The Derivative - Running an "Old Fashioned" Hedge Fund with Adrian Keevil of Plustick Partners

Episode Date: October 15, 2026

In this episode, Jeff Malec talks with Adrian Keevil of Plustick Partners about his path from corporate finance and academic research to investing, and how his work on stakeholder relationships informs the firm’s approach. Keevil explains Plustick’s old-fashioned partnership philosophy and its focus on distressed, event-driven, and special-situations investing, from overlooked assets and misunderstood businesses to shorting unsecured bonds. He also shares the personal and professional experiences behind his perspective, including his family’s history in market trading and lessons from studying how real businesses operate. The conversation explores portfolio construction, credit markets and private credit, the potential economic effects of AI, and the ethical questions AI raises in business and education. It wraps up with Keevil’s Charlottesville restaurant recommendations.  - SEND IT!Chapters:00:00-01:23= Intro01:24-11:54= Plustick Partners and the Old-School Hedge Fund Model 11:55-30:29=Distressed Investing, Hidden Assets, and Building a Resilient Portfolio 30:30-48:00=Unsecured Bond Shorts, Credit Markets, and Finding the Story Behind a Business 48:01–58:37 = Private Equity, FanDuel, and Plustick’s Idea-Driven Research Process 58:38–1:10:55 = AI, the Future of Work, and Business Ethics + Top restaurants in Charlottesville From the Episode:NEW WHITEPAPER: Beat the Market with Less VolatilityPODCAST: Zigs, Zags, and Finding Micro Cap Winners with Ian CasselFollow along with Adrian and Plustick ⁠on LinkedIn, and be sure to check out plustickpartners.com to learn more about what they are up to.Don't forget to subscribe to⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠sign-up for our blog digest⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠.Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.rcmalternatives.com/disclaimer⁠⁠⁠⁠⁠

Welcome to the derivative by RCM Alternatives. Send it. Hello there. Welcome back to the derivative, brought to you by RCM Alternatives, where we just put up a new white paper. We took about 12,000 mutual funds and ETFs that are around in January of 2020 and saw how many did better return than 6040 with less fall and a beta less than 0.5 to the S&P. Just 22 made it out of 12,000. Pretty crazy. Then we did what we do and put it on hard mode and then super hard mode.

Ended up with just five in the end. So go check it out. RCMaltz.com slash white paper. R-CM-A-LTSA-LTS.com slash white paper. Okay, onto this episode where I get to talk to Adrian Keevel, who's a professor of business ethics at UVA, but that's just in his spare time. On his day job, he helps run the cleverly named Plus Tick, an old-fetch. an old-fashioned hedge fund, his words,

that looks for opportunities and what others see as tainted companies. We're covering that weird word taint as well as distress, AI, and hidden assets. Just don't call value. Send it. All right, everybody. We are here with Adrian Kievel.

Did I get the last name, correct? You did. Thank you. What's the background on that name, Kevall? It's an English name. My dad was English. and his family came from a town at the town in Wiltshire called Keeval and they all came from there, I guess,

and made their way up to London and then he came across the pond. Nice. Have you been back? You visited that town? I've only been there once when I was young. It's sort of fun to go and take a picture next to the sign. Yeah, here we go. But his whole family basically moved up north. It's kind of a cool story if you want to hear it.

It's not totally a side story. but it's a little bit of an origin story, I guess. They were farmers, poultry farmers in Wiltshire, and then moved up to London to open a market in one of the big markets in London. This is a long time ago, a few hundred years ago. And they would sell the farm-raised poultry that they had, sell some game, and then they realized at some point that there were a lot of farmers like them that had game to sell, that the market wasn't centralized.

So pricing was really weird. So they created the first market. for poultry. Oh, wow. So they traded from, I think, four in the morning till like 10 the morning and then do whatever else they did for the rest of the day. That's where these Chicago grain traders get it, right? They're still. Exactly. Exactly. Exactly. Right. That's the origin. Used to be the good gig down at the Board of Trade, just 9.30-ish till 1.30 p.m. 100%. That is a cool story. It's always weird to me, like your name, where they just came out of this town

and people are like, oh, that's the guy from Keeble and then it just became your last name. Exactly. I think in the world English, she was like De Kavelli or something. I guess everyone had the same name. They had first names,

but they all kind of had the same last name because they're from the same place. I love it. Yeah. And then we were chatting offline a little. You're in Charlottesville, Virginia, which is a favorite spot of mine. My sister lives there.

How did you end up there? You a QI.M. Alam or how did you end up there? There's not many firms. Yeah, there's a little industry, a little kind of cottage industry of funds down here, both private and public market funds and some as the QIM and the managed futures for realm. And I came down, though, for graduate school, first for an MBA and then for a PhD at the Darden Business School here. And then stuck around after the PhD.

You got both. You didn't want to leave school. That's such an old school. I did both. I know. My friend is a brain surgeon. And actually, I was at business school, the same number of years. He was in medical school.

So I know, it's funny. And what was the, what was the PhD in? I studied, I called behavioral finance, but really, I was interested in understanding stakeholder relationships that companies have, you know, with their, you think of stakeholders just as someone who can impact the firm or who's impacted by the firm. And so that would be like customer, suppliers, investors, lenders. employees, community regulators, those sorts of things, and trying to figure out a way to value those relationships and also sort of investigate the quality of those relationships, such that you could

sort of predict future performance of the business in a way that wasn't really reflected or at least not called out in the historical financials. You could see clues there, but, you know, those aren't things that show up in financial statements, but there are things that impact businesses. So that was what I came down to do. And then when I was finishing up the PhD, I was on my way to be a professor and I was going to use the research to inform my investing and do some investing on the side, maybe have a little fund. And my partner, well, now business partner, then it was a friend or acquaintance. He convinced me to put the reverse the order and invest with him full time and do a little professoring on the side. He had a great line.

He said, do you really believe in your research? I was like, yeah, he goes, you ought to invest behind it instead of just talking about. it. So that was sort of the origins of plus-stick partners. And I was want to say plus-stick, but no, plus-tick. And that's got a good. Yeah, go ahead. You got it. Sorry, I didn't mean to talk over there, Jeff. You're not going here, or you going with that because you're market's guy, you know what comes from. Yeah, exactly. So tell us what the, I actually didn't know, I guess I knew if I scraped the back of my brain that it went away. But yeah, tell us what's going on. went away. The old zero plus tick rule or uptick rule where you had to, if you wanted to short a stock,

you had to short it into a plus tick or an uptick. And, you know, we're, our hedge fund is sort of a throwback hedge fund, the way hedge funds used to be, and we're big believers in market integrity. And the idea that you could bear rate a stock into the ground, you know, on technical pressure, maybe not fundamental. We don't think is the greatest thing for markets. And so our name is a little bit of a nod to an era when markets were a little bit more driven by people and there were sort of norms around and regulations around to keep the markets functioning properly for everyone's benefit. And what do you mean by the old school hedge fund or wedgicon? Yeah, an old fashioned hedge fund, old fashion partnership. Like our Tommy, my business partner, he that in the past worked at Hamburgton

Quist when he was younger and saw one of the first hedge funds that got created there. And you know, Back then when hedge funds, and then he co-founded a fund actually in 1990, so really early days called New Generation, which he co-managed for like 22 years with a partner and a bunch of folks there. When hedge funds launched, this isn't meant to be a lecture, but it's kind of interesting that they were really vehicles. I'll put the professor hat on for a second, you know, the history lesson a little bit, that they were really created for the benefit of families and individuals. and some institutions that were willing, you know, that we're willing to accept a reasonable amount of risk. The fee structure, I think, was the origins of the fee structure was so but arbitrary. And I think, you know, if you do the math, the fee structure, like a classic two and 20 really does start to over time probably favor those that gather assets because it's a

pretty good business collecting 2%, you know, and producing whatever kind of return you need to return to keep your investors happy. Yeah. It's like not necessarily... have a big call option. Exactly. It's getting paid to have a big call option. And I think, you know, our idea was to take it back to the way it used to be, which was, you know, smaller, probably smaller team. Everyone focused on the investing side of the business, obsessively focused on performance,

sort of willing to tolerate risk and volatility in pursuit of performance, you know, in a reasonable amount of volatility and risk. You know, complete alignment between your LPs and the GP. So it's really a true partnership. And ideally that we would be the biggest investors in the fund and have a lot of money here and all that stuff. And there weren't a lot of funds that were doing that when we launched in 2012. It was, you know, most of the guys who had good track records really had scaled their businesses and grown. And also, the market also developed just that hedge funds and alternatives in general became more palatable or interesting to pension advisors and insurance fund managers and those kinds of folks who have a different sort of goal.

in mind compared to a family, generally speaking, like they might care about like a 7% with really low vol or they might, you know, want some kind of other thing that doesn't necessarily comport with maximizing the return. They want to not get fired. Checks and boxes not get fired. Exactly. They want to not get fired. And you know, in the actuarial assumptions, all those sorts of things, that's not something that a family or individual typically is focused on. And so, you know, we figured there was a good market of folks who were interested in a fund that would at least try to outperform and have that as sort of the central mission of the business. And then do you, like a lot of people I think would hear old-fashioned hedge fund and just think, like,

way more volatile, like 50% vol or something. Are you, that's part of it? Not that bad. Or it's like, yeah, but there's some vol, there's more vol. We're not trying to hedge out vol. We, my partner has a great saying he doesn't like to be hedged against making money. So we're not trying to necessarily hedge out. Well, I would shouldn't say hedging out fall, we'll get to that later maybe,

but in terms of hedging out single position risk by, you know, offsetting, you know, going along and then, you know, buying puts or other things that you could do to sort of hedge out your risk of being wrong. Because in our view, at least, you know, you can, and we'll get into strategy in a little bit and sort of see how it works from a sort of a mechanical standpoint. but you can trim your losses if you're wrong and you can be aggressive and get out of things. But if you trim your upside and you're right, that's a big problem. You can't really undo that. And so we're looking for positions that are going to have big moves.

And so if we hedge out some of the risk, we're also hedging out some of the upside and potentially a lot of it if it has a big move. I'm hopeful. It seems like portable alpha is making a bit of a comeback institutionally and even coming down to the retail level that some of the institutions. institutions are like, oh, we'd want high vol. We don't have to put up as much money and we could be holding it over here and T-bills or whatever else, right?

That's to me, I'm always like, give me as much volatility as possible because then I have to give you less money. From your lips. From your lips. That's the idea. Exactly. Yeah, which to your point, families get that, individual investors get that. And I think the institutions just have too much money.

Yeah. Right. They're like, I don't have a money problem. I have a allocation problem. I have to get it all out the door. Yeah. That's interesting there. And then so you, your partner, how many total are on the team?

There are four of us on the investing team. And then we have a group of folks helping us on the op side. But four is kind of, we found that four is a good number. Maybe might hire other analysts at some point have five of us. But we like to have a small team. We're all covering all the names together. Very collaborative, sort of a pretty intense day. And we're, you know, we're investing junkie.

and we want to work with folks who are investing junkies. So we're kind of at it 24 hours a day just because it's fun, you know, not because we run a sweatshop. Right. I don't think. So let's dive into the strategy then. So I wanted to call it kind of macro. Would you push back on that?

Or I'll let you describe it. Then I'll push back on you. You know, it's funny. It's another consequence of us being sort of old-fashioned. We kind of go back to the days when there weren't really categories, I would say, in hedge funds. But, you know, if you put us into the context of, the categories that people have nowadays, I would say that we would probably fall into the distressed

event-driven special situations bucket or three buckets. You know, we, we were distressed in that we do, we are credit-oriented, although we express our investments a lot of times through equities. And we both come from, well, Tommy especially from a distressed background, the traditional financial distress. And, you know, since we watched the fund, we've had a considerable amount bankruptcy restructurings in the portfolio. But, you know, those are, those are episodic and highly dependent on the credit cycle. I remember when we started, the maturity wall was like in 2014, and then the maturity wall was 2016, and then it was 2020. And now I don't think anyone talks about the maturity wall anymore. It kept on getting pushed out. So, you know,

we also, like the things like we really love about the stress investing is that when something really blows up and people lose a lot of money, it, it, It's kind of, not surprisingly, psychologically freaks a lot of people out. You know, so most folks aren't comfortable with bankruptcy. We're very comfortable with bankruptcy just because we've done it so many times. The code is predictable. It's, you know, but a lot of investors just aren't geared up for that. Some people have it in their mandate that they can't hold distressed securities or, you know,

financially distressed securities. And so what that does is it creates like a whole bunch of sellers who are, because they're scared and justifiably scared. And then a few universe of buyers because there aren't as many folks who are interested in distressed securities. And then sort of a psychological taint that sticks around on a business after it's gone through a bankruptcy, particularly a pretty bad one, because everyone lost the money and, you know, people are pissed off. They think it's a POS. And so it can have, if you're creative with your research and you're able to sort of step aside from the taint on it, you can start to

find investments that, where you don't have to really speculate what the thing is worth. You can actually figure out what the assets are worth. And, you know, what the, sort of capital structure is worth in and do the math and subtracted to see what the equity or whatever the security you're interested in should be worth. And but not just like most hedge fund people are going to jump to distress debt, right? Exactly. And that's mostly. And that's where it gets mostly expressed.

But now I think that business over the years has moved much more on the litigation side. And so the funds that are really focused on distress nowadays, I would say maybe within the last, it started about 15 years ago. It's probably the last five or 10 years has begun the bigger thing to be distressed litigation where your sort of idea, one guy put it, I'll clean up the language.

It was a trader friend of ours who said, you know, it used to be that you got, you spent a lot of time to find good value in the market. And now you spent a lot of time to find good value in the market and then you spend more time

trying to screw everyone else out of it so you can make more. And that's, I think, where the market has gone. And for better or worse, it's become, like, highly litigious. And that's just not our thing. Like, we've been on committees. We've done that. And it just, it's a time suck. So that's like grabbing a seat on the board and pushing for this. On the committee, exactly. These, putting shareholders to get more than those shareholders. 100%. And so you're sitting on a committee and you're going up against other committees,

depending on where you sit in the capital structure. And it's like really fun, really fun and time consuming. but you know you can juice your return a little bit but you're not getting like a five bagger generally in that kind of a scenario it's like fighting over certain things that are sort of technicalities in the bankruptcy process and so we've done less and less of that over the years I would say and what we discovered kind of early on was that that same dynamic the taint and all those things that makes I think distressed markets really inefficient also happens in the sort of we call it performing markets or the more general markets where a company makes a bad and a as a strategic decision or there's an ethical scandal or there's a recession in its industry or a new competitive venture, whatever the reason is and the stock goes from 200 to 30. You have the same kind of dynamic that you have with distressed in that people lose a lot of money. They sell the stock. You know, they never want to hear about XYZ POS again. And you can get in there, go to the hood, figure out what's going on with the business, understand its stakeholder relationships, make sure everything's squared away and buy a stock that might not go from 10 to 200 again,

but it could go from 10 to 30 or 40 or 50 pretty reasonably. And so that's what we end up doing a lot more. I would say we'd do that kind of style of investing. And within those, within that world, there are a few different sort of wrinkles on it. Real quick, how do you, so if it goes bankrupt, though, aren't the equity holders wiped out on the securities were zero? Yeah, so this would be a company that doesn't, isn't going bankrupt. Like the business actually is okay. But the future value of the business has been significantly questioned by the market. So whether there's- And that market's reflecting that risk that that might go to zero.

Yeah. Exactly. That it might go to zero or, you know, frankly, like sometimes it's just, there's fatigue and grouchiness, you know, you know how like pain trades go. Yeah. Don't do them. Don't tell them exactly. No one wants to hear about them.

Yeah. And most people on this part would be talking about, right, riding that momentum. Like, following the trend. down, not trying to catch the proverbial falling knife, right? You're going to get a knife. Exactly. Yeah, so you do have to be careful there. And we like to wait until the situation is like really actually improved. And we can have hard evidence that suggests it's improved before we invest. You know, you can still have a stock go down from there generally, but usually you can be pretty comfortable that you're underwriting to. Again, this is where the credit perspective comes in that we're

underwriting to like a liquidation value that's above where we're paying. And then do you need to get a seat at the table, so to speak? Do you have to have inside info with a, that's a loaded term, ignore that term? No. Do you have to have, right, meet with management and really get the, or just you're on the sidelines like any other investor that might buy the stock, but you're doing all the research that's publicly available? It's that.

We're trying to avoid dealing with management. And because one thing we've learned also doing us a long time is that management teams typically are really good salespeople. And managers are really persuasive. And, you know, when we've spent time with management and, like, heard their view of how things are going and it's, it's, we've gotten swaned in the past a few times. And so we realize that we can actually do a better job if we don't talk to them unless we really have to.

So we're trying to find management teams that truly get it, you know, that have really, and, you know, where we can identify why the stock cratered and, you know, or the bonds cratered, and then understand what it's going to take to turn around and go see, like, try and find evidence of that happening. And we'll try and triangulate on a management team. Like, we might talk to their competitors. We might talk to other investors or lenders who have dealt with them, suppliers who've dealt with them.

We'll read trade journals, look at court transcripts, that sort of stuff. But we try and stick away from them just because they're really so good. They'll tell you what you want to hear. Exactly. So that's the long side, but then you also will take shorts, right? Yeah, there's actually one other wrinkle on the long side that we do, which is kind of, it's a little bit, it's related, but it's a little bit different. And we like companies that have hidden assets, you know, where you can buy a security,

like generally it's a stock, but you can buy the stock for the price of the business and then have an asset thrown in, like some kind of valuable asset that is for a reason not producing cash or sort of not core to the business. And, you know, one example that we really love to find when we can find is radio spectrum, you know, the stuff that they use for cell phones and other devices. And that's sort of a finite, I guess it's a commodity, but there's a finite fixed amount of it. There's a lot more use for it now in these days. And so you have companies that were once like a satellite company or once like some other sort of a weird business that didn't really didn't really ever materialize.

That business is terrible, but the spectrum that they own can be really valuable if it's repurposed and used. And so we like those kinds of things where, you know, another example recently was Moderna stock, where it was kind of, you thought it was trading for where the, the, the, the vaccines would be worth, like the vaccine business in a reasonable case. And they had this whole cancer therapy regime going with Merck that was basically not priced in. It was like a free option.

So we like that kind of stuff, too. And then that was crazy. That jump, right? So I was just about to ask if you're dealing in all like small cap, midcaps. But no, Moderma's a huge stock. But then, yeah, like it traded like a biotech startup for one day. Totally. And that's a classic example where the stock was at, I don't know what the high for

Moderna was. Definitely in the 200. It might have been higher. You know, went down, you know, to the 20s and hung around the 20s and 30s for a long time. And it's funny. It was just this, you know, it's a, you know, it's, we've seen. I don't know, I can't totally explain it at some point maybe when I have more time for academic research, I'll try to do a study to figure out why, but we didn't find anyone who was really

talking about this cancer therapy or technically a vaccine, but it's more like a therapy. Merck has ketruda, it's their largest drug. It's, I think the largest drug in the world. It's like $30 plus billion a year of revenue coming off patent. There's some pressure for Merck to keep that thing going, obviously. And this therapy that they were doing in conjunction with Moderna made Ketruda more effective in some really robust early stage clinical trials. And there was, you know, phase three readouts coming down the pipe. But, you know, for whatever reason, it wasn't reflected in RV, it wasn't reflected in the stock price. So, did we?

Like, Moderna, I wouldn't necessarily a conglomerate, but like a, yeah, things with lots of business lines or different products. Like, does the market tend to price them at the lowest multiple, right? So, like, it was getting priced at their lowest multiple. multiple product. Totally. Sure, you got that, but we're just going to discount this to what you got. I think that's right. Time Warner stuff is the same thing, right?

Yeah, totally. One other phenomenal. You've got HBO, you've got this stuff, but you also have this beast of a legacy cable business that nobody wants. That's what we're pricing you to. That's what we're pricing you to. And you see it sometimes also when you have a business that has multiple lines that cross industry groups at investment banks.

And so depending on what group. covers them, you know, they'll get a multiple based on that industry group. It might not actually be appropriate. And in those folks still have a lot of influence, I think, over how things are priced generally in the market. Like with Moderna, there was, every analyst had like a $30 price target, except for this one analyst at a place called Burkline Capital Markets. She had a $135 price target on it. And that is because she was looking at the cancer data. And she's super smart and not afraid to make a gutty call. But, yeah, yeah. The, uh, And that's surprising here that they have any legs to stand on anymore.

Like after all that we've been through with all the dot com and everything that the analyst community is still chugging along. Certainly in our distressed world it is too. Like we deal with a bunch of weirdos in a good way, you know, who analyze the strangest securities you've ever, you know, you can come across and they're super smart. And I think in distress, you know, especially in credit, the spreads are still pretty good. You know, they're still getting paid well. And, you know, chunky equities, sometimes, you know, the commissions are okay. Those folks are, I think, not only really smart, but also doing good work. And we found that, you know, that's been a huge resource too.

Like, no one really talks to those folks for whatever reason. But, like, why don't they get poached by hedge funds and want to go do, or do they just have this short shelf life where they're really smart covering that and then they go on to other things? It's a good question. Sometimes they get poached. Sometimes they were at hedge funds and it didn't work out for whatever reason. You know, sometimes it's a personality thing.

Like, they're just. Yeah. I'd rather just cover these couple stocks and not be up in the middle of the night. They're not like smooth, you know, sometimes they're not like smooth talking type guys who, you know, they have a good niche. They make money. They're happy. They do weird stuff. They like their clients.

And, you know, so it kind of works with them, I think. They're not always right. You know, they're not always right, obviously. Yeah. So it makes a market. Yeah. So you'll go as big as Moderna. Will you go?

Is there a limit on how small you'll go? We had the micro cap guy on a couple weeks ago. That was a fun episode. Pink sheets. Yeah. I felt like I had a decent amount in common with him, you know, being sort of like in the weird sector of capital markets. This is another kind of weird sector of capital markets. Yeah.

And yeah, we will do pinks. We'll do over-the-counter stocks for sure. They have to be pretty liquid. Like, we can't, we don't like to buy stuff that just doesn't trade because we just don't want to be locked into something. We don't trade a ton, but we like to have the ability to get out of something if we think the stories changed. there's something with a thesis that we don't like. And so we try and have things that are, even if they're over the counter, they trade with regularity. And we know who's trading them and where we can find liquidity pretty quickly if we need to. And then what's it look like in

terms of what you'll risk on a trade and how long you'll hold it, that, that whole calculus on the long side. A full long for us is 5%. And so we typically have about 20 longs. So that's 5% at cost. And then we let our, we'd like to let our winners run. We used to let our winners run with no at all governor on it. It's assuming that the thesis was still good. And so if we had like a 10-bagger and nothing else moved, it would be almost 50% of the portfolio, you know, somewhere, you know, like that, you know, relatively much larger than the rest of the portfolio. And that was great. And I think that works mathematically.

The problem is like a 50% position in your book. If it moves down, obviously it creates a lot of volatility. You kind of have to be right because I'll kind of get into our portfolio management. if you're curious, our theory on portfolio management for what we do. But you kind of have to be right if you have, it's basically like 10 positions in one. And so we've started now, last, I would say, three or maybe four years ago, we started trimming stuff when it gets above 15, even if we think the thesis is still great, and then reinvesting it into other stuff that we like that hasn't moved yet. And that, I think, is reduced some volatility and actually goose it returns.

So it's been a good thing. You might get some rebounds, premium out of that, too. but yeah exactly do you view it as like a venture portfolio like i'm gonna have all these beds and one or two is going to pay off or are you more like no i believe i mean i know you believe in all them but i don't need them all to hit i just need one or two to hit that's the it's it's sort of it's the same like the first time tommy and i talked about it the first thing he came to my mind was yeah this is a little bit like venture not that you're expecting to have a bunch of zeros and one you know, a thousand bagger, but that your structure portfolio so that you can make mistakes. That was kind of like the idea. If you have 20 positions that you know well, where you have

a minimum 2 to 3x return hurdle if you're right. And ideally a window into a 5 or maybe a 10, 10 plus type return if everything goes well and you're also a little lucky. So if you have 20 those at 5%, let's say you have one or two that really win a few others that do pretty well, like their doubles or whatever, then some that are flat and a couple that are down 50, you can still make a great return, you know, because your winners really compensate you for your mistakes.

As opposed to like, sorry, go ahead. I was just saying, but that's the danger of what you said earlier, but switching to like, oh, we're going to take some off and reallocate.

Like, if you cap that, you get a trouble. Like, we'll let it rip. Usually what happens is like these are event-driven situations where, you know, where the,

the, has a mega move on some news. Like, Moderno is a good example. We've had other ones in the past where there have been like competitive bids for an asset that they own. And in those scenarios, like you're not truing on the way.

Like, you come to work and it goes from 10% of your portfolio sometimes to 20 or 30% in a day. And then we'll, and then we'll pair it back. Yeah. Yeah. So we're not, it's a good point because we're not like rebalancing every day.

If it gets to 12%, we got 13%, we have to take it back. And it's not that it's a little bit more when when some kind of catalyst is realized and something goes really up. And then as opposed to letting it be 40% of your portfolio for the next six months, we'll take it back. And, you know, you just can't cheat on your hurdle. Like you can't, like for our strategy, if we had positions that were going to return 15% and, you know, you had one that didn't work, you've got to find a whole bunch more. It's going to take you a long time to catch up.

Yeah. One position is down 50. You've got to be. So for us, we're not like doing it the way I think I don't want to venture in a bad light, but those folks are making small calculated bets. They're truly, they don't know that business might not even exist in some cases. They're betting on a management team. And there's a lot that can happen and go wrong.

With us, we're trying to underwrite and understand businesses that already exist that have cash flows or assets and great management teams, hopefully, and good sales relationships and good relationships with their lenders and those things that, you know, where I think we're expecting to be wrong just because it's just, I think we've done this long enough to be humble and know that even if you think you can be right, you can still be wrong. And so we wanted to structure the portfolio in a way that would actually work to compensate you for some mistakes, just some normal mistakes, you know, or bad luck. That's where you differ from the really old-fashioned hedge fund guys. They would never think they could

be wrong. We'll not be wrong. We'll just lever it up. I haven't heard you want to say value, but part of me thinks this is just a value story, right? You're a value investor and you're waiting for the value to be right. My partner is beating that out of me, that language. Because it has sucked for so long or it doesn't sell or? Not at all. It's so funny. That's what I thought it would be.

No, it's not that at all. He thinks that things are worth what they're worth. You know, like the market price is the market price. So don't tell me about some intrinsic value. There's no value. It doesn't exist. No one's willing to pay for it. It doesn't exist.

So get that language out of your mouth. But I will say that we do, if I can get him to relax that a little bit, we have an awesome relationship. We have a lot of fun here too. But if I can relax that a little bit, I would say that, yeah, we are value-oriented, for sure. Like, we're trying to find things that are, and he would hate it if I said the word mispriced, but, you know, that in sort of classical financial, you know, theory, are mispriced, you know, due to some market efficiency because of either it's overlooked, misunderstood, complicated,

if you know, bankrupt, you know, a turnaround, those sorts of things. And it, and, but it's not, it's different than wait, like a merger Arab guy or something. It's waiting for the event and then buying the side they think is mispriced based on those facts. You're like coming in way before an event saying, I don't know if it's going to be bought. I don't know if it's going to reshuffle its management, what's going to happen, but I like the fundamentals, basically. Yeah, like, like there was, you know, one company Comscope that,

that we were, sometimes we come at things from a short, like, shorter company. We'll short the, be short bonds. Do you want to get in the shorts now? Is that a good segue? It was unintentional. Yeah. Yeah. But this is a good, this is a good one that's illustrative, I think, of what you were getting up before and also it gives a little a short. So we like the short unsecured bonds typically. Like that's our bread and brother on their short side. There are a lot of good things about that. There are a couple of, uh, real quick, when did unsecured bonds become a thing? Or what, what are those doing? Who's, who's issuing those? The company? Yeah, companies are them. They're usually at the bottom of a capital structure below bank debt and secured bonds,

you know, that have asset coverage or, you know, cash flow coverage or some other kind of coverage for the value of the bonds. It's, you know, in theory, kind of like, I think of it like a credit card, you know, where it's an unsecured. Basically high yield liability. Yeah, exactly, high yield bonds that don't have asset coverage. And, you know, and what's cool about those, shorting those is if a company goes bankrupt that has, you know, a lot of like a top-heavy, top-heavy, excuse me, capital structure where there's a lot of secured paper and paper that have rights to assets and bankruptcy above you. Those unsecured bonds at the bottom of capital structure can be effectively worthless, just like the equity. And so you can short a bond at par,

theoretically. It goes bankrupt. There's no asset coverage and you cover it at zero. That obviously is totally theoretical because you're shorting it. Yeah. in the 90s and you get maybe 10 cents or five cents when you cover it. But, you know, so it's, it's just like shorting equities, the difference being that you're, you're borrowing bonds. And the other difference being that's awesome, I think, is that if you're wrong or if you get squeezed, you know, bonds that aren't converts generally don't go above much above par. It might go to like 102 or three or, you know, something like that, depending on the interest rate. But it's, it's not going to go to 8,000, you know, like a stock can do. Right. And so that's why we like the short bonds.

and all our bonds are just idea-driven alpha ideas that are not hedges on our long book. So it's... What does that mean? Idea-driven like that? Yeah. AIs eating software or something like that? No, sorry.

That was terrible. I'd use a very vague term. They're like specific idiosyncratic one-off things that we think, you know, company acts is going to go bankrupt within six months. And the bonds are trading, you know, in the 80s. And we think there's zero asset coverage. Let's short those bonds. And if it goes bankrupt in six months, then we'll make a lot of money.

And if it doesn't, you know, I'll probably cover and take a little bit of loss and move on to the next one. So the long book is usually three or four years average duration, I would say, for an investment. And the shorts are more like, you know, six months, less maybe. And it's not long short equity. You're not matching those up in anyway. They're just two separate sides of the coin of expressing different views. Exactly. Sometimes we'll do some weird stuff like we'll short a bond and then as a hedge we'll buy the equity.

If the equity is at like 50 cents or a quarter or something like that, we'll buy a little equity, short the bonds. Because if it doesn't go bankrupt, that equity can tend bag. And so it compensates us for being wrong on the short. But we're not usually pairing off trade. It's like long something, short something else. They're all individual standalone ideas. And then that could be based on, like, give me a few examples of that, like management or they couldn't, they went out to raise new money and they couldn't. It's generally like a company that has a lot of leverage.

and a maturity that's coming up, you know, maybe in the next six months or so. And we have substantial doubt that they're going to be able to make the maturity because, you know, the business is declining. They've double pledged assets potentially. They've got a lot of other obligations that the business has that aren't necessarily on the balance sheet like technology debt or cap-c-ex debt, like a retailer that allows the stores to get gross. Those sorts of things that are, you know, they are obligations, but they don't necessarily show up on the balance sheet as like, as a loan or a bond. And so we're saying, we're saying. We're sure. shorting it with the expectation that when that maturity event happens, that there's going to be

restructuring or somewhere around there. Maybe usually it's a little bit before company goes bankrupt. And that's the typical short situation. It's somewhat episodic and a little bit dependent on the credit cycle. That's also, you know, there have to be some bankruptcies happening. Like right now, there aren't many. There are a few out there, but not a ton compared to, you know, normal times. Even with rates have been going up? Why is that? What's your macro view on what's happening there? I would say the two factors.

One is that there's still a decent amount of liquidity from the stimulus in 2020. You know, and the monetary. What? From the, we're still, we still have stimulus. Can you believe it? There's still a lot of cash sloshing around from those days. A lot of folks refied out. That's, you know, they turned out their debt.

So that helped them buy some time. And I think monetary policy. generally has been pretty loose, even though interest rates have increased. You know, the money supplies pretty healthy. Liquidity is pretty good. Credit markets have been really good. And then I think the other big change is the advent of private credit, where you have, you know, folks with really deep pockets that have a vested interest in a company not structuring or not hitting a, at least not hitting a Chapter 11 case in court. They might restructure it out of court. And it's another source of liquidity, I think, for companies that are looking for money.

So, but the private credit guys were struggling big time, like over the last 18 months, right, of gates and you know, it's funny. No distributions and all that. So that's kind of, I guess, to your point, like, yes, they're doing all that so that they don't see the bankruptcies. I think that's part of it. I mean, I think also as part of that narrative that was so interesting, like if you looked at their net assets, most of these private credit folks were raising a lot more than they were getting redemption requests for, which is kind of interesting. So their net assets were going up. You know, I think. You know, credit markets are a little weird also because, and this is probably why Tommy, my partner, doesn't love me using what's the value because, like, credit markets are so marked to market still, you know, that if something is for sale and there are no bids, like, it can just, you know, it'll trade down until it won't even trade. It'll just, you know, hit a bid low and then all of a sudden someone else wants to get out, they trade it lower. And so I think there was a little bit of liquidity. If you know those markets, like those guys do really well. They didn't wind up to print trades and cause like a cascading panic that, you know, wasn't necessary because, again, it could be a company that's in perfect shape, but no one's ever heard of it. So someone's trying to sell a big slug of paper and it's not a big issuer and maybe it's a small issue and people don't know the business. You know, that thing might go from par to 80 just because someone's looking for a print and they need to get out. And so I think that to me explained some of that gating behavior a little bit more than like, oh my gosh, these guys are lying about their portfolio companies.

it's all fake and there's some of that probably, but there's definitely some covenant lightness and stuff like that that's out there. But like it's not, you know, I don't think, we didn't think it was emblematic of a huge credit cycle. The sovereign situation, that might be a bigger deal. Do town. We think. I mean, like companies go bankrupt and countries can go bankrupt too.

You know, if we're watching France pretty closely, again, we're always bottoms up. You know, we're not macro folks, I would say. We have to be aware of the macro because it impacts the stuff that we're dealing with. And, you know, French government bond yields have blown out. I think the market knows that because it's on the euro, it can't print money like we can to inflate their way out of the problem. And so their only recourse if they end up having too much debt is just to default. And you had some politicians kind of insinuating that they would be interested in doing that.

And that can cause people that would really get a little freaked out. And, you know, it wouldn't probably cause a currency crisis because they're on the euro, but it could cause some kind of a cascading sovereign debt situation. And that's also compounded by the fact I think that there's a lot of supply, a lot of credit supply right now. A lot of countries are issuing a lot of bonds because they're running deficits, most of them. And then also with AI, you've got, you know, hundreds of billions of dollars of the bonds coming out of corporates and loans that are attractive yielding with, you know, great corporate sponsors. And, and so I think there is a, there is a risk to bonds go lower because there's a lot of competition right now for dollars

in credit world, but we're not, we're not, so yields, yields higher. Yeah, bonds lower yields higher. But we're not seeing that so much in like a typical credit cycle where you have, you know, companies truly running out of money and not being able to tap the corporate, the markets yet. their costs of debt is going through the roof. There's no question, but they're still able to finance. They're still able to find financing generally for maturities and for, you know, general corporate purposes. And so they're able to kick the can, I think.

And that, you know, again, it's not a big piece of your model of like, hey, if the yields are above X, we don't want to touch any balance sheets below Y or something like that. Generally not. We try and think of them all independently. Yeah, yeah. You know, and, you know, I don't want to date you, but we've been around long enough to remember sovereign, you know, U.S. corporate, you know, sorry, U.S. government bonds at these levels. You know, this was kind of a normal level, historically speaking. Yeah, exactly. That is. I was just talking with some about that the other day, like what, like everyone's crazy. They just are like, why aren't rates at below 2%? Like, well, that was the abnormal part. That was weird. That was weird. That was kind of normal. And it's healthy. Like, if government bonds yield 7%,

Like, that's a great thing for a lot of retired people and a lot of, you know, I hope it doesn't get there. But that's like just competition for returning capital markets, you know, assuming that it's not like a huge crisis, which maybe will be. That'll bring the old-fashioned hedge funds back. Hey, we got to beat 7%. Let's go. We got to bring our vol off 5% in order to beat 7% return. And how did you become a credit guy? So if you were just in school, school, school, and then right to this?

Or you were- I was in corporate world. first, like, my dad was investment banker and he actually practiced investment banking every day of his life until he died. He was one of those rare people who just loves investment banking and loved markets and loved, loved his clients and just loved the sort of the, I don't know, for those those who were in the business, just the essence of financial markets. And so I was kind of assumed I was going to go into corporate finance. And when I was, I did a summer internship at Cowan, actually on the trading desk, which was really cool.

But I thought I'd go into investment banking. And he advised me instead of doing an analyst program and an investment bank to go work for a real corporation. I was like, imagine that. It's like there's these companies that exist out there in the world that don't just. I thought they were just chess pieces. No, they're actual. No, they're real. And I, and, you know, and so he said, go work one of those companies.

for a couple years. See if you can get a corporate job where you can kind of see how, how companies actually run, how they're managed. And you might end up liking it also, but if you end up going into investment banking, like you're planning, then you'll probably be better at dealing with your clients because you'll have some experience in an actual corporation. I didn't really know what that meant. Now I'm really grateful for that advice because I think if I'd spent my whole career on Wall Street, I might not have understood how real companies that, you know, that, you know, that you don't just exist to move money around, which is kind of what we do at the other day.

You got payroll and, yeah, you make a saying. Inventory and then. Exactly. What was the company, can you say? Yeah, yeah. I went to work for a company called, it was a holding company of advertising agencies and some media agencies called Young and Rubicam Inc. And it had been, it was actually really cool.

It had been private. It had founded in the 1920s. It was private and it did or had done a recap with a fund called Helman and Friedman. They're their top tier awesome sort of technology media oriented. At least they were private equity fund run out of San Francisco. And so this company was it was pretty big. They had a they had somewhere around 20,000 employees, which at the time was was a decent amount of people, 1,200 offices, 120 countries.

It was a pretty big operation. And we went public. and then we were added to the S&P 500. I went in in the management training program right after the company had gone public, ended up working for the chairman of the business. And then when we were added to the S&P 500, all of a sudden this company that no one really had heard over cared about before had to be added to a bunch of portfolios.

And so investors and analysts had questions and like some really good questions. For example, you have all these offices. Where do you guys make all your money? like which offices are the most profitable. And we just didn't know because that's not, you know, like, and so one of the, one of the things I had to do was to reach out to all the CFOs of every office, get their financials, and then create like a, and maybe we'd call it probably an operational financial model where we understood

what their revenues were and what their expenses were at an office level. All the accounts tied, obviously, but we just didn't know at that level of granularity. And what was crazy, what ended up happening, which is really interesting, is we found, A, we found a bunch of money in places that we didn't know was sort of there, which sounds weird. But like India, for example, had capital control. So you couldn't repatriate profits. You had to keep them there.

And so, but B, what we found was that the offices that we thought were making all the money that were, you know, really fancy, you know, for lack of a better term, you know, that had slick management team, awesome office space, you know, whenever you went out there, you had the best time. Put them in a lineup. That's the one you would pick. 100% you think they were crushing it. And then the ones you thought you were crushed that we thought were terrible that had dowdy offices that, you know, the guy went home and, you know, read to his kids at night.

Those places, this is obviously a little bit drawing some stereotypes, but those, the places we thought were making money, we really weren't, and places we thought we weren't making money we really were. And that, to me, that was like, it was such an eye-opening experience for me because I always assumed naively as a kid, and I'm probably not alone. in this that businesses know everything, like a public company, they know everything about their business, you know, they know, they know, you know, where, who's making money, they know who's, you know, doing what and where they need to invest. And, you know, what that showed me is you have

some really smart people running a really good business that's done really well and been around for a long time. And they don't know that stuff. And they have the same bias of what we didn't know the word, I didn't know the word bias back then, but they have the same sort of like misconceptions about the reality of their business that you that a normal person would have it's like I tell some investors sometimes like what are the institutional guys do right thinking that they're just smarter because they're bigger and I'm like well mostly they're just the same as you as like a guy with 100 grand trying to find the best thing and they just have way more money and a little bit more guardrails but yeah like same thing like you don't you don't know you don't know what you don't know until you know you don't

know and so I realized that then that kind of got me interesting interested in investing and, you know, that you could actually make a difference, that research could actually make a difference because you might be able to understand the business, maybe even better than a management team did, or at least there was like an abme for finding out things that other people didn't necessarily know about a stock. You almost invented private equity with that. You know, like, hey, you guys don't know enough. I can come and help you.

I really know, I really know more about your business than you do. What's your take on private equity? see a lot of like private equity scars for lack of a better term and like some of these distressed names like they got loaded up with the debt they took them out too fast they opened too many stores right i'm thinking of pop bellies the chicago institution here yeah do you see that in real time of like is that some of what happens yeah it's it's it's funny but it depends on the sponsor you know like there's some sponsors that will will never or i wouldn't say never but that are that in our view have been very, very reticent to let a company file and they'll keep it going,

you know, particularly ones that focus on like tight industry, you know, industries that have quick cycles like oil and gas, you know, hospitality, typically, real estate, you know, where you have boom and bus cycles. Some funds will keep a business going through the bus cycle because they know booms around the corner, others will let it go and just move on to the next thing because they've taken dividends out and they've sort of realized. as much in the investment as they're going to get in their minds. And so they just rule. And so we do definitely when we're investing in a sponsor back,

because a lot of these sponsor back businesses also have publicly traded debt. So the company's private, but the debt is public. And if we're investing in those businesses, we're definitely aware of who the sponsor is, where the business sits in the life cycle of the fund that it's in, which managing partners running at, you know, what's their track record, what's like how they dealt with, capital market with bondholders in the past and those sorts of things that I think can give you

a decent insight and what's going on. But we have seen our fair share of businesses that get hollowed out. But I'd say that's kind of the minority. We've seen some terrible businesses that work businesses to begin with that go bust. And we've also seen some ones that have a portion of the equity public and a portion of equity private that do really well because the sponsor is actually They're really good. So I think it sort of depends. But yes, I mean, there is certainly, and, you know, gosh, there was one, I definitely won't name any names of the sponsor.

It's all public. So anyone who wants to. Darn it. Come on. I want to be like, I will not deal with these three guys. This one company, it was a telecom merger. They merged. So they took over like the third tier telecom wireless telecom business in Greece and then proceeded to

dividend themselves out like all the money. and then left a shell that was totally worthless. And in discovery, they found the name, you know, when guys do deals and gals, they come up with names for the deals. It's kind of cute, you know, like before it gets announced. They had Project Helen and Project Troy. I was about to say, was it Project Trojan horse? 100%. And so this was like an egregious situation that, you know, was probably still being litigated 10 years later.

We were out very quickly. But, you know, so, yeah, you'll see that stuff. But, you know, it's a little more nuanced, I would say, probably generally. Sorry about pot bellies. Yeah, I mean, it'll be back. It'll just restructure. That's a, people forget that bankruptcy isn't like a death sentence. You know, it's a very healthy process.

I still go. I'm going to ask you about one name, Fandul, whatever they're called Flutter Entertainment, which has got hammered because of prediction. market stuff and they were just old school betting. Yeah. That was one of my biggest holdings that had been going up like crazy and then I am not a professional single name stock investors.

So I missed all that news and it got basically down 70%. Like is that something you would look at or that? It's definitely something that would be on our radar for sure. And I'm actually intrigued by that one too. Like, because there's a regulatory angle. There are a bunch of different things you kind of need to handicap to use a betting term to really understand if it's a good business going. forward and you know obviously those guys invested a lot in in effectuating regulation that

you know allowed them to be licensed to operate in all these states and then here you have this prediction market business that comes out that doesn't for whatever reason have to conform to those same regulations and so there's a like there's this term we use an academic world called non-market strategy where businesses compete not only in their businesses but also like in their ability to effectuate regulations. And so, you know, it seems, it does seem, though, unfair, especially since the states, if I want to, like, think about the benefits of gambling operating in a state is obviously the state's budgets, you know, benefit immensely from gambling tax revenues. Yes, some of the residents of those places end up with gambling addiction, but it's not,

the rates aren't, you know, it's not that prevalent. It happens. It's not that prevalent. It might be, somewhat preventable to a certain degree and certainness those people can be helped, but the state budgets that really education and other things that rely on, gambling tax revenues that are getting sort of hollowed out by the prediction markets moving into bed. And now in Illinois here,

they just added like a 50 cent per bet fee, which is on the normal sports, but not on prediction market. So like then to your point, that's going to cause this friction where the state's like, no, we want, we're going with the one that gives us the revenue.

pays us the money. And so I think there are various lawsuits going on at some point that'll be adjudicated in the courts. And I can't imagine it's possible. And I haven't done a lot of work on it. So don't, you know, listeners out there don't bet on this. Sorry, I keep on dropping the puns. But, you know, it's, it seems, it seems highly improbable that, that a federal court would not see the merits of state regulation for betting, given the tax revenue issue being local and not federal. obviously there's other federal taxes that are collected too but the state taxes are really important to those state budgets if someone's figured out of a way certain navigate that doesn't seem fair yeah and so maybe that that ends getting so long story long phandal's super interesting i met some

of the managers senior management team over there actually just because they've i teach business ethics at darden now is the first year course and we've had those folks come visit us a few times they because they've done a pretty good job in terms of the addiction side of the bit of of gambling and it's a good managing team do you ever start the class of i'd be like wait there's business ethics i thought that left like 100% to 10 years ago that's still a thing 100% it's it's it's the shortest class you'll ever take the but then say you had you're like i love this bando but you could just place that trade or you go in front of a committee like what's it look like in internally when you want to put something up. If one of us has an idea, like, let's say I'm interested in Fandle, I'll put together like a very short form, like a one-pageer. It's like for us, the analogy that we use, if you think about like buying art, like the market for art,

you can buy art at a place like Sotheby's or Christie's, you know, one of those big auction houses. And, you know, it's a vetted piece of art, the provenance of where it's been before and its life is known. And you sort of know who the other bidders are, especially when you're buying it and you see their hands. go up, but there's people on the phone, you kind of know who they might be. And you end up paying what should be like a fair market price. That's how I would sort of characterize,

in this analogy, characterize the broader markets. And it's, you know, in, to extend the analogy for art, you know, we're kind of shopping for art in a junk store, you know, or like the roadside antique store where, you know, who knows why something ended up there, its pro bonance is definitely not known. But you've got a chance at finding something that's like, Again, Tommy will kill me, but mispriced, like fundamentally mispriced. And, you know, you might find a declaration of a dependence, or you might find some famous painter, you know, painting that someone for 10 bucks. But in order to find those things, you have to look through a lot.

And so we've designed the way we've designed a research process is to allow us to really see a lot as many ideas as possible. And so the first phase is this literally, we want to invest as little time as possible until we think that something actually has promise. We use this very technical term called if there's a there, And so the first phase is you do this one-page thing, I'll take it to the guys. I'll take it to Tommy first, say, what do you think about this? Kind of interesting.

Then we'll bring it to the group, say, here's why I'm thinking about this. Here's why Fandul is distressed. Here's what it would take to turn around. Here are some catalysts on the horizon. We'll bat it around. And if we think it's worth more time, then we'll start to put more time into it. But we always do it in like little iterative steps. So we'll know exactly.

Go research this facet of it. and let's get back together. We get back together, go research this facet of it, and get back together. That way we can keep, you know, five or six ideas. We're going to look at as many ideas as possible. We can keep a lot of moving at the same time. Anyway, so that's how it would start. And I would say, you know, here are the issues.

Here's the business. Here's the stock price. Here's its capital structure. It's not going bankrupt. It's still profitable. I assume I have a hidden assets. Exactly. He's an asset.

And there's this regulatory component to it. And one of the, you know, my behavioral angle comes in where we think about these stakeholders. You know, if I was going to think about Fandul, you've got the customers, you've got the states, the regulators, and all these folks have a stake in the outcome of this business. And, you know, depending on how Fandul's dealt with, I think Fandul has a really good record of dealing with the regulatory bodies and their states where they operate. I think they're generally well regarded by those folks. And, you know, there is, I would spend more time, obviously trying to get hard evidence for that. That's my general assumption. Anyway, so let's say I did a bunch

research and found that to be the case, then I'd have a pretty strong belief that when push comes a shove and this thing gets this regulation or this litigation, rather, gets to the federal courts that it's probably going to go in their direction, you know, because the, yeah, the other way, if you, if you don't have any more room, like you have these four new ideas that are all great, but the portfolio is already full, then something go out for something to come in? It can. It definitely can. We're always looking for, we're always looking to improve. of the portfolio. So I love all my babies, but looking at you guys. None of you guys are safe. I love my children. You could all be replaced tomorrow if we find something better. So we're always

trying to find something better. If you're tired listener, you can hang up now, but I'm going to go into AI now because you sound like you would know a good bit about this. So A, are you using it in that research process? That seems like you could do 10, 20, 30, 50x more ideas with it. 100% 100% And B are you seeing like I've

heard me on the podcast saying I think this is going to be recessionary and a lot of these companies are going to have trouble being replaced

which we're starting to see some of that happen with software like is that part of your thesis or that's part on the board of like hey we got to worry about this piece too

yeah I worry about it I worry about it all the time and it's like a little bit of worry because we do own some AI related infrastructure sure. We own applied digital, which we've owned since it was like a $2 stock and was an almost

bankrupt Bitcoin miner. I think it's a phenomenal business. Great management team, well positioned. We own some inodata and one or two other smaller things. But, you know, that, but the short thesis is really interesting because, I mean, there's two sides to it. There's either going to be this, like, enormous productivity game, which could be really good for markets. I think you kind of got, you've gotten that listeners. If you, are avid listeners to the show, you've probably heard this before because Jeff's said something similar. There, there's going to be. this we're possibly thing where earnings growth is through the roof, but that, you know, employment goes up. And at some point that obviously would catch up with earnings because people can't

buy as much stuff because they have jobs and that could create a recession. I think my hope, so we have to watch for that. And that we can just see in the fundamentals without like speculating too much. Like if if we see unemployment tick up, there was some stuff this weekend in, I think in Bloomberg, about banks getting ready to fire a bunch of people because of AI. You hear stuff anecdotally. I'm sure every company is going to blame AI for firing people just because they want, you know, because they just want to fire people. Well, and it helps them justify their spend on it too, right?

100%. Yeah, and they sound smart. You know, oh, wow, they're AI. I think my, and, you know, so it's hard to predict what could happen. I think you've done a really good job of articulating the recession scenario. The only, like, there is a bullcase scenario that's, I think, a little bit different from just the productivity game piece. And that's that, you know, companies really do compete for talent. And, you know, there's an element of, you know, and also they compete for customers on things other than price.

You know, like a brand equity can be one way to think about that or, you know, a sense of purpose, you know, the company's values. And, you know, companies, it might be that companies, the company A, decide. it wants to do like the same amount of output with fewer people. And so it becomes much more operationally competitive. And company B wants to grow its output with the same number of people. So company A fires a bunch of people and can do the same amount of work. Company B decides it really wants to grow the business using AI and not fire people. So have people actually be more productive and lever them to make the business itself more productive.

That is awesome. The flip side is a lot easier, obviously, to cut costs than it is to grow revenues in most industries. So there might be like a little bit of disconnection and timing. But I think those businesses that have that approach are probably more likely to be able to recruit and retain good talent, assuming that humans are still involved. Right. And maybe one day the AIs will want to work there too. I thought you were going to go with that people have to compete for talent.

So that puts a natural like cap on what they can do. And so you'll have a lot of smaller companies that can grow tremendously because they don't have to compete for the talent anymore. Yeah. They can outsource the talent to the AI. I think that could be great. And then the big businesses, like, and, you know, the small businesses do employ a lot of people. Like, if I think most people work for small businesses in the U.S. at least. And if the hardware store that you work for all of a sudden becomes much more productive, that's probably good for you.

I'm a little bit worried about the sort of the, quote, white collar jobs that, that, could be at risk. Accounting, legal. Yeah. Yeah. And investment bankers and, you know, people that are. Analyst. Yeah, analysts.

Exactly. Analysts. Hopefully not portfolio managers. But, you know, that makes me a little bit nervous. And that's probably, don't you think that's kind of likely? And then those folks will, they're smart. They'll figure something out. But you could see definitely a recession before there's the growth phase.

Yeah. Right. Or if they're just, their spending is curved by any. Yeah. By some. next that'll have a multiplier effect down lower. Especially since they are big taxpayers too. You could have government revenue issues.

You know, the government ultimately could make it illegal to fire someone because of AI. That could be one thing that they deal. It's like if you were going to draw up the perfect scenario, it'd be like, let's go after the biggest W2 earners in the country. It's like kind of what it's doing. Like, what? No, that doesn't sound like a good idea. And then lastly, we'll finish up, like, where does that fit in with your business? this ethics class. Like, what are the students asking about this? What are you trying to talk about

it? Like, does the AI need ethics? Does it have it? It's a really good question. You know, it's, we, I mean, there are two sides. One is like, what is, what are the ethics of AI, you know, in terms of like, what is it, what is it, what is it, what is it, what is it, what is it, in an academic setting, obviously, it's different question than in a business, you know, what's, you know, you know, should you represent your work as your work when it's been generated by an AI model, all this sorts of questions that are kind of interesting. You know, if, you know, how should you manage your business, you know, given the ability to fire people and remain productive, you know, should you be that kind of a company? Is that the kind of business you want to be?

Those sorts of questions are interesting. And then, yeah, what are the ethics of AI, I think, is, you know, and it is a massive, unanswered question. And, you know, I've heard people having debates about do, do the models have rights? Like, do we have to think about these agencies, as sort of like people. I'm not sure I go all the way there, except for, hey, my, I love you, my bots, I love them. I don't want them to come after me,

in case there's singularity or whatever they call it. But no, I think those kinds of questions. If they read this in the future, they're like, no. Yeah. Adrian said he loved his bots. You guys get rights. Exactly. This transcript will save me.

You know, it's, it's really complicated. And then, you know, if they have ethics, whose ethics are you going to give them? I mean, obviously, ethics is a very deep, they're all different schools of thought on ethics in terms of what's the right way to make a decision. Is it some kind of utilitarian framework that, you know, kind of maximizes

the benefit of the grace of people? Is it some kind of a consequentialist thing where you have a bunch of rules, or is it, you know, the ethics of care where, you know, you kind of maximize just general welfare and care for people? You know, is there a virtue angle to it? And then is that the government's job

to put all those in place or each of these companies, which is the big matzabal sitting out there. Yeah. Yeah. And then like there's another risk, I think, of, you know, things like effective altruism, which, you know, the surface seems like a really good idea. But it's also a little bit dangerous because, you know,

what someone views is like the right way for the world to operate. Might be great, but the rest of us have to live in that world also. It might not be right for everybody. And so you can think, oh, this business is so. good. They're operating with, you know, with the goal of doing X, Y, or Z for society. But that might not be good for society. It might not be good for me or you. You just don't know. Right, which I could just be like a, the model could be like, well, I'm supposed to optimize for society and I'm using too much water in this data plant. So I'm shutting myself down. I'm shutting myself down.

Totally. I've concluded I'm not good for society. You know, if they start to realize that lies actually work really well, you know, they can, you know, they can shortcut and not actually do the work. not burn as many, you know, tokens by just lying to somebody or making something up. And my manager has no idea that I'm just making this stuff up. I'm not burning any tokens. Anyway, we're kind of getting off topic. No, but I knew you'd have some good thoughts. Appreciate that.

But yeah, and the students is crazy. Like, A, are they going to have any jobs? And then B, how are they going to use it and put it out there? And that's, I mean, so far, they're still having jobs. and how they're going to use it as still being written, you know, and it's, it's, I think it's going to be super interesting. We started last year for the first time allowing students to submit an AI generated work, but I had to see all their prompts.

And at first I was like, this is so dumb. They're not doing any work. But then, like, actually the prompts tell me if the person actually understands the ideas or it doesn't. Right, because I'll be like, no, that's not quite right. Like, you need to be more on this angle or whatnot. Totally. And the initial prompts. It's twice the work for you, right?

Then you've got to read the thing and the prompts. I kind of just end up reading the prompts because the prompts are basically like a real well-written outline and also when the person's critiquing a response I can like oh wow they actually really understand this on a pretty deep level like a deeper level that whatever AI model they used really kind of understood or did the AI model was missing the point and this person actually understood it and because writing an essay is awesome I love to write but on the other hand like

is that the most productive use of someone's time or is like once you understand something and you've had it outlined is that should that be sufficient kind of going back and forth on that. It's really hard for me because I love, I love academic research and I love writing, but I do also see that there's like this parsimony of the prompt, which is kind of an interesting way to convey ideas and might end up being the only thing

that anyone really needs to do going forward. Parsimony of the prompt. Yeah, like it's going to be a boat name. That's good. Yeah. For you and I sail away when the bots are coming after us. I love it. All right, Adrian, give me your best three restaurants

in Charlottesville, we'll leave it there. Okay. O'Card Social. O'Card Social. I'm not going to remember any of the ones I've actually been too soon. Not in any order. Maggie's Midtown and Riverside Lunch. There's a, probably three.

If you haven't hit any of those, I highly recommend it next time of your town. The scene there is crazy. You're like having this great, great food in this small college town. You're like, how did this happen? That's a research project. That's a history project. Like, why is there such good food scene there in Charlottesville? It's bananas.

There's another place called Birdhouse. If you like roast chicken, that place is awesome, too. It's only roast chicken, but it's really good. Only roast chicken. Love it. Highly recommend it. All right, Adrian, we'll show everyone where to get a hold of you in the show notes. Thanks so much for coming on.

Thanks for having me, Jeff. I appreciate it. Yeah, yeah. Thank you. Okay, that's it for the pod. Thanks to Adrian. Thanks to RCM. Go check out that white paper.

Thanks to Jeff Berger for producing. We'll maybe probably be back next week. If not the one after that, peace. You've been listening to The Deriviviv. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCMaltz and visit our website to read our blog or subscribe to our newsletter at RCMaltz.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments.

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