We Study Billionaires - The Investor’s Podcast Network - TIP596: Building Wealth Through High-Quality Stocks w/ Stig Brodersen and Clay Finck

Starting point is 00:00:00 You're listening to TIP. In today's episode, my co-host, Clay Fink, and I discuss how and why we should invest in high-quality businesses. It is a bit ironic that we're doing this episode almost 10 years into the tenure of the investors' podcast. I remember reading about Buffett early in my investment career and how long it took him to realize that investing in high-quality companies is the best approach. Now, investing in high-quality companies intuitively sounds easy, but it's so hard to pay up for

Starting point is 00:00:30 Our brains just thinks linearly and not exponentially, which is how you should be thinking to understand the power of Buffett's best investments. Join Clay and me as we explore the benefits of high-quality businesses in today's episode, and if you plan to go to Omaha for the Berksday Hallaway's annual shareholder's meeting, make sure to stay until the very end to learn more about our events. We talk about how you can meet our host, William Green, Clayfing, and Calgary, but also guest of the podcast, and this is including but not limited to Anthony Kingsley, Fonshuang, Jean, and Chris Beck.

Starting point is 00:01:08 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 Ammastersen. I'm your host, Dick Broderson, and I'm here with my co-host, Clay Fink. Clay, how are you today? Doing great, Stig. It's always great to chat with you on the show. And I'm excited to dive into today's episode. I'm excited, too, talking about high quality investing. And, you know, one of the things that I learned early on is that if you pick the wrong

Starting point is 00:01:52 stocks, you're going to lose money. And you might be thinking, steak, that's so obvious. Like, yes, of course you're going to lose money if you don't pick the right stocks. But I want to add something to that because it probably sounded too obvious. There is something to be said about buying high quality businesses. Because if you're right about the business, even though you're going to be able to be able to valuation might be of, the company will grow into that valuation eventually. You know, one example could be Microsoft.

Starting point is 00:02:17 You know, it traded at a very, very high price compared to its value during the dot-com bubble, for example. And it took, what, 16-ish years, depending on how you mentioned it before it grew into that valuation, but it eventually got there, whereas if you bought the wrong business, you would have lost all your money. So, and I should also say that it is a bit courageous now whenever Clay and I are talking about what is high quality businesses. There's no exact definition of what high quality is. You can't look up and say it's exactly those 10 metrics and then it's a high quality business.

Starting point is 00:02:50 With most things in life, it's easier to say what quality is not, perhaps compared to what quality is. And I think I heard from one of the book clubs that you did, Clay, that was it from the what was the name, like the art of the motorcycle maintenance something? You know quality whenever you're see it. I think that was how it went. Yeah, Robert Persig's book, Zen and the Art of Motorcycle Maintenance. That's a grind to read through, but there's, you know, there's those nuggets in there where, you know, like that quote, you know, when you see quality, you know it's there when you see it. And he talks about it in his purse egg and his classroom, he's got a classroom full of students. They've never really dove into the concept of quality. I mean, who really has? But, you know,

Starting point is 00:03:33 when he shows them like a high quality, he shows them two papers, and he has everyone sort of agree each one and each, everyone sort of agreed on what quality looked like and that applies to so many things in life. Yeah, and that's very well said. And I think I want to use that a segue into talking about this study created by Bessonbiner. And this is quite of a famous study, at least if you're into stock investing, but he has this study that's been quoted quite a few times and he's using data all the way back to the 1926.

Starting point is 00:04:02 And he found that only 4%. Just going to say that again, only 4% of stocks are. performed US government bonds. Now, originally this study was made on U.S. businesses, but it was more or less the same conclusion whenever he was looking international stocks. I think it was even fewer stocks whenever he looked at international, but more or less, regardless, the conclusion still held true. And, you know, you can look at this different ways.

Starting point is 00:04:25 You can say, well, if only 4% of stocks are upperforming T-bells, I don't want to look for those companies because it's just too hard. You know, let me just buy an ETF. And I think that's a completely reasonable conclusion to make. You can also say, well, if stocks overall, despite this, are drastically outperforming T-bills, then you get really rewarded if you can find one of those 4% stocks. And that's what Clay and I are setting out to do in this episode. So, yeah, let's dive right in.

Starting point is 00:04:57 I want to start by talking about the business before I talk about the management. And I wanted to put that disclaimer there. And, well, I should say why I wanted to do that, because whenever I started out investing, I know a lot of the listeners there, some of them are very experienced. Some of them are just starting on their journey. I kind of feel I got blinded by these charismatic leaders, larger in life stories. And I think in another segment here later in this episode, we're going to talk about the importance of leadership, because this is not my way of saying that leadership is not important.

Starting point is 00:05:27 It is very important. But it's even more important what the business is. is more than what the leadership is. And I wanted to emphasize why. You know, being at the right place at the right time, that means a lot too. Bill Gates has families talked about how him, Steve Jobs, Steve Case, clearly as he was smart people, but he talked about how they were at the right place at the right time.

Starting point is 00:05:48 And, you know, if the three of them were born 10 years earlier, 10 years later, you know, it was just the sweet spot in whenever personal computers took all the world. And it was just a huge addressable market. And this is not my way of saying that. that rise and tight lifts all boats. It's not that easy. You know, many companies in the car manufacturing business, they've come and gone. But it takes me to the next point about barriers of entry. It's just so important for a business that you have high barriers of entry. It's immensely difficult, for example, to be successful in retail for a sustained period

Starting point is 00:06:23 of time or, you know, to run restaurants, which is another sector with very low barriers of entry. You don't have a lot of valuable IP you can protect. It doesn't require your billions of billions and capital to go into that market. And I'm not saying that it's impossible at any means. You might be looking at Walmart or McDonald's and great businesses for sure. But I also want to say that they're the exceptions. They're not the rule. And perhaps, and this is probably a story for another day, but McDonald's business model is

Starting point is 00:06:51 not so much built around food. Yes, that's important, but they have this entire wonderful business model around real estate. but again, that might be a story for another day. And so I guess this is my way of saying that Peter Thiel has this wonderful quote where he talks about that competition is for losers. And I couldn't agree more. You want to invest in companies without competition if you can. But of course, that's easier set than done.

Starting point is 00:07:17 They're very few of them. And those that do exist are undiscrutedly from antitrust. Alphabet, Mera comes to mind. Of course, I should say, competition is good for us as consumers. But for us as investors, we generally don't want competitors to the companies we invest in because they drive down margins and stock or shareholder return. And I should also say with the lack of competition, you also have more pricing power. Pricing power is always important, but especially in the world with higher inflation.

Starting point is 00:07:47 Consider a company with $10 million in revenue, $9 million in costs. If the company can just raise the price by 10% without incurring additional costs, then they're doubling the profit. And I should probably also say in this question, Clay and I have set out to do in this episode, we are not looking to find a company that has a competitive advantage that cannot be eroded. Like that company just unfortunately doesn't exist. But you can find a company that has a competitive advantage that lasts longer than others. You know, for a long time and some probably would even argue today, a company like Nvidia, they look like they have very strong competitive advantage.

Starting point is 00:08:25 But even in video, feeling the pressure of export restrictions, and big tech companies that want to develop their own chips because they don't want to be, you know, depending on Nvidia. And I can't tell you whenever it will happen, but I'm at 100% sure that Nvidia will eventually lose their edge. It's just the world of capitalism. It's an iron rule. And I think I want to stay in the world of semiconductors just here for a bit. One company that I found very exciting for a time was Micron Technologies. Micron Technologies is an interesting company because it operates in what you call an oligopoly, which is basically just a fancy way of saying that you have a market structure with very few competitors. You only have

Starting point is 00:09:02 two others, Hynex and Samsung. And if you only have three players and they quote unquote act rational, they don't compete on price. They compete on other things and they don't drive down the margins. But even that is no guarantee. And actually, you know, it's sort of like a cartel where as long is they don't really call each other. It's not illegal, but they can more or less go about that. But even their temptation very often, even if there's only three players, are just so high in terms of breaching that cartel to gain more marketia, which Samsung did and sort of like, to some extent, they wrote the business there for the three of them. Because it usually gets repaid and kind. If one company lowers the price, then the others also have an incentive to do that.

Starting point is 00:09:45 So it's very difficult to find the perfect market structure. You know, if you have a monophobic You have antitrust issues. If you have oligopoly with just a few players like we talked about before, then you really rely in them to act rational and think long term, which is really hard. And then you also have other market structures where there's a lot more competition, which by definition is even harder. But of course, if you could choose, you want as little competition as possible. All of that being said, and perhaps this is my way of going back to the beginning here,

Starting point is 00:10:15 because the mistakes are really in not finding the right business. And I should say even if you bought Berkshire Hathaway back in 1965 when never Buffett took over, like even if you bought that IP of say 100, you would still have made your money back. You know, again, going back to the power of finding the right business. But all of that being said, I want to throw over to you. I kind of feel like a ramble enough there, Clay. Yeah, you make a lot of great points there, Stig. And I'm reminded of Chris Mayer's book 100 Baggers, which is sitting right behind me.

Starting point is 00:10:48 The number one company in his study of 100 baggers was Berkshire Hathaway. So if we are paying a P.E. of 100 for a company, we should be very careful because I don't think the base rates are very high on making a stellar return on that are very good. But the study you mentioned is quite interesting, the 4% study. And I think it's so easy for people to get intimidated by that 4% number and think, how in the world am I going to be able to pick? the company that happens to just, you know, outperform treasuries over the long time frame. But when I look at some of the research around quality investing, I think there's still a case to be made that, you know, a lot of investors can still identify those companies that are high quality or maybe they're cut from a different cloth for lack of a better term.

Starting point is 00:11:39 And I like to fall back on some of these ideas or these sort of rules of them that Chris Mayer talks about quite often. I'll name a few of them here. you know, strong balance sheets. A strong balance sheet helps a company, you know, weather through those really difficult periods. You know, you can probably find a long list of companies that, you know, had average or maybe weak balance sheets in the great financial crisis and they couldn't get access to capital markets. And, you know, the stock essentially gets annihilated in that sort of situation where, you know, they can't cover their costs. And maybe that leads to enormous share dilution at the worst time you want to issue shares, if it's even possible for them to do so.

Starting point is 00:12:19 So strong balance sheet is something where it allows a company to endure for a really long time and weather through those difficult periods. A few others here I'll mention is just consistently profitable. A company that's profitable, they have access to cash and they're able to continue to weather through those periods. And I think there's a case to be made that profitable companies that continually reinvest, they have high return on capital, usually tends to. correlate well with stock returns.

Starting point is 00:12:46 I'm reminded of one investor in Williams' book, Richard Weiser Happier, he talked about, you know, just a simple idea. Stocks follow earnings. You know, some people might do well investing in unprofitable companies, but it's just not the game I want to play. I think it's a game that's really hard. And I like games that are relatively easy at least. And then managers with skin in the game is something we're going to talk about today as well,

Starting point is 00:13:09 Stig. And, you know, obviously there are companies that do well that don't have managers with a lot of skin in the game, but I think it makes it a lot easier to find these businesses cut from a different cloth. I've recently been reading this amazing book. It's called Quality Investing by Lawrence Cunningham. And Cunningham, he lists three characteristics that indicate a high quality business in his eyes. This is strong and predictable cash generation, so like I mentioned, profitable businesses, sustainably high returns on capital and attractive growth opportunities. Part of all this, I think is, you know, being lucky in some sort of sense or a company just being in the right

Starting point is 00:13:49 place at the right time. And, you know, there's a story of Bill Gates. You know, he's obviously very smart. But he was also born in Malcolm Gladwell talks about this in his books where he was just born in the right city. He got introduced to computers at a very early age and the rest is history. And there's just so much to the story, though, too, in terms of the luck factor. There's a quote at the start of this book, Quality Investing, that's a quote by John Ruskin. It says, quality is never an accident. It's always the result of intelligent effort. And you mentioned Zen and the Art of Motorcycle Maintenance.

Starting point is 00:14:24 He has that quote in that book, Persing, whether you're mending a chair, selling a dress, or sharpening a knife, he writes that there's an ugly way of doing it and a high quality, beautiful way of doing it. And I just absolutely love that quote. And then I can't help, but also mention Nick Sleep. He's written that you really want to do everything with quality as that is where the satisfaction in pieces. So it's really turns into sort of this philosophical concept once you dive into quality. But for the purposes of this discussion, we'll stick to the investing side.

Starting point is 00:14:56 And it makes me believe that when you have a business that really puts in the work, they're able to have some sort of first-mover advantage or they have some sort of opportunity to get ahead of their competition. I think there's just those situations where it's just so difficult for businesses to chip away at that competitive advantage. They can see maybe a lot of what the company's doing, but even if competitors, they quote unquote do all the right things, I think there's still those cases where it's just so, so hard for other companies to replicate what the leader's doing. And it reminds me of what Christian Billinger told me on the show on episode 582. too, Christian said that sometimes it's great when you find a quality company and it's really

Starting point is 00:15:41 difficult to clearly communicate what makes it high quality. And when it's difficult to explain and tell others what makes a company so great, then it's more likely to be misunderstood or underappreciated by the market. And I think this is part of the reason why people can get attracted to these super high quality businesses. Maybe they're trading at higher multiples. You can look at the financial of these companies. you can see the earnings, you can see the assets on the balance sheet, there's really no debating it.

Starting point is 00:16:11 But when you have a quality business, you're also making a judgment about the future, you know, how long can they grow, how much capital will it take for them to grow? And that's really where a lot of the difficulty lies as well as, you know, what sort of future is coming for the business. And I mentioned that quote about quality not being an accident and being the result of intelligent effort. I personally don't really like to have to guess where the company's going to be a few years down the road, say three years out. If a company has grown, say, for 10 or 15 years, then odds are that probably wasn't an accident. And you see that sort of consistency. It's very predictable. They have a model that's very repeatable.

Starting point is 00:16:57 And, you know, it's pretty reasonable for me to believe if nothing materially changes within the industry or nothing materially changes within the company, managers have skin in the game, then that helps give me the confidence in being able to forecast growth, just say for the next few years. And that really gives me comfort in figuring out the right price I should be paying. And Cunningham, of course, talks about valuation in this book as well. He said, quote, quality companies thrive in the long term, but stock markets tend to overweight the short term. And that long term versus short term focus is so, so important to understand. He talks about how Wall Street is just so short-term focused and really they're rewarded on oftentimes quarterly or annual results. So oftentimes they're buying stocks that they believe

Starting point is 00:17:43 are positioned to outperform in the short term. You know, they might be going out and buying Apple, even though it's trading, you know, at an all-time high in terms of it's multiple. And they just think it's sort of a momentum play and all these funds are allocating to these mega-caps. And he also points to the decline. average holding period in the overall stock market and how over a one-year time period, 80% of the moves and stock prices are explained by the change in the multiple. And to me, that's just sort of random. You can't really predict whether the market's going to re-rate a stock from a 25 multiple

Starting point is 00:18:19 to a 20 or 30 over the next 12 months. Like, I'm not in the game of predicting that. But the most important factor in the long run is not the multiple, but it's the earnings growths. And that points to your point earlier where, you know, the business quality and where the business is going to be in the long run. And not so much how the market's viewing it in terms of the multiple. So if you're investing for the short term, like maybe on Wall Street, then you should probably put a lot of focus on the multiple you're paying. But if you're investing in quality businesses for the long term, then earnings growth is what ends up being

Starting point is 00:18:52 most important. Yeah. And I think it makes us good points here, Clay, about the short term and the long term because we often tend to think that what other people are doing, which might not be what we're doing, that's crazy. Like, why would they do that? And, you know, I think you point to a really good point of, we have different motives. Let's say, let's look at Berksa Heatherway right now. So it's trading at the time of recording 357. So what is the intrinsic value of that? Let's say it's probably north of 400, perhaps 450. We can always go into a discussion about that, but let's just say that is more or less the intrinsic value. So is it crazy to sell Berksa Hathaway today? It depends on a lot of things. You know, perhaps if you want to go out and buy it now

Starting point is 00:19:36 and someone is selling, perhaps they found something that's even more undervalued, that they were rather owned. So that's not crazy. Perhaps the seller is a retiree that is well aware that Berkshire is undervalued, but he needs money to live on and he perhaps can't afford the risk of even though that Berkshire Hathaway is he agrees that it's undervalued. it can still tank and he's well aware that he can tank. So, you know, he has to consider that if he has to pay rent next month. And so I think it's important to understand that people just come from different angles. And perhaps you were 25, perhaps you have, I don't know, four-year investment horizon and you don't have a very broad universe and you really love Berksie

Starting point is 00:20:15 Heller. Well, in that case, it's probably crazy to sell it, especially if you're sitting on some capital gains. And so I think that really also goes to Clay's point about Wall Street might act. crazy, but if they're incentive, if they get a bonus next quarter, well, perhaps it's not crazy for that person. But anyway, speaking of Berksa Hathaway, Warren Buffett, you know, Warren Buffett has this wonderful quote he talks about that you should invest in a company that can be run by an idiot because one day, you know, someone will. And I think with that in mind, it really goes back to this idea behind. It's really the characteristic of the business more than the management. That's important. But it's also very important to focus on the management.

Starting point is 00:20:57 You know, if we talk again about Warren Buffett, you know what, that story has been told many times about, you know, how he bought Berksie Hallaway and how he felt it was probably one of the worst investment decision, if not the worst investment decision here we did because he was a terrible textile mail. And in today, it's a sprawling conglomerate. But if he had continued to file money back into and wanted to continue for that to be a tax email, like there's no way it would be the company it is today. And so that was a management decision. It was an active management decision to move away from that and then invest into something else that was way more profitable. So I think that's important to keep in mind. Another thing to keep in mind is to

Starting point is 00:21:36 avoid double accounting. So let's say that you're looking at Apple right now. And you conclude that Tim Cook is a fantastic CEO, which is? And you say, well, you know, this is how much it's grown in the past and because it's Tim Cook that's leading the company is probably going to grow more because we really have to put a premium on great management. Well, you can already look at the track record of that great management. So it's really important you don't do double accounting because you can already see what has happened. And we would like high inside ownership.

Starting point is 00:22:07 Now, then the question comes, what is high inside ownership? Is it 5%? Is it 20%? It's very difficult to answer. and I think more than an exact number, because everything else equal, you would say that the higher the better. You want to investigate how has the management, especially the CEO, build their ownership stake. Preferably want the company to be found a let. There's a lot of caveats to that, but you would preferably want that. They typically have a high insider share just from the sheer fact of them,

Starting point is 00:22:37 you know, founding it originally owning close to 100% of the company, if not all of 100% before it IPO. And there are multiple studies that support the thesis of founder-led companies and that they typically perform better. They don't take excess leverage. They have a very long-term view. And some companies that we might think of today could be a company like meta. LVMH is another. For a long time, you could say Amazon and Alphabet.

Starting point is 00:23:00 Now the founders are sitting at the board. Another thing I look for is frugal management. Mark Leonard, CEO of Consolation Software, travels on his own dime. He doesn't take a salary. I should also say that he's see the exception and not the same. the rule. Unfortunately, that's the way it is in corporate life. And you would also want a higher ownership from insiders, born in the open market, if that's possible, not through stock options. But that is a very tall order, and it's not something you're able to see. The board of directors

Starting point is 00:23:31 for Berkshire is the exception. It's certainly not the rule. Very often, it's through stock options that the management would have acquired their ownership stake. You also want to ensure that KPI as I said for the management that's within their control and align with shareholders. My favorite metric is a return on investor capital. If you see someone being compensated sold based on earnings per share, you probably want to run away screaming. There's just so many misalignment there with debt and financial engineering, and it's just terrible.

Starting point is 00:24:00 Another thing I like to do is I like to read the earnings transcripts or sometimes listen to the earning transcripts if I can. I'm a bit guilty here because the main reason why I don't listen to them is because it's part because they're typically a lot of numbers. and they're easier to read, but also because I cannot figure out how I can read them at like 1.5 speed or two times. Like, it just drives me crazy how slow it is. But anyways, go through the earnings transcripts, and you can quickly tell how well the executives understand capital allocation. And often they don't. Being a great capital allocators is very often not how you become the CEO in

Starting point is 00:24:34 the first place. And I would also say that of those who do speak like good capital allocators, You know, in our world, there's a lot of people who talk buffet fluently. They talk to talk, but do the walk to walk. And you have to go back and look at the track record for how do they allocate dividends, share repurchase, how do the act on acquisitions. And so before I throw it back over to Clay, I should probably also say that lots of disclaimers here. I hold it shares in Berksie Hathaway.

Starting point is 00:25:01 And I mentioned the consolidation software. Even though I actually pitched it a long time ago on a mastermind meeting, I was not smart enough to actually buy checks in the company. I think you did, Clay. So I just want to put all the appropriate disclaimers out there. Of course. Yeah, I do own shares in Constellation Software. And you make just great points on insider ownership. In the end, I think it really comes back to the incentives. If the CEO or whoever's on the management team, if they clearly have a significant portion of their net worth tied up in the company, then I think that's a pretty good sign. And you also make a good point of how did they get those shares? Was it just handed out via

Starting point is 00:25:46 stock-based compensation or did they purchase the shares on the open market? You might have one CEO that makes $2.5 million a year and they have $10 million invested in the stock. But a lot of that might have been acquired through stock-based compensation. That's not necessarily a bad thing, but it's just something to keep in mind in terms of the incentives, how did they get the shares? Was it just handed to them or did they go out and purchase it themselves? And then you might have another CEO that makes $250,000 or $500,000 in a year and then they have, say, $5 million invested in the company. And on top of that, very little or no stock-based compensations performed. So you see that they purchase those shares in the open market maybe five or 10 plus years ago when the stock was way lower

Starting point is 00:26:27 and then they've made all these long-term decisions that have played out well for them. So when it comes to insider ownership, there's definitely not a hard number. It's just getting a sense of how managers are incentivized and then getting a sense of whether they're working for the company to enrich themselves or if they're in it to make the best capital allocation decision for shareholders. So it's like getting clues to give us an idea of where the manager's head is at, where their mind is thinking. And you mentioned Mark Leonard and paying for his travels on his own dime.

Starting point is 00:27:03 I think that says a lot about where his head is at. Like, who's he thinking for? Is he thinking for himself or is he thinking for shareholders in terms of that one decision there? So, you know, what kind of shareholders are managers trying to attract? All of these can serve as clues, but there's no one hard rule for what makes an exceptional manager. You can look at the compensation structure, the bonus incentives, stock

Starting point is 00:27:25 repurchase programs, their dividend policy. And then I also like to think about whether management and CEO is overly promotional or not, or are they just working on the business, keeping their head down and not really talking with the media at all? And naturally, I think newer investors naturally get excited about the overly promotional CEOs. They turn on CNBC. They see the interviews. They see whoever CEO, I won't name names here, but some people tend to be in the news headlines every single week. And part of me gets really excited when I see a company with a really, really great track record, exceptional track record. There's little to no analyst coverage. The company doesn't really care about chatting with Wall Street. And I try and find some interviews with the CEO

Starting point is 00:28:17 and you can't find a single one. You know, it's just like a totally private person. And those are clues for me that the company might be overlooked. A lot of retail investors probably aren't interested or probably even know the name exists. And they aren't on the radar for a lot of people. At the end of the day, we really want managers who are good stewards of shareholder capital. And I think a fantastic book for this is William Thorndyke's book, The Outsiders. We've covered this book a couple of times on the show. You and Preston did one and then I did one as well just because it's so good.

Starting point is 00:28:50 And it really gave me a better sense of what a quality manager looks like that's in quotes there. Some of the things that come to mind from that book is just discipline, patience, independent, and thinks long term. When these great opportunities come, they're willing to make these really bold bets when these great opportunities present themselves. And then just basic principles to live like a good life, honesty, integrity, operating with a high level of ethics. It's all sort of clues you want to try and dig up in all these items I mentioned earlier. And Lawrence Cunningham, he had this quote that I absolutely loved that I wanted to share here. Good managers are never satisfied, but are instead driven by an indefiable and passionate quest for improvement. And company performance, it really comes down to people at the end of the day.

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Starting point is 00:33:48 That's Shopify. dot com slash WSB. All right. Back to the show. Yeah, and Clay, if you allow me to pull on that thread about managers never being satisfied,

Starting point is 00:34:00 I think that's so important and I like to use metaphors from sports. And you can just tell from some players whenever they win their first championship, they're like, they're golden, they're set, and then they're just not as driven anymore

Starting point is 00:34:12 because they already won. And then there are other sort. thinking, well, I won one. So I'm just getting started. I need to win a lot more. And I think that's also very telling of managers. You know, I look at Elon Musk. You know, he made so much money from selling PayPal that he could be riding into the sunset. Did he do that? Very much, no. And he, you know, he founded Tesla and SpaceX and he was about to go bankrupt. I want to say multiple times. I think you just read this book and I think you're going to do an episode on that soon. Clay, so you probably know that. But like, I want to say, I read the first book about, or one of the

Starting point is 00:34:49 books, the one that banned something's unwrote in 16 and whatnot. And I think he was telling something to his wife or ex-wife about like, he was willing to move back with his parents because he wants to put everything into his new businesses. You know, there's just a selection bias there or someone who's willing to, and a selection and a survivor bias to someone who is willing to put everything into the businesses and not being satisfied. There's a lot of truth to, you have the Intel founder and the Grove. He has this, I want to say what's the name of one of his books or perhaps the e-book, only the pair not survives. You know, you want to, if you want to compete for the best in business and sports, you can never be too satisfied because it will just

Starting point is 00:35:31 make you complacent. And as soon as you become complacent, someone's going to eat your lunch. And, You know, McCuban, he has this book that we covered. It was a long time ago, Preston I read there. I don't even remember as Colbert or something, but I remember he talked about the greatest sport in life is the sport of business because it's 24-7. I absolutely love that quote. I think that's so true.

Starting point is 00:35:52 So for the highest quality companies, you're looking for management that's never satisfied, and they can really channel that eagerness into value for shareholders. And because there's just so many examples of a management that are becoming dissatisfying. perhaps even bored, and then all of a sudden they start deploying capital into ridiculous projects. And I kind of like feel that I don't want to be the guy who's talking about the most successful people in the world and say, oh, but like they have terrible relationships. You know, I kind of feel, I kind of feel it's, in a way, it's a little unfair because it's almost like you want to say, yes, Elon Musk has so much more money than me, but, you know,

Starting point is 00:36:34 he has terrible relationships. And I should also say for the record, I also know people without money that has terrible relationships. So it's not an either-or. That's not my point. But I think there is something to be said about those people who have that drive. And you almost need to be a bit of, I don't know what the right word here is,

Starting point is 00:36:54 without it coming across as too negative. But you have to wake up and have a billion dollars and be like, no, this is not enough. And have that personality. And I kind of feel like most of us would probably, If you woke up one day with a billion dollars, be very satisfied and perhaps chill more. Stig, you're really tapping into something there where, you know, I mentioned the term cut from a different cloth. And I can't help but think of the company, Kyle Greve and I just chatted about Dino Polska, that episode we did.

Starting point is 00:37:23 I own shares in this company, so I'm not trying to pump my own stock. But I just want to mention just one thing with that company that just, it just sort of blows me away, how this guy starts this, retail business, which we said isn't the best industry to get into, but they seem to be sort of an exception so far, at least, similar to a Costco or Walmart. And, you know, this guy starts this company in the late 90s. He ends up selling a bit of his, he sells 49% of the business to raise funding in 2010. So from 2010, he had a 51 stake in this business, 51% stake in this business and he was just all in growth mode. They had something like 100 stores now and now they have over 2,000 stores. In the last 13 years, he's never sold a single share and this company's

Starting point is 00:38:13 just been a compound machine ever since then. And, you know, I'm sure in 2012, 2013, 2014, he could have just sold a bunch of his shares, hired someone else to run the business and go live a wonderful life. And, you know, for him, I've never, you know, listened to an interview with him or anything. And he's not a public guy. And, you know, it just seems that there's something there where, you know, he's just, he loves the game of business. If I had to, just based on all the clues I've seen in terms of the studying the company, you know, reading their reports, diving into some of the capital allocation decisions they make. They reinvest 100% of cash flows. And it's, you know, I think he could be a case study of an outsider type C.

Starting point is 00:38:56 So it's just, you know, you really have to be cut from a different cloth to have that sort of time horizon where I'm not thinking one year, two year, three years out. I'm thinking like decades out so I can like hand these shares off to like my grandchild during someday is probably some of the things he's thinking. So I think it's just such an interesting point in a case study. It's sort of why you and Preston started the show is like these really successful people, what makes them click? You know, what makes them get up in work 12 or 16 hour days?

Starting point is 00:39:26 Elon Musk. Yeah, and that's the point because most people would be listening and saying, that doesn't make any sense. If I had a billion, I mean, you know, Elon Musk has a lot more than a billion dollars. Like, I would stop working. But that is exactly why he has so much money because he does have all that money and he's still working. And so there's this selection, but, you know, if you ever watch the last dance with, you know,

Starting point is 00:39:48 it was the polls in the 90s, you could just see how insanely competitive Mike Jordaners. And you would be thinking with all those championships and with all his glory and money and why didn't he just stop? He did, though, but they also play baseball. And then he stopped again. But why didn't he stop way sooner with all that's going on? But that's because he was so competitive. And so you're absolutely right.

Starting point is 00:40:11 You can't really compare it because it's just, yeah, just cut from a different cloth. And I was speaking with Mnich about this the other day. And we were talking about serial acquires. And he was basically saying that's a terrible business model. And then I said, what about Mark Leonard and Constellation Software? And he said, look, stick, it's just cut from different cloth. You can't even like, you talk about serial acquires in general. That sucks.

Starting point is 00:40:35 But then you have a select few. And what they do is just in their own league, regardless of what they're doing. So you can't even compare. I think it's important to think about that. Also, whenever we have the disclaimers about, you know, it's really the business, it's not the management. There are some type of management that also makes the business. And I never own shares in Tesla, anything like that, but I'll be the first one to say, I can see why a character like Elon Musk can drive things in different ways for better or for worse

Starting point is 00:41:04 than other CEOs can. So let me see if I can rope myself back in talking about high quality companies. So what am I looking for here? Can we filter on any key ratios? I think the short answer is yes, but it will also come with different disclaimers. Open any investment book, listen to any podcast. they will tell you how flawed any metric is that you're looking at. And that would be right.

Starting point is 00:41:26 So it's the nature of investing. You cannot find one key metric that explains everything. If it was that easy, there were no money to be made because everyone would be looking at that metric. And the future is always unknown. And stock investing is certainly no different. History can give you clues, but it's really the future cash flows. That's all that matters. But if you really put me on this spot and you asked me to pick one metric, for me I would

Starting point is 00:41:49 say it would be ROIC or return investor capital. I would also say that return on capital employer would come relatively close. It's really an imperfect proxy of the quality of a business. And if you see a company with a long track record of a high RIC and you estimate that it will continue to do so, you likely have a winner in your hands. And over time, you will find that whatever that number is for your RRIC, that is the return that you will get, especially if you hold it enough, more than necessarily the multiple that you paid. And so why is that so? Well, a company with a high RIC, it tells you that it's probably operating in the industry

Starting point is 00:42:30 with good growth opportunities. You probably also have good capital allocators, probably also in a good sector, and they think really well, I already mentioned allocated capital. So how much is put into buybacks, dividends, how much can be reinvested? it back in the company. And, you know, that is really key ingredients for the success of businesses like Brooks-A-Hatherway. That's, for example, not paying a dividend. Then you also have LVMA that's actually paying a dividend, but they're doing in a very intelligent way. Because if they can't deploy the capital in a good way, it's also better than they pay that out to investors. And you want them

Starting point is 00:43:09 to have an incentive to send money back to the headquarters. So the capital allocators there can deploy it the best possible way. And I actually spoke with someone from Mastermind community that have speaking or have information for the management from the CEO brands of LVMATs, for example. And they are compensated based on our IC, which I don't think is any surprise whenever you look at the track record. You have companies like Alphabet and Apple, they have RICs higher than 20% for many years. And you can also, I always have all of these disclaimers. That's because numbers tell you one thing and you always have to dig deeper. You could argue that a company like Amazon would have that too, but then you have to adjust for the growth. So if you calculate it, you can argue that they don't have, but you

Starting point is 00:43:53 can rearrange the numbers, which is a bit difficult to do here on our podcast. But then you can see that they have a really, really high return on investor capital, but perhaps not on the reported earnings. So I keep on saying, our ICA should probably just mention once again, as a return on investor capital. You also have a very related number of return on capital employed. It's almost the same. One is before tax. Another one is after tax. There's something with short-term abilities. There are a few differences there, but you can just think of it as if you put money into this machine, how much is it spitting out on the other side of it, just to make it as simple as possible. And then, of course, another advantage, and one of the reasons why Berksa has been so successful,

Starting point is 00:44:34 is because they don't pay out a dividend, because they've been able to reinvest back that into the business for decades and decades. So that also gives you a tax advantage because you could be sitting in those capital gains, whereas you will be taxed on the dividend. So you can seem to wait and let that compound or compound. Stig, I wanted to transition here and mention some of the challenges as it relates to investing in high-quality companies. You know, it's so easy to, you know, read books like this one by Cunningham or read Chris Mayer's book. But as we talk about oftentimes Stig, most things in life, business, investing aren't easy. You sort of choose your heart. Right. And the first challenge I wanted to mention here that comes to mind is that although quality

Starting point is 00:45:21 companies can deliver high returns, there can also be periods where, you know, frankly, it's just quite boring. I'm reminded of the Hunter Bagger study where he mentioned Berkshire Hathaway. It was the best performing stock in that study. But there was like a five to seven year period where the stock went nowhere. So obviously, long-term investors in that business had to be extremely patient. You know, patience is absolutely required in letting that magic of compounding work for you. And you should more so focus on what's going on with the business. Is Berkshire reinvesting? Are they making wise capital allocation decisions and pay a little bit less attention to the stock price? Because I'm sure after that period of it going nowhere, it had pretty good returns after and it kind of caught back up

Starting point is 00:46:04 with itself. And I'm also reminded that Chris Mayer mentions this time and time again that these compounders are high-quality businesses, they tend to have significant drawdowns. Berkshire Hathaway, for example, their stock has been cut in half four times over its lifetime. And Netflix is another example that's sort of been a high flyer. They've had four drawdowns of 25% in a single day. I mean, talk about testing your conviction, you know, 25% percent. drop in a single day. Investors tend to get spooked with that company on their subscriber numbers and whatnot. There was one period where Netflix dropped by 80%. And seeing an 80% drop in a stock, I mean, I can't imagine that the base rates are very high on recovering and making new highs.

Starting point is 00:46:53 So the market definitely has a way of testing your conviction in most companies and testing whether you actually know what it is that you own. And this is actually a checklist item for me. I like to think about, I like to just ask myself, if this stock were to decline by 50% over the next six to 12 months, which is entirely possible with a lot of stocks, whether we go into a recession or whatnot, if it were to decline by 50%, how would that make me feel? And if I start to get feelings of anxiety or start to get anxious, then maybe there's something with the business that's unstable or there's some sort of fundamental vulnerability. It's sort of like a gut check. It's like checking with your gut on how you'd feel and you put yourself sort of in that situation

Starting point is 00:47:37 mentally. Yeah. And I should also say it's easier set than done because very often whenever you do see that 50% drop, there is a really good narrative to it. And so whenever we think about, how would I feel if this was like 50% off, we might be thinking, well, nothing changed. So I would love to buy more OSCE for the same price. But that's very often, unfortunately, whenever a.

Starting point is 00:48:01 stock trades down 50%, perhaps not in the case with Berksie Heatherway. It does so for a reason. One painful example that I have, and I've mentioned it a few times because I learned so much from the painful experience of having invested in Alibaba, was that it dropped 50% not from my average price, but it did drop 50%, but it also did that for good reason, unfortunately. And so I actually did buy some back and then I lost even more, but it doesn't work in a vacuum. And having that conviction is really, really important. So it's one of those things that intellectually makes a lot of sense. Then you see it happening and you go like, wait, it's not that easy.

Starting point is 00:48:43 Yeah. It comes back to being really diving in and understanding the business. I am, of course, no expert on Alibaba. But when you feel that the mo is really strong and you feel confident in the business and it's long-term prospects, then, of course, a 50% drawdown should be one of the best things to hear because the stock is now essentially trading at a bargain and your perspective returns are higher. And yeah, that's the trick that that's the sort of trap that a lot of investors find themselves in where they get excited about

Starting point is 00:49:17 a business, buy it when the stock is rising. It's so much easier to buy a stock when it's rising than when it's falling, they can fall into that narrative of, oh, this is, you know, price follows narrative. So whenever the price falls, people do sort of have a narrative behind that. And oftentimes there is good reasons for the stock price falling. But sometimes it's just Mr. Market sort of gyrating and, you know, throwing its fits. And when a company on my watch list is going through some turbulence in terms of the stock price, I also like to see, like, is that normal within its history? There's one company I added to this year. It was down nearly 50%. And then I looked at the fundamentals. And, you know, it wasn't really the case of like something like Alibaba where there's,

Starting point is 00:50:02 you know, a lot of pressure on the business. I look at the underlying business and the business seems to be growing and doing as good as it's ever done. And I look back at this company's history and it's had a 50% drawdown in 2022 and then it's had a number of 30% corrections in the past. And, you know, I just saw it as a really good opportunity. And I'm also reminded of the interview I just released with Andrew Brenton where, you know, he's able to outperform not only the market, but outperform his own investments because he's adding at those opportune times. And, you know, obviously it's easier said than done. And I'm also reminded, we just did an episode on Dino Polska. And it quickly traded down. And I was able to get an average price around the 360,

Starting point is 00:50:49 360, 370 range. And then in a matter of weeks, it rose up to around 460. It's something like that right now. And that's not me saying like, oh, I'm like a master market time or anything. It's just so easy to think I can get in at a lower price. I'll wait for the future to be more clear about this business. Or, you know, it's so easy to think, you know, I'll get a better price later. And I just view it as short term thinking when you're trying to time when the market is.

Starting point is 00:51:16 and you just have to be able to see the opportunity and then be able to hold on. And if the facts change, then maybe you end up selling it out of loss later if you determine you were wrong about the business. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. And customers now expect proof of security just to do business. That's why VANTA is a game changer.

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Starting point is 00:54:55 business school, the markets are efficient. And then you start your education in value investing, you realize that's not the case. But there's also something to be said about the market very often is somewhat efficient. So if it does drop, there's very often a reason for it. Perhaps it's a value trap. And so there might be a stock that used to trade at, I, I don't know, $100 and you felt you wanted to take a position because the intrinsic value was $200. And now it's less to $50. But now we also have to adjust what's the intrinsic value now? Are you still buying it at a 50% discount? And then you go into all of these kinds of thoughts of well, it might still be selling at 50% to its intrinsic value. But now it's not a high quality

Starting point is 00:55:36 company anymore. And we just talked about at the top of the episode that, you know, time is the friend of a wonderful company and the enemy of a poor company. So, you know, it's not that easy as perhaps we make it out to be here. And short term, it can also look like, you know, hindsight is always 2020. And if you've been one of those who've been holding on to Berksie Hathaway and it took, you know, 50% drawdown 50%, you're going to look like a genius because you held on. But, you know, perhaps whenever Berksia ASEAS were trading at, you know, $12 in the mid-1960s, you were like, no, I'm going to wait until it goes to $11 for an Asia. And then it never did. And now it's more than a half a million dollars. And so it's not that easy. But what I hope what you get out

Starting point is 00:56:24 from, out of listening to this episode is what's the framework you're going to apply whenever you're looking for these high quality businesses? Yeah. And I think another point there. Obviously, there's the Benjamin Graham saying of, you know, the markets of voting machine in the short term and a weighing machine in the long term. And one of the things, things I like to think about or consider, obviously, each company in each situation is different. But I think one positive sign is seeing if the stock price goes way down and the company starts repurchasing shares opportunistically, I think that's a pretty good sign. I know Copart has done that in the past where they have a really strong balance sheet. The stock traded way down and they start

Starting point is 00:57:04 repurchasing those shares. And another sign I think is quite interesting to think about is when you see a CEO or a manager start repurchasing shares themselves, you know, making a major purchase in the company. I think that's also a really interesting sign that, hey, you know, managers, they have plenty of reasons to sell a stock, but there's probably only one reason they're going to buy a stock, and that's because they think they're going to make money doing so. So transitioning back here to some of the challenges with quality investing, Cunningham, he listed four challenges that I wanted to mention here in his book, Quality Investing. So the first challenge is to have a long-term outlook, which is, you know, we've talked a lot about in this discussion, you know, thinking in years, five-plus, ideally five-plus or more instead of a few quarters. And he also tells the example that I really liked how he pointed out the power of compounding and how important your rate of return is. You talked about return on invested capital and how returns sort of tend to correlate with that. He writes, the concept of compounding is one of the most important and valuable ideas in the world of business and investing.

Starting point is 00:58:09 Its power is relatively invisible over short periods of time, but galactic over long periods of time. Consider an investment of $10,000 that earns 10% or 7% annually. So you have two different scenarios here. During a single year, that amounts to just a $300 difference in your investments in those two scenarios. But if you expand it out all the way over 25 years, very long term, it adds up to a difference of over $54,000. So the 10% annual return one investment is worth twice as much as the one yielding 7%. So really putting focus on a, I'm reminded of Chuck Okre. He said, investing is all about your rate of return.

Starting point is 00:58:52 In this concept, it really applies to everything in life. You can how just the small things, they really matter. You know, looking for those clues. You know, in other areas of life, you have your health, your relationships, your work. The small things matter because over the long run, they add up to really big things. And I think of individual investors, they adopt that long-term approach. It can really give them a massive leg up over a lot of other investors. The second challenge he mentions here is living with short-term underperformance and

Starting point is 00:59:23 those years of pain where the stock's not going the direction you wanted to. All great investors, they always have periods where they trail the markets. You know, 2021 when markets were euphoric and irrational, I'm sure many great managers underperformed the NASDAQ or whatever else, underperforming these high flyers that are sort of carrying the indexes or carrying the markets. And it's estimated that quality companies, Cunningham states, quality companies tend to underperform the market every two or three years out of every decade. So, yeah, Chris Mayer and I talked about this too,

Starting point is 00:59:57 where these great managers, they always have periods where they underperform. And the key is to stick with your original strategy and not, you know, being swayed by whatever the market's doing. Then the third challenge is that quality is very subjective and it's based on these qualitative factors. You know, you can't just look at a number and just buy based on the numbers alone. And the quote he has here in the book that I thought just rings so true,

Starting point is 01:00:21 it's easier to explain that a stock is cheap than a company is great. So investors that are able to look under the hood, get a good understanding of the business, the market dynamics, that can give themselves a big edge. if the company is generally misunderstood and underpriced by the market. And then the fourth challenge here I'll mention before I throw it over to you is that this approach can be essentially boring. You know, quality businesses in a way, in a way they're explained in the book, at least, they tend to have products that aren't going to revolutionize the world.

Starting point is 01:00:53 You know, Tesla obviously is like a 50 or a hundred bag or whatever and has all these great products, but most big winners aren't like the Teslas of the world that get all the attention. You know, like I mentioned Copart, you know, who wants to analyze and study like a junkyard business that just, you know, has these strong, steady returns year after year. Not very many people are willing to sit on that. So it can, you know, it's businesses that aren't typically making headlines. They aren't going to double or triple, you know, in a few months, like what a lot of investors are trying to do if they're newer to the markets. And, you know, these businesses just tend to be really simple. They're management teams that just do the same thing over and over again, and they find this

Starting point is 01:01:36 formula that works for them, and they're able to implement this formula for decades over time. And Cunningham points out that some sophisticated investors, they sometimes get interested in these obscure companies or turnaround situations or even a company with a revolutionary product, like an Nvidia, you know, that takes a lot of understanding, you know, in terms of market dynamic, there's plenty of money going into that space, I'm sure, which is, you know, I like businesses that are simple for me to wrap my head around. And this approach, it really requires you to stay disciplined and stay away from the new shiny objects that come up every few months. Yeah, I'm really happy that you, that you say that. I was speaking about micro-technologies

Starting point is 01:02:21 before, sort of like to your point about semiconductors. And so I was invested in that company through minus his fund. But I was very excited about it. I saw Lee Liu take a big position. He usually never trades anything in the States. And I think a lot of the followers here of the show, they know how much we respect Liu, part because of his own track record, but also because it's the only person in Chalemonger, so I have trusted his money with. And so, you know, he speaks so highly about him. And what Lee Lu does just always seems to make a lot of sense. And so he invested in micro-technologies at some part in time. And he also made a decent amount of money, and now he's out. I couldn't help but think, okay, so Manny's has invested in Lillu invested in Micron.

Starting point is 01:03:01 I think even Munchin mentioned, I don't remember if it was on our show or it was one of his, the other interviews he did where he talked about. Now he sort of like got the, got the blessing from Chalemonger. That it was a great pick. I never saw it on Chalemonger's 13F, but like he was looking at it like, yes, like God himself has said my technology is. And I was looking at it. I was like, I just don't understand it.

Starting point is 01:03:23 You know, I was reading a book about semiconductors and I went through the theory and I was like, I just don't think I'm wired that way. I don't think I'm supposed to be invested in that company. So anyways, I think it goes back to this idea behind Only Invest, What You Understand. So you bring up a great point there, Stig. You know, you can see all these people get into a certain investment. But the good news is there's countless opportunities in the market. If you find a great company and you just decide, you know, it's just not at the right price or it's, it's just not a business I can fully understand. There's always other companies out there. You probably just maybe haven't found yet or you haven't, you know, researched enough. There's,

Starting point is 01:04:05 there's always new opportunities and, you know, markets are always moving. Prices are always changing. And for example, we're going to be chatting about our mastermind group and, you know, people are always sharing companies in there. And, you know, for me, like this year, it's been, it's really been a year of change for me in terms of my portfolio and like selling a good amount of my index funds, holding a little bit of cash, you know, always looking for the next opportunity. And like right now I have something like a five or six percent cash position. And, you know, I'm kind of waiting for the next opportunity. I'm looking to find and I don't know when it'll come, but I'm, you know, have that confidence that eventually come around. Maybe Mr. Market will give it to me or

Starting point is 01:04:43 maybe I'll just find some new idea. I think if there's one thing to take away from from this episode about high quality investing is that it's really all about compounding. Preferably, you would like what Chris Mayer, and we mentioned Chris Mayer quite a few times here, but he's an amazing investor. And he talks about the double engines, right? So you're buying at a low multiple, but you're also buying a company that's going to compound its earnings. So you have those two engines.

Starting point is 01:05:13 I'm going to do the Humble Brack and say that a year ago, I bought into Spotify. And I want to say I bought in at like 78, 79, something like that. it's run up 150%. So I'm only mentioned that as a humble bribe because that never happens. Whenever I buy a stock, it always drops. So for me to make 150%, usually it never happens. But that is sort of like one of the examples of the double engine. You know, you're buying a great company at a low multiple. Then earnings go up and you have the multiple expansion too. And I should also say if you do go in and look at Spotify right now, it's still thinking it's reasonable value. I think I'm going to talk about it perhaps in one of the mastermind episodes

Starting point is 01:05:46 here soon, but you have to adjust the earnings. Otherwise, it looks completely messed up. but that's sort of like a story for another day. So it's really all about compounding, but I'll be the first one to say, it's not because you cannot make money other ways. You know, if you could buy, I don't know, AT&T, all the common stock for $1. Obviously, that's a no brain there.

Starting point is 01:06:05 The answer to that is yes. It's not because you can only make money with high quality investing, but I'd probably say that it's a simpler, if I dare say simpler in the world of investing. It's a simpler way of making money in investing. Nothing is easy whenever it comes to investing. But I would argue that it's probably easier to have, now it's it easier. But having that conviction whenever you see a 50% drawdown,

Starting point is 01:06:33 if it's a high quality business, it's a bit different than whenever you have this special situation, you have this catalyst, and there's too much debt, and then you see cut in half after you thought you bought it at a very low price. That's whenever you start to be like, do I really have the conviction to hold on to this? And Cunningham doesn't list this as a challenge, but I feel like we can't talk about this, you know, quality investing approach without talking about valuation.

Starting point is 01:07:01 I'm reminded again of how I like to look at the historical drawdowns and maybe the historical multiple, just to kind of get a sense of, you know, where is the stock at in terms of where it's been historically? And, you know, some of the companies I've got into after they've had a drawdown is like, you know, this is one of the most, you know, I look at the history and if I see, this is one of the most extreme drawdowns it's had in its history. And it feels, it's sort of this gut feeling where it feels like the market's sort of, whatever

Starting point is 01:07:29 it's thinking or whatever reason is trading down, it feels like it's overdone. So it's kind of, you know, looking for those opportunities to stack the odds in your favor and see those twin engines that you mentioned. And, you know, I do think quality of business is obviously really, really important. But we also, of course, need to be mindful of valuation. And I think valuation is something that's really important. You know, the classic examples, Microsoft in 1999. I was just talking with Scott Phillips, who works at Templeton and Phillips Capital Management.

Starting point is 01:07:59 His wife is the great niece of Sir John Templeton. He also mentioned the Microsoft example. And he mentioned that it was trading at over 20 times sales at that time. So in terms of valuation, the hardest part or one of the hard parts of this quality investment, approach is that a lot of these companies, they are going to look expensive over a lot of its history. It's oftentimes not going to be trading at a multiple to owner's earnings of 10, you know, with a return on capital of 30. You know, if you find that, feel free to let me know, because I'd love to check it out. But I usually don't see that. And Amazon is another prime example

Starting point is 01:08:35 where you really needed to look under the hood and understand the value creation that was happening throughout its history. And Bill Miller, you know, he's a great investor to study in terms of someone who you went against the crowd. He went against the people that said, you know, Amazon doesn't make any money. And I think another great example is Constellation Software. When I shared my episode talking about that company, people are like, it's a great company, but it's got a P.E. of 90 or 100. And it's like, you know, there's, of course, you know, I'm not looking out, looking to go out and buy companies that are trading at P.E. of 90 or 100. But you need to really, you need to really, understand, again, the value creation at play. And in the case of Constellation Software,

Starting point is 01:09:15 there are adjustments you need to make to normalize the multiple to better reflect economic reality, essentially. So you need to understand the shortcomings of accounting and then how that ties into valuation. And even those companies with multiples around 25 to 35 just to give a broad range, you really need to develop that conviction in the long-term sustainability of business model, you know, you don't want to buy these businesses trying to earn a 50% return in a year like some people might do in a special situation or a cyclical. It's really a thinking long term in terms of the valuation because, you know, say a company's growing at 15% per year and it's at a multiple of 30, well, odds are you aren't going to make a ton of

Starting point is 01:10:02 money over the next year unless, you know, there's some sort of huge surprise, earning surprise to the upside. But when you look at that, level of compounding, if they're able to compound at that rate for, you know, 10 years, then, you know, in hindsight, the multiple oftentimes seems to look pretty reasonable. So, yeah, having that good understanding of valuation and not getting caught up and just because the stock's gone up, you know, oh, this is a great business because the stock's gone up, you know, you need to be aware of your own biases and natural human instincts at play. I absolutely love what you said there about looking under the hood. You really need to be able to

Starting point is 01:10:39 adjust the numbers because the reporting earnings suggest reporting earnings. But of course, whenever you do that, you also set yourself up to all types of biases, especially confirmation bias. And, you know, one mistake that I was very public about, I think you can probably go back to 2015 whenever Preston I did a recording. And we talked about Amazon. And it was trading at $400 at the time. This was before the stock's 20 to one stock split. So it was equivalent to $20. And today, I should say, is trading 156. And I remember, I remember, I remember telling Preston, you know, I would not buy shares in Amazon because, you know, they're not making any money.

Starting point is 01:11:16 And I thought I understood the company. Clearly I didn't at all because they were just reinvesting everything that made into the business. And here we are. It's, you know, it's more than 7x up. And that was like Amazon 2015, that was a huge, huge company. And it's one of those things where, you know, I think Buffett has this quote where his biggest mistakes are by omission.

Starting point is 01:11:37 and, you know, he talks about how, you know, he should have invested in Google, he should have invested in Walmart. He did that in Walmart, but much, much later and didn't make as much money as he could. But anyway, speaking about Buffett, you know, he said at one of the shareholders' meetings that he very, very often get asked the same question, which is very different ways of asking, how do I get to become as rich as you, just faster? So anyway, speaking about Buffett and high-quality companies, I wanted to talk about, you about the Berkshire Hallaway and our shareholds meeting the first week of May.

Starting point is 01:12:11 And we're doing something different in 2024 than we've done in the past. You have two different options. The first option is what we call the Berkshire Summit. You'll be hosting that. You've got to have a dinner with William Green, a few other guests. Could you talk more about the Berkshire Summit? Of course. Very excited for both events we're going to be hosting in Omaha.

Starting point is 01:12:31 Starting with the Berkshire Summit, this is going to be an exclusive event. we're hosting for a select number of members in our audience. So the highlight of the summit is having dinner with a number of special guests. So on Friday, May 3rd, 2024, so far we have a few different people lined up to join us for dinner as special guests. We have Gottumbade, the author of The Joys of Compounding. And then we also have Johann Steen and Daniel Zhang. They are both managers at Technion, which is a serial acquirer based in Sweden.

Starting point is 01:13:06 Stig and I both own shares in this company is what I should mention since I mentioned the company's name. And Franchois or Sean, he also plans on joining us on Friday, who's been a guest on William Green's Richard Weiser Happier Podcast. And then we're also having dinner on Saturday, May 4th, 2024 as well. William Green's going to be joining us. And then William was kind enough to invite a number of the guests who have been on his Richard Weiser Happier Show or are going to be future guests.

Starting point is 01:13:36 Those are Christopher Sy, Chris Begg, Anthony Kingsley, and Edgner Knudson, hoping I pronounce that correctly. And they're all going to be joining us Saturday evening, so it should make for quite a fun night seeing William. And his guests are really quite special. So I'm really looking forward to the opportunity to see all of them. So it really should make for quite memorable weekend for those who register and plan on joining us for the summit. And then we also are going to have social hours after each dinner. and really give members the opportunity to really get to know each other and have the opportunity to chat with all these, you know, just amazing investors.

Starting point is 01:14:15 And as of now, we plan on allowing roughly eight attendees for the Berkshire Summit. I think that's all we're really going to have room for, you know, given all the special guests that are going to be joining us and the very limited seating we have. And then we also have a few other things lined up for the weekend for those who sign up for the summit. We are going to help those members, you know, plan. out their weekend, select the hotel. For those that happen to not be aware, I'm from Lincoln, Nebraska.

Starting point is 01:14:40 I used to live in Omaha, so I'm quite aware of, you know, the Berkshire weekend. It's not your eyes. First rodeo sting. And, you know, we're well aware of, you know, the headaches that come with, that can come with Berkshire weekend. And we also, I mentioned members will have a chance to really get to know each other. I plan on hosting a couple of pre-calls going into the weekend, just to give people a chance to who they're going to be meeting, who they're going to be sending.

Starting point is 01:15:06 down for dinner with. And we're going to be also saving seats at the Berkshire meeting for our attendees. It can be such a headache getting decent seats without waking up at like 5 a.m. For those who haven't been to Elmah, you get to the CHI Center. It's just sort of a madhouse in terms of the line goes for blocks. And yeah, we'll be sure to have great seats safe for those that attend the summit. But really, the bottom line is that we want our summit attendees to just have the best experience possible during their time in Omaha. Clay, please give a handoff. Where can people learn more if they're interested to learn more about the Berksia summit?

Starting point is 01:15:43 Yeah, I personally expect this to be quite popular. So if you're interested, I encourage you to get in touch with us as soon as possible. You know, oftentimes with Omaha, people are planning out months in advance because just the flights can get pretty crazy as you get to February, March timeframe. So the easiest way to sign up for this and learn more would be to go to the Theinvestorspodcast.com slash Berkshire Summit and just enter your name, enter your email, and that's an easy way to get in touch with us. Or if you just like to get information right away, you can also just shoot me an email.

Starting point is 01:16:19 I emails Clay at theinvestorspodcast.com, and that'll put you in touch with me directly. And I should also mention Clay. So we have two different offers. So we have the Berkshire Summit that we just talked about. We also have meetups for a mastermind community, which is something different. And the last thing I want to do is to confuse the listeners. So now we heard one, then there's another offer. So let me throw a peg over to you to talk about that.

Starting point is 01:16:47 Yes. So just full transparency for those tuning in. The Berkshire Summit is a higher ticket event. And the TIP Mastermind community, this is totally separate. And this is our highly vetted community that we just do a ton of things for. a lot of the community is based online. But one of the benefits of being a part of the TIP Mastermind community is that we have two live events each year that we host for the community to allow people to develop

Starting point is 01:17:17 those deeper relationships and get together in person. So our next official live event is going to be over the Berkshire weekend. We have two social hours planned. That's for Friday and Saturday evening. And yeah, that's again, May 3rd and 4th, 2020. in Omaha. And these social hours are solely for those in our community. And then, you know, maybe people bring their spouses or friends that tag along, but

Starting point is 01:17:43 primarily those in our community. And we started this in April, 2023. And already we're close to approaching 100 members. And I expect, you know, after having the New York City event and seeing sort of what happened last year in Omaha, I expect us to have around 30 people attending. What depends if you include. some of the people that tag along spouses and whatnot. But we'll have a good number of people at our social events.

Starting point is 01:18:10 It'll just be a great opportunity to get together with just some amazing people in our group. And what I really like about this, I've mentioned this in the past on the show, is that when you go in and you know a lot of the people that are going to be there, it's really easy to get past those surface level conversations. You know, you know what their background is. You know what sort of investments they're sort of interested in. You know where they live, you know, the city they live in, obviously not where at in the city. But you know where they're coming from, you know, I'm sure we have some members from Europe that are going to be making it. We have, I know, some of people who I call friends that live in New York City. They'll be coming to Omaha to my neck of the wood.

Starting point is 01:18:52 So it's just amazing to have this opportunity to get together with people that are just so like-minded. and we'll also put together a group chat for our community members. So whenever you land in Omaha, it's just so easy to coordinate, hey, I landed Omaha, he's in town and you can just go and maybe Thursday evening, you go grab drinks with a few of the members. So that'll be super helpful. And then it'll give you that chance just to ask quick questions. You know, I can respond quickly that if you have issues getting around Omaha or whatever

Starting point is 01:19:21 issues you have in terms of your time during the Berkshire weekend. And this is really an extension of everything else we do in the community. You know, we're constantly having members hop on Zoom, you know, have discussions, talk about stocks, talk about, you know, some of the issues they're having with their investing style and their journey, constantly sharing stock ideas. And then we're just hosting various events all the time on Zoom and whether, you know, we talk about different books. I'll mention that we're one of the book club events that we have coming up is talking about

Starting point is 01:19:56 Morgan Housel's book, who's going to be a guest on the show here soon. He releases new book, same as ever. And I said, hey, I'm going to be reading this book and just book an event. And I know a ton of people in our group are going to be reading it too because so many are just like, voracious readers. It sort of blows me away some of the members that join. And they're just like, hey, I read a book a week or whatever. And just like, people ask me how I read so many books is like, talk to these people. They know something that I don't. But we also have a special guest come in and chat that are oftentimes guests on we study billionaires. So the Q&A coming up here on January 4th is with Ian Castle. So if you're, for example, if you're super interested in

Starting point is 01:20:35 having a chance to ask Ian questions, you can shoot me an email and you can apply for the group. If you're super interested in that or super interested in the book club, that's just a sneak peek at what's coming here soon. And it's been so exciting just to see the community to continue to grow, you know, see the amazing people that continue to join. And I'm really excited to see everyone in Omaha. We had a really fun time in New York City recently. So if this is of interest to you, you know, sounds like something that you really want to be a part of. You can get on the waitlist to apply to the community at the URL here, Theinvestorspodcast.com slash mastermind. Again, we're approaching 100 members and we plan on eventually capping it around 150. So that's

Starting point is 01:21:19 Theinvestorspodcast.com slash mastermind. Or again, feel free to shoot me an email. I'd be happy to shoot more information your way and help you out in any way I can. That's Clay at the Investorspodcast.com. Thank you, Clay, and just one quick note to that 150 number. So a lot of, some people might be familiar with that number. It's called the Dunbar number named after you guessed it. His name was Dunbar. And it's about like how many people you can have a relationship with.

Starting point is 01:21:46 And there have been done a lot of studies and all kinds of tribes and going all the way back. And like 150 people sort of like seems to be the magic number. So whenever Clay and I were, and Kyle were talking about, you know, we got so many members coming in. We have to cap it at some point in time. Otherwise, you know, it won't be the same experience. And we talked about should we cut it off at the Dunbar number. And that's apparently 150. But, you know, I think what I like very much about the mastermind community is I think I used to think that I was a bit like screaming into a void.

Starting point is 01:22:17 Like, you know, I might be really interested in one stock, but I don't really have any of my friends who would be interested in. Well, first of all, they really were interested in stock investing, but they certainly wouldn't be interested in this specific stock pick or they would never have read the Finanza statements of that specific stock pick. And so, for example, after the last mastermind discussion I had with Toby and Hari, a few days after we had a call where we discussed LVMH, and only people who were interested in LVMH jumped on that call to talk about the stock. And so I think it's an opportunity just to get more specific feedback on your stock ideas.

Starting point is 01:22:49 And like you mentioned, Clay, we had quite a few guests who also. also be guest on We Study Billioness that engaged with the community. We had Toby was there. Not too long ago, Chris Mayer's been there, got on bait. We hope to bring them on again. And then, you know, just speaking with other readers, you know, for example, going into this episode, you know, whenever Clay and I decided that we were talking about high quality investing, you know, I typed up in a group chat like, oh, we're going to do a discussion about high quality investing. What is that to you? And George from my community said, why don't you read this book called High Quality Investing, that Lawrence Cunningham wrote, and so we

Starting point is 01:23:23 picked it up and read it and used in the preparation for this episode. And so I think that's why I'm so excited about it, because there's just one thing to be said about being surrounded about like-minded people and not just like-minded as in we're interested in investing, but that specific stock pick or that specific counting rule, if you're really going to be geeky about it. And, you know, I don't really have close friends nearby that I meet up and discuss them with. So it's really a privilege for me to have the ability to jump on Zoom and speak with like-minded people about that. I'm reminded when I was in college, I was exploring just various books.

Starting point is 01:24:04 I was super interested in just the self-help personal development space. And sometimes you get into some of these and they're just sort of ridiculous. but one of the little quotes that one of the books had, I have no idea what book it was from, but it said, your net worth is your network. It was something like that, like associating the net worth and the network.

Starting point is 01:24:24 I'm like, okay, that's like totally ridiculous. But like, when I have this community to bounce ideas off of, I can like see like the huge value in it. And I, like for me,

Starting point is 01:24:33 it's personally a huge asset, especially when I find a member that knows a whole lot more about a stock than I do. For example, I won't mention the name of this company just because it's so small. But I found this name. I found some research that was behind it. And obviously, it's super easy to get excited about a name when you read this specific research. And then you're hearing all the right things.

Starting point is 01:24:56 And you get this sort of la-la-lo-palooza effect, as a monger would call it. And just having people to bounce the idea off of really helps. And I share this idea. I shared the research. I'm like, hey, I started looking into this name. It looks pretty interesting. and I just shared it with the group. And the company happened to be from Australia.

Starting point is 01:25:13 And we've had a number of members join from Australia, at least a handful over the last couple months. And one of the members, he manages his own money and manages a fund. And it was like just like a few days later after I shared it, we were on a Zoom call and he mentioned, Hey, Clay, I looked into that company you shared. And he said he spent 30 or 40 hours researching it. I'm like, oh, man, like that's like, it's hard to put a value on something like that

Starting point is 01:25:38 where like, you know, this obscure company in Australia, and then now you have someone in your network that knows all about this company, you know, he's just someone that really gets deep in the weeds on this stuff. And for me, like, I personally see a lot of value on that. And then we, Kyle and I, we talked about Dino Polska here on We Study Billionaires. And we sort of made an exception to what we typically do on the show. I mean, most in our audience probably aren't that interested in some random company out of Poland. But So we can't do it too often, of course, but many in the community are very interested in such a company. And, you know, many of them are invested alongside us in some of the companies we talk about.

Starting point is 01:26:20 And these companies that are just so high quality. And obviously, you don't want to find yourself in an eco chamber where you're just sort of saying the same things. And that's one of the other nice things about the community is there's plenty of people in the group who are willing to share their opinion on, you know, why they aren't buying it, why they don't like it and why they, look at other things. So yeah, it's quite an interesting thing we've started here, Stig, and I'm super excited to see where it goes over the next year. Very much. Clay, any concluding marks here before we end the episode? It was fun chatting about high-quality investing. Yeah. Well, I'd love to record another episode with you in 2024 when the time comes, and it's always fun recording episodes with you, Sting. Likewise.

Starting point is 01:27:05 All right. Ladies and Jens, that was all that we had for this episode. of The Investors Podcast, and we'll soon be back with another episode. 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. 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

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We Study Billionaires - The Investor’s Podcast Network - TIP596: Building Wealth Through High-Quality Stocks w/ Stig Brodersen and Clay Finck

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