Good Investing Talks - The youngest quality manager? A talk with Shaurya Gupta

Episode Date: October 12, 2023

I had the pleasure to interview Shaurya Gupta of https://gupta-partnership.com/. Shaurya started his partnership 5 years ago, at the age of 21. He is hunting for quality stocks.

Dear viewers of good investing talks, it's great to have you back. Today we have Shiree Gupta, of Gupta partnership with us. He is, for me, in the bucket of the emerging managers, he already has a kind of career with him. He's already five years in the game of being a professional investor. And in the first five years, 60% of all hedge funds fail, according to some studies in this space. How have you made it to survive? And what was helpful for you to survive this first five years?

Great opening question, Tellman. Thank you for having me today. I'm really excited to be here. That's a great question and a true statistic. The majority of hedge funds fail within the first few years since launching. I think, you know, first off, I must say that we're not structured as a hedge fund. We're a separately managed account platform, but sure enough, we are a long-only concentrated investment firm. And so our approach can be similar to a number of hedge funds that are included in that study. I think the key is to begin with the end in mind. I was very

familiar when launching on day one with the struggles and common pitfalls that plague hedge funds. And typically that is raising too much capital, raising capital from the wrong sources, clients who are not aligned with the hedge fund necessarily and more focused on the short term, spending a lot of money on expensive rent or expensive research projects. And I just decided to do the opposite. You know, when we launched on day one, it was with three families. It was my family and two others that trusted me. All that money felt like family money. I felt a great obligation to do well for people who had trusted me. And so what we did is we just had a very, very low cost structure. We took the long view, and I think that allowed us to sustain. The other thing in terms of

investing in allocations is that when we started, I was a little wary of valuations at the time of the environment we were in in terms of investing. And so I was very patient. You know, I started on day one and throughout most of the first year with the majority of client capital in cash and just to select few securities. And we very gradually, consistently invested capital from there. And so we were able to take advantage of the trade war in 2018. We were able to take advantage of the coronavirus sell-off in 2020.

And once again, you know, it was wonderful that we had clients who, we grew with the word of mouth, and we had clients who self-selected into Gupta Partnership, and these were all folks who thought very long-term about investing. They viewed investing as buying a piece of a business, not trading a piece of paper, and they understood that taking advantage of volatility was the key to long-term success. And so, you know, they were primed and ready and aligned when the sell-offs came, and they were happy to step up to the plate and ad capital instead of what I saw. going on with a number of my peers at the time, which is clients pulling out capital or clients

that felt like the manager had overpromise and underdelivered. So in summary, I think it was just about having the right structure on day one, finding the right clients, being very honest about what we could and what we could not do, and, you know, letting everyone know that volatility is a price of admission. They should expect it. And I would say, tell me, over the last five years, my expectation for the volatility that a prospective client of Gupta Partnership and myself as a manager must comfortably endure has only gone up. In the last five years, we've had three periods of significant market volatility, two of which a lot of folks in the industry with decades of experience are calling once in a decade sell-offs. And so I think

this is the state of the world we're in and and people need to be be ready for it thank you for this very interesting answer um you're now 26 and if you started your partnership five years ago you started with 21 it's like starting investing partnership is not a typical thing a 21 year old person does so what drove you to start a partnership that early yeah tellman what drove me was was absolute love and passion for the game. And so, you know, I was the kid, this is the, the location I'm in right now is the study in the family home that I grew up in. I was the kid that was reading all the time from a very young age. And I loved reading about the great operators, the great business people, the great entrepreneurs, the great businesses. It started with a passion for

Benjamin Franklin. And over time, it transitioned to reading about Le Schwab at Le Schwab Tires and Sam Walton at Walmart and Jim Sinigal at Costco and of course I came of age when a lot of the great technology businesses of today's world came of age as well. So I remember being a preteen and when Instagram was just a photo editing app. I remember the days when I would come into this study to use the desktop computer and, you know, I would get my 30 minutes to surf the web and be on Google search. And I remember the years when it felt like within, a few weeks we went from going into the mall all the time to purchasing everything on Amazon. And so I've loved business my whole life. And in regards to starting a firm, I just, to be

honest, didn't know what else I would do. I gooped a partnership is a reflection of me. It's an embodiment of me. And I always say that I don't work as hard as I do because I run a firm. I chose to run a firm to launch a firm because I was working all day anyways, doing what I love. and I figured I might as well do it for some folks that trust me and represent them on this journey of evolution and compounding interest. So I know the world doesn't need any more investment firms, but I need to invest. So it's just what I love to do, Tellman, is what I would say.

It's time for a quick, Edward Tillman. Here we go. Are you looking for a beautiful and efficient way to analyze stocks? Then please check out what my friends at Stratosphere building. They've built a great tool to visualize data, to get ideas about ownership of stocks, and many more information that's helpful in the analysis process. You can find that tool where the link below, and feel free to sign up. It's free. Thank you for your attention. And now, Edward Tillman.

Ander, what role do mentors play for you as a person to grow and for the survival of your partnership? I mean, they play a critical role, Tillman. a critical role. It's all about standing on the shoulders of giants. And so, you know, I'm very blessed and appreciative to have had mentors through the journey that have taken to me and have felt a vested interest in my evolution and my career. And mentors, you know, I have, there's friends, there's clients of mine that are mentors. And then thankfully, over the number of years, I'm very, I'm very happy and blessed to say that a number of the investors who inspired me to launch my firm,

whose success inspired me, whose journey has inspired me along the way. I've gone from five years ago reading about them to now collaborating with them as a peer and being appreciated for my quality of work. And so all I can say is they play a very, very critical role. And those are the mentors that I'm close with. Then there's also the mentors that don't know I exist. And so there's a lot of those on this bookshelf. And of course, you know, we have Charlie and Warren and as well as the imminent dead. So the investors that have come before us, the business people that have come before us, there's all sorts of lessons in history that I think it's important to learn from. The most important of which I believe for a long-term patient investor is the

idea of taking advantage of volatility. And so we've seen decade after decade, century after century, the great business people, the great operators, the great investors, they have all been able to maintain a calm and a peace and tranquility and an ability. And an ability to take advantage of pockets of volatility. And so that's a lesson I learned very, very young. And it's served me well for the last five years. And I believe it'll serve me very well for the coming decades ahead as well. So what is your hidden hack to win investors you admired as friends?

Great question. What is my hidden hack? It does not be hidden. Maybe it's like plainly and, Very easy to do with patience. Yeah, I think there it is. I think it's an open world. And the investing community is a small one.

And a lot of the investors that at least I admired growing up were one-man shops. And so they were easily reachable. It's just about finding a way to add value to individuals. And so I'll actually give you a story. When I was in college and trying to break into the industry, there was an individual who's a good friend of mine. His name is Alex Bozard, and he runs a firm called Bossert Capital. And Alex, I had read a Forbes article about Alex, about some sum zero competition he was a part of where he had done very well. And at the time, I was 19 years old. I was just about a graduate college.

And I sent Alex an email. And I sent him an email. I told him that I admired him and I really respected him. I looked up to him. And I would love to speak with him for just 10 minutes. for just 10 minutes. And so we ended up popping on the phone and it resulted in a multi-hour conversation. And that's something that's happened in my life many, many times, which I feel very blessed for. Years later, you know, Alex and I had become very close friends when we would go to Daily Journal to listen to Charlie Munger speak. We would stay in the same Airbnb's. And years later, I asked Alex, I said, Alex, why was it that you responded to the email and you, you know, were so interested that you stayed on the phone for multiple hours.

And he said, Charay, when you sent the email, you sent an actionable pitch or an actionable write-up on a stock attached to the email. And he says, what you don't understand is that I was receiving 50 emails a week at that time, but only 1% of people thought to actually add value and to add an actionable pitch and to do some work and some research and be helpful and value added. when asking for time. And so that's a lesson I've taken with me, which is at every step of the way,

how can you add value to somebody that you're reaching out to, how can you show kindness, or how can you show willingness to help? And I think in our industry, ideas are democratic. All investors know that great ideas can come from anywhere. And so the most effective tip I have is put in some work, study a company that you love, write it up, do deep work, deep analysis. And by the way, expect that five years after you send the pitch, you'll look back and be

embarrassed by the quality of research. But it's the effort and the thought that counts. And so always try to think about what the person who's receiving the message would want. What would you want if you were in their position? And so that's my hack. Thank you for allowing me to think through it, Tillman. what is the goal of your partnership and maybe like within within this five years how has it changed sure the goal tillman is to do very very very well for our clients who trust me with their

capital it was not easy for clients to trust a 21 year old with capital they believed in me they believed in my journey they believed in my philosophy my process and they wanted to be along for the ride. And I'm very appreciative of that. And I don't think it's all that easy for somebody to invest with a 23-year-old or a 25-year-old or now a 26-year-old. And so, you know, I'm always appreciative of clients I join. I'm obviously very confident that I'll continue to do well for clients. And the goal is just that. The goal is to do what I love, to do it on behalf of a group of folk who are aligned, who view buying stocks as buying pieces of businesses who want to be involved with each other as a partnership as well as with

our companies for many, many years. The firm is called Gupta Partnership. It's a hand-in-hand partnership. And so that's what I would say. And I think the one evolution I've had is I've just realized more and more that in terms of the goal of Gupta Partnership, my job is not to sell the firm. My job is not to market the firm to individuals who are looking to bucket goop to partnership. It is simply to explain my philosophy of investing, my approach to investing, and to see who that resonates with and allow them to self-select. And so I've noticed that through self-selection, through word of mouth growth, through dogged consistency, both in the investment process, as well as the process of bringing on clients, client partners, you know,

that's the way that that that I prefer to grow but but in terms of the overall goal tillman not much has changed it's to do this for many many decades and for clients to look back after many decades and it'd be so so happy that they that they trusted me whenever they chose to to join on the journey and and that's what i that's what i'm focused on you already mentioned your style of investing how would you describe the style of investing sure tellman at gupta partnership i am absolutely focused on investing in dominant businesses that are thriving today and will be thriving in five years, 10 years, and 15 years from now. We only want to invest in a select group, a focused group of dominant businesses that I can understand and that I have some high degree

of confidence in regards to what they're going to look like in the future. Typically, they benefit from very strong structural advantages, and they have some self-reinforcing feedback loop. And then they also have elements of quality, which I would actually distinguish from structural advantages. And Tillman, I choose to buy into these businesses for the long term, and I choose to buy into them via the public stock market. So that is a choice. And the reason that I buy excellent, outstanding, dominant businesses on the stock exchange

is because the stock exchange is a auction-driven market. It's a market where a number of constituents with different time horizons, different incentives, many with a time horizon that is a few minutes, others where their time horizon is a few hours, others where their time horizon is a few days, and fewer where it's a few weeks, fewer where it's a few months, and very few years.

And they all come to this market, and they all exchange stocks. And the intrinsic value of businesses doesn't change all that much. But their stock prices fluctuate tremendously. And there's tremendous volatility because the participants in the auction have volatility in their emotions. And so because of apathy, because of market myopia, because of easy access to now free trading as well as fractional ownership, access to leverage via margin and options, we get tremendous volatility in stock market. markets, and that allows for the patient long-term investor focus on dominant businesses

to invest in these businesses when for whatever reason they're trading at a valuation where the prospective returns are incredibly high. In a private transaction, it's very difficult to find that, especially at a smaller scale. You mentioned elements of quality. What are elements of quality and what is quality for you in a business? Sure. Quality to me, and this is not a business we own, but quality and I made a distinction between quality and then structural advantages. I think a lot of times, you know, people use them together, but but they're really two different things. A business can have really high barriers to entry and incredible structural advantages, but at the same time, it may lack in this essence of quality.

Quality to me, Tillman, is Ferrari having one of the most aspirational luxury brands in the world with price in elasticity and yet deciding last year to only manufacture and sell about 13,000 vehicles. So caring about the long term, caring about many decades from now. There's a number of compounding machines, and once again, I'm naming a few we don't own here, but Costco, Ferrari, there's a number of businesses where the way they operate is very much focused on doing things well and doing things for the long term. And so I would define it as a persistence of excellence and a conscious persistence of excellence, the right way of doing things.

I think an investor can have quality too. An investor can do things the right way or they can do things. things a different way. And so there's quality in everything. You have a great clarity in your thinking. But clarity on one side comes from learnings, but if we're honest, it also comes from painful mistakes and pain that helps to get clarity. So let us talk a bit about the learnings or mistakes that helped you to find this clarity to achieve the goals of your partnership. what were these mistakes and learnings how much time do you have and i'm sure we'll have and i'm sure we'll have many many more but um you know miss i would i would um i would break it apart tellman i would say that

there's mistakes of commission and mistakes of omission so there's mistakes where you make an investment and it turns out your thesis was flawed or the research wasn't done at the level that you expect um i believe we've improved a lot in that regard but i will speak about that. And then there's also mistakes of omission. Those are the situations where you knew enough to invest and you didn't. And then you sit around and you blame yourself for years and years and years when you do the math on all the profit you could have made, but you didn't make. And so let's start with mistakes of commission. In terms of mistakes of commission, Tillman, the biggest one for me would be when I, an investor focused on high-quality businesses, dominant businesses,

exceptional businesses for the long term, does not do a good enough job of understanding the mentality or the mindset or the viewpoint, the opinion of the most important constituent in compounding machine investing, which is the consumer, the customer. It is really important to dig incredibly deep into the customer utility from a product or service. What is the value being offered to a customer by a product or a service? And I think that my biggest mistakes of commission have been when I did not take enough time to understand the deep profundity or essence of what it was about a product or service or offering that a customer loved.

And so when there was competitive change, when there was price competition or a benefits competition, I was not the first to know, and I did not do a good enough job of appreciating that. And of course, that can lead to a slippery slope because what happens with investors who focus on businesses that are undervalued relative to future prospects is when the thesis starts to slip, sometimes it corresponds with the stock price falling as well. And so you say to yourself, well, you know, maybe I was wrong. I was laxadaisical, but perhaps that's now discounted in the share price. Perhaps the share price is now accounting for some of the lapses on my past. And I've changed on that, Tillman, I want to focus on businesses that I understand the consumer value, the consumer benefit very deeply. And if I have a hunch that something is changing in terms of the ability for this business to be an inevitable success as close to, to inevitably dominant in five, 10, 15 years as possible, I don't want to be associated with

it because I only need a handful of companies. And we can talk about that as well, which is the increasing concentration that I've begun to focus on in terms of having a focused portfolio. The second thing, Tillman, oh, in terms of mistakes of commission as well, I should say that when it comes to understanding deeply the customer value, part of that comes from doing deeper work over time as you mature, getting out and talking to a bunch of people instead of just reading stuff on paper. But a part of it also comes from leaning into a circle of competence. So I think it's really important for an investor to expand their circle of competence over time. I think it's just as important for an investor to at any given moment in time clearly

define their circle of competence. And so what I found is that when I lean into my circle of competence, even if it's simple, even if it's a boring industry or a boring business. You know, as Warren Buffett says, there's no points for jumping a five-foot hurdle instead of a one-foot hurdle. So when I lean into businesses that I truly understand, I mentioned earlier how a number of consumer technology businesses came of age when I was coming of age, I really get these businesses. And the more I lean into them, the more comfortable I am because even though it's helpful to speak to experts and people in the industry, the more that you can have an intuitive understanding of the value, I think the safer an investment can be. It goes back

to Peter Lynch and Philip Fisher, buy what you know and buy what you know deeply. Now, let me end Tillman with the idea of mistakes of omission. Thankfully, while they're always painful, and I can name a number of mistakes of omission, one of which would be Ferrari, which I mentioned earlier, I've started to come to peace over the years with mistakes of omission. You know, if you do the math, that'll drive you crazy. What I've actually realized, Tillman, is that the greatest mistakes of omission that I've made

were not companies outside of the portfolio that I should have bought. It was companies that were already within the portfolio that I understood that I should have bought more of. And so I don't beat myself up that much about things outside of the portfolio. I've realized that if you do a good job of distinguishing excellence in business,

you're going to have plenty of good stuff in the portfolio. And it's an investor's job to recognize true greatness and to lean into it. Your portfolio typically has all you need, the winners and the losers. It's about how innately and how deeply you understand the profanity of your portfolio. What is your framework for portfolio construction? My framework for portfolio construction, Tillman, is I am buying pieces of businesses. I am just buying them on a stock exchange. they're not pieces of paper and that means that there's two currents that are at play at the

same time one is i really want to concentrate my capital where i have an insight where i have a deep understanding of the business and what makes a business special it's secret of success and so over time especially through these periods of volatility as well as as well as this period of increased competition in the last decade, I think I've gotten a very good understanding of which businesses are truly unique. And of course, I'll make mistakes, but I think that's a good baseline to start from. When I find those businesses and when I understand them, truly understand them, I want to own a lot of them. And so typically a full position would be at least 15% of capital committed, and it can be as high as a quarter of the portfolio in a given business.

Of course, the bar for the business is very high. The standard for the business is very high. And I think it's important and necessary to have high standards in investing because our alternative option, which is for our clients to index their capital to put it in a low-cost index fund, it's a pretty good option. So high standards are very important. There's not that many good businesses that anybody or great businesses that any specific particular investor can truly understand and that are undervalued at any given time. You know, I'm looking for businesses that, and this is an aspiration, it is a goal and an aspiration, not a promise, but I'm looking for businesses that are being valued such that they are offering using conservative

projections of future profits and IRA around 15% a year. 15% of year compounded is a very, very high aspiration, especially in businesses that are known to be incredible with a proven track record. And so when I find one, we're going to commit a lot of capital. And then there's the second current at play, which is the idea that you don't need to have all the position sizing right on day one because the nature of compounding interest is that the good businesses will prove themselves over time. The right picks will prove themselves over time. And even if you have a portfolio with, say, 15 stocks, as Christopher Cy said, my friend Christopher Sy, who is on your show, you don't need a badass concentrated portfolio, he said. You can just have 20 stocks,

which is relatively concentrated, and let them run. The winners will show themselves and the ones who are not doing as well will prove themselves as well. And then it's up to an investor to choose to shed them or to add capital to the ones that are underperforming. So both of these are realities. I just lean towards concentration because my personality is such that I want to put my eggs in a basket and watch that basket closely. And every investor has to invest in a way that is authentically them. The final thing I'll say is as a one-man shop, I can cover a lot of ground. I pride myself on flipping over a lot of rocks, if nothing else, then to compare our portfolio companies to other companies on a consistent basis. But in terms of owning something, there's

only a few things that any investor in a one-man shop can truly follow at any given time. at the level that is required when it comes to quality research. I'm not sure if Christopher Saiz said, bad ass, but I take this as a kind of quote. I'm paraphrasing. What kind of risk have you underwritten the past five years you wouldn't underwrite today anymore? That's a great question, Teltman. There's two ways I would answer that. The first is, back to what I said about investing in situations where the financials looked wonderful.

the returns on capital were great, the industry structure was great, the management team was in place, but they're aligned, they had a track record of success, it was trading at a reasonable multiple, but not thinking deeply enough about terminal value. When investing in compounding machines, when running any discounted cash flow analysis, which is the way to value a business, it's of course subjective, but inherently it's very, very logical of an exercise. When running a discount of cash flow, you realize that the terminal value, is all that matters. You know, you have the 10-year growth period and then the terminal value, which is the growth of the business from the end of 10 years into perpetuity. Very few businesses

last in perpetuity. I mean, if I sit here today, capitalism is brutal. My starting position is that everything dies in due time. And, you know, if we were to look for businesses that have been around for over 100 years, there's very few. There's some consumer goods companies like Coca-Cola. There are some luxury brands like Louis Vuitton. there's the railroads, there's the rating agencies, but there's not that many. And so with that in mind, with that as a starting framework, I think that not thinking enough about terminal value, not thinking enough about whether a business is earning high returns on capital because there is really a deep competitive advantage and customer utility, or simply because there's a cozy

oligopoly structure that has not changed historically, but can change in the future. And so you really want a business that when you, when you are, you know, I always say that you want a business that meets all of your criteria. It checks all your boxes. Once it checks all of your boxes, then you own it and you don't wake up every day reading about how great it is. You have a counter thesis and you explore the counter thesis and you constantly trying to figure out where you can be wrong. And so I would actually love to go into an example about this in the next segment, Tillman, in terms of how to diligence counter thesis. But, but that's what the focus should be on. And so, So, you know, there was companies that we bought where it looked cheap, but I didn't have a really deep insight into the customer utility and the unit economics in the future.

I will not look at those situations anymore. And the second thing is actually the reverse of your question, which is I'm not close to being an old man yet, but they say the young man knows the rules, the old man knows the exceptions. And I think through this very volatile five years, you start to notice some exceptions. And so I was really averse to leverage before, and I still am not a fan of leverage. But I've realized that investing is situation-specific. Every company is unique in its own way, and it's important to understand that some businesses may be able to support more leverage than others. So the way I think about leverage is it's like driving and having a knife glued or taped

to your steering wheel. And most of the time, you're going to be fine. But every now and then, you're going to run. over a speed bump, and you're going to get quite a scare. And so having watched certain businesses go through the recession in 01, the 9-11, the great recession of 0809, you know, the trade war of 2018, the coronavirus sell off. Having seen businesses go through all of this, I think I've gotten a good sense of which businesses actually can support some leverage to be able to enhance shareholder returns, whereas leverage to me was anathema before.

I would not even look at something. So over time, you become more nuanced, and over time you're willing to underwrite, not more risk than before, but you're willing to take a more nuanced look at things that may be characterized as risky if just looking at the headline or making a generalized statement.

We won't talk about the topic of counterposition here right now. I just want to give up an invite to reach out to him to talk about this topic. And maybe he also gives one or two book recommendations, because as you see from the background, he likes books and he has a lot of books he's read. Maybe let me continue with the question on your circle of competence as an investor. How would you describe it? Tillman, I would say a circle of competence is one that an investor can define.

And so it's not about just knowing what can go right with businesses. it's about knowing what can go wrong with businesses. And, you know, over time an investor will understand their circle of competence. What really helps, I think, is studying a number of businesses and then doing this exercise called a profit pool. And so Michael Mazbosin has talked a lot about this, which is on the X-axis having the revenue of an industry and on the Y-axis having profit margin. So if you were to take, let's say, the automotive industry, you would look at the auto-assemblers

or OEMs like Ford and GM. You would look at the distributors like LKQ. You would look at the parts companies like O'Reilly and AutoZone. You would look at the dealerships. And you would figure out how does the revenue lay across the industry? But then in terms of quality of earnings, who seems to be earning outsized rates of return on capital and high profit margins? And that can show you over time what are the real compounding machines or quality gems within an industry. And typically a lot of the talk tends to be on the businesses generating the most revenue when what's most relevant is the businesses that are the most profitable and have the greatest growth prospects of profitability as well. So, you know, I've over the years gotten to know

certain industries really well. I would say one of those is aerospace. There's a lot of businesses in aerospace, especially aerospace parts that I understand deeply and I understand more and more every year as I speak to people in the industry. I understand consumer technology very well, that once again, I came of age when many of those businesses were coming of age. Digital advertising speaks to me. So all of the simple stuff. And profit pooling really helps with expanding circles of competence. And the other thing that helps with expanding circles of competence is the ability to be a student of business models. And so when I started the firm, I would tell prospective clients that they should expect me to invest in potato chips before

I invest in semiconductor chips. But it turns out over the years, through studying these businesses, expanding my circle of competence, reading up on it, doing profit pooling, I started to understand some of my connectors better, which makes a lot of sense because I'm from the Silicon Valley. I grew up in a suburb. I'm here in a suburb right now near the Silicon Valley. and the history of the Silicon Valley is the history is semiconductors. And so what I did is I understood the idea of the outsource contract manufacturer

and the value they can add in an ecosystem. And once I understood the trajectory that a lot of contract chip manufacturers can go on where they go from very commodity products and over time they move up the value chain, I took that business model and I applied it to semiconductors. And so what I was able to do was understand Taiwan semiconductor very deeply, And it just so happens that they have ecosystem control because they are the contract manufacturer for the industry. And so they are the largest customer of the semiconductor equipment companies like ASML and KLA. And they're also the largest supplier to businesses like Nvidia and Apple and so on.

And so once you understand the company that has ecosystem control, you can then move outwards and understand other businesses in the ecosystem better and better. One thing related to chips as well as related to Circle of Competence, Tillman, and I'll be brief on this, is the idea of constantly living with where you can be wrong in investing, because that is key to Circle of Competence. And I wanted to provide just a brief example on that, and I have many more that folks can reach out to me personally with. I'm heavily invested in the cloud computing industry. This was an industry that came to be when I was in college at Berkeley. And, you know, I was in college at Berkeley during the perfect time. It was the world of big data.

And there was a number of startups, you know, being founded in Berkeley and in Stanford because of the rise of cloud computing giants, which allowed for these startups to outsource their storage and their compute. And it was something that was not possible decades before. So I view the cloud computing giants as a very structurally advantaged business or industry. They're all structurally advantaged businesses. They benefit from huge economies of scale. They have switching costs.

There's the process power of building and operating a data center. There's the lock-in, the rip-and-replace effect, the brand effect. I mean, you name it, they have it. Once I came to that conclusion and I invested heavily in the industry and I have for years now, my job was to have a counter thesis and every day ask myself where I could be wrong. And so more recently something happened, which is very illustrative of how I approach, circle of competence and ensuring that I prove to myself that if I truly have a circle of competence, that means that I know if something can go wrong or is likely to go wrong.

I started to realize that for the first time in a long time, the cloud computing giants were doing something, which was having to procure a number of GPUs, specifically from Nvidia, in anticipation of a killer use case for AI and machine learning. And this was driven by a lot of customers because there's a lot of artificial intelligence hype right now. So historically, the cloud computing giants, you can think of them as building or leasing data centers, filling them with racks, on the racks, they're servers. Each server has CPUs, they have some GPUs, there's a lot of networking equipment, there's memory chips, and that's the way to visualize the data center. And we know the historical economics of

data centers and of storage and compute, and they're very good, especially as customers start to use more and more of the cloud provider software stack. Well, I wondered if things were changing for the first time. And I wondered if the unit economics and returns on capital on this massive CAPEX spending by the cloud providers on GPUs, on graphic processing units, was as high as the historical returns on capital in the cloud computing industry. And so what I've been doing for a number of months now is I've been doing a very deep dive into speaking to a number of individuals in the industry who worked for cloud providers or worked for Nvidia or our customers, of the cloud providers. And what I'm trying to understand is the payback period, the return on

capital, and the unit economics of this new GPU wave for cloud providers. And so I think it's very clear to everybody that this is a huge positive for NVIDIA. The question is, is it a huge positive for the cloud providers, or is it a money drain? And I would just end with, the calculation is not that difficult. The question is, what is a cloud provider able to procure a GPU for from NVIDIA? There's a list price, but there's also volume. discounts? And then what are they able to rent out the GPU per GPU hour to end clients? And what is the incremental operating cost of doing so? The incremental power cost, cooling cost that they did not have to bear before in a CPU world. And there's some other nuances, which is utilization, contract links,

contract terms. Our customers are able to transition to new chips? If they're able to transition their contract to new chips, does the existing chips sit idle? Or is that, that chip able to be utilized. So there's some nuances. But these are really fun experiments to go out with the starting position that I believe the GPU wave may be really bad for my businesses. Now let me go explore that. And hopefully I disprove it. And I realize that these businesses still have a very bright future. So that's the approach of a circle of competence. It's constantly challenging yourself. And only then can you really define the circle? You already mentioned some of your business here and there, and I had a pleasure to read your letters, and I was a bit disappointed.

Like, it wasn't really fancy businesses your own. It was more like the boring ones already people know it's no Kavana, no nothing special, where I thought, oh, I have to, I never heard this name. Why are you trying to be unfancy and a bit boring? I'm not trying to be unfancy and boring. I would actually argue that the returns on these businesses and their persistence of excellence is very, very fancy. I'm looking for excellent returns. And that means I'm looking for excellent businesses that are undervalued. And I would say that a lot of times undervaluation can happen because of myopia, because markets get very myopic over time.

And investors can become very apathetic when there's some sexy new thing or some fast-growing industry. and it happens time and time again. I used to believe that a lot of the compounding machines, if you go and you look at the stock charts of compounding machines, Tillman, you'll find that they do really well over time. But if you draw a trend line above them for what the price you could have paid to earn a above average return, but not the incredible return they generated,

just an above average return, that trend line is much above the stock price. I mean, a lot of times it's consistently, above the stock chart. And so that's really interesting to me. I used to justify and rationalize this by saying that, oh, you know, the great businesses have positive surprises and they just continue to exceed expectations. Over the years, I've reformed that. I've started to believe that it's not so much that these businesses exceed expectations per se. I think it's more that the expectations were too apathetically low to begin with. And I think that's a product of human nature. That's a product of

auction-driven markets. I know from, you know, Peter Lynch said this when I was very young, I would read books. And Peter Lynch said, when you're at a cocktail party and everybody wants to talk to you, you're in the wrong stocks. I mean, it's when nobody wants to talk to you. They keep moving away from you. They're going to sleep and they're bored where maybe you're on to something. And so, I mean, I'm just looking for excellence. And I'm very open to buying something that is unconventional. I'm open to buying something that is well-followed. what I'm looking for is Alpha, and that is the North Star, and I believe that once again, it goes back to the idea that Nick Sleep said, which is that sometimes it's not about

the varying opinion or having a contrarian opinion on a company versus other people. It's just about understanding a business deeper than others. It's about having an understanding of the profundity of a business, of the essence, of what makes it special, which allows you to invest in it over the long term, allows you to sit through volatility and allows you to add through periods of volatility. And of course, that is supported by a tremendous amount of work as well, like I said, to make sure that you're looking at disconforming evidence and taking it very, very seriously. The other thing I would say, Tillman, is in regards to the size of businesses, because this is a question

that's brought up very much, you know, Charlie Munger has always said you live in the world the way it is, not the way that you want it to be. I started investing professionally in 2018 for clients. I didn't choose the time that I was born. I didn't choose the time to start a firm. I just started investing when I came of age. It just so happened that I joined markets professionally at a time when the number of companies in the public markets in the U.S. had gone from 10,000 many decades ago to somewhere around 4,000 now. And I think more recently it's gone up a little bit about 4,000 with the SPAC mania as well as some recent IPOs. but that's just a product of reality. It's just the world the way it is. And what we've had, if you look at the academic literature, is something called the Matthews effect. The idea that virtually every industry in America has increasingly consolidated over time. And that's been because of a world of low interest rates, a lot of cheap money, a lot of private equity. So a lot of businesses taken private or a lot of businesses acquired by strategics within their industry.

At the same time, a lot of the businesses that were younger that were invested by venture capital over the last decade and a half, they stayed private for longer. And by the time they came public, they became bigger. They were much bigger market capitalizations because technology is inherently scalable. And so they scaled a lot faster, especially with venture capital money than businesses of the past. And so I think it was just natural that I came into a world where the really strong, great businesses, the market leaders happen to be bigger.

They happen to be bigger. And I'm happy to look everywhere, but I find the true compounding machines. They've been around for a while. They have a track record for excellence. And because of the way that businesses can scale in today's world, they're naturally bigger. And I'm very comfortable with that because it's not about the size of a business. It's about, once again, what are the prospects for earnings per share in the future? And the final thing I'll leave viewers with on this topic is, you know, in 1990, Warren Buffett

investing in Coca-Cola, 1989, 1990. it's one of his most successful investments of all time. My understanding is at the time Coca-Cola was one of, if not the largest, market capitalization in the U.S. markets. 30 years later, or 25 years later, Warren Buffett invested in Apple. Apple was also one of the largest companies by market capitalization in the world at the time. And so people call them gems hidden in plain sight. I don't think they're hidden.

I think they're evident. A lot of people just aren't looking. And for many years, Warren and Charlie said it was really helpful to compete against people who were told that the markets were efficient. So they weren't even trying. I think more recently for a number of reasons, a number of reasons because of the way the industry has evolved, our investment management industry has evolved. And there's so many funds trying to sell themselves and pitch and market themselves

and raise capital based on being in buckets. I think that very similarly, people have just stopped. even if the large companies are well followed, I don't think they're well understood necessarily. And I think that people have just a lot of times stopped looking or stopped wanting to own them in size for personal reasons as well as because they're pushed by clients and limited partners to look elsewhere for Alpha. And I would just say I'm very thankful to have clients who understand that the job is to focus. The job is to be simple, is to own just a few businesses and not to invest in businesses with preconceived notions of what works and what doesn't. just to look at what is working in the world and try to copy that.

And so I invest behind excellence, and that's my answer to that. And I want to apologize for you being disappointed when you read the letters. I hope you can forgive me. Yeah. I try to. Maybe you come up with fancy ideas one day, but if excellence is your fanciness, you're just a capitalist that wants to make money. Yeah.

What should I say? My last question is what do you like about consumer technology companies like Alphabet, Amazon, and Microsoft your own? But maybe we've been a bit into the conversation and we already have also planned a small presentation in the community where we talk about a very interesting idea of this. Maybe let's keep it in the community and combine it with the invite for the viewers. So if you want to hear his thoughts on these consumer tech companies like Alphabet Amazon or Microsoft, please apply for the community where I had a link below and otherwise you can I give one little

can I give one little interesting tip for them okay so I would just say very simply what I like Tillman is that I these businesses I understand that very deeply I understand them as a consumer as a user I live in the world where they've been dominant for so long and I would say broadly what I like is I talked earlier

about the ability to have structural advantages that are a product of your business model and then positive feedback loops I would say very simply with all three companies you mentioned, they are two-sided marketplaces, in effect. They benefit from network effects, which is a very strong positive feedback loop where scale begins scale. And they also, the final quote I'll leave viewers with is, I mentioned this in one of my previous letters. One of my favorite quotes by a venture capitalist at Andreessen Horowitz named Alex Rampel is the battle between a startup and incumbent comes down to whether the startup,

can get distribution before the incumbent can get innovation and when it comes to a lot of these very successful consumer technology businesses of today's world my opinion is they have strong distribution and they got a lot of innovation within them and so i think these businesses will keep chugging for some time and the rest of the specifics of the of the businesses tillman will save for the group thank you then if you're interested in more please to the community. And thank you very much for the interview and your great insights. And I hope we can keep on doing interviews in two years, three years, five years, 10 years, 20 years. There's a lot of compounding waiting for you. Absolutely. I'll be around and time is the force multiplier for

compounding interest. And so, you know, I'm proud of what I've been able to achieve for clients over the last five years through a tumultuous volatile period. But what I'm most excited about tellman is the fact that we have many, many decades to go to continue improving, evolving and compounding capital on behalf of clients. And so thank you for having me and I'd love to be back. Thanks for coming and bye bye to the audience. Bye bye. As in every video, also here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says, always do your own work. What we're doing here is no recommendation and no advice. So please always do your own work.

Thank you very much.