Richard Cook - Traversing For Value

Ladies and gentlemen, welcome to the Business Brew. I am your host, Bill Brewster. As always, thank you for tuning in. This episode features Richard

Cook of Cook and Bynum. Richard is a concentrated investor that is currently focused on EM. He can go anywhere. He's global, but seems to me to that the current focus is on EM. You can listen to the interview and decide for yourself. Anyway, I have gotten to know Richard now for, I don't know, probably close to a year, maybe it's a little bit shorter than that, but it's been very fun getting to know him. I hope that you are interested

in the conversation. He drops a fair amount of great Nuggets. I don't know, I like this conversation a lot. I hope you like it.

As always, nothing in this program is investment advice. All of this is for entertainment purposes only. Do your own due diligence, consult your financial advisor before making investment decisions. And anything that Richard said on this interview, he can change his mind and he has no duty to update you or come on this program to let you know. So that's that and enjoy the show. Before this music drops, I do

want to give a shout out to my editing team at Speech Docs. You can find them on Twitter at Speech and Docs's docs. Dax and his team is are fantastic. I met them. Well, I was introduced to them when I was on Value After Hours. They've done Toby's work, at least on the transcript side. I don't know about editing the pod because those pods are normally dropped live. However, I moved from the podcast consultant to Speech Docs and the transition has been, I would argue, seamless.

I hope that you as listeners have not noticed a difference. And all I can say is that Dax and his team offer incredibly good value and they're very responsive, and I very much appreciate what they do on the back end of the show. So if you are somebody who is thinking about starting a podcast, please consider Dax and his team at Speech Docs. That's SPEECHDOCS. All right, ladies and gentlemen,

Richard Cook from Cook and Bynum. Thank you very much for joining the show. Sir, how are you doing? Great. Great to be with you, Bill. It's nice to do this. Last time we saw each other was in New York. That was a a decently fun panel I think. Oh yeah, I enjoyed it very much. Thanks for leading that. I tried, I tried my best. There was a lot of discussion about like governments and following election results, the more so than I thought there might be, but I don't know if

that's just a function of what you have to follow when you're in EM investing or not. Well, I think the course of governments matter and I think they matter for more for some businesses than they matter for other businesses. I think a lot of the trading that happens in emerging markets is shorter event driven around the elections because that's kind of the the amount of attention and focus that people

have. And I think there's less or I think that's attracted to us about searching for names in emerging markets as there's less fundamental analysis and good business analysis work happening. But I mean, certainly governments matter. They matter more in some countries than others. Like a China wants to do something, they do it and Peru, the government's pretty small and pretty ineffective. So kind of capitalism happens regardless if the government

wants it or not. And so that there, but also we think about the businesses we buy, we think about how sensitive they are to a big shift to the laughter, a big shift to the right and new administrations. And I think that that's a important part of the underwriting in the US as well. I think you still find the same thing in the US, but certainly it's something to think about when you're. Yeah.

For those that don't know, because we're jumping right into emerging, you tend to be skewed emerging right now. But I mean you, you have disclosed an investment in ABM Bev that has a substantial amount of US cash flow. So and I don't think that you started as emerging right. So it's not necessarily by design, it's sort of an an outcome of a process or is it by design?

Well, we've been doing good. We've had global unconstrained go anywhere concentrated mandate since we started back in 2001. We're coming up, our anniversary's coming up in a couple weeks. We'll be 20-3 years in.

So we started out, of course, because that was our base of knowledge and our circle of confidence in the USI had a couple mentors that really encouraged us starting in 2005 to look at emerging markets because they said they're less people with your skill set there and and that there's more of an opportunity to have an edge if you do the type of work that we do. So that's not sufficient.

But in that time period in the late 2000s, valuations got pretty expensive in emerging markets relative to the United States. So we had some positions that worked fairly well and then our exposure shrunk. And then maybe this has been too soon, but maybe the last five years or so, our exposure has increased as the relative valuations with the US have gotten more extreme.

So, but we have a, we continue to have the same philosophy, but we continue to have a strategy that is global unconstrained. And then we also have a flavor that is just emerging markets excluding China. And when you, you say you said global unconstrained and concentrated. So that leads to two questions. Your top I'd, I'm going to say 8 holdings because I don't even know if they're 10 consist of how much of the portfolio 100%, OK.

And how many investments have you made since inception over your 23 years? We've made 40 investments in 23 years. So you would say you're a little bit longer term than the street? I guess, yeah, I mean we try to think like business owners and we approach management as long term oriented business owners. And I think our average holding period's been about five years and we have delivered, we've not delivered a lot of short term capital gains to investors over

the years. We're conscious of transaction costs, but especially if thinner things that could be smaller. But mainly we like to buy a business, assume that it's not going to trade again and are we happy with the result. So then we're not in a trap of trying to guess what sentiments going to be or who's going to buy this from us later or

whatever. We could just compound capital with the internal rate of return of that business and you know, this course other pieces of that, but that's our, our time horizon as we, we go into something assuming we're going to own it forever. Maybe best case, the stock goes up a lot in the first, you know, 12 months in one day and then we can sell it and then earn a much higher return than we expected.

But it could go the other way, could be that the sentiment goes more negative, but we're, you know, we're, we're underwriting to a cash flows or, or to owner earnings that we expect the business to generate over time. So we were talking about before we, we hopped on when the stock price does go the other way and, and it's going against you. One of the things that you've

written about in the past is how powerful buybacks at levels below intrinsic value can be over the long term. But I thought a wrinkle that you put in your analysis that was interesting that I'd love to hear you riff on is how a controlling shareholder can help that situation. Yeah, I mean I've seen a number of you know a lot of businesses that we've owned, we own now and we've owned historically have had controlling shareholders. I think that that suits us since

we have a long time horizon. We like if we like the partners, we think we have to underwrite them and make sure they're people we want to be in business with. But if we'd like them, that could be an advantage because they are focused on 10 year horizons and longer and not on my stock options are expiring. I need to get the stock up to or whatever the I think of. There's a different places, you have different cultures around buybacks and different tax

incentives. But I can, I won't name the company, but I can think about a conversation I had with a large U.S. business with a controlling shareholder. And the CEO was talking about how he's going to get his valuation up and sort of upset that his valuation multiple wasn't more like some of the business that he admired. And I said to him, I said, you have a controlling shareholder that they own almost nearly half the business. You're buying back stock aggressively every day.

Why do you want? It's in the benefit of your controlling shareholder if the valuation just goes down. I mean, the multiple guys are not the intrinsic value, but the multiple goes down. It's really powerful. So I think the letter you're referencing, it was sort of came out of that discussion with him. But in my mind, sort of shame on his controlling shareholders for creating a fault, The bad incentive for him that he wasn't focused on building intrinsic

value per share. Yeah, because that that's where he should be when you could think about different proxies to make that test that in your comp agreement. But we see that all the time that we see lots of companies buying shares above intrinsic value or trying to get their stock up and thinking short term they'll do transactions, oh, if we did this we'll get price more like that. Or if we list here, we'll get this multiple instead of the multiple we have. And a lot of time and energy and

money is wasted on things. And I'm always like, we'll just make a better product. Satisfy your consumer, your your customer better, you know, be more efficient, find ways to save money. Those are the those are the things that we're more interested in when we are talking to management teams. Yeah. Well, the the letter that I was actually thinking of, the comment that you had put in that I thought was quite insightful. And one one of those that when you read it, it's like, oh,

that's common sense. I wish that I had written that, but it was that the controlling shareholder protects you from a take under. Oh yeah, that's a good. Point and well, you made it. It's very smart, right? Yeah, it's brilliant. It's absolutely. Brilliant, that guy who never heard television. No, I mean, that is fair. I mean, you do deal with companies where their stock is down and it makes them vulnerable. But if you have a controlling shareholder, that's not a risk. Yeah.

So that should give you more courage to, I mean, I talked to, we'll frequently meet with companies and this doesn't sound as quite as crazy in an emerging market as it does in the US, But we're like, I'll ask him at the end of the meeting, why do you have an investor relations team? What is the goal of your IR effort? And I think usually the answer to that is their goal is to get stock price up.

It's like a sales effort. And what we're much more drawn to companies that have no investor relations that, you know, don't report in English or, or that are not, I mean, where they're there just to provide information, perhaps they're accessing the debt market and they need to have an investor relations team in order to improve their yields.

I mean, that's a good answer. But you know, if the IR effort is really around not just communicating accurately with investors, but trying to get the stock off, you can figure that out pretty quick. And not, never would we get involved in those companies, but it's definitely a, this definitely means there's probably a difference in sort of values about what their goals are from what our goals are.

What are some of the tells that you've seen over time that investor relations is kind of there for the multiple? Well, sometimes they'll basically will say it, Hey, do you know any conferences we can go to or we can reach a lot of new investors or if they're, I mean, I get emails from investor relations teams like, hey, look at our stock. I mean, that's just the worst kind of case.

But with the way they communicate, how frank are they when you go back and read the way they communicated two years ago and four years ago, how does it compare? Or they quick to say that this or that is temporary or needs to be adjusted out or is or whatever. And then and maybe it does, maybe it is a one off event, but how does that, what does that kind of sniff test say about

what the reality is? And so I don't think it's that hard of everybody's walked in a car dealership and gotten gotten pushed hard to buy something and other times you walk. But we've also dealt with some really wonderful people on the best investor relations teams. Besides just not having one. I would say the best teams are looking for ideas.

They're accessing people that are following their industry seriously and they're looking to gather information from you that they can convey to their CFO or their CEO to help them better manage the business. And I think we've had some a number of constructive relationships like that over time where as an investor we have access to every public copy and industry in the world. And we will talk to them, we'll follow them, we'll engage with them.

And sometimes they can bring competitors and peers and suppliers and customer information to an investor relations team and say, hey, you know, they're, they're doing this there and it seems to be working like this is an opportunity for you or we're seeing this trend and it may be a headwind for you. Think about how you can get ahead of it just sort of be a part of the cross pollination of

pitch of information. And I think with that you can build, build a, you know, if you're useful to them, if they view you as useful, then they'll, they'll, I, I think that you're there more reasons for them to talk to you and you have a better seat at the table about something else that you want to influence. You know, in the last few, several months, we've had two of our CE OS come to Alabama to see us. We talked to our, our manager teams frequently when just about without exception.

And I think because we are focused on the long run and maybe we're encouraging them to their sort of better angels to not listen to what some investment maker has in their ear about the short term, but to think about the long term. I think that the right management teams want that. They want that feedback. And so it could be hopefully we're able to add value that way. Just maybe how to run this business. Do it the way that you think it's best.

Don't ignore the noise and. So you write a lot about bias

and avoiding bias, and how do you think about the sort of juxtaposition of getting to know a management team and the bias that that can create and remaining rational while being engaged? I think that gets to your personal disposition a little bit. I, I mean, I know investment managers that don't want to know management teams because they sort of well management teams are good salespeople. And I'm going to be biased. I mean, I think it's really an important question.

I think you can. I certainly have seen investment managers get suckered in by charismatic leaders and I can't think of where we've done that. And I'm just thinking through our 40 investments. But I'll probably will think, reflect on this tonight and think of one or two where maybe we weren't as objective as we can be. I mean, I'm certainly, we try to avoid bias, but we're certainly not immune. So I mean, Charlie Munger talks about avoiding your fair share of folly.

And maybe that's a that should all be our goal, but maybe we, whenever there's new information about a business, we try to re underwrite it from scratch. You know, we have models, of course, that we carry along, but I frequently will, you know, open up a spreadsheet and sort of think about the business totally anew. And so kind of refreshing all the time, which is as if you didn't know anything is, is

important. I would also say that we have a culture here that is different than a lot of other places that I've been exposed to. And that I encourage everybody on the team, not just the research team, but everybody on the team to be able to say both sides of every question.

But like I'm in the context of research, you know, I don't want us to have a pitch and defend culture where someone owns a stock, they present a stock, they get in the portfolio, their their bonus is tied to the results of that particular stock. And then that creates this incentive for them to hide information about that company and only give you the best information.

It's really helpful if we spend 6 months on an idea and then we find one point that makes us not want to invest like that should be encouraged just as much. And I, I want everybody here to be able to tell, hey, Richard, you're an idiot. You're thinking about that the wrong way or you hadn't thought about this or and hey, this is important, but this is also important. They're counter to each other. I want us to be seeking the truth wherever that is.

And that hopefully reduces some of the bias that they can creep into any kind of investing. But it's certainly not foolproof. But that's the best I got is to, you know, keep, you know, it's like if you write a paper and then you put it aside, you read it again the next day, you'll make improvements. And so those types of ways of tricking yourself into rethinking, well, someone else has got a bearish view on it. Let's be able to explain the bearish view. Why do they get to that point?

How do they think that way? Can we challenge their assumptions? We disprove that. And how do we rub our nose? And and then another thing we do is kind of imagine a priori, if this is kind of our thesis about this business, We think they're going to do this. Let's kind of write that down, think about it, and then as events unfold, how did it turn out if we were expecting this to disprove our thesis, We have a test already out there, and then that happens harder for us to stick with it.

So, and we try to do that both the opposite way too. We actually do that with the things we don't do, which is the long list of things we should have done that we thought about doing that we didn't do. Oh, you mean like we were worried? Like mistakes of our errors of omission almost. Yeah, absolutely. I'm constantly somebody is digging up from our teams chat from 8 years ago where I said we were worried about this or we thought this was going to go that way and it didn't go that

way. And this worked out better than we thought. And sometimes it's we were worried about something and that's exactly what happened. But, but also sometimes it's we were worried about this and maybe we were too worried about that. What can we learn from that? Or is it just been lucky that it didn't work out that way and that or hasn't worked out that way yet? So I don't know trying to redo decisions with postmortems is is a frequent part of our of what

we're doing. Well, I shouldn't say you make few decisions. There is not much activity in your portfolio. So I would think that making

sure that you're not falling in love with an investment just because you've owned it for a number of years is a skill set that maybe has to be developed. Yeah. I mean, we've made some mistakes by holding on to things. We've also made mistakes by getting rid of things. I mean, we've lost more money by selling things too soon for sure. Seems to be a common refrain. It could be a comment on where we are in a market cycle. Yeah. Well, that's true.

But I've we've been through a few cycles, so I don't it's not just this cycle. And we, we, we first started our business, we bought Tractor Supply Company. Oh. Yeah, you told me. This and it quadrupled and we sold it, thought we were geniuses and then I think it's up more since we sold it than the S&P or anything. Else you want to tell people how cheap he bought it. We bought it.

I don't know the split adjusted, I can't give you all that, but we paid about seven times earnings for it. It was a double digit grower. The CEO owned about 15% of business and he was buying stock in the open market they had. So that can't do the split adjusted, but they had about 40% of the stock, half the stock value in expanded working

capital. Basically they had put in a new inventory system that had failed and had no idea how much inventory was in their stores and they made the decision to that. They didn't want their customers to come to the store and leave dissatisfied, so they just pushed inventory into the store. So if you went and visited the store, they'd have 7 wooden axe handles and seven synthetic axe handles and they probably needed one or two. And that was true across every category.

So they knew that they needed to get a picture of their inventory and they needed to, they needed to pull that go back to a more normalized inventory, which I think the inventory turns to drop to two. And they would have been 3 1/2 before. And so if you just took their inventories back to 3 1/2, you were paying like three times earnings. But I think we lacked, I mean, we thought it was a decent business.

We've always skeptical of retail, although that's been a place we've done a lot of things. We didn't have one in Birmingham yet at that point. We visited some in Tennessee and Nebraska and a few other places. But we lacked, shame on us, a good lesson. We lacked an understanding that this was a very good standalone format. They could be near a Walmart or near Home Depot. It could be just fine.

I think we were worried about their skews getting competed away from them by the big boxes and that was unwarranted. They wound up their biggest competitor went bankrupt. They bought a hundred of their big competitor. They they had about right around 300 stores at the time. They bought the cherry pick, the best hundred stores from one of the competitors and converted them to their format and went on to have a ton of success. I mean, obviously it's been a

tremendous success story. I wish we had been a long I wish we'd stayed with the ride because we know kind of red stick redneck companies, Tractor Supply, really it was is a store for people that pretend to be farmers and and you. Know I had to go in for my dog or I had to go there for my dog. Yeah. And so truck boxes and fence posts and some of the things, I mean, it's definitely, you know, but my mother certainly resembles that and I do too, is someone that likes to be in the country.

And so it's a business we should have been able to understand really well. I think we understood it well and we lost a lot of money because we didn't understand it, didn't understand their offer better. Do you think that has anything to do with, I perceive what you saw was a balance sheet issue and then it's sort of transitioned to growth earnings power machine.

Do you think some of that was because you were focused so much on the inventory sort of normalizing and once that sort of played out, it was like, OK, well, now it's close to fair value. So we're we're sort of done here. Yeah. I mean, I think we felt like we'd made the easy money and that it was going to get harder for them because retail is hard. And we were worried that at that point, Walmart and Home Depot and Lowe's were still growing pretty rapidly.

And we thought as they grew that that would, I guess we did. We lacked the imagination to see how big the white space was for tax black company. And and in our defense, we were 23 at the time, but we were still learning, investing. But if you have a retailer that has a pretty fast payback period for opening a new store, 2 years, 2 1/2 years and they have, I think they thought their estimate at the time was they thought they had room for like 800 stores by the country.

They have way more than that now. So they were too conservative in that number. And I think we probably trusted that. I don't know why we trusted it per SE, but we lacked the imagination to see how big it could be. They also we're very focused on the sort of upper income rural areas. You know, they were like horse. The count of horses was an important number for them for locating a store because that's going to locate gentlemen

farmers. But it turns out that stores work pretty well if it's, you know, cattle. It's not just where you don't have a lot of horses. Interesting. Yeah, it works pretty well and the less sort of gentrified country areas as well. And I'm not sure they do that yet, but they look, they did a fantastic job of managing the business and and growing it. And so I give them a lot of credit and I wish we'd have been stayed on them for the ride longer.

But maybe, I don't know, maybe if we'd spent more time in Tennessee, we could have figured that out. Maybe if they'd had a store here, we could have figured that out. Or maybe we were just too mature as investors to figure that out. But a lot of good from a success for us, a lot of good lessons. But it was fun. I'm glad. I mean, certainly happy we had the result we did. That was very helpful to the for our business growing at the beginning.

I'm just thinking about, OK, well, even if you'd held Tractor

Supply Company, what would that have been like in O 8, which gets me to what was that period generally like to manage for you and and where were you focused at the time as a portfolio? Yeah. So we actually did a little better than average in O 8, which I credit to not any sort of just because we tend to own higher quality businesses. We tend to own businesses that are less cyclical.

And also I'd say an important thing in that period is that we got net new money from our investors family that is our largest investor now added money to us in the fourth quarter of O8, the first quarter of O 9. So that's really I can't Seth Klarman talks about how important it is to have good investors, to be a good manager and I think that is understated under less under understood. It's more important than people

realize. And so we've had having the confidence and support of investors that think like business owners and that see down drafts as opportunities is really enabling. I reflect on that period. My wife and I agreed to not give each other Christmas presents that year and because we want to get every dollar we could into

the market. I mean, I think we, we understood in real time, Dow and I did that this was a generational opportunity and the valuations were really stupid and that you could find businesses that we're not going to go under because of the financial crisis and you could buy them very attractive, very attractive. And so we worked really hard to get our capital into things and we did have a a very good period of nine as well.

So we did kind of over that whole cycle was a very good period for us, but on a relative basis and not bad on an absolute basis. And we made over that period we did well. We, my regrets, I think we wrote a letter at the end of O 9 where we talked about our mistakes and despite having a really good year and I think about the things that we thought were very cheap that we hadn't done enough work on yet and to have the information adequacy that we

needed, I think about. And so one of our lessons of that was keep stockpiling things that you've done the work on. You don't know when they're going to get cheap. You don't know because it happens. What happened that period was fairly short period and we did the best we could. We got our money into things that we we're not going to invest in things we don't know well. And we had a good result, so I'm

not. But there were other things we thought were almost certainly going to be really good that we didn't put our money in because we hadn't done enough work. We hadn't been like, for example, there were a few companies in Chile that we wanted to buy, but we hadn't been there yet. But we've been there 10 times since because we did want to be prepared for the next time there was a downdraft like that. We wanted to be able to do those

things. And so we keep building our watch list and of companies that we can get up to speed on very quickly even if we're not following them every single day because we want to be. If there is a panic or I think our best performing physician in the last couple years is one that we first met with more than a decade ago like 12-14 years ago and it went from 30 something times earnings to seven and then we bought it and but we talked to them several

times along the way. We visited them and you see just never quite know when something is going to become attractive. But if the business has got good characteristics, we could throw it in our watch list, we can put alerts on it relative to multiples and different things. And hopefully it will, they will bubble back and that, that's the cumulative part of this game. What kind of underlying series of events has a stock moved from 30 times earnings to seven? Yeah.

Maybe that's a theme that we look for sometimes. So the company is based in Turkey. And so Turkey went from a place that everyone was very excited about the prospects of Turkey to total panic about and legitimately so about Erdogan and the consolidation of power and the hyperinflation and different things are going on

there. But one lesson we had learned in a different situation that we kind of model that we look for is if you have a business that's domiciled somewhere, trade somewhere, but a majority of the businesses outside of that country, then it could be an interesting place to when there's panic or a little bad perceptions of the economy or the country or the valuations or whatever you could buy, you could pick off a company where you're, you feel like I'm buying

the international business, even if it goes to 0 here, I got protection in the case of this company, all those international subsidiaries roll up to Dutch subsidiaries. So even if they were to totally steal the Turkish business from us, which I don't think that's likely, by the way, but we still

thought it was very cheap. And so we wind up paying six or seven times earnings for a company that's growing, probably going to grow underlying volumes and the mid to high single digits for a long time and probably to go profits in the high single digits to low double digits for a couple decades. And well run, good controlling shareholders, good governance. And people loved it because of those fundamentals and then they hated it because they just wanted to sell everything after

an election. And then all the way back to the top of our conversation, I think there is frequently too much focus on elections and sort of macro ETF trading double country. And then maybe another thing that we've seen is that when there's an election that move that's more socialist leaning, that is a favorite head, particularly Latin America where we've done a lot of things,

that's a favorite headline. The English speaking press will run and sort of tell a Castro narratives and overlay that on any given country. And then when it doesn't really work out because the country and there and there's big differences between countries in Latin America. But if the country is actually kind of capitalist and it's root in terms of the what the what the voters want and that government becomes very unpopular.

They don't actually and institutions are somewhat strong and they don't actually implement a lot of socialism. I mean, the economy does OK. Nobody goes back and writes the story. It's it's there in the local press, but it's there in Spanish in that case, but it's not in, it never comes back in the English press and investors don't come back until like the next election when they turn back to the to the right and then and then money will flood in. So.

This is what a friend of the pod, Ian Bisic, was talking about with Colombia. He was like, look, everybody thinks that, that this president is, is a big lefty, but if you look, he's lost the support of our country. So he can't really do that much anymore. And, and he can mess up some things. I, I noticed their, their EMP company or whatever, they're kind of driving some policy from the top to make them more ESG or whatever. But that's, that's not a long

term issue, right? That's maybe another year and a half issue. So what does the next 10 to 20 look like Is probably a more important question. Yeah, I've seen this story a bunch of times. I would stop short of predicting what's going to happen in Colombia because I'm not quite as close to that one, but I

definitely have seen that theme. I mean, if you look at COVID, I mean, the country, the large country that had the smallest amount of deficit spending in order to deal with the COVID crisis was probably Mexico. So AMLO, the socialist was more fiscally responsible than Trump or any other government you can find essentially in a large country. And because he was obsessed with protecting the peso.

And so that was really, there is a kind of thread of in Latin America, the thread of socialist leaders that will reference communism, socialism, Bolivarianism, but they will be governed by some practicality. And, and I certainly think AMLO just said some things that they were very bad for Mexico.

I certainly wouldn't endorse them, but not necessarily terrible for business and and and terrible for the people of Mexico. If you have sort of as anchor, I'm going to keep the peso from falling apart. Do you think that's because they've seen other Latin American countries lose their currency? So it's sort of front and center. Yeah. I mean, the Latin American debt crisis is still in the minds of people that are over 50 in Latin America and they they certainly are conscious of that.

That's the question. And the countries and the companies are much more so than then to the extent that they have leverage, it's, it's in local currency. They're not, they'll have a whole bunch of dollarized debt in general. And so they're better protected from those outcomes. You also these countries, some of these countries have 40 to 50% debt to GDP and which is not nothing, but it's a lot lower than most of any of the Western company countries. So I don't know.

I, I, I, I think it's good that they, if the currency is a check on deficit spending, I think that's a really good thing for the people in those countries and for the economies and, and ultimately the businesses that we, that we look at. Yeah, interesting. Is it fair to say you specialize

in bottlers or is that not? Well, it's certainly a, well, it's an important part of our portfolio now, but it's an industry that we've been involved with since 2006. It's a big part of our portfolio now and one hopefully we have some expertise. I think you do, but I I didn't know if I should say that you specialize in it. That might be a little bit too narrow of a word to assign.

Yes, I think specialize is too. I would, I would stop short of saying we specialize because I do like a lot of the characteristics of it, but I also can imagine a future where their valuations don't support our having maybe any position at all. So. What do you like so much about those businesses or, or I mean what do you like about the characteristics of it?

I shouldn't say so much, but when we talked about it once, I thought it was very interesting, like you're, you're in the weeds on it and it's fun to talk about. Well, we are in the weeds, so keep me from going too deep and and boring your listeners. But I think one thing in general in emerging markets, Coca-Cola has a higher brand equity than relative to competitors that it does in the US.

So you have to think about Pepsi as a bee brand in Latin America and frequently at a 10 to 25% price discount. I thought about you a lot, Not in a weird way, but I was in Costa Rica and I was talking to the people down there and they they think Pepsi's like dirt water.

Yeah, it's very different. I mean, I mean, I'm in Alabama, which is a course close to Atlanta and where Coca-Cola bread equity is relatively higher than if you were in New York or somewhere where Pepsi's got more of a following or Texas, where Doctor Pepper's got more of a following. But the bread equity difference is bigger in Latin America. It was wild. I I went into the little mom and pops. I only saw one little Pepsi stand and it wasn't even as you drink a coke.

I like it And and the Pepsi wasn't even refrigerate refrigerated. It was just standing there in the middle of the store. Yeah. So I would say the other insight that we stumbled upon back in our first trip to Mexico was that the mom and pops, the informal market is, is a majority of the sales of Coke, of the Coke system in Latin America. That's true. I think in almost if not maybe not every country, but virtually every country of Latin America. It's also true in other parts of the world.

So that was really interesting that, but do you have 7075% market share, which is not uncommon and you have this very fragmented route to market? So I think at the time the numbers we were working with was that Coke was selling about $7500 per point of sale. And if Pepsi were, which was like 15% market share, if they were to sell to all of those points of sale, they'd be sub $1000 or around $1000 per point of sale. So that math doesn't let them get to all of those points of sale.

So you have a lot of smaller mom and pops where there is no Pepsi available. You get to a mid size mom and pop and Coke is put a cooler in as you witnessed, and they had their product cold in first position and they typically have a hot replacement shelf next to it with their products. They're taking second position. And then Pepsi, if they have a cooler, it's in third position, but frequently they won't have a cooler in that in that second, that third position.

So now I'm competing with cold Coke versus hot Pepsi. And then if I get to a large amount on top, the Pepsi is going to be there in a cooler for sure. But like I said, I'm in first position. I'm I'm confronting the customers that come in. The other piece of it is we're doing, you know, a third, let's say in Mexico, something like a third of the business is returnables. So I can reuse that bottle 20 to 30 times. So it allows me to price

discriminate. You know, if Bill comes in, he's not worried, he's not work looking about to save a quarter. He's going to buy the non returnable and walk out of there and not worry about where he's going with it. But if I'm, if I'm four guys on a construction crew and we're having lunch and we're are very price conscious, I'm going to pick up the two liter returnable. We're going to split it with cops over lunch and then I'm going to take it back and get my deposit back or turn it in to

get the next bottle. And so that ability to price discriminate. I think they have about 20 skews of Coca-Cola, just red Coke, regular sugar Coke in Juarez, Mexico, for example, which is one of the top, maybe the top market in the world, Dados, necros. I think it's actually the number one city in the world for per capita consumption. So that that return, that ability to run a returnable offering and have that be a big

part of your volume. I can now sell that two liter returnable at the same price point as the non returnable Pepsi, but I got a lot more margin in or I could sell a 1 1/2 liter at the same price point. And for the consumer that is, but it's not worried about or need for that use case or whatever it is. They don't. They can't handle the returnable

for that use case. And so now if I'm a consumer and I walk in, I can say 25 pesos get a 2 liter Coke returnable or I can get a 2 liter non returnable Pepsi, which I don't like as much, or I can get a 1 1/2 liter non returnable Coke depending on what my needs are. I'm sort of bracketed that consumer's decision and I can keep people in the brand and I can reinforce this volume, volume dominance, which allows me to continue to control this point of sale.

So what we've found is this execution at the point of sale for the top business of the top brands is a reinforcing. And that's why you see such high market share in a few categories across Latin America and really across a lot of emerging markets in the world that have this large and formal economy. And so we like that about the bottling system and that it has the kind of a secondary Moat beyond the brand equity. That is reinforcing because their ability to sell through to

this fragmented offering. Well, you write, you often write about focusing like I don't, I don't want to put words in your mouth, but I'm pretty sure these are accurate focusing on the Moat from the customer's point of view. And as I'm hearing you talk, the interesting thing is the mom and pop gets the refrigerated offering that that they don't have to worry about coming out of pocket for.

And then because of that, you are able to or not because of that, but because of the scale of the bottler, you're able to serve the end user as well in more interesting ways, right? To to allow them to have more choice. And as that sort of wheel reinforces itself, the the secondary offering just kind of gets left further and further behind unless they're willing to just lose money to try to

capture market share. But if if you're asking people about the brand and they're telling you it's basically a non existent thing in their head, then how many years do you have to lose money in order to catch up? And is it worth it to even try I? Mean it's not worth it. And so and then I think the interesting dynamic is that there are typically, you know, three to five companies that have the scale to distribute to the point to the mom and pops in a country, the Brewer or two and

the cook bottler. And then typically there's a couple more group of bimbos is a good one in Mexico, Nutresa and Colombia or Ali Corp and Peru. And they'll come to market with a maybe a whole basket of different products. So then if I'm trying to get to market and I am not at one of those companies, I got to pay them, you know, and try to hitch a ride on their truck. But then I don't get the same level of attention. I don't get the same displays.

It's so frequently you're seeing Pepsi get to market on someone else's truck. And but then that interesting question is, OK, now I have the Coke truck or I have the NBEV truck or or whatever. What else can I put on my truck? And the bottlers in more parts of the world are starting to distribute beer, particularly in Latin America where the countries are largely Catholic. You don't have any kind of sensitivity about alcohol distribution.

You're seeing other products try to get to market that way. And you're also seeing right now I got this relationship with this customer. Our bottler in Mexico has a has put point of sale machines in these mom and pops. So they have tablets and they're scanning goods and they're keeping track of their inventory. But we also have real time information now of everything that's being sold at that store, including our competitors goods. And hey, what problems can we solve for this mom and pop?

Wait, they'll bring a white truck and deliver other goods for them? Or can we, you know what? Can we help them allow their mom and pop to be access point for the unbanked so that if they need to top up their SIM card or they need to pay their utility bill and they have cash, can we help provide some of the services for them to help

maintain this mom and pop? Because this mom and pop ecosystem, of course, it's got tension with the more formalized retail and but since it is a part of our Moat, there's good reasons why we want to protect it and help it thrive. So thinking about ways that we can deepen that relationship and make that customer more money so they'll continue to favor us and we can get access to their consumers is, you know, it's there's a lot of pieces of this and of course, these people are

really good. I mean, it's this outstanding management team and they're thinking about these things all the time. Well, I have no idea if Mexico is similar to what the, what I visited in Costa Rica, but I, I thought what was interesting was the guy said we were on sort of a, a tour and he pulled over and he said this is a typical Costa Rican town. And he said we put like a, a

soccer field in the middle. Then you've got your houses and he says there's a church and then there's a bar and then there's like this store. And to your point, if you are the, the point of contact for the store and then you can get these insights into, I mean, you, you almost become like integral to the town growing up, right? And and if it's possible to help them succeed, it's hard to think that they would want to tear you out of their ecosystem.

No. And frequently the Bob and Pops are of course won by a respected member of the community in that neighborhood. And it's usually somebody in the neighborhood that's running the store. It's not like it's somebody across town or someone that no one knows. And we they're, you know, part of the data gathering that you're getting from this now is when you think about a mom and pop, what is the proximity of that mom and pop to the soccer field?

Is that determined? Yeah. If it is, then we need to have some more of our Powerade in that store. That makes sense. That's the mix. If we're close to a school, we'd have more of a certain mix. If we're close to a church, if we know there's going to be a big community event, the concert, a football, big football match, we know we need more inventory in that store before it.

So every time we're out of stock of something in the store that's lost sales and every time we don't have the product that the consumer at that store, what's the income level of that neighborhood? Is it close to a bus stop, whatever, then we're losing sales. So how do we have the data to predict what would work best at that store? And then how can we show that to that customer? Because all of all of the

inventory is cash on delivery. So I got to convince that that store owner that custody, we call him the customer that hey, you, if you added energy drinks here or if you added some other product that's maybe it's slightly down the, the one or two percent product. We, we, we think it'll be worth it for you. We think you'll make profits. And so it's, they got it. You got to build that trust with them. And then, but if you can gather the data and and optimize that, you could.

There's more and more opportunities that way, too. The other thing that we, that we talked about that I thought was pretty fascinating was, and I'm, I'm going to ask you, you may not have this off the top of your head, but when does a country start to consume soft drinks? Like what's the per capita GDP before people start to drink

soft drinks? Well, let's maybe let's defy it as ready to drink, which is basically anything that's bottled or canned or as opposed to brewing tea out of the tap or something. And somewhere around 4 or $5000 is when we see per capita GDP is when we see people really start to adopt ready to drink. Before that, it's too big of a price point for most people. As long as you're not in a place with really bad water quality or something.

And then that accelerates really to about $20,000 in per capita GDP. And then it starts to taper off.

And then you're not going to like you're not going to see a lot of volume growth in the United States in ready to drink. People can afford to drink ready to drink, all kind of categories. And so with the goal then is to premiumize them. Yeah, you know, and Starbucks has done a splendid job of that of not necessarily in the ready to drink category, but who knew that everyone needed $5.00 coffee? Everyone may not, everyone may not. We'll find out.

Well, see if the new CEO, yeah, OK, ignoring the last, you know, couple years, it's been a remarkable story in the last 25 years. And so how do you premiumize? And of course, the liquor makers are trying to do that, the wine makers are trying to do that, the beer makers are trying to do that. But there's they're not, there's only so much liquid that humans are going to put in their stomach. So how big of a percentage of that can you be profitably and how profitable can you be at it?

So we look for that. They're different kind of S curves like that for different products. I mean, different cultures have different answers to that. But that's something we look for if we're going to get involved in a business and we're expecting growth and volume. Where is this country and what is their car level of consumption of that product, what is sort of possible. And so that's definitely a part of our our analysis where we

also bottle Cokes and Pakistan and Bangladesh and per capita consumption there is for in America, we're a little over 400. So the average American is drinking a little bit more than 1/8 ounce Coca-Cola Company product per day. And and Piedos Negros Mexico, the last number I remember is about 1000 and obviously they're poorer than us, but they're have about 1000. So that's like, I guess what's possible. Wow. Why is that?

Because the water is not good. Well, part of it's, yeah, part of it's the water is not trusted. That's part of it. But also just culturally. But if you go to dinner, and I don't know if you saw this in Costa Rica, but if you go to dinner in Mexico with Mexicans, they will put wine and Coke on the table next to each other. It's like it's just a culturally they think about, it's a

aspirational good still. It's absolutely embedded in what people do in a way that maybe espresso drinking is in, in, in, in Italy or something. But if you look at like per capita consumption, just to kind of think about this, but I'll give you a couple. Pakistan is is like 36. Bangladesh is like 20. So long run, so there is. Long runways and those are countries that were there's not a lot of alcohol consumption either because they're Muslim.

So there's even when water quality is not always reliable, they're hot places. So you certainly can imagine a really long runway, first just to grow volume and then second, hopefully it's good to countries continue to grow economically and then there's opportunity to premise them along the way as well. So when, when you think about, I

mean, in some of your letters, you've talked about intrinsic value and, and how much company that can the durability of a company impacts intrinsic value. How much more are you willing to, to, and I, this one's going to be impossible to answer, but just directionally speaking, how much more are you willing to pay for a company that you feel like you have that much line of sight into future earnings potential versus one that you don't?

And I, I don't mean to ask a leading question, but I'm a, I'm a stop it there and see where you go. And then I may have a follow up. OK. Well I'm anxious for the follow up because I can't really give you a number. I mean the math is math. I would say as a general rule, we, we believe capitalism is more relentless at destroying outsize returns on capital than people expect. You can think about some

businesses. We'll go back to the 99 period where you had like people making fiber optic cable and making basic switches and stuff, stuff that was pretty repeatable where there wasn't a huge technological advantage. But because there was no, there wasn't enough supply, they made very high returns on capital, but that wasn't durable. And so they, some of those businesses have worked out just fine, but they were trading at huge multiples that didn't make

sense. So it's very if a company is making an outsides return on capital, the world is coming for them. Absolutely the world is coming for them and they're trying to steal those profits and less the government is somehow preventing competition. So if you have that company with that, with that situation, how

do you handicap how durable that is? And if it's if they're going to make an outsize return on capital for five years and then they're going to decay or even be replaced, they're not worth that much. Maybe they're worth 7 times or anything, they're worth 10 times earnings or something. But if they're, do you think they can reliably earn an outsized return on capital and grow their business for, you know, the next three decades, then they very well may be worth 20 times earnings.

So I can't, you know, without what's the growth rate? Yeah. What's the return housing, house, all those things. You can't quite answer it just just hypothetically, but it's really important. Yeah. And. What's the leverage? And all of those things, I remember we were talking to Dow and I were down talking to some students in Alabama. They have a we give them a plug.

But John Heinz and Culver House Investment Management group is something that Dow and I were involved with since this beginning and CT Fitzpatrick created it. But it's been fantastic to watch the growth of that and how a great job the students are doing there and how much it's improved

and how comes. And it's really a first class group, but I remember they were presenting to us one time pretty standard model of we're going to project the next five years of earnings and then we're going to put a terminal multiple on it. And well, 76% of the value of the intrinsic value of the business that they were estimating was in this terminal

multiple. And our bias is to be explicit about that actually forecast all of the years with the assumption that earnings are going to decay, that the outside's returns are going to capital are going to decay 1st and then ultimately the earnings are going to decay. And so if we're if that's not our base case, we need to really have a lot of confidence in a Moat. And I think that you start playing with that math and start thinking about the world that way.

And it gets harder and harder to pay 20 plus times earnings for a lot of businesses and you have a lot of growth or that you need to have a lot of confidence in the durability of their of their cash flows. Tough thing about that

conclusion is it hasn't been the right conclusion looking backwards over the past decade, right? No question about it, no. So well, I I wish those students well, and I tell them all War Eagle, but that is neither here nor. There, it's odd. No, my follow up was going to be my. My sense is you probably just avoid the the latter scenario of a company that you don't feel like you can forecast but.

Yeah. I mean, what that's ultimately what happened usually the market, look, there are a lot of businesses that we can forecast 24 months out, but they rarely trade at two times earnings. So if we're paying 15 times earnings, we're implicitly saying that we know something about the next 10/12/15 years of results of that business.

So I'd like for us to know, be able to say that This is why we think this business is going to do roughly this over the next 15 years, not over the next two, because like, how are we getting our capital back? And then once we get our capital back, how are we getting a return?

So I think the net effect is when you don't have that visibility and other people may, I mean, there's lots of businesses where someone else may have an expertise that allows them to see much farther in the future than we can. But we need to be able to. I want to see all our money coming back and then I want to see the profits on the other

side of that before we invest. And that's, that's how we think about, I mean, that's how we think about buying a private business or some real estate or something else. And so that's, I think that's the intelligent way to think about public investing, public equity investing. I mean, it's a very high bar and it should be, right? You wouldn't you wouldn't walk around buying every business you were offered. So you should probably treat

public markets in the same way. What it it One thing that I, I

thought was an interesting letter that you or an action that you mentioned in a letter was when you sold craft and my perception was that you didn't like the financial engineering decision to separate them. And Mondelez. The the kind of counter that I had in my head was like, well, it was kind of a financially engineered organization to begin

with. So what what about the the spin off transaction or the separation offended you a little bit more than the sort of levered return aspect of that business? I didn't like that. I never like it when a company's doing a transaction that's raising their costs because they because they did, they increased their cost structure just because basically one part of the management team didn't want to own the slow growth piece.

We don't see any numbers on Duracell anymore, but Procter and Gamble, you know, basically gave that business to Berkshire in exchange for a bunch of stock and because they didn't want to own a business that was shrinking slowly. And I just don't like that. I think you ought to be able to, I mean, I think a good manager ought to be able to manage the business is growing and shrinking both.

And I think if they're in roughly the same industry, which was the case with Kraft and Mondelez, you ought to be able to manage those together. I mean, like having more clout with the with the grocery store chains to the supermarket chains should be a positive even if you have Folgers next to Oreos and one of them is shrinking and one of them is growing. So I don't think it improved the focus of the businesses.

I don't think I just didn't really buy this was completely engineered by an investor banker that said, hey, we can get this big multiple and the piece of this is growing and it's got more emerging market exposure. But I think that the the underlying businesses were more or less in the same industry and there was plenty of opportunities for them to cross pollinate. If they were intelligent about the way they did their comp structure in the way that they

did, they managed success. So they may be that Folgers dying slowly was was the best outcome the one could hope for. But that's worth fighting for. I mean, you certainly how long can you keep a business profitable without injecting more capital into it? I mean, like that's, that's a noble goal and that's obviously worth less, but there's

something wrong with that. And I, I just this sort of obsession with growth for growth sake or hey, we're going to get rid of this particular division because it doesn't show growth. I I really doesn't. I don't like that. Well, I'm sure internally or or at least the pitch was Mondelez will have a lower cost of capital and the aggregate will be worth more. But I don't know. I, I don't know that it's turned out to be a very good decision.

I I haven't really checked. Yeah, I don't know either actually. And maybe we should run a little post board on that. We made some money on that investment obviously, but we sold both of them at the time, same time actually. And we certainly interact with Mondelez. When I do it, when I'm visiting mom and pops around the world, I see a lot of Mondelez products and then they are it is a Oreos in particular a nice product. Yes, they are. They're delicious.

Yeah, they are delicious and I would I often argue to my kids that Oreo is better than the finest dessert at the finest restaurants. Yeah, I, I mean, I tell you what I've been on lately is the Doritos, the Cool Ranch have entered my house. I wish they never did. That's like crack. Yeah, I mean that, you know, I know it's a different company. I'm just saying those two, those two are the perfect snack foods. Yeah, say it. Yes, they I can't argue with that.

I kind of. I do keep them out of my house, hopefully. I have to because. I can't stop. You can't stop. You can't stop. Well, Pringles might kind of get us in trouble for that, but I agree with you. You can't stop. I guess we never said you pop. So anyway, that's neither here nor there.

OK. So something I find kind of interesting you have disclosed and it's that you know anyone can look you have an investment in ABM Bev and you had the craft investment. I think the narrative on 3G is that they cut to the bone and maybe aren't so customer focused and you're somebody that's very customer focused. So I'm kind of curious to hear how they how, why you're comfortable going against the grain in that scenario? Well, maybe I would revolve a craft of monies.

I think before 3G was involved, OK, so but with and I was about but we certainly have not covered ourselves in glory with that investment. We're we're close to break even on that. So that has not been a winner for us. So I I think what we do see outside the US and outside of Europe in particular is that they have a similar dominant position with the mom and pops. For example, in Colombia, they have like 95% market share.

So they have some really dominant positions that are really valuable and some really entrenched moats. I think that they. With the exception of the Bud Light fiasco, which hopefully we can skip over. I think they have done a pretty good job with their customers, with their consumers actually. They've innovative a lot of when they saw the craft beer thing happening in the United States doesn't really can't really happen in Latin America in the same way because of the route to market.

They start innovating beer with more flavor and created a bunch of products in a bunch of their markets have been very successful in the sort of premium space for the customer that wanted a different type of beer. And I think they satisfied that consumer intelligently and well and prevented competition that way, but not leaving crumbs out

there. I think one of the big things they got wrong in the stock price and why, you know, part of the reason for our result is that they thought they were saving money by borrowing. They noticed that the euro was correlated to emerging market currencies relative to the dollar. So they borrowed a lot of money in euro. They had a leveraged balance sheet when they bought SAB obviously, and they borrowed in

euro. And I think they assumed that that because it was historically had been correlated with the currencies in Latin America that that would work out OK. But then that correlation broke down and the euro strengthened a lot against the currencies of Latin America where they had, they were actually earning most of their profits.

And so they were effectively very short the dollar, both on the leverage side, they were shorted on their COG side and they were shorted on their sales when they got pulled back into U.S. dollars. So they're all three ways they were really leveraged short the dollar and the dollar rallied a lot. And I think that execution hasn't been perfect, although I think it's been pretty good. I think they actually executed their way through COVID better than any of the other big Brewers.

And I think that they have really terrific notes in a lot of their markets that are quite durable and are really valuable. I dream one day of the coke bottlers and the and the Brewers getting together in more mergers because then you'd have sort of 50% share and and these mom and pops and you could eliminate a

bunch of costs. So I think there are a lot of opportunities, but they're being very levered and levered short with a mismatch on the currency, effectively short the dollar in a period when the dollar really rallied. I think that really hurt them. And when perhaps some of the 3G success was less maybe than it was reported been part because they were levered. They were also at the time kind of leverage short the dollar when the dollar didn't do well.

And so I think that's sort of carry trade currency piece of it is maybe was a bigger part of their success initially and bigger headwind to their success more recently. Then it's interesting to think about. Well understood. My perception was that they just kind of got to the a couple N + 1 acquisitions that just got too big. Like if they could own Corona in the US and they didn't have to sell that, that would be huge.

And then they had to divest to so many brands and they bought SAB that, which is kind of and then and then you're buying something at a premium and everybody knows you're a for seller. And especially with Corona, there was only like really one logical player to sell it to. The story would be way different if they own Corona in the US. Way different. It'd be better if they'd hold on, held on Corona Modelo and sold by life.

But that was not obvious at the time that we years ago on Modelo, Grupo Modelo back when it would when I was a virgin had a stake in it. But it was a standalone company and part of the thesis of our buying it was the growth of Corona, particularly at the time in the United States. This is man who's six or something so unbelievable that Modelo is now the number one beer in the US That's a crazy

outcome. That's a good beer, though, so and I endorse everyone drinking it whenever they're outside the United States. But. But here? Here by Bud Light or some random regional craft beer that ABM had bought. Yes, exactly. But we didn't buy it till after

that transaction. But we anyway, I look, it's, it's been not one that we cover ourselves to glory, but I think that most of the money that we lost and we're kind of break even, but most of the money that we should have made has been a result of the dollar strengthening so much and they're being kind of leveraged short at three different. Ways yeah well, I pitched it way higher and thankfully I sold it a decent time I didn't get too killed on it but I, I, I, I like

the entity. I just one somebody said to me once about the the acquisition of craft brewing companies. He said the problem is it's kind of like when and and I know that phase is over, but he said it's kind of like when you buy a new car on the second that ABM bet buys a craft Brewer and kind of like tanks in value. Now I don't I'm sure the financials aren't this the same as the brand perception, but

craft brewing's interesting. I've, I've found it's one of those those industries or products that there's like a really good scale and then they get too big and it's just really hard to make good beer at scale. I don't know. I don't know what it is. Maybe that's just my mind. Yeah, I would say several years ago I went to the craft beer conference in Denver and I sort of didn't shave for a few days and put on AT shirt and try to kind.

Of I could see you, you could like pull it off if you were bearded. If I was beer, I tried to look like I was interested in starting a craft beer and basically just walked around the convention. Floor like a Metallica shirt or something? I had a a local craft beer shirt that friend that has a if I got to buy all the machinery, I got to buy hops, I got to buy barley, I got to how would I go about doing this and the yeast and you had all the different bees and talk to them and pretty

clear. I mean, craft beer a third, but probably 25% of American beer drinkers want to drink beer that tastes like, you know, what I would call beer, like some sort of European version of beer that has a lot of flavor that's maybe it's a third or maybe it's a little less. And no one really was was answering that demand other than imports. So there was an opportunity because systematically over the decades, Miller Lite, Coors Light, Bud Light, Budweiser had gotten more increasingly bland.

That had been basically that they'd taken flavor out of the beer for 40 years each year. And so there was an opportunity there. It was unmet consumer demand. And then secondly, with the way the three tier distribution works in the US, everybody was able to piggyback off the scale of the big Brewers to get to market.

And of course that doesn't work. That's a, you know, accident of prohibition in the United States, that we were set up that way in 49 states, but nowhere else in the world does that exist. So there's not, you can't create a craft beer in Brazil and get the market on the on the Ambab truck or on the Heineken truck. You got to get the market yourself, which means you can't. So you know, the craft beer was

selling at a premium. This is very profitable initially for these distributors and there wasn't much craft beer. So they were very happy to add to their trucks and, and go make money on it. But then once there are a lot of craft beer companies, then they were no longer able to demand the pricing from the distributors. And so basically they turned into rest of the restaurant business. And you can make money at your craft. You need to be able to make money at your.

Brewery. Yep, as a bar, otherwise you can't make it. And, and so I think that's the future, which probably means there's less craft beers than they are now. But and but the cost difference is like I'm working off old numbers but I want to say it was like 60. The large Brewers are like in the 6060 something cents per liter and the craft beer was

$2.00. Yeah, well, the prices that you pay as a consumer show it. Yeah, I mean the but the but still I mean like the prices you pay as a consumer are less different than the cost. Yeah, the margins are tighter, no doubt. On craft, yeah. So that makes it very, very hard. And so I think the other cheat is that, yeah, I think this is an interesting thing as as beer tastes are developing, it's much harder to make a logger than it is to make an IPA.

Oh interesting, that's why there's so many IPASI guess. That's why, yeah, I mean, with an IPA, it's sort of designed to be able to survive in India, you know, back at 150 years ago. So you throw a lot of hops in it basically disguise whatever mistakes you make in the brewing process and so and there are consumers that want. That I'm one of them. I just didn't realize that was why.

Interesting. And so, but when you try to make a logger, it's a much more careful about the temperatures and the yeast and all the different pieces that go into that. I'm not an expert, but much more difficult to make a logger and keep it from being skunk or something because you can't really hide it if you do. So as this growing sort of craft beer session beers that you're seeing, which it's harder to do that.

And so it's more likely to me that someone like Modello who's doing that at scale is making a good session beer, is going to grab that share at the expense of the craft beer makers they're just set up to be. You can't just like basically know how to make beer in the kitchen and make a good logger Pretty tough. Session beers are a good concept. I don't have to feel like I'm wimpy drinking it, but it's got like the right amount of alcohol that I can drink it, not get bombed.

Yeah, well, beer's a good, good, good idea, period. Yeah, I tell you what, I'm kind of at the age where I can't handle it anymore. If nothing else, my belly just grows and grows. So, alas, opens up some potentially dangerous, you know, can't go down a tequila path just 'cause I can't handle beer. Otherwise things can get off the rails. But that's neither here nor

there. Can we talk about your, your investment in Jumbo and, and that business? And I wish, I wish that there was a way. I'll try to put a picture up or something. But the way that you described like when you're going up the escalator, how that that particular retailer has scattered tchotchkes all up and down the escalator to, to sort of like get your mind to impulse buy. I love that that story of how you bought that business and then I'm pretty sure you exited. But I I like that that

investment quite a bit. Yeah. So when when, you know, when the Greek crisis happened back in whether 2011 or 12, we I went to Greece, met with a bunch of companies, try to figure out what there was anything here that was mispriced. And it might be interesting because the country was completely bombed out and there was good fears about a recession and falling out of the euro and all of those things were happening. Jumbo was a business that we looked at then and admired.

We admired the management team. The owner is is is fantastic. He's so awesome. And that's such an interesting manager. And they basically just buy their, they buy products in Asia. And that point was mostly China. And they bring them back and put them in a store they have. There's a toy store, but it's more than a toy store. We don't really have an equivalent to it in America, so I don't know exactly how to, but seems like a really big. Well, merchandise.

Dollar Tree, for lack of a better term. Yeah, I would say that's right. Yeah. I was in a similar format in the UK last week that has something similar. It's like a large format Dollar Tree, Dollar General, Yeah, with no food that that's fair. And yeah, and they have like escalator and they just put the stuff. I've actually seen the same technique in Shanghai when I was there picking. Oh, wait, but they just there's you're on the escalator, you're stuck there. Why not put some things there

that you can grab? Yeah. And and you got the kids with you and of course the kids going to grab it and now what's the mom going to do? And so but they're. Yeah, you're not. You're not having your kid put down the dollar toy to have them scream for the rest of the time that's not going to happen. Right. And, and the disorder of that is actually part of the fun. I remember, like the original idea of Toys-R-Us is like, let's let's put toys in the aisle and

let's let them fall. The kids knock them over. That's like part of it. And so there's a certain aspect of that too as well. But I love how the management, the the the owner is so systematically conservative. He's like, well, we don't know what's going to happen down the road. We know this is working now.

It could get worse. And then they're like consistently beat their kind of whatever they don't really give guidance, whatever kind of guidance they give you, they consistently beat it and they run with no leverage and they're expanding in Romania and and they don't really have a lot of competition from Amazon in that part of the world. That's something to pay attention to.

But well, I guess 2022, the stock got backed down because there were fears about being with COVID, they're not be able to bring in the products from China that they were in in Southeast Asia that where they were getting them and the cost of bringing things in was going up. And they're all the models permanently damaged.

So OK, well, they started a share buyback program, but this is a very conservative management team that only is only going to buy back stock because they think it's cheap, not one that's just running a share buyback program. That's what they're supposed to do. So we started picking off some shares kind of right at a right, slightly above the share buyback level. And then, you know, the model still worked and they sort of get out of the COVID inventory and supply chain issues.

And the stock was up. I can't remember, I maybe I was up over 100% and we got to long term capital gain status and we exited. I mean, I don't, I do think there are some challenges. That's a lot of key man risk in that business. But you know, the, it is a nice

niche business that works. It wouldn't, probably wouldn't work in the US, probably wouldn't work everywhere, but it does work in there and they're reaching quite well and, and they're conservative about it and it's so really a nice business and maybe we'll get a chance again, you know, so. Yeah, you, when you sent me a, I don't know, you'd tell me like you're right up. And then I started reading some transcripts. That guy that runs it is like a

really cool person to read. Yeah, I just love it when you get that level of frankness. Yes, when they this is our problem, this is our challenge. We're not sure that how it's going to work out. Like that's makes me want at best, like that level of frankness from a manager is, is something that we'd love to see. I mean, I almost want to just close my eyes, not even look at the price and want to buy it. But that's of course not what you do.

You do have to. I have a number of companies on our watch list that I met with a guy and I won't reveal the name because I do want to buy the stock at some point. But I met with him and he said, he said, do not buy my stock. It's too expensive right here. It's awesome. You know, I was supposed to meet with the CFO and I, I walk in. He came in and introduced himself. I kind of missed his name when he walked in and he said, oh, I'm sorry, the CFO is sick. You'll have to meet with me.

I didn't really fully understand it was ACEO until about 5 minutes in the conversation. This is the first meeting with the company. And he anyway, but he's like, yeah, you don't want to buy my stock. He's like large investment banks are saying everything in Africa is cheap. Like that's nonsense. I've been operating in Africa for 40 years and you need to get paid back quickly if you're investing in Africa.

Oh, interesting. Yeah. So this is, I can't remember how long ago that was 10 years ago or so. It's like, so don't buy my stock now, it's too expensive. What's the stock done since? It hasn't done that well. There you go. He was right. I'm happy they've ably managed it, but the the macro headwinds and and South Africa and around their region where they were selling have been very tough. That's sort of his. He also said yeah. He also talked about the brain drains.

Like I, I have good people, I send them the US to get an NBA and they never come back. Yeah. And that's really a that's a, that was like his biggest challenge was retaining talent in addition to the consumer, the macro situation there. So, but I just, he didn't know. It's interesting. A lot of times when you meet a really good manager, they they'll reference some things that you and I would talk about. But he didn't seem to know any of that. He just knew how to run a

business. Like he, he had to learn that by copying Warren Buffett or something. He just knew it and it just was coming out of him. And and and anyway, I regret that we've never owned it and that we've never made any money off that.

But I every now and then you run across a manager like that, that's, you know, what are you going to call it old school or just like they see their business the way that as an entrepreneur and not as the way they're supposed to package it for theoretically house some finance person expects to receive it. Well, I'll tell you what, what has messed me up is I used to be the person that was like, oh, I'm looking for people that write like Buffett.

Now if I see somebody that writes like Buffett, I'm like, ah, this is probably a promote. I don't know. I don't like this, which it's hard. It's kind of like this is either somebody I really agree with and I should listen, or it's somebody I think is totally full of crap and I don't know. Yeah, I think you see people that quote Buffett but don't actually write like him.

Like they're they're they're trying to tie themselves to that brand, but they're not, they don't have the inside and they don't have the frankness and they don't have the sort of obvious honesty that comes through and Buffett's writing. And so that's what I'm trying to hear when I read somewhat is, are they quoting these ideas because they they hurt them somewhere or do they, is it really in their bones?

Is it who they are? Does your, your travels and how you, I, I mean, just like hearing you rattle off just in this conversation, how many places you've been? I mean, does putting eyes on somebody and talking to them, Is that how you help yourself understand how they actually think and, and are they just sort of marketing or versus do they believe what they're saying? I don't know any other way to do it. I mean, maybe I think you always want to learn what the company

says is happening. And then I think you want to find as many ways to independently verify that as possible. And so if a company says they're doing something, they're doing X, well, we may not be able to test that, but if they're say they're doing Y, well, let's go test it. I can remember I was on one of these investor days in Eastern Europe and a company they set up, clearly set up four stores for all the analysts to go

through. And, and I said, Oh, this is how we do it. This is how we execute in these stores. And look at, look at this, this is great, you know, good. And then I went to, I went to 20 other stores and had totally different experience, actually didn't. I thought they were executing fine, but it was nothing like the stores that they clearly had rigged for Analyst Day, which I don't know. That tells you something about, you know? Do you want to partner with that?

Yeah, maybe they weren't even, you know, in that case, I I like the Ceoi don't think they were kind of being explicitly dishonest, but it was definitely like a razzle dazzle share. So we're we trust but verify or whatever. I'd like to go back and ask them questions and maybe they have a good answer. You know, hey, the local guy got a little carry away. He knew the CEO was coming and so he wanted to show off of the CEO and he got carried away.

That really wasn't a dictate for me, which is fair. But how, what do they say? How do they say it? How do they used to say it? I think that's something important is to look at way they describe their business five years ago and what they thought the challenges were. And if it's roughly the same management team and it's not simple, but you're trying to get at your level of confidence and

and their ability to forecast. And then I'd like to ask them what are the things that if they went against you could really hurt your business and what are the things that you're really worried about? And I think I heard anecdotally that Build a Way used to ask companies, you know, how would you go bankrupt? I used to ask that. I tried asking that for a little while and I got so many blank stares. They were just confused by that.

I kind of thought maybe I was, I can ask in a different way and without damaging and like kind of putting them on their heels so much. But yeah, it's, it's you got to go be there in person. You got to go into their marketplace. You got to talk to their customers and their suppliers and their. Their peers around the world, their competitors in their in their country and see if what they're saying that they're doing matches what you're able to observe.

And frequently it doesn't, but sometimes it does. Yeah, sometimes they're lying and sometimes they're just fooling themselves. But the net result is the same for you as an investor. I like that that that should be a quote. We're, we're going to, we're going to put that up on a, on the YouTube thumbtail or whatever. When you said what you said

about South Africa and Greece had the, the crisis and just what I experienced when I was in Costa Rica, it just seemed very dependent upon tourism and sort of maybe a pro cyclical aspect to what what's going on. How do you think about the valuation disconnect between some of these emerging market countries and and some more developed countries and whether what's justified within that versus what's not justified?

I mean, surely if you look at history, I think we're like at A50 year, you know, 50 year divergent evaluations between 11 metric I saw this week between emerging markets in the USI think you're 1015 years on different metrics. And we're we're not just against emerging markets, but against the whole rest of the world. And I don't know that that's not

going to get bigger. I'm not making a forecast, but you need to have pretty rosy assumptions about growth in the US for it to outperform, you know, the rest of these places. But we're we're trying to find individual businesses in a back to owning, you know, 8 to 10 companies at a time. I don't necessarily have to believe that coastal we don't, we actually own a small one of our businesses as a subsidiary in Costa Rica, but it's not that important.

But I don't necessarily have to believe that Costa Rica is going to be really successful for us to make money. So it's kind of like with this individual business with their current level of profitability, what are the risks that it gets better or worse and what are those things and how likely are they to happen? And without buying at it four or five times earnings, maybe there's a, there's a level of uncertainty I'm willing to tolerate.

If I'm paying 15 or 20, I'm probably not willing to tolerate that uncertainty. Will you hedge the currency exposure or are you fully unhedged? We are unhedged. We have the ability to hedge the currency. We actually got a couple only a couple times. We really got close to doing that. But typically we a lot of our companies have hedges internally. A lot of companies have. We look at what percentage of their COGS are in local. We also look at how they're

financed. Most of our companies have very little leverage or no leverage when that's important too. And then what is their pricing power? You look at our Turkish business, we've raised prices above inflation consistently over the last several years and we're making record profits in Turkey. So 70 plus percent inflation or whatever the latest numbers are in Turkey, we've been able to, we've been able to grow profits faster than that because we've raised revenue faster.

So should we have hedged it? I mean it's almost basically impossible to hedge the Turkish lira. So I think the answer to that is different for different businesses. And maybe if a business has got a bunch of leverage implicit in when they have a mismatch on their current on their leverage and on where they're where they're earning money and where they're paying debt or you probably we tend to not want to get involved. We prefer back to the controlling shareholder.

Usually when the business has got controlling shareholders, there is not a lot of leverage in it because you know, if you're learning, if you're AI don't know a Mexican investor and you've made a lot of, you're made a lot of money, you've seen a lot of crises. And you don't want to, you want to, you want to go keep your seat, your chip in your chair.

And if you have a bunch of leverage, you're a not able to survive the inevitable volatility that's going to happen, but also you're not able to take advantage of that. And I would say that one theme that we have maybe is kind of thinking about being a counter cyclical investor and investing in businesses that have a mentality where they're thinking about how to expand their business when things are bad.

Peter Kaufman's been a tremendous mentor for us and he always talks about how he pays his bills faster when things slow down and he he wants to be the employer of choice for people that are thinking start to get nervous about their job

at the competitors. Competitors, you know, when things slow down like and he like he can afford to, he'll make an order to be with a supplier to help that supplier in those situations because then later when they really need the help with that supplier, they have a very loyal relationship.

And so if you are able to the, if you have capital are able to deploy it when there is panic that can that's a that's a durable competitive advantage also and particularly in places that don't have the same sort of central bank backstop that we're used to in the United States. I like that. I went out to see Peter once. That was fun. I should, I should do that again. If I ever get invited. I don't know that he'll invite me back. We'll see.

I pushed back on something once, but it was it was it was a friendly debate that he won. He's a remarkable guy and very bald in a charity here in Alabama actually. And my mom's in town, but I've known him long before that, that he's a really an amazing manager, an amazing, amazing at people and how to motivate them and how to make them feel loved and how to, you know, build teams and so many things to to learn from Peter. Yeah. How has building an investment firm been for you?

You know, it's, it's an interesting pursuit and I, I got to meet at least one, I think two of your team members at Markel, but definitely one just kind of curious. I, I just had Bruce Berkowitz on and he mentioned that that was an area that he did not succeed in. And I'm just kind of curious how you how you've worked on developing your team? Well, I guess I'll go all the way back to the maybe the beginning of the business. Dal Bynum and I moved home from New York.

We got a three bedroom apartment and we started the business in the third bedroom. So our mentality has always been we're entrepreneurs and this is a startup and let's stay very hungry. Let's think about what our burn rate is. Let's see how how long we could stay in business if we were to lose our biggest customer, our two biggest customers or whatever. And let's be really careful about every dollar we spend, make sure we're getting a positive ROI on that.

And we've been fortunate to have wonderful people that came along at the business with us at different points. And our first person that ever joined us is Len OS and she's still here and she's been a tremendous part of the team now for, I don't know, 15 or more years, right, Maybe 18 years now just take it back. And but we are Dal and I would always, I think we even wrote about this one time, but we would always question each other.

We started working on learning things together in elementary school, really and teaching each other things and questioning each other and challenging each other. And we never had an argument, but we were always pushing each other and kind of looking at things. Oh, we could learn that and like, let's go. Do you really know that, Richard? And or you not know that? And so we started thinking about institutionalizing that as a team.

We wanted to have that in the culture, you know that that everybody have a very flat organization. Tell people why if you if you ask them to do something, have them give you feedback. And so I would say we've had been very fortunate to have work with wonderful people throughout

the whole period here. So they've been very supportive to me and difficult personal times and in difficult work times, you want to hire smart people and you want to hire people that think like, I think like owners and the decisions they make, but also always put higher clients first. That we want them to always be thinking about what would the what's best for the client and how can we do this better for our clients. And so you have to ask some of them, I guess and to assess that.

But hopefully, I mean, I feel very proud of the of the people that are here and the people that have made big contributions here in the past. Very cool. Well I have enjoyed getting to know you.

Shout out to our mutual friend David for the the introduction. And that's been fun, man. I hope that this was an enjoyable use of your time. I'm going to get you out of here on time. And, you know, thank you very much for joining the show. Well, thank you. Thanks for what you're doing. Thanks to David who put this together, owe a lot to David for sure. And I'm hope we can talk again soon all. Right, man, I look forward to it. All right, take care. Bye bye.