Good Investing Talks - Edward Chang, how did you compound with above 30% p.a.?

Episode Date: June 16, 2021

Edward Chang of Pledge Capital started his fund 5 years ago. Since then he compounded money at outstanding rates. It was a pleasure for me to talk to him about this way into investing, his favorite stocks, and where he sees his firm in 5 years.

It's great to have you here, Edward from Pledge Capital. Very nice to have you. You're currently in New York? Yes, yes. Thanks for having me. I'm currently based in New York, born and bred here. Great. We already had a pre-talk for our conversation,

and there you told me something about your mother into role bringing you to investing. Maybe you want to share it with the others. It's a great story, I think. Yeah, no. sure you know both my parents um yeah but yeah my mother in particular but my father as well both wanted me to pursue a career in investing and uh they actually um you know encouraged me to start my own business it's it's it's been a childhood dream of mine um and uh you know when when when i started actually she she made me promise you know if i made a ton of money that uh i would give back and uh and

and try my best to invest in companies on the right side of change. You know, my mom, she's a very interesting woman. She founded a nonprofit and a chapter of a nonprofit from Taiwan. She founded a chapter here in Long Island. And, you know, growing up, she would, she ran a youth group as well, part of the organization. And every Friday we would go and she would show us a video of some natural disaster. And she tried to convince us to give back and volunteer. So she was quite an interesting character, both my parents.

But, yeah, that's why. I think your mom brought you to investing and did let you buy the first stocks or? Oh, yeah, yeah. So, yeah. So she gave me some money back when I was 12, I think it was like $3,000. And I bought Gateway Computers. It was my first stock. I was researching computers to buy, and I loved the website.

I was able to, because they do direct consumer. I was able to buy a cheaper computer. I was able to customize it and add a video card. So I loved it as a consumer, saving money, and also just building a computer that I wanted. So, and ever since, I just, I've been hooked, right? This was after the tech bubble, so valuations were really bombed out. It was, you know, just a very fortunate time for me to start investing. I believe it was a single, mid-single digit PE, 2003, and pretty much anything you bought

and made money, I made, I believe, 70% of very quick time, and I was just hooked, and I just fell in love with investing. there and then and ultimately, you know, decided to pursue this as a career. It was a hobby for a very, very long time. Before we go that, that's a good point. You're writing on your page that you're volunteering for the Suu Kyi Buddhist Foundation. I hope I spell it right. Yes, Sushi. You got it. You got it. Yeah. Since when are you doing this? Ever since I was little. So like I mentioned, my mom, she founded the Long Island chapter. So I've been part of the organization since I was one. You know, my mom, very lucky to have my mom around as a kid.

She would always bring us to the office, and we would play, and she would watch us and do her volunteering events. So it was quite a community to grow up in, right? I feel surrounded by people who are Buddhist. My father's Catholic, so surrounded, you know, went to a Montessori. But surrounded by these folks, they make a very positive, you know, impression on young kids. So it was a great environment to grow up in. But did you take away from it for investing?

That's a very interesting question. I think it's a loaded topic, right? I think it plays into a lot of themes that we're seeing today. In college, you know, we learn about, you know, triple bottom line, you know, social, corporate social responsibility. It's this huge debate now, but in my opinion, there's a lot of win-wins, right? You can do things that are good for society and shareholders. And of course, I think there's a lot of issues with ESG and veterans. But, you know, just seeing this shift, for example, in vegetarianism and veganism,

I'm not I'm not a vegan or vegetarian, but seeing how society views vegetarianism and veganism and how that's shifted during my life, it's been pretty eye-opening and, you know, educational, right? And I think society is always evolving, and companies are evolving. And a lot of the companies on the right side of change, they're evolving with the times, and they're doing things that the consumer want. And I think there's a little bit of this angle with Avid. It's definitely relevant. But companies that find these win-wins could often be some of the greatest home-run investments.

If that makes, if that makes sense. Yeah, it makes sense. We will later talk a bit about avid in depth, but, um, even let's go back to you lurking around investing and looking for an opportunity to start a business. How long did it take for you to finally decide to go for it? You know, I, I started my business when I was, uh, 26, 27. So about five years now, um, I'm 32. too. And, you know, I had a career. You know, I started out at Deloitte in their advisory business,

and then I switched over to UBS, and I covered restaurant stocks there for a while. But, you know, it was always my dream to start my own business. Five years ago, you know, I had the benefit of, you know, friends who are doing similar things. My college roommate, he has his own business now. He started it about a year before I did. And my other college roommate, his wife, she also started her own business, a fashion-oriented consumer business, about a year before me. So I think it's rekindled those people, my friends, they rekindled that itch. And, you know, my parents were very supportive of it.

My father started his own business, you know, decades ago. So having that community around me made a very big difference and ultimately, you know, it, you know, really excited me and really inspired me to pursue this. And, you know, fast forward five years, it's been, gosh, I can't, it's, it's, it's been a wonderful journey. How important was it to have this community around to survive the first years? I think it's very important. Having the right people to talk to, you know, when you're starting your own business from scratch, it honestly, I can understand. It can be scary, right? You go through a lot of challenges and having the right people to lean on, to encourage and motivate you, who have been through something similar. You know, five years ago, my father gave me a great piece of advice. It's going to take you three to four to five years to really. see if this is working out. So you have to give it time, right? You can't give up in year one or year two. You either decide you're going to give it three, four, five years or don't try. You know, just you can have a great career on Wall Street. But, you know, if you go for it, it can, you know,

your life will be very different, you know, in 10, 20 years. You're building something, you're planting a tree and you're hoping to, you know, harvest and benefit from it and, you know, benefit. from the shade for the rest of your life. So I think it's a very important aspect, your support group, your community. You named your firm pledge capital. What does it stand for pledge capital? You know, honestly, I haven't never really gotten into this. I don't typically talk about it with clients, but it's a pledge I made to my mother. She wanted me, you know, five years ago, and this is when, I guess, ESG was still kind of becoming a thing. It's not that powerhouse it is today.

She wanted me to try and find companies or look for companies that were on the, you know, we're doing good things for society. And to try, right? I mean, I didn't say I'm only going to do that. But to try to look for those win-wins and try to avoid, you know, bad companies. And also to, you know, if I'm a. get a lot of money, she wanted me to promise to give back. So, you know, that's kind of what played into it. You know, she's kind of the person who thinks if you, if you make a positive

commitment, it doesn't help. It doesn't hurt. I mean, it helps with your drive. You know, if you have like another mission, it helps you work harder. And I think, you know, just to kind you know she's had a really big impression on me my whole life but it's also the way Buffett has structured his partnership like he gave away a lot of in the giving pledge to to Gates foundation of the wealth he has built if you if you're looking for this win-win situations does this keep you away from trouble in the companies you're investing in potentially uh I definitely believe sometimes it creates risks, right? If you're on the wrong side of change, it creates unnecessary risk, right?

So it's not so much that it's a defensive move, right? It's more, in my opinion, it's more of an offensive move. And you can say there's a great adage that says the best defense is a great offense. And that's how I kind of view the situation. You know, a lot of people like stocks like, you know, Altria and Philip Morris. And I'm not necessarily saying those are bad investments, right? Or, you know, some people wonder or question if all this, all the trends we're seeing in EVs could eventually lead to, you know, maybe in the long term could lead to some of the oil and gas companies getting into trouble. And certainly there's, I think there's questions around their terminal value.

So, yeah, for sure, I do think it can keep me out of trouble. But I primarily look at it as a way to identify companies that are making very interesting changes in the world and who are growing and benefiting from the trends that we see. With this, you're already describing a kind of uniqueness of your approach. What is also or what are the factors that are unique to pledge capital and your approach of investing? Well, it might not be unique to me because I think a lot of really smart investors are doing similar things or the same thing, right? I think there's a lot of investors who like to focus on the small midcap space. So that's definitely a differentiating factor for pledge capital. Other companies, other investors like to focus on companies.

that, you know, are, there's some sort of S curve or a positive inflection point, some sort of catalysts. So I love focusing on companies that are investing to, investing in their business, transforming the value proposition for its customer base. And so, you know, I'm always looking for young companies that are doing something really exciting. such as, you know, the joint where I think the value proposition was fantastic. And I'm also looking for more mature businesses that are undergoing some sort of change, like Avid, right, like we'll be discussing. And it's, you know, mature, maybe they dominate a space.

A lot of examples like Soda Stream is a great one where, you know, they're investing in some sort of product or new strategy. or just enhancing, you know, the value proposition for their end consumer. And I think when they do that, they, when they increase their moat, they, and because their moat strengthening, it increases their ability to go after their TAM and grow securely. And so we love finding great businesses that are doing that. And so that, I think that kind of highlights. That kind of, you know, summarizes my, my strategy.

You already mentioned some of the companies you invested in. They have different business models like Everett is some kind of service for microphone or devices for the film production industry and also software. The joint is shiropractic, I think. It's a therapy chain on. Right, chiropractic chain. So, you know, it's like in the, it's kind of similar to physical therapy. but I look at it as a preventative health care company. There's a lot of studies about how if you have pain in your back and you treat it early,

you can avoid much more serious surgeries later on. So it's definitely therapeutic. There's definitely this, you know, if you take care of it now when it's a small problem and you don't let it fester, I think there's a big benefit to preventative care. And I think that's, it should become a much better. bigger thing over time, hopefully. You also have this reed that is investing in the farmhouses for cannabis. Right.

So that's, I feel like that's kind of a little bit trickier. And that's where, you know, I have some clients who will ask me, I mean, you know, why are you getting into cannabis, right? So they started out, Power Reed started out owning a railroad. a railroad track. And they bought it. It's on the bucks from like 40 years ago. So it's on the bucks for nothing.

And it's grown and appreciated in value as interest rates have come down. And they also now invest in greenhouses, which is a more sustainable way to, you know, farm cannabis and also various other products. And obviously, you know, agriculture is a commodity. But they're getting, so, you know, they're investing on these greenhouses where they use less water. They use, they depend on sunlight. So it's a more environmental way to grow cannabis. And it's, in my opinion, for a lot of cannabis users, that's actually really important, right? They like to hear that.

They like to support craft producers who have very unique strains. who are, you know, have a cool story to tell who, who, you know, like, I think there's a, you know, Justin Bieber's song. He, he likes his cannabis to come, you know, come from the sun, right? To be grown by the sun. As opposed to, you know, when under the illegal, you know, error, a lot of this was grown indoors, and it's very expensive to grow it indoors. You need to depend on artificial lighting, right? You need, it's, it's, it's, it's, it's, it's, it's, it's, It's more costly. So greenhouses actually have a cost advantage versus indoor farming.

And, well, there are, you know, investors who believe that outdoor is a risk. Outdoor, it's very hard to optimize, you know, outdoor growing. If you look in Canada, there's a company called Delta 48, I forgot the exact name, but it's really tough. with a lot of, you know, outdoor challenges, you know, the wind, the water. It can all hurt the, you know, the plant, the crop. It can reduce its quality. So a lot of the outdoor stuff is actually, you know, for, it's used for extraction. And ultimately, I'm actually a little worried, I think there's a company out there called Amherst, and there's a couple other bio, kind of biotech companies. They can synthesize THC for much cheaper than outdoor growing.

So if I had to look out five years, it's assuming cannabis is legalized, you probably have greenhouses that are, you know, creating cannabis for, you know, people, you know, the traditional cannabis products. And then a company like Amherst or other biotech companies who are synthesizing THC at much cheaper costs. And that's what's supplying the, you know, the edible and concentrate trade market. So that's that's an interesting company too. You know, we've we've done very well with that with that investment. Thank you for the insight across your portfolio. But I was wondering a bit when I read about your investments. What do they have in common? What is, is there a common pattern you can identify? What? So with with power rate, it was a so I I like growth.

I like to find value stocks, but I think it's, you know, the value growth debate, it's kind of a moot argument, but it's like yin and yang, you can't figure out growth or you can't triangulate growth without knowing. You can't know value. You can't triangulate value without knowing the growth story. So, I mean, some commonalities. Going back to the two buckets of stocks I like, power rate was undergoing a transformation. right, it was focusing on a new area, right? And when I found power rate and when we invested, I believe it was trading at half of the, you know, NAV, right, the price that we paid, right, a mid to high single digit, high single digit price. You know, the assets on its balance sheet, you know, were carried at historical, its historic value.

Same with Avid, right? And, you know, Avid was, you know, we originally pitched it a year and a half ago. And it was trading very cheap to, you know, what I thought the brand was worth, what I thought the earnings power was worth, right? So for both Power 8 and Avid, you know, kind of a single digit price to owner's income, right, kind of multiple. So, and Avid was also undergoing a transformation from perpetual to SAS. And I think that's a great transformation that by itself creates a lot of value for, you know, it lowers the entry cost, right? It lowers the investment cost.

So it's great for new users, low friction to try it, right? They had a free product. They have a $25 per month tier, or 50 month per month tier. So it opens up and it enhances their, you know, conversion. And not only that, but they were investing in their product. You know, now we're going to Avid. I think they had a great management team that was really focused on the product and investing to simplify the product, enhancing the user experience for the core user.

And so I like that transformation of both power rate and at, avid. So it kind of fits into one of those two buckets I laid out, right? A company that is going through some sort of transformation in investing in its business, taking it into a new direction. And so I guess the commonality with the joint is a little bit, it's different. Although I think with the joint, you definitely had a similar pivot, but this is kind of of years ago, you know, not as relevant now, but we're seeing it play out, right? They're focused on regional developers. These regional developers, it was a model kind of wrote out, I think, five years ago,

where they're recruiting, and I've spoken to a lot of these regional developers, and there are people with skin in the game, right? They're usually successful businesses with a lot of connections, and oftentimes, most times they own one or multiple joint franchises. And they go out there and they, you know, lever their networks to sell the joint, right, to their friends and to their connections. And I think a lot of companies, when they're scaling, they encounter growing pains. In regional developers, not only help you grow, but it can actually reduce those growing pains. By having someone with the skin in the game to coach new franchisees, you reduce problems from arising, in my opinion.

So I really like that, you know, Peter Holt focused on this strategy, using and leveraging regional developers. And in my opinion, it really enhanced their ability to grow quick and grow sustainably. So I guess that kind of is a common thread, right? It's some sort of underappreciated pivot that others just haven't seen yet. And I love finding those. So you like to dig in value names that can become long-term compounding growth names? Yeah, yeah, because, you know, obviously growth, growth, growth investors, They've had a wonderful, you know, run, you know, multi-decade run now.

And so I think it's important to buy what other really smart investors will come to appreciate, right? So my opinion is if you can find value stocks and, I mean, the joint wasn't necessarily a value stock, But if you can find these stocks that other, you know, really smart investors will want to buy and own long term, I think that's a path to very strong, you know, returns. So definitely love mining within the value universe for stocks that I think are undergoing some sort of transformation and can be viewed as compounders. And, you know, that's the goal, right, to find a stock that can go up to. two, three X. And then at that point, you know, you're maybe you've grown your confidence in management and you believe in the story even more. And you think it can go up another two or three X in the next three years or five years. And I think that's, that's a dream to find

these multi-year compounders, you know, with very, very attractive and strong investment stories. What makes you say yes to an investment or let me reframe the question also, but what are the hurdles for you to say yes? A lot of investors have checklists, and I try to have a very simple one. I love finding companies that have a moat that have some sort of, and because they have a moat, they can execute and deliver on their tam and actually achieve that tam. So those are two very important characteristics. And then I love finding great businesses, right?

So with Avid and the joint, you know, one area that I like to focus on is businesses with high margins, right? And both of these have high margins, right? The franchise business and the software business within Avid. I think that's a very good business model. They're both subscriptions. subscription type, the joint is not exactly, it's a membership, you know, shorter, I guess, lifetime, but kind of a recurring revenue base. So I really like these recurring revenue models. Power rate for sure is similar, right? It collects rent. And so, yeah, that's, so if I had

a, if I had to lay out my simple checklist, it'd be, you know, a good business that can generate an attractive return on invested capital. And, you know, management team is important, too. But I kind of not only, I think, is important to identify good management teams, but I think management teams that are kind of undervalued and people don't necessarily believe in them yet, right, who are kind of becoming or who can become recognized as great management teams. So I love what Peter Holt did with, you know, the focus on the regional developers. You know, you want to look for management teams with a lot of skin in the game, right? So, you know, with Powery, you know, the CEO owns like 30% of the company.

And he just invested, I believe, like 15 million recently. he just he bought shares um so you know so those good business good management team uh a mo and and a good tam a good you know secular growth story what are you measures or what is your framework to identify a management team that's undervalued or that that's really tough yeah definitely really tough um i typically want to see them investing in the business right Not necessarily, you know, buying back shares or doing things that investors want, but doing right by the customer, right? Like making solid long-term decisions, right? And I think, so for example, like I think Angie is an area where, you know, I think there's a lot of question marks.

but when I look at that potential, you know, when that, when I look at that potential opportunity and that management team, I do believe they're executing in the right direction. You can't argue that. I think they're moving the product in the right direction. And there's a lot of examples of that, right? So, you know, I think good management teams, a lot of times we're kind of looking backwards. and I try to have somewhat of a more forward-looking approach, you know, what are the management teams that are investing in their product,

thinking long-term, and really trying to build something that's just way better than what exists now? What is your ideal time for investing in a stock? Like, how long do you want to hold it? How long-term are you in your commitment to be invested? Well, so we're still invested in the joint, and it's, you know, one of our, still one of our biggest positions. You know, we've held it, gosh, I think, since, you know, 2018, early 2000, March 2018-ish. And ideally, we want to hold stocks for three to five or even longer, right?

I mean, I think when I build out my models, I'm looking out. six, seven, if not eight. Yeah, I think when you see get to like the 10-year market, it becomes harder. I think my sweet spot in terms of looking out is really that five, you know, four to six year mark where I feel like, you know, I have a lot of confidence. If this, you know, if they're investing and, you know, this is kind of like where, how long I'm looking out. And for me, it's also like I have to balance.

I'm trying to make as high of an IRR for my investors as possible. Those are my incentives. So it doesn't necessarily make sense for me to hold super long term, like seven to ten years. But I think there's a lot of alpha to be made investing with that three to five year time horizon, which is already quite a deal longer than a lot of other traders and other market participants. and, you know, once it becomes super recognized and everyone knows the idea, you start to lose your alpha to some extent, right? And, you know, I do look for punch cards, right, that I will always want to hold, but maybe not in the same, not to the same extent, right? I mean, we can run pretty

concentrated. You know, I do kind of have like a mental, you know, size of, say, 25% of the portfolio. And I have held, you know, a position of that size for, you know, three years, four years. And, you know, avid, we obviously plan to hold for a very, very long time. So, you know, it depends, right? A lot of it depends on the situation, right? You know, we always are, we're always monitoring the risk. If the risks, you know, become a problem, we, that's when we, that's one reason we'll move on. If the IRA drops significantly and we see other really attractive opinions. So, you know, our portfolio could, some positions could be kind of, you know, more of a cost of capital for us, right? Maybe the IRR has dropped and, and, and, but they, they become kind of

the hurdle rate to some extent, right? Like, you understand a story very well. You believe a lot in the management team and in the investment story. So you have to weigh all your opportunities, all your new opportunities against that. And if we find something where we really believe in, we'll look to trim, right? We'll look to trim into, you know, big moves and so that we can finance other, you know, investments. So that's kind of how I I think. I do want to try to hold positions for a long time, because I think that's one of the biggest mistakes you can make. You know, kind of thinking back to this Philip Fisher quote, right? Billions have been lost by, the gist is that billions have been lost by investors selling too soon

when it would have been more prudent to hold on because, you know, those those investments are still going to be multi-baggers. And, you know, that's why I'm, I'm, that's kind of my my thought on avid right now and and yeah so we can talk more about that for that maybe let you said you have this three to five years time frame where you build an investment what is the return you expect from an investment in this time you know typically we're very interested if we can find an iR of you know 30% right you know maybe 20% of the low-end, sometimes you find things that are a little higher than that. And, you know, obviously, the IR, you know, it's just kind of our best guess, you know, what we're willing to underwrite. And that's the kind of IRR that I feel like you can find in that three to five-year time horizon. And sometimes they, you know, they get brought forward, you know, if, you know, if, you know, if it's a particular compelling story, it can occur a lot fast. master and, you know, the long-term IRR will fall.

And, you know, go from 30% to say, you know, 15%. You know, if it's a very strong story, I think that occurs for exceptional, extraordinary companies. So let's go a bit into Everett. Sure. Position you like very much. How did you come across the idea? What was the first time you heard about Everett? Actually, it's from a friend of mine.

He was a roommate of my roommate, good guy, very smart investor. He told me, you know, we talk a lot, and, you know, I've been an investor in Autodesk and in Adobe. We've made money in those businesses. Love that subscription, you know, media, right, well, in architectural, you know, focused products. And so he thought avid was right in my wheelhouse. And so, you know, he recommended it to us to take a look. And so that's why we did a pretty deep dive. And we saw a lot of characteristics that we liked.

It helped that we had a client who is a movie editor. And we were able to, you know, do a lot of due diligence, talk to a lot of different users. I grew up with a friend, a childhood friend of mine, you know, who went to NYU with me. He went to Tish. He's also a movie editor. So I just loved finding this company that had basically persisted for the better part of three decades. Well, about three decades, right?

Like it's kind of like a weed, right? Just all these big, giant, you know, gorillas. and elephants trying to go after, go after them, right? For years, investors were worried that they were going to go away. But their users, their core users are very loyal. And for a lot of reasons, it's it's kind of like Excel for us, right? There's Google Sheets, but, you know, if you paid me $100, I honestly don't think I would switch if that option was there. I just, I prefer Excel, I mean, I, so for habit users, all their shortcuts, you know, they, they know all their shortcuts. They have all, they have their setup. They've been using it sometimes for a couple

decades. And not only that, but it's not only just Excel, it's, it's kind of like a hybrid Microsoft and in Excel, where they have plugins. So it's almost like the operating system with apps, with all these plugins that are very important. So, you know, that's what initially drew me to the business, and that's how I found out about it. What else did you like about Avid? With Avid, I really liked the management team and the risk reward and just the potential there. And let me elaborate. They're very dominant in Hollywood. Vast majority, right, for Hollywood movies and TV shows are edited on their software.

And kind of going back, I wanted to bring in the fact that, you know, hardware is a very important component. The integration between software and hardware is very important. big studios and big clients they just don't want to switch to something where there's a lot of different vendors it isn't as well integrated and you know they're working on multi-million dollar projects and it's just not worth it for them to save on their avid subscription by you know going with someone else it's just a cost of doing business right so going back to your new question what else I liked. So the management team, the opportunity, the potential. I think prosumer has always been called out by investors as an opportunity. But I actually really liked that this

current management team was investing in their core product, right, before really going after this prosumer activity. The prosumer activity was always an opportunity, but you can't take your eye off the ball, right, which is your core business with, you know, your business. You know, your Hollywood studios. So they were investing into that business, right? Developing cloud products, developing SaaS products, you know, really focusing on security and, you know, reliability of their cloud-based solutions. They were listening to the Disney's and HBOs of the world that were kind of thinking.

There was a media consortium of studios laying out the move into the cloud. And Avid was listening, right? They were investing in this area. They were looking for partnerships. They rely a lot on third parties, right? Plug-in developers and partners like Microsoft to help them. And so I really liked that they had a product-focused CEO. He was the product guy who took over as CEO.

And if you give the product guy the reins, he's going to invest in their product. And I liked what he was doing, investing in their core instead of solidifying their moat, and listening to customers solidifying that competitive advantage around their core business before attacking prosumer. And I believe that's playing out, right? I think at this point, the moat for the core business has moved in the right direction, and we're seeing tangible results. It's obviously been accelerated by the pandemic. The pandemic broke the mold. It made customers believe you can trust these, you know,

very highly paid editors to get their job done, right? If they work remote, they can deliver on time. So it broke the mode and broke the thinking, you know, that existed for decades. And there was kind of this cultural, you know, inertia. So it changed that and accelerated the shift to remote. And it also made, I guess, you know, disaster preparedness, you know, resiliency of your infrastructure. like very important topics for IT executives within the media industry. So, you know, definitely the pandemic helped, but they were moving in this direction.

So, you know, just the last point on this, you know, it's very hard to get a professional to consider a prosumer product, in my opinion. I think that's, it's tough. So to solidify that and then and then, and then, and then, to a prosumer market where I think the tables are completely different. It's not as hard. In my opinion, it actually could be easy to convince a prosumer to consider a, you know, a tool that's used by all the pros, the best content creators or, you know, in the world. If you make it simpler, right, if you make that product simpler, you know, if you make it,

if you enable more cloud collaboration. So Pro 2 is a great area to dig in. to explain that. And if you lower the price to $25 or $50 a month, right? So we heard a great story, you know, talking to a musician, for example. He's also a music teacher. And he has students who are literally selling fruit roll-ups or candy on the bus to afford a pro tool subscription. I mean, I think that's just incredible.

And it speaks to their opportunity in the prosumer space. where they have a very small market share. And the market, frankly, is just multiples, an order of magnitude larger than a professional market. So I really like that potential and that risk-reward set up. And maybe we can go one step back and you explain what kind of products Avid offers and what are this new products they launched? Yeah, yeah. So, you know, Avid historically. going back 30 years, they created, they helped create, or they, you know, they created a product

called a non-linear editor. And before this, right, I was learning, you, you had to do it by hand, right? There was a machine where you were looking at individual film and you were slicing and combining it together. And it was still done for many years after, but NLEs digitized this, I guess, organizational. In the beginning, it was an organizational. Like, you were able to fit clips together and there was, you know, media management, so, you know, you can go back and, and actually find those clips, match it with the digital version and, and put together the final product. But then, you know, eventually all of it was done online, right? I think a lot of it, more and more of this is just done digitally, sorry, not online, digitally, where you're ingesting videos into, you know,

a computer and just editing it. So that's what Avid does, right? And they acquired Pro Tools, I believe, in the mid-90s, and it was a similar product, right? Both products, right, the Media Composer product basically was a first mover within Hollywood. And it was used by Disney and various other studios to, you know, cut everything from, you know, long movies to TV shows to commercials. And so pretty much everything on Netflix, there's probably 80, 90% chance that if you're watching

on something on Netflix, it was cut on media and composer. And then Pro Tools is media composer but for audio, right? And their market share within the professional music space is maybe not quite as high, but a lot of music created by, you know, most famous musicians are constantly. cut on pro tools. And so that's what they do. It's a digital, and obviously they've branched out. They do a lot more other things now. They, they, you know, they have control surfaces, you know, mixing equipment. They sell a lot of storage, both physical storage as well as cloud storage. You know, storage is actually a very recurring business as well. Hard drives tend to fail or the IT departments are

They start to worry about a hard drive's failing after four or five years. So there is an impetus to replace it every four to five years. And storage continues to grow and it's going into the cloud to some extent. So it's a business with a lot of different segments. And what did management do right for you that you could identify as a value driver? and how did they execute? Well, so like I said, with the cloud product, there was something called Avid on Demand, right?

This is a new product that they've been creating. And they've worked with Azure. They work with Equinix and various digital infrastructure companies. And basically what it is is, I think that idea probably came from the gas industry, gaming as a service. So, Navidia and a lot of other gaming companies, they created a product where there's a virtual engine running all this data and all this

all the engines like gaming video editing is a very very you know compute intense product and so and not only that but if you have a virtual editing machine you can spin it up and spin it down from anywhere. You can access it from anywhere in the world. So it's really good for remote. It's really good for these teams that work in different cities, project by project. So they basically invest, they listen to their clients and they created avid on demand. And when we first started taking a look, this is more of a proof of concept. They were working with studios to test it out. And now they just recently formally launched it. So a commercial version is now available.

And it definitely seems like, you know, that's the way of the future, right? Because if gas is possible, there's no reason. You know, the original thesis is that if gas is possible, and we spoke to, you know, some engineers around this, you know, I've had a lot of conversations with, you know, people involved, you know, in the data center industry, like Equinix or Digital Realty. just to understand this, how, how, you know, whether this is possible or feasible. And so, you know, I guess the general thesis was that if gas is possible, and this is, you know,

if gas is going to enable the ready player ones of the industry, then, you know, avid had an opportunity in that it was possible for them to create an edit, you know, a virtual editing machine, right, to help with, you know, video editing. What did you do to get a certainty? What was your research process to say, I want to invest in Evert besides doing all of these interviews you already mentioned? You know, I think Philip Fisher is just, I think, a great teacher. And a lot of the things that he teaches, or, or, you know,

lessons and case studies that he shared, they're so relevant today. And in fact, perhaps they've become even more relevant over time. So everything that he talks about in his book, I think, is very important to do. So even just, you know, you mentioned the Scuttlebutt research that we do, you know, talking to a lot of industry insiders, you know, talking to, you know, resellers and implementation providers, you know, talking to people who are involved with the tech stack. We, you know, talking to competitors, right, I like to consider, you know, everything, I want to consider things from everyone's point of view, right, the customer's point of

view, right? So getting into the mind of the customer and the end user and also different types of end users, right? Like, so my wife's a podcaster, considering whether or not it's ever possible for her to use pro tools. And, you know, whether or not a vlogger, right, the tens of millions of people posting video content on YouTube, whether it's possible they will ever consider avid. So I think all those important, right, considering the, you know, the thoughts and what's going on behind the brain of the different stakeholders or the different parties, you know, in this ecosystem. So, you know, we also like to dig into the history, you know, so looking at the former management team and I think what was an early pivot into prosumer, you know, I think

they weren't quite ready for that back then. And, you know, this time, it's different. I think there's a lot of evidence to that. So, you know, we spent a lot of time digging into that. of course, I think, you know, everyone digs into the filings. You know, we love looking at the, you know, past two or three years of transcripts at least. You know, coming from the south side, you know, I used to be the model guy. I built all the models. I've built over 100 models the last, you know, five years. That's a very important part of our process. You know, I think there's a lot of smart investors who can maybe do that in their head or do it on the back of envelope. And, you know, we try to do that. We, you know, we, that's a starting point. But in our opinion, you know, we, we like to build models of, you know, every company that we invest in. And it's important for us to consider the long term. I think it makes it a lot easier to consider, you know, what does, what do the financials look like?

What, you know, when they report the 10Q and 10K, what does the balance sheet income statement and cash flow look like, right? And thinking through all the different moving pieces, you know, I think a model. helps break it down. It may not always be necessary, but it's a, it's a kind of a checkbox. It's, you know, it's better safe and sorry. So we spend time doing that as well. What did you buy into when you first bought ever? Was it the existing business and the optionalities you gave a certain value or what if? Exactly. So, you know, there's a lot of uncertainty with optionality, right? But I don't think you can, in order to be, I think, a successful investor, you have to, you have to assign value to optionality and upside potential. And obviously,

there's always, you know, I think people are always hesitant to do that, especially at a, you know, all-time high when, you know, it's like going back to, you know, Ben Graham. And, and Mr. Market, you know, case study and teaching, no one wants to be a greater fool. And you never want to be like the last person who gets in, you know, because of the high price and excitement, you're going to write this magnificent story. But you still have to consider, you definitely have to consider that optionality and that, then that upside. And it does, it takes a lot of work, right, to get confidence behind it.

And you obviously want to predict, you obviously want to try and predict, you know, that before the inflection point, before the S curve. And it's not, you know, always easy to do that. But, but you're right. That that's what excited me, finding a company that I thought was, you know, investing in its business was when it was approaching that point and potentially approaching that point in a year. or two, right? And having confidence that they were. And

yeah, so yeah, that's right. How you're generally going about this optionalities trying to give them a certain value in your models, for instance? Yeah, so we like to

play in our model, right, different scenarios. Right? And so you know, in the back of these cell-side research reports, you know, you had, and I used to update those, you would have a bulk case, a base case, and a bear case, right? And so to some extent, it's basically a judgment on the risk, right? What is the downside, right? Like, and you have to think through, okay, so this is the worst case scenario. This is the best case scenario. And, you know, it's one thing to do that. I think it's a lot easier to do that.

what's harder is actually figuring out, you know, how confident you are that the bulk case is actually going to come around. And I think that's really, it's really important to play out and think through those scenarios and really think through the risks, right? For Avid, it was, you know, I love the setup where for years and years, for a decade, if not more, right, 15 years, right? So since Final Cut Pro, I think investors were just worried about the risk, risks, that these two guerrillas were going to come in, right? First, Apple, and then Adobe, that they were going to come in. And there's this narrative, right? And it was supported by a lot of quantitative, right, factors, right? Like, Avid saw pricing decline for the better part of three decades, right?

the pricing for their products drop, right, in response to, you know, Apple and in Adobe and, you know, much cheaper competitive products. And that fed into the, you know, the narrative, the investor fear that this was not a sticky product and that it didn't have staying power and it was only a matter time before Avid went away. But that didn't happen. They persisted for, like I said, for three, for basically three decades, you know, like a weed. Even though there was cheaper alternatives or maybe even, you know, free alternatives, the vast majority of their user base just never wanted to switch. They were always finding one excuse or another and just, I also frankly think it's a better product, tailor made for professionals. But it was really that confidence

that I just don't believe a company that they're basically the only company, right? Avid alone is investing into SaaS, sorry, into cloud, right, into the SaaS cloud product, virtual editing. It's not a focus area for Apple, right? These businesses are giant conglomerates. They have, you know, this small professional Hollywood, you know, business is not their core focus. And it's also, frankly, just a drop in the bucket. So losing half a point to avid, right of market share to avid is nothing but whereas for avid gaining half a point or a point of market share per year it's very very meaningful so that they benefit from that focus so looking at the the bear case and figuring out do i believe the bear case is going to go is going to happen and looking at

the the bulk case and figuring out is this something i believe in and i just when i looked at avid i just didn't believe the bear case was going to play out right there were they were addressing a lot of the problems that I think that investors critique them about, right? For example, like education, I think they're doing a really good job in education, reaching out to educators in the North America market, maybe less so in emerging markets or even Europe. I mean, I think they're moving in this direction and they're doing a pretty good job, very good job in North America with universities and getting their products in the hands of, you know, up-and-coming content. creators, right? You get them early. And just having, so not believing in the, in the, in the,

in the bear case and believing in the bull case, that's what really got me on board. And that's, you know, that's like kind of what pushed me over to take, take a position. And, and initially, you know, we, we didn't, we didn't make it, you know, a very big position, right? It's, it was more of a, we saw a lot of potential and we saw a lot of potential upside. And it was a, it was a business. We wanted to see the proof of concept for cloud work out and a commercial version. We believe there's a prosumer opportunity, but we wanted to get more confidence around that and for management to really talk about it. But when we got involved a year and a half ago, the marketing officer was complaining about never getting marketing, a marketing budget,

and enough marketing dollars to throw at this pursumer market. And she talked about the phenomenal LTV to KAC that she was saying, right? She was basically saying it was infinite. It was like thousands of X or whatever. And so we like that setup. We really like the potential. And we thought, well, you know, if they execute, we can add. It's going to grow organically.

And so for me, Avid is, it's quickly becoming a potential. punch card like it's worth asking is this a punch card investment right can it become a punch card investment right it has a strong product strong competitive advantage right sticky with its core user base it's extremely sticky right it's it's persisted it's existed for 30 years and huge companies have tried and in my opinion they're not succeeding in in destroying their share in the professional market and then there's a there's strong growth potential right there's growth potential went into the cloud editing business where, you know, maybe they can double their ARPU or triple their ARPOO over time, right, from, you know, storage and this cloud

editing business. If you can, you can break it down, it's, there's an upcharge. It's definitely an upcharge. There's also an up charge from switching from perpetual to subscription. They've They've called out, you know, an upcharge there. And so it's worth wondering if this is a potential punch card. And, you know, it's not valued at such, right? It's, you know, I think it's a $36 stock. Management thinks, you know, in 2025, they can make up to $4, right? So, you know, is it's, I think people are obviously, you know,

up the stock. But for me, you know, I think it's justified. It's, you know, people are paying, you know, what I think is a fair price for a company of its quality, right? And for me, you know, at this point, I'm trying to, you know, remember the words of Phil Fisher. You know, you don't want to sell too early. You know, billions are lost by, you know, investors who get out, and, you know, a stock could still be a, you know, very profitable investment long term. So, yeah, those are my thoughts. Is there anything you want to add on EVID? No, I think we covered a great deal, yeah.

So what is your thesis on Angie? Hey, tell money 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. And thank you very much for the insight into Angie. Yeah, happy to. For the end of our interview, I want to ask you about a quote you have on the front side of your material.

Social responsible investing can be highly profitable. What is the theory behind it? Oh, so I think there's a lot of trends, right? I mean, if you look at consumers these days, more and more, I think they're willing to vote with their feet and their dollars behind, you know, socially responsible, right? So it's not just things that are just no-brainer good for them, right? Like an ANG, you know. So, for example, avid, right? In Hollywood, I think you have a group of individuals, perhaps more than any other industry,

who care about environmental causes. And so not only is remote work potentially good for them from the point of view that you can avoid an L.A. Russia commute, but it's also environmental, right? You save on the smog and the congestion and just all those, you know, carbon emissions. So, you know, more so than any other industry, I think that is a potential factor for adoption of a cloud-based editing software. And so when you look just more broadly, right, and I think there's, I have a case study on SoderStream where we talk about the aspects, right, that, you know, consumers care about, right? the health benefit of drinking seltzer versus soda, right? So encouraging more soda, so encouraging more seltzer consumption, right?

In addition, right, and that's on top of, you know, saving, right, reducing our plastic consumption, right? But if you're buying soda at, you know, from the grocery store and it's also heavy to carry back, right? So they did some really interesting marketing around that. I think it's really appealing in addition to, you know, I think saving money, right? So in addition to the convenience of not having to carry all of this heavy soda, containers of soda, you're also saving money. In addition to that, there's also that angle where it's healthier to drink seltzer. And also, you know, it's more environmental. So, you know, it's, I'm not necessarily saying that ESG is the only way to go.

I think there's a lot of great investments to make that are not ESG focused and just strictly just focused on consumer, you know, consumers just getting a better value prop. But I love it when I find a company that is not only increasing the value prop, but doing something that a lot of more and more consumers care about. But it enhances, in my opinion, their growth potential and the investment story there. Coming back to the offspring of our conversation, your business, where do you see pledge capital in five years? You know, I've been very fortunate. You know, the last five years we survived and I'm just, this is what I love doing, you know, on a even say on a, I try more. now to just take time off on a Saturday and just try not to look at stocks now. But it was a hobby for me that became a profession. So I'm just, I'm so happy that I can just continue to do what I'm doing. Hopefully I'm managing more money. What I'm really focused on is just looking for new companies

on, you know, on the right side of change, finding those stocks and really, you know, you know, know, delivering really strong performance for my share, for my clients and, you know, my, my partners. That's my first and foremost goal to do right by them. And hopefully just organically, we're going to grow just because we put up good results. And as people understand, our long-term investment strategy will grow organically. And so, yeah, hopefully that happens as well. But But I'm already very grateful with, you know, what Pledge Capital has become. It's been a wonderful run already. Is there anything you want to add for the end of an interview?

No, except, you know, I'm always, you know, always love networking with like-minded individuals such as yourself. So, you know, happy to chit-chat on, you know, A&G, Avid, the Joint, any other names. You can, you know, find me online. Just reach out. I'm on Twitter at edward.chang. You can reach out to me on LinkedIn. Always happy to connect and share anything, answer any questions, or talk any interesting stocks. This was a pleasure.

Thank you so much for having me on. thank you very much for your time and your insights they were really interesting thank you hope it's helpful bye to our audience bye everyone bye 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