Good Investing Talks - How does Stone House invest super concentrated?

Episode Date: January 29, 2023

Stone House Partners has a fascinating investing approach. Compared to the other investors on this channel, they bring the term "concentration" to a maximum. What does this mean for their performance? The answer is surprisingly good!

In this episode, you can get to know two really underfollowed investors. Mark and Ruffy of Stonehouse have built an impressive track record over time. And all of this, while they're really concentrated in their style of investing. And warm welcome to the Good Investing Talks podcast. I'm your host, Tilman Fersh, and I'm very happy that you're discovering underfollowed investors and underfollowed companies together with me. Before we jump into the conversation, I want to share the disclaimer with you. To sum it up, it says that this podcast is no investment advice and no recommendation.

So please always do your own work. And now, without further ado, enjoy the conversation. And don't forget to like and subscribe to this channel. The audience of good investing talks, it's great to have you back at the podcast. And today we're really having one of the under followed or under discovered investment firms here. Welcome to Mark and Rafi of Stonehouse Partners.

Great to have you here. Great to have you here. Great to be here, Tillman. Nice to see you again. Great to be here, Tillman. Thanks for having us. You're both located in the U.S., I think, on the East Coast. I think Mark is in Florida.

And, Raffi, where are you? I live in Westchester now. Okay. It's very interesting. I'm in Germany, so we have some kind of time difference. And also, like, a heat difference. We already, in the pre-chat, I talked to Mark and told him that we have snow outside. you don't have this in florida that's a good thing there's no snow that's good um but i hope we make

also not only in a cool conversation but also some kind of warm insights into your business and the way you do investing maybe let's start to think about the the stonehouse um you have in your name because your partnership is called Stonehouse Partners. And Stonehouse isn't a typical house, if you think about the U.S. Most houses, they are made out of wood. Can you please maybe also to think in this metaphor, name three points where you think your approach is outstanding compared to the typical house or partnership in investing in the U.S. Yeah, well, I've just, you know, going back to the name Stonehouse,

It's not, there's not much, you know, huge story behind it. I grew up, I love to ski. And, you know, when you're starting out of fund, this is back in 2010 when I was starting out the fund, you write down all types of names that you could choose and a lot of them end up being taken. This capital, that capital, that partners. And I found Stonehouse. It's just a street up in Vermont on a ski mountain, nearby ski mountain where I like to ski at.

And that's where really the history of the name came from. I guess if we had to think about how Stonehouse, you know, plays into how our partnership has evolved, you know, we like to think that we have a very good foundation, you know, and I think that comes from having, you know, where I think I and I talk about often is we're very lucky to have exceptional LPs who really have embraced our strategy. and, you know, allow us to invest the way that we think is correct, you know, to go for the exceptional outcome over many decades, which is what we're really going for. Rafi, what would you add? Yeah, I think it's, you know, naming a fund is always an interesting process. I think for us, our LPs are what allow us, as Mark said, to have the strategy that makes the most sense for us.

And so they are the foundation of what we are able to do. And, you know, I think it might have not been the real. and he named it, Mark named it at a time in 2010, I think it does kind of make sense in the context of having that kind of that strong foundation that allows us to be somewhat unusual in industry, but, you know, it allows to, you know, Stonehouse has now been around for 13 years and allow us to have the success we've had. So let me stay a bit in this idea of the Stonehouse, because when I was thinking about your partnership, it helped me a bit. I once built a wall with natural stones and to build a wall with

natural stones is a tricky thing because we really have to make sure to turn around every stone that it fits in a certain way and then you can build like a wheel wall. Does this kind of like turning around every stone till it fits also describe your process a bit? You know that's a very good way of thinking about it. Somebody Rafi and I never really thought we don't think about our name too much actually. We're just focused on you know the investments and generating you compounding over here. So the name really, you know, we never gave it too much thought. But if I had to think about it, you know, Rafi and I, we do, part of our process is, you know, turning over a tremendous amount of stones. You know, I think that one of our favorite, you know,

this can get into our investment process a little bit, but, you know, turning over a lot of stones, but not doing very much in terms of trading is kind of a key pillar of our investment philosophy. And I think it goes back. One of the key, I think, insights and articles that I, you know, has kind of shaped our process over time has been the, you know, monger's art of stock picking speech. And that to us, you know, in there, you know, talks about you just have to keep working and working and working and hope eventually to have a few insights and find, you know, an idea that or a situation where the odds are just tremendously in your favor. And then when you find those, you bet heavy. and other times you just do nothing in terms of trading. Rafi, what would you say?

Yeah, it's interesting. We, especially at the top of the funnel, we say, you know, to us, you know, a great idea can come from anywhere, you know, to us it doesn't require, you know, saying only can come from somebody with an MBA or some specialty to us, you know, listening to my sister-in-law has been helpful over time and understanding consumer preferences and not that she's saying and in terms of investing just in terms of her own preferences, and that can drive, you know, a research process. So we purposely keep the top of the funnel extraordinarily wide

because we really believe you got to keep, you know, you don't limit yourself at that level. But as Mark said, we are very aware that we only think we, over time, we don't think we're going to be able to act frequently. Therefore, we only, we really need to dig deep and understand, you know, kind of situations we fully understand to believe we have the probabilities is correct to, you know, make to kind of concentrate an investment we like to make. And that goes, as Mark said, to the munger's art of stock picking because it goes to the

idea that, like, you know, just because something's the best company doesn't make it the best stock. And that's something that sometimes people lose sight of over time. So we, you know, we're really in the ideal situation looking for situations, not that we just understand, but we can really see that there's a change happening oftentimes at the company that is often qualitative and we believe will show up, you know, down the road in the numbers and the free cash flow per share generation over time and the market, you know, because it's more focused on near-term dynamics is missing. And that those are the situations that kind of we like to turn over a lot of stones to look for that kind of very specific dynamic that can like drive, you know,

for us an exceptional outcome because we think the probabilities are not correct, are not correctly assessed by the market. Before we go into the analysis of business and your investment, process maybe let's go bit in your business history and the business history of the partnership stonehouse partners mark you've started to build the firm in 2010 what have you done before and what was the reason to start a project on your own yeah um so you know i've always i think since i was a you know um even before high school i was interested in the market interested in business I think sometime in high school I was turned on to the Buffett Letters, which is where I know many people start their journey. And that really resonated with me.

A lot of the stuff that was written in there, you know, to the extent even today, I think about compounding. You know, every day I walk into the office, it's the first thing I see behind me is a chart of what compounding does to a dollar over many years at different rates of return. And it's really the first thing that we look at or that I look at every day. when I walk in, you know, just to maintain that focus on the long-term power of compounding, which I don't think people, you know, when they're starting out, really have an appreciation for. So I would say, you know, then I obviously went to college. I studied business undergrad at Wharton. I think a lot of people when they, you know, I was kind of in that mode of coming out and getting a job either in banking or consulting.

And I did banking, actually, my junior summer in college. I was in a group that kind of serviced the big private equity shops. And we were, you know, building LBO models and having all these inputs given to us to put in there. And I really, what I realized then and I had an inkling earlier on was I really love to be more focused on finding the inputs and, you know, through hard work and research and kind of getting out there, figuring out the input. and the key variables that are going to make an investment work, you know, be good or not, instead of, you know, being given the inputs and building the model that way. And I was always fascinated with public markets, just the opportunities that I have seen out there over so many years. I just, you know, it's hard to think of any place where there's greater opportunity

than the public markets to compound capital. And, but that takes obviously the right temperament. And, you know, you have to have that. And, you know, I just prefer that to a situation I was in where, you know, every deal was negotiated and maybe financing was stapled to the deal. And, you know, whoever had the lowest cost of capital was going to win that deal. I was more interested in digging and doing research on my own. I was lucky enough to come out of college and get a job at a long short fund in New York called forced capital. And, you know, every one who starts, you know, first day on the job, you think you're going to get this Bloomberg terminal and access to all this cell side research. And really, really was actually the exact

opposite for me. My boss, who's a, you know, I learned a tremendous amount from him, came out and gave me a corporate card and basically said, I don't want you in the office. I want you out doing field research and coming up with insights, visiting companies. You know, you're not getting a Bloomberg. I don't want you talking to anyone on the sales side. I want you to come up and, and kind of do this on your own and come up with your own opinions. And I learned a tremendous amount during when the years I was at Forrest, one of the, you know, some of the, you know, the, what was very valuable there was, he was so focused on us keeping digging and digging and digging to get insights.

And whether it was cold calling former CEOs of companies on the phone and trying to try to get insights from them into industries, or just getting out on the road and visiting private companies that compete. I think, you know, getting started at Stonehouse really goes back to one of the first companies that I researched when I was at force. It was a company called Copart, and it was kind of the summer, fall of 2004. And this was a company that is in the auto salvage auction business, which as many of your listeners might know, if you get into a car accident, God forbid, and the car is deemed

the total loss. More often than not, it ends up at one of these salvage yards where it gets auctioned off on behalf of the insurance companies. And I just found this business to be very fascinating. I traveled around the country visiting mom and pop salvage auctions to gain insight into the business. And eventually I went out because Copart was a company and we were researching it intensely. It didn't need capital. It never came to New York. on any sort of road show. They were not promotional. To really get an insight, I went out to the annual meeting of stockholders, which almost no one attends, obviously uncontested. And I went up to the founder, CEO at the time. This is the fall of 2004. His name is Willis Johnson. And he really

spent the next several hours with me teaching me about the business, his history. Funny enough, when I first approached him, we said, oh, are you that banker from New York who was visiting all my competitors because they had called, you know, he's been in contact with every player in the industry for decades. Eventually, you know, they would sell out to him given he was the leading consolidator and best operator. And, you know, we hit it off and ended up owning co-part at my old fund. It was, I think, in the fall 2004, it was a $2 stock now. It's in the mid-60s. So it's been an exceptional business. But I learned a lot about business, understanding unity economics, return on investment. And really, you know, what I really, really great to me

there is ability to partner with exceptional business operators and exceptional people in the public markets, really at the click of a button. Anyone could do it. And so, you know, ever since then and earlier, but, you know, I would say that has been, you know, really pivotal in starting Stonehouse, Not to mention, you know, when I got the idea to leave for us eventually after a wonderful experience there, and I, you know, what everyone does when they started fun, they write down on a yellow pad, you know, like I have in front of me today, everyone that they could possibly go hit up for investment. And Willis ended up being, you know, at the top of my list. I flew out to California to see him and he was a day one investor in the partnership. So that's just incredibly lucky how that happens and yeah, that's how we got started here. Are you planning to travel abroad during the next weeks or month?

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or how would you describe these years? Yeah, I mean, over 13 years you try a lot of different things. You kind of figure out when I, you know, we've had a stint of activism in this fund where we went publicly activist on a company that was way back in 2013. But it really, really taught me a lot of things about investing in public markets and running a partnership. I would say that's something that I've since shied away from principally because it taught me a lot about liquidity. I think that, you know, at the end of the day, you want to be able to change your mind if the facts change. And I'll let Rafi jump into it because he's also been instrumental in our thinking on this. Yeah, no, I think Mark and I talk a lot about,

You know, even though we run a concentrated approach, you know, there's a technical liquidity, which we are focused on because we do believe, you know, you have to be able to change your mind in this business. Facts do change sometimes and you need to make sure there's the ability just from the daily volume of any given security that if we needed to change our mind and exit, that we would have the wherewithal to do so. And that factors in to how we think about what we're going to invest in. And I wasn't around at Stonehouse when Mark did his stint of activism. But obviously at that point, Mark obviously had limited. to liquidity primarily because he had a board representation. And I think Mark has changed his view that ultimately working constructively with management is a very good thing. But if it gets to a point of going activist and you have to limit yourself with that board representation, ultimately is not the healthiest thing for us in terms of having the ability to shift capital and change our mind. We also now, you know, over the last 12 months, we've talked a lot about, about kind of this idea of mental liquidity. Because I think a lot of people, it seems like to us, And we are hyper aware of it ourselves have kind of because they're so public in their names and they're so talk about them so frequently that it seems to us, even when the facts do change, they don't actually change your mind primarily because they've told so many people that this is, you know, a great investment or they told it their partners or whatever it is that they get so trapped mentally in their name that they're not able to change your mind.

And we think that's also a very dangerous thing in this business because, you know, we do think the ability to change your mind is critical as facts, you know, as your hypothesis, you have an hypothesis. facts, you know, start refuting that hypothesis. You have to be able to sell. And so we talk about that a lot of turnities. We think it's absolutely critical for us to be able to operate in a way where we can be concentrated, but also be able to recognize where we might be wrong and therefore not say, well, we totalize people. This is such a great investment.

Therefore, we can't sell. We're kind of become more hyper aware of that over the last 12 months. Mark, if you could go back to 2010 and meet your younger self and tell them some things about how to build an investment business, what would you tell him and advise him to better build an investment business? Yeah, I think, you know, something that I did when I was starting out, obviously you write down all the people that you could approach and try and get investment from. I had no track record on my own at force. It was a one book run by the portfolio manager there, and I was just a research analyst. But I think, you know, everyone is willing to take a meeting

for an idea. If your funds are, you know, popping up every day and you want to get meetings with people, I think what I did, I created a deck on a singular idea. And I said, I cold email, you know, a bunch of fund managers who I thought would be interested or, you know, people that had the ability to invest. And I said, look, I have this idea. I want to share with you. This will show you some of the type of work that I do. It's also an actionable idea. I'm not going to make you sign an NDA, but I just, you know, trying to get your foot in the door, trying to get meetings. Almost everyone will take a meeting for an investment idea. And so that I think is primary, you know, in terms of just getting your foot in the door. I know Rafi had a similar experience when he was getting into investing

prior to joining Stonehouse. And, and then I think, you know, finding the right LPs, I think that is, you know, and you find them, you know, by by reaching out to them and contacting them, especially with a great, well thought out investment thesis. I think that is hugely important in, you know, knowing who you are as investor, the type of fund you want to build and starting out with the right capital base that will allow you to invest the way that makes sense to you. I think a lot of people know what makes sense but are kind of trapped into a certain bucket of type of fund that they have to have that makes it not, you know, totally makes, you know, keep everything aligned. Rafi, what would you say? Yeah, I think it's, it's, I think this is a business of ideas and, you know, I met, I met Mark through a mutual friend in 2010, actually, but the reason I joined Stonehouse was because I had an idea. It was actually a short idea in a company, I believe, was committing accounting fraud. And I believe it was about to break because of an auditor change that was forced upon the company

and that the new auditor was going to ding the company when they had to file their annual report. And so a friend who introduced me to Mark in 2010 actually told me to go reconnect with Mark in 2016 to see if Stonehouse would scale the idea. And it goes to the idea that, you know, when you have a great idea in this business, people will listen to you because that's what this business is about. This is a business of ideas and proving out your ideas and then investing the capital based on assessing the quality of those ideas. So I think, you know, for me, I wouldn't have been able to join Stonehouse

and it's been, you know, now five plus years unless it came from an idea I had on the short side, ironically, because that's not really Stonehouse as MO, but it was from through that idea that Mark decided to make me a job offer. I think Rappi's being modest. He came to see me. I think it was we got together in December of 20, 16 and i think in the first few months of 2017 the stock was down 50 percent i had it on my watch list and i just i said raffi why don't you just come sit in the office we'll figure

something out um you know i had extra space and so now we're more than five years later it's been a great partnership raffi you work before you joined stonehouse at the new york times which is not like the worst address for journalism what made you then even like decide to to go for investing as a full-time job and switch careers. Yeah, so I just, so I actually, so I, I was actually a lawyer when I first met Mark where you were connected. I was a lawyer at a law firm court, Robes and Gray in New York in 2010. And then so at 2016, I was, I was working at New York Times as a researcher for a columnist

named Marine Dowd. And as I was saying, that was a period of time I had the short idea that I wanted to run with. And so I, but I caught the investment bug in, law school, so I was later in life, and I had a great, amazing law school experience and a wonderful time at the law firm, but I did know I wanted to shift eventually to investment. So I was able to kind of, you know, after leaving the law firm, kind of do my own investing for a period of time. But this special idea I had, you know, I really wanted to scale,

and that's kind of forced, you know, kind of me to go to Mark to see if we can make it bigger. But it was kind of like a self, truthfully, a self-taught love affair with investing that that kind of drove me to where I'm at today. It was not, you know, through formal education. But that goes to the idea also. I think that my view on investing is great. And, you know, you know, learning investing, obviously you can do it a very formal approach. But I also think it could be, you know, self-taught.

I think the concepts are very, are very learnable. And obviously, they're hard to apply. I mean, it's a very hard thing to apply. But the concepts themselves are, you know, for anybody, I believe, can learn about investing no matter what their current career is. What kind of journalistic or law lens have you still on when you do investing and that others don't have, that don't have this background? I think what has helped me, it's interesting.

So the research process at the Times, I think I was working for Marine Data, as I said. And what she taught me is, because she's been an exceptional journalist and now opinion columnist for many years. I mean, she started in New York Times in the early 80s. She's been around for a long time. And she tells me, in the end of the day, what we are, storytellers, right? She's a storyteller, and not that she invests, but, you know, she finds, you know, she's throughout her career, wrote an amazing stories about different people and

oftentimes politicians. And when we invest, what we really do, when Mark and I get into our research process, what we're really doing is writing, in our view, kind of a magazine story. And obviously the other day, you know, if we're going to invest, then we put the money down on it, but, you know, ultimately our process involves not much different than the journalistic enterprise of saying, you know, what is this company, what do they do, who are the people, what are the drivers of future returns and write and kind of be able to as if we were going to just write it out into a story for people that are digest and read and understand. And I think the legal side is obviously just a lot.

When you're learning the law and then practicing it, even though I was a short period time on it's practicing, obviously you really have to, your reading comprehension has to go up by a large factor to be successful in law school and at a law firm. And I think it's just kind of that educational process of understanding logic and reasoning and improving your reading comprehension is always beneficial. So I think the benefit for me, you know, it's interesting, is I think by not going through kind of the more normal banking or kind of MBA path, which is perfectly fine place to obviously start your career and go through, I think I probably came with a little different mindset and a little less preconceived notion to what makes a great investment. And I think that that overtime has, you know, helped me in my own unique way being a little bit different than other people. I think by not having such a formal approach, you know, growing up with investing, I think I might come at it a little differently.

I think that's helpful for anybody. I think everybody's got their own path. And I think it's helpful for people to recognize that their own path can be, you know, helpful in the sense that you don't, you know, you want to, obviously, you're not going to, the concepts are often the same, but you don't want to think like everybody else. And sometimes by not, you know, going, being in the same class kind of process as everybody else that helps you kind of see the world a little differently. How has a stonehouse process changed since you joined the firm?

I think Mark would say I've been helpful having a little more cynical approach to, you know, to push back against certain ideas to have a good sounding board, knowing that I look at things a little more cynically than Mark often. And so especially over the last number of years, there's been a lot of things we've studied very intensely, some names that were part of kind of, you know, some of these, the error of certain stocks that were going up but not making any money and kind of making sure, like, you know, that just because something is a good story, like, we have to like, you know, do we actually understand the union economics? Do we, you know, we just, you know, are we, you know, making sure we're not falling prey to kind of the group

think mentality that can overrun some of these type of situations, I think, Marcus, yeah. I think Rappi is touching on one of the key things that we guard against, you know, is, you know, over the last several years, you know, is, is FOMO, frankly, and, and fear of missing out on, you know, we, we look at a lot of companies, as we mentioned, getting back to the stones, we turn over a lot of stones, and we, you know, you have to be comfortable in this business, I think allowing and being happy for and clapping for other people that you may know or other people out there in the market who are making money on stocks that you've frankly looked at and researched and gone through your process, you just can't get there.

You know, maybe, you know, people are falling in love with revenue growth, but not really thinking about long-term union economics and the stocks are working for periods of time. But at the end of the day, we really, you know, have to maintain. very difficult at times frankly is protecting against fomo but it's been great raffy and i you know i think we have a very good way of thinking about that and just being happy for others who can who can make money and things we don't understand maybe let me add before we jump into investment philosophy a partnership question in your partnership what are three strengths you like about the other the other has or free strengths the other has or three strengths the other

you like. I think Rafi, you know, he's a very, as he mentioned, he's a very fast reader. He consumes a lot of information quickly and is able to distill it down to key concepts. He pulls out, I think, kind of key variables that are going to, you know, what we try and do is, you know, consume a lot of information and understand all the different information out there that we can gather, but really distilling down an investment to a few variables is what we do. And I think how it would make sense. So there's so much noise out there and so much data you can collect. But for the way we invest, distilling down investments to a few key insights or variables that are going to make or break is important. I think Rafi is able to identify those very quickly.

And I would say third, he's a very, very hard worker. It's hard to, I think what I've really been so lucky, actually, to have Rafi on board. You know, this is a fund that I started and kind of, you know, you're the founder of a fund. Rafi is not the founder, but I would say he works as hard as a founder and, you know, is kind of, this job is a 24-7 job. And he's kind of shown that to me, that he is, he is, uh, all in on this as much as I am, even though I started the firm. Yeah, with Mark, I think, I think there's a lot of, Mark has a tremendous amount of strengths. I think anybody who's in this industry and has been doing it for 13 years, I think that, you know, there's something, you know, this is a very difficult business for the survival

race not very high. I think, I think there, a lot, there's a lot of reason Stonehouse has been around for 13 years, but I actually think the number one thing. Well, I guess I'll combine a number of things together. But basically, Mark has the exact right temperament for being a portfolio manager. We run a concentrated strategy that means there is going to be volatility. You cannot avoid it. I mean, it's not possible when you run a concentrated approach. And in order to run that successfully and compound money at a very high rate over time, you need to be emotionally able to handle it. And Mark has demonstrated to me over and over again since I started working for him that he has that emotional wherewithal to withstand the volatility, understand that, you know,

you cannot use if you're if you're if you're a forced seller at the wrong time it can destroy years of hard work so you know we don't just you know just because you know if the market's just because you know we don't just say well our stocks down therefore we're 100% sure we're right and the market's not wrong but it's more like you also can't allow that emotion to just force you to sell just because you can't take it anymore and mark you know it's really demonstrated it over and over again and i think mark is is incredibly strong in a sense that he knows what he knows and he knows what he doesn't know. This is a business with a lot of big egos. A lot of people have a lot of success and then think that they know everything about everything or think they have to

be the smartest person in the room. And Mark, I think, truthfully, he's very smart because he knows he doesn't need to be the smartest person's a room always to be successful, that he's an incredibly curious person who wants to compound at a very high rate for as long, you know, as humanly possible. But I think he knows he's able to do that by being a great listener and knowing that he doesn't need to be the smartest person on everything, but there's just a few good insights he needs over a course of years to really generate the return to the Stonehouse has been able to generate. I think it's kind of that combination with a great foundation that allows a, you know, it has allowed Stonehouse to be successful, truthfully, because I think there's a lot of people

who are obviously some of the smartest people around, but a lot of times they either don't have the right temperament or their ego gets so big that they start allowing themselves to think they can know more than they actually know. Do you look for an investing community? Then Good Investing Plus might be the place for you. Here you can make friends with other investors, get feedback on your ideas, and learn and grow. If you're interested in Good Investing Plus, please click on the link below. I'm looking forward to your application.

How do you filter out what really matters in the consumption of information? Sometimes there's this picture used of noise and real facts. It's interesting. I have a funny thing with this at this point because I've thought about a lot because I consume an insane amount of information. And it gives me great pleasure in a sense that even if I wasn't doing this job, this is the way I am for a long time. I just like, I love information. I love, I just love like, and it's almost like meditative in a weird way for me. I know some people say they need the opposite. They need to turn off the noise. But I actually find myself most relaxed when I'm just kind of overconsuming information. So it's kind of a strange thing, I guess, that that's just the way I am. I think. like anything, I think there's a lot of muscles you develop over time. Like an example, just as a concrete example, something Mark and I focus on a lot is marketing. We think one of things that people often, well, I would say miss, but they don't use it as enough of a filter is if a company is spending a significant percentage of revenue on marketing expense and the idea is that someday that needs to lever, I think people don't put a high enough bar of the odds of that

happening. Like it's very difficult thing for a company to, you know, just one day shut off its marketing budget and still grow at a healthy rate. Oftentimes, the reason it's growing so fast is obviously just kind of overspending on marketing. And so this idea years later, you'll be able to lever that we think is something that we often use as a filter to say we can't invest in this company. We just don't feel confident that's going to happen. And the other way, we often find investments now where we find any company that's able

to, been able, obviously particularly on the consumer side, but it could be enterprise as well, grow without marketing. That to us is a very powerful sign of something that catches our attention. from the, you know, the muscle of saying we got to really look into this company very closely because there's something clearly special going on that has allowed to achieve such success without spending a lot of money in marketing and the product is clearly resonating. So it's something like those, it's those type of filters that we kind of, you know, take in so much, but then have these strong filters that allow us to say, okay, what is actually

worth spending, you know, real time on beyond the initial kind of, this is interesting. It's interesting, Rafi. You mentioned consuming information, but one of the things that we actually don't do as a firm, and I think is subscribe to all sorts of credit card data and try and get, you know, short-term type of data on companies, you know, we think, you know, a lot of that would just not play into the way that we invest in even cloud our judgment, just having too much information based on short-term stuff. Rafi, how would you describe that fact that we don't use that? Yeah, I think we've determined that credit card data and any type of hard data like that that's really short-term in nature in our view would actually hinder our process because ultimately we're obviously making, you know, generally long-duration investments

or the idea of them being long-duration, obviously they don't always work out that way. And making long-term decisions based on, let's say, weekly credit card data sales is not, it doesn't match up to us. And so therefore, we think if we, you know, having, you know, I think people, you know, you have to just decide how you're investing. Obviously, if you're investing based on trying to predict quarters and you need to credit our data to even like try to do that. But if you're investing on like, you know, qualitative change in a company that you don't

think actually will show up in the numbers for, you know, a year or more, then obviously, you know, weekly or monthly kind of data is not going to help you. So we kind of come to the conclusion, at least for us, that it would actually hurt us. And we kind of try to always, you know, if you talk about, we consume a lot, but always be aware of where the, you know, where you can go wrong. And I think that's like, I think that's something Mark's actually one of the strengths that we were talking about before, Mark, is that, you know, he's been around long enough to know where you can go wrong. And therefore, we kind of want to, you know, avoid that because the mental side of the business is so challenging. So if we were sitting with one of our companies that we've owned for a while and we're looking constantly at the weekly sales reports or not sales reports, but the weekly credit card data, it might actually make us so emotional about it that it makes us make strange decisions. versus by not knowing it, it helps us kind of keep up more level ahead. Mark, how do you cultivate and grow this right temperament of a good portfolio manager? I think it has to do with, frankly, gathering the right set of LPs and not trying to be someone who you're not. I know that I'm not someone who can manage a portfolio and not ever be down these.

types of things. I know that, you know, the kind of firm we want to build for multiple decades is going to be, you know, a handful of concentrated investments at any point in time and you're going to have that sort of volatility. And when you take on partners who might be expecting something else because they've seen a track record of returns that they want to get involved in, that is to me the kiss of death. I think you have to be at all times, you know, upfront about your process. It's not going to, and you're investment process, it's not going to resonate with everyone. And it's not for everyone. But, you know, the select people that have found us over time, either through referral or word of mouth,

you know, have been the right people. And that to me, because we've had periods in the fund where, you know, there has been quite volatile and drawdowns. And, you know, we've been able to recover from all that, you know, from all those episodes. And I think a lot of it has to do with not having the outside pressure of something that you promised to someone that is never going to happen and then it happens and all of a sudden things go haywire. This is part of investing in Stonehouse

is it's not going to be a straight line. It's going to be a bumpy line, but hopefully over many decades that it's going to pay off handsomely. Rafi, what would you add to that? Yeah, I don't think there's much else to add. I think it's having the right partners, having the right foundation, understanding what we're looking

for, you know, building those muscles, it really does, like, you know, just like the money compounds, it compounds, it compounds, that compounds itself over time, I think, you know, it's really, you know, we're, we're trying to achieve a certain set of a certain, we're trying to achieve a certain thing and having the right people along for the ride is critical because if it wasn't, then it would just, you know, during one of these more volatile periods and it just, we would have to invest a different way and that would, that would ultimately cause problems, you know, for our long-term returns. So as business builders, you don't look for growth in its sake that it's growing,

but for the right kind of growth, so to say? Absolutely. I mean, Raffey and I think about this all the time, you know, that if we, if we have the partners we have and we don't raise another dollar in the fund and we compound this, you know, this compounding chart, it's really quite powerful. But over the next several decades, if we can, you know, keep up solid returns, you know, we don't have to raise any more money. It'll be a great career. I think that's what is the big insight. And I think once you unshaffle yourself from fitting into a certain box that has to please all sorts of different groups, the real light bulb goes off and you can start thinking in terms of producing longer-term exceptional results for people.

Let us jump to a bit more business analysis, investment philosophy. what are important metrics that you look for in an investment so you know at the base obviously what we are trying to do is judge you know the future free cash flow per share of a business and then obviously in our process as I said the top of the funnel we keep wide open but then once we get to something where we think we understand the business understand like how it works and and kind of the basics you know kind of building blocks that you're looking for like, you know, you know, why the returns on invest in capital sustainable, you know, why can this business generate, you know, real wealth for shareholders over time.

We then often go into, we go into a kind of a checklist approach process where the thing we're really, really looking for is, as Mark said, you know, the art of stock picking something Mark refers to a lot in that we want to just say, okay, we figured out this is a great business, but why is it not obviously, you know, valued in a way that's already reflected that, and therefore why the forward return is not so exceptional? So what we really look for when we get into that kind of checklist process is we often find our best ideas are involved in a situation where there's some type of change happening at the company or in the industry oftentimes that changes people frankly but it's usually some form of qualitative

change happening that we can assess in a realistic manner and then what we like to see because this goes to the how high a bar we're looking for we kind of find these change situations that we believe will drive you know a much higher rate of future free cash flow per share than the market is estimating in our view, but it will take oftentimes to develop. But we find management teams that have kind of a, what we've come to term of per share obsession, because oftentimes, you know, if you don't combine the two, the results can't be exceptional because oftentimes people, you know, management teams are not per share obsessed. They know how to build a business, but then they, you know, will over time, you know, create through dilution or other means,

harm your forward return. So we kind of look for those two things in combination where there's some, you know, change that we don't think the market's pricing incorrectly in a management team that really gets that their shares are, you know, that they have a long-term per-share obsession and oftentimes recognize that their stock might be undervalued based on that change and neither is repurchasing the shares ahead of that change or just has enough recognition of how powerful the future is for the business and that they want to make sure the per share value is preserved. About in your framework, how do you think about depth?

Like I personally tend to avoid debt in companies. How do you think about it? That I think, you know, it's a tool like any other. I mean, it's something that I think, you know, obviously too much of it going into a bad period can kill you. So we're very aware of that. But from a standpoint of all, you know, only invest in unlevered businesses,

I think that's not one of our checklist. I think it's not something that will always stay away from as a, you know, litmus test. Rafi what were you said yeah i think we you know it's something to consider obviously you know we don't we don't shy away from companies obviously that have debt on their balance sheet but we think from our perspective it's really an assessing the management's ability to understand how to manage your balance you correctly and that means that certain companies

obviously should have debt and don't and therefore that's actually a knock on the business reason why we won't invest actually truthfully that business is clearly overcapitalized and the the management team, for whatever reason, culturally or other reasons, is actually not per share obsessed. And therefore, they're actually not optimizing the business for shareholders. Obviously, you see that a lot in tech world where you have extraordinary businesses, but the balance sheets are kind of clearly hoarding way too much capital. And then obviously, another side, you've got to be careful that, you know, that you're not,

obviously, in a situation that obviously nobody calling macroeconomic swings is very difficult. And obviously, you want to make sure the business can, you know, even if it has debt, as the ability to pass that, you know, get past any storm. So it's something, you know, we're very obviously aware, but we look at as kind of, when we assess the situation, we kind of assess also management's ability to understand how their balance sheet should be run over within reason. And I think, you know, I think it's hard to say without being specific about any specific

company, but I think it's not something obviously we look at as a negative just because a company is dead. You run a very concentrated book and this with success. I think the reason performance. I saw it was like in the around 20% Panam compounding you did with Stonnell's capital partners concretes to this. But with this very concentrated book that's even below, I think, five stocks your own. How do you make sure that you don't look stupid or don't make a mistake with the investments you do? How do we make sure? I mean, I think concentration to us is more of

an output of our process and an input. I mean, we don't come into the office and say we have to own a certain number of stocks. I think, you know, Rafi and I are completely invested in the fund. We're the largest investors. And obviously, you want to compound our capital at the highest three within reason, brutally reasonable. I think that, you know, it comes back to staying within our circle of competence, thinking about the businesses, not necessarily the stocks, the businesses that we own, the underlying free cash flow that we're kind of owning as an owner of these shares. And, you know, in terms of looking stupid, I mean, that's something that you just have to be prepared for in business. I mean, you have to be willing to look stupid, frankly, for periods of

time. And that, I think, is what separates your ability to make returns and, you know, missing out on huge winners. We talked about FOMO earlier, you know, you can look pretty stupid for periods of time in this business. But at the end of the day, through your research and, you know, building conviction over time, you know, I think there's nothing that, there's nothing like going out, visiting businesses, kicking the tires, touring the facilities, meeting management, you know, different levels of management, not just, you know, your corporate CEO, but go all the way down, head of product, head of sales, you know, all the way down the chain and gaining that type of conviction and investment. That's the way we invest. And, you know, we almost think like private

owners many times of businesses when we, when we buy something. You know, we basically don't think about where it's going to trade in the short term. We're looking out, you know, three to five years typically when we when we underwrite something. Rafi, what would you say about looking stupid? Yeah, no, I mean, it's going to happen. And anybody running a more concentrated approach is it has to be, you know, you're not going to be right all the time. I think goes the idea we need, that's why liquidity, mental and technical liquidity is absolutely paramount for us, paramount for us, because, you know, we have to be able to change our mind if the facts change, and we have to be, and then be able to change your mind,

you have to be able to sell. And therefore, you know, we, that is something, you know, we think about a tremendous amount. So the ability to have liquidity allows you to be wrong and move on to the next idea. It's very important in that. Because the way, you know, I think you can go wrong. a lot of ways in this business but one way is obviously of running a concentrated illiquid portfolio means that you can't ever be wrong and we know our portfolio is concentrated but liquid

mark you already mentioned a bit the the stones you turn around people can you maybe give some more lights because like in your philosophy or in your approach you look for change and usually it comes with people or often comes with people what kind of stones are you turning around to make sure that the change is going the right direction and that you're investing alongside the right kind of people yeah i think you know at the end of the day um you know you you can rap and i talk about often you know expert networks transcripts things like that i think that's kind of table stakes at this point and oftentimes if we see too many transcripts popping up on a certain company uh or doing research on that it's uh sometimes honestly a red flag to us um because it just means people

People are searching for reasons, you know, to try and confirm why they, they, they, they, they, they, they, they, they, they, they, they, they, they, they, they, it's, it's, it's trying to get a real, uh, insight into people. The, the, the, the, and, and I, and I, and I, I've come to realize is that, after doing this, you know, in Stonehouse for 13 years and then prior, prior to that, um, for a couple years at force, you know, everyone can sell a good story. You know, you don't, you don't get to the top of a company, uh, without being a good salesman. generally. You've played politically. You've played well. You've, you know, been able to step up the ladder and you're charismatic. So at the end of the day, we really have to judge people by their actions and not a story they're telling or a, or because they're charismatic. So it's actions, it's results. It's, do we understand decisions they made at different times in their career at prior experiences. And it really comes down to, you know, are you judged on results or what they're telling you they're going to do, you know, with X, Y, and Z? Raffi, what would you say? Yeah, I think it's like, you know, people, as Mark said, people, you know, when you

rise up at a company, oftentimes you're a good salesman. So we have to, you know, it's really the actions of the people and their histories and decisions they make, we judge them by more than, you know, how they sound because oftentimes the smoothest sounding person can often be, you know, not, you know, obviously good at kind of BSing you. So it's really we judge people more by their actions historically and understanding their decisions versus, you know, just saying, well, they sound good. So that means they are going to do the right thing. Because, you know, there's also examples of where you have to be careful because there's some company management that talk very good game on, particularly around capital allocation, but it becomes almost its own marketing thing for the

company versus actually, you know, creating wealth for people. It's a very strange situation sometimes where that's the sale pitch and it's not, but it's not because of their actual decisions. So we try to judge people by the decisions. I think it's, and it goes back to the idea of like while we go deep into a company, you know, we think, you know, if things aren't obvious at a certain point and if you have to like adjust your model a little bit this way, I mean, obviously that that means there's something that you're just not, it's not there. You can't, you can't get that level of precision. And, you know, and I think it's, I saw something funny that somebody said recently that I really I thought was so insightful, but they were saying, you know,

the old man in Omaha outperformed all the TMT funds over the last number of years by buying the one stock they all hated. And that being, you know, Warren Buffett buying Apple stock. And I think it's, you know, you know, you learn so much from Warren Buffett, obviously by his writings, but also his actions. And in the case of Apple, when we look, it's funny to think about that because it was just such a simple idea of what he saw as like a, you know, a consumer, sticky consumer product company that was at that point, at least when he was buying, probably trading more like a cyclical hardware company. And, you know, it took that, it wasn't because he had the best, you know, the most transcripts or the best data. It was just kind of a simple understanding

of the power of the business. And then obviously, you know, through Tim Cook showing that he's compared why did he buy Google or other ones, I think because Tim Cook showed he was so shareholder friendly. You know, he runs his balance sheet much different than other tech company runs their balance sheet in terms of thinking about per share value. So, you know, that, you know, that, that, that, that, that, that, that, that, that, that, that, that, that, that, that, that, that, that, that, that, that really resonated with me, because it just goes to the idea of, you know, what we're saying is that, you know, the simple, powerful ideas and the per share obsession can drive a lot of returns and trying to, trying to, trying to overcomplexify everything, can, can, can make, you know, and thinking that if you read another expert network transcript, that will give you the answer. It's, it's often case the opposite. You guys seem to look for very deep insights in stocks that.

not many of us cover or invest in. But like you already gave this example of the co-part CEO. You were talking to Mark and you did all this work to get to talk to competitors and get some insight also like to get this deep insight and like if you think about investing as a relationship business, relationships and trust form over time. And this is also the foundation to get this deep insights. How do you think about this? this time you need to invest to get deep insights and also the time you need to build trust

and the relationships for these deep insights. Yeah, I think, you know, building trust, I mean, I think that's most primarily with your LP base. I think that's essential in this business. I think, you know, I'm not spending our time building trust with companies that we're going to invest in because, you know, we, while we do like to go very deep, we do need to keep, we can't make like, oh, I love this person so much. I can't sell his stock. That's not something that we ever want to have constrain us. But in terms of building trust, as you mentioned, Tillman, I think what's been so helpful to us, you know, in periods of time, our investors over, you know,

long periods of time and going through different episodes of volatility and drawdowns and coming out of them and having this track record, I think they've developed trust with us and have added during periods of time when it makes sense when we frankly say this is a great time to be adding capital to the fund. And that type of trust is the type of trust we focus on building because it becomes like a flywheel. Rafi, what would you say about going the other way when we invest in companies? Yeah, you know, it's interesting. I don't, I guess in terms of like the management like trusting management is that i guess i'm uh not yeah to have deep insights about the industry and also information that others don't have you have to build relationships and be

with the ear close to it and like people usually in the first talk they don't say you all the pitfalls of the game they play yeah give you all the insights about the dark dark stories or whatever stories i'm not sure we actually have information in my view at least i don't i think oftentimes we don't have it it's not that we have information other people Don't have it. It's more that we assess it differently, the same information, other people have. And that goes the idea we, Mark and I are very focused on not falling credit group three. We often say that oftentimes with the investments, it's like people agree with you later, right? It's like they have the same data, but oftentimes your investment turned out to be right because people come around to it later.

So it's oftentimes that's the situation. And so it's more that we have, we probably rank higher than other people in terms of how we assess cultural. things are companies than other people. And therefore, when we do our research, we often focus on that to maybe a higher degree than other people do because obviously the business quality matters, the industry matters. These things are obviously driving a huge amount of the return, but also the people matter so much. And so we kind of just rate that higher than other people. And then in terms of assessing it, it's a harder. It's a squishier thing. There's no data on, you know, personality types. Right. I mean, this is not like you can just score people and say,

oh, they're going to be good. So I think that comes from a combination of muscle. And And then also recognizing that, you know, you have to assess them based on what they do and not just what they say because, you know, because otherwise you can get trapped into very good sales pitches. So I think that's why, you know, as Mark said, it's more of an output of our process, our concentration than an input because finding these handful of situations where, you know, everything lines up and the company has a per share obsession and the culture and all these things that are, you know, a little squishier all line up in a set way that we really believe we can assess the probabilities correctly of the future freak out. it's it's only a handful of these that you're going to really find so if we lowered the bar then we would obviously have more stocks in our portfolio because at that point you can say this is a good business and a good industry who cares about the people to do okay but to really get the exceptional outcome I think we really think you really need a lot of more things to line up and so it's it's yeah I think I think we we smartly and I think this credit the mark is really focusing

on the culture at companies and the people making these decisions helps us have you know sometimes more insight than other people. You know, people have access to the same level of information. Yeah, I think then, Bradfrey touched on a concept of probabilities. I mean, we're not operating in a world where we're going to have perfect information. I mean, it's not going to happen in public markets. And I think that's something that we like, actually, because we like doing research and we like kind of building these kind of theses get going and you start testing them.

But you're never going to have the perfect information. So you're constantly feeding, you know, different information, you know, trying to ascertain these key variables and then weighing kind of probabilities against price, frankly, you know, probabilities of different outcome against price and building conviction around, you know, why these are, you know, have an exceptional skew, these handful of ideas that we own at any point in time. in your toolbox of working with companies you you don't use the concept of the loud activism anymore but you really want to have companies that are shareholder friendly and sometimes management are just humans and they don't see all the things and you as a shareholder sees things management doesn't see how do you bring this on the table and how do you make sure that there's a certain shareholder friendly influencing and not activism happening i think you know, at the end of the day, Rafi said, I think earlier in this interview, I think he said that, you know, we know what we know and we kind of try and stay away from what we don't know. At the end of the day, Rafi and I have never run a company, unless you can call Stonehouse a company. We are not business operators. I think what we do is trying when we interview management and talk to them, we trying to understand why they did certain things, why, why, why, you know, why this, why that and keep asking why, why, why. And you can understand how someone thinks. And then you can judge.

how they operate businesses or previous episodes in their career, how well, you know, how the results have turned out. But we never claim to have any sort of insight or edge and trying to manage a business. I mean, we're not going to come up with a great idea ourselves in terms of managing a business. We want to kind of find these special entrepreneurs. And, you know, if they're not the founding entrepreneur,

they act like one when they're running the company and think about it as if it was their own. I think that where we can add some value is kind of, you know, behind the scenes, kind of showing them some math on if, you know, X, Y, and Z happens, you know, as you think it might be in your long-term plan that you'd be released publicly and you think, you know, this is what your five-year plan in terms of what you think you can do with this company happens and you do this with your capital allocation strategy, you know what? Your stock at the end of the day is going to be worth twice as much as it would if you

did something else. And either that resonates with people or it doesn't. And frankly, we want to be invested alongside, you know, these great business operators who also can wear the hat of great capital allocator. And I think that it's so important to think about because your outcomes can be so different. Rafi, what would you add to that? Yeah, no, I think, you know, it's, I think Mark has, you know, I think Mark's personality lent itself to very good constructivism, because companies do realize, you know, especially when you become a long-term shareholder, that, you know, you know, that, that, that Mark does have some insights into capital allocation and understanding, you know, like, in terms of, like, what, you know, how to think about your, you're, whether

or not your, your, your stock currently is under value or not, and how to take advantage of that. So I think it's, it's funny, because there's a letter from, I believe it was 1984, a shareholder letter, Warren Buffett wrote, where he talks. about obviously the mechanical aspect of repurchase programs being, you know, it can create a lot of wealth for people if you know if you're able to, you know, repurchase your shares when they're undervalued. It's a very attractive way to build wealth. But he also makes the point that it also, companies that management teams that aren't willing to repurchase their shares when they're clearly undervalued are also showing your hand the other way, which means

they're just interested in other things, right? It's like they're not doing the obvious thing. So, you know, it's funny to think about for us as we talk about the people and the decisions they make, you know, when we're assessing a situation and we talk about the per share obsession, if we're talking to a management of a company and, you know, they're, you know, capitalized in a way and also generate free cash in a way that they could repurchase their shares and they're, and we believe their stocks undervalued because of different things happening and they do, but they won't do it, then that's probably a sign, you know, we're never going to be activists in that situation, but, you know, that is that just a sign that they're not, you know, able to make, you know, you know, the decisions that are, that makes sense to us. And therefore, we're obviously not aligned with the right people. And it obviously goes the other way, too. When you talk to a management team that might not have that in their toolkit, because it's just not something they grew up understanding or not, you know, there's not just their business people running businesses.

They're not thinking about a capital allocation that way. But when you talk to them and then you explain it to them and then the light bulb goes off in their head and they realize that this is how big of an opportunity is to take advantage of the current situation, given the things they're doing on the business side, that to us is obviously a great sign the other way. Wow, this is, this is like, you know, the market hasn't picked up how shareholder-friendly and this management team is. They recognize the things you're doing the business are going to have big impacts on the future operating results and they're willing to buy back shares ahead of all these changes. You know, that to us is a powerful indicator the

other way. So it just, it's, I think we are very willing, and Mark, particularly is very well with the work constructively in management to help them understand this stuff. But it's also a helpful a way for us to assess, you know, the, you know, assess their, you know, kind of like willingness to be good stewards of capital over time and therefore whether or not it makes sense for us to, you know, be invested. Can you tell us a bit more about like how you mark or maybe Rafi as an observer, like how you work with management in this sense? Yeah, I think, you know, it's, it comes with, you know, time. I think everything, uh, you can't. You can't, just happen overnight, but I think over time, you can, you know, we've made presentations to boards,

we've written letters, and we've had different meetings about capital allocation at our portfolio companies. And at the end of the day, it's just that. I mean, it's literally, you know, presenting our ideas, you know, we're not coming up with any sort of operating plan that's so far, out from what this management team thinks they can do, given all the stuff they release publicly to investors. It's just a couple, you know, variables around the edge that could make a big difference. And that's really it. It's, you know, it's, and you kind of can see pretty quickly whether their light bulb goes off, you know, because we do want to invest a long time, alongside aligned owners of shares themselves who have a significant portion of their net worth in the

investment because we're so concentrated and we have our net worth in the fund. Any investment we're making, we're putting a significant portion of our net worth into the investment. We want to be aligned with people who have the same, obviously. So if they can't see pretty clearly how it could be enhanced or through some suggestions, maybe it's not the right team to be backing. Maybe they're kind of marching to a beat of a different drummer, or they don't really believe kind of the projections that they put out to investors over time.

Rafi, what would you say there? Yeah, no, I think it's just a good way, you know, way, truth of it's a good way, you know, I guess you can argue, and you asked me before about, like, where kind of like our information edge comes from in those situations, we, you know, truthfully might be able to gain an edge. over other investors where we're able to like be in a situation where we can you know be in their room explaining some concept to management and the management just you know it's not that they can't disagree with us because obviously you know that that's actually not necessarily a bad thing

I mean the mission should be like oh you're right but if you see that they're just not don't have the kind of the the per share obsession then it's just like why why are we bothering with this investment I mean it might be fine but what is it really going to are the odds of it being extraordinary because it just goes to the idea that public markets are a funny thing. Companies, the way they get built over time are so interesting to study. And, you know, there's nothing wrong with investing in a company that's probably more bureaucratic, you know, in its nature. But ultimately, you know, Mark and I, funny enough, used to have kind of, I believe, a watch list. I forgot what it was, it was an interesting kind of metric.

What was it again, Mark? It was kind of like the crazies. The crazies. it was like kind of these very unique companies run by individuals who, you know, people either think are amazing or think are, you know, nuts in a bad way. So, you know, it's not that we initially only want to invest in those situations, but it goes to the idea that you want to, you know, to really get, find in our view, exceptional investments. It often requires a culture of entrepreneurialism at companies that, you know, people want

to truly achieve great things. Because oftentimes you're at a company where everything's fine, everybody can keep their job and get their nice salary and you don't have to try that hard. And that's not necessarily the worst thing. It's just not to us going to be probably the best investment. And therefore, you know, there might be a good investment for somebody who's like, you know, because of whatever reason it might be a short-term good investment. But for us to really create long-term wealth, it's the odds are not the same.

I think that's something Mark can talk about as you learn from Willis Johnson so much at Copart. You know, obviously he was the first investor in Stonehouse, but also Mark, I think over his career and I go say idea of people and culture realize that not only was there, he talks about it to me endless thing because it's just such a powerful example to him of Copart being an exceptional business, but the people and the culture were just absolutely exceptional, but you couldn't really fully understand that unless you got to know Willis and his team. In this list of crazies, if you don't have an answer there, it's fine.

How do you just think crazy, bad crazy and good crazy? It's a fine line, that's for sure. I don't think, I don't know, Mark could talk more about it. I don't think we kind of like, we didn't like do an assessment afterwards. It was more just like kind of like, admittedly if you looked at list, it would be a lot of obvious people. You're going to guess some of them might be because some of them were quite famous. It was more just like the clear examples of public companies where there was very ambitious people running it who were out on what I used this term, like, you know, kind of on the spectrum of like doing things to their own, their own way and just didn't care about people's perception of them. And so we didn't necessarily say it was good or bad.

It was just saying these might be interesting companies to look at because they're really doing things quite differently. And oftentimes, truthfully, it goes back to a concept we talked about earlier. Oftentimes those companies, if you look at their marketing spend, were actually quite low because the, you know, it was this kind of product obsessed type of people who were more obsessed with the product and driving demand through obsession over the product versus driving demand through buying Google ads. And so, you know, kind of they fell in that spectrum too. so you do us it was an interesting list in the sense of just thinking about kind of that metric of like how crazy is your CEO it's not I don't know if that ever made on a checklist exactly but it's kind of an interesting thing about how much time do you give yourself before actually investing like stuff let maybe put it in the picture again from the first stone you turn around

turn around to like the final investment stone you start rolling yeah I mean we we keep a running watch list of probably 30 or 40 companies that kind of gets sifted. It's like a triage every week we go through and try and see where we should be spending our time based on price and probabilities that we've done research on companies. And then sometimes something happens. There's some change that, as Rafi mentioned, that we find and we just have to get ramped up very, very quickly and doing enough work to get us to the the place will put, you know, money down and say that this does make sense based on the

imperfect information that we have. Again, you're always operating in a world of gray. I mean, you're never going to get to a place where, yes, I know I'm buying this today. And I know that the stock is going to be up, you know, five X from here at that point. It's kind of weighing probabilities based on information you have at the time. And sometimes you can gather that information and get there very quickly that this bet makes sense based on, you know, the price and where you think it could happen if X, Y, and Z comes out and sometimes, you know, to build conviction around larger positions, you know, it takes,

it takes years, frankly. Rafi, what would you say? Yeah, I think it's just like the joy of constant research is that you build muscles to the point where you can act quickly, but it's not really that quick because it's just you're kind of built up enough muscles that you know an industry at this point, you know, you know enough of the people now. It doesn't mean, so it really depends on situations. Some situations require us to spend, you know, a long time before we're able to invest and other times we've just been studying the industry and for a variety of reasons or studying the company and the people to be able to make that investment quicker. So it does depend on a situation, but I think the joy of this business is you don't swing a lot, but it doesn't mean

you're not practicing every day. And just the practice is just learning every day about different businesses and different people. And it allows you to kind of, you know, when the pitch is coming over that you understand to act quicker than, you know, to act, you know, not quickly because in a sense of like immediate, but not feel like you need to spend the next 12 months, you know, reading every document that's ever been written about the company to make the investment. Yeah, I mean, if when we build a model on a company, you know, if we have to go out, you know, a certain number of decimal places to say if this is good for us or not, I mean, it's definitely not good for us. Precision in that case is the enemy.

I think that, you know, it has to kind of click before that, that this is, that this is something that that makes sense to us. How do you make as a, as true in a partnership, make sure that you control and challenge yourself or each other so that you don't come off the road or that you don't make mistakes and run into biases? Yeah, I think we, I think Rafi have a very, very good working relationship. I mean, he's probably the first person I speak to in the morning and the last one at night before I go to sleep. And I think we've just developed over time the ability to be very honest with each other, you know, pointing out things that don't make sense or, you know, running into different biases that might be out there. We're constantly kind of shooting this back and forth and having this discussion about stuff. With your approach, you're looking for change that isn't seen by the market. But if this change gets seen and the positive impacts it, usually it leads to a certain multiple expansion.

With what kind of multiple expansions are you like fine to have in a certain stock? Because it's usually a nice thing that drives returns if the free cash flow multiple goes from 5 to 15 or something like this. where do you see there's an overexpension for you? Yeah, I think, you know, Rafi and I, what we constantly, you know, I think back to some recent examples, you know, we're constantly focused on the forward IRA of an investment. We don't kind of underwrite multiple expansion going into an investment. If it happens, that's great.

We kind of focus on what is kind of in management control, which is operating the business and kind of, you know, what is the, obviously, free cash flow coming out of the, the business over time that we can think about. So multiple expansion doesn't go into our thought process. If it happens, you know, that's the double tailwind. But I think, you know, always focusing on the forward IRA, you know, if something is, it was trading at a certain multiple and I was trading it twice that multiple, you know, how like, and it comes back to probability also, how, what's the probability that it's going to go to three times the multiple it was trading at previously and kind of

keeping that in mind and then also keeping in mind everything comes back to thinking things like a private owner of businesses like would you want to hold on to a business if you had full liquidity at you know if you can suck out this much cash over time and get or get paid this much today for it versus you know what we were buying it previously so it just comes back to that you know probabilities thinking like a private owner and understanding that you know the beauty of the public market is you do have liquidity. I think sometimes that's, you know, something we need to, obviously investors, you know, can get, you know, as Rafi talked about, the two types of illiquidity that we think about, you know, that's the beautiful thing. Rafi, what would you say?

Yeah, obviously when we're underwriting that, you know, we think there's a change happening, and often that change is going to mechanically increase the return on invest in capital of the business and then ultimately go back and do any type of analysis and when that happens, the multiple usually expands if the market believes that's a sustainable change and return on invested capital. So we're not unaware that if things play out as we expect at the multiple expand, but we don't underwrite that going in.

I think for our sense, as Mark was saying, we've got to make sure if we're lucky enough to find situations we invest in where the return on investment capital obviously goes up and then obviously the multiple expands, that's obviously going to be a very good outcome, but then recognize it's like, let's not fault, just because we believe, you know, you don't want to fall in love with the situation to the point where you don't realize the forward IRS to collapse because there's been

investments Mark and I have worked on together where we are shocked by the quickness of the market to re-rate the company based on something we assessed. And in those situations, you know, you really want to be honest with yourself about what are the realistic FRRs and therefore, you know, you have to be able to sell in the situation. And it's hard. That's, you know, I think some people will say in this business, selling is sometimes hard than buying. And I think that, you know, because it's so easy to say, say, you know, like, oh, you know, you can just fall in love with the manager team or the company and say, I know it's a little overvalued now, but I'll keep holding.

But I think just being constantly realistic about what reasonable forward expectations are is helpful. And I, you know, it's funny. We also talk about a lot about, we've been focusing and talking about, I should say a lot about industries where we don't expect the market to ever get so excited about the business from a multiple perspective and how that itself can be a powerful thing over time for compounding because if our assessment on the quality and duration of the business is correct, then oftentimes management does have this tool where they can, you know, be constantly

repurchasing their shares at attractive valuations. And because obviously one of the problems obviously companies run into is that eventually if they're generating a lot of cash and their stocks trading at a very high multiple, what do you do with all that capital? But, you know, there's certain industries actually, if you look back historically, where, you know, the multiple has stayed very reasonable and management recognized that there. they're just in a very good business and have just basically retired a significant amount of their shares over a long period of time. So it's interesting to think about. So obviously we just always want to honestly assess the situation and be honest about the forward IRAs

because it's very easy to just follow them up with your name and just say, I don't have to sell it even though things going forward are not going to be as good. Aside of the forward IRA, why do you sell? What are other reasons? I think, you know, if you write down your, your reason for owning something, and that's changed, like, for example, if you are, you know, believe that a new management team has come into a company and they can do X, Y, and Z, or some sort of change that you're, you know, or after I mentioned, you know, a lot of what we do involves around change that's not kind of recognized by the market yet. If any of that kind of goes backwards and or falls apart, I think that's a big. signal for us to sell. And secondarily, it really does just come back to forward IRA. I mean, that to us, you know, if you have a situation where you have done all your work, you're excited about the opportunity and your checklist, you know, things really line up. Again,

we don't make that many investments. So we generally invest where things really do line up for us. And that, you know, some of that goes wrong. There's just no kind of reason to hold on, you know, when there's other stuff to do with the capital out there, you know, if your thesis breaks, you have to be honest with yourself. And I think Rafi is very, very, very helpful in kind of always, you know, testing each other and making sure that the reasons why we own something still exist. Yeah, thesis drift is very dangerous in this business. And it's something Mark and I had talked about before, about just the honesty we need to have with each other, whether whether it's my, the idea sort of comes from me or the idea of someone from Mark,

you know, if we believe X, Y, Z and then the facts are not playing out that way, you can't just be like, well, X, Y, Z didn't play out. And it's the next, you know, we're on to the next, you know, letters. You know, it's, you know, we have a thesis and the facts are not going against it. We, you know, we have to be willing to recognize that you can, you know, moving on to the next thesis and holding on just because you're being hopeful is not, is not a good strategy. So you now, as one of the, my last questions, so you have this 12 years of experience

working on the foundation with strong partners at Stonehouse. With what kind of partners does your approach work best, like from the investors in your fund side? Right. I think people, you know, obviously that, you know, our results, you know, are lumpy. And so people have to be prepared to accept periods when their monthly statement is not what everyone wants to look at, frankly. And us, you know, Rafi and I being the largest investors in the fund, we, you know, definitely feel those periods just like everyone else. I think it's you have to have, you have to come into our fund.

And I think that that is what people who have selected into our, into our partnership, knowing that, you know, it's not going to be a straight line. and kind of understanding that process and, you know, it takes time to build up that level of trust with us managing the capital. Ravri, what do you say? Yeah, I mean, people who, you know, it's the limited partners who just recognize that obviously they're not going to invest all their capital with us. I mean, and so they recognize, listen, obviously indexing is a very good choice for a lot of people, but if you choose not to index, you know, investing in a lot of different managers

that are all diversified ultimately is going to get indexed like returns with higher fees. I mean, it's mathematically impossible not to at some point if you're invested in with a bunch of managers and they're all very diversified. So our investors have self-selected us because they're looking for people who are willing to concentrate in a handful of ideas that resonate with them for a variety of reasons. And they realize that the long term couldn't be quite good, but quite lumpy. And therefore, like, you know, they're not, they kind of go in immediately with the right mindset, you know, that they rather earn the higher. lumpy return, then try to get the smooth lower return. And by finding those select handful investors who think like that enables us to succeed because we don't, you know, when we, you know, we have a month that's not great,

which is inevitably going to happen when you own, you know, you only own a handful of positions. We don't get any calls. Nobody's, you know, nobody's, you know, nobody's, you know, beating down our door saying what's going on because they have the right mindset going into the, into the, into investing. And I think Mark's approach to transparency with limited partners resonates a lot with them and that they you know their transparency is very very you know very is there for them and therefore it helps them understand our process my last question is always or is the offer to add something we haven't discussed is there anything you want to add yeah i mean i think i think

it's uh you know essential i think in building up stonehouse the last 13 years um you know transparency uh both with our partners and kind of the um you know, companies that we invested in the management teams that we meet. I think that's been so critical to what we've done. You know, we don't get many inbound calls from our LPs when they want to know about stuff. They wait for our letters and stuff. But, you know, we're always kind of reaching out, updating people, letting them know our thoughts of, you know, our LPs in the fund. And I think that's been critical to building trust and getting that flywheel going. what do you say?

Yeah, as I've been with Mark now, we talked about five and a half years, and I think it's a testament to Stonehouse and Mark that, you know, whatever, with the level of success, Mark, has been able to achieve. He hasn't changed his approach in terms of how he thinks about people and the way we should communicate them. I think it's an important lesson because, obviously, you know, you start off and, you know, you don't have a track record, and obviously you might act a certain way, and then some people gain a certain level of success, and they might change their attitude to how much they

to communicate with people just because now they're at a different point in life but i think mark because it's just who he is has stayed the same and i think that's been incredibly important in terms of the durability of stonehouse and thank you very much for the insights into building stonehouse and turning around money stones thank you very much for coming on it was a pleasure to have you and to the audience thanks for staying and bye bye to the next episode bye thanks to me