The Pomp Podcast - #1324 Sam McLemore on How To Invest Billions Of Dollars Intelligently

Episode Date: March 11, 2024

Sam McLemore is the Founder and CIO at Patient Capital Management. In this conversation, we talk about time arbitrage, volatility, 3 sources of edge, lessons from Bill Miller and other great investors, independent thinking, bitcoin, macro, technology stocks, and more.  ======================= Base is making it their mission to bring a billion people onchain. But what exactly is Base? It's an Ethereum L2 offering a seamless experience for both builders and users. With near-zero gas fees and rapid transaction speeds, Base is shaping the future of the onchain world. Base is a canvas for everyone, with hundreds of apps in the Base ecosystem, whether you're an emerging creator, a seasoned developer, or someone exploring the onchain space for the first time, Base is designed to bring your ideas to life. So, if you're looking for a platform where the future of onchain is being built daily, Base is your destination. Join in and make onchain the next online. Learn more at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠base.org⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and follow along on Twitter at @BuildOnBase to see cool things to do onchain, everyday. ======================= Introducing Espresso - the world’s most interactive portable display. They have a portable screen that is incredibly light, comes with a nice stand, and the user interface is very easy. Anyone who listens to this podcast can go to ⁠⁠⁠⁠⁠⁠⁠⁠us.espres.so/pomp⁠⁠⁠⁠⁠⁠⁠⁠. They have a brand new offer waiting for you.  ======================= Pomp writes a daily letter to over 265,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/ ======================= View 10k+ open startup jobs: ⁠⁠⁠⁠⁠⁠⁠https://dreamstartupjob.com/⁠⁠⁠⁠⁠⁠⁠ Enroll in my Crypto Academy: https://www.thecryptoacademy.io/

What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Today's episode is with Sam McLemore, founder and CIO at Patient Capital Management. Sam shares in this conversation, time arbitrage, her thoughts on volatility, the three sources of

edge, mosaic theory, how there are two speeds in this business, why Bill Miller always taught her to compare, compare, compare, how she thinks about independent thinking, emotional stability, understanding of institutional and individual actions. Then what one of the laws of markets being prices follow revisions of expectations, and much, much more. Sam is one of the great investors in public markets today. She's been doing this for a long time. She has worked with some of the greats across the finance industry, and she holds nothing back in this conversation. Sam does a fantastic job of letting us into her process and helping us explain exactly how she invests capital today. Here is my conversation with Sam McLemore. Anthony Pompliano runs Pomp

Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Today's episode is brought to you by BASE. BASE is making it their mission to bring a billion people on-chain. What exactly is BASE? It's a layer two offering a seamless experience for both builders and users. With near zero gas fees and rapid transaction speeds, BASE is shaping the future of the on-chain world. BASE is a canvas for everyone with hundreds of apps in the ecosystem,

whether you're an emerging creator, a seasoned developer, or someone exploring the on-chain space for the first time. BASE is designed to bring your ideas to life. So if you're looking for a platform where the future of on-chain is being built daily, BASE is your destination. Join in and make on-chain the next online. Learn more at base.org or follow along on Twitter at buildonbase. Again, that's at buildonbase to see cool things to do on-chain every single day. Today's episode is brought to you by Espresso, the maker of the world's thinnest portable display. Now, listen up. If you're like me, you feel like you are at a command center when you sit down at your desk. I got a gazillion tabs open and different windows for different activities.

There's my web browser, my text messages, I have Slack open, and I got a notes app. I normally work on a desktop, and it can be very, very productive. But everything falls apart the second I leave my desk. If I'm traveling, if I go to a coffee shop to do some work, or just want to work from the kitchen table, my laptop doesn't have enough screen space. I lose my command center, and my productivity falls off a cliff. It's a major problem. But this is where Espresso comes in.

They have a portable screen that is so beautiful that you'd think Steve Jobs came back from the dead to create it. The thing is incredibly light, it comes with a nice stand, and the user interface is so easy that I figured it out. How to do it in less than three minutes. If you listen to this podcast, you know that's not an easy feat. So the Espresso team and I, we became friends. I got to know them because I really liked the product. And those screens, they now want to offer them to any fan of the podcast. So we struck a little deal. Here's how it works. Anyone who listens to this podcast can go to us.espresso. Or that's too confusing. Just go click the link in the description. If you go to Espresso's website, they've got a brand new offer there sitting for you. You get

a little discount and you'll get a beautiful screen. Trust me, I use mine every day. You'll love the Espresso screen and I think it'll make you more productive. Go check them out today by clicking on the link in the description. All right, guys. Bang, bang. I've got Sam here with me. Sam, your firm is called Patient Capital Management. A lot of people talk about being patient in the market. Also, in your most recent annual letter, you talked about the money is in the waiting, the famous Warren Buffett quote. What is the obsession with patience? And why is that the thing that you're hanging your hat on and kind of putting forward into the world saying we are patient capital? Yeah, that's a great question. So I think first of all, you know, some people

have called compounding the eighth wonder of the world so the magic and if you look at the charts of warren buffett's well you know most of it was made at the very end in like the last 20 years and he's 90 something so i think it's not well understood i preach this to my kids but just the power of long periods of time and you know compounding on your capital so one i think that's the purpose of markets. That's how it can help, you know, anyone. And then secondarily, I think the market's just much more efficient on the short time horizon. So we talk about time arbitrage. Most funds are owning stocks for less than a year. You know, a lot of institutional investors are compensated based on monthly or quarterly results. So at those

kind of timescales, the market's highly efficient, it's extremely difficult to beat, there's just a lot less focus on longer time horizons, three, five, 10 years. So we think that there's a much greater opportunity for active management to add value there. And if you look at, you know, individual investors returns, there's a lot of focus on, you know, the cost of fees, you know, passive versus active, actually, the thing that hurts people the most is poor timing. So selling after things have done poorly, buying after they're up a lot. So we focus on that behavioral, you know, component as well, in terms of just trying to get people to be patient, hold on, you will go through bad times, even with great investments. So a lot of that,

conspired to deciding that the name of the firm should be patient, getting people focused on the long term has a lot of different benefits. You mentioned time arbitrage, and maybe you could unpack that a little bit of how do you think about it? And is it something that is quantifiable? Or is it something that's more kind of, you've been doing this a while, you've got intuition and kind of a feel for, hey, there's probably some mismatch here of our time horizon and maybe others in the market? Yeah, well, I think we're trying to bring science to our process wherever we can. Investing is always a mix of art and science. I think one thing that we try to do that maybe many others don't do is we're trying to quantify market expectations

over a longer time horizon. There's a lot of hedge funds out there that are looking at what does the market expect or what does consensus expect for the next quarter, for the next year? do we think the company can beat it and they're looking at expectations in that realm but there's a lot fewer that are saying you know what does this price imply for the performance of this business over the next five to ten years in terms of growth in terms of margins in terms of you know investments required and so that's where we start you know what's the market telling us and what do we need to believe to think this is you know a good investment because it's much harder to figure out what the right numbers are, you know, versus figuring out what's the market telling me? What's

my bogey? How hard does that appear? In a world today where it seems like information is even more abundant than it has ever been, the speed at which that information changes, and you can access it also kind of plays into some of this. But then there's this element of people get cute with narratives and with numbers, you know, the famous community adjusted EBITDA, I think it's maybe the most egregious example. But if you look at a lot of public companies, there's all kinds of versions, even some watered down versions of that. And so how do you think about, you know, like your access to information, the speed at which you can get it, and then also kind of gut checking, hey, this is what management is telling me, but maybe we have a different way of viewing

either the same numbers or the narrative. Yeah, I mean, whenever we're analyzing companies, we're trying to get to the true core economics of the business. And so, you know, I think free cash flow is the best, you know, indicator of what that looks like. You know, we're trying to understand investments required to grow and sustain a business. So, you know, EBITDA, especially some of these adjusted EBITDAs, I would agree with Buffett and Charlie Munger that they're more like bullshit earnings. So they're not, you know, for the most case, a true indication of the earnings potential of the business. There's a lot of real expenses that they're excluding from that. But sometimes there are, you know, one-time expenses that aren't good indicators about the future of

the business. We're trying to make adjustments for those. I think when we think about markets, you're exactly right that there's far more information out there. If you look at the market 50 years ago, there were informational advantages to be had. You know, in Buffett's early days, he could go, you know, down to the company and talk to the CFO and get information that no one LTAD, and that created an advantage for him in investing. That just really doesn't exist anymore, Reg FD and the amount of information out there. We think that there are three sources of edge that you can get in the markets. Informational, again, I just think that's virtually impossible. Again, some people have it at very short timescales in terms of these

quant funds that are trading, but we just try not to be at a competitive disadvantage there. I think where we compete is more an analytical advantage. So it's not that you don't have information others don't have, but you put it together to form a different conclusion. Classic mosaic theory. Again, I think those are really difficult to find in today's day and age because there's just so many really smart people, you know, focused on investing. So the area where we think we do have an edge and where there are enduring sources of edge are these behavioral anomalies, you know, extremes of fear and greed, hurting, you know, people's loss aversion, you know, recency bias, you know, selling things that are losers, you know, things going too far. So we tend to look for opportunities there. And that feeds into then, you know, over a longer term horizon, what are the normalized, you know, economics of the business? So let's walk through maybe one of those situations, right? There's thousands of public companies. I'm sure you guys would love to be experts in every single one of them, but it probably is impossible to be an expert in every one.

And so when you see these large kind of events occur and you're like, hey, that may be a behavioral over-rotation in greed or fear, what is the process like to go and kind of get up to speed on what's happening in the exact situation that has caused this, but also understand the fundamentals of the business and trying to realize, hey, is this just over rotation or actually is the market getting it right? And there's a reason why the price is going up significantly or down. Yeah, I mean, I think mostly it always depends. So we're often drawn to names that are down a lot because, again, we know that market prices move much more than underlying business fundamentals. Sometimes, you know, something fundamentally in a business will

attract our attention. So NVIDIA, you know, tripled its, you know, top line last year and no business that I'm aware of at that scale has ever done that before. So when you have that sort of thing going on, it makes you stop and say, what's going on here, you know, and want to try to understand it better, but also want to try to understand what the market's pricing is. So again, usually our first step is what is the market pricing in? Can we reverse engineer on a discounted cash flow basis what the market's telling us so we were doing this yesterday on uh on match.com like what does the market believe this business can grow the growth rate the sustainable growth rate of this business at what kind of margins at what kind of investment levels then you know me

and the analysts were going back and forth on what's reasonable what do we know so you know so once but but the first step is just what's the market telling us and that takes them back and forth, because there's assumptions embedded in there. But once we come to that, then we're like, well, what do we know? And what's the bogey here? And so then it starts starting to try to work through. Then we'll try to, again, so assuming once you get to that point, you might say, well, that seems reasonable. It seems pretty unlikely that there's a significant mispricing here. What would we need to believe to have significant mispricing? Okay, this is what we need to believe does that seem reasonable and and so if if the answer is yes then we just keep doing

work and then we try to figure out well what do we actually think is going to happen and the future is uncertain so we're always looking at scenarios so we're saying well this is our base case but what what happens if things really go well and what if we're completely wrong and so then what's that range looks look like because you know we want an attractive risk adjusted return to be compensated for those times when we're wrong. So, and there's a lot that goes into that process of working through all that. How much of the informational advantage that maybe a non-quant fund has is the willingness to go and just like read, you know, annual reports and the Ks and the Qs and do this work. And I know you spent a lot of time working with Bill Miller. And one of the

things that i got out of i think it was lattice work maybe was the book uh where he was sitting at the baltimore orioles games and would just bring like huge stacks of paper and in between innings they said he was just like basically nerding out reading all this this work and so like is that maybe an informational advantage that goes into this process you're talking about it's like you guys are willing to do work that maybe other people aren't or they're just using screeners or things online but not actually sitting and reading well i don't know if it's a an informational advantage. I do know that in all the most competitive endeavors, you have to be willing to put in just tons of time and effort. You know, the more time you spend,

the more likely you are to be competitive. I was just listening to a podcast on Michael Jordan and Kobe Bryant. And I'm not a big sports person. My son is very into basketball. But I was laughing at these stories about Michael Jordan and just how hard he worked and how many hours he put in and how seriously he took it and what he did to his teammates when he didn't think that they were, you know, taking it seriously enough. And certainly Bill always, I mean, I remember one of the first stories that he said was that Peter Lynch, you know, who did great at Fidelity Magellan and then retired pretty young in his forties. And he was like, there are two speeds in this business, overdrive and stop. And I think that's exactly right. You can't, you cannot compete

in the markets, the amount of information, the amount of competitiveness, how difficult it is, you just have to be at it all the time. And so I think that's kind of table stakes, if you're going to be competitive. Now, I do think, I don't think it's an informational edge, but I think doing the work of reading more 10ks, you know, having casting a wide net, trying to understand how companies are performing and how they think, that can generate ideas and it can generate insights. And Bill, one of his rules, you know, he had a lot of rules for success in business and investing, but one of them was compare, compare, compare. Because again, all investing is, is what's the best, you know, of this relative opportunity set. And so to

understand what that looks like, you need to have a really good sense of, you know, the whole landscape of what's out there. So again, I think you just have to be a voracious consumer of information and reader to do that well. You've worked with some of the investing greats. You mentioned Bill Miller, but also Michael Mossabon as well. Talk a little bit as to what did you learn from each one of them and maybe some things that you took with you in your career, but also I think about it somewhat when you have mentors or people you work with, sometimes you may learn things that you don't want to take with you as well. And so what are some of the takeaways that you've had in these experiences in your career? Yeah, that's a great

question. I mean, I was so fortunate to work with Bill for over 20 years and for Mike with Michael for many years, and they are both so impressive. And I learned, you know, so much from each one of them. I think Bill, you know, again, I joined him right out of college, and I worked with him for over 20 years. And that was, I like to say, when the job lottery, because I was just so fortunate to have that experience. And he really taught me, you know, so many things from, you know, the most basic thing on how to succeed in business, he had this, you know, set of rules, which I just shared with the team the other day, and I still think it's quite helpful for people. I think he taught me how to think in a very different way. Bill was a philosophy major. And so, you know, he did grad work in philosophy. And so he had a unique way of thinking about the world in terms of, you know, he used to I would attend these presentations with him and he had a whole bunch of great slides.

And one of them was on Ludwig Wittgenstein. It had like a triangle and, you know, it said it had a list of take as an example, the aspects of this triangle. It can be seen as a triangular hole. I have the quote here as a solid, as a geometrical drawing, as standing on its base, as hanging on its apex, as a mountain. anyways it goes on and on and on and on and his point was about epistemology like how do we know what the truth is like what you know how do we actually understand the world around us and um and so i think in markets back to your initial point it's really interesting to think about those things because you mentioned you know narratives get attached to certain things and when does that happen? And is there some underlying truth about the, you know, business? That's what we're trying to figure out is what does that look like? But the future is uncertain. So no one knows

what the future looks like. You know, so I think with Bill Buffett, one of his quotes is that what makes a great investor is, you know, independent thinking, emotional stability, and a keen understandings of the behavior of institutions and individuals. So I think, you know, I think Bill was great in all of those. And I learned a lot from him in each one. I mean, I don't think you can learn emotional stability from someone else, but you can learn the importance of it. You know, in terms of Michael, I think what, you know, Michael wrote the book on expectations investing. I fully, you know, adhere to that approach. I think that one of the only, you know, laws of markets is that stock prices follow revisions to expectations. And so, you know,

those can be revised up. You know, some people are momentum investors because those strong momentum trends drag up expectations, you know, over time. Those of us that are more contrarian and value oriented, we like to find a disconnect between the stock price and what that's implying versus the actual fundamentals of businesses. And those should converge over time. And then Michael also taught, you know, the proper analytical process for many, many things. Like how do you do a discounted cashflow? How do you analyze, you know, a merger? You know, how do you calculate return on capital? I mean, every single, you know, thing that you need to understand in this business, I think Michael has, you know, the correct answer on how to approach the topic. And he put a lot of,

he puts a lot of time and effort into thinking through these things very carefully. And so I was very fortunate to work with him and learn that. Now I'm going to, after extensive research of many things that you have said publicly, which there's not actually that much, but I've been able to sift through it all. I'm going to repeat to you things that you've said, and I would like you to expand on them. One of the first is companies can drive

significant shareholder value by sensible capital return policies. And so how do you define sensible? And then how do you evaluate whether the company actually does have those sensible policies or not? Yeah, so I think to take a step back, one of, if not the most important job

of a management team is to allocate capital. That will determine whether the company's intrinsic value increases, decreases, stays the same. And so, and a lot of CEOs get to that position without actually having had to do that. That wasn't what, you know, if they're the head of a department, they might be great at engineering or sales or whatever it was, but it wasn't capital allocation. And so, you know, we try to analyze and understand their ability to allocate capital. If you're a long-term investor, you know, they're likely to allocate the entire market capital over your time horizon. And so that's what we're trying to do.

And what we're trying to see is, are they investing in things that earn returns above the cost of capital? That will increase the value and the most attractive opportunities. Now, there's a lot of art in that assessment, and I think when I was talking about that, there's sort of a second layer here, which is we are value investors. Now, we look at intrinsic value, the present value of the future for cash flows, what I call classic value or low accounting multiples, which sometimes are a good indicator of value and sometimes not.

But that style of investing has gone through a very prolonged bear market. And the assets in that style have come down, the number of investors in that style have come down. And in my early days in the markets, usually if you identified an opportunity that was trading below its intrinsic value, eventually other investors would come along and the value gap would close. and uh you know that hasn't been the case lately and so i think that comment was about listen if there's not a mechanism within the markets for this gap to close what you need is you know companies that are returning more capital to shareholders and so if a company has a 20 free cash flow yield um and it looks quite cheap you know but it's investing it you know, it might never close that gap or take very, very long, very, very long time versus if they are going to, you know, like General Motors did, buy back 20% of the stock in the fourth quarter of last year, then, you know, you will essentially create the cash on cash returns of the business.

And so as long as the business isn't shrinking, which people are fearful General Motors will, but even the core ice part of the business is still growing, then, you know, eventually I think that that will create these like very high returns in the market. So David Einhorn has been out a lot talking about market structure changes and the depth of value investing. And he's come to the same conclusion that, you know, the importance of these sort of companies returning capital to shareholders in order, you know, as a way to realize the returns, you know, within the classic value space. I think that's what I was referring to on the capital return policies. So as you're talking about this, one of the situations that it makes me think of is back in

2020, the airlines, they needed a bailout. And if we put aside all kind of the political conversation and a lot of what I would consider is almost the noise, the reason why the airlines got met with that situation was no one was flying, right? There was government lockdowns. And so they didn't have revenue coming in. But then people went and they said, hey, look, for the last 10 to 15 years, these organizations have been returning immense amount of capital back to shareholders. They've been doing share buybacks and the stocks have performed well and kind of all the things that up until 2020 was exactly what you would want to see as a shareholder, right? You want them taking that free cash flow and kind of doing this. And so how do you think of the

balance between like saving for the rainy day versus returning shareholder capital. And that's probably the most egregious situation where basically you go from a good business to like no revenue. But it does feel like that in some way doing the quote unquote right thing for 10 years prior, then put them in a kind of a precarious position in this extreme situation. So how do you as an investor or shareholder, maybe talk with management teams about, you know, how much should you return? Or how should you be thinking about cash versus, you know, maybe that yield that you're giving back to investors? Yeah, well, I think first, we want management teams to invest in whatever has the highest return for the business. And many times, most times that is

investing in the core business. But ideally, comparing that to the return on buying back the stock, you know, dividends, paying down debt, whatever, whatever it might be M&A. So I think, and and obviously whenever we're having these conversations you never want capital to be returned that will put the business at risk so keeping the business viable safe and sound is you know at the top of the list you know that being said when some something once a century comes along um one it was unexpected right so no one ever thought that even you know i guess i guess in a pandemic uh everything would be completely shut down and so um so fortunately those companies they did get a bailout you know a bailout they did get some government funding because they are

an important national you know infrastructure would be very bad for the country if they didn't exist anymore some countries did let their airlines go i think you know how it ended up working out. I think some of them would have been fine and didn't need that. Delta Airlines, which we actually own, you know, didn't actually even raise any equity capital. And these airlines now have these loyalty programs that they were able to monetize. But I think it's a good question, you know, what level of capital, and I've talked to the airlines about this, the ones we own, do you plan on keeping for this sort of, you know, once in a very long time event? And they certainly are going to you know be more prepared in the future but but we would always say don't

do anything that risks you know risks the business um so again i i think as in most cases it it depends you know it depends but uh now it's and and just like you know the financial crisis or the pandemic now it's on the set of they're looking at it as a risk they're looking at How much liquidity do we need? What kind of capacity do we need to survive another event like that? And they haven't so far bought back stock yet. I still think they shouldn't. It will be important, but they're going to continue delevering before they get there. Yeah, it's a little bit of like a scars, psychological scars, right? I'm going through that for sure. Another thing that you said, and there was actually two quotes that I think kind of reflect each other. You said that someone traffics in facts and not ideologies. And then talking about a different person, you said that they should be commended for quote, thinking long term evidence based rather than emotion based independent. That's characteristics of a sound process. And so what makes a logical sound thinker and about this process when you're evaluating, whether it's someone you're hiring, whether it's a management team that you're thinking about, you know, backing, how do you just think about logical sound processes and evaluating whether someone is able to follow that or not? Yeah, that's a great question. There's not an easy answer to it. But I think, you know, one, we're always trying to understand how does someone think, right? Like, how are they making decisions? What are their inputs? And do those correspond to what we can independently verify? And so I think the areas where it's done poorly might be easier to identify. Right. You can look at many politicians and and I see headlines every day of stuff that's being said that I'm like, that is not actually, you know, how the world works.

And, you know, vilifying companies or, you know, returns or not letting any mergers go through. I'm like, okay, like this just is not, but that's an ideology that they have. And so they're, you know, acting based on that. And then I think within investing, you know, there's plenty of examples and we all do it to some degree. So we try to be aware of it and not do it. But it's a highly emotional, you know, experience of making and losing money. And, you know, people let that, you know, drive their investment decision making. And that's a very, very poor way to make investment decision making.

I mean, many people are, you know, I actually when I was younger, I was probably more critical about this. Now, I actually think most people are are rational. and usually when they're selling when things are down it's because the fundamentals and the prices are moving together and so things look scary and bad and so there are there are quote good reasons maybe to sell except that you know if you step back and look at a wider sample set like you shouldn't do that you should buy after after things are down and so michael Morrison talked a lot about base rates. So if we're, you know, the inside view versus the outside

view, you might think, oh, I have a loss in the security and I'm going to sell it. But if you can step back and say, what if we take a whole bunch of experiences of when stocks do this, what's most likely to happen? That will help, you know, I think get you to a better answer oftentimes. As part of this analysis in these situations, obviously you can look at the company, you can do the best you can to evaluate the thought process of the management team, maybe the industry, the specific products, et cetera. But there's always kind of the macro cloud that is hanging over. And you mentioned Peter Lynch earlier. One of my favorite quotes is as somebody who pays attention a lot to macro, I think Peter one time said,

if you spend 15 minutes on macro, you spent 13 minutes too long, right? I love that quote. Yeah. But we live in a world where macro definitely matters, especially from the Fed, Right. And obviously interest rate decisions and many sometimes just comments that they make, not even decisions, but just commentary. And you tweeted once and you said that you're referencing the book, The Fed Unbound. And you said the Fed seems to misunderstand its mandate, which is about money supply growth, not inflation or employment, which are indirect results. And so can you elaborate a little bit on maybe the Fed and that comment specifically in terms of how you view their role as part of your process of allocating capital? Yeah, I mean, I think one, there's, it's 100% matters.

The macro absolutely matters. That doesn't mean you can forecast it with any accuracy or bake it into a process in a way that's additive. And so, you know, we try to distinguish between those things and we know we'll have cycles and we know we'll have recession and we'll know we'll have tightening and easing. And so the question is, can you use those things as an additive, you know, piece of your process to make better investment decisions. And there's not a lot of evidence you can. And so, you know, I think the past couple of years is a great example of that. How many people

did we hear, you know, getting very bullish in 2020, 2021, only to get very bearish as the Fed, you know, increased rates and people said, we'll never have a soft landing. It's never happened before. Lo and behold, it looks like it's happening. That's what all the evidence suggests. so the market is up a lot. So again, I think we definitely want to understand the environment we're operating in. We want to understand the risks. But the next step of trying to forecast or base our investment decisions on some view about how things will evolve, I've just seen so many areas where that goes wrong. I mean, one of the easiest rules was rates go up, housing, builders you know get hurt okay well that didn't happen so there's just so many times where these

you know these rules go wrong so on that particular quote you mentioned by Lev Manan I can't take any credit like that is his line of thinking I thought it was a really interesting book especially when I was reading it you know in the context of what's you know been going on and and his point and he's at Columbia Law School and so he has lots of different ideas about you know, monetary policy, the Fed's job, you know, how changes we should make to, you know, the regulatory structure. But, you know, his view is that, you know, the Fed's job of managing money supply, that money supply is like a critical infrastructure, like the electricity grid. And it's essential that we get it right. And because if we don't, it can cause huge problems. And so

he said, the job of the Fed is really to manage that money supply growth, and in an optimal way. And if it's managed in an optimal way, that leads to full employment, and, you know, stable prices and moderate long term interest rates. And he also says, it's a very blunt tool. It's all the Fed has, well, they have some other, you know, things that they can do, but that's their main tool. And he said, you know, he has said, you know, we need to manage the shadow baking system, which is not within the purview of regulators. But it's essential because we don't want the whole system melting down. And so the Fed's blunt tool to do this is the money supply. And so it leads to them doing things like, you know, growing the money supply way too much and leading to inflation.

But that's not the optimal structure of the system. And so, again, we just try to understand what's going on to follow smart people that helps us understand, you know, what are the risks? What do we think, you know, is likely to happen? Again, who knows if the Fed's going to increase rate or sorry, decrease rates three times this year, four times, you know, was six times at the beginning of the year. And honestly, I don't think it matters all that much where we fall, you know, within that regime. Obviously, if we have a recession, that will matter. So you're talking about human-led monetary policy, which is nearly impossible to predict. Even the people inside the Fed, I don't think, could predict what they're going to do yet.

The asset management firm that you spun out of, there's a couple of people there who are pretty excited about Bitcoin, which is kind of like a decentralized, almost automated monetary policy to a degree. How do you view Bitcoin as an asset? And maybe even whether you're excited about it or not, are there lessons that maybe we can take from these decentralized systems and apply back or vice versa? Are there things that we can learn from the Fed and maybe apply to Bitcoin? Well, first of all, unfortunately, I was late and the internal skeptic in my old firm, and I kicked myself every day for that because I missed

out on, you know, Bill was buying it, you know, it was a couple hundred dollars a coin. And I was like, oh, here's another thing. And it was like, it's going to become a currency. And I didn't see the evidence for that yet and and you know bill likes to say that the we get asked all the time what's the difference between us and he says um my threshold of information that i need is higher and that is true i do need to analyze more information but he was exactly right that the amount you could make if you were right was much greater than what you could lose so i should have invested based on that and then in 2017 it ran up you know and bill had owned a lot of it and he owned it in some accounts and it got to 3,000 or 4,000. And that was when Jamie Dimon and

Buffett were coming out with all these critical things. And I was like, Bill, maybe you should cut this back a little. And I was completely wrong. So it went to 20,000 and then it did crash, but it went back to 3,000 or 4,000. So I got it completely wrong because that's where I was telling him to cut it back. But by 2020, Bill had been in the space for a long time and by that time there's actually some good academic articles that uh compared it to gold this idea of digital gold and that made a lot of sense to me again that was out there earlier in like 2016 2017 but i thought there's one gold and it's basically a psychological belief state asset so it depends on the acceptance of many many people uh so i was like the odds of

that happening again are low. But by 2020, Bill was on a call virtually every week with a lot of really smart institutions, institutional investors who wanted to get up to speed. The institutional adoption was clearly growing. And there was quantitative support for it being similar to gold, although much earlier in its life cycle. And I thought that there was a risk of inflation and it could serve as a good hedge. So I bought it in some portfolios I managed at that time. I still own it. I like it. I mean, I think what makes Bill the most bullish on it is he said, we have a fixed amount of supply. There has never in the history of the world been an asset where the supply does not vary with the price. So usually prices go up and it creates

more supply. And that's not the case here. And so he's made the point, if every millionaire wanted to Bitcoin, they couldn't have one, you know, so there would be competition for price. So those dynamics are, you know, I think what gets him so excited. And I still think, you know, thinking of Bitcoin as digital gold still makes the most sense to me. And gold has, you know, 14 trillion, and you went over some of these numbers the other day on CNBC, but a 14 trillion approximate market cap versus just over one for Bitcoin. So if it, you know, continues along that path, that would imply, you know, a price between $600,000 and $700,000 a coin, which is, you know, a lot higher, like 10 times where we are today.

If we continue down kind of this technology thread, one of the other things I think that is back uh in the early 2000s if i understand correctly um bill and others that were in the value investor camp there's a lot of controversy especially in the late 90s maybe even uh where the value investors who started to buy technology stocks were almost excommunicated from the value investor camp it was like you're not a real value investor uh if we then fast forward to the 2010s buffett was very much kind of lagging on tech and people were you know to some degree giving him a hard time about it. He now owns Apple stock. It's a huge percentage of the portfolio. And so how do you view technology stocks from the value lens? Like, you know, some of these people who folks

would look at and say they are some of the world-class value investors, they're now buying the tech stocks, but is there a different way to look at it? Or is it just, hey, if we think it's worth less than, you know, or the price is lower than what we think it's worth, then like that fits the value investor framework and we can go ahead and buy it. Yeah, well, you're exactly right. In the late 90s and early 2000s that's when I I joined Bill at the end of that period and he you know was in some you know speaking at some events at you know Columbia Business School with the value investing program there and you know he had invested in Amazon and like there was a confrontation and then people told him that you were not a value investor that is not a value

investment and Bill's point and this was one of the things that struck me the most because when I interviewed, you know, we bonded over one of the stocks that turned out to be one of our biggest mistakes, Kodak. It was down a lot. It was generating all this free cash flow. So I was like a classic value contrarian, you know, type of person. And it was actually transformational to me to realize some of the best values actually are the stocks that look expensive and that aren't cheap on the metrics. But if they can grow and compound value over very long periods of time, that's what creates, you know, the most investment, attractive investment opportunities. So, you know, the value of any investment is the present value of the future

for cash flows. That's what we're trying to assess. And obviously for Amazon and the early 2000s, it was a great value, one of the best values that ever existed in the history of the world, but it was very controversial. And, you know, people did not believe a true value investor would invest in those. Now, fast forward to today, and many of those businesses, you know, Alphabet, Meta, you know, Amazon, are recognized, Microsoft, to be the best businesses in the history of the world. They generate tons of free cash flow, huge free cash flow margins, low capital requirements. You know, they've had huge growth and continue to grow at very attractive rates and they've dominated and led the market. And you're right. We track some growth

investors. We track some value investors. I think they all own some of these companies. And if you didn't, you were probably put out of business because they've just led the market so much. So again, I think with all companies, what we're trying to understand is what does that future cash generation look like? What are the competitive advantages of the company? You know, what is its growth potential? What is the underlying, you know, business model and profit margins? How defensible and sustainable is that? And again, there's a lot that goes into doing that. But the basic process is the same. And I think Warren Buffett, you know, he's always had a tighter definition around his circle of competence. And he said technology was outside of it.

You know, Bill recognized early on, partly from his work with the Santa Fe Institute, that while technologies change rapidly, the market shares of technology companies actually don't. And they've been some of the biggest monopolies. If you look at AT&T, IBM, Microsoft, now all of these big tech companies, they're natural monopolies in many states. So those are very attractive investment characteristics. And I think how we have always thought about it is we will always want to be expanding our circle of competence. And that's like the growth mindset, which is different from how people thought 50 years ago. You can always learn new things and new areas. And certainly technology is something you want to learn about.

It's extremely important. It's only gotten more important to the economy. You in your recent annual letter said patient capital management are long term contrarian value investors. how do you deal psychologically when you have confidence you've done the work you're putting on a position and i am sure whether it is public scrutiny maybe even internal you know kind of pushback of somebody say hey are you sure uh and then maybe even your investors saying what are you doing how do you handle the confidence that you've built up by doing the work versus the natural human psychology of like hey why do these people disagree with me and like am i actually

sure in what i'm doing yeah well i think one so we always think of two pieces of the puzzle the fundamentals of businesses those will determine the intrinsic values and then there's the expectations of the market and and prices and there's a lot that goes into both pieces of that and we try to again analyze both separately so i think it's it's easier if the fundamentals are agreeing with you to maintain your conviction, convince other people. The challenge is they move together in a lot of ways. And there's natural cycles and variability in the fundamentals of businesses. Unfortunately, it's not linear. It's not a straight line extrapolation ever. And so there's a lot of art in, again, figuring out what normalized is. And Warren Buffett talks

about that a lot. And he talks about, you know, he's talked about a number of times, including his most recent letter, how he got that wrong in some cases. So I think there's a lot of art involved in what that looks like, but that's where we focus. And again, when I see disconnects, when expectations, which you don't see it very often where fundamentals are great and expectations are low. I saw it in travel companies a few, a couple of years ago when travel was doing great. And again, because of the legacy of the pandemic, the stocks were really not. And that created a great opportunity. I saw that with home builders in 2011, where housing was just starting to take off and

like the stocks were at half their financial crisis levels. Usually that only happens after a really terrible period of performance where people are still anchored on, you know, the trauma of what just happened. And so normally you don't see that disconnect. Those make me really excited. Normally, they're kind of moving together and there's some judgment involved on, you know, is the weakness in fundamentals or the disappointment in fundamentals indicative of a longer term problem or not? And so I think that's where a lot of the debate comes in and that's where we want to spend a lot of our time. And again, we're just trying to assess, you know, the differences and we want a big margin of safety.

So we want expectations that are materially different so that we're like, even if we're wrong on this, you know, we have that big margin of safety built in. We've been talking about evaluating technology companies and maybe what the market expectations are, but also technology can be a tool in your toolbox. And so how do you think about your investment process changing? Big data, AI, plenty of other kind of innovative technologies, many that have been promised are going to help in the investment process or change the conclusions you may come to or give you access to new information. is that coming to fruition? Are you guys using some of these technologies? And like, what are the changes to the investment process when you use the technology yourself as a tool? Yeah, I think it's a great question. I think we're really, really early in this. And so I don't think we have great answers yet on how this will evolve. I mean, I think it's probably,

you know, the investors who are most far ahead here in terms of utilizing it are the ones who are operating on very short time scales and looking at, you know, really minute market price movements and, you know, can they get any edge there? I think at the longer, you know, over a longer time horizon, it's, you know, there's less available right now, but I think that there's going to be, you know, I'm all over the team on making sure that we're looking at any tools, you know, using anything. I think we're using it more, if you look at ChatGPT or Copilot, not squarely in the investment realm, but for some of our marketing, helping draft things really quickly.

It's really a great efficiency. But I think that will move over. So one of our first steps in the process of analyzing a company is we have a quick look. And that pulls together a lot of the most important data that we think is indicative of the likelihood that the stock will work. So insider buying, returns on capital relative to cost of capital, you know, does management, are they incentivized properly to, you know, grow the value of the business, free cash flow yields, things that have been correlated with outperformance. So right now, it's a manual process of pulling it together. I am sure in pretty short order, we're going to be able to use technology to automate some of this using all of our different tools. And then again, that's a huge productivity boost, you know, once

we get there, because then we could run these things on many, many more companies than we're able to, you know, in a manual way with a small team. And so I just think we need to, you know, be all over making sure we're on top of these tools and taking advantage of them. But again, I think we're very, very early in that process now. That makes sense. When you play video games, especially sports video games, sometimes in the game at first, they let you design the players. And so you can pick how tall they are, how fast they are, how strong they are, all these, you know, kind of things of like create the perfect athlete. If you had that ability to create kind of the perfect investor, what are some of the qualities or things that you would look at in

terms of, you know, the essentials? When you're hiring an investor for your team, what are you looking for that you're like, they got to have this in order to be successful in this game? That's a really good question. So again, I think there's lots of ways to be, there's lots of different ways to be a great investor. So, you know, I think I will stick to in our firm, you know, what would, because again, someone can be a great momentum investor. That's not what we do, you know, so they would not be successful in our firm if that's how they operated. But I think one And, you know, like the key aspects of how we think about the world, you know, we tend to be focused on this behavioral angle. So we're looking for areas where the market's gone to extremes.

So there's a there's a contrarian element to that. We are value investors. So we want to understand the intrinsic value of the business and how, you know, how that compares to market expectations. so again independent thinking you know because if someone's just going to want to assume the view of the crowd and all the research and everything everyone else is thinking out there then that's going to lead to a conventional view and not a differentiated view so we do need and again most people think like other people that's what defines you know convention and there's a good reason for that you know there's a great reason for that that has kept us safe for you know many

years, but we want to think, you know, independently. We don't want to be emotional. I think of voracious appetite for reading and curiosity, you know, a high level of competitiveness and ambition, you know, something that's going to drive you to do the work that you need to do, you know, a high desire to make money. I mean, at the end of the day, that's the objective we want to make money and so all the process is designed to allow us to do that but you need someone highly driven and motivated you know to do that and who really wants to spend you know their time that way um so and and probably not too overcome you know not overconfident i mean that is that can be a big impediment if because again i i'm kind of of the paranoid camp of like

you never know what you don't know. And you need to, you know, be all over, you know, making sure all these smart people don't have an edge on you. And so, you know, a lot of smart people who are, you know, quite accomplished think I've got this, like, I've got this, I know what I'm doing. And so, so I think you're making sure you're not too overconfident. I have a ton of books behind my head for those that are not watching this, just listening. you also have a number of books behind your head on your bookshelf. What are two or three of your favorite investing books? Or maybe when you hire people, you give it to them, or maybe even your kids, like you got to read these books in order to kind of get up to speed.

My kids aren't quite old enough yet to, to take my recommendation. My oldest is 12. I could actually start with her, but so I think, you know, I think there are some great ones out there. One like analysts, Warren Buffett's annual letters, you know, making sure, I mean, it's such a great education and he's, he's such a great writer. He's such a great thinker. So understanding business value creation, um, is just so essential. Uh, you know, one that I've read a lot, it was at the top of Bill's list of books is reminiscences of a stock operator. So that's more about sort of the game of markets and behavior. And so that's, you know, that's a great one, as well. You know, I don't know if I love the expectations investing approach, it's somewhat technical. So I think if

people are highly interested in the analyst route, that is, you know, a great one. Morgan Housel's books. Same as ever is the most recent one, The Psychology of Money. The Psychology of Money will be the first thing I give to my children. Because if they can only, I don't know if they're going to, they're probably not going to be investors, but they do need to understand money. Everyone does. And so I think that is just such an excellent book to help people think about what's the best way to think about money and what is wealth and what is being rich And what are the errors that people make here? And so I think that that is, you know, a great one too.

William Green's Richer, Wiser, Happier is, you know, a magnificent, it's one of my favorite books as well. Yeah, you named a ton of great books. It's funny because one of the books that I think really turned me on to the work that you all did at Miller Value Partners over the years was latticework and kind of understanding you know the whole idea of the mosaic theory and stuff and actually books seem to follow a similar pattern like if you see one book and you see another book referenced or maybe somewhere in you know the index or whatever and you kind of like build this web and the next thing you know

you're like oh many of the people that i respect or enjoy talking to they've read a lot of the same books and so you just want to find more more of those same things no robert hagstrom is a great author and he's written a number of books i think he's coming out with a new edition of the warren buffett way and so i i think his books are great as well and michael mobison's other books like more than you know are probably ones that a broader audience would be interested in and then just the expectations investing absolutely well sam thank you so much for your time today where can we send people to find more about patient capital or to follow you on the internet um yeah well thank you so much for having me um so we have a website patientcapitalmanagement.com and

We have a blog there that people can sign up for. And then I have, we have Twitter and LinkedIn accounts, and I personally have those. And we're getting more active about, you know, posting stuff and sharing things that we think are important and will help people make better investment decisions. So I think those are the best places to find us. Awesome. Well, thank you again. And we'll definitely do this again in the future.

Thank you so much.