We Study Billionaires - The Investor’s Podcast Network - TIP585: Concentrated Value Investing w/ Shree Viswanathan

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Sri Viswanathan. Sri is the founder and portfolio manager of Svian Capital, a long-term, concentrated, patient and global fund invested in public equities. During this chat, we cover the story of his father earning 40x on an investment, despite never garnering an interest in the subject, the most important aspects to investing internationally, why we should remain fully invested in uncertain times, how investors can minimize the impact of ego on their performance? What led Shri to running a concentrated portfolio

Starting point is 00:00:35 of only nine holdings? How Shri thinks about inflation and currency risk investing internationally? Why Dino Polska out of Poland reminds Shri of Walmart in their early days and much more. I really enjoyed having the chance to chat with Shri, as well as learn about some of his portfolio holdings. Just for full disclosure, I did purchase shares of Dino Polska in recent months with the recent price drop the shares have had, Kyle Greve, the host of our millennial investing show, and myself will be doing a more comprehensive deep dive on the company on next week's episode that will be released on November 9th.

Starting point is 00:01:09 So be sure to tune into that episode if you're interested in learning more about Dino Polska. With that, here is my chat with Sri Viswanathan. You are listening 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. Welcome to the Investors Podcast. I'm your host, Clay Fink, and today I am thrilled to be joined by Sri Viswanathan. Shri, it's great to have you here.

Starting point is 00:01:51 Clay, appreciate you having me here. As I told you earlier, the lineup in your podcast is amazing. And for me to be invited, I'm honored and humbled. Thank you for having me here. Well, truly, I really appreciate having you. the opportunity to have you on. I've had a chance to listen to a lot of your talks, read your letters, and had a lot of fun diving into your portfolio holdings and finding some new names. So I like to start this conversation by asking you to tell the story of your father, who wasn't a big saver, he wasn't a

Starting point is 00:02:21 big investor, but he ended up investing in an IPO in 1992. So please tell the story of how this came about, how it played out for him, and the lessons you drew from that. Absolutely. Also, before I get started, I do want to thank my friend Chris Mayer. I believe he's the one who referred my name to you, I believe. In any case, thanks to Chris as well. So basically, the backstory to my father's investment. I'm originally from India. I came here as a student and forgot to buy a return ticket back home. While I'm an American citizen, given that both my wife and I have extensive family connections back there, we keep going back to India regularly. So earlier this, This year I was in India when one of my brothers asked me to sign some papers to transfer my father's stock certificates into digital format. I was quite surprised by this. First, my father who worked for a large oil company in India before retiring comfortably in 91 was not a big saver.

Starting point is 00:03:20 Second, investing in the stock market was not only considered frivolous, but was also frowned upon, at least within poor family. So ever since that trip, I've been trying to piece the past together, but I think this is what happened. So immediately after his retirement, one of his friends had urged him to submit an application for some shares in the IPO of this company called Kontak Mahindra and Indian Bank. He reluctantly submitted one for 10,000 rupees, which is approximately $400, adjusted for FX back in the early 90s. And 1992 was the full first year after the deployment of this big bank economic reforms. The then finance minister, Dr. Landlian Singh. So India was just beginning to break away from the shot of socialism.

Starting point is 00:04:11 And Kotak was growing at breakneck's feet for which it needed capital. So against this background in 92, Kotok announced its IPO. And because of high demand for its shares, not all individuals got what they wanted, what they asked for. In fact, the friend who had urged my father to submit his application, he didn't get any. The most interesting part of this backstory is not that my father got his allotment, but what he did after, which is absolutely nothing. So soon after he got the shares, my parents were visiting me here in Chicago. And typically when Indian parents visit their kids in the U.S., they'd come for an extended stay and they were here for more than three months. So I think this time lag helped them tap into this natural bias, which is neglect.

Starting point is 00:04:55 of all things financial. Come to think of it, it may not have been just willful neglect. I think he just forgot about this investment. And this was his first and only attempt at being the Warren Buffett of the Wisselnoughton plan. He never brought it up with any of us. He passed away in 2008. By the way, by that time, this investment had grown to more than 40x and approximately 28% return a year.

Starting point is 00:05:20 Since none of us knew about this investment, we couldn't possibly interfere in the compounding process. This investment continued to balloon carelessly. In 2014, Fidelity investments here in Boston supposedly reviewed the performance of its customers from 2003 and found that the best returns were from its customers who were either dead or inactive. While some say that such a test was never run, I like this test for the major takeaways. Inactive and dead people have outperformed in the long haul. So in my father's case, he was inactive for the first 16 years, and he's been dead the last 15. In fact, since his debt, this late investment has gone up another 12x for a total of well north of 500x since 92. Well, upon this release of this supposedly fidelity run research, this gentleman John Rick and Taylor, I'm not sure if you've come across his name.

Starting point is 00:06:15 He writes very extensively on Morningstar. He came out with a very interesting statement. He said, that dead have their own drawbacks. for done company and that dishes need washing, they're never at wrong. As investment mentors, though, they have their merits. And I thought that was a fascinating statement from John, but essentially I take away three major lessons from this. First, you know, market rewards inactivity, whether it's a result of willful neglect or sheer abdication. Doesn't matter. Second, the power of compounding takes time to exhibit its phenomenal force. And it's always bad. And it's

Starting point is 00:06:52 always back-end heavy. I'm sure you've read Robert Kirby's paper on coffee can portfolio, somewhat very similar kind of a concept. And third, I'd say never skip school, particularly when the class is about concentration. Had he added a zero or a couple of zeros, which he was capable of law at that time, my father, the current size of this investment could have been monumental to life-waltry. As such, it's just a merely good-sized investment. I think it is bookmarked with some very interesting life, reneauet lessons. So that's my experience with that wonderful episode. Yeah, well, there's so many lessons and things to point to there. You mentioned Chris Mayer, and we chatted about, you know, you need to become comfortable with inactivity and make

Starting point is 00:07:40 inactivity your default. You know, I was talking to Chris and talking about he's always reading, he's always learning, but from an outsider's view, it doesn't look like he's really doing anything. You have to make an inactivity is a productive activity in a way, is a way of thinking about it. And it also reminds me of the Peter Lynch quote that the real key to making money in stocks is to not get scared out of them. And people feel like they're doing something productive when they're trading in and out of stuff. And I think it's just such a good reminder to make inactivity our default behavior in the majority, if not most cases. I totally agree. I absolutely agree. And the same statement has been repeated by many other investment solvers.

Starting point is 00:08:23 And Charlie Munger, in his own style, he says, it's not the trading, it's not the buying and selling, where you make money, it's sitting on your back that actually leads to significant returns. And people have their own ways of saying this and exhibiting the eventual result. And it's evident. This is, in my father's case, he's not an investor, he's not even a novice. It's not something that he was ever interested. And it's just that you happen to accidentally stumble into an investment that turned out to be a phenomenal success. Yeah, I absolutely agree. Being patient long term is the great approach.

Starting point is 00:08:56 Before we turn to talk more about how you invest and how you think about different aspects of your portfolio, I wanted to mention a quote here that I found in your Twitter bio of all places from Ralph Waldo Emerson, it states, money often costs too much. And I think this really points to the type of person you are and how deeply you're, you you think about the world. So I just want to ask you what this quote means to you and your thoughts around it. Sure. Actually, I have a four-part investment criteria. It is in capital before I deploy capital into anyone name. I'm looking for an affirmative answer to these four questions. We'll cover the rest of all later if you want, but the one that's more relevant to this question is

Starting point is 00:09:40 a company run by high-quality management team. I have a specific order in which I ask these questions. This is the third question in that order. Management team is an important aspect of my analysis. And I try to look at this, determine this quantity from a variety of angles, honesty, competency, ownership interest, and compensation and incentive structure. As I was mentally preparing to launch this fund a few years ago, I stumbled on this fabulous essay where Ralph Wolde Emerson titled, Compensation. It was totally not what I was expecting. The title cut. The title caught my attention was totally not what I was expecting. It's a great essay on spirituality. He says everything comes in toes. A good act and the benefit from the act go together. So it's a bad act

Starting point is 00:10:29 and it's repercussions. They cannot be separated. Essentially, if you do good, you get a credit against your name in Carma National Bank. You do something bad, you're going to have a debit in your account at some point. So anyway, this led me to explore a little bit about Emerson. I didn't know much about him with that point. That particular stumble onto this title led me to explore a little bit about Emerson. He's written a number of essays and one other that I came across was this one called Wealth. And that's where this particular quote comes from. I don't claim to understand

Starting point is 00:11:01 everything he says in his essays. The spirituality angle resonates well with me. Much of it goes over my head. Perhaps so much stuff going over my head is probably how I became bald. But that particular quote jumped up because my own decision earlier in my life with respect to money and how this particular quote resonated well with me. That's why I used that as a lead quote in my Twitter account. When I think about this quote, I often think about, you know, a lot of those are showing up to work, you know, oftentimes to get a paycheck and to get by day to day. And, you know, many of our audience

Starting point is 00:11:39 have a family, they have a mortgage, you know, they have bills that need to be paid. And I think about someone like you, you've probably come to this realization at some point where if you want to have ownership over your time, you're going to need to own some sort of business and to be able to spend your time however you want because time is very scarce, whereas money isn't near as scarce as time. So does this quote tie into that of you wanting to pursue a path of money management? Absolutely. And again, I know for many things in my life and many other investors' lives, Buffett is the North Star. If you go back in time, you'll see that that's how he designed his life. He wanted to have control over his time. There's a fantastic interview with Charlie Rose. That's still

Starting point is 00:12:22 widely distributed, but he shows his diary and everything is empty. He keeps his time to himself. But to answer your question specifically, yes, that's a primary driver. But I want to tell you something about this other author. There's this fantastic author in India. His name is Vishal, Conno. Dundell Wall, last name is a little long, but Vishal, V-I-S-H-A-L is the first name. He writes extensively, he's written by a number of books. There's a book called The Sketchbook of Wisdom. Fantastic, easy read, phenomenal book. It's more a coffee table kind of a book.

Starting point is 00:12:55 But there's a chapter in it called Seize the Day. And he says, imagine you have a wonderful friend who deposits $86,400 into your account every morning. This happens daily, 365 days a year. The only condition is that you can't save that deposit. You must spend it that day and the end of the day it goes down to zero. But a friend deposits another $86,400 into your account the next day. What would you do with this money that is handed to you every day? And question is, would you think carefully about how you would use this money?

Starting point is 00:13:31 Of course, $86,400 a day is a lot of money. Now, it's replace that dollar with time. A day has 86,400 seconds. Again, you can't save the unused time. It's gone at the end of the day, but a new time deposit is made to your account. This is a fascinating little example to help think about how to spend your time. I love hanging out of my friends. I love doing these types of calls, talking to my investors.

Starting point is 00:14:00 But most of my time, I try to manage it according to my own. interest, my own, the design is entirely mine. Much of my day is spent time reading, thinking, a lot of spiritual pursuit involved in there, and think people wanting to have control over time. This is a good sort of an example to keep in mind. Steve Jobs has mentioned a similar kind of an example in his own way. There are many different examples, but this one sort of resonated well. And so I've designed my life to suit my style. And this particular endeavor, managing SVN Capital, the way I manage it, concentrated long-term patient, global, allows me to use that time as I find appropriate. That time decay of 86,400 seconds, I use, I allow it to decay at a

Starting point is 00:14:51 rate that I'm comfortable with. I wanted to turn here and shift to one aspect of your fund, which is the global perspective. You had mentioned to me that your portfolio at SVN Capital as not only nine names, five are in the U.S., two in Poland, one in Sweden, and then one in France. So having that global perspective is quite important to you, given that four of the nine are outside of the U.S., all in Europe, actually. And you have a very high bar in what can make it into your portfolio. So I'm curious if you could touch on some of the most important things that investors should understand.

Starting point is 00:15:29 Maybe they're based in the U.S. like I am, and then they're looking to venture out into Europe. they really like some of these businesses. What are some of the hurdles they need to get over before, you know, making an investment internationally? You know, in one sentence, I would say it's the quantity of the people running the company, but that's just what one sentence response. There are many other pieces that come into arriving at that point for me personally. I told you, I have this four-part investment criteria, and they're always the same irrespective where the company is located, U.S., Europe, Asia, wherever. And it goes in the same order. First is, do I understand the business? Of course, right? That's the basic

Starting point is 00:16:08 question. Second, is it a high-quality business? We can dig into that later. Quality is defined both in quantitative terms and in qualitative terms. And then is it run by honest competent management team, skin of the game, which I've already covered? And then is it a reasonable valuation? To help me focus my efforts in finding these multi-bagger opportunities, overlay a few concerns. strains on top of this. Now, we know that accounting is the language of business. I believe being a CPA, having studied accounting at a graduate level, and worked as an accountant for a few years, all that sort of helped me understand this language a little bit. So I look for companies that follow either US GAP, which is only the United States, or IFRS, International Financial

Starting point is 00:16:57 Reporting Standards. But there are more than 110 countries that follow IFRS. So I've overlay a couple of other constraints. I want the companies to be filing their financials in English, which completely takes out Japan from my map, for example, even though it's a country that's very attractive, I'm always interested in it. Why do you have the English requirement given we have things like a Google translator? Surely there's something more to it than you don't know Japanese and such. Yeah. So I think that's a great question, given the kind of, you know, the type of investments I make and the time period that I invest for. One of my primary criteria is to try and understand management team. I want to be able to have the conversations with them,

Starting point is 00:17:43 understand what they're saying. Of course, there are tools like Google Translate that will allow me to translate a few things, but Google Translate also has its own constraints. There's only a certain amount that he can translate at one time. And in fact, I can use Japan as an example. I've been interested in this country. It's a phenomenal opportunity. And a few years ago, I actually looked at a few companies, picked one, and I hired a translator to actually have this conversation with the management team for me. I sent all the questions.

Starting point is 00:18:15 It was an expensive ordeal, but I wanted to go through the motions and see if this is something that I can push forward. So I actually hired this translator. She was very helpful. She was fluent in English. She's a Japanese lady. And we went back and forth a few times to the management team. And both the management team and this translator were quite supportive of this whole effort

Starting point is 00:18:36 of extending the time horizon with a number of conversations and the time that they were spending. Eventually, I had her translate a few documents, not all of them, and eventually I asked the question of whether there would be any kind of a document that their company would file in Japanese that cannot be seen that I will not be able to understand or I will not be able to access. This particular company said yes. And that was the end of my journey on that front. Long story short, I want the companies to be in English because I want to understand who

Starting point is 00:19:10 they are. Now, here we are on a Zoom call, even though I'm in Chicago, you're in Lincoln, Nebraska. I can understand you. You can understand me. Even this conversation is a little less efficient than meeting face-to-face. me being able to see the black of your eye and you'll the reverse will give us a lot more information than is evident even in this conversation. So when you have a situation like what I described, I think I personally think for my efforts, there is no one dry claim to do all these

Starting point is 00:19:43 things, right? Yeah, we know, for example, Buffett is invested in these five large Japanese trading companies. He's been invested in other investments in Japan before. I am not sure what is criteria is. This is how I have designed my life. I want to be able to remain comfortable when I deploy my capital, my investors capital, to say that I know what I'm investing this into. Those constraints limit me down to a few. And the third constraint that I did not finish up was, I want to be personally comfortable with the local governance loss, the IP loss. So that sort of takes away any country that has expropriated private property, much of social. America, many other Asian countries for that matter. I personally want to be comfortable. And there

Starting point is 00:20:30 are many other countries that I'm currently not interested in, invested in, that have not expropriated private property, not yet at least. But I just don't have any edge in those countries. And so I stay away from them. So that's why I have limited myself to North America, Western Europe, and I'm increasingly looking at India, which I'm sure will come up in our conversation later today. Yeah, let's turn to that actually. You were born in India and presumably you would be able to get more comfortable with maybe some companies there rather than say Japanese company. Do you expect your portfolio to eventually expand to India and where are you at on, you know, in that research process? Yes, I'm very interested in the Indian market and I'm actively working on

Starting point is 00:21:17 a few companies. By the way, I'm not legally able to start trading. in India at this point. And though I'm from India, I'm an American citizen and the local equivalent of SEC. It's called Sebi. Security's Exchange Board of India has certain constraints, regulations, many hoops that I need to jot through before I can get approved for trading in India. Going through that process at this point, but not there yet. They tell me I'm just a couple of weeks away. Be that as it may. I'm interested in this country and working on a few. But no, I don't have to necessarily add a new name to the portfolio at this point. I have nine names. It doesn't have to be India per se. It just happens to be what I'm working on. But yeah, I'm constantly on the

Starting point is 00:22:02 hunt for great businesses that fit my investment criteria and I have zeroed in on a few, well, at least a few in India at this point. Actually, on that front, I just got back from India a couple of weeks back, spending almost two months there was both personal and some day diligence work. There are some puts and takes from what I call as a short stay. Unlike in the past, the current economic environment is robust. I'm sure you've heard about the demographic profile. There's 1.4 billion people, largest country on earth today. But about 50% of that, 1.4 billion or less than 25 years old, that's almost 2x, the current population of the U.S.

Starting point is 00:22:45 India is the leader in digital payments, for example, way more than China's. They have way more than US. But more importantly, what that means is this digital payment is capturing a lot of revenue in the tax network. So a significant difference relative to what has happened in the past. And then, of course, the geopolitical attraction was largest democracy sitting next to China while the Western world is looking for an alternative. All that is working in the company's favor, the country's favor.

Starting point is 00:23:14 On the other hand, the public market valuations appear to be high relative to the country's his own history and definitely compared to the developed boat. On top of it, what I also noticed this time was at least among the business communities, other investors, a few of them that I meant, on the money class. There is a level of overconfidence that's bordering on arrogance in a sense that people feel that India has arrived and that it can't be relegated to an also-ran status by the West. You know, years ago, Buffett talked about the ABC of Business-D-K, Arrogance bureaucracy and complacency. I think that's happeningable to countries as well. So that's something that I would be mindful of. So having said all that, the positives seem to all play the negatives.

Starting point is 00:24:01 And so I'm still studying these companies while I'm keeping an eye on these other factors. Related to investing internationally more broadly, I'm also curious to get your take on, you know, on the one hand, you know, if you opened up to more ponds to, presumably you may find more high quality names. On the other hand, many people speak to the higher valuations that are in the U.S. So presumably you could get more attractive valuations for similar quality businesses overseas. So I'm curious to get your take on how this sort of weighs in your thought process and your approach and your take on the quality names you can find internationally and then the valuations that relate to those companies relative to the U.S.

Starting point is 00:24:46 Yeah. I've pondered that myself, Prior to launching SVN Capital, for example, I spent time as an analyst, portfolio manager in a couple of different platforms here in Chicago. All my time was spent on U.S. names. But many of those businesses had a lot of international exposure, but the analysis was primarily U.S.-centric. And for me to expand into this international or a global approach, it does raise a question. However, given my background, the way I think about compounding wealth over time, U.S. is the the primary driver of that idea, but it's not the sole owner. That concept has been exported very nicely to many other countries. Europe is much older, not sure financially, back in the

Starting point is 00:25:31 days it was richer, but in terms of the capital market development, Europe has gone through that transition. And we're increasingly seeing that in Asia. Related to that question, I would cite this interesting study. I'm not sure if you have heard of Dr. Hendrik Bessambinder. He's a professor from Arizona State University. In 2017, he released a fascinating paper with a very provocative title. The title was, do stocks outperform treasuries. So it's a little bit of a digression relative to your question, but I'll come back to that. He released this paper in 2017 asking if stocks outperform treasuries. And on the face of it, the question may sound irrelevant, But then he dug into it, you'll see that he went back to 1926, brought it all the way to 2016, I believe.

Starting point is 00:26:23 And that was a good long 90-year stretch. He evaluated the market, and he concluded that barely 4%, only 4% of the stocks outperformed the treasuries. The rest either were at the treasury level or even worse. So that was a fascinating study to highlighting a few things. We'll cover that detail later. But looking at this report, there's this fund out in Edinburgh, Scotland, called Bailey Gifford. They invest globally. They saw this report, and they were very interested.

Starting point is 00:26:58 They went to the professor and said, hey, we like this analysis. Can you actually repeat this on a global scale? And he went back and redid it in a global scale and found out that barely 3% of the stocks would perform the local treasuries over time. The point is, first of all, there are a few quality businesses that do outperform over a long stretch of time. If there is a business that's generating a healthy return, by definition, it starts attracting competition, which means returns get arbitraged away. But there are a few of these businesses that can defer such reversion to mean for a variety of reasons. Competitive strength, it could be the brand, it could be many other things.

Starting point is 00:27:41 But the point is, there are a few that can defer such reversion to mean for a variety of reasons. such reversion. And it's not just US, but it also happens globally. That's number one. But the more interesting aspect is that are only a limited number of companies that can do it. And so my view is I'm combining the 4% that he found in the US and the 3% that he found on a global scale. And I want to arrive at a portfolio that I can understand that I'm comfortable with that can generate that healthy return over a stretch of time. So that's how I have put the portfolio together. and that's how I'm developing this portfolio. That's why it's global.

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Starting point is 00:32:25 Back to the show. Got it. And I had another point I wanted to tie in here that really relates to the story of your father and remaining fully invested and, you know, staying invested for the long haul. In your Q4-2020 investor presentation, you said it was a fantastic time to be invested in the market, despite 2022 being a really rough year for stocks overall. And then you fast forward, just six months and your funds up 29.3% net of fees as of the end of Q2, 2020. And that's not to say that the bear market's necessarily over that we saw in 2022, but it addresses a

Starting point is 00:33:03 the need to remain fully invested because at just about any point in time, there's always going to be people that have a strong case for stocks to go up. And there's probably going to be another strong case from somebody else just as smart that stocks are bound to go down. But really, who really knows what's going to happen in the short term? And it also reminds me that people tend to have this confirmation bias of they're seeking out the information that they want to use to confirm their existing beliefs, whether they think the market's going to go up or down. So I'd like for you to share the research you use to back the claim that it's wise for investors to remain fully invested in high quality businesses, even if we're in what feels like

Starting point is 00:33:43 tumultuous and really difficult times. Yeah, but before diving into my answer, again, allow me to digress a little bit. I'm going to cite this book, Money Game by Adam Smith. This is not the old one. This is actually George Goodman uses the pseudonym Adam Smith. Fantastic book. In it, he says, the first thing to know is yourself. Otherwise, the market is an expensive place to find out who you are.

Starting point is 00:34:08 I think that's an excellent point. The way I choose to do it is different from many others. For example, one important point is the investment time horizon. Ideally, my horizon is time infinity, but in reality, it's seven to ten years at least. While it's widely agreed upon fact that holding equities for the long term leads to better investment outcome, several factors drive investors to take a shorter time horizon leading to more trading. In fact, the average holding period of a stock on NYSC has come down from almost five years in 1970 to less than eight months now.

Starting point is 00:34:47 Thanks to social media, high frequency trading, everything that's happening in the market these days, it keeps going down. And in fact, when I talk to prospects, when I talk to my investors, I always try and cite these three T's that I think are the pain of investing. Turn over. Now, the average mutual fund, for example, turns over 116% a year, which means every single position is bottom sold at least once within the year. That, of course, leads to high transaction cost, and that in turn leads to higher taxes. But most pernicious of all is the fact that such actions unnecessarily disrupt the process of compounding. Back to your question about, what did I use to

Starting point is 00:35:29 back my claim for being fully invested. I'd say there are at least three different data points going from macro all the way to the portfolio. Again, going back in time, if you use SNP as the proxy for the market, there is empirical evidence to show that the market is up approximately 65 to 70% of the time. This is, I believe, one of the reasons why shorting is such a difficult exercise. I myself, I don't short or use any derivatives or anything else to lever up the portfolio. It's a simple, long, only portfolio of high-quality businesses. So that's number one. Number two is in 2022, while we were going through this market turmoil, increasing interest rate, recessionary, potentially a recessionary environment, JP Morgan wealth management released an

Starting point is 00:36:18 interesting chart that showed how remaining fully invested from 2002 to 202,000. 22, approximately 20 years in SMP 500 would have generated approximately, say, 9.5%. But if you missed the 10 best days, your returns would have been cut to 5.2 almost half of what it would have been otherwise. And actually keeps getting worse if you miss the 20 best days, 30 best days and all that. The other, the punchline, I believe, in that release from J.P. Morgan wealth is the other interesting point that they make, which is seven of the 10 best days occur within 15 of the 10 worst days. It's actually worth repeating. Seven of the 10 best days occur within 15 of the 10 worst days.

Starting point is 00:37:04 And essentially it means things get punched up. Good days, bad days, they all get punched up together. So instead of coming in and out, it's better to endure the pain of a drawdown and then enjoy the benefit of reversal. It reminds me of March 2020 because that's one of the more recent events. You know, March 2020, everything was going crazy. Markets are just dropping like a rock and hitting those limits. And naturally our tendency is like maybe I should be selling right now because, you know,

Starting point is 00:37:33 there's lockdowns. And when really that's the time likely to be buying as long as you have that long term approach. Absolutely. In fact, again, I think this was a real test or a real exercise that Fridelity went through. I saw something like, soon after that drawdown, Fidelity ran this exercise and they found out that the individual shareholders who were 60 years and older that held a bank brokerage account in Fidelity, who were 60 years and older, were the most nervous. They are the ones who cleaned out of their equity portfolio.

Starting point is 00:38:05 Soon after that, during that and soon after that period. Think about that. It will take ages to recover what they have lost, and they're already 60 plus. In any case, back to your own. question, I think the third point that sort of backs my position is the collection of these high quality businesses that I have. When I look at the portfolio from a portfolio level, adjusted from the weights within the portfolio. These are high quality businesses, high free cash flow growth of more than 20%, high return on invested capital, around 20% again, and high interest

Starting point is 00:38:41 cover, that is, these guys have very little to no debt on the balance sheet. And all of that And when you compare that to say in the market of S&P, these metrics are meaningfully higher than what the market offers. When the underlying fundamental economics of these companies continue to remain strong, I was and remain convinced that one will follow the other. And it's not the fundamentals that will follow the stock price. That's why I advocate remaining fully invested. I wanted to talk a little bit about ego as well. I know this is something you've thought a lot about. And with many things in life, as with investing, oftentimes the biggest enemy isn't something external or somebody else, but it's ourselves.

Starting point is 00:39:25 Can you talk about how important it is to understand the impact of ego when it comes to investing? Yeah, this is a deep question. It's very close to my heart. It's how I live my life. But it's widely accepted and it's well known that ego is the source of many problems in life, particularly in the investment arena, ego is a primary. source of problems. It makes you overconfident, makes you think you know something when you really don't. From the moment one wakes up in the morning till one shuts the eyes at night, this process of reinforcing this ego goes on. There is a subject. I, for example, like this picture, the object, or it could be many other situations. There is a subject and an object relationship. That's essentially establishing and reinforcing ego. That's what gets. This process started, I believe.

Starting point is 00:40:19 A number of years ago, I read this book called A Search in Secret India by a skeptic and British journalist named Paul Brunton. Back in the 1930s, he visited India looking for a solution to this spiritual aspect of life. And he finally found this saint in South India. Much of the last third of the book is about this particular exercise. The saint's name was Ramana Maharshi. Maharshi is essentially a great saint. It's a Sanskrit.

Starting point is 00:40:46 word for a great saint. One of this saint's methods helps eliminate that ego by asking, who is asking that question, who is that I, that subject that's raising this relationship? Look at who is experiencing that benefit of looking at that picture or whatever that object may be. Inquire as to who is experiencing these things and the mind quietens down and helps eliminate, or at least reduce that ego. Observe the observer and reduce that ego. That's the the essence of his teachings. When I read this book the first time, I merely appreciated it and didn't give it much thought. But years later, I came across a good podcast in which the guest highlighted this book and I went back and that's when this light bulb went on and I got hooked

Starting point is 00:41:32 ever since I've been following the saints' teachings. So that's how I commit this every day, trying to tamp down that ego a little bit. You've stated that you spent, or you spend 30 to 60 minutes a day doing some sort of meditation. And you called it a ego reduction exercise. Talk to us about how this works in practice. Yeah, it's an individual exercise for a number of years. And I was working in downtown Chicago, raising kids, like a family. I used to find it very difficult to get this time.

Starting point is 00:42:07 Now that I'm running my own fund, this is part of how I've designed my life, right? This suits my needs and how I'm able to spend this time. I'd say I spend a lot more time than just 30 to 60 minutes these days. It's an exercise in which I'm looking at my thoughts as if I'm looking at a different person. So the mind's proclivity is to wander around. And so we have all these thoughts. In fact, an average man has about 30,000 thoughts a day. That's a lot.

Starting point is 00:42:35 If I can catch myself thinking a thought, if I look at that thought as if it's a different entity, it quietens me down. In fact, Phil Jackson, the former coach of Bulls and Lakers, he's written a fantastic book called My Hoop Dreams. He goes through us all this. He's a very spiritual person, by the way. That exercise of looking at that thought, attempts the ego down helps me quieten that process a little bit. Now, I don't catch it every time. What I increasingly do all through the day.

Starting point is 00:43:03 In fact, I find it a little easier in the mornings than in the afternoons and later in the evenings. as John Wooden, former basketball coach, usually a basketball coach, said, good things take time, as they should. We shouldn't expect good things to happen overnight. Actually, getting something too easy or too soon can cheapen the outcome. So this is a tough process, a tough exercise, but I'm sticking with it because I think I'm seeing improvements. One tangible evidence in myself is I used to have large swings in the amplitude of my emotions, getting very upset when the stock in the portfolio goes down or vice versa. I can see that amplitude reducing quite measurably over the last few years now.

Starting point is 00:43:44 That's how I go about it. I'm thinking more about this ego. And you just mentioned the emotional aspect. Is there anything else when you look back to the very first day you purchase the stock to today where you're seeing the benefits really shine through through this ego reduction exercise? because 60 plus minutes per day compounded over many years. I'm sure the compounding effects of that have just been tremendous on your end. So I'm curious if you could point out some of the major benefits you've seen over the years through these exercises.

Starting point is 00:44:15 Absolutely. It comes back to designing my life the way I wanted. For example, when I hit the gym, I hit the gym almost five times a week. I used to listen to podcasts or some music earlier on. For the last few years now, I do put on my AirPods and, It's on noise reduction mode and it's just me, my thoughts, and my guru. And just continuing to focus on those thoughts helps me with the rest of the day. I spend almost all my time.

Starting point is 00:44:43 For example, this year I've made only one major change to the portfolio. Much of that was done by April of this year. Yes, new capital that's come in. I've added them to a few of the existing names, but a portfolio level change, there was only one. And that's all by design. I wanted to be a portfolio of collection of high-quality businesses where I don't make too many changes. We know, for example, in a dynamic system, not sure if you're an engineer, engineers typically agree immediately. They say, we know in a dynamic system, more moving ports will lead to increased possibility of things going wrong.

Starting point is 00:45:22 It's the same thing with us as human beings when we have in our ecosystem, when we make too many decisions, there is a higher likelihood of things going wrong. I believe that's the reason why Steve Jobs, for example, for the longest time, had just a blue jeans and a black turtle neck, at least one less decision for him to make during the day. And I try and make all these small nuances to how I think and how I operate. All that I think has been possible because of this focused effort on my part to tamp down that ego, to do this, to be constantly aware of that thought and how I create the eventual product that I call an SSV in capital.

Starting point is 00:46:03 I think this is a good transition point to talk about the level of concentration in your fund. You know, you talk about the engineering concept where the more things you introduce, the more headaches it's going to lead to. And concentration is definitely a key part of how you operate your fund

Starting point is 00:46:19 and your portfolio. And, you know, many investors, they speak to, you know, all the benefits of concentration. But I think there's very few that actually live it out, at least in the manner you do, of only having nine names. So another idea that sort of relates to this is you've talked in the past about your background and your upbringing and having this very conservative upbringing. And you know, you want to approach investing in a very

Starting point is 00:46:45 conservative manner. So it may be somewhat surprising to some of the listeners to hear conservatism and only having nine names. So can you speak to how you came to develop, you know, this very concentrated approach and then eventually become comfortable? with it and seeing it as a very conservative way to invest. Yeah. In my background, prior to launching SVN Capital, I was at advisory research, a Chicago-based store-ed franchise, and another one called Keely Asset Management, particularly in advisory where I spent a majority of my time.

Starting point is 00:47:19 The founder late Mr. David Heller, I consider him to be my guru for what I do for a living these days, taught me am with you about investing, concentration, even though the concept of concentration was very different, the way he came at it, and just the approach to portfolio management. But over time, I'm sure you've come across not just profit and monger, but many other successful investors who have shown us this path of arriving at a high-performing portfolio through this concentration model, even though I went to an university Chicago, which is, I call it as the Citadel of Capham, Capital Asa pricing model,

Starting point is 00:47:56 Eugene Farma, who got his Nobel a few years ago, for this concept of no free lunch. Even though that's the second best decision I made in my life to go to Innocie Chicago, I don't necessarily practice that. I, in fact, practice the exact opposite because of how I have learned lessons from some of these stalwarts. It's a gentleman by name of Dave Contasaria out of Valley Forge, Pennsylvania, highly successful investor, very concentrated. Joe Rosenfield of Grenna, back in the days, he was one responsible for bringing

Starting point is 00:48:29 Warren Buffett onto Grinnell's board, very concentrated portfolio. Lou Simpson of Geico, in fact, as time progressed, even though Lou was a little more diversified as time progressed, he became even more concentrated. So many other names who have done it this way, and all that sort of led me back to, I refer to this exercise, to this research paper by Dr. Hendrick Besson Binder, to put numbers around that research. From 1926 on, he said there were, It was $47 trillion of wealth that was created. Fascinating data. 47 trillion was evenly split between 83 companies that created 23.5 trillion.

Starting point is 00:49:08 And the other 23 and a half trillion was created by 25,584 companies, essentially pointing to again, barely 3 and 1⁄2, 4% of the companies generating that return. That sort of, he dug into many other details, but to give you, specifics here, four items jumped out for him at least. Strong cash generation and accumulation, rapid asset growth, high R&D, for example. These were important items that sort of contributed to those 83 that sort of generated that return. That's what I've gone after. Companies in the portfolio today, not only do I understand what they do, but they generate high return on incremental capital. High return is anywhere in the high teens to 20 plus percent.

Starting point is 00:49:56 Not only do they generate high return, but they also have significant opportunity to reinvest. Almost all of them reinvest back into the business. A couple of them actually put 100% of their free cash back into that business. Now, that's an important metric. The combination of high return and reinvestment, that's what leads to value creation over time. Of course, these are companies that are owner operated. It's either the family or the founders that are running it, and they have vested interest

Starting point is 00:50:24 in the decisions that they make. and almost invariably all these battlesheets are devoid of debt. If we know one thing that sort of kills companies, it's leverage, it's financial leverage. As I said, I don't use any additional debt or any sort of a derivative to juice up their returns. And I don't want the management teams to use any debt either, not any debt. And I don't want them to get too excited about that. In fact, the most appropriate, sometimes people ask me, what's the most appropriate capital structure for a company? I say that's dependent upon the sleep pattern.

Starting point is 00:50:55 It should allow the management team to sleep well. It should allow me to sleep well. That's how the capital structure should be designed. And there are very few companies that fit that mold. And not only have these stalwarts prove that to us, Bess and Binders research on the U.S. and global scale has proved that to us. And I'm seeing it within the portfolio. Yes, there are many other companies that have certain profiles, similar profile,

Starting point is 00:51:19 but they fall into categories that I don't understand. I'm not an engineer, for example, I'm not an engineer by training. And so some of the tech software, I'm not a medical professional, and so I don't understand the biotech for my industry. So there are many companies in those spaces that fit the rest of the criteria, but not necessarily supporting my need for understanding those businesses. So for all that together, it comes down to just a handful of businesses. And the more I spent time getting to know these companies, the companies,

Starting point is 00:51:51 the competitors, the industry, the management team, the more I spend time doing all these things, obviously I'm gaining more confidence, and that allows me to remain concentrated. And so that's why you arrive with this concentration question. And I believe that is the most appropriate way for outperformance. Somebody wanted to generate just the market's return of 9.5% out of S&P 500. It's not a shabby return at all. I'd say for most people, that may be the most appropriate. But I believe if we can choose the quality from that group, SMP 500 or MSCI or whatever that may be,

Starting point is 00:52:30 and stick to these few investment criteria, we can arrive over time. We can arrive at a number that's much better than the market. I also wanted to ask you about one of the names in your portfolio, which meets many of the characteristics you just said, you know, stellar balance sheet, minimal debt. It actually has a 100% reinvestment rate and is reinvesting at roughly 20%. That name is Dino Polska out of Poland. And you don't need to get into the nitty gritty specifics of Dino here. Actually, my colleague and I plan on doing a deep dive into this company on the podcast here in the near future.

Starting point is 00:53:09 And full disclosure to those in the audience, I've recently purchased shares in Dino Pulska in September and October in light of the share price taking a beating recently at least. In doing research on Dino Polska, you've talked about it a little bit, and I was really interested to hear your take on it because it's in your portfolio as well. One thing that really stood out to me is you mentioned that Dino Pulska reminds you of Walmart in their early days. So I'd love for you to expand on the similarities you see between Dino Pulska and Walmart. Absolutely. I'm sure you've read Sam Walton's autobiography that he wrote right before he passed away. It's a fantastic story of entrepreneurialism, the opportunity that America gives for people like that, and specifically about the growth of Walmart.

Starting point is 00:53:57 The initial days of Walmart was obviously focused on rural markets, rural parts of the south. Of course, today, it's a much larger company. It's in much bigger cities as well. But in the earlier days, it was primarily rural and small town America. Let's pivot to Poland. Poland has a very interesting demographic profile. And this is an important component of the thesis itself. In most countries, when the country starts developing,

Starting point is 00:54:25 the opportunity set for the people would be more plentiful and bigger cities and towns. And so you would see people leave small villages and towns to move into these bigger cities and towns. And that was a natural progression. We've seen that happen in China. We've seen that happen in many countries. continued. In fact, even in Ukraine, the urbanization rate, the rate at which cities get populated relative to the rest, the urbanization rate was in the low 70s before the war, of course. And generally in the West, U.S., UK, and even in South Korea, for example, these are all well north of mid-80s.

Starting point is 00:55:02 Low in mid-80s is the urbanization rate in these developed markets. Ukraine is in the 70s. Poland, for the longest stretch of time, has been around 60 some percent. In fact, it's even slightly less depending upon how you slice and dice the size of these cities and towns. And it's not something that's happened recently. It's always been this way. And it's a sort of an interesting aspect to how that fits into Dino. Dino Polska is a grocery chain focused on rural markets of rural and small town markets of Poland, where Dino's competition has been primarily mom and pop stores until recently. There's been some competition from a couple of the bigger players more recently, but nothing really meaningful yet. So that demographic dynamic sort of fits

Starting point is 00:55:50 very nicely into this story of how Dino has been growing. Dino was founded in the late 90s. It's grown from approximately 110 stores in 2010 to a little north of 2300 today, a good high 20% compounded annual growth rate. Invariably, all that growth has been in this rural market. And what he has been trying to do, what Thomas Biernatsky, the founder, who's still the chairman of what they call us the supervisory board, he wants more than 50% of the stock. What he's trying to do is set up these small stores in rural markets. Each store caters to only about 3,000 to 5,000 people. And as soon as a store starts servicing more than say 5,000 people, they open up a new store down the road. And that's how they've grown

Starting point is 00:56:35 organically. There is no acquisition involved. And they're letting these small towns, the stores populate these smaller towns, and they're letting the smaller towns grow into the stores. That's the primary point I wanted to compare relative to Walmart. And I said, this reminds me of the early days of Walmart. One of the big questions are sort of looming thoughts when I think about an investing in a company like this. On the one hand, all of their grocery store chains are in Poland. And Poland right now has a quite a bit higher inflation rate than in the U.S. I just looked up the data and their inflation is sitting around 10% reported numbers. And then the U.S. reported CPI numbers around 3 to 4%. So you have the aspect of the business, 100% of their stores today are in

Starting point is 00:57:20 Poland. And then also if you're purchasing the shares, you're purchasing the shares in that local currency. So the Polish is lotsy. So you also have the risk of, you know, that currency going against the US dollar. So I'm curious if you could paint a picture on how you think about maybe currency exchange risk in general and the inflation risk that it kind of goes along with that. Sure. Let's take the inflation point first. In most emerging markets, you'd see inflation to be slightly higher than what we see in the US or generally in the Western world. It's just an agent of the growth and how their local central governments, the federal reserves with the local countries continue to control their currency.

Starting point is 00:58:03 So everything is intertwined and generally I see higher inflation in those local markets, emerging markets. But particularly after Russia invaded Ukraine and February 24, 2020, the entire Central European, most of Europe, but particularly the Central Eastern European market, has gone through a gut-trenching move. You had 8 million people come in as refugees into Poland, Polish people with their big hearts, took many of them in their homes. Government in position at that point, by the way, there was an election just a couple of days ago, and we have another instance of the bloodless change of government most likely happening in Poland as we speak.

Starting point is 00:58:45 In any case, the government stepped up and started giving financial incentives to these families that were taking in these refugees. All that meant there was a higher level of money circulation within the country. And of course, this was leading to higher inflation across the board. wage inflation, full inflation, you name it, there was higher inflation. In fact, inflation was as high as almost 20%. It hit as high as almost 20% not too long ago. But as we've seen all the last few months across the board, inflation has started coming down. As you rightfully pointed out, inflation currently is around 10 some percent. Ten-year interest rate, locally has come down more than 50% from what it was same time last year. All that is

Starting point is 00:59:32 pointing towards a reduced level of inflation. First of all, I do accept higher level of inflation for markets like that. And so that leads to the second question about currency and fx risk. I personally don't hedge any fx risk. As you said, I have four names outside the US, two in Poland, one in Sweden, one in France. I don't hedge any of them. I just let the natural hedge to play out, particularly given the long time horizon that I'm planning, I believe the currency natural hedge will take it of itself, particularly hedging the FX risk would be even more onerous, expensive, and time-consuming, because they move around so much within a short span of time. And I let it play out over time. But then again, as soon after the war started,

Starting point is 01:00:14 the Zlati, which was about three and a half, slotties to a dollar, moved to as high as five Zlati's to a dollar. It's now closer to 410, 420. All that again reflects the sense of not quite normalcy, but closer to normalcy as we speak relative to what it was in February, March of 2022. But that also requires another point to be highlighted. The sovereign balance sheet in Poland is actually even better than Germany's. Debt to GDP in Poland is even less than 50%. even better than Germany's, which is supposedly the worst frugal within the EU. You've got a population base of approximately 36 million, about the size of California. About 8 million came in.

Starting point is 01:00:58 Most of them have moved on. About 2 million continue to reside there. They're integrated well into the system in society. And you have a balance sheet that's better than even Germany's. Political wrangles continue to happen. Not sure how this is all going to play out from a macro standpoint within Poland, but the company continues to execute on its plan of growing its storeways within rural markets, competition continues to remain.

Starting point is 01:01:24 I'd say lackluster, even though Bia Dronka, which is the biggest competitor, biggest player within the country, has started opening up smaller stores in direct competition to Dino. It's still not meaningful enough to impact what Dato is doing around the country. I accept the full inflation, which is now on the trending in the right direction going down. It affects risk is something that I accept going in, allowing natural hedge to play out, but even there we're seeing improvement relative to what it was around the war. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 01:05:02 investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at 3,000, fundrise.com slash income. This is a paid advertisement. All right, back to the show. And I think it's also important to mention here, just the incredible value proposition that Dino offers to its customers. I'm looking at, you know, the prices, they offer the lowest, oftentimes the lowest prices in terms of any of the grocery store chains. They're very convenient because there's these small box stores that, you know, are oftentimes very close to their target consumers, whereas many of these other stores are larger boxes, more centralized within these cities. And then they offer pretty much everything the

Starting point is 01:05:45 average Polish person needs. One of the things that sort of stood out to me is that they make sure they always have the meat counters, whereas many of these other grocers don't have that. So the selection is also really good. And to tie in the inflation piece here again, the key to these big winners and these big compounders is their ability to continue to earn high returns on capital. And on the one hand, I could see inflation maybe squeezing some of the lower end consumers where today they might be purchasing some level amount of groceries and then the next year they just aren't able to purchase as much because of high inflation. And then I could also see a bit of a tailwind where some of the higher-end grocers, Dino steals

Starting point is 01:06:25 share from them in light of higher inflation where consumers kind of push down to lower-priced grocers. So I'm curious your thoughts on how inflation might impact their returns on capital over time. Yeah. In fact, before this question, you started talking about how you've started buying data because the prices have come in over the last month or so, particularly after their Q2 update, primarily impacted by inflation and slower growth. I am less concerned about the slower growth and the potential impact of inflation. I am concerned in that in any retail investment, Retail, by the way, I think, is one of the most difficult sectors to be consistently

Starting point is 01:07:06 outperforming it. Many successful investors have had their troubles in that space. But in spite of I'm more optimistic about D-O-4-a-vary of these reasons. But the most important metric in retail is the like-for-like sales or the same store sales relative to inflation. And generally speaking, in the West, we don't necessarily bring inflation into that equation because inflation has been low. But in the case of emerging markets, one and particularly given that inflation has been high, we do want to compare that relative to that. It's been a positive

Starting point is 01:07:37 spread over time. More recently in that Q2 release that they did, that's friend had come and quit meaningfully. That's poorly the reason why the market has reacted the way it has. Stocks down more than 30 percent since that release. Well, I'm less bothered about

Starting point is 01:07:54 that because, as I said, inflation has started coming in. We'll see this play out over time. And number two, Their value proposition is, first of all, source products locally as opposed to sourcing products from other manufacturers. And as a result, they have fewer private label compared to Beardronka, the largest operator. And more importantly, they also have a policy of following the biggest discount to their drunker's most, particularly price increases on certain products.

Starting point is 01:08:27 They watch how Beardronka is increasing its price. on certain products and they replicate it even though Dino is offering their products to the rural and the small town market. Similar or same amount of percentage increases what they push through. On the other hand, I don't believe, I'm not 100% certain on this, I don't believe they do take the prices down when their drugout takes its price down. So that sort of allows them to keep a relatively healthy margin, particularly relative to the inflation in the local markets.

Starting point is 01:08:58 And so that's one reason why I'm not concerned about that. The second aspect is the slower store growth that they have announced recently. It's not something that came out as a surprise. They had been talking about it for a little while. I'm sure you've noticed that the debt level went up slightly about a year ago. They started talking about opening up the second meat processing plant. That debt was essentially going to support the opening up of this meat processing plant. And as a result, because interest,

Starting point is 01:09:28 locally had started going up, they wanted to be able to fund the growth, any future growth from their own cash flow. So that's why the store growth, that number went down relative to what it had been in the past. Somebody looking at the store growth and looking at this light for like, relative to inflation more recently might have been surprised if they were not following it for a longer stretch of time. But that's what gives me the confidence that I don't get too excited about the inflation scenario and not too worried about the slower store. growth. Inflation scenario is revering, slower store growth will revert. I'm not saying it will go back to opening up another 300 some stores a year. It'll probably be slightly lower than that, but they have

Starting point is 01:10:09 enough room to continue to increase the number of stores from the current 2,300 that they've got. I'd like to also tie in the valuation of Dino because it really points to your investment strategy and it's a very important piece. It's actually the last valuation is the four. of your four criteria and investment framework. And I talked to some of my investor peers and a lot of them will say, you know, this is a fantastic business, but you're paying a optically high multiple and you're going to have to use relatively high growth assumptions for an extended period of time in order to justify paying that sort of valuation. I just checked and it looks like the PE multiple on Dino Polska, for example, today is around a 28 or 29. And I'd be interested to hear how you

Starting point is 01:10:56 think about investing in these companies that trade at a premium, trade at these optically higher valuation multiples? Absolutely. And we can use Dino as a good example. And it's an important aspect of, it's the fourth and still an important criteria for me before I deploy capital. And that's a transition that I made over time. Years ago, I told I came from advisory where I was trained to think about valuation as the primary driver and then move on from valuation to many other factors. I've completely flipped that order today, as I'm running SVN capital, and keep valuation as the last of the four criteria. And in the case of Dino, for example, what gives me this, yes, relative to the low multiple companies that you may come across,

Starting point is 01:11:46 Dino's historical multiples have been high. Today, at this price, I think it is even more attractive, given my expectation of future growth, and I'll address that growth in the second. But using PE or Pressbook or EE to EBITDA multiple, whatever metric that may be, it's typically a quick back-of-the-onvalop computation to help us keep some sort of a guardrail, and that's all that is. But in most of these situations where we have these high-quality businesses performing at a high level, I think we need to use a slightly different, not necessarily saying give up, on valuation, but slightly different approach to thinking about valuation. So let's use

Starting point is 01:12:27 Dino, for example. As I said, they have 2,300 stores, 36 million people, 2 million from Ukraine. If you exclude that, you still have 36 million people. I told you about 60% of the population lives in 50 to 60%. Let's use 60 is in smaller towns to rural areas. And that's about 23 million people. Dino has services 3 to 5,000 people per store. You take an average of about or 4,000 people to a store, that 23 million over 4,000 leads you to something around 53, 5,500 stores that Dino can get to. Of course, in this analysis, I'm assuming many other things, no competition, nothing disruptive in terms of Dino's growth, no other war, or many other macro factors that may come in a play.

Starting point is 01:13:13 Those are completely out of my control, out of our control, and so we have to think about the potentiality using these numbers that have thrown up. And in any business, competitive analysis will be the most important aspect of how I think about the future. I think it was Winston Churchill who said, the farther back you see, the farther forward you'll be able to look. And so if you look back at how the company has performed, of course, it was a much smaller company back in 2010, has grown with almost very little to no competition in the rural markets. Today, you may say there are competitors like Dietronka who are coming into these rural markets. That may be true, and the dynamics have changed.

Starting point is 01:13:53 Law of large numbers is also working against them, but given this dynamic of doubling from 2,300, more than doubling from 2,300 stores over the foreseeable future, and each store, each mature store, they've opened a little more than 1,000 stores over the last four years, and it takes about three to four years to break even, and a mature store generates mid to high 20% return on capital. And it's interesting when you look back at the most more recent performance, those 1,000 some stores that have been open over the last few years, they haven't started contributing to the bottom line yet. When you overlay all these pieces, stores that have been opened, the future growth that's coming, and each store generating that kind of 20 plus percent

Starting point is 01:14:39 return. And the company not paying any dividend or buying back, but reinvesting every cent, every penny back into the business, that's what allows the company to continue to create value. When I look forward at Dino from here on out, it's a 38350s lottes today, allowing for slower growth over the next, say, year or even 18 months, but going back to a slightly healthier growth as the company brings down the existing debt on the balance sheet, when they'll be able to think about capital and a slightly broad sense. All that leads to the next, say five years or so, cash generated over the next five years or so relative to this current price back into an IRR of something into the high teams and low 20% from here.

Starting point is 01:15:27 So that's how I think about valuation. The current multiple of, I think, next 12 months EPS is only about 19 times. Maybe LTM. It's slightly higher than that. But that's all back of the envelope metric. What I'm looking for is the cash generation capacity of this business, is that stable? and strong enough? Or is there a force lurking in the dark that can disrupt this cash flow generating machine? I'm not convinced that there is one at this point yet. And so I'm not necessarily forecasting it

Starting point is 01:15:59 into the next 10, 15, 20 years. Even forecasting it into the next five years is a big challenge. But as I said, looking back over the last few years allows me to get some comfort in terms of thinking about the future. That gives me the confidence. That gives me the ability to say this is a business that can continue to generate healthy returns over the foreseeable future with enough room to grow. Right. And another interesting aspect that wasn't even mentioned is that they have many neighboring countries with similar characteristics in terms of the consumer base and the types of consumers that they are. A few I'll mention here is Czech Republic, Slovakia, Lithuania, and maybe potentially Ukraine. if the situation gets better there one day.

Starting point is 01:16:45 So it sounds like you aren't even really considering, say, five plus years out, they might be expanding big time internationally. But today they are solely focused on Poland because there's still that huge opportunity for growth there. And even if you don't even consider the international expansion, there's still a lot of potential growth ahead. I personally would like for them to just stay within Poland. That's a market. That's the home base.

Starting point is 01:17:09 That's the market that they know. well, that's just my personal preference. Company doesn't have to necessarily satisfy my individual request. But yes, there are, if you look at the map of Poland, the western part of Poland borders Germany. Then the southwest is Chet Republic and Slovakia. The eastern side is Ukraine, Lithuania, Belarus, and even a limit of Russia.

Starting point is 01:17:31 The west is a lot more prosperous than the east. Western part of Poland is where the company got its start. And if you look at the store base, it's more dense within the Western portion. In fact, just last year, they opened up the first store in the southwest part of Poland. Poland is broken up into 16 states. And the eastern four, five, six states are less prosperous relative to the West because they border Ukraine, Lithuania, Belarus. And they just opened up their first door in one of the eastern states. There is more room there.

Starting point is 01:18:05 But expanding outside Poland, it is a possibility. I think Czech Republic is one market that may have much closer demographic profile and perhaps even certain operating environments similar to Poland. Beardronka, as I mentioned, the largest, which is about 28, 30 percent of the market. It's a company controlled by a Portuguese company called Geronimo Martins. They have publicly announced that they'll use Poland as the base and start thinking about Slovakia, which, as you rightfully said, has certain features similar to that of Poland. I think for Dino, it may be Czech Republic, but many things will have to fall into place.

Starting point is 01:18:47 One of the things that Dino does is they own the land on which these stores stand. They get the land from agricultural, from farmers in agricultural neighborhoods, spend time, money, takes about 18 months or so to get the permits to make them approve for commercial use. and those types of things need to be available for them to start replicating what they have accomplished in Poland. But they don't necessarily have to go there to even describe what I'm talking about. There is enough rule within Poland itself to continue to grow. It's really interesting.

Starting point is 01:19:20 A bit earlier, you mentioned the quote, you know, the further you can look back, the further that you can look ahead. And I'm reminded of Teleb's book, The Black Swan and the Turkey example where all things are well until Thanksgiving hits. And that reminds me of, you know, the situation right now in Ukraine and, you know, whatever effects that might spill over into Poland. And, you know, you can look back in history and, you know, make assumptions on what's going to happen. But sometimes the totally unexpected can happen. So could you also talk about how you became comfortable investing in Dino and investing in Poland more broadly, given the conflict to the east of them in Ukraine?

Starting point is 01:19:58 Yeah. Actually, my investment in Dino and in Poland, was way before this conflict even started. Another small investment I have in Poland is a software company called. It's now called Text. It used to be called a like chat. In any case, before I spent time in some of these markets, Sweden and Germany are closer to the Western world. Poland obviously has a different profile. I spent an enormous amount of time reading up on Poland. I visited Poland as, of course, last year a few months after the war started.

Starting point is 01:20:30 But before that, I spent time reading up on Poland. It's a fabulous country. It has some fantastic history. It's one of the few countries that has actually made the leap. According to IMF, has made the leap from developing to developed market. And many factors have helped the country move in that direction. I live in Chicago, as I said, Chicago has the second largest Polish population outside of Warsaw. And many of them actually are involved in construction-related work.

Starting point is 01:20:59 I've spent time in real estate before, before my B-school, and in fact, right before the war started, I was actually redoing my kitchen, and the entire crew was Polish. I spent time talking to them. They shared a few radios, a few of them were going back and forth between Poland and Chicago. Many factors come into play, but you want to understand the market, I think. It may be better to actually go live there. Again, allow me to digress a little bit. I finished reading this book by Robert Caro called Working.

Starting point is 01:21:31 Robert Caro is the famous two-time Pulitzer Prize winning author who wrote about Robert Moses and Lyndon Johnson, particularly when he was working on Lyndon Johnson, who was from a small place in Texas. Robert Carrow is from New York. He decided that he was having trouble collecting information about Lyndon's earlier days, and he decided that he and his wife will move into this small town, Texas. It was incredibly helpful in his process to gather more data. So that's just an aside. That's what happens when you really want to know the place.

Starting point is 01:22:05 I think it may be helpful to go live there. I wish I was able to go spend an extended period of time in Poland. I'll continue to go, but I haven't spent the kind of time that Robert Kohlrow spent in Texas before he wrote that book. But I've read up a lot. I've talked to a lot of Polish people. I've talked to the company itself, Polska. I've talked to many industry experts that have come from Beardronka. Unfortunately, I haven't come across anybody who has left Dino Polska itself.

Starting point is 01:22:32 That's being able to talk to me. But Beardronka, a few other grocery chain operators in Poland have been able to talk to those people. I've been able to collect a lot of information from what I did, different sources, and that's how I've been able to get comfortable with the country, with the people, and particularly this company. It's interesting. You mentioned kind of the privacy of Dino Polska's management. If my memory is correct here, the founder started the company in 99, and he ended up taking on external funding to fund their growth around 2010. And the founder still owns 51% of the shares. He's kind of known for being very private. So presumably, you haven't met with Dino's management team, although you would prefer to do so. You just really have to. haven't been able to and you've had to get a lot of your information from other sources. Yes, I have not met him. I have exchanged regular snail mail conversations with him. I hope to be able to meet him during one of my trips. But the companies, I are, he's very comfortable in English.

Starting point is 01:23:39 The CFO is not quite as comfortable in English, but generally speaking, the management team is reticent when it comes to engaging with the market. I think it's primarily driven by a how Tomas Biernanatsky, the founder, sets the tone for the rest of the team. The IR guy is the eyes and mouth of the company and he'll engage with us anytime we want, but Thomas doesn't generally meet with investors. I hope to be able to crack that code one of these days. I don't know when. And oftentimes when this is the case, it's maybe a company that's just so large and they have so

Starting point is 01:24:15 many different things going on. Like, Dino Pulska, it's around a 9 billion USD market cap. So, you know, it's not a company that's getting attention from all these big name investors. And I'm sure they are strapped for time in terms of, you know, all the work they're doing and expanding their business. But I think it sort of points to their focus on what really matters. And that's the fundamentals of the business and sort of minimizing a lot of the noise and like speaking with Wall Street and such. I actually, in one sense, it's annoying to not be able to see the black of the eye or the blow of the eye of the decision maker. but in another sense, I appreciate the focus on the operations.

Starting point is 01:24:53 Sometime back, Todd Combs, he did an interview with Michael Mubison in Columbia. It was a breakfast meeting. Michael was asking you about a number of the things that he has learned after moving over to Berkshire, blah, blah, blah. It's a fantastic read if you get the transcript. But one of the things that Todd says in that interview is an interesting question I ask management teams is what are the things that you would not be delay if you were private and why are you not doing them? Invariably, this investor communication is one thing that pops up as one of the top

Starting point is 01:25:30 items that they would not be doing if they were not public. And so here's Dino Polska, which is another few companies like that. They don't like to engage with the management team. In the case of Dino, yeah, they don't need to raise any capital. They did raise debt for that a meat processing plan, but generally they're not in the business of raising capital constantly, and they're not in the business of promoting their stock. They do want to provide the correct information to the market, marketplace, and so they do conduct an earnings call in which the CFO and the IR guy will go back and forth. But outside of that, they don't like to engage with that, with the industry. And I do sincerely appreciate the approach. But yeah, yeah,

Starting point is 01:26:11 that was an interesting point that Todd brought up in his conversation with Michael Mobeson. And on the other hand, there are a few companies, even today. I wish they were not quite as engaging with the market, constantly talking about their company, about the market, about the management team, blah, blah, blah. I would like for them to actually be a little less talkative. Shriad, one more question I wanted to ask you, before I let you go, give you the final handoff at the end.

Starting point is 01:26:40 At the very start, you mentioned Chris Mayer. It's an investor that you know. and it sounds like you guys keep in touch and run ideas by each other. And you also have a few names that intersect Dino Polska being one of them. And to the best of my knowledge, Chris's portfolio has a sizable allocation to serial acquirers. And for those who are familiar, serial acquirer is a business model whose futures growth is essentially predicated on, you know, continuously making these acquisitions. Constellation software is one sort of prominent example that we've talked about on the show.

Starting point is 01:27:13 and a lot of our listeners have taken interest in learning more about. But Shri, you don't own any serial acquirers in your portfolio, and I'm sure you've done plenty of research around this, given that you talked to Chris from time to time. So I'm curious to get your general thoughts on serial acquirers and what's kept you out of them today. Yeah, you're right. Chris and Ivey go back a while and we keep talking about our portfolios and ideas and all that,

Starting point is 01:27:37 and he does have a few more serial acquirters than is typical. For me, I wouldn't say I don't have. any. I know Heinko is one that I own. It is a serial acquirer, although their acquisition program is slightly different in that this doesn't happen all the time, but in most of their acquisitions, they don't acquire 100% of a company. They acquire 70, 80%, leave a slug for the selling shareholders to remain vested. That's a slightly different business model compared to most of their serial acquiters. That's a feature that I like. But I would say this is more a personal deformity that I have that's holding me back. And I've told you I went to investor Chicago. Ever

Starting point is 01:28:19 since I graduated from Chicago, I've been in a number of different number of companies. Each one of them has been acquired, was a commercial bank, as an investment bank, and then even asset managers, advisory and Keeley. Each one has been acquired. And it's interesting that none of those acquisitions have panned out well for the acquirer. Perhaps it's the source of that deformity in me. I'm also reminded of Buffett used to write these very interesting letters back in the days. It's unfortunate that he doesn't write those types of letters these days. But there was one that he quoted many years ago, forget it must have been in the mid-'80s. He said, he thinks about acquisitive growth. He said, I'm reminded of this country singer Bobby Bear in which he said, I've never gone to bed

Starting point is 01:29:04 with an ugly woman, but I've sure woken up with a few. In any case, I'm not saying I'm completely opposed to it. There's a McKinsey book on Valvation has talked extensively about the type of acquisitions that pan out well over time. There's an interesting author website. I think his company is called Scott Management. He has put together certain features of serial acquirers that he thinks do it the right way and have actually made it work over the long time. But it's just a combination of acquisitive growth, not necessarily panning out over time

Starting point is 01:29:38 based on my experience. And yes, I've been wrong. Mark Leonard, Constellation has been a phenomenal success. There are a few Swedish serial acquiters that have done it right, and I'm not in any of them. So I've been wrong so far, but maybe over time, as I continue to spend more time looking at these companies. And actually, some of them have also come into the, I've also declined by 20, 30% over the last few months, particularly the Swedish ones. You never know. I may actually change my opinion, change my thought process.

Starting point is 01:30:10 life as an investment manager is always a question of being a learning machine and not a machine yet when I continue to spend time trying to learn. This may be one thing that I may learn over time. I am a slow learner. I know that. Well, being a serial choir and being successful for decades, it's an incredibly difficult task. And it's one of the Chris Mayer names, you know, just studying one of their managers. They talk about this learning journey too. They're continuously learning, continuously trying to figure things out. And I think we're all sort of in that boat. But Shri, I don't want to hold you too long.

Starting point is 01:30:47 It's been one of my longer interviews here. And I want to give you a handoff here to give you a chance. If anyone in the audience would like to learn more about you and SVN Capital and any other resources you like to share, please give them to hand off to where they can do so. Oh, thank you. I warned you off front that I do tend to talk a little more. Thanks for having me and for people to follow me. website is www. www.svncapital.com and my email is shri at svncapital.com. And as you said, I'm also on

Starting point is 01:31:19 Twitter at SVN Capital. We'd love to connect with your followers. And I can't thank you enough for having me here today. And I'm extremely sorry that this ran way too long. No, it definitely didn't go too long. I thoroughly enjoyed it. And I thought this was probably a good cut off point. And maybe we can continue the conversation at some point in the future. Absolutely. Thank you and look forward to staying in touch. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence.

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We Study Billionaires - The Investor’s Podcast Network - TIP585: Concentrated Value Investing w/ Shree Viswanathan

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