Invest Like the Best with Patrick O'Shaughnessy - Ted Seides and Brent Beshore – The Future of Asset Management - [Invest Like the Best, EP.30]

Episode Date: March 28, 2017

This week, my good friends Ted Seides and Brent Beshore join me to discuss the future of asset management and a ton of fun side topics. While we are all passionate about investing, we’ve had very different careers: Ted in alternatives, hedge funds and fund of funds, Brent in lower middle market private equity, and my own in quantitative equities. What we share is a passion for investing in general, and a deep interest in where the asset management business and profession is going.   This conversation starts like most episodes—a somewhat structured exploration of the investing business –but morphs to be a bit more fun and informal as we work our way through a bottle or two of wine. In the later half, we talk about how to dissect an industry, common features of good businesses within a given industry, books we’d like to write, books we wish existed, and things we’ve learned in our careers.   For comprehensive show notes on this episode go to http://investorfieldguide.com/brentandted 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

This podcast is sponsored by CFA Institute, the Global Association of Investment Professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The chartered financial analyst credential is the most respected and recognized investment management designation in the world.

The views expressed in this podcast do not necessarily represent the views of CFA Institute. 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'Shaunicey is a principal and portfolio manager at O'Shaunicee Asset Management, all opinions expressed by Patrick and podcast guest. are solely their own opinions and do not reflect the opinion of O'Shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment

decisions. Clients of O'Shaunossey asset management may maintain positions in the securities discussed in this podcast. I really underestimated the impact that this podcast would have on my life. I owe a huge thank you to everyone listening, especially to those who have shared the ones they've enjoyed most with their friends. I haven't done a single thing to quote, market this show. It has been 100% organic word of mouth growth, so the large audience size is thanks to you all. I deeply appreciate it. What I appreciate even more, however, is that the show's success has pushed me to be more thoughtful about what admittedly remains an informal process, searching for the most interesting people I can find that will share lessons they've learned with me and with you.

Were it not for the podcast, I would never have met most of the people you hear each week. Some of those guests have become dear friends, including the two in this week's episode, Ted Seides and Brent Byshore. Ted and I flew out to St. Louis to spend a day with Brent. While we are all passionate about investing, we've had very different careers. Ted in alternatives, hedge funds, and fund of funds, Brent in lower middle market private equity, and my own in quantitative equities. What we share is a passion for investing in general and a deep interest in where the asset management business and profession is going. This conversation starts like most episodes, a somewhat structured exploration of the investing business, but morphs to be a bit more fun and than formal as we work our way through a bottle or two of wine.

In the latter half, we talk about how to dissect an industry, common features of good businesses within a given industry, books we'd like to write, books we wish existed, and things we've learned in our careers. We spent a long time talking about Ted's famous bet with Warren Buffett, but I've removed most of that and saved the conversation for another time. You'll hear us reference it here and there, mostly giving Ted hell, but rest assured we will explore the entire thing in more detail at a later date. I could spend all my free time having conversations like this one and die happy. Thank you again for listening and sharing because you're doing so has allowed me to find people like Brent, Ted, and many others, and led to friendships which have quickly become an important part of my life. For show notes, visit investorfieldguide.com forward slash Brent and Ted, all one word. We begin in the middle of a conversation we are having on the future of hedge funds and the fees they charge clients.

Please enjoy this conversation with Ted Seidies and Brent Bishore. But there's some structural headwinds that hedge funds have today that they didn't nine years ago. Most notably the level of interest rates, which imposes a cost to getting in business for really for the generation of returns and hedge funds that has nothing to do with the market. So with short-term interest rates at, you know, one or two percent, you're, earning nothing or negative on your cash, whereas nine years ago short-term rates at four or five percent, you were starting off up three or four percent. So there's a big cost at the beginning. The fee argument's a funny one because fees are certainly coming down for hedge funds today. Where do you think they are? What's kind of the spot market?

Spot market's probably still close to one and a half and 20. I think that hedge funds are highly concentrated. They're still in the hands of the 200 large funds that are, call it, north of a billion dollars, and that's roughly where that fee is. The incremental fees a lot less. So a new fund starting out has to offer incentives to get in business. And even in the last week, since the letter came out, there have been a wave of announcements of larger funds starting to cut their fees. But for the most part, you're at a downward trend starting at call at one and a half and 20. What do you think that's going? And Brent and Ted and I have talked a lot about this in the next five, ten, look out as far as you want. One of the sentiments,

out there now is if you're any good at investing, you know, you'll get rich pretty quick and you won't need to charge management fees. So the vast majority are all of the compensation when you're investing someone else's money should come from carry above a hurdle or not, but that seems to be a common sentiment. At the same time, you've got this issue of funding a business and without management fee and very competitive labor market for talented people and hedge funds, your advantages can get eroded pretty quickly without management fee income. So what do you think that transition is going to look like? We talked about this a little bit last time, but with Brent here, too, it would be fun to talk

about the future of asset management and where we think we might be heading. Well, we know where the direction is. We know the direction is down in terms of, called the fixed cost, the management fee. And often that gets offset either with longer duration of capital or maybe even higher incentives over an appropriate hurdle, less clear how we get there. Now, I think one of the things that's happened is if you go back 10 or 15 years in hedge funds and just think of it as a business, so we'll get Brent in here quickly, you had a business with a high profit margin.

Hedge funds were making 15 or 20 percent. Markets were less efficient. And the one and a half percent management fee was dwarfed by the returns you were generating or whatever you're paying in dollars is dwarfed by the total profit margin dollars of the business. But then as returns came in because markets got more. more competitive, it's gotten more and more clear that that fixed cost is just too high as a percentage of the returns. And so I don't think that's going away. What it means is that the

vast, the $3 trillion, vast dollars that are already allocated to hedge funds don't require the high management fees they've had historically. But to your point, Patrick, that makes it really hard for a new entrant to get into business because they need something to fund their operations. So we know the direction. I'm not sure how it gets there and when. from your seat where, you know, you've been doing it in a very different way in the private equity world, pretty much by yourself, outside this kind of institutional asset management world. From the outside looking in, what seems right or absurd? What do you think the future is going to look like?

I think it's interesting. I think the world's moving much more towards heads I win, tails I also lose, or at least that's what I hope moves towards in that direction. You know, I think there's a lot of misaligned incentives, whether it's been in venture capital, or private equity, certainly in the hedge fund world where you have a relative outperformance, whether that can be tied directly to luck or to skill is part of the debate, but you end up getting into this, you know, heads, I win, tails you lose. And I think hopefully those are, those are going to evolve. I mean, I agree that Ted says, how do you get there, though? I mean,

I think there's a lot of institutional inertia. I don't see a clear path either, although, you know, you start seeing in the venture capital world, I wonder how much of that's going to mirror kind of what's happening maybe in the hedge fund world. You have the Andres and Horowitz coming along and saying, we're going to take all of our 2%, all of our management fee, and apply it instead of towards exorbitant salaries and towards, you know, enriching the partners to the founders. We're going to spend virtually all that and arguably even more than that on servicing

the businesses that were that we're moving towards. And I wonder if in the hedge fund world, I don't know if it's a direct corollary, because I don't know if you don't need to add layers of complexities. We joked about there are some hedge funds out there that just have hundreds of PhDs sitting on the sidelines for basically window dressing. I certainly don't hope we don't get into the world where it's mostly just window dressing, but that somehow the fees that are taken up front on the management of the actual assets

are going truly towards that and not towards the enrichment. That's not where you should make your money, basically. Yeah, it's a complicated problem. And I find it especially interesting in the private equity world, too, where arguably what you do, imagine you had some pot of money. that was effectively management fees that the return you could earn and then pass on to your investors by deploying that management fee income could be huge. But it has developed such a pejorative negative connotation in the minds of investors everywhere

that a higher management fee just in a linear fashion is worse and worse for investors. Yeah. And I think that you get into this weird dichotomy between being truly an investor and being more of a capital deployer. And I think that the higher the management fee is, and the more of a heads-eye-win tails you lose structure that you set up, the more natural tendency you'll have towards capital deployment, capital gathering and capital deployment. And so, you know, I think everyone's trying to go, well, everyone who unless you can get into that game is trying to get away from that. I think that everybody who's a capital provider is wanting to put their money with investors and not capital

deployers. And so, you know, I wonder how much of that language those are, you know, changing over time. I mean, there was a period of time where I just kept hearing over and over again, no, you're buying a vintage of fund. That's what you're doing. Well, that's just capital deployment. If you're just buying a vintage, then basically what you're saying is, yeah, we're going to get you into what everyone else is getting into. And let's cross our fingers and hope it turns out well. I mean, I don't know how much you should make it. That's your job.

I mean, I think there should be in the future, hopefully a premium put on true investors, people that are generating, not to get too done, real alpha as opposed to sort of the, the wins and the luck's, the way the luck bounces over time. So I don't know. I wonder how those things are going to involve. One of the weird things is how fees tend to be in roughly the same ballpark, whether you're talking long only where it's a percent that's coming down. The weight of the average is probably 70 bips or something like that. Or in hedge funds where it's one of the half and 20 for enormously dispersed outcomes.

And the most talented guys, it's kind of like in basketball, like LeBron James could probably justifiably get paid $100 million a year by the cabs. He's worth that much. Just like Renaissance Technologies or some of the outlandish results that have been delivered by hedge funds should be a lot, probably even higher fees than they charge. But you get this kind of level playing field and the net result is you have to have the aggregate underperform the S&P 500 in the long-only space. It's just math over 10 years. And you effectively have this enormous tax on the world's assets for those that are deploying the capital on their behalf. And even if they lose, they're still charging 1% along the way. So there's, there's this, I don't have a solution.

I'm just fascinated by the problem as someone that wants to, that believes in active management, believes in skill, believes that it's extremely hard to identify that skill ahead of time. I don't know what to do other than obviously eat my own cooking with quantitative type investing, but it's a huge problem. And I don't know, I would not want to be in the seat of a big capital allocator with with the trend being, the career risk being don't overpay. for active management because you're not only losing up front, then you're losing in the long term. But now you've got to think about a 30 times multiple. What are the key variables that allocators should be looking at when evaluating an alternative option, whether it's a bucket they're filling up

or they feel that the equity markets are just too expensive? I think the core of the question is, what are the underlying fundamentals of return that you get? Let's call it a long short equity hedge fund. So the long side we understand, a bunch of stocks. What's been interesting is even in this period of time of strength of the S&P, a number of long short equity hedge funds have created long only products out of their long book. And with great consistency, they have been very successful and outperform the S&P. So it's not the long side that's been hurting the hedge funds. It's been the short side. In this environment, shorting has been incredibly difficult. Part of that is, as I mentioned before, with low interest rates, there's just a cost of doing the business.

The other part of it is that shorting is a lot more crowded than it was nine years ago. and the volatility of single name shorting has made it incredibly hard for someone who has a thesis that a stock trading at 20 is ultimately worth 12 to not watch it go to 25 or 30 first and have to cut the position because of risk limits and then actually not be able to make the return. So it's just been really hard for people to make money on the short side. And that's going to be something to watch. I don't think that's going away anytime soon in the U.S. So what allocators should be looking for is where there are pockets of opportunity where they still see inefficiency.

So what I found over this period of time is that managers participating in the Asian markets that are fundamentally good investors like to buy good businesses, relatively cheap, short expensive businesses that they don't like. That still worked. Asian long short managers have delivered terrific alpha over this period. There are certain sectors in the U.S. that are less trafficked generally by hedge funds. And you could look at the data, but I would define where hedge funds traffic generally is consumer stocks, financials, TMT, technology, media telecom, and some in health care. But there are other places where it can still be interesting for hedge funds. That's interesting. What's the story there?

Why, is there any particular reason other than just maybe like a snowball effect that that was what some big names covered early? Why are there certain sectors that are more traffic than others? I'm not sure I know the answer. I think that some of it probably can be described as where there are perceived winners and losers. So the technology sector being the most notable example, product cycles are so fast that in theory you can pick winners and losers. I think health care and biotech in particular, similar. A lot of big winners, a lot of big losers. Consumer stocks, it feels like everyone thinks they know something about retailers.

Everyone can go to stores. They shop somewhere. They have a wife that shop somewhere. The old Peter Lynch approach, right? The old Peter Lynch approach. But there are other sectors that think of, for some reason, consumer staples, just tend not to be trafficked by hedge funds. Utilities certainly not. Real estate stocks, not so much.

And every now and then you find someone who's really an expert in those spaces, and they've continued to perform quite well. So those are the pockets where I think even net of quite high fees, skilled hedge funds can continue to deliver. So, Ted, we covered this a little bit earlier, but is it possible to pick the best, pickers over time? Or, I mean, we talked a little bit about a selection bias issue that are going on there. I think that's an interesting, interesting observation. I think it's possible, and it's certainly possible to select the better ones from the weaker ones, but it's harder.

And it's harder in part because the process for allocating capital to managers is more efficient. There are more smart allocators today than there were 10 or 15 years ago, and they tend to find the perceived talent, so the star number two or three guy from a big hedge fund that spins off and goes on his own, there are a lot of people that are interested in investing with them. And as a result of that, the perceived talent attracts capital quickly and gets to a size where they don't really have the advantage of being smaller than they might have. So it is doable.

Again, I think it's more doable if you try to find the major league player playing in a in a little league or a minor league market that's less efficient. But look, I am less confident in my own ability and the ability of others than I was eight or nine years ago when I made back clearly. And I certainly think that my old shop protege did a better job picking managers than we did picking selectors of managers. How much was size of factor when you were picking? I mean, I think there's a pretty well-known trend that as good pickers get large.

and their asset volume, their performance sense of decrease, correct? In general? In theory? In theory. I'm not sure that's played out in practice. Really? Okay. So you're not sure that that's actually provable in the markets, and that's something

you didn't obviously observe directly then? Yeah, I didn't. You see academic studies that consistently show small managers do better than large managers, and you really don't see any academic studies that show that large managers do better than small managers. But if you actually look at the studies, they usually define small as less than $50 million dollars in assets. And that's not an investable universe. So what's happened over the last bunch of years is that the large managers by and large as a group have performed as well as a

group of small managers. And they're certainly more comfortable for the marginal allocator to invest with. So they've attracted more and more money. But unfortunately, it hasn't been the case. The group of small managers has at least meaningfully outperformed the group of large managers. Now, you can ask why, and one of the big cases I would make is that the advantage of a small manager is having a broader investable universe, which means they can participate more meaningfully in small mid-cap stocks. Well, in this period of time, when the S&P's been as strong as anything, that hasn't been an advantage. If anything, it's been a marginal disadvantage. So it's hard to know if it's because the small manager is less skilled or just their broader playing field hasn't really rewarded them for the opportunity set. It would certainly seem, you know, we look at a lot of this data, that that effect of, the simplest way to think about it is take the Russell 1000 or the Russell 3,000, whatever your broad benchmark is, take the cap weighted return minus the equal weighted return, that that dominance of cap weighted results in this cycle has overwhelmed any sort of skill that's happening in the small to midcap space because the numbers have been staggering.

like 2015 was an especially crazy year when all the returns of the S&P 500 came from, you know, a small handful of stocks. And if you missed that on those stocks, you underperformed. It was a terrible, I think it was literally the worst year since like 89 for active managers, broadly speaking, something like 11% outperformed the benchmark. And cap weighted minus equal weight. It is usually a pretty good proxy for active versus passive management. If we think about, again, the future of edge. And this is a question I've started asking, investors that I'm meeting with is, okay, what's your edge? Because this is what everyone asks. Why is it there? Is it structural? Is it sustainable? Is it persistent? Why won't it be

competed the way? And there's the old kind of tricotomy of analytical, behavioral, informational. And you were telling us a really interesting story earlier about informational edge that I'd love for you to share with us about how crazy it was 20, 30 years ago and how much the fight for information has changed. Yeah. Well, you know, I talked about the challenges of shorting right now. And that that story was one about the Feshback brothers, who were three brothers that were well-known short sellers in the 80s. And they were colorful Scientologists. There was a whole bunch of noise about them. Matt Feshback, one of the three brothers, happens to be a good friend of mine. And they compounded a short only fund in the 20s for about 10 years in the 80s when equity

markets were up 15 or 20 percent a year. So the question is, how did they do that? And they were, again, And they were known for fraud busting, and they definitely had a couple of stocks they found that went to zeros. But when you talk to them, their hit rate on making money on shorting was extremely high. It was 70, 80, 90 percent at times. And the reason was that unlike today's market where processing and getting an edge probably means something about thinking differently or processing information differently, in the 80s it was all about acquiring information. And what the feshbacks, one of their great tools, was they would hire college interns and recent graduates, put them in Washington. And their job would be to go to the Library of Congress, look up the recently reported 10 cues, pick up a phone, go to the phone book, put dimes in the machine, which doesn't exist anymore, call the office. They were down in Clearwater, Florida, and tell them what the report said.

And what would happen was back then the reports would get sent to the Fidelity Portfolio Manager would wait a week, get the 10Q in the mail, and when he read it, the stocks would react. So the Feshbacks were a week ahead of everybody else just by hustling and realizing, hey, if you go to the Library of Congress, you can see the information before other people could. So there were all kinds of things when people were forward thinking, intelligent, motivated, that hedge funds were able to do, you know, 15 or 20 years ago or 20, 25 years ago, that there are just so many smart people looking for those edges today. It's probably shifting towards computers.

Yeah, it reminds me of the, you know, the location of high-frequency trading cables or computers closer and closer to the exchange. Or the satellite photos that are being used. Yeah. I mean, everyone uses the examples of Walmart, satellite, you know, parking lot, satellite photos or credit card data for consumer companies, things like that. But I think, because now we're looking back, and kind of laughing about that.

And you could look back to something like Ben Graham in Northern Pipeline, where Ben Graham figured out that there was this wealth of data that Northern Pipeline reported to the ICC that nobody knew about. And he figured out that they had that stocks trading at 50 or whatever, and it's got 60 bucks of cash on its balance sheet

that nobody even knows about. And so he has this aha moment and becomes kind of an early activist to get this money to unlock this shareholder value, so to speak. We talked about this with Jeff Graham on the very first episode of this podcast. So we look at, look back at these what seem like quaint examples, but I'm sure in 20 years we'll look back today

and there will be quaint what seem like quaint examples. Well, that's my question. Where are the coin examples going to be from 20 years from now? I think that that's what everyone, especially in the hedge fund community, is trying to figure out. So if there are signals that have alpha in them and they have a half-life, let's assume everything's got some sort of half, maybe not. Maybe value investing has a, we'll work forever, some way, shape, or form, but maybe the excess returns are diminished. That's the big question is, one, what has like a half life that's worth pursuing that's not a one-year signal that's going to work and then everyone will know about it and it'll go away? Well, it's got a three to five-year half-life or something like that. And maybe that's

the Walmart, although everyone's been talking about these damn Walmart parking lots for for the last three years. So I bet that advantage is already gone. But I don't know. Yeah, I think social sentiment, social media sentiment is kind of an interesting area that I know there have been a lot of startups in that area. I think a lot of them have bombed out and not proven to be, well, have been proven to be more noise than signal, but that would seem to be an area. I also wonder how the change in how many companies are public makes a difference as well, right? I mean, I think there's a lot of, you guys are more the experts than I am, but the universe of publicly traded companies seems to be diminishing. And so as that happens, do you continue to slice the pie thinner and thinner and

thinner. I don't know. I don't know how that's going to play out. It'll be interesting to see. I wonder, you know, with the SEC rule changes, how these sort of almost semi-public companies, how those will evolve into a completely different class of companies, right? I mean, I think you can raise $50 million of capital and be kind of like semi-public right now without making many of the disclosures. I wonder how that's going to create almost like an entirely different stock exchange. I don't know if you, either of you guys thought about it. Well, I think it raises broader questions of the future of the corporation in general. And these kind of economies of scale in the industrial world, we've talked about this as well

on past episodes, in particular with Alex Mosed, on kind of the platform business model. And we've talked a lot about asset light businesses, the power of outsourcing, the need for, or less of a need for big, scaled organizations that you can effectively run with a pretty small group of people, a really neat business and outsource the rest. And if you can do that, maybe there will be continuing to be fewer, fewer public corporations that all these signals are based off of all the data, all the research that we're talking about is just a 50 year chunk of time, right? And in the history of the corporation, it's changed a lot. And we've seen dramatic changes since 2000, thanks to kind of

the availability of data, the internet, connectivity, the platform business model. Available at capital of the private markets. I mean, look at Uber. Totally. It's crazy. Yeah. I mean, yeah, if you can have a business at that scale, go that long without going public, you know, what's the, what's the point. Well, this seems like a different type of company that's now raising in the private markets at huge scale that has a very different business model, right? You know, it's sort of the high burn, high burn public companies are seeming semi-private now, right?

I mean, they're still getting money from the fidelity's and those types of people. I mean, they're just not technically publicly traded. Yeah, I think that for prospective returns, thinking back again to what allocators should be thinking about, that the price component, unfortunately, has really run. away from us. And that's great when a low-fee instruments delivered really strong returns, 14% returns, you said, for now quite a while. And now you've got a batch of somewhat seasoned investment people who have seen nothing but I barely saw, you know, in my career, I barely saw I started right before the crash. So that was my first experience. But since then,

it's been kind of hunky-dory. It's been, it's been fairly straightforward and a straight line up into the right. And we get conditioned on these sorts of returns. Unfortunately, with those returns come outlandish prices. And so the question I'm asking everybody is how to think about valuation. At some point, a 30 times multiple, the earnings yield on that is so paltry relative to inflation that the associated risk just becomes too much to bear. And so it seems to me like the most important thing is to think about value today. Now, that's, I'm extremely biased because I'm sort of a value, a value guy at heart, and that's what the data suggests you should be. But that's why I've spent so much time with Brent, with others that you'll hear in upcoming episodes about private markets.

I know there's a lot of hair there. But at least there you can see businesses trading at more responsible multiples. So maybe we could talk a bit more about that. And what we haven't done in past episodes is really explore particular industries. And it'd be fun, Brent, for you to maybe pick one or two that you've got a lot of experience with that you've seen what works and what doesn't across, you know, 1,000, 2,000 businesses or so you see a year to flesh out kind of how you think about industry dynamics when making an investment decision. Well, I think the industry is interesting in the sense that it's almost, most of the, so most of the moat in any of these small businesses are going to be tied up with the owner. That's the first thing you've got to

remember with any small businesses. So from an industry perspective, most of the small businesses have sort of an average return on the owner's time. Now, there's always going to be pluses and minuses and easier industries and harder industries, I would say that the, it's almost like a sexy spectrum. Like the more boring, typically, the higher the average returns in an industry, the more attractive, sort of naturally attractive the industry is, the more the returns on average are going to be driven down. And so you see a lot of this, like the wine business is terrible business. The film business is a terrible business. The restaurant industry on an individual basis is a terrible business because you can go and interact with any of those products and think, oh, wow,

this is a, this is a great business to be in. I think I'm going to quit my job doing whatever and go work in that. You know, no one, no one has their, you know, roof replaced on their home and looks out at some guy nailing shingles to your roof and, and says, you know what, I really hope I get to replace that guy someday. I mean, it just doesn't happen. I think those are those are the, those are the fundamentals that drive, we're seeing here laughing, but those are the fundamentals that drive a lot of human behavior is just what looks attractive. and what do you stumble into? So from an industry basis, I mean, I think naturally from a value standpoint, there's

definitely an incentive to get involved in less sexy industries. Now, when you get down into sort of the individual industry, regardless of whatever it is, you're going to find a really interesting chain of value where the most obvious places to participate are typically the lowest return. And then you've got a whole bunch of providers around. that obvious place that typically have higher returns, right? So if you talk about the real estate industry, what's the obvious thing in the real estate industry will be a realtor? Well, the real money in the real estate industry is not in being a realtor. It's selling stuff to realtors.

I mean, that's the kind of the joke that exists. Same thing. Even if you take an industry like the wine business, which I said is typically a terrible business. There are plenty of people in the business or in and around wine that make a tremendous amount of money and have extremely successful companies. One of the companies in my backyard that's an incredibly successful company supplies barrels. Missouri Oak worldwide. It's an enormous business. And it's so under the radar, but do you want to necessarily be in the whiskey business or the wine business? Those are the obvious places. The places you make the money are in the barrels or the steel rings that hold the barrels together or whatever the thing may be or even heck, even the

wine transportation business. We've actually seen a couple businesses that specialize in in the transportation. So I think that those non-obvious, the more non-obvious the role is in the industry, the more protected is naturally going to be. So it's a good point, which is that it's less about searching for particular industries that have favorable economics or investment opportunities, but probably every industry, even the glamour ones, have subcomponents, component parts, business-to-business-type businesses, which nobody has any idea exist, probably never even think about when buying the bottle of whiskey or the bottle of wine, but which have the most favorable economics. Yeah, absolutely. And I think that it goes increasingly now into the software

side. I mean, there's a lot of amazing software businesses that are built on helping very boring operators, like the pest control business. Well, there's software providers that all they do is specialize in helping pest control, like local dude in a truck, make his business more successful. I think that's the trick is to find those niches that are helping support the economy without being necessarily the thing that's obvious to get into. Can you talk a bit about the newspaper world and the media world as an example of something that's a bit counterintuitive to the, or at least it's starting to run contrary to the popular narrative, that newspaper is a terrible business model and dead, everything's going digital,

but maybe there's some data that suggests the opposite. Yeah, well, I know why you're talking about this, because I sent you an interesting study on this topic. So the newspaper business, I think, is following the same arc that a number of other industries do, which is you have people shouting about disruption. You have some real disruption actually, obviously, going on. The first being Craigslist really taking down the classified section, which was a huge area, source of revenue and profits for newspapers that sort of artificially propped up the editorial side and maybe helped take pressure off the ad side. The bottom line, when it comes to media of any sort, is it's all about attention. So there's a lot of vanity metrics around views or likes or, you know, anything that you can come up with to show some sort of interaction. Those can be easily faked. At the end of the day, all that matters is can you affect a consumer's behavior reliably and consistently in a certain direction? Like, that's it. And that's all about attention.

And so what you have in this interesting, you know, the economics of the sort of digital divide versus the print divide. and you take newspapers, for instance, is most of the value, if you look at that's being driven, is still being driven through print. Even though digital is growing faster, a large argument to be made is digital is growing faster because the emphasis is on digital. It's obvious that you need to be in digital. Of course, every consultant, every talking head is, oh, my gosh, look at that media group. They got to digital late.

They're screwed. They're way behind. Well, actually, if you look at who is doing the best, there are some huge outliers that are print only still, or the vast majority of their revenues print only. And so I think you get into these interesting dynamics where you have these very counterintuitive trends that occur where everyone's shouting in one direction. And the reality is if you can, you know, afford to sort of stay the course and sweat it out a little bit and go against the grain. I think there's still real dollars to be made in the media business. Seems like change and the pace of change is a

useful variable in any investment decision, that things that change faster, faster product cycles for companies, industries that are changing faster, it's just harder to get it right, and that luck becomes a bigger determinant of the outcomes. Ted, do you think there's anything from the allocator's perspective again that kind of falls up on that theme? Like, are there tried and true old strategies that maybe will come back into form away from kind of the proliferation of every million different hedge fund strategies to just old world strategies that seem to work that in the next cycle, especially if the markets do for low returns, might have better returns? I think there's one big one which has to do with duration.

So everything we've talked about with hedge funds and quantitative investing has to do with the increase in turnover. So whether it's manager turnover for an allocator, stock turnover for investors, certainly hedge funds higher turnover than traditional long-only managers. and the whole system has gotten set up to have shorter and shorter attention spans. So the managers, the companies with quarterly results and then managers trading on that and then investors looking at shorter term track records and certainly in hedge funds where benchmarking is more difficult than it is in traditional long only.

So if there's one opportunity set in that, it's for those few investors who have the wherewithal, the right capital behind them to just be able to look out a few years. And I've seen that a number of times, whether it's hedge funds or traditional long-only managers, but managers that have a longer duration capital structure feel like they have a big advantage in looking at a particular security or a situation where, say, there's an event that they think can play out with great certainty over two years. They just don't know when. And the result of that, the security trades quite a bit cheaper than something else that

has a merger with a defined date that's very crowded. So on this duration idea, I'd love to hear from both angles. So let's say I'm an investor looking for a capital allocator or a capital allocator looking for an investor. What are the setups that would be conducive to a true long duration? I've started to hear from some very interesting allocators that try to do really cutting edge, interesting work, that they've got some guy in a room that just reads all day in Switzerland and, you know, pick six stocks and he's got no overhead. And he's got no overhead. And he just, just cares about selection and nobody knows who he is and that's the kind of guy that they want because he has he truly has a long you know the incentives are aligned and he's got a long duration but of course there are enormous risks associated with something like that there's no institutionalization there's no secession there's no there's nothing so what might be some markers of an allocator or an investor that doesn't just pay lip service to long duration but can actually execute on it Patrick, you and I both know this from being in the asset management business, that it's a very rare organization that has the wherewithal to see through cycles.

Because even if they have the ability to do it, their clients may not. So it's a very hard sort of downward spiral to break. Where you do see it broken. So one great example is in private equity. So today, private equity is the buzz. Private equity firms have done really well. Valuations may be higher, but that doesn't change the fact that. they've done well. Well, one of the reasons they've done well is that allocators take themselves

out of the way. They give someone money. They say, here, go invest this over four or five years, and hopefully we'll see a nice return in seven or eight years. And that gives the absence of a mark to market, the absence of scrutiny, the absence of pressure to generate returns in the short term is a huge advantage. It's harder to do that in the public markets, but you do see certain organizations, they tend to be smaller, they tend not to be the big brand name firms that have decided they're going to, they recognize the challenge in attracting that type of capital. They recognize the challenge in knowing it's a more limited prospect universe of potential allocators that will withstand volatility. And they nevertheless set up their businesses so

that they'll only be interested in attracting that type of capital. So they may have a long-term lockup is the easiest example of hedge fund land. There are a few funds that'll just say, look, I'm only taking three-year money. And that dramatically shrinks the potential size of their business, but they believe that will allow them to generate higher returns. And if in fact they do, then they'll have a more stable business over time. Brent, from the perspective of somebody as an investor yourself, who at some point might take outside money, what would be the most important features of a partner that you were looking for if you were deploying somebody else's capital. Yeah, I would say that long duration obviously is incredibly important, being able to, well, especially in the area that we get into, it's so hard to get into the deal. I mean, I think that's the thing that's underappreciated. When you get into a great deal, the fact that you have to get out of it so quickly, I mean, even private equity, you talk about long lockups and that seems short to me. The fact that it's just so funny, like the language is the same, but the duration is completely different. I mean, I think about getting into a business and thinking I'm going to exit out of it in three or four years.

I mean, which is sort of a normal cycle. There are so many decisions that you should be making. Well, I shouldn't say should. It depends on your time horizon. You could be making that would help the business in five or ten years that are materially different decisions than you would make if you're planning on selling it in three or four. And if you're planning on holding it in perpetuity, assuming the business continues to perform well and you have great relationships and all of that, it just seems like pure insanity to put some sort of artificial marker at the end. So I would say duration definitely key. the second thing is, you know, sort of a counterintuitive application of aggressiveness is how I would describe it.

I think something that would be very attractive for us is being with us in the good times or the uptimes. And I would say now is it, you know, it's a good time to buy a business. It's a good time to sell a business. It's sort of not weighted one direction or the other. I think it's all situation dependent right now. The next downturn is where we discussed earlier. It's going to, you know, feel like the mosquito at the nudist colony. It's just time to go nuts.

And counterintuitively, most capital providers shrink back and try to sit on the sidelines. And, you know, everyone claims to, what is it? You know, when blood is in the streets, you know, you go and buy. Like, no one does that. No one actually does that, I don't think, or very few. We want to be in a position, regardless of we take outside capital or not, you know, we want to be in a position that we have capital and the guts to go out and be able to buy when others are selling and need to sell for very good reasons.

You can't health issues, you can't time out. Marital issues, you can't time out. None of us get out of this life alive. It's just, you know, things happen. And we want to be in a position when there are less buyers out there that we are the buyer of choice always, but especially in those times. So I think that's an incredibly attractive thing as well. Totally switching gears, just to have some fun for a few minutes.

What do you think each of you guys has changed the most on? We talked a little bit about this last time, Brent. in the last, say, two to three years in terms of some long-held belief about investing or the world or how you conduct yourself, that's very different. And Brent, last time you said, just kind of being more understanding of people from their perspective, putting yourself in their shoes as a popular one. So maybe I'll ping you for another one. But something that, as we're all trying to, listening to stuff like this and I listen to a ton

of podcasts, I read everything and get my hands on, I talk to as many people as I can, I look at as much data as I can wanting to learn. What are some of the long-held beliefs that you've shed in the last couple of years or even more recently than that that surprised you? I think that I have a newfound appreciation for how hard everyone's job is. So everyone thinks their own job's hard. And then you sort of, you look around and you see the highlight reel of everyone else and you say, oh, well, my job's hard, but surely his is easy or a lot, heck of a lot easier than mine. And it's interesting because when you fly at 30,000 feet, which is basically what you're doing when you look at other people's lives or other people's jobs in particular, I think it's really easy to get yourself in this weird situation where the grass always looks like it's greener for everyone else. And the interesting part is we've dived into all of these companies over the years.

And we've gotten to interview hundreds and hundreds of executives and lots of different industries. And I've gotten to work with a lot of different people. Everything is hard. That may sound like an obvious or kind of like, well, no kidding. But I think it's highly underappreciated. Anytime anything appears easy, it's because you either don't have enough information or you got lucky. And I think that's really been a driver for me of balancing my opportunity costs and understanding that most of the value that accrues in any situation is sort of powering through the dip that in, inevitably occurs when the newness of something wears off and you get into the weeds and you

start grinding on something and you realize, wow, this is a heck of a lot harder, heck of a lot more complicated. The dynamics are completely different than I had expected. And you sort of realize that the easiest thing that what feels like you should do is reverse course, you know, turn around, go down a different path. And as I've done that, you know, in my career, every time I've reversed course and gone down another path, I've gotten in the exact same position where I'm like, oh, now this is hard. Well, I had no idea. Well, now I want to go back and do the other thing because I've now forgotten how hard that thing was. Why did I come down this path in the first place again? So I'd say that that's kind of the biggest realization I've had as well. It's definitely in the last two years that I was introduced to Don Miguel Ruiz's the four agreements. And the one that resonated most is the concept of not making assumptions. And the number of times I've seen someone struggling with something in a business, personally, whatever it was, that was based on an assumption that they knew something was about to happen or they'd get themselves into a tizzy because someone was sick and that meant that this was

going to happen and how difficult it was going to be. And just taking in that we actually don't know what's going to happen. And that has so much applicability for business, for investing and for life. And it came to me in the last couple of years. There's a friend of mine who introduced me to his work. And every day I wake up trying to question what assumptions I have and realizing that I don't know half as much as I thought I did. Yeah, I think mine would be, that's an awesome one, mine would be this idea that there's sort of a mountain to climb, a learning curve or an effort curve or something like that where doing something interesting early on is incredibly hard and can take years.

But then there's this strange inflection point past which sort of getting over the mountain, so to speak, that all of a sudden it completely reverses course. And what was very hard, all of a sudden you get past some tipping point and becomes much easier. It isn't necessarily easy. But all of a sudden, the outbound effort gets compensated for, with, inbound help and the only way to make that like rule of the universe work for you is to figure out something that you really love doing and just do it without any expectation

kind of like an assumption but expectation maybe is the better word without any expectation of anything coming back to you ever something that if you just did it the rest of your life and never saw a penny or thanks or anything from it you would still enjoy doing that those have been the most powerful, that's been the most powerful use of time outside of a, you know, your day-to-day job. And that is, that is impossible to understand because I'm just beginning to understand and kind of feel it. It's impossible to understand unless you actually do it. One of the questions I've been asking people is, and it kind of runs counterfeit's answer, but, but what, what are things that actually feel almost easier, effortless to you that look

like really hard work from the outside because that's a great way of honing in on what you might want to do with your life. And, you know, Brad's so, so Brad the first time said, you know, he tap dances to work, which I think is true. It just doesn't mean it's easy. Enjoyable doesn't have to be easy. But I think that that's an incredibly powerful way to use some of your free time. I actually would agree with you. To be honest, there are certain things that I can do that, that seem like no-brainers to me, that seem to be extremely challenging, much more challenging for everyone else. My argument would be that still doesn't make them easy and there's still a huge amount of room to grow in them. It's almost like on a curve, you sort of talent can take

you so far and then hard work's got to take you the rest of the way. And I think that talent maybe is the boost that gets you further faster than everyone else. But ultimately, it's all still difficult. And I think that expectation of you may be able to do it faster or more intuitively than everyone else or than most people, it still doesn't make it easy. So Ted's written a book. Brent has probably written the equivalent of a book. Is not writing a book. If you were forced to write a second book, Ted,

and if Brent, you had to write 300-page book, what would you write about? If I was forced to write a set at this point in time, I think I would write a book about transitions. I've gone through a lot in the last couple of years personally and professionally in transitions and have learned a lot from it. And I've found that I seem to, like what you're saying, Patrick,

people seem to come to me now that are in certain changes in their life. And I feel like I can help them. And that's just a really fun place to be, having gone through some stuff. I'm not going to write that book, but having gone through the process of writing one, but that's sort of where I'm at today. And the piece of information I think I've acquired that feels like it's most helpful to others. So what are the one or two subtitles to that book? What are the big categorical, useful, replicatable, is that a word, lessons for dealing with transitions effectively? Nothing's coming to me right now. How to lose to Warren Buffett and still wake up and look at yourself in the mirror?

Or is that not? No, is that not? Too soon? Is that too soon? The mirror is out of my house. I think one is a concept I heard of from. the Headspace app that we talked about sort of the last time, which is that if you have a day where it just feels like it's cloudy inside your head, you have to remember that there's always a blue sky above that. So you might not be able to see it at that point in time, and you might not be able to see it for a while, but it's there. It's always there. And that's a big one when people are going through tough times. And the other for me is the importance of both reaching out for

help and getting outside of yourself. So when anyone's going through a tough period, they tend to stew in their own challenges. And one of the tools I found that's helpful is in that moment to think, who can you reach out to and call that might need your help? And just get yourself outside yourself, realize that this is really all about being of value to other people. What's your book, Brent? Well, it's my book.

I think there's some interesting lessons around why. big businesses get big and why small businesses stay small. And so it would probably be something around the hygiene that you need to have in sort of every major area of a company needs to have the equivalent of the floors cleaned and the toilet paper replaced and have your teeth brush. And it seems like mundane and sort of not very impactful. And it's not unless you don't do it. And I think that a lot of business.

businesses stay small because they're not willing to do the basics and sort of they try to fly past them and, you know, take shortcuts. And so, you know, I would, I would probably say that that would be the path that, that I think there's a lot of value to be had there. And there's a lot of self-help business books out there, right? And they all talk about these like theoretical strategies around what you need to do and how you need to do it. And I think that so much of it is just the basics of where is cash coming from? Where is cash going? What is consuming cash? What is consuming cash poorly? And just making, kind of cleaning everything up. Unfortunately, I see so many businesses that we examine that are unsaleable because they just have, have such bad habits deeply ingrained in them.

We jokingly called this hygiene alpha earlier, which I think is a term that I've now coined. It's like building to scale. Yeah. It's a powerful concept. It's you know, there's that really hokey titled book, How to Double Your Profits in Six Months or Less. I think the author's name is Bob Fyfer. Don't get divorced. Yeah, don't get divorce is a good one. That's how to have your assets. Oh, sorry, sorry.

And apparently it is the, A, one of the handbooks that Brazilian private equity firm 3G hands out to its managers. And it's a really, it really is about hygiene. And if you're interested in this idea of hygiene, business hygiene, it's probably the best book or the only book that I've come across that's anything close to that. And the simplest expression of the idea is that you should maximize strategic costs, which is defined as anything that might contribute to growth, to revenue earnings growth. You should want to outspend all of your competition in those areas and that you should cut every other non-strategic cost to the absolute bone. And if you can do those two things, some of which is vicious. And it's what was your term last time that synergies are, you know, firing someone and losing less than their salary? Right.

So it can be kind of cold and vicious. But it is a little interesting heuristic for thinking about how to use that idea of hygiene to get a better business. Well, I think it's actually on the upside of that. So, you know, most people focus on the downside, the synergy, the cost cutting, you know, all of that. I think on the upside, it's extremely spot on. A lot of people don't realize about, for instance, advertising dollars is you want to spend till the marginal utility of that advertising dollar is virtually zero because Uncle Sam is paying for half your advertising dollars by the deductibility of it. And you're able to build a moat around the business through outspending, out marketing, using different channels. And that's something that's just not widely appreciated, especially in small business.

And this is, I would call this a layer above hygiene, but it's pretty close. I mean, big businesses understand that there's a reason why Geico, for instance, under Warren Buffett, has exploded their advertising dollars. I mean, absolutely exploded them. It's not because he's an idiot. It's because it works. And so when you find something that works, you want to maximize the use of that tool to its full success. And I think that's the exact opposite of how, for instance, most business owners think about it.

They think about it as like, okay, what is the minimum amount I can spend? because every dollar I spend on advertising is coming straight from my bottom line. And in essence, that's the weird counterintuitive nature of a lot of these investments that people don't understand, that you're actually harming the business and you're not maximizing the value of the business by not spending the dollars. Now, you have to have good metrics and you have to have good strategy around it and you have to have talented people that are working with you on it. And that's a whole separate discussion that we could have about the survivorship bias and selection bias of service. service providers to small business, which I think is a huge problem that goes sort of unaddressed in the nature of if you have a $100,000 ad spend, the only people that you can hire to spend that $100,000 on your behalf probably aren't qualified to spend the $100,000.

And so there's this weird chicken and the egg issue that goes on. And I think that's where a lot of these small businesses stay small. I'm going to invert the book question and instead ask if you could somehow produce out of thin a book of extremely high quality on any given topic where you haven't found that book yet. What topic would that book be on? I would say that the book that I'm most interested in, that I still feel like hasn't been written around incentives and businesses. So there's been a lot of behavioral psychology books written.

Daniel Pink, you know, synthesize a lot of really good literature in his book, Drive, which I think holds considerable merit in some. instances. And we found, unfortunately, it doesn't hold as much merit in other instances. And that's no fault, Daniel Pink at all. In fact, I greatly appreciate his contribution. I would love to see just how different managers, different situations are incentivized that are working out well. One of my mentors and somebody I really respect, Peter Kaufman, who runs Glen Eyre out in L.A., has an incredibly straightforward structure for how he incentivizes his company. and the discussions I've had with him around that.

I mean, he's paying his line workers, you know, do you want to call him that? You know, the people who are in the factories producing product considerably more than competitors and generating above average profit margins. So when you kind of come out from a, I'm going to call 3G mindset, you're like, how can that be? That doesn't make any sense. Well, the incredible magic that I think he's harnessed that is underappreciated is that he's perfectly aligned the incentives between the line workers and the executives. everyone's eating from the same trough and the metrics are the same. And so everyone's aligned in

what they're trying to achieve. And, you know, from his mouth, he says it's a 5x 10x gain that you get. So it's not a 20% gain. It's not a 30% gain. It's, you know, 500 to 1,000%, you know, greater. And so I'd love to see more examples of that. I'd love to hear competing thoughts because I think there's no right or wrong answer. I think a lot of it's the art of it. But that's the book that I feel like, gosh, I just would love, I think it'd be like dance around it. But they don't really get to the heart of it and really get a lot of good examples because it's usually such confidential information. People always ask me for a good recommendation in the behavioral finance arena and there are good books. But the trouble with all of them is that it's a collection

of studies, who knows how many of which are, we can replicate. We know this huge replication problem we're going through in the psychology literature for sure. And you're right, there's never been a good book that actually says, okay, here's how you can actually use some of this, use some of this information. Yeah, I mean, I would absolutely love it. I think I came up with two. Excellent. I got two, too. You got a lot more time to think about it, too. I had a lot more time to think about it. One investment book and one non-investment book. So the investment book, I think Patrick, close to what you were talking about, is a book that talks about chasing returns and provides all the data over time to show in every asset class and every security how damaging that could be

so that there's evidence to bring to every decision maker along the food chain to try to understand that this is not a good thing for whoever your constituents are. So I don't know if that's wrapped into behavioral finance or it's evidence-based or whatever it is, but a fairly simple book that proves what we all know, but we all think we're the ones that are the exception to that rule, but that somehow reverses this short-term dynamic. Before you get to your second one, the funny thing about that book would be that the current answer to the question of what everyone's chasing is the S&P 500. And I think that idea, which is, again, if you go stack up every major investable

opportunity right now and you stacked them by trailing eight-year performance or whatever it is, the S&P is going to be close to the top of that list. and everyone thinks that it's this obvious, easy investment decision today, but it is, in its own way, a performance chase. And anyway, that would be an interesting last line of that book if you updated it often. Like, oh, and by the way, here's the thing that if you buy it, you're committing this, maybe it won't work out that way because sometimes, you know, like we saw in the last 10 years, you can start with a great performance and it can continue.

So it might work out that way. but odds are that the performance chase today is the broad U.S. market. Yeah, I'm not big on market predictions, but I'll make one anyway. It worked that so well for you last time. Exactly. I was going to say, who do you want to wager with this time? Let's just go ahead and get that on the record. Me and Brent, we'll split it. Too soon? Too soon? Too soon. Too soon. Too raw.

One of my former partner, Scott Besson, who later ran Soros's family office, has this wonderful line that he says, when the boats tip too far in one direction, it has a way of writing itself. And it's very hard to know why, you know, why this indexing movement should change. I don't think it will. I think it's a big trend. Why the S&P should roll over? I don't know, but it will.

I don't know exactly when, but it's coming. And we kind of can all nod our heads in agreement. So a sober reminder. I will be right. Eventually, I was wamp-womp-or. All right. The last book. So this is something, I think the two of you are probably too young to appreciate this,

but that's okay. I'd call it something like building a bridge. And so one of the things you realize when you get into your 40s is that you'll have these frustrations with your parents, for example, for all these things that you thought they should have taught you. Because, you know, they're your parents. They're supposed to teach you about life and all these things. And one day you wake up and you realize, well, nobody taught them. And there are all these lessons. And you can go all the way back to what didn't I know about how to treat other people or table managers or relationships or relationships or relationships.

relationships with other people or sex. Can I say that on a podcast of sex? All these things that you thought you should know. So someone should write a book that says, here are all the things that when you're adult, you realize are common knowledge that you may not have been taught because your parents weren't taught, because their parents weren't taught.

But this is sort of common knowledge, and everybody should know that. Like don't make bets with billionaires? Oh, too soon? Too soon? Yeah. So here's a funny one. This never occurred to me.

Earlier this week, a friend of mine sent me an email as all this publicity is coming out. He said, do you realize how good this would have been for you if you were winning the bet? Oh, man. It's pretty good even in loss. It's good marketing. What a kind of should have. So I've got two as well. I've had the longest time to think about it.

So the first one would be very hard to put together, and it would probably have to be like a bunch of co-authors. But Brent and I often, really, it's one way, Brent giving it to me, sharing PDFs or long, summaries of industry dynamics of kind of what what the key variables or levers are in a given industry and let's say I'll use Gix's classification that there are in public markets probably 60 or 70 industries and then maybe 124 sub industries I would love a book that was five to 10 pages on each of those 60 to 70 industries to understand the change the current state what matters what doesn't matter from a qualitative, from a quantitative perspective, I think that that would be an incredibly valuable, to think about that idea of, Munger's idea of mental models.

It's sort of like an analog to that, that just to understand the basics of how every major industry operates, it's always fascinating. And usually it's the most boring ones that are the most interesting, setting like, you know, oil and gas services companies or something like that, which sounds incredibly mundane is anything but. And I think that would be a, it'd be long book, but it'd be fascinating. Well, I think that that information is so incredibly valuable that the only people that are currently getting it are the custom research projects that all these research companies put together where they have this. It's the same information, but they twisted a tiny bit and repackage it and then sell it for, you know, $10,000 for a 50-page report

or whatever it is. I think someday somebody is going to wise up and figure out that they should put together the 25-page version that's sort of more general. And, absolutely, Absolutely. That would be like something you keep on the shelf and come back to it. I mean, there's a book that we, we use in the office a little bit. It's kind of like the standard for brokers of small businesses that go through every, I mean, I say every, it's probably, gosh, I don't know, 900 or 1,000 different types of businesses. And it's like half a page to a page and a half on them. And it'll give you like the standard multiple. It'll give you kind of the big red flags.

It's a pretty interesting book. Now, unfortunately, as I've thumbed through quite a bit, a lot of the stuff's pretty much you can Google it and figure it out pretty quickly, put two and two together. But I think that the blown out version of that that's more industry specific would be, that'd be amazing. The closest thing I've seen, Michael Mawison put out a piece a couple months ago on base rates. Yeah, that was good. Which was really good. It's not exactly, it doesn't really have the dynamics of the industry, but it was really good for sort of quantitative metrics, profitability of industries. Yeah, I saw a chart of returns on invested capital by industry over periods of time.

Man, that chart, I have it like super glued up in my office and my desk. So we've done a lot of this work and never published it on the quantitative side, especially I think return on invested capital is the most interesting metric at the industry level. Right. And it's pretty stunning the divergences between return on capital and profit margins, where profit margins are at all-time highs, but in many cases, companies have used so much debt and debt is incredibly chief, so the interest burden doesn't look bad. But the return invested capital at those same businesses with so much debt employed is really not that good, sort of mediocre by historical

standards. And there are all sorts of these metrics that are fascinating. But when I've spent time, and I did this twice, maybe two years ago, where I did consumer staples and energy as two sectors that I explored. And it was incredibly interesting exercise. I was doing it sector by sector rather than industry by industry, but it took forever. It was like a really intense. I was interviewing people. I was interviewing like hedge fund PMs to give me on the weekends to give me a sense for what was the dynamics that were important. It would be a hard book to write. I tell you what, you know, what's really interesting. I actually tweeted about this, I think yesterday the day before is I feel like there's an incoming purge that's going to occur as interest rates rise where there's so many

businesses, and we see this all the time, smaller businesses, where the margins on those businesses are so low. And with interest rates artificially, well, they're just low, regardless of artificial or not, right? They're just low. And the interest rates climb. The ability of the business to make up that margin is just not there. And I feel like there's just going to be this giant purge. I'm actually curious what you guys think. If it's going to be a big purge or it's going to be kind of quiet. But I mean, I think it's going to be, there's going to be a lot of businesses that that aren't around by the sheer nature of what they're providing to consumers that has been masked by the ability to get cheap debt. I think that's totally right. And it won't stop until interest

rates or the cost of capital rises significantly because why not start those businesses, especially if you're doing it with other people's money. You know, you're basically, you're building yourself a fantastic option that's free and not free, but very cheap. And why not? And I think that they'll be carried out feet first, and you will have a massive purge when interest rates rise across a lot of different industries. I wonder who's holding that debt. You look at the people that are sort of supplying that. I wonder how that's going to ripple through the credit markets.

It won't be pretty. No, I mean, and it'll go in every way. There are these ETFs that hold high yield bonds that have a massive liquidity mismatch. So you could see pockets where you expect the pain to come sooner, the rate. go up, all this money and bonds going to hit. Hard to know exactly what the short-term impact is on stocks, but it's not going to be good. And then all the private equity funds who have levered continuous sort of reinvestment, what's going to happen when it's not so easy to refinance the debt?

So I thought of another one, which is a similar theme, and these books would all sell like 500 copies each, so these are not going to happen. But the second one, and Brent started the ball rolling on this one, is sort of a catalog of mental models. Mental models being this idea that everyone talks about, but again, there's not like a good central repository for, okay, what is opportunity costs? Why should I think about it? Why should I think about incentives?

Or, you know, pick your, as Brent put it, you know, mental models that have the most freight or carry the most impact. I think that that sort of collection, again, as a sort of collection, it would be much less interesting than a big narrative, which is what makes books actually sell. but that would be extremely useful for a college student or someone early in their career. I didn't learn about a lot of this stuff until I finally wasn't embarrassed to ask because I just assumed everyone knew what opportunity cost was and I needed to pretend like I knew it. So that sort of collection would be interesting as well.

You know what's interesting about that? I think if you'd asked me three or four years ago, I would have said, yeah, it would be amazing if it was like 200 or 250 deep, right? And you can get into these sort of, there's still applicable mental models, but you know, you're so infrequently used. And now I think, at least where I've kind of evolved to, is that you need to have like the 30, maybe 40 that are just constantly applicable. And you need to pound them into your head in and the nuances around that.

Like how, you know, opportunity costs. You know, you just brought that up as being example. It's pretty easy. You can talk to most people and pretty quickly they're like, oh, yeah, of course. If you do something, you can't do something else. Well, the nuance around opportunity cost is tremendous. There are 10,000 examples of how opportunity plays out in the world that are fairly subtle, but once you identify them and you kind of understand how to look for them, they're so obvious

and they help control everything we do. And so, you know, I would say that book would really, honestly, I'd say, you know, 20 chapters that are fairly lengthy and then 20 chapters that are half or a quarter as long, sort of the 20 most important and then the next 20 most important. And, you know, I think Munger's the one who uses the, you know, the ones that carry the heavy freight. And he said there's only like 20 that he thinks that carry the really, really heavy freight. And I think that's true. If you had to write a chapter in that book, which chapter would you write?

Which mental model would you choose? Oh, gosh. That is brutal. What's my one mental model? I could start. So I would definitely choose compounding. I would choose it because it would be incredibly fun to do the research on manifestations of compounding. in non-investing settings.

And business would be the first obvious one, but in all sorts of weird, different parts of life. Peter Attia and I on a previous episode talked a lot about health as the key biological manifestation of compounding in the other direction, right? Where your health span looks like an inverted investing chart, where it's kind of declining steadily, steadily, steadily, and then all at once towards the end of your life. And I think that you could probably find some of the most interesting, fun, cool people and examples of how little things done consistently every year, every day, every week could have nonlinear effects in multiple years or decades into doing those things.

It's like a big, huge part of my personal philosophy for living. And so I think like a deep investigation of compounding outside of investing would be just a really fun exercise. size. So that'd be the one I chose. I'd probably say circle of competence would be, would be such an interesting one. If you look in history at those that have done really, really well, they have fairly tightly, well, they have figured out what their circle of competence is, continually pushed it out. You know, circle of competence being the, the area that you actually know more than most people, you have a good firm grounding in, you have first principles that you can, you know, sort of judge things by. And I think most people, you know,

people, unfortunately, including me, I have this tendency to sort of veer outside my circle of competence and be overconfident in what I know about the world when it's just we're since making creatures. So I would say studying what's occurred when you stay inside your circle of competence, showing lots of examples of people that have maybe stepped outside their circle of competence, and how to push the edges of it, I think would be probably, I'd say that would probably be the most interesting chapter for me. The one that I'm most curious about is some kind of of the 80-20 rule and this sort of instinctive blink, which kind of go hand in hand. Intuition.

Intuition. And to some extent, they're opposite ends of the spectrum. But there is something to intuition and where it applies and when it doesn't apply and how people make mistakes based on it that is just sort of fascinating and you see come up over and over again. I think intuition is one of those ideas that is, it's almost like a value investment. It's something that's very out of favor in a algorithm-driven, systematic, process-oriented world where everything is solvable.

And that all intuition is a really finely tuned algorithm that we just don't know what the equation itself is. It's just rooted in tons of experience. All it's really saying is gather an enormous amount of experience and let your subconscious process it. I don't know how much we could study it, but it would sure be fascinating. to understand the dynamics of it. Yeah, that's one of the things actually probably in recent years that I've paid more and more attention to. And I sort of went through a period where I paid more attention to it and then paid less attention to it. I think it's kind of trying to follow the trends, right? It's like open offices. Like worst idea ever. Everyone loves it. And the way I think about it now

is that it's like pinging every potential experience you've had in the past, thing you've read, you know, sort of everything that's somehow in you all at the same time and then rendering an immediate result. And so it is the algorithm. We have no idea how it works, but it feels like, in most cases, other than the obvious ones where you're, you know, you have psychological biases at play. And I mean, there's, there's all the literature around that. I really do feel like when you get a good circle of competence and you get a deep fluency in something, that intuition, you just can't, you just can't replace. I mean, I think about some of the businesses that we own now and the people that lead those businesses. And they oftentimes can't tell me exactly why they're

doing what they're doing, which used to scare the crap out of me. I mean, we'd ask him, you know, why do you want to spend half a million dollars on that again? And they're like, I just think it's the right call. And it's like, well, I'm glad you think it's the right call. Now you need to tell me why you want to spend half a million dollars. And, you know, what I found over sort of a fairly lengthy period of time in lots of these instances was they're almost always right if it's in their area, their circle of competence, and if it's in sort of where you can allow your intuition to work. I think it's incredibly powerful. And that's one of the things, frankly that we struggle with the most. One of the things we see in all of the seller packets

that we get, if there's an intermediary involved is, oh, the replacement value of the owner is $150,000 a year or whatever it is. And it's like, well, sure, technically we could hire somebody to come in at that cost and sit in the seat and try to make decisions. And they'd probably make fairly decent decisions. Trying to replicate that intuition, I mean, it's almost impossible. It's hard to put even a price tag on it, which then goes back to. not to keep harping on sort of the core thesis that I have, but it's most of the moats that we look to buy are inextricably tied to the owner's personal relationships and intuition.

A couple more questions and then we'll wrap up. If you had to each put your money with some other person management team, ETF, you know, pick your location and you could never touch it again. What would you do with it? So this one actually has come over time. And let me explain what and why, and then I'll say who and what. So the world's gotten tough. Capital markets are expensive.

We've talked about that. So if you're going to put capital somewhere over time, you want to own things that are going to compound. You want to do it with people you can trust. You want to do it with someone that's off the radar screen, playing a game that's less efficient, and is structured in such a way that they're not going to have external pressures to behave differently than how you'd want to come down your own capital. There aren't many places where you can do that, and I think a lot of capital allocators

search for that, but don't find it. And when they do find it, there are institutional constraints that prevent them from making that investment. One of those people is Brent. And so, like, I'm not trying to blow smoke next to the guy who's serving me wine right now. However, if you have an opportunity to take someone with a decade or more of experience buying tiny companies who dedicates their time to doing that and understands how to improve them.

That's rare. It's a rare skill. And I sit here envious watching Brent talk about all these really fascinating things. But if I could partner with Brent, that's something that I would happily take my kids' retirement funds, put them there for a couple decades. And I'm sure the outcome would be quite good. Well, let's see here. I can't invest in Ted's betting. So, too soon?

Too soon? No, too late. Too late. Too late. Sorry. Exactly. That's very kind of you, Ted. That's what happens whenever you feed somebody wine for, you know, for a while. So I have to say, so I'll say what I'm doing for my daughters. We've put a little bit of money away for my daughters. And it's going to go exactly with what we've talked about. And I'm sure you guys are going to give me these dirty looks. But it's the S&P 500. It's Vanguard. It's an index. And I think that's a reflection of my. my lack of, frankly, like all public markets to me are outside of my circle of competence. So I own no public equity. Personally, I have tried over the years to be involved. I don't have the intestinal fortitude, nor the personality, nor I think the intelligence to be able to do it well, or at least better than the, better than the averages. And so I have kind of determined that I'm going to buy the future of American industry from my daughters and let it compound over a very long period of time.

I think that it's hopefully a foregone conclusion that in 20 or 25 years, whenever they access that money for the first time, that it will be higher than it is today, which it may not be much higher or, you know, depending on how things go. With that said, if I, I would hope that they would do something with it for themselves. I think the best place to invest is in yourself. I mean, that's one of the things that I think people are very much underappreciate is in their own education and their own knowledge. and their own relationships. I think that's where you get the most compounding. And so I don't know how that would look, but I think it would be more on a personal basis than anything.

Hey, Patrick, how about you? Well, Brent kind of stole my answer, which is I think some of the most interesting investments are in, and I won't name the people because they won't mean anything to anyone. But in people that I've gotten to know, either I've known for a long time or have just recently begun to know, Brent would fall in this category that have, incredibly deep. Circle of competence seems like the wrong term to me because competence isn't right. It's something much deeper than that. It's an area. I've started to meet these people who just know whatever it is they do at three or four levels of depth beyond everyone else. And there's something

really magical that happens when people do that kind of investigation for themselves, start to apply that knowledge. So it's not just an academic exercise, but they're actually taking that deep learning and applying it somewhere with deep work. And that kind of scales across, I can think off the top of my head of about five different people, whether they be kind of investment managers or upstart entrepreneurs or people within a division of a larger company that I would just figure out a fun way to allocate money to them,

to people that have this kind of deep knowledge that apply it, apply deep knowledge. I always ask that this is like a classic dinner party conversation. Like if you could somehow, and they did this with, this was a short-lived idea with Aryan Foster, I think was the running back that did it. Like if you could somehow buy equity in another person and participate in that person's upside, you know, career earnings over time. I just think that's such a great question and a fun way to think about people and people you want to meet, people you want to add to your network. And so that would be my answer that I would kind of just like you spread of the cross five hedge funds. There's probably five or so people in a variety of different places where the common theme,

is incredibly deep knowledge in a very particular area, something far beyond competence, who have also demonstrated that kind of, that go, that they apply that knowledge. And it may not necessarily be all financial return. I think that some of these people will just, will just discover amazing things, and that that's a good investment as well. So sort of a hybrid answer between the two. I got one for you guys. What does retirement look like? I don't think I'll ever retire. I mean, I'm a fiend for research. When people ask me what I do, I just say I'm a researcher. And at various times, that's mythology or investment data or industries or people or travel or

whatever. I just love researching. And so that will never change. And I think there will always be some sort of, I think that Bill Gurley had a great quote, talking about venture capital or something that you haven't done anything, you haven't accomplished anything until you're liquid. And by that, he meant that there is a market that is willing to pay you for your stock in the example he was using.

But I think that the price system and mechanism is an incredibly powerful one. And that until you can get people to pay you for what you're doing, you haven't discovered anything of real value. And so I would always temper that research mentality with the price, the real price that people are willing to pay for what it is I'm doing. I've tested it out a little bit over the last year. How's that working out for you? Not that well

I'd say for a couple months It takes some adjustment But there is a notion of sort of finding the middle And being engaged with smart people People you like spending time with And then having plenty of time to do leisure activities So for me that's always been athletic I don't know if it were a permanent thing

I'd probably have to tweak a few things But it works It just takes some time to ease into Maybe I'm going to revise my answer a tiny bit which is I might, the closest thing to retirement might be like some sort of pilgrimage of sorts. I've always had this internal struggle between growth and adding stuff and adding knowledge and more, more and more and all of the, I think, most compelling philosophical literature on subtraction that the only way you actually get any better is taking things away.

and there that price mechanism wouldn't be helpful at all. So maybe I'm totally wrong. But I think I could stand when my kids are older and safe and happy with their own families. I could see myself taking three years in India or something like that to whether it's an inward pilgrimage or a physical pilgrimage or some sort of very removed contemplative period. That might be like a mini retirement, but I don't know that it would last. but that would be my one caveat to my never retire answer. How about you, Brent? I don't know.

I'm curious about this because I've been, you know, we deal with people all the time that are retiring. And so I'm kind of always around retirement as a concept. And being in my mid-30s, like I don't, I don't think I'll ever retire, right? I think that's the answer that I hear from most people. And I just wonder if like you get to a point in your life where you're just like done. I wonder, look, what I want to know is, are the people that are retiring today? did they always have retirement in their head as a concept?

And was it something they were driving towards or is something that evolves over time? Because I do hear people, we have somebody in one of our companies that's like, I am retiring at 65. Like that is my goal. My goal is to retire at 65. And kudos to him. It's just, I wonder if that was something, if it's sort of a time thing. Like that was a moment in time. It was kind of like the open office of whenever it was in 1970s or whatever.

And it was just like always stuck with us because I don't feel like I want to retire. I mean, I truly, I don't like every day, but I love what I do. And I hope to continue to be able to do it for the rest of my life. But I think it's an interesting concept. I just wonder how that evolves over time. You could circle back to a mental model related to this as something I heard in a speech a couple of years ago. A lot of high achieving people strive for success. And success can be defined in a lot of different ways, but let's assume that's tied to financial rewards.

And that may or may not be tied to fulfillment. So there are people who achieve success, reach some financial goal, and then they say they're going to retire in the rest of their life, they're going to look, search for fulfillment or whatever that is. The challenge is for those people who do that and then don't achieve the success at that level and are a little bit lost than trying to figure out, wait, I thought I was going to do this and then feel fulfilled. And so the notion of sort of finding those two things together, which you both have done in your lives, but a lot of people struggle with. The sort of concept of how do you get in the flow? How are you doing work that you just enjoy, that you can do better, that's easy for you, but hard for other people is all part of that. And that if you can find both of those things in your day-to-day work, there's no need to be thinking about, oh, I'm going to put this down and go do something else. But there are, I think it's rare.

It's rare to find people who have had the good fortune to work their way into a career that is both can meet their sort of financial objectives. to live the life they want and feel fulfilled on a day-to-day basis. I think that's the key. It's good fortune because I look at the different career paths I could have had. And it's sort of like somehow along the way, I feel like I grabbed the bus that was driving 60 miles an hour down the road. And I somehow latched onto it and went for a wild ride because it played out the Monte Carlo simulation. It doesn't always end up this way. And I feel very, very blessed for you guys of that.

For your last question, just to leave everyone with something neat. if you had to share a book, an article, a person that you've come across with interesting or new or unique ideas, let's say in the last six months, what would you share with people? You know, I'd have to say, this is a little bit cheating, but this is a past podcast guest of yours, which I was the one that they recommended it as Peter Attia. If you, I haven't been able to listen to the episode quite yet, but if you, yeah, I have no doubt it's awesome. Peter is somebody who I have gotten to know over the years and have the utmost respect for his thinking and the way he goes about analyzing, taking nothing for granted in a space that I had no

idea, health, how much was taken for granted. And in many ways, I think Peter's turning things on their head and shaking up a lot of ground in the process and doing it in a way that there's sort of there's no other way to do it other than experimenting on patients that need the help or want the help and are doing it in such a way that's just incredible. I think it's the future of medicine. I think that whenever you see what Peter's doing, it is what medicine's going to look like in 30, 40, 50 years. I'll go with one of each and we've talked a lot about the bet, but it's been an incredible blessing for me to have gotten to know Warren and Ted Westler and Todd Combs through this. And people can be skeptical about

Warren for many reasons, hard to argue with his success. But having had the good fortune to spend some time with him, he's just a remarkable, humble guy and just feel very, very lucky that despite looking like a fool in the media and all that kind of stuff, I've been really fortunate to have built that relationship. I recently have read a book called The Book of Joy, which is a series of conversations with Bishop Tutu and the Dalai Lama. talking about what creates joy and happiness and life. And I didn't really have expectations of the, in fact, the head of the lower school at my kid's school recommended it.

And it is just extraordinary. It really gets you outside of yourself. And one of the things I talked about earlier and learning these two men who have been through such difficult times in their life and yet walk around with a smile on their face and watching them turn difficult circumstances into positive perspectives is just something I'd highly recommend. So mine is going to be, Brent and I have shared this book.

And there's very few books that actually change my behavior. I usually find nuggets that are interesting and maybe I'll remember for a while and apply every so often. But there's a book called The Systems Bible by John Gall, who was actually, I believe, a doctor passed away a number of years ago, talking about sort of the philosophy of systems. And it's called The Systems Bible. I picked it up expecting to read a book about how to build great. systems and I'm a very systematic guy and my my bias was that all systems are good or mostly good.

And the book is the exact opposite of that. It basically says don't build a system unless you absolutely need to. If you're going to build one, make it extremely simple and let it evolve from simple roots to more complicated structures. And it was just one of those books that was a total, just a mindbender because again, Robert Schiller has a great line. I can't remember what interview it was with. It might actually been with our friend Morgan Housel that he said this, but he said, you have to remember that very often your thoughts are not your thoughts, meaning what you think or what you spew when asked your opinion is not something you've actually chewed on and considered and gotten that deep knowledge on. And when you realize that and you

start watching yourself, it's kind of a disaster because you realize that you are regurgitating digestible, common opinions without having really considered them. And this book was the most stark example of like, oh my God, I've never actually thought about whether it's good to build a system. And this seems to be extremely compelling theoretical evidence and some really great examples of why systems can be evil and very, very quickly can become perverted. And so that book is for anyone that's in business, because business is, you know, a collection of systems, anyone that's a, you know, routines or a habits person, which are just themselves systems, I think can totally change the way they think about how they conduct themselves or their business by reading this book.

So it's obscure and it's goofy and kind of a dry sense of humor, but, but man, did that book knock me off my, off my chair? You know, I have to say, I got one more to add, and I think it's, it's one that I definitely recommended to Patrick a few times now. I'm going to get him to nudge to read it at some point is making sense of God by Tim Keller. And regardless of wherever you are in your faith journey, I think it's a, it's a book that lays bare the alternatives to faith and to make sure you're fully understanding sort of the cohesive worldview that you have accepted or that you are accepting. And I think that's something that it's a book that I wish I had been able to read 15, 20 years ago because I think it would have given me a lot of clarity around

the choices that I made. And it's one that I would highly recommend, again, regardless of your faith, regardless of where you are in your faith journey, or maybe you've settled on the issue. I think it's certainly one that's going to challenge you and give you a lot of insight into at least how maybe the other half thinks and lives. And I got a tremendous amount of value out of it. Well, this has been a real blast, guys, informal, more informal than most, but a lot of really interesting topics that we've covered. So thank you both for your time. And now let's go drink the rest of that wine. Cheers. Hey, everyone. Patrick here again. To find more episodes of Investor like the best, go to investorfield

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