the way we think about the world and how how we think about investing in companies. So. Yeah. So, so that's a natural transition. I mean do you want to talk a little bit about yourself and your firm and what y'all do? Sure.

Happy to do that. So Mac Alpha Capital was founded almost six years ago, January 2020 and we launched with outside capital in September 2020. We have two main strategies, 1 is long only and one's long short. Our long only strategy focuses on international small cap stocks and our long short can really go anywhere, do anything very different than many of

their long short strategies. We can talk about it in more detail later, but we really are focused on international small cap value stocks on the long side because as we'll talk as well, we think it's the best opportunity in the world right now by far and the best that we've seen in that space in at

least 50 years. And then we are also short some stocks in the long short strategy where we are trying to take advantage of what we think is exceptionally high valuations of companies that historically have not earned their cost of capital and don't exhibit any characteristics of having competitive advantage. And those are primarily in the United States and primarily in the small cap growth area.

That makes some sense. I could argue that some people would say that there's some large cap growth that fits that as well. As well we we tend to stay away from that area and we you know part of what we think is our competitive advantage is being in the small cap space where we don't have to compete with the likes of the big multi Strat shops and try to kind of out guess or out predict the

quarter. So we use our smaller size and longer time horizon as competitive advantage and and really try to go where there is less competition, but an area we do think is ripe for generating alpha through deep fundamental research. So do you mind talking a little bit about, I realize being focused on small is part of what makes you different, but do you want to go into a little bit about what you do that is proprietary or unique to you?

Sure. So yeah, I mean we, we chose small caps because we do see a once in a generation if not significant longer opportunity in the space. So that we did have that option really with our strategies to to look in different areas. But we do think it's an area that's that's right for generating exceptional risk adjusted returns. So I mean talk a little about the firm. So again, we were founded six

years ago. We have 3 fundamental analysts in addition to myself, the three partners that founded the firm. We all met at MIT over 35 years ago. So we've known each other for quite a long time. And Tom and I worked together at JP Morgan in the 1990s. His background is much more fixed income and risk focused. He was primary previously Chief Risk Officer at Alpha Dyne Asset Management, which is a $10 billion global macro hedge fund.

You know, I think we I got a very unique education at MIT and the background is interesting and it goes to really understand how we think about managing the portfolio and portfolio construction and risk management very different than a lot of we think long only and long short managers. But. So in terms of when I started my career, so Tom and I met in a finance course at MIT in 19891990, which was Andy Lowe's first class.

He taught at MIT at the graduate level and Tom was getting his PhD in physics and I was an undergrad and we met in that class and, and one of the things that was kind of unique in MIT at the time, pretty much every class in my mind was really fixed income or derivatives oriented. There really weren't any classes geared towards the equity market. And while I was an undergrad, I was in ROTC. So I was in ROTC to pay for

college. I graduated and spent some time in the active duty and then the reserves. But I went to, came to Wall Street to work at JP Morgan. Not surprisingly, I, I'd known about equities and I'd, I'd read about Warren Buffett and I'd been investing in equities a little bit as a teenager with money I'd save from kind of mowing lawns and shoveling snow and driveways and bailing hay

and summer jobs, etcetera. And invested a little bit at that time and knew a little bit about kind of Ben Graham and the value School. But I did read Intelligent Investor in 1991 when I was at my Officer Basic course in the military and continued to kind of focus on equities.

But my day job at JP Morgan was I was a portfolio manager in fixed income originally. And it was really proprietary trading initially. So trading the bank's capital to make money for the bank and kind of asset and liability management. And so that changed a little bit about how I think or have thought sense about portfolio construction because I was dealing with at the time fixed income markets were were pretty liquid even given our size.

But after a couple years I moved to the commodities department and was focused on precious metals primarily and then eventually currencies. But it was, it was fixed income, commodities, currencies and derivatives all that. But it, it really made me think a lot, the asset and liability business made me think a lot about duration mismatch and the basically, you know, we invest in liquid securities for the most part, even a small cap space.

But we think a lot about the horizon and our investment horizon tends to be on the long side, about three to four years. But we also know there's a lot of investors out there who were willing to invest like that and then provide daily liquidity to their investors. We think that is a recipe for disaster. Eventually it works really well till it doesn't, right? So your investors come calling for liquidity and they need short term liquidity.

The analysts will no longer have a three or four year time horizon. So that's one way we kind of structured the firm differently as opposed to a daily liquidity vehicle, right. But having a longer term time horizon, not having to out compete those multi strap firms is one of our choices. We make the other. How do you structure that like you know, quarterly redemptions or lock up? So we, we have an initial 15 months off lock up and then quarterly redemptions with

quarterly notice. And you know, so it, it, it definitely will try to prevent any issues where we want to make sure the analysts are thinking long term all the time. And you know, as as many firms and I've worked at some exceptional firms, you know, the time horizon gets pretty short around now, right. People are starting to think about the next 45 days or so. They're not too much worried

beyond that. We want the analysts thinking all the time about long term as opposed to worrying about a great idea. But maybe I'm concerned it's going to get marked to market against us the next two or three months, you know, or the next two weeks or a month. How's it going to affect my bonus this year, things like that. So we we think about those structures and how to make the firm better from a cultural

perspective. But that's the other big thing we learned at JP Morgan was performing construction risk management really mattered because we had leverage and concentration in these other asset classes and we were quite large relative the size of the market, especially in the precious metals market. So given the factor commodity positions were so large, you really had to do your deep research ahead of time because you couldn't change your mind and do a 180. And just get out, right?

And and get out and, and do it efficiently without being very expensive. So even going back over 30 years ago, I was really thinking long and hard about doing the research ahead of time and recognizing that we had to because the structure of portfolio had to do things differently than many. We couldn't, we, we couldn't be a short term trader in that regard. It was not going to work. That's a that's a bit of a structural disadvantage now, in a way. Versus being able to. Yeah.

I mean, given, given the choice, you'd rather be nimble, right? But I'm sure that there was. Some benefits, absolutely. You'd rather be nimble and, and we are today, but at the time we were so large, you couldn't be that nimble. And yeah, it's a structural disadvantage.

But I do definitely believe that we've used the, you know, we kind of used the longer term time horizon as an advantage where myself and the analysts aren't so focused on, OK, how much money did we make today or lose today or this month or this quarter? Try to do the right thing long term, because I think it does, is I think that more and more investors and the data is I think pretty clear on this, right? The holding periods for equities have gotten shorter and shorter over time.

You know, time horizons used to be measured years and now they're in months. And with more and more trading volume going shorter and shorter term, we choose not to compete in that space. And traditionally, I think we tend to be on the other side of many of those trades, right? So we tend to be buyers when things are selling off and selling when things are going up.

So hopefully we end up paying less in bit offer and crossing those spreads and trading against the market as opposed to with it on a short term basis and try to use it

opportunistically. Yeah. How, how have you, what have you seen the evolution of the market? I, I mean, I'm hearing what you're saying. I'm curious how you've, how you've seen it evolve over your career. Does it feel different these days? I was talking with somebody on Tuesday that said, you know, it's still kind of easy to buy things, but selling things sometimes is very liquid and you almost have to like, I don't know, go to lunch at lunch hour because the volume is just kind

of not there. Curious for your thoughts on that. Sure. I'll, I'll share my perspective and I think it's, I think it's kind of human nature that we all like to complain like it's so much harder today than it used to be. It was always easier before. So it gives us all excuses when things aren't better. But I do think there is some reality to that, right. So the increased, the increased amount of quad, the increased amount of passive investing, I

do think has changed it, right. And maybe I'll address it slightly differently than the, the conversation we had earlier

this week. But we do think that, you know, traditional value investing and, and we are value investors and I believe that, but there's a unique aspect of the way we do it. Value has not worked pretty much for the last 1518 years, right? It used to be, I think in, you know, maybe what was even taught at Columbia a long time ago, you like a stock, you think it's worth 100, it trades at 70. That meets kind of your margin of safety. You just buy it and you buy kind of a full position there.

What I think happens now, I think the market tends to trend a little bit more short term. So maybe you want to buy it at 70, but it might matter how it got to 70, right, If it went to 70 kind of slowly over time or kind of straight down, maybe the shorts are pressing a little bit more, maybe the trend following maybe the the algos, etcetera, the the quads are pushing it. So maybe you want to buy it at 70.

But one thing we've gotten, I think we've changed a little bit the way we enter and exit positions because what I think you see is the short term momentum matters more. So while I'd be heavy buying the whole position at 70, you know, I used to kind of, this is a a question I used to ask all my students at class. So you're in your first job, you recommended stock, same situation. You think it's worth 100, It trades at 70. You recommend buy it. It goes from 70 to 60.

What do you do? Most people kind of reflexively answer, buy more goes from 60 to 50. What do you do? Most people will still say buy more. Maybe a couple people at that point are going well, I recheck my analysis. I recheck my analysis. Yeah. As a value investor, you say you want to buy more.

That works in theory. I think depending on where you're working, if you're at a faster money hedge fund or maybe even a lot of lawn only firms, you do that your first, you know, that's your first recommendation, you might be out of a job pretty quickly if that stock ultimately goes to to 31st. And you might be right and I'm not saying the analysis is not right, but the mark to market could be pretty severe in the short run.

And if you bought a full position at 70, you know if you be feeling pretty bad a month or two later if it's down another 3040% or more. Yeah, yeah, it's, you know, the

longer I have these conversations, the more it, it may sound silly to say out loud, but the more I realize that there are a lot of institutional imperatives that stand in the way of what is otherwise theoretically good behavior. So setting a business in a firm up to be able to take advantage of the correct behavior. Right. Seems to be important. And Bill, we think that's very

important. We, we, we focus a lot on the culture of the firms we invest in, but we think having the right culture in our firm is important. And a long after I graduated in Columbia over 20 years ago, early in my career, I started kind of keeping a list of things that I thought, you know, basically I call them problems to solve. And it was a basically an Excel sheet thinking about issues we saw in the markets.

But you know, I know you're also kind of a fan of Charlie Munger and he's been a big influence on the way we think. You know, we're not, we don't get paid for difficulty, right.

But my view was if we could think about how to improve the firm structurally, reduce what I call friction cost or alpha drags within the firm, if we could do that from a structural perspective, from the way the incentives are aligned and the way people are treated and the behavior you incentivize, maybe we can generate extra alpha that way. And in my mind, that's also, I mean, it's, it's important because I'd prefer to be working with people who are aligned more

directly. But I think you get, if you can do that structurally, maybe that alpha of 25 basis points a year or ten basis points a year or whatever we're talking about, maybe it can become more permanent if you will. And so part of our desire and and Tom and Gemma and I talked a lot about this as as well as the other analysts who set the firm up, is that something we want to do and we want to eliminate as much as possible those friction costs that occur at most firms.

Yeah, that makes sense. How much does does do technicals work into your process given that you're sort of an ex trader? Do you do you look at those at

all or not really? I we pay attention to the markets and technicals, but we don't, there's not, we don't make decisions based on them. We're aware of what's going on. I'm aware of kind of the price movement in stocks. I care, we care a lot about absolute valuation, just kind of thinking if, if we buy a firm and the valuation is X, what are what's our expected return look like over the next, you know,

full cycle. But we, we also pay attention to absolute in the market relative to the market relative to the sector relative where the stock's been historically. We want kind of as much information as possible to frame our decisions right. And they, I think kind of the, and maybe I think I got this from Howard Marks, but you really want to know the environment you're investing in, right? So how you behave might be very different today than what it would have been, you know, 10

years ago or 50 years ago. So an awareness of that history is important. We like, we tend to own companies and have a lot of history. We've got some companies that go back in the portfolio that have been around their origins of at least 100 years ago or older. And so, you know, and a lot of our companies have been public for. At least 10 to 20 years. So we got a lot of financial history and we want to see how companies have behaved through cycles because we we're strong

believers in history. But the one thing we think hasn't changed, we think our change very little is we think human nature is very slow to change. And why is that important? We believe that most of the financial mistakes that have happened historically, and I'm talking about the extreme mistakes, the bubbles, the crashes, etcetera, that we've, you know, that we've all read about over the last 500 years or longer will likely happen

through our lifetime. So we don't think that the human beings, if we were sitting here having this conversation 2000 years in Roman times, people would still be driven by those same desires that they had then. People want to be famous, they want to be thought of as being an expert on something. They want, you know, they want, they want to be wealthy. They, you know, the desire for love, recognition, whatever that

hasn't changed. And so I think that leads to cycles rhyming pretty significantly, right? Cycles repeat for a reason. And, and we think it's because, you know, the, the, the instruments are which people are investing in change, but the desire to avoid pain and, and get rich quick really hasn't changed pretty much for the most

part, we don't think. So if I'm, I'm going to set you up with a hypothetical and let's see, let's see how you answer this. So hypothetically, let's say that, but there were 7 to 8 stocks that were driving most of the market. And historically, they were some of the best businesses that people have ever seen. And people that avoided them generally sort of lost assets

under management. And then there was another basket of stocks that was trading pretty cheap, but it's really hard to raise assets buying those. Do you think it might be possible that people would overstay their welcome in the first basket and avoid the second basket and or do you think that you want to keep dancing in the first basket? I mean, I think that. This is all hypothetical. Hypothetically, of course, I

think that is a real problem. And I think that pretty much every professional investor probably struggles with that, no matter kind of, you know, and, and, and we know, right, if, if you haven't owned a good chunk or at least a few of those names in the first basket, you're getting pressure to own them. Why didn't you own this? You know, and I, and I hear it from some of our investors who, you know, institutional investors, they talk about the same issues they get.

Or if you have wealth management firms or Raas who have clients who, you know, they, they want to be, you know, everybody wants to be, yeah, you know, have the popular conversation at the cocktail party, right? And they want to have owned what's been working. And while we understand that, and we're not immune to that, let me be clear, right?

But we are acutely aware of it. We try to study behavioral finance a lot and try to, again, put up organizational processes to minimize the risk that we will do something that we think ultimately we're going to regret, like following the herd

in that situation. It, it does, you know, it, it's hard to resist, it's absolutely very hard to resist. But when things get to be as extreme as they are in certain areas of the market today, we definitely think it's best to avoid that. You know, and, and you're, you're seeing some of that come out and just in the last few weeks a little bit more. You know what really sucks?

It sucks to stay at the party too long, but it really sucks to leave the party early and be able to look in the window and see everybody continue to party. Yeah, that hurts. Yeah, that that. Then you want to walk back in the party at the wrong time. Yeah, Well, again, I I'll go back to Charlie Munger, Right. What's he say? He he talks about envy as it's the worst of the deadly sins, right. It's one of the seven deadly sins, and he says it's the worst one because it's the only one

you can't have any fun with. Yeah. That's right. And you know, and, and obviously, you know, being really smart is no, no panacea here, right? We know that Isaac Newton lost a lot of money in the South Sea and the Tula Bulmania. You know, a lot of people don't like to see others doing really well and, and not be involved. You know, I from our perspective, we have, we have a specific mandate for our international small cap strategy.

So that's pretty clear. And I think our investors, our institutional investors and our individual investors would eventually not like it if we strayed too far from that mandate. But we're, we're, I think we're staying well within our, our lane there, if you will. We do have the ability to go in our long short strategy kind of anywhere we want and do anything we want.

We haven't changed our view where we think the best opportunity is on the long side over the last few years, despite it being a very difficult environment for what we're doing. And we haven't, you know, you, you kind of alluded to the fact or mentioned, you know, could we be short some of the larger companies that we don't think have a competitive advantage? Yeah, I mean that that could be possible, but we've chosen not to not to stray to that area.

We think there's a a better environment. And historically we've got a lot of data to back up what we're doing and how we search for our ideas on the short side. And we think we're in an area that ultimately will be right for poor performance. And as I like to say, if a company's going to go to 0 eventually, if it starts out big enough, it's kind of got to go through maybe 10 billion, five billion, 1,500,000,000 market cap on its way to zero and, and we do believe. Well, it's dying smart.

And what we think, we definitely know that, you know, in times of stress in the market, liquidity dries up. And if companies have traditionally more difficulty accessing liquidity, which small companies traditionally do, and that affects how we think about buying our long positions. We want to make sure they generate free cash flow throughout a cycle because they can't be dependent on governments to lend them money or bail them out when things get bad. If you've got.

How this is fake news, you got to ask Sam Altman. Man, you can spend a couple trillion and the government's the insurer last resort. Yeah, that's, that's the latest I I saw that in the last 24 hours as well. So. I'm just saying if that if the top happened when he said that, it would be poetic. Right. Well. Not not that. Not that I'm trying to make you call tops or anything. And it's. Interesting to look at what's going on.

When we, when we talk about all this, I want to be clear, I don't want what I what I think is going to happen. I don't want to happen because I think what happens is not good for the country as a whole. I think it's bad for the economy. I think it's bad for a lot of individuals. A lot of people are going to lose a lot of money. If we're correct that this what we think is a bubble. And I mentioned this, I was at a conference early this summer, I had a family office event and I

mentioned a bubble. And people looked at me like I had three heads. They thought I was crazy. And now it's like, it seems like every day I'm seeing multiple instances of people calling it a bubble. So it feels like things have changed a lot that are they the recognition of maybe there's a bubble has definitely changed a lot in the last six months, but but we don't want it to happen.

But again, what we want and you know, it's like, I want certain things to be different, but we have to invest in the environment we're in. We can't change it. So we want to do the best we can for our investors.

And, and we think that there's clearly some bubble characteristics, you know, and we can talk about that more, but we see a lot of this in the small cap space where the valuations of some small cap companies that have never earned their cost of capital, that don't generate a lot of free cash flow trade well in excess of what they did 25 years ago in March of 2000 at the peakofthe.com bubble.

And they are more levered today. So for example, in March of 2000, there were, according to our data, there were about there were 400 companies in the United States that traded over 10 times sales. And I don't know if you remember the famous Scott Mcneely quote about 10 times sales about the implications of that. And I'm, I'm happy to read it if you want for the for the listeners because it's pretty

shocking. And he said it pretty well about the implications of when you pay 10 times sales for a business. What does it really mean? Yeah, sure, read it.

So, so Scott Mcnealy was the CEO of Sun Microsystems, which was one of the, you know, the darlings of the Internet bubble. Eventually I think they got bought by Oracle, I believe. But at at the peak valuation around, you know, early 2000, the the stock hit over 10 times sales.

And a couple years afterwards, I think he was quoted in I think Bloomberg or business week or whatever saying the following, at 10 times revenues to give you a 10 year payback, I have to pay you 100% of revenue for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have 0 cost of goods sold, which is very hard for a computer company. That assumes 0 expenses, which is really hard with 39,000 employees.

That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. That assumes with 0 R&D for the next 10 years I can maintain the current revenue run rate. Now having said that, would any of you liked about my stock at 64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking? Was he he should have been issuing equity?

Was he issuing equity while this was going on? I don't know. I don't know if he if he did the. Purpose of at the at the market offerings, right? Like you might as well just flip it to the to people that'll buy it. We'll talk about this later. I just had a discussion with another company in October row 8th that had a significant row in their stock. I told them they should issue equity and they told me I didn't understand finance.

I said, I said, you know, and you might think Scott Mcneely's comments are disingenuous to say after the fact that he said it two years later. He didn't say it before, right? But in fact, the math is valid, right? He, he, you know, obviously to generate any kind of return, real return paying that kind of multiple, the business is going to grow substantially and. I mean, that's, that's what

people are betting on, right? And they're betting on, but they're betting on growth rates, which historically have not ever occurred or you know, the base rate would be extremely different than their their basic assumption, right?

And it's. Actually tough thing about the Mag 7 is they have they have defied the base rates at massive scale. Absolutely. And it's not that different for what Sam Altman said recently. So he was raising money. They're raising money for open AI recently, right? I think their most recent valuation was 500 billion. And according to Verge, he told reporters he said something that he said, you know, people are over excited about AI models and someone will lose a phenomenal

amount of money. And then last week he was interviewed and was asked a question about how you going to pay for this stuff, which is a question we asked in our most recent letter. And where's the money come from? And he didn't really answer the question. And then this week we're talking about a government backstop for funding, right? So he, he will be able to look back and say, I told you some people are going to lose money

if that in fact occurs. But the last week he seemed to take instant, you know, with the short sellers or, or in fact, it's a, it wasn't public and he wishes it was public so short sellers could lose money. And again, you know what what we're talking about, though, in my mind, this is not PhD level finance. It's common sense and basic arithmetic, right? The, the, the base rate expectations when you own a company that has that high of a valuation isn't good, surely, just like in 2000.

So the basket I talked about in 2000, there were 400 of those companies. The median return of that basket from March OO to March O one was down 79%. The average return over like the next three years was down like 90. And a few of those companies did survive and became very good stocks for the next 10 or 20 years, right? But on average, they went down, you know, 8090% first, right? You know, and today we see a

basket. The basket's a little smaller, but probably a lot of the listeners know that the number of public companies, United States is about half of what it was in 2000. So there's. Yeah, I thought this is an interesting way of thinking when you said this to me the first time. Yeah, a percentage. Versus how many are listed. Yeah. So now there's about 300 companies that trade over 10 times sales. And again, 10 times sales is the minimum, right?

The the high could be thousands of times, right. But today the average valuation of those three, those that basket of 300 is 3X what it was in 2000. And they have a lot more leverage. They've got 50% more leverage on average. So all I'm arguing is from a purely data perspective, from math perspective, the current starting conditions is a lot more favorable than they were 25 years ago at the prior peakofthe.com bubble. Yeah, you know.

Yeah, the, the, the, the thing about the, the big cash flow, generative mega cap tech that are investing. I, I think it gets tougher because you, you can have a legitimate argument about like how much should you capitalize the spend? Because if they're sort of overspending, does it really matter if they cut it off and it's two years and the numbers are kind of nuts, but the amount

of money they make is nuts. Part of me though looks at, at what you're saying about and not you, but but the fact pattern around open AI and the fact that so much private money is willing to fund CapEx on what appears to be non unproven economics. Though I, I did hear that a model is the, the argument was the model is profitable after a year. The the issue is you have to spin up a new model every year. But that reminds me a lot of the the textile mills of Berkshire

Hathaway, right? So I don't know, man, it's going to be an interesting time. And, and there's questions regarding, you know, the depreciation rates for the chips. And I think Microsoft had a quote this week saying something about they've got data centers they can't use because they, they're basically just have, you know, chip sitting idle and, and rock sitting idle because they can't get the power. We, we do think, I mean, we're

happy to talk about that as well. Oh, it's not, it's not our primary focus. We do think there's some issues there, you know, and again, you know, I hope that AI does a lot of beneficial things for society and and I kind of think it will, but it doesn't necessarily mean that investors today are going to get a great return on

investing those companies. My issue generally, and again, we do not have positions long or short in any of the MAG 7 or the leaders of, you know, the kind of the AI spend, right? What we do believe though is our companies being a customer of, you know, if three companies are competing to produce the best model and maybe only one of them wins. So it's great for them and maybe it's bad for everybody else in theory, but the customers probably benefit across the

board. So can we buy businesses that are going to benefit no matter who wins, right? Because I think it's very difficult, at least for us, we don't think choosing the winner is, is possible. And I don't think there's, you know, when you get massive change like this in a business, it is extremely difficult to pick the next winner, right? That's, that's, you know, a little bit of the crux of what Bruce talks about, right?

We don't have any historical examples of understanding what the competitive advantage is and who does win. And I'm sure we don't know how to do that. So we will try to stay within our circle of confidence and stay out of that, trying to make that bet because I don't think we can do it any better than anyone else. Yeah, no, that makes sense. And I didn't. I didn't mean to make this conversation a negative Mag 7. I actually happen to think the to the extent that you think of

them as a planet. The moons around the planet are where a lot of the froth is, more so than the big boys seems to me. And I think I mean from from our perspective too, it does look like, you know, yes, some of those companies are spending, talking about spending a lot of CapEx it relative to what they used to. So their free cash regeneration may be very different than it has been historically. Returns on capital might be different. They may be much more capital

intensive. But what we look at at a high level, there's companies that are much smaller in nature who were much more questionable in terms of do they have any competitive advantage and are they likely to be a winner at least the the most of them. MAG 7 as you mentioned, you know they have generated a lot of cash flow in the past and you know don't look like they get based on current earnings and cash flow generation don't look as expensive.

Yeah. And they have, they have like tangible distribution advantages that you that you can actually articulate, right. I I think some of the other things that have like AI in the name or were AI enabled, some of that stuff seems kind of nuts to me.

But what when we look at it and we look at a lot of history and I talk about this more, but we see a big opportunity, international small cap value and we look back to kind of the the biggest 10 of the biggest companies around March of 2000. We do think there's a lot of parallels to the2000.com bubble. Obviously, yes, AI is different than the Internet, but you know, AI is probably not that different.

We could have had the same conversation about railroads probably 150 years ago and radio and autos 100 years ago. And you know, with the story of the graduate was plastics, right? I mean that, you know, and, and it was the Internet and, and maybe this is faster, not sure, but some of you know, those, those great companies and some of them were great businesses in 2000.

You know, the average return from the peak, most of them were down 50 to 50% or more after three years and at some point traded down much more significant than that. So you know, and and we've talked to investors who listen to what we say about international small cap value when they see the opportunity. But like you said, they are, they're afraid to leave the party early, right? And you started. Hurts, man, everybody else is having fun you're sitting out there, you're. 100% correct.

It's, you know. Hopefully you're not as hungover at the end. Right. But but it's, it definitely makes it difficult for people to make that switch and the and the pushback we've gotten for probably a better part of a year or so as well. When it turns, then I'll do it. But they want to wait till it turns. We started to see international work, right? Yeah, well that's what I was

going to say. The turn that no ones paying attention to is actually international value as a factor has done reasonably well over the last five years. Yeah. And it it and we're seeing, you know we're seeing it start to work. And according to our data, we've got a long term history. We have charts on each of the factors, international, small and value that go back. The minimum is almost 50 years, the longest is 55 years. And and that's where we think the data gets a little questionable.

So we don't go back further, although I've seen other people's work that are similar to what we do. And it would suggest that going back to the depression, you'd get the same results. We've got an outlier.

We got outliers today where international relative to the US is the cheapest it's been in 55 years at least maybe well, not quite as cheap as it's been because it's rallied a little bit this year. So it, we're just a little bit off the lows of, of where we've been for the last 55 years. So we're probably, you know, in the the cheapest 1 percentile

for international stocks, right? And a lot of US investors, and there's a lot of other very smart people who've written about this as well, you know, have said, you know, international diversification hasn't worked for most of the last 30 years. But does that mean international

diversification is not? A good thing to have over time and you know, I, I'm a big sports fan and a big hockey fan and I like the the Wayne Gretzky quote you skate to where the puck is going so we can talk about what's happened the last year or two or longer. But investing and I think Bill Miller's had a very similar comment to this too, is, you know, all the analysis, all the data you've got as fact as history and all the values derived by what's going to

happen in the future, right. So we want to skate to where the puck is going and we it's not about calling the top. It's not about saying you might not make money in some of those businesses, but we think the asymmetry for where we're looking at and where we're investing is much better than that, where the downside seems to be extremely, extremely limited and the upside could be quite large.

And that's that's international. The value factor as we look at it is the cheapest it's been in 50 years and small versus large is also quite interesting. Our analysis there, we actually use US small versus large. We just get better data that way versus looking at it from a international perspective. Cause a lot of the, even the international small cap indices, MSCI has one that's only been around for less than 20 years. So it's really hard to get good historical data.

But we that would show the international, sorry, small caps are not the cheapest they've ever been relative to large caps using U.S. data. But again that chart use so it says that around 2000 small caps were a little bit cheaper than they are today. We think there is a problem because the data series is different now what I pointed out before about the extremes today because you have a greater percentage of companies that trade it much more extreme levels that skews the whole data.

So the the data set, so the average today doesn't look as cheap as it did before. That makes sense. Yes, that does make sense, but I follow. If you can buy. So we also believe that these time series valuation again is not a short term signal. Most people know that, but we do think it's a good indicator of

long term future returns. And if you look today, you can see that the Schiller PE for the S&P 500 is about as high as it's ever been, right around 1999 levels at somewhere around 4544 times cyclically adjusted earnings for the S&P 500 that would be anywhere near those levels. And even the only times it's been near these levels were around the peakofthe.com bubble from like 97 to O2 is suggestive that the S&P 500 will return close to 0 total return over the

next 10 years. And I've had investors say to me, well, that's OK if I get 0 the next 10 years. And so that I asked him, I said, well, it's if it's zero from here and it doesn't change at all, you might be OK with your allocation. What if it goes down 50 or 80% first? That usually gets people's attention, right? It's it's 0 might be OK. Yeah, well, it's a long duration 0 and you don't know the path.

But it, but if it goes down 405080 in the meantime, that's a lot more concerning to people from, you know, and Speaking of somebody who lived through it, you know, it's definitely something that worries us. And, and we look at it. And so we look at kind of the environment we're in today where we think we ultimately get meaner version in these factors. We see no reason why we will not. And we think that that gives a massive tail when what we're

doing. And if we go back to 2000, the other kind of parallel is one of our advisors to our firm, one of my mentors, the legendary value investor Jean Marie Aviard, who is I mean such a fine gentleman, but he was a great phenomenal

investor. For people who don't know when he was at Sock Gen. before in the Seventies, 80s and 90s and then first Eagle from the late 90s on, you know, we we saw a long period of underperformance leading up to the.com bubble peak for international small cap develop stocks and his performance from 2000, 2002 as the NASDAQ was losing 73% of your money. Cumulatively, he outperformed

by, I think 45% a year. So a small allocation to away from what everybody loved into something that was unloved at the time because he he had made money through his investors all the way through the 90s, but he was lagging the performance of the S&P and the NASDAQ, which is what you kind of talked about right at the beginning. Everybody watching the, you know, the party go on and on, right.

And, and Jean Marie is famous for saying I would rather lose half of my investors because he had a lot of investors leave and the capital went down. But I don't lose half my investors than half of my investors money.

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If you don't like it, feel no obligation to stay. But if you are in the market and looking, I would appreciate if you used fiscal dot AI forward slash brew to check it out. Right, he was making people money, but they were, they saw a better get wit get rich quick scheme somewhere else or they thought, and it worked until the peak of 2000. And then, you know, he was up 150% or so and the market was

down 75%. And trying to, you know, part of the reason we are, we structure the proper way we do and choose

the companies we choose as we try to minimize the downside risk because we just believe the math of coming back from significant losses is very difficult. So it's psychologically damaging to the analyst. It's, it's hard to be a portfolio manager and it's hard for the investors, right? Because investors can say they have a long time horizon, but inevitably something comes up and they might need the money sooner. So the path of returns matters as well.

Yeah, no doubt and so. Well, it matters the compounding too, the math of the returns. Matters, but but recovering from those losses, right? So if you go down 75% versus someone like John Marie who made 100% or whatever at that point in time, trying to, to catch him over that period of time and over the next 5-10, fifteen, 20 years is extremely difficult. He's got such a massive head start, right? And it's, it's better for your investors. And I, you're probably familiar with Dalbar.

Dalbar is an institute which does a lot of studies on individual investor behavior. And they've done studies that show that most, you know, most investors massively underperform their underlying investments, Meaning, you know, they buy a fund after it's done well, sell it after it's done poorly, right? And so they typically the long term studies I've seen, I think they get maybe 1/3 of the

underlying performance. So let's say the index does X, the manager does X and the investor does 1/3 of X, right? And so the managing that path, I think helps us, allows us to sleep better at night, allows our investors to be comfortable with what they own and hopefully they stick with us through inevitable bad period, which will obviously happen, happens to nearly everyone, right? But that path does matter and hopefully it allow them to stay the course.

So if we achieve X, we want our investors to get X. Will be very disappointed if they come in and leave at the wrong times. Ended up much worse than that.

Now why? Why can I not, you know, passive, Passive is the rage. Why do I need an active product in international small cap value? Why? Why is there no ETF that satisfies us? The well, I'll bet you in the next 5 years there will be an ETF that satisfies that today. I'm not aware of one that does there. Are there variation? There's not a lot of liquidity or a lot of volume at trades in kind of ETFs that are even the space, but they don't really focus on value.

Maybe they're international small, you know, and not surprisingly, it hasn't been an area that has generally worked globally for the last 1718 years. So you haven't had the demand from investors historically. We're starting to see kind of some of the interest change whatever from just from our perspective for us. So if I can extrapolate that to the broader market, I'm sure there's a lot of interest more broadly. And as you see money flows and as it worked better, I wouldn't

be surprised to see that happen. But even versus kind of the other benchmarks, we've tried to structure a portfolio that is traditionally in a long way portfolio, much lower volatility, lower beta, lower correlation, right. With lower Vol and lower correlation, you end up with lower beta to the market. So that in bad prays to the market, whether we're talking about like the draw down in late 2018 or 2021, we've tended to lose a lot less than the market.

And that's our goal, right is in those environments, we try to lose a lot less. And so we can compound ultimate higher rates is, is the desire. But I don't think there's a lot of there's not a lot of investors around. I think a lot of big firms are not in the space.

Another reason we like the area because there's not as much competition because as you all know, right, most people you know, if they can scale their business and can be larger, the incremental cost of running a $10 billion fund versus A $1 billion fund or not that much higher or 100 billion versus 10, right? So most firms pushed to go larger and larger, if they at all can, right. And it it makes sense from their economic perspective, you

understand their incentives. It goes back to their incentivize to do that. And I think fewer and fewer people have invested in the space. And so a lot of the managers who traditionally have been in the space have struggled and it's been difficult for them and assets have gone away. Doesn't mean they've lost money, doesn't mean they're, you know, and you know, and some of the investors are closed. But I think it's just, it's, it's hard to, it's been a hard place to be for some time.

Yeah. Well, to your point on sort of catching up, I mean, that's a that's a bit of the dilemma that value as a factor has over the past not and probably since 2020, it's probably outperformed. I haven't looked recently, but the 10 years leading up to it, it was tough. A lot of people got bled out.

Yeah, we, we still show the way we look at it, we still show value is still underperforming. So I'm not saying that's the only way to look at this. That's our data and the way we define value, but you know, and our portfolio. How do you define it? Yeah. So when when we do the long term charts from a relative performance basis value, we look at value versus growth. And one of the ways we look at is we'll look at like Russell 1000 value versus Russell 1000 growth in, in our approach, we

are much more quality investors. We tend to focus on again not surprising given the the influence by Bruce Greenwald, you know being taught by MTA and for him being hired by him, working with him. We focus a lot on competitive and that's the number one thing we focus on, which is more it leads us to higher quality businesses. So our businesses, we are value investors, but our portfolio does not look like a statistically cheap value

portfolio. And if we had, I would argue the results would be a lot worse over the last 10 years or so because statistical value hasn't worked very well, right? But so, so we focus on competitive advantage, number one, capital allocation #2 and culture of the firms we're investing in. And so focusing on those areas leads us to owning better company. How much higher quality companies.

And everything I would say is currently, we think the differentiation between the best businesses and the worst businesses is pretty narrow. So the way I'd like to describe it is if you, you know, if you were trying to buy 2 products, you're trying to buy, you're trying to buy a car. And again, I don't really want to offend anybody, but you say, you know, historically probably know he's driving one anymore.

You could you could buy a Pinto for the same prices you could buy, you know, a Cadillac, right? We'll keep it all American and whatever you. Know yeah, you'd rather not blow up if it's. The same price you probably want, most people probably want to buy the Cadillac, right? You want, you want the higher quality product at the same price. If you got to pay up, you know, if you got to pay 10 times more than maybe you're making a different decision.

But what we see is the valuation compression where we look at some, what we think are great businesses that are still extremely cheap on an absolute basis relative to their own history, relative to the market, relative to the sectors,

etcetera. But we think that the asymmetry is quite good because we're we're starting to see and, and there's been, I mean there's been clear evidence of this and there's been talk about it, but there's more active private equity involvement globally than there has been a long time. And so there's a lot more capital earmarked for international private equity. It's already been raised right.

We know there's issues with private equity markets, but you know, Steve Schwarzman said recently they plan to put 500 billion into Europe in the next 10 years. And then you've got long only managers that have also talked about investing significantly in other areas where we we see a lot of opportunities in the UK, for example, the UK market is has some very high quality business, we think and stocks

are very cheap. Where we've seen one of the biggest wealth management firms in the world and one of the biggest Canadian pension plans have also talked about putting significant increases into that country because we see opportunities, we think they do as well. But the, the private equity money has started to flow. We've seen it. We've seen take outs in Japan at 100% premium. We've seen that in the last year. We've seen a lot with a lot of

strategic buyers. Strategic buyers have a lot of cash too. And one thing we do believe is, you know, as growth slows down, people look to deploy that cash and look to to buy growth and that the corporate balance sheets, according to our data, they got the most cash they've ever had extra financials. If you took all the the companies outside the financials in the MSCI world, they got the

most cash they've ever had. And part of The thing is, you know, international small cap value stocks are so cheap that they've got a lot of cash. And you know, when you know, we know that, you know, the market cap of NVIDIA now is $5 trillion. It's bigger than I think. You know, it's bigger. Maybe it almost as big as Japan. Maybe it's, you know, it, it's as big as most every country in

the world except a couple. You know, the entire market cap of like the EFA small cap index is around 4 trillion. So if you, and you've got a, you've got a couple trillion in private equity coffers ready to go and you've got another 10 trillion in cash and the balance sheets of a lot of companies who want to buy growth. We're starting to see flows into the space. We're starting to see interest. You know, our, our flows have been strong this year with new

investors. We're starting to see it from RF PS pick up. We're starting to see people talk about it. So a small movement in dollars into the space, could it be relatively important to changing the direction of some of these companies in the overall industry levels? And, and importantly we've seen and we've seen it from kind of all from wealth management firms to a pension plans to endowments, foundations,

etcetera. But we've also seen sovereign wealth funds say they've never invested in the space, but they're looking now because they see the opportunity is, in their minds, pretty, you know, pretty astronomical.

It's interesting how when you look across, you know, the, the, the common refrain, and I think there's a grain of truth to it, but maybe not more than a grain, is that the businesses in the United States are on average better than international businesses. Do you think that is a accurate statement or do you think that's colored by Valuations are somewhere in between? Price tends to drive narrative. Sure, I, I think there's some truth to that.

We do think there's a lot of high quality businesses in the US and maybe it's our natural bias, you know, to be patriotic. I mean, I served in the military and, you know, and, and I think a lot of things good about the US, but I, you know, there's

also been some studies recently. And I think, I think GMO did a study recently saying that the argument that fundamentals have been better in the US over the last like 10 or 15 years is actually, according to their data in a piece they put out, I think American unexceptionalism they put out in the last few months argues that Japan's actually been better from a fundamental perspective. So it's, I think it's hard to

argue that. I don't it it matters for an investor if you know, so you could say if you believe the US is better fundamentally, you should pay a premium for U.S. companies. I can't dispute that. But I do believe strongly that you know, the most dangerous words in finance are it's different this time or and everybody seems to want to the the narrative always supports

the view people have. I think that the discrepancy in valuations on average and again the average kind of tells us where to look a little bit, right. But we still do deep fundamental work on companies and we own some great businesses within the United States. So I'm not saying they're all expensive or they're all bad. There's a lot of very good business we don't own because of valuation, but there's a lot of really good businesses we do own

and we think they're cheap. But I think that the, the disconnect today between, you know, perceived quality, real quality and evaluations is significant. And I think for a long time, Japan got a bad rap for the returns on capital of the businesses, right? And, and a lot of Western investors looked at it and if they didn't make any adjustments to the balance sheet, yes, the Roe is low because they've got way too much cash in the balance sheet. Well, you can adjust for that,

right? Now as an investor, do you think you're going to ever seen in that cash or not? Maybe you're never going to see it. And so you want to you want to adjust for that. But I think when you do the aggregate analysis, we think that can be quite misleading at times, right. From that perspective, if you just look across the board and say the average are we is, you know, it's, you know, let's say it's 7 for them and it's 15 for the US.

But the US companies have 40% net leverage and the Japanese companies are, you know, 20% net cash, right, you can make up. With US, companies have been buying in shares their equities artificially depressed. That said, there is very real

rebuttal. I mean, until Japan sort of got on the companies to return the cash as a minority shareholder, it's all illusory cash flow until it's not. 100% And I mean I can. I've had a long experience investing in Japan. When I was at Pequot Capital as an analyst, I over 20 years ago to 25 years ago, I wrote a report saying we were looking at, I was looking at the big auto companies and we were generally at the time long the Japanese and short the American auto companies.

But the idea I said, I wrote a report and said something about the fact that the problem is, is our time horizon is so much shorter than theirs. They're thinking that this Toyota thinking decades out and we were worried about the next calendar year Max for the most part, right.

And we saw it again when, when Abe came back into power in 2014, maybe you know, you, you saw the, the Japanese Stock Exchange create the index that, you know, basically you had to have 10% ROV to be part of the, the club. And so there was a push to get your ROV to that level. But we try to have a lot of thoughtful long term discussions with the companies we own. And we we have significant exposure there and we've talked to a lot of them.

Again, we do it all privately. We're never public about it. But we had a company said, you know, told me it was a, the son of a founder running the business. The company been in existence since 61. He was talking about, he wanted to do what was right for Japanese society and they had pretty low returns on capital and a great business. I thought at the time, I still think it's a great business. And I said, I said to him, I said, what if you want to do the best for Japanese society?

They had a lot of employees that I thought were extraneous here. A private equity firm would go in and fire 95% of their employees and just move on. He, he was not going to do that. I said, well, in my mind what you can do if, if you can improve your returns on capital and improve your free cash flow generation, you can afford the luxury of having extra fat in

your organization, right? If you think that you don't really need, you automated your factory so you don't need these 200 workers anymore, but you don't want to fire them. You want to let them retire with dignity or, or whatever your

kind of perception is there. My point to him was the best thing you can do to have control of your company and to do best for Japanese society, if that's your goal is to make it a Better Business. If you can go from being a 5% ROV business to a 20% ROV business with significant improvement in free cash flow, you will have the flexibility to make that decision. But if you have 5% ROV, we know you also can't grow that business at 15% a year either, right? Without borrowing money you

cannot do that self funding. Yeah, that, that makes sense because you can only grow as much as your ROV times how much you can deploy, right? Reinvestment rate, right. So, so that was kind of the discussion we had. There with. How interesting, that's a smart way to frame it. It, it wasn't. And, and I think a lot of those companies have been approached by Western hedge funds, you know, buy back stock, do this,

whatever. And then they're renting the company for three months or six months or a year and stock goes up and then they're gone and the company has to live with the long term ramifications. Interesting. So wait, just going back to that, what you said to him is you said if you want to do the best for society, let's say you can grow 10 but your RO ES only 5, you need to borrow the 5% that you would need to otherwise.

And if you really think that you can grow 10% and your company is great, get your RO E to the point where you can, where it supports your growth and then you can maximize utility. Yeah, and it's smart, man. I like that way of framing it. And this thank you. But this was a company that we thought had a lot of untapped pricing power, right?

Because it go back, you know, you know, again, when were the last time international stocks were expensive was around 1990, around the peak of the Japanese bubble, right? They've been in a bear market for a long time. There's been very little you've seen mostly disinflation or deflation, outright deflation there for the last 30 years. But they have a product, they were, you know, they were 20 times bigger than their nearest competitor. They had significant cost advantages.

And so I was suggesting they consider raising prices again, right. You want to, you know, what's going to flow. How do you improve the bottom line most effectively? If you can raise prices by a small amount, still much cheaper than any of your competitors. I just was saying don't give it all away to your customers.

If you keep some for yourself, then you can do with the company what you want to do. And and that's, you know, try to solve that problem, but it wasn't, you know, it would never work if we went and told them do this, do AB and CI don't know how to run their business better than they do, right? We try to, we try to partner with companies and talk to them about their strategy and try to understand if we had the same information they had, would we make good the similar decisions,

right. And we have some operating experience of people in our company today. We have people that worked at, you know, GE and AT Carney and Colony and Hawaiian Airlines. We've got some operating experience, but we don't pretend to think we can run their businesses better than they do, right? But we can. And we have helped many companies from companies that are in the mag seven dozen years ago about capital allocation to the smallest companies we own today. That's interesting.

How many, how many companies are in the portfolio at any given time? Yeah. Broadly, we're around 80 companies on the long side in the portfolio and our long short, we have a similar number of a little bit less, but for today we probably have 6065 shorts. How do you talk to 80 companies? It's it's difficult. So are, are not, I'm a kind of a process guy, maybe not surprising kind of given the

quantitative background. I have always believed in doing things, trying to be more efficient with how we do things, right. And we have a small team. The, the way we go about it is we try to take a universe down in small caps, which is probably about 20,000 companies truly down to about 5000 very quickly. And then from 5000 to a watch list on the long side of maybe 4 or 500.

How do we talk to 85 companies? Well, half the companies we own today, I believe, I say, I think we're still above half. We've owned or done significant research on at some point in the last 20 something years. We have companies and portfolio today. We had one taken out a couple years ago, but let's see 1 today. I know I first visited in 2003, aerospace and defence supply supplier. So I've been through multiple CE OS with that company. Think it's a great niche

business. I've been following them for a long time. So we've got a lot of experience with a lot of companies. Historically, we've travelled to meet a lot of companies. We've done a lot of travel. I used to travel 4 * a year to Asia and probably 6 times to Europe. So we do visit companies.

But going back to your question, how do we do it, We really try to use technology to be very efficient, to minimize the time spent in gathering information and have time for the analyst to think about what the data tells us and, and to do our analysis and do our primary research. So we really, you know, some, some firms brag about, I look at 100 stocks and then we choose one. We, we kind of probably do as well or more because we end up buying kind of less than 1/2 of

1% of the universe. But our idea is we don't want to spend a lot of time looking at most of those businesses. So businesses have characteristics that we're not going to like, IE we don't think we can predict, you know, that this is under massive change. We can't predict what it's going

to look like in the future. Businesses haven't earned their cost of capital, businesses that have a lot of leverage, businesses that have opaque balance sheets or maybe off balance sheet liabilities which we can't really evaluate. We tend to stay away from those. We stay away from kind of pre production mining companies or pre production biotech

companies, right. So we're eliminate, we do our first filtering is to eliminate a lot of the universe and then really only focus on the tails, right. And we want to be in the the tail where we get the combination of a great business at an exceptional valuation opportunity and, and we, we tend to watch those until they become attractive. But we do deep fundamental research on all of our companies.

We've got extensive models. We talked to companies, we talked to people in our networks quite a bit to understand suppliers and customers and competitors to get a real good view of the landscape. Do you want to talk a little bit

about portfolio construction? I know it's a a topic you're passionate about. Sure. So from portfolio construction perspective, we, we do think we do it differently than most. And and why do I say that when I talk to other adjunct professors at Columbia or whenever I'm in a Columbia event, a lot of people will come up to a lot of value investors, fundamental investors and the first questions like

what's your best idea? And while we think that's necessary, like you, you want to have a best idea, but the best idea is not that important to us in somebody else's portfolio, in a portfolio traditionally like a Bill Miller portfolio where he had 20% of his portfolio in one name, best idea might be really important. Our best idea tends to be much smaller in nature. You know, our, our biggest positions tend to be in the three to 4% range depend on the

fund. So you know, in our average position is today, you know closer to like 1 1/4% in that range on the for the long always strategy and they're a little bit bigger on the long short side. But, but in that order of magnitude, we believe our process works really well and we believe we can identify value. We don't necessarily believe we can identify a catalyst. Do we think a lot of people saying there's a catalyst, it's like they're trying to create a story around what they want to

happen. But but we can, we can use the data to identify value. When we think about portfolio construction and again, this does go back to the days of JP Morgan being concentrated levered portfolios. We, we think about and I, I thought about this a lot from those days and I think I learned a lot from the quads at that period of time from the CTA is trying to think about how to

manage risk. And I think I've always thought about it differently from a portfolio perspective as an equity investor, as an equity investor over the last 25 years to say, you know, can we add a stock to the portfolio, even a long one portfolio? Can you add a stock to the portfolio that actually reduces your risk? Most people say that's not possible, but I'll give you a a

simple example. Well, if you're, if you were long a lot of Japanese exporters and they benefit from a weakening yen, if you actually were also long a Japanese importer that benefited from a strengthening yen, you might actually owning those two stocks might reduce your currency risk there, right? Does that make sense? Yeah, for sure. So, and, and we think a lot of investors do the traditional well, what's your, what are your sector weights? What are your country weights?

That's your exposure. We're willing to be very different than the benchmark and we pride ourselves on this and we believe in this. I think Peter Bernstein said the quote right. The only way to be different in the long run and produce superior returns in the long run is by willing to be different and look stupid in the short run, right? So we are, we're benchmark

aware. We know what the benchmarks doing, but we never have a discussion about, oh, I like this stock, the weight, the benchmarks are 1%. We like it supposed to be 1 1/4 or 1 1/2. That never comes up. I couldn't tell. Maybe once a quarter if I see like the top ten names of the benchmark, I can tell you, but I can't tell you I would doing the bad. I can't name one of the the any of the top ten stocks in our benchmark because I don't really care. I don't I don't know it, it

matters. It matters to somebody else if they want to look at us relatively speaking in the short run. But there are sectors we're likely to be underweight pretty much systematically. We have been for a long time and like I'll mention a couple financials, real estate and utilities and and why might be that. That's your underweight. We're underweight, traditionally very underweight those spaces. Why is that? And some value investors, a lot of value investors like financials, they like real

estate. Well, go back to what's our big focus. Our number one focus is a competitive advantage. I don't believe that there's a lot of competitive advantage in small cap financial companies, real estate or utilities. Most of them haven't earned their cost of capital. Most of them have a lot of leverage. We don't like the valuations of real estate overall. That's another reason not to like real estate. And there are exceptions, right?

But traditionally we're very underweight those areas because again, you know, as a former JP Morgan employee, I'll say, you know, I think JP Morgan, I respect him a lot as a bank.

If you want to go borrow money for your Business Today, and JP Morgan offers to lend you money at X, and you go to a bank that's not quite as perceived to be as high quality, and they offer to lend you that same amount of money, same terms, but the rate is half of X, I'm willing to bet you and most everybody else will go borrow money from somebody else. Now, JP Morgan is a lot more than lend money like that, but you get the idea, right? They're lending a commodity.

That commodity is the same no matter who it is, right? And small banks especially, so, you know, we tend to stay away from that. We think the opportunity set is much bigger and broader in small caps. We're not forced to own those names. Yes, some of them are quote UN quote cheap and we've seen it in for a while. There's been cheap European

stocks for a while. It concentrated a lot in the financial area and that's just not an area we ended up owning financial services or companies that are, you know, supply them with product, but not traditional banks, if you will. So it does lead to a slightly different focus in a portfolio from a construction perspective. That's number one.

Number two, when we launched the firm, Tom and I, so again, Tom is another part of the firm who is Chief Risk Officer at Alpha Diet. We talked a lot about how much we're willing to risk on being wrong and you know, we believe we've got, you know, a very good process, one of the best processes to identify value. The risk is that you don't you can't see the idea to fruition because you run into bad luck in

the short run. And I think that a lot of people you know they they believe in concentration. And this is 1 where I probably differ from a lot of kind of Columbia associated professors where I believe there you do have benefits of diversification that people do not truly appreciate. Jean Marie Aviard did appreciate it. On the other hand, one of my other mentors, Bruce believes strongly in concentration as do

a lot other portfolio managers. But we think we get the benefit of a broader portfolio that's diversified that allows us to have lower correlations to the market, lower volatility, while not impacting our ability during alpha. If we had 1000 companies with the alpha go down, yes, that's too big. The the analysis we've done in our history over the last 25 years would suggest we think

somewhere around 80 is fine. And there's a little, there's some arguments coming out now in the academic community arguing that number should be bigger, but especially in small caps, if you had a 10 or 20 stock portfolio, in my mind, you really can't have a real institutional quality business, right? It's, it's too volatile. But you know, we think we get the benefit. So we, we put together a portfolio that for our time here and at our previous firm has about 80 companies, 80 long

companies are all small caps. Most people would agree that small cap companies are more volatile than large caps. You look in the US, the S&P Vol probably is somewhere between historically somewhere between 17 to 20%. The Russell 2000 Vol with over 2000 companies small cap companies is probably 25 to 30% volatility, if not more. The NASDAQ is kind of in that range.

We put together a portfolio of 80 small caps with a volatility historically of somewhere between 10 and 13 by and we're again, we're willing to be more concentrated in sectors than some. So we're not just trying to again, not, we're not trying to minimize volatility, but it's the nature of the companies we choose and the way we think about their interaction and their correlation, how they fit the portfolio. And, and that's one thing I

think we do differently. We, I did it intuitively before at previous firms, but we've been able to adding Tom to the team here has allowed us to quantifiably analyze this and we've reduced our correlations of volatility with the portfolio. So what's led to historically the firm I was at previously we tended to own have a lot of cash. That was kind of a nature of the firm desire to have a lot of cash as a reserve. What we've been able to do here is take the cash down in our

long way portfolios. We're much more fully invested say close to 100% ninety 9798 versus historically 75, but we still show as low a beta as we did prior. Yeah. So what it allows us to do is suck upturns but but still preserve more capital on the downturns. Sorry. Yeah, no cash drag sucks. Yeah, absolutely.

That's, I mean, that's probably. In the environment where we think that the the ability to compound at you know, we, we think ultimately our you know our companies will grow value because of the the free cash they generate due to revenue growth margins etcetera. Oh and the returns on capital and reinvestment at a very high rate, kind of worst case probably low to mid teens plus we get set worst case. We think worst case from here crazy is is crazy.

But then you add in the fact of the money flows, we talked about the meaner version evaluations, you kind of get Charlie Monger's Lollapalooza effects, you get some crazy returns.

So from our viewpoint, we don't want to be, we don't want to have any cash. We think that cash drive will be significant. In fact, when we we look at our long short portfolio, we actually have managed that more recently, not throughout our entire history, but this year being over 100% net long. But even, but even in that situation with a little bit of leverage because our companies

tend to be very under levered. Our shorts are so unique and different that our beta to the S&P has been somewhere under .1 this year and our beta, the NASDAQ has been zero and beta like bitcoins negative. So it it'll our, our structure of our long short portfolio is very different than most long short funds. So we we managed to a higher net exposure or lower gross. Yeah, OK. But it's but it's very different than anything we've ever seen. Oh, a higher net and a lower gross.

Interesting. But it allows us to take our long ideas which we think are kind of it up, you know once in a lifetime opportunity, get a little bit more leverage to make more money there. But we think our shorts are kind of once in 25 year opportunity to make significant absolute returns on the short side, right. It's been very difficult for people to make money in short

side for the last 25 years. You know, there's been periods of time where they've been able to do it, but not consistently. And obviously the environment's changed a little bit now where you can earn a short stock rebate etcetera. But that allows us a different approach from that perspective. Yeah, but, and I would I mean, we can talk more about the portfolio construction. I'll just say one other thing

and I'll stop. But it it's, you know, when we start looking at new ideas, we do independent risk analysis to understand how they will fit in the portfolio. So if an analyst wants to look at stock A or stock B, we before they do any work, we can understand quickly how is the stock behaved in the past, how does it fit with our existing portfolio. And that understanding we think helps Lee has LED us to a portfolio that's very different than other investors in our space.

So we're very different than even other small cap international investors. But more importantly, for a broader portfolio, it's a great, you know, effectively we think we're a positive expected tail hedge for most people because we think we won't make positive returns. So it's the insurance policy that will pay you at the end of the day because it behaves so differently than everybody else.

But it's, it's not, you know, so it doesn't have the same characteristics of going up and down with the market like everybody else. Well, that's interesting man.

If if people listen to this and are interested, how can they reach out to you? Sure, we have a website somacalphacapital.com. Mac Alpha Capital is the name of the firm. They can, they can e-mail me or e-mail the firm and and we will be happy to get in contact with them. But thank you very much. Yeah, well, hey, thank you. Thank you for for chatting. This is enjoyable. And I don't know it's it is an interesting environment to look at.

And statistically, it is hard to deny that international looks a lot cheaper than the US, though that the equal weight S&P doesn't look like crazy crazy, but it doesn't look crazy cheap either. Right. So, all right, thanks again. Thanks for your time. Thank you, Bill, and thanks for everybody listening. Appreciate it. All righty, take care. Thanks. Bye. None. Music.