Good Investing Talks - Chris Waller, why does Plural Investing own TerraVest stock $TVK?

Episode Date: March 17, 2024

Chris Waller of Plural Investing joined us for the first time. Learn more about his fund & investment strategy.

Dear viewers of Good Investing Talks, it's great to have you back. And today I'm having a first manager interview with Chris Waller. Chris, it's great to have you here. So who are you and what kind of fund should we associate with you? Well, thanks, Tillman. Thanks for having me on. And thank you those who are watching and listening for taking the time. As you can potentially tell from my accent, I grew up in the UK, not in London.

Really? Bristol, yeah, based in the southwest. And I'm based in New York now. So my journey to getting here is really that I initially started working in London at Goldman Sachs asset management in a global equity and then international small cap fund. I moved in 2016 to New York to do my MBA at Columbia a business school. And shortly thereafter started a fund. It's focused on global small cap value and is really about trying to find the seven to eight best ideas or hidden gems that are going to work out over three to five year time horizon. So Chris, what kind of investing situations make you really passionate and like where you can't stop thinking about anymore maybe you can

name one or two situations where it's just like chris the passionate guy from yeah from not from london from pristol yeah yeah so these i'm really looking for hidden gems so i'm looking for companies that are generally quite off the beaten path um they're usually companies that may initially look boring. So, you know, TerraVest, which we might discuss today, is in propane tanks and boilers, which doesn't sound very exciting. And, you know, another position might be in banknotes or package holidays. So although these industries might sound quite boring, the companies themselves can be quite

exciting. So I like companies that are dominant in small niches that have management teams that own a lot of stock and our owner operators and really have a long track record of delivering good performance over time. And I think when you can find some of these businesses that have not yet been widely discovered and they're trading for very reasonable prices, that's what really gets me excited to be able to invest in a business with those type of qualities for many years to come. So what kind of pawn or spaces do you find ideas or where do you fish for them? Yeah.

So the companies are generally in developed markets and particularly English speaking markets. And that's because unfortunately, I only speak English. And a lot of my process is about trying to find sort of 15, 20 or more people in the industry who are industry experts and really trying to speak to them. So usually these companies are in either the US, Canada, UK or Germany, although I do occasionally look outside. In terms of the size, they're smaller businesses. So generally under a $2 billion market cap, sometimes as low as 100 million. Generally, the sweet spot is probably 4 to 700 million in that range. And more sort of consumer industrial businesses, more sort of simple to understand.

So those would be the sorts of characteristics I'm looking for in terms of the geography and size and so on. And generally speaking, you know, significant insider ownership and dominant in a niche market. In terms of where I kind of get ideas from, I spend a lot of time. reading write-ups. So I will read write-ups off of different websites, you know, so good investing would be an example where there are write-ups that people post, some other sources like Value Investors Club and other locations. And I end up reading probably around 20 write-ups a week and having a process where I essentially, you know, take notes and track these companies and the ones that I think are interesting then enter my watch list. And over time,

more and more ideas should really come from the watch list than from an idea that's totally brand new. I would say today it's about 50-50. And as the fund continues to progress, I would expect a bigger portion of those ideas to be coming from those watch lists stocks where I'm pre-prepared and they're sort of ready to go when those stocks become cheap. And if someone looks on the website for write-ups, it's in the community. So you first have to apply to Good Investing Plus. Yes. More on this later.

So let's go back to your process. You mentioned you look for small cap value. What is in your definition? Yeah. So when I think of value, I'm not necessarily just. thinking of what you might call deep value or, you know, asset-based businesses or cigar butts. I'm really looking for more franchise businesses that are, you know, certainly a going concern and then creating value over time. So I'm looking, you know, very simply at what is the value of

a business generally three years from now in comparison to the current price. So I think three years is a short enough period of time where you should have a good idea of what free cash flow is going to be at that point. But it's also a long enough time that if this is a business that's a high-quality company going through a difficult period, or maybe there's some cyclicality or other factor that is causing the business to struggle, three years should be a long enough period of time where that really gets resolved and you can see the kind of underlying earnings power of the company. So I'm typically looking on that basis. In theory, a business could have lots of different characteristics and still be cheap on a three-year basis. But generally for me, these are going to

be companies on a relatively low multiple of free cash flow today and then even cheaper in three years. So I think today the average company in the portfolio trades on about 12 times trailing free cash flow and is growing at sort of low double digit rates. And that means those companies will be on a single digit of free cash flow in three years time. And generally that's the type of valuation I'm looking for when I say value. Let's talk about your circle of competence. And maybe that by a more challenging question, where have you stretched it recently? Yeah.

So I'm a generalist. So I think it's an important advantage to be able to go to different geographies and industries. Having said that, I think there are certain specific areas where I tend to focus a lot more on. So, you know, consumer and industrial businesses are generally ones that I find that are easier for me to understand. So I don't generally, for example, look at any healthcare, banks, insurance companies, natural resources. There's a whole host of industries that I will not look at. Now, within consumer and industrial, you still have a very broad set of companies there. And so a lot of my process is about finding these sort of 20 industry experts that can really help me learn about a business.

And typically by the time I've invested in one of these companies, it's been a couple months of research, of talking to people, which may seem like a long time in an investment world where often analysts are being forced to come to a view on a company within a few days or a week. but actually it's quite a short period of time compared to someone who spent their career in an industry. So I try and develop my circle of competence through these discussions and then continuing on an ongoing basis after the investment. I think in terms of stretching that area of competence, there are unfortunately certain businesses where even after doing that type of work, it's very hard to predict what the future will look like. So one of the mistakes that I've made over the last few years is actually investing in an e-commerce business called Red Bubble. Now it has a slightly different name. So that was a company where we've done a lot of work, but the reality is that growing e-commerce businesses can have quite an unpredictable future. and if you haven't reached a certain level of scale,

you become vulnerable to changes in all sorts of trends. And so that's a company where I probably stretched too far out of the circle of competence. And I did actually write about it in one of my quarterly letters sort of describing some of the mistakes there. But you also stayed away from one of the quiet loft, the e-commerce place, naked wines. You've written a long report on this.

Yes, well, that's a good example, actually. And funnily enough, I think some of the mistakes with Red Bubble helped me avoid naked wines. So naked wines, as some of your viewers may know, is an online focused business that delivers wine directly to consumers. And particularly in the United States, where there is a three-tier system with retailers, distributors and producers creating all sorts of. of cost, naked wine's selling point is that it can essentially cut through that and sell wine at a much cheaper price. And this was a company that I think gained a lot of attention, particularly sort of two years ago with the sort of Netflix of wine's idea. But that was another company with an uncertain future given it had not reached a level of scale where it would really be sort of inevitable that its economics would be superior to other companies. companies in the long run. And so I did in that case, you know, again, speak to quite a lot of people in the industry and do some data analysis and essentially found that its wine was selling for this, for a very similar price to other producers. And so really the key selling point of the company, which was that it could sell the same quality wine for a lesser price I found in in my data was not yet the case. And in addition, there were some quite significant. significant competitive changes happening with companies that were much larger than naked wines.

For example, you have aggregators like Vivino that are in some cases 10 or more times bigger than naked wines. You have companies like the food delivery players, like DoorDash, for example, that are now entering this industry or Uber Eats entering the industry. And so you had these giant players with just much greater scale. the ability to acquire customers at lower costs entering the industry. And so Naked Wines really had an uncertain future. And so given the uncertain future and the fact that its existing selling point was not as compelling, I was able to avoid that as a result. You've mentioned the industry exports.

You're trying to kind of date before you do an investment. what is an industry expert for you and how do you find them it differs depending on the company i'm researching so essentially um you know having spent uh let's say a week or two looking at the public filings and transcripts of the company and competitors i have a sort of rough understanding of the industry and i draw up a list of people who in a perfect world i would love to speak to So that would quite often be former employees at a senior level. It might be people at competitors. In the case of TerraVest, which is a company that makes a lot of acquisitions,

it was the founders and CEOs of the companies it had acquired in the past. So these are all people who have a perspective on the industry or the company, and that perspective has been based on a lot of experience. whether that's just experience in the industry or experience directly with the company itself. And so those would all be people I would class as industry experts. Sometimes they can also be more junior people. So in the case of naked wines, one thing that I did quite early on in the research process was speak to five or six wine producers and distributors to just help me really accelerate my learning.

and that it was not necessary in that case to speak to the largest wine producer in the industry or largest distributor I think at that stage of the research process most wine producers and distributors would have been helpful in really educating me on the industry in your research process what are reasons that you do not invest and discard an investment Yeah. So certainly, you know, circle of competence if it's an industry or company that I just feel like I'm not going to be able to get a good understanding of where the business is going to be in a few years, whether that's in terms of the free cash flow or the competitive advantage. That would definitely be a reason. And that is something that can be apparent initially. But it can also, unfortunately, become apparent after you've done a lot of work and realize you still really don't. have a good handle on the future of the company. So that would certainly be a reason. In terms of the quality of the business, I tend to focus on competitive advantages a lot. So really looking at the unit economics and the returns that a company can generate and then whether it has those

competitive advantages to sustain those economics. And so competitive advantages would be another a big reason where if a business does not have a good reason where it can sustain these economics, you know, even if those economics are attractive today, I'm unlikely to invest in that business. And then the third one, and actually the most common reason, particularly initially, is around governance. So I think governance is a really important topic. And I'm happy to go into a bit more detail if it's helpful as to how I look at that. But I think it's really important, particularly in the small caps, that you have a shareholder base, a board, and then a senior management team that is aligned with what you are trying to achieve as a shareholder and has the

expertise to really execute on that. And so quite a lot of times when I initially look at a company, I will find that the governance isn't up to scratch. Generally, That means the management team may not have shareholders as their top priority or actually just don't have the expertise to really execute at the level that I would like. And so governance is the sort of third and I would say most important reason that a company gets rejected. Did you already explain the governance aspect or do you want to go deeper onto this? Maybe I'll just touch on it a little bit more. I won't go too much. Because you gave this hook that you want to talk about it.

So happy. Yeah. I think governance can be thought of in a few different ways. I think first of all, the owners of the company, the big shareholders, depending on who that is, they can have different incentives themselves, whether it's a private equity firm that maybe wants to exit in a short period of time, whether it's a family that has owned their shares for years or decades. I think seeing who the owners are is really important. And then the board, you know, quite often those owners will influence who's on the board. They may be on the board themselves. And I think it's really important that the board contains both shareholders and industry experts.

And I think it's surprising how often boards don't contain either of those. So those could be shareholders sort of directly, sort of major funds. It could be management who own a lot of stock, ideally both. And then people who are actually industry experts being on the board as well, quite often a board will have a lot of people from different industries, but actually not from that industry itself. And then just trying to understand what are the incentives of the board members? Why are they there?

Are they on a lot of boards and looking to collect a sort of nice fee? Do they actually own the stock? And I think more importantly, how much of their own? money have they put in to buy the stock versus how much have they taken out in various fees? And I think sort of the last sort of major thing just in terms of the way compensation is structured, who's on the compensation committee, and particularly looking at small decisions that can give you a hint as to their true motives. So when management miss certain metrics for their bonuses, what happens at that point? Does the board pay?

them anyway? Do they adjust the earnings? And so how these little things occur over time gives you a lot of clues. And I think just that the last thing is how are employees incentivized throughout the organization? You know, is there a profit share? Are they paid, you know, based on the specific sites they're on? Or how are they incentivized? I think that tells you a lot as well as to what the organization is trying to achieve. If you go back five years, which part of your research process are you now spending way more time on? Yeah, I mean, I do think it is the governance aspect. I think that some of my mistakes, particularly when I started, were around management.

And the three things that I really expect from my management teams is, is integrity, a customer focus, and then prudent capital allocation. And I think probably most investors, including myself, when I initially started, were probably very focused on capital allocation and not so much on the first two. And that is through sort of experience and making mistakes that I've come to learn that just how important those first two factors are. So, you know, going back to the governance, a lot of that is around incentives and also, frankly, the integrity of the management team.

What are they really trying to do? And are they people who have your best interests at heart? And are they honest? So I think that's something that's really important and it can be quite tempting to see a company that's maybe growing rapidly, maybe it trades at a cheap valuation and sort of justifying and rationalizing to yourself

that, okay, maybe the management isn't so good or maybe they have a checkered history and trying to justify to yourself that that is okay. And my experience is that that will ultimately come back to hurt you at any price. And so really, unless I feel that the management structure is right and the integrity is right, there isn't really a price at which I would be willing to invest in the company. And that's probably the biggest area that I now focus more of my time on. You also produce reports when you invest into the company or when you don't invest to show a bit of your research and thought process.

I'm happy to share a link to the report below so people can find it and also they can subscribe to the newsletter where you distribute the reports if they want to future reports. And the latest reports you've published was on TerraVest. Maybe you can do the summary or a TLDR quickly on this company. Yeah, so TeraVest is a company that is listed on the Toronto Stock Exchange under TVK has a billion Canadian dollar market cap 750 million in the U.S. It trades on 14 times free cash flow and will likely grow earnings at double digits going forwards. It's a company that has done really well over the last decade, had annualized shareholder returns of around 30% per annum,

and I think can do really well going forwards. The five most senior members of management all have the vast majority of their net worth in the stock, and most of them are still fairly young, even though they have experience. So the CEO is 40. And the companies follow as a roll-up strategy of acquiring and then restructuring businesses that are generally mom and pops in the storage tank and pressure vessel industries, as well as some other industries like boilers and furnaces. And essentially, they have a long runway to keep acquiring at sort of 11 times earnings,

restructure to seven times, and really just repeat that like they have done for the last decade. And it's a company that doesn't speak to sell side analysts. They don't hold earnings call. They're not really well known amongst institutions. investors. And I just think that as they continue to execute and deliver those strong returns, it will just become sort of better known amongst larger investors. And I expect the stock to continue to do well for those reasons. So what kind of problem is the company solving for the customer to come back to the idea of customer focus? Yeah, I think for customers,

these products tend to be fairly similar. So if you think of a propane tank, there are different sizes. Some of them go on the back of a truck. Some of them go next to an oil field. Some of them go next to your home. And what TerraVs can do is it essentially has lower cost because of its scale. And so the main cost of producing a propane tank or pressure vessel is steel. And just by the nature of its scale and direct relationships with steel mills,

TerraVest can often get anywhere between a 10 or even 30% discount on the cost of steel, which is usually half the cost of this product. And so they in some cases, they can pass that on to customers in the form of lower prices. They can also generally deliver quicker. So because they have the ability to have that steel inventory available, which would be a significant cost for a mom and pop. And if that mom and pop was not able to actually sell the product, they would have a lot of cash in working capital that they would struggle to potentially finance. And so Terabest, again, through its scale, is able to have that product ready. And so it can deliver quicker.

And actually, some of its customers really value that speed of delivery. delivery. If you are, for example, an oil and gas producer in Western Canada, and you need a propane tank to be able to begin your drilling because propane is a byproduct of that drilling, every day you are waiting for that propane tank. You are actually missing out on all of the production you could be having. So speed also matters. And essentially, TerraVest is a company that through its scale can just deliver a better product. at a lower price and that helps customers and so how do we get from 11 to 7 not from 7 to 11 yes well definitely going from 11 to 7 is is the key so there are a few areas some of these

I would say probably three areas I would point out these businesses are generally small businesses still run by their founders and And quite often they are not as profit focused as they probably could be. So the first area where TerraVest makes a big difference is just in terms of the mindset of the company. And just by being focused on actually trying to maximize profitability, that can lead to a lot of changes in terms of which product lines are you focused on. Are you still selling products that may be not so profitable? How do you think about, you know, pricing, delivery, all these different. areas, how do you incentivize salespeople and so on? There are a lot of areas where just a different

mindset can ultimately make a big difference. I think the second area is what we touched on, which is in the purchasing. So they can get a very significant discount in the cost of not just steel, but other products like valves and parts and so on. And so that's just a kind of really easy instant improvement that they can make. And I think the final areas in terms of shared resources. So TerraVest has about 20 companies across these different industries, but many of them operate in similar industries and similar geographies. And so there can be some shared resources, whether that's in terms of production facilities that were maybe underutilized previously and they can bring different production facilities

together and really get that utilization improvement, whether that's in terms of sharing leads. So perhaps one company is speaking to a client that wants a certain product and maybe that taravest company is not able to supply it, but there may be another tariffest company that is able to. And so they do have quite a good structure that shares leads. And so that produces better outcomes for clients as well. What is the holding period for this investment? Well, generally speaking, I'm looking at three to five years, but there's no particular

reason why it has to stop at that point. I think particularly when you have a company that has a great management team that can continue surprising you, that holding period has the potential to be much longer than even five years. And I would like to think in the case of TerraVest, this is a company that fits into that category. And although the fund is not older than five years, so I can't sort of prove and test that theory, what I can say is that there's one of the main investments in the fund today, Jet 2, is a company that I first invested in personally 11 years ago and held throughout that period. So, you know, ideally that would make my life a lot easier if there are companies I can just, you know, continue to hold because they've got a great management team.

And that's what I'm hoping TerraVest will become. So from 11 to 7 and from 2 to 11. Yes. Coming back to TerraVest, when do you have you felt in your process your research is finished? If you can say there is something like finished. Yeah, well, there isn't really a point when it's finished because I think it's really important as an investor that you continue your research after you make the investment. I think this is probably an area that I've worked on and probably most investors or many investors don't spend as much time as they should should on because we sort of think that all the training we go through is that, you know, how do you find a stock? How do you do the research and then how do you size the position? And then that's kind of the end of it. But it really isn't. So I do have a process on an ongoing basis to continue the research. But in terms of that initial phase, I think that once you've spoken to a good number of people in the industry, you should have a level of knowledge where you feel like you understand what's happening in the industry and you feel like you're fairly confident where free cash flow is going to be in three years in my case.

But just as importantly, what the competitive dynamics are going to be like in an even longer time span. And I think once you have that confidence and you can compare your notes perhaps to what other investors are writing on the company to just make sure there aren't any kind of major areas that you don't understand, I think at that point you probably understand enough that you can make a decision on whether to invest in the company and then continue your research beyond that. you've made a bit of a long pitch here but what could if you potentially gotten wrong on this company so where could you be wrong yeah i think that um probably two areas i think the company does have some cyclical exposure so it does have some exposure to oil and gas for example now i don't think it's as significant as um as some investors may feel but there's probably 20% of revenues that are exposed to oil and gas, and there is some revenues expose the housing cycle, for example. So if there is a big cyclical decline,

that could definitely impact this business and investment. I do think that management have been quite good in previous downturns. They're quite profit-focused. They're quite cost-focused. and actually oil and gas in Western Canada has been in a recession, effectively since 2014, when the price of oil came down from $100. And they've been able to maintain that part of the business at sort of a low level of profitability or break-even when many competitors have gone out of business. So I think they're quite good at mitigating that. But nevertheless, cyclicality is at risk.

And I think the other potential risk is just in terms of them continuing to make acquisitions, they could always make a bad acquisition. And I think that although the management team is quite focused on not just building an empire and very focused on their returns, they could always make a mistake. And as they grow, those acquisitions will likely get bigger. And so there is the potential for a more sizable acquisition that if it goes wrong, is a bit bigger than what a historic acquisition might have been in comparison to the size of the company.

Let's move from Terra West and move to your business, the fund management business for the end of the interview. Why did you start out as a fund manager? Yeah, it's a good question. I mean, I have someone who I think for a while has wanted to start. start a fund and invest in the way I'd like to invest. And actually, when I was at Columbia Business School, I was very fortunate that I had a professor, Joel Greenblatt, who was still teaching at the time.

And he's probably the professor from whom I learned the most. And, you know, he's been obviously a very successful investor himself. And a lot of my approach was really inspired by what he did. with Gotham Capital. And I was fortunate to have a number of discussions with him. And that's really how the fund initially came about. So, you know, the reason I'm looking for off the beaten path stocks, you know, particularly small caps, you know, a concentrated approach over a longer time horizon,

you know, that was all sort of inspired by the success that he has. I think probably one difference in approach. He's obviously kind of famous and been very successful at special situations investing. And this particular fund is not so focused on special situations, although there are a couple companies that I'm invested in that are spin-offs. But generally speaking, I'm looking for slightly higher quality businesses that don't necessarily have to have come out of a special situation. So I think that would be an area of difference.

But yeah, being able to launch a fund and invest with this type of approach, I think, was really the reason behind starting it. And if you can handle the stress, it's a very rewarding position to be in. So I have to ask at this point, was there one light bulb moment for you in conversation with Joel about the fund or ways? Is it, ah, would I have thought earlier about this? Yeah, wasn't a light bulb moment in terms of I should start a fund. I think there were definitely key moments in terms of the approach. You know, so I think initially I was not as focused on small caps. You know, I was certainly looking at small caps, but I was also willing to look at, you know, larger, more covered businesses.

And, you know, it's something that Joel, you know, many. mentioned clearly is that one of the advantages you have when you're small is to look at smaller businesses because what tends to happen is the investors who become successful, their funds grow and they're no longer able to look at some of these small businesses. So whilst you have that opportunity, use it to your advantage. So I think that was definitely a kind of key point that he emphasized. I think. Yeah, I think another key point was just in terms of focusing on, again, a little bit higher quality businesses. They don't have to be the best businesses in the world. But I think one thing that he said to me is, so, you know, a traditional approach might be, I'd like to buy a dollar for 50 cents. But if you buy a higher quality business for 70 cents, but that intrinsic value goes from a dollar to $1.20 to $1.40 over time, well, which. one really has the bigger margin of safety, you know, probably actually the second one, which might look a bit more expensive initially. So I think, you know, those are probably just

kind of a couple key points that he mentioned that sort of helped adjust my approach a little bit. Hey, Timon here. It's great that you have made it that far into the video, and I think shows a certain passion for investing you are having. If you want to dive deeper and go further down the rapid hole you're invited to apply to my community good investing plus it's a place that's very helpful to people who are ambitious about investing it's helpful to investment talent as well as experience fund managers so if you're interested please click on the link below and now without further ado enjoy the conversation what of kind of value do you want to bring to the marketplace as a fund business well i think you know of course you know primary

your goal is to deliver good performance to your clients. I think that, you know, actually one of the things, you know, Joel asked me and I try to emphasize in my letters and when I speak with people is success for me is having the best performance rather than necessarily the largest fund. And so the approach is structured in that way. That's both in terms of the approach of the fund, you know, being quite concentrated can sometimes put off potential clients. I'm not necessarily. necessarily trying to minimize volatility or drawdowns, but ultimately I think that approach will generate better performance over time. And so that's something that obviously

I'm really looking to contribute. I think another area that is hopefully interesting is just these types of reports that I've written and started to publish more. And I'd like to think they're reasonably in depth and kind of interesting to read if you do want to read something long. If you don't want to, it does come with a one-page summary, so you can have a short interview. But, you know, hopefully that type of work and ongoing work is sort of interesting and, you know, helpful to certain people as well. And again, the link is below in the show notes for people who are interested in the reports. What is your competitive advantage as a fund manager, you kind of answered this already, but maybe there's more color to this.

Yeah, I think it's actually quite important that your investment model and your sort of business model fit together. So the advantage I have today is I can go to the small gaps, and then on top of that, not only is the level of competition generally lower, but I try and really maximize my advantage by being able to spend a lot of time on each company. So because I'm only investing in sort of seven to eight best ideas and it's a three to five year time horizon, that really means I only have to find one or two ideas per year. And so that might be one idea from the watch list where I've done a lot of work previously. And so maybe only one totally new idea per year. And so when that's what I'm looking for, I have the advantage that I can just spend a lot of

time on each company and I think a lot of investors don't always have the luxury to be able to spend a couple months on a new investment and I think one of the reasons why doing this type of work and sorting and speaking to these 20 people doesn't happen too often is because it does take a lot of time and work and so because I've structured my approach in this way I do have the ability to have that time. Now, the reason I say the business model is important is because, you know, if you had a team of a large number of people, you would need a much larger fund and therefore you would not be able to invest in these types of stocks. Or you would have to hold many more stocks to be able to support that type of asset base. And so I think that is an advantage when you're small and you have

a small team. In my case, it's myself and a chairman. You have the ability to stay small and look at these companies and devote that level of time. And so that's really this sort of advantage I've tried to focus on. No office animals, no cat or something like this. No. Yeah, exactly. Too much cost on those things. Yes. As my final question, how do you think about portfolio construction in this setup? What is your framework? And is it any different in the small cap? Yeah, I think certainly in terms of portfolio construction, I think it's important the types of

businesses you're invested in. I think if you're invested in, let's say, more traditional value companies that are, you know, can be quite low quality, maybe their cigar butts, you do need a much more diversified approach because the reality is that there are certain risks with those companies that, you know, can cause quite catastrophic outcomes in some cases. And so you do need a much more diversified portfolio. I think with companies that are a little bit higher quality and, you know, franchise businesses, and in my case, companies that generally speaking have very low amounts of debt, sometimes even net cash with seven to eight stocks you tend to get the majority of the benefits of

diversification without the negatives of you know having companies that may generate lower returns in terms of how i sort of size the positions um i generally take a fairly simple approach because they're all in different industries quite often different geographies um and so i essentially just look at my upside and downside and then i place a higher waiting on the downside. I think it's really important, particularly when you have a concentrated portfolio to size your position on the downside. So I think that's definitely an emphasis of mine. And I do have a qualitative overlay where there are a few qualitative factors that I think are really important over time, but are very difficult to quantify. So for example, management transformation

of a business, I think is really important, but it can be difficult to estimate accurately how will this transformed business look in three years, sort of by definition, you know, particularly if you have a good management team, they should be able to transform that business in ways that are hard to predict. Another example would be sort of industry disruption. That could be in your favor. Maybe you are the disruptor. It could also be, you know, out of your favor where you are the incumbent being disrupted. And again, that can lead to quite uncertain outcomes, but it's clearly an important variable. So essentially, I do look at the upside downside with a focus on the downside and have a kind

of qualitative overlay just to adjust for some of these qualitative factors that are difficult to accurately sort of predict. So for the end of the interview, you always sense as a guest to add something. So is there anything to add? from your side? Not too much. I think maybe a couple things. I think this approach of looking at small cap value, it does have a sort of proven record in the sense that there have been a number of people who have been successful with this approach over time. I think it's been a more difficult period actually over the last couple of years for value investors in general, but also particularly

small cap value, especially when, you know, a lot of managers are compared to in the sea, that are dominated by large-cap tech, actually. And so that's something, you know, not just for me, but I think probably many of your listeners are probably feeling the same. And so I think one point is just to, you know, stick at it. And the reason that these categories tend to do well over time

and the reason the opportunities exist is because there are actually periods when it's quite difficult. so that that would probably be one and maybe just a quick plug at the end for for yourself i do think you know what you're doing at good investing is really exciting and you've built it out quite quickly so yeah i think i think it's really good what you're doing there and i like uh i like your work around berkshire hastaway in particular uh with the guide and a few other things you're doing happy to see you there in the near future and the video will be published ahead of them so

if people look for information on the meeting feel free to go on my website you find this special on berkshire and thank you very much to the viewers for listening to here till here thank you very much chris for joining me now it's time to say bye bye bye i really hoped you enjoyed this conversation if you did please leave a like and a comment and and for sure subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer. So here you can find the disclaimer. It says, please do your own work.

This is no recommendation. What we are doing here is just a qualified talk that helps you, but it's no recommendation. Please always do your own work. Thank you and hope to see you in the next episode. Bye bye.