We Study Billionaires - The Investor’s Podcast Network - TIP647: Value Investing Masterclass w/ Soo Chuen Tan

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Sue Chen Tan. Sue Chen has quite an impressive background as he's the founder and president of Diserine Group. Before starting Diserine Group, he was the managing director and partner at Deccan Value Advisors and an analyst under Seth Clarmine at Bow Post Group. Prior to that, he received his MBA with high distinction from Harvard Business School and Bachelor and Master of Arts degree in law from Oxford University, where he graduated first in his class. He started Diserene Group in 2010 with less than $100 million in assets,

Starting point is 00:00:36 and he's grown it to over $2 billion in AUM. While I'm unable to share Diserine's performance numbers due to compliance reasons, the firm has had an impressive investment track record since its founding in June 2010. Su Chin operates within the boundaries of a very strict value investing philosophy, only investing when a deep margin of safety is present. Because of this, he's had a batting average of 82% within Dyserene's investments, meaning that for every 10 investments he's made, he's been profitable on more than eight of them. Even Peter Lynch said that you would make it into the Investment Hall of Fame if you could bat just 60%.

Starting point is 00:01:11 During this episode, Suu Chen and I discuss what led him to starting Dissorine Group shortly after the collapse of Lehman Brothers, what differentiates Disserie Group from other value investors, lessons that Suu Chen commonly teaches younger value investors, whether great investing can be learned or not, how Su-Chin balances the subjectivity of markets with a solid and rational investment approach, the importance of reflexivity in markets, how disarrine has avoided value traps, and much more. Su-Cin is incredibly thoughtful and intelligent, so I think you're really going to enjoy this one. With that, I bring you today's episode with Su-Chin-Tan. Celebrating 10 years and more than 150 million downloads. You are listening to the Investors

Starting point is 00:01:56 Podcast Network. Since 2014, we studied... the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now, for your host, Clay Fink. Welcome to The Investors Podcast. I'm your host, Clay Fink. And today I'm so pleased to welcome Sue Chin Tan to the show. Sue Chen, it's so great to have you with us.

Starting point is 00:02:29 Thank you for inviting me, Clay. It's a privilege to be here. I'm a big fan of your show. I wanted to start with the founding of Diserene Group. You have such an interesting background and such a great run so far since you started in 2010. So after the collapse of Lehman Brothers in 2009, you for some reason started the process of launching disarrane group. And in hindsight, it might seem obvious to launch a firm because asset prices were low, sentiment was depressed.

Starting point is 00:02:57 But actually doing it when the world's going insane is just a totally different story. So how about you talk about the experience of setting up and launching your own firm when investors were just fleeing the markets during the great financial crisis. Great question. Well, I'm going to start with compliance disclaimer because I have to. Our compliance policies restrict me from discussing performance in a forum like this. And our compliance team has asked me to point out that nothing I say is an offer to sell or solicitation of offer to buy any security.

Starting point is 00:03:26 So an investment decision should be made based on customary and thorough due diligence procedures, which should include but not be limited to a review of all relevant documents as well as consultation with legal, tax, and regulatory experts. To answer your question, I started disdrained when I was 33 years old, and sometimes it's good to be young and a dealistic. I didn't know how hard it was going to be coming out of Lehman. I was and still am a big fan of Warren Buffett. When we launched, I wanted to do the Buffett thing,

Starting point is 00:03:54 which is to run an investment program over a 50-year-time horizon. I said, I want to throw a big old 50th anniversary party and have a bunch of septuagenarians and octogenarians and non-generians, partners come and celebrate the journey that we've been in together. That was something that in my mind I really wanted to do, and it's still very much the plan today, and that's what we're working towards. Now, in order to try to do that, I wrote a white paper on what a 50-year investment program would look like from first principles, not anchoring on what the industry is, but what we thought it would be if we had to design it from scratch. In it, I said that we would invest pursuing a fundamental,

Starting point is 00:04:30 long-term contrarian global value investing philosophy. Of course, we were not reinventing the wheel. These are all elements of classic value investing. These terms roll off the tongue. Few stock pickers ever say, oh, we're not fundamental or were not long-term. But I was quite specific about what each of these terms meant. The first was fundamental. And sometimes people say fundamental and they mean as opposed to technical. But for me, it was not the case. Fundamental means owning businesses, not owning stocks. And there's a big difference. If you're a business owner, even if your business is a small business, say you run an auto dealership or you run a gas station, on the laundromat, you know the business will have good and bad times is given. And no business

Starting point is 00:05:04 owner says, oh, my dealership is going so badly. Let me go dump it. And then when earnings recover, I'll buy it back. That's crazy. A business owner owns the business through both good and bad times. And of course, if you don't like the business, then it don't have to be in the business at all. But if the through cycle economics of the business are good and the business is a worthwhile one to own, then expect to own it through full economic cycles, through both good and bad times. That's a direct lead to the second element, which is being long term. In public markets, when investors say that they're long term, sometimes they mean holding a stuff for one year, that's long term, or sometimes it's two years, and sometimes

Starting point is 00:05:40 three years, that's very long term. But really, an economic cycle is seven to ten years. So if we want to own a business through economic cycles, we're talking about a generational time horizon. So we put a stick in the ground, and can imagine that was quite countercultural in 2010, to say we are going to own companies generationally. That's two. Three, it's being contrary with. This is a crucial element of value investing, but this element itself has fallen out of favor lately because it has paid off to buy businesses

Starting point is 00:06:08 that are riding high and own them as a keep writing higher. That's been the story for the last decade or so. But I'll believe was and still is that if you want to own a business generationally and generate supernormal returns from that, then you have to have a large margin of safety when you make the investment. That is a necessary condition. Now, the markets are generally too. efficient for those prices with large margins of safety to be available all the time. It's rare. Usually, companies are available at such prices when there's some uncertainty around the business. Something's gone wrong. Sometimes that's because of something company-specific. For example, a company loses a big customer. Sometimes there's a whole industry that goes through a convulsion.

Starting point is 00:06:48 For example, in 2010 when we launched, that was a US healthcare industry. The affordable care had just been passed. That created a lot of uncertainty for both payers and providers, and it cost a sell-off in US healthcare stocks. Sometimes it's a whole country. The whole country goes in recession or inflation or unemployment, you name it. And sometimes this whole world, like a global pandemic. The human mind is not wired to take uncertainty well. Uncertainty breeds fear and fear breeds for selling. In those times, otherwise healthy businesses come up for sale and it's our job, as a value investor, to be a provider of liquidity to force sellers and to quote Buffett to be greedy when others are fearful. The goal is to become the lead underwriter of the business, to say,

Starting point is 00:07:25 at this price sell the company to me, I'm willing to buy it, not because I want to flip it to somebody else, but because I want to be the final owner of the company at that price. So that's being contrarian. Now, the fourth element is being global. Here, we made a conscious decision to depart from Buffett a little bit, or at least the early Buffett. So Buffett famously compounded over a generational time horizon, and more, by owning primarily U.S. businesses. But Buffett lived through Pax Americana. A lot of wealth was created in the United States. So if you own the Geico or Seas Candies or American Express or Coca-Cola over Buffers' lifetime, well, you've done really well. But Distrian was launched in 2010, not 1950, not 1960. The world was and remains

Starting point is 00:08:06 a much more global place. Barriers to capital, barriers to labor, barriers to entrepreneurial talent, barriers to technology had all come down like, not American, I'm here in the States, yet there was still significant informational, language, cultural, time zone barriers that make capital markets around the world, not efficient at all. For example, the capital markets in Malaysia are not at all efficient. They look like the US looked in the 50s and the 60s. I believe was and still is that over our own investing lifetimes, we should invest with a global mandate to take advantage of capital markets inefficiencies and to find wonderful businesses around the world when they're out of favor. Now, I just described value

Starting point is 00:08:45 investing. Our belief was and still is that these are so easy to describe, but they're actually really hard to execute. Everyone wants to invest like Buffett, but few can because of the structural asset-lite mismatch in the modern investment management industry. Asset-lite mismatches were back in the news in recent years because of Silicon Valley Bank and First Republic, etc. But there's even bigger asset-lifference in the asset management industry itself. Most public markets funds offer daily, monthly, annual, if you're really lucky, two-year liquidity terms, yet equities ostensibly have a generational duration. You cannot tell folks with a straight face that you want to invest with a generational investment horizon when your capital can be pulled each quarter. It just doesn't

Starting point is 00:09:29 work. This is especially true for emerging managers. Emerging managers need to put up numbers in the first three years or they're out of business. Most don't have the luxury to think and invest long term no matter how well-intentioned they are. Our thesis was that if we want to invest and act differently from other place and industry, then we have to structure the firm differently. So we structured our firm with three-year, five-year, and ten-year investor-level gates, which were highly atypical in 2010. You can imagine just in the aftermath of the global financial crisis. In fact, they were under theema to so many investors because so many partnerships

Starting point is 00:10:04 had actually thrown up gates during that time to prevent redemption. And here we were launching a new firm with three, five, 10-year investor-level gates. Now, these are still highly atypical today. We also wanted to align incentives, so we created three-year clawbacks on our incentive allocations so as to avoid the heads-side win, tails you lose, structure of many investment partnerships where GPs collect incentive allocations on the way up, but then when they suffer drawdowns and they're below the high watermarks, they just shut down the firm. Few GPs ever returned incentive allocations to LP. We thought that was unfair and we created these clawbacks.

Starting point is 00:10:36 In 2018, a number of years after we launched, we decided to return capital to our investors because cash balances were creeping up in our portfolio and we couldn't find anything we wanted to buy. We thought that this was the most intellectually honest thing to do. But we wanted to be able to call the capital back later when we next found compelling investments. So we restructured our partnerships and incorporated a capital commitment feature similar to those of private equity partnerships. Our investors commit capital to us and we call the capital only when we found investment opportunities that meet our investment bar. We also sweep cash back to our investors when we exit our investments. so we're not forced to reinvest proceeds from one exit to another company in our portfolio.

Starting point is 00:11:14 The structure allows us to maintain a strict investment discipline and demand absolute, not relative, hurdle rates for our investments. Because of our structure and mandate, we have a willingness to do anything and the ability to do nothing. We know that is a rare privilege. I've just talked about legal structure, but back in 2010, I believe that setting the right culture for a partnership was even more important than getting the legal structure right. We sometimes forget investment partnerships were actually partnerships.

Starting point is 00:11:45 There's a general partner, there's a limit partner, it's a partnership. If you roll back the clock to the early investment partnerships, for example, the Alfred Winslow-Jones partnership, people will actually go into business with each other. Someone contribute to sweat, which is the general partner, others contributed the money, which is the limited partners, but the DNA was really a JV. Roll the clock forward to 2010. And an investment partnership looked more like a product than a JV. Buy this hedge fund product. You buy that private equity product.

Starting point is 00:12:11 You buy this stream of returns. You buy this exposure. You buy that attribution. But really, the limited partners in that partnership were just customers of the partnership. They're not really partners. You get your statements. You get your PowerPoint presentations. You get your investor days.

Starting point is 00:12:26 And once a year, you get your chicken dinner. But you're not really a partner. You're a customer. We wanted to dial the clock back all the way to what partnerships. and create a genuine partnership in its DNA. De facto, not just the URA. That was more than a little bit of self-interest in this. I was 33 when I started the firm.

Starting point is 00:12:44 I fancied myself to be hardworking and well-intentioned, and I fancied myself smart and all of that. But I was one person, and here we were trying to have this massive global mandate, look for value anywhere in the world. We were doing work in the Eurozone, and me and which army was in our interest to co-opt our LPs to be part of our team. We're lucky our day-one LPs included. endowments and families and why wouldn't we use the networks and relationships and resources

Starting point is 00:13:10 and experience of these very sophisticated, very experienced partners to allow us to punch above our weight. And so we did. Of course, you cannot just demand that a certain endowment of a family and say, now you're a partner and now come help me do my job. You have to earn the right to actually have that partnership. And my theory was, well, if you wanted to do that, then you have to be really transparent with your partners. And by transparency, I don't mean just sharing portfolio reports. These days, funds say we're transparent because here we share our positions with you. It's not that. It's more sharing what it is that we're working on, almost opening up the kimono and almost being vulnerable in saying, hey, we're struggling for this. We don't know how to think about the Eurozone

Starting point is 00:13:50 crisis. Can you help us and have them walk with us in the process? And this is almost the opposite of the typical approach of a money manager that behaves like a Wizard of Oz and steps up on the podium and says, I predict X, I predict why I see this, I see that. I mean, honestly, we don't see anything. We don't have a crystal ball. We can tell the future. So we thought there was a much more honest and much more vulnerable to share all that we're working on and then asking for help. A couple of years after we launched the CIA of one of our university endowments traveled with us to Greece

Starting point is 00:14:20 to help us do due diligence on companies. And they were basically part of the team. We're very lucky that we have the investors that we do. and that's made all the difference. I just talked about the DNA of our limited partners. Now, that's one leg of a three-legged stool. The second leg is our team. We've succeeded in building a long-term team

Starting point is 00:14:37 where bright, talented, ambitious folks can come in, put down roots and flourish in their careers. The third leg is our portfolio companies. We've succeeded in building many long-term relationships with our CEOs and CFOs and management teams of the companies who are invested with. We're 14 years old, and there are certain companies in our portfolio

Starting point is 00:14:53 that we've owned for 14 years. The three legs of the three legs of the three. three-legged stool, reinforce each other. We're proud that we've built this culture of partnership with long-termism. There are few enduring sources of competitive advantage in investing, and long-termism is one of those few. It's clearly a very unconventional way to set up an investment partnership that allows you to invest really long-term, especially relative to what you tend to see in the industry. And they also really admire your eagerness to look for the biggest dislocations in the market, which we're going to be talking about a bit more in this discussion, whether that be the Eurozone

Starting point is 00:15:29 crisis in the early 2010s or COVID-19 and March 2020 or some of the things that you even see happening today in 2024. In doing research for this interview and just hearing that great response there, it's very clear that disarrine group takes the concept of value investing very seriously. What I'd also like to mention is that many value investors who invest globally especially seem to have really struggled in the past 10 to 15 years when you compare them to. to something like the S&P 500, but your team has managed to overcome just such high hurdles in such a difficult investing environment. So what do you think differentiates disarrine group in the world of value investors, especially

Starting point is 00:16:08 those who invest globally? You're absolutely right. The last decade and a half have been extraordinarily difficult for value investors. We look around and we do not see many value investors left standing. Too many value investors have been casualties of the growth at all costs. unit economics be damned, mania of the recent capital markets. Some chose to retire, others are forced to shut down because of redemptions, yet others simply chose to reinvent themselves in order to survive. Value investing has become something of a lost art. We see this in how faithlessly

Starting point is 00:16:40 portfolio compositions have evolved among some investors who were once supposed to be fundamentally inclined and valuation aware. We see this in numerous investment discussions wherein breathless narratives dominate at the expense of empirical economic thinking. Common sense has ceased to be At one level, this attenuation of the value investing community, which is yet another casualty of the financial bubble, is heart-wrenching. We have deep respect for our craft. But to be honest, and frankly, somewhat selfish, it's also clear the feel for those value investors who remain. The question becomes, okay, so why have we survived? Besides luck, which is obviously always a big factor in our industry, there are few modes in what we do, but we believe that we do have

Starting point is 00:17:19 several sources of competitive advantage. Structurally, we're set up to invest over longer term time horizons than many investors. And this allows us to take full advantage of multi-year-time arbitrage in a way that maybe many other value investors can't. For idea sourcing, we wander off the beaten path to look for investment opportunities and have the broad mandate to do so, so we don't have to pile into crowded trades, and we don't. Analytically, our mental models and patent recognition toolkits are oriented towards long-term underwriting of businesses. We talk about businesses, not stocks. And in particular, the structural modes, barriers to entry around businesses, rather than predicting near-term earnings per share.

Starting point is 00:17:58 Valuation-wise, we maintain a strict price discipline when making investments, and we've kept that discipline for 14 years. And our structure, again, helps us to do that because we can return capital if we don't find anything that we invest in a way that maybe some other value investors can't. Psychologically, the empirical evidence also suggests that we're temperamentally wired to be long-term value investors, and that is that each member of the team is patient and skeptical and contrarian and independent-minded, and we think instinctively in terms of probabilistic distributions of outcomes. Those psychological traits are important. Finally, and we've talked about this

Starting point is 00:18:36 already, was supported by a truly high-quality supportive investor base with whom we've built muscular and constructive working relationships. The depth and the breadth of our investor network gives us a reach that is truly a valuable asset. Of these, I think that were most divergent from most of the industry in our time horizons. At this, I'm used to thinking about businesses for more than one economic cycle. It's almost second nature to us. Because of our long-holding periods, we are happy if we can find just a handful, like four new investments a year, which is roughly, given our size of our team, one investment

Starting point is 00:19:13 every two, maybe three years per analyst. That's very few. When we make such investments, we fully expect them missed the bottom. and to find ourselves adding more to our portfolio company investments as their stock prices decline. This has resulted in the phenomenon that we call the value investors j-a-courth. When we buy something, it gets cheaper, we buy more, it gets cheaper, we buy more. And that could be over a number of years, and then over the fullness of time, the thesis works out. That time horizon is just very different from most investors. As a result of that,

Starting point is 00:19:48 one, two, three, five years seem to us like pretty short timelines. We sometimes forget that these same time horizons, like to sit on something for five years and it hasn't worked, seems like an eternity for shorter term investors. So this time horizon arbitrage allows us to sow the seeds of our returns several years in advance. We sow for future returns today, something that we will reap many years from now. Often, we studied the companies who are buying today many years ago and have been patiently waiting for the day when their stock prices get cheap enough for us to become shareholders. Our capital commitment structure then allows us to have the dry powder to wait and wait and wait and wait. And when the opportunity arise, to actually pounce, to actually be

Starting point is 00:20:34 greedy when I are fearful. They all work together. And these, frankly, are just rare privileges. 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. This is where you hear firsthand stories from people using Bitcoin to survive currency

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Starting point is 00:24:37 slash WSB. Go to Shopify.com slash WSB. That's Shopify. dot com slash WSB. All right. Back to the show. So in chatting with you and getting to know you,

Starting point is 00:24:53 you had asked me, what sort of episode do you want to put together? What are some of the things you want to talk about? Well, I was thinking about, well, ideally I want to empower our listeners to hopefully become better investors. And in getting to know you, I had found out that you're a mentor to a lot of investors,

Starting point is 00:25:07 many of which are young analysts at your firm. So I think a good question for you as someone that mentors a lot of analysts and people in the industry, if one of those mentees came up to you and asked you how they can become a better investor, how might you respond to them? This is not a hypothetical question. I get this question a lot, not just from members of this serene team, but other young analysts in the industry. Frankly, I enjoy talking to young analysts because we're all on this journey of becoming

Starting point is 00:25:35 better investors and it's fun to see young people at the beginning of the journey. My observation is this. In recent years, it's been amusing to read and learn about how people talk about, oh, intangibles are the modern day assets and it makes accounting irrelevant and to learn how young analysts are now outsourcing things like model building to sell side analysts or to service providers in order to deploy capital based on, and I quote one such analyst that we talked to, creatively imagining the future of businesses that are unprovable. I'm not making this up. I think that it's been fashionable to pour scorn on Ben Graham style value investing that emphasizes scrubbing balance sheets, reconciling income statements to cash flow statements, and carefully

Starting point is 00:26:20 reading the footnotes. We believe that good value investors must pass through Ben Graham in their journey as investors. In one's 20s and 30s, one is often reaching the height of one's raw and ethical horsepower. One can recall tremendous amounts of data about businesses, fluid intelligence is at its peak. I'm way past my peak. But at this stage, we believe that young analysts must develop a fluency in accounting, which is the language of investing, by working to understand the financial mechanics of businesses, including working capital turns and cash conversion and operating and financial leverage, and price and volume and cost drivers. In the process, young, Young analysts will begin to develop patent recognition skills for good businesses with resilient

Starting point is 00:27:03 balance sheets, high capital efficiency, high cash conversion, flexible cost structures, etc., and then also recognize bad businesses with vulnerable balance sheets and fragile business models. As analysts continue to progress in the development, they begin to appreciate that not all valuable assets sit on balance sheets. For example, the brand recognition, habitual consumption, global distribution reach of Coca-Cola are worth a lot more than its P&E. Analysts begin to understand that accounting earnings do not always reflect the true economics of a business model.

Starting point is 00:27:34 For example, the Berkshire-Hatherway Regents Group produces more cash flow than it produces in earnings because of the flow it generates. Then, over time, young analysts begin to appreciate the power of intangible barriers to entry or modes. In addition, analysts begin to recognize the true outliers, that is, the exceptional businesses that bug the trend of particular injury. For example, the rare retailer that sustainably makes supernormal profits, the atypical industrial supplier that sustainably commands high margins, or the uncommon software company that benefits

Starting point is 00:28:05 from low industry clock speeds. As analysts continue to mature and as fluid intelligence becomes crystallized intelligence, they begin to appreciate the incorporeal elements that make a big difference, including incentives and leadership and culture and values. There is no shortcut for this process. A gramite foundation is a feature, not a bug, in the education and makeup of a value investor. One cannot reasonably expect to be able to spot exceptional companies if one has not yet sufficiently studied the economics and accounting of the average business, so as to establish the base rate by which to recognize exceptionalism. Without being fluent in the language of accounting and microeconomics, analysts are unable to process.

Starting point is 00:28:53 as narratives, as descriptors of real-world phenomena that can be independently tested. For example, it may be the case that many outstanding companies are led by driven, out-of-the-box thinking, larger-than-life, owner-operators that are outliers that seek to disrupt existing industry structures. But the question that Annal should ask is, well, how many failed companies are also led by such personalities? And which outcome is more likely? When base rates are properly established, one typically finds that apparent outliers in short-term performance are more often the result of excessive risk-taking, luck, or other confounding variables, for example, monetary policy that are not actually endogenous to the company at all.

Starting point is 00:29:37 Genuine outliers are much rarer. Many investors we respect from Warren Buffett to Nick's leap have traveled on this evolutionary journey with skills that are built on Graham-Mike foundations. Of course, what we're saying is not new, we're simply restating less elegantly epictetus's exaltation to practice yourself for heaven's sake in little things, and then proceed to creator. That's all this is. Here are a few practical suggestions for young folks who, at the beginning of that journey, and they might not be so exciting to a lot of people listening, but here they are. First, I would say, sign up for good accounting classes online. Get good at double entry general ledgers, debits and credits, by doing lots of

Starting point is 00:30:19 and lots of them. They're not fun, but they'll teach you a lot. Next, sign up for good microeconomics theory of the firm industrial economics classes online. Invest in really understanding the classical models of perfect competition and monopolies and duopolys and aliquables, don't take shortcuts. Next, sign up for good statistics classes online. Invest in truly understanding probabilities and distributions of outcomes and base rates

Starting point is 00:30:45 and baysian reasoning. Then, if you can, sign up for good logic and epistemology classes in the philosophy department online. I know this is unusual advice. Just do it. Next, sign up for a good applied game theory class online, preferably one that involves lots of math that you then have to work through. Next, pick a company that has been around for a long time, for example, Costco, and read through 20 years of annual reports. And don't start with the commentary. Instead, start by reading the balance sheet, then the income statement, then the cash flow statement, without the commentary, see what the numbers tell you about the business

Starting point is 00:31:22 and what questions jump up at you by just looking at the numbers. Then, and only then, read the commentary to see if you can get the answers to those questions. You already have the questions, and now you see whether the commentaries answer those questions. If not, then try to read around to find out if you can find answers to the questions that you thought of. But if you start with the numbers

Starting point is 00:31:40 and then the questions emerge from them, you will not anchor on a narrative around the business. Next, when you obtain answers to the questions of their business, ask, but why? And if you get the answer to that question, ask again, but why? Keep following the ys until you get to foundational topics of conceptual importance. And even when you get there, ask, could it be otherwise? For example, if the provisional answer to Y, why, why, is X. The question is, cannot X also cause Y, and can X also cause not Y. If so, under what circumstances?

Starting point is 00:32:16 As the late Charlie Munger used to say, invert, always invert. Lastly, unless you're already at this serene, find a good person to go work for. Really do the legwork up front to find out who they are. Not all good investors are also good coaches, mentors, and people developers. They're not the same thing.

Starting point is 00:32:36 Go find them. When you do, invest in building that relationship. If they don't have a job for you at a time, that's okay, keep in touch. Keep investing in that relationship. Thank you for such a thoughtful response. And my apologies for the listeners for such a long list of homework from just one episode here. You seem to really highlight logic and epistemology there. I'm reminded of Bill Miller's deep interest in philosophy who worked closely with Nick Sleep, who you mentioned. Why are these two topics in particular quite important for investors and what sort of impact did

Starting point is 00:33:10 they make on you? Well, I think they're crucial. I was fortunate that my time studying law gave me the opportunity to learn more about both formal logic and about epistemology, which is the theory of knowledge. Ultimately, fundamental investors must come up with theories about how a business behaves. That's at the core of these mental model buildings, which requires both inductive and deductive reasoning skills. Such theories must then be able to be tested and falsified. That's the theory of theory making, so to speak. If a theory isn't subject to falsification, then it's not theory at all, but simply dogma, or sometimes just a circular assertion. For example, the statement, good management teams generate better returns for investors. It's circular and it's not

Starting point is 00:33:54 falsifiable if one cannot define the term good management team independent of such management team's track record of shareholder returns. If you define it based on the track record, then you just have a circular definition. In contrast, the statement, fast-growing businesses are better investments than slower growing businesses because investors tend to underappreciate growth. This is an empirical statement that can be examined and thus subject to falsification. But paradoxically, the statement is actually self-negating over time. If it is examined and discovered to be empirically true for a certain period of time, then investors will begin to bid up the price of fast-growing companies such that the observation will no longer hold going forward. This feedback loop

Starting point is 00:34:38 likely becomes faster when machine learning tools become more powerful. So such an empirical statement is only ever contingently true. It cannot be true for all periods and all states of the world. Epistemology is similarly important. As investors, we must ask ourselves, what is it to know something? And this is almost a meta question. For example, we say we know that Costco has good corporate culture. But how?

Starting point is 00:35:04 Why do we believe what we believe? at this arena, we believe that knowledge is actually slippery and humbling. The more we learn about a business, the less we realize we know about it. Epistemology is especially important for value investors because the concept of intrinsic value is so foundational to the craft. As value investors, we have to hold fast to the belief that each business we study has an intrinsic value or intrinsic worth that we must do our best to estimate without falling. into a reductionist Berkeleyan conception of intrinsic value being what other market participants

Starting point is 00:35:43 would pay for it. George Berkeley was an 18th century Irish philosopher who advanced the theory of quote unquote subjective idealism, which argues that things in the world are ideas perceived through the mind and as a result cannot exist without being perceived. For example, if a tree in a forest falls to the ground and no one heard it, did it really make it a sound. Indeed, if no one is around to see or touch the tree, how can the tree be set to exist at all? Applying this to investing, a Berkeleyan conception of value of any asset called asset X is necessarily linked to the price that someone else is willing to pay for that asset. The belief goes, if no one is willing to pay a price for asset X, then there really is no basis

Starting point is 00:36:33 for saying that asset X is worth anything at all. On the flip side, if folks are willing to pay a certain price for a particular asset, for example, Bitcoin or Picasso painting, then that asset must be worth that price. Reality is thus processed through perception. Based on this approach to investing, price and value are the same thing. So if people price a particular company based on multiples of earnings, then the company must be worth that multiple of earnings. If people price a different company based on a multiple of sales, then that company must be worth that multiple of sales. If people price yet another company based on multiples of eyeballs or subscribers, then the company's indeed worth the multiple of eyeballs and subscribers. Berkeleyan investing is thus an exercise in persuasion. You make money when you can persuade other

Starting point is 00:37:22 people to agree with you on your perception of value. Because people tend to besuade by narratives and it's a very human thing, the most successful investors using this approach are also the most persuasive storytellers. Now, value investors have a fundamentally different approach. We believe that an asset has intrinsic worth regardless of the price that others are willing to pay for it. That worth does not fluctuate moment to moment based on how others perceive the asset at any given time. Instead, the intrinsic value of an asset is simply the net present value of all the cash flows the asset would generate over the course of his economic life. Our job as value investors is to try to figure out this value the best we can, and we can't travel in the future, so we don't know what

Starting point is 00:38:06 the future cash flows will be. So we try to estimate it with imperfect information, imperfect tools, and imperfect skills. We are all in Plato's cave, as it were. The fact that we measure intrinsic value imperfectly, and we can change our minds about it, does not mean that an objective intrinsic value does not exist. With the passage of time, we'll find out exactly how much cash flow, a particular asset, would generate over its economic life. There is objective truth, even if no one investor has a monopoly of it. Consequently, figuring out intrinsic value becomes a weighing exercise. We're trying to weigh what the business is worth, not a voting exercise. The extent to which we're right depends on not how many people agree with us. We make money if the asset we invest in

Starting point is 00:38:53 actually generates a cash flows we expected to generate and we are able to buy it at a sufficiently any compelling price. So in William Green's wonderful book, Richer, Wiser, Happier, which I'm sure you've read and is sitting right behind me, he talks about how some great investors are just simply wired a certain way. I recall some of his interviews, for example, with Charlie Munger, where a lot of these price drops just don't really affect him. But I think most people have a hard time stomaking these sharp drawdown.

Starting point is 00:39:22 Some investors, like the Charlie Mungers of the world, aren't really emotionally affected by them. To what extent do you believe that great investing and this approach that you've outlined so thoroughly can be learned? I think that there are certain traits of good investors that are inherent. Jason Zwick has a great summary of this in his blog, The Seven Virtues of Great Investors, and I highly recommend that people read it. However, these traits, I think, are simply the starting point. I do believe that good investors become good investors over time, largely through deliberate practice and continually working on their craft. I use some sports analogies.

Starting point is 00:40:03 Bobby Knight wrote in his book The Power of Negative Thinking that, I quote, try putting together a game-winning touchdown drive if your linesman can't go with a snap count and jump offside. If your backs haven't mustered putting the ball away to avoid fumbling when hit, if your passer doesn't check where the defense is, as well as where his receivers are going. if the receiver doesn't look at the ball into his hands rather than glance upfield to see where he can go before he has made the catch. There's no chicken and egg question here. Fundamentals come first. Good things come to he who waits if he works like hell while waiting.

Starting point is 00:40:40 In his book, A Lifetime of observations and reflections on and off the court, John Wooden agreed, and I quote him here, many athletes have tremendous God-given gifts, but they don't focus on the development of those gifts. Who are those individuals? You've never heard of them, and you never will. It's true in sport and it's also true everywhere in life. Hard work is a difference. Very hard work. Now, quote a third person. In his paper, the mundanity of excellence. Sociologist David Chambers found that excellence at different levels of competitive swimming required qualitatively different levels of performance. Olympic swimmers don't just train harder or workout more than college-y-level swimmers. They swim differently. Moving up from one

Starting point is 00:41:20 level of competitive swimming to the next, often required fundamental changes in technique and discipline and attitude. These changes sometimes require deconstructing existing swimming techniques, and unlearning previous habits of training and competing, and then layering on new skills, for example, anticipating the starting gun. At the end of the day, Chambers found that excellence is often surprisingly mundane. Elite swimmers did many little things better than those at lower levels, but they did not often possess anything extraordinary, for example, extra lung capacity that can be characterized as innate talent. Luckily for us, we believe that this is also true investing.

Starting point is 00:42:00 Successful investors do not need superhuman IQ or EQ, though both will help. We believe that becoming a world-class investor ultimately involves getting good at all the many little things and fashioning a world-class investing enterprise, accumulating all the little advantages to gather constituted mustery of the craft. Nevertheless, in the current age of instant gratification, many whippersnapper-snapper stock pickers have sought

Starting point is 00:42:28 to skip right past all of this. They sprint, not walk through their evolution to become too high conviction investors swinging too hard at quote-unquote multi-baggers predictably without classical training and proper form, such while swinging seldom ends

Starting point is 00:42:44 well, especially given the non-agodicity of the investing endeavor. At Dysreen, we're careful to build our investing skills on classical foundations. We prefer to be hardworking patient marathon runners rather than sprinters. Each year, we continue to develop empirical data sets, knowledge base of businesses, sharpen our network with toolsets, expand our mental models, reinforce our psychological conditioning, and hone our judgment. Some of the improvements we want to make may require reconstructing our mental models, sometimes including long-held ones, retooling our research methods and techniques, including how we ask questions, how we interview

Starting point is 00:43:20 people, how we process information, et cetera, and then re-examining our psychological biases and decision-making habits. We've been unafraid to continue to put in the work on all these fronts. We believe that this continuous improvement increases the likelihood of achieving satisfactory long-term investment outcomes. I love that multidisciplinary link you made there from sports to investing, and I think it makes a lot of sense. And we were chatting before we hit record how you'll be traveling essentially across the world and it shows the level of work that you put in to the craft of investing. So a bit earlier, you mentioned this concept of narratives and having to convince others to pay a certain price for a company, which isn't, of course,

Starting point is 00:44:02 how value investors approach this subject. In Morgan Housel, he shared on our show earlier this year, the importance of narratives and how narratives and stories is so important in investing. He had this wonderful quote that I really liked, that every stock valuation is a number from today multiplied by a story about tomorrow. Value investors, of course, we seek to be objective in determining the value of a company. But I think the problem is that there's this narrative and this public perception aspect that can really be just entirely subjective. What's cheap today might remain cheap for quite some time, stated another way. So how do you remain objective in your investment strategy, even though there's this aspect of investing that's highly, highly subjective.

Starting point is 00:44:50 That's a great question. So I've already discussed our epistemological stance that as intrinsic value lies in a world, not in our heads, not in heads of other people. So that epistemology actually creates a basis for the idea that we're not trying to look to the minds of others or the perceptions of others when we try to figure out when intrinsic value is. Now I'll discuss the psychological element of this, which is ultimately rooted in the willingness of successful value investors to truly be contrarian and independent-minded. Here, the seminal 1951 experiments conducted by psychologist Solomon Ash is instructive. Let's imagine that you're a participant in one of Ash's experiments. You are the six person in a row of seven participants. The experimental

Starting point is 00:45:30 asks each participant which of three different lines. Line A, line B, B, line C, is the same line as a reference line. So there are three lines, A, B, C, and then there's a reference line. And they ask which line is the same length as the reference line. Now, you look at it and you go, line A is clearly shorter than a reference line. Line B is clearly longer than a reference line. And line C is exactly the same length as a reference line. The experiment starts, and the experimenter asks Participant 1, which line is the same length as a reference line?

Starting point is 00:46:02 To your surprise, participant 1 calls out line A, then participant 2 calls out line A, Then participant 3 says line A and you're like what? Then participant 4 does the same thing. And then participant 5 does the same thing. Line A. Now it's your turn and you stare and stare at the lines. It seems obvious to you that line C is the line that matches the reference line.

Starting point is 00:46:28 So your pulse quickens. You're in the throes of epistemic angst, which is true what I observe or what other people are saying. The experiment is repeated several more times and, Each time all five participants before you identify the same line which doesn't agree with the direct observation. So you begin to wonder, are my eyes reliable? Should I continue to answer the questions based on what I perceive or based on what other people are saying, when is my turn?

Starting point is 00:46:54 As it turns out, the rest of the participants in Ashes' experiments are not actually participants, they are confederates and you're the sole subject of the experiment. The test isn't really about your perceptual judgment, but your willingness to conform. ran this experiment multiple times. In control conditions, when participants were answering alone, they identified the correct line more than 99% of the time. In contrast, 75% of participants who sat six in a role of Confederates who deliberately gave the common incorrect answer conformed at least once. In all, 37 of the responses were conforming, meaning they deliberately changed their answers to match the wrong answer of other participants. These experiments are

Starting point is 00:47:36 especially striking because participants were not told to try to achieve consensus. They were just simply trying to point out which line is the same line as reference lines. They were not asked to agree with each other. The urge of a participant to conform stems from an automatic heightened arousal from knowing that he or she is standing out. Of course, in investing, sometimes the truth is more ambiguous than which line is the same line as a reference line. But in today's investing environment, that's not always true.

Starting point is 00:48:03 our observation is that epistemic ambiguity isn't always at issue. Sometimes it's just clear. For example, we own some incumbent businesses that purportedly are being disrupted by new entrants, often highly unprofitable, with businesses that are tiny fractions of the size of the incumbents. As hip as the incumbents are stodgy, such disruptors, nonetheless sometimes have expected unic economies that are far inferior to those of the incumbents. Even so, until recently, some of these disrupted businesses have valuations that are

Starting point is 00:48:32 even larger than the sizes of the incumbents they're seeking to disrupt. Naturally, we ask, is there some bigger game being played here? Maybe the disruptors are attacking some larger market and the incumbents just collateral damage. The answer often is just no. It's simply replacing the incumbent business in the industry. So how can the market cap of that attacker be larger than the market cap of the incumbent today? But until very recently, we often found ourselves in metaphorical action labs full of people claiming that magic beans that hopefully will grow to three foot tall beanstalks are worth more than fully grown 10 foot binstocks already generating beautiful giant edible pots. Whatever pressure we may feel to conform our view to others,

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Starting point is 00:52:48 All right. Back to the show. Man, I just really liked that study you shared. It just really sort of highlights the emotional and psychological side of investing that's so, so important. I wanted to transition here. Given at the start you mentioned how you started your firm looking forward to celebrating the 50th anniversary, the value investing framework you outlined as well is something you hear from a lot of investors. A lot of investors can talk to talk, but very few can walk the walk. I'm reminded when I went to the Berkshire meeting in May. I had spoke with, you know, just met some fund managers and just ask them, hey, what's your investment framework to look like? How do you invest in this fund you recently launched? And, you know, they all say the same thing. Investing great businesses with strong competitive advantages. They invest for the long run and they want to pay a fair price. And pointing back to the 50 year anniversary, which is something you don't hear often. I hear a lot of investors say they invests with a three to five year time frame typically with each investment they enter. From your experience,

Starting point is 00:53:48 I'm curious to get your thoughts on whether the industry or whether other value investors actually think long-term in practice and the way they truly operate and not what they say. The short answer is, no, I don't think so. It's true of the majority of investors. Frankly, I don't think it's just investors that are short-term focus. Management teams are as well. There's a great paper about this. It's called Short-Termism at its worst by Harvard Business School Professor Malcolm Seltter, and he identified several important factors behind the phenomenon of short-termism in corporate and investor behavior generally. First, there's the issue of misaligned incentives, and we talked about that already in incentives of money managers for corporations.

Starting point is 00:54:26 It is hard for corporate executives to think long-term if they are overwhelmingly rewarded for short-term results. There's another people on this. It's called duration of executive compensation by Radaritan Gopalian, Milburn, Feng Huasong, and Arjun Thacker. They developed a metric for pay duration to quantify the average duration of the compensation plans for all the executives covered by the Equalor Consultant's survey of 2006-2009 proxy statements, the average pay duration for all executives across 48 industries in their sample was just 1.22 years. Such performance compensation duration borders on the absurd

Starting point is 00:55:04 for leaders of ostensibly multi-deckered institutions buffeted by so many factors beyond their short-term control in any given year. You might as well report people based on random number generators. In a survey of 401 U.S. CFOs conducted by John Graham, Campbell Harvey, and Shiva Raj Kopal, 80% of survey participants reported that they would decrease discretionary spending on R&D advertising and maintenance to meet earnings targets. 96.7% of survey participants prefer smooth to bumpy earning paths, keeping total cash flows constant. As a result, 78% of survey participants would sacrifice real economic value to meet an earnings target. They literally admitted to that.

Starting point is 00:55:50 This incentive misalignment is exacerbated by the shortening of CEO tenure. In 2020, the average turnover of CEOs was about seven years for companies in the SSP 500 index, about 6.9 years in the Russell 300 Index, and 4.9 years in the SSP 500 Industrial Index. So that's one, just misaligned incentives. Second, we've experienced the ascendance of an atomized, disembodied, speculative, and tradally financial culture. Soltar identified the competition among investment managers for investment dollars as the desire by such managers to minimize business risk, especially in light of asset lighting mismatchezer industry that we've already discussed as important drivers of modern day short-termism. This has caused ever-increasing equities market turnover.

Starting point is 00:56:37 According to the World Economic Forum and the IMF, the average holding period of public equities in the US has fallen from about five years in 1975 to about 10 months in 2022, from five years to 10 months. Senior executives in public corporations have responded to this shrinking holding period of investment managers by offering quarterly financial guidance to manage analysts short-term stock price expectations. However, a McKinsey study found that providers of such guidance were not rewarded with higher valuation. The only significant effect of the practice was to increase trading volume of companies when they begin issuing such guidance. At Dysrin, we view the absence of short-term financial guidance from CEOs and CFOs, along with the lack of performer

Starting point is 00:57:25 adjustments and reported earnings, as signals for a company's culture of long-termism. And there are relatively few companies that don't provide guidance. Another effect of short-termism has been to encourage firms to shed or outsource functions formerly considered to be critical to a business, including R&D, manufacturing, sales, distribution, thus creating atomized and fragile slivers of businesses that nevertheless often command illogically lofty valuations. For example, you see pharmaceuticals, software companies that do not attempt to maintain going concerned investments and instead seek to continually acquire other companies in order to hollow out such companies, engineering, R&D, and sales distribution themes, thereby eliminating all possible

Starting point is 00:58:13 sources of competitive advantage for the business. And these have been fitted as asset-light, high RRIC poster children in the respective industries. And that's crazy. You'll have farmer companies that don't do R&D, software companies that don't do R&D, and yet these are the poster children in their industries. The corporations that have become the darlings of modern capital markets get curiouser and curiouser. Third, this tradally culture has been exacerbated by Gresham's law. This is named after Sir Thomas Gresham, the 16th century English financial. Gresham's law is a monetary principle stating that bad money drives out good. The application of Gresham's law in financial markets has been exacerbated by whiplash monetary policy.

Starting point is 00:58:54 In particular, free money tends to attract speculators and crowds out rational intrinsic value-based investors, thereby shrinking investment horizons. In the short term, changes in marginal demand and supply of printed money dominate the actual operating cash flows of the businesses in driving valuations over time. This drives out investors playing the weighing game, that is those trying to figure out the interesting values of businesses, and attracts speculators playing the expectations game that is trying to focus on trying to predict marginal changes in expectations or sentiments about the future. Sauter points out that in modern-day financial markets, the over-availability of information has also reduced the half-life of marginal news flow to that of the top of ice cream

Starting point is 00:59:35 on a hot summer's day. Today, traders relying on information edge are willing to pay gobs of money to alternative data sources for small handfuls of KPIs track right down to daily frequency, and single tweets can change valuations of companies by tens of billions of dollars. As money printing then accelerates, the expectations games gradually reduce. investors to hanging on to every one of a single human being that is Jerome Powell's, Freuden tells. So a little bit earlier, you also touched on reflexivity, and you also discussed this in one of your shareholder letters as well, and I really wanted to dive into this subject too. So reflexivity is quite an interesting topic because it really just points to just the immense complexity in

Starting point is 01:00:27 markets. If people apply something that's worked well in the past, it doesn't necessarily mean that it's going to continue to do well in the future. Markets are constantly adjusting. The world's always changing. And we've talked a lot on the show about how even just look at Buffett ever since the 1960s, he's continually had to reinvent himself, for lack of a better term. As Berkshire grew, their opportunities had changed and thus he needed to change. So I was curious if you could also discuss this concept of reflexivity a little bit more, because to me it just seems to be hugely important. You're absolutely right. Reflexivity is one of the many reasons why the real world doesn't operate in accordance with idealized economic models. I've already given one example

Starting point is 01:01:07 of reflexivity when we discuss why the proposition fast-growing businesses are better investments than slow-growing ones because investors tend to underappreciate growth. It's unlikely to always be true. That's because of reflexivity. Now, let's use the right-healing industry as a second example of that. We've always wondered why right-healing companies, whether in the U.S. or elsewhere, don't use AI tools more in pricing driver PR models. Could a right-healing company not use external data, for example, about weather forecasts or airline schedules or sports events or concerts or other calendars as inputs into prediction models for demand for right-healing in particular market at a particular time?

Starting point is 01:01:46 If a right-healing company could predict such demand in advance, could it then not offer higher incentives to get drivers to a specific location in advance of meeting such a demand? for example, a concert or a sports event. If so, could the market not clear at a better equilibrium than the one where after a sports event, a few riders get the cost that they want at very high prices because of such pricing? And then other riders out of luck

Starting point is 01:02:10 and they don't get any drivers at all. With the help of big data, couldn't significant latent demand be unlocked and the total addressable market for right-hailing be expanded? That's the question that we had. The issue we learned from our research is that if a right-hilling company started offering drivers too much money to go to specific locations in anticipation of demand,

Starting point is 01:02:30 then drivers would not be willing to go to those locations otherwise, even when there's a search in demand. Some drivers may also start cutting back on driving during normal times when they aren't paid driver incentives. That is, the income satisfies, not maximise. So paying up for drivers to unlock otherwise latent and unfulfilled demand in a certain area may cause market failure in other areas because of the impact these payments have on driver behavior, hence the reflexivity. Now, reflexivity also exists in financial markets. We believe that among the biggest investment stories of the last decade is how ultra-loose monetary policy intended by central banks around the world as a tool to counter-cyclically reduce economic and financial systems risk, instead

Starting point is 01:03:17 dramatically exacerbated those risks. This is the result of free money, changing. the behavior of economic actors. Startups with Hail Mary business models were given Newt Scarmander suitcases for cash, and I'm using a geeky Harry Potter reference here, to pursue them at obscene valuations. Private equity sponsors were given Newt Scarmander's suitcases of cash to roll up perfectly mediocre businesses with mountains of debt and wisps of equity, equipped with the license to self-determine and self-report the value of those businesses using prices they and others like them paid. Public company promoters were given nudes scam-under suitcases of cash to perpetrate Ponzi-like roll-ups and other compounder schemes and were rewarded by their shareholders for doing so.

Starting point is 01:04:06 Credit market participants willingly lent nude scammered suitcases of cash to anyone and everyone and were able to offload the risks to others, for example, through securitization. We think that this story is not yet fully told. As the late Charlie Mung equipped, easy money corrupts and really easy money corrupts absolutely. So in your 14th anniversary letter, you outlined what you called your batting average of your portfolio over its lifetime. So from June 2010 to May 2024, your batting average was 82%, which in my opinion is like totally unheard of. Talk about how you first define batting average and how important of a measure you find this to be.

Starting point is 01:04:50 Thanks for paying attention, Clay. I don't know how much. many folks who read our investor letters pay that close attention to the numbers on it. Our batting average is simply the percentage of our investments that are profitable, realized and unrealized. So the numerator is all the positions that we've invested in that are profitable and the denomated is all the investments we've ever made. And the betting average you're talking about is our long betting average. We're proud of our betting average over a 14 year period. It means that we've been right more often than we've been wrong and that even when we're wrong, the margin safety of our investments have sometimes protected us from permanent capital impairment.

Starting point is 01:05:21 Our returns have not been generated by one or two multi-bagger winners. Since our inception, we have not owned any of the fang stocks, but we've had many winners, nevertheless. And even when we're wrong, our mistakes haven't been that costly to our overall portfolio. And so the batting average and the downside protection has been at the foundation of our returns over the last 14 years. This is what value investing is supposed to be. As Buffett said, rule number one, don't lose money. Rule number two, don't forget rule number one. and the returns will take care of themselves.

Starting point is 01:05:52 Our study of history and our own investing experience affirms that fundamental, contrarian, value investing is both empirically and logically sound over a multi-year investment period over multiple possible states of the world. A priori, meaning before the fact, we believe that few other strategies can rival its antifragility and cumulative probability of compounded success over time. Of course, you're going to have the stock picker who picked Nvidia and made a lot of money on it and get into the Hall of Fame that exists, it will continue to exist. But over a multi-round game, having a high battery average, protecting your downside, demanding a margin of safety,

Starting point is 01:06:27 doing this over and over again, over in investing lifetime, we believe has the highest expected probability of success before the fact. Yeah, and I'd like to comment further on this. I think a lot of value investors, when they demand such a large margin of safety, say they look in a metric like price to book. Let's say companies trading at like 50% price to book, which would indicate the company may be trading well below its intrinsic value. But oftentimes these can end up being value traps. So something that looks cheap isn't actually cheap when you see how the investment plays out over time. Can you talk more about that, how you've seemed to avoid so many value traps? Yeah, that's true. You said it really well. Something that trades at a low

Starting point is 01:07:08 price to book may not be cheap. What is intrinsic value? Intratively is a net present value of future cash flows and you want to buy it a big discount to that. I'll give an example. Let's say the book value for a company is a whole bunch of land that they overpaid for and the land doesn't have much use. It's a white elephant. Then what's the value of that land? If it can't generate cash flows, we would argue that that land's not valuable. The fact that it trades at a low price to book says nothing about whether the socks cheap or not. Just generalizing from that, value investing is not about buying low P stocks or low price to book stocks. It's buying businesses at big discounts to what they are worth. It's not a statistical exercise. It's a fundamental

Starting point is 01:07:43 exercise. And it's no surprise then that the strategy of just buying low multiple stocks hasn't worked. It shouldn't work. We don't do that. There's a second reason why there are certain value traps. Businesses could trade at big discounts to what they're worth, but minority shareholders never get access to the cash because the people who control the business don't want to distribute the cash or reallocate the capital in ways that aren't beneficial to minority shareholders. So there, once again, the more fundamental we are, the better it is because you have focused on who runs these businesses. What do they run these businesses for? How are they reinvesting the cash? It's not a sufficient condition that it trades at a big discount to what we think is worth.

Starting point is 01:08:20 It's also important who runs these businesses and how the cash is being reallocated, etc. The more business-like the crafters, the more likely it is to be successful. Right at the start, you mentioned Warren Buffett, but Charlie Munger has also made a tremendous impact on you. It was in 2018, you actually met Munger. You outline a number of his quotes and your letters. One of the lines that you really seem to appreciate was this quote from him, Avoid crazy at all costs. What does that mean to you?

Starting point is 01:08:50 So I love that Charlie quote, but my favorite is actually a more modest one. He said the best thing a human being can do is help another human being no more. Charlie walked the walk of his dictum by generously sharing his time and worldly wisdom with so many people, including me in his last years. didn't need to do so. So many nonaginarians spend their time very differently from Charlie, but I suspect that he thought that this was the best use of his time in the last season of his

Starting point is 01:09:18 life. So I've learned so many things from both Charlie Munger and Warren Buffett, and I think that the most important thing I've learned is to think for myself and to reason from first principles and have the intellectual courage to act differently from the crowd, regardless of how lonely a path this may be. You mentioned that we met in 2018. I told Charlie that we were struggling to find good investments that met our investing bar. And I asked Charlie if he had any advice for what we should be doing differently. He looked at me unblinkingly through his moon-shaped glasses and said, who said this was going to be easy? Which of course was exactly right and served as a time to kick up my behind. So classic laconic comment. Over time, I've become more convinced that Charlie's

Starting point is 01:10:01 belief is true and that the best thing that each of us can do is to help others around us no more. It's a very humble thing to want to do, but it's a very important thing to do. There are fewer, purer expressions of caring and fewer gifts that are more valuable. But to answer your question, because Charlie had the profile he had, he tended to serve as a Rorschach inkblot upon which investors superimposed their own investing biases and predilections, clothing them with immediate credibility. For example, Charlie's influence on Warren Buffett to buy wonderful businesses at fair prices over the years have been co-opted by so many investors to justify paying insane prices

Starting point is 01:10:45 for good businesses, thereby guaranteeing poor returns on such investments. Over time, as too much capital began chasing too few such good businesses, the definition of quality changed so that investors began throwing insane money behind shockingly poor businesses with structurally challenged unit economics, masquerading as high-quality compounders. Of course, Charlie and Warren themselves did not participate in this escalating insanity. Instead, they continued to be rare voices of common sense in a recent age of epic financial unreason. See, for example, Charlie and Warren's comments on widespread and self-serving accounting shenanigans, the mad as hatter-craze in venture capital and private equity and the games they play, the demanded speculative fervor in

Starting point is 01:11:34 cryptocurrencies and the disparating principal agent incentive and time horizon issues in modern-day capitalism that we talked about, among many other things. The irony, of course, is that many of these comments were widely heard, they're widely shared, and then roundly ignored. While we share many of Charlie and Warren's sentiments, in years past, we kept our opinions to ourselves for fear of being criticized for casting stones at our neighbors' houses. Over time, we've learned that there's a certain amount of intellectual honesty in expressing our opinions publicly even when and especially if they are unpopular. We've become more comfortable speaking up when we encounter the white straight beliefs that fly in the face of common sense. For example, to point out that money losing

Starting point is 01:12:15 businesses are not actually better than profitable ones. Or to observe that businesses don't simply become better simply because they lever up other similar businesses. There is real courage and great freedom in calling crazy behavior, crazy in naming that behavior. In palpable ways, it is a psychological defense against the dark arts, then this is another geeky Harry Potter reference, and a tool for sanity and capital preservation. As with many of the other lessons we've learned our investing journey, Charlie led away. Well, Su-chin, I really appreciate you joining me on the show here in helping a lot of people tuning in to, you know, help them know a little bit more today. So it's really an honor to have you on the show, and I appreciate the opportunity to

Starting point is 01:12:57 chat with you and get to know you over the past few weeks. To give a final handoff here, how can those in the audience, learn more about you, Dyserine, and any other resources you'd like to share. Thanks, Clay. So we have a website. It's Dyserine.com and I can also be reached on LinkedIn. Thank you very much for these incredibly thoughtful questions. This was a lot of fun. Awesome. Thanks so much, Suu Chen.

Starting point is 01:13:19 Really appreciate it. 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 quotes. courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP647: Value Investing Masterclass w/ Soo Chuen Tan

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