Good Investing Talks - Why do you like Deere & Company stock, Alex Furmanski of Unison Asset Management?

Episode Date: May 6, 2025

Alex Furmanski of Union Asset Management joined us for the first time for a podcast to discuss his investment approach and why he likes Deere & Company stock.

Dear viewers of Good Investing Talks, it's great to have you back at the podcast, and it's great to welcome Alex Fomanski of Unison Asset Management. Alex, from where are you joining us right now? Hi, Tillman. I'm joining you from Miami today. Thank you for having me. Now, everyone is a bit jealous about the weather. You're enjoying at the moment, so let's maybe switch topics fast and talk about investing. Alex, how long are you, since we've been? When are you in the investing game?

So I've been investing professionally for over 20 years at this point. So it's been quite a journey. And how long do you want to stay in this game? You know, it's one of the best things about investing, as exemplified by Warren Buffett and Charlie Munger into their 90s and almost 100. this is a perpetual game that knowledge is cumulative and as long as you have a little bit of luck and your body and mind most importantly keep working correctly it's something that you know you can keep on doing forever so you already mentioned this 20 years you're in the investing game what are free learnings that have changed you as an investor in this 20 years you know probably the period that most shaped my philosophy was the great financial crisis I was early in my professional investing journey when when that happened and so my aversion

to risk in large part stems from my experience during that period of time it was a difficult period for a lot of market participants and I'm a big believer that no hard times should go by without learning many lessons and I clearly learned my fair share of lessons from from that tumultuous period. So that was probably, you know, a good thing that had happened early in my career. The last thing you want is an episode like that to teach you lessons later in life. But, you know, this is a constantly evolving game and journey and you're always trying to, you know, incrementally get better. What are other learnings that shaped you? You know, when I started off in investing, I was more of the cigar butt approach type investor,

meaning I was looking for stuff that screened optically cheap, you know, stuff that had high, you know, free cash flow yields, you know, the proverbial, you take a last puff out of the cigar butt before it kind of goes extinct. And I, you know, through hard lessons, I learned that it is much better to compromise a bit on price and focus more on quality because ultimately, an investment will return

the return uninvested capital that that company is able to generate on its reinvestment. And so if you're investing for the long term, which we are at unison, you need to find those companies that have that ability

to reinvest at high rates of return for long periods of time to end up with a good outcome. You already mentioned risk in your previous answer? What are the most important risk factors you're looking into in this stage of your investing evolution? Yeah, so we define risk as permanent impairment of capital as opposed to volatility or beta, which a lot of market participants seem to focus on. And so, you know, what we do here at unison is we're bottoms up investors where, you know, we're trying to ascertain, you know, with conservative assumptions, what a business would be worth kind of on an intrinsic basis.

And obviously, those estimates have key inputs that go into generating them. And so if you make a big mistake in your underwriting or your assessment of intrinsic value, then, you know, security could be worth much less than you thought originally. And that's how you end up with a permanent impairment of capital, which is, you know, how we define risk. Maybe let's go a bit away from the investing topic and talk about your motivation. So what are things outside of investing that keep you pushing even harder to achieve success in your profession? I've always been into sports quite a bit. I'm a avid runner, tennis player, biker, skier.

Anything that focuses my energy and mind on, you know, athletic greatness has been a great outlet for me. You know, I ran, well, only one marathon, but a lot of half marathons, always trying to push down my time. And, you know, I find that, you know, the resilience that gets embedded in one that competes, you know, athletically is very akin to the investing game. You know, you have some of the best and brightest minds in the world competing against you. This is a game where you're trying to go to bed every night and be slightly incrementally smarter by reading, doing a lot of work and research, and just loving the game. And it's very akin to sports. So I'd like to draw that analogy between kind of investing in sports. Let me take this idea of the long run you're trying to do.

What is your goal you try to achieve? for you and your client base in the long run? So historically, the U.S. stock market delivers kind of call it 9 to 10% annualized returns. And this is, by the way, over long periods of time, you could go for, you know, stretches of decades without, you know, positive performance, as was the case from 01 through 2010, 2011, for example. So what we tell clients and how we do our underwriting is, you know, we try to target at least a 12% rate of return when we're underwriting securities, which is a nice margin over, you know, the historical result that the market has delivered. It's important to note that, you know, we hold ourselves accountable over a full market cycle to deliver these returns because depending on where,

you are measuring in the cycle, you know, somebody might look very smart, but they might be taking an undue amount of risk. And so, you know, going back to my earlier comment and lessons learned early in my career, you know, lesson number one is don't lose money and lesson number two is don't forget lesson number one. It's very hard to come back from from large losses, not only because of the way, you know, the numbers work, right? If you lose half of your capital, you have to double to get back to par. But also psychologically, you know, if you are not in the right frame of mind to take advantage of periods of dislocation and increase opportunity because you're fretting over your losses, that can have a meaningful impact. As it did with me in the

great financial crisis, I was more timid than I should have been, you know, in late 2008, early 2009. And part of that was I was nursing, and this was on my personal account, I was nursing some heavy losses from the period leading up to that. When I'm honest and think about investing businesses and investing funds, it feels a bit like it's a commodity and a lot of strategies sound a bit like the same. But it's also important on the other side to differentiate. What is your differentiator with your firm? Absolutely. I couldn't agree more. But we're big believers that actions speak a lot louder than words.

And so despite the fact that a lot of it sounds commoditized, when you actually dig a little deeper and look at how principles in investment funds act, you find quite a discrepancy. I would say that our biggest advantage is our time horizon, and that really stems from having the right investor base. So in a world where holding periods on stocks has gone down from years to, I think it's less than 10 months now, our holding period is going in the opposite direction. So our average portfolio turnover, I think, has been around 13%, which implies, you know, an average hold period of seven to eight years on our securities. I think that that makes us definitely a minority. There's actually a study that was done by one of our peers, I forget who, but where they looked at this concept of concentrated value in investing, and I think they defined it as having one position greater than 5%, an annual turnover of less than 30%.

And only 1% of capital in global markets. I think this was around 2019. So of the 80 trillion, only 800 billion was invested with this concentrated value investing philosophy. And Berkshire was half of that. So despite the fact that we seem to be sometimes hearing the same story over and over again, the truth is very few market participants act in this manner, at least professionally. And I think a lot of that stems from the pressure they get from their limited partners to deliver short-term results. And so, you know, whereas a lot of professionals are trying to determine if a company is going to meet or beat expectations on a quarterly basis,

we're looking kind of more three to five years ahead and asking ourselves, is this company going to be in a stronger and better position in three to five years? and that ability to kind of look through the short term generates some great opportunities. You also look for businesses with exceptional quality. So let's dive into this. What is quality and is exceptional quality? Yeah, absolutely. And by the way, this is one of those terms that I think has gotten taken to an extreme. And we saw the consequences of, you know, it's just not, you know, quality in and of itself doesn't give you a margin of safety.

You need quality and the right price. And I think a lot of people forgot this lesson in the period leading up to 2022. And we saw the consequences of that. And I would maybe argue a little bit currently we're speaking in late February of 25 seems to be happening to some degree again. You're trying to marry quality and price. You're always trying to do that. And it's a trade-off to some degrees. But to answer your question specifically, for us, a great business is one which can

reinvest its excess capital at above-average rates of return for long periods of time. And so we are keenly focused on a metric called return on incremental invested capital. And, you know, we've dissected the market. market by tiers and how, you know, the rates of this metric compare for our holdings and stuff on our watch list versus the broader market. And that is, you know, how we ultimately define quality. And what is this tweak to exceptional quality? Well, it's not, I mean, let me let me back up. If you look at, you know, the market over long periods of time, and there was a study by a professor out of Arizona State

University looking at this. I think he looked at 100 years of stock market history, and basically a third of 1% of all public companies during that period accounted for half the value creation in the market, and 4% accounted for all of it. And so what's exceptional, you're trying to buy those companies. Easier said than done. But this is a game where you really only have to be right once and not be wrong a lot, and you can end up with an extremely good track record. So for us, the journey really is to try to identify and hold those securities that, you know, make it into that short list of statistics I just cited. But where do you get ideas for such kind of companies from?

So we have a process called serendipitous discovery. We get ideas from our heavy dose of reading, not only newspapers and magazines, but trade journals, company filings, all of that stuff. But also from just keeping our eyes and ears open and observing the behavior of our children. you know, see what products and services they're gravitating to or on a personal basis, what we're gravitating to. We're big believers in becoming users of a product or service when analyzing a company, because from that vantage point, you're really able to understand the value proposition much better.

So, for example, our company that we used to own up until recently, Uber, when we were, you know, doing our due diligence on it. My partner, Daniel, became an Uber driver for a couple of weeks to really understand the economics from the vantage point of the driver. There were some specific questions we were trying to answer, and the best way to get the answer, you know, besides asking the drivers is actually becoming one and experiencing it. So really ideas come from anywhere. both been doing this for over 20 years. So we're very familiar with a lot of the companies that are out there.

But we're always on the lookout for new stuff. Maybe let's take the picture of a cook. So you get a fresh idea or fresh fish on the table. What kind of aspect do you spend the most time in researching or preparing it to put it in the soup? your offer for his portfolio? No, absolutely. It's a lot more on the qualitative side than the quantitative side.

It's really focused around understanding if the company in question ultimately has pricing power, right? Because pricing power is the holy grail of investing. And pricing power comes from, you have an exceptional value proposition, be it a product or service that you're providing to your customers, that, you know, no matter kind of almost anything that can be thrown at that business, you can charge a bit more and still, you know, continue to earn those great returns on incremental invested capital. So really our process is honed in and focused on understanding that value

proposition. And obviously these things don't happen in a vacuum, meaning there's competition. So a lot of our analysis and we like to call it, you know, our scuttlebutt is talking to competitors, to customers, to suppliers to really get a sense of, you know, how the company that we're analyzing is positioned with within this ecosystem. So we can get back to that question of pricing power. In your research process, which free investing mistakes have improved your process the most? Mistakes happen for all types of different reasons. Like, I'm thinking about one recent mistake, which was we underestimated the technological

disruption of a newer technology and how that would affect the company we own. So disruption is always, you know, a big risk in investing. You know, you might find something that has. a 50-year history without much disruption and then all of a sudden, you know, a new technology shows up that throws everything on its head. So it's always, you know, trying to look ahead and not so much look through the rear view mirror. That would probably be the biggest one that's, you know, that I can think of right now. Is there another mistake you could share with us? that influenced your process?

Yeah, I think the other mistake would probably be what I alluded to earlier, which was, you know, the focus on statistical cheapness and not enough on quality. And that's just a mistake that, you know, time is the friend of a good business. And so if you own a bad business as time goes by, you know, probably the intrinsic value of that bad business is deteriorate. and so a lot of my investing mistakes have come from from that bucket if you will hey timon here it's great that you have made it that far into the video and i think it shows a certain passion for investing you're having if you want to dive deeper and go further down the

rapid hole you're invited to apply to my community good investing plus it's a place that's very helpful to people who are ambitious about investing. It's helpful to investment talent as well as Experian fund managers. So if you're interested, please click on the link below. And now, without further ado, enjoy the conversation. In this episode, we also want to talk about an investing idea you currently own and find interesting. We pick John Deere or Deere and Company, which is John Deere. Also, like, what kind of products does this company sell? So, John Deere is a powerhouse in agriculture.

They make tractors and combines that are ubiquitous here in the U.S. and really in many parts of the world. That's their core business. They also have a smaller construction business, which they acquired a couple of years ago. But really, the core business is. is on the ag side. So it's a company that did $38 billion in sales last year.

And the ag side of the business is probably north of two-thirds of the revenue. And geographically, it's a similar split, you know, between the U.S. and the rest of world where the U.S. and Canada are, I think, two-thirds or so of the business. What is deer doing better than the competition in the market? So, you know, the moat on deer really stems from scale, first and foremost. So, you know, they have the largest dealer network in North America and the second largest globally. So basically what this means is if you're a farmer and you're on your, multi-million tractor and it's the middle of harvesting season and you have a problem that needs

to get fixed. The last thing you want is to have a lot of downtime. And so having the ability to, you know, get your tractor serviced and repaired in a quick manner is critical. And so deer has nearly 1,500 dealers versus CNH, which would be the next one at less than 500. So, That's a very important reason for their advantage over competitors. Scale also allows them to invest a lot more in R&D than their competitors, just for reference. So like I said, Deere did $38 billion in revenue, Agco and CNH, which are the number two and three combined, did $25 billion last year. So that gives you a sense of how much more they have to spend an R&D. And this translates into that.

So since 99, Deer has invested nearly $30 billion into R&D, which is greater than the market cap of CNH and Agco combined. And so this R&D has delivered some of the best technology out there, which really addresses the needs of farmers to make their operations more efficient. So let me take a step back. If you look at, you know, the total spend on a farm, the equipment is about 10% of a farmer's spend, around 30% is land, and 60% is labor, seeds, fertilizers, and other inputs. And so going back to what I was talking about in pricing power, really, what

you're doing is, you know, if you improve the technology on the tractors, combines, etc., and you're able to reduce the other 60% bucket because, you know, you have these cameras and sensors that allow the spraying to be, you know, very specific as opposed to, you know, over a general area, then you can save the farmer on fertilizer, seed costs and all that stuff. And so that is the value proposition that, you know, John Deere brings to the table and they're able to have better technology than their peers in large part because they've spent a lot more. So with this idea of excellent quality put on Deere, what does this business make an excellent quality business? Well, ultimately to us, it goes back to, you know, return. So, you know, this is a business that can generate, you know, mid-teens returns on incremental invested capital over a full lag cycle, which we believe is pretty attractive for such a dominant and established company that has been around for over 200 years.

Obviously, it's not the highest rate of return. But again, we got to trade off stability and visibility vis-a-vis return. And so, you know, we think that the risk reward of owning John Deere or starting to buy it when we did in August of last year is pretty compelling. How comfortable are you with the reason multiple expansion of John Deere? Well, listen, as you can probably surmise, you know, John Deere and ag equipment manufacturers are heavy. to act prices which are notoriously volatile. So just to give you a sense, you know, in the current cycle, corn prices went down 50%. In the last downturn, which was 2013 through 2016, they went down 70%.

And since we invested in August of last year, I think corn prices are up nearly 40%. So when you talk about multiple expansion, I would argue it depends on. you know, what earnings estimates you're using because really, you know, the price of corn went up significantly. And by the way, that's just luck on a short-term basis. If you step back, you know, historically, these ag cycles last about two years. You know, when we invested originally into deer, I think we were 18 months or so into the current ag cycle.

And we, you know, after doing deep work and talking to a lot of participants, we didn't really believe that, you know, this ag cycle was going to be more pronounced or deeper than others. So that gave us some comfort that we were closer to the bottom. Obviously, we didn't know exactly where the bottom was and that, you know, corn prices would, you know, increase materially soon after we purchased it. But a lot of the price action in the stock since then has been driven by corn prices and broadly commodity prices increasing significantly. We still think that, you know, when we look at our estimates on on a mid-cycle basis, which is really what we used to underwrite deer, we're still getting kind of north of that

12% IRA that we talked about. So there's still value in deer despite the run in the stock. What is your holding horizon for the company? Ideally, forever. That's what we really try to target with all our holdings. Unfortunately, price fluctuates a lot more than value, and so every now and then we have to get rid of a security because the price runs too much ahead of its value.

But we'll see what we'll see. But we'll see what happens with Deere and our holding period is ultimately going to be determined by, you know, the stock price and the value at which it trades. Maybe to sum this part on Deer up, how would you describe your investment thesis in a short summary? Listen, I again, so number one, why is this company great? It's because it has scale. What does the scale allow it to do? Number one, it allows it to have a much broader footprint of dealer networks, which leads to less downtime and better service for its customers.

And number two is it gives it the wherewithal to invest a lot more in R&D than it's next to competitors, which are CNH and ACCO. And the statistic I said was since 1999, Deer has invested nearly $30 billion into R&D, which eclipses the market cap of C&H and ACCO. So we believe that, you know, this scale advantage is the hardest one usually to, you know, replicate. And we believe that, you know, Deer continues to be ahead of its competition. I would encourage your viewers and listeners to take a look at some of the videos of, you know,

that Deere has on its website. you know, touting its technology, it's pretty, you know, impressive, you know, some fun facts. Like, for example, deer's machinery moves on a third of deer's surface. And in their last investor day presentation, they were talking about how, you know, how large-scale farms can operate these days in large part because tractors and combines have become a lot. you know, more automated and efficient. And they were talking about how a farm that's 40% larger than Manhattan is operated with only 20 workers and 34 machines.

And so that efficiency that, you know, in large part comes because the technology is so great because the R&D spending is so high is a very attractive proposition to farmers. Maybe let's jump to one last talk. Public portfolio construction, how do you think about portfolio construction? What is your framework to build your portfolio? So we typically have around 20 or so positions. And we usually try to size positions at 3, 5, or 7%.

There's no magic to why it's 3, 5, and 7 other than that makes positions big enough that they're impactful. It's very hard to find good investment ideas. You know, Deer was the only idea we added to the portfolio last year. And so we are extremely selective. And so at that kind of sizing, that usually is impactful that, you know, if you're right, you're going to make good money and if you're wrong, it's not going to be fatal. So that's generally how we size positions.

Another thing we take into account when sizing positions is our biggest positions aren't necessarily the ones where we can make the most. It's the ones where we think we can lose the least. So it's a bit of a different way of framing how you size positions. And that goes back to the risk aversion I was talking about earlier. So that's generally how we approach portfolio construction. One other thing I will say is in our mandate, we have the ability to hold cash in lieu of finding great opportunities. And cash has been building for us in large part because the securities that we hold, a lot of them have appreciated. We've exited some of them.

And so cash has just naturally built up because we haven't been able to redeploy some of that cash into great ideas at the moment. So your framework is more anxious than aggressive, how you build your portfolio. Yeah, listen, we're paranoid about a lot of stuff. But, you know, this is a business and a game where you also have to know when to be aggressive. And so we are pretty good contrarians to a large degree, meaning, you know, because both my partner and I have lived through several market cycles already. We know kind of how it feels when there's a lot of blood on the street and that's when kind of the muscle memory kicks in and pushes you, even though your gut is kind of telling you, you know, the best decisions

tend to be where your, you know, your gut is kind of spinning and you're a little bit unclear about whether you should be pulling the trigger. Those usually end up in the best decisions. I don't want to come across as, you know, we're afraid to act when the time is right. We've become a lot better at that. So as the second last question, where can people follow you if they're interested in your work? So we have our website, unisonam.com, where, you know, we share interesting information. and you can sign up for our monthly reads newsletter where, you know, on a monthly basis, we share some of the more interesting stories that we come across in our learning journey.

That's probably the best place. And both myself and my partner are also on Twitter, although I'm not that active. I do tweet every now and then. Those would probably be the best places to follow us. Thank you very much for your time. And thank you very much for the audience to sticking with us and listening to this episode. Bye, bye. Bye, Tillman.

Thank you very much. I really hoped you enjoyed this conversation. If you did, please leave a like and a comment and for sure subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer. So here you can find a disclaimer. It says, please do your own work. This is no recommendation. What we are doing here is just a qualified talk that helps you, but it's no recommendation.

Please always do your own work. Thank you and hope to see you in the next episode. Bye-bye.