We Study Billionaires - The Investor’s Podcast Network - TIP543: 100 Baggers: Stocks that Return 100-1 w/ Chris Mayer

Starting point is 00:00:00 You're listening to TIP. On today's episode, I sit down with Chris Mayer to discuss the lessons from his book 100 Baggers. Chris is the portfolio manager of Woodlock House Family Capital. Chris's book was published in 2018, and it has quickly become a favorite within the investing community. The book very clearly explains the ingredients needed for a stock to compound and grow to 100 bagger status, which is what we discussed during this episode.

Starting point is 00:00:28 In this episode, you'll learn the primary characteristics of companies that reached a hundred-bagger status in the past, how Chris views valuation when purchasing high-quality companies, how Chris assesses the durability of a moat, why stocks are one of the best long-term protections against calamity and chaos, why Chris prefers to own companies with management teams that own substantial portions of the company's stock, why Chris chose to concentrate his fund into only 10 holdings, Chris's assessment of Constellation Software and why it's one of his favorite positions, and so much more. Chris is a wealth of knowledge and has really helped me a lot personally with determining what are the most important attributes of a business to look at. And I find it really fascinating to study some of the companies that are in his portfolio, such as Constellation Software, Topicus, Copart, and Old Dominion Freight Line.

Starting point is 00:01:20 And these are all really high conviction names for Chris, as he only owns 10 or so stocks at the time of the recording. What I also find fascinating about Chris's approach is how he makes investment decisions very infrequently. During 2022, for example, Chris mentions during this interview that he only made one purchase and one sell. If you haven't read 100 Baggers, I really recommend the book. It's been really helpful for me and helping me refine my thinking of what to look for in a quality company to hold for the long run. With that, I really hope you enjoy today's discussion with Chris Mayer. to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Starting point is 00:02:19 All right. Hey, everyone. Welcome to The Investors Podcast. I'm your host, Clay Fink, and today, I'm very happy because I'm joined by Chris Mayer, Chris. Thank you for joining me today. Hey, good to be on with you, Clay. So I read through your book, 100 Baggers for probably the third or fourth. fourth time in preparation for this interview. And it's definitely one of my go-toes when figuring out, you know, the types of things I want to look for when purchasing a company. I'm, I'd call myself more so like a quality investor. I want to buy a higher quality company, kind of what Warren Buffett's preached more and more. Maybe we could get this conversation kicked off by maybe just

Starting point is 00:02:56 having you just tell us what a hundred bagger is and what brought you to writing a book on them. So a hundred baggers of stock that goes up 100 to one. So you put a dollar and you. get a hundred back. How I got into it? Well, that's, uh, that's interesting. I mean, I said, started with Chuck Ackre really in 2011, and he gave a talk called Investors Odyssey. And you can find it online. It's definitely recommended it. It's a great talk. And in that talk, he mentions a book by Thomas Phelps called 100 to 1 in the stock market. And I was an investing junk, you know, I thought I had read every kind of investing book out there, all the obscure ones, too. And I'd never heard of that one. So I got it and I, you know, I really loved it. And I started quoting from it.

Starting point is 00:03:41 And this was back when I was running my newsletter. I had a reader say, you know, you should update that book. I said, yeah, that's a great idea. So that's how really got started. I started to put together the research on my own and to update Phelps's study. But that's what really inspired me. It is kind of funny that you come across some of your best ideas from the outside. It just kind of serendipitously happens to you and then you're like, hey, why didn't I ever think of that? Serendipity is a powerful thing, man. At this point, that's one of my favorite words, serendipity. It's never underestimate. So tell us some of the key characteristics you found in studying the hundred baggers.

Starting point is 00:04:21 I know you put a lot of money into updating the study to put together the new list of companies that achieved the hunter bagger status. So where were some of the key characteristics you found? Well, I mean, the list that I created too, I saw. of, you know, called it a little bit. So I took out a lot of the little tiny, a little microcap flares, like, you know, if some little mining stuff went from five cents to five bucks or something, that kind of stuff didn't make it. Because I was trying to kind of grapple with the idea that you might be able to see these in the numbers, you know, you can't really predict if a mining company is going to hit it big or some small little biotech company is going to have a big

Starting point is 00:04:58 drug that suddenly, you know, goes up hundreds of percent. We've all seen those happen. So I was trying to find if there were some predictable ones. And, you know, I guess I was a little bit, I didn't find as much as I thought I would as far as this is kind of like a statistical profile, which I kind of hoped I might get more at. But because the path up the mountain is so varied, and there's so many different ways. But if I had to like pick a few things, I would say, you know, almost all the stocks, all these stocks, you know, took a long time to get there. Like if there's kind of like, imagine a fat tail. Like most of them were 20, 25 years. took to get there and to do that.

Starting point is 00:05:35 So you have to compound capital at 20 to 25% a year for 20 to 25 years and that gets you your 100 bagger. That's basically the math of it. So that kind of frames it. And everything else is kind of backing into how do you get that? How do you get that? So that's the most important. And I would say, you know, that means that you have to have companies that grow a lot, right?

Starting point is 00:05:56 So the McDonald's of the worlds and the Home Depot's that just expanded and had the world is their, you know, market. I mean, those are the ones that kind of stand out. That's definitely one of those traits, the ability to just really grow, grow, grow, high returns on capital, long period of time. Obviously, companies that did this also had,

Starting point is 00:06:16 usually had some sort of moat, had something that they did that was difficult to copy. And then another one that I liked, that I'm more sensitive to because I've integrated this in my own investing process, and that's it,

Starting point is 00:06:28 that they have some sort of entrepreneur or somebody behind it. So there's a number of like, you know, Charles Schwab, you got Charles Schwab, right? Steve Jobs behind Apple. I mean, there's always, not always, but there was often an individual and entrepreneur, some driving force that really got it going, and that was important to the name. There are exceptions to that, but those are some.

Starting point is 00:06:48 Yeah, and then the biggest winner of your study was TIP's favorite Warren Buffett and Berkshire Hathaway. I think at the time you wrote the book, it was an 18,000 bagger, which just mind-numbing returns when you think about it and look at his track record. record versus the S&P 500. Yeah, it's nuts. This is crazy. You know, as someone that's younger and is continuing to learn more and more about investing and listening to your past interviews, I know you talked about how you learned a lot along the way and kind of found your way to wanting to buy these higher quality companies. And I think one of the biggest struggles for me is the catch-22 of you want to own a great business, but oftentimes the market knows it's a great business and it's trading at a higher valuation.

Starting point is 00:07:32 or higher multiple. And I think that some investors kind of struggle with that because maybe 20, 30 years ago, a lot of these higher quality companies weren't trading at as higher multiples. But maybe we'll see that direction shift a little bit with higher interest rates now, too. Yeah, I mean, that's an interesting point.

Starting point is 00:07:51 I mean, evaluations for most of these great companies who were generally higher. I mean, it wasn't like, we all can find exceptions, right, when I think like Constellation software, you know, you go back to like 2015 or 16, whatever it was. I think it was they had a pretty crazy low, multiple earnings. You're like, what happened there? But that's kind of not very typical.

Starting point is 00:08:13 Most of the time, great companies carry premiums. And even then, it can still work out. I mean, I always think of those little exercises like Terry Smith is famous for doing, you know, where he looks at a company and then he rolls back 20 years and shows you what you could have paid and still earn whatever 10% compound return and the P multiple is always really high, you know. You ain't got to be careful with that kind of thing because you've got to be right about the business.

Starting point is 00:08:40 But I've done that with some of my own holdings. I remember I did copart, and I think I looked at like it's a 10-year period where it was up 10x, but I looked at, well, you could have paid, and you could have paid like 60-something times earnings and still made 15% compounded over that decade, even though at the time it was still trading in a premium to the to the S&P, I think it was 20-something times. So, yeah, you really got to be, you know,

Starting point is 00:09:06 right about the business. And then I would say, you know, you don't think of it necessarily like you only get one bite of the apple. So you buy some today. And, you know, two, three years down the road, maybe you get another chance where it's where it does get kind of cheap. And so, you know, if you're really, especially if you're younger and you're investing in these things for the long haul, you're going to get more assets as you go and you'll probably be buying them for years. That's another lesson with the hundred beggars is that for a lot of these stocks, you could have bought them at the highest price paid for, you know, the highest price they traded and in any year, you could have done that for years in a row and still made a hundred times your money.

Starting point is 00:09:44 So if you're really right about the business, you have more room on valuation than you probably think. As you mentioned, do you really need to be right about the business? And a key piece of that is obviously what you've alluded to is the moat. A company needs to be able to continue to grow and continue to fend off competition and earn those high returns on capital and continue to grow earnings. An example to nowadays, a stock that's kind of been punished as alphabet. Charlie Munger said they have the strongest moat in the world years back. They regret missing that one.

Starting point is 00:10:19 And then now people are saying, you know, they have no moat. There's AI's coming in, chat GPT and all this and its capabilities. How do you go about assessing the durability of a mode? about, yeah, I spent a lot of time on that because that's, I mean, Clay, you naturally hit it. I mean, that's the thing. If you're going to own these things for a long time and you're buying businesses and earn high returns on their capital, you want to make sure they can continue to do it year after year. And so you have to spend a lot of time figuring out what makes it special, why are they earning those high returns. So naturally excludes a lot of things that are very cyclical. You know, you might have an obvious example. We say you have an oil and gas company that's earning great.

Starting point is 00:11:00 returns, but that's only because we're at a good spot in the oil cycle, for example, that might not always be the case, right? So you really have to spend time figuring out what makes it special. And I don't know, I mean, there are different kind of competitive advantages, you know, network effects. We all know, we all know some of these. I think of an example like, say, Copart is a name my own. I always mention it because it seems to be a good example of a company that has a moat, has basically one other competitor insurance. auto auctions, but its competitive advantage is really rooted in the real estate that it owns and accumulates over a long period of time, and then the network effects of having all these

Starting point is 00:11:40 different buyers and sellers of salvage cars, salvage vehicles on their marketplace. And so that becomes very, very difficult for competitors to crack over time. So that's what you have to do. I mean, it's a case-by-case basis looking at the companies and figuring out how is it able to earn those high returns and then being convinced that they can do it for a long period of time and it's very difficult to copy what they do. As I've learned more about, you know, how investors go about beating the market, it's been a really humbling experience. Initially, you know, it's easy to believe that, you know, it's impossible to beat the market nowadays with all this information

Starting point is 00:12:22 that's out there. Anyone can access it for free. You have all this money in Wall Street that can invest in certain resources you can't get access to. The list goes on for reasons, you know, you won't be able to beat the market. And I was reading The Joys of Compounding. It's a fantastic book by Godham Bade. And he talks about this study where they look back and they looked at, okay, here's the higher performing companies that earn high returns on capital and the lower performing companies. And what they found in that study is that the winners tended to keep on winning and the losers tend to keep on losing. And when you buy one of those winners at a fair price, essentially the opportunity for an individual investor like me, the opportunity is to have that long time horizon.

Starting point is 00:13:06 So buying those winners and then just allowing them to compound as you just sit and wait. And I think that's one of the beauties of it and something you've discovered in your research as well. Yes. And I don't know that you necessarily want to make like being the market your goal right off the bat because it's kind of like, you know, saying you want to be happy. It's just not a goal you go at directly. It's kind of like it's the end result of a good process. And also, you don't have to do it a whole hog. If you were an individual investor, you could take some of your money, put in an index fund and leave it there and then put some other part where you're trying to do better than that by studying businesses and doing as you suggest, trying to buy the winners. And I definitely agree

Starting point is 00:13:48 with that, the winners tend to keep winning. And there's always, again, there's always exceptions, it's easier. You know, I was saying, you kind of joke with the end. You're buying a chart that goes up and to the right, and you want it to keep going up to the right. But that's what tends to happen. The winners do tend to keep on winning again because they have some competitive advantage

Starting point is 00:14:08 and something special, and then they keep doing it. So all good points, I would say. 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 00:18:33 Nowadays, there's a good number of people that put a lot of their wealth outside the financial system and some probably just wait and hold cash, waiting for the next crash to happen, essentially trying to find the market. And you referenced the work of Barton Biggs in how he studied these different historical catastrophes, what I'll call them, and how one preserves their wealth during times of chaos. So talk to the audience about why investing in stocks offers investors good protection against this type of calamity. Right. Yeah, I mean, Barton Biggs' book was an interesting read. I think it's called War, wealth and wisdom. And he looks at World War II and he looks out how different stocks, stock markets

Starting point is 00:19:18 behave. And even through that whole calamity, if you had bought U.S. stocks, he would have been, it would have done okay. I don't know if I would take that too much to extreme. I mean, I think the basic idea is that you want to own something. You want to own stuff. And if you own shares in a good business, a great business, your odds of surviving that calamity or are probably okay. Now, we can come up with extreme calamities where that's not going to be the case, but, you know, most of things like wars and recessions and those kinds of things. And just think about it. I mean, when you have a great business, you have, you also have, you have people there trying to figure it out, trying to figure out the problems and keep the business going. So I think people underestimate that because they tend to think that they just want to own something like gold or something that they know won't change. And there's certainly a place. in your portfolio for those kinds of assets. But I don't think you want to underestimate the ability of a really good business to navigate its way through difficult times. I mean, just look at the 20th century. It's kind of a mess. But if there's a number of stocks that did perfectly fine.

Starting point is 00:20:28 And the result of his work, he essentially recommended putting at least 75% of your assets into stocks. Yeah, and that's Barton Biggs, which, you know, he was kind of a, he was kind of pessimistic in that book, right? I mean, he wasn't, yeah, he wasn't, I think he had a lot of survival of stuff in there too. So, and he still said 75%. And this guy is just looking at, you know, history in different markets and how they performed during very bad times. Another piece I really resonated with in your book was the focus on owner operators. I was talking with one of our founders, Stig, about a company and, you know, I was telling them all about the business, you know, how, how well the stock's done over time and he kind of ignored what I was, you know, saying about the business. He's like,

Starting point is 00:21:16 how much stock does it do the insider zone? And it kind of just took me back because it was, you know, pretty unrelated to what I was talking about. But I think it just hits on the point of how important insider ownership and owner operators is within a business. These are businesses that are heavily owned by the managers because the managers ultimately decide the fate of the business. So maybe you could expand on what makes owner-operator companies a ripe hunting ground for investors. The more and more I study business and the more experience I get, the more I realize that at Fottom business is just about people. And I guess there are some businesses that are so great that even when they have lousy management, they can survive that for, you know, derive that.

Starting point is 00:22:00 But I always think of that Buffett quote, too, where he says, you know, over 10 years, a CEO. determines where 60% of capital is the business is employed, something crazy like that. So capital allocation makes a big difference. And so I always like skin in the game. There are a number of things, I'd say, you know, the behavior of people who own a lot of stock is just different, and especially comes out in times of crisis. And there's different studies for this that show that they'll invest and continue to invest even during down times where a more hired-hand CEO might, you know, kind of pull back and

Starting point is 00:22:35 and what's to preserve his job doesn't want to be called in a question. So I think about even specific examples, you know, like Old Dominion Freight Lines is a business I own, and they have continued to invest in opening new distribution centers even when the trucking markets are weak and where their competitors don't. I remember a slide deck from one of their presentations where they show over a 10-year period of time, the number of distribution centers,

Starting point is 00:23:03 how it's grown for Old Dominion, but for a lot of their competitors, it has not. So the willingness to invest in the business is very important. There's another interesting example. I mentioned Copart, and I tweeted this out, the difference between Copart and insurance auto auctions when it came to investing in the business. Copart, again, owned by Willis Johnson and Jay Adair

Starting point is 00:23:25 that have quite a bit of skin in the game, and they think long term and invest in long term, whereas insurance auto auctions was owned mostly by, you know, investors. There was not an entrepreneur in the heart of that one. And they were more intent on paying dividends and didn't reinvest in the business as aggressively. And so over time now you really see the difference.

Starting point is 00:23:47 The market share for Copart is where they were almost equal, say, I think it was in 2016. Now it's like 6040 slanted for Copart. And that's not something you can easily fix because Copart has been investing. every year for all those years and, you know, billions of dollars by now. And so it's very difficult to make up that ground. So those are some reasons. I think also there's other evidence that's out there about families, family owned, you know, I also count families as insiders. So if you

Starting point is 00:24:20 have a family-owned business, they tend to, they have certain behavioral patterns that are good. So, for example, they don't play that earnings, the quarterly earnings game. They tend not to give guidance. They tend to be less levered, less financial leverage. So, you know, you add that all up. The incentives are just more aligned naturally when you have, when you're investing with people who have a lot of stock of their own. They're already on the same side as you, just naturally, by the fact that they own so much stock. Again, I always like to point out that there are exceptions to this, and I'm sure we can all come up with it. Examples of businesses where the insider owned a lot and, you know, still treated minority shareholders very poorly. But by and, by and

Starting point is 00:25:00 large. We look at the good place to fish, you know, by and large, the populations of insider owned companies tend to outperform. I mentioned the joys of compounding, and he has a chapter all about incentives, and he's pulling these Buffett and Munger quotes. And, you know, you read that chapter, and you're like, just like blown away that incentives really drive so much of human behavior. If you want to understand why someone's doing what they're doing, it goes back to the incentives. And when someone owns a lot of stock, just natural. they're going to want the shares of the stock to do well over time and they're going to be more likely to think long term and make those conservative type decisions.

Starting point is 00:25:40 Right. Yeah, I mean, but my among the famous quote on that is show me the incentive and I'll show you the outcome. So, yeah, and that's a big part of what I do at Woodluck House is look at the incentives and we, you know, our portfolio is full of companies that have high insider ownership. So it's important. You mentioned Woodlock and the fund you're managing. So transitioning from your book 100 Baggers,

Starting point is 00:26:07 what were some of the key takeaways other than maybe the owner-operator piece that you've implemented into your own process? Do you always try and apply this template when you're investing in a company, or are there other sort of situations? That's a great question. I mean, I think that, yeah,

Starting point is 00:26:27 when I did the study, it definitely had impact. but I began to appreciate a lot more the compounding that these high quality companies are capable of and results. But it took a while. I was kind of slow to go that way entirely because even when I opened my fund in 2019, I still had some positions that were like some of the parts or deep value kind of or special situations. And it's only, you know, it's gradually over time, has been pushing more and more and more to just doing the finding some high quality companies I can just own for a long time.

Starting point is 00:26:59 And so finally, you know, I'm all the way over there and 100% now. And I'm really not interested in, you know, buying something that's trading it, you know, deep discount to beers and then you know you play some kind of, you know, catch up that's going to take place over the next year or two. And then you try and you do another one. So I don't do any of that now. So now I would say, yeah, I'm 100% with the outline that I put in 100 baggers. So the big ones would be focusing on that return on capital and a high return.

Starting point is 00:27:29 in businesses that can continue to do that for years and years. That's really the focus. And I think maybe one difference is, you know, in the book I talk about staying with companies that are small in market cap. And in the fund, I've kind of, I've expanded that. I mean, I have some companies that, well, there may be like 30 billion or now or so, although when I bought them, they were less. But still, I think that would be one difference is that I'm not so much focused on market cap, but focus more on the returns. I mean, I still favor smaller companies. But I think, and I don't think I'm going to, in the fund, I'm going as small as I said in the book. That would be one difference.

Starting point is 00:28:04 But other than that, yeah, that book is really laid out the principles of what I'm doing now. Another aspect of a business I've really come to appreciate is the return on capital, because that's really, at the end of the day, is really going to drive your investment returns over the long run. So I'm curious if there's a certain figure or hurdle rate you're looking for, maybe in when you're analyzing new investment, are analyzing that return on capital? Yeah, I mean, I try to underwrite to at least 15% compounded, and so double over five, quadruple over 10. And that's, you know, with what I think are reasonable assumptions for the business.

Starting point is 00:28:43 And there's no special magic to it. I mean, I look at, I try to make some reasonable estimate of what return on capital is, make some reasonable estimate on what the reinvestment rate is. And then, you know, you get that compounding number, see what you get, at the end of five and 10 years, have some multiple on that. And then what's your IRA, you know, to now? So that's the way I think about it. And I really don't get much more complicated than that.

Starting point is 00:29:11 One thing I really like is how transparent you are with your portfolio on Twitter. I know that psychologically that can be difficult for some people to share a position they hold because it becomes difficult to change their mind when the facts change because they've already stated they have a position in it. Could you give an example of a company you were holding that you ended up selling? And the reason I wanted to ask this is because you mentioned earlier, it takes a hundred-bagger 20-plus years to play out. And selling interrupts that process.

Starting point is 00:29:44 And you have to kind of start over, I guess I'll call it. One famous example of selling too early is Buffett selling Disney at a split-adjusted price of 31 cents. he sold at a 55% gain and that ended up costing them billions as many know. So what's a recent example of a company you've sold and how your thesis was busted? Well, yeah, I know. First to talk about the transparency thing, I think, you know, writing a newsletter for all that time that I did and being in a fishbowl in that way, having portfolio just open all the time

Starting point is 00:30:18 and everybody's seeing every movie make, I think that was good kind of training for this because it gives me thick skin. I really don't care very much what other people think. And I'm happy to change my opinion. And that's the way it goes. I mean, I'll tell you, one cell was, well, I was the only stock I sold last year. I had one buy and one cell.

Starting point is 00:30:37 So I was Texas Pacific. And I had that since my fund started in 2019. I owned it. It was a good winner, big winner. But I think what thesis change is I misread sort of, of the insiders there and they corporate governance like just got worse and worse and anybody can you know search Texas Pacific and you could find TPL's a ticker and you'll find lots about the sordid tail of what's gone on there since uh you know abuses on executive pay the way they've

Starting point is 00:31:12 just a lot of things the way they've handled their proxy with shareholders i mean it's a long list of things so i couldn't take that any longer and that that that is one that that i was one that sold. Very interesting. Since we mentioned your portfolio, you have somewhere in the ballpark of 10 holdings, and someone in the audience on Twitter wanted me to ask, why do you feel confident running such a concentrated portfolio when unknown unknowns are always lurking? Yeah, that's a good question. I mean, I wouldn't recommend it for everybody. And when you have a 10th portfolio, there's a lot of things that are automatically, you know, no-go. So I'm not involved. I'm I'm not involved in anything that has financial leverage.

Starting point is 00:31:55 I don't have any deeply cyclical businesses. All the stocks I have produce a lot of cash. I have high returns on capital. They have really entrenched competitive advantages. So the odds of a permanent impairment in any one position is very low. So that's one reason. And two, there's a good case for concentration. I'm sure you've seen a number of different studies.

Starting point is 00:32:19 And, you know, people have something of a false. view that somehow the number of stocks they own is going to save them, you know, that owning 25 is safer than owning half that number and really depends on what you own, right? So there's a lot of different research. I forget, you know, I remember Joel Greenblatt, he said something like six to eight, you know, there's other ones that say 10 to 12, whatever the number is. The advantages of diversification roll off pretty quickly. Certainly, you capture almost all of it. Benefits have 20. Maybe probably at 80% or so, maybe more. or with even 10.

Starting point is 00:32:54 So I'm more comfortable with that because, you know, I get to know those businesses really well and really get to understand them deeply. You know, we talked earlier about what makes them special, why they earn those high returns on capital. So I really dig into that. And so I'm really very comfortable owning them over a long period of time.

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Starting point is 00:36:46 Chuck Okre owns it. Francois Rochon owns it, who's a Canadian investor, and he was actually on our podcast with William Green. And when he mentioned Constellation during that interview, and he talked about how the main reason he invested in the company was because of Mark Leonard, the company's founder and president, I'm actually releasing an episode all about Constellation here this weekend. The episode will be released by the time this conversation goes out. For those who not are familiar, many of you likely are by now. Constellation's a holding company where every year they're acquiring dozens and dozens of these small software businesses and they're just using the profits from

Starting point is 00:37:25 those businesses and just renting and repeating and going out and buying more businesses. So Franchois said when he read Mark Leonard's letters, he described it as love at first site. And I can relate to it that as I read his letters and put together that episode. So I'd love to just get your general perspective on why Constellation made the cut for you. Yeah, actually the same for me. I read the letters. But I'll say at first, I was skeptical of it for a long time. I remember thinking, you know, they can't be acquiring good companies.

Starting point is 00:38:00 They're about rolling up with these. There's no terminal value on these things. Got to be junkie, blah, blah, blah. I remember being very skeptical of that. But then I finally did. And I don't remember what was the impetus that finally got. me to sit down and actually go through his letters. But that was when it was like, wow, you know, yeah, it definitely got my interest then way up. And then I started to do a lot more work on it.

Starting point is 00:38:21 I remember I tried to contact other investors on Twitter who had known the name and trying to just kind of orient myself to what's going on there. But now, yeah, it's one of my favorite holdings. I've done a lot of work on. I've talked to a lot of people who've worked there. And I think it's a supremely rational place, really driven by all the things we're talking about. I mean, return on invested capital and growth rates are the heart of the incentives there. So, yeah, I, that's the gist of it. I mean, there are a number of interesting markers, like they have the same number of shares outstanding now as they did when they went public.

Starting point is 00:38:55 Just the track record of compounding free cash flow per share. The incentive system's great. Like I said, the executives there, they have to take a portion of their bonus used to buy shares, so they don't get any option grants, no freebies. Mark Leonard himself is, you know, he has kind of like, a frugal personality focus on shareholders, which I think then permeates the rest of the organization. There was that one letter where he mentions he pays up for business class out of pocket. So there's all kinds of little things like that.

Starting point is 00:39:22 I think it's a very special company, and it's a good one to just own and leave alone. Was there anything interesting in particular you found in talking with people that worked there? Yeah, I mean, you know, how data-driven they are, how they really stick to their hurdle rate. on these acquisitions. So that definitely stood out. I mean, I remember if it's a 25% hurdle rate, if you have a deal, it's 24.8 to no go. So it's a lot of discipline like that

Starting point is 00:39:55 that I think is admirable. And then just the M&A machine itself, their ability to find new names. I mean, I think their database, from what I've heard, is over 100,000 names. So suddenly, you know, context, I think they bought 134, something like that last year. So suddenly, in the context of over 100,000 names, maybe 134 doesn't sound so.

Starting point is 00:40:19 The other thing is the, you know, the decentralized model is really amazing. So, you know, they've got these six operating units, but a lot of the M&A is pushed down. So it's not like you have just people sitting in headquarters doing, you know, 134 deals one every third day, you know, sitting there doing these, whatever it is. it's really farmed out to these six groups and even within those groups and there's certain M&A, the ability to M&A. So it's very decentralized, which is remarkable. I don't know that anyone has succeeded to quite the extent Constellation has with that model. Yeah, the decentralized piece is quite interesting.

Starting point is 00:40:58 I can see a lot of positives from that, but one tweet I just saw the other day talked about how there was issues with compensation of some of their employees, and that can be kind of one of the drawbacks with the decentralized piece, is each of these managers and the operating groups kind of need to figure out what works for them, and if they don't get these great ideas from some of the other groups, then they might not move quick enough because there might not be as much communication at times. Yeah, there's been some turnover more recently, recently being, I don't know, the last year or so. and most of that has been in, yeah, like M&A teams, you know, there's a number of copycats,

Starting point is 00:41:41 and if you look at them, their ex-consolation guys. So this is a, we'll be interesting to see how this plays out over time. But then, you know, when I talk to people that are close to the organization or a little higher up, they will tell me that the people left are, I don't want to say they're fine, you know, they're okay letting them go. They're younger people. They went from money. And the higher level executives are very stable, you know,

Starting point is 00:42:05 you get those golden handcuffs with your shares and all that. So we will see. I think the big if for me with Constellation is their moat and their growth runway. I know that the management team is going to do right by searholders. They aren't going to try and take advantage of them. They're never going to budge on their hurdle rates and they're going to be transparent when they think the returns are going to be lower on their acquisitions going forward. So how do you assess or think about the moat and the growth runway? Is it something that's knowable? No. I mean, yeah, that's the big question. Like, if you're a Constellate shareholder, it's like how long they can keep going. And there must be a limit out there. There's a limit out there somewhere. But the way I think of it is a couple of ways. One is I mentioned the 100,000 plus in the database. I think there's plenty of room. And I've talked to actually some of the copycats as well. And they don't even necessarily run into each other. So it still seems like there's a lot of names. There's still a lot. Hard to believe because it's just, but there's a lot of these things out there.

Starting point is 00:43:04 The world's pretty big. It seems like it. It seems like it. So that's one. And then the other way I think of it is that, you know, if I want anybody on the planet to be thinking about how to deploy capital, it would be Mark Leonard and his team, right? So they have a feeling they're going to come up with some interesting things to do. I mean, they have other avenues. We saw the way they did the All-Scripts deal.

Starting point is 00:43:25 We saw how they did the spinoff with Topicus. They're doing another one. So, yeah, you know, I've heard, you know, they could go into horror, or course. on the market software, they could go into another vertical. I mean, I just think that they have a great deal confidence in them, and I think they'll be able to figure out interesting things to do. And if not, then I think they will return the capital. And that will be, I mean, at some point that will happen, right, there will be, you can't grow to the sky. But you also remember, you know, people said the same thing about Berkshire for a lot of years and just kept going and going and going.

Starting point is 00:43:55 So I suspect we have a lot of time left on consolation. Your fund also holds Topicus, which is a spinoff of Constellation. I think I read somewhere that Topicus is around what Constellation was in 2010, 2011 in terms of their size. So do you view them any differently, you know, just as highly capable of a management team, just probably more room to grow? Yeah, I don't, yeah, I think that's about right. I mean, they're focused more in Europe and Europe is a little less competitive than North America. And Topicus has some advantages there being in those individual markets. having local people there that speak the language, know the rules. So I think Topikus will be a good one.

Starting point is 00:44:40 I think it's very much like a mini consolation. Since you wrote the book 100 baggers, everyone wants to know what the next 100 bagger will be, but we don't want to put too much pressure on you or any particular company, but maybe you could share one of your higher conviction holdings. Well, you know, I only have like 10 names, so they're all pretty much high conviction. names at this point. Yeah, I mean, we mentioned a couple. I'd certainly think co-parts are

Starting point is 00:45:09 really good one, particularly because now their chief competitor is kind of put up the white flag. IA agreed to be acquired by Richie Brothers, and I don't know whether that deal will happen or not. The Richie Brothers shareholders are rebelling, but you clearly have a wounded, distracted competitor that is at, I think, a structural disadvantage at this point. They would take a lot of time and a lot of money, and it wouldn't even be certain that they could equal, you know, equalize with Copart. So that's a good one. And Copart still, I mean, seems to get better with age as the network effects kind of

Starting point is 00:45:42 take hold, and they still have plenty of room to expand overseas. So that would be, that would be one super clean balance sheet and great team. I mean, really good capital allocators. This is a team, you know, they're not paying any dividend, they're reinvesting everything. So very good compounder still. That is another great point that you brought up related to Copart. You mentioned some research that was done for Copart related to their competitor, where the competitor was paying out dividends and Copart was keeping the money internally

Starting point is 00:46:14 and reinvesting. And the difference in their returns, just like it's astounding over time. So it goes to show, you know, the importance of great capital allocation. And if you have a great capital allocator at the helm, they're going to recognize that if you have a great business and you have reinvestment opportunities, then dividends aren't a great use of capital because that's money that could be used to deploy internally within the business. So I think that was also a really great point that I think a lot of younger investors overlook some people get attracted to dividends. Yeah, that was one of the more

Starting point is 00:46:46 controversial things that Thomas Phelps said in his book when he wrote that dividends are an expensive luxury. And it's just basic math. If you have a great business, you'd rather they take all the cash and keep reinvesting it. If they can, there's certainly a place for dividends. you don't want companies to just take the money and invest in lower quality businesses or blow it on stupid acquisitions and things. So there's definitely a place where eventually companies should pay a dividend. But if you're focused on looking for these big multi-baggers, then probably not going to be in a dividend payer.

Starting point is 00:47:16 Now, sometimes, you know, company returns might be high enough where they could still pay half of their cash flow out of dividends and still compound really high. And there's rare bit rarely, but you'll find every once in a long, long while, you'll find a business and grow without any reinvestment at all and has very high returns. And so it's a math problem. You know, it's some combination of returns and reinvestment that you want to get a good compounding number. Yeah, tying that into two businesses we've talked about, Berkshire, to my knowledge, never paid a dividend that I know of anyways. And then Constellation Software, they pay a small regular dividend and they were paying these special dividends when they had extra cash.

Starting point is 00:47:55 and I believe it was a couple years ago, Leonard released a letter stating that they're going to be discontinuing any special dividends until they stayed otherwise because they want to put that cash back into the business. And I think that's a great decision how one of the executives is like bugging Mark Clinton to discontinue these. And eventually he comes around agreeing with them and making that move. Right. I mean, if you're earning 30% and then you're returning and you have your opportunities to invest and get 25% return, but instead of taking that, you give it back to your shareholders. Your shareholders would probably say, keep it and invest it to the 25. That's still a really, really high return.

Starting point is 00:48:35 So I think that's a very, you know, it's a big positive that he came around on that. And, yeah, it's another feather in his cap, I suppose. We had talked about, obviously, Constellation and Berkshire. And I knew Mark Leonard just as this Buffett-like character. So if I were to spend this weekend just studying one company or one founder that maybe you just really admire, maybe even one investor, is there anyone that you have in mind that would be worth researching and maybe even me potentially covering on the show? Well, you know, Willis Johnson and Copepar has a great story. Has that book Jump to Gold? I definitely recommend that great story and not as well known.

Starting point is 00:49:17 That would probably be the one I would go with. I mean, Old Dominion also has a very good story because they're the Congdon family. And they started back in the 30s with like a single truck lane. And there's also a book they have that tells their corporate story. But in that case, it's not one executive per se. It's more of a family over several generations, but still an interesting case study. Awesome. Well, Chris, thank you so much for coming on to the podcast.

Starting point is 00:49:44 I really enjoyed it. Huge fan of your work and enjoy following you. So before we close it out, how can the audience get in touch with you and learn more about your book and your fund. Yeah, well, I'm on Twitter. So that, Chris W-M-A-Y-E-R. And I have a website with Lockhouse Family Capital. I have a blog I write occasionally.

Starting point is 00:50:07 So those are two best places to find out more. Awesome. Thanks so much, Chris. All right, thanks, Clay. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing, by the Investors Podcast Network and learn how to achieve

Starting point is 00:50:24 financial independence. 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. Written permission must be granted

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