Invest Like the Best with Patrick O'Shaughnessy - Jeff Gramm – Activist Investing - [Invest Like the Best, EP.01]

Episode Date: September 12, 2016

Hedge Fund Manager and author Jeff Gramm talks with Patrick O'Shaughnessy about the history and current state of shareholder activism and discusses how Jeff invests himself, taking large positions and often board seats in undervalued companies.   For comprehensive show notes on this episode go to investorfieldguide.com/gramm/ For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

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, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfield guide.com. Patrick O'Shaunisee is a principal and portfolio manager at O'Shaunicee Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Ashonasi asset management may maintain positions in the securities discussed in this podcast.

My guest today is Jeff Graham, a portfolio manager at Bandera Partners and the author of one of my favorite investing books, Dear Chairman, Boardroom Battles in the Rise of Shareholder Activism. Jeff is also one of the nicest people I've come across in this business. It's been a pleasure getting to know him in recent months. In our conversation, we just discuss the history and current state of shareholder activism and how Jeff invests himself, taking large positions and often board seats in undervalued companies. Please enjoy. Okay, Jeff, so I'm going to start with a couple quotes from your book, because I think

there are good bookends for understanding this history of activism that you explore. The first one is from Ben Graham, which kicks off the book. And really, I'm quoting these two passages less for their content and more for their tone, because it's changed so much over the years. So Graham was fighting against a company called Northern Pipeline, which I'll let you describe kind of what he was doing in a few minutes. But this is an excerpt from the letter you published in Dear Chairman, where he says,

because of its ownership of the largest interest therein, and because of the prestige represented by its name, the Rockefeller Foundation must be considered to some extent in the ethical position of trustee for the smaller participants. We are hopeful, therefore, that it is high-minded and generous solicitude, evident in so many fields will be manifested to some degree in the foundation's attitude towards its fellow shareholders. It's a very nice, professional tone, and then we'll fast forward to a later letter in your book written by Dan Loeb to Eric Seven, who is the CEO of Star Gas at the time. Loeb writes, sadly, your ineptitude is not limited to your failure to communicate with bond and unit holders.

A review of your record reveals years of value destruction and strategic blunders, which have led us to dub you one of the most dangerous and incompetent executives in America. I was amused to learn in the course of our investigation that at Cornell University, there is an Eryx 7 scholarship. One can only pity the poor students who suffer the indignity of attaching your name to his academic record. So a pretty interesting change that we've seen in eight or nine decades in activism. So what I'd love to start by doing is really highlighting the major stages that you lay out in your book. Maybe starting with what Graham was fighting and what he was doing and how he was a pioneer of activism. Sure. Well, with Ben Graham, he kind of existed in a different era, right?

So, like, when he was a shareholder in the Northern Pipeline Company was the mid-1920s, and, you know, most of the smaller public companies had big concentrated owners. And so he had to appeal to the Rockefeller Foundation, who was a 30% holder, to win their vote. And you don't do it, like, by, you know, we'll calling them a crazy person and, you know, we'll pull and Dan Loeb on them. But obviously, I mean, just, you know, the kind of, like, the times that were very different. I mean, it was interesting, like, to read, like, the company's responses to Ben Graham. Like, I don't think I put them in the book, but they were very civilized.

But, you know, with Ben Graham, like, the era was very different by the time that we got to the, like, the 1950s and the proxiteers, which was the next chapter. You know, like, you had seen this big diffusion in the time. in stock ownership in the country. And the proxy fight in the 1950s that I highlight, which is the Robert Young against the New York Central, it was like a political campaign because you're like appealing to these individual shareholders. And that's kind of the key movement in the book.

Like it really is a history of how, you know, passive share ownership evolved. So a lot of the changes of activism and the changes in the dynamics of these campaigns has to do with the changes in the underlying shareholders. Can you describe kind of how that happens? So you mentioned that early on there were huge holders like, say, a Rockefeller Foundation, and that became much more widely distributed. Can you kind of describe what precipitated that change? Sure. I mean, like it kind of like historically, like it's a lot about like the history of American capital.

I mean, in the early days, like, the capitalists were, you know, like would be, you know, big strategic investors or sometimes even bankers. But, like, you kind of, I'm a great example for this is a general motor. So in the 1920s, a GM had a big ownership from DuPont, but also, you know, when they made all of their acquisitions, they did it with stock. And so, like, you had, like, a lot of these, you know, owner capitalists, as Peter Drucker called them. And what happened ultimately is between the 20s and the 50s, a lot of those, you know, what kind of older capitalists died and passed away. And these, you know, big concentrated stakes in public companies got essentially distributed and diffused out to individual shareholders. And in the 1950s, there was even a movement by the markets, by like the New York. stock exchange to advocate for this like, you know, a populist will movement of like, this is the

people's market and like, you know, you need to own your share. So it was both like the passing away of the old concentrated owners and a public interest in owning shares like that drove that big diffusion. And it really didn't last long. Like you had the 1950s when like you had this you know, very diffuse ownership. And beginning in the 1960s and the late 50s even, you saw this this reconstruction into the mutual fund industry, the big pension plans, you know, institutional investors as we know them now. So it was a quick flash. So let's back up for a minute. We'll come back to the proxy tier movement because I also felt that that was kind of the most interesting turning point, both for the idea of shareholder value, but also for the activist movement,

more broadly speaking. So going back to Ben Graham, though, obviously what activists want to do is earn a great return. And Graham's story was so interesting because Northern Pipeline, which I think you mentioned in the book was trading at $65 or whatever it is, had $90 of what he called guilt-edge securities just sitting there earning. Basically cash. Right, basically earning nothing. And back then, companies were required to publish much less information. So this wasn't readily available knowledge and sort of the ultimate gold mine that Graham found,

I think, through the ICC or some commission that Northern Pipeline was required to report to. So he basically found a gold mine sitting underneath this company. where the cash is worth a lot more than the shares. And his effort was ultimately to release that shareholder value, if you will, get that cash into the hands of the actual shareholders who could earn a much higher return than Pipeline was earning on that cash. Yeah, I mean, it's a great example because it is, I mean, ultimately, if you're trying to kind of explain to your readers about the value of a company,

it's a lot easier if just there's a huge pile of cash there, like to fight over. But, yeah, I mean, it's a fascinating story. like basically the government collected a lot of information on the railroads, you know, so the public could go look up these reports, ICC reports, on the financial state of all the railroads, and a lot of financial analysts did that. And so Ben Graham was looking through the annual report of the ICC, and he sees kind of in the footnotes a table on the pipeline companies. You know, there were eight public pipeline companies that had been,

formed when a standard oil was broken apart. And he sees it and he's like, wait, I didn't know that the pipeline company is reported to the ICC. If they do, then they might report more than just the basic statistics on this table. So he takes the train down to D.C. And he asks them, like, do you have any reports on the pipeline companies? And they bring out these full 20-page reports. I have the one for Northern Pipeline. I got it, you know, from the National Archives.

and it's got like a full balance sheet, like a list of shareholders, all the kind of things that back then were very hard to get. And he sees, you know, well, not only the size of their balance of valuable bonds, but like the names of the bonds. And like he's like, well, these are, you know, these are money good bonds. So it was then that he knew that like the company was essentially, like if you liquidated just like their financial holdings and kept the business whole, like it would be a bonanza for shareholders.

Sort of like the perfect example against market efficiency back then. Pretty amazing that nobody else knew that information. Yeah, I mean, it is like, you know, just the fact that you had to do hard work. Even after, you know. Probably still true today. Yeah. Yeah, I mean, even after like the formation of the SEC, like you still had to go to the SEC reading room to get your reports, you know? So like even in the 50s and the 60s, like a lot of public information.

about public companies was hard to come by, which made the market less efficient. Sure. So what is the transition from Graham to these proxy tiers? Because I think that that movement probably sets the stage for the rest of activist history. Yeah. I mean, the proxy tier movement is a pretty fascinating movement because it really was the beginning of this pro-shareholder populism. And, you know, people talk about that beginning in the 80s or the 90s and that like the corporate raiders and the shareholder activists and Boone Pickens were the first guys that talked about the shareholders' rights. But that's not true. I mean, like you had this whole, a public, a movement that got a lot of press attention of these guys like, you know, Lewis Wolfson,

you know, Robert Young that were in Time magazine and on TV talking about how, how public companies, you know, needed to protect their shareholders. And they said, look, there's this whole campaign by the New York stock exchange, like this own your share in American business, and that if you buy shares, like, that we're partners. And if we're really partners, then, you know, we deserve, you know, like our rights, like to vote in a new board if we want to. And so they really began to flex, you know, that muscle that had not, you know, I mean, like the Ben Graham thing with Northern Pipeline, that was very under the radar.

That was not in the newspaper. Like when I did a search of the Wall Street Journal archive, that was not even in there. Like these things in the 1950s were front page news. And so that was like the real beginning of this kind of, you know, pro-shareholder populism. How much of that was kind of all talk for them trying to earn a buck for themselves or their investors? And how much of it was real reform? I mean, I'm always of the opinion that, you know, well, people are like are self-interested animals. And so as far as they were concerned, I mean, I think it was all kind of, well, posturing to make, well, profits for themselves.

themselves. But I think a lot of what they said was right, and I'm sure that they believed it. So, I mean, I guess a combination of both, but ultimately, I think, you know, those guys were all out to make a buck. So Peter Drucker says that kind of through this era, we're the first truly socialist country, because we're the first, where this ownership of American business is so widespread. So you get from that, and then what's the next stage? I think about it as, you know, the junk bond era, the corporate rating era, especially of the 1980. Would you say that's the next kind of major chapter in the history of activism? No, because I think that you can't ignore.

Well, there are two things that you can't ignore. Like, you can't ignore the conglomerators, right? So that was this big M&A movement that did have some elements of hostile M&A. Like they had, like, hostile, you know, tender offers. You know, those were smaller companies in general, but it was, you know, I mean, that sowed the seeds for the hostile, like the hostile takeovers that began in the 70s. And then, I mean, like, I couldn't leave it out of my book. Like, you have to talk about the, like, emergence of Warren Buffett, too,

which, like, his career began in the mid-1950s. And, you know, the 60s were a pretty grand time for him, too, I think. So when you get to the 1980s and some of the more famous activists that people now still are talking about today at Carl Ican, etc., what changes? Because there seems to be a self-interest driving, their actions, kind of above all else, and a lot of change in terms of how companies start to protect themselves from these raiders who don't seem to be acting on behalf of broad

shareholders, but to make as quick a buck and as big a buck as possible. Yeah, I mean, it's an interesting question. And I mean, it's always, you know, fascinating with, you know, with any kind of historical exploration because there is, you know, like your prejudices and how you think the world works, like the lens through which you see the world has a huge influence on like on how you interpret these past events. So this emergence in the 1980s of the corporate raiders, like a lot of people are like, oh, this was the beginning of the birth of greed and like these guys are greedy now where

before that it was a business was, you know, more honorable. And I kind of don't buy that at all. I think in the 50s and the 60s, you had a lot of greedy guys. And you did in the 70s too. They just got all washed away. But I think in the 80s, to me, the defining thing was Michael Milken and this vast infusion of capital that he gave directly to the Raiders. And so, you know, guys who were small fry in the 50s and the 60s or the 70s, you know, those kinds of outsider investors would now have access to huge. sums of capital. And so in my book, I profile Carl Icon versus Phillips. And, you know,

Phillips was like a top 20 company in the country. It was, I forget, you know, $10 billion or something. It was a huge company. And you have a Carl Icon, you know, going after it. I mean, he doesn't have the money. And he's not financed by the big banks or like investment banks. He's like financed by these, you know, like the cronies of Michael Milken and like the people that buy those junk bonds. And so like he got to do this whole thing of going after a huge established a company, like without any help from the kind of the financial establishment. What was he trying to do with Phillips? What was his specific mission? He was out to make a buck.

So with Phillips, you know, they like had been targeted by Boone Pickens. and, you know, Boone Pickens, it's actually a great story, which I put in the book, too. It's like he actually, like, his father worked for Phillips and he worked for Phillips, and he had a long history with the company. And he goes after them as a hostile writer, and they basically buy him out. Now, Boone Pickens was, you know, well, very sensitive to charges of green mail. And so he was like, well, you can buy me out, but, like, you have to do, it has to be equal treatment to all shareholders.

And so instead of just paying Pickens a lot of money to go away, Phillips had to devise this scheme to pay out Pickens, but to also do right by shareholders. And they give like the shareholders this complicated restructuring that the market ultimately values for less than the cash that is paid to Boone Pickens. And so Icon sees that. He sees, I can go after Phillips. Pickens is a smart guy and he knows the space and he clearly thinks it's undervalued. But what he's also going for is, you know, if he buys into the public shares, he thinks that they need to sweeten their offer, you know. And so he succeeds in doing that. Like he makes a big fuss and Phillips sweetens the recapitalization.

So his shares go up. It's an interesting example of making a quick buck. I've heard the story where my mom would wear a shirt called People Before Profits in the late 70s, early 80s, which has a better ring to it than stakeholders before shareholders. But that's kind of what's going on here is, you know, you put in your book a couple, the example that stands out to me was, I don't know who it was, but somebody took over Pacific lumber, which had a sustainable kind of growing plan for timber, basically fired everyone, canceled that sustainable plan, clear cut, a bunch of old growth, redwoods to make, you. the quickest of profits. Yeah, Charlie Hurwitz. It was a gruesome case. And I wonder, I wonder, you know, was it through the 80s and obviously the junk bond era

came to an end, ultimately? Was it public reaction to things like that to, you know, things like I can making a tremendous amount of money very quickly really to the benefit of nobody else but him? Did that change things? Was the attitude towards activism or even the strategy of activists changed after that era? Yeah, I mean, that's a good question. And like in a weird way, our society both, like, detested those people, but also held them up for our admiration. So, like, I was too young at the time, like, to really process it all, obviously. But I don't really know the answer in terms of public opinion. I do think that you did have a few specific policy initiatives.

and you had the end of Michael Milken, which, you know, a kind of put an end to the rating in the 80s as we know it. Like, you know, like the 90s was a bigger deal decade than the 80s was. There were lots of huge mergers in the 90s, like some big hustle deals. But like this period where you could basically be a nobody, and if you found like an undervalued company,

get quick funding, like to go. after it in an aggressive manner. You know, that's over and it hasn't come back. It didn't even come back in the early 2000s when you had this, like, ample supplies of capital out there. Like, it's a funny thing I talk about, like, in my book that, like, you know, that was, like, the only time in history where, like, you know, they just, like, allowed people with no experience, like, at all, like, to go on a spending spree. And then I had in my footnotes, like, except for, well, maybe, like, the Icelandic investment banks in the mid-2000s, which was, like, a little bit of a. similar saying. So I can't have this idea, this I think you call it anti-Darwinian idea of kind of corporate management that for the most part it was dominated by really good institutional politicians,

people who are good at rising the ladder, but not necessarily at either managing the company or allocating capital. And you've got this sort of Peter principle that people rise to the level of their incompetence and that creates the opportunity for a lot of these activists to go out and shape companies up. Obviously, I think that has persisted, right, that the world, is still full of, especially maybe in what you call the wasteland of the small cap market, still full of companies that are badly or even horribly mismanaged. But given the end of the kind of I-can, you know, milk and junk bond era, obviously activists are still targeting companies like that. So maybe kind of close this history off for us through the 90s and then,

you know, the 2000s to the present of what it's looked like since then. Well, I mean, I think like that since then you've seen this, you know, continued. concentration of share ownership in the institutions. Like you did see this brief period that I talk about in the book of kind of the Dan Loeb, you know, public hedge fund letters, like the shame-driven activism. You know, but that didn't really last long because the way that it's evolved is that, you know, they're like in any given public company, if it's not controlled by, you know, by insiders, there tend to be a handful of institutions that, like, that have,

a lot of the votes. And so the game of shareholder activism is a lot more a game of persuasion now. And so you, as an activist, are trying to convince the institutional shareholders that you have the right ideas and, like, perhaps that, like, the current management doesn't. So in the 80s, you could go for the quick takeover. In the 90s, you kind of, if you were a young activist with no access to capital, like you, well, lots of, you... them did this, like, embarrass the company thing was all they could, you know, really think of. You know, by now, like, a lot of it is, like, behind the scenes, like persuasion. And as a result, the big institutions are the arbiters and a lot of these disputes. And you have these

funds, like people like a Value Act or, you know, Bill Ackman even. Like, they're very politically astute in some ways and persuasive. And they tell a very good story. So this, this persuasion that's happening. So I'm a quantitative investor, but I'm always very curious to see who are the major shareholders of some of the key businesses that we own. And one of the things you have to do is scroll down a little bit on the page every time on the 13 Fs because one, two and three is Vanguard, States Street, Black Rock, dimensional. You know, a couple really concentrated massive asset players that are that are either purely passive or, you know, quant light. I'll call them like a dimensional. But you'd be surprised. I mean, if you look at Vanguard, I mean, it's just like an index. I don't know if you'd call that. Yeah, well, whatever. Like, you know, whatever Vanguard is, they're passive investors

in the sense that, like, they put together these, what products like to match an index, but they have a pretty robust team to study governance issues and to vote shares. And so even, like, a lot of these big institutions that they're not actively choosing

to buy X or Y stock because of how they think it's going to do, they are active participants in its governance. And so those are the kind of people that you need to persuade. It's kind of fascinating. It's almost like we're witnessing, and I'm sure this will continue, you know, Vanguard captures market share every day, an inversion of these ideas of passive and active, where active for the longest time has been active selection, meaning you're picking stocks trying to beat the market and probably less so than being involved in those stocks.

It's passive owner, active selection, passive ownership, I'll call it. And now it's the opposite. It's passive selection. And it sounds like with teams at Vanguard, and probably this will happen in other places, active involvement in the management of the company. Yeah. I mean, like, if you're a Vanguard, then, like,

you are so established, right, that your long-term interests are, A, that the S&B 500 is well-managed, will be that the markets have integrity. Like, you want for people to trust in the S&B 500. Like, and see, like, that corporations have integrity. And so, like, they do have a real vested interest in promoting good governance. Can they do it?

Like, you know, can you build an incentive system that makes sense? It's a weird dynamic when you have, like, this entity with, you know, 22 paid professionals who have this huge impact. I mean, like, how much are those people getting paid? Probably not that much. And how are they, how's their performance measured? Yeah. Well, and it's extremely hard to measure it, right?

So it is a weird dynamic. And if you think about it too hard, it's... Talk yourself in circles. It's a little bit uncomfortable to think about, wow. So, you know, what's going to happen when Vanguard owns 10% of the market? You know, how persuadable are the people who vote their proxies there going to be to bad ideas? You know, I mean, you know, power intoxicates. That's, you know, that's a lesson from history, right?

So it'll be fascinating to see. And the whole growth and passive in ETF investing, I don't know about ETFs, that could be a flash in the pan, but indexing is going to keep growing. So that dynamic is only going to be stronger. So we've got kind of the complete history now, where we start with Graham operating very much under the radar with information that nobody else has to unlock value

in one very small specific company to almost activists as marketers. that they're persuasion experts and trying to convince, I guess we'll call them passive or big institutional owners to vote a certain way or to promote a certain kind of governance. So for me, that raises the question, which I think is fascinating, of the very idea of shareholder value. You talk about this quite a bit in the book. And unless you really dig into the history of this idea, you probably just take it for granted that U.S. companies or companies in general should act.

in a way that is best for their shareholders. And I guess what that means is the most cash going back to their shareholders, the greatest growth of share price, so on and so forth. But when you dig in, as you do in the book, you realize that that is kind of a, not only a fairly recent concept, but also potentially a fictional one. So I'm going to read a quote from, you don't actually quote this in the book, but I went and read a book that you recommended, or at least referenced by a woman named Lynn Stout, talking, I think the book was called the shareholder value myth.

And so she says, shareholder primacy had become a dogma, a belief system that was rarely questioned, seldom explicitly justified, and had become so pervasive that many of its followers could not even recall where or how they had first learned of it. Put bluntly, conventional shareholder value thinking is a mistake for most firms and a big mistake at that. Shareholder value thinking causes corporate managers to focus myopically on short-term earnings reports at the expense of long-term performance, discourages investment in innovation, harms employees, customers, communities, and causes companies to indulge in reckless socially irresponsible behaviors. Now, that's obviously probably an extreme opinion. If there's some continuum of opinion on the idea of shareholder

value, she's obviously very much against it. So the question is, is this the right way to think about it of, let's say stakeholders that includes employees and customers and society at large, the environment, what have you, versus just pure equity shareholders. Where do you fall on that continuum? What should companies be optimized to do? Well, you know, that's a key question. And I really do think that's a good book by Lynn Stout. It's like a really thought-provoking book.

And she definitely, I mean, she kind of has two arguments. There's the legal argument of like, look, there's like no legal reason like the corporations are required to prioritize the shareholders, which is true technically, but then there's like the practical thing of like, well, except like they're not, well, forced to, but a board of directors is appointed by shareholders. And so like that, well, bias is always going to be there because you have to raise your capital from somewhere. But then, like, she also gets into the practical argument of, you know, what companies that, like, are run specifically for shareholder value can be a myopic, like can be short-term oriented.

We have to be careful there because it's easy to kind of slip into kind of a semantic argument because I think, you know, when some people say shareholder value or people are focused on shareholder value, they don't, like, we're not all talking about the same thing. And I think like for someone like me, I mean, obviously, I guess not obviously, but if you have read my book, I think that you see that like I'm pretty much pro, you know, shareholder in like in terms of corporate governance. think that a board of directors, I think their job is to protect the long-term interests of the shareholders. And I think if a board is beholden to too many bosses, it's easy for them to be beholden to nobody. And so, like, I do think it's important to run companies for the benefit of shareholders. But I think the way this, like, devolves into semantics at times is, like, look, I mean, people in our shoes inherently understand that it's not in the long-term interest of shareholders to kind of denude the environment and to exploit the labor to the point that we don't get good service, to neglect our customers to the point that we lose them. And like a lot of the debate, like in a weird way, like it's about, you know, that happening.

And to me, that's, well, bad long-term governance. And I do think that the whole long-term, short-term issue is a human nature issue. Like, I think boards can be too short-term-oriented. Shareholders can be short-term oriented, but so can managers. And, you know, so can CEOs. And so that's a problem, like, for all of us. And, like, I haven't seen lots of compelling evidence that, like, oh, well, public company shareholders are just, well, so myopic. Like, they're, well, so short-term focus that it's, like, destructive to the economy.

Like, I think there's a lot of examples where, like, if you look at a company like Amazon, you know, where they are investing all of their excess cash into long-term growth. Like, they're doing everything, like, for their long-term benefit, you know, well, possibly for the negative benefit of society. But, you know, for their long-term benefit and for their customers' benefit and for their shareholders' benefit. it. And so, like, I'm not, like, that compelled, you know, by the argument that, oh, like, we live in a world, like, you know, where shareholders just, like, completely short-sighted. Rampaging. You know, can misinformed, you know. Alfred Rappaport, who's written a number of books on this topic, says that managers talk shareholder value, but then walk quarterly earnings. And obviously, Bezos is maybe the perfect example

of the opposite of that, one of these kind of rare, truly long-term thinkers that really does seem to walk that walk. But I guess the problem is balance, right, that for every Bezos, there could be 50 or 100 much more myopic managers that are focused on hitting performance targets because, let's face it, the average CEO tenure these days in the Fortune 500 is something like six years. So I wonder, coming back to the idea of stakeholder versus shareholder value, if the idea of shareholder value has become so popular and so commonly accepted because it's very measurable. Share prices, share price, earnings are earnings. You know, you can really track those things and say whether or not a company is being effective for its shareholders. We live in

this kind of age of measurables where we're obsessed with T-Stats and R-squared and statistics. It's much softer and fuzzier once you start getting into stakeholders. And so I wonder, I guess my question is, is there some set of measurables or at least some governing objective that companies could start to bake into their, the, kind of the essence of their businesses. Because as you say, there's no, if you go read companies kind of founding papers, none of them say our mission is to maximize shareholder value. They don't want to tie themselves to that. So can we get out of this bind? Can we move past kind of the simple, pure measurable of share price to something that better promotes stakeholder value? Or do we just need to, you know, let things

play out as they have? Yeah. I mean, I think A, that we basically can't, but B, I mean, I would even question your premise about the value of the measurable of the share price because, you know, I'm a firm believer that, you know, the markets, like, are not efficient. They certainly are not efficient in the short term. So even, like, evaluating CEOs on the performance of their stock, you know, during their tenure is very problematic. And, you know, like, to me, that's like a big concern that I have. with share-based compensation, right? Like, I'm a value hedge fund manager.

All of us, like, for years have kind of talked about the importance of incentivizing the management in the right way and we're making sure they have, like, the skin in the game, all that stuff. But, like, to me, a stock options are highly problematic because, A, they're highly leveraged, and then, B, they're levered to an irrational market. And so you ultimately introduce this big hunk of compensation that's completely erratic. And like you'll have companies, you know, where like, you know, everyone will get a huge pay year just because of the movement of the stock, which will may or may not be warranted. And in a year that they're doing all the right things and they make all the right decisions, they might not get rewarded.

So I think it's, you know, we're really problematic. And I think, again, it's like among the many things in governance that boils down to the value of an effective board of directors. Because ultimately the board has to evaluate the CEO and they shouldn't just do it on the short-term share price movements. Like they need to understand that, you know, markets can get suckered into overvaluing companies. Do you think that governance today, and I guess, is another way of asking whether or not the opportunity set for activists, how that stacks up today versus the past. And I guess one proxy for the opportunity set is how good is governance. The worst, the governance, probably the better the opportunity set. So where do you think we stand today?

I mean, I would kind of question the premise because I think there's a lot of bad governance and there always has been and there always will be. But in terms of an opportunity set for activism, I think you really also need a deeply undervalued company because of the work involved, the possibility of failure. When you go active on a company, you lose your liquidity. So I think the governance opportunities are there. Valuations are higher. Like we're in the middle of this or at the tail end or like who knows.

I mean, you know, who knows where we are in this historically long bull market. So like to me, the real. a gating factor on activist opportunity is undervalued companies. And I'm not, you know, we'll seeing them as much. Like I think if you're like an activist and like your only target is, well, bad governance, then I think that's a dangerous, well, situation to be in. Very interesting. So I would love to move now into kind of your history and your professional career outside

of the book and outside of activism. I know you started in music. Maybe talk a little bit about that. Yeah, well, I played in a highly mediocre band. Pretty much through college, we started at the beginning of my sophomore year of college. And so that was 1994 or 95. And it was a band called Aiden. We were on Team Beat Records, which is a DC-based indie label.

And we had four records, and we pretty much toured from 96 until, 2001 when I went to business school. So for those years, like I lived in Chicago for one of those years, but then I moved back to D.C. So like I lived some in D.C. and some in the near D.C. suburbs. And I pretty much attempt and toured. But it was, I mean, it was a great, it was a really educational lifestyle, I think, and I really think that going on tour is a pretty incredible life experience. I'm sure.

But it was like it was hard. I mean, like, it's funny, like, when I moved to New York, like, I came here for business school, like, I realized that all my friends in bands in, like, in New York had, like, real jobs. Like, they had, well, jobs that, like, would tolerate their artistic ventures. And so they all had careers going, whereas everyone in D.C. and most everywhere else in the country, if you played in a band, you were a bartender or a temp or, like, you did this, you know, hourly work. So, like, it was hard. Like, I do feel like I kind of had this great life experience, which was incredibly valuable, but I didn't, like, accomplish a lot, like professionally in that time. I find that most people that have a story like yours, you know, ultimately a very successful one,

have some sort of threshold crossing moment. So going from that lifestyle to Columbia to business school seems like an odd transition. How did that come about? I think ultimately I knew at some point that I would go back. to school and do, you know, well, some kind of, I don't know what you would call it, you know, career advancement. You know, I mean, like, the band

was really fun, but, like, we never were, A, good enough, but, like, we never, I mean, like, you really have to work hard and, like, to make it work. And, you know, there were seeing the bands that became successful in the time, like, that we were doing it, um, the ones that succeeded pretty much 100% of them were incredibly hard workers

and all of the band members were completely committed to it. And we could never really do that. Like, you know, like we were never all on the same page. Like, we, you know, didn't tour nearly as much as, like, as we could have and, you know, and should have. So I think the deep down I knew that, like, you know, like we weren't going to be a successful band. So, I mean, I don't really know.

know what to do and um and i thought about like do i want to learn to be a computer programmer or do want to go to some kind of a professional school and um i had a family friend um arthur levitt who was a a clinton's cc chairman who who basically um helped me get into business school so like i thought of business school at the time as like a like a versatile degree that you could potentially do a lot with and i think it all you know like i got real lucky like like it worked out of very well for me. So you went to Columbia and I know you now teach there and that's sort of probably the school. If you talk about what school has produced the most, maybe famous investors, period, but certainly the most famous value investors. Obviously, Graham and Buffett being the kind of founding

fathers, but tons of huge names, Joel Greenblatt. I think Abelly went there. I think Cooperman went there, some really big names. So I'm curious when you got to Columbia, it sounds like your idea was that a business degree can be broadly... Yeah, I mean, I didn't know what I was going to do. Broadly strong. I mean, so when I got there, like, I didn't know anything about investing. I had never heard of Warren Buffett. I mean, I didn't, you know, know that stuff.

And Columbia was, it was pretty different. Like, we didn't have that value investing, you know, program that we have now. And I love that program, but I think one downside of that program is it restricts a lot of, of the best teachers to this selective program that is hard to get into. So, like, when I was there, I mean, I must have heard at some point, like, oh, you know, you should take security analysis. It's a popular class. So, like, there were three sections, and the one that fit my schedule was the Joel Greenblot one,

and, like, it really, I was that lucky. I mean, I took it, and it resonated with me. But I had, well, no master plan to do investing. I didn't even will really know what investing was about. So I took that class and it really clicked. And at that time, I didn't know about Columbia's history with investing. I think the spring of my first year there, I had a person in my little, like what's called an IP group, but it was like a four-person study group who was like into Warren Buffett.

And like he gave me a book on Buffett. I think that he gave me the Lowenstein book. which I didn't read, but then I read the Warren Buffett way, and then I read the, like, the Lowenstein book. And so, yeah, you know, once I, like, I got into it, like, I got super focused on it. How was the green-black class structured? Was it, was it investment case studies? Was it broad principles? I mean, it was a lot about the secret, I'm hiding places in his book. But, yeah, it was basically 12 classes. Like, in the first class, he, I remember, like, like he kind of focused on, you know, debunking efficient markets.

He, well, brought the Wall Street Journal out. And, like, we looked at the 52-week highs and the 52-week lows of these, well, companies like American Express and Walmart. And then usually he would have in the first three or four weeks, like, case studies. And, like, he would have these, like, very simple special situation. So we looked at the Dunn and Bradstreet spin-off. Like, we looked at Munsingware, where, like, you could. kind of it was like they had a particular line of business that was very profitable, but everything

else, you know, well, drained all the profits, but those could be cut away. And then by the end of the class, he began to have a lot of guest speakers, and we just would do more stock pitching. So, like, we would get in our little groups and pitch stocks. So to me, it was more the beginning of the class. I, like, had never heard of this, you know, well, special situation stuff. And, like, it really clicked with me. And like at the time, and I don't know like to what extent this was delusional, but at the time

I felt like I was getting it well faster than like than everyone else in the class that like he would go through an example and like I would get it. You know, we'll raise my hand. I can get it first. Like perhaps everyone will knew the answer but didn't want to raise their hand or whatever. But I just well felt like

I kind of had a knack for it. Tell me how you got back into teaching there. So a friend of mine who I met in that that class. Eddie Ramston, who's a fund manager. He runs a fund called Cabern Capital, which I invest in, actually. It's a great fund. He was like a superstar student. He got seated by Greenblatt after that class. And he also took, so to back of a bit, like the one, I think there were two classes there in investing that you had to apply for, that were like the new model at the investing school. There was this Paul Sankan class, and then a class taught

by the Blue Ridge guys. I applied to both those classes and got rejected. Eddie took them both. He took the Sankan class and did so well that he got asked to be like the co-teacher the next year. And then the next year, I think Sankan had to back out of it. And so Eddie, one year removed from being in the school was the teacher. And he, like he did a great job.

He's a really good teacher. So he moved back to England. like he teaches at the London Business School now. And when he moved, he kind of put my name forward, like for doing it. I stutter. And it's gotten a lot better, but I had a really bad stutter in college and after college. And, yeah, I mean, even at Columbia, like, I had a, you know, like a pretty bad stutter. So when I got asked to do it, I mean, this is not what I told, you know, Greenwald when, you know, when we were talking about it.

But I kind of viewed it as if I'm not going to do it. this, then, like, I'm never going to do something like this. And it was, like, my chance to kind of try. Like, I mean, I basically did it as a form of speech therapy. Wow. And so that was, you know, kind of the reason I did it. Like, it was a little bit like, I got this opportunity. For my entire life, I would have, you know, we'll said no to something like this. And it was just, it was like eight months away. It was, well, just abstract enough. But I was like, screw it, I'm going to try this. And I did it. And so, yeah, I think this will be my fifth or sixth year teaching. there. Wow, what a neat story. I didn't know that origin. So where we'll go next is your actual

portfolio. So there's no more, I guess, interesting way to really see what you believe than to look at what you own. And one of the things I'm most fascinated with as an active manager myself is the institutionalization of asset management, the rise of, we'll call it closet indexing, where portfolios look more and more like the market, or at least more and more sensitive to key risk exposures relative to the market because the fastest way to get fired, and I can attest to this running portfolios that look a bit different from the market is to underperform, even if that underperformance is over a very short window of time and nothing's changed about the strategy or the philosophy. There is a, I think, shorter and shorter leash for doing badly

versus, you know, very low-cost passive alternatives. And so I got a nice big smile on my face when I looked up kind of your top holdings because there's no mistaking you for a closet indexer. And yet a good line where you said value investors are journalists at heart who feel compelled to gather their own facts and do their own analysis, which I think obviously needs to be the case for the kind of portfolio you have. So what we'll do is maybe walk through a few examples, kind of think about them like case studies and maybe use them as jump off points for asking a few kind of broader questions about investing. So the three we're going to go through are Stargass, Poppies, and Tandy Leather.

Okay. So we'll start with StarGas, which was it's, I think, if I'm not mistaken, at least in the last filing, it was about a quarter of your overall portfolio. I think it's like 21%. Okay. So it's still the number one holding. Yeah. You know, so like with 13 AFs, obviously, they don't include cash.

They don't include like unlisted stocks or foreign stocks. So it's not the whole picture. Right. But, yeah, StarGass is our largest position. So I was interested to see that because obviously that was one of the topics or chapters in your book was Dan Loeb versus Stargast. I mean, it's not a coincidence, right? Like when you're writing a book, you definitely hop at an opportunity to take a shortcut. So it was easier for me.

I mean, I knew that I wanted an angry Dan Loeb letter. Yeah, of course. And I knew that that was a good one. And it was way easier for me to write about that company than like ICPT or something where I didn't know the company at all. Just to take one more opportunity before we dive into StarGAS to highlight, because the lobe letters are just awesome. So lobe writes in that same 13D to 7, to Eric 7, the CEO. How is it possible that you selected your elderly 78-year-old mom to serve on the company's board of directors and as a full-time employee providing employee and unit holder services?

We further wonder under what theory of corporate governance does one's mom sit on a company board? should you be found derelict in the performance of your executive duties, as we believe is the case. We do not believe your mom is the right person to fire you from your job. And I love how he keeps saying mom instead of mother. This is so condescending. So anyway, so obviously you're not involved with StarGas when Loeb is fighting. Well, I was. Or were you?

Well, so my first job in the industry, I was at a distress fund. Like I started, well, during business school in 2002. And then in 2000, either 04 or 05. my direct boss, Greg Schrock. He was the director of research at that fund, and he and I launched a new fund called Arclo, where I was the junior partner. We were funded by, like I'm seated by a protege.

And that was also distress fun. And I think at both HPV and at ARCLO, I had looked at the SGU bonds. And then at ARCLO, like, that was when all of this, the Dan Loeb and the blow-up will happen. And we looked, I think that we own both the bonds and the stock, like a little bit. And so I, you know, we'll follow that whole thing. I remember we talked, like, to Loeb and there were, he had a lot more stories, like, off the record.

Like, you know, that, like, we're even harsher about Eric Seven. And so I, like, had been following it. And then when we launched a bandera, it was among our first positions. I mean, you know, one thing that you see a lot with special situations is, you know, you do see kind of investor fatigue. You know, so with Stargass, they did a restructuring, like they equitized a lot of bonds. So there were, you know, kind of two dynamics. A, the event had happened.

Well, there were a bunch of dynamics. I mean, like, another one was, like, the event had loudly and publicly happened. Just describe that event kind of a lot of. Oh, well, so SGU in the old days was a basic, it was will run by an investment banker and was like a dividend paying security. It was an MLP. It traded on yield. Like the sock was like, you know, 20 to 25 bucks a share, even though, like, you know, they were kind of, well, ran these hard businesses, including, like, this heating oil business.

Like, they ran into trouble. They made some, like, essentially, like, directional bets on the price of oil, and they blew up with this guy, you know, well, Eric, seven in charge. They sold their propane business because it was an MLP, like they passed on a $10 per share taxable gain to their, shareholders at almost like the same time as announcing that they might have to file for bankruptcy. So, hey, here's your stock. You're about to lose everything. By the way, like you go, yeah, well, 10 bucks per share gain. You know, so Dan Loeb got involved, you know, called for his ouster. They did this whole restructuring. It was all very, well, ugly and public. When they did the restructuring, you know, that was a controversial thing too, because the board took what, you know,

on the surface looked like the less good deal. There was a Soros-backed deal that looked like the better deal for shareholders in the short term, but they went with the more reputable management team. So they went with this Yorktown partner as a private equity firm who now controls SGU, had sold the old SCU, like a heating old company in 2000. So it was their management team that came back in to recapitalize it.

So you had all of that happen. And you had like the new management team, like you had a lot of the equity in the hands of these old bondholders, you know, which, you know, creates a dynamic. And then you had that whole Dan Loeb noise where it got lots of attention. And when all that will die away, you're left with a stock where people are like, oh, yeah, S.U, I've heard of that. And people don't. They tend to underfollow these things that have been in the public eye. And also, I think, a part of it being in the public eye and of a lot of blow-ups in the heating-all space, you know, so at the same time that SG blew up, this other company blew up called Heating Oil Partners, like that business got dismissed as a crappy business when, in reality, it's a surprisingly good high-return business. And so, you know, we, you know, kind of saw this, like this excellent, you know, management team buying into these assets.

they're really good capital allocators. They're like a good private equity firm. So it all kind of lined up, right? And then 08 and 09 happened too. And then also in 07, like the huge increase in oil prices, which is bad for their business. And so it was a situation where lots of bad things were happening in a fatigued, a stock,

and then you add these like real bad, well, macro pressures. But yet underlying it all, you add a good change in management and good governance. and, you know, good oversight. So a setup great and, like, ultimately, it still isn't as respected as it should be, which is the reason that we, you know, we'll still own tons of it. Like, we've owned it for a very long time. And I, and I, and I still feel like it's extremely undervalue. So value investing is, I always say, like, a nice way of saying very pessimistic outlook. And look, this is like, the heating oil business is. Secular decline, right?

Declining, and it has been, like, for decades. But Yorktown, like, these guys that control, Star Gas, you know, like, they launched a heating oil business in 1981 that they sold to Star Gas in 2000. The same dynamic was happening over that period, you know, with a little bit of differences in the relative price of natural gas to oil, but like it was a declining, you know, doomed business and like, and they return with something like, you know, 65X, like in that period, and they know what they're doing. So, like, the main thing there is they perpetually, like, or valued, like, as this, you know, well, terrible commodity business when they're kind of not. I mean, it's not a great business, but you can earn an outsized return.

What do you think? I mean, so how long have you owned it? I guess how long has it been either your number one or top position? Probably seven, eight years. So is there a catalyst that would cause the market's perception to change, do you think? I would have thought with the low interest rates, you know, them paying a dividend. I mean, they pay kind of the lowest dividend that they feel they can pay to keep the shareholders unhappy, but they prefer to retain the cash, which I agree with, like for acquisitions and buybacks.

But it yields, well, 5%. I mean, I would have thought at some point that it would, you know, kind of go back to trading on yield. And look, I mean, you know, markets are optimistic. And in history, there have been times that people have valued heating, heating old companies like propane companies. like, you know, with a lot of optimism. So, I mean, I would have thought, like, at some point that that would have happened. And then, you know, we had two years in a row of these, like, abnormally cold winters where they just made gobs and gobs of money.

And I would have thought that, like, the valuation, you know, would have improved more than it did. What, when you say they're good capital allocators, that kind of perk my ears up, I think that that is one of the more interesting ways of evaluating a business or certainly a management team. And you mentioned both acquisitions and buyback. So when you say good allocators, what do you mean by that? And is that allocation piece or that allocation skill a key part of what you look for

when screening for new investments or at least want to see continued good allocation from your existing investments? I mean, honestly, like, you know, when I look at stocks, like, I'm more looking like for bad allocation as a thing to avoid. great capital allocation is so rare and it can be hard to predict in the future that it's not the driving thing that I'm trying to identify even though it's hugely important like it's more like I'm trying to avoid the disasters with bad allocation with us like with star gas yeah it's like they're extremely disciplined and good on the acquisition front which is hard to be in a declining industry

where you're the biggest player so like among the more annoying things that is that has happened to us with Star Gas is like there were two or three great assets that popped up for sale in the industry that got gobbled up by these Canadian, well, propane companies that, you know, like we're playing the dividend game with their investors and, you know, they needed to grow and they, you know, will grossly, like, you know, overpaid for those assets, you know, the new Star Gas has been great. Like they've gotten like a bunch of good acquisitions done, but they don't overpay for the bad ones. And then they are really opportunistic on, you know, debt and share repurchases. So in the

financial crisis, they, like, they bought back up, like, a lot of their bonds at a huge discount. You know, since we've owned the stock, they've bought back about, you know, 25% of the shares, like at opportunistic times. And so, like, they really are good on the capital front, which is key for a declining, you know, cash generating business. Do you have a broader opinion on buybacks? it's one of the, we'll call it quant factors that I find most interesting. And the empirical evidence suggests that companies that buy back, as you say, gobs of their shares, especially ones that do it at cheaper relative prices, you know, low PEs, low prices, sales, etc., have pretty significantly outperformed the market over the longer term.

Now, we're in a period now of, you know, certainly 2015 and thus far in 2016, when these high buyback firms have lagged pretty considerably. But longer term, it's been a pretty much. pretty effective signal or factor to look for in companies. So do you think that, and I guess I'll frame the question also by saying that most coverage of buybacks is pejorative or negative. There seems to be this kind of narrative that it's manipulative, it's self-serving, it's a way of boosting EPS, hitting targets, and that instead that cash should be invested for growth. So where do you stand on kind of buybacks more broadly and knowing that it's been a good thing for

store gas. Yeah. Yeah. I mean, that's, I mean, those are all great points. And like, it really is the area of corporate governance that's probably the least understood. Like, in every board I've been on, in lots of dealings with management teams, they really don't understand buybacks. I vividly remember I was in a meeting with Popeye's, you know, a billion dollar company, great company, discussing a buyback. And, you know, I was kind of pushing them. They had been essentially badgered into doing buybacks by their shareholders. And I was pushing the CFO, just, you know, we're trying to figure out how he thought about it.

And so we're trying to kind of evaluate, would he be opportunistic? Would he turn it up or down depending on the market price? And he was like, well, you really want to put these things, you know, get them in the front, like the beginning of the year. So it, you know, will have the biggest effect on your, you know, diluted share count for your annual earnings. It's like the worst thing that you want to hear as an investor. It's like, well, it doesn't have anything to do with long-term intrinsic value.

And so they're so misunderstood. And as you say, like, there are lots of companies like that will kind of have them on autopilot. So like to me, it's like I really love to see it when you have these like opportunistic. Lumpier. You know, like aggressive buybacks. And I don't know. I mean, like to me, the main issue is that boards often don't know how to value. companies. They don't know how to think about the value of their companies. When they seek

a guidance on valuation, they'll get like a banker report. That's a means to an end. So they don't really know, A, even if they knew, you know, well, how buybacks worked, which they predominantly don't. They don't understand valuation, like enough to do buybacks in the right way. So, yeah, It's another example of how with corporate governance, it's hard to have a best practice. Because with buybacks, you can see the best and the worst of performance. And there's like a good buyback, you know, creates a tremendous amount of value. A bad buyback directly destroys value. Burns money.

And the shareholder basis ultimately, if you own the share, then you're going to be biased in favor of thinking it's undervalued and that a buyback is the right thing. So it's a real, like it's a hard issue to think about from a, you know, from a governance perspective. That seems to be a new major tool in the toolkit for activists is agitating for buybacks, you know, apples, the most famous example. Yeah, but I think that you did have a little bit of a one-time period, like where companies are like are overcapitalized. Interest rates had dropped precipitously and the cost of borrowing was so low. and CFOs were not quite as sophisticated on their ability to borrow cheaply. And so I think a lot of that of like the low-hanging fruit there is gone.

And that was a powerful tool that I think, you know, was good, like for shareholders, like when these like overcapitalized companies, you know, will borrow to buyback shares cheaply. But now it's less clear. And I don't think it's just a tool that's always going to be there. I mean, you know, like with buybacks, if, Like, if you look at the math on buybacks, like, if you're only buying back a small percentage of the float, it's really hard to move the needle. Like, you have to buy back a lot, and you have to, like, to buy it back at a pretty, you know, big discount, like, to really drive value.

So, I don't know. I mean, they're like, like, our two approaches there, like are people that think, well, there's a tax advantage if you buy back at fair value over time as if it's a dividend, then you add value there, too. That is true. but like to me what, you know, gets a me excited as an investor is a board that understands the value of their company, and you see that, you know, will manifest through aggressive buybacks. That's interesting that, you know, all the work I've done on buybacks, and it's been a kind of key area of focus in my research has more or less empirically confirmed what you're saying, which is the best way to, let's say, qualify a buyback program is sort of this lumpiness,

this relationship to big discounts and these kind of high conviction bets that companies make. And I want to separate it into what I call lower conviction, which was 5% or less of shares in a one-year period. And high conviction or highest, which is, you know, five or 10% plus of shares. And sometimes you see a, you know, a 15% or a 20% massive, massive bet. And what you find is a couple interesting things where there's a correlation between the conviction level, the percentage of shares being repurchased and the relative value. So higher conviction, on average, the share prices are trading at cheaper or bigger discounts.

Yeah, that's interesting. And then the second thing may be more, you know, useful for active investors is that the forward returns of those stocks are considerably higher. So, you know, you get large stocks at, you know, call it 10% return since 1982 when share buybacks became, you know, really popular. The low conviction group outperforms by, say, 1% a year a little bit, but not hugely significant. and it's varied. And then that high conviction group outperforms by about 4% a year.

So it's a big gap. And there does seem to be, and of course there's plenty of examples even within that high conviction group of value destroying buybacks. But from an empirical standpoint, it does seem to be true that the lumpier, higher conviction, bigger buybacks that aren't just like a dividend proxy where it's one or two percent of shares every year or timed at the beginning of the year with diluted EPS in mind. I mean, it seems intuitively true to me. It'll be interesting to see if we get a sustained bear market, you know, what the data looks like.

Because it's also, you just have had a market that has gone up and, you know, when people were buying back shares. But to me, like if I see, you know, buybacks with a brain behind them, usually they're good. Yeah. You know, and at times they're bad if the board's just wrong and delusional, like which happens. So we talked a little bit about Popeyes. I'd like to move to the last position we'll talk about before getting to some closing questions, which is tandy leather. Sure.

And what I'm really most fascinated about about tandy leather, first of all, I intentionally didn't really look into their business because I kind of wanted to hear it from you. It's a weird business. But the most, the number that jumped off the page is not the weight of tandy leather in your portfolio, but the percentage shares outstanding that you own of the business. So are you the largest shareholder? Yeah. You are.

Yeah. Yeah. So we own about 30%, which, this. This is also, that's like a real, you know, we'll hornets nest with like affiliation rules, all that kind of stuff. And I'm on the board, so I have to be careful about what I can say about it. But, you know, the main thing with Tandie is it's a really good niche business. So they're a retail company that sells a leather and tools to leather crafter. So for people who make things with leather, they have like a fanatical customer base, you know.

so they can have their stores and will very low rent areas and the customers will come to them. And I bought it, you know, like it's kind of a classic, you know, well, microcap a story. These, well, tiny companies, like their valuations get, you know, will heavily influenced by the activities of the large shareholders and liquidity. So in 2008 and 2009, there was a 16% shareholder, like the Wellington group. I don't know why a company like that would own 16% of like of tandy leather. They're a big microcap player, I think. Oh, really? Yeah.

But they're like, I mean, like they're big funds. Oh, yeah, sure. They have big funds. But like, so we basically bought a big hunk of our position at probably like a 30 or 40 million dollar valuation for a company with no debt and excess cash that at the time was probably doing like $8 million of operating income and, you know, did like, you know, well, $12 million. like last year or the year before. And then we bought another huge chunk from a retiring CEO to bring us up to basically the 30% where we are now. So I was just a real fan of the quality of their business.

And usually, like with our positions, again, like as we talked about with a Stagas, like with Popeyes, it's a lot like the Stagas story. It was a special situation. They were a conglomerant. They basically liquidated. They went a year with no CEO. They got an excellent CEO. People were tired of the name, and then the financial crisis hit.

And so you had a year of great performance, but during the financial crisis with a new CEO, it had a special situation narrative. With a Tandy was just like a really good business where you had like for some reason, a shareholder that, you know, wanted to sell at all costs. Like at any price. and, you know, we stepped up with the bid. It strikes me that, you know, when you think about obviously hyper-liquid, large-cap markets that dominate stated equity returns, you know, everyone talks about the S&P 500, that maybe the future of, we'll call it Active Management, and I want to get your opinion on the active passive debate in a minute,

but maybe the future of Active is more in situations like this where you're sacrificing liquidity, obviously. for a longer-term view on a good operating business that, you know, obviously tandy leather means nothing to almost every single stockholder out there, but is a meaningful part of your fund. Do you think that that's true? Do you think that, you know, the real opportunity is going to be in smaller cap, less liquid, longer horizon type investments like this? No, I mean, I'm agnostic.

Like on that front, I mean, I'm agnostic about a lot of things. but yeah, look, I think there's a dynamic to microcaps and the liquidity problems and, like, the issue, like, of ultimately, like, a lot of times, like, you're at an information, you know, disadvantaged from the seller. It's a lot like distressed investing with, like, you're buying a block of distressed bonds, like, from someone that knows a lot. There, like, are all these aspects of a microcap, like, investment that would make it hard to have, go, quantitative or like an indexing, a hundred people. strategy. So I think there will always be room for like active, you know, managers in tiny, tiny companies to your question of, so there's a second, you know, well, question like implicit in yours, which is with this, you know, we'll fund and indexing in the mega caps, you know, will we hit a point where the quality of it, like an individual fund managers will judgment

in general, like, they're not going to be good enough to compete. I think it's just a completely different question. And it's a question about, you know, essentially, you know, judgment or what kind of, like, access to information. But I don't know. And I just assume, like, the market is prone to bad misjudgments. And I do think there's a place for concentrated big cap investors, too. And so I think there will continue to be. And look, I mean, I think it's hard to outperform.

And I think over time there will probably be, you know, compression on fees. But I think there's a place for, like, active managers across the board. And, I mean, I kind of wonder, as, you know, quantitative, like, investing grows, will that help, like, a small pocket of active investors? Like, to me, like, the more problematic issue with the growth of algorithmic, you know, hedge fund investing in the mega caps is I think that like we're seeing this real imbalance and access to information there too where you have the really big funds are now will have the resources and the world has evolved in this way where they have access to more real-time information

than even the companies do and so they're buying all of this you know well real-time data on consumer habits, which I assume, you know, will skirt the gray areas of securities law, but it's pretty fascinating. So, like, I've thought a lot about that and the impact that that'll have in the long term. I've seen, like, you know, satellite imagery for, for mall parking lots. That kind of stuff, yeah. Crazy unstructured data. I mean, I get, like, an email, like, I mean, every day from, like, oh, we have a few big cat positions. So, like, we own, like, you know, Google or Chipotle.

And I think that, like, will, puts us, like, on the radar of these well, firms that are like, hey, we have all this, well, value-added research on how Chipotle's doing, you know, this week or whatever. Yeah. So there's this whole industry of that stuff. It's kind of like Graham looking through the, you know, the ICC at special information. And I think the question now is the problem we face now as active investors is how in the world to separate signal from the noise. because surely most of that information is completely useless. Well, I mean, and I think that's a good thing for long-term investors. I mean, ultimately is like, I mean, that's not going to hurt them.

Right. If they're like, are people out there that know what the next quarter is going to look like. Two quick questions on your business. I'm curious, one, if you benchmark yourself and if so against what. And two, maybe talk a little bit about your investors because I can tell, you know, having talked to you before this conversation, but also through this conversation and based on your portfolio, that you've got a high conviction, long-term investing strategy here. Yeah.

That's not all your money. You've got investors. And so the quality of those investors, I'm sure, matters. So maybe you could touch on that. Sure. Yeah. You know, we've been really, really extraordinarily lucky in that a large percentage of our current investor base.

And they were only a fraction of our beginning investor base, but they have come to dominate it in terms of assets are collection of high-frequency traders. So they're all high net worth individuals. They're all, like, they tend to be young and sophisticated and interested in markets. And we've been, well, very, you know, well, fortunate that over the life of our fund, which will coincide with, you know, 07, 08, 09, which were, you know, banner years in that industry, that, you know, they grew at a period where it really helped us to have access to capital. So we've been really, really lucky on that front.

I knew lots of fund managers in 08 and 09 who had to close shop, who were doing just as well. I mean, you know, like my old boss at Arclough, Greg Schrock, who works here now. He's the one at the end of the office. I mean, he was a big subprime short. He was up like 80% in 07, up like over 10% in, you know, in 08. And then he was up in 09, but just a little bit. And he basically like lost his seat investor and had to fold up shop.

So we've been really fortunate to have like a great investor base like that understands what we do and that like allows us to invest in the way that we know how to invest. And so when you think about, you know, benchmarking, like we're not out there marketing. Right. Like to new funds. We're not out there. We're trying to get big institutions. Like like when our clients invest in us, I think of them as choosing us over the S&P 500 index fund. Right.

So that's our competition. Yeah. And I feel like not only is that hard to outperform in terms of its return, it's a lot more tax efficient. It's like way easier from an administrative, you know, well, standpoint. So, I mean, I think that, like, do we have a high bar to live up to? Like, we will sometimes have these investments where we're investing in, like, some kind of a liquidating trust where it's a tax disaster and, like, we'll get our K1 and September.

And so, like, we really are an administrative burden on our investors. So they're choosing us. And, like, and I feel like to make it a worthwhile investment, it's the S&B 500. And it's not just that it performs well. It's, like, easy for these guys. Right. To not have to deal with the K-1s and, like, the liquidity and all that stuff. So, yeah, like, we never really, like, compare ourselves to, like, the value industries or the

Russell or, I don't know. I mean, I guess that like we have. Yeah. I mean, and there are times when like, you know, we obviously are going to be, well, more correlated to the Russell. So like in periods where like we, you know, we really suck. Like, you know, we might say, well, like the Russell sucked. Yeah. And we're value, value based. You know, that could partially explain it. Right. But, you know, but, you know, but they know that like we have 10 to 15 positions and that in any given year, that it will be, you know, will driven by these, you know, um, idiocy. syncratic things. Yeah.

How often do you have, or maybe the most recent time that you've made a major portfolio change, which I'm assuming your turnover is very low. Yeah, we, um, our biggest portfolio, like we sold, like we used to own a general motors and we sold it. So yeah, in the last three years, all of our big changes have been sales. Yeah. Yeah. We really haven't bought a new core position in, like in a long time.

Is that value driven? Is it a lack of cheap opportunities? I think so. I mean, I hope so, yes. I mean, I view it as its lack of a productivity on our part, but hopefully the reason that is the case is because there's not compelling ideas out there. So I'm going to close with a few kind of fun, quick questions. Sure. The first of which is, what is the kindest thing that anyone's ever done for you professionally? Definitely, Arthur Levitt got me into Columbia Business School.

So I applied there Like I did the interview After I got in I think it was like the first week of school The dean of, I think it was the dean of admissions Called me into her office And basically explained like we wouldn't have let you in Except like for Arthur

Which is like Which in hindsight like You know I mean I think Well her telling me was I mean I'm glad that she told me Like I'm glad I knew It did you know Will motivate me like I suppose

like to make me resent them. I was, you know, like, and I'm incredibly, we're grateful that they did it because, you know, going to that school has been extraordinarily good to me. But then at the same time, there's a part of me that's like, you know, they should be taking, well, more people like me. Right. I mean, I had the apt to go there by, like, a wide margin. I just, well, didn't have the, like, the resume, like the business background. And so, like, a part of me is like, well, you know, like they should take, well, more people like me, you know, but, but yeah, like, without him, like, I wouldn't, like, have gotten in there. I mean, you know, at the same time that I applied to Columbia, I got rejected by NYU,

and, you know, those were the two schools I applied to. So it was, you know, real proof that Arthur, you know, did get me in. You mentioned that at Columbia in Greenblatt's class, you felt like you just got some of the stuff faster than other people. So maybe this is the answer to the question. But I'm curious that if you could isolate one skill or skill set, that you feel you're just better. You have more aptitude that drives a lot of your advantage.

What would it be? I don't know. I mean, if I have a skill set that is above average, it's above like average for the general population, probably not, like above average for, right, the paradox of skill that Robeson talks about, yeah. I mean, I think I'm good at big picture thinking. I think I'm a good writer.

Like, I think I'm a good, you know, written communicator. and I think those are things that have helped me professionally, but I'm not sure that they make, like if we're talking about above average in the peer group, I think I'm pretty average in the peer group. Given that we first met each other because of your book, and we're both, I think, pretty voracious readers, or at least have loved books throughout our lives and both writers as well. Every one of these kind of podcasts has the interviewer asked people for a book recommendation,

So I'm going to try to do it a little bit differently just to keep it more interesting. Not so much just a one book recommendation, but if you somehow had the power to force everybody in the world to read one book, what would it be? Interesting. I mean, so like I have thought about this some, and I think, yeah, I mean, like I think the big issue is, you know, like I'm 41 years old. You know, when you're 41, like every book is a baby step, right? Like there's no one book that you can read when you're 40 years old that, like, is going to have a profound influence, I think. I just think like it all, you know, will feeds like the way that you see the world in a positive way. But, I mean, I read Anne Rand in like the 10th grade and it had a profound impact on me.

Even though, like, within three years, I had completely like rejected everything that she said. it's like you are just like at that age that books have a profound impact. So I think the way that like that I read now is well very different from like in high school. Like you're like this sponge. Yeah, well sponge. And you will know so little like that everything like affects you in a huge way. So all of those books, all of like the books like that like have a huge impact on the way that you see the world. You have to like to read at that age.

So I don't know. I mean, I love a lot of books. Well, now, but they don't. Like, but every book is just, you know, like a small change on you now. And it just, it depends on, like, on who you are. So, like, I don't really have an answer. In terms of business books, I guess, like, when people ask me, like, investing-wise, is that, like, I do always push the snowball.

Like, I feel like, A, it's. It's a great book. Yeah, and it's weirdly, you know, we'll under the radar even among the Buffett devotees. Yeah. And I think that book is more valuable than, like, I think, like, a young, like, investor coming up now will, we'll get more from the snowball than from the intelligent investor or security analysis. Kind of like a lot of aspects of your story that we've heard today, I think there's huge value in the snowball, in just understanding the stages and hardships and hard work and, you know, strokes of good luck

and all the things that go into what, you know, looking back seems like an inevitably great career. Yeah. It's very hard to be successful as a fund manager. And a lot has to go right. And I think Snowball, I think Snowball is probably the best example of understanding that journey. Yeah. Yeah. I mean, I think it's a significant achievement.

and I think it does exactly what Buffett, you know, wanted the book to do. And I think it's a real shame that he's divorced himself from it because I go to the Berkshire meeting every year. But this year was the first year that I did the book circuit. So I went to all these book events and the snowball was invisible from them. And when I talked to young people, like a lot of them have read the Lowenstein and not the Snowball. Like the Lowenstein book is good. but to me it's completely unnecessary, especially if you read the snowball. And the snowball just has incredible access.

And it's just it gives you such a better feel like for how much of an anomaly, you know, Buffett is. But also for like for how he thinks and what drives him. It's a shame that it's not like the profile book at the meeting every year. It should be. Last question. If you could hear anybody else interviewed like this. Who would it be? That's a good question.

I mean, you know, like I'm always fascinated by people who are productive but have, like, diverse interests. Yeah. So, like, I really like this guy, Tyler Cohen. Like, he blurbed my book, but he's interested, like, in lots of different stuff. Is that the marginal revolution guy? Yeah. Yeah. I don't know how he does it.

I mean, you know, well, how does he have time? I mean, how does he organize his day to cover that much ground? I mean, yeah, like, I think that ultimately, and I think, like, a lot of, you. of a fund managers, like, are kind of interesting people. I think Clarman, Cliff Asnus, well, guys like that, like they're well-rounded and sophisticated thinkers. I mean, I think ultimately when you get, you know, writers or, you know, will people who, like, you might have a little bit of a more narrow interest,

like, you might learn less from guys like that than, like, from people, like, that, you know, will really, you know, cover lots of ground. Yeah. Interesting. Great. Well, thanks so much, Jeff, for doing this. Cool. Thanks for my first recording, and it's been a blast. So I appreciate it. Great. Well, thank you. Hey, everyone. Patrick here again. To find more episodes of Investor like the best,

go to investorfieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, OSHAG. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover invest like the best. Thanks so much for listening.