Invest Like the Best with Patrick O'Shaughnessy - Carl Kawaja - Wisdom from Decades of Investing - [Invest Like the Best, EP. 236]

Episode Date: July 27, 2021

Today’s conversation is one of my all-time favorites, with someone I’ve come to respect deeply in the field of investing. My guest is Carl Kawaja, who has served as a portfolio manager at Capital Group for decades. Capital Group is among the most respected shareholders in the world, with over $2T of assets, and listening to Carl, you’ll hear why.   In our conversation, we cover Carl’s criteria for building conviction around long-term holdings, why he views uncertainty and ambiguity as healthy, and why tolerating failure is key to great investing career. Throughout our discussion, Carl connects his lessons through a variety of direct experiences, personal analogies, and broader frameworks. I love his ability to talk in the weeds about his investments in Vale and TSMC and then quickly shift to his broader thematic views like “The Empire Strikes Back.” I hope you enjoy this great conversation with Carl Kawaja.   For the full show notes, transcript, and links to the best content to learn more, check out the episode page here. ------   This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days, Canalyst has models on Robinhood, Marqeta, Grab, and everything in between. Learn more and try Canalyst for yourself at canalyst.com/patrick.   ------   This episode is brought to you by Eight Sleep. Eight Sleep's new Pod Pro Cover is the easiest and fastest way to sleep at your perfect temperature. Simply add the Pod Pro Cover to your current mattress and start sleeping as cool as 55°F or as hot as 110°F. To embrace the future of sleep and get $150 off your new mattress go to eightsleep.com/patrick or use code "Patrick".   ------   Invest Like the Best is a property of Colossus, Inc. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.    Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.   Follow us on Twitter: @patrick_oshag | @JoinColossus   Show Notes [00:03:38] - [First question] - The two companies he has owned the longest and what they’ve taught him as an investor  [00:16:37] - Discussing his investment style through the lens of simplicity   [00:24:35] - A time where he worked to try and create a simplified equation but couldn’t  [00:30:59] - Discussing his investment style through the lens of echolocation and ambiguity  [00:36:03] - Thoughts on whether buying well or holding well is more difficult [00:40:40] - Capital Group’s history and his river-rafting analogy in regards to the company [00:47:48] - What he means by “The Empire Strikes Back” and relevant market themes [00:54:50] - A brief summary of “The Empire Strikes Back” [00:58:42] - Common reasons that he may have gotten something really wrong  [01:03:34] - Impressions made on him by the poet Rilke [01:09:00] - The work of Brunello Cucinelli and the nature of quality  [01:13:08] - Advice for new investors who want to step into the field and set themselves up for success [01:13:54] - The Visual Display of Quantitative Information  [01:17:39] - What he’s learned about kindness [01:19:54] - The kindest thing that anyone has ever done for him

This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. I'd heard of Canalyst over the past few years and became more interested after meeting the founder and CEO last year to pick his brain about SaaS businesses. Founded by a former byside analyst who encountered friction in sourcing, building, and updating models, Canales is now used by over 300 institutions, including the largest money managers in North America and by a number of guests on the show. With detailed company-specific models, on virtually every investable public equity, Canalist clients are able to react more quickly.

If you've been scrambling to keep up with a deluge of IPOs and SPACs these days, Canalist has models on Robin Hood, Marquetta, Grab, and everything in between. Their pre-IPO models are built as soon as the S-1 hits and include all segments, KPIs, and non-gap figures. If you're a professional investor and haven't talked to Cannibalist recently, you should give them a shout. Learn more and try Canales for yourself at canalist.com slash Patrick. C-A-N-A-L-Y-S-T-com slash Patrick.

If you're curious to hear more about Canales, stay tuned at the end of the episode when I talk to Canales customer Ryan Cope from American Century Investments to discuss Canalist in more detail. This episode of Invest Like the Best is sponsored by 8 Sleep. Eight Sleep's new Pod Pro cover is the easiest and fastest way to sleep at your perfect temperature. It pairs dynamic cooling and heating with biometric tracking to offer the most advanced solution on the market. Simply add the Pod Pro cover to your current mattress and start sleeping as cool as

55 degrees or as hot as 110 degrees. It also splits your bed in half so your partner can choose a totally different temperature. I was so impressed after using 8Sleep that I became an investor. To embrace the future of sleep and get $150 off your new mattress, go to 8Sleep.com slash Patrick or use the code Patrick. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts,

and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinion. and do not reflect the opinion of O'Shaunsi asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. Today's conversation is one of my all-time favorites with someone I've come to respect deeply in the field of investing.

My guest is Carl Kowajah, who has served as a portfolio manager at Capital Group for decades. Capital Group is among the most respected shareholders in the world with over $2 trillion of assets. And listening to Carl, you'll hear why. In our conversation, we cover Carl's criteria for building conviction around long-term holdings, why he views uncertainty and ambiguity as healthy, and why tolerating failure is key to a great investing career. Throughout our discussion, Carl connects his lessons through a variety of direct experiences, personal analogies, and broader frameworks. I love his ability to talk in the weeds about his investments in Valé and TSM, and then quickly shift to his broader thematic views like the Empire Strikes,

I hope you enjoy this great conversation with Carl Kowajah. So Carl, I think an interesting place to start is around two of the companies that you've owned for the longest. I think you know which two I'm talking about. It allows us to talk about an interesting contrast between them because I think their performance has been similar, but they're drastically different businesses. And I want to know what you've learned from the experience of owning these two companies. So welcome and start by telling us what these companies are and the lessons they've taught you.

Sure. Thanks, Patrick. Thanks for having me on the show. I'm a great admirer of it, as you know. Well, the two companies that I thought might be interesting to talk about fall in the category of, I hate to say the word unique because it's so overused, but very special businesses, distinctive businesses that do some of that's hard to replicate. And I guess what I was struck by and thinking about talking you today was what are companies that I've owned a long time and what, kept me in them and what is it that they do that is differentiated. I actually just tried to figure out what were the companies that I've owned the longest. I've managed money as a diversified portfolio manager at capital for 22 and a half years. And today actually happens to be my 30th anniversary. The two companies that I have owned continuously for the longest time are Taiwan Semiconductor Manufacturing and Valle, the Brazilian I. iron ore producer. And I'd say those are two really different businesses. And I think that if you should have asked the average person which one is more distinctive or does something harder,

90% of people or more would say that it's Taiwan semiconductor. And I would agree with them that they do do something that is really hard to do and incredibly distinctive. They are the world's leading semiconductor manufacturer. They obviously supply a variety of fabulous companies like Nvidia and AMD and so on. If you've looked into semiconductor manufacturing at all, which I know you have a little bit, they operate at incredibly precise specifications for manufacturing. So clean rooms, you can't have any foreign particles. I believe this is true that the mirrors inside the ASML EV machines are balanced to such precision that if one of the mirrors in one of those boxes were the size of the state of Germany, the eastern part of Germany would have to be within

one millimeter of the western part of Germany. So just extraordinary. Those lasers, they shoot a laser through a drop of liquid tin and it shards into the inner beam of light and etches a line that is three nanometers wide, really, really hard stuff to do, incredibly hard to do. And I guess one of the reasons that I've owned TSM for a long time is that they do have a core confidence at doing something that is so difficult like that. Although ironically, perhaps that is not the most difficult thing that a TSM does. And for me, the insight that I had about TSMC and the reason that I've owned it for a long time or one of the things that has kept me in it has been that, TSM is actually able to do something so difficult as that, but also at the same time to satisfy

the needs of multiple customers. Intel obviously has formidable manufacturing expertise. IBM did. Samsung does. Global foundries perhaps did. The Chinese government has thrown tens of billions into semiconductor manufacturing without much success. It's both kind of a brute force problem and a science problem, but also there's an element of art to it. There's an element of coordination across multiple vectors and an analogy, a very simple analogy, and I'm prone to those apologies, but one that I like is I love my mother's cooking, probably every son does, but I think my mom's great at cooking. And my mom is also great at making dinner for 14 people and having a conversation with you at the same time.

And somehow, like, everything is warm that is supposed to be warm and everything that is cold is supposed to be cold is cold. And everything kind of arrives on the same time. And I know all my mom's recipes. I've seen her in the kitchen a million times. But, you know, if I have you and like 12 friends over for dinner, like, the lettuce is going to be hot. The steak's going to be cold.

I'm going to bring the beer like two hours later, dessert is not going to be finished. Somehow she's able logistically to put a bunch of different things together. And TSM is extraordinary in that way. And another analogy I thought at TSMC kind of reminds me to those restaurants that I used to go to when I was a kid, often like a Chinese restaurant, where the menu is, it feels like it's a 40-page menu. And there's chicken with cashews, chicken with peanuts, chicken with pistachos, walnuts, pecanes, almonds. And, They do this incredible job of satisfying all these different small preferences. And in my view, a mistake that Intel and perhaps Samsung or others made is they were

incredibly good at the most popular chicken, call it chicken with cashews, spicy cashews. And they did that incredibly well. But then customers came along who said, oh, I'd like chicken. I'm allergic to cashews. I'd like the chicken with peanuts, please. And they said, well, that's going to cost you. 50% more. That's a big change. And people went to TSM and TSMC got good enough at all the different variants that eventually they were the biggest chicken and nuts purveyor in the world. And their

cost of chicken and nuts and their ability to make chicken and any kind of nuts fell precipitously relative to everyone else and gave them value added. Okay, hopefully I've in a long-winded way giving you a feel for why I think TSM is special and why I've liked it. Almost platformed in its fulfillment capabilities, like a web services would be, like, you can do whatever you want with its platform, whereas with the other ones, like, you can have any car you want as long as it's black, that'll model fee thing. Yeah, yeah. And it's very durable. And for me, it's hard to hold on to stocks for a long period of time. The few central grounding principles that keep me in it are very helpful. And of course, there were times when I guess I could have optimized returns by

selling it and then buying it back at the low. And I've done the little trimming and adding here or there over the years, but it's kind of tough to hang on to something unless you have some core belief that what they do is special and you remind yourself of it or are reminded of it over time. And then, of course, if it changes and goes away and you were wrong, then you should sell it. But I believe this is roughly true, Patrick. Looking at the course of the last 22 and a half years, I believe that the all country, World Index is compounded about 7.5 or 8% a year. Over that time period, Taiwan Semiconductor has

compounded at about 18.5% a year. But interestingly, to me, the other company that I've really liked is this Brazilian iron ore producer, and it has also compounded, believe it or not, in dollars at about 18% a year. Why is that? What is unique about that? Iron ore is a commodity. You can type it in to Bloomberg and get the price every day. And iron ore actually is prevalent around the world. I'm not a geologist, but I think it's probably fair to say that iron ore exists in every country in the world in some quantity. And lots of countries mine iron ore.

And iron ore has been around since the Iron Age. So it's not a new invention. And in fact, the process of mining iron ore is not incredibly. I mean, it's complicated, and I don't think you and I should go into the business, but it's nothing like what TSM does. But what is distinctive about Valle is that iron ore in the quantities and of the grade at which they find it really primarily only exists significantly in two places in the world. In Brazil, in the Amazon, where CVRD, where Valle is based, and then also in Western Australia

in Perth. And the nice thing about the iron ore that Valle finds is that it has a very high ferrous content. The high ferrous content makes it fantastic iron ore to blend with your domestically sourced iron ore. And the biggest iron ore consumer of seaborne traded iron ore in the world, not surprisingly is China, where most building occurs. And China has plenty of domestic iron ore, but it's low-quality iron ore that is, expensive to smelt and turn into steel. So they need to import Brazilian and iron ore to enrich the quality of their iron ore. And I ate dinner at a friend's house last night and they made this pasta pomadoro from their garden. And I'm sorry, I'm going with all the cooking.

I love it. Let's keep going. Or actually, it's possible in Naze. But they had picked this basil in their garden and they blended it in to the pasta sauce and they blended in a little bit of parmesan. It made it amazing. It was delicious. And of course, I could buy the meat at the market and I could buy the tomatoes at the market, but they had this ingredient that made it better. And basically, that's what Valle does. And it really only exists. It's a cornered resource on a large body of water in a country that has a significant infrastructure.

So they have found iron ore in other places in Brazil, and Anglo-American spent a lot of money on a mining development there. But it turned out it was too far from the water. Because although the iron ore price has gone up a lot, I actually find it very affordable for what it is. Currently, the iron ore price is around $220 a ton. Not that long ago, it was $60 a ton. But I challenge you to ship anything from here to China in vast quantities for $220 a ton. Like it's a long way to send something, and they do it very efficiently.

And then their own cost is obviously a fraction of that, so they're very profitable. And I really like the dynamics of the iron ore market because basically there are three significant producers in Australia. There's one significant producer in Brazil. And they basically control the global seaborne traded iron ore market. Although I love companies like Google and Amazon like others do who speak on your call. And I love a company like TSM as well. I actually suspect that Valle's competitive advantage is more durable. than any of those companies. I know that's heresy to say that. And Facebook has an incredible

moat. And I love Facebook and love the stock and management and all of that. But steel has been around since the Iron Age. And it works really well. It's everywhere. ubiquitous. It's ubiquitous. And someday we'll all return to the office, hopefully. And when we do, we'll take elevators up to the 38th floor or the 82nd floor. And the reason that you, you can live and work in tall buildings is because of steel. There's no one who listens to this call who lives in a tall building made out of wood or brick or plaster or carbon fiber. Everybody who lives in a building that basically is over 10 stories lives in a building that depends on steel. And tragically, of course, there was this accident in Florida where I think one of the reasons

was that the rebar had rusted inside of it. Steel makes so much of the world possible. It makes cars possible, planes possible, tall buildings possible, cities possible. It's been around a long time and nothing's come along to displace it. So I think the odds are very good that nothing will. Actually, I remember several years ago I went to see Amazon, which is another company that you know, Patrick, I like and admire a lot. I was at their new headquarters when they were actually just building the spheres. So I took a couple of pictures, all the building that was going on for posterity.

And of course, I loved Amazon, had a great meeting and was struck by it. But it also came back and I was like, look, Amazon's this incredibly cool company that is very virtual and e-commerce and the new age. And guess what they're buying a ton of? Steel. You know. If you think about these two companies, what they share in common is a distinctive competitive advantage, a very different competitive advantages.

But it's also one that you said you like to have a lever or two or a key variable or two in the businesses that you can keep checking in on to maintain your conviction. I think it's a good excuse to ask about that finding those variables and just your investment style, more generally speaking, you gave me these three great ideas that love to explore each of them in turn to summarize your investment style, those three being echolocation, ambiguity, and simplicity. Maybe you could explain those three just as a window into the rest of the industries and trends that we'll explore in our conversation. Well, I'll start with simplicity. I find I do better as an investor in businesses that I understand.

To be honest, sometimes I invest in businesses that I don't understand. I don't invest in them. I try to invest in businesses that I understand, but what I sometimes find is that I didn't understand them after the fact and something surprised me. But I like businesses that I understand, and I like it when I can explain to myself a couple of the, key metrics of the company. And for what it's worth, when I meet analysts internally, and we have a

very big research team here at Capitol that I feel blessed to have access to, but also folks in the outside world, folks on the south side and so on. I like it when people can kind of lay it out for me and say, for example, I was looking just coincidentally at another Brazilian company the other day. This is a soybean crush company called Bungi. Our analyst said to me, well, here's how you think about their business. He said, a bushel of soybeans weighs 60 pounds. And when you crush it, it produces 44 pounds of soybean meal and 11 pounds of soybean oil. And I think four pounds of hulls and a pound of waste or something like that.

Hopefully that adds up to 60. Soybean oil sells for about 60 or 70 cents. So soybean meal, I think, goes for $450 a ton, and I think they're 2,000 pounds and a ton. So that's 22 cents or so, 23 cents a pound. And in my simple mind, I can say, okay, how much meal and oil does this produce? What is the revenue for that? What is the cost of a bushel of soybeans, which I think is 12 or 13? bucks and then do the math and figure out how they make money. And so I like being able to explain

to myself on a business. Here are the simple metrics that drive it. So when I go visit them and they say, oh gosh, the price of soybean oil has fallen from 70 cents to 15 cents, it means something to me. And I kind of quickly do the math and understand it. And I also like understanding the math of why their product works for customers and why it is compelling to customers. And a good example for me like that in terms of simplicity, if I may state another one, would be Apple, which sadly I do not own anymore, but I bought, I feel like our memory is always that we bought on the low day of the year in question. The reality is not quite that true.

but I do remember buying Apple kind of around 2007, 2008, a few years after the iPhone had been introduced. I think the iPhone was introduced in 2005. And one of our analysts, a guy named Craig Bcock, who I work with, did this great work where, from memory, and my memory's little foggy, but at the time Apple was not recognizing all of the revenue of the iPhone up front, because there was some concern that there'd be some cost of churn and replacement of the phones and so on. And they weren't quite sure how people would use it. And he was able to explain to me that, in fact, no one was going to give up their iPhones. And that's obvious to you and me now.

But back then, that was like the Nokia, Erickson, Sony, da-da-da, and Apple was a new entrant to it. And I was like, you kept your phone for a little while. And then if there was another one that was better, you junked it and you got another one because if the Erickson phone had a better, cooler look or something like that, you just switched your phone number to it and it was no big deal. He was able to explain to me, gosh, this is a much better product for customers. People are going to get this and hang on to it and not give up on it and they're going to put

photos on it. And if you remember back then, I can't remember how many photos you could store in. Not many. But it was like 200 photos. And you're like, oh, my God, who's ever going to take more photos than that? It's like, you know, now we all come back from vacation. And it's like, there are 300 photos on it from the trip. So he was able to explain that to me and explain to me what I work for customers.

Then another one of our analysts, a guy named Andre Miroshanu, gave me this great insight where at the time, initially, the iPhone was only available on AT&T. It was not also available on Verizon because AT&T subsidized the phone a bit to get it in the hands of consumers. And people said, well, this is not that competitive of phone because AT&T needs to lose money to sell this phone. And they're only doing it because it's a hot phone and they're trying to get customers. but it's a bad business idea. And our analyst Andre said to me, well, the thing people are missing is people are buying voice plans with the phone, which is pretty much what most of us use phones for back then. He said, and they're also buying these data plans.

And it turns out that they're texting a lot and they're downloading stuff. And I was like, oh, really? People are using phones for that? It turned out people are using phones for that a lot. And now, of course, we watch NBA playoff games on our phone. We watch Netflix on our phone with phones. all about data and voice became a commodity. But he explained to me that actually it's a great deal for ATMT to be selling these phones because they are getting these very valuable data

hungry users who will stay with them. The net present value of acquiring those customers is worth much more than the subsidy of getting them. I guess that's what I think about Patrick when I talk about simplicity of a business. Unit level understanding of what's going to going on. Unit level understanding of the economics, yeah. And also in my own head, how do I make money on the stock from here? What are the expectations? Are they going to sell a lot more phones? Is the price of soybean oil going to go up? Is the cost of advertising going to go down? A rough understanding of the metrics for myself. Yeah. It's basically like, can I build a simple equation for this business and then go work on the variables and try to figure out what might drive success or

failure. The other thing I would say, Patrick, is I often find in successful investments, really just one thing mattered. You spend a lot of time trying to understand 30 different things. Do I like the CEO? Is the CFO honest? Is the tax rate going to go up a lot in Japan? Is the new variant of the product, not coronavirus variant, but the new model of the product going to sell well? Is Apple going to compete with them, whatever? But usually, only one thing ends up being important. And what I try to do is figure out what is that one thing. And if I don't know what that one thing is, it's kind of like playing poker. You're the dumb guy at the table and you should stop playing that game and let the person who knows what that one thing is play.

And then is that one thing likely to be very determinant in terms of how the investment works? And then do I have superior information about what that one thing is? Like do I, have a differentiated point of view. If you meet all three of those characteristics, then it's promising. Then you should do more. Is there an example of the opposite where, and ideally it's with a business that people might recognize, where you did work to try to create the simplified equation and you just couldn't figure it out? Oh, all the time. Like I'd say that's the bulk of my time. The bulk of my time is going to meetings and seeing companies and exiting the meeting and saying, I have no idea. They might do great. And if so, Patrick O'Shaughnessy's going to own it and he's going to do well,

but I will not. Another way I sometimes think about that math is, let's say that there are 2,000 or more working hours in the year. I sometimes think that really only, I hate to say it, but only like two or three hours were the good ones. The other 1,000. and 997 hours, we're looking around for the good hours. But when you find those good hours and they're not hours, they're minutes or something like that, they're golden and they're amazing. And you're in a meeting and you have an insight. It just resonates with you. And I'll tell you an example of a conversation I had like that, not even a meeting. This is a secondhand conversation. But I remember speaking to a Japanese bank analyst in the early 2000s. And he was a goal. Goldman, the name was David Atkinson, and he'd been asked by Hank Paulson to be a translator of a meeting that Goldman had with Mitsubishi UFJ. And it was at a time when the big Japanese Money Center banks were in crisis and in fundraising mode. This is an unusual position to find themselves in because generally speaking, credit quality in Japan had been good. Obviously, there had been huge asset, inflation leading into that and they have very low cost of deposits.

but nonetheless, they all found themselves capital short. MUFJ and Goldman had a long partnership stretching back to a predecessor company like in the early 1980s. And Hank Paulson, who I didn't have the good fortune to know, but had a great reputation, was in Japan to see whether investing in MUFJ would be of interest to Goldman or partnering with them a little bit and giving them an equity. infusion of about a billion dollars or something like that. And I remember talking to David Atkinson about the meeting. And I said, you know, how is the meeting? And he said, well, it's a very

interesting meeting in one respect, which was that Japanese company meetings, and I lived and worked in Japan for capital. And he said, it was very interesting meeting because the chairman of, I think it was the chairman of MEFJ or a senior official there, said to Hank Poulson, we're very honored to have you visit us. you so much for coming. We've had this long and distinguished relationship that matters very much to us over and above money. And so before you make this investment with us, I think I have to warn you that we may fail to succeed as a firm. That wasn't news to the market. Stock was down a ton. Everyone knew they needed to raise money or not make it. He wasn't really telling him something new. but in the context of company meetings that I have had and hundreds and hundreds,

if not more than a thousand of them in Japan over the years, meeting a Japanese CEO and having said to me, be careful, you might not want to invest in our company because you might lose all your money, because we might go bankrupt. That is kind of equivalent to an American company saying, the world is on fire. We are exploding. We're being hit by a meteor from outer space.

And we are going to do everything we can to avoid that eventuality and try to do well. I heard that. And honestly, it made me want to run out and buy all the Japanese banks subject to due diligence and meeting them and understanding the math. It was something that really made me think. I feel like I spend my year rooting through haystacks looking for like thin little golden, needles that point me one way or the other. And sometimes it's something that a company said. I get an insight about the product or I think about the math a little bit differently

than other people. And you realize that the total addressable market is really 10 times bigger than you thought and not the size that everyone else thinks. I actually had an insight like that. I hope I'm not going on too much and giving you too many of these. but I had an insight like that with Google and Facebook once where I was having an argument with one of our analysts who I really respect a guy named Mark Casey. He's a fellow portfolio manager now. But I said to him, I said, what happens when the size of the business for advertising fishing becomes bigger than the fishing industry itself?

when Facebook and Google are bigger than the advertising budgets of Procter and Gamble and Unilever and Coke and Nike, like, is a business still successful? And I sort of did some of my rough, quick, simple math, aided by another colleague, guy named Ryan Brown, to say, if they continue to grow from here, how much of the world ad spend do they consume? I think world ad spend was like two and a half trillion at the time or something like that. and they were 10% of it, let's call it or less. They grow incrementally as tough as people think. And my colleague Mark said to me, more politely than this,

but you idiot, the advertising market's a lot bigger than Procter and Gamble and Unilever. The advertising market is the local pizzeria around the corner that now gets one incremental customer by reminding you that they've got a special tonight or something like that or they're bundling cheese sticks with it, and all those other merchants who have arrived in the giant ecosystem and the global advertising market was vastly bigger and also going to grow much more because there were a million folks who'd never really advertise before and had no access to capturing customers on social media and would. So you tell me which makes more sense first, echolocation or ambiguity, you choose.

We'll do both. I think I could sort of bundle them together in a way. I have been at this same firm for 30 years. One of the reasons for that, of course, is that I enjoy it so much. I'm so grateful to the firm, but also I really think it helps me to be at a place like this. And I guess what I mean about echolocation is that a colleague of mine, Martin Romo, made up this term. And he said, you're like a bat, basically, that runs around the cave kind of shrieking, and which is not totally far from the truth about the way I am in the office sometimes,

kind of shrieking out ideas and kind of hearing how it sounds when the sound comes back to me and like finding my way through the cave. If the sound really hits me here, like I realize I got to go a little bit left or a little bit right, often I will have a investment idea and some of them are totally wrong. For a while, I really like merchant power generators and Calpine and Miranda. For a while, it was very right and then terribly, terribly wrong. But I sort of tried to convince a bunch of other people that these are great ideas at the firm. People came back to me with really good reasoned arguments about why I was misguided and wrong and stupid.

And it kind of saved me a little bit from myself. I got this feedback and I wasn't able to convince them. And then there are other times when I've had an idea and I've shouted into the void, maybe I didn't hear the echo come back. And I was like, oh, there's a long runway there. There's a long way to go. I remember when Google went public in 2004, one of those same analysts, Mark Casey, he built an earnings model for Google that assumed that they would have a fair amount of operating margin compression.

He still really liked it. And I did a little bit of that rough, simple math, and I said, they literally need to hire every computer PhD who has graduated in the United States for the last five years in order for them to like grow expenses as much as you forecast. There's no way this is happening. So I built my own earnings model that was twice as bullish as his earnings model and he liked the stock plenty. I forwarded it to another colleague who was skeptical about Google and I said, well, here's why you're wrong. Here's my Aaron's model. He cleverly figured out that I had hacked Mark's model and was using it, but I didn't find his pushback convincing. He didn't convince me that I was wrong, and so that was an investment

that I liked that I did. And I think that partly ties in a little bit to ambiguity, Patrick. Bill Miller is a friend and someone who I admire and have tried to learn from, and this quote is not exactly right or exactly true to Bill, but it's roughly right. I remember when Bill was with Lake Mason Value Trust and had that phenomenal track record that he put together, someone asked him how he felt about his portfolio, and it was at a time when he'd done incredibly well and was doing really well.

And he said, I feel pretty terrible about it. He said, I have some stocks that have done well and they've gone up a lot and things are going their way, and he's like, I'm terrified of those. I'm really worried that they're overvalued, like all the good news is in them and they've had their run. And he said, and then I own some others and they've been real dogs and they look really cheap, but it looks like maybe they're just on their way to being a lot cheaper and have no terminal value.

He said, usually when I feel that way, I do pretty well. That miserable state of uncertainty is kind of a good place to be. I really learned a lot from that. And I try to remind myself of that because I do think we have this post-factor. certainty that we say, gosh, it was so clear to me. I always love Jeff Bezos. I thought he was going to do so well. I remember the Amazon converts in 2001. I think they yielded 13%. You can look back on that and be like, well, I tried to buy every one I could then. And in fact, I do remember buying them then. And frankly, the only reason I bought them then is some other colleague of mine said to me,

You're like, you idiot, you use Amazon all the time. Stocks down a bunch. They have to convert that yields 13%. Like, how can you not buy a little bit? And it's important to remember that when you did these things, you weren't quite certain. And it took a long time to develop certainty in them. And it's good, even with things that you like, to maintain a little bit of that uncertainty, too. Because sometimes you start really loving the things that have done well and convincing yourself that they have a huge moat and that the CEO is great and so on, and then you blind yourself. So for me, that ambiguity and uncertainty is an important part of my own investment process,

but supplemented by other folks here. What do you think is harder, buying well or holding? I think it partly depends on your personality. I do believe that this job is very idiosyncratic. We all learn from people in this job. I learn from you. And I'm not just saying this because I'm on your podcast, but I love listening to the podcast.

I know lots of other folks who do. And I learned from your questions, and I learned from the folks who speak. I'm informed by it. But my grandmother used to say, like, to thine own self be true, and she ran a small general store and was a successful entrepreneur,

and I feel like I learned a lot from her. And I do think you kind of need to bring, this is like a trendy comment for anyone who has kids in school, but you need to bring your whole self to it. But you sort of need to bring the things that make Patrick O'Shaughnessy, Patrick O'Shaughnessy, like in your case, your love of the woods and love of Whitman to your investing process, because that makes you distinctive. So with respect to whether it's harder to hold or harder to buy well, I think it kind of depends on your personality. And for me, I guess, My personality and investing nature is partly formed not just by the left brain or something like that,

but my childhood. The part that makes it hard to hold, I feel like I benefit from my mother's influence. My mother is, with all due respect to her and hopefully she won't listen to this podcast, one of the most stubborn people I've ever met in my life. my mom has a point of view about the way kids should learn to ski, which is you start at the bottom of the hill and you sidestep your way up. And once you get good enough to sidestep your way up to the top of the hill, then you can ski down it.

Not the most fun approach to learning how to ski, but one that she feels like is tried and true and safe and works well. And you're not going to convince her otherwise. And that part of me has helped me hold on to things. I guess. The part, I'd say that buy well, and sorry to reference my parents, but my father was a finance professor, went to Columbia Business School and then taught at UCLA and became an entrepreneur. And I feel like I learned the buy well part from him because my dad is very numerate, very savvy, distinguished in school and knows a deal like the minute he sees it. I would go to a restaurant

with my dad as a kid. My dad would say to me, what do you think of the prices on? this menu and say, what do you think is underpriced on this menu? Do you think they're charging too little for the salad and too much for the drinks or vice versa? And then my dad, for what's worth, I used to basically everything used to come down to raise the prices. If restaurants are full, it's because their prices are too low. It's much better to have higher prices, fewer customers and make more money. My dad also used to say, and this feels like getting a good deal, but my dad used to say that when we were kids, he gave us 25 cents and told us to like walk around the neighborhood and come back. And if we didn't come back with a dollar, we weren't his children

and he, you know, kick us out of the home. But that by side comes from that. And you need a mix of them. In terms of what I think is harder, and sorry, I segwayed a bit from your question. I love it. It's so interesting. For me, probably holding on to things is harder because my nature is a bit reflective of my dad, I'm always looking for deals and bargains. And for me, everything kind of comes down to math. You're renting a house for the summer. And I always want to get the best deal, like the best location, the best road, the best view, the best layout, the best terms or something like that. My mind gravitates to that. I'm sure you're the same way, Patrick, but you want to build a spreadsheet, an algorithm, and like search air with me and V and B.NB. And

find the best thing and like, yay, you won. And sometimes it's like you won, you won, you won. And it's like short-term gratification. It's like social media or something when really what you should have done was buy the house. I see you enjoy it. And enjoy it over the years. Yeah. And hold on to it. This is the kind of thing my mom would do. My mom would be like, oh, that's a nice place. Buy that and go there every summer. And you'll have a really happy life. Whereas my dad and I, more, oh, well, there's that other place, three blocks down, it's like a little bit closer to the beach. Doesn't that look interesting this summer? You mentioned Capital a few times. It's such an interesting firm that I think relative to its size, it's done a very good job of being a quiet giant of sorts. You mentioned this idea of this

river rafting analogy in the history of Capital Group, which itself is just an incredible business history. Could you just say a few words about the firm, this analogy reference and why it's such an interesting place? I'd love to. I joined Capital in 1991 out of business school. I shouldn't say this, but I'll admit that I kind of had a backup offer if it didn't work out because I really didn't know much about the firm, and it was hard to learn much about it other than through the interviews, and I kind of thought, I'll work there, but I know some other people in the industry, and if it doesn't work out, I'll go to some other place. And in fact, the other place that I could have gone to was going to pay me more than twice as much as I made for going to capital, which meant a lot to me coming out of

business school with loans and everything else. But 30 years later, I'm still here. So I'm the lucky one overwhelmingly to still be here. The river rafting analogy that I like, Patrick, is I feel, and of course everything's subject to change, but I feel that at this firm, at least, if you work hard, and you keep an open mind and enter with certain attributes that we are really responsible for determining before you join or while you are here, things are basically going to work out pretty well here because we have a long-term time horizon. And some of the older former partners at Capitol used to like to take younger associates like myself on river rafting trips in the summer, like we'd organize 20 or 30 of us to go on a river

rafting trip in Idaho on one of the big river systems there, like the snake or the middle fork or something like that. And if you've ever been on these river rafting trips, first of all, they're a ton of fun and I'd highly recommend them. Second of all, I'd say they're like a little scarier than you might think. There are some rapids, there's some kind of waterfalls, people fall out of the raft, the water moves quickly, it's cold. And what I say to people when they join at Capitol is that The river rafting analogy is very apt because you don't know what part of the river you got in at. You don't know where you dropped in on the river. And you might have dropped in right before the rapids.

And if you did drop in right before the rapids, the odds that you're going to drop your ore or fall out in the boat are high. And you want to be in a boat where there are seven other people who've done it before and who are digging with their oars and pulling, who importantly are going to go downriver and pull you out if you fell out of the boat and put you back in. And sooner or later you will hit clear water. Like you will hit a long, smooth stretch of clear water and you will make your bones. And sometimes you joined in January of 2008 and you went into the global financial crisis, which you and I remember was scary. and you're a new analyst who just graduated from Harvard or Stanford, Columbia, or wherever it is. And oh, my God, you're in the rapids and you're going over this waterfall and people are falling out of the boat, especially you.

And it's really important to be at a firm that has a long time horizon so that you kind of have time to figure it out. I think a lot of people aren't smart enough or perspicacious enough to figure it out on day one. And we have very long time horizons here. So this firm really was started in the 1930s by the Lovelace family. And this is roughly true, but the legend goes that the original Mr. Lovelace, John Lovelace, he was working in Detroit at a stock brokerage firm as a partner. And he got nervous about the frothiness in the market. And he took his money out.

I think he took half of his money out in 1929. And then by the end of 1929, the other half wasn't really there. But the half that you took out was very valuable to have taken out. He moved to Los Angeles, which is obviously far-sighted. He started capital. I believe that we acquired an investment company of America, which was like an early mutual fund, basically, in either 1931 or 1933. And then he ran the firm for 26 years without making money. So he was a SaaS pioneer before SaaS existed.

But he ran the business with a very long-term time horizon that is still true to the way that the firm is managed today. So we try to invest with a long-term time horizon so that TSMCs or Amazon's or Valleys, we try to own with a long-time horizon. We try to manage money for people who we encourage to have long-term time horizons. And then we try to take long time horizons with people too. So there are folks here who've started as analysts and frankly had terrible results. And we've waited five years, six years, seven years to sort of see whether they were in fact bad. If you covered U.S. financials in the beginning of 2008, it was hard to look smart at the end of 2008. You certainly own one of them.

It was terrible. So we'd give that time. And also sometimes the best thing we like to say that happens internally is when you lose money right off the bat. It's a great mind-focasser to be unsuccessful. And especially in this current hiring environment, I see so many resumes from leading business schools. These candidates, they haven't made a mistake their whole lives. And not much has gone wrong. As you and I well know, when you invest, lots goes wrong.

All the time. Yeah. You look so stupid. It's so embarrassing. And some people can't cognitively process that well. And they should go do another job. Like, I don't know whether management consulting has lots of failure, but those people seem really smart to me and seem to do well.

Like, maybe go do that job. Go do some other thing where if you work hard and are smart, you're going to either win a lot or win a little, but basically you're going to win every day. But you shouldn't do this job. unless you're willing to experience a lot of failure and have it be really galling. In my experience, the best investors here, I had a former colleague. He used to say that he'd had more one-way bungee jumps than anyone else at Capitol. And he was arguably the best investor I ever saw here.

I think he made that point on purpose. I mean, he did it to be self-effacing. But I think he was also saying, hey, if you want to do well like I have, you need to be able to tolerate doing terribly. One thing that really makes you distinct in all the conversations we've had is you've already talked about it today, this fascination with how stuff works, like systems behind an outcome. I think the first time we talked, you walked me through like how a wind turbine asset works, like in this crazy amount of detail and that you just enjoy that sort of thing. With that in mind, I'm really interested in this idea you have of the Empire Strikes Back. Can you describe what potential, I'll call it market theme that you've been thinking about more recently? Yeah, I mean, sometimes I think it's helpful to have an idea in your mind of things to go out and find more of.

I can't imagine there's anyone who comes to your call who doesn't say that they haven't learned a lot from reading Warren Buffett. I remember that I read this thing about Nebraska Furniture Mart years ago in one of the Buffet annuals where he said, Mrs. Blumpkin, he said that he was so stupid because when he met her, he forgot to ask her if there were any more like her at home and turned out that her cousins or something like that were the boreshimes and then he bought boreshimes. That worked out well. Sometimes I like find a family that I like the Blumpkins, the Bumkins per se, but then see like Do you have like a daughter at home that my son could marry? Right.

And for me right now, one idea I've been thinking about is this idea of the empire strikes back, which is what is the extent to which existing incumbent companies, the empire, can reinvent themselves to respond to the companies that are disrupting them and doing well? So I feel like Amazon famously for a long time killed Target. Target, in fact, was briefly Amazon's partner, with all due respect to the management of Target, I was always blown away that they partnered with Amazon to sell their products to represent their store online through Amazon. And Jeff Bezos has said to me that he feels like Amazon would have done a pretty good job for Target. And he may be right.

I'm sure he is right. but I think Target should have been making those investments themselves early on, obviously, to be competitive. But now what are we seeing? We actually are seeing Target reinvent itself and adjust to it. And some of these established retailers are reaching a tipping point where they have a certain percent of their sales online and they're using their store network, do some fulfillment. And some people do still like going into stores. is another example of a company like that would be Indotex, which owns Zara. I don't know how well you know that company.

This decently well, yeah. Banished retailer, but a brilliant retailer, in my view, a brilliant founder and a brilliant current CEO, Pablo Isla, with apparel, it's changing, but with apparel, a lot of people like to go into the store, and they like to try on the product. And importantly, they like to return the product. A lot of people, I think they have sort of have to have. a philosophy. I'm going to buy six different things. I'm going to keep actually two of them, but I'm going to try them on for fit. I'm going to see how they look in the mirror, and then I'm

going to return them. And it turns out that having a physical presence is very helpful to that. Another example of a company like that, in my view, in a company that I really admire, I think it's really interesting to spend time on right now is General Motors. And I really have a ton of respect for Mary Barra, the CEO there. She is a GM lifer. Her father also worked at General Motors. In my view, a very, very talented executive who I suspect could have a bevy of the most coveted jobs across America and has chosen to stay at GM to kind of reinvent GM. What has she and the team at GM done? Invest incredibly heavily, push all the poker chips on the table. behind being successful on electric vehicles.

And I really think that they have some great products coming. Time will see. But if this new Cadillac lyric is a success, if the electric version of the Silver Auto Truck is a success, and if this Hummer, which looks awesome, by the way, electric Hummer is a success. I mean, how interesting, what is more Empire Strikes Back or reinventing yourself

than taking the Hummer, the most kind of loathed planet killer vehicle, like imaginable and making an electric version of it. And I live in San Francisco, which is center of an environmental movement. And I had a friend, a colleague, a guy named Bill Gray, also at Capitol, who drove a Hummer, but lived in Marin, and he felt like he had to stop driving the Hummer, because, like, so many people kind of yelled at him and said, like, you're destroying the planet. It's a scarletter. Yeah, exactly. So I think nothing is going to make Bill happier than to have like an electric hummer because it is a really fun car.

And then they also are inventing themselves in terms of autonomous vehicles reinventing themselves. And I actually think what they're doing, cruise is really interesting and it's a longer and separate discussion. But to me, autonomous vehicles remind me a little bit of the iPhone. and we're not at the stage where we know for sure they work and so on. But if autonomous navigation works in vehicles, both trucking and passenger cars, it's going to be such a powerful thing. And I think electric vehicles already are that. We've seen it in Tesla, but the Chinese EV companies, for example,

are also terribly interesting that way. And I drive an electric car now, and I'm never going back to a combustion engine car again, partly just because I didn't like going to the gas station. Like, I just didn't resonate with me. Like, I didn't get a lot of value out of going to the gas station. Like, it's not that much time, but it just drove me crazy to spend my time, like, waiting there and filling up. And I'm such a person who's always trying to time optimize.

I always was like, does it make sense to fill the tank 100%? Or like, what is the math of, like, filling it 90%. You know, that extra minute I saved myself today. Like, what'll that add up to over the next 20 years? And then I think Disney probably is the poster job. for it. Remaking itself with technology. Yeah. Hats off to the team there. I haven't known the stock. Some other folks have, but my family sure likes Disney Plus. My daughter wrote me, my daughter, Noel is my media advisor, but she wrote me about the Loki show that I guess just came out. Yeah.

Yeah, drop last night or whatever. And she's like, you have to drop everything and watch it immediately. She's like, please. And my son, Marcus, who you know, Patrick. He feels the same. He thinks they're contents dynamite. So congrats to them. Is it a good way to sum this idea up that there are these big, call it like S&P 500-style industrial American companies. GM's a great example that's been around forever. And that there was this couple decade period of just technological explosion.

And we know the winners of that. The Fangstock sort of won that story. But all these businesses still have enormous ecosystems, like huge embedded infrastructure and processes and talented people. people on some time horizon, talented people with a bunch of access to resources, like, are going to compete and try to catch up. And the world got so used to the Fangstocks winning that the valuation discrepancy got very, very wide. And that sort of is the Empire Strikes Back opportunity. Is that like a fair summary of it? That's a very fair summary of it. And look, they're not all going

to make it. Lauren Buffett also has this beautiful analogy about horses. I forget the exact math, but there were, I don't know, 20 million horses in America in 1900. That math's not right. And they're like 6 million now. They're fewer horses. That, as an aside, maybe the math on non-autonomous cars. If autonomy works, I do like driving. It's fun.

But I don't know if I like it that much, especially over the July 4th weekend. I don't know if I like it enough to have a car that doesn't have full autonomous capability. and maybe roll this forward 50 years from now, driving the car yourself is going to be something that like old guys do to indulge their nostalgia. Our children will be like, oh yeah, dad used to drive a car. Here, I'll show you how it works. Their kid will be like, oh, God, that's so neat.

You can turn it yourself. That's amazing. Most stuff won't make it. If I can segue Patrick, like another thing that you and I have talked about that I think is interesting right now. now and maybe like partly speaks to the Empire Strikes Back thing is, I wish I knew the answer to it. I'm just raising the question, but I think it is an interesting question. One of my colleagues, Brady Enright, did some math that really resonated with me the other

day. It's that simple math. But he looked at the percent of S&P 500 earnings that the top five companies account for. This is roughly true. But I think Apple, Microsoft, Amazon, Facebook, and Google are 22 percent of that. S&P 500's earnings. There are 500 companies in the S&P. Five of them are 22% of the earnings and similar percent of the market cap.

And also, I think there's probably no one who comes to this call, myself included, who doesn't have fairly rosy outlooks for those companies. Like, I think the consensus is they're all going to grow 15% a year. You know, Microsoft's a 20% grower, Amazon's a 20% grower, Facebook. book has so much monetization laugh, yada, yada, yada. But if you assume that they all grow that quickly, if you assume that the S&P 500, I think we would all agree, is not going to compound at 15 to 20 percent a year over the next decade. But if these companies do, not only are they 22 percent of S&P 500 earnings now, but they're going to be 75 percent of S&P 500 earnings.

And that seems unlikely to me. And so to me, that is kind of an interesting market question right now. Like, if you were a betting man, would you take the other 495? Would you take the field? Or would you take the Lakers? Those five companies are the Lakers with LeBron and the healthy Anthony Davis and maybe like James Hardin and Kevin Durant on the team too. The field still wins often, yes.

Yeah, as we saw in this playoffs, guys get injured. something happens. And maybe the government does the injury or something else happens that injures them. When you've gotten things really wrong, whether omission or commission, something you missed or something you did, is there some common reason that you did get it wrong? Funny, you're asking me one of my favorite questions, ironically. Like, one of my favorite questions with CEOs is to ask them, what is their greatest error of omission and commission? In our business, it is my view, and for me certainly personally, it is the case that is the errors of omission that bother me the most. And so I really don't spend much time worrying about errors of commission.

And I have made, and maybe that's because I've made so many of them that if I worry, if I'd never sleep at night. But I also think it's kind of healthy not to get too hung up on them because I learned so much from Jeff Bezos's annual reports. I love them. He has that analogy. where he's like, in baseball, you can hit a home run and score four runs if the bases are loaded, but that's as well as you can do. But in our business, you can hit a home run and score a thousand runners and beat the other team like a thousand to three. It's worth swinging for it.

I think that is generally more true of the investment business. You can strike out. So I worry more about errors of omission than errors of commission. when I have made errors of omission, I would say that it is often because I have not, and it's embarrassing to say this, but it's because I have not done enough work, and I have not been open-minded enough about the opportunity. I have dismissed it. And I'm sorry, I'm citing so many of my colleagues, but I always associate ideas with names.

But I have another colleague whose name is Andrash Razen, who his own Tesla. probably since it was $18 a share or something like that prior to like a million splits. So maybe it's like $2 a share or something like that. And we're good friends. And we were driving around San Francisco, actually in the beginning of 2000, when I still could have bought the stock. And he said to me, he's like, look how many Teslas there are here. He's like, how can you not own this stock? Like everyone wants to own them.

And I remember I was at a Columbia Business School class. And one of the students wrote a short report on Tesla that was convincing, as all the reports were back then at the time, about how much cash they were burning and they were going to be insolvent and everything else. And I was one of the judges, was one of those class judging things. And I said, to the students, I said, who in the room wants a Tesla? All of them raised their hand. And I said, I would not short the stock if I were you. Like, I don't know whether I would buy it, but I wouldn't short it. But honestly, I was too lazy and too. close-minded to do more work myself. I knew that what they had was something really powerful

because everyone wanted them, but then I didn't push myself to do more. So I have made multiple errors of omission, and I make them all the time because I am narrow-minded. My father has a saying that I like, as I mentioned you before, he was a professor, but my dad likes to say there no decisions that are difficult to make, and I think it's sort of true about investing as well. He said there are only decisions where you have imperfect information. So any time that you can't decide what to do, force yourself to go get more information. On the errors of commission, I guess one theme, that's probably true that I haven't done enough work on those also. occasionally I have deluded myself and I've kind of allowed myself, particularly when the story

changes, I've sloughed it off. There was a CEO who I really liked and then he got a job at another company that seemed really good. So he left and he went that, went to go work at that place. And I didn't sell the stock because I was like, well, I still like the business a lot and he did get this other offer. Like I generally think when a CEO has a good job and is doing a good job at a firm that he likes and he leaves, he has written you a letter saying to sell the stock and you should read the letter. And there's always some fancy reason. This happened or that happened, but there's nothing more fun than running a company that's doing great and doing a great job of it. With room to run. With room to run. And when she leaves and goes to some other place or

retires to Bermuda, sell the stock because they know something that you don't, or at the very least, quadruple the amount of work you do on it to see if you're certain about it. I have a couple of questions on maybe they're a little bit funny for a conversation on investing, but I know they're influences or things that have impressed you or made an impression on you that I'd love to share with people. The first is the impression made by the poet Rilke. Well, I do love Rilke. I know that you sometimes ask people. what their favorite things are to read. And I feel like people have all these very scholarly things.

I love Michael Mopison, who's on his show, for example. And as an aside, like, I think everyone should, like, read every single thing that Michael writes. But then I've said, as much as I love Michael, I doubt that some of his wisdom will have the staying power of letters to a young poet. And I have learned a lot from reading Rilka. And one of my favorite Rilka quotes gave me a softball, because I know you like this one, too. but he says, perhaps all the dragons in our lives are princesses who are only waiting to see us just once act with beauty and courage. I love the idea that dragons or princesses, and I think

we often look at things that are problems in our life, think that they're so daunting when really their opportunities. And I don't mean to be Pollyanna, and of course some problems are problems. But like in my own case, I had cancer 10 years ago now, 10 years ago this summer and totally fine now, luckily. But that was a problem. That was a dragon. I was scared. And initially we didn't know what source of the cancer was and didn't know the trajectory of it. And it turned out I was very lucky and it worked out well.

But it's been a princess for me or a prince depending on your gender. But it has been something wonderful. I got involved in cancer research. I got to know several scientists. Some of those scientists became some of my best friends. I joined the board of a hospital, the hospital in San Francisco. Other people started to view me as a cancer resource or someone who they would call if they had a question or knew something.

I ended up investing in a few companies related to oncology, and that worked out well from a work perspective. It ended up being something great. And Patrick, I know you are such a prolific reader, and I enjoy like going to Investors Field Guide and just reading your summary of work that you've read. But I think some of those like fundamental truths that you learn from reading outside of work,

like of course read Warren Buffett, of course read Michael Mobison. I'm going to give a shout out to Henry Ellen Bogan, who, I guess in a way, a competitive mind, but really a friend now has his own firm durable. But I thought he wrote wonderfully in his annual reports when he was at New Horizons. Like, of course, read all that. But read the other things, too, that reflect on you. Because honestly, when things are really uncertain and, I don't know, let's say you own a bunch of Amazon, something bad happens and stocks down a bunch, it's not your DCF model that's going to keep you in it.

it's going to be something that Walt Whitman said struck you as like a fundamental piece of wisdom that you hung on to. And another quote that I think you know that I like is from Antoine to San Joseperee, but he says, if you want to build a ship, don't drum up people to collect wood and don't assign them tasks, but rather teach them to long for the endless immensity of the sea. I think sometimes like, and great leaders do that. Like they teach people to want certain, things. And I mean, we all think of our parents when we think of people who we learn from. But like, I remember when I was a kid, my father luckily has had financial success in his life, but initially we didn't are in the beginning. And we used to drive around these nice neighborhoods and look at nice

houses all the time. And my dad used to like to do that on the weekend. And these were houses that we, it seemed like we could not have afforded in our wildest dreams. And they're like vastly beyond our reach. And my dad said, I like driving around and looking these houses because it motivates me to figure out how I can afford to live in one of them someday. And he said to believe, teach people to want certain things and then let them figure out how to get there. So teach your children to want to be ethical, want to be hardworking, want to be good dads and partners and brothers and stuff like that. And then let them figure out their path to it. And I think some great C, do that too, which is why I sometimes think, I'm sad sometimes when people don't take the time

to write annual reports. And I'm so grateful to CEOs who write annual reports in their own words, because I really think that a lot of the folks at the company like a good annual report, they read it. And they're like, oh, wait, that's who I want to be. Jeff at Amazon has done so many brilliant things, but in some ways he is also led by his own phenomenal example, his own incredible attention to detail, his own rigor for things. And I think other folks at Amazon, and have a brother who worked at Amazon, they kind of say, huh, I kind of want to be like that too. I mean, of course, everyone would like to be worth $200 billion. But people also want to be hardworking and bold and creative and gratitude forocitum and all that.

I think Jeff, you know, at right time to mention it, given the changes at Amazon, is an artist in a way. Maybe it sounds silly to say the business is art, but in many ways it is, and he's a hell of an artist. And a lot of that in business, as you point out, is leading by example. And I think of your mom with the 14 people, like somehow making it happen seamlessly. It reminds me, again, of something you mentioned in our very first conversation, which was the work of Brunello Cucinelli. Again, this is maybe small scale. I think you also mentioned Diane of Riland. Some of these examples of just like what I would call quality.

I'd love you to tell those kind of the angle here because I think it's a nice place to start to wind down. Brunello Cuccinelli is an entrepreneur and a business person who I really respect. Probably many people on this call have heard of his clothes. Their high-end clothes for men and women sold through their own chain of stores, but also in Bergdorce or Damon Marcus or something like that. They have a certain cachet with people. Brunello is a remarkable individual himself, though. He's from Salomeo in Umbria, in Italy.

He still lives in Solomero, and all of the products that Brunello Cuccinelli sells are manufactured in Solomero. And he has a very distinctive philosophy about a humane approach to business. So he thinks that businesses should be integrated into society and make society better, and he's a very charitable person. And he has rebuilt Solomeo, this medieval village, and made it totally beautiful and sponsors art festivals and tries to encourage other people to do that. And he also has a real commitment to beauty and to beauty and design that I think is very authentic. And a lovely story, I think you wouldn't mind if I shared, is that they have a factory where they sell the products, where they manufacture the products.

And it's in the valley kind of underneath the town of Solomeo. And there was some distribution facility next to it, like not a DHS, but something like that, like a trucking logistics things where trucks came out and trucks went out and so on. With his own money, Brunello bought the factory next door, I think, for about $60 million. I mean, fortunately, he's a billionaire because Brunello Cuchinelli's been very successful. But he bought the facility next door for $60 million. dollars. And rather than expanded or renovated or turn into another factory, he knocked it down and he planted a field of grass and flowers. And the reason he did that is he said, we make beautiful

clothes. He said, how can I ask people to make beautiful clothes when they don't look at something beautiful that inspires them? I mean, on the one hand, you and I is financially oriented, people might say, that's insane. You know, he spent $60 million to plant a field of flowers. Like, you're the craziest guy I've ever heard. On the other hand, it's beautiful and incredibly brilliant, really. Because how many luxury brands can you cite that have not been around 50 years? The great brand, Chanel, Celine, LV, Prada, Montclair, Hermes,

You know, Ferragamo, Hermes. These are all things with heritage. Like, one of the reason someone spends $2,500 on a Louis Vuittonth bag is that Catherine Hepburn had one or something like that. And the reason that Emma Stone has one is that Catherine Hepburn had one. And that's why someone else wants one. But no one had Brunello Cuccinelli bags 50 years ago. But he has, out of whole cloth, created this incredible luxury brand through his, vision. And I think that's remarkable. And I think I had mentioned to you, Diana Veland, who was the

editor of Vogue, but she had a similar real commitment to beauty and to elegance that I think made Vogue the formidable presence and brand and magazine that it's been in America for the last 50 years. What advice would you give to new people that want to get into the field of investing? You've mentioned a lot of things, which is don't just read Buffett, read Rilke. What else would you tell people that you think can productively help them? Maybe one decide if they want to do this job. And if they decide, yes, do a good job in the early years of being sponges and setting themselves up for success. I have a practical piece of advice, Patrick. I mean, I have lots of whatever broad philosophical kind of advice, but some people probably listen to your podcast.

I don't want to hear another guy telling me to read RELCO. That's not so helpful. I need the job. one thing that I think is very helpful that I always say to people, and I swear no one ever follows my advice, and maybe it's bad advice, but I still keep repeating it stubbornly, is I really believe in reading Edward Tufty. The visual display of quantitative information has a dry title is the single probably most practically useful book you can read to distinguish yourself in this job, because it is an education into thought. It is a pathway to understanding how to think about things critically and understand which variables matter. And then importantly, it's also a user's manual for how to convey ideas well.

Our job requires so much numeracy. And I'm always struck in analyst earnings models that every number is the same font. If the gross margin is going to go from 42 to 67%, make the 67%. 57 bigger than the 42. It'll convey something. A typical self-side earnings model probably has 26 by 20 rows or something like that, 520 numbers in it. You're a bright numerate person, but even you can't quickly parse 520 numbers and see what's relevant. I certainly can't. It would be helpful if the font sizes or the script were different that, like, pointed your attention to things. And that's the kind of thing that you learned from Edward Tufti.

And frankly, if you really studied his book and he has several of them, but giving him a free plug here, but order the quantitative display, the visual display of quantitative information, it's a delightful book for one thing. And it's so useful for thinking. So that would be some of my advice for people coming into the business. I love it. I think it's the first Tufti. recommendation on the show. It's an incredible book. We hand it out because we're quants.

And if you don't use smart presentation of information, like it's just so hard to get anything across in our business, I love that book. Yeah. Do you know the space shuttle Challenger Tufti story? No. Edward Tofti looked at the data when those challengers so tragically exploded, as you may remember everyone, you know, did these inquiries. And Richard Feynman, like, pointed out that it was the O-rings that were the problem. But I guess the night before the launch, this is roughly true. The scientist at Morton Thiacol, who built a rocket, sent 13 pages of data to NASA and said, hey, we really don't think you should launch tomorrow. And I guess in NASA's defense, apparently everyone writes them in the last week and says, don't launch tomorrow, because everyone

gets nervous that they made a mistake and they kind of need to go ahead with it. But I guess they looked to the 13 pages of data and they're like, we're not convinced we're going ahead with it. And as you know, it was a cold morning. The O-ring, which separated the two chambers, shrunk in the cold, and it allowed gas from one chamber to leak into the other,

which ignited in the air and caused it to tragically crash. But Edward Tucci took those 13 pages of data and he put them in one graph. And the graph had the size of the rocket, the year, the launch of the rocket, like where it happened, you basically condense all of the information into one graph, and included in that graph was the temperature. And when you looked at it, you realized that on the cold days, over the course of 30 years, something didn't work. And they didn't know then, tragically,

what it was, they only learned after the fact. All you needed to do was look at that. And you were like, oh my God, it's going to be cold tomorrow. It's going to be under 62 degrees on lunch day. we should not do this. And sometimes invest things like that. If it's under 62 degrees on launch day, don't buy the stock. It comes back to what you and many of the other investors I respect most have said, which is very often it's one to clean simple variables that matter. It's just about doing the hard work to make sure you give yourself a chance to see that.

I think it's a really interesting and important closing story. So you know, my traditional closing question, before I get to asking it to you, what have you learned from George Saunders about kindness before I ask my kindness question? Well, you and I think have both read George Saunders' commencement address about kindness. I mean, that should be required reading as well, along with Rilke. I feel like I've learned so much from it. I guess the thing that I learned, for those who have not read the essay, George Saunders, in a delightful, entertaining way and the brilliant writer that he is,

says that he's made a lot of mistakes in his life. He swam in some river in Bali and these monkeys. keys were pooping from the bridge. He swam under it anyway, and he got dysentery and nearly died. And it was just, like, incredibly dumb and did a bunch of other, like, really stupid things. But he says, he doesn't regret those. What he regrets are, like, opportunities in his life that he had to be kind when he didn't exercise it.

And as he looks back on his life as, like, an older person, which all commencement speakers tend to be, his regrets are the times that he had an opportunity. to be kind and he did not. I really recommend it as reading and I recommend it as advice too. I'd like to practice it more. I should practice it more than I do. I'm committed to doing it more, but I was telling you my experience with cancer before, seeming like a dragon, but being a princess, but I have had the opportunity to help some folks with cancer, some of whom have done well and recover it and pursued the right treatment and been healthy and others, unfortunately, who have succumbed to it. And I had a dear capital colleague, a friend named Galen Hoskin, who

battled prostate cancer, a very aggressive form of it, and then unfortunately succumbed to it. But the opportunity to spend time with him and work with him and try to be helpful to him is one of the great gifts of my life. I'm so grateful I was able to do. I feel like I learned that from George Saunders. That was a good lesson for me. So now, of course, I have to ask, What is the kindest thing that anyone's ever done for you? Well, because I love your podcast so much, I know that you ask this question, gave a lot of thought to it. There have been so many that I'm grateful for. But I guess one that I remember was when I was a boy.

I had a neurological condition. I had fallen as a little baby, and I cracked my skull and had a brain injury. And it caused me to be on antiseasure medication. I used to be on this medication. and now I think people take somebody called Kepra, and the whole field of seizure treatment has improved amazingly over the course of the last 50 years, which is totally great for the patients.

But I was on an earlier generation of the medicine that kind of like dulled your reaction times and had a very sedating effect. And I didn't like it as a kid, and I battled having these seizures. And it also had the effect of making, me feel a bit ostracized as a kid. Like, no one wants to be like a weird kid who's taking pills every day and on some weird

medicine and drop his books or not able to play soccer because he's doing something. My parents had a doctor who took care of me a guy named Bill Stennis when I was growing up in Santa Fein, New Mexico, and he was my doctor who I saw. And I used to go in for electroencephalograms where they put electrodes on your head, and then they measure your brainwave activity. And basically, if you've ever seen an EEG, it's kind of like an EKG. Like you look at the pattern on the EKG. And with the EEG, you should sort of see like a uniform series of spikes.

But then if that's interrupted or unusual, then there's something that is interfering with the brain activity. And when I was a kid, I got these so often that I got good enough to like look at the printouts myself and say like, oh, still need some more medication. not working out. But then eventually I thought that I had graduated from the medicine. And I remember that I was in Dr. Sennis's office. He was meeting just with me. And he said, look, I'm sorry, but I have some bad news for you. He said, your EEG came back and he took it out and he showed it to me. And I realized that, you know, it was bad news and I was going to have to stay on this medicine.

And I think I was 11 or 12 years old, but really bummed about it. And kind of feeling like, my whole life I'm going to have to deal with this thing. And it's so unfortunate. He had a small little model car in his office, a little Ferrari. And I was listening to him and pushing the car back and forth on the desk in front of me, playing with the car. And I said, I understand. And I went home. I took the bus home or something. And I didn't even tell my parents because I figured he'd tell him the next day or they'd get the news or something. But I was really bummed about it. Then I remember later that night there was a knock at the door. And I went to the door and this guy had come, Dr. Bill Stennis, and he opened the door and he said, hey, I know you were really bummed today.

And I know you enjoyed playing with that little model card. And he said, I wanted to give you that car. A patient of mine gave it to me. So I didn't feel like I could give it to you. But he said, I went by this toy store and I had another little model car like that, a little car with, I think they had gall wing doors or something like that. And he said, I bought it for you and I want you to have it. But he said, more importantly, I want you to know you're going to be okay. You're going to have a normal life. You're going to end up being a normal kid.

And this is something that you're going to surmount and you're a good person and like your life will go well. He had this confidence in me that gave me so much confidence in myself. And it was so exceptionally kind. And I still have that car on my desk. When stocks are down and much, I reach out and push it back and forth and think, oh, boy, that other stuff worked out. Maybe the stock will go up again someday, too. Sometimes I think the kindest thing someone can do for you is to believe in you. It's a fantastic, fantastic closing

story, one of my favorites ever. I've still looked forward to this one. It's been nice getting to know you just through a bunch of conversations. But what I like most about this conversation is that it was about investing, but also we've done a lot of other interesting things, which can make you a better investor that have nothing to do with investing. And I'm so appreciative of your time and all that you've taught me. So, Thank you so much for joining me here today. Thank you so much, Patrick. Thank you so much for the show.

I learned so much from it and so grateful for it. Thanks for your friendship. This episode was brought to you by Canalist. In this four-part mini-series, I sit down with Canales client, Ryan Cope from American Century Investments, and talk about how Ryan found out about Canales, how he got involved in small-cap investing, and his favorite aspects of using the Canalist models for him and his team. In this week's episode, Ryan and I talk about how his investing process.

will get better over time and what makes his small cap income strategy so interesting. How do you see this progressing? It makes me think back to those great stories about the Fishbeck brothers, shorting stocks by like being at the Library of Congress and getting the 10k first and calling their trader ahead of time, like the sort of information arbitrage. It seems to me like the way you're using Candlest isn't necessarily like you're trading on information that's coming faster, but rather you're using it to just free up time in your own process to do more value-added work. How do you see that going forward? So none of this stuff is static. Your process isn't static. Candlest product isn't static. In what ways do you think those both get better over time?

Yeah, that's a good question. You're exactly right. There's nothing coming in from the canales data feeds that is proprietary information for us. So everything that we do is layered on top of that. In terms of how that evolves over time, I think the data, as you've mentioned in the past, is going to become more and more of a commodity. So it's going to make the analysis that done of that data more and more important. And as I mentioned, I think there's going to be continue to be a place for active management and good analysis of that data indefinitely into the future. Can you mention a little bit about the small cap income strategy? I think that's kind of a weird, unique space, right? Like you think that the bigger companies pay more dividends, but there are small ones

that do too. And what is interesting about that category to you? And how does that map onto all this discussion of tooling and K&A specifically? Yeah. So that's a very unique strategy that we have focused on delivering income in the small cap space. Small caps actually have a few huge advantages relative to large caps for income purposes. So first is diversification. So we have totally different sector exposures than you'd expect from the large cap equity income product. Second is a bigger universe of dividend paying companies. So there's over 1,800 small cap companies who pay a dividend compared to about 380 in the S&P 500. And as a function of the smaller company size, these stocks have both more capital appreciation potential and more dividend growth potential as well.

So our portfolio yields about 3% today and we're really excited about it and we think it's an undiscovered asset class. So both of our strategies are managed by a team of five people. So as we expanded that universe and explicitly began to focus on income, we started looking for efficiency tools. And that's exactly when we came across a catalyst platform. Can you say anything else about why income and efficiency are paired? What is it about that category that the efficiency variable becomes important? Well, it was really just expanding our universe of coverage, but for instance, an example of something that we do different in that small cap income process is that we really stress test the dividends for each of these companies. And so that's something

that Canales allows us to do extremely easily and uniformly across the entire portfolio. If you enjoyed this episode, check out, join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.