We Study Billionaires - The Investor’s Podcast Network - TIP674: Outperforming the Market, Managing Risk, & Market Inefficiencies w/ Andrew Brenton

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Andrew Britton to discuss his biggest investing lessons from beating the market over the past 25 years. Andrew's the CEO and co-founder of Turtle Creek asset management. Since its inception in 1998, Turtle Creek has achieved an average annual return of 20.3% versus just 8.3% for the S&P 500. $10,000 invested into their fund at inception would have grown to over $1.2 million as of September 30th, 2024. And have that money been invested in the S&P 500, it would have been worth around $75,000. During this conversation, we'll cover the fundamental drawbacks of a buy-and-hold investment

Starting point is 00:00:44 strategy, why the stock market in the U.S. is becoming less efficient over time, how Andrew thinks about allocating to AI and software businesses in his portfolio, how Turtle Creek manages risk investing in the stock market and why they added Kinsdale Capital to their portfolio this year and what keeps Andrew going after 30 years in the investment industry? Andrew's one of the more impressive investors I've had the pleasure of bringing on to the show, so I really hope you enjoy our conversation. 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. We keep you informed and prepared for the unexpected.

Starting point is 00:01:32 Now, for your host, Clay Fink. Welcome to the Investors podcast. I'm your host, Clay Fink, and today we welcome back, Andrew Brinton from Turtle Creek Asset Management. Andrew, it's great to see you again. It's great to be here, Clay. So it's been about a year since we last spoke, and since then, you've crossed the 25-year mark with your fund, and you've put up returns of 20% per A&M, while the S&P 500 has had a total return of around 8%. And I'm not sure what the statistics are on how many investment firms last 25 years, but my guess is the number's quite low. So our show is called We Study Billionaires. So we like to discuss billionaires like Buffett, Howard Marks, and Bernard Arnaud, but we also like to interview very successful fund managers

Starting point is 00:02:26 like yourself who happen to have Buffett-like returns. Now, Buffett, of course, is well known for his buy-and-hold strategy as he's held companies like Seas Candy and Coca-Cola for decades, as well as a number of wholly owned businesses. I was curious if you could just talk a little bit about some of the shortcomings of this buy-and-hold approach. Warren Buffett has a problem that I don't have, which is he is constantly building more cash. He has a business, the insurance business, with the float, of course, and he compounds that problem by having good investment returns. So I get it when he says, I'm never going to sell. Now, let's be clear, and we'll actually talk about a situation where they ended up investing

Starting point is 00:03:07 in one of our companies, and then two years later, they in fact sold. So it's not as if Berkshire never sells anything, so that's a misunderstanding. But he has a problem. He has lots of cash, and he wants to put it to work. And his fundamental philosophy, I think, is it's always better to own companies than sit in cash. And if you look at the long-term history of having money in treasury bills versus having money in the stock market, even when the stock market is above-average valuations like it is today,

Starting point is 00:03:41 it's still better to be in equities than to be in cash. And so in a sense, we have the same philosophy, but because we don't have a problem of just massively building cash all over the time, we're striving to be fully invested almost always. It's rare that we have any notable amount of cash in the strategy or in the portfolio. So I think the shortcoming of a buy and hold is it's very simple. If you own public companies and the share price of one of your companies doubles, and that does happen with us over time, and you look at it and you say, well, we have an intrinsic value. We've done a lot of work. We have a present value of cash flows. We're the classic DCF invest.

Starting point is 00:04:26 If you look at that and say, well, the share price is doubled, the intrinsic value really hasn't changed. We have a very long view in each of our companies. If you say, I don't want to sell any shares, then really the thought experiment is you should have owned a lot more at that lower price. And that's how we think. And that's when we first started Turtle Creek. We thought, again, it was that would happen sometimes in the early years.

Starting point is 00:04:51 The share price would go up a lot. And we might not feel like selling shares. And I would press my partners to say, well, we should have owned a lot more shares at the lower price. So think of us as to the best of our ability, trying to own the right amount of each of our companies today. And again, tomorrow. And our views on our companies don't change that quickly. As you know, the fundamental intrinsic value of a company moves around, but it moves around

Starting point is 00:05:17 not that much compared to the share price. And so it's just a common sense perspective that it's what I just said. If the share price doubles and nothing's changed, your margin of safety is much less. So to sit and just watch it and see it become a double weighting in your portfolio, to us, that just doesn't make any sense. And I like the way you've put it in the past is instead of buying hold, it's buying optimized. So buy and reevaluate each of your holdings.

Starting point is 00:05:47 And I'm reminded of Peter Lynch. He once said that selling your portfolio winners to buy the losers is like cutting your flowers to water your weeds. And I know for a fact, you aren't going out and trying to buy bad companies by any means. And you're well known for increasing your stake when share prices are down and the fundamentals haven't changed and then selling down your steak when the share price rises to a large extent. Is it ever the case where maybe the fundamentals are improving faster than you originally

Starting point is 00:06:14 anticipated, meaning that you should continue to add to that type of position? Absolutely. I mean, we've owned a Canadian company, although it's listed now on the New York Stock Exchange, it listed about three years ago. It's in the transport industry. There's nothing particularly notable and differentiated you would think about trucking or transportation, but some companies are truly differentiated. And this is one of them. So think of the over the years, the share price has been as low as $3. That was in the credit crisis. and it became our biggest holding, and it has traded north of $200, and today it's just a little below $200. About three years ago, after they listed it in New York, they made a significant acquisition of less than truckload operations of UPS freight. It was very large for them. The CEO is extraordinary, and they've made over 200 acquisitions, frankly, probably over 300 had acquisitions over the years. And some of them big, some of them small, this was a big one.

Starting point is 00:07:21 And it was highly accretive. And so our normal reaction would be, the stock went up a lot. It actually reacted positively very quickly. And we normally would be, have been trimming. So think around $100. And instead, we did a fundamental reset of what we thought the company was worth because this one acquisition was so potentially accretive. And so we didn't sell. And in fact, over time, we call it hit the reset button, right? Say, no, in fact, we're going to buy stock at $100 that we sold at 80 a year ago. So we do reset when something fundamentally positive has happened. And that does occur across the portfolio, but a really important thing to understand about

Starting point is 00:08:06 our approach is that we're not being conservative in our forecasts. So if you find a good company, or ideally you find a great company, and you add it to your portfolio, we will size it based on the present value of all future cash flows going out 30, 40 years or longer, and not be conservative in that step of our process. And if you do that, we haven't found yet that we trim out of a position. And in fact, it just keeps going up and we never get to own it again. That hasn't happened, or I should say it differently. So far, it's happened. We have some Canadian companies that used to be in our portfolio that today aren't and we're still closely following them.

Starting point is 00:08:49 But it's not like I look at, well, what was our forecast 10 years ago? What's their actual? And we're woefully below that forecast. Like the one I'm thinking of it, it's remarkable how bang on we were. They did a little worse in the U.S. than we were forecasting, but they did better in Canada. And today, they're making what we were projecting them to make from 10 years ago. The thing is, the stock is trading at a premium multiple. And if it continues to always trade at a premium multiple, we won't own it.

Starting point is 00:09:21 It won't make it into our portfolio. But when you look at the stock return in the last 10 years, it's positive, but it's not terrific. The risk in investing in the public market to a large degree is overpaying for companies. And looking at your portfolio 10 years later and say, well, the company did really well, but the stock hasn't done really well. And so we're constantly trying to own the companies whose stocks are the cheapest today, but within the framework of a fulsome forecast. We own a U.S. company called Flore and Decor, which is a category killer retailer. And we got the opportunity.

Starting point is 00:10:03 You mentioned 2022. I didn't think we'd ever get the chance to own it. But with the fear of a recession in the U.S., investors punished consumer-facing companies, and this is definitely a consumer-facing company, but our change to our value as a result of modeling an economic slowdown or a recession that we're in. I'm not saying we're in a recession, but we're in an economic slowdown. The impact on long-term view of value is really quite small. There is an impact, but we haven't changed our view as to how many stores do they have in 10 years and in 20 years? And so that meant that we said, hey, this is really cheap, cheap enough to get into our portfolio, but it's trading at 50 times current earnings.

Starting point is 00:10:50 I mean, it's not a low PE stock. So you have to believe that right now their earnings are depressed. And then you have to believe in lots of growth for it to look cheap enough to make it into the portfolio. Yeah, that example with floor and decor reminds me of you've mentioned CarMax in the past. and, you know, they had a short-term slowdown and the share price dropped by somewhere north of 60%. And you mentioned that. You know, the idea that the intrinsic value changed by 60% over one year or less is just a ludicrous idea. I think it ties in well with my question here regarding market inefficiencies and how that varies over time and taking the opportunity to add to a company like floor and decor when share prices are unfairly punished.

Starting point is 00:11:35 I look at your returns over the past few years. I see positive 28% in 2021, negative 22% in 2022, and then positive 33% in 2023. So I was curious if you could talk about how these inefficiencies vary in a year like 2022 or everything just seems to be dropping. And then the years that follow, you're still making changes of your portfolio. But it's the other way where a lot of companies share prices just have a tailwind behind them. It's really hard when you look back over the time you've been in the public market, and I'm speaking about myself, to try to say, what's changed? I think the market has become more inefficient.

Starting point is 00:12:14 And if you think of what drives inefficiency, there have been a lot of work in behavioral finance, of course, that explains a lot of human biases that we have. And those have always existed. And that includes short-termism. It includes, you know, the endowment effect, all those biases, is loss aversion. We try to not have those creep into our process. That's part of my job to make sure that we don't say, well, what's the catalyst to make someone like a stock go up? We really try to avoid that part of the discussion, trying to read the mind of the market. But if you think about some things that have changed, whether it's the institutionalization of the market, where you have investment managers worried about their business in addition to acting as a fiduciary for their clients.

Starting point is 00:13:01 And that's a big shift over a 50 plus year period. But the more recent changes, whether it's social media, and I think back to the dot-com bubble, because we were around then with the chat rooms, that was the first social media. And the impact that had on share prices, and now you add in the quant strategies and the trend following and AI. There are definitely really smart people spending their time on things that we don't even think about and running very, very different strategies than us. And I don't know whether that makes money or not in aggregate. I'm skeptical, but I don't know. But what I do know is that that's driving very large share price reactions in both directions. And it definitely is the case in the U.S. more so than

Starting point is 00:13:50 Canada, as we've in the last 15 years moved into owning U.S. companies, that is something we see. But I think it's becoming more extreme, and it creates shorter-term, greater inefficiencies in the stock market, which I like, but you still then have to believe that in the long run, the market is a weighing machine. And I don't think that's changed. But we'll see how long things can stay mispriced. 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.

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Starting point is 00:18:07 business partner, Shopify, and start hearing, sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. When we look at a company like Home Capital, which is one you held for around 12 years, the compounded in your return of a buying and hold strategy over that time period was around 8% annualized. But it was quite a bumpy ride for the stock because, you know, it was way up at times and way down at times, so quite volatile both to the upside and the downside. So your buy and optimize approach actually generated around a 14% return owning that stock. So if we assume that that company's intrinsic value was compounding at 8% on

Starting point is 00:19:02 average. Is that the type of investment that's attractive to you? Because it seems that in order to achieve outsized returns that you did, you're almost needing that volatility and that short-termism and that inefficiency is embedded in it. Before I talk about home capital, I'll use another example of a company in the portfolio that's now been in for maybe eight years. And that's a U.S. company, Service Corp, the largest funeral home company in the U.S. in North America. They're also in Canada. I often use that as an example. I say, look, it was cheap enough to make it into the portfolio. The buy and hold return has been pretty good. The problem is, as a bonus, we would like it if the stock moved around. Well, I would say to earn mid-teen's returns over the long term,

Starting point is 00:19:49 which is our bogey, the way we think, I don't know that you could do that with a buy and hold. Could you find enough companies that are actually going to grow their share price at 12, 13, 14 percent a year. There are some, but as you know, there aren't that many over the very long term. We have a few Canadian companies that we own. I mentioned the trucking company. He's grown a share price close to 20 percent over the 17 years we've owned it. So there are examples of that, but there aren't that many. And to come back to Service Corp, when I looked recently at the buy and hold, I think it's around 11 percent. But we actually added 500 basis points. I was surprised to see how much because if you look at a stock chart of Service Corp, it really hasn't been that volatile.

Starting point is 00:20:35 And yet, of course, it has moved around over the eight years. So I was surprised, and we do track that holding by holding, because the way to think about our approach is when we add a company to the portfolio, we think that the long-term buy and hold should be pretty good. Like, we've added four companies this year. At each time we did that, the discount to our intrinsic value was greater than 50%. So you kind of say, look, from there, owning this and doing nothing, if our forecasts are reasonable, then that's going to be really good over a five to 10 year period. And then we simply say, it's back to what I started with on the podcast. If the share price of one of them goes up a lot and nothing's changed, we're not selling it out. We're just, this is around the edges. It's just

Starting point is 00:21:25 trying to enhance a core fundamental buy-and-whole strategy. And even with companies that were in the portfolio and then we're out of the portfolio and then are back into the portfolio, actually our longest time holding, when we met the then new CEO, and this was eight or nine years ago, he asked, like, so, you know, how long have you been a shareholder? And I said, yeah, we've been a shareholder for 15 years almost. But I didn't mention there were times that we didn't own any shares because even when we didn't, I fully anticipated that the share price would come back to us, which it did, and we became a shareholder again. So it's really thinking about we're going to own these companies for a very long time, but sometimes it's going to be small

Starting point is 00:22:09 amount and sometimes it's going to be a large amount. And the best recent example is a Canadian company called ATS Corporation, which is now listed in New York as well as Toronto. It listed last year and that they had their first investor day in New York last fall. It's a really great story. It's a world-class company. And so part of the reason why the share price went up a lot last year was, I think, just broadening the investor base and U.S. investors getting to know this company. But also, they had massive bookings from General Motors. And General Motors panic and push to get into electric vehicles in the last few years. And we all know that that adoption has slowed, and so GM has slowed their building of electric vehicles. And as a result, some of these

Starting point is 00:22:56 big bookings for ATS have been delayed. And some of them may not happen. The thing to understand is they didn't have any business in transportation a few years ago. And recently, it's 30% as they revenue these bookings. They're doing battery pack assembly lines, automations, global automation company. And as a result of that, it's funny, last fall, this is a company we've owned for 16 years, and I'm really impressed with the CEO. He's been there now, most recent CEO, he's been running the company for six years. He comes out of Danaher, just a really superb CEO. And then what happened is with this delay and the EV slowdown, even though that part of the business, and you do a long-term forecast, there's almost no impact. It's a bit of a one-off. It's a bit of a one-off.

Starting point is 00:23:45 off. Their core businesses, life sciences, more than 50% of their revenue. And last quarter, they had record bookings in life sciences. And that's a recurring, repeatable business line out decades. Evie battery pack assembly is not. At some point, GM will insource that. And in 10 years, they probably blew back to zero revenue on the transport side. But it's very good business for them right now. And as a result of doing a long-term forecast, we didn't reduce our view on the company's value. We actually have taken it a bit higher this year as a result of talking to the company, even though the EV part is lower than we were forecasting a year ago. But with the short-term results, and this is back to the thought of so much short-termism in the market,

Starting point is 00:24:31 the share price fell by roughly 50%. And this year, we have increased the number of shares of that company in the portfolio by three times. So whatever we owned at the beginning of the year, We own three times as much today. And we bought a little bit in, I'm talking Canadian dollars per share now, in the 50s, we bought a lot more in the 40s. And then when as low as 34, we bought way more in the 30s than we did in the 40s and, of course, in the 50s. So it's not a straight line. It's not linear. And who knows if it's going to go lower.

Starting point is 00:25:03 It's up $10 so far. And we're close to the point where we start that trimming process. And to come back to home capital, 8% buy and hold over 11, 12 years. no, that's not very good. That isn't what we're hoping our companies will do. But it's okay when you understand the history of the company and the fact that they had a funding, this is Canada's largest subprime mortgage lender. So imagine after the U.S. housing debacle, what happened, the hedge funds that made money on that turned to Canada and found out there are actually two pure play subprime mortgage providers in Canada. The thing is, it's a very different market

Starting point is 00:25:40 up here and think of it more as near prime. So it's actually a very good business and their loan losses over their history has actually been lower than the large banks with prime mortgages. So just think about that, lower loan losses and they're only charging maybe 200 basis points more. And then over time, people who can't get a prime mortgage often graduate back to getting a prime mortgage, whether it's new Canadians that don't have a credit history yet, self-employed, who can't prove up their income on an automated basis. But if you do the work, you're willing to, you're able to prove up, they've got a hold co, and they've got revenue,

Starting point is 00:26:15 they've got earnings here, and you can qualify them if you're willing to do the work. The reason that it was an 8% compounded return, what the key one is, they had a liquidity crisis seven or eight years ago now, a classic run on the bank. The loan book was extremely solid, but that worry about a housing bubble in Canada and a lot of other noise, and some mistakes the company made, they were in a crisis period. And they actually survived the crisis. At the time, we were the largest shareholder. And Berkshire Hathaway, Warren Buffett, came in to bump us

Starting point is 00:26:50 down to second place. He bought out of Treasury to own 20% of the company. And the interesting thing is he wanted to buy 50% of the company, but the second tranche got voted down by the shareholders. The company didn't need the first tranche. So they issued equity at not a very good price, but to the right person, to change the tone and accelerate their recovery from that funding crisis. And it worked really well, but there was dilution. And interestingly, even in that one year where there was a crisis, again, eight years ago, they made a profit that year, just not as much.

Starting point is 00:27:28 but it was the issuant of equity to Buffett. And then two years later, the repurchasing of those shares, so Buffett didn't get to 50%. And he said to us, well, it's not strategic if I'm only at 20%. It's a really good business. I like it. And so he sold his shares back at a nice profit a couple of years later. And so that dilution, if you were to take that out, which you can't, then you'd probably be in the low double digit buy and hold return.

Starting point is 00:27:58 And that would be fine. We'd always like it if it's better. And then because things move around, we're able to improve upon that. Back to your question, do we need it? As I said, I think you need it if you target or hope you can get into the mid-teens double-digit type returns over the very long run. I don't think you can do that with a buy and hold. And so it's a bonus when we find a company and we say, hmm, this is a really good business,

Starting point is 00:28:26 But it's different. It's unique. It's hard for the analysts to maybe understand. There aren't five comps that you can just simply benchmark. Everything else trades at 11 times. So this should trade it 11 times. For us, it's a bonus if it's a unique one-of-a-kind company because we never try to predict will things get mispriced. But our view is odds are things that are unique are more likely to get mispriced. You know, we like low intrinsic value volatility and high. high share price volatility. But the core point is quality businesses like Service Corp, and if they never move around, that's okay. So you mentioned ATSCorp being a technology name. And it reminds me when I was tuning into your annual meeting. And invariably, there's a question

Starting point is 00:29:14 about AI during the Q&A session, almost goes without failure there. So when we look at some of the brilliant capital allocators like Mark Leonard from Constellation Software and Brian Jellison, the former CEO of Roper Technologies, they really capitalize on these mispricings and how software businesses are valued when you consider things like their pricing power, customer stickiness, abnormally high margins, et cetera, and, you know, of course, delivered exceptional returns to shareholders over really long time periods. So I was curious of Turtle Creek is intentionally trying to make an allocation to software businesses or AI type companies, which have shown that these have been some of the best businesses to own over the past, say, 10, 20 years. I'm curious to get your

Starting point is 00:30:00 thoughts on that. I will admit that we missed Constellation Software almost because we were too close to it. Before starting Turtle Creek, I ran the private equity arm of one of the big Canadian banks, and we put a committed term sheet in front of Mark when the company was private. He funded with all of his existing investors, and the general rule in private equity is if somebody does you're supposed to cut them into the round. And I did run into Mark sometime later, and we talked about it. And he admitted, yeah, I should have. I didn't really think about it. And he just was kind of, oh, well. And so when Constellation went public, we didn't dig in. So I can't speak to Constellation other than to recognize just how incredibly well he's done. We will own software companies,

Starting point is 00:30:48 and we do own software companies. And our longest time holding is another classic, consolidator called Open Text. And in fact, Mark Leonard will say that, you know, he learned a lot looking at what another person, Stephen Sadler, has done. Now, Stephen has run a software consolidator for years called Enghaus. It's a TSX listed company. We've owned that in the past. We just don't today because of valuation. So today, we don't own as much what I'd call pure software as we have in the past because of valuation. I mean, keep coming back to valuation. There's a really good software company out of Ottawa called Canaxis. They do supply chain software that really scales. So it's the holy grail for, you know, knowing where every widget is in real time globally.

Starting point is 00:31:42 If you're a multinational, that's what you, that is the holy grail. That's what their product does. But in the pandemic, if you recall when the supply chain was such a big topic, this stock traded through our intrinsic value estimate. And by then we didn't own any of it. And it kept going up. And now recently they've got some issues. They're doing a CEO search. And the stock has come back down to around our estimate of intrinsic.

Starting point is 00:32:08 But recall my comment, the companies we've added year to date have all been trading at a little more than a 50% discount to intrinsic. So we still follow it, but it's got a long way to go to come back down to where it's cheap enough. I think for us, what's important is owning companies that are intelligently using artificial intelligence, machine learning. I mentioned ATS, and one of the last times we spoke to the CEO, he started talking about AI. And for example, they do food processing equipment and automation, and he said, well, we're using

Starting point is 00:32:42 machine learning and cameras to visually inspect the fresh produce to improve upon the sorting, the grading. And he said, I kind of think of it as it's cheap analytics. Because I remember when I first came out of business school, there were companies using machine learning and cameras to try to improve upon that quality control sorting process. But AI, in his mind, at least at this point, is cheap analytics. So it's company by company that we, we, really want to understand how they're using any new technology, any new innovation. We're really focused on owning the company in an industry that is embracing any new technology, but doing it in a smart way. And we own Ingersoll Rand and have had for many years now.

Starting point is 00:33:32 It's not the old Ingersoll Rand. It's a company that was called Gardner, Denver, that then bought a part of Ingersoll Rand and kept the name and the listing for tax reasons. But we meet with the CEO, and I can still remember sitting last year in our boardroom meeting the CEO and the CFO, and my head was spinning after a 20-minute description from this guy on how they're using AI to generate fully qualified leads for their human salespeople. And I sat there feeling sorry for the mom-and-pop type companies in their industry thinking, it isn't a fair fight. And you can see it in the results. Every quarter, they exceed our expectation. And some of it is because of this applying AI to their business in a smart way. CarMax, the biggest used car retailer in the US,

Starting point is 00:34:24 they're using digital assistance. They're using AI in their business. And when the head of Microsoft's AI business, when he speaks about AI, one of his common case studies is CarMax as a customer of Microsoft and in his view how they're using artificial intelligence in a very good way in their business. And what the CEO explained to us recently, he said, other companies that are selling used cars, they want to avoid people getting to a human. And as someone who's bought more than one Tesla over the years, the one frustration I have. If it all works perfectly, it's fine. But when you want to talk to someone, sometimes it's really hard to do that.

Starting point is 00:35:09 And what CarMax wants to do is get you as far down the line in purchasing a used car from them. But when you need to speak to a person, they drive it to a human. And it's that interaction of using AI in conjunction with salespeople in a smart way. I think those are the things we're looking for with our companies. But as a result of that, they've cut the number of salespeople they have by more than 50% in the last couple of years. So your comment there on one of the managers sort of making your headspin. It just sort of reminds me on how much the success of a company really relies on exceptional people and their ability to innovate and do a lot of things.

Starting point is 00:35:56 Just a lot of everyday common people just simply can't understand, no matter how much they want to understand it. And it's sort of led to me personally, just trying to find some of the most exceptional managers I can find and put a bit less emphasis on valuation, frankly, because over the long term, if they're able to continue to do just great things and continue to do what they've done, they tend to surprise to the upside. So I'd like for you to speak more about this because you're holding, say, 25 to 30 names. It's like, how accurate can you really be in forecasting what cash flows are going to look like

Starting point is 00:36:28 five or 10 or more years down the line when you're talking about all these innovations that are happening in the space like AI and all these new technologies that are emerging. I was curious if you could just speak more to that. I mean, when we look back, because we keep every model, and it's interesting that everyone does now in the financial model for any one of our companies is there's a tab that maps the, we use about a 9% discount rate. It's a range. Think of it as 8 to 10. And we've never change that discount rate, regardless of whether interest rates are high, whether they're low. And when you map that, if your forecast is correct, and if they're not paying a dividend, most of our companies don't, or if they do, it's tiny, then if you're perfectly accurate in

Starting point is 00:37:13 your forecasting, then the value should be going up at 9% a year, right? So we've got a chart for each of the companies, just so I can look at it. Okay, what would 9% be for the last 10 years? and what's our actual value, which is going to move around more than a perfectly accreting 9% a year. It's been pretty good. I mean, to your point, more have been to the upside. And so what we're trying to do is we own, if I use CarMax as an example or ATS as an example, yeah, you can make assumptions. How much market share do you think they will have in 10 years and in 20 years?

Starting point is 00:37:51 Will people still buy used cars? And then how will they buy it? Well, that's an important question. Will everything be purely online, in which case, CarMax will have stranded assets with their showrooms? But really, the physical reality of used cars is you have to refurbish them, you have to get them to the person who wants to buy it. So there's still a physical need, and there always will be a physical need. And then you just simply try to make reasonable forecasts on what can they get to in a market share. Well, they have some mature markets where they're more than a 12% market share. That's remarkable, given how fragmented the industry is. But they just opened their first store in the New York area

Starting point is 00:38:34 a few years ago. I think it was pre-pandemic. So you kind of look at the size of the U.S. market. You look at how they've done in the more mature markets, the repeat customer experience that they're having, and you try to roll that out over a multi-year period. The final thing I'll say on this, not all management teams are equally strong. As you said, It is an uncertain world out there. You really want to be invested with management teams, with companies that are reacting and innovating. You don't want to be in the company that just doesn't see it coming. Well, yeah, it's a tough balance between thinking about business quality and management quality and thinking about the valuation it trades at because companies within a

Starting point is 00:39:17 particular industry could trade at drastically different valuations and it can be tempting to go after some of the more cheaply traded ones. I wanted to ask you a question about risk here. So academic theory would suggest that in order to achieve higher returns in the market, one needs to take higher risk. However, in the value investing space, many would define risk differently, which would be the chance of permanent loss of capital or permanent capital impairment, rather than the volatility in the stock price. And risk is a tricky term because it's very difficult, if not impossible to measure. I was curious if you could talk about how you determine how much risk you're taking

Starting point is 00:39:57 in outperforming the market to such a large extent. Yeah, well, we're definitely in the value investor camp. The idea that one uses volatility to match risk, I think it was Robert Schiller, who said the jump from the market's reacting to every new piece of information, right? Okay. to jump to that, then conclude the market's getting it right, as he says, is the greatest economic error in thought in the 20th century. And if you step back and think about one of the great innovations in a sense of, you know, thinking about investing last century among the academics,

Starting point is 00:40:38 is to say, well, it's easy to measure returns, but you have to think about the risk you're taking. And of course, that's true. The problem is they latched onto, because what else, can you latch on to? That share price fluctuations, that's risk because markets are perfect or pretty much perfect. And so that share price is reflecting value constantly. And it just isn't, as we've been speaking about. And so we've always thought of risk as, like, are you wrong on your forecast? And I stress how fulsome our forecasts are. But the range of outcomes for Service Corp is a lot tighter than for other companies like an Ingersoll brand or other companies that we own. So we want to have our best forecast, but then we have a factor that we call dispersion.

Starting point is 00:41:29 Like what's the range of outcomes? And some of our companies have a much bigger range of outcomes when you think out 10 to 20 years versus a service corp. That is the largest funeral home company in the U.S. Their business is kind of inevitable, unfortunately. And so as long as they're running their business well, and we think they are, it's a tighter band of outcome. So that's how we think of risk being wrong.

Starting point is 00:41:56 And then on top of that, bad events happening to our companies, there's always that risk. And sometimes it's unexpected. We talked about home capital and the funding crisis they had in a calm housing market and a very strong book of business. Unfortunately, we have it now in Canada, but at the time we didn't have a Fed window where a fully solvent deposit-taking institution can say, hey, here are some really good assets. Can I borrow from you? It's important the Fed does that. And so now we have that in Canada. So if that ever happened to home again, although it's a private company, it was taken over last year, and so we don't own it anymore, there's another company in the

Starting point is 00:42:43 industry called Equitable Bank. That's not a company that today is cheap enough to make it into our portfolio, but it's a really good company, and we are closely following it. And if it got cheap enough, we would add it to the portfolio. So we think about a range of outcomes. And then we recognize the reason you want a portfolio and not just three stocks is bad things can happen. I mean, we've, a long time holding of ours, went through just a fiasco in the last six, months where the board fired a CEO, a founder CEO who was 63 years old. The board trying to defend themselves said to us, well, you need this succession plan, in which point I said, that's like firing that CEO of Berkshire Hathaway 30 years ago, because he's in his 60s.

Starting point is 00:43:32 I mean, it made no sense. Anyway, it's been fixed, but if it hadn't been fixed, if we didn't have a completely new board and a much stronger board, the chairman of the board is also chair of United Rentals, formerly the CEO of United Rentals. So it's a very, if you look at their board now, it's business people, very impressive people, but that was a bad event. And if the shareholders hadn't been able to get to an annual meeting finally and have a shareholder vote and completely change the board, that intrinsic value of that company would have been impaired meaningful. And so there's always that risk that a company-specific event occurs that is negative. It's going to happen, and we stress that to our investors.

Starting point is 00:44:17 It's not that bad things aren't going to happen to some of your companies. It's how do they handle it? And then what do we do as investors? And rather than cut and run on Gildan Activeware, we were quite vocal for the first time in our history publicly challenging the incumbent board. and as I said, it resulted in a wholesale change of the board just a few months ago. And so things are fine now, but it could have been ugly. It might have been a profound impairment of intrinsic value if the founder's CEO had not been

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Starting point is 00:48:07 slash income. This is a paid advertisement. All right. Back to the show. One of the other things that sort of stuck out to me when I look at sort of how your funds evolved over the years is starting out, you're this Toronto-based firm focused primarily on Canada. And over time, you've made a shift towards focusing more on the U.S.

Starting point is 00:48:28 So as of today, it seems that your weightings are now around two-thirds U.S. and one-third Canada focusing on the mid-cap space. What are some of the things that you like about U.S. listed companies? And I'll caveat this question by saying other than the valuations being more attractive. So this was always the plan, right? The plan was always, okay, we're ex-private equity. The three founders, as I mentioned, we set up and ran the private equity arm of one of the Canadian banks. And so we thought, before we look anywhere else, let's look in Canada. And that was

Starting point is 00:49:03 the first decade. And then about 15 years ago, we thought, okay, like, we're always going to find new companies that'll be management proxy fights and management changes and IPOs. So we're not going to not look in Canada, but let's do the same thing in the U.S. And we're still in that process, but there could easily be a time we say, okay, let's do the same thing in Europe. But we haven't gone to that step yet. As we were looking in the U.S., there were a couple things I didn't know. And one is valuation, to your point. Is the U.S. market more efficient? And therefore, we wouldn't be able to find companies that are as mispriced. Well, in our experience so far, the U.S. market's not any more inefficient or efficient than the Canadian market. It's very similar from a valuation

Starting point is 00:49:48 standpoint at times. I think there's a higher velocity in the U.S. There's just more people jumping all over something if the stock gets hit or there's an event. So I think there's a, you know, you can see it with our Canadian-only listed companies, even the cross-listeds are, move around more, but especially the U.S. companies move around more. Regardless of whether ATS is listed in New York, which it is now, or the transport company is listed in New York, they will never be in the indices in the U.S. The S&P 500 or the 400 mid-cap, you have to be a U.S. You have to be headquartered in the U.S. to be a candidate to get into those indices. And if there is a lot of flow because of the indices, that's not affecting our companies.

Starting point is 00:50:36 So, for example, we had our Thanksgiving a couple of weeks ago because our harvest is much earlier than yours. And that's a day when we have a holiday, but it's full trading in the U.S. What struck me that day was how little stock traded an ATS and the transport company versus a typical day. And so there are lots of U.S. shareholders, and they might have been transacting, but all of the passive money, the index related money, was not touching those Canadian cross-listed companies. So valuations, though, are similar away from the velocity point. The other thing we didn't know is, hey, with Reg FD, will U.S. companies be as open to talking to us the way we talk to our Canadian companies?

Starting point is 00:51:32 And it turns out there's no difference at all, as long as you're not bugging them about the quarter. They're as open and fulsome as we find with Canadian companies. So those are the two things I wasn't sure about. And you're right. We are now, the portfolio is roughly two-thirds U.S. It may even creep up to be more. But if you think of the two countries as 90-10, I would be surprised if it was ever that kind of mix because, as you mentioned, we are Toronto-based. Maybe there's a home field advantage just in terms of the ease of talking to our companies. So maybe it'll end up being 80-20, but I'd really be surprised if it's 90-10 at any point. time in the future. We've identified a few hundred companies that meet our qualitative criteria. And then today we have that full working financial forecast on over 100 companies from which to construct the portfolio. And so if we never found another company that met our criteria, that would be okay, but I'm pretty sure we're going to find more.

Starting point is 00:52:36 So in your Q2 letter from this year, I believe you shared that your portfolio is treating at nine times next year's earnings with those earnings projected to grow at around 20% per year over the next five years. And you've also shared that one of the biggest risks in investing is overpaying. And you've been quite good at not overpaying. As over the past 15 years, you've only lost money on three stocks. And whenever I look at someone's portfolio, there always seems to be a name or two that just sort of sticks out to me as being a bit different from some of the others. And when I looked at your portfolio, I looked at your recent edition of Kinzale Capital. This is an insurance company.

Starting point is 00:53:18 It was trading around 30 times earnings, and I'm looking today here. They just reported their quarterly report, and the stock's down 8%. So it's slightly under 30 times earnings now. And they've just shown an unusual ability to grow at really high rates for a really long period of time. And then the return on equity has continued to increase as well. So they seem to be carving out their niche quite well in the excess and surplus insurance base, ensuring some of these special cases. I was curious if you could talk about what gave you the confidence to pay up for a company like this.

Starting point is 00:53:52 So as you mentioned, I hadn't looked, but I'm surprised that it's down today because they actually had really strong results. They beat our expectations, both on the losses and on operating costs. They have such a low combined ratio versus the industry. It's just, you know, it's almost like you look at it and say, how do you do that? And that's another company that is utilizing technology in what they do and leverage kind of their, a lot of their competitive advantage from what I've garnered. That's exactly right.

Starting point is 00:54:22 This is founder run, an individual who was at one of the large specialty in excess insurance company. So think of, you know, Lloyd's of London. And it's interesting, I was at a conference in London just a few weeks ago. and someone came up to me and actually knows us pretty well and he's actually an investor, it turns out, but he's also in the Lloyd's syndicate or his family is. And he just chastised Lloyds for their old-fashioned ways and either on the float side or just how they run their business. And he knew about Kinsale and he said that is a remarkable company. So what this individual

Starting point is 00:55:00 did with a team has built a, it's in a sense, it's a software company, has built the ability to generate bespoke policies for small and medium enterprises really fast. And he's stressed, he saw his former employer stray into other things, like reaching for things that he thought didn't make any sense. And he's not going to do that. And so whether it's on the operating cost side versus the competition or the underwriting side, like they had 380 basis points of cat losses in the quarter, and yet they still beat. And we weren't. modeling that because it's a hard thing to model, they still beat our loss assumptions and the streets loss assumptions. But the stock down, we won't have changed our view on the company,

Starting point is 00:55:47 if anything, as you mentioned, it's a newer name for us. And we think about context and how long we've known a company in terms of target weightings. If anything, we're taking our view probably up a little bit. And so who knows why the stock's down. Clearly, people were looking for a big beat and they didn't. This is a company since we've owned it at the first of this year that the first quarter they reported after we owned it, the stock went up 20%. And they actually, it was exactly what we were modeling. And I don't know why it went up that much. And then the next quarter, inline results, the stock was down 20%. And now a beat, and the stock's, at least so far today, as you mentioned, sounds like it's down 8%. And we've reacted to that, but it was interesting when normally,

Starting point is 00:56:36 it's what I'd said earlier, you know, you own something and the stock was up 20%. If nothing's changed, then we would be trimming a bit. And I walked into one of my partner's office that day, and I said, what are we doing? Should we trim? And he looked at me and he said, I'm really worried that, you know, and he specifically identified the person on the team who kind of, there's always a prime one person who drives the model. We all are involved with the assumptions and talking about the companies, but of course there's somebody who kind of drives the model. And he said, I'm worried he's not sure we're capturing all of the future in this company. They have roughly a 1% market share in the unregulated excess, especially in excess market. That market continues

Starting point is 00:57:23 to grow as a percentage of the overall insurance industry. They've got this remarkable advantage And so we have a big forecast, but I'm not sure we've fully captured it because it's a fairly new name for us. So we do our best. We talk to the company. They've been growing in a hard market. So what happens when it's a soft market? Do they see any signs of anyone else replicating what they're doing?

Starting point is 00:57:52 And the founder, CEO, had a great line. He said, you'd think in a capitalist society that if you built a better mousetrap after 15 years, other people would try to. I see no signs of anyone trying to do this. It is tough. It's tough with a company like that. We know we're not going to get it exactly right. We're trying to get it roughly right.

Starting point is 00:58:11 But I stress that's one that's harder than, you know, because to think that it's cheap today, you need to believe that they're going to take more and more share, that they're going to continue to have a remarkable combined ratio. And it was interesting in talking to them about the float, they have very little equity exposure compared to what a Berkshire or Fairfax Financial would have. But their logic is, look, we're growing written premiums at 20, 30%, 30%. The previous last couple of years, I think it was even 40% in some quarters,

Starting point is 00:58:44 were highly profitable. You don't want to constrain your growth by owning too much on equities and then having a market correction, which prevents you from writing the amount of business you want to write. It's very logical. But they said, look, when our growth slows down, of course we're going to move to more of a balance in terms of how we invest the float. And for the first time announced not a big, but a $100 million share repurchase authorization. It's notable because this is the first time they've ever, the board's ever authorized any amount of a share repurchase program. So from all we've seen so far, it ticks all of the boxes for what we're looking for. But look, it's back to that. concept of range of outcomes. It's back to the concept of how long and how well do we know them. It's different with Service Corp and Ingersoll Rand as a U.S. company who we've known for

Starting point is 00:59:38 eight plus years than Kinsale we've only been on for a couple of years. I had one last question here, and I want to be mindful of your time. So in your company's annual meeting this year, you mentioned that the majority of your net worth is in your founders fund and the investment in one of your newly launched funds is through your foundation, which exists for charitable purposes. And during that annual meeting, you made statements like the best is yet to come for Turtle Creek and it feels like we're just getting started. And like I mentioned at the top, you've been doing this for over 25 years. And in our previous chat, you said, you'd look forward to doing it, hopefully for another 25 years here. I'm always intrigued

Starting point is 01:00:19 by individuals who just have a remarkable job of growing a firm, building a firm, building a great team and just doing exceptional work. I look at someone like you who's presumably financially independent many times over. I was curious if you could just talk about your motivation to keep at this for so much longer. What is that driving force for you and that motivation to keep doing what you're doing? It's a lot of fun. It's not a majority of my assets. It's all of my assets. And I know that we're not taking big risk, so I'm very comfortable. You know, once you own 25, 30 well-run companies in different industries, you don't need to be more diversified. And so when you think about a kinsale, to meet and interact with a founder, CEO, spend time

Starting point is 01:01:09 with him and the team he's built, understand how he thinks and learn about the industry. I didn't know anything about the specialty in excess market, or at least not much. We're not industry experts in anything. I didn't know anything about hard surface flooring and how you can reinvent, go direct to the mountain around the world, as they say. It's a really interesting business model, but then you need to spend your time thinking about and pushing on it and why can they outcompete Lowe's and Home Depot and then the other specialty stores.

Starting point is 01:01:39 And interacting with these management teams is fascinating. I can't imagine not doing it. But as you mentioned, it's also building a team. And we have built, my partners and I, I think, have built a really good culture and a good team. So my wife knows that if something happened to me tomorrow to do nothing, keep everything in Turtle Creek. So when I step back and look at the work we're doing today versus 10 years ago, 20 years ago, I think the work actually is better, company by company. But the thing that my partners and I are excited about is we're able to pick from so many more

Starting point is 01:02:14 companies than we were back in the day. And if we hadn't grown the investment team, if we weren't following more than 100 companies, we wouldn't have a portfolio trading at 10 times earnings with that kind of growth. And in fact, I went and asked one of the analysts a while ago to say, tell me about the companies we have a full view on, the 30 most expensive ones, some of which we've owned in the past, as I've described. And it turned out their trading at 120% of intrinsic, so 20% above intrinsic. Whereas think of those additions, just the additions to the portfolio are trading at less than

Starting point is 01:02:54 50% of intrinsic value. If we had not grown the investment team, if we hadn't grown as a firm, the portfolio wouldn't be nearly as cheap. People ask me, why is it so attractive right now? And I think some of it is that narrowing of the market that we've all read about the magnificent seven and the amount of passive money, that's a sum of it, but most of it is we haven't been standing still. And how could you not want to do that? I mean, it's not like I want to stop doing that. So, yeah, I think my attitude and my two founding

Starting point is 01:03:27 partners, their attitude is, and they are younger than me. We're going to do this as long as we can. But to come back to that, stress that point, it's, there's not a star manager here. There's not some Savant who just has a knack for picking stocks. There are some groups like you would know about a lot of them. We're more of a team-based approach with a consistent strategy where I don't think we succumb to groupthink. And that means there's no one or two people that are absolutely critical to the investment process. At least that's what I believe. I'd like to think I'm important, but I don't think I'm critical anymore. It's the excitement of not only of the companies that we get to interact with and learn about, but it's also just interacting with the people at the firm.

Starting point is 01:04:17 So yeah, health-willing or health-allowing, I'll be doing this for a long time. Yeah, it's just something really remarkable you built. And you mentioned your two partners. So Jeffrey Cole and Jeffrey Hable, you founded this with them 25 years ago, and you guys have worked together for the past 30 years. So you've all honed in this process over many, many years. Let's just put it at that. So Andrew, I can't thank you enough for joining me here today.

Starting point is 01:04:41 It's such a pleasure having you on the show yet again. So before I let you go, how can the audience learn more about you and Turtle Creek if they'd like? I think just listening to this podcast and the other one we did is I think it's all there. But we have a good website that we write a lot. I think we keep our most recent three years of annual meetings, which we record. and we've got a series of writings called the Tao of the Turtle and the way of the turtle. So I think just on the website, there's enough there to really understand our investment approach. And it's funny, years ago, a young kid came in from Vancouver.

Starting point is 01:05:22 He found us through his father. And he said, stop writing so much. So what do you mean? He said, because other people are going to do it. And I said, no, no, no. But we're not saying anything new. I mean, maybe the one new thing is a debate of buy and hold versus what we do. But otherwise, there's nothing original here.

Starting point is 01:05:44 A good value investors have been doing it for a long time. And there's, in fact, as many commentators in the industry, at least I hear them say, there are fewer and fewer value investors, which I think is true, the fewer and fewer fundamental investors, at least as a proportion of the market. So investing's hard. In this conversation, it sounds kind of, you know, you go find great companies and then you own them when they're cheap and then you change how much you own. When we show those case studies, how we've done on a holding and how we've changed it like ATS, tripling the number of shares in the portfolio year to date. In hindsight, it sounds really easy. And they say, oh,

Starting point is 01:06:22 of course you did. You bought more when the stock went down, of course. But in the moment, it's not so easy always. Or at least maybe we find it easy, but you need to have a certain temperament to be able to buy more stock at lower and lower prices, because then you need the foundation of really having a balanced quality view of intrinsic value. And if you have that and you combine it with the temperament, it's actually not that hard to catch folling knives all day. Well, Andrew, thanks again. I really appreciate the opportunity, and I know the audience is going to enjoy this one again as well. Thank you. Thanks, Clay. All right, everybody, Thanks so much for tuning in to today's episode with renowned investor, Andrew Britten.

Starting point is 01:07:06 If you're interested in collaborating with TIP hosts and other VETM members of our audience, you may be interested in joining our TIP Mastermind Community. The TIP Mastermind Community is the community we put together for portfolio managers, private investors, and high net worth individuals who want to network with others, talk stocks, join or tune in to our weekly live Zoom discussions we record, or attend our live events in Omaha, New York City, and London. We're looking to onboard just five new members this month, so if you're interested, be sure to join the waitlist at The Investorspodcast.com slash mastermind. Or simply shoot me an email at Clay

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We Study Billionaires - The Investor’s Podcast Network - TIP674: Outperforming the Market, Managing Risk, & Market Inefficiencies w/ Andrew Brenton

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