We Study Billionaires - The Investor’s Podcast Network - TIP633 : What I Learned from Chris Mayer w/ Clay Finck

Starting point is 00:00:00 You're listening to TIP. Hey, everybody, welcome to the Investors podcast. I'm your host, Clay Fink, and today I wanted to share the lessons I've learned from Chris Mayer, who's someone who's just really changed my mindset around investing, and he's made a huge impact on me personally. Chris Mayer is well known for writing the very popular book, 100 Baggers, and he's also the portfolio manager of Woodlock House Family Capital. I would consider Chris a mentor of mine through being a host of the show, as I've had him on

Starting point is 00:00:29 the podcast three times now. The first time we had him on the show, we discussed his book 100 Baggers back on episode 543. That was around one year ago. The second episode, we talked about one of his other books titled How Do You Know? That was episode 569. And then the third episode, that was the most recent one, we chatted about long-term compounding and his holdings in Constellation Software, Topicus and Lumine. We also discussed his learnings from 2023 and how his fund performed over that time, and that was episode 608. So it's very clear that Chris Mayer is a fan favorite here on the show. So I wanted to put together this episode to share what I've learned from him, and hopefully you get some value from that. I'm also going to talk a little bit about

Starting point is 00:01:12 our TIP Mastermind community at the end of this episode, as we're nearing our limit of 150 members. So if you're looking to be a part of a community of like-minded value investors, then be sure to stick around until the end to learn more. With that, I hope you enjoy today's episode sharing what I learned from Chris Mayer. Celebrating 10 years and more than 150 million downloads. You are listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:01:47 We keep you informed and prepared for the unexpected. Now, for your host, Clay Fink. All right, so first I wanted to start this episode off with a disclaimer. I'll be the first to say that when it comes to these concepts of, you know, when it comes to learning from Chris, I am just incredibly biased. I own five companies that Chris owns in his fund. So whenever he speaks positively about a name or we talk about a name on the show, there's just a lot of confirmation bias there. And I'm also just a huge fan of Chris's books, 100 baggers and how do you know? I think he's a really smart guy. I think he's a great investor. But it doesn't necessarily mean that,

Starting point is 00:02:34 you know, if Chris owns a stock or if I own a stock that other people should own the stock too. So I'd encourage the listeners to do their own research prior to investing in any company and not take anything on this show as investment advice. So if you tuned in to my previous episodes of Chris, you might be familiar with some of his holdings and we've talked about a number of them on the show. But the intention of this episode is not to promote any of them, but rather to share the principles of how Chris thinks about investing wisely. So with that out of the way, I I recently watched a video that Monish Pabri put on YouTube. It was a Q&A with YPO's Mosaic chapter.

Starting point is 00:03:12 And Monash talked about the impact that Charlie Munger made on him. And there was just some really interesting things and insights that I wanted to share here that I think are going to tie in well and sort of team me up for the rest of the episode. So Monish talked about the Charlie Munger quote of taking a simple idea and taking it seriously. So there's a lot of information out there these days. and this quote really gets to the fact that when you discover a great idea, we need to really utilize that to the best we can and then filter out a lot of the noise that's out there in the world.

Starting point is 00:03:45 So related to this, Monish early on in his life, he recognized the power of cloning and cloning the simple and really powerful ideas that he discovered from others. He tells a story of two gas stations in California that were diagonal from each other, at this busy intersection. And both of the gas stations were self-serve. What one of the gas stations did to try and differentiate themselves is that the owner, about once every hour, he'd just go out, pick a random car and then deliver an extra service to them, say, wash their windshield, check the tires or whatnot. And he did this at no extra charge. And then the other gas station

Starting point is 00:04:26 owner was seeing this taking place. And he just thought that this was just ridiculous. There was no way he could do this for everyone. He'd probably go out of business if he tried to do this for everybody and deliver that extra service. And it doesn't deliver any additional revenue because they're not charging for it. So the other owner just kind of ignored him. He just kept about his business. Well, it turned out that over time, the gas station that provided that extra service, they gradually saw their business increase over time. And then the other gas stations business was declining. So the lesson that Monish took away from this is not to be afraid to copy or clone the great ideas from others. He explains that he himself has shamelessly cloned the likes of Buffett and Munger, and he has no original ideas himself.

Starting point is 00:05:15 So one of the interesting parts about this is that Monish claims that humans have a natural aversion to cloning. So some people don't like to look like they're stealing ideas from others. you know, they just can't come up with an original idea themselves or whatnot. And some also, I think, consider it beneath themselves to copy what others are doing. Monish saw that he could gain a massive advantage by stealing the best ideas from the smartest people he could find. And there was a very small percentage of people that he claimed to be master cloners that essentially ran and owned the world.

Starting point is 00:05:48 He talks about how most of the value creation at Microsoft is things that they copied from others. You look at Lotus and they created Excel. They looked at Word perfect and created Word. They looked at the Mac and created Windows. The list goes on. And then he also mentioned Sam Walton and Jim Senegal as examples of master cloners. Jim Senegal from Costco, he was asked what the most important thing he learned from Soul Price.

Starting point is 00:06:13 And he said, that's the wrong question. He learned everything from Soul Price. So just to be clear, this isn't my way of saying that we should find great investor and buy any stock that he buys, I think that's a recipe for disaster. But when it comes to Chris Mayer, I have shamelessly cloned some of his ideas that he's shared online as it relates to investing and as it relates to how to identify and find a great business. So when you look at Chris's actual holdings in his portfolio over the past few years, his holdings have actually changed. So, you might look at his portfolio today and he may sell something and he has no obligation to

Starting point is 00:06:56 file a 13F or tell anyone other than his investors that he's sold the position. So keep that in mind if you were to ever get a stock idea from somebody else who may be investing, you know, based on different information, they may have a different time horizon. You don't know what sort of the information they're acting on or why they're doing what they're doing. And when it comes to 13Fs, those come out every quarter. So when somebody does sell a stock, You don't necessarily know when they sold it, what price they sold it, the reason they sold it, and so on. So you really need to do your own homework when it comes to this. I'm also reminded of a quote from Guy Speer.

Starting point is 00:07:32 He once said that nothing at all matters as much as bringing the right people into your life. They will teach you everything you need to know. So we need to be extremely careful of the people that we're surrounding ourselves with, as well as the content we're consuming. and when we surround ourselves with people that are better than ourselves, we can't help but eventually improve over time. So with that as a backdrop, I'm going to dig right into the content here. So I'm going to break this episode up into three different segments more broadly.

Starting point is 00:08:02 The first segment, I'll be sharing my top takeaways from reading 100 baggers. The second segment, I'll share my top takeaways from reading, How Do You Know, which is a much lesser known book, but in my opinion is just as impactful. And the third segment, I'm going to talk about how we can apply these. principles to today, and as well as share some of my insights in serial acquirers, which are a major part of Chris's fund. So before getting to 100 baggers, I'll mention that one of the first things I think about when it comes to Chris Mayer is the importance of humility to be a successful investor.

Starting point is 00:08:37 I think being humble as an investor means recognizing that the future is just fundamentally uncertain and we have to be really careful about what it is we think we know and what it is we don't know. It means that just because you've had good returns in recent years doesn't mean that your returns are going to continue to be good because luck and randomness are just such a big part of an investing and we can't really remove that. I'm also reminded of Francois Rochon's Rule of Three, who I just recently interviewed on the show. The Rule of Three states that one-third of years you're going to underperform the market. One third of your investments, you're going to be wrong about. In one third of the years, the stock market is going to fall by 10% in that year. So related to the humility piece,

Starting point is 00:09:25 it's important to recognize just how much things change over time. One example of this is if you just look at a picture of yourself five years ago, you'll notice how much you've changed over that period. And the same thing goes for investing. Over a five-year time period, businesses changed drastically. And we really need to be humble enough to change our opinions when the facts change, you know, when a great business starts to fall by the wayside, we need to be humble enough to part ways with it if necessary. So the 100 Baggers book, it was inspired by Thomas Phelps' book, 101 in the stock market. That was published back in 1972.

Starting point is 00:10:03 I also reviewed that book back on episode 556, Thomas Phelps' book. It was released in 1972, and it looked at companies that had incurred. their stock price by 100 times, and then the broader lessons that could be learned from studying such companies. And then Chris wrote 100 baggers and he essentially updated the study, and he also shared the lessons he learned, and his book was published in 2015. So many people, when they dive into value investing, they inevitably find Warren Buffett, and then they learn about the journey of buying cigar butts, and then eventually transitioning to focusing on higher-quality businesses. And in studying all these fantastic investors, one big reason I tend to focus on really

Starting point is 00:10:44 high-quality businesses is because of the positive asymmetry that's associated with them. For example, let's say you buy two stocks that you believe are amazing companies. And at the end of 10 years, one stock ends up being an amazing investment. One stock ends up being a terrible investment. So let's say stock A goes up by 10x and stock B goes down to essentially zero. So the stock that goes up by 10x, that would equate to a 26% annual return for that one stock, and then the other stock would be a 100% total loss of your money. So in this case, the hit rate of your investments was 50%. You had one great pick and one terrible pick, but the ending outcome was still a win as your average annual return over that period was 17% per year. The lesson is that when you buy and

Starting point is 00:11:32 hold fantastic businesses bought at fair prices, they tend to bail you out over time and overcome some of the losses that you have in your portfolio. So in the previous example, say you put $10,000 in each stock, the loser lost you $10,000, but the winner gained you $90,000 because it increased 10x from $10,000 to $100,000. When you're focusing your attention and your capital on average or subpar businesses, I think that positive asymmetry when you look out over a 10-year time frame just doesn't exist to the same extent. The trick, though, is truly finding the very wonderful businesses. And when talking about 100-baggers, the idea isn't to find the next company that's going to go up by 100 times, but it's more so to help us distinguish between

Starting point is 00:12:26 what makes a great business or a great investment and what doesn't. So the first thing to note is that great businesses are found in all sorts of industries. Even the industries that many people would perceive to be a bad industry, Walmart and Costco are examples of these big long-term winners, and they are both in the retail space, which is brutally competitive in a very difficult industry. Chris's study had 365 companies that increased by 100 times. the average company took 26 years to reach that status. And very few companies did it in less than 15 years.

Starting point is 00:13:03 Most companies fell into the 16 to 45 year range. So pretty wide as time span here in terms of what it took for companies to increase that much. And this is a reminder to me that big winners certainly don't happen overnight. You might find a company today that's been very successful over the past 10 years, but it still might have another 10 or 20 more years to run. You don't need to buy the apples and the Amazons of the world the day of the IBO or the day they open up shop because these stories tend to play out over 20 years or more. Berkshire Hathaway was the top performer in Chris's 100-Bagger study.

Starting point is 00:13:41 And I'm sure many people looked at Berkshire Hathaway in 1996 when it was $32,000 a share and told themselves that it was too expensive. Buffett's 65 years old and his best days are behind him. And since 1996, shares of Berkshire Hathaway are up by over 18 times. Another thing about many of these great businesses is that they tend to surprise you with how long they can continue to grow and continue to deliver high returns to shareholders. The average duration of 26 years is also a reminder that the Hunterbagger framework fundamentally requires just a ton of patience. And it's one of the reasons also why I prefer this quality investing approach. In a world where information is everywhere, it's very difficult to get an informational edge. So I believe my edge as an

Starting point is 00:14:33 investor may be just having the ability to simply just sit on a great business for much longer than many other shareholders. So the average holding period for stocks back in the 1970s was five years and today it's just 10 months. I would imagine that for a lot of these great businesses, a lot of people invested in them are, you know, thinking out over a three-month, 12-month, 24-month time frame, and maybe less than 5% of investors end up owning a stock for more than five years or more than 10 years. A lot of investors like to think about things like the macro and trying to time the market. Some might need to, you know, go out and buy a house and sell their shares. Some might just get scared out after a bad quarter or negative headlines related to the

Starting point is 00:15:18 company, just these short-term headwinds related to it. And I'm reminded of the Peter Lynch quote that the real key to making money in stocks is not to get scared out of them. Chris proposes the coffee can idea in his book, which is the idea of getting a basket of stocks and just coffee canning them away mentally to help prevent you from getting scared out of them for short-term reasons. Now, that's not to say that we shouldn't ignore the facts when the facts change. One thing we can do to help AID us in thinking long term is to write out our thesis on paper or create a document that shows why you bought a stock. And then over time, you refer back to it. So say you buy a stock for specific reason today. In three years time, the stock might do fairly well. But did it do well

Starting point is 00:16:06 for the reasons you initially bought it for? That thesis can help us hone in our process and identify by whether we're buying a stock for the right or the wrong reasons. And when the facts change, say three years from now, you can refer back to your thesis on why you originally bought that company. So let's say you bought Costco years ago. And part of your thesis was that you believe they're going to grow their store count over the long term. And that's going to deliver high returns in the form of earnings. Well, then you'd want to track the store count over time. And sure that's growing. And let's say it were the case that store count, declined for two years straight because, you know, some stores needed to be shut down. They have

Starting point is 00:16:47 higher levels of competition. They're losing share from other companies. Whatever the case may be, we can use the original investment thesis to help determine if we should stick with the position or not. And as I mentioned earlier, businesses and industries, they're just changing all the time. And we need to be humble enough to recognize when our original thesis is no longer intact. So most big multi-baggers are going to have substantial earnings growth and high returns on capital. If a stock takes 20 years to become a hunter-bagger, that requires returns in the rate of compounding of 26% per year. If it's over 25 years, then it requires 20% compounding. And over 30 years, it requires 16.6% compounding.

Starting point is 00:17:32 And when I look at the companies that Chris owns in his portfolio, I would say that he practices what he preaches, in the Hunter Baggers book, you tend to see return on invested capital greater than 15% in most, if not all the companies that he owns. So if you look at Constellation Software, for example, they've had Return on Invested Capital of around 30%. They have a business model of going out and doing these acquisitions of these tiny little software companies. And when they do that, they generate returns of 30% within the conglomerate. And when I last spoke to Chris, he mentioned that Constellation Software was one of his top holdings. I sort of think of a business as a compounding machine.

Starting point is 00:18:14 And when you look at the return on invested capital, it's a metric that tells you how much money you get back for every dollar invested in the business. And the other key aspect is that the company is using their earnings to reinvest back into the compounding machine. If a company has a return on invested capital of 30%, but they're paying everything out as dividends, then your long-term returns as a shareholder will likely be much lower relative to what the business itself is earning if it were reinvesting back into that compounding machine and reinvesting into that future growth. Chris is also a big believer in the idea

Starting point is 00:18:52 that winners tend to keep on winning. One of the things he shared with me on the show that is just so simple is that you're finding a great business whose stock has sort of gone up and to the right, and you just wanted to keep going up into the right, which is kind of tongue-in-cheek saying this. And because those great businesses tend to continue to hit new all-time highs, you know, value investors or people who want to buy a big bargain, they have a hard time getting into it. When you really think about it, if a great business is continuing to execute on its growth strategy, then that should lead to stock price appreciation over time. and assuming that the starting valuation isn't crazy high,

Starting point is 00:19:34 then it's just going to keep hitting new highs every year or two over time, and it's just going to be up and to the right for much of its history. I think one of the lessons from that is that great businesses really tend to bail you out over time. You might initially pay what looks like an expensive valuation at first, but as the business continues to execute, you may end up regretting not buying more initially. Chris stated to me, I quote, If you're really right about the business, you have more room on valuation than you probably

Starting point is 00:20:04 think, end quote. But that's the real trick is getting the business right. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From, June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history.

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Starting point is 00:24:22 of a company. So let's say you look at a company, one of them's compounding at a rate of 20%, then you have another business that's compounding at a rate of 6%. Over one or two years, that rate of compounding doesn't really make a big difference when looking at the earnings growth. But once you extend that out over, say, 10 or 20 years, you really start to see the magic of compounding come into effect. And I really think about that a lot. I come across a number of stock ideas. I come across a number of stock ideas, some of which might be optically cheap companies with low return on invested capital. I may be able to make a quick buck on mean reversion, but it's also capital that I could be allocating to a higher quality company. Plus, with a lower quality company, I don't have to figure

Starting point is 00:25:09 out what to do with the capital, say in a year or two, once you see that re-rating. So there's sort of a dual benefit where it might require less work over the long run. You don't have the tax it, and you can fully embrace this long-term mindset. When I pull up a list of the wealthiest people in the world, essentially all of them became wealthy by concentrating their wealth into a great business and then focusing all of their energy on growing that business. Just think about Elon Musk, Jeff Bezos, Warren Buffett. Warren Buffett didn't grow his wealth to over $100 billion plus

Starting point is 00:25:41 by looking for cheap companies with low return on invested capital. He did it by buying high-quality businesses and letting them run. So when I look at Warren Buffett's portfolio at Berkshire Hathaway, they now have a $174 billion stake in Apple, which is a company he first started purchasing in 2016. When the stock started a run and the business continued to execute, he didn't flip it and move on to something else. He saw the long-term potential of where Apple was heading, and then he let that position run. And concentration is also a key part of Buffett as well as Chris Mayer's strategy.

Starting point is 00:26:18 Chris Mayer, he has 11 holdings, and he sets a really high bar on what can make it into his portfolio. There has to be high inside your ownership. There needs to be a clean balance sheet, which prevents the risk of ruin. And then he needs to see that high rates of compounding, a strong management team with a proven track record of executing as well. So not too many companies fit under that umbrella. I did the podcast episode on Copart back on episode 601 where I covered Willis Johnson's book, Junk to Gold. and Copart is a core holding of Chris's fund, and he speaks very highly of it. When Chris joined our TIP Mastermind Community for a Q&A, he was asked which holdings he has the most confidence in over a 10-year time period.

Starting point is 00:27:02 And he started by saying that essentially all of his holdings are high-conviction names, but the top two would probably have to be Copart and consolation software. And this was back in the summer of 2023, so his opinion may have changed since then. When I read that book on Copart, it really highlights those key characteristics that really make them stand out. You know, a great culture, managers who think and act long term, a lot of skin in the game. And then you just look at their financials over the long term and then their stock chart. And you're just like, wow, it's just like an incredible story and just really an incredible business. Chris has spoken very highly of Copart and a number of the episodes we've done on the show as they're just such a good.

Starting point is 00:27:47 good example of a high quality business. And it also reminds me how many investors consider Copart to be expensive because their multiple is currently at, say, something like 30 when you look at the EV to EB. You know, it's much higher than the market. And Chris, I think he'd also say that, you know, it's not expensive in his view when you consider the long-term compounding that's at play with this business. And then you look at the competitive dynamics and how they're continually stealing share from their competitors. And they're continually expanding their mode. They're stealing share from their competitors, like I mentioned, and they're just continuing

Starting point is 00:28:24 to get stronger and stronger. On the other hand, some people are also concerned about the terminal value of this company and whether autonomous vehicles are going to disrupt the business over the long term since they're in the salvage vehicle industry. And I think it's also worth mentioning that it took Chris some time to fully transition to just sticking with high-quality businesses. When he started his fund in 2019, he owned a new. number of these deep value or some of the parts type plays. And today he's really fully transitioned

Starting point is 00:28:54 to 11 high-quality businesses and his fund that he believes are really rock-solid and have a lot of potential to compound long-term and sort of check all the boxes of what I mentioned earlier. And one key distinction with the way Chris invests that is really important to highlight is that when he looks at a company, he's not asking himself, is this going to be the next hunter-bagger? He's more so looking for companies that are compounding at above-average rates, typically 15% or higher, and if the company has a lot of room to reinvest and a lot of room to grow into the future. In his book, he talks about how many 100-baggers, of course, started as small companies, and this isn't so much a criteria for the way he invests.

Starting point is 00:29:38 Of course, he prefers smaller businesses, but it doesn't prevent him from buying a great company, say if it has a market cap of $20 billion or $40 billion. So to use a few examples here, Copart, Constellation Software, and Old Dominion Freight Line all have a market cap today in excess of $40 billion. And other than the difference in the size, the principles laid out in the Hunterbaggers book really highlight how he thinks about investing in the big winners in the market. Then after he finds those winners and those stocks that he really likes for his own portfolio, he really wants to stick with them for the long run. After the first few years of the fund, it really seems like he's found 11 businesses that he really likes. Looking at the turnover he's

Starting point is 00:30:22 had in the past couple of years, in 2022, he added one company and removed one company, and then in 2023, he didn't remove a single position in his portfolio, and his portfolio was up 45% on the year. One of my favorite things that Chris has said to me in my most recent interview with him was as a general rule, he thinks that the source of outperformance comes. from an investor's willingness to let something become a bigger part of their portfolio and really ride those winners. The ideal scenario would be where something sort of takes over their portfolio and becomes 20 or 25% of it because it's just been a huge outperformer relative to the others and especially relative to the market. And he also thinks of a lot about the people within the

Starting point is 00:31:12 business because at the end of the day, business is all about people. He thinks a lot about the people running the business, managing the company. Do they think long term? Do they have a lot of skin in the game? Do they take advantage of opportunities when a crisis hits? And he has a section in 100 baggers on owner operators and why they sort of think differently. So when a crisis hits, for example, owner operator, especially like a family run company, they tend to reinvest and take a little bit more risk during a crisis, whereas a hired hand usually likes to pull

Starting point is 00:31:46 back and just wants to keep his job, essentially. When you own a stock with a company that has managers with skin in the game, they tend to think longer term. Their interests are aligned with theories as a shareholder. And unlike a lot of companies out there, they seem to be working for you rather than against you. I'm also reminded of William Thorndyke's book, The Outsiders. Oftentimes, these CEOs have unconventional thinking and they zig when the market is zagging. Another term people use when talking about Buffett or some of these other outsider CEOs is they're just simply cut from a different cloth. The advantage that they bring overall to the business is very difficult to replicate. I'm reminded of Mark Leonard and Constellation Software, just another great example.

Starting point is 00:32:32 You read his letters and you quickly learn that he just thinks much differently than most CEOs and it really gets to the crux of understanding how their business can generate high returns for shareholders. Next, I wanted to turn here to share my favorite lessons from my second conversation with Chris discussing his other book, How Do You Know, a guide to Clear Thinking about Wall Street investing in life. This book taught me to really be careful with the words that I use and how we interpret words that we're reading, saying, or thinking about. To help highlight this and what this really means, there's the quote from the book,

Starting point is 00:33:11 The Map is Not the Territory. Another saying is the menu is not the meal. Just because we say something doesn't necessarily mean it has any real meaning behind it or it's an accurate representation of reality. So I'll dive into a few examples here to show you why I find this to be so powerful. Oftentimes you hear people use something like the PE ratio or the Schiller PE ratio to say that the overall market is vastly overvalued today. And it sort of makes sense.

Starting point is 00:33:42 If the Schiller PE is 33 today here in 2024, and then you look at 1994, it was 20, that would lead many people to believe that stocks are expensive today relative to 1994 based on that one metric. But Chris makes the point that it really isn't that useful because the S&P 500 is something that is dynamic and it's always changing. The S&P 500 in 1994 was drastically different than the S&P 500 today. So in 1994, I'm going to name the top top. 10 companies by market cap that were in the S&P 500. So you had ExxonMobil, Coca-Cola, Walmart, Raytheon, Merck,

Starting point is 00:34:22 Procter & Gamble, General Electric, PepsiCo, IBM, and Johnson. Here's the top 10 companies as of 2024. Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla, Berkshire Hathaway, Eli Lilly, and Visa. You might notice that not a single company is the same from these two lists. And when you compare the economics of these businesses, you're probably going to find that the economics are extremely different. Companies like ExxonMobil, for example, are going to require tremendous amounts of capital to run, whereas businesses like Apple and Microsoft are extremely capital light and they don't require a lot of capital to grow at attractive rates. Businesses with portals, economics rationally deserve to trade at a lower P.E. than a business with superior economics. So

Starting point is 00:35:14 is it really true that the market is more, quote unquote, expensive today? The book also talks a lot about labeling. Chris often says that he doesn't label himself as a value investor or growth investor, quality investor or whatnot. He says that when you label yourself, you limit yourself. I think that saying right there is just so powerful and not even just related to it. investing, you know, thinking about life or your career or whatnot. When you label yourself, you limit yourself. A lot of people look at a company and they look at the industry the company's in and make certain assumptions based on that. Maybe they'd look at an automaker and say that automakers aren't great businesses or a retailer and say that retailing's too difficult. It taught me to be more

Starting point is 00:36:01 open-minded when viewing the world and being more careful of what we assume when using these labels. So take Ferrari, for example, who is in the auto business. They've generated excellent returns for shareholders. And had someone saw Ferrari and said that automakers don't make great investments, then they would have missed out on a big winner that simply did things differently, built a boat for itself to generate those high returns. What's also worth pointing out is that it sounds so obvious that you shouldn't just take a label at face value. But most people, I think, act in this manner of taking a label.

Starting point is 00:36:38 and allowing it to cloud their judgment and cloud their thinking and not being willing to really dig underneath the surface to understand what it is that's actually there. Chris also harps on how useless macro forecasts are and how we should be skeptical of anyone who makes them. There were countless people that said that we're going to see a recession in 2023 and I honestly admittedly expected the same thing. In 2023, we saw real GDP grow by 2.5% in the stock market. market was ripping. And one of the really difficult things with forecasting these shorter term moves

Starting point is 00:37:14 is that even if you're right that we're going to enter a recession, it can be extremely difficult to know what that means for asset prices because markets are just dynamic. They're forward-looking, ever-changing, and there's so many variables at play that you can't just really simplify to a model or simplify to these if X than Y thinking. Chris used the example in my most recent interview, of a company's portfolio, old dominion freight line, and how in 2023, they had a decline in revenue and a decline in earnings per share. So at the start of the year, if you knew that was going to happen and you were given that information ahead of time, you probably wouldn't have bought the stock. You probably thought it'd be having a really bad year. The stock increased by 43% that

Starting point is 00:38:01 year in a year where they saw a decline in revenue and a decline in earnings per share. And it's sort of just makes your head spin thinking about that. So instead of worrying about or trying to forecast the unknowable, he puts the vast majority of his time and attention on studying great businesses, oftentimes getting to know his existing holdings better, and really drilling down on the most essential variables that will lead to a company's success or failure. You know, what are the two or three major drivers that are going to lead to a company's success over the next 10 years. So instead of worrying about if a recession is going to happen, he knows a recession or two or three is going to happen over the next 10 to 15 years. He just doesn't necessarily know when

Starting point is 00:38:47 they're going to happen and he hopes to just continue to own the business through the ups and downs of the overall market. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure

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Starting point is 00:42:16 Another point that Chris and I hit on during the episode on this book for this discussion was around PE ratios and how investors can misinterpret them or maybe even use them as a valuation tool in itself. One of the really important variables that a PE ratio leaves out is the capital required to produce that level of earnings. So let's say a company has a PE of 5. It may look like a cheap stock, but if 95% of those earnings, earnings need to be put back into capital expenditures just to keep that business going, then the

Starting point is 00:42:51 business might not look near as cheap as it might seem because it's so highly capital intensive. What is also really important is the return on invested capital of a business. A business may have grown substantially over the past year, but you need to consider how much capital was required to achieve that growth. I think it's a reminder for me that growth for its own sake is not necessarily good. It's how much capital was required to achieve that growth. When looking at a PE ratio, Chris recommends benchmarking that ratio against some sort of return measure. That could be return on invested capital, return on capital employed, return on equity. All these can help guide you and put the PE ratios in perspective. So if you ever happen to screen on different countries

Starting point is 00:43:38 or whatnot, be mindful of that when you screen on, say, the UK or Japan today and see these low PE ratios. Also take a look at the return metrics, and it may make sense why PE ratios are at the levels they are. So you might see a company with a PE of 10. It's highly capital intensive, and you see the return on invested capitals 5%, something like that. And I think this points to the critical lesson of being careful not to oversimplify the world too much. You know, markets don't move. just based on one variable or these basic narratives like when interest rates go up, stocks go down or lower taxes mean stocks are going to rise or high debt levels mean lower growth. The list goes on. No single factor drives the market and correlation doesn't necessarily

Starting point is 00:44:27 mean causation. Sometimes you'll see investors use reversion to the mean as well as a way to get returns in the market. Chris also questions the use of reversion to the mean. in markets for a number of reasons, and the main one is that there's no rule that says that markets have to revert to some mean. The mean is just an arbitrary concept that exists in our heads and has no tether to reality. So these simple cause and effect relationships that we see are sometimes people just having a desperate attempt to make sense of the world. The reality is that the world is a much more confusing and complex place than we give it credit for. He wrote in his book, How Do You Know?

Starting point is 00:45:10 I quote, drawing out reliable cause and effect relationships that hold firm in financial markets and life in general is hard, really hard, maybe impossible, end quote. So the bottom line is whenever you see someone explain things with this basic, very simple, if X, then Y thinking, then you should have probably a lot of skepticism towards that reasoning and never be too sure of such thinking. So now to the section on how we can apply these lessons to today. In light of everything I've learned from Chris, one of the most important lessons I learned was to think really long term, say 10 years out. It's a time where you can sort of wrap your head around 10 years. It's pretty hard to say, hey, I'm investing for 40 years. But you really want to think long term. And most investors, I think, truly aren't thinking on that sort of time frame. When you think on this time frame of 10 years or so, you don't really get attracted to something that's a cheap multiple that you're hoping is going to re-rate. And, you know, it's something that also has lower returns on capital than many of the other businesses out there. I think it's just a really difficult game to play as well. Some can win at that game. So when you focus on higher quality businesses that can compound at high rates for a long period of time, that's where I want to put my focus.

Starting point is 00:46:31 So in my recent conversation with Chris, we talked about Consolation Software, Topicus, and Lumine. These companies are really referred to like the Constellation family because Topicus and Lumine are spinoffs of Constellation Software. So just to use Topicus as an example here, it's a company I personally own. Generally, Topicus, they're going out and making these acquisitions of small software businesses. They're targeting around a 20 to 25% return on their capital when they're making these acquisitions. When I pull up Finchat, it shows that Topicus's return on capital employed. It's been around 20% over the past five years, but there may need to be some adjustments to that calculation to better

Starting point is 00:47:13 reflect reality. Chris, during our interview, he harped on how all these companies in the Constellation family are targeting a return on capital and the 25% range. So some investors might look at Topicus and say it's expensive. When I look at 2023 numbers, I see the company had 1.1 billion euros in revenue, 239 million euros in free cash flow. And then the market cap at the time of recording here is around 6.5 billion euros.

Starting point is 00:47:42 So to try and put that multiple in perspective, when I divide that price divided by the free cash flow, I get a multiple of 27. And automatically, I imagine in many of the listeners' brains, they might think it's reasonable, it's cheap, it's expensive, depending on who you are and how well you know this company. So I'm going to run an exercise on the potential compounding for Topicus here. Topicus is fishing for a bit bigger deal sizes than Constellation Software historically has, so I'm going to use a 20% rated compounding number in this example.

Starting point is 00:48:15 So let's say that over the next 10 years, Topicus is successful in continuing their growth strategy, and they're able to continue to reinvest essentially 100% of what they earn into these new acquisitions. And of course, we don't know the future exactly. Maybe they're going to pay some dividends along the way like Constellation did. Maybe their returns are going to be higher. Maybe it's lower. Just for reference, Constellation software, which really is sort of a unicorn in the world of stock investing. They've compounded at 30% over the past 25 years.

Starting point is 00:48:47 And now Topicus today is the same size that Constellation will. was back in 2011. So, you know, many would argue that Topicus is in the early endings of their growth and has a lot of room to run in Europe. So if Topicus in this example were to grow their free cash flows up by 20% annually, 10 years from now, they would have free cash flows of 1.48 billion euros. Just for simplicity sake, let's say we can apply a multiple of 25 to that, discount that back to today at a 10% discount rate and then figure out how does that compare to the market value so that's our intrinsic value how is that compared to the market value so that gives us a value today in this scenario of 14 billion euros and that would imply a discount to the current value at the time

Starting point is 00:49:36 of recording of around 54%. So recognizing the power of that compounding is what Chris called the secret to long-term investing in these really high-quality businesses. So when Chris hears that Topicus is trading at a multiple of 30 or whatever you think it's at. He believes that this is potentially attractive given the business quality of Topicus at this time. And of course, we don't know the underlying probability of them achieving this level of growth. And that's really the somewhat difficult part. They might not be able to grow for that long. They might have trouble reinvesting, say a few years down the line. Or the flip side might happen. Maybe returns end up being higher than 20%. And this is why we don't put all of our eggs in one basket. We want to spread

Starting point is 00:50:22 ourselves out across a number of these different exceptional compounders. And I'll also say that this is definitely not a buy or sell recommendation. This is a company I own. And I recommend that everyone else does their own homework and consult a professional before making investment decisions. So again, I've personally come to really try and embrace that long-term thinking when analyzing a business. It's compounding at high rates because when you end up being right about the business, the long-term results are just sort of jaw-dropping. That's how you get these 10-baggers or 20-baggers. It's from buying them, letting them compound, and not selling them when they double, triple, or go up 5x. And since the journey of long-term compounding is just so long,

Starting point is 00:51:06 you're going to get plenty of opportunities to add to positions in great companies. Say, even the greatest companies have their fair share of 20% or 30% pullbacks to, during their run-up. So it's not like just because a company might be fairly expensive today doesn't mean that you won't get opportunities in the future. So just using Topicus as another example here, since it's top of mind, the stock opened at around 65 Canadian dollars in early 2021, went up to nearly 140, and then it went back down to that 65 range, and today it's already back up to 120 and 24. So it's really had a lot of volatility. Some kind of companies aren't quite that volatile, but it's just an example that even when you look at just a

Starting point is 00:51:52 one or two year time frame, there's plenty of opportunities to add to it. But the key is really being patient and then acting on the opportunity when it presents itself. So 2023, for example, Chris saw some inflows into his fun. And on our show, he had mentioned that he added to two of his existing positions that he found to be attractive. And he was being really opportunistic when he sees the opportunities that can juice his returns as, you know, he may get some multiple expansion when he looks at his opportunity set and what is traded down and what is most attractive when looking at the prospective returns going forward. It's also worth mentioning that Chris is a very reluctant seller of stocks for valuation reasons. Only when the valuation gets really egregious

Starting point is 00:52:36 and he has other opportunities to deploy that, would he even consider it. But in general, he isn't doing any selling just because a stock is expensive. Usually, he's only selling if he's changed his mind about how good a business is, or maybe he's found an opportunity that's way better than his existing opportunity. So he said a rule for himself that he doesn't add to a position if it's over 10% of his fund, and if it goes above that, he just likes to let it run. And remember that quote of his that I mentioned earlier, the source of outperformance comes from an investor's willingness to let something become a bigger part of their portfolio and

Starting point is 00:53:13 really ride those winners. I feel like I can't dive into Chris Mayer's approach here without talking about serial acquirers. My co-host Kyle Greve had Chris Mayer on our millennial investing show back on episode 310, and they discussed serial acquires during that episode. Of Chris's fund, I believe around six or seven companies would be considered serial acquirers, and the simple reason is that they're really good at solving an investor's problem. He views the ones he owns as, you know, being businesses that check all the boxes, high returns on capital, long runways to grow, disciplined management teams. In this case, they're very disciplined in acquiring companies. And it's just really difficult to do well consistently. So for those not familiar, a serial

Starting point is 00:54:03 acquirer is a company that uses acquisitions as the engine to drive their growth. So there's set level of earnings, and each year they primarily use those earnings to go out and purchase other companies, and that's how they generate those high returns is through those acquisitions instead of reinvesting internally. So many investors steer clear of serial acquirers because either the risk of the business model failing is really hard to determine, or the valuation is just difficult to pin down or the runway's uncertain. And this can be really difficult, too, because if you think about it. If a person wants to sell their business, they want to get the highest price they can. And maybe they want to try and hide the bad things about the business that may be underneath the

Starting point is 00:54:50 surface. So once someone buys the company, they might realize why the previous owner ended up wanting to sell. So it's really an art figuring out how to best go about this. In the acquisition process itself, I think it needs to be decentralized to some degree once you get to a certain size. It's not like one person can go out and make an acquisition every day or every week. I'm reminded, Berkshire Hathaway, they've actually centralized their capital allocation approach, and they've been forced to do bigger and bigger deals over time. And Constellation software is really on the flip side of that. They've just continued to acquire all these small companies across a number of different teams and operating groups, and they've really have this formulaic

Starting point is 00:55:33 approach to these acquisitions and that they know exactly what they're looking at. for and what they're willing to pay for them. And another difficulty is getting the cultures of different companies to mesh together well. So oftentimes you'll see a successful serial acquirer like Constellation Software. They tend to have a decentralized approach where they make the acquisition and then they just let the managers run their business generally the way they want to. They don't go in, try to change things and lay a bunch of people off or anything like that. they recognize that meshing cultures of different businesses together can be really tough.

Starting point is 00:56:07 And there's this common belief that mergers and acquisitions tend to not be value accretive, but it can really be situation dependent and the way that managers really end up approaching it. So where mergers and acquisitions can get management teams into trouble is when you're doing a bigger deal with a lot of leverage. And if it's outside of their existing industry or circle of competence, that can all also get them into a lot of troubles. So what serial acquirers are really trying to do is apply a consistent programmatic formula that they can just rinse and repeat to create that shareholder value. The valuation is also super, super important with a lot of these deals that go bad, they tend to overpay. Sometimes they buy things on the public market where things are just priced higher more

Starting point is 00:56:54 generally. And when you look at the rock solid serial acquirers, they're very disciplined in the prices they're willing to pay and tend to purchase within the private markets as well, which tends to have more attractive valuations. So Constellation Software, for example, they have their hurdle rates of what they're looking to get out of a deal, and they are not willing to budge on that at all. Chris also likes that serial acquirers are quite diversified in their businesses. So Constellation Software, they have over 700 companies they own, and they also diversify across different markets of the world. So, you know, if a serial acquirer owns companies in different industries and they have different companies, then that really adds to the robustness of the business model relative to

Starting point is 00:57:36 a company that's just in one industry, in one market, in one country. And when it comes to serial acquires, the big question is, how long can they do it? Constellation software, for example, had operating cash flows of $400 million in 2015. Today, they're operating cash flows over $1.7 billion. And so as they grow, they need to figure out creative ways to redeploy those cash flows. And so far, they've been pretty successful at doing that. But really, their bread and butter is going after these smaller deals where there isn't much competition around the purchase price of, say, 5 million USD. And they've needed to find larger deals to help put larger amounts of capital to work.

Starting point is 00:58:16 The larger deals, as a general role, tend to have lower returns relative to the smaller deals and more competition and getting them at the right price. In the past couple of years, they've managed to put substantial capital to work into larger deals. So they've sort of defied gravity of what many thought their runway was and how long Mark Leonard, the president, can continue to achieve high returns. And it's interesting in Sweden, there's a lot of successful serial acquirers. So they're doing some interesting things there.

Starting point is 00:58:45 And if you're interested in learning about the business model, you can study some of the companies in Sweden. Lifco is one example that comes to mind. there's a host of others. And as with any business, I think culture is especially important with serial acquirers. Great cultures, they have the right incentives in place. They have good people, good managers that think long term, a disciplined approach. And ideally, there's an aligned interest where all the managers own a lot of shares in the company. So transitioning here, if you're listening to this episode and you're liking what you're hearing, I think you may also be interested in learning

Starting point is 00:59:19 more about our TIP Mastermind community. This is a community that we created that's tailored for portfolio managers, entrepreneurs, and high net worth individuals who want a network of value investors to bounce ideas off of and continue to learn and grow. We have many members who also focus on high-quality businesses similar to all the concepts I discussed today. As of today, we have around 120 members and we're going to be capping the group at 150 to ensure that we can keep it really high quality and ensure that, you know, Stig, Kyle, and I can get to know members pretty well. All three of us are pretty active in the group. We're hosting weekly live Zoom calls, sharing content and whatnot. For the weekly calls we do, we cover a range of topics. Recently, we've had a few

Starting point is 01:00:03 members give stock presentations to the group. A couple of the companies we covered were MasterCard and Mercado Libre and then tech company out at Poland. And then we also tend to do a Q&A with a special guest each month. oftentimes it's a guest from the podcast. So last month in March, we had Joseph Sarposchnik, join us for a Q&A. That was very well received. He was great. And then this month in May, we have energy expert Arvin Sanger. And then some of the other calls, Kyle gives us quarterly presentations and shares the updates he's made to his portfolio. And people really enjoy those. And occasionally we talk about some of the things we're reading. Just before the Berkshire weekend, we talked about three of Buffett's previous annual reports,

Starting point is 01:00:44 from the 80s and 90s that Kyle and I found interesting. So we read those, hopped on a call, and the group sort of shared their insights and lessons from reading those. So we do a bunch of different things each week online on Zoom. And then, of course, we record everything for those that aren't able to make the live call. Here coming up, looking ahead, we have a social hour to meet new members. We have a member spotlight with a portfolio manager in the group who focuses on high-quality businesses. And then Kyle also invited a CEO of a microcap out of a Canada that he has in his portfolio. So he invited that CEO to come speak with the group. And then a few members in the community are also interested in that company. And that's just one big thing

Starting point is 01:01:26 I really love about the community is being able to really dive deep into the weeds on a business or an industry. That structure just doesn't really work as much in a podcast format. So for example, Christian Billinger, he joined the group a couple months ago. And he was a podcast guest on a show. and, you know, he was comparing and contrasting the financial statements of LVMH and EMS in how their businesses differ. So it's just really difficult to do a lot of those things in the podcast format. Then we also have two live events per year in person with the community. We just wrapped up our events in Omaha during the Berkshire weekend. We hosted two social hours that had over 30 community members attend.

Starting point is 01:02:09 So it was really nice to have the opportunity to connect with everyone in person. There's a lot of these people you get to know a bit online. And then I think meeting in person just really helps build those solid relationships. In the fall, we'll be hosting some meetups in New York City, still working on the dates to get those dates penned down. We did New York City in 2023. There's a ton of fun. And I'm very excited to be heading back there for the fall of 2024. And yeah, it's going to be a lot of fun.

Starting point is 01:02:38 We do social hours. We tour around the city. A lot of our members are based in the New York City. area and many of them work in finance. So if you're interested in joining the TIP Mastermind community, you can learn more and hop on our wait list by visiting the investors podcast.com slash mastermind. I've also got the link and the show notes. Just look for TIP Mastermind community there. Or just visit the investors podcast.com slash mastermind. All right. So that's all I had for today's episode. I really hope you enjoy this one. I really enjoyed putting it together. It was a lot of fun.

Starting point is 01:03:11 and I always enjoy learning from Chris and hope to bring him back on the show sometime in the future. Thanks for tuning in, and I hope to see you all again next week. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses,

Starting point is 01:03:33 go to theinvestorspodcast.com. This show is for entertainment purposes only before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP633 : What I Learned from Chris Mayer w/ Clay Finck

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