Good Investing Talks - Are 1 - 2 investments per year enough? Andrew Rosenblum on AHA moments

Episode Date: January 25, 2021

Andrew Rosenblum of Bonsai Partners is an impressive investor. He is looking globally for great business and investment opportunities. Here we chat about his way into investing, his approach, and his investment in RedBubble.

Hello audience. It's great to have you back on my YouTube channel. Today I'm having Andrew Rosenblum of Bonsai Partners with me. Hi Andrew, how are you doing? Hey, Tellman, doing good. How are you? Doing great as well. It's a strange year, but it's also good because we have the chance to chat via Zoom. I'm currently in Germany and you're in the West Coast. And I think it's called CarSpart, the place you're living. It has a German reference. reference or something you told me before? Yeah, it's like an old style, the Carlsbad village sections, like an old style German village. And I didn't know that until, you know, I moved here and I thought, hey, this is pretty cool.

But yeah, we're sharing some German heritage love. I think we, I should visit you one day if we have the possibility to travel again, but it looks good currently with the vaccine coming up. Bring your surfboards. that that would be cool I can't serve but it would be cool to try I want to start our conversation with two questions on one side you have the reference in the back it's your bonsai where did your name of the company comes comes from bonsai partners and the other things you told me before that you were a short guy and then currently you're running a long only fund how did this turn come and why aren't

you shorting. But maybe let's start with the bonzai. Maybe the easier question. Now it is time to show the disclaimer. You can find it linked below this video. The main message of the disclaimer is always do your own work. This is a qualified talk, but no advice. Always do your own work. Thank you. You know, I've gotten a lot of interesting feedback about the name bonsai. So what I originally thought would be cool would be to use the name bonzai. bonzai because it takes a long time in the art of growing one to create something beautiful. And in many cases, the bonsai masters themselves, the beauty of the tree is only really apparent after the master even passes away. So it takes decades of careful and patient care in order to

grow it. But I've gotten some really funny feedback. One person that I met said, That's a terrible idea to call it that because isn't bonsai, you know, constructing a tree to keep it small? And you're like trying to grow your portfolio. And I was like, wow, I didn't think about it that way. But really, you know, names are just that. I think I put a lot of emphasis on figuring out and finding a great name because I thought that would be really important to building a brand. But in reality, the brand that I'm building in any company builds, it's a reflection of what you do every day. And so the name is really irrelevant. It's how you behave and act and makes the name worthwhile. So a lot of names are just gibberish, but we know

them because they deliver great products to the market. So, you know, I think I cared a lot more about it in the past. But as my lawyer told me, he's like, it's a cute little tree. You know, he's kind of like, he's like, you should keep the name. So that's how it became bonsai. And then You asked, you know, why am I not shorting stocks anymore, even though I have a history of doing so. You know, it's funny. When I started Bonzai, so I started officially and launched in October 2018, I had a blank sheet of paper for the first time. And in the past, I had worked underneath somebody. I used to work for a really wonderful fund called Matrix Capital based out of Boston.

And I was the, I was like the resident short seller there because none of the other partners wanted to do it. I was like the only, when I started, I was the only junior person at the firm. I actually was the junior person that replaced, not replaced, but like was the person after Dennis Haum. So Dennis left and there was like a year gap. And then I came in as this person fresh out of college and no one wanted to do it. So I ended up doing it.

But I had this blank sheet of paper when I started bonsai and I really asked myself the question, what is it that I'm trying to do? And I think that just knowing what you're trying to do is really half the battle in almost anything investing in particular. And for me, this pursuit was solely because I wanted to create the best long-term track record that I possibly could. You know, that's why I went out and I took the risk to go out my own way versus is staying at a pretty established place. And, you know, when you know what you want to do, then you can work backwards and ask, well, how do you do it?

And for me, when I looked at, you know, my history of shorting, I realized that short selling doesn't do what I'm trying to achieve, which is earn very high returns, which are delivered through compound interest. You know, it's very easy to understand how compounding works. I think there's been so much talking, talking that's been done about it. But it's really hard to obtain it, easy to understand, hard to obtain. And when you look at short selling, I've actually never heard anybody describe it this way, but shorts reverse compound.

So every 10% you make incremental, it gets smaller and smaller and smaller. So if it's $100, you make $10, and then you're at $90. And then if you make 10% again, you make 9, and then it goes to 8.1. And so your returns are actually getting smaller and smaller and smaller. the more it works, which is the opposite of going long. And so when you go long, the ideal time horizon is the definition of the name. If you own something for a very long period of time, that implies you're having good success with it by definition.

And the opposite is true when you short because you want to be in it for as short a period as possible because you're actually paying the compound interest because markets typically go up. And so you typically need to have a catalyst and you need to have some sort of insight into why the window of time is really short. My old boss used to say that if you get the timing wrong on the short, even if it works later, you are wrong. And so what I was trying to figure out was how do I obtain that compound interest? And I realized that shorting was not the way to do it, especially because the return on time is very small. Because if your time arising is small, for a short investment

and you spend all this time researching your return is small and the time horizon is small and since I'm a single person running out of Southern California I need to be really, really careful where I invest my time. So that's why I focus on long investments

versus going short like I used to work while working at another fund. Now it's time for a message from our sponsor to you. This episode of Good Investing Talks is supported by MIT Investment Management Company. Short, they are called Mitimco. Metimco managed the financial assets of MIT through partnerships with talented investment managers all over the world.

Metimco is eager to connect with emerging fund managers. They invest alongside young and unconventional fund managers. For them, they bring resources and creative perspective to the fund management journey. Whether you're a one-person shop just getting started or a team of investors building something unconventional, Mitimco would love to hear from you. So please contact them. No firm is too small, too early or too uninstitutional. You can drop them a line at partner at matimco.org. Here you can find the email address as well. And visit their website, mitymco.org slash emerging managers with timco.org slash emerging managers write their main email if you're interested in signing a fund or already starting a fund now back to the video maybe with the

reference to this story the name bonsai also means like growing something beautiful but you know your limits to a certain extent I want to ask you for the heck you did to enter a hedge fund directly after college, if it did get it right? What was your way of doing it? Yeah, there's no real hack, to be honest. I think a lot of it is luck. I'm really lucky to be where I am today. And maybe I can kind of give it, I mean, if you want, I can kind of give you the origin story that led up to that moment because I think when you think about, you know, any, I'm not a superhero, but like I love that when you read a comic book or watch a superhero movie, There's like that origin story at the start, and it kind of tells you all of those, like,

those early moments that imply why the hero behaves the way that they do and operates the way that they do. And I don't know if you know who Byron Wien is from Blackstone, but he said something that was really insightful. He said, when you meet somebody new, try and figure out what formative experience happened in that person's life before the age of 18. because it will color pretty much everything that happens afterward in their life, and you'll get to understand them a lot better.

So I grew up in a suburb of New York City. That's where I was born and raised for my first 18 years. And my father was an entrepreneur. Like he had a small pet supply store that he had in Manhattan. And from an early age, I never was like interested in investing. Like that was not a thing. I was always interested in businesses. And I think that that's still true today.

Like my interest in investing is a reflection of my interest in companies and why people buy and sell things and what things are worth. It's true if you read your letters. So they're great to read if you're interested in businesses. But go on with the story. Yeah. But like even when I was a kid, like I got suckered. I mean, did they have beanie babies in Germany?

Like did you guys get suckered into that stuff too? Yeah. Like, of course, I got, I got suckered into that because I thought, you know, this was this amazing opportunity to buy something, you know, on the ground floor and build something that would be worth a lot more in the future. So I always had that like commercial sensibility to me. And it was kind of isolating because I didn't know any other like, you know, I'm talking like seven, eight years old. Like I didn't know other people who felt that way. But I made it to college. I ended up at the University of Michigan at their business school.

And so for the first time, I was surrounded by. other people who loved business and like the concept of like understanding why people buy and sell things, why companies succeed, what leadership is. And I realized this weird thing, I was just spending all of my time in this, we had this like trading room called the Tazi Center where they had Bloomberg terminals and faxed terminals and like all these resources. I used to spend all my time playing video games when I was younger, right? Now I was spending all my free time in this like, this like 20 by 20 room, maybe a little bigger than that, 50 by 50 room, like talking with maybe five other people about investment ideas. And so I figured I wanted to do it for a career.

And so ultimately what I, when I graduated, I graduated in 2010, which was right after the financial crisis. So it was kind of like a tough time to try and break into a hedge fund. But I took a gamble. I took a bet on myself because I believe that it would be worth. I decided that rather than go the conventional route, which was, you know, take an investment banking job or a consulting job or a job at one of the big three, you know, tax firms, like they all came to my school to try and, you know, get undergrads. And those are great jobs. Like, they're amazing places to start your career. But I knew exactly what I wanted to do. And I didn't understand why I needed to go to an investment bank and, like, do deals for people in order to invest in stocks.

So, you know, I went on Bloomberg and like some people, much to their chagrin, they leave up their email addresses on their, in their accounts. And so, you know, I just figured out, like, what are the 13 Fs that I've been following that I think have interesting portfolios? Let me make a list of a hundred of them. And then I'll take, you know, those people who have the email addresses, I can figure out who to email on the analyst team and send them my best investment idea. And so I ended up sending, you know, 100 investment ideas. And I was like, hey, I'm a, you know, I'm a, you know, undergrad at the University of Michigan. I love, you know, your portfolio and approach to investing. Would you be willing to talk to me?

My best investment ideas here. Hopefully it's helpful to you. And, you know, that led to a lot of conversations. And it surprised me because I'm not, that's not who I am largely. Like, I'm not this like cold calling maniac. But when you really believe in something, you do your best to try and make it happen. And so it ended up where a number of people would get on the phone with me. They tried to give me advice.

A lot of them weren't interested in hiring me. But they just wanted to talk to this kid who was like gritty and, you know, trying to run through a brick wall. And ultimately there was one person who I had a, we had, ended up having this really long conversation about the investment idea I sent to him. And it was a short idea, of course. And, you know, he probably spent like a half hour just ripping it. at a shreds. And I thought, wow, this guy's amazing. Like, he just knows everything about this

business. He's just, this is just what, like, hedge fund analysts are like. They're just so smart and good. But at the end of the call, he said, hey, Andrew, like, enjoyed the conversation, but just so you know, not only is your short thesis wrong, I own the stock. It's my biggest long position. I cover the sector. And, like, have a great day. Bye. Like, click. And so I thought for sure that I had blown it, but ultimately over time, you know, he ended up calling me back and said, hey, you know, Andrew, I'm looking to hire, you know, a junior person, you know, as a trial to see if this would work, would you be interested? And like, I caught him off and I just said, Kyle, you know I am. And so I just threw all my stuff inside of like this, I went out and I bought

this like tiny car, which, you know, this used car that smoked, smelled like cigarettes because was all I could afford and I like threw all my stuff in and I which I didn't have any stuff by the way it was just like a couple of things and I like moved up to Boston sight unseen and you know found an apartment with like five other guys and I ended up staying in Matrix for like five and a half years and after that you went into cancer research why did you take this turn you know I'd come back to what I said earlier, which is I've always had an interest in companies, and I just found that investing was the most authentic way for me, an interesting way for me to get to learn about a lot of them. I think one of the things that's really cool about investing is the learning cycle is it's not really long. Like when you're working on one thing, it takes a long time to figure something out. In investing, it's like a sign curve where you're like, you're constantly learning new things. And then once you kill an idea, you can take the lesson.

learned, or if you invested in the past, take what you learned and apply it to the new and new areas. And I love that. And I also kind of have like ADB brain. So like just working on one thing for a long time, I thought was kind of challenging. But over the five years that I was investing in the back of my mind, I was always just like, you know, operating and investing, they're joined at the hip. And I always wondered like what it would feel like to build something. And similarly, like I, you know, I kind of had my quarter life crisis. You know, I was just like what, man search for meaning like what what am i doing can i do something that's really meaningful not that like investing for you know large institutions and foundations and endowments isn't wonderful

but like is there a way that i could do something that really matters that like where my hands are literally on it and so one of the wonderful things that matrix did was uh they they host these uh events with some of the executives you know associated with the companies that they invest in And they got this big box at Fenway Park, which is where the Red Sox play. And they had all these people together. And I ended up meeting this gentleman named Diego Morales. And Diego was this very senior person who worked at Johnson and Johnson. He was their global head of innovation.

And adaptive biotechnologies, which was a company that Matrix had invested in, you know, put a good amount of money into. That money was, you know, essentially not side-pocketed, but it was. it was segmented to build this new business inside of this genomics company. So they had this wonderful technology that allowed them to profile the immune system of a person. They could actually say for the first time, like, here is the composition of someone's TNB cells, but they didn't have, like, amazing ways of monetizing that. And so they hired this guy, Diego, to build this new business that would find and create

drugs and therapies that use that technology. And so I met Diego at this Red Sox event. And like he was, he was looking to build a team. You know, so Adaptive had this office in Seattle, but he had this mandate to build something where he was located in San Diego. And we just like kind of hit it off. Like I think he heard about me and I'd heard about him because I didn't lead the diligence on Adaptive. One of my colleagues did. And like we got introduced and like we just started talking. And he's just like this crazy charismatic guy. And he's like, look, come build this company with me will change the world. You know, you're going to move to San Diego.

You're going to love it. It's going to change your life. I'm like, we're going to change the world. We're going to find therapeutics that are going to change the world. And like, we pretty much had a handshake agreement like on the spot. Like, of course he's like, this is what we're going to do. Like you're going to fly out. You'll get to see the office that I just lease.

You get to meet. Like, I was literally employee number two. Okay. Well, three. Like he had hired. a scientist to run the effort that he worked with the J&J. And then he hired me to like build the business with him and help him be like, I don't know, CFO like in a box in this tiny little business as part of a larger organization.

But what was really cool that we were doing was we ultimately created a platform for identifying cancer immunotherapies. Because what we did, what adaptive has is this technology that allows you to, you know, effectively barcode T-cell receptors, which are these arms that protrude off of a T-cell. And T-cells are these wonderful part of your body called the adaptive immune system that's able to find these exquisite pathogens, these bad things in your body and attack and kill them. And for the first time, like, what adaptive could do was profile them in really high throughput. And our thinking was if we could figure out which T-cells, you know, maybe like if I have cancer, Tillman, And it's a representation that my body wasn't able to identify and kill the cancer that was

growing, tumor that was growing in my body. But it's very possible that you or someone else actually has a T-cell that could attack and kill my cancer. And if we could engineer precisely that T-cell and create a therapeutic drug that I could technically get infused into my body, you would be curative. And we know it works in theory because that's what your body does every day. it just means that I didn't have that right T-cell or cocktail T-cells in my body. And so it was, it was on the bleeding edge.

It was so interesting. Like, it was genomics. It was immunology. It was oncology. And I felt like I was building something wonderful. You know, maybe you didn't ask this part, but the segue at the end and how I kind of went full circle and came back to investing was, you know, it was this decision on whether or not we spin out the business and have a separate.

separate company because that was kind of like always the, that's the reason why we were in San Diego was it was the promise that theoretically we would be able to raise money ourselves and be a self-sustaining entity still under the adaptive umbrella. But management, they wanted to, they wanted to sell the business rather than invest all this money into it. So we ended up shutting down the San Diego office and it kind of left me in this crossroads where I decided, you know, hey, what do I, what do I want to do? I wanted to go back into investing. And then it was, what are my pathways to do that? Pathway number one, which is really nice and what allowed me to say yes so quickly was Matrix really wanted me to go to Adaptive to help them build out the business, which ended up being a great exit. They ended up selling the business to Genentech. So it was a blockbuster deal that the adaptive team brokered and it was amazing. And we did it in a really short period of time. But what Matrix said was if it doesn't work out, come back. And so I had the safety net, which made taking the risk a lot easier. And so I was kind of at that crossroads where I needed to decide, do I go back or do I move

forward in my life? And I think, you know, for most people, you just don't want to go back because it's nothing against Matrix. Like Matrix was like the dream job of dream jobs for me. Like I would have worked there for free. And frankly, like they knew that and they didn't offer me much when I started. So, you know, I loved working there. And I worked. from the bottoms of the bottom, you know, and I made it, I made a name for myself, and I ended up, you know, driving an impact for the firm, and it was unbelievable. And the amount of learnings and things that they challenged me on were huge. You know, like, I started, like, very value focused, you know, like in the traditional, like, you know, Graham and Dodd and Buffett, you

know, and then I was in this tech fund where, you know, they were on the bleeding edge of everything. And it really challenged me to think about what does quality mean? What does a great business look like? And, you know, I grew so much. It was like being in a sandbox and playing with a bunch of toys and like having an adult like slap my hand when I picked something up that was probably some crappy company that was at a cheap price. So I was able to to really, to learn really well. And then they gave me like autonomy to find the short ideas that I wanted to hunt for. So it really allowed me to express myself as an investor and to learn about my process and to test it out and see, you know, repeatedly, hey, is this working? And I was getting this feedback loop because I think if you wanted to see if something works, you want to see if short, like if you have an investment philosophy and you want to see if it works, like test it out in shorts during a bull market.

And if you see it consistently working, like that light bulb should start be flipping that like, hey, maybe what you're doing, there's value to it. And that's what Matrix taught me, but ultimately what I decided to do at that point in time was go my own way. And I did that because it came back to that moment that we described earlier, which was I wanted to be able to generate the highest returns that I possibly could. And I don't think it's possible for any investor to achieve that, frankly, if you're working underneath somebody else and it has nothing to do with, you know, Matrix, Matrix is amazing. I just felt like, you know, if there's a bend diagram that, you know, it's like, this is my definition, like, this is my universe of, like, great ideas. And like, this was the head of my funds. Like, the overlap I thought would be like one to one.

But instead, it's like this tiny little overlap. And so you have to really manage up to try and get ideas into the portfolio and you have to adapt your style. And I wanted to be unencumbered. And I wanted to invest in the way that I thought was right. So that way I could generate the best returns that I'm capable of. And so that's how I came to start Bonsai. So you have to tell me more about the way you think that's the right way of investing.

Yeah, I mean, it's generate the best returns and what are the best returns for you? So this is going to sound so trite and stupid that it even needs to be said. But I'll say it anyway and I'll kind of share my thoughts on it and how I think in a way. I'm looking for great businesses available at great prices. I know that sounds so obvious, but I feel like today there's this really strange dichotomy that exists between, you know, people looking for great prices and people looking for great assets. And it's like, which side are you on? Are you a value investor? Are you a growth investor? And it's this like false dichotomy that exists. And my view is, if you want to, if you want to, earn truly spectacular results on an idea, it's just not good enough to find a great company. It's just not good enough to find a great price. You have to have both. And I don't know if you've

ever watched a movie where it's like one of those bank heist movies where they're like trying to get into the vault and they're like, open up the vault and the bank tellers are walking in and they're fumbling with the keys and they have like two sets of keys and there's two different bank tellers and they stick them into the separate holes, they look over their shoulder and they twist together. It's kind of like that. Unless you have both of them, you're not going to get into the vault. And so what I'm looking for is kind of, you know, I can't say I have a lot of originality around what a great company looks like. You know, I think Matrix really helped me to understand, you know, the dynamics of, you know, high barrier to entry businesses because

underlying almost everything is the economic theory that the more competition you have, the lower the returns you will be, you will have. And so there are lots of ways that you can keep out the competition from, you know, those bearers entry like network effects, brands, you know, that has been discussed ad nauseum. And I'm looking for all the same things that most people are. But the area that I'd say that I'm doing, what I'm doing is a little different. it kind of hinges on the same topic as before, which is I'm not just looking for things that have companies that have high barriers to entry. I am. I'm looking for those companies that have

stocks with high barriers to investment. And it's the exact same line of thinking because if I want to generate high returns, just like that company is generating high returns, I need things that keep out my competition. So if everybody else sees what I can see, the price will be really high, and that sucks out the excess return in the stock. So what I'm looking for are these wonderful businesses, you know, that have like long runways for growth, great ability to return cash to shareholders, could be asset light, could be asset heavy, there's a million different ways. But there's something to it that keeps out my competition.

And the way that I would describe different barriers to investment is they can be either physical barriers, or they can be intellectual barriers. A physical barrier is something like a geography that maybe just doesn't have as much competition in it, which is probably why you realize that most of my stuff isn't in the U.S., even though I'm in the U.S. I tend to think that it pays to go where the opportunity is. It could be a language barrier.

It could be a liquidity barrier. There are all these things that are, you know, these physical things that keep people out. I think those are the easiest to understand. I think the most interesting ones are the intellectual barriers. because a lot of times when you look at a great business, it'll often be mispriced because maybe there's some sort of a mystery to it that you need to solve and figure out the answer. Or it could be like onerous uncertainty, new competition.

And a lot of times, like, you'll find great businesses that they don't want to explain why they earn supernatural returns because they're smart. They know that if they put that in their annual report and presentation, you know, then all these other competitors are going to come out. So they try and obfuscate the truth. And those are some of the best opportunities too, where like when you look at it on paper, you're like, either they're hiding it in their financials or they're hiding it in the paragraphs, you know, the MDNA of the annual report. And so I relish the opportunity to take those high barriers to investment. And through my research process, I try and break them down. And so I tend to think that I go where others aren't

willing to go, and I do what others aren't willing to do. And that allows me to buy those great businesses at a great price. And maybe just like a historical example from my time in Matrix, which I thought was really interesting, where we executed the strategy without even knowing it. One of the neat things of working at Matrix, it was seated by a venture capital firm called Matrix Partners, which worked across the hall from us. So they were like the early investors and like sand disk and FedEx and Apple and like all the networking companies around the dot-com boom. And so they gave, they gave David money to manage.

And like we had this. It was like a like a loose partnership where the venture capitalists could help us understand what was going on because they saw the earlier stage businesses. And one day, I guess one of them went to David and said, you know, because we were looking for software as a service companies early on in the progression to the cloud. It was still like a controversial thing in like 2011, 2012, and David had this vision that like, this is the future. And he got that so right. But one of the partners went to him and said, hey, like, have you ever heard of this company based out of New Zealand called Zero X-E-R-O? And all of us were like, what? I never heard of this thing. And they're like, well, you should really take a look. I think it has all the characteristics that you'd be looking for and that their metrics are great. So, you know, David had, I don't, I think it might have been me. I don't even remember if I worked on it or not for a little bit, but some of the analysts

started looking at it. You know, it's the sticky business that provides tax software to CPAs. And so, like, they help you file your, I don't know if that's the case in Germany if you guys use, like, accountants to, like, file your taxes. But here in the States, like, you have to go to a CPA. They, like, do all the work for you. But the cool thing is, like, when you link up with a CPA, they put you on a subscription. So it's like this, they have like all these channel partners that are just evangelizing the

software for you. And it's incredibly sticky because you don't want to change your accountants. So we love the business. Like we underwrote this business. We're like, this is fabulous. But then we did this weird thing where we looked at the price. And because no one had heard of this like sleepy New Zealand company, it was trading for like 130 million market cap.

It was tiny. It was minuscule. Like if you compared the valuation metrics. to like the U.S. comparables for software as a service business. It was like an order of 10 greater, like price to value multiple. Like I'm talking multiple, not valuation. And so we were buying this thing at like every day, David, and my hat goes often, he was buying every single share that he could find on the public market.

We were like 80% of volume every day, buying up everything we could find. And eventually like he led a pipe in the business where we gave them a nine, figure check. But I think in aggregate, like, we got like 20x return on that, or maybe not every tranche of capital, but like today it's a $12 billion business, but we were buying it $100 million. And that wouldn't have been possible if it didn't have these barriers that kept out other investors. Now everybody knows about zero. But like the key is like having that great business at the right price, it allows you get those supernatural returns. And it's just by coincidence that like red bubble happens to be in Australia.

But I think some of those similar barriers were apparent to me there because a lot of people have just never heard of it. That's very interesting. How scalable is your approach? Well, let me go on a bit of a tangent. I'll kind of explain how my thinking has evolved over time. Scalability is not the first thing that I think of. because, again, my goal, like, this is an optimization problem, like, when you start an investment

business. And unfortunately, like, there's the asset optimization problem and there's the return optimization problem. And, you know, I kind of had to choose. And, like, my philosophy at the end of the day ended up being, I want to maximize my IRA, not my AEM. And I felt that if I had, if I demonstrate excellence on the IRR side, the AUM will follow because the scoreboard takes care of itself ultimately. So, you know, knock on wood, we're off to a good start on the IRR side and over time I'll have to scale up. What I noticed, like, so I have this cork board that I put up on my wall in my office. I didn't show you this, but, and you can't see it. But what I did was I went back and I did an audit of everything that I failed at. You know, every name that I,

I either invested in that had a bad outcome because I made a mistake at the outset or a name that I didn't end up investing, but I spent a lot of time because that is a failure too. You know, wasted time can be a big issue. I have this like these like tombstone tiles where like I have like all these different names and I ask myself like, what are the similarities there? Like what are the threads that I can pull on in terms of, you know, themes that I got wrong? one of the things that I tend to do poorly is I tend to get I bought a lot of smaller businesses that didn't have the ability to scale and I got lured in like I'm actually I actually do not have

a lot of cases where I paid up too much and like it was dead money for five years like the biggest thing that I struggle with is buying small things that end up going nowhere or the other thing that I think is interesting is a lot of the time I always underwrite if I bought this today would I be comfortable owning it 50% down? But the real question I should be asking myself and now I do is what I want to still own it if it was 100% up. And not about selling those,

like wanting to buy something to sell it later, finding something that ultimately when it reaches that 100% up point in time, the business was fundamentally better at that point and like the intrinsic values consistently growing. And so I'm getting better at buying things that ultimately are scalable. I think you don't have to be a bottom feeder

in order to make the strategy work, even though some of the smaller things are attractive, I actually think like it doesn't pay to do that like $100 million market cap investing in the United States because we have this incredibly robust venture capital ecosystem. What's unique about Australia and New Zealand is they don't have that. And so a lot of these companies, and maybe it's changing, I would assume it's changing, but at least back when the cohort of companies that I'm investing in were looking for money after like Series A, there was nobody there. And so like, you know, one of my companies IPOed at one million of revenue and then I think

Red Bubble IPOed, I don't remember the exact revenue number, but it IPOed at like a market cap of like 200 million Australian dollars. And so what that does is it allows the public equity investors to capture more of the economics. And I think in the United States, there's a lot of traps. here. And also, I used to think that the bigger the company, the more there would be, you know, the more analyst coverage there is, the less mystery there is. But like you probably saw, like, in my last letter, like, I bought a large cap company. And I don't think that it's exclusively in small companies, but you have to be buying things for the right reasons. But just to like

answer your question about how scalable it is, I think it's pretty darn scalable. I'm not looking to be the biggest fund, I'm just trying to generate the biggest returns. And as long as I can compound my knowledge faster than I grow the asset base, then the returns will be safe. And if I, if I don't, if I end up raising way too much money, like faster than like my knowledge gets better and the opportunity set presents itself, then it then it'll be a detriment to my returns. And like, that's the thing I'm optimizing for. So I will not let that happen. But one of the things that I thought was really interesting. I don't know if you follow, do you know who Chuck Akri is? Yeah. He's like a great investor and he does these like, he does these quarterly calls,

which can be really, really good. And someone asked him, Chuck, like, when are you going to like close the fund? Because I think he was at like seven or nine billion dollars at the time that, at the time that they asked that question. And he's like, I'm really glad you asked me that question because when I started, like people asked me like, when are you going to close the fund? I he launched with like maybe like 100 million or 200 million. And he's like, you know, I'm going to cap it at like 300 or 400 million. And it's the same notion that I was that I was talking to before about like when you hit your price target, like the business gets better. He was like by the time I made it to 400 million or whatever it was, I just got so much better by that point in time

that I was able to accept more. And so my hope is that I continuously keep getting better because that'll allow me to scale. It's not so much the opportunities that like there are just tons of opportunities out there. And I do think that, especially like when you have a global mandate and you're willing to not like put yourself into this tiny little box, it means that there's just a world of opportunity. And so I'm not concerned about scalability for at least a long time because I'm still really small. That's a good, good point.

One thing you already mentioned a bit is the question if you're going to this niches where nobody else invests, how do you, or how do you make this niches change, like people want to invest there because they have to buy the stock from you to a higher price later in the game? Or what is needed that these niches change and that businesses get recognized by others? What a good question. I don't have a definitive answer, but I have my impressions. my view is that the truth always comes out. Like I told you, I did a lot of shorthing. Like, the truth always came out.

Like, you can't hide the truth. And if something's a great business, people are going to figure it out, especially in market economies that are so efficient at allocating capital. It's been said numerous times that the past is always perfectly priced in the future is often mispriced. And so if you're able, like, the key thing that I'm trying to do is I'm trying to find great businesses that people just don't realize it yet. So I'm not looking to convince anybody or like evangelize, but I know that when the business executes, people figure it out. Like it's kind of that, it's like that notion of like, you're smart and I'm right and eventually we'll see the same thing because I know that there's lots of smart investors out there and investors all talk.

So the thing that's mystery now won't be a mystery in the future when it's generating, you know, significant amount of profits in the future. And I don't need to be operating. Like, if I have a long enough time horizon, I don't need a catalyst. I don't need to have a view of when, you know, it happens. I just need to be in the game. And so, you know, I love it when people just don't know that something's great because that's, that is my opportunity. And maybe just to kind of like, you know, double click a little bit on this, like, because it's something that I've been thinking about a lot recently. A lot of people spend their time thinking about these, like, really high-level, grandiose topics.

you know, like, I think like even like there was a fund recently that like not sued, but like threatened to suit somebody for like writing about compounders. Like or they're like talking about like platform economics and, you know, like high level things that can like apply to hundreds of different companies, at least for me, like I found that when you go really, really deep onto something, it actually gives you the opportunity to see something that others aren't able to see. and in my opinion, the definition of information that'll make you a lot of money, it needs to have two things.

It needs to be rare and it needs to be valuable. Rare and valuable. It can't be one or the other. And I think a lot of these high-level universal ideas, they're valuable, but they're not rare because you can come to the same answer from 50 different angles. And they're often very easily communicated over a cup of coffee. So what I end up doing is I end up going really, really narrow and deep into a single business or an industry.

And I want to get to know the nitty gritty because you don't know where those moments of insight come from. And I think that if you have a really concentrated portfolio, it allows you to go where others aren't willing to go, not just in terms of the names, the stocks, but actually the detail and the information that you can uncover to try and find the truth. I think that if I wasn't doing this for a living, I'd probably be like an investigative reporter or something like that because I love being on the hunt to figure out what is the truth in these weird mysteries. And so the advantage I have is like, and you'll like learn to train

your spider sense to identify like, hey, I found something that's insanely valuable that nobody knows. And if you can just find a few of those moments, it gives you the opportunity to bet big on them because that person who has, you know, a 1% position or 2% position on an idea, they're not going to be willing to devote months of their life. I think like, you know, sorry to go on all these tangents, but I think that investment management, like the, like the, who came up with the rule that we need to have like a 30 position portfolio or like a 50% position portfolio? Because it doesn't make any sense to me. You know, it's kind of like a way of absolving yourself of responsibility because if you, let's say you have a 2% idea in your, in your portfolio and it's

an abject failure, and it goes down 50%, you lost 1% for the portfolio. But we both know, the market moves 1% in a single day. Like, what are you betting on? Are you betting on the market? Are you betting on your ability to do differentiated research and pick certain stocks? And so my ability to be really concentrated, it allows me to transcend a lot of my competition in a way. And so, you know, to kind of bring the idea full circle, like I dive really, deep into like these little niches. I uncover these valuable nuggets that allowed me to see value that others can't. And then the value will be presented to the market over time as the business executes hopefully. Yeah, this also refers back to the point with where I came up

with the scalability question because to go that deep, it's hard to find the right hunter is. It's also a problem I talked with Fred about from Hayden Capital that he's also looking for this hunters and the center characteristics are hard to find. Like, if you look in the future, like we say we talk in 2030 and I'm going to ask you about how many positions did you have in your portfolio and what was the medium number of positions you had in your portfolio. What would you, what might you answer? Okay, so let me take another securitus route to answer your question.

I'm really bad at going direct because I have this, I have this like ADD brain that works like a web, and I know I'll lose the line of thought if I don't blurt it out right away. One of the things that I've been thinking about a lot, and it could be just be because I spent a lot of time on Red Bubble, is I've been trying to figure out what other industries are similar to the discipline that we're doing. and I think one of the disciplines that actually has a lot of similarity is the world of art. And I think that, you know, more often you kind of see more scientific comparisons. You know, I think when I was in business school, you know, it was very formulaic.

You know, here's what Kappa M is. Here's WAC. DCF, like all these acronyms. And like, it's a very scientific thing. But like you asked me like 2030, what does the world look like? is there anything more artistic than like being a soothsayer and trying to predict what the world will look like, what companies will do, who will be successful? I think that this is an artistic pursuit more than a scientific one. I think there are attributes of scientific theory that are really important, especially with the scientific method.

But like the concept, like the reason why I bring up art to answer this question is I've been thinking about this too. I was like, if you're a musician, and someone asked you, you know, I want you, like, which musician you think will come up with a better album? Artist number one, who says the album will be a reflection of my inspiration. Or artist two, which says, I'm going to have a 12-track album, and each of them are three minutes long, and then they work backwards to create these three-minute sound bites versus like the artist A who might be like dark side of the moon or whatever and they have like a 12 minute

long song and then like a two minute long song and it's like it's all based on this like sense of inspiration and these epiphany moments which I think that's how invest great investing is done it's like you get these aha moments and in my view I've like if I look at like my history I probably get like one or two of those a year maybe the cadence is more or less and my view is that if my holding periods are you know hopefully infinite like that's the That's the definition of great investing, right? But if I have like a three to five-year holding period, you can work backwards to say, like, what is the output of the portfolio if you're finding it on that cadence?

And so, you know, we zoom forward, you know, 30 years. My view is that, you know, the portfolio management will be the output of what I found, not the input of what I mandate that I need to have on, you know, on day one. And I think a lot of people take the opposite approach. They say, I need to have 15 positions on day one when I launch. Like, what's your day one? portfolio. A lot of investors asked me that question. And I was like, I don't know. And they're like, well, I'm not going to invest with you. Like, if you don't have 15 ideas on day one, like, I'm not

going to invest with you. And I'm like, I don't think I've ever, I think I have had 15 good ideas total since I started 10 years ago. So like, how the hell am I going to have 15 good ideas? So the way that I positioned the portfolio and how I expect it to look, it'll probably be somewhere in the realm of like five to 15 ideas. You know, it's hard to. know what 30 years from now it looks like, but that's ideally what it would look like. And you know, a lot's going to change. I'm not trying to be an empire builder and build this big important company, but I imagine that like maybe I want to do more work in China. And to do that, maybe I'll actually have to be a team of two instead of one. And I don't know how you juggle

that because I know that there's a lot of weird team dynamics, like when you grow a team. There's good and bad. So a lot can change. But if I was just to keep the status. quo and like and keep you know progressing that one to two per year cadence over you know 15 years with that like time horizon my outline that's probably the the size of it and conviction will be the determinant of how big certain things are but there's not a lot of balance in my portfolio today and you know hopefully that'll change over time what i found interesting maybe it's also reference to the idea of the web you thought about your brain is that you have like If I look at your portfolio, it's a mix of a semiconductor manufacturer software as a service company for warning systems, I forget it, right, leader in genomic sequencing instruments, and reagents, two-sided marketplaces, red bubble, and a church-giving processor.

It's like a huge array, and where are the knots where you hang up these ideas and connect them? and is there a pattern in them or how do you get comfortable with like this huge spread of industries? But yeah. See, of course there's certain things that are similar about them. I won't even like talk about like

how they are similar from a business model perspective. But what's universal beneath all of them is that same view that this is a great business available at a great price. And a lot of those businesses have had barriers associated, which kept the price low. But the biggest thing is they have to be businesses that I can get to the answer. You know, there are a lot of businesses out there that I just can't possibly know whether or not in the future it's going to be worth significantly more or not.

You know, one of the things I truly believe, I don't think I'm the smartest person, but I think that it's much more important to have intellectual honesty over intellect. And so every one of those names, I know deeply because I've spent a lot of time doing differentiated research on it to get to understand and know the truth about it. And I might be wrong. I'm not going to be 100% right on all of them, but I'm giving myself the best chance to not fool myself by using a really rigorous scientific approach to, you know, the scientific method, you take a null hypothesis and you try and disprove it.

And like when you have that short seller's mindset, at least when it's wired in your brain for a while, you're very skeptical and you're trying to kill your ideas. And I think that's really important because there are a lot of investors out there who invest in, you know, maybe they love the SaaS space and they buy a zillion of them at really high prices. And they just believe it's going to work because, you know, they have a really high price target and they believe the growth will be sustainable. Even though they may not know that that is actually going to be true. I think what's, you know, yes, these software businesses are fantastic. Like to use Warren Buffett's analogy, it's like a huge castle with a huge moat. but the reality is this castle has been built on sand these businesses change very quickly

and they say never build a castle on shifting sands and I think that the logic that you know oh we have these LTV economics for a customer and it's going to be true 20 years from now and like they'll stop investing and they'll get these like these great mature margins and then we'll put a huge multiple on it like the moat comes from spending all that money. And the instant that you stop spending that money, the sands underneath like evaporate. And so like for me, like I just need to be really intellectually honest about what I know and what I can underwrite. And like that process is woven through all of it. But each of those ideas, I came to through a unique pathway. I think that the idea generation process, if you want to

talk about it, I think it's like this serendipitous one where, you know, a lot of people view it as like this machine that, like, you crank out, like, ideas if you do like step one, two, and three, it's actually not that. It's very much the serendipitous randomness process. And you can increase the odds of luck happening, of serendipity happening, if you just do certain things, including just paying attention. You know, some ideas I literally was just walking through, like the other day, I was walking through the grocery store. And if you're just always on, you'll look down and say, like, who makes that palate that all that food is stacked up on? Like, maybe I should look that up when I get home.

Another, the answer, of course, is Brambles, which has this amazing business where they rent out pallets all across the world through this brand called CHAP, another Australian company. Or, like, just by talking to people, creating a network of other investors that share ideas, by reading about things that are interesting to you, and then just like, always being on and talking to people and asking them who else they respect. It creates that web, like you said, of ideas that, you know, will naturally come to you. And you can't control when they come, but you can control whether or not you're paying attention. You know, maybe to like, beat a dead horse a little bit to, like, talk about art again.

But, like, who do you think is going to create a better album? The musician who, like, has messy relationships, maybe like a substance abuse problem. they love to travel, they have like interpersonal issues inside the band or like the artist who goes into their studio every day from nine to five and like eats the same turkey sandwich every day. Like the odds of inspiration happening is greater in option A than in option B. And I think the same is true for investors. And so the web that you're painting, there are all these like discrete moments.

Like one of the, my first investment was in a company called Aspenero Gels. and I found Aspen because I was just interested in material science one day. I saw Bill Gates posted his annual favorite books, and he posted this book called Stuff Matters, which I thought was neat. I was like, oh, I want to learn about stuff. And so they had this chapter. Welcome to the Nut Club. I mean, they even had a chapter on chocolate, you know,

because the author was like amazed at how like, It has this like solid properties. It's like melty in your mouth and like how you make chocolate. But he had this entire chapter on this topic called an aerogel. And all an arrow gel is if you want to conceptualize it, it's like a block of jello. You know what? You have jello in Germany? Or is it called something else?

And then if you take jello but you suck all the liquid out and all you have is this like solid block with all these like little holes of air. And the author, he portrayed this magical substance because it's the best. insulator on earth. And so if you have a block of aerogel, you put in your hand, then you take a blow torch, your hand will be fine. It can, like, it can, it can survive heat and cold extreme temperatures. And I got interested and I said, well, is there an aerogel company? Of course I did. And so I just like Google the aerogel company. And I, lo and behold, I found that there was this company called Aspen. But what was neat about Aspen was they didn't invent the arrow gel. Like one of the things the book taught me was that great inventions happen

all the time, but they're rarely commercialized. It's hard to actually make them usable at scale. And with an arrow gel, if you have this like solid brick that like could be an insulator, it wasn't very useful because if you touched it the wrong way, it just shattered. And the innovation that Aspen came, uh, came to find was they, they decided that imagine if you have like that liquid jello that you pour into like uh into a bowl they cap they also put like this little blanket inside of it you know like imagine like a fleece blanket they just poured the jello on top and then they sucked out the the liquid and what that did was it made it a flexible bendable cutable insulation so they created this composite aerogel blanket that made it usable worldwide

and so they built this amazing new technology that was you know it was the same thing that was, you know, was found in 1930. Like, that's when aerogels were discovered. But no one had used it until Aspen came around in like the late 90s to commercialize it. And so like something like that, that's how the web is working in my mind. Like, I'm just always on because it's what I love to do. And it, you know, we can talk about Aspen. There's good and bad about that one. But, you know, I think it's just a fun journey to try and figure things out. We have a, a bit comparable story of a company in germany it's called wakut tech they are building vacuum panels for insulation as well and they figured a process out where this vacuum panel stay on a high

quality for years and years and years and they also are tradable on the stock market you can invest in them and they they're vacuum panels and their vacuum services spawned part of the vaccine against corona because the vaccine has to be cool about around minus 70 degrees and they will be a huge winner from this and they're already a huge winner this year so you could look into them if you're interested as well but maybe let's go to to deep dive into red bubble and i already showed you that i have some red bubble uh things in my my room this is i love it this is a pillow cover and this is also this warming stripes are also from red bubble they show the global warming and maybe let's start with the question how you did discover the company and what made you

that deeper in that deeper into it sorry i think it's just another excellent example of the serendipitous process working so i first invested in red bubble and 2019, I believe, early 2019, but I first heard about it five years before. So 2014, I was at Matrix and I was looking into, I'm sure you've heard of Zillow, Zillow group. Sure. And I was doing my research on Zillow and I thought like, hey, this is going to be like my big long idea that finally makes it into the portfolio. I'm going to do all this research. And I found this great entrepreneur based out of Australia. His name is Simon Baker, and he created one of the great Australian tech companies called REA Group. He got seated by Rupert Murdoch to create this

property portal where effectively everybody who's in Australia that's looking to sell their house, they post like, hey, here's our listing. I think it's like real estate.com.com, I think is the domain name, but it's REA group, his name in the company. And it's like the best business I've ever seen because it requires no capital. And like the agents actually who sell the REA software, or not software, but the listing, they get paid regardless of like a percentage of the price. And so they have this like mandate that they can raise prices every year. And like selling your home is so infrequent of a sale that like you'd be silly not to post

it on the internet because that's like where 80% of every home search starts. And so like if you're looking for price discovery, you'll make far more if you pay the $200 or whatever it is on REA. But anyway, so I talked to this guy. He built this multi-billion dollar company and he like educated me on Zillow like to the nth degree. I learned so much from him. And I just remember thinking like, and he told me like, hey, I do like marketplace investments like privately. And I just remember thinking myself, I want to know every single thing that this guy invested in because he's that good. And I like, you know, of course I like stock like his like investment fund where he has like public like information. And I found that he was on the board of this like small Australian

company called Red Bubble in 2014. And I remember going to the website and being like, what the hell is this? This is just a bunch of garbage. Like, why are there all these memes and, like, nonsense pictures? I just didn't get it. I thought it was just a website that sold crappy items. And then you fast forward to 2018, late 2018. That's when I started, you know, I figured exactly how I found it. I think I literally just did a screen for Australian tech companies.

I was just bored one day. Like, when you get bored, just make a long list and then go from company to company to company and just ask. what are they doing? You know, I do that from time to time. And I just remember being like, wait a second, red bubble, that like crappy Australian company, that's public. And I also saw I was like down like 60% that year. And I was like, well, now that it's public, like, let's see like what their pitches, like, and what they do. And so that's how I got introduced to the story. But let me like, let me just explain what they do and kind of why I found it interesting and where why I think it's a really neat business.

So Red Bubble, it's actually a three-sided marketplace. So they can- If you're okay with it, I will share some, my screen with the website open. I entered the search for its stock market. So we see some of the things they have. So you can get all the like, they have this mucks with, yeah, with. Not the best example, but like maybe if you type in like avocado, then you might get a better, because a lot of this stuff is like memes right here.

Let's see. Yeah, let's see. It's in sticker, sorry, I have to change this. Yeah, it's weird. Let's see if it works. Yeah. Yeah, so this is independent artists that are creating these designs. designs. And that's the part I didn't understand. Yeah, there's memes and stuff. Like, you see those

like hamsters or whatever. Yeah, like there's some memes, but all these things, like some independent artists somewhere made this. And it's really impressive what Red Bubble has done to bring together this world of, I don't know why this. Oh, okay, I guess I'm a kind of, I was wondering what Guy Fiority was there. But they brought together in one place, a place where independent an artist can go to try and monetize their artwork. So what I think is really interesting about Red Bubble, and I think there's some similarities to Uber and Airbnb, and that they're tapping into this underutilized asset base. So in the case of Uber, there are people's cars, which maybe aren't being driven to their full utilization or someone's house, which may have empty rooms,

or they have a second house that's just lying there. Across the world, there's this universe of artists, like these independent artists that create these great designs, but they're kind of just lying fallow on their hard drives. You know, it's just like sitting there, unutilized. And if the artist wants to sell that art, historically, what they had to do was, you know, create a web presence themselves, build a website,

get an audience somehow, like, you know, you create content that's shareable, get people to come, you know, that whole rat race. And then from there, they have to actually buy inventory and get it like printed on things, like, you know, shirts or whatever they want to sell mugs. And then when an order comes in, they have to go to the post office and send it out. And then when there's a problem, they have to like give them their phone number and like field angry calls and then send out a replacement. And that was a lot of work.

And they probably earned like 50 cents on every dollar that they sold. What Red Bubble did was they said, hey, we're going to create the place where independent artists can go to upload their art, and we will do the rest. And the value proposition that Red Bubble offers to artists is huge. So there's this new technology, well, new, like it probably came out like 10 years, 15 years ago called Print on Demand, which is just another way of saying, like, really efficient way of printing out individualized pieces of artwork and designs onto different canvas types, be it a shirt, you know, like you have that print in the background. You have your Warren Buffett

and Charlie Munger, pillowcase. Yeah. So, this is the pillowcase. Let me. You can put, you can put the pillow in. But like, they came to the realization, or it was, it was a revolution. And what Red Pupple decided to do was to create a platform that enables the use of print on demand, rather than historically it had been like you bring the artwork, like you design something yourself and you get it printed on a shirt. Like let's say like your local soccer team, you want to have like Rosenblums, you know, footballers or whatever. Instead, like you can go and actually tap into this universe of wonderful art that can get printed across, you know, I think today it's around 100 different canvas types.

from pillowcases, shower curtains, shirts, sweaters, socks, skirts, aprons, they have duvet covers. They have, you know, more masks, jigsaw puzzles. They have all these different blank, you know, pieces of canvas or physical items that they can literally print the design onto. And the artist loves it because Red Bubble has, you know, is able to aggregate traffic for them. They don't have to create a website. they instantly get their design ported over onto a hundred different canvas types. They don't have to invest in the inventory. And then this is the really cool part that I think is really underappreciated.

Unlike most marketplaces, Red Bubble does not charge the supply side a fee. What Red Bubble does is it pays a fee. So the person who's getting a take rate is actually the artist and not Red Bubble. And so what's really cool is if an artist uploads something, and let's say they want to design a t-shirt, by default, like the split is something like this. Like, don't quote me on this and going off a memory. It's something like 20% of the sale goes to the artist, 30% goes to Red Bubble, and 50% goes to the fulfillment partner, which is not Red Bubble, because Red Bubble doesn't make anything.

They have this network of partners that print and ship for them. And like, that covers the physical cost of the item, the printing, the shipping. And what the artist can do is that default 20%. There's actually a sliding scale. And so what they could say is like if it's a sticker and like the sticker costs like a dollar, they don't want to earn 20 cents for their work. They could say, I want like a 50% or 100% commission. And all that does is when they slide the scale, the underlying price goes up, you know,

that the customer pays. And so the artist is in full control. of how much they earn or not on a particular product. And of course, like when you raise the price, like demand will go down potentially. But the nice thing about Red Bubble, and we can talk about the demand side and why it's really valuable there,

is that there's a very high propensity to pay when you find something that expresses who you are. When you find that unique thing, like Red Bubble is not the cheapest. It's actually like recently pricey. They don't deliver fast. Like you pay for shipping, but at the same time, like, you know, maybe I think for a second, like I just bought, here, hold on, I just, I showed you it before, so I bought, I bought this cool mask and I just came like last week. It's like of the

constellations. And I thought it was so neat, but like I ended up paying like $25 for it, you know, shit. And, you know, I thought for a second, but I was like, that mask is so cool. Like, I have to have it. Like, even though it's like probably twice the cost of another mask. But anyway, like that the artist is earning the take rate that they choose. And so all the artist does is they upload their art. They don't do, you know, they pick out which products they want to print it on. And then they just wait for the money to roll in, like they get a check every month. And so Red Bubble has become the de facto place for artists, independent artists, upload their work. And then like to talk about the product market fit on the demand side,

like Red Bubble focused solely on the artists at the start. But once they built this wonderful library and they built this like fulfillment network that fulfills all of the, uh, the, the orders and it prints it out on all these different product types. It built up this wonderful platform for the customer, like people like me who are buying rather than making the art. And the reason why I think it's really unique and why Red Bubble is going to be a lot bigger in the future from a revenue perspective. Like this isn't like a stock call, you know, by the way.

Like this is just why I own it. For me, like, I think the revenue will be bigger in the future because it's hard to see a future where fewer people are buying products that express who they are. You know, today, like most people are buying these mass-made products and they wade down aisles hoping and praying, not praying, but like, hoping that, you know, something that someone mass-produced will fit their personality. And so what Red Bubble offers, it's like this, it's this personalization engine. Like, if you want avocado something, there's a zillion designs. If you want, like, I'm sure even if you typed in like avocado ninja, there'll be something. Like, there's a million different random things.

that will help you express your quirky personality. And that, I think, has amazing potential, you know, that's enabled by print on demand and these independent artists. And they've expressed that deep product market fit through their revenue growth over the years, which has been very strong. The last part, like, you know, I focus so much on, like, why it's a great fit for the customers

and the artists. From an investor's perspective, it's a really beautiful thing because they have this amazing business model, too. So the first thing that I think is really attractive about it is unlike, you know, so there's another print on demand company that does a really good job called Simpress. But Simpress, which owns like Vista Print, like they own their, like their own facilities for printing and shipping things. And what Red Mobile realized was there's a lot more value to being the platform that hooks up to this network of, like I think they have around 50 fulfillment partners today that print and ship.

So it's asset light. two, it has a negative networking capital cycle, which sounds like a bad thing, but really all that means is they get the money first before, you know, anything is ever made. So Red Bubble is just like, it gets, you know, in Warren Buffett Parliads, it gets float. You know, so there's the period of time. It's like an insurance company. They get the money first before like they have to pay it out in claims. And so they end up paying the artist at the end of the month. They pay the fulfillment partner after it's made or in the process of making it. And so it's very cash generative, like they are in 30 cents on every dollar, which is a margin that's charged to the customer.

And like the way to think about it is like there's a 20% markup or a margin and a 30% margin, 20% to the artist, 30% to the red bubble. And like the customer willingly pays that 50% margin because they found a unique product that expresses who they are. And so at the end of the day, you get this wonderful business that's very cash generative and doesn't have. you know, this capital heavy, uh, infrastructure. And then I think just like generally speaking, the runway for growth is, is really significant because they're, you know, their brand awareness in their, you know, their largest market is the United States. Like, I've done survey work. I think the company's done survey work. It's 10%, 15%. You know, most people have never heard of it. And I think that this is something that is really powerful, even if you're just buying for yourself. But I think it's like,

it's like the ultimate gifting engine. Like if you know somebody and they like something, you can send them something really unique that probably they'll enjoy. So those are the reasons why I think it's interesting. Have you thought it through compared to Etsy? Because you have this painting with Etsy behind you and it's also a point to attach at this point.

I think what I find interesting is that they positioned themselves in a space of art production that's industrial to a certain extent and they can build this scale and mass production and combine it with art which is in my as stronger as Etsy but what does you take on this?

Etsy built something that's awesome. It's such a great business and it's further along in its maturation cycle. But remember when I told you about like that example where the fund I worked for bought zero and it was like a factor of 10 different valuation? So when I told you, did the work on Red Bubble and when I originally bought it, and even when I bought more of it,

I did, I mean, Etsy's the closest comparison, right? So like Red Bubble earlier in its journey, probably longer runway, maybe, you can argue. But when you compared the valuation for this like quirky Australian company that no one had ever heard of, there was like a 200 million Australian dollar market cap to like the behemoth Etsy, like the way I was comparing it was like as a multiple of their gross profit. Because sometimes like you can, the profitability gets obfuscated by the cost structure and then like the revenue numbers weren't comparable between Red Bubble and Etsy because Red Bubble, the reason why they look like they have this really small gross margin is their revenue line is actually their GMV,

the gross merchandise value. Well, Etsy's is the net revenue from their GMV. And so it's not apples to oranges. And so like if you just compare the gross profit dollars to their market caps or enterprise values. I think at the time that I bought Red Bubble, Etsy was trading it like 20 to 30 times. Pretty pricey. Red Bubble is trading for two. It was an order of magnitude.

I don't know. It was an order of magnitude. Is that 10? It was 10 times less expensive for a business that I thought had a much longer runway and ability to scale. And so, of course,

I looked at Etsy and I thought it was a cool business. But the thing that kept me out was, I didn't really see what the mystery was that I was trying to unlock. You know, I think Etsy's a great business, and everybody knows it. That's kind of like where I was at with that one. And, like, of course, I'm kicking myself that I didn't buy it when it went down a bunch in March, but instead I bought Red Bubble because it's what I knew.

So, of course, I compared it to Etsy, and I think that Etsy is attractive. But I think, like, if I'm looking to earn those superlative returns, you know, maybe I'll own Etsy. point, but I think it has to be really attractive, both from a price and a business quality perspective. And the price kind of kept me on the sidelines. In your letters, you don't talk that much about management. And it's, it sometimes shines through in some parts of the letters, but that brought me to the question that, that less talking about management. What importance do you see for management in general and what importance do you see

for management here? It's tough. Oh, well, Red Bubble, I think, has great management. And I'll get to that in a minute. I think, you know, like, there's nothing new here to hear that I think founder-led businesses are superior because there's a lot of alignment of incentives. But I think that, remember, just go back to what I said before, which is if you're looking for information, that's, that's going to earn you a lot of money. It needs to be rare and valuable. And I think that it's pretty consensus these days to go for founder-led companies.

And I think that everybody's looking for founder-led companies. And so I prefer them. But in my opinion, I have to wonder how much of that you're giving up in the price. Also, like, just from my experiences, I've learned that there's a highly misused term called the law of large numbers. And all the law of large numbers actually tells you

is if you have a really large sample size, you can reasonably use that sample to understand what the outcome should look like. And I think like when you're underwriting a single person versus underwriting like a company which has like hundreds or thousands of independent actors all kind of marching along one marching order, you can much more accurately predict

how the company will do than what the person will do. And so I've really, I've actually really struggled at underwriting people. I think it's, you know, it's obvious to, you know, people, I understand people's intellect, but I found it a lot harder in terms of understanding, like, whether or not people are going to make the right decisions and whether or not they're going to, you know, be aligned with what your thinking. My, probably my single greatest failure as an investor came from misjudging a management team. and it shook me to the core

and it made me ask myself whether or not I have the ability to judge management teams well at all outside of like wondering like hey are you doing the right things do you seem like a reasonable person and are you intelligent enough to like be able to make good decisions in the future

but like so we own this company and I'll say the name with a company at Dan when I was at Matrix I was the junior analyst working with a senior who is like a great investor and he was like guiding me through this investment. He was in the healthcare space. We were a top, you know, 20 shareholder of this company.

And the company was just executing like crazy. You know, we probably like, the stock was up like 100, 200%. But every time we reached out, you know, we wanted to speak with the CEO or CFO. They rebuffed us every time saying like, look, he's just focused on the business. And we loved that. We absolutely loved that. Like this guy wasn't like wasting his time. like talking to, you know, schmuck investors and, you know, we were, you know, constantly trying

to get them on the phone. Eventually we get a meeting with CEO and CFO. I fly out to their headquarters on the East Coast in New Jersey. We get to the lobby. It kind of like, it's not like the nicest office. They take us to the boardroom. It's like not fancy at all. Like there's chips in the table. The seats are old. We're like, this is amazing. Like they really, you know, they're really running a lean, mean machine. The CEO comes in, CFO comes in. It's a principal discussion. Every question we asked, like when we'd been owning it for like a year or more, like we have thoughtful questions. They asked everything with the most disciplined, thoughtful answer I've ever heard. And even at the end, after I walked out of that meeting, I said to, you know, the person I was working

with and I was like, that was the best in management meeting I ever had. And he looked at me, it was like, aren't they incredible? Lo and behold, that company was valiant. And the people that we were talking to were lying to us about the facts and figures that we were asking them about. And it shook me to my core because one of the things that I thought I could do reasonably well and people have told me that I can do reasonably well is I'm good at empathizing with people and kind of understanding, you know, what's the body language?

Like, it's just something that I'm fascinated with. I'm like, I try and understand people. I think it's important. And I just got that so wrong that it really made me question. Can I do that in any effective way? Fortunately, we didn't, you know, we sold Valiant long before it's collapsed. So it wasn't like we were caught with egg on our face. But it was a mistake in our lapse of judgment at the start, you know, in terms of understanding

these people and what they were doing. You know, of course they were telling us they weren't raising prices. you know like we thought this was largely a volume growth story so in terms of like not you know talking a lot about management teams I actually don't know how well I'd be I am at picking them but I prefer to have founder led teams with you know aligned incentives and clear thinking you know the person who ran red bubble and currently runs it has run it like I think they've been in existence for 12 years or so and he's run it all except for one year. He's the founder. He's a great, great person named Martin.

And Martin is really principled. And the person who he hired for that single year or two years, I don't remember, was his like COO who was with him for a long time. And I also think he was really principled and good. You know, and I think more than anything, the thing that they impressed on me was like, they're actually good people. And I was really impressed by that. Like when COVID-19 came out and they came out with a mask product really fast,

they thought, like, should we even do this at all? Like, is it unethical for us to, like, profit off of this? And what they decided to do was, for every mask they sold, they decided to donate one. And I thought that that was just like a wonderful reflection of, you know, what their values are. I think it's hard to, like, if you can really create a, recreate the culture of a company and understand, you know,

what's important to these people, like, it can give you a, window into, you know, their soul in a way. And, you know, these are really ethical, good people who, you know, they really care about the artist. Like this, they built this for the artist. They really care about their customer. They care about their impact on the environment. Like, they try and be carbon neutral with everything. And like, you wouldn't do that and sacrifice in the short run unless you thought, like, is worth it. And so I'm really impressed by them. Like, the CEO came back on an interim basis at Red Bubble. They're going to find a new CEO for full time because this guy wants to retire and we'll see hopefully they have good

judgment and their ability to find somebody new but look I had a bad experience in the past maybe I'll get better at underwriting management teams and I'll write it later in my letters so maybe that's the reason why you're cautious with saying something about management teams for the end of our interview do you want to add something we haven't discussed might be interesting for the years? Yeah, there's one topic that I think it's a perfect time for me to stick my foot in my mouth and really piss some people off because I'm good at that. Perhaps, you know, and I'm saying that facetiously, I think, you know, the reason why I'm talking to you in the first place, Tillman, is there are a number of people who helped me

along the way, especially when I was getting started. And you know what's weird? The vast majority of those people who were, you know, really helpful at the start and got nothing in return, they've all been guests on your show. Like Dennis Hong, Cliff Sossin, I don't know him personally, but like Rob Vinyl helped me a ton. Like the MIT folks helped me a ton. All of these people help set my mind right. And like you've interviewed or like participate work with like all of these people. And I thought to myself, you know, what is, you know, you call it good investing TV? It's not just about good investing. These are good people.

And there aren't a lot of examples of the good guy winning in this business. And so I just wanted to be, I wanted to be able to maybe give a little back to someone else and maybe help them to learn. And so that's how I prefaced this answer. So my view of investing, and I'm going to weave in something that I said before and then I'll get to like the, so again, the web is going. I'm going to weave in something that I said before. about being an artist with a concept that I'm going to weave in right now,

which is like, please don't copy Warren Buffett and Charlie Munger. And I'll get to why I believe that. Like, I love them, learn from them, read everything that they do, but don't copy them. Okay. So one of my favorite quotes that I found recently is from Pablo Picasso. He said, you must learn the rules as a pro so you can break them as an artist. Sorry about the motif about art, but it's just been rolling in my mind. But I think that that, you know, if you think that investing is an art form, you have to ask yourself, how am I going to

break the rules? You have to break the rules if you're going to be a spectacular investor. And when I think about any great artist, they've all done something to break the rules. And what that did was it allowed them to transcend the competition. If there's like a motif from this like discussion we've had is that if you have a lot of competition, they're going to erode away the profitability of that strategy and or, you know, in the parlance of art, the currency is attention. And so like, you know, Picasso, there's this museum in Barcelona that I saw called the Picasso Museum. And you get to see all of his early work where he did all the same stuff that everybody else did like he painted and the impressionist style. And you wouldn't have known that it was Picasso.

and he did not stand out, but what he did was he was a masterful artist, and then he decided and he figured out, like, what is it that I know how to do? What is it that I'm uniquely capable of doing? And how do I break the rules to break out and be different? And he created the cubist style. And like, it could be Lady Gaga, like wearing, you know, meat as like a code or whatever the hell she does that, like, you know, gets her attention. Like, I think it's similar to the world of investing, like if you want to win, you have to learn how to break the rules and beat your competition to do something different. And I think that a lot of people, they mistake the notion of learning from somebody as copying somebody, because it's human nature to copy

what works. And it's this like, it's this cycle of something works, it attracts competition, and the thing that work no longer works in the future. And so it's this game of guys. adaptation that we're in, like the world of investing. And so you need to be able to figure out, like, who am I? What am I capable of? And what am I going to do differently? And I think that, you know, like if you were a physicist and you were studying about Isaac Newton and you learned his laws, like, would you go out and sit underneath an apple tree hoping that the apple would drop on your head? Like, would that be the thing that got you to your next breakthrough in the world of physics? No, because in life, like the problems worth solving are not going to be

found by following in someone else's footsteps. Every physicist has to learn about Isaac Newton and Einstein, but then you need to not copy these people. You need to take the lessons that they are presenting to you, like from Buffett and Munger, and you need to adapt it to your personality and the opportunity set that's out there today. I mean, there's a reason why they're buying tech stocks, Berkshire, because they're learning. They're adapting. They're not staying static. And you need to figure out where those pockets of opportunity are and what you're uniquely qualified to do in order to break out from your competition. One of the things that Peter Teal says I really like is, he says, great companies don't beat the competition. They remove

themselves from the competition entirely. And so I would suggest and ask of anybody, you know, what are you doing to remove yourself from the competition and have a sustainable edge and break the rules? So that's how, that's what I would say. Maybe it's not only breaking the rules like being outstanding, like standing in a place that's not in the ground. Awesome. If you want to have another picture for this, for this point. But at this time, I want to say thank you very much for taking the time and having the interview of me and I think there's much in it people can learn from and I hope we have the possibility to chat in another day again. Thanks, Selman. Good to connect. Thank you. All right. Bye to the audience. Bye-bye.