Odd Lots - Brad Jacobs Plans to Make Billions in the Building Supply Industry

Episode Date: December 28, 2023

Brad Jacobs has founded multiple multi-billion dollar companies in his career. He turned United Waste into part of a major trash collection conglomerate. United Rentals has been a massive winner in equipment rental for the construction industry. And XPO Logistics (which has spun out GXO and RXO) is a freight behemoth. Now, he's planning on doing it again. His new company, QXO, wants to be a billion-dollar player in the area of building products distribution. On this episode, we speak to Jacobs — who is the author of the new book, How To Make A Few Billion Dollars — about why he chose to go into this industry, his philosophy of building businesses, and how he plans to win in this space.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthall. And I'm Tracy Allaway. Tracy, obviously over the last few years, we've done tons of episodes about freight, logistics, trucking, warehousing, etc. All right. And one of the things that has always struck me is just, you know, all of this crucial stuff, how sort of chaotic and held together with tape and glue these industries often seem to me. Can I tell you something? My husband and I are rebuilding the shed in Connecticut. And just getting the lumber for the shed is this massive production that involves us like renting a truck and having to like negotiate it from some lumber yard and then like bring it back and forth piece by piece. The industry of all the movement of these physical goods and products, it seems so difficult at times. And it also seems sort of ripe for opportunity. But then you also hear stuff like convoy going out of business, right?

The freight broker that was supposed to be using new technology to revolutionize trucking and things like that. And so, I don't know, there's like this tension between moving physical products and then using tech to make the whole space more efficient. Totally. It's one of these areas. where it seems like, oh, yeah, they must be more simple. Like, I remember one of our first sort of eye-opening episodes with Stinson Dean talking about how lumber is distributed. And so much of these communications just on sort of message boards or boards that

might resemble Craigslist. And then, you know, we've talked about it with Craig Fuller and Rachel Premack at Freight Waves and the idea that, you know, you look at how trucking brokerage works, these load boards. And this is all this crucial stuff that's sort of at the center of how the economy works. and it's like they're in WhatsApp groups. And can anyone pick up a load in Akron and bring it to El Paso next week? And this is how it all works. It seems so informal.

And then, of course, it leads to these inefficiencies like trucks running around empty, basically. What's it called deadheading, basically? Yeah, yeah. And things like that. And I guess the question is, like, what is the sticking point here? Is there something, like, fundamental about moving physical goods that is, I guess, resistant to new technology or is there maybe something about the industry where, you know, people are making, well, they were. People are making lots of money from lack of transparency in the industry.

And so they themselves are resistant to new technology. It kind of reminds me of the bond market sometimes and stocks. Absolutely. Tracy, it sounds like given the headaches you've had with your new shed, that you could really use some efficiency gains in the world of building products distribution. Could you not? Yes. Yes. especially since I keep messing up the ridgeboard on the roof. I can't get it straight. And then every time

I mess it up, we have to go and get more lumber. So yes. Yes, please. Well, we do literally have the perfect guest. Someone whose career, I think, almost is so odd-lodsey in all of the topics that we discuss over the years. He has started, depending on how you count between five and seven companies, started an oil brokerage, the founder of United Waste Systems, which rolled up waste collection companies sold to waste management, United Rentals, and then the creator of the logistics conglomerate XPO, which also spun off a freight brokerage, a logistics company, etc. We are speaking, obviously, to Brad Jacobs, who just a few days before this recording announced the creation of a new company called QXO, which intends to be a market leader,

in the space of building products distribution. He plans to make billions of dollars, and he's the author of a new book, How to Make a Few Billion Dollars. I like how in the press release for the new company, QXO, he basically says he aims to make billions of dollars. So it connects very well with the book. Well, he has a track record of making billions of dollars.

I would love to make billions of dollars. So maybe we'll learn something. Brad, thank you so much for coming on Odd Lots. The pleasure's mine. Look, some people think in millions, Some people think in trillions. I think of billions. It's a very reasonable middle ground between.

Middle ground here. So you say you're going to build a market leader in building products distribution. There's a lot to get into. But let's just start here. When you look at the industry right now of building products distribution in the pre-QXO world, what does it look like to you? What do you see when you look at that industry? Something that's really big, first of all.

It's $800 billion between North America and Europe. So it's large. And it's very fragmented. You've got 7,000 distributors here in North America. You have 13,000 in Europe. So there's a lot of independent companies and a handful of public companies, but it's mostly privately owned companies. I see an industry that's growing.

It's been growing at 7% compounded annual growth on the top line for the last five years. I see an industry that is rich with acquisition targets. So it's an opportunity to scale up. And I also see an industry that could use more technology. There's a handful of companies doing some cool things in technology. But by and large, the industry as a whole is behind where logistics is. It's not where the logistics industry is. This is exactly what I wanted to talk to you about.

So in the press release, you say, I think tech-enabled company or something like that. What does that mean exactly in this context? What is the technological opportunity that you see here? It's a few things. number one, it's how you interact with the customer. And right now, mid-single digits percent is done over digitally. And 90-something percent is done face-to-face. That really should be reversed.

I mean, eventually over time, not right away, you should see more and more penetration of digital on that. So that's number one, the e-commerce penetration. Number two, pricing. Pricing could be more methodical, could be done electronically, could be done by AI, could be done by machine learning and be interactive and continuous and thirdly the inventory so this is a business has a big transportation logistics element to it because you're buying a bunch of products wholesale you're storing them in DCs and then you're the distribution so like warehouses yeah fancy word for warehouses okay and then you're delivering them in delivery trucks to the end user so there's a lot of

There's a lot of transportation logistics here. And the DCs or warehouses that I visited so far, not a whole lot of automation. And they should be highly automated. Now, a handful of companies aren't doing automation, but they're the exception, not the rule. And it really should be the rule, because as we know from GXO logistics,

where we have a couple hundred million square feet of warehouses around the world, automation is where it's at. That's where it's going. And that's what customers want. It takes out cost, it increased safety. it's faster, it's more accurate. There's a thousand reasons why automation makes perfect sense for the inventory part. And then it's not just the picking and packing that needs to be automated.

It's the actual inventory management. So these distributors have lots and lots of skews. And getting it just right of not having too much and then tying up capital, but not having too little and then disappointing customers so you can fulfill their demand, this has to get right. And GXO, for example, has had a client. Boeing for years and years and years. It went back to a new breed before we bought them.

And they do the parts management for that all around the world on a global basis. And that's done technologically. That's done not by people figuring out, you know, I think we need this many parts of this here and we need that many parts there. It's doing it methodically using lots and lots of data and using algorithms to understand that to get the inventory just right. And here in the building products distribution space, I think there's a big opportunity to optimize the inventory management.

And then the last component of technology that excites me is basic route optimization, meaning you've got delivery trucks and it's still being done the way it was done in trucking like 15 years ago, for the most part. Again, there's exceptions to the rule of some fine companies doing good stuff. But by and large, it's not optimized in a typical distribution company you have right now. And I think we can bring that to the table pretty quickly. So I have a billion questions already, not a million, or a trillion, just a billion. It's good, good, run the right scale.

But just so we understand the business, what part of the supply chain are you actually targeting here? Is it the wholesalers who supply lumber yards or lumber yards that supply builders or both? We're buying wholesale, we're selling retail. Okay. But there's three different categories of end markets. There's residential, there's non-residential, and it's infrastructure. So residential is like you, like your apartments, you.

your houses, people who need floors and windows and doors and roofing tile and so forth, HVAC. Then there's commercial. Commercial can be any kind of building that's not a house. It could be a school, could be a church, it could be a factory, it could be a town hall, it could be just anything that's not people living in it, but has a roof protecting from the elements. And the third category would be infrastructure.

So infrastructure is roads, bridges, tunnels. all the pipes underneath the ground. And if you look at these three sectors, one thing that excites me about this is, all categories there are old. Houses are over 40 years old. Commercial facilities are over 50 years old. A lot of the infrastructure underneath America

is over a century old. I mean, it really needs to be repaired and lots of activity has to be done here. This is an industry that's not going to go into the metaverse. This is an industry that's not going to be, disrupted by AI. It's going to be enabled by AI. And that was important for me when I looked at 500 different opportunities because quite a lot of them I have serious questions about whether they'll still exist in five or 10 years. Can I ask a question? So with the XPO and that family

of companies, I guess why is QXO a separate company that needs to be, okay, it's in building supply distribution. If you have a freight company, if you have a logistics company, if you have a freight broker, why can't your existing companies simply move deeper into this space? Why is it important for it to be focused on its own? Because when you describe, you say, okay, well, the transportation system is like where trucking was 15 years ago. And I want to, we'll get into sort of the state of trucking. Why is it not that existing logistics related companies can just offer services to this industry? I mean, we could, but it wouldn't be a real pure play focus company. So The XOs, the GXO, RXO, XPO, they're very focused now.

We divided the company up into three very carefully designed units. You got GXO being supply chain, being warehouses around the world. It's got a thousand warehouses. And that's all it does really. It really does warehouse, warehouse, warehouse. So it's an inch wide and a mile deep on warehousing. It does it really, really, really well. And then you have on RXO, it's the asset light transportation.

It's the tech-enabled brokerage model. And it also has the last mile. delivering right people's houses. And then thirdly, you have XPO, which is primarily an LTL carrier, less than truckload carrier that's mostly in North America. And we divided the company up into those three categories because that's what our owners told us. That's what our shareholders told us. Our shareholders told us, look, we don't want all these things altogether. We want to have more defined, pure plays so we can invest in the industrial comeback, and then we'll invest in XPO for LTL or we want to go more consumer or we want to go make a play on on e-commerce, which will go more

with with GXO. And that's worked really well. I mean, we were getting a conglomerate discount for our multiple. We were trading like eight times EBITDA. Today, those three different companies trade at double-digit multiples of EBITDA. And that's, in addition to improving the EBITDA, the multiple on EBITDA improved too. So it made sense to split those up. So I don't, I think we would be going backwards from a shareholder perspective if we, if we started becoming more multifaceted and blended distribution together with the exos. The news doesn't stop on the weekends. Context changes constantly.

And now Bloomberg is the place to stay on top of it all. Hi, I'm David Gurra. Join us every Saturday and Sunday for the new Bloomberg this weekend. I'm Christina Rafini. We'll bring you the latest headlines, in-depth analysis, and big interviews. All the stories that hit home on your days off. And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughtful, enlightening conversations about

business, lifestyle, people, and culture. On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world. Then on Sundays, we speak with journalists, columnists, and key political figures to prepare you for the week ahead. Join us as soon as you wake up and bring us with you wherever your weekend plans take you. Watch us on Bloomberg Television. Listen on Bloomberg Radio, stream the show live on the Bloomberg business app, or listen

to the podcast. That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Let's talk a little bit more about your plans for QXO. And so you mentioned that in the U.S., there's 7,000 companies. And in Europe, there's 13,000. And, you know, you're going to hit the ground running, have billions of revenues.

You're going to buy up a bunch of companies and roll it up. My understanding, you know, going back to the United Waste Days, and when you're going to sort of started building that up. It was acquiring different types of assets. So distribution, but also landfills, et cetera. You know, and I think when people think about roll-ups in the traditional PE sense, they're like, oh, I'm going to go out and I'm going to buy 20, you know, HVAC companies, and we're going to unify their back end and take out some debt and make them all leaner in operation and Six Sigma and all that stuff. It feels like you're thinking much more holistically in terms of buying different parts of the supply chain to work together.

Can you talk a little bit about what assets you need to buy to make QXO work? So you mentioned it correctly. At United Waste, we bought landfills, we bought transfer stations, we bought collection companies. And that became one integrated supply chain. Yeah. And it worked really well because we took out a lot of cost as a result of doing that. We had an end-to-end solution for customers, and they loved it. And that's why our earnings compounded at 55% Kager, and not coincidentally, so did our stock price.

So I get that. So you have to create a company that works for the customer, that the customer appreciates the service that you're providing, so they wire money from their bank accounts to yours. So it's very, very important to do that. Here, in QXO, in our building products distribution company, we're going to stay very focused on distribution, meaning distributing, building materials to the three segments that I was just talking about with Tracy in terms of residential, non-residential, and infrastructure. And I'm going to stay right on those three things. And I'm going to toggle between them depending on opportunities as they arise, attractive opportunities, we're going to be opportunistic, and how we think the five, 10-year outlook looks for each one of those. So you mentioned

infrastructure and just connecting this back to the landfill business that we were just discussing, reading your book, one of the things you talk about is the reason you were able to buy up landfills at that time was partly because of new environmental regulations that made them more costly for the existing owners to actually run. And so a lot of people wanted to get rid of their landfills, I guess at reasonable prices and you snap them up. When you talk about infrastructure spending, it seems like part of your MO is maybe looking at what the government is doing, what the government is spending, its money. on and taking that opportunity into account. How much does that figure into your planning? And the other story you tell in the book is at one point, you bought up a bunch of road rental companies in anticipation of $600 billion of infrastructure funding. But that didn't really work out. So I guess, like, how are you evaluating the opportunity and the risk here? I'm not counting on government handouts. The government handouts are the cherry on top. It's extra and it's great and we'll take it. But that's not what the business plan is based on.

The business plan is based on that the infrastructure is very aging, and there's got to be spent about $2 trillion in order to fix it up. Whether that happens at this pace or that pace or from this pocket or this pocket, it doesn't really matter. It's going to have to happen because, so you mentioned you have a house in Connecticut. So you know what I'm talking about? Driving from Connecticut to the city is a bumpy ride. Yes.

So these things have to get fixed and later. And then on residential, you look at residential, So the average house is 42 years old. I mean, when I was a kid, it was 10 years old. That was an old house. So a lot of repair and remodeling is going to happen there. Nothing to do with the government. The government's, I don't think.

The government's not going to pay Tracy Allaway to repair and remodel your house. I wish they would. They might pair to install heat pumps. Insulation. And other sort of, you know, clean energy advances. Yep. Yep. And there is one company, Watsko, who specializes in HVAC that's capitalizing on that

and making a ton of money doing that. But I'm not counting on that. I'm not building a business plan based on government large as. That's nice and it's an extra kicker, but that's not the guts of the business plan. You know, I mentioned in the beginning that one of the big eye-opening things is Tracy and I have learned more about these industries is how low-tech communication is and, you know, freight brokerages where it's still based on phone. I think we heard, right, right? Maybe faxes still or maybe in the last few years there's no more faxes. I'm not sure.

these websites and WhatsApp groups that, you know, super retro, what in building supply distribution, when you talk about how low tech it still is, you know, let's say Tracy works with some local provider of lumber or whatever she needs, like what is the process by which the current status quo these goods are delivered to a regional distribution center or to her house? So a couple things there. Let's start with the beginning part of your question about truck brokerage. Truck brokerage is not as old fuddy-duddy as you may think. Okay. It's evolved quite a bit in the last 10 years. Now, in 2011, when I got into the truck brokerage business, it was just as you described. It wasn't low tech. It was no tech. It was 100% people talking on phones to each other

and very slow-poke way. We didn't have faxes. It was still email, but it was not very machine-to-machine. Fast forward to today. RXO, which was the truck brokerage spinoff of XPO that Drew Wilkes and runs. Yeah. That business now, 97% of their orders are either sourced or covered electronically digitally. So it's come a long, long way. Okay. Now, RXOs at the forefront of that, it's been the leader of technology because we invested in that right from the beginning. That was our vision. But even the whole industry, it's not 97%. But it's over half. Over half now is done electronically. So that's brokerage. That's where brokerage has gone. Now, distribution is kind of where brokerage was 10 years ago, maybe eight years ago, because like I said, there are a handful of companies that are

starting to do this digitally. But overall, as an industry, it's still single digits percent. So it's going to penetrate much, much more than that. There's so many things, depending on the type of product we're talking about, that should just be ordered on your phone or on your website. You should not have to go somewhere and stand in line. It's just, it's not necessary. What are the sticking points to technology adoption in distribution? Because I imagine, you know, if you went to a company and you said, I can make your invent. management a lot more efficient using technology, it seems like a slam dunk for them. Maybe it costs a lot of money and that's the issue. Maybe on pricing, if you say I can make your pricing a lot more transparent, maybe there's

less of an incentive for them to improve that. But like, what are the major hurdles that you see here? It's really just doing it. It's a question of companies putting money there. This is a very low-capex business, very, very low CAPEX. The conversion from EBIDDA free cash flow is enormous. In some companies, the free cash flow is more than net income. There's very little investment in CAPEX. I don't mind investing in CAPEX for technology. In fact, I want to and I will, because that was the big driving force of our success at XPO

was being ahead of the curve on technology. So we're definitely going to do that there. And that's all that's required. Now, you have a lot of companies that are private equity owned. private equity because of their structure, their nature, and they have to give the money back to their investors after seven or so years, sometimes it doesn't make sense for them to invest hundreds of millions of dollars into technology because they're going to be flipping it. So why should they do that? I get that. And sometimes companies have a lot of pressure on

short-term earnings, a quarter of the year, and they don't have an investor base that's got a long-term view of it. So my investors always have been the ones looking for the big kill. We're not looking for just like 200 basis points more than more in the market. We're looking for big, big, big returns. So XPO is 32X. And United Rentals today is more than 100x. 100 bagger, pretty good. 100 plus bagger, actually.

And that's the kind of investors that invest in me, ones that want big, big returns and are patient money that can hold a stock for a few years and make a big bet on that. And those kind of investors totally get it, that you've got to invest in technology in order to have the J curve, so that in years three, four, five, you're a category killer. And you have a big competitive advantage against companies who haven't been investing in technology. So I'm definitely going to invest significantly in technology.

The United Rentals chart is absolutely insane. There's a $4 stock in 2009. It looks like it's basically an all-time high right now, but over 500. It's close, yeah. So extremely well done on that. You know, I... Well, I can't take full credit. I've been gone for a while.

You're original investors, the ones that just buy and hold, very pleased with you. I'm sure. On freight brokerage, though, I want to get back to that. Because, you know, I know there's like different models. And you mentioned that, okay, it's way more digital than it used to be. But on the other hand, there are still big, basically freight trading floors or things that resemble a trading floor. And I went to the headquarters of a arrived logistics.

in Austin, Texas, and there's a lot of, you know, and we talked to their CEO, and, you know, there's a lot of X Big 10 or Big 12 or SEC athletes working the phones in those places. It looks like kind of a stock brokerage, and in one side of the room, they're talking to shippers and the other side, they're talking to carriers, et cetera. Like, there's still a lot of humans involved in the process of freight brokerage. And then when people think, it's like, oh, why can't we just have Uber? And Uber, of course, hells there's a freight business. And then Tracy mentioned convoy, which I think was going to try and Uberize the industry,

and it recently failed. It recently had to sell for basically nothing is my understanding. Why are there still so many humans involved in the business of connecting shippers and carriers? There's fewer number of humans now per revenue, per dollars, per shipment, than there were two years ago and five years ago and ten years ago, and that's the trend. I bought a company called NLM from Landstart back in, it must have been 2014 or so. And it specialized in freight brokers,

mostly for the automobile industry, but other industries too, that had expedited requirements. Like they needed, like a factory floor was going to close down unless they had a machine or a part. And they needed it like in two hours, like right away. And they were willing to pay premium prices for that because the cost of not getting it was really quickly.

This business blew my mind because I went out to go and visit it. It was moving over a billion dollars a freight a year. It was a pretty sizable firm. And it was totally quiet. They were like a few dozen people there. And they were basically taking care of the computers. And there was none of what you just described.

There was no, it wasn't like the old-fashioned New York Stock Exchange trading floor from trading places 30 years ago. It was very automated. And I said, this is the future of brokerage. This is where brokerage is going, where it's more machine to machine and automatic. automated, tech-driven, tech-forward, not dependent on human beings. Now, there still is a role for human beings in almost any business because of human relationships, and that's important.

But the actual transactions increasingly in almost every industry, including Chuck brokerage, should be done digitally. But they're not right now, right? I mean, there's a lot of email, and they say, like, hey, we need this in North Carolina. I mean, I see it all the time. Or it's, I mean, it may be digital, but it's email and a human reading email. RXO, 97% of the shipments are either covered or sourced digitally. And they're growing at three times the industry average.

And that's why they're growing at three times the industry average is because it's tech power. It's done by technology, not by us mere mortals. I'm Francie Lacqua, an award-winning journalist. And I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts. I've interviewed everyone from heads of state to fashion icons about the news of the moment. But I've always been curious who are these people as leaders? I don't think there's one right way to be a leader. Make decisions.

A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. How much does pricing power matter, for instance, in the new distribution business that you're starting? Like how much of the strategy depends on consolidating and then being able to get pricing power in the market. And the reason I ask is because if you look at something like freight brokerage, I mean, one of the criticisms of that market was a lot of people lowered their prices in order to get market share, so get people using their apps or whatever. And then when they started

raising prices in order to actually make money, people just switched platforms, right? Like, it was very easy to switch. So I guess how do you manage those things, you know, the scale and the pricing power? In billing products distribution, the business plan is not to raise prices to the end customer. However, the business plan is to lower our cost of sourcing, of procurement. And that's not a difficult thing because as you get bigger and scale up, you're a bigger buyer. You're a bigger customer and you get a better break. A lot of these products are sold on a rate card, basically. It's not much to negotiate. It's a rate card. If you buy this price, this amount, this is what your price is. You buy a larger amount, you get a lower

price. You buy an even larger amount. You get an even lower amount. And that's the part of the business model is to scale up and get the procurement savings and then actually pass along some of that to the end user and keep some of that for ourselves. How big do you have to get then? So again, going back to your ambition to be a multi-billion dollar company in Europe and the U.S. and to have that sort of power to get good prices from the original, the sellers, like, how much do you have to buy in order to get the scale that you want to sort of hit the trajectory you're aiming for? to buy, we're also going to grow. So the industry is growing at 7%. So I would hope to grow more

than the industry organically. But you're right, the main growth is going to come from M&A. And we've already put out revenue targets of we should be at a billion dollar, at least a billion dollars revenue run rate after year one, the end of year one. We should be at least $5 billion revenue run rate after two or three years. And my vision is to be at tens of billions of dollars in revenue over the next decade. And I see a very clear path to do that. those numbers. So Joe and I both read your book, How to Make a Few Billion Dollars. And I enjoyed it. And I have to say, it's not what I was expecting. I was expecting a biography, but like actually, it's sort of conceptual in many ways. So at the very end, for instance, you have a list of thought experiments, including one that

that's very similar to imagine yourself as a banana or imagine that you're related to a banana. human DNA is 50% related to banana DNA. Like, what inspired that direction in the book? Because, again, it seems kind of unusual. You don't get many billionaires writing, you know, lists of thought experiments. And there's also a timeline of technology advancement. Okay. So let's start with the thought experiments.

The purpose of the book, as you can tell from the title, is how to make a few billion dollars. And in my experience, I've met so many very successful people. many people who are much more successful than I am. And they're very different from each other in many, many different ways. And they're identical in one trait. They think differently than most people do. And I think that's a big insight that if you want to create something big, something amazing, something very successful.

And it doesn't have to be just making money, by the way. Making money is just one thing in life. But if you want to accomplish anything huge in life or in business, you've got to figure out a way to think differently. Because if you think the same way everyone else thinks, you're going to get the same results that everyone gets, which is like the average results. If you want super average results,

you need to think differently. And I've made it my discipline, my hobby, my passion, my pastime, to think differently and use different techniques of self-hypnosis and meditation. Wow. And cognitive therapy and mindfulness and thought experiments. And I come up with all these things.

I mix and match all these different schools of consciousness, so to speak, and I come up with my own thing. And it helps me get out of my little way of thinking and it helps me think in a more unbounded way. And that helps me think big and move fast, which is the mantra of making a lot of money and business. So speaking of thinking differently, there was one part of your book where you talk about doing due diligence on companies. And you've spoken about this a lot before. You do a lot of research before you make these decisions. But you also mentioned that you have been working or have worked with a guy who was a 25-year investigator and polygraph examiner for the CIA. So you have him interviewing the executives of companies that you're going to take over?

Absolutely. And so we could have a whole podcast just on Phil Houston. On due diligence. We'd love to. We'll have a follow. That would be fun. Yeah. That would be great.

He is the world's expert in detecting deception. Oh, so he, yes, he was. Definitely going to have him on. Oh, come on. I think he'll do it. I think he will do it. He's actually written two books on it. And it's right out there.

It's right there and how to spy the lie. And I find the truth, I think he'll get the truth in the very interesting books. So he was a polygrapher. He was the most senior polygrapher in the CIA. And everyone in the CIA has to get wired up every year, just make sure they're not a spy. And he learned that you ask a question, which is the stimulus. And then there was a response.

Now, the polygraphy measures your galvanic skin response, your stress response, your heartbeat, you're sweating, and so forth. He also noticed that there were other things besides that. There was body language. There was language language. It was the language that people used in order to answer a question. There were clusters of traits that were the hallmarks of deception. And he created a whole method of detecting deception.

And it's a very disarming. technique. He's great conversationalist. You would never think he's not a difficult guy or an interrogator or anything like that. And I've studied him very carefully and I've worked with him for, whoa, decade and a half now. I'm still not as good as he is on that, but I've studied how to detect deception. And so is my senior management team. They've all taken his courses. They've all taken his training. And we find it so beneficial. We find it beneficial in due diligence on companies because guess what? Sometimes people don't tell you the truth

when they're showing their companies. They exaggerate a little bit. And guess what? In job interviews, when we're interviewing people, you know, people sometimes spin. They don't tell you the straight story. And if you can figure out what's baloney and what's true,

wow, you can save a lot of aggravation, a lot of money, and you can avoid a lot of mistakes. So I do believe that learning the art and science of detecting deception, and we've used Phil, Houston, he goes, his nickname is Dick Houston to do that, to teach us. That's really helped us a huge amount.

So all of these industries that you've worked in, like, I don't know if it was always the case, but these days there's something like, I guess I would say sexy about a lot of these sort of, you know, like I see people on Twitter like talking about like supply chain so hard right now. No, like for real, like self storage or I want to buy up HVax and you hear stories about X, ex-Warton MBAs and the first thing they want to do is get some friends together. and roll up in the local pool management company or HVAC or whatever, or, you know, a chain of laundromats or whatever. These physical things that exist in the world that aren't going to disappear or go anywhere. You spent a year figuring out which industry you attack next, building products distribution.

Is there a system for identifying industries or types of companies that you use to go after next? I have a system. And I write about it in the book. I put the process that I use in order to study an industry. and in order to study a specific company. And to make a long story short, I get a lot of the important information. And I don't waste time on the unimportant information. And I'm doing this long enough.

I know what's important and what's not important. And we do a lot of diligence online before we even meet people. And then we try to use the time of the people we're talking to very politely, very judiciously, so we're not wasting their time and asking them things that we can find out from other sources. But we want to know all the important stuff. And we're looking at an industry, we're looking at a company. What are we trying to figure out? At core, we're trying to figure out whether it's an industry or a company.

Fast forward five years, seven years, ten years. What's the revenue going to be? What's the profit going to be? And what's the cash flow, whether it's inflows or outflows over that period of time? All the hundreds of other questions that we're using for due diligence are all important, but they distill down to those three questions. How do I figure out over the next half a decade, decade, what's the revenue going to grow, what's the profit going to grow, and how much cash is going to generate or use up?

And in the end, it comes down to how much money would we put in and how much money would we get back? And it's no more complicated than that. And if you stick to that basic concept that I just mentioned, you will make a lot of money. You will create alpha. If you deviate from that, if you don't pay attention to that, you say, well, yeah, the return. on capital is not so great, but, no, there's no but. You're going to have a finite amount of money, and then five, ten years later, you're going to have created a revenue stream and a profit stream, and you'll have generated cash flow between now and then. That's going to determine what

your stock price is and how valuable your company is. And all the due diligence ends up being about that. You do seem to have a connection with the physical space, though, which I mean, Joe and I clearly share. And I take issue that it's not sexy. No, we agree. We agree. That's why we spent the last three years talking about this stuff. The other thing I was going to say is when I first went into financial journalism, I wanted to be a commodities correspondent because there was like a romanticism with this idea of like moving large amounts of stuff around the world. So I guess my question is what is the attraction there?

Like is there something innate about the physical space that attracts you to it or is it more about the market opportunity? you mentioned this earlier, the idea that, you know, like, people are always going to have to move things. This isn't a business that is going to disappear overnight. It's more opportunistic than conceptual and abstract, more concrete. It's here are industries that my playbook, the Brad Jacobs playbook, is applicable. And that playbook involves a lot of M&A and a lot of integration and a lot of optimization of what we buy. And those techniques apply to the industries I've done. been in. Some of the industries, that's really not the plate. It's not fragmented enough. You really

can't buy enough. Bigger isn't necessarily better. Maybe the long-term trend is not so fantastic. So I looked into many, many, many other things, but I dismissed them because they didn't check all the boxes. This one happened to check all the boxes. But I looked at many other things. I looked at many other industries. Like what? Well, I spent a lot of time going back to my roots. As you probably know, my first 10 years in business were in energy, was oil and gas. So I spent a lot of time down in Texas looking at oil and gas properties. There are some really cheap properties for sale, like two or three times cash flow.

And they have 20, 30-year lives. So you can get your money back in a couple of years, three years, and then you have just pure profit, year after year after year for a long, long time. So I got really excited about that. Generally, I'm a value person. So I said, wow, this is really, really deep value. But I talked to the 17 or so sovereign wealth funds

and pension plans. that have invested in XPO in the past, we have a great relationship with, and almost all of them said, hey, I get it, but we're not gonna invest in that. And because ESG, and because the oil and gas business went through a bad patch there for a while,

but I like going into streets that have gone through a bad patch, you get better values there, but I couldn't see a way that I could raise many billions of dollars to finance energy. In fact, I even read in the lobby, waiting to come up here in Bloomberg, I saw a new fund is being raised by a couple guys, talented guys who left Warburg and they were in their energy department and they're

raising a 750 million dollar fund they could probably deploy 20 billion dollars they're not going to raise 20 billion dollars they're going to raise 750 million that's my point so I part of my strategy is to go to my good old friends in Singapore and Canada and Middle East and get funding to go out and do M&A and I don't see how I could do that in energy for example last question for me so you mentioned that you have to start with another and bolts. What is the cash that this company is going to throw off over the next three, five, ten years, et cetera? And then you said, people come up with a butt to justify something

that's not bad. What are the lies that investors tell themselves or entrepreneurs tell themselves that cause them to make mistakes? They go for the shiny object of the moment. Because what happens to be, to go back to the sexy thing, sexy at the moment. And what sexy at the moment may not be very sexy in five or ten years. You have to look at what's the real. What's the real? You have to look at what's the business here and what's the demand going to be over time and what's the supply of that service or product over that period of time and you have to just look at it in a very elementary fundamental way like that and then you can predict how much value you're going to create many many investors and many business people many boards even don't even think like that and it's shocking really

because it's so fundamental to value creation I have a completely self-interested topic as my last question. You want that lumber. It's going to be about the shed that you're building. No, actually, it was going to be about journalism, which is, you know, the book and a lot of your businesses to date have been about technological opportunity and disruption. And you have a sort of throwaway line in the book about AI and how it's going to mean that many jobs in journalism are likely to become obsolete, which, you know, fair enough.

I won't necessarily argue with that. But as a thought experiment, what would be your? play on AI's impact on journalism. Like if you had to do something in the journalism space right now, what would it be? You know, I looked at media. I looked at it, couldn't find the right thing. I looked at a handful of companies, actually, that were doing media ads, advertising and media. But I got nervous about what's going to happen from a regulatory front when some of the European rules, which are much more stringent about the advertising, the cookies and sharing the information, when that comes over here, and maybe that business could get disrupted.

So I get nervous about that. I didn't see the right ending for that. Okay, can I have the lumber? Yes, I will definitely. You're going to be customer number one, Trace. I probably will, yeah. Brad Jacobs, thank you so much for coming on Avlods. That was a blast.

My pleasure. Thank you. Tracy, I think I know how to make a billion dollars now. I'm going to call up my friends in Singapore. I'm going to call up my friends at some Middle East sovereign wealth funds, and I'm going to talk to the people that I know who have built incredible software technology for the world of physical distribution and then find a new industry to take over. Okay, no excuses, Joe. I got the playbook.

Now you have to do it. And you're going to hire a CIA investigator as well, right? I got it. I feel this is it. Okay. Well, great. I'm glad we've solved that. No, that was such a fun conversation.

And it is interesting, like, okay, Brad has clearly done a lot of businesses, five or seven, depending. on how you count, as you mentioned. But there does seem to be this common thread throughout all of them. So like, A, a lot of them have been in the physical space. And again, like it seems like there is that perpetual opportunity there in that the business of moving stuff, getting rid of stuff, isn't going to go away. And Brad was talking about that. But also the idea of all of that, I guess because of the way it developed is just so fractured to the point and like localized. So that that's a place. in the economy where there are still opportunities for scale and efficiencies. So even though the businesses sort of range across a large variety of things, like it does seem there is this commonality.

It's super interesting, too, to think about, I guess, the unequal distribution of technology today. The idea that there are some warehouses around the country that are very automated and very up to date and others that have never felt perhaps the competitive pressure to need to do so, or even in freight brokers, the idea that there are some brokers that resemble giant trading floors and some not. I find that to be really fascinating. Also, this idea of just like, okay, if you have access to the capital, you can get scale from day one. And obviously so many entrepreneurs, like, are what is going to take to get scale? Well, in theory, if you have the money, you can be big from day one and get the best prices from the vendors. Yeah. And we have to have, what was his name, Dick Houston on the show.

Also, just one other thing that is interesting is just this idea that there's some businesses that are very attractive, but the capital isn't there. And so that comment at the end about certain energy assets being cheap, but no one wants to put up the money for them. Like, someone is going to capture that alpha, I assume. Yes, except in the media business, I guess. Except that. There's none here. There's no hope. Okay.

Shall we leave it there? Let's leave it there. All right. This has been another episode of the Allthlots podcast. I'm Tracy Alloway. you can follow me at Tracy Allaway. And I'm Joe Wisenthall. You can follow me at the stalwart.

Check out our guest, Brad Jacobs, new book. How to Make a Few Billion Dollars. You can have the playbook to make a few billion dollars yourself. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashel Bennett at Dashbot, and Kale Brooks at Kail Brooks. For more Odd Lots content, go to Bloomberg.com slash Odd Lots, where we have a blog, transcript, and a newsletter. And check out our Discord.

Discord.g. where listeners are chatting 24-7 about these topics, including lots of a transportation channel in which I suspect there will be much discussion of this episode. And if you enjoy odd lots, if you want us to record more episodes on how to do due diligence with the help of polygraph examiners for the CIA, then please leave us a positive review on your favorite podcast platform. Thanks for listening. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data

to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do. We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world.

Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen.