Good Investing Talks - Soo Chuen Tan, what have you learned building Discerene Group?

Episode Date: October 19, 2022

Together with his team, Soo Chuen Tan has built the global Value Investing firm Discerene Group. They have scaled the firm to a respectable asset manager. In our conversation, we discussed Soo Chuen Tan's builder story and his investing approach.

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And now, enjoy the video. Hello, audience of Good Investing Talks. It's great to have you back. Today I'm welcoming Sue Jen of Disarine Group. Sue, you're based in Stanford, Connecticut. Am I right? That's right. And we've met through a guest of mine I had on the channel And it was quite interesting as he introduced me to you.

He said, you're his mentor, which is quite interesting. And so I thought I would start this podcast with an question taken from this mentee of you and then build a bridge to the topic of mentorship. But let me first post a question of your mentee, who was also on the channel. People could guess in the comments who it was, but we will see. You're investing globally with Disarine Group and out of Stanford, Connecticut, where you're based. Why do you follow a global approach and not only focus on the US or a certain other geography with your firm? So, Tillman, thank you for having me on the channel as an honor and privilege.

My compliance team asked me to read out this disclaimer. So I want to start by saying that our compliance policies restrict me from discussing performance in a forum like this. and our complaints team asked me to point out that nothing I say is an offer to sell or solicitation to buy any security, such offers will only be made by private placement memorandum. So I got that out of the way. Greetings to the team, my best wishes. Just to answer your question on global investing, as you know from our previous conversations, I'm a big fan of Buffett. You know, I love really investing as a craft. You know, the reason

for doing global is, you know, if you cannot go back in history, you know, when Buffett was managing capital in the 50s and 60s. The world was a very different place. We went through Paxson Americana. The U.S. developed quite a bit. A lot of wealth was created. A lot of wonderful businesses were created. Now, when I started a firm was 2010 and, you know, the world's a different place. Beres to trade had come down. It's a much more global place. You're interesting, you know, companies being built all across the world. Yet you still had cultural differences, language differences, time zone differences, information and differences. Capital markets were not that deep in different parts of the world. They still aren't that deep in many parts of the world.

And it was interesting to me to be able to apply value investing principles across the landscape where so much wealth was created in so many parts of the world, yet, yet there's so many asymmetries. And that was kind of interesting to me, and to take on that challenge or be able to paint that canvas, given that, you know, we now had the technology and we now had, you know, communication tools to be able to invest globally. Before we take a deeper dive into your Westminster approach, I would love to follow up a bit on the mentoring side and why you decide to do take a role as a mentor for other investors.

So what's the reason for this? Yeah, I think it just comes naturally. I've been very lucky to have had mentors myself and just going all the way back. You know, all in all our cases, our parents are our first mentors. I was lucky that my parents were natural mentors, both of them taught physics in high school, the high school teachers. And in my childhood, I grew up, and you had so many just students coming to our house, you know, after school, just for help, help with, you know, career advice, academic advice, going through physics, going through career decisions, university decisions, academic decisions. My dad in particular loved kind of helping high school students out, figuring things out in life and maintain those relationships over long periods of time. You know, one memory I remember a lot from the childhood.

is we would sit around waiting for him for dinner and he'll still have students in his living room and he'll be talking, he'll be very animated. And then my mom would kind of clap the plates and clapped the balls and hints that it's dinner time. And he would just ignore it because he wants to talk to his kids. And he enjoyed doing that. So that natural idea of having mentors and building mentorship was something I grew up with. And then of course I left Malaysia. I went to the UK and then I went to the U.S., you know, the whole world of first business where I joined McKinsey and then if investing was new to me. It's not a world that I live in. And I now live in Stamford, Connecticut. The town I grew up in is very different from Stamford, Connecticut. But I've always been lucky

to have had people like say, hey, let me help you, let me coach you, let me, you know, kind of, you know, kind of be a sounding board. And I was a very curious person. And so, you know, build out these very natural mentoring relationships. And I've benefited from that my whole life. So it's very natural now to actually kind of have those same relationships. And for as long as I can remember, I've had that. When I was younger, it was folks from Malaysia reaching out and say, hey, I want to, you know, I want to go to college at Oxford.

How do I do that, et cetera? Later, you know, kind of analysts will say, hey, I want to pursue a career investing. How do I do that, et cetera? And then even later, it's like, I want to. to start an investment firm. I want to start a partnership. How do I do that? How do I think about it? And it feels good to have people travel with me on this journey that we call life. What kind of people have been mentors for you in investing? Oh, there's so many. And I'll be because I don't think there's a big gap between business and

investing. So my earliest mentors were people I work with at McKinsey. And they're not necessarily stock pickers, but the business people, right? So, you know, one of my earliest mentors was a partner at McKinsey. His name is Pramath. I work with him when I was like 23 years old. And he gave me a, you know, he was a leader in a very real sense. He let people from the front. He kind of showed by example. He took an interest in people. And he treated people in ways that made you feel like you want to, you want to do good things for him. You want to follow him. And, that he does that by creating autonomy, creating circumstances where you have autonomous goals that you strive towards, they are difficult, but are kind of achievable if you

kind of apply yourself out to it. Those are the best kinds of mentors, I think, and also give you the rope to kind of, you know, be creative and be your own person. So, so, you know, kind of the way he let people, the way he let teams, it's not necessarily an investing setting. So at McKinsey was an investment firm, but the ability to leap from the front and the ability to kind of cultivate and build people. That was my, you know, kind of first professional experience. My first investing job, I work with a guy called Richard Hurowitz, who, you know, still remains a friend today. He was great. He was very bright. He was very intense. He was very structured. But he also had a mentoring gene, which is great. It's not all good investors that have that. He would take time

away and kind of explain from first principles why he did what he did, how he kind of thought about. So that the process of it, how the sausage is made, how the how the thinking goes, was just a wonderful thing that he was able to do and, you know, what were friends up to today. And this, you know, this was my first job, you know, out of business school and I knew nothing about investing. And then through my investing career, there's different people who have taken an interest, different people that I consider friends. You know, the late Charles DeVos, who ran IVA, who's kind of passed away, was a wonderful mentor. We talked about investing. We talk about building a firm. We talk about, you know, kind of entrepreneurship.

We talk about how value investing has evolved over time. And, you know, the beauty about mentors is they take time away and they don't make you feel like it's an obligation. They make you feel like they actually want to spend time. And then as I've gotten older, you know, your mentors become your peers. It's not just kind of people who are a generation before you. because you're traveling on a common journey and, you know, we don't have the answers to everything. Your peers, whether it's other money managers, you know, kind of, you know, people call me mentors,

I will say the same thing about them, because you're traveling on the same journey, you share experiences, you go through good and bad times, and in times where you feel like, I don't know all the answers, reaching out to people that, you know, kind of can be a sounding more to you and quite a few of them. And then, you know, as we've gotten more LPs over the years and built, you know, generational relationships with them, our partners, our LPs become a mentors. Because they've seen so many firms.

They've seen the good, the bad, they've seen how firms fail. They've seen how organization structures feel. They say cultures, they see, you know, bad decisions made. And they become mentors. They become some important. So it's kind of we evolve in a career. The people who are mentors actually kind of widens. and yeah and you know that's you know that's the journey i'm on so it is more like a flat hierarchy

in mentorship or is it like a certain levels up and down or how would you describe this up and down so i still have mentors today that you know kind of what the generations before me you know have professors mackenzie partners uh people that i work with when i was younger and now we have 20-year relationships and more, right? And in some cases, some of the folks I work with have retired. Some of them are still, but they're still mentors. And the benefit of those is, you know, get a different season of their life. So you're not just talking about professional mentorship. We're talking about life. You're talking about priorities. They're talking about how you spend your time. You're talking about, you know, kind of deeper questions on what is the good life.

And then you have peers who are in similar stages of our life as we are, you know, kind of work, I'm now 45. I'm halfway through our life. We're talking about, all right, we're now at this stages of career, what does the next 10 years look like? You know, what are the things we struggle with? And sometimes it's about, you know, kind of building an organization. It's leading people. Good stock pickers are not necessarily good managers of people. How do you lead people? How do you create incentives of people? How do you, you know, how do you create conditions by which people can flourish and having those conversations? So those are peers. But then, you know, the people who are younger than me, who have now worked with me for 10 years and more. And often, they have a

different perspective on my own strengths and weaknesses. And they can be mentors too, because, you know, you realize that you don't have the answers. I mean, that's true of anyone in life. And so they've seen me, you know, make decisions. They've seen me make bad decisions. They've seen me, you know, react poorly to a certain stress environment. And then, you know, because we have the basis of trust, they can kind of give me feedback on how I could operate differently. So over time, it becomes a multi-generational relationship. So you like open feedback in someone who says you in your face that you're wrong. Oh, absolutely.

So, you know, you're German, being blunt is great. We are just used to it. You're wrong. In Asian cultures can be very polite. So, and, you know, and culturally in different parts of the world, people give feedback in different ways. But, I mean, it's not just me. I think, I think we should go through life. think, you know, surrounded by people who feel like they, they care enough about you to tell you

you're wrong. Because most of the time, people just don't care. Like, you know, you're wrong. So what? You're going to deal with your own consequences, right? Yeah, it's sometimes also like, yeah, even for Germans, it's sometimes not that easy to say someone is wrong or just like, you don't care enough that it's, that this investment you do because also it's not like the typical thing.

If you say something good, like, it's nice. but if you criticize people or like, not in criticise, but if you certain time attack them, it's not that easy in the social trade. I mean, you have to care enough about someone to actually take time away and say, you're wrong or here's how you can prove and actually take that risk, right? There has to be that basis for a relationship. You don't walk around telling people that you don't know they're wrong or mistakes and they make. So almost by definition, it's something that.

that comes from a place where someone actually cares enough about you to do something like that. Imagine one of your mentees would ask you what you think about the current investment climate and how it influences the chances to find great businesses and stock picking. What would you tell him or her? A mentee. I think, and I'm a value investor. So I think this is a great investing environment, unsurprisingly, for value investors. You know, every sequential crush of a market meltdown or sell down sounds like a spring of opportunity.

And for obvious reasons, you know, as value investors, you know, we think of businesses, businesses. They're not stocks. There's an intrinsic value to every business. And when stock prices go down, the gaps between, you know, market price to intrinsically goes up. that's just a natural thing. Often is the idea of the difference between, you know, the market as a voting machine and the market is a weighing machine. You know, the value of a business is the value of the business. And you know the business is going to go through good times and bad times. That's natural. And that's when a gap kind of opens up between, you know, the price at

which this business are being quoted at and their intrinsic value. And by the way, the interesting value includes good years and bad years. It's something to be expected. If the gap opens up, As a value investor, it's the opportunity to be the underwriter of the business. So you say, at this price, I'm willing to buy it. Give it to me, I'll buy it. I don't care if it trades down more. I'll buy more of it. The business is the business.

I appreciate the business. And being that underwriter, when there's uneconomic sellers, when there's fear, when there's a fog of uncertainty, that's the time when value investors shine. So short answer, great time to be a value investor. Be patient, be contrarian, think about the fundamentals, and play up. offense. But where would you tell the mentee that she or he could be wrong? Because like a crisis also means like there could be value traps out there and risk that maybe you miss if you're young. Yeah. So if you're young, I and it's a great question. I think investing is a journey.

I think that, you know, a lot of folks these days, we live in an age of, you know, instant gratification. You want things fast. You know, people want to become a good stock picker quickly. People want to swing very hard at things quickly. But really, investing is a journey, you know, kind of as you go along the journey, you build on your foundation and you get better at better, right? So it is dangerous, I think, to try to swing at things, you know, if you don't have the patent recognition abilities, the judgment, the foundations to be an investor. And so my advice would be for folks like that, be patient, like, you know, kind of, you know, we have a long life. You know, hopefully all of us have a long enough life that in the fullness of time, we get to be able to get better and better our craft.

So don't be in the hurry. But for folks who have those foundations, being contrarian and keeping a level ahead in a time like this, it's wonderful. You talked about value traps. Value traps happen all the time, good times or bad times. When markets frothy, when markets are in the dumpsters, there will be value traps. And when you say value traps, businesses that look ostensibly cheap but not actually cheap at all, right? So, you know,

something that trades a low P.E. stock that's actually going to go out of business, stuff like that. Those, you know, businesses will always be around, both in 40 times and in good times. I think it's actually more dangerous in

40 times. You're more likely to get into value traps when valuations are very high, generally speaking, because when that happens, then you look at something that looks ostensibly cheap. That's the only thing. you can buy in a time when there's more value generally valuations are cheaper you're more likely to buy better businesses at a reasonable price because they are available for purchase a

reasonable price so they also actually kind of in the value tribes are actually lower in you know bad times than in good times so again the distinction is between value which is the net present value of cash flows and the price which is where the where the stock trades at coming back to your first answer on the dmenti question what is the the level you have to play in this situation where you want to play offense as a value investor the level you have to take on defense like how much do you have to balance offense and defense in the situation where things look cheap is it still first looking at defense

that you never lose money or is it also like how you do how do you balance this Yeah, I don't think there is a balance, meaning, you know, I think the perspective of a value investor is that you underwrite every business on, you want to buy it with a large margin of safety. That's embedded into the investment. What that means is that there is actually a free lunch, right? So when things get cheaper, the marginal safety for the investment actually gets bigger. But your potential upside is also larger. It's a little bit counterintuitive from the perspective of modern portfolio theory, but that is kind of what value investors believe. So what that means is the same decision that's both offense and defense. When you buy something with a big margin of safety, you're also buying something with high prospective returns. And if it gets cheaper, if nothing's changed on the underlying,

then your margin of safety has just increased, and the odds of permanent capital impairment has become lower. and so you should buy more. So it's the same decision. So when you're buying more of a business, when it gets cheaper, that's offense because you're trying to generate returns, but it's also a difference because you've kind of baked in the margin of into investment.

We generally don't believe that there's an independent decision of risk management outside of the decision to figure out what the downside of a business is. And that is, you know, value investors are very aware of risks. You're very aware of where things can go around. You're very aware about all the ways in which you can lose money on an investment. No investment is risk-free. No business is risk-free, but you're just aware of the risk, and you're on the right of the risk. And you say, you know, what marginal safety do I have? If I wake up tomorrow on the front page of the Wall Street

Journal, everything I worry about actually happens. In that's the end of the world, how much money can I lose? And you bake that into your numbers, you bake that into your downside. Once you have that, that's your margin of safety. So, so, you know, in an environment like this, And often, it's not just like this, go back to 2020, go back to, you know, other dislocations. You often have a fog of uncertainty. Things happen, things, you know, kind of, there's uncertainty about public health. There's uncertainty about economy, uncertainty about interest rates and uncertainty about capital markets. That fog of uncertainty was always there. It just becomes more vivid in those times. And that, you know, kind of range of outcomes and therefore uncertainty is baked into our downside numbers, even when that is not front and center for us.

And so then when you make a decision, it's a really big turn. And then you can confidently step into the breach and say, okay, now, you know, at this price, we're willing to take those risks. So let's reimagine the conversation you have with your mentee. And this mente wants to build or is already building an investment firm. And what would you tell him or her about building investment firm and this challenging business climate we currently in? Yeah, I started this in 2010, in a perhaps even more challenging investing environment. So the advice I'll give my mentee is the same advice I gave myself when I started the firm, which is that when you're trying to build something over a 50-year period or more,

which is kind of what I wanted to do when I started discerain at the time I was 33 years old. So I thought I had 50 years and maybe hopefully I do. have 50 years. So you're trying to be... Sixteen. I need to work out more and eat better. But if you have those time horizons and you're trying to build something for the long term, its current investing environment doesn't matter, right?

So it can be a really bad time. It can be a really good time. It can be whatever. You're looking over a long enough time horizon. The principles are the principles. It doesn't matter. So the advice of give to anyone trying to launch a firm today or at any other time are the same, which is you want to get your foundations right. So for me, being very clear about the way I wanted to manage money.

So, you know, kind of I wanted to invest as a fundamental investor. I want to own businesses, not stocks. I want to invest for the long term. And by the long term, I mean generationally, I wanted to be contrarian. I wanted to be global. Kind of have those things right. have your North Star pointed in the right direction in terms of how you want to invest and the way you want to express your investment program.

Don't blow with the wind in terms of, you know, kind of, you know, what's the investing fashion of the day? Two, you know, create the right foundations from a DNA perspective of the firm. So not just the investment program, but the DNA of the firm. So, you know, to me, that has three pillars to it. One, have the right partners. you know we forget investment firms are limited partnerships it's a partnership there's a GP with a general partner and their LPs they're limited partners but their partners back in the 50s when

hedge funds private equity funds etc were new they were actually partnerships people got into business together someone's actually putting in a sweat equity but everyone was involved and it's a real partnership it's not a product you don't buy a hedge fund product and then and the LP is not a customer, they are a partner, and we're going to business together. And like any partnership, you want to find the right partners. If you, no one would ever, you know, randomly enter into partnerships with a new person you don't trust. You want to find the right partners. And you're saying, okay, we're in the same boat and we're trying to enter into business together. It's commercial enterprise enterprise, it's an investment enterprise. And, you know, in bad times,

we want to fall in, you know, I fall in, not fall out. So we want to, you know, kind of lean into, you know, those times and kind of work things through. I don't want to act like a Wizard of Oz. A lot of, you know, money managers think that you, what kind of like we're an Oracle, we talk about markets, we talk about, I'm not, I'm a human being, I'm one person, I don't know the future, I don't know what's going to happen, I'm going to figure out how to best navigate uncertain environments, make good decisions, make good judgment, and I'm going to do it with my partner. So that's kind of the idea of partnership. Find the right partners. And we're very lucky we did. So we're 12 years on.

You know, we've gone through good and bad times with our partners. And, you know, it's, you know, it's worked out well. Our partners have, you know, been super supportive through good and bad times. So the advice, so that's one leg. The second leg is the people at the firm. If you're launching a new firm, who you work with on your team makes all the difference in the world. Integrity, character. people who are team players, people who are long-term-minded,

people who want to be part of something bigger than themselves. For good or bad, we attract a lot in our industry generally. We attract a very bright people, very ambitious people. But drive, ambition, etc. Often comes with impatience and often comes with egos. So you want to find driven, ambitious people, but are also patient, but also are intellectually humble and personally humble. tough combination but if you find those people create conditions for them to flourish

so that's on the team right and then three for us the third leg of the still is to partner with our CEOs and CFOs of the companies we invest with and for those people you want to build long-term relationships you don't want it to be a transaction you want to be a relationship you want to get beyond the kibuki of CEOs and you know shareholders when you talk about quarterly numbers you talk about earnings, et cetera. You want to get to a point where you actually have a relationship with them to talk about your business, and you get a point where you can actually help them with their business. I started my career at McKinsey.

McKinsey works with companies, CEO, CFOs all the time in thinking through difficult business problems. And you want to get to a point where they give you permission to do that. And if you create those legs of the stool, then you have a much more resilient investment enterprise that can go through good and bad times. So that's one perspective. That's my perspective. And that perspective, I think, is true regardless of the environment, regardless of whether

you launch in 2010 or 2015 or 2018 in good or bad markets. What did you learn while scaling this business from the 62 to 1.6 billion? Yeah. Maybe let me ask it this way. What mistakes did you do on this way and how were they helpful for you to make a better business? Hey, Tillman here. I'm sure you're curious about the answer to this question.

But this answer is exclusive to the members of my community Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investor day by day. If you are an ambitious, long-term-oriented investor that likes to share, please apply for good. investing plus just go to good minus investing dot 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 is being fast a good thing in building an investment business or is being slow better

I think the right answer is the balance. So I think that more often the mistake is too fast. That's an observation, not just investment firms, but any business. Building businesses really quickly and not getting the foundations right. So a startup, a tech company, you know, et cetera, you don't know what you don't know, you make these decisions, and then it's too late to change them. And investing is particularly important because I talked about having the foundations right. I think that my personal belief is that you need very strong Grahamite foundations to be a good investor.

Gramite Foundation, Ben Graham. It's all about getting the accounting right, the balance sheet right, the cashdust right, the unit economics, right. There are some very basic things on kind of stacking up a business and understanding how the business works. for investing, I think that's an important foundational thing. What we've noticed is that younger analysts want to skip right past that. They don't want to deal with accounting. They don't want to deal with revenue recognition. They don't want to deal with gap.

They don't want to deal with understanding balance sheets. They don't know how to deal with working capital, which are considered very boring. And you want to go straight into talking about business models and TAM and disruption, et cetera, right? But you don't get the foundations right. You don't get the core right. It's actually you tend to make. mistakes when you don't do that.

You know, the example I give in other fields is if you want to be, you know, a good impressionist painter, get your classical painting technique, right? You want to be a good jazz musician, get your classical training right. You want to be good, good modern dance answer, get your classical training, right? The training is really important. Then you can break the rules. Then you can figure out how you kind of make exceptions to the rules. And so your question on business building for every business, whether

is investing, whether there's any other business, getting the basics right, getting the foundations, right, getting the principles, getting the team, right? Those things are important. Now, that is, so the mistake is acting too fast, but you can also act too slow, right? So I think my general kind of DNA is I'm cautious, I'm downside focus, and sometimes it means acting too slow. Sometimes it means, let me think about this more, and then think about it some more, and think of it some more, and then the opportunity passes. And that's the mistake I tend to make. And so over the last 12 years, the idea of saying, it's not perfect, I don't know everything,

but I'm going to make a recent judgment, and trusting that judgment more, it's been an evolution for me. And so getting to the right balance between the two. How good is the market to manage different clock speeds? I don't think markets appreciate clock speeds well. and, you know, there's actually a book called Clock Speed that is worth reading. But if you look at the history of Fortune 500 companies and the pace at which that changes,

go back to the Fortune 500 companies, circa 1960, 1970, 1980, 1990, 2000, 2010, 2020, it's changed a lot, right? You know, the largest companies and a composition of the five, it's not just the largest companies, but the 500th company, 1,000, that has changed a lot. Creative disruptions. Real. Businesses have useful lives. They grow up, they mature, and then they die. People forget the last part. That's true of every business. But markets don't appreciate that.

So what happens is that when businesses grow, they project that growth. And they say, okay, if it keeps growing like this for the next 50 years, look how big that business can be. But that's always the exception. There are always the exceptions. There's Amazon. Amazon has grown to be really, really large over a long period. time. But that is the exception. Most businesses don't get there. Most businesses, you know, taper off quickly and then they die. And people always forget that. And it's just human behavior. We have this anchoring, but, you know, on the nearest data point, the vividness bias. But if you take a step back and understand collect space of businesses, you appreciate that, you know, it's true. It's natural for businesses to grow, mature, and die. It's just effective

of life. And therefore, when you value these businesses and figure out the life of the businesses, don't project earnings into the sky forever. It's not going to happen. Be, you know, kind of, you know, be, you know, kind of zen about it, understand that all businesses have naturalized to them and value them accordingly. That acquires us to be sober. That requires us to actually, you know, be balanced, you know, to temper our excitement about the futures of business knowing that, you know, you know, naturally, you know, there will be completion, there will be changed, there will be disruption, et cetera. And, you know, but that, to answer your question, I don't think markets naturally think about that. That's why you have market caps of in 2000, the market care of Cisco, the market care of Yahoo was tremendous, right?

And today is the same with a whole bunch of businesses because, you know, people tend to project the present into the future indefinitely. You already mentioned that you've had conversation with a lot of peers in investing. What is the right clock speed or a good clock speed to grow in an investing business? Yeah, we studied the clock speed of investing businesses and realized that this is a terrible business. So if we apply our own lens to our own business and study our own business, there are very few barriers to entry in our business. The clock speed is really fast, you know, very few investment firms. survive, period. The, you know, the top investment firms in 1960, very few are around, 1970, very few around,

you know, 1980, very few are around. We don't have to go even that far. I graduated from business school in 2004. I came out with a list of the firms that I would love to work with, you know, that I aspire to go work for. Many of them are not around anymore, that list. It's a fact of life. So it's the same thing when I started a firm. I understood that, right? And I said I wanted to invest over the next 50 years, which was very ambitious, very bold for me to say that. You have to realize that that's not the base case. The base case is that investments will fail. You know, many firms that launch in 2010 with me are no longer around, 2011, 2012 are no longer around. So kind of knowing that about our business and understanding how fragile.

our business is, also means that when you design the firm and when you kind of operate, you have to kind of operate with that in mind. If you're going into a business that's very difficult, you know, kind of the odds are against you. You have to structure the firm very, very differently from most other firms. And we talk about, you know, the duration of the capital that we have, the partnerships that we try to build, and the team you try to build. Firms fail for all sorts of reasons, you know, the duration of the capital. People leave, people quit, you know, kind of things go wrong, incentives go wrong. You know, managers, PMs like me get too big for their breaches.

We think we walk on water when things go right, and then we make bad decisions because you think you walk on water. So creating the environments where people can say, Suchan, you're wrong. You're being delusive, et cetera, delusional. Creating those conditions are really important. But even with all of that, right, creating even with all those conditions, you still know that it's a fragile enterprise. Investment

firms are fragile things, even with all of that. And that creates a certain level of humility. And by the way, it creates a certain level of the way we run the firm. So we keep our expenses low. We're quite humble. This is the office. It's a humble office. I saw it. It's true. But the chocolate cookies are great.

So if you ever, they ask for the chocolate cookies. The office is humble. I think we tend to to say look like, you know, kind of, you operate in an environment where there's a lot of uncertainty and you're trying to do something over the next 50 years. A lot of things are going to happen and you just need to be anti-fragile. You need to be able to cope with good and bad times. You need to have a good kind of approach to do it. You need to be patient. You need to be risky and you need to deal with, you know, assets declining, things changing, et cetera.

That's going to happen. They're going to deal with being wrong. And then, you know, kind of, then what I said before, learn to enjoy the journey. Let's learn to enjoy not just a good by the bad times. And that increases the odds of us actually being resilient and being able to last through the times. And one question I like to ask a lot of folks is, you know, name investment firms that have been around for 50 years. Just name them. They're not that many. It's not zero. So it's not that many. And imagine the power of compounding. So, so, you know, even if you compound at 10% a year for 50 years. You should get to very large numbers, even from our exercise today, if you compound for 50 years, we'll get to 200 billion in assets in 50 years.

But how many investment firms have 200 billion of assets compounded at even 10% for 50 years? You don't see them. It's because, you know, it's hard. It's a hard thing to do. So anyway, the clock speed on our business is very, very, very, very. very quick. It's a very competitive business. So anyway, I don't know where that answers their question. How have you learned to enjoy the bad times? Yeah. So I think the big part of the answer is to be intrinsically motivated by the craft itself as opposed of the outcome. So going back to mentorship, you know, when folks ask me, you know, hey, what should I do, et cetera. My advice, this is not original advice. It's advice that a lot of people

give is find your passion, find something you're passionate about, something that you actually enjoy, something that even if you're not paid to do so, your free time, what do you actually enjoy doing? Tillman, you found your passion. You're doing something that you enjoy, I think. And that's true for everyone. If you find something that you enjoy, you enjoy doing it regardless of where the external signal is. For example, value investing. Value investing has been out of favor for a really long time. So for many years, people talk about the death of value investing.

It doesn't work anymore, et cetera, right? But if you kind of work at the craft of value investing, and I love value investing, I love the craft of the discipline of going through the process of figuring out various gentry in businesses and understanding and figuring a margin of safety, figuring out what can go wrong, that's not necessarily rewarded in the time when the markets are very frothy, figuring out downside, underwriting what can go wrong,

learning about modes of businesses over a 20-year period. But if you're actually motivated by the craft, you're motivated by kind of understanding the businesses better and understanding the mode better, et cetera, then that is the reward in and of itself. It's not what, you know, kind of the external kind of, you know, kind of drivers are. And if you do that, and then the rest of the craft, building a team, building a culture, building things, building relationships with CEOs, getting to know them

better, if those things, the inputs are what kind of makes you, you know, kind of what drives you, then it's much more likely that when you go through bedtimes, that you don't go forget about it. Or, you know, I don't want to do this anymore. Or, you know, the team breaks. down because, you know, people, people don't want to work together anymore and, you know, et cetera, because it's all, it's about, it's about the craft. And, and by the way, what I'm saying is probably true for, you know, I'm a big tennis fan, you know, Federer just retired, Serena, Williams just retired. You know, I don't know them, but it's probably true for them. Like, why do they keep doing what they're doing? It's because they actually genuinely enjoy the sport.

You know, both of them had careers of more than two decades, you know, at, you know, at a the age of 40, 41, why keep doing what they're doing? It's because they enjoy it, I think. I'm projecting that, but I think. How important is it to, like, how have you thought when building your business about the investors you want to win and how important is it to get the right investors? Yeah, so important. I think it was probably the most important thing.

And like I said, one of the things that were most proud of, you know, going back to investment partnerships being fragile. You can walk around and saying, I want to invest for 20 years when you have capital. That's very short term. It can be pulled at any time. And I knew that. So when I started the firm, I said, I really want partners who think, who are like-minded, who are generational partners, who, you know, Buffett says there's my favorite length of partnership is forever. And that was really important. Now, you can say I want, you know, long-term partnership. You can't, you just can demand it. You have to earn it, right? You have to earn the trust of the people that you want to pay partners with. So, you know, kind of one of the things that I'm glad we did is to be very, very

slow, you know, in building these relationships. It wasn't like, oh, give me money, here's the check, go wire, but it's building relationships, it's building that trust, getting to know which is a better. And, and, you know, if someone was too quick in saying, okay, I want, you know, you slow it down and say, hey, just make sure we understand kind of, you know, kind of what we're doing here. And then after that, continue to earn that trust, right? So trust is not built like a day or even a year. You know, we have partners now that have been with us for 10 years or more. You have to earn the trust every day. And not by saying, by doing, you know, your actions speak a lot louder than your words. And so, you know, I think the proof is in the pudding.

We've been around for 12 years. You know, we have had good times and bad times. For example, in COVID, when, you know, things were selling off, we had big drawdowns. We called capital and all of our partners funded. So we were able to deploy a lot more capital to work. But there are other times when things are not cheap. And we say, look, things are not cheap. We're going to give back capital.

We did that in 2018, for example. And so kind of we behave in a way that is all about investing. And people reciprocate, right? So that's, you know, I think that's so important. I don't think we would be around today if we didn't have the partners that we do. We could have blown out many times over the last 12 years, but here we are. So how much capital do you already have given back? Or like what percentage maybe if you don't have a like?

In 2018, we gave back 30% of the capital that we had in the mean fund. but obviously we give it back with the right to call it back because if we're going into capital commitment polls and we've called it back right because there's been investment opportunity since and obviously now were a lot bigger than we used to be

so we've had a lot more net inflows beyond a capital that we gave back I think if you think about Edge as an investing firm when I studied about your approach, some of the edge comes from knowledge on Southeast Asia. Let me dive a bit into this. What does the common investor usually get wrong in the perception of Southeast Asia?

Yeah. I don't think that, you know, edge is an interesting question. I don't think that we necessarily actually have an edge in Southeast Asia. I'm Southeast Asian, but, you know, South East Asia is a big place. There are many countries. And so, you know, I think it's too easy to say, hey, I have an edge there. I'll talk about edge and I'll talk about civilization. I think our edge is, if you ask me to kind of name my edge, I think it's a few things.

So one, we do turn over stones that other people don't turn. We're willing to go around the world and turn over these companies that may not be so well-known and we're interested in looking at them. Two, it's about time arbitrage, right? having, you know, perspectives, that are truly long-term perspectives and, you know, and truly mean it when we say we want our own business so long-term and often allows us to, to, you know, take advantage of these locations. Three, we have mental models that are different.

We look at structures of businesses, and so our analytical lens when we analyze our business is different from others, just simply because of the perspective of time. Four, we have price discipline. So we are value investors. We're proud of it. We always don't want to pay up for businesses. you know, again, that has been a little bit out of favor in recent, the idea of looking for bargains. We look for bargains. And that discipline of not overpaying, I think is quite

helpful as an edge. Five, psychologically, being value investors means being contrarian. So it's in times like this, you play offense, you know, you're not afraid, you don't freeze up, you buy, and the opposite, when things are really good, you get fearful. You say, okay, maybe I should give back capital. Maybe I don't want to chase this. Maybe this is not an environment to be a hero. just being psychologically wired to be a value investor, there's a certain level of delayed gratification in that. You may remember the marshmallow tests or water michel. People who, you give the kid one marshmallow,

the kids are able to sit on their washmen and don't consume it for the whole recess and get too at the end of it. The ability to delay gratification, I think, is like a second. And six, we talk about our partners, our LPs. Our LPs help us a bunch of our weight because they have big networks. They're very sophisticated, they're very thoughtful,

they're very partnership-minded. that it's just an unfair advantage. So I think that's the edge. Now, let's talk about Southeast Asia. So I grew up in... Let me reframe my question. What role did South Asia play for development of your film? Yeah.

So Southeast Asia is where I grew up. I understand, you know, kind of grew up in Malaysia. When you grew up in small countries, you look out. So, you know, when you grew up in a big country, you don't actually have to look at. out. You know, kind of it's, you know, you know, kind of America as a continental power. You can live in the States and be perfectly fine. When you look out, you, you have a very kind of different lens by which you look at a world. When you grow up in Malaysia, you kind of, you read about all

these countries. You learn about all the licenses. You look up, you know, you worry about big neighbors. You worry about a lot of things. You grew up in developing country where things are changing quickly. You see how, how an economy moves when it's, you know, you know, kind of low-income and then middle-income and the structure of the company changes. You see how structures of businesses change from family-owned businesses to corporations, you kind of, et cetera, right? So it's, you have a different perspective. Effectively, you have an emerging markets person's perspective of global capitalism.

You also have an outsider's perspective on culture. Cultures are different, even from country to country. Southeast Asia is not one place, there's many different places. You know, you can have learned the different histories of the Philippines or Indonesia, or Thailand or Cambodia or Myanmar and then you see how things change when I grew up in Malaysia

it was a very different place you walk outside of my house you see rice fields just farming we have mosquito nets to go to bed because otherwise mosquitoes kind of feast on you when you sleep but you know kind of now

roll back the clock you go back to my hometown it looks like a different place the economy has developed there are more paved roads They're more kind of industry, there's more commercial buildings, there's tourism, et cetera. So, so, you know, you realize that things change and things develop and wealth gets created, you know, lumpily through good and bad times. So it gives you those perspectives and it gives the perspective on cultures, right? So I'm actually ethnic Chinese, my grandparents came from China.

So even within Malaysia, I'm an ethnic minority, you know, it's not the main culture. you see different cultures in different ethnic groups. You see the kind of a life of a diaspora in a particular country. So going back to investing, what that tells you, so we're not a Southeast Asia specialist. I don't hold myself as a Southeast Asia expert. We don't have large investment in South Asia and not elsewhere. But that perspective of looking at cultures in their specific context and history and et cetera,

I think it's helpful. It's helpful everywhere you go. It's helpful in South Africa. It's helpful in Brazil. It's helpful in Korea. what are the most attractive markets then for looking for opportunities in your eyes so we like to own companies not markets so it doesn't matter where the companies are if you own a really good business with a good management team sitting on it it can be the toughest market and the company will still do really well and we've had so many examples of that you know we own a company in in turkey that i'm not going to name but you know, we're big fans of them, good CEO, tough, tough, tough environment. You know, Turkey is, you know, in the tough economic environment.

Inflation of 80% or whatever. Yeah. I mean, it's not easy. His job is not easy. He's done a really good job. And you can see the share price reflects that. So the stock market is not doing well. The economy is not doing well.

The currency is not doing well. But the company is doing really well. It's a good business. it's not just good management team structurally there's a moat around the business it's a good business so so it's you know he's you know it's not just that it's all about execution it's about the structure of the business and a good management team and and you get a good outcome because of that and it's true everywhere right so so our modus operandi is usually go find these companies and find them usually when the markets are not very benign anywhere you know whether it's

Turkey, whether it's South Africa, whether it's Greece, you know, during the Eurozone crisis, we were looking at, you know, investments in Portugal and Greece and Ireland. Today, you have dislocations in Turkey. You have to the locations in other countries. So often you want to find these really good businesses when they're not doing well, not when the economies are doing well. So it's almost the opposite, right? So going back to being contrarian, one thing to buy good businesses when you're out of favorer is, requires you to be contrary from a macro perspective. I mean, again, quoting Buffett.

Buffett likes to say the best time to sell hurricane insurance is right after the hurricane. It's the same perspective with investing in companies. How much knowledge, for instance, on the example of Turkey, or pick another example, do you take, besides understanding a business, besides also understanding the country specifics and the country risks you're underwriting? So we always do bottom up. So you start with the business. And then when you study the business, obviously,

then you go to the level of the industry, right? Because the business doesn't operate in a vacuum. So there's an industry. So you have to understand the industry. You understand the regulations around industry. You understand the competitive dynamics. You need to understand the ecosystem. And then after that, you have to understand the economy

because the industry doesn't operate in a vacuum, right? Any business. If you study, you know, just to make up a business, you study, you know, kind of beverages. You know, you know, you don't sell beverages in a vacuum. You sell beverages to people. You sell, you know, so the economy matters, the composition of the disposable income, you know, where people, you know, where people shop, you know, behaviors, consumption behaviors matters. And then you go, okay, then of course, monetary policy, of course, you know, kind of trade policy, these things affect the economy.

So, but you start from the bottom up and you learn about the ecosystem. from the perspective of first the business and then, you know, outwards, which is completely different from someone who says, okay, I like this country, I don't like this country, you know, I'm going to long, you know, this particular geography. I'm going to go short that particular geography is a completely different lens. But at the end of the day, you can't ignore the macro. And if the macro is bad, pick that into the numbers, say the macro is going to be bad. You know, like that should affect your earnings.

That should affect this was your income. that should affect in the purchasing power of consumers that should affect costs of businesses. It will ultimately be baked into your expectations of cash flows of the business. Let's move to an example of a company we want to discuss in this video podcast.

You already had some conversations out there. We will link them up here so people can find them. You brought Megit with you. Meggit is a UK company, if I'm right. What does the company do and why did you get, why and when did you get interested in it? Yeah, great. So before I dive into it, again, quick compliance disclaimer.

So our compliance policies restrict me from talking about specific performance numbers, et cetera. And we're picking one company, Magid, to discuss simply as an indication of an investment approach, not for any other reason, just, you know, and I deliberately picking an example of investments that we now exited so that it's not something live in our portfolio, et cetera. So it's just a case study. We talked about, you know, kind of what we said about macro dislocations and that it gives us an opportunity to buy good businesses.

This was a prime example of that. We bought Magid in March 2020 in the death of COVID. And you can imagine it was very contrarian because Megas is aerospace parts. manufacturer. They make breaking systems and other parts on planes, a small part on planes. You can imagine that that industry was going through an incredibly difficult time in 2020 because there were no planes flying. But going back to understanding microstructures of the business and starting there. So megat's parts are very small. In total, all mega parts account for 0.15% of the planes.

So they're very small. But if you know anything about kind of aerospace parts, these parts are spec into the plane. The FAA, for example, spec parts into the planes. And what that means is every time you need to replace a particular break, you have to go back to the specific manufacturer. In the case of those brakes, it's maggot. More than 70% of maggots parts are sole source,

which means there's no other manufacturer for the specific part. What that means is once you're specced into a particular platform, every time you need a replacement, you're going to go back to Megget and buy that part. And these, going back to clock speed, you know, the clock speeds of aerospace platforms are very long. You know, a particular plane, the platform is going to be like 20 years. The planes are going to be around for 20 years. What that means is, you know, once you're expecting the part, you have a very good line of sight

over the next 20 years, what the aftermarket cash flows are going to be. Now, it's a really profitable business, you know, operating margins are about 18% which is under 20%, and pre-tax return investor capital RIC on an unleavened basis is 20%, which is actually very, very healthy for manufacturing business. 20% unleavened RIC means if I build a plant of the manufacture parts, I get my payback in five years. And so a business that's able to reinvest at 20% RICs is wonderful. And if you find any investment firm that can reinvest at 20% of compounded returns, that would be wonderful too.

So it's the same when we find a business like that. You know, 20% RICs are very, very healthy for a manufacturing business. Now, importantly, Magid, unlike some other aerospace card findings, think about themselves and an engineering firm. That's the culture and the DNA on the firm. It's an engineering firm. The CEO, Tony Wood, came from Rolls-R-R-R-R-R-D. And what that means is they reinvest a lot in R&D.

So they keep coming out of new parts. They try to win RFPs. They try to win parts in planes just to give you specific numbers. shipset the platform is about 1.7x, which means that planes go from old platform to new platform. There's 70% more parts on the new platform versus the old platform. And that's very healthy. What that means is once I win all these parts in the new platform for the next 20 years,

as the parts get replaced, I'm going to get that cash flows, right? So you have very good line of sight. And that is in sharp contrast to other aerospace companies that often actually, you know, their roll-ups, they just bypassed. They fire all the R&D, they fire all the sales, and then they just raise prices. there's no machine of winning business organically. And MAGA does, right? So we like the way mega is run.

They also run quite conservatively from a balance sheet. So net debt to EBIDA was just under two times, so less than two terms on net debt to Ibida, which means that in the downturn is anti-fragile, going back to looking at the downside. You know, if you don't have a lot of debt, you can have a very tough economic environment and you can still survive through it

because you're not going to blow up, you're not going to go bankrupt, have you know bonds that become due so you you you are quite anti-figer so for all those reasons we thought mega was a really good investment but of course in during covid the stock treated down 70% and we bought the business for eight nine times earnings uh eight nine times earnings for a business that had 20% RICs and you know and and it goes to what we're talking about it's all about time might be trudge obviously stepping into the breach and buying an aerospace company in In March 2020, when no one knew when travel was going to come back, no one knew whether

there was going to be a vaccine. So we could have been in lockdown for two years, right? You know, remember in March, there was, you know, I'm in the New York metro area. There were ships parked in New York to become makeshift hospitals because we ran out of hospital rooms in New York City. So it was a very difficult time. There was a lot of uncertainty. We didn't know what was going to happen.

Maggot didn't know what was going to happen. The CEO, the CFO, didn't know what was going to happen. We talked to them, and it was very, very stressful for them during that time. All of us were stress. It's not like we knew, you know, Canaubo. But because we knew that this was actually a really good business, very high RRICs, through cycle, really good economics, and in the downturn had the balance sheet to withstand the difficult times, it gave us a confidence to play off. So we ended up buying a lot of the stock. We ended up buying 2.2% of the company.

We became one of their largest shareholders. And then we began to build a really good, you know, relationship with the management team, you know, kind of Tony, who is the CEO, is someone we've come to respect, you know, and we knew that it was going to be tough. We didn't know when things were going to recover, but we thought that was okay, because over a multi-year period, the business would have been fine. So that was the thesis. Obviously, what we didn't know was how quickly things were going to recover. We didn't know the vaccines were going to happen. We didn't think that, you know, if that was going to print as much money as it did, that cost capital markets to recover so quickly.

And then, of course, we didn't know that Parker Hennephen was going to make a tender offer for it. But they did. So a company tendered for Megan at eight pounds a share. Our average cost was two pounds and changed. So there was a, you know, kind of big premium. and mega is now being taken out. And so, you know, it turned out to be a very profitable investment for us. But, you know, obviously at the time, the thesis wasn't, oh, it's going to be taken out.

There was no catalyst. It was just, you know, owning a good business with a margin of safety that could reinvest capital at 20% RIC. And we thought that was, you know, very attractive. It sounds like you turned around a lot of stones to get to this level of knowledge on the company and the business and the industry. Absolutely. I mean, that was the only aerospace company that we bought, right?

So we understand the entire aerospace ecosystem, but we didn't buy any of the other airspace companies. We didn't buy Boeing or Airbus. We didn't buy any, you know, airlines. You know, we bought Magid because we thought that that was, you know, kind of the best company to own through a difficult time. And the valuations were very, very compelling. Can you maybe walk me a bit through the research process

that you took on to get to this deep knowledge. Yeah. So the research has to be done way before the investment. So we studied aerospace businesses way before Magid, way before we became shadows of Megan. So just a little bit about a research process. We call our research process piece time process. A peacetime process is a process where you're learning about a business.

You're not making an investment. A wartime process is when you're actually going to make the investment. So you have to sharpen your pencils. You have to kind of make sure that your models are tight. have to do the balance sheet. But peacetime projects, you're just studying businesses. Most of the time, we do peacetime research, not wartime research, because most of the time we're not making investments. You know, value investing is, again, it's an exercise in patience. You sit around, you sit around, you do nothing, you do nothing, you do nothing, and you find something that you

like, you make an investment. But that's very seldom for us. So most of the time we're doing peacetime research. So going to Magad and Aerospace in general, we've studied the aerospace ecosystem, you understand the rhythm at which parts get specked into planes, the rhythm at which, you know, kind of platforms get built, and we started the clock speeds of platforms and, you know, kind of, you understand the ecosystem, tier one, tier two, tier three, and we understand both the civil kind of ecosystem and the military defense ecosystem, you know, kind of military defense, the rhythm of contracts, the Tina Act, which is the Truth and Negotiations Act, how, you know, kind of how Megan and other aerospace guys work with, you know,

kind of, you know, kind of, you know, the Department of Defense, et cetera. So, so, you know, a lot of that, you know, true not just for this business for every project, requires kind of two parallel streams of research. One is scuttlebutt, obviously talking to competitors, customers, suppliers, et cetera. A lot of people do that. We do that, but the focus of our question tends to be more structured. just on the standard structure of the business, longer-term trends around the business, competitive dynamics, game theory, etc.

So we've done that across the ecosystem. Doing scuttlebutt work gives you a little bit of a composite picture of the business. But I like to describe it as a picture. It's a steel picture. It's not a movie. It's a picture. Because by definition, when you're talking to people, you're talking to people at a point in time. So you're going to develop a perspective in a point in time.

What we then also do is get very long data series about the industry, about prices, about volumes, about, you know, changes in the composition of her parts. And that's data. And data gives you not just a picture, but a movie, because it takes you back in time. And if you just talk to people, you lose the perspective. of history. And so we kind of went through the data for the industry and all the parts and volumes and prizes, et cetera, of different competitors and across different platforms. And that kind of tells, gives us a sense on how the industry actually, you know, works over a long period of time. And marrying the two, the scutterbot and the data helps us get a picture on the business. And

then it's getting the new management teams and, you know, kind of understanding the cultures of different businesses, how people make decisions and etc. So all that work was done way before we became shareholders and we never knew whether we're going to be shareholders or not because it depends on price it depends on like I said we're quite price discipline so the fact that we like a business doesn't mean we like the price for it we won't pay any price for a business we believe that there's a fair price for every business and so you need to wait for times when prices come to you and it's usually during times when the business is not doing well and the macro is not

good and then we get to become shareholders Is there any method or tool you use where you sometimes wonder why not many other investors use this method or tool to research companies? The short answer is no. I don't think that we have any superpowers. You know, I think that investing. I wouldn't call it a trick, not a superpower in this case. Yeah, I don't think there are any tricks. I think that investing is a super competitive industry.

everyone's very bright, everyone's very hardworking, everyone's very motivated. I don't think we have any special tools or any special skills. Like I said, I think where we're different is things that may not have anything to do with us, which is one, we're willing to turn over a lot of stones in different countries, right? So other people can do it too, but, you know, kind of not everyone does. like I said, I think we tend to think very long term. That's a habit. That's a skill.

It's like, what does this business look like in five years? What does this business look at in 10 years? Other people can do it too. But it's actually hard to do because then you need the length of capital to do that. So for example, buying maggot, I think most people will agree that Megat is a good business. It's not just us. I think very few people would be willing to buy Magid in the middle of COVID when there was huge amounts of uncertainty about what earnings power is going to look like in a year, maybe two years, maybe three years. So the ability to think long term about a business, you know, gives us the advantage there.

And then, you know, having the partnership base to say, great, buy more. go buy more and it trades down by even more big drawdowns are fine we're going to take that risk etc these are structural advantages that are harder to replicate now on the business analysis itself i think sometimes we do come up with differential insights on businesses they're not actually that common but they usually come because you have the luxury of thinking about structures of businesses over longer time periods than other people. And we have more time to do that. So anyway, I think those are the advantages. If there's any one superpower that we have, it's near 10y. Neuteni just means a rest of development. You act like a child.

So we look for people with a childlike passion for investing. So we're all adults. But the idea of still looking at the world like a child, being passionate about all, you know, learning about things. And you remember when you're a child, the world spreads up before you with wonderment, right? So everything is new. Every experience is new. You're so curious about everything.

You ask a lot about, a lot of wise. If there's any special superpower at Dyserene or, you know, it's not getting passionate about learning. And, you know, that's not a special skill. It's not a special trick. But it's a perspective on the world that allows us to keep learning. And if there's anything that I would call a superpower, it would be that. Do you also then look for management teams that are like this, that are the curious like a child?

Or what role does the management team play for you generally in underwriting a business? Yeah. I think that's a wonderful trait when you find it in anyone, including management teams. to be fair, not all CEOs like that. I think, you know, CEOs are, you know, CEOs have different drives, different passions. We've met very different CEOs in our lives. Some CEOs are really passionate about the thing itself, really passionate about the business, the engineering of a business.

You know, a CEO of a car company could be very passionate about the car, the engineering of the car, you know, etc. Some CEOs are driven by other things. Some CEOs are driven by one thing to build a culture they're proud of. Some CEOs are frankly driven by economic success, financial success. Some CEOs are driven by the recognition of their peers. Some CEOs are driven by the mission of an organization. So they're different drives. Different people are different.

Sometimes it's a combination of things. Understanding what drives CEOs and business leaders is a fun activity. We pretend to be armchair psychologists and read the minds of. of the CEOs that were partnered with. Here's the thing about drive. Whatever the cost of the drive, whatever the cost of a motivation of a CEO, it can change over time.

So if someone's driven by financial success or recognition for others, that can change whether or not you achieve it. Maybe you don't achieve it, and then your drive changes. And maybe you do achieve it and also the drive changes. So either way, the motivations of people can change.

That's true for, you know someone who wants you know kind of a sense of mission someone who wants to make a change in the world you're driven by some idealism that drive can also change your life circumstances can change you can come up with personal tragedy you can experience something in the family where your priorities change in the perspective changes regardless of what you know kind of the drive of someone that can change so meaning purpose drive what makes us do what we do what gets us up in the morning for all

human beings is something that's dynamic and can change over time coming back to change and the original thesis when you invest in a business how much thesis drift thesis change do you accept when you're underwriter security and how do you keep track between the original thesis and the changes in this this granges great question that is one thing that i think we also pay quite a lot attention to. For us, a thesis is a thesis. It must be able to be disproven. So a thesis is a statement where you can go right or wrong. If a thesis cannot be disproven, it's not a thesis, it's religion. And so when we express our thesis, we try to do it where there's a null hypothesis and then you can disconfirm the null hypothesis, right? And then we revisit it.

I'll give an example, right? If you say a business has positive externality that creates a positive feedback loop, so skill, big a skill, be skill, big a skill, and you can create winner-tick-all dynamics. If that's the thesis, then you should see that it should be gaining share over time. It has to. As it gets bigger, it has a positive externality, a positive feedback loop. You cannot just say, oh, it's growing and everybody's growing and, you know, kind of, you know, it's fine. It has to gain share.

and if it doesn't gain share, it's a disconfirming evidence about a positive feedback blocress. It's actually very hard to prove thesis. It's much easier than disprothesis, but you're so looking for the empirical evidence that would disprove your thesis. And if it disproves it,

you have to go back and say, you know, where was I wrong? Right? You have to have that intellectual honesty. Where do you see the borders of like saying, okay, I'm wrong here? Or this is changing to,

to something that's acceptable or is changing to something that's bad? Yeah. So we're wrong often. Quite often. Investing is quite humbling. So the question is when is it acceptable? It goes back to what you impounded

in your expectations, right? You know, what... you know, wrong in both directions. Sometimes businesses work out better than we thought and in the ways that we don't expect. And we're wrong if our thesis is ax and it works out that the business evolves into something. And it's better than we thought. We're still wrong, right? Now, in those cases, you go, we're lucky.

So, you know, it's better than we thought. We didn't expect that. It's not what we model, you know, kind of our numbers are, you know, just very different because, you know, of course that's acceptable, right? You know, you'll say, great, it's actually better than we thought. And here's why, and this is what we miss. And we learn something from it. There are other cases where were wrong because the macro environment was different from what we thought. So we modeled something and then the macro environment is a lot worse. So you have to take your numbers down, you know, because the macro environment is worse. you know, you didn't expect a pandemic, and then there's a pandemic, and cash flows, you know, you have to make the in your numbers and your DCF changes. But then, you know, the stock price may also change, and you go, okay, at this price, it's good. So that's fine. What's not fine is when you have certain theories about the structure of a business, you know,

the motel around the business, the competitive industry, you know, kind of, et cetera. And it turns out not to be true. It turns out to be. And you go, okay. Well, I thought through socioeconomic source X and it's why and it's because of this thing that I miss. And then you have a sell, right? All people, you know, kind of you say, you know, this is a management team that I trust. This is CEO that I trust, et cetera.

And the CEO does something that you go, oh, you know, it's a disconfirming evidence on that. Then that is not acceptable. Obviously, you know, it's easy to describe what I just said. But obviously when you face facts and circumstances, it's not always so clear cut. and that's where judgment comes in. But it's really important to be able to articulate what it is that you're underwriting and what is that you're not underwriting.

What are reasons for you to sell then besides the ones you already mentioned? Yeah, so there are three reasons to sell. One is you're wrong. You should sell regardless of whether you've made money or not made money. Sometimes we're wrong and we've made money, right? And you're lucky, but you should sell.

two, we sell when something has gotten to our estimates of intrinsic value, so it's not cheap anymore. Prospectively, returns are not going to be good. So we do that. And three, we sell when there's something better to buy. That's actually very seldom for us, again, because we're lucky you that we have this drawdown structures. We can call more capital if we want to buy something. We don't actually have to sell something that we own to buy something else that we like, which is different from most, you know, public markets funds. So that third one is very seldom. It probably happens more now today than it's ever been because we have, so we have more investment ideas than we have capital. And so, you know, in those times, you actually have to sell

something to buy something. So at that time, you're picking among your children. You like all your children, but maybe you like one of your children more. So you have to sell one to buy another. So that's a third reason for selling. how long are the stocks staying in your portfolio like how old is the old's child the old is as old as the firm the first stock we ever bought is still in the portfolio so it's 12 12 years almost a teenager I would guess that the average you know holding period is seven eight years is the average of the time that we hold investments and hopefully as we get older, that average issue goes up.

So, yeah. Maybe as one of the closing questions, how likely is it that I will find a high growth stock in your portfolio if I ever could have a look at it? Very likely. So it's all about intrinsic value. So a company that's growing really fast. You can do a DCF of that, right, like any other company.

And if you get a big discount to that number, then it's trading in a big discount. counter intrinsic value and we'd love to own it. So especially given the current market environment, the answer is extremely likely that you find that because there's some very high-growth companies that are selling off very aggressively and they're good businesses. So why wouldn't we owe them? That's a good point for the end.

Is there anything you want to add we haven't discussed in our conversation you find important for the viewers and the audience? No, I think we covered a lot of ground, you know, so, you know, I appreciate your thoughtful questions and this has been a really fun discussion. I tried my best. Thank you very much. And thank you very much to the audience for staying till here. Bye bye to you all. 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.