We Study Billionaires - The Investor’s Podcast Network - RWH044: How To Beat The Market w/ Bryan Lawrence

Starting point is 00:00:00 You're listening to TIP. Hi there, it's a great pleasure to be back with you here on the richer, wiser, happier podcast. I have a rare treat in store for you today. Our guest is Brian Lawrence, who's one of the smartest and most thoughtful hedge fund managers I know. Brian runs an investment firm called Oak Cliff Capital, which is based in New York City. He's beaten the market by a wide margin over the last 20 years by investing in a concentrated portfolio of high-quality companies that he tries to buy during those infrequent moments when they're out of favor and undervalued. It's a classic investment strategy that's profoundly influenced by a trio of legendary investors whom we'll

Starting point is 00:00:42 discuss in this conversation, namely Warren Buffett, Charlie Munger, and Shelby Cullum Davis, who inspired Brian by turning $200,000 into $800 million. What makes today's episode particularly special for me is that Brian almost never gives interviews. So this is a unique opportunity to spend a couple of hours in the company of a formidably intelligent investor who has never really opened up to this extent. In this conversation, we talk in depth about how to beat the market and why this concentrated value strategy makes so much sense. We talk about the intense drive, focus, and emotional stability that are required in order to generate superb returns. We talk about how Brian

Starting point is 00:01:30 looks for new investments and what six specific questions he asks when analyzing any stock. We talk about what he does when a winning investment becomes richly valued. We discuss what he's learned from many years of investing in the energy sector, which is an area where he and his father, who's also an extremely successful investor, have made a fortune in the private equity business. We also talk about how Brian structures his time and how he structures his physical environment in ways that help him to think clearly and calmly, and also what books he recommends to the people he cares about most. I've been friends with Brian for about a decade, and I've come to regard him as one of the clearest thinkers I know. As you'll hear, he's exceptionally rational and has a

Starting point is 00:02:19 remarkable ability to cut right to the heart of a subject, whether it's the art of investing or, for that matter, the art of friendship. If you want to achieve long-term success in business, markets and life, I think it's well worth paying very close attention to what Brian has figured out. I hope you enjoy our conversation. Thanks so much for joining us. You're listening to The Richer, Wiser, Happier Podcast, where your host, William Green, interviews the world's greatest investors and explores how to win in markets and life. All right. Hi, folks.

Starting point is 00:03:06 It's such a pleasure to be here with my friend Brian Lawrence, who runs a very successful investment firm called Oak Cliff Capital. Brian, it's lovely to see you, especially after the misadventures that we had with me failing to plug my tape recorder improperly. Thanks so much for coming. I'm delighted to be here and I've been looking forward to this conversation. Thanks for having me. It's great to see you.

Starting point is 00:03:27 And I feel like I should share a little bit with the audience about the unusual backstory behind this interview, which is Brian and I have been friends really for about 10 years. I think it's 10 years since I met Brian through Guy Spear. And we've become increasingly good friends in recent years and also with his wife, Gillian Zoe Siegel, who we'll talk about later. And I sent Brian an email at the start of 2023 saying, look, this is an open invitation. Come on the podcast anytime. And Brian sent me back this kind of polite. notes saying, there is another podcast in my future, but not for a bit. And then he said, when the time's right, let's talk. And then finally, a few months ago, he wrote to me and said, okay, it's time. And so one of the things that you'll notice as you look into Brian's life more is that he's really done amazingly few public interviews. I mean, he did a, he did a podcast with my friend and co-host, Dick Brotterson in 2022. He gave a terrific speech at Jim Grant's conference in 2021. And otherwise, there's nothing. And so I wanted to ask you, Brian, like, why? Why? Why? Why do you keep such a low profile and also why, thankfully, did you relent and decide that

Starting point is 00:04:33 you would undergo this questioning from me? Well, it's a good question. I think I have a desire to only do something like this if I feel there's stuff to say. I don't really think the idea of doing a podcast for the sake of hearing myself talk is terrific. So the question in doing something like this is, do I have something interesting? to say. And what I've grown convinced of listening to the podcasts you've been doing with others is that some of the subjects that you've been touching on are interesting things. And, you know, I've just grown more comfortable with the idea that you and I could have a good conversation.

Starting point is 00:05:10 We've been having these sorts of conversations for 10 years. So I thought maybe we tried to do it in podcast form of see if it was interesting. Yeah, it's great. Well, I'm really happy that you're here. And I know there is an act of trust and friendship involved in doing these things because you don't really know where things are going. Like we have, you know, you know that I've got about eight pages of questions, but you never know quite where it's going. And so there's an element of a leap of faith. And so it's, given especially the fact that you don't do this much, I'm particularly happy to have you here. So thank you. I'm terrified by the eight pages of questions. I know. I know. I probably shouldn't have told you that. Well, I brought it down from 15 or 14 yesterday.

Starting point is 00:05:47 So I wanted to start by asking you about your father, who's also called Brian Lawrence, because I think it's impossible really to understand who you are without knowing about your father, who's been an immensely successful investor in his own right, specializing in energy at a firm called Yorktown Partners, which is a private equity firm that I believe he co-founded back around 1991, and they've invested about $8 billion in about 122 companies or so. And you worked with your father for many years, and you speak with him several times a day. and I've only met him one time briefly when I went to your wedding back in 2021, but I know how much he's influenced you. And I wanted to get a sense of what you've learned from him that's been formative because he's such an impressive guy.

Starting point is 00:06:38 And there's something very distinctive about him and the sense of duty and service, but also the sheer intensity of the guy and his work ethic. So that's a long-winded way of teeing you up to tell us about your father. Yeah. Well, thanks for the question. He's an amazing guy and an inspiration to me. He started a business within a company called Dylan Reed and Investment Bank, which spun out in 1997 as Yorktown partners, and it's had a lot of success investing in oil and gas companies. And that success came to him as a result of a lot of work and later in life.

Starting point is 00:07:17 And so he was 55 when it spun out, when it became independent and really started to make its mark. He was 55. I was 30. So I think an important thing for me is that the early part of my life, there was not this. And so I was fully baked when this started to happen. And the lessons that I absorbed from him, like watching him do this, you know, the intensity of it, you know, I think if you watch something like that happen when you're young, I don't really know what that's like. I know what it's like watching it emerge later in my life. I think you basically have two choices as the child of a successful guy.

Starting point is 00:07:54 You can coast because your life is easier or you can kind of step it up and try to live up to it. And I'm very much in the latter camp because I've seen the difference that hard work makes and I've seen what hard work really means. And I think that there's something about his effort, which I think about a lot, he's over. he's always showed me that the last 10 or 20% of effort, whether it's time or intensity, results in massive outperformance. And so it's important to be intense all the time. It may look easy from the outside. When you see great success, you're like, oh, my gosh, it was easy for that person.

Starting point is 00:08:32 There was a bunch of luck involved. And luck certainly is involved in success, but a lot of it is the result of intense work. The Italians have this word called spretzatura, which is someone who makes hard work. look easy. You see their easy success and you say, gosh, it must have been easy to do that. It was not. You know, there's a lot of effort that goes into it. I think that's been a powerful lesson. I think another very powerful lesson is the value of always trying to do the right thing for your partners to build that reputation over a career and to have a reputation for doing the right thing when no one is looking is a very powerful thing. And it results in loyalty from people.

Starting point is 00:09:12 it results, trust from clients, and sometimes it's not easy to do, but he makes it an imperative. And that's been a real example. I remember Guy many years ago telling me the story of a company. I think it was cross-tech that Guy had invested in. It went kind of horribly wrong. And your dad was deeply involved. And I remember Guy saying to me that your dad could so easily have screwed the shareholders. And instead, he totally and utterly, honorably turned the company around, made everyone more

Starting point is 00:09:42 than whole. And so my impression for many years before I met your father, even fleetingly at your wedding, was this idea of him as somebody who was deeply aligned with his shareholders. And I see that in you as well. I see this kind of obsession in you with doing the right thing. And kind of there's a sort of Boy Scout quality to you, Brian, which I always enjoy. When I came to stay with you and Jillian on Fire Island. I remember being really struck by how involved your family was with the fire department there. Can you talk about that? Because it seems in some way very central to what your family is about, that sense of responsibility and kind of civic duty. And it's not really something that is necessarily that common in the investment business, but it's very distinctively

Starting point is 00:10:36 Laurentian. Yeah, well, there's, I think there's, there's, there's, there's, people can have, uh, talent and they can have drive. And there's a lot of that around. I think there's another thing people can have, which is I kind of think of it as almost like a fiduciary gene. Like, do you want to do the right thing? And is that part of what you bring to the world? And, you know, I, I'm, I'm not knocking people who are more interested in focusing on themselves. But I, I, I like to, I like an environment where I'm with other people who were, you know, I'm, I'm, I'm, I'm not knocking people who were, I'm, I'm not, I'm trying to do the right thing for the people around them. And I think a lot of that is my father's example. And a lot of it is this community on Fire Island where I grew up and spent summers and my children have been and some of my best friends are. And that community, it's about 130 houses in a little area. It's 135 acres. A lot of it is swamp. And the houses are very unremarkable, wide economic range of backgrounds of the people there. The unifying thing is that virtually, Essentially, everything is run by volunteers.

Starting point is 00:11:40 So if you have a tennis program, sports program for your kids, swimming, it's all, you might have some professional staff, but the curriculum, the hiring of the staff is all done by volunteers. And at the center of the community is the fire department. And the reason the fire department is so important is the houses are up on posts because every now and then you get an overwash from the ocean, storms. And a house up on posts made of wood that's been there for 60 years. It's like a bonfire.

Starting point is 00:12:06 And there are repeatedly fires. And there was a fire in 1983 that knocked four houses down and killed three people. And I remember standing watching the fire happen. And our volunteer fire company was underprepared. And our fire had to be put out by companies that came from a community from the east, from one of the gay communities on Fire Island. And from the community from the west, you know, these Italian guys. And they put out our fire.

Starting point is 00:12:31 And the very next day, my father joined the fire company and the neighboring Italian. community. On Fire Island, you disaggregate into, you know, we're in the Waspe community, there's the gay community, the Italian community, the Jewish community. My father and a couple friends were so upset with the performance of our volunteer company. They joined in the Italian community and I joined there too. So I was a firefighter for 38 years, first in that community, then I came back to my community. And now my son is a firefighter himself, 22 years old. And to watch that example be paid forward is very cool. There's also, I don't know if this is relevant, but this is a thing that's sort of an interesting point about firefighting.

Starting point is 00:13:11 70% of the firefighters in the United States are volunteers, because there's not population density enough and 70% of the places where people live in the United States to afford a professional department. So volunteer firefighting is very much a cultural thing in a lot of the United States. And there was an interview Bill Clinton gave in the mid-90s. Bill Clinton was a political master. And he was asked, how do you, if you're going to a town you've never been to before, how do you arrange for a political rally to happen? How do you make sure that people show up and are fed and are there to listen to what you have to say on your whistle tour? And he said, it's important to call the mayor because obviously people elect him, but half

Starting point is 00:13:48 the people didn't elect him. So he's only liked by half of the people. And it's important to talk to the used car dealer. He's probably the richest guy in town. That's a small town. That's the richest guy. The guy you really want, or the woman, you really want to organize your event is the chief of the local volunteer fire company, because that person has been selected by the community to get stuff done. That person can find pizza for 250 people and can organize an event. And if he says or she says, let's go do this, that people will show up. I find that really interesting to hang out with the people in the community who are trying to make that happen. So that's a little bit of what that has been. I also thought it was really interesting when you and I were chatting yesterday and you said to me that one of the lessons of being in the fire department is on an island like Fire Island is if you don't put out your own fire, nobody else will. And you were also talking about this sense of responsibility and always wondering, are you doing the right thing in a way you'd be proud of if you saw it in a newspaper, which is a very Warren Buffett-like mindset, right? Like this sense of responsibility, duty,

Starting point is 00:14:53 cooperation, quite old-fashioned. Well, I can be pretty self-focused, self-interested. I like to pick stocks in compound capital. I mean, I'm a capitalist, but I think that to spend time in a place like that, and to have your children spend time in a place like that, have your children become friends of children of your best friends, all of whom are steeped in that kind of value system, where the houses cost a tenth of the houses in the Hamptons. And it's not about the money.

Starting point is 00:15:22 Like, if you're living in a community where the most expensive house is a status symbol, that's a certain type of community. If you live in a community where your ability to organize the maintenance of a $500,000 fire truck that the community has taken out the donation over the past 10 years, if your social currency is your ability to organize something effectively, I kind of like that community better. You know, that's a community of get it done regardless of background. and it's so interesting to me as a journalist you know my role is usually like traditionally to be the non-joiner on the outside making facetious comments and it's just a different role in life right like we're journalists I think we're just not joiners we're perennial outsiders looking at what's going on and judging it so I think maybe that's one reason why I'm so struck by the fact that you're actually in the trenches doing it I guess I mean it's it's it's

Starting point is 00:16:19 maybe it's a cork. I really enjoy it. And, you know, some of my, some of my oldest friendships are there. And I think it's a really good value system. One of your oldest friends, obviously, from growing up in Fire Island is the famous investor, Chris Davis, who we've had on the podcast recently. And I think it's fair to say it's probably your best friend and who's also now a director of Berkshire and is a fascinating guy. And Chris, I remember you telling me gave you a copy of Charlie Monk. Langer's lecture on the psychology of human misjudgment relatively early. I think this may have been around 1998, 2000, that sort of thing. You've told me that changed your life, that the scales fell from your eyes when you saw that. Why did that have such a profound impact on you at such a formative stage in your life? Yes. Well, Chris and I joke about this a bunch. My father had started as an investment banker. And it was pretty obvious to me that being an investment banker was an interesting thing to do as I came out of business school in 1993. And I very much

Starting point is 00:17:26 admired this guy Felix Rodin, who had developed a very interesting professional career, financially successful, but also was important in the affairs of New York City, saved it from bankruptcy in the late 70s. I admired a career like that, like a broad, intellectually stimulating, financially rewarding career. So that's what I had chosen to do. And there was, was no real success by my father to cause me to do something different. However, my father was giving me these, you know, letters of Warren Buffett. You know, you should read this. And, you know, I was dismissing it because, you know, sons and fathers sometimes, you know, they don't necessarily speak clearly. They may speak lovingly, but they don't, you know, they don't do exactly what the other one

Starting point is 00:18:04 tells them to do. And so Chris Davis in 1998, I think I'd been a banker for five years, maybe six years, 1999, he hands me this recording of Charlie Munger giving a speech about the psychology of human misjudgment. And my first reaction was this guy, Munger just seems to be a pretty, you know, there's a lot of hutzpah challenging, you know, academic psychologists, you know, with no academic background at his own. And I listen to it. I'm like, wow, this guy makes more sense about this area of human behavior than anyone I've ever heard talk about this. And it just kind of led to a reassessment of a bunch of stuff. And ultimately, you know, I left Lassard in 2004 to set off Oak Cliff. And it was just a seminal moment for me. There's some other reasons I left Lizarre,

Starting point is 00:18:53 but that, you know, Chris giving me that really set me on a different path. The reason Chris and I joke about this is each of us has a list of books that we want our children to read. And our children don't necessarily read them because, of course, it's their fathers suggesting them. So we've tried various things. We've tried bribery. Read this book and I will pay you. for a book report, but maybe the best thing to do is to get a friend to suggest the book that a friend is more impactful than a father is an interesting idea. I tried to pay both of my kids to read Undo It by Dean Ornish, which I read and I had a sense, I was working on a book that was related to health and longevity that I was helping to ghost

Starting point is 00:19:31 write. And I read that book and I had a sense of, oh, this guy is explaining stuff in the way that if you were reading Securities Analysis by Ben Graham, like the same. scale sort of fall from your eyes because you could suddenly see all of these mechanisms by which our body was being affected in all of these different ways. And I think I offered each of my children $150 to read it and neither of them read it. And neither of them had any money either. There you go. You should have given the $150 to a friend, had them keep $50 and give $100. I don't even forget the money, just suggest it to a friend and have them suggest it. It's a very interesting problem. But then once in a once in a

Starting point is 00:20:10 while I'll sort of, I'll look over and they'll be reading a book that I love. But yeah, I'm not sure it's ever because I've suggested it. So what else is on that list of books that the 20 or so books that you want your kids to read by the time they become real adults, fully fledged adults? Well, I think it's in the spirit of what Chris did for me. You know, it's this idea that you can very quickly come up the curve in a discipline. You know, there's Hutzpah there, but I think there's also truth. I believe with a good book and maybe some reflection, maybe some other books in the subject, you can get yourself to maybe 70 or 80% domain knowledge in, let's say, biology or psychology or physics, or the history of India. I mean, that last 20 or 30% might take you

Starting point is 00:20:58 10 years of a PhD to achieve, but how do you equip your children with these different models? So, you know, there's a book called Influence by a guy named Robert Childini, which I think is a masterclass in how marketing is used by people to try to influence people. And you need to read that in order to understand how you are being influenced. And you need to read that in order to understand how maybe for something that you love and is worth making happen, you can influence other people to make it happen. I think that's an amazing book. I think Fort Charlie's Almanac, you know, as a compilation of munger's writings and speeches is amazing. There's a book by a guy named Alonda Baton called The Consolations of Philosophy, which I think is a terrific, philosophy can be very inaccessible.

Starting point is 00:21:46 It's a terrific introduction to how, I think it's six philosophers he goes through and he tells you how that philosopher is relative to your life. And I just think that's an amazing thing, just to drill down on that. That's an amazing thing. This is why philosophy can be useful to you. Yeah, I liked that book. He also wrote a beautiful book many years earlier that I think may have been his first release, successful book called How Proust Can Change Your Life, which is a lovely book. That's an amazing one too.

Starting point is 00:22:13 And what I remember from that book is how to suffer successfully. That's a very interesting concept as well. So there's a bunch of, there's a very beautiful book called Difficult Conversations about how to have a difficult conversation with someone. I just, I don't know. There's a list. I can send it to you after the podcast. Yeah, that would be great.

Starting point is 00:22:30 And when you look back and you think about the impact that Charlie had on you, the things that you've actually done differently. Because in a way, in a way, a lot of what he was about was, as I said in my book, not just achieving financial victory, but the manner of the victory, how you treated people. What impact did he have on you in terms of the way you decided that you wanted to do business and operate in the world? And also avoid stupidity, which is obviously one of the great lessons from Charlie. Yeah.

Starting point is 00:23:01 I think it, Charlie has, Charlie is a, you know, fascinating and an inspiration to so many because you were, we're, we're, a lot of us are looking for meaning, right? You know, it's, it's, it's a world where some of the old meaning that people might have found in religion is gone or weaker. And, you know, Charlie really is a bit like a modern day philosopher. You know, how do you live a good life? And of course, everyone focuses on it because of the commercial success. that he had. But really what's at the heart of what he's saying is simple ideas clearly stated, you know, cutting through the complexity of life. And there are some simple ideas about how to conduct business. Like be the kind of person who is trusted. Like, you know, your trust and your reputation are within your control, right? You know, your innate talent is not, your height is not, you know, where you were born is not.

Starting point is 00:23:56 But whether or not you, when you say you're going to do something, you get it, done is within your control. Reliabilities entirely within your control. Whether or not you save a lot of money is within your control. And it's, it's actually a piece of advice I got for Felix Road and during my time at Lazard. This feels like something Charlie should have said, like always be saving money because a couple things will happen. First one is you'll save a lot of money, right? The second thing is, if you're saving as much of your income as you can, then by definition, you're not doing what you're doing for the money because you're not doing it for the fancy house or the big vacation.

Starting point is 00:24:38 You actually intrinsically enjoy what you do. So, test, do you enjoy what you do? You're not in it for the money. You're saving the money that you're making. And then the third thing is, as the money piles up, you develop autonomy, and autonomy allows you to be even more of the person you want to be. And that feedback loop is quite extraordinary. And Roetton himself really embodied it. I remember interviewing him many, many years ago, because I interviewed him about a guy called Albert Hettinger, who was a great role model for Bill Ruehain, who is a legendary investor now long gone. And Roetton was interesting because obviously he was this immensely successful investment banker, probably the most important person at Lazartrez in his time. And yet then had the power and independence and autonomy to go off and help prevent New York.

Starting point is 00:25:25 going bankrupt around 1975. And so he really embodied that, right? Like he had the power and the independence of mine just to be able to say, no, no, I'm going to do this really interesting and really important thing. So I think that- The story has kind of grown in the telling, but he was probably 6% of Lazzard's profits. He owned 6% of Lazzar's partnership, but he was probably 30% of the revenues. And so, Andre Meyer, who was running the firm, said to him, you can't take two years off from

Starting point is 00:25:53 the firm to go fix New York City. He said, well, I think I can actually. The math says I can. And then, of course, you know, it was not like saving New York City was bad for business when he came back, right? So, yeah, that's a very interesting thing. But, you know, Charlie, it's also the best way to be successful is to not take undue risk. You know, don't do stupid things. You know, conduct your business so that, you know, wait, wait, wait until the opportunity is obvious. the risk out of the opportunity. So that's really informed how Oak Cliff has been run. We're going to do well, but we are going to, you know, how do you make Oak Cliff into the kind of place where when the financial crisis comes, as it does all the time, you know, whether there's a financial crisis or a

Starting point is 00:26:38 pandemic or whatever else is coming to us, it actually gets stronger in the crisis. So that's another thing. That's another munger lesson. So let's let's get to Oak Cliff in a second. I want to fill in people on the chronology here, right? So you, you go. got a kind of mediocre second rate education at Yale where you got a bachelor's in history and economics. Then you went to Cambridge to get a master's degree in England. We tried to civilize you. And then you went to Harvard Business School and graduated in 1993. So it's about as polished a resume as you could have. And so then you went to Lazard for about 11 years. And Lazard, for people who don't know, was this kind of legendary Auguste firm that had been founded in 1848.

Starting point is 00:27:22 So I'm wondering when you came out of that and you decided leaving Lazard in 2004 and set up your own firm, O'Cliff, were there skills that you'd learn in investment banking and also in private equity where you'd done work with your father that have helped you as a stock picker? Yes. There were a lot of things about investment banking that are not useful to being a stock picker, but there are some things about that particular type of investment banking, which was the the merger and acquisition business that were. And I think maybe a story will kind of illustrate the difference.

Starting point is 00:27:59 I was made a partner in January of 2001. And Michel Davy, the senior partner at the time, said it was the worst day of the rest of my life because all of my partners would now consider me to be a competitor. And I had to generate my own business. That was a fun first day. And so I was thinking about how I could come up with ideas.

Starting point is 00:28:17 It would be relevant to people to maybe hire me to do merger and acquisition business. And in November of 2001, reading 10K, you know, reading different financial information, 10Ks and 10Qs and other things for Amazon.com, I noticed that, you know, the stock was down, I think, at like, $6. And the bonds, there were $2 billion worth of the bonds that Jeff Bezos had sold to finance, expansion into Europe. And they were trading at 40 cents on the dollar. So the bonds were saying that the company was worth $800 million, but there was $800 million in cash on the balance sheet. So what the bonds were saying was that the value of Amazon's business, November 2001, was zero. And I think the firm had been, you know, Amazon had been around for,

Starting point is 00:29:00 we've been founded in maybe 1994, 1995. So, you know, this Amazon's, you know, people know what Amazon.com is and the bonds are saying it's worth zero. That was interesting. So why are the bonds worth zero? So, you know, trained, you know, I've done a bunch of financial analysis. Bonds are worth zero because credit analysts led by a guy named Ravi Saria, who was a a guy at Lehman Brothers, very, very smart, had properly pointed out that if you're a retailer with a negative operating margin and negative working capital facing Christmas, you're going to go bankrupt. Like the never in the history of retailing had a retailer ever survived Christmas with negative operating profit, negative working capital. The suppliers would pull their support, I think it would collapse after Christmas. Okay.

Starting point is 00:29:41 Why did it have negative operating margin? It had a U.S. book music video business that was profitable and it had a European business that was unprofitable. You could shut the European business and be left with the profitable U.S. business. It was obvious. You could just read it in the financial statements. Why was their negative working capital? They were turning their inventories 18 times. If Jeff Bezos wanted to sell a copy of a warrant piece, he needed like one copy a day.

Starting point is 00:30:06 And Len Reggio running Barnes & Noble needed one of his 750 stores. And when you bought your book at Amazon, the credit card company paid you that day, paid Amazon that day. So there was no accounts receivable and very high accounts payable because you didn't pay your book suppliers for a long time. Negative working capital for a company that's growing is not a sign of weakness. It's the reason Michael Bloomberg is so rich. You pay for your Bloomberg subscription in advance. Negative working capital meant that Jeff Bezos was being lent money by his suppliers. And so I took this idea to Barry Diller.

Starting point is 00:30:42 And Barry Diller thought this was the best idea he'd been brought in like five years. and he hired us to buy a controlling position in Amazon's bonds, a third of Amazon's bonds. And it was like one of the most exciting moments of my young investment banking career. And it was going to be an enormous fee, you know, very high profile transaction. And then he called up and he said, I've reconsidered it. I can't do it because I'm the, I operate a public company. It'll be publicly disclosed. It'll be too complicated for what I'm trying to do.

Starting point is 00:31:12 And he was right. But anyway, I tried to get Walmart to do it. I tried to get Francois Pino to do it. No one would do it. And so I went to the General Counsel of Luzard. And I said, could I please buy these bonds personally? Because I've done all this work. I just want to take a big chunk of my net worth and buy these bonds.

Starting point is 00:31:30 And the General Counsel of Lazzard said, under no circumstances, can you buy the bonds? That would be a conflict because if one of the clients, prospective clients, you've talked to about this, comes back and says that they want to do it, it'll be a conflict. I said, in what world is doing what I'm advised? a client to possibly do a conflict, A, and B, the Lazard that Andre Meyer built in the 50s and 60s would be buying a ton of the bonds because that's what we used to do. Anyway, they wouldn't let me buy them. Like a year later, the bonds have gone to par. The stock has started its march from 6 to 3,000.

Starting point is 00:32:04 And I learned that the buyers of the bonds at 40 cents were Warren Buffett and Bill Miller. And then the firm Lazard is taken over by a guy named Bruce Wasserstein, very talented. to banker. And he comes in and he sees that I've had this interaction with Barry Diller. And he says, go call on Barry Diller once every six weeks with a new idea and get another assignment from it. And I say to Bruce Wasserstein, I don't have an idea every six weeks. I'm just not going to have an idea like that. And there's some back and forth. And I have a lot of respect for Lassard. It's an amazing place. But the frequency of an idea that good and a client willing to do it is too infrequent. And so the idea of setting up Oak Cliff as a place to do infrequent ideas,

Starting point is 00:32:52 it's a different application of a similar skill set, different mentality. Don't talk to clients just to talk to clients. Talk to clients when you have something to say. And in this case, the clients now are people who trusted us with money and my own money and my family's money. I want to talk about Oak Cliff in detail and about it as a kind of laboratory for what I would called the power of concentrated value investing because really it's a it's a it's a beautiful experiment in concentrated value investing and it started just to set the scene it started i think you launched in june 2004 so a little a little less than 20 years ago started with six million dollars in family money now i think it's about 270 million in assets under management and one of the great influences on

Starting point is 00:33:43 you was Chris Davis's grandfather, Shelby Column Davis, who died back in 1995 and was a famous investor who a lot of our listeners won't know much about. Can you talk about Shelby Column Davis and how in some ways he inspired O'Cliff? Because in a way, in a way, he was the opposite of the problem that you had at Lazard, where you couldn't put your money where your mouth was. Like Shelby Column Davis was somebody who really invested his own money and his own idea. So tell us who he was and why he inspired you. Yeah. Shelby, very smart man, you know, academically, you know, D.H.

Starting point is 00:34:25 D. He ended up somehow an insurance inspector for New York State in the 1940s and spending time studying the various reports that insurance companies would file with New York State and other jurisdictions, insurance companies to this day are regulated by the states. So they file financial statements with the SEC, but they file regulatory reports with the states in which they provide insurance. And by looking closely at the state regulatory reports, he had an edge understanding insurance companies. Very smart. He found different things to invest in his whole life, but the early edge and a persistent edge was insurance companies. And with $200,000 of his wife's

Starting point is 00:35:05 family's money in 1947, he started investing. And he had a brokerage firm, shall we call him Davis & Co, which bought and sold securities. I think he had a seat on the New York Stock Exchange. So that provided a little bit of income for him. But the $200,000, he never took other people's money. And he just invested it in a concentrated set of ideas, largely from his understanding of the insurance business. And that $200,000 by the time of his death, 48 years later, was $800 million. which is a 4,000 to one return, about 19% compounded. And that example really spoke to me.

Starting point is 00:35:43 There was a related example. My grandmother, my father's mother and her mother, my great-grandmother, they grew up in the Depression. My great-grandfather died. You know, mother and her three daughters, one of whom was my grandmother, were left kind of in a sort of a tough financial position. So they got jobs, real estate brokers, whatever. But they also picked stocks. And with just their own money, they didn't have an agency insurance inspector. What they had was common sense.

Starting point is 00:36:11 And the common sense was like this. Find products you understand. Kellogg's cereal, Hershey's Chocolate, AT&T, the phone company. So you understand what the product is. Get the annual report. You don't really understand what's in the back because you haven't trained as a banker or going to business school or anything fancy like that. But in the front, there's a letter from the CEO.

Starting point is 00:36:30 Does the letter from the CEO make sense? does this guy speak in jargon or is you speaking clearly? A, and B, are they paying a dividend that always goes up? Because whatever the company is doing, if it's always sending you more money each year, it can't be that bad. And then just continuously reinvest the dividends. And so when my grandmother died in 1995, I think, she had, you know, like $5 million worth of stock.

Starting point is 00:36:54 And the cost basis on most of the shares was less than the current dividend payment for the shares. That's a very powerful example. And to the end of her life, you know, if there were a window that was rotting out in her house, she'd be complaining about paying $800 for this window, but she had this amazing stock portfolio. So the Shelby example, the example of my grandmother, the power of investing with a systematic, disciplined, thoughtful way really spoke to me. Yeah, there are a series of beautiful lessons, really for you, I think, in Shelby,

Starting point is 00:37:30 we call him Davis' story. Like the fact that a snowball, if you keep the snowball rolling for 48 years as he did, without catastrophe, it's just overwhelming. The fact that he had a competitive advantage, as you said, because he was focusing on an area where he knew more than other people is another critical lesson. There's one lesson about Shelby that I was not eager to emulate. And, you know, you can see it in this book, Davis Dynasty, which, you know, it talks about Shelby and then his son, who was also named Shelby Davis, and then Chris and his

Starting point is 00:38:07 siblings. Shelby, Sr. really liked margin. So he was, you know, 50% levered the whole time. And so the normal volatility that concentrated stock investing brings to you, which we can talk about later, we might get to that subject, was accentuated by the margin. And so his returns, that 4,001 unlevered, would have been less. But the swings were just unbelievable. I think there was one point in 73, 74.

Starting point is 00:38:38 He might have been down 80%. And that, for me, the psychology of that is fascinating. I don't, you know, I met Shelby when I was young. I was too young to ask him these questions. I would have loved, if I had the ability, I would want to talk to him about what that felt like. I like to be the guy when everything is coming down who has, you know, who has an unlevered balance sheet, who has cash to deploy, who's bought put options. I like to build resilience like that.

Starting point is 00:39:06 Shelby enjoyed enjoying levering his life in a way which I don't think I would be comfortable to it. I think his story also gets at a really central conflict in the investment business, which is you can be incredibly smart as a stock picker, but if you don't have control over the capital in your fund, you're really, really vulnerable because people can bail out at the worst possible time, which obviously has happened with people like Bill Miller over the years, who's brilliant, and Bruce Berkowitz, is another guest, both of them guests on the podcast, you know, because it's so uncomfortable for people to have that kind of volatility.

Starting point is 00:39:46 And so this is a big subject that I want to talk to you about this, which actually is something that you talked about in the very good speech that you gave to grants conference a couple of years ago. I think you were talking about the two great challenges for an investor. So on the one hand, you've got to make great returns. And on the other hand, you've got to deliver those returns to the shareholder. And so Shelby Calm Davis had the advantage that he didn't have a share. shareholder who could bail out on him at the worst possible time. But so let's talk about this, this structural issue because it's hugely important, right? You need to find a good approach to investing, but then you actually need to be able to stick with it. And that's one of the things that obviously, Shelby Senior managed to do. Yes. So it's very important to understand what your edge is.

Starting point is 00:40:42 Like if you don't know what your edge is, you don't have an edge. And so, you know, what are our potential sources of edge at Oak Cliff? Like, you know, I think there are three. There's analytical, kind of informational and structural, right? Analytical, are we better at analyzing? Are we smarter to analyzing companies than other investors? I think we're smart. I mean, I think they're smarter investors.

Starting point is 00:41:05 There's lots of smart people out there trying to do what we do. So I don't think we have very much of an analytical edge. Informational, we own 15 stocks. That's a lot fewer than a mutual fund guy who owns 150 stocks. So we are, and we know this from our conversations with CEOs, when we sit with the CEO having done three months of work on his company and really focused on it, and we ask him questions, we are better informed than most other investors. Our objective is to be the most informed. And that gives us something of an edge. But our main edge is structural.

Starting point is 00:41:37 And, you know, we have opened up Oak Cliff to other people, to clients, in order to have a pool of assets. assets that allows us to spread the costs of research across a greater pool. But what we've done is we've been very careful, as we've done that, to be clear, this is a long-term game. And I am sure that that has diminished how much money we've raised. I mean, we've raised a total of $85 million and we've distributed $82 million. The net capital raised by Oak Cliff is $3 million over its 20-year history and we're sitting on $270 million. So this is not a fundraising operation. But what we do with our clients is we say, this is a long-term game. You need to put this in a place that's in your own psychology that says long-term. And this should not be a huge

Starting point is 00:42:27 amount of your net worth. It's a big amount of our net worth, but it's our work and we're comfortable with it. But for yourself, it shouldn't be a big piece of your net worth. And you have to, half of the money that it has been raised by us is locked up for three years. And we ask that every new client lock up at least a quarter of their capital for three years. You could have six percent of it back each year, sort of a thing that Buffett used to do in the mid-50s with his early partnerships. You could give him some money and take out six percent each year to live on, but put this in a place that is long-term. And what we're trying to do with that is as we go through a downturn, we want to have a client base that expects it, is not upset by it,

Starting point is 00:43:13 and possibly gives us more money in response to that downturn being an opportunity. And it's been very intentional. And I think it's a big source of advantage for us. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord. And every conversation you have is with people who are actually shaping the future.

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Starting point is 00:47:35 Going back to the origin. of Oak Cliff, in a way it also grew not only out of the influence of Shelby Colm Davis, but also the influence of Buffett, who you had an important meeting with back in 2004. What was the big insight that came out of that meeting that really shaped your sense of what the opportunity was for an active stock picker like you? Yeah, it was 2004. I found myself in a room with him. And it was a meeting, I think organized by Alice Schroeder for stock pickers with Buffett.

Starting point is 00:48:18 And there were maybe 15 or 20 of us in that room. And he was telling us about what stock picking was like. And, you know, the questions we were asking him kind of all boiled down to, how do we become like you, but faster? And he said, well, unfortunately, that's not going to happen. It's a long game. But two pieces of good news, he said, as long as you believe in American capitalism, you should expect progress, you know, a general upturn.

Starting point is 00:48:49 As long as you don't do stupid things, you should do well as the market grows in general, as the economy grows in general. But the real tailwind for you is that the average share price of a stock goes up and down by 80% in a year. And I remember thinking to myself, that's just insane. I get him on the first point, but on the second point, he's lost his marbles. So I went back to New York and got out a electronic version of value line and started crunching the numbers. There were, I think it might have been 4,500 public-traded companies back down. I think we're down to 3,800 now. The numbers are still the same. If you take 52-week high, divided by 52-week low, subtract one, for every one of

Starting point is 00:49:32 the, let's say, 4,000 publicly traded companies in the United States. And so it's a percentage by which the 52-week high has exceeded the 52-week low each year. And you crunch these numbers. You go back 20, 25 years, you find that in a calm year, which is basically every two or three years, I'm sorry, two or three years out of every four is a calm year. Average stock in the S&P goes up and down by 40 percent. And the Russell 2000, the smaller companies, goes up and down by 60 And in a crisis here, like you have a pandemic or a financial crisis or an invasion of Ukraine or something, things go up and down by 100 or 150%. So Buffett, by picking 80% was picking this average number.

Starting point is 00:50:12 And it's extraordinary. You know, big companies like I think in the grant stock I was talking about Google. I mean, Google should, you know, Google in the last year has traded between the low 90s and 150. Google. Okay. How many people use Google? You know, it's more than a billion users of each one of six. seven of its services. How many people cover Google from an investment point of you? How many people

Starting point is 00:50:33 understand Google? Basically, if you're a sentient being on earth with a smartphone, you know what Google is. And yet the value of its stock is varied, you know, by 70%, 65, 70% the last 52 weeks. That's like an extraordinary thing. If you've done the work to understand the business and the crisis of confidence comes in it, because it's a very rich opportunity because what you can do during the month or so that it's having that crisis of confidence, you know, Transdime in the middle of, which sells, you know, replacement parts for aircraft in March and April 2020 as air travel came to an end, you could quickly do work to see that it could survive for three years with there, with no air travel. And so the stock went from, I don't know, 600 to 200. You could buy a lot

Starting point is 00:51:20 of Transdime. And now the stock is 1100. You know, that's, that's what we do. It's, this is, this This is so important and I kind of want to pause and have people who are listening kind of dwell on this because it's such a fundamentally different game than most people are playing. And I this is this is something that I wrote about in my book when I was interviewing your friend Joe Greenblatt and also in writing about Charlie Munger that in a sense, you know, Munger expressed it so beautifully and so eloquently in his image of the spear fisherman that basically what you should be doing is an invest. is standing by the side of a stream with a spear. And then once in a while a fat juicy salmon will swim by a new spirit. And then you might go back to doing absolutely nothing in terms of purchasing for the next six months or more. And so the whole game really becomes one of waiting very patiently for these rare, infrequent, extraordinary mispriced opportunities that then you seize with what Charlie would call gumption.

Starting point is 00:52:26 And that's something that I think fundamentally most people don't understand. Even most professional money managers are playing a very different game than that. Can you just sort of riff on that idea? Because I think this is almost like a different philosophy. It's like trying to explain to people who think the world is flat, that the world is round. Because once you get that this is a really beautiful approach, there is a sense in which the scales kind of fall from your eyes.

Starting point is 00:52:55 Yeah, I think the first thing I'll say is it's not really waiting by the stream. It's working like, heck, back to that point about spread satura. Like there's an enormous amount of work that's going into trying to understand these businesses. The businesses you own and then the businesses you wish you owned to be prepared because you might have to make a decision on a Tuesday and you want to have done the work. So there's a lot of work going into it. And then the second piece is, you know, mothers tell daughters it's just as easy to fall in. with a rich man. Like, you want to study the businesses that are good businesses. So this is a, you know, there are different flavors of this, but our flavor is we don't want to study a business

Starting point is 00:53:34 and be involved with the business unless it's just a, you know, there's like three things. We want a natural monopoly. We want a rational duopoly. We want a low cost operator. And why do we want those things? We want those things because they have durable cash flows. You know, if something is a good business because of one of those three characteristics, you have a lot of confidence that when you when you forecast its cash flows out into the future, you know, they'll turn out within some band of uncertainty that's not that wide. That's what you've got. And whatever disturbance is causing it to be valued more cheaply by the market, if you can turn your research attention to whether or not that is a temporary thing, are those Amazon bonds trading as though the business is worth

Starting point is 00:54:19 zero because negative working capital is a bad thing or a good thing. Like, that's really what that was. And so are you looking at a good business that's undergoing a temporary crisis of confidence? And those, you know, there's also corporate actions. Things can get spun off and they're misunderstood because the new owner doesn't understand what he's been given. A new CEO can come in and change the strategy. There can be some new business opportunity that is underappreciated, temporary setback. And what's interesting to me is that there are not that many good ideas. And so necessarily this requires a concentrated portfolio because I don't have an idea

Starting point is 00:55:02 like this every six weeks. You may see us do nothing for a year. Another thing is that this investment practice, although this is what really, if you look at the Forbes 400, you look at who's done well picking stocks, this is basically what people do, it's practiced by so few people. I mean, the estimate that I saw at a ValueX conference, you and I have attended those in Switzerland, you know, I talked about it in the talk for Jim Grant, maybe 1% of the equity market is managed this way. At the time I looked at the statistics, it was an $80 trillion equity market, all of the markets in the world,

Starting point is 00:55:37 US, China, Europe, and 800 billion was managed in a way that looked like this, you know, concentrated positions that were held for a long period of time, you know, with conviction. 800 billion out of 80 trillion. And of the 800 billion, 40% was Berkshire Hathaway. So it's interesting that this idea, which it can make you a lot of money, but it's not practiced by a lot of people. Why? I think one reason is that if you make mistakes, it really shows you can't just hide in the average. And two, it requires a mindset that some people may not like studying businesses as much as they like raising money or some people may not like the volatility that they deliver for themselves. Some people may want to do it faster or more differently.

Starting point is 00:56:24 There are lots of ways to make money. This is the one that always just made most sense to me. I really like studying businesses. I like trying to understand what's happening in the world. And I like placing infrequent bets, you know, investing in infrequent ideas. Yeah, it makes tremendous sense to me temperamentally. It's, I mean, I'm, I'm not capable of it because I'm not obsessive enough or interested enough, but I've outsourced my money to people who do it this way. So temperamentally, I'm totally aligned with you on this. And it's interesting that it's, this approach of very concentrated value investing is what we've seen to work from people like Buffett and Munger, Joe Greenblatt, Bill Miller. And yet, as you've pointed out in your

Starting point is 00:57:08 excellent annual reports, which I've been reading over the last couple of days, going back, I think, all the to 2004, you point out that one of the big challenges that makes this so difficult to execute is that investors end up, the shareholders tend to lose faith in their fund managers during these inevitable periods of underperformance. And in one of your letters, you pointed out that Berkshire Hathaway itself has seen these three periods when it lost half of its value. So back in, I think, 73 to 75 and then 98 to 2000. And then again in 2008 to 2009. And then you also pointed at that even Berkshire underperformed the S&P about a third of the years over nearly six decades. And so I was looking through your returns over the last 20 years.

Starting point is 00:57:52 And if I counted correctly, I think you had underformed the S&P eight out of 20 years. And yet you've outperformed the S&P by a decent margin more than 100 percentage points over those 20 years. Can you talk about this fundamental challenge to take advantage of the beauty of this approach, of concentrated value investing, you need to be able to handle what I remember Joe Green by describing to me as the pain of underperformance, that there are these periods of underperformance where you can look like a fool and it's psychologically incredibly painful. Yeah, well, there's clearly something out there. There's a firm called Dalbar, which does interesting studies of mutual fund flows. And a lot of people focus on this fact that active managers

Starting point is 00:58:42 tend to underperform the index. And that's an argument given for investing in index funds. And we can come back to that in a bit. That is a very logical choice for most people. Just invest in the index fund and forget it. You know, just let the index do it. But Dalbar has done this work, which shows that the average mutual fund investor who's picked an active manager,

Starting point is 00:59:03 that active manager on average underperforms the market by, let's say, 1% a year, which is almost their fees. They unperform by the amount of their fees. And then, unfortunately, because the clients add money to the mutual fund that's done well, right after it's done well, and then take money out of the mutual fund that has done poorly, the client's returns underperform the active manager's returns by four percentage points. And so clients, on average, according to DALBAR, and they're looking at statistically significant amounts of fund flows,

Starting point is 00:59:42 I think it's like dispositive, you know, it's very, very hard to argue with their methodology or their data. The clients are underperforming their active managers by four percentage points is a ruinous result. Ruinous. I mean, four percentage points of underperformance over a 30-year investment horizon leading to someone's retirement is a nest egg that is 70%, 70% less. And so to see something so systemic and so empirically obvious indicates some sort of a thing in human psychology that is a real thing.

Starting point is 01:00:15 And a conclusion from that is it really is better for most people to be an Indynex fund. And not cash out. Keep your money in. You know, like just have psychologically, that's my allocation to equity. Just keep it there.

Starting point is 01:00:32 Don't cash out at the bottom because you can cause real damage to yourself. Don't add frenetically as it's rising. You just have a measured annual approach. I think that's better. That's the right approach for most people. If you want to try to beat the market, which we've done for 20 years, you know, that's a, that's a labor intense, temperamentally challenging thing to do, which can be done, but not everyone can do it. And there's this, there's this study, or it was a debate in 1984, super investors of Graham and

Starting point is 01:01:11 Dodsville, Warren Buffett himself debating a guy named Michael Jensen. And Michael Jensen actually ended up being a professor of minor, at Harvard Business School, in this small world. And Jensen was arguing that markets are efficient and that Buffett's success in 1984, he'd been managing Berkshire Hathaway, I think full time at that point for 15 years. And he had the Buffett partnership track record before that. He'd obviously widely outperform the market. And Jensen was saying, your outperformance is statistically just an anomaly. You know, you're just, you can be explained by this many sigma. Enough lucky monkeys flipping coins will result in a Warren Buffett.

Starting point is 01:01:52 And Buffett's response was, well, actually, there are eight other investment firms, all of whom studied with Ben Graham, all of whom kind of knew each other loosely but owned different stocks, and here are their track records. All of them outperform the market. So there's at least eight other lucky monkeys. And he has some beautiful math about how the probability of the lucky monkeys actually being all lucky is like it's, you know, you'd need like, I don't know how many alternative universes for that to be true. But a point that falls out of that, which he comments on, is that every single one of the managers underperformed about a third of the time when measured annually. And Berkshire Hathaway itself, I went back and I looked for this 19 of the last 54 years.

Starting point is 01:02:37 He's been managing it 54 years with full-time Warren Hens. Berkshire Hathaway stock has underperformed the S&P, 19 of those 54 years or 35% of the time. And just imagine yourself, it's 1975. Over the prior two years, Berkshire Hathaway stock has fallen by half and the market is flat. Do you sell your Berkshire Hathaway stock? If you had, that would have a very bad decision. It's 1999. Berkshire Hathaway stock is up slightly, but 40 percentage points less than the S&P.

Starting point is 01:03:06 do you sell your Berkshire Hathaway stock? That would have been a very bad decision in 1999. So there seems to be something about this process that results in these periods of underperformance that means this is really not for everybody. And I don't know if that's answering your question, but that's... Yeah, and it gets at such a profoundly important issue because this can last for years, right? No, I remember you and I were texting about it when you were reading my book and you were reading the chapter where I was talking about Jean-Marie Eveyard. Because Eveyard, there was a point where he said to me, look, after a few years, you start to wonder, am I just not getting it?

Starting point is 01:03:50 Like the paradigm has changed and maybe I'm just, you know, so it's really easy after a period where you've done incredibly well as a contrarian concentrated value investor to look back and say, well, this makes so much sense. but when you're in the thick of it, and I have a lot of friends who do this, right, professionally. And so, and I think like childbirth, they forget how painful it was. And when you're in the thick of it, when you're actually going through that period, it's kind of acony. Because you have a lot of your shareholders bailing out often if you don't have a structural advantage. I mean, you have a structural advantage that's similar to Guy Spears advantage, which is a lot of the money is your family money. So you're less vulnerable to people bailing out. But you start to wonder if other people who are making tons of money investing in stupid stuff

Starting point is 01:04:41 have figured out something that you haven't figured out. So it's kind of embarrassing and fear of missing out kicks in. I mean, it's just it's torture. And so I wanted to ask you about the emotional psychological side of this. Because when we talked about this yesterday, you mentioned to me, look, I'm way less emotional than most people. Can you talk about the wiring that you actually need to be able to handle the pain of this? Yeah.

Starting point is 01:05:09 I think that I'm pretty, I think I found really what I want to do, like analyzing businesses, trying to understand the world, developing conviction, you know, looking for places where the conventional wisdom is wrong. I just, I love living in that world. and I enjoy this. And so when something starts to go against us, you know, we bought something and it's down, I really enjoy that.

Starting point is 01:05:41 That's really distinguishing between a mistake and an opportunity is where you make a lot of the money doing this. And I just really enjoy that. And I think a lot of people don't. I think that they don't like confronting their own mistakes. I'm really struck, you know, apparently, Charles Darwin had this saying, the human mind is like the human egg. Once impregnated with an idea, it's impervious to new ideas.

Starting point is 01:06:05 I really value disconfirming evidence. Like, I welcome, you know, one of my favorite things to do is to talk to a short seller. Like, when things start to go against us, like my intensity of desire to figure it out kicks in. And we've gone back from the beginning of Oak Cliff 20 years ago. if you measure being right as the stock that we bought, either we sold for more than we paid for it or it's trading now, we own it still for more than we paid for. We've been right 70% of the time and wrong 30% like we're definitively wrong 30% of the time. And identifying where we're wrong, that's where we work most intensely. And I just think that's how we're wired.

Starting point is 01:06:50 And then we've done the things that we've done structurally choosing clients, having clients choose us for the right reasons that mean that when we're down, we don't get calls saying, oh, my gosh, you promised us something that isn't going to happen. Right. So that's, that's, that's a huge advantage we have that we have clients who understand what we do. And, you know, I have emotions like everybody else. I mean, I'm not inhuman. But, you know, we, we own 15 companies right now. They're trading it 14 times, trailing free cash flow. The S&P 500 is at 22 times. These are very high quality companies and just learning more about them and, you know, the dozens of companies on the watch list that we'd like. It's just the emotion drains away and you live in a

Starting point is 01:07:36 world of, you know, learning more about each one continuously. And I don't know, maybe I'm just wired in a way that that's what happens. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and

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Starting point is 01:11:31 Yeah. Or be it less less than you would have done if you sold. all of it earlier, I guess. But I in a way was more interested in when I, when I looked at your portfolio and I thought, actually, it's interesting because you owned stocks very early that turned out to be extraordinary. Like you, you own things like MasterCard or Visa back in 2011 or back in 2009 when people thought American Express might go bankrupt. You had call options with a strike price of about 20. And I was looking at yesterday, I think it's a 212 now. And, um, and, um, and, and you bought CarMax very early, I think back in 2004 and then sold in 2015. And I was wondering if maybe actually the real mistakes in certain ways had been harder to look at because they were

Starting point is 01:12:23 less obvious because they were actually things that were kind of amazing that you didn't hold. And I was wondering how you think about that issue, just when you were smart enough to find a really great business and then let it go. too soon. How do you think about that fundamental problem? Yeah. Oh, it's a great question. So if you pick a business, it's a good business, it turns out to be a good business, your analysis is right, you buy it at the right price, it's now gone up. I guess there's two countervailing things. One is, wow, you feel great about that decision. You're happy every time you look at it in your portfolio, you know,

Starting point is 01:13:06 you tell clients about it, you tell your wife about it, that's dangerous because just because something's done well for you doesn't mean it's going to continue to do well for you. I mean, every day that you don't sell a stock is another day you choose to buy it. Right. So every day you keep something in your portfolio is a decision. So you have to apply the discipline to it, which is, I feel really good about it, but am I still learning about it? Is there something about it that the thesis is changing? Is there some new competitor? Is it success attracting some new disruptive thing? You have to constantly be watching for that.

Starting point is 01:13:48 The other thing is that back to that share price is going up and down 80%. If you've bought something that is a good business, one of these things that we like, you know, the rational duopoly, a low-cost operator, I guess something with a lot of runway to increase cash flows to shareholders, then its intrinsic value is going to be going up into the right, let's say 15 or 20% a year. But it's share price, if the share price is going up and down by 80% a year and the intrinsic value is going up and down by sort of 20-ish, there will be times when the share price succeeds intrinsic value. And these things are highly, you know, it's imprecise, but you do your best. You project cash flows forward. You say, holding this for the next five years, eight years, ten years will result in a return to us. If the share price runs too much, that return drops.

Starting point is 01:14:45 So if you develop conviction in something, you make in an 8% position, you think it's going to do 20% return for you over time. and the stock doubles. You no longer have an 8% position, you have a 16% position, and you no longer have a 20% IRA. The math of that in one year is you probably have a 12% IRA. So would you make a company with a 12% IRA into a 16% position, or would you trim it? So that's the constant process.

Starting point is 01:15:13 And the other thing that happens is new ideas are coming in all the time. And you've got something with a 10 or 12% IRA and a brand new thing with a 20% We make these decisions infrequently. We do not like to pay taxes. If you sell something that's highly appreciated, you know, we ourselves and virtually all of our clients are taxable. So these decisions are made slowly, but you do make them. Do you make mistakes? Do you sell MasterCard too early? Do you not own enough trans time the entire time you've owned it? Yes, you do. But, you know, that's, we're going to make mistakes. But if you don't have that kind of process in place, I think you'll make more mistakes. When you look back at your analysis of your mistakes over the years, is there anything where over the course of the 20 year evolution of Oak Cliff, you've really changed or updated your process or the way that you invest? Because you see, actually, I didn't really understand the importance of this. This is much more important than I realized or I'm doing this wrong. Yeah. I think the main thing that's changed is that. When we started Oak Cliff, we had part of the capital invested in more special situation kind of opportunities where there'd be something an event or something in the capital structure

Starting point is 01:16:33 that you could say, you know, made something cheap. But the business quality was less good than, we always had good businesses, you know, the master cards and the CarMaxes and the Transdimes. But some of these things, you know, we had a cruise line called Ambassadors International allura. We did something, which is basically the only time we ever shorted anything. We owned Porsche and shorted Volkswagen in order to isolate the piece of Porsche that, you know, the Volkswagen didn't own. Those sorts of special situations. The problem with them is that if you, they can look statistically interesting on a piece of paper and you make a lot of money doing it. But if you go into

Starting point is 01:17:10 a financial crisis, the market doesn't care what you paid for it. And if the business is brittle and breaks, your thesis breaks. And you're not in a good place. I would much. rather have, you know, after 20 years, I think a lesson is, if you're in a bunch of good businesses and you hit the financial crisis, your good businesses do well, they may even get stronger. They buy back their own stock. They buy their competitors. They take market share. You know, I think special situation investing is something that we would, I mean, would we do it again if we saw something amazing? Maybe. We're really interested in the good businesses that are long holds. That's the evolution.

Starting point is 01:17:50 So when I look at your portfolio now, and I don't want to talk specifically about individual stocks because I know you're wary of discussing this, but as people who look at your filings can see you have big positions in things like, or at least you did at the end of last year in interactive brokers and basic fit and trans time and stror and Gildan and alphabet and Meg Energy and Guidewire and the like. So you owned at the end of the year about 14 stocks. So a lot of what you're doing is this kind of mad, intense research process to find another good idea that can be added to this kind of elite group of companies that have some kind of long-term competitive advantage, that have great durable businesses and the like.

Starting point is 01:18:37 Can you talk about what that actual process is like? Because that's where you're spending much of your time. I remember you writing once in one of your annual reports, you said, the greatest challenge is keeping up the pace and the temperament to read 750. annual reports a year in search of very infrequent ideas. So tell us about that actual process, which is where you spend much of your actual week. Yeah, I think, said the investor to the journalist, it looks a lot like journalism. Painful and badly paid.

Starting point is 01:19:10 Well, it depends how the stock picking goes. You never know where the next idea is going to come from. And it could be, you see. an investor you have respect for by something you try to reverse engineer what they've done. It could be a disturbance in the force. You know, something's happening. You know, the German economy is in a recession. What are the great businesses in Germany that you might want to look at?

Starting point is 01:19:34 Or it could be you read about a new CEO someplace. But that populates like a funnel. About a hundred of those types of things drop into the funnel each year. Let's say two a week. And pretty quickly, you know, is this one of the, a high quality business? Is it a natural monopoly? You know, does it, does it, does it have two players who dominated who are being rational with each other? Does it have pricing power? Is there a, is this a low-cost operator in the incumbents, the people it's competing with, you have no

Starting point is 01:20:06 ability to match those prices? And so, you know, like Geico, you've got, we're interactive brokers, you've got decades of growth ahead. If it's not that, it gets thrown to the side. But we're trying to answer six questions. Is this a business we understand? Is it a good business in the way that I just described? Is it run by the management team that thinks like shareholders that will treat us like partners? Is it cheap, you know, demonstrably relative to its expected cash flows? Is it trading in an attractive valuation with an attractive IRA, internal rate of return owning it from here?

Starting point is 01:20:39 Why is it cheap? Can we identify the reason why we are right and the market is wrong? What's the variant perception? That, you know, we spend a lot of time on that. And the final one is question number six, if we're wrong, because we can expect to be wrong at least 30% of the time, how much money will we lose? Right. And so those six questions really, and let's say about 10 of these, deals like about one every four to six weeks, call it 10 a year. We turn on the afterburners.

Starting point is 01:21:11 And that process is to try to become the best informed investor, like talk to competitors, customers, suppliers, ex-employees, read. years of transcripts and public filings, do the same thing for the competitors, so that you put yourself in a position. Ultimately, you're going to talk to the CEO of the business, and you're going to be able to say to him, we think we understand your business. We think the three things most on your mind are A, B, and C. What do you think? And that's really our happy place. When we get to that place, when we're having that conversation, sometimes the answer is, oh, we get to that place, and the share price needs to be 20% less. So we just say, okay, that was good. We now understand that one. Let's focus on another one, wait for the share price to drop, which it might never.

Starting point is 01:21:54 And out of all of that, out of those 10 things where we turn on the afterburners, we might have two decisions a year to invest into a new idea. So you're an intensely competitive and driven guy, and you're very focused on this task, right? I mean, it's a fiercely focused task looking for these diamonds in the rough. tell me how you actually structure your day. Like I remember when I stayed with you on Fire Island, you got up early. What's actually, I mean, in some ways there is, I think in my book I described the best investors as like mental athletes. There is a sense in which you have to be a mental athlete and you have to manage your time well.

Starting point is 01:22:38 You've got to think about your energy levels, your fitness. And I know you play squash like four times a week and like, like you. You think pretty carefully about this stuff. So can you talk about what you're actually doing as a kind of mental athlete trying to equip yourself to win an extraordinarily competitive game where you're up against really, really smart people? Well, I am pretty competitive. That's true.

Starting point is 01:23:06 And I really enjoy this. I don't think I could do this if I didn't. I mean, I find this to me the most intellectually stimulating and, interesting thing I've ever found to do. And solving these puzzles is just fascinating. So it does not feel like work. I guess that's the first point. It really does not feel like work. Like if you told me I had a year to live, I think I would, I'd spend a little bit more time with my family. But I mean, this is what I want to do. But I'm up at, I'm up at 5.30 in the morning. I work out. I'm at the office by 8. It's a bunch of reading. It's pretty unstructured. When we're in intense afterburner mode, there's

Starting point is 01:23:46 phone calls with different people we want to cross-check with customers, competitors, suppliers. There's travel pretty infrequently. You can do a lot of this with this amazing Zoom technology. And there are four squash games a week in addition to the kind of morning workout stuff because I've got three guys I've been playing squash with between two and 10 years. And we're all getting older at the same rate. And our objective is to play squash into our 80s. I'm 57 now. And I find And it's just wonderful to have, you know, the squash club is four minutes walk from here. So it's just a nice interlude in the middle of the day. And I'm home by 630 or 7.

Starting point is 01:24:27 I have an amazing wife who I spend time with. We have really good friends. We have four children between us, three of mine, one of hers. It's a second marriage for both of us. Spent a lot of time with our kids, spent a lot of time with our friends. But I'm working on the weekend, too. I mean, it does not feel like work. I mean, reading another annual report or reading another book about an industry, reading, reading more information about, you know, some corporate leader and the choices he's made, I find to be endlessly fascinating. So it may look a little intense to other people. I don't really know any of the way to do it.

Starting point is 01:25:00 How are you handling distractions, Brian? Like, like obviously there's an unbelievable number of opportunities to fall down rabbit holes with information coming at us the whole time. with all of these technological distractions from the many different screens. What are you actually doing to make sure that you're using the information available to you hopefully and not self-destructively? Well, you never know what a wormhole is. I mean, maybe at the bottom of the wormhole is an investment idea that doubles your money. So it's, I guess it's a constant thing every morning. How do we spend our time?

Starting point is 01:25:41 Like I write myself a note every morning. These are the four things I want to get done today, and I try to cross them off by the end of the day. But there is no playbook for this. It's something new every day. It's kind of exciting. I don't know what will happen. At the beginning of each day, I have no idea what will happen at the end. What will be important?

Starting point is 01:25:56 Who will come in? People visit us. People call us up. We call people. We learn things. I don't know. I wish I had a good answer for you. I wish everything was perfectly planned out, but it's not.

Starting point is 01:26:05 So it's interesting. It's not that structured. At all. No. I wanted to ask you about your actual physical environment because I was very interested when I went into your office in your home on Far Island and you had a bust of Lenin, a small bust. And you told me at the time that you have four offices dotted around the country. And in each of them, you had a bust of Lenin. And I've thought a lot over the years about how we structure our physical environment in ways can help us. as investors or writers or anything else. Talk about why you have the bust of Lenin and why your

Starting point is 01:26:46 offices are the same. Yeah. Well, there's two common things in each of the places that I work. One is a bust of Lenin. The other is a nap couch. You can see the nap couch behind me. I mean, if a day goes by and there's not a 20 minute nap, that's a failed day. I think our bodies, at least my body, wants to nap at about 2 o'clock after lunch. And to try to power through that with caffeine is unwise. So that's one thing. The bust of Lenin, that reflects in December of 1988. I was studying in England.

Starting point is 01:27:24 And we had a chance to go on a trip to the Soviet Union. It's before the wall came down. And we were in Moscow and Leningrad. And on the trip to Moscow, we went to the Lennon Museum. and the Lennon Museum had all these things that Lennon had said and done, but also it had these rooms where the curators of the museum had said, well, Lenin predicted this, Lenin predicted this rise of the proletariat and it had happened in these countries. And Lenin predicted this scientific breakthrough, that scientific breakthrough. There was a room where it was the room of information technology and they had a big statue of Lenin and a whole bunch of slogans of Lennon from writings, I think in like 1920. where he, they, they cherry picked some things that he'd said to say that he'd predicted the personal computer.

Starting point is 01:28:11 And on this sort of stand was a Russian copy of an Apple II computer. Okay. And it's 1988. So Apple II's in, I think, introduced in 1981 or something. This is seven years late. And it's a Russian Apple II. And it's like twice the size of an American Apple II. And it got bolts and it gets clunky and all this stuff.

Starting point is 01:28:36 And there's this big, it was translated for us. Lennon predicted this. And so outside on the street, they were selling these surplus busts of Lennon, you know, made of steel or something for 25 cents. So I bought one and brought it home. And I've collected them since. I have this bust of Lenin on my desk to remind me of like the danger of certitude, like the danger of ideology, like that this guy was so confident and so. compelling to his followers that he took his country from 1917 until 1991 on a wild ride of insanity. And if you diverge from the ideology, you got shot in the back of the neck.

Starting point is 01:29:21 And how many people were subjected to famine and all in the service of an ideology, right? And so it's just a reminder that no matter how confident I feel about something, and maybe especially because I feel competent about something, I should have a sense of doubt and duty to try to figure out whether or not there's a differing point of view. One area where I think a lot of this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, would call heavy ideology. You see it come up a lot in the investing world when it comes to energy. And, and this is an area where you have a particular expertise. You've, you've made a lot of investments over the years in energy stocks. You've served on the boards of various energy companies.

Starting point is 01:30:03 You spent many years working at Yorktown, which specialized in private equity investments in energy. And I think about this a lot, this question of how do you actually separate the heavy ideology surrounding the energy sector and the reality? And I wonder if you could kind of help guide us through with your experience on this to explain a couple of things. So first, we talk a lot about the importance of sure. shifting towards renewable energy, right? There's clearly, unless you're really a heavy ideological denial, there's clearly an important environmental issue going on here. But then there are also

Starting point is 01:30:46 really important pragmatic issues involving our reliance on fossil fuels and the importance of actually using fossil fuels, you know, to raise the standard of living in places where they also deserve to live well. And you've, you used a great phrase with me when we've talked about this in the past where you talked about the missing money problem. And I wonder if you could just unpack this and talk about how you think through this issue in a kind of non-ideological, rational, pragmatic way. Yes.

Starting point is 01:31:19 So my father and his partners with Yorktown, 120 investments. I've helped them from 2013 till 2021. I was devoting some of my time to helping them develop a renewable energy practice because were investing in oil and gas companies, you know, I led, help them lead investments in battery companies, wind companies, solar companies, and help them recruit a new team of people. So they'll raise the next Yorktown partnership. I, you know, energy investing is sort of the family business. And as long as I can remember, you know, dinners with people from the oil patch or trying

Starting point is 01:31:58 to make this happen. So, I mean, I have a really hands-on sense as to what. happens in order to keep the lights on. And so, you know, saying it and doing their different things, this is, this is from some combination of like talking about it, but also watching people do it and investing in it. So I guess the missing money problem, I think there's the physics, the economics and the politics. Okay.

Starting point is 01:32:22 So let's just go through this in order, right? So I can organize this, the physics of it. And not many people understand this. We're so wealthy. We've gotten detached. from where our energy comes from. A well-fed adult human working 10 hours a day can create like a kilowatt hour of electricity of energy.

Starting point is 01:32:44 And a kilowatt hour of work from a well-fed adult manual labor would keep a 40-watt light bulb on for 24 hours. That's what a human being can create with their own work. And if you take gasoline, which has been called a fossil fuel, right, which is a, you true, it comes from old animal and plant biomass that's been compressed in the earth. It's basically a bunch of carbon and hydrogen atoms attached to each other. The energy in those carbon and hydrogen bonds in a gallon of gasoline is 34 kilowatt hours. So a gallon of gasoline has within it 34 manned days of work, which is an extraordinary amount of energy. and people complain about paying $4 for a gallon of gasoline, but when you work out what you're paying per man hour of work, you're paying one cent.

Starting point is 01:33:43 And moreover, the kilowatt per hour per gallon, like if you say, well, let's take lithium, which is at the core of this new energy economy, these batteries, which are powering these amazing Tesla machines, the energy density of a lithium battery is 150th, 2% of that of gasoline. And gasoline, when you call it a fossil fuel, but we as a society, we're, you know, 4,000 years into our civilization, have not discovered as energy dense a substance as gasoline

Starting point is 01:34:16 and its cousin diesel. There isn't another one at room temperature just sits there. It's good forever. The only thing that is close to, you might, that is more energy dense is uranium and plutonium. You need a containment vessel. Like, you're not going to see a nuclear powered car. So if you think about the impact that this incredibly dense, you call it a fossil fuel, you could also call it a miracle fuel. Like the impact that gasoline and diesel and coal before them have had on our society, if you think about standard of living, Cicero lived in the first century BC, Roman senator, right?

Starting point is 01:34:51 His quality of life was better than that of George Washington. We lived 1800 years later. like they're both you know agricultural societies Cicero had toilets that flushed right Cicero's roads were better you know if you look at GDP per capita between 100 BC and and you know 1776 AD there's almost no change I mean there are

Starting point is 01:35:14 there are wooden ships and compasses but you know the and gunpowder but very little economic innovation 1802 James Watt discovers the steam engine and can start to use coal to create mechanical energy. So today, you know, we've gone from steam engines to internal combustion engines. When you turn on a Toyota Corolla to go get a latte at Starbucks, your 170 horsepower engine is delivering the energy of 3,000 people. It's like you're in a chariot being pulled by 3,000 people, right?

Starting point is 01:35:48 Where wealth in Cicero's Day, he had 100 slaves. George Washington, we know, had 100 slaves. Wealth would be 100 slaves. George Washington is one of the richest people in the American colonies. Turning on your corolla to go to get a lot to you, you've got 3,000 people working for you, and you're paying them one penny an hour. So that is at the core of why, when you look at world population going from half a billion in 1776 to 8 billion now, you look at GDP per capita exploding, it's this energy.

Starting point is 01:36:20 So we are, we're a species that's deeply dependent on the physics of these high. or carbons. The economics of it, like there have been energy transitions. So we had Cicero and George Washington and your economic achievement was dependent on how many animals or humans you owned. Flesh, wind. That was the first, those were the first prime movers, right? Then we had coal and coal from 1802 onward, you know, all the industrial revolution and the railroads and all of that. And then coal gave way to oil and gas. You know, in 1912, the Titanic launches. It's powered by coal.

Starting point is 01:37:02 I think it's pretty much the same year. Churchill, who's the first sea lord of the admiralty, is making a decision. Despite all of coal in Newcastle in the UK, he's going to have dreadnoughts be powered by oil because it's more energy dense, more efficient. So he's going to make himself dependent on the Persian Gulf, but his dreadnots will be as fast as the German dreadnought. So we move into the age of oil after World War I. men and horses to coal to oil, that's three energy transitions. Now we're in another energy transition, right? This energy transition is not driven by the lower cost and higher efficiency of the new modality.

Starting point is 01:37:38 It's driven by the need to reduce emissions of greenhouse gas. And so far, and there are a lot of people working on this, so far, the expense of this new energy is more than the old energy. And so here's an example. And this, you know, I have a very good friend, 25-year friend who is leading thinker at the Environmental Defense Fund working on matters of climate change.

Starting point is 01:38:07 He's actually two weeks from now. He's going to be in California. You know, they're launching this satellite into space funded by Jeff Bezos, backed by Google, to monitor methane emissions all around the world. It really is doing amazing work. His name is Mark Brownstein. He calls it the Mississippi.

Starting point is 01:38:22 money problem. If you have a solar panel, you claim that the energy produced by your solar panel is cheaper than that of natural gas. But you, the solar panel developer, don't have to pay for the battery necessary to store the power at noon. And you don't have to pay for the natural gas plant that is necessary for when you have like, you know, let's say three days of cloudy skies. society has to pay for those in some way. And so the missing money problem pops up in all society so far, whether it's California or Germany or two examples, where your penetration of the electric grid goes above 30% wind and solar, your cost of electricity starts to spike.

Starting point is 01:39:11 So the numbers in the United States right now, 21% are electric grid is powered by wind and solar. We have a 19 cent per kilowatt hour retail electric price. In Germany, Germany is up to 44% and they're at 44 cents. 44 cents. It doesn't sound like a lot, 44 cents versus 19 cents. If you had German power prices here, if you doubled the share of our grid provided by wind and solar with battery backup and you also have to pay for natural gas plants to sit there for the times when the sun doesn't shine for three days of time.

Starting point is 01:39:48 He went to 44 cents, German power prices. Every household in America would have an electric bill annually that is $3,000 more. $3,000. And who pays that is the missing money problem. $3,000 is not a lot to some members of our society. But data from the Federal Reserve Board, 40% of American households can't come up with $400 of emergency savings for a medical emergency, right? $3,000 is a ruinous number. That doesn't even include, that's just your retail electric price. That's not the cost of more expensive chicken in the

Starting point is 01:40:25 refrigerator at the grocery store. So that's the economics. This energy transition is not being driven by lower cost and higher efficiency. This is being driven by a need to, a very understandable need to reduce emissions. So you get into the politics. Politicians understand the need to reduce emissions, but they're operating in a system where they need to be reelected. In my experience, very much a minority of politicians, by far below 50 percent, don't have the numeracy or the physics or the economics to understand what I just said about the missing money problem. And so they very much understand the desire to get reelected. And so what they do in response to popular desire to see emissions fixed is rather than, they basically have two choices. They can

Starting point is 01:41:12 put a price on carbon, which would cause society to have a real price reflected through, which would cause people to put a price on carbon emissions, therefore doing alternative behaviors, reducing those carbon emissions, or they can subsidize the guy with the solar panel or the guy with the battery. You know, Biden's Inflation Reduction Act offers $60 a ton for people who put CO2 in the ground and they offer 30% off at the capital cost of the battery. And for a politician, this is really exciting because the guy with the carbon sequestration project or the guy with a battery project is also a donor.

Starting point is 01:41:54 So the donors give money to the politicians. These different things get subsidized. It's not the efficient path. The efficient path would be a price on carbon that allows the missing money problem be fixed in the most efficient what possible. for an energy investor, and O'Cliff has a couple things that are energy investments, it's tricky to navigate because what you need to do is you need to recognize that the politicians are operating both from a lack of numeracy and from a need to be reelected in a system where

Starting point is 01:42:25 they're going to do these things that are economically irrational. So you need to own things that no matter what irrationality the politicians do will prosper, but you also need to own things that eventually, because I think we'll get there, the cost of this subsidization and inefficient path will grow to be so great that eventually a price on carbon will be imposed and you need to own something that when there's a price on carbon, let's say $100 a ton on all CO2 emissions, your investment will prosper. I'm really looking forward to that day. I think a representative democracy is actually pretty poorly placed to manage an economic problem of this nature. It's like the biggest engineering project ever undertaken by man.

Starting point is 01:43:08 And it's our founding fathers, I think if you had described to them this problem, they would have said, oh, the system is not going to be very good at this. They were living in a world where taxes were 1% of GDP through import tariffs and there were like six frigates. You know, it was not like, how can you have a representative democracy to rework the most complicated economic machine known demand, which is called the power grid? But that's the missing money problem. And I'm just hoping we get to the answer soon. Just one other thing, and this is, it feels a little bit like a rant. You can't have a price on carbon until you have a legitimate substitute, because if you put a price on carbon and you don't have a substitute, the way that your carbon emissions will go down is less economic activity. Like what you need is you need the Elon Musk's of the world to create cheaper solar panels, cheaper batteries, cheaper electric vehicles, and then bring the price signal to push us all towards that substitute.

Starting point is 01:44:01 But I think the way our politics are toxic already, like if you said to people, guys, you really can't drive as much, you can't, you know, buy as much, you can't, you have to suppress your standard of living. I don't think, I don't think the American people are ready for that. And so the politics of it are very tricky. With your investments, you've clearly positioned yourself in an intelligent way so that you'll be okay, whatever happens, right? So you own a very, very low-cost oil producer in North America. You own a company that provides heating oil and propane to hundreds of thousands of households. So you're thinking very seriously about the practicalities of how to be a resilient investor, even in this very fraught environment where there's lots of ways this could go in terms of regulation and the like. But I'm wondering how you wrestle also with the ethical concerns of investing in this area.

Starting point is 01:44:54 Because this is something I know you're very thoughtful about. And I had a discussion with Guy Speer about this a couple of weeks ago when we were all in Switzerland. And Guy wrestles tremendously with the ethical questions about investing in coal, for example, where he's like, look, it's this incredibly juicy idea. But also, I've been publicly stating the fact that I want to invest in things that are really good for society. And so then I see guys sort of twisting himself up in knots being like, well, if I were to own options, that's different. or if it's metallurgical cold, then it's different. And I think there's a tremendous tendency to rationalize our own behavior that's good for our own finances. And I'm wondering how you wrestle with this question of how we should actually think through the ethics,

Starting point is 01:45:46 the morality of investing in companies that probably on balance are not great for the environment, but that are necessary. economically. Yeah, I guess like an overarching point and then two things about investing. I think the overarching point is that we're so rich that most people, even very educated people, have no real idea where our energy comes from. Like there's a wonderful book that's actually on the list that I want my kids to read. It's by Vacliff Smil. It's called How the World Really Works. And he makes this beautiful point in the introduction, which is, I think it's the last time that two educated people could meet and reliably know half of what the other person knows

Starting point is 01:46:35 was like 1780, that the specialization of information has gotten to be the point where the glory of, you know, large language models and then, you know, genetic botany that, you know, increases crop yields, but then, you know, this person is a trial lawyer. If you bring these people together at a cocktail party, they'll talk about all sorts of interesting things they have in common. None of them will be their professional experiences. Whereas two people meeting in 1780, they will have read Plutarch and they will have had John Locke and they will have read. There's like a library that you could carry around. Human knowledge has exploded.

Starting point is 01:47:11 One consequence is, like 1% of the population farms now used to be 70%. You could have a conversation with anyone about farming in 1780. I mean, what do you and I really know about harvesting crops? What do you really know about drilling for natural gas? If we had no fossil fuels. So an interesting thought experiment, I think we would be, like, I think you and I would be dead in 10 days, 14 days? Dead.

Starting point is 01:47:38 Because, you know, here in New York City, there's like three days of food in the supermarket. Like every morning, the trucks come at 7 in the morning. I mean, they're powered by diesel. the crops depend on ammonia that's synthesized from natural gas. If a guy named Fritz Haber, I'm sorry, the Bosch process for creating ammonia in 1912, like if, you know, the way the nitrogen used to be put onto crops was, you know, animal and human manure, which is 2% nitrogen by weight. If you don't put nitrogen back in the soil, you're, you can't grow crops anymore.

Starting point is 01:48:15 So you would spread animal and human waste onto land. When was the last time many of us have done that? Then it was guano. You know, you'd put it on boats off of the coast of Chile and ship it up here because it was 8% nitrogen by weight. That's extraordinary. And then this German comes along and he manages to synthesize it from natural gas, which comes out of oil wells.

Starting point is 01:48:36 It's 78% nitrogen by weight. But no one knows that without natural gas, there would be, you know, 80% of the food on their table wouldn't be there. So I guess that's the overarching thing, like a lack of understanding as to what really is sustainable, what our society really depends on is the first point. I think the second point is as we wrestle with this and deal with a missing money problem and try to figure out a way to intelligently reduce the emissions, you need to choose your investments to survive this interim period of different government policies. When a politician who is enumerate and may be ignorant of these things stands up and proposes a policy, it may damage a market or a business. And you just need to be able to anticipate what they're going to do and own something that survives through this policy, this period of, I think, muddle. And then that gets to the third point, which is you need to be in things that are sustainable, like truly sustainable, sustainable, informed by the real need to sustain human.

Starting point is 01:49:40 civilization as well. And so if you imagine ultimately a $100 a ton carbon price, I'll bet you we could reduce carbon emissions. I'll bet you if people did better insulation of their homes, it might cost just $20 a ton. At some point in the future, I believe there'll be a general price on carbon. And this will no longer be an ethical question of, are you doing the right thing? Are you doing the wrong thing? This is a societal price on carbon that's lowering our overall societal emissions and some businesses are sustainable because they are providing the goods and services that we need in order to survive as a civilization and as a species for less than that cost and therefore it is a sustainable business.

Starting point is 01:50:21 And so the two businesses at Oakcliffe owns, I believe passed that test. So I really don't think this is ethical. I think the ethical thing is a bit of a false argument. I think it's really, do you own something that ultimately is going to survive this crazy missing money political problem and ultimately is sustainable? And in the meantime, by the way, because a lot of these businesses are shunned, if you own a business that's generating a lot of free cash flow that's run by people who are buying back the stock and it's ultimately going to be sustainable, it can be a very good investment. Yeah, I mean, look, there's clearly a lot of money that can be made in this area because of the underinvestment and the fact that it's untouchable for certain investors. And so it's a little bit like Howard Marks telling me many years ago when he was investing in areas like distressed debt, when people will tell you a whole category is uninvestable, it becomes an incredible investment often.

Starting point is 01:51:17 Well, it becomes interesting, but you have to own things. If you're going to own them for the long term, especially, you have to own things that are not, that are creating a pie, only some of which is going to the shareholders. And you just have to define that pie as being good for the environment as well with a rational price on carbon that society can live with. And I think that this question, is it unethical to own a coal producer? That's sort of an interesting question. I think more relevant is, is that coal producer? If we really had a rational climate policy where CO2 emissions cost $100 a ton, would that coal producer still be in business? And if the answer is no, you shouldn't own it.

Starting point is 01:51:52 So at the moment, as you've said to me in the past, we have this very inefficient patchwork of subsidies for things like solar to try to encourage people to behave in a way that's going to be better for the environment. And I think a lot of consumers like me who are not very knowledgeable about this stuff and don't really know what truly has an impact and what doesn't. what advice would you give us if we're responsible citizens and we actually want to change our behavior if we can afford to change our behavior? Because obviously there are people in poorer countries who don't have that luxury of changing their behavior very significantly. So if we're in a position where we can, what do we do in terms of making decisions about whether to insulate our home or buy solar panels or buy a Tesla or whatever? Like what's just pushed on us because they're really appealing subsidies, you know, lobbyists who've done a really great job of making us believe that it's the best thing to do.

Starting point is 01:52:53 If you were me, what should I actually go out and practically do if I want to lessen my impact on the environment? Yeah, it's a great question. I think one thing that you can do is it's a little dense, but there's a pretty good summary. get a book by a guy named David Mackay called Sustainable Energy Without the Hot Air. He was a Cambridge professor of physics who wrote this book, distributed it for free. It's been described by Greenpeace and by Shell Oil as the best book on renewable energy ever. And it goes through point by point, like what you can do, what you tangibly can do and what the real impact is on emissions as a homeowner.

Starting point is 01:53:33 Like one thing that stands out is heat pumps, you know? I mean, one thing that stands out is, you know, ride a bicycle more. I mean, but you can, these things are turned from gestures into actual measurable actions by his numbers. So I'm an, I prize numeracy of many things. That's an amazing book to look at. I think another thing is there are now, you know, ESG as a movement is becoming much more defined. And the environmental, the E and ESG, there is increasing quality of disclosure of what businesses are doing in terms of carbon intensity. The European companies are leading the way.

Starting point is 01:54:16 They're now efforts underway in the United States for U.S. companies to be required to disclose their carbon footprint. You know, I mentioned before, my friend Mark Brownstein, Environmental Defense Fund is about to launch a satellite into space. is going to provide free data on the methane leaks everywhere in the world for everyone to see. And so let's just drill down on that. Like, if your utility is revealed by that satellite data, which I think will be available in six months or something a year, your utility is leaking methane,

Starting point is 01:54:48 which is a terrible greenhouse gas, like 30 times as bad as carbon dioxide, become a member of your community to pressure that utility to plug the leaks. I think there's going to be more and more information to be able to say, well, this company is responsible, that company's not responsible. And there's been a little bit of a lamentable trend where people buy credits. Like I hereby offset my carbon emissions by buying these credits to make sure that this forest in the Amazon is reforested or something like that. That, you know, some of that may be okay.

Starting point is 01:55:20 What I really think we need is good data so that people can see the problem and pressure from conditions. consumers, also ultimately a pressure from taxes. That's what I think will fix this. And I think a lot of the oil and gas industry would welcome it. And what do you think in terms of cars and the like, like, like, as I'm weighing what to buy, like, should I be buying a Tesla? Should I be buying a hybrid car? Like, like, beyond the noise and the politics of this, like, what would you do if you could afford to buy a decent car and you were trying to weigh? Like, what do I do beyond virtue of signaling that actually will have an impact. I think buying an electric or hybrid car is a good thing. I think if you bought an electric car in a place that uses coal to make the electricity, I'm not sure what you've really done for society. So I would do some work on that. But I hesitate to recommend the purchase of an electric car because it's more expensive

Starting point is 01:56:17 and you've got range issues. I own a Tesla. It's an amazing car. but I drive a little secondhand Honda HRV because it just gets better range and living in New York City, it's harder to get a Tesla charged. So I don't know. I think the choice of an electric car is a little bit of a personal choice.

Starting point is 01:56:38 If they were cheaper in five years, I think it's going to be an easier decision, but saying it and doing it are different things. We need to see the electric cars get cheaper. Yeah, just to switch before I let you go, when we were talking yesterday, you said to me, I've never been this happy. And I was, you know, when I look at a lot of the most successful investors, you know,

Starting point is 01:56:57 you're friends with a lot of them. They're a pretty dysfunctional bunch. I mean, they have a lot of broken marriages. No, they're not. They are. They have a lot of broken marriages. They have a lot of kids who don't talk to them. And they, you know, what, what have you figured out about how to actually combine being happy with your work, which obviously you love and you find intellectually incredibly stimulating with this broader question of how actually to have, you know, a decent family life. And can you talk a little bit about that? Because I feel like some of our listeners wonder, like, if I actually managed to be a really successful investor, am I just going to create a trail of destruction in my life? Like, how do you do this and be a successful, happy, productive,

Starting point is 01:57:43 functional human being who is good to your family and friends? Yeah. It was last, at dinner last night with an investor who we both know. And I was teasing him about this time at a prior dinner last year. He had said to me, you know, Brian, I really enjoy our time together. And, you know, your fun company and you're smart. I feel like I learned things from you. But we're guys. And we might see each other five times a year.

Starting point is 01:58:12 And, yeah, that's big for, you know, male friends. I pointed across the table at his life companion. this wonderful woman he's with and said five times a year with you, but I'm going to spend 360 the next 365 nights with her. So she's two orders of magnitude more important to me than you are. And I said, are you saying we should be more intimate? So I thought that was funny. It was so mathematical.

Starting point is 01:58:44 I've been so generous to you not to out your friend. because I know who this multibillionaire is, but I'm not going to do that. I'm being tactful and not saying anything. I'm not going to do that. But I think it's a really interesting point because the choice of a life companion is really an important decision. And if you get that wrong, it's a bad thing. And so I just be very thoughtful about that and really nurture that and do a good job

Starting point is 01:59:14 with that. And the difference one person can make, This is a very interesting thing about this human condition. Like, you have these friends and they can be going on for decades and they're so important as a source of happiness, but especially for men, like, if you get that life companion thing wrong, or if you choose a life companion and then your life changes dramatically, just really be thoughtful about that. Having a group of friends who really treat you, you know, like a friend is very important. And it's, you know, you had Chris Davis on your, on your podcast and he said something, which he's, he said to me in private, I've been thinking about this a lot, this idea of 10,000 day chunks. Like, you know, your first 10,000 days, you're very wide. You know, who do you go to school with? Who are you going to marry? What are you going to be? And then day 10,000 to 20,000, you're very deep. You drive into your career. You have your spouse. You have your children. And then you pop up at day 20,000 men after, you know, a pretty intense career. generally don't have as much as well-developed friendships as maybe they should. They've spent so much time on being a good father, being a good provider, having the career they're going to have. And you pop up

Starting point is 02:00:24 at age at day 20,000, which is like age 56 or 57 or something. And it's, you know, you really can, especially if you're doing what you want to be doing, like, I am not going to go be an architect. That's not going to happen. Not only do I love what I'm doing, I'm not, you know, I know exactly I'm going to do for the next 25 years professionally, but I really, having that breadth of friendships, and starting my 50th birthday, I just said, I really need to spend more time at this. And I'm lucky enough to have some friends who really feel the same way. And that's been, that's really enriched in my life. I wonder if I'd done a little bit more of that between day 10,000, day 20,000, but I don't know, that's, I don't know. And I think the final thing is, if you screw up your

Starting point is 02:01:05 children, nothing else matters. And I know I've got a couple of examples, you know, some of who are very close to me, who at one I'm thinking of in particular, who at the end of her life said to me, you know, she was such a mentor to me, like all of the glittering achievement that you see me having achieved, like at the end, all that matters is, you know, is my daughter. And just remember that. It's very important. Back to this point about sustainability of an investment. Like, if you so devote yourself to an investing track record and you neglect your life companion and your friends and especially your children, what really do you have at the end, but also how really sustainable are you for the people who can trusted you with their money?

Starting point is 02:01:48 Like, you know, if you can't bring to the office, not just an intense focus on what you're doing for yourself and your clients, but like a happiness at the end of the week, you know, to go relax with people, I don't think you're doing yourself a service. I don't think you're doing your clients the service. And it may feel like that last bit of intensity, you know, to the detriment of your marriage or your friendships or your children is in the interests of some professional furtherance. But I don't think it is, you know, you've got to find a balance. And that sounds a little airy-fairy, but it's deeply true, like a lot of things. You got married to Gillian Zoe Siegel, who's an old friend of mine as well, thankfully, in October 2021. And actually, she sent me a photo

Starting point is 02:02:31 recently where it showed that I think the first time that she spoke to you many years ago, I was in the background. So I was watching over you partly, Brian, and unconsciously. I was making some point to her. She looks horrified. No, she looks very dazzled by your handsomeness. But Gillian, for people who don't know, wrote a very interesting book called Getting There, which I've gifted to a lot of people. And she's a photographer, and she's an entrepreneur who has a new company called Lusari, which I told Brian he's not allowed to tout, but I'm allowed to touch. And I actually have my...

Starting point is 02:03:05 www.lussari.com. And I actually have my Lusari goggles, which she very kindly gave me, which are very handsome. You look better than them than I do. But that's not the goggles's fault. But they are elegant. But the thing I wanted to ask you is, Jillian, who's close friends with Warren Buffett, among many other people has a particular gift for relationships. She's extraordinary at building and nurturing relationships.

Starting point is 02:03:37 She's as good at that as these great investors are at stock picking. And I wondered if there's anything you've learned from observing her over the last few years about actually how to build really rich relationships, rich friendships in particular. Yeah, I'm amazed by her. she's a bunch of things that are like on the surface. I call them the obvious things about her. She's smart and talented and beautiful and fun. And these are the things that are pretty clear very quickly when you talk to her.

Starting point is 02:04:09 But there are two things about her that are less clear, but you get to know about her if you spend some time with her. The first one is deeply genuine. And you see it in the way she interacts with people. Like it can be like the people at a restaurant like at the table next to us. Like we're just eating out on a Wednesday night. She starts talking to them and you can see she just engages with people, any sort of people. And their night is better. She gets them laughing about something.

Starting point is 02:04:41 You know, people we meet when we travel, like someone giving us a tour of, remember this in Marrakesh, this guy suddenly his whole life story coming out of him as he realizes who she is and what she's interested in. and it can be important people who open up to her. Because when you're talking to Gillian, you're talking to Gillian. Like there's no artifice. She has this bracing thing called a straight talk, where if she's upset with you, she'll tell you exactly what she thinks. And it's terrifying the first time you get it, but it's coming from a place of such empathy and integrity.

Starting point is 02:05:18 You realize it's a gift because you know exactly where you stand. And I think lots of people, people respond to that. And that's amazing. I think the second thing about her, which is like a double word score, is that lots of people across these relationship, I've gotten to meet her friends, lots of them, when they've gone through tough times. And tough times are inevitable. Like, you know, the idea that there's no tough times in a well-lived life is just farcical. Like her entire book getting there is about getting people to open up about the tough times they've been through. I mean, arguably the 30 people she talks about and getting there, you know, the, from Warren Buffett to Michael Bloomberg to, you know, to Frank Geary to, you know, Craig Vendner. Craig Vendner, sequences a human genome, tries to kill himself before doing that because he's so despondent about his life. Like, how do you go through that tough time and then up into the right? What you start to realize is getting up into the right depends on getting through the tough time. And she's been so aware of that her whole life, friend after friend, like you hear these stories,

Starting point is 02:06:16 they go through a tough thing, like a tough battle with cancer or a terrible relationship thing or job loss. and the person they're calling for help is Jilliam. And so, like, if, it's, I keep, I wish there were a word for like the opposite of a fair weather friend, because in the dictionary, there would be Jillian's picture next to that definition, and that would be the caption. You know, like that, and so if you, what's interesting about our life is if you're genuine and you're there, you're really there, and you do that over a long period of time, what compounds up.

Starting point is 02:06:49 And I'm amazed by it. And I said, you were at the wedding. I think I said, you know, it's like the people around you are a solar system of planets. They're all orbiting each other. And we're all exerting a gravitational force on each other. Right. And the gravitational force of Gillian's character, I think, certainly pulling me, and I think it's pulling others towards their better selves. Right.

Starting point is 02:07:13 She's quite something. Yeah. She's a lovely. She's a lovely person. I'll tell you one very small thing about her that I know, I know, I know. won't be a surprised you, but that I, because I'm a writer, I'm always looking for like little tells about the way people behave. And one thing that's striking to me about Gillian is that she very consciously, when she's, when she's going out for dinner with you in a restaurant or

Starting point is 02:07:38 meeting, meeting you, one, in her, in your apartment or anyway, she makes sure that she puts the other person in the best seat where they'll have the nicest view. And I think that's a, it's a, it's a really interesting little insight into good behavior, you know, that she, you know, she, she doesn't, she doesn't sit in the restaurant with the beautiful view of the ocean. She makes sure that her guest who might not be there again gets to enjoy that view. Yes. Yes. There's a, there's a, there's that, there's a kindness. There's also an intensity. She's from a very entrepreneurial family like that, you know, there's the Lusari goggles business is, there's lots, of ideas all the time. She has three brothers. It's quite amazing. They all have law degrees. They're all

Starting point is 02:08:27 very supportive of each other. They're all starting things all the time. It's an extraordinary family. I wanted to ask you one final question. I remember once we were walking on the beach, I think, in Fire Island, and you said to me, I'd like to ask prospective clients in our fund. What's the money for? Like, if I'm going to make you all this money, what's it for? And I thought those are really interesting question and also applies to you in a way, right? Because you already won this game, right? I mean, you're already very wealthy by anyone's standards. You have a very wealthy family. And I mentioned this to you yesterday and you were like, you know, yeah, but I have this loop in my head that's like, you know, I got to paddle faster. I got to achieve more. And, you know,

Starting point is 02:09:13 I know it's somewhat related to the fact that your father's been incredibly successful and you want to prove yourself and prove yourself and prove yourself again and again. And I wondered how you think about this issue of like, what's the money for at this stage? Yeah. I mean, the question that we ask people who contact us, they reach out to us or we get to know them or something is, we really want to know who you are and what you expect, you know, from an investment with us. What is this, is this something that you're going to need next year for, you know, a house or is this something that you're trying to build for your family over time. And what we're looking for with that question is like, you know, is this really a piece that's part of your long-term financial plan? And also,

Starting point is 02:09:56 do we know who you are? Do you know who we are? Is there a relationship here? We really want to have that relationship because we're on this journey together. And I want to know a little bit about you. And I think you should know a little bit about me. So that's where that question is coming from. And I think, you know, what's the money for for me? It's always been about autonomy. Back to that Felix road advice. Like, you know, I want to do exactly what I want to do and I want to do it in the right way. I don't want to be told to do anything that's the wrong thing to do.

Starting point is 02:10:28 And I want to do the right thing at the right time. So that autonomy to do that is very important to me. I do not want to call on a client with the wrong idea every six weeks. It doesn't make any sense to me. I want to have, you know, a well-lived life. I really love this business. I love solving problems and I love delivering results for people. And that's deeply satisfying.

Starting point is 02:10:55 And ultimately, the money, I think it's just as important, you know, the making of it for me personally. This is a personal thing. It's just as important to have a piece of my life that's about giving it away. Like, you know, maybe five or ten percent of time. I've been involved in the Charter School movement in New York. You know, Jillian and I are, you know, talking about, you know, what other philanthropy, she and I might get involved in. Like, is there something that you're involved in that's making people's lives better

Starting point is 02:11:23 where your money and your time make a difference? And, you know, I could run a control group of me. Like, let's say 100% of my time was in investing. That's one universe. And 90% of my time is an investing and 10% is in that. that attempt to grow a network of charter schools or, you know, Julian is very interested in helping some of the, some of the things that are happening in Israel. Like, we could look at the investment returns of those two worlds. I suspect the one in which 90% of the time is working on that nonprofit stuff actually gets better investment results because you run into more people.

Starting point is 02:12:01 You think more about the world. And I, that's an uncertain question, those two control groups. the certain thing about it is at the end of another 20 years of this or 30, 40, when you look back at what you've compounded up, you know, there's financial compounding, there's friend compounding, but boy, wouldn't it be cool if you'd compounded some other stuff? If you'd made that community a little bit better, wouldn't that be great? Brian, I think that's a very good note to end on. And I just wanted to thank you. It's been a real joy chatting with you. And it's always a joy chatting with you and I've really enjoyed becoming friends over the last decade and I'm looking

Starting point is 02:12:42 forward to many more conversations in the years to come. Well, William, you get me to talk about stuff that is very interesting. I feel like I, you know, you're almost like a therapist or something. And some of these things have been done with wine. This one's been done over Zoom. We'll see how it plays for an audience, but I've really enjoyed it. So thank you very much. Next time we'll do it with wine too. We'll see how that one goes. All right. Thank you so much. Be well. All right, folks, thanks so much for listening to this conversation with Brian Lawrence. I do hope you enjoyed it.

Starting point is 02:13:14 I'll be back very soon with some more great guests, including a terrific conversation that I had recently with a very successful hedge fund manager named Christopher Sy. In the meantime, I'm heading off to Omaha in a few days for Berkshire Hathaway's annual meeting. I'm really excited to hear Warren Buffett speak and to reconnect with lots of old friends and former guests on the podcast who will be there, including. people like Monich Pabry, Guy Speer, Francois Rochon, Chris Davis and Tom Gaynor. If you happen to see me in Omaha, please feel free to come up and say hi amid the maelstrom. Neither to say, I'll also be very happy to sign a copy of my book, Richard. Why is that happier if you happen to have one with you?

Starting point is 02:13:55 For now, you're welcome to follow me on X at William Green 72, and as always, do let me know how you're liking the podcast. I'm always really happy to hear from you. Until next time, take good care and stay well. Thank you for listening to TIP. Make sure to follow Richer, Wiser, Happier, on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network.

Starting point is 02:14:33 Written permission must be granted before. syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - RWH044: How To Beat The Market w/ Bryan Lawrence

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