Good Investing Talks - Christopher Tsai, is investing an art? Insight from 20+ years of successful investing

Episode Date: February 14, 2022

Christopher Tsai started his fund in his early 20s and is since then invested with an impressive track record. In this interview, he shared deep insights from his 20+ year investor career. We also talked about the overlap between investing and art.

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Hello, audience. Hello, Christopher. It's great to have you on. Christopher Zai is today a special guest. He's coming from New York to us. And I'm happy to record our conversation. Great to have you on, Christopher. Hi, Tom, great to speak with you today.

You have this long stock market experience. I will also show here a chart of your experience or your performance since 2000. So you have this long track record. And I, with my setup here today, I brought a bit from my Zoom party we had yesterday in our community with me. The community is called Good Investing Plus

and there we did a Zoom party to connect. But with your long experience and parties and investing, it's not always the best thing to be investing when there are parties on the stock market. How was your experience with party atmosphere and excessive atmosphere on the stock market? market. It was a crazy time to start managing money. In the early 2000, the old economic companies actually felt like they had a hangover. Their valuations were very low, but on the other hand,

tech-enabled businesses, the so-called new economy companies of the time, were extremely frothing. So what we saw was a bifurcation of the market that was really interesting. In other words, some value-oriented businesses were really, really cheap. I remember companies like progressive corporation and genuine parts, traditional auto insurance or auto part companies selling at six times earnings and with five, six percent dividend yields. And then on the other hand, you had companies with absolutely, no, earnings and real doubt about the inherent viability of the businesses trading at astronomical valuations.

So that market was a difficult but also exhilarating time to launch a business just because of all the opportunities that were presented to people who didn't want to join that so-called party. When did you have to have the feeling that these party atmosphere is came back to the market in which time periods? Yeah, certainly the housing bubble of 2000, well, I guess beginning around 2005 or the end of 2005 leading into the 08-09 financial crisis. That was certainly a period where we started to see a lot of froth again, not necessarily

as significant as eight, nine years ago, and not necessarily in the same. types of businesses or sectors. But there was definitely a concern going into 08 and 2009. And today, this 2020 period? Yeah. Actually, I find that if you had asked me this question a few months ago, I think my answer would have been very different. And that's because the sell-off in technology

companies, and particularly smaller and mid-sized technology companies, has been really significant. And I think that a lot of the froth that might have existed in certain names has come out of it. And then in other areas of the market, I find that it's somewhat the opposite case. In other words, some of the more traditional businesses are actually expensive, in my opinion, whereas the new economy companies of today are actually represent a greater value than the other businesses. You're now 22-year-plus with your fund on the market. What has made you stay interested in hook for this game?

That's a great question. I think that I've, since I've been a kid, since I was a kid, I was a very curious person. I think curiosity is the answer to your question. It's something that started off with areas, of course, outside of business. But as I began to look at companies, the changes that go on, the new businesses that are being created, it's just a phenomenal, phenomenal time to look at companies. You did start your fund with, I think, 25 or something like this. Was it a good age to start a fund on your own,

or looking back, would you have sometimes wished you've gone a different path, like to other institutions, not like, here's Christopher and it's my fund? So there are benefits and disadvantages, of course, to starting early. So in terms of disadvantages, it was harder to gain traction because I had no reputation. I didn't have the network of people really to speak with. I did have some experience early on because I started to manage money very early. that allowed me to make mistakes, I think, earlier than many investors make mistakes. I wound up working for Mario Gabelli, John Levin, who was a partner with Michael Steinhard.

I had a wonderful experience growing up and learning from my late father. So on the one hand, I didn't have that network. But on the other hand, it was phenomenal to do something on my own and to create something from scratch and to have the freedom to manage a portfolio without the institutional constraints that you see cropping up more, it seems to me, more and more. Maybe a question that's quite broad for your 25-year-old self. What knowledge is and strength would have, do you have to feel in looking back you've missed as a 25-year-old and you had to acquire maybe also in a bit painful way over the years? I think it's, you asked me about curiosity before.

And I think that's a, also at the root of this question, being able to constantly think about the world in different ways. ways and not get trapped using models that you yourself might have used or other people use is so important. And it was, it's not a lesson that you can just teach. It's an experience that one has to go through. I think that I've been reading this book. I'm not finished with it because it's a long book. It's Marcel Proust's.

in search of lost time. And he says, Proust says, that the real voyage of discovery is not in seeking new landscapes, but in having new eyes. And there lies the curiosity that we've been speaking about. It's so important to look at the world constantly with new eyes,

particularly because the world is changing very quickly. Right? Businesses are, they don't have the lifespan that they used to have. So in 1958, McKinsey did this study. And McKinsey showed back then that the average lifespan of a company was 61 years. That's incredible, 61 years, six decades. But today, that number is 18 years. And one of the reasons tell them that it's 18 years is because technology is encrovalued. upon old business models.

So if you're not thinking about the world in new ways, if you're not being curious, if you're not constantly looking at the competitive threat that technologies pose to traditional businesses, then you might find yourself in a business that's going out of business. So again, being curious is not something you can just teach. teach. It's something that you, I think, have, and it's something that you can foster over time. Eleanor Roosevelt, by the way, said something really, really wonderful. She said, I think at a child's birth, if a mother could ask a fairy godmother to endow it with the most useful gift, that gift would be curiosity. So I wish I was endowed with that gift. I was endowed with that

gift and was able to foster it from the very beginning. I think that it's something in business that you learn. You either have it or not, that curiosity. But I love, I love looking at different businesses, different business models, especially today. Like you have this close to 25 years of experience of managing your own fund and how, which topics I used have you worked on since these 25 years to get better at are there any consistent topics that have kept you up at night let's say it's this way that you're

still trying to achieve and get better with yeah I think the let me let me draw parallel to answer your question between investment management and the Michelin Guide. We know the Michelin Guide for restaurants. Chefs work their whole lives to get one star and then two star and three stars. And what gets them there? Well, creativity gets them there, pushing the boundaries and being the best at what they do. And they're not doing things like everybody else, by definition. There are only a handful of chefs in the world that have three Michelin stars. The problem is that for those few chefs that wind up getting those three stars, what do

they then want? Well, typically they want to maintain those three stars. And so everything else becomes subordinate to those, to keep it. those three stars. And I think that investment management is unfortunately very similar to that. And so when I started out, I was inundated with the idea of structuring a portfolio in a way that would get you those three stars, if you will. So that meant looking at beta, looking at sharp ratios, looking at standard deviation. And what I found over time is that if you start to behave like everybody else, your performance is going to be like everybody else at best.

So over time, I have refined our process. In fact, we moved away from trying to worry what other people thought about how the portfolios looked. We moved away from that a long, long time ago, maybe three, four years into managing capital for outsiders. So today, it's all about structuring the portfolio in the most optimal way. So what do I mean about that? I mean, it's about structuring a portfolio to maximize return and minimize risk. And that's pretty much all I think about in terms of managing the portfolio. Maximize return and minimize risk.

I don't worry about so many of the items that institutional investors worry about that wind up really restricting a manager's ability to have flexibility in Create Alpha. I don't worry about what other people might think of the portfolio. The key is to manage portfolios as if nobody was looking. So that's how I've moved things. over time. Maybe also let me go back to the point of the technology you made, and I would be curious to hear where technology and the change that was enabled by technology surprised you in your way you're doing research, where you saw something, it was changed by technology where

you're even thinking, ooh, this is super interesting to me. Yeah. There's, of course, different types of technology. and different types of business models within technology. The most interesting business model to me is a platform business. So platform businesses, many of your viewers will already know what platform businesses are, but for those who don't, platform businesses are businesses are businesses that have an architecture, that's enabled by technology, and that architecture allows buyers and sellers to come together

to transact, you know, two sides of a trade. And what's really interesting about platform businesses is that they, in many ways, resemble multicellular organisms. So there's this mental model with biology. So what do I mean by that? I mean that if you look at life, multicellular organisms, there's a lot of phenotypic variation.

And that phenotypic variation is a result. It happens because the central metabolic processes within cells is relatively static. And so what you wind up in life is you get variability, but you have a stable architecture. That central metabolic process is a stable architecture that then allows life to create variation. And platform businesses work very similarly. So the way I look at platform businesses and the architecture

is that you have these kind of, call them, modular components. they're developed, they're designed, they're modified, and they sit on top of this architecture. And that allows these businesses to have a desired combination of stability, the architecture, like the central metabolic processes inside cells. And it allows them to have flexibility because you can rearrange the modular components as you need to over time. So what does this all mean? It means that technology businesses that are platform businesses

have a much higher chance of growing in an exponential manner, as opposed to a linear manner. And they have that chance because they have the desired combination of stability and flexibility. So I'm fascinated by platform businesses. You see other characteristics of them

like network effects. where you can bring in new users at a near-marginal at near-zero marginal cost. I mean, it's very powerful. It's one of the reasons why you get this exponential curve, often with platform businesses. If I look at your portfolio, I also have found some hardware software businesses in it that intertwine hardware and software. What do you find interesting about these businesses? I like vertically integrated companies that sell hard.

which would be the equivalent of, call it an installed base. So the more hardware that's out there is equivalent to an installed base on which these businesses then can sell high margin software. That's a powerful model if the product that you're selling is sticky and the software functionality is integral to that product and keeping that product new. So if you think about an iPhone or a Tesla car, the hardware is in the case of Apple. It's the actual device, the phone, in the case of the case of Tesla, it's the car. And on top of that, these companies are selling high margin software. So it's a nice combination. It's equivalent to the Gillette Razor Blade model where the company would sell a,

handle and then the blades on top the handle being the hardware and the blade being the equivalent of software today after this this jump in technology i want to go a bit back and also use these long term experience you have on the stock market and maybe one question that is also quite interesting with your family in mind is how you i think your father had a certain footprint in the financial community and also had a certain name in the community. How do you find your journey and your way to build your own reputation of being Christopher Sy and not just like the son of your father? Yeah.

My father gets a lot of attention. But before I, and I'm happy to answer that, but before I answer that, I want to just talk quickly about my grandmother. My grandmother, Ruth, was a really interesting lady. So she was a stockbroker herself, and she was the first lady that traded stocks, bonds, and commodities like gold on the Shanghai Stock Exchange. This was from around 1939 to 1942, I think December, 1942, when Japanese troops invaded the Shanghai International Settlement and the Shanghai Stock Exchange closed. So she was, I mean, that was, if you think about it back then, that was very unusual to, to even have access to trade on an exchange. And this was in Shanghai in 1939.

She was an interesting lady, not only for that, but because she was great with people. And I think that she taught my father a lot and influenced my father and his choices to not only go into investment. management, but to move from investment management into other areas like dealmaking and running companies. But my father at heart, to answer your question, was a momentum investor. And I guess the best way to characterize how he thought about companies was to tell you and your viewers about a story about a situation in 1990, maybe 1996 or seven, something like, something like that. So I was looking at this consumer product company. And I spoke with my father and he said,

oh, you need to look at this medical products company. It's much more interesting. And I said, okay, well, what is it? And he gave me the name. And back then, you know, you couldn't just download all these reports. So I called the company up. I got the 10 Q's, the 10Ks. I started looking at the business. About a week and a half after I started, you know, going through all the material after

the material arrived, I called my dad up and I said, hey, this looks really, really interesting. I think I might buy some. And he said, no, no, no, don't worry about that company. I sold it already. So that was his approach to looking at companies, very short-term oriented, very trading-oriented, transaction-oriented. And I learned very early on that that was not only, I was not only not good at that kind of approach, but it didn't sit well with my mentality.

So I differentiated myself in the sense of how I looked. look at companies, much more fundamentally based, much more long-term oriented. We look at taking positions that we can keep for a decade or more. With all that said, Tillman, I will say that I learned a very valuable lesson from my father. And he never dismissed high multiple companies just because they had a high multiple. And I think that the world has changed a lot since just 15, 20 years ago. By that, I mean the world has moved toward technology. Technology is the infrastructure of the equivalent infrastructure of railroads.

I mean, so much doesn't happen without software and technology. That's the infrastructure today, and you have to understand the economics of that infrastructure, the accounting of research and development, sales and marketing. It's very different from a traditional company. And many businesses that appear to be expensive, that have high multiples, are actually not expensive. And the problem with many investors, I think, is that they're screening for businesses. they are naturally repulsed when they see a multiple above whatever, 20, 25, maybe lower. But sometimes the multiple is just so misleading.

So you have to do your work. You have to dive in. You have to be curious, as we were talking about earlier. Walt Whitman said, be curious, not judgmental. You have to be curious. dive in, do the work, understand, is this company cheap? Is it not? You're not going to find great businesses just by screening for low multiples.

It doesn't work anymore. So that's something I learned from my father. Don't dismiss companies that appear to be expensive. Now, he might buy them, he might have bought them for the wrong reason, but that's a lesson that I've certainly taken from him. And I learned that early on. Are there also lessons you've taken directly from your grandmother? I learned, she had a saying, don't be a square table when you can be around one.

She intuitively understood Dale Carnegie. This means? It means that there's no need to be abrasive in how you speak with other people. And I think that Fred Rogers, I'm not sure. Many of your viewers know who Fred Rogers is, but he was the character, Mr. Rogers, very, very popular TV show in the States geared toward children. And he said there are three ways to ultimate success, to be kind, to be kind, to be kind. So I think you want to approach people. Everybody, you know, everybody is going through the same kind of emotions.

Everybody has difficulties. You don't know what those difficulties are. Everybody has a bad day from time to time. Everybody has joys, desires, needs, wants to be loved. My grandmother understood that she knew how to deal with people not to be abrasive, not to be square around the edges. Dale Carnegie espoused that way of behaving, and so did Fred Rogers, who is one of my mentors.

I should say idols. We already have the topic idle is quite interesting. one in investing and you decided to go down the bit of a long-term oriented value investing rabbit hole and you generally built the way you invest on the shoulders of giants and try to copy them to a certain extent but I think the interesting thing happens when you modify and enhance the work from the past

and use the ideas Buffett, manga, Soros, whoever has built. What are your example for this modifications and tuning and enhancements? I love that question. So first of all, let me just say that I'm not a huge fan of this, the idea of value, this concept of value investing because all intelligent investing has to be value investing. And we, we're looking for growth companies, but we're trying to get them at value prices. the idea of, so I spoke earlier about McKinsey's study about the lifespan of companies.

1958, it was 61 years today. It's like less than 18 years. So if you think about that, what's the, what's the effect of that? The effect of that is that it's very hard to stay within just your circle of competence. Let me, let me, let me give an analogy of skiing. Are you, are you a skier, Tomin? No. There's, for the skiers out there, I think we can agree that it's not fun skiing the same terrain all the time. And not only is it not fun, but it becomes actually, not very pleasant when you start skiing terrain that you're no longer capable of handling. So you want to be able to ski, I think to be a good skier, you want to be able to ski the easy mountains. We have an easy mountain here, not far, called Catamount. You want to be able to ski Catamount.

You want to be able to ski the harder mountains, the most difficult mountains in the world, like, I don't know, Verbeye or Jackson Hole. And I look at skiing similarly, to investing in the sense of, you know, where's that circle of competence? So you want to identify your circle of competence for sure. But I don't think that that's enough anymore. So Buffett said stay within your circle of competence. I don't think that's enough anymore. It's not enough because technology, again, is encroaching upon traditional businesses. It's not enough to say, I'm going to buy a company like Gillette and hold it forever because this company can't possibly be disrupted by technology. Well, wrong. Look what happened with Dollar Shave Club. Dollar Shave Club was successful

because it operated with a new business model, a business model that was enabled by the internet. That is technology at heart disrupting a traditional model. So think about that. You need to understand where are the competitive threats coming from. And that means not only staying within your circle of competence, but constantly expanding that circle of competence so you know where competitive threats might come from. Again, you've got to be curious. If you're not curious, then you've got a problem, I think, in this business, particularly today. So if you're actively trying to leave your circle of competence, and this might also lead to invests, how does this, how do you make sure that you're not the petsy on the table? Yeah, so I wouldn't say I want to just leave.

I don't want to leave my circle of competence. I want to expand my circle of competence. I want to build upon the knowledge that I have in the areas in which that I'm comfortable with. So you don't want to, if you're a beginner or skier, you're not going to just go ski verbi. You're going to start with the smaller mountains. And that's my analogy with skiing. You want to start where you're comfortable, but you want to challenge yourself and you want to do so carefully in a measured way, be realistic, don't fool yourself, try to continue to gain knowledge and

improve your understanding. And if something is too difficult, then that's where you've got to stop. That's a very personal thing that you need to be honest with yourself to answer your question. And people, I mean, the community. right the community that we have of such wonderful investors such smart investors it could be very helpful in expanding one circle of competence which non-investing concepts have you integrated in your investing approach and why are they helpful for you like concepts where you if you explain them the normal investor says what and you use them for your way of thinking yeah i mean there are a lot um there are a lot i think that one of the big things i mean investing is not just

logical if you're if you're approaching investing in purely a logical way i think you're going to fail. And the reason is because markets are composed of people and people are behavioral. They have fear and greed. I think Charlie Munger said it right. He said, if economics isn't behavioral, and I don't know what the hell is. So I'm mention this because you want to understand these cognitive biases and the effect that that has on investors. And you want to understand some of these other core principles like compounding and elements from physics. So human nature, for example, moves at the pace of geologic time.

So what do I mean by that? Well, I mean that people really, from an emotional standpoint, they haven't changed. So that's an idea that's super important to understand because if you realize that human nature, we've got roughly 20,000 years or so of recorded human history, right? So if you realize that over the 20,000 so,

years of recorded human history that human nature hasn't really changed, then you start to understand that these cognitive biases that we all are susceptible to, they haven't changed either. So we take an idea from elsewhere, from psychology and from our understanding of how The Earth has formed over time very slowly. And we apply that idea to understanding human nature, to understanding the fact that, you know, people are going to behave pretty much the same way that they always have. And that can be helpful, particularly in periods of dislocation in the market. There's also another, we're talking about the Earth in,

in geology, and there's, of course, this idea from physics and from math, which is simply compounding. But I don't mean compounding just in the sense of money. Compounding is very real and powerful when it comes to money. Einstein pointed that out in compound interest. But compounding is powerful force that. that also can really help one in terms of behavioral edge and knowledge, like knowledge compounds.

So you want to continuously learn and build upon your knowledge because it all compounds. So that's something else that I think we can take from physics, that idea, and apply it to not just investing, but to how we live our life. And now that I'm thinking about it, there's a Japanese concept called Kai Zen. Kai Zen is at the root of how I think about side capital and how I think about my own life. And Kaizen means essentially change for the good.

Kai is the change in Zen is for the good in this case. So it's about continuous incremental changes over time and how they lead to substantial and improvement. That's a powerful idea that I think that we could use not just investing, but in our lives in general. Continuously refine something takes time, but it compounds, the effects compound. Aren't there any examples you want to share on Kaizen and how you lift it? I think that getting rid of distractions is certainly one element of being more focused in refining one's process. So the idea of investment management is, it can be very different for different people, can mean different things for different people.

I'm trying to improve our processes continuously. And that takes shape in different forms. Minimizing distraction is certainly one of those areas I'm trying to focus on. So, I mean, it can be as minor as turning off the sound when you get an email because each little email creates a beep. and that's very distracting when you're trying to do deep work on something. It could mean, you know, making sure you go to sleep every day at a certain time, maximizing sleep, you know, sleeping within, sleeping in an alignment with circadian cycles. All of these little things, it's different for every person.

And you already mentioned the biases. we humans have. How have you built your setup that you have this biases under control is a bit of a maybe not the right picture but manageable and that you have certain buffers hitting in to to block you acting bias driven? Well, the key is to figure out what biases you're most susceptible to, I think. So I have an idea of what biases I'm most susceptible to. And what I've done is I've I've created a checklist. So whenever I think about buying a certain security or selling a certain business, I'm just going through my checklist to make sure I'm not falling prey to some of the biases that I feel I'm more prevalent to being affected by. I also think it's important

to slow down. You know, we have inherently an action bias, and unfortunately, it's super powerful, and it makes us want to do things, especially portfolio managers. So many portfolio managers feel like they can't just sit still, not only because, not just for themselves, but because they want to show their clients that they're working. The big problem, I had a client once who I had a meeting with, and this person said, Christopher, it doesn't look like you've done very much in the past nine months. I see one cell. I don't see anything else.

And it was, you know, it was a loaded question. It was a question that was not only loaded, but misguided. And perhaps in this person's field, the idea of doing something constantly is what you need to do because that's what generates revenue. That's what clients expect. It might be something that you're doing on an hourly basis for your client. But the investing business is completely different. The investing business just runs in the face.

of what so many people are accustomed to seeing. I should say successful investing runs in the face of what so many people are accustomed to seeing. We don't pay to buy and sell all day long. We get paid for being right. It's going to be costly if we're constantly doing things that are not sensible. Maybe also let's try to look back as many of the viewers might be younger investors on your younger self, like 22, 25 years ago.

Which habits you had in this age did you learn to let go over time or maybe like to break it a bit more down? What does now a week of you look like compared to a week of you in 2002? Yeah. Well, I think that this links very nicely with the previous question about action and having an action bias. I was much more frantic 20 years ago. It's important to slow down. You make less mistakes. You think deeper. You think more clearly. I think that was reflected very much in the portfolios. was much more turnover in the portfolios if you go back 20 years than there is today. How did you achieve to slow down? Well, when you realize how much money you're leaving on the table by selling out of winners in great companies too early, I think you learn pretty quickly when you start doing the math. Yeah, it's painful.

maybe let's switch to another side of yourself you have this this the side of being an art collector and with art i associate this two intertwined invites they are for me an invite to open your mind and invite to see different how does these two invites help you of to be a good investor or also good human yeah i love i love the i love the question um and and we can talk not just about being an artist like a painter or sculpture, but even if you think about being a fashion designer or a musician. So what are all these artists have in common? Well, they have one thing particularly in common if they're successful. They are able to read the times. So good artists can read the times. To be a great investor, I think,

that you need to be able to read the times you need to understand where the world is and where it's moving so that's one one area that i think um there's a nice parallel between art and uh and investing in that side or or successful artists and investing how is this this spending time on art and also collecting art change you in seeing things this this lens of an artist how has this influenced you the spending time on art for me is an outlet it's a wonderful way to start thinking perhaps not so logically about a situation but more intuitively I mean, there's an intuitive, great artists, again, are able to read the times, and that's reflected in their work. And if you look at their work, there's an intuitive quality to what they're saying.

I think it's important that one opens one mind to thinking not just logically, but in other ways. as I'm answering your question I'm reminded of a guy by the name of Rory Sutherland who he wrote a fantastic book and one of the things that he said in this book called alchemy is that we need to think not just logically but with psychological We need to think about how people behave. You know, people are not always, mostly they're not econs, right? They don't, for example, calculate the expected utility of a purchase, right? There's an emotional element.

There's a lot of emotion in art. There's a different way of seeing the world. And I think it's important that we stay open to that and not get trapped again, thinking about the world in just one way, not using models that might not really reflect reality. Are you creating art yourself or are you just? Oh, gosh, no. The closest I get to creating art is the portfolios that I create for our clients. And there's certainly, I look at portfolio management to some degree, like I would envision myself if I were an artist painting a painting, you know, putting the painting together with 12 or so companies. We own 12 companies today.

I don't know how many shades of color that might entail. But it's about putting something together in a certain way, right? portfolio concentrations, types of businesses, how businesses might react to each other or react in the opposite way of another company. So I think about constructing portfolios as a bit of an art form and certainly managing them as a bit of an art form, but I still draw stick figures, Tillman. I didn't develop that side of my brain very well. Same here.

So we are fascinated by art, but just like art, not art literate or whatever. My two kids are amazing artists. I couldn't do, literally I couldn't do, I couldn't even come close to what they're doing. It's great that you have them in the family, the artists. So let me do the comparison you already did, did a bit. more actively how is the collecting of great art and getting a portfolio of great art different to building a great portfolio of great companies it's not and that's the lesson that I took away from my father actually my my father and

understood the the the importance of buying the best and the best of course can mean different things to different people. But you want to buy the best. You want to buy the best art. That doesn't necessarily mean the most expensive art. It means quality. You want to buy quality. Quality means something different to different people. But you want to focus on quality. You want to buy the best in art. You want to do that in real estate. You want to do that in investing in buying companies. You want to buy for us, we're looking to buy the most competitively advantaged businesses that we can find that have a real economic moat, that have a real long runway of growth that can grow in an exponential manner. Again, many of those

companies tend to be platform businesses. So we lean toward technology enabled or technology businesses that are platform businesses, but ultimately at the core of all of this, at the core of art, at the core of real estate, at the core of investing, I think about it the same way, by the best. What are your filters then for quality on both sides? So we'll leave real estate out and we'll talk about art quickly. What does it mean? Well, I'm interested in original thought.

I'm not saying that artists shouldn't take inspiration from other artists. All artists take inspiration from other artists. All investors also do. Well, yeah. And there's this lovely parallel, right? That has to go beyond just taking inspiration. The art has to push something first. There's a quality in when the artist and the work that he or she produces comes together as one and that is reflected in some sort of vision or explanation of the world that takes what we've previously known further.

the artist is trying to explain the world. Ultimately, that's what artists are trying to do. It's trying to explain the world. It's using different models. But that's ultimately what it's doing. So good artists are inspired, often inspired by others, but they then take things further. Now, the parallel to investing is that, and as you mentioned, The 13Fs are, you know, 13Fs are readily available.

Investors are often taking inspiration or copying other investors. By looking at the 13Fs, shameless cloning of other investors. And that can be a real big problem, especially when that initial foundation is not solid. right, that whoever that idea is coming from, if that idea is not right, then there's a problem. So how I think that this problem, and it's a problem, it should be, it should be understood that this is, I think, not a good way to go about managing portfolios, not just copying the smartest people. And this is why. The reason is not because, let's assume all of the investors that one is copying are correct. They don't make mistakes. Let's just assume that. The problem is

that if you haven't done the work yourself and you haven't really understood the nature of a company, the inner workings of the company, how that company should be valued, where that company is going, what are advantages? If you don't understand all of these things, in a market downturn or in a period of overvaluation, you will not hold on to that name. And you're going to make a mistake. You're either going to hold it too long or you're going to sell it too early. You won't have the conviction if you haven't done the work. So fine, take inspiration from great managers. I have no problem with that. I think that's a great way to start. Why make your own mistakes when you could start at a higher level, right?

If you think somebody is a very intelligent manager and he or she just bought this particular company, why wouldn't you want to look at it? That'd be pretty silly. But you better do your own work because if you don't do your own work, in a market dislocation, you will never have the conviction to know what to do.

And the one thing that we know is that markets will be in periods of overvaluation and undervaluation. There will be major sell-offs. There will be periods of euphoria. Those periods are coming. So you're looking in both in art and investing for kind of creator figures or builder figures that build something new based on the foundations that existed before and enhance this? I think what you want to do as an investor is definitely align yourself with great managers. And the interesting thing is that in the world that we live in today, I think the great managers, for the most part, are, you can find them. several of them are public figures, in my opinion.

They're taking businesses in a different direction. They're just so far ahead of the competition. Or they're just great, they're skilled allocators, right? A great manager can be a great manager in different ways. I'm definitely inspired by certain managers, either for their vision or for their capital allocation abilities. One of the great capital allocators, for example, would be, I think, is Bill Stearitz. And Bill Stewart's did a phenomenal job with Rawson Purina.

That was well known. I mean, his track record was well known. But then he went out and launched post or took over post. So it wasn't a secret. So you can follow some of the great. capital allocators and some of the great managers in terms of what they're what they're doing with a business or their vision is is often readily discernible as well you know where to look how important are people then for you very important so one of one of my one of my mentors who

is actually just a few blocks from here is Ron Barron. And Ron Barron talks a lot about culture, people. Way underrated. Can't be screened for. You have to meet them and get to know them and build trust over time. You don't always have to meet them. Because I think that so much is available to us today. in this technologically enabled world.

There's so many interviews. So many people know each other. It's great to meet, obviously, the managers, but I don't think it's necessary. Interesting point. Maybe let's go back to the art and investing comparison. What is harder for you to give away a great piece of art or to give away a great company you've owned for a long time?

Hey, Tillman here. I'm sure you're curious about the answer to this question, but this answer is exclusive to the members of my community Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investor day by day. If you are an ambitious, long-term-oriented investor that likes to share, please apply for Good Investing Plus. just go to good minusinvesting.net slash plus you can also find this link into show notes I'm waiting for your application and without further ado let's go back to the conversation let me go to art as my last back to art for my last question on art

art is also about tragedy deep feelings loss also sometimes even protality, drama, and the skills of power, if you think about art and what artists process with this. How does this side of art has helped you to become a better investor and human? There are, there are certain companies tell men that we just wouldn't buy. And I'm not going to, I'm not going to name them. But the reason we wouldn't buy them is not because the economics are not good. In fact, in one case, I think it's just quite an undervalued business at this point. But we wouldn't touch it.

I personally would not feel comfortable supporting a company that I thought was, many ways destructive to to humanity and you know quite frankly we don't need to own it there's too many there are too many other options by too many i mean you know we own 12 right that i mean we could just buy more of one of the other 12 or another business we don't need to own something that is uh in my opinion, not good for humanity. To add to that, quite frankly, the best businesses tend to create win-win situations. They're not zero-sum gain situations. Those businesses that are zero-sum tend not to have those long-run ways of growth. They're not as durable. They might perform

extremely well for a shorter period of time, but they tend to fail. So we want win-win, you know, we want to, we want to operate within a win-win framework, not only in terms of how we're managing money for clients, but also in terms of the businesses in which we're placing our clients' assets, they need to be companies that operate with a win-win framework. They're most durable. Can there always be win-win frameworks? I think so. Why? I mean, if the question is, can you only invest in win-win frameworks? I think so. Do all businesses, can all businesses be win-win? I'm not sure. But can we only invest in win-win frameworks? I believe so. That's what we're looking for. In our conversation, we talked a lot about the

and transformation, and also a bit about the future. But what role does the future play in your analysis? What are you willing also to pay for the future as an investor? It really is, I think, you're talking about valuation, company valuation? Company valuation, also like there's this idea of the value investor, are all a bit inspired from of not paying for like for the future very much just paying for the substance or the future growth but with technology and change it's also important to be a right position to get the future right and be positioned in the right companies that have

this exponential growth in the future yeah so i think that somewhere along the lines, investors started to speak about paying for the current business and paying for the future as if they were completely separate. But if you think about the value of a company, so what is the value of the company? If it had no assets or liabilities, let's just say you're valuing the future. sales of a company? Well, it's the discounted cash flows of, call it the owner earnings. And if it had assets or net assets, well, that part is the present, the present value of the, of the business. So if there were no cash flows in the business, there would be no value to the

business unless it had some assets elsewhere. So what we want to, to do is we want to think about, well, what part of the existing business is going to continue and what part might be on top of that? That's the optionality. But it's all, if you think about it, it's all the future. There's no way of really getting away from the future. Does that make sense? next sense but then maybe maybe this question doesn't really fit but what you're appealing then to to pay for the future or no doesn't make that much sense because the future and the current valuation are defined or how do you get the certainty to that you're right with investing in this future that is to come out of the data you get from the current situation of the business Yeah, I mean, at the end of the day, it's trying to understand the competitive positioning of the company. We spoke about Gillette earlier, and what I'm trying to emphasize for the purpose of this conversation is that all value comes from.

the future. The question is, does some of that value come from an existing business, an existing business model or existing product? Or does some of that come from something entirely new? So if we think about Gillette, Gillette's a great example because it's was around, I mean, it's been around since the early 1900s. And it's, it's, core razor blade business was unsurmountable for generations. But Dollar Shave Club comes around, sells direct to consumer with a competitively priced product, a good product, and they steal tremendous market share from Gillette. So if you were looking at Gillette right before Dollar Shave Club launched, you would say, okay, well, how much am I paying for the current business

and how much am I paying for the future? The problem was that the current business was no longer going to be in the future, if that makes sense. So all value is coming from the future, unless there's a net asset value on the balance sheet that is, somehow not reflected in the cash flows. It's not double counted somewhere. It might be land, right?

That you can count on now, and that's likely not going to change in the future. So that would be part of your calculation of intrinsic value. But the rest of the business, you have to look to the future. So if you're looking to the future, even with a business like Gillette, you're thinking, okay, this is pretty stable. Well, it's not stable. So at the end of the day, my point is that you have to understand the competitive positioning of the company.

It's all about the competitive positioning of the company. Can that company continue selling what it has sold in the past? What's the value to that? And is there something that might transpire? in the future? What's that worth? So what I'm trying to figure out is, you know, what the future cash flows of a company are going to be? What's the market value of the company today? Compare those two. And understand the optionality of the business. In other words, is there optionality? Is there potential for future cash flows that are just not reflected in the market value.

That's where it gets really interesting, is where you're paying for something for the current business, but you're not paying for any optionality. That's the unknowable part. And that's where it gets really interesting because Richard Zekhauer said that big returns come from the unique, unknown, and unknowable. If we can somehow get optionality and not pay for it, that can be really fun. That's a good thing. Is there any past experience where you had this? You could share with us? We see optionality in a lot of the businesses

that we own today. And our 13F is public. So I would I would I would think about you know, I think

about market values and intrinsic values and optionality. And a lot of the businesses that we own are working on, are working on products or services that are not yet reflected in the valuation today. But I don't think we're paying for that. So if, you know, if they hit, if they're, if they're successful, that's great. Well, it would just increase

our IRA. And if they don't hit, I don't think we're paying for it today. for the end of our interview is there anything you would like to add we haven't discussed was it mark twain that said it ain't what you don't know that gets you into trouble it's what you know for sure that just ain't so i think we should all um keep mark twain in our mind as we think about what we own why we own it And again, always remain curious, not judgmental. Try to understand that if something doesn't make sense to us, or something doesn't make sense on the surface,

maybe it makes perfect sense, just not to us. I'll give you an example. If you go back to 19, no, 2007, Apple had just launched its iPhone. And many investors at the time said, well, the market value of Apple makes no sense. They said it didn't make sense because Apple was worth more. than Nokia and Palm, research in motion, all those companies combined. How can that be? And what people didn't understand, or at least a lot of people didn't understand, was that

Apple was shifting to an entirely new business model. and it had a product that had tremendous network effects that were not understood. And the market didn't understand that the other companies would actually be completely disrupted by this new business model, by this new product, by new technologies converging. So the market as a whole got that, and that's why Apple was worth more than the competitors. combined, but the short sellers didn't get that. They were closed-minded. They were looking at the world through a lens

or with models that no longer made sense. They didn't understand the changes. But if you think about it, if a company has a positive future, a bright future and its competitors don't. The value of the company that is leading disruption

in taking market share and growing profits will not just be worth one multiple of all of its competitors combined, but as time goes on it will be worth two times and five times and ten times and a hundred times and ultimately an infinite number of times as all the other businesses continue to lose cash flow and the present

value of those future cash flows decrease and the intrinsic value of those businesses decrease. And we're seeing that same argument today in certain areas where the value of one company might be worth all the competitors combined. People are making the same stick because ultimately that one company will be worth two times and five times and an infinite number of times of all the other companies combined

that may no longer have any cash flow. It's just mathematics. It's numerator over denominator. But it's catchy, right? It's a very catchy thing when somebody says, this makes no sense, this company's worth all of the combined value of the other players. It's very catchy, and it's powerful for some reason.

I haven't figured out why that's such a powerful argument, but it's very powerful. Some cognitive bias there that we all have, or at least I have. It's a powerful argument. But if you actually break it down and you figure out, okay, what does that mean? What is the value of a company? How is the math being compared, numerator over? denominator. What's happening to the denominator is what's going down. What's happening to the numerator while it's going up because the future cash flows are increasing. Present value of those

cash flows is increasing. Intrinsic value is increasing. So obviously it becomes multiples, not just one or two times. So be curious, not judgmental, as Walt Whitman said, and always look at the world with new eyes. And thank you very much for your insights. I hope we also opened some eyes of some viewers and listeners. Thank you very much for staying to now. And thank you very much also to you for sharing your wisdom. Thanks for putting together this amazing podcast with such great investors.

I'm proud to be part of it, I'm welcome. You're welcome. And bye-bye to the audience. Bye-bye. As in every video, also here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says, always do your own work. What we're doing here is no recommendation and no advice.

So please always do your own work. Thank you very much.