Chit Chat Stocks - The Best Value Investor You’ve Never Heard Of (Norbert Lou Of Punch Card Management)

Episode Date: January 17, 2024

On this episode of Chit Chat Money, we discuss: Norbert Lou’s Famous NVR investment His unique portfolio concentration How he started his hedge fund Punch Card Management ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatMoney/featured  Follow us on Twitter/X: https://twitter.com/chitchatmoney  Follow us on Substack: https://chitchatmoney.substack.com/  ********************************************************************* Chit Chat Money is brought to you by Public.com*. Sign up for a high-yield cash account today: ⁠https://public.com/chitchatmoney⁠ *A High-Yield Cash Account is a secondary brokerage account with Public Investing. Funds from this account are automatically deposited into partner banks where they earn a variable interest and are eligible for FDIC insurance. Neither Public Investing nor any of its affiliates is a bank. US only. Learn more at ⁠https://public.com/disclosures/high-yield-account⁠ ********************************************************************* Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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found in the podcast description. High-yield cash accounts are available for U.S. members only. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chit Chat Money. This is our Wednesday episode.

And today we're talking about a really uncovered investor, under-discussed, someone who does not have a lot of publicity. If you look up his name, you're not going to find any pictures. You're not going to find any interviews except for one that he did in 2011. and you're not going to find any investor letters, but he has an exceptional track record. He was identified by some of the world's best investors as someone to allocate money with. And he has a great way of writing concise and clear investment pitches. So we're going to go through it. His name is Norbert Liu. Before we get started though,

I want to do a couple of housekeeping items here. First of all, if you enjoy the show, it always helps if you give us a review or better yet, tell a friend, be like, hey, if you want to learn about Norbert Liu and the best investor you've never heard of, go ahead and check out Chit Chat Money. Soon to be Chit Chat Stocks. We're still waiting on the name change. Want to get that ingrained in people's minds before we switch. And then we also have a newsletter, our sub stack. It's free, totally free, but it's just a nice supplement to these shows. if you like reading something brett does most of that so you can appreciate brett if you're reading those constantly um but yeah that's gonna be kind of the all the housekeeping items i'm

thinking of is that anything i'm missing there bro i yes hello everyone um this is gonna be a fantastic episode but i think i want to tease since we are going off of just the strictly stock research episodes every week, don't worry. We've had some comments that people still would like to see those. We're still going to be doing some of those. And I just want to tease some of the upcoming episodes. I will be researching HIMS and HERS, which is a fascinating telehealth. And I'll save it, but it's a hard to describe company.

It's trying to disrupt the healthcare industry, and it's doing quite a good job, actually. I was pleasantly surprised at how well the company is doing as a spec. And then Ryan is going to be researching, currently researching Booking Holdings, one of the best performing stocks of the last 20 years and dominant online travel agency. And then we're going to be doing a discussion on Netflix and streaming with Francisco Oliveira and Alex Morris from the Science of Hitting. Plus more and more stuff consistently throughout the year. And we'll do one of those a week every Wednesday. day. So yeah, I think before you did most of the research here, you were kind of inspired to do this after reading this comprehensive 30 page interview slash profile of the secretive investor,

Norbert Liu. Since you did all the notes, I'm going to kind of not maybe not even be the interviewer, but have follow-up questions for you on any sort of topics as we kind of do with these type episodes. What do you think investors should take away from this discussion? Who should listen to this as we're about to get started here? I think it's actually really valuable for probably most of our audience, which is fundamental investors, people that manage their own retirements, portfolios, and don't do so that actively. So if you're just trying to find winning companies that will provide good returns for a long time, Norbert Lue, I think is a perfect person to study because he's done that maybe as well

as anyone over the last 25, 30 years. So it's probably long-term investors, people that like letting their winners ride. There's a lot to be learned here. He's also, Norbert Lew has also done kind of special situation net nets as well, but he's had the experience of a massive winner and what the benefits can be of that, how much easier it is to manage a portfolio like that and when are the right times to add. So I think there's a lot of lessons to take away. And probably the best way to do that is to visit or to look at and analyze some of the investments he's made over his career. But you're kind of the questioner here. So do you want to kick things off? Yes. Let's get started about who Norbert Liu is. What was his life? What led him to starting Punchcard Capital?

yeah so kind of early life he went to an average high school i think it was actually kind of below average grew up in connecticut he was always a pretty good student though kind of top of his class very studious his parents were his mother was a taiwanese immigrant and his father was chinese immigrant and they both emphasized academics heavily so i mean from a young age He was very just focused on academics in an area where maybe it wasn't the top priority. And a lot of it apparently was that his mom growing up in Taiwan would constantly say, even though you're number one in your class here, the number ones here wouldn't be anywhere near the number ones in Taiwan.

And so it was constantly this kind of like, once the pool gets bigger, you might not be as special. And it sounds kind of mean to say to your kid, but apparently it was inspiring to him. His mom was also an accountant, and his father was an engineer, but eventually became a stockbroker. But really, top of his class, graduated, went to Cornell. He didn't have any interest in finance for quite a while. He was studying agricultural and biological engineering. his father though as i mentioned when he became a stockbroker he tried to get norbert into finance by showing him like technical analysis and like teaching him this one pattern yeah i thought it was very funny where he was trying to really get him on elliot wave theory which that's a bit of a cult right there uh sorry to anyone that prescribes to that theory but it's been decades now of

uh i i don't know it's just a funny name and part of the technical analysis group yeah he tried basically norbert kind of listened to him and said it doesn't make much sense to me i don't really understand that and he kind of comes at it with an engineering background which i gotta say if you took occupations and said and this will be music to your ears brett since you're an engineer but if he took occupations and had to bet on one that would be the best investor like returns wise i think i would go with engineers like doctors baby no i don't know if i'd go doctors i don't know if i'd go probably definitely want to go athletes uh they it just i for some reason it seems like engineers tend to make great investors um anyway but what did clip

for him is when he read Peter Lynch's one up on Wall Street, Peter Lynch was probably in his prime at this time as managing the Magellan Fund for Fidelity. And he had written one up on Wall Street and that was when it kind of clicked for Norbert Liu. He basically, he read it and was like, okay, this makes a hell of a lot more sense than technical analysis. You're buying ownership in businesses and these businesses could potentially be worth a lot more than what they're trading for. So he liked that. He instantly registered for a number of finance and accounting courses, and he continued to kind of read all about it. And at this time, this really surprised me how early this happened, but his mother gave him $60,000,

which was apparently most of her retirement to manage while he was either a sophomore or junior in college after he was taking, he just started taking finance courses. I'm going to be honest. I don't think I'd ever do this as a parent. Not most of my retirement. It's one thing to bet on your kid, but to give him most of your retirement when he's one year into studying finance, I think for one, huge vote of confidence, but it also probably tells you how smart Norbert Lou was and that his mom probably thought he could pick up on this pretty quickly. So gave him $60,000. We'll revisit that in a second. But he landed an internship with JP Morgan that summer, and he ended up finishing school, top of his engineering

class. And then coming out of college, he wanted to work in investing. So he looked for analyst roles. He was offered a number of jobs, and he ended up taking a position at a company called Brown Brothers Harriman. It was a pretty small shop relative to a lot of the big investment banks at the time but it was a way for him to work really hands-on brett you want to add something there yes uh connecting to last week's episode where we covered bridgewater associates and ray dalio uh i should give it a tease and anyone that didn't listen to it you seem to a lot of people seem to like it so if you haven't go give that a shout out but apparently norbert lou got an offer to work there but decided to turn it down because it seemed a bit eccentric for him that i guess he

had a good nose for what eccentricity was because that place is a bit strange probably not for him a solo investor just likes to read stuff all day but i kind of think what would it you know that could have been a huge decision for him if he got caught up in the bridgewater stuff for years and years and years does he you know is his entire life different i i that that was a big takeaway i had from reading this article which for anyone who wants to read it we'll link it in the show notes or just ask us over email or twitter yeah and i'm not sure if i mentioned this part too but he's a pretty quiet guy from what i gauged kind of diligent read a lot very patient and wasn't like the most outspoken so not sure that would have thrived too well at

bridgewater but uh who knows anyway here's what one of his partners at the firm brown brothers Harriman said about him. He said, he, as in Lou, was always extremely reliable and very effective in terms of just getting stuff done, but very calm. You could talk to him at nine or 10 o'clock at night and say, we need to get this done. And when you arrived in the morning, it was there. In my opinion, he was the go-to analyst. If you had a tough project, you wanted Norbert on the team. So a high price there. I mean, that's kind of exactly what you want out of an analyst. uh maybe also that's kind of a lesson here for people that are in college potentially coming out trying to work at an investment bank or an investment shop any sort of fund the kind of

skills that are valued in that area is just being diligent getting your work done and kind of being a member of the team that people want to want to have anyway after that he uh he was an analyst there for i want to say two years i think was how long the development program was and ended up joining Elliott Management after, which at the time, it was $1.4 billion in AUM. It was big, but not nearly the size that it is today. It was still a lot of the distressed debt type investments that Paul Singer liked to do and kind of got famous for early on in his career. So started there, and they had apparently great returns during this time.

However, it was a very active management style. They were buying and selling securities a lot. I think they were just now at the time getting into private equity. So it was very hands-on. A lot of it was about deal flow. So having relationships with people in the industry and basically Norbert Liu kind of said, it wasn't my strong suit. Even though I saw how successful that style of management could be for investors, it wasn't my nature. And so eventually, he graduated away from NVR, not NVR, Elliott Management. But in his time there, and I think it was actually when he was working at Brown Brothers Harriman, he came across a company called NVR. I'll stop there.

Anything from his early career that you could call out and maybe thought was interesting or thought would be indicative of a good future investor? Well, I don't know if there's anything about a good future investor besides the fact that he has good aptitude and seemed to have the margin of safety mindset where he wanted to be prepared, he wanted to learn. He didn't think he was an expert right away, which is probably a flaw that a lot of young people,

such as ourselves maybe, 2020, 2021 had. i think we can get more lessons on that later but more of a career or life lesson is finding something not you know if you're a smart person like norbert you can probably work wherever you want but finding something that fits kind of the venn diagram of what you enjoy and what you're good at like what fits your personality and skill set would for him as he mentioned wasn't going to be at a fund that's very active like elliot management looking at data constantly which you know they have fantastic results nothing wrong with that just wasn't for him or something like bridgewater that seemed a bit strange a bit uh eccentric has a lot of communication with a lot

of people there's just a lot of talking and he was more of a silent um just reading stuff going solo making contrarian bets and it's just whatever industry you're in investing or anything else it's fitting what you enjoy and are also good at where investing there's so many different styles that can work you know the classic one is growth investor versus value investor both can work i mean i like david gardner i like ben graham they're both legends of the investing game but i don't think either could do what the other one was doing successfully so i think that's a lesson finding what finding what's your what what can fit for you and your personality yeah there's a lot of ways to make fun of us in the investing world and uh i think norbert luke kind of shows

that and so let's talk about nvr which a lot of people may recognize that name but at the time which he was at Brown Brothers Harriman. So this must've been, I think in 1997, maybe 1996. It was not very big. It was $275 million market cap. And he came across this because NVR announced that they were, I think it was a hundred million dollar buyback authorization. And keep in mind, $275 million market cap. That's a lot of the shares outstanding if you use all of it. But also keep this in mind. This just came out of bankruptcy. So 1992, I believe NVR went bankrupt. They came out, I think it was the merger of two different businesses that came together. And it was a notable home builder, but they had had some problems. And so

it's not what we think of NVR as today. But anyways, so we saw the buyback announcement. And he said, $275 million market cap, and maybe I'll start looking at this a little deeper, started digging and he realized that he really liked what he saw. So to kind of paint some context around it, NVR was a home builder. However, unlike traditional home builders, which would acquire large plots of land, hold it on their balance sheet while they develop homes on it and then sell it at the end, NVR would instead purchase an option on the land. This meant that NVR would usually pay 5% to 7% of the land value up front and then could exercise the right to pay the remainder once the lot was finished.

However, if they chose not to buy the land for whatever reason, the developed lot, they would forfeit that deposit that they put down, the 5% to 7%. So it was a loss, but it's less of a risk than potentially holding land on the balance sheet if the market – if you get into some sort of a down cycle in housing. because then not only do you have the land as inventory on the balance sheet, or maybe it's just called land on the balance sheet, which gets marked down, but it's also harder to sell the home. So you're just holding those homes in the meantime. Anyways, so it's an asset light model. Additionally, though, he found that this model actually ended up getting replicated a lot. There were, I think, home builders today, like a lot of them use this options model. But what he really liked was that they were also the largest home builder in their market, which I think was like the DC metro area.

Being the largest home builder in that area gave them local economies of scale. So you're getting better deals from third-party contractors. You're getting lower material costs when you bought it in bulk. Basically, there was just these smaller economies of scale that led them to be able to grow a lot quicker. And he thought it was a good recipe for success. The stock traded like seven times earnings. So he started buying it in 1997 around $23 per share. For context, I believe NVR trades at $7,000 a share today. One of the best performing stocks of the last 30 years by far. You want me to give you the total return, which I don't think they pay a dividend, but

either way, it's the price return or the total return. Do you want to guess? Because you mentioned 1997 8 there is the start you want to guess what the total return has been since january 1st 1998 i want to guess i think i saw this 28 1998 1998 so not since inception let's go 10 000 percent. 34,000 percent. So 340 bagger right there. Yeah. Quite good. Shares outstanding down 72 percent. Not bad. Not bad at all. And does he still own NVR today in Punch Care Capital? No. I wonder what if he just held NVR, if those returns would be better than doing anything else sort of like the oh what's that guy's called who we could probably do another episode on at some point this year in the future the guy that ran that owned the three stocks amazon costco and

berksley yeah it seemed like that where he was like look these are the ones we're gonna own i'm just gonna give this money back to you you buy those three stocks so that's what i'm gonna do and we're never gonna sell maybe that actually would have been better returns than you know just holding NVR. You know what I mean? But it's kind of hard. I mean, it's hard to do it. I bet he got quite a bit of those returns. Yeah. I'll talk about what he did over time here in a second, but to kind of go through his thesis on NVR, here's an excerpt from an interview he did in 2011, kind of rehashing what he was thinking. So he said, running through every element of his thesis, he concluded that NVR with its combination of low risk and high potential

growth, was the best stock that he had found in three years of managing his mother's portfolio. Keep in mind, this is still mostly the $60,000 that his mom gave him. NVR had little debt, was a low-cost provider of a basic necessity, and had been around for decades, and yet was growing rapidly. Despite these advantages and the company's willingness to buy back its stock, NVR traded at only seven times that year's after-tax earnings. And since it was the best thing he could find, he ultimately made it 35% of his mother's portfolio. He said he saw, I think it was some study in college where it's like six to eight stocks in different industries gives you most of the diversification you need.

And so he's always kind of been that big believer in concentration as opposed to having like 50 stocks in your portfolio. But I think it's important to mention this here. within a year of buying the stock had doubled so he bought it at 23 in 1997 the stock had doubled in a year i have made this mistake brett i know you have made this mistake because we did it together however he did not sell and i think it's a little easier for him because there was not multiple expansion the multiple was staying the same despite the price doubling the multiple was still single digits so he was continuing to hold it and he couldn't find anything that he thought was a better investment than NBR at the time.

His largest positions really did tend to perform best and accounted for most of the overall return of his portfolio, as is probably unsurprising. However, he was still doing these side bets, net nets, unique situations where he thought he can make a little money here and there. And he says the other positions, for all the effort of looking and analyzing and buying and selling just right, didn't amount to much in comparison when he was basically looking back at his returns. over that time. So important to mention there that how much more difficult I think it is

to constantly find small winners as opposed to finding the right one at the right price and just continue to hold. Is that kind of your takeaway there as well? I agree. Yes. It's so much easier to just hold on to something that's high quality that you bought at the right price. You don't have to pay the taxes or you're deferring the taxes until you eventually sell. And look, I think the key is, one, good management team with a unique business model that really were the best in their industry. Two, runway for reinvestment. I think he mentioned that in this write-up where he said, even though it's talked about a lot, it is underrated because of how important a runway for reinvestment is at a good return

on invested capital, because if you can invest $10 billion and earn 20% returns on that, it's much, much better than a company that is at a market cap of $500 million that's never going to be able to invest more than $500 million, compared to one that's also at $500 million, but could increase that to $10 billion over time. And then, again, the seven times earnings is important. When people look at, say, seven versus 15 times earnings, or even 12, you might think it's not that big of a deal, but flip that number around. What's one divided by seven? What's one divided by 15? The earnings yield you're getting on that initial investment is so, so different,

even though that number might not seem actually that different. But the lower you go, the more that each individual change in a PE number, you know, from five to six to seven matters that much more. Plus, lastly, is the buybacks,

where he mentioned that a good pattern match is that you don't just buy something because it's buying back stock and reducing share count, but a good indication that a company is generating a lot of excess cash

to return to shareholders and has smart management team is a consistently reducing share count, which we've seen tons of other smart investors say over the years. He's not novel with this idea, but I think that's something that we try to take away, something we're trying to learn now.

And I think any listener should try to search for as well. Yeah, it's ironic because his investing style morphs over time to looking for companies that don't buy back stock, But that's where he started his research process, which it feels to me like that's a great place to look because if a company is announcing that they're going to buy back 33% of their stock, it's either going to give you a short bump or they feel confident enough to buy back all that stock because they believe in the business and it's cash flow generative enough to do so. So it's a good place to fish, but it's not the end all be all. And we'll talk about that here in a second. Well, you had that quote you tweeted out as a little tease about companies that aren't buying back.

But I'm looking at, as a little tease for the episode, second largest position, 25% of the portfolio is a consistent repurchaser of stock. So maybe we'll get to that later. But you mentioned his investing style. How does Norbert Lue invest? what can any listeners learn from that yeah so like i kind of mentioned earlier he dabbled with those little short-term wins short-term gains and then he had nvr and he says by buying a great stock and just hanging on i ended up seeing how that could work out better than a lot of strategies that really had an impact later on how i viewed the ideal investment i mentioned that he was

looking for NVR by, or he found NVR by seeing the $100 million buyback authorization, but he goes on to say, you actually want the companies that have such bountiful reinvestment opportunities that they don't buy back any share. In other words, and he's not saying that in this case, they had the option to buy back shares. They could have bought back stock and generated probably good returns for their investors that way, juice the earnings per share, probably a pretty impressive clip, but it was like, which option is better? They're both good choices. In this case, they saw such good returns on the capital they were deploying in their actual business that it didn't make sense to buy back stock. And he also emphasizes this point later

on as well. It's not just companies that generate high ROIC in the short run. It's companies where that IC is endless, and the IC is return on invested capital, the invested capital part. They can continue to invest the capital. If you're a home builder, you can continue to expand your market. There's so much demand for homes that it's kind of this long runway to actually reinvest. So not only are you getting the good returns, but you can do it for a long, long time. Those are the two qualities he was looking for. But to buy it at a good price, I think starting with companies that are potentially buying back lots of their stock is probably the way to go. That's at least the place to start fishing for companies of this sort.

I agree. I agree. I think it's good pattern matching, as I mentioned earlier, where if someone's consistently buying back stock and the balance sheet isn't in shambles, it shows that they consistently are generating excess cash that they can return to shareholders, which is how you make money over the long run. But I think that's also an important point that a good management team balances what return they can get on the buyback versus what return they can get on reinvesting into the business. i won't i i've i'll try to resist mentioning the the niche grocery chain that i always seem to talk about just because it's such an example of this but that's the type of management team that does that as well where they look at okay can we add another location yes what return can we get on that it's about 15 okay well at one point our stock was trading at a 15 earnings yield so is

it safer to just reinvest technically with the buyback into our existing stores it's a good problem to have but yeah i think lou is probably saying okay i want management teams that understand this aspect where 90 95 don't really either understand it or don't care about it yeah or The only problem with his quote where it's like you want the investment opportunities that are so bountiful, they're not buying back stock. The issue is that management teams overestimate. Most management teams think they have such bountiful reinvestment opportunities when in reality, most of them are not generating returns on invested capital above 50%. So maybe in most cases, buying back capital or buying back stock is the right way to go. Yeah. Let's go through kind of how he got discovered though. So keep in mind,

he's still just some investment. I don't think he's partner at this point. He's maybe a higher level analyst portfolio manager at Elliott Management. I read it today. Yes, it is portfolio manager at this moment. So he's portfolio manager. Not a lot of people know him. He's still just managing his own money, his mother's portfolio, but he has been reading a lot of Buffett Munger. So he decides to go to a Berkshire meeting. And in one of those pamphlets they pass around at the Berkshire meeting, he found an ad for Value Investors Club. For those of you that don't know, Value Investors Club was started by Joel Greenblatt and John Petrie. Joel Greenblatt, and I think John Petrie

as well, had been running Gotham Capital Management for a while, which might've been but it was their hedge fund. And he had been doing exceptionally well. He was the author of You Can Be a Stock Market Genius 2. He's kind of a famous investment teacher. He teaches a value investing class at Columbia. And anyway, just this well-known investor. So he started Value Investors Club. It's this online investment idea forum. You have to apply. You have to write up a company in order to be accepted. And Norbert Lu decided he's going to write up NVR. It was a six bagger at this point for him, but he still thought it was the best opportunity in his portfolio, best opportunity he saw. So he decided to write it up. He was accepted on that application

and he won the bi-weekly competition for best pitch. He quickly followed that pitch up with this micro cap asset management firm that ended up, it was just a successful net net. And then there was a third stock called NII Holdings. All of them handily outperformed the market. In fact, NVR was a 15 bagger within four years of the write-up. So very successful pitches and Joel Greenblatt and John Petri took notice of this. So they invited him out to New York to meet with them. They were like, okay, these pitches are incredible. Let's meet with him. Let's see if he's interested in managing any money. Before I get to that though, here's a quote from Joel Greenblatt. He says, to this day, I hand out the first three write-ups

he wrote on Value Investors Club to my students at Columbia to show them what a brilliant, concise, straightforward, and clear investment thesis looks like. So if you're someone that wants to work on your investment thesis and how to write a good pitch, I recommend going to Value Investors Club and looking up the pseudonym Charlie479. He has, I think, seven pitches that were on Value Investors Club over his, I think he stopped doing it after a while, but really all still very good write-ups. Six out of his seven won the weekly competition or whatever. Anyway, so they invited him out to New York.

He said, we want you to start a fund and we'll back you. will handle the backend, which is a lot of the work. And oftentimes you get someone who's a really good analyst, but he's not a great fund manager because there's so much work involved with handling the backend, reaching out to investors, stuff like that. It kind of requires different skillset. So they were like, listen, you just do the research. We'll do the backend. We'll give you seed capital to begin with, both me, and this is Joel Greenblatt speaking, me, john and gotham capital which was running a fund of funds so they all gave him money and he was pretty reluctant at first because it's he was worried that it was going to be he was going to

start working like optimizing for short-term performance whether he liked it or not and he has this good quote in his interview where it's like you can call yourself the long-term investor as much as you want. But as soon as you start managing that outside capital, it's very, very easy to start worrying about short-term performance because you're judging yourself versus the market regularly. It helps you raise capital down the road. And it just becomes this constant game where you're trying to optimize in the short run. So he was worried about that. And so instead, he put in these parameters that were like two-year lockup agreements, like recurring two-year lockup agreements. So if he didn't want to get out after two years,

you stayed in for another two years. If you didn't want to get out after that, it was constantly like a two-year cycle. So he knew how much money he was going to have for the most part. He ended up offering these to Petri and Greenblatt and was like, would you accept it under these parameters? They said, yeah, that works. And the other part that I think is important here, Lou was the only analyst. There are no other analysts at punch card capital like it's just him and he says i didn't want to remove myself from the critical details of an investment by installing a layer of analysts what do you think about that i like it yeah for anyone that doesn't know we started a fund that we ended up

shutting down uh recently but i do like the not having too many analysts idea our fund would have been no different if we had besides a few stocks that were small um it would have been no different if we had a bunch of money versus basically no money as we started out with so yeah what where did you mention the name of the fund yet because it does the way he invests basically is modeling off a buffett one-man show right which buffett did to the extreme essentially and took it to a, what is it now, $600, $700 billion market cap, where essentially he's, for all intents, he has some other people working with him now, but for most of the time, he's been the true number one capital allocator there, the only quote unquote analyst

besides, I think there's four or five other people. But why did he call the firm punch card Capital, what is that referring to? Because I'm not sure every listener knows about that. So we talked earlier about how he quickly learned to look up to Buffett and look up to Munger. And one of Munger's, or not Munger's, Buffett's quotes, I can't remember where he said this. It might've been at their annual meeting. It might've been at one of those business school conferences that he constantly did. But he says, I always tell students in business school, they'd be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision, they used up one of their

punches because they aren't going to get 20 great ideas in their lifetime. They're going to get five or three or seven, and you can get rich off five or three or seven, but what you can't get rich doing is trying to get one every day and so that punch card analogy norbert lou he really liked it it really resonated with it and he decided to call his firm punch card management which i think is just probably one of the stickier names and it's probably why a lot of people maybe some people know the name norbert lou is because of the the name of that fund so that was that was why he stuck with the punch card name the other thing i was just going to mention is i like i like for a smaller for a smaller manager like him did you uh did you see the

thumbs up thing yeah some reason for anyone watching the video i think only like 20 25 do ryan has some setting on his zoom it's quite hilarious that if he gives a thumbs up it does a little emoji animation and he can't figure out how to get rid of it yeah anyway the uh Something I like is that if you're a fund manager, especially a smaller fund, your performance, that's it. You are your performance. And if you put a layer of analysts in there, if they recommend some stock or they're meant to cover the stock and they're the one that's supposed to do the research, you got to own their performance as your own. To me, it just always made sense to make your own investments. If you're the portfolio manager, you're the analyst as well. Anyways, that's kind of a sidetrack, but quite interesting. The other part here is performance. So he does not publicly report his performance, which was a little bit frustrating for this episode. He did calculate his own performance from 1994 to 2003.

It's a little hard to like, you kind of got to take him at his word here, but I think the fact that Greenblatt and them gave him money, they probably looked through to make sure that his investments were legit, that he actually invested in stuff that he wrote up and he seems like an honest guy. Not to mention he just owned NVR, which had incredible returns during this time. So this makes sense. But according to him, he compounded his money at 38 and a half, or he compounded his mom's portfolio at 38 and a half percent annually from 1994 to 2003. He turned that $60,000 into a million dollar, basically made his mom a millionaire. So good for her, congrats. And then from 2004 to 2011, which is from the time he launched his fund to when he did his public interview, he generated 14.5% annual returns net of fees at a time when the S&P did just 2.2%. So really solid returns. And that came after 2008 when he had a bit of a rough year. I think

his portfolio was down something in the mid 30% range. So had a rough year, but he bounced back quickly and ended up still absolutely crushing the market over that seven year time span. Now, I don't know what he's done since in terms of performance because he does hold a lot of cash. So you can go back and you can look at his 13 Fs, but those don't account for the cash he holds. So that cash could very easily have been a drag on his performance. There's no way to really know. But yeah, I guess any thoughts on his performance there? Is there any reason to think the 38.5% isn't credible. No, it is because look at NVR's performance of that was,

what was it, 30% of his portfolio? That's going to drive a lot of those returns there. I think it is an example, and we've already talked about this, of letting your winners ride if you buy right with a really high-quality company. if he sold out of NVR. And I remember them talking about this in the interview. There were a ton of comments on this value investors write-up that said, this thing's up 6X in six years or whatever it was. I would buy this on a pullback or something

like that. This is one where you sell on the rip and then buy on the pullback. And that may sound smart, but it never actually works with a high quality company. And I think the philosophy of never sell until, well, as we're about to get to, you see something tragic about to happen or something totally changes with the underlying reality of this business. Spoiler alert, he sells out before the GFC. Incredibly smart. It's just an example there. I think of it's so much easier and better to just buy something and never sell as long as business quality remains good. Yeah, 100%. And you mentioned that he does end up selling NVR, I think around 2007 at roughly $900 a share. So quite the performance from his $23

original purchase price. But let's go through some of the other investments that he's made while running the fund, the ones that are public. Keep in mind, to the best of my knowledge, He's never owned more than six stocks at once. And over the last 11 years, I don't think he's owned more than 10 stocks in total. And some of those have kind of cycled through. So he's very selective, kind of takes that punch card approach, literally. Anyway, so he also owned a company called, I think it's Quinsa or Quinsa, that brews a beer called Quilms.

And it's very popular. Quilmes, Quilmes. Quilmes, Quilmes, sorry. By Spanish, the accent might be a little better, but yeah. It was super popular in Argentina and some other Latin American markets. He bought in at $17 a share in 2005. However, this is probably one of the last times he wrote on VIC because he wrote it up and the stock ripped while he was still trying to accumulate shares or still wanted to buy some. So he basically said like, yeah, I kind of stopped wanting to write up because people

were tracking my portfolio and my changes and it ended up kind of hurting my performance. Anyway, so Kinsa was a family-run business, but it was being acquired by InBev at the time. And there was this kind of unique buyout clause. We've seen this with something Buffett recently did. uh like there was this acquisition where it was like he said in five years i'll buy it for 10 times earnings and then all of all of a sudden the management team's like okay well let's boost that earnings number but in this case there were some clause that incentivized kinza to really

boost their earnings so and a lot of it came from just as you might guess raising prices on the beer So he had that sense that they were going to do it. It's exactly what happened. Eventually, he got paid $82.50 for his shares, which was, it looks like, almost a four-bagger over two years. Great performance there. And keep in mind, we're just, it might sound like, oh, we're just calling out one investment here, one investment there, yada, yada, but he was really concentrated. So these were like huge portfolio swings for him. When we talk about some of these investments, he did have a couple of investments that didn't work out though. So he bought Zip Realty. This was kind of, I don't know, maybe like a Zillow before Zillow. They were trying to be like an online realtor. And the thesis didn't play out. He ended up cutting it pretty quickly. I think he lost a little bit of money on it, but it was a good example for him of when you're not seeing the thesis prove out, just cut it early. And then he also bought Abercrombie & Fitch, which ultimately got destroyed due to competition. If you remember way back when, if you were going to malls throughout the 2000s, you might remember how popular Abercrombie & Fitch was. But quickly, the American Eagle and Aeropostale, they really started to copy the display and

the setup type at Abercrombie & Fitch, and they basically just got competed away. I think every, doesn't every investor go through the idea like, oh, this seems like a good apparel company and then realizing apparel is absolutely impossible to invest in. Yeah. And it's, when I was reading through this investment, he described what Abercrombie & Fitch was like at the time, which like everybody was flocking to these stores. It was a very different experience. And it just, it keeps me now, if I ever want to invest in a company like Lululemon, I think I'm going to avoid it just because it always seems bulletproof at its peak, but competition comes quick in industries like this and habits change pretty quickly. Crocs, good example now, but there's plenty out there. Anyway, so there's two that didn't work.

He said one of his biggest mistakes with not buying Morningstar, he got very obsessed with trying to find businesses who had latent pricing power, ones where he knew they could jack up prices. Morningstar was one of those. It was a little too expensive, but he ended up not buying it because of that. And it ended up doing really well. Other one here, he ended up buying Moody's after the great financial crisis, which once again, he thought it had latent pricing power because people were paying like three basis points to have their bonds rated. And it's like You're potentially paying 200 basis points if you don't get a rating from Moody's. If you're trying to issue debt and you don't get a good rating from Moody's, you're going

to be paying a lot more than to just pay for the rating. So anyway, he saw pricing power that way. Those are some of his successful investments. And then in 2009, he bought Burlington Northern Santa Fe Railroad, which as many of you probably now know is owned by Berkshire. So this was one where he's like, okay, lots of latent pricing power. It's sold off a lot due to the GFC. He ended up accumulating shares and then within a year, Buffett bought the whole thing. However, this is ultimately how he fell into his Berkshire ownership is at the time, I think they were offered, you could either convert it to Berkshire shares or you could take cash. And there is a reluctance from a lot of managers to buy Berkshire in their portfolio because it's like you're deferring the capital allocation responsibility to Buffett.

I think how a lot of people see it, it's like, why would I pay someone to just own Berkshire? I can just go and Berkshire myself. And he didn't see it that way. He thought the stock was cheap at the time. So he took it. He took the Berkshire shares. I think it's up more than 400% since. So good returns for him. And today it's 54% of his portfolio.

Thoughts on the Berkshire investment? Yeah, that is an interesting way to go about it. I didn't know about the BNSF entry. That's an interesting fact there. So that's nice. I guess for the listeners to know about that one, and looking at that, say, Whale of Wisdom or 13F war, hey, on our friends over at FinChat, right?

But, yeah, I don't... It's estimated to be 50% of 4% of his portfolio. Not sure if that's actually true, right? No one knows for sure when these 13Fs get filed exactly what's what because they don't have to file everything. They're just estimates. But I think it's a bit strange. It's probably fine.

And maybe his, yeah. And look, his returns have been great. They're clearly been fantastic, but I, I don't know. I don't know. I don't know about this one. Berkshire is 54% of the stocks he owns. He could have a big cash pile that's not reported. So it's not like, and he has at times.

kind of a whole a lot of cash so probably less as a percentage of the overall portfolio yeah did you uh did you see though that and it kind of gave me okay that he owned the short-term treasury etf that we used to own did you see that in the whale wisdom that he owns that now sgov it's kind of funny we were buying the same one the zero he's just he's just us with more he's just us with more aum yeah hey two portfolio overlaps right there um as you're going to get ally financial but i think as that's for me that was helpful because i there was there's always chirpers online that say something's dumb like when you said uh a company should just own treasuries instead of buy back if there's trading at 30 times earnings uh or it's not like it's a

debate that they should have and there's always a lot of chirpers around that we had some chirpers about buying a short-term treasury etf uh so yeah i don't know sometimes you just gotta stick with with what makes sense to you and there's gonna there's always gonna be someone out there that's gonna tell you that your investment is dumb because not everyone's gonna agree on every investment but yeah continue were you about to think like he was proven out because nbr did so well but i imagine there were a lot of people calling him dumb when he was owning it as 35 percent of his portfolio in 2003 or whatever. For this strategy, I think it's important to do what he's doing with the cash balance because you could think it's the best investment in the

world, but two months from now, it could be an even better investment. And to give yourself the flexibility to add more shares over time to your positions that you love in a fund structure, it helps to have that cash balance. Let's go through some of the other holdings though. His second largest holding is Ally Financial. And I will take a chance to plug FinChat here. If you go to their super investors page, they track not only the holdings, but the changes in the holdings over time. So you can see when they initiated positions and how it's changed over time so ally they first bought it in the first quarter of 2020 and by they i just mean norbert lou we both follow ally pretty closely we both own it do you think this fits

his typical blueprint for an ideal investment i agree yes and it was part of the reason that we like ally or okay first we had some of our say analysts that are friends that we've met online um talked to us about it gave us a little pitch they've come on the show before i think or maybe we've just done some of it was personal calls but whatever but then we looked and we saw that berkshire likely through todd or ted uh owns significant stake in ally and also uh nobert But Lou here at Punchcard Capital was like, okay, they're probably onto something. We should research this company. I think it does make sense.

One, you have a long runway for reinvestment with historically solid returns on that reinvestment. You have a, I mean, look, comparing it to NVR might be a bit of a stretch, but the fact that they're online only and have that structural cost advantage, I think makes a little bit of sense to compare them to NVR from their option lot model, where there's a bit of an innovator's dilemma there from the legacy players and then two stocks cheap yeah yeah it's it's different in the sense that they aren't there's not a whole lot of place like physical spots for them to put capital like they can they can like pour it into marketing and they can increase the savings rate that they provide to customers but it's not like nvr how they can like accelerate

their own growth by investing more in new land options and stuff like that. So a little bit different in that sense, but yeah, it seems to track in terms of durable advantage, which should help them compound capital for a long time. And then having like the ability to keep pouring money into auto loans or wherever they see fit. So it seems like long runway potentially to keep growing for ally. Anyway, that's 25% of his portfolio. The third one here is kind of interesting.

And it's Winnebago Industries, which is the largest manufacturer of towable RVs and motor homes. And he first started buying it in 2019, but in 2020, he bought up more than 5% of the stock. So he had to issue this 13D that basically says, whatever, I own more than 5% of your stock. And he wrote a letter to the board. I'll go through some of this.

He basically says, he calls out two things, really. He says, you guys are using excessive leverage, which I know COVID isn't foreseeable, but you guys know you're in a cyclical industry, so maybe you shouldn't use excessive leverage in an industry where there's going to be downturns. And then he also says, more or less, I think it's hypocritical for the CEOs to be taking such excessive compensation right now when they are laying off a bunch of the lower level employees and he calls out their use of the corporate jet so kind of went activist which i find kind of funny for a guy that hates being active and hates being in the limelight

um i don't know kind of just interesting here because he also didn't sell like nothing changed It doesn't seem like there are any corporate strategical changes, but he kept his... He sold a little bit to go under 5%, but he ended up continuing to own it. Yeah, it is an interesting one. I've seen a lot of people talk about this one.

I believe it's the one with an eccentric CEO who is very communicative in the media. But I'm not sure. Yeah, I've never looked at this company, so I guess I don't know. but I kind of trust that he probably sees something here. But like we've said before, it doesn't mean he has to be right. And who knows?

Maybe Winnebago is the one that's going to be the big winner, Ally Financial the big loser. But what's interesting is looking at his portfolio. Now, the estimates here are never exactly right. But if we look at his Berkshire, as you mentioned, it came with the BNSF acquisition. But let's say he's owned it for over a decade. Ally, he's owned since 2020.

Winnebago, he's owned since 2019. There's Smith and Wesson here, but it's pretty irrelevant. He's underperformed probably for the last 5, 7, 10 years. And that's hard. Maybe not 10 years, but he's probably underperformed quite a bit for the last 5 to 7 years. And I wonder... Maybe.

I guess other stuff could be... Has Berkshire underperformed the market over the last 13 years? Well, it's 14 years, yeah. Since 2009, has he? Let me get that math done for you. Because now it's 54% of his portfolio, but he's also had a bunch of like, he's had investments that lasted a year and a half kind of thing,

and it's really impossible to know what those did. So he hasn't had a core holding that drastically outperformed, but unless Berkshire has, I'm not sure. but I think he's been basically, I would guess, pretty in line with the market. Okay, I have it from January 1st, 2009, which I guess is probably pretty close to the bottom there. S&P 500 total return, 603% cumulative to today.

Berkshire, 465%. That's certainly possible, especially if he's holding a lot of cash. I guess you could be right, though. I was just looking at what he owns today. maybe it's not a significant underperformance but i think my the reason i brought that up is not to hate on him or anything obviously his long-term track record is great but it's an example of one no matter what strategy you have you're going to go through periods of underperformance and two it's got to be tough to deal with psychologically that at least for me is would be one of the

hardest things to go through. Yeah. I think I'd have a harder time on really good performance than the stock selling off. If you own three stocks and one of them's 35% of your portfolio and it's quadrupled in two years or a 6X in four years, I think it might be harder for me to keep holding on to that one yeah it's so hard to do ryan yeah okay that's so hard ryan that's a terrible problem to have something that what i mean we've had winners where we sold farmers market yeah i get i get what you mean i think maybe from a fund managing outside capital perspective i you know what i mean i feel inclined to take the shorter term gains it's a lot easier as an individual to just hold that stuff

because you're not reporting it to anyone. Exactly. It's tougher. All right, last position here. It's just 3% of the portfolio, but it owns Smith & Wesson Brands. We recently looked at this one. This is the, I think,

the largest firearm manufacturer by market cap in the US. If not, it's one of the leading manufacturers. And they have a couple of brands. They're really most known for their handguns. guns uh but i remember looking at it and they're going through a lot of stuff where it's like they're they have to relocate their main manufacturing facility which is super capital intensive they've had a big inventory build up and i just he initiated this position pretty

recently less than or a little over a year ago it's a little hard for me to tell what he likes here obviously he doesn't like it enough to make it a core position but i don't know what were your thoughts on Smith & Wesson in general. I didn't like him when we covered him. I thought there was a lot of risk there and not a lot of margin of safety. Who knows what his thesis

is, but if it goes to zero, it's not going to be relevant. Yeah. It's been around since before the Civil War, so going to zero seems a little unlikely. Right. Well, hey, I can't remember how much debt they had. The equity could go

to zero. was it yeah it's pretty little pretty little debt if i remember correctly anyway um so that's all the holdings that's pretty much everything we know or i know about him he is like i said very discreet does not talk at all in public aside from that one interview it would be awesome to see him speak in public and give maybe some rationale behind some of his investments, but it doesn't seem like that's going to happen anytime soon. So I guess my question to you, more of a discussion question is, do you think there are some good takeaways for investors here? Is this a strategy worth replicating? Yeah, I do think there's a lot of

takeaways from his style. One of the biggest downfalls of individuals, I think, is too much diversification. And I'm not talking 15 stocks. He's a bit extreme. Five stocks. It's extreme for me, not my style. Very few people have that style to be comfortable with five stocks in their portfolio. But if you're going to have 50 positions that are all 2%, that is just asking for confusion. It's asking for being overwhelmed by your total portfolio. And it's just asking to track the market, I think it is much better in so many aspects to just own, say, 10 to 20. For me personally, I'm more of a, I think 10 positions is kind of where I feel comfortable because I really value not owning too many things. I just would rather have focused on a few ideas

at one time. That's me. I'm also younger, not in a wealth preservation mode. And I think the only maybe complaint i'd have with him and yes berkshire is different because it's it's a portfolio of basically a lot of companies but i think you can get the benefits of not of concentration at kind of that 10 positions and let your winners ride and it still would be the same as probably five positions ish you know give or take you're not going to complain if one performs a little you know a little bit better but the risks are a lot less like you have that diversification a little bit more as a backbone. I know he mentioned six to eight

was the number from that study, but if you have five stocks that are at 20% of your portfolio and one of them goes to zero, it's pretty hard to do well. Yeah, I guess if you're going to run the strategy, it's important to have one of his key elements here, which is very little use of leverage

because then you run less risk of like all of them going to zero if they all employ pretty much zero leverage. But I don't think it's a strategy most people should replicate. It's probably one that I should not replicate because this guy, he is very bright and he is very thorough with his research. If you look at some of the net nets they did, if you go read his write-ups, you can get a sense of the kind of investor he was. And for most of us, maybe it's better to own like like brett said 10 stocks or more uh maybe not crazy diversified but more more than i think two or three stocks at any one time um also berkshire's kind of cheating because it's like 20 businesses yeah i don't know that one always confuses me i think he's still going to be running

this portfolio probably for a while here so i'm wondering how that's going to evolve over the next five, 10 years. And we'll be able to track it since he has to publicly file. Yeah. The things I would really take away from studying Norbert Liu is try to find businesses that generate good returns on the capital they invest into the business and have a long runway to do that. And then lastly, even though he says he doesn't, the best companies are the ones that don't end up buying back stock. It's a decent place to hunt to begin with because you're getting the margin of safety. And if you find that it's a really quality business with room to invest capital at high rates, it's just cherries on top because then it's the better

of two alternatives between buying back lots of stock or investing into the business. So probably a good place to start your investing journey in my opinion. But I think that's about it for today's episode you want to lead us out here yes i can yeah and those were the takeaways i had as well let's see for anyone hey if you enjoyed this episode give us a review spotify apple podcast that's the best way to support the show these shows go out everywhere you get your podcast spotify apple or even youtube although we i should say you can watch it on youtube but it's just two guys on a zoom screen uh we have shows that come out every wednesday we do a live stream on youtube every thursday that comes out on the podcast player on sunday mornings

i think that's it we'll have a write-up here for the sub stack coming out uh on the wednesday that this is released as well so have that you know might hit your inboxes for any notes links all that good stuff thank you to all of our sponsors let's hit a disclosure here we are not financial advisors anything we say on this show is not formal advice or recommendation ryan i any podcast guests may own securities discussed in this podcast. We may have owned them in the past, and we may buy, sell, or hold them in the future. I hope all the listeners learned something from this episode. I know we learned a lot reading about Norbert Liu as well. We'll see you next week. don't you wish you could just hit skip on the worst parts of your life you know the same way

you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way i planned and today i'm still figuring it out somehow things usually get worse before they get better. Apparently, that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.