We Study Billionaires - The Investor’s Podcast Network - TIP705: The Quiet Winners: Unveiling Hidden Value w/ Adam Wilk

Starting point is 00:00:00 You're listening to TIP. The consensus is that small cap stocks are not synonymous with market beating returns among the investing community. But Adam Wilkes Fund, Greystone Capital Management, has invested exclusively in microcap stocks and has returned 23.8% net of fees since inception versus the S&P 500's annualized returns of 17.7%. So that general thinking is prone to error. Today, Adam and I will discuss some of these holes in thinking, why they exist, and how investors

Starting point is 00:00:28 with an open mind can take advantage of these market areas with higher inefficiencies. Adam is a very interesting investor because he comes from a unique background I have just never seen from a professional investor. His initial goal was to become the general manager of a professional basketball franchise. He scouted for one of the best run organizations in all of sports, the San Antonio Spurs. While there, he learned how to scout for talent in hidden places. He also discovered that while it can definitely be harder to find talent in the harder to find pool of the later rounds of the draft, it was still possible to locate winners that other scouts often overlooked. You can probably already see the parallels between this and value investing.

Starting point is 00:01:08 Value investing is about finding excellent investment opportunities where nobody else is looking. Adam has used his knowledge to help find some exceptional investments. It all starts with microcaps. This is an area in the market with very few eyes on it precisely because many funds simply can't invest in it. Once Adam identifies an interesting business, He'll then go deep into learning more about management. We'll go over why Adam places such a significant emphasis on management. Hint, it was due to one of the biggest investing mistakes he ever made, which will also cover in depth.

Starting point is 00:01:40 Another competitive advantage Adam has observed is his ability to make his investing process as labor intensive as possible. He's learned that doing the work that very few others are unwilling to do will reveal some incredible investment opportunities that are unknown to the investment community. This has helped him find several multi-baggers that have helped. helped feel his market beating investing returns. If you enjoy learning how you can use your prior experiences to leverage yourself as an investor, want to see where inefficiencies exist in the markets at nearly all times,

Starting point is 00:02:09 and learn some interesting analytical concepts to improve your own investing, you'll want to tune into this week's show. Now, let's jump right into this week's episode with Adam Wilk. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaire, cares the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve. Welcome with The Investors Podcast. I'm your host Kyle Grieve, and today I have the pleasure of talking with Adam Wilk. Adam, welcome to the podcast. Thanks a lot. Thanks for the invite. Happy to be here.

Starting point is 00:02:57 So you had this very eloquent quote in your founder's letter by a person named Jacob Rees. So I just want to say what that quote is. When nothing seems to help, I go look at a stone cut hammering away at his rock, perhaps 100 times, without as much as crack showing in it. Yet at the 1001st blow, it will split in two. And I know it was not a blow that did it, but all of them that had gone before. So I'm interested if you could maybe elaborate a little bit more on how this quote applies to your general investing strategy, especially in regards to discipline, decision making, as well as holding a long-term view. Sure. Yeah. So the concept of pounding the rock, which is kind of the shorthand for that

Starting point is 00:03:37 quote or saying is the sort of bedrock philosophy of the San Antonio Spurs, which is where I started my career working as a scout and basketball operations employee. And one of the first things that they showed me when I went to the facility to interview and the day I arrived for my first day was that exact quote. And they have it above an actual rock and Fledgehammer that's in a glass case located in the practice facility. And it's one of the things that they, it's one of the sort of sounding principles of the organization ever since Coach Pop started working there in the late 80s. And it's the thing that they use to sort of guide their day-to-day activities. And the concept is, obviously, that small bits of incremental progress can lead to outsize returns over time. And that's an

Starting point is 00:04:27 excellent sort of metaphor for analogy for in the sports world. because it involves practicing and getting a little bit better at your craft every day and just trying to improve a little bit by the time you go to sleep versus when you woke up. And honestly, I can think of no better formula for, sorry, analogy for compounding as well. So it relates very much to investing and from an investment perspective. And the idea behind that is kind of like no one day moves the needle. So speaking from my own perspective, studying businesses and industries and doing portfolio management and related work and trying to sort of expand or deepen my circle of competence isn't going to change necessarily that much on one specific day. But a bunch of those days added up over a long

Starting point is 00:05:11 period of time, we've to something pretty significant. And there's sort of a well-known data point about Buffett who amassed the majority of his wealth after the age of 50. There's this really interesting chart on the internet that kind of shows the trajectory of that, which happened obviously toward the second half of his age. So it's kind of, I learned that quote from a sports that basketball context initially, but it's really set the talent for what I do on a daily basis and just again, trying to improve a little bit every single day. And the founding of Greystone was also very much based on a set of principles that I deem true about investing and a set of principles on how I'd like to operate the business moving forward. And that idea of developing things that you

Starting point is 00:05:53 stick to every single day, drew ups and downs, through thick and thin was something that I took from the Spurs. And the code itself is something I shamelessly stole as well. The biggest difference between, I guess, a basketball context or that quote in general. And what I'm doing is that the stone eventually breaks in that saying and the kind of metaphor is over. But investing, one of the things I love with investing is that it's kind of a lifelong practice and it's something, it's a profession and a practice where there's no end game. And so I kind of view my role and my job as, you know, a professional learner, but also just trying to get a little bit better every single day. and I'll be trying to improve my craft and kind of what I'm doing as long as my brain works and hopefully be doing this kind of on a multi-decade time horizon, which is the like of time that I've

Starting point is 00:06:40 kind of put in my documents as far as how I want to operate Greystone and the way that I think about, again, structuring the business and also the types of investment that we make. So it became a very applicable and useful thing that I also have, again, in my documents on my bookshelf and that something that I really just try to kind of live my life by and structure my business died. Does that make sense? No, that makes total sense. And that's a really good segue into my next question about the stone breaking. So in your founder's letter, you had this really good point about some of the significant differences between basketball and investing. And the one point being that your body doesn't break down and investing unlike basketball in virtually

Starting point is 00:07:19 every other sport. So I think, you know, this really allows for this compounding of knowledge that can continue to increase for hopefully decades, hopefully your entire life, like your example, with Buffett. Whereas, unfortunately, with basketball, you know, you reach a specific age and unfortunately your body just gives out. I mean, the famous saying, you know, father time is undefeated. It's pretty apt here. So I'd really love to know a little bit more about maybe one or two specific areas in your investing that you've cloned, you know, directly from the spurs that maybe you haven't mentioned already here. Sure. So the first thing that I took from there would be the discovery of undervalued or mispriced talent. So my job of San Antonio was defined undervalued

Starting point is 00:07:59 undervalued players. And I learned a lot. I was basically trained how to do that and I learned a lot from the people above me in terms of where to look to do that. And this first had a very unique advantage because prior to the time I got there, they had been doing this for decades. And given that the team was good every single year and made the playoffs, they never had the chance to draft a player in the top part of the first round because they were a good team. And as a result, they had to try to eke out whatever advantage they could from a scouting perspective by finding good players that could contribute in the second round of the draft. And they did that by being one of the first teams to start scouting players overseas.

Starting point is 00:08:37 And I learned a lot from this experience, meaning that you could create a significant advantage for yourself by doing something very different from what everybody else is doing. And their entire philosophy as an organization was to either be first at doing something, whether it was the use of analytics or bolstering their kind of sports science capabilities or kind of looking left when everybody was looking right. And from a scouting standpoint, that was a really big focus of the organization. And that mentality resulted in them finding some really great players toward the back end of the draft, Mono Genoble being the most prominent example.

Starting point is 00:09:09 And if you kind of translate that mentality from a basketball perspective to an investment perspective, the area of small companies is kind of right within efficiencies, an area where there are much less eyeballs on these businesses. it's a place where larger funds can't necessarily operate if you manage a certain amount of money. And so it comes with these sort of embedded discounts in these companies and the inefficiencies that, I think, are right to be taken advantage of. And unfortunately, this sort of narrative for small companies, which we can get into, has been that they are just as a group, lower quality than larger businesses on whole.

Starting point is 00:09:41 And as an average, that might be true. But again, given my job in San Antonio was to be the person to sort of wade into this group of players and find undervalue talent, I view my job. is very similar from an investment perspective. I'm the professional that tries to find the high-quality businesses in a group of maybe lower-quality ones, if you are to share that view. And so that would be the first thing that I took from them

Starting point is 00:10:02 is just the idea that if you do something differentiated, like focusing on sort of undiscovered, under-followed businesses, that can usually lead to some good things if you know where to look and how to value a business. And the second part of that would be making your efforts kind of labor-intensive. So if you are to sort of skirt the conventional scouting wisdom in San Antonio by looking in areas where others aren't, the same wisdom can be applied to investing.

Starting point is 00:10:31 And the issue with that is it's much more difficult. So a lot of times with small companies, both the businesses themselves and the management team, there's less information available to analyze the companies, partly because there are less eyeballs on it and the market hasn't really caught up to speed with those businesses, but also because they're just smaller companies. And there aren't usually video interviews of the CEOs or significant information on the websites about the product or service for people to speak to about their experience with the company. And so the work done from a due diligence perspective is very labor intention. And I feel that way about a lot of the things that I do at Greystone, not only been being differentiated, but there's also a sort of manual process involved to get to know the companies, to get to know the management themes, to rely on my own research and work that I'm doing,

Starting point is 00:11:17 and have a willingness to kind of go to areas that others aren't that are outside the publicly available documents or financials. And when you combine those two things, the doing what others aren't doing or being differentiated and incorporating kind of a manual labor intensive process, it's created an advantage where I can walk away from researching a business, which is kind of a differentiated insight about how the earnings power of that company might unfold over time. And the last thing I'll say is I kind of melds that with a focus on the corporate culture. So the spurs have one of the best organizational cultures of any professional sports team that I've ever seen. And it starts at the very top with, again, the principles that they believe in.

Starting point is 00:12:00 And it sort of bleached through the rest of the organization. They have an amazing mentality. No job is too big or small for anybody. Everybody sort of takes out the trash. And you're going to buy into these principles that we've been operating on for a long time. and that takes shape in the hiring of people, in the evaluating of talent, in the decentralizing of employee decision making, in the autonomy that you're granted, and many other things.

Starting point is 00:12:27 And one of my favorite parts of getting to know a business, if I can, is trying to discern how favorable the corporate culture is and how that will help the business grow over time. Because there is a time in any business trajectory, the longer they survived, where eventually the culture will kind of take over from a sort of growth standpoint and from a standpoint of the things that really drive the business forward and getting to know the people behind the company and getting to know the culture as well as a huge part of what I do.

Starting point is 00:12:56 It's very difficult. But if I can sort of combine all of those three things that I took from San Antonio, meaning looking in an area that others aren't, making sure the process is very labor-intensive and uncovering aspects of the culture that maybe aren't available publicly, that It's usually a really good situation for a mispricing. Yeah, thanks for that answer, Adam. And we're going to be getting into a lot more details on some of those as well. But I want to go over an interesting question that I like to just ponder about with a lot of my guests,

Starting point is 00:13:25 especially ones like you who are running these kind of one-man shops where you're not having to rely on other people or people in your organization to get information. So I know that you said that you do get some sort of third-party information that you outsource when needed. but generally speaking, you're just working by yourself here. So I'm just interested in learning a little bit more about what maybe some of the advantages are and disadvantages of running your fund independently. Sure. So I would say the decision, both the decision to do my own thing like Launch Greystone and the decision to kind of keep it as a one-man shop,

Starting point is 00:14:04 we're left short of manual decisions and much more organic in that they kind of made themselves. and I spent years prior to launching Greystone going through this really interesting process where I knew what I wanted to do and I liked to gather information prior to doing things and I spent a lot of time interviewing people in the industry and talking to people who manage money, whether it was fund managers or financial advisors or wealth managers. And I walked away from that process with a lot of interesting information. Most of it was not good. and I kind of walked away from that information gathering process a little bit disappointed in what I found.

Starting point is 00:14:43 But the high level is that I knew that if I was going to do my own thing and I wanted to do well, then and also had any sort of differentiation that my path and structure was going to be a lot different from what I was seeing out there. And I put some of that in my documents, as you correctly noted, bulk of which consists of thing small, aligning capital with my partners focusing on in a differentiated area of investing as we talked about and adopting a very long-term view, which are all things that I didn't really see through my study of the industry. And that process is also helpful because my background is not a Wall Street-related background. As I just mentioned, I come from the sports world. I have very little formal experience, and I kind of had to craft

Starting point is 00:15:27 Greystone using it sort of a handcrafted playbook. And so being a one-man shop kind of allows me could do a lot of things. Number one, to think and make investment decisions independently and avoid sort of marketing in the traditional sense as I'm being interviewed on a podcast right now. And also keep my costs very low. And I think that last point is really important because there are certainly exceptions, but there's a real tendency for emerging managers or even new funds to opt for a very high cost structure on day one. And sometimes that comes with a lot of asset, which is nice, but whether you run a small fund or large one, none of the infrastructure really improves your ability to allocate capital. And I think that's an important point because

Starting point is 00:16:12 I'd argue that a more bloated cost structure or expense structure and a team of people, a nice office, et cetera, really makes your business more fragile to market an economic shock and bouts of volatility. And there's also probably a willingness to, or maybe even a necessity to accept capital, likely from partners who may not be aligned with you. And that was a real concern for me upfront. And my structure is unique, I believe, because I spend the majority of my time focused on the investment-related work, such as investment research, managing the portfolio, studying businesses, kind of the old school reading and thinking and a lot of writing.

Starting point is 00:16:52 And when investments are made or as I gather more information throughout that process, I can then be really open and transparent about my thought process. processes and try to attract like-minded people to the firm in terms of my partners or who are people who would ultimately like to allocate. And it becomes this really interesting kind of self-selecting organic process whereby the people who have allocated capital to Greystone have sound the firm on their own. And it's been with very little, been with basically zero push on my part or any marketing efforts or hiring someone to help me in that regard. And that results in a structure where I believe my investors can kind of, number one, they understand

Starting point is 00:17:35 what I'm doing and what I'm trying to accomplish, but they can also sort of stick through me through periods of volatility. And that's because there's a very strong understanding of, hey, what I do, but also they've made a decision that what I'm doing resonates with them and we can all kind of grow together and adopt this sort of long-term view together. I think that's a pretty powerful thing. And in the event that there are ups and downs, again, I don't have sort of a high cost structure to adjust or answer to. And it's more like making the business, you know, fairly anti-fragile. And I listen to the founders podcast a lot. It's an incredible perspective giver. I read some of the books, obviously, which you're familiar. And Guy did an

Starting point is 00:18:15 episode on IKEA recently. And IKEA has this amazing cultural principle that goes, reach good results with small means. And that idea resonated with me in an incredible way. And I've kind of become, since I started the firm, I've kind of become obsessed with cost control so much so that when this is all set and done, I would love to, you know, set some kind of record for revenue per employee or low operating cost as a percentage of AUM while still generating world class returns over a long period of time. And I think that that's just become a really important part of what I'm doing. And And there's a second part to that IKEA principle as well, which is expensive solutions to any problem are usually the result of mediocrity. And I actually view keeping expenses low, having a

Starting point is 00:19:02 maniacal focus on cost as a way to become actually anti-fragile, whereas the sort of conventional wisdom around the industry is to beef up your service providers and your infrastructure and hire a team of people and do everything to make yourself kind of institutionally friendly or investable. And if I'm guilty of one thing, it is not trying to be investable to anybody. for good or bad. And so that's a good actually segue into the disadvantages of doing it this way, is that it takes longer and it's a slower process. And I've had to turn down capital from people I didn't think were going to be a great fit. And the type of partner that I'm looking for is rare. And it's just a flog, you know, intentionally in a good way. But I'm in no rush. And as I mentioned,

Starting point is 00:19:43 I hope to be doing this for a really long time. And so far I've found that there are much more, many more benefits to doing it my way than trying to kind of appease a certain industry base if that makes sense. 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 Form 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,

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Starting point is 00:24:04 Back to the show. I want to transition this to another topic that's near and dear to my heart, which is quality. So, you know, you alluded to this earlier that some people such as myself, when they hear about these microcap businesses, they have this kind of preconceived notion that, you know, these businesses are just lower quality. You know, you mentioned drafting players in the second round being generally lower quality. And, you know, I know that you've now obviously been looking very specifically at microcabs for a long period of time now and you actually don't believe that small caps automatically equate with a low quality. So can you maybe outline why you think some of this? dogma exists and tell the audience why they might actually be making a mistake in overlooking quality small cap businesses. Yeah, I think I make money at times when there's over extrapolation in any one area,

Starting point is 00:24:54 or one direction in the market, where a narrative has taken hold of something and pushes it a little bit too far. That's a pretty powerful source of returns sometimes. But I can go back to my Spurs days and use some of the examples that I used previously just by saying that dismissing all small companies is kind of like, saying every second round draft pick is terrible. And again, like I was saying before, on average, I would say second round picks are not as good as first round picks. And that probably is proven true from a statistical standpoint in terms of career contribution. But that doesn't mean it's every

Starting point is 00:25:26 single one. And in San Antonio, our job was to find the higher quality ones that can make an impact to the organization. And it didn't really matter what the narrative was for the group, if that makes sense. And so in the same vein, I can kind of admit on average that smaller companies are lower quality than larger ones in public markets. And I think the issue is that it can apply disproportionately to microcapped, where there's a lot of garbage sub $50 million. There's promotional shady management teams. There's businesses that don't understand capital markets. There's lower quality business models, whether you're talking about the product or service. I kind of have to weed to this area to find what I'm looking for. But the reason, I think the biggest sort of,

Starting point is 00:26:11 the biggest sort of reason why small companies are viewed at lower qualities is because they may have one product or service line that could suffer more in an economic downturn. They may have less access to capital. They may be less conservatively financed. Their competitors might be able to gain share while they lose it in an adverse business scenario. But what's interesting about Graystone is that I'm not screening for those qualities. So I'm looking for the opposite. it. And so a lot of times, as I mentioned, I can kind of make money when a narrative gets pushed too far, whether it's company specific or just talking about broadly, all small companies are terrible. And to kind of separate myself in this area and to find some differentiated insight, I do a lot of

Starting point is 00:26:50 primary work and I speak to a lot of industry people. And I really think hard about the quality of the business and the competitive environment. And there's a business that we own called Schillogist. It's a software-focused business that show software to nonprofit. and government organization. And it's a great business. There are some public market peers that kind of mirror what Jill just does have been long-term compounders for really long time.

Starting point is 00:27:17 The business has a very high value prop, excellent fundamentals, high margin, very sticky, incredible cash flow conversion characteristics. There's a real opportunity, long runway for growth here. And by and large, it kind of hits on every metric for a quality business that I like. But when I got involved, there were concerns regarding growth prospects. There were concerns regarding the quality of the business and the margin trajectory for a number of reasons.

Starting point is 00:27:43 But after spending a lot of time with a customer base and industry experts, I kind of developed this view that their product offered an incredibly high value prop. It was a really integral part of what their customers needed in terms of their day-to-day workflow. The technology use in general among nonprofits and government organization was kind of set to explode post-COVID for a number of reasons. and they were really well positioned to capture some of that growth. And as I mentioned, they were also aspects to that business that mirrored some of these compounders that I'd studied and the trajectory for syllogists could be very similar, not the same, but very similar.

Starting point is 00:28:19 And so when something like that is the case, and I've put some boots on the ground and done some work on actually sussing out what the quality is, it doesn't really matter to me what the narrative is or what investors think about companies being low quality or this is going to stay cheap forever. I basically walk away from something like that and I have a different deal and then I can act on it. And going back to what I was saying about this labor-intensive process, it just takes time and sometimes an insight isn't always derived and there's nothing to

Starting point is 00:28:50 take from the process. But in this case, having visited 20 to 25 nonprofits and speaking to their technology teams and their decision makers and doing a number of other thing, led me to this idea that, you know, based on a number of factors, this could work out very well. And that's, again, very independent of the sort of broad narrative out there. So one of the common characteristics that I've noticed now that I've moved more and more into investing in a microcrops myself is that a lot of people looking for microcrapes specifically are looking for growthy type businesses. So when I was looking at some of the names that you mentioned in your letters over the years, I noticed that, you know, it's not specifically just growth businesses. Yeah, of course,

Starting point is 00:29:30 there are some growth businesses, but there's also, you know, maybe a few what you consider cigar butt types and maybe some, you know, low, mid, single digit type growers. So I'm interested in learning your specific view and your perception on microcaps, you know, do you think fishing in those waters is more conducive for finding growth or, you know, what are, what, what's your general view on that area? Yeah, it's not a requirement. Of course, there are smaller companies that can become larger ones, and that's a great situation that's depth in front of, and there multiple examples of companies in the portfolio that shit that framework. So it's not something I shun, but it's also not a requirement. There are two companies now, maybe three in the portfolio,

Starting point is 00:30:09 that don't reflect a lot of growth, at least on the top line, but there are other very attractive aspects of the business. And one of the best performing investments I made during the past year, plus was not growing fast at all. I think about three to four percent top line growth, but they made some changes to the cost structure and to capital allocation that has worked brilliantly and the investment has worked really well as a result. And so it depends. I like opportunities like that as well, like the one I just described. This is a high quality business, great management, strong capital allocation and a high free cash flowed into repurchases. And again, it's worked out really, really well. Limited growth is required for the result that we've achieved. And so it's very

Starting point is 00:30:52 situation dependence, but I would say above growth, a change in expectations is the much more powerful force. I think a business in transition can be an excellent source of return along with growth and earnings power that's improving sometimes suddenly. And growth can come before that, growth can come after that. Again, there can be limited growth path, but it's a very situation dependence. And for each investment, I think Greystone owns, or it's 10, 10 companies right now. For each investment, each one has kind of a different flavor of growth, capital returns, what's happening with the cost structure, whether they're in transition or not, the runway for growth, et cetera. And it just kind of becomes one of the pieces of the mosaic that

Starting point is 00:31:36 I try to put together when evaluating a business. So another thing that you mentioned in your founder's letter kind of talking to this different buckets of businesses that can be in your portfolio, in your founder's letter, you did mention that you do will invest sometimes in special situations. So one kind of, special situation that I noticed in your portfolio seem to be a company called Leon's. So, you know, I'm just interested in learning. How do you kind of view special situations as an overall strategy for you and for your portfolio? And also, how are you kind of determining position sizing on special situations compared to, you know, other investment buckets that you have?

Starting point is 00:32:13 So honestly, that language in my founder's letter should probably be updated because The portfolio comprises mostly just high-quality businesses that I'd like to own for a long period of time. And I'm not necessarily looking for what people deem a special situation in a vacuum. Having said that, like Leon's, which we can talk about, there are elements of almost each one of our businesses that contain special situation-like elements, for lack of a better word. and that can be something as simple as a management change or a rights offering or a portfolio of real estate that is not being, whose full value is not being reflected on the balance sheet, or anything that can somewhat disguise the earnings power of the company. And I like to look for those situations that I kind of refer to a special situation

Starting point is 00:33:07 because they can exist inside of the wrapper of a quality core business. And that's a really good situation for me. to evaluate and step in front of where I have a really good quality core business that fits the attributes that I'm looking for. But then there's also this other element that is causing the market to maybe underappreciate the business. And so again, as a category, it's not something that I sort of seek out. I think special situation have become their own investment type in today's age. And it's not, the portfolio is not split between the two. But I love, as I mentioned earlier, a business in transition with special situation element, as long as the core business is very high

Starting point is 00:33:49 quality. And so, again, we can talk about Leon's, but just going back to the syllogist example, since I already kind of laid out the business case. When I came across the company, they had undergone a management change. The new management theme should drastically change the capital allocation policy, so they cut the pretty hefty dividend that they were paying. There was a strategy ship. So the company was historically a slow growing business that focused on M&A. They were going to stop all of their M&A and focused on returning the business to organic growth for which the opportunity set was very good. And outside of that, those changes, the core business was excellent. And I spent a lot of time with their customers, the high level being most of them said,

Starting point is 00:34:29 these guys could raise their prices 200%. And I wouldn't go anywhere. That was very telling. But outside of that, sort of this business is not going anywhere. It's very low churn, very attractive. for the reasons that I laid out, but there's all these other pieces that are less certain and are kind of obscuring the earnings power of the company. The future looks very different from the past. The margin profile historically looked very different from where it was going. Again, there was a new management team who had to execute,

Starting point is 00:34:55 so there was risk there. And if you could do the work on kind of the quality business itself, you could get comfortable with these other elements of the investment. And I would definitely view those pieces, those moving parts as special situations. light, but the business itself represents everything that I look for in kind of a high quality compounder. So it's more of the special situation angle today for me is more. Let's try to find some pieces that represent that, that may be obscuring the earnings power and see where we come

Starting point is 00:35:24 out on the other end, but less so a type of investment in and of itself, if that makes sense. So one thing that you alluded to here in our conversation is your importance on analyzing management and culture, which I also agree is critical to understanding a business at a high level, especially if you're looking to own a business, hopefully for a long period of time. So you've mentioned in your letters that underwriting management is just as crucial as underwriting business. I'd love for you to maybe detail how you go about underwriting management and kind of what you hope to find in management teams that you want as well as what you want to hopefully avoid.

Starting point is 00:36:01 Sure. It's an imperfect giant definitely. evaluating people is incredibly difficult. It's probably the hardest part of my job, and I'm not even claiming that I have it 100% right, but it is a huge focus of mine, just given my experience in sports and the importance of it there, and by experience evaluating human talent, which is very different from like a business. I do believe it's a point of differentiation for Greystone. I like to develop relationships with the management teams that run our businesses. I like to get to know them over time, and I'm not saying that

Starting point is 00:36:32 in and of itself is an advantage, but I think in small companies specifically, the people drive the results much more so than their large company counterparts. Obviously, some of the best entrepreneurs and CEOs in the world exist at some of these large businesses, Jeff Bezos being a great example, who probably could do anything with his life and have a ton of success just based on the way he is and how he thinks. But there's very limited access to him in terms of being able to shit with him in a meeting, figure out how he thinks about things, understand what the problems are that he's facing. Obviously, there are videos and publicly available interviews that can give you a sense. But the sort of machine that he had built over time, obviously Amazon started

Starting point is 00:37:14 as a small company, but the sort of machine that they built up over time means that there were a lot of other elements took place that he could kind of oversee that would drive the business forward and obviously still remained an integral part of the business. But it's very different from a small, in terms of a small company where there may be one product or service line, one go to market strategy, less employees in general, a smaller revenue base, a different cost structure where a very smart operator, entrepreneur, and capital allocator can really drive the result positively or negatively over time. And at a high level, I guess it's important to just define what I'm looking for, which is really just a sensible management team who's

Starting point is 00:37:53 very competitive and communicates openly and honestly and most importantly treats our capital well. I like to see the last point is really important because preferably because they are invested alongside of us or it's an owner operator. I do make exceptions to that, but as I mentioned, for the evaluation part, I lean pretty heavily on my experience in sports. And one of the hardest things to evaluate about a player or a person is how hard they will work when given an opportunity. And from a basketball perspective, that was probably the toughest thing to figure out. We never knew how that would unfold until a player arrived at the organization. And it's like this impossible thing to sort of work through because human beings are interesting. They will tell you,

Starting point is 00:38:42 they will tell you almost anything that you want to hear or that you ask them. But the issue is you don't know if they're lying. And so the best way to go about that is, to try to piece together information that provide some kind of insight into those questions. And getting to know the person is very helpful. One of the things I like to do with management teams is different touch points with them. So obviously there's the formal business meetings. There's the calls that I undertake to get to know the business. But then if I can, if we're in a shared geography, I like to try to get together for a coffee or a meal.

Starting point is 00:39:15 I like to learn a little bit more about them personally. Do plenty of channel checks to see kind of what they're like outside of what they tell me. and I try to get to know, again, just sort of piece together this idea of what kind of person I'm dealing with here and how likely they are to do certain things moving forward. And then I'm very big on track records, and that's kind of been, I think, a relatively new part of my process. Well, maybe over the last couple of years, based on some nasty mistakes made on the management side, I would say that my worst investment mistakes have been backing young or first-time

Starting point is 00:39:47 CEOs in the public market space. it has never worked out well for me. And I can definitely see the sort of allure or sorry, appeal. They're investing in very large businesses with a very long track record in industries that don't change that much because you have a very strong history of evidence of how things will go over a long period of time. And I've definitely come to appreciate that more and more, the longer I do this. In the small company space, you don't always get that sort of history, but again, I'm very big on track record. So looking back over a management decision-making history, both throughout the company and through their career is very important. How do they speak about the

Starting point is 00:40:22 business and how does that align with what is actually unfolding? So do they have a really good understanding of the company? And are they able to communicate that in a again, sort of like sensible trajectory? I'm not even talking about guidance per se, but if a company has an estimate of their earnings power and cost structure, but every single quarter they're whiffing on those estimate, that brings up a question of credibility, among other things. And so there's a number of examples that we could go into that help kind of paint this picture of what the track record is like. But it's a very, it's very much an ongoing process. Sometimes it takes years and there are companies in the portfolio now where we've owned for a long time and I just feel like I'm getting

Starting point is 00:41:05 to know the management team is on kind of a deeper level. And that's, that's been very eye-opening to me just to see how things unfold over time. And you kind of get, I've, I've kind of, I've, I've, realize I kind of get led in on more and more thing, the deeper that relationship is, not talking about the company specifically, but just kind of like what problems somebody is facing and that can be very high opening as well. And, you know, just finding, if I can find sensible people who have a good understanding about their business and the industry and they know how to telegraph that, you can kind of build up a pattern over time and you get this sort of cadence of how they communicate. And putting all that stuff together, it just paints a very nice

Starting point is 00:41:42 picture of like, again, what kind of person you're dealing with, how they're likely to react in certain situation, how the business might perform. Obviously, they're always surprises, but how the business might perform in certain economic environments and then how they might react to that. And if you can take, if you can paint a good picture based on that information, and then both of you, both management and myself, analyze the kind of competitive environment and get a good understanding of how they're reacting to thing relative to their competitors or their peers. That's a very interesting subset of data, both

Starting point is 00:42:16 stuff to sort of work through that's written and, sorry, quantitative, but also anecdotally. And I usually, it's an ongoing process, but I come out of that process initially and ongoing with a lot of metrics to plug into this sort of manual scorecard system that I've developed. And it's very unscientific,

Starting point is 00:42:39 but it gives me an idea of the various attributes I'm looking for in a management team and how they kind of score or grade on those criteria relative to the other investments in the portfolio, the other things that I'm looking at, and just for the company specifically. And a management team that scores highly on those attributes is a really good sign just in a vacuum, but it doesn't make for an investment, a good or bad investment. It's just kind of a way to aggregate the data that I'm gathering and the information that has come across.

Starting point is 00:43:09 and it kind of tries to make the process a little bit more quantitative. But again, it's a people thing. It's about evaluating she's human beings, which is very, very difficult. And so it's always going to be this imperfect giant. And I've been blindsided kind of in both ways, good and bad, with some of these companies. And so I would just say that I try to be as precise as I can and gather as much data as I can. But it's an imperfect process. And it's a ongoing, ever-changing, ever-evolving sort of thing that takes place.

Starting point is 00:43:39 Let's go over some of the mistakes that you made here in the past. So, you know, in our previous conversation, I asked you what your biggest mistake was, and you said that the most recent one was probably a business called polished.com, which was this online consumer goods retailer. So I'd love for you to maybe share, you know, what got you interested in this business in the first place? What were your mistakes? And then, you know, what were the lessons that you learned from investing in this

Starting point is 00:44:03 business? Sure. We could probably do an entire episode on polished alone. But when I first came across the business, it seemed like it was incredibly misprice because earnings power was increasing considerably. The company, there was a number of special situation attributes in place in terms of the way the company went public, the lack of eyeballs. There was a management change. And a number of areas that pointed to this could be the company was discounted for the specific region. And it polishes an e-commerce appliance retailer or was the company.

Starting point is 00:44:39 company filed for bankruptcy. So that is a good foreshattering to where we're headed here. But their company was an e-commerce appliance retailer, and that's actually a fairly good business. They were fairly asset-like. They were growing very fast. They had a very different cost structure than the brick-and-mortar stores. And they were excellent at marketing online, and their SEO presence was such that they had kind of the secret sauce in their geographies. They were nationwide appliance retailer, but they were excellent at reaching customers and getting people to visit their site and order appliances. And the high-level thesis at the time, it's been some time since I revisited it, but the high-level thesis at the time was that the business was growing pretty

Starting point is 00:45:20 significantly in the post-COVID world. The majority of appliances would likely shift online over time. This was an incredibly big market. They were set to capture a portion of that. It was run by a really passionate entrepreneur who had grown the business from zero to $400,000. million in sales at the time I got it all. And their cost structure was such that there would be some pretty decent operating leverage as they continued to scale. And I thought that the company could reach a billion in sales at some point, and they would have margins significantly in excess of their brick and mortar pierced. And I was wrong about all of that. At a high level, I think that investment was the perfect storm of financial portfolio management and behavioral

Starting point is 00:46:01 mistakes and I severely overestimated the quality of the business and the quality of the management team. And then when red flags emerged, I failed to act quickly and decisively enough. And as I think we had talked about you and I had talked about previously, I did a decent job of managing the position through many of the ups and downs of holding it. And then at the very sort of tail end of the investment, I sort of compounded the mistake by adding to the position pretty significantly when the company announced that they would be trying to sell themselves and hired a bunch of people to take steps in that direction. And it ends up in a pretty nasty, permanent loss of capital

Starting point is 00:46:39 and a lot of lessons that came from that. But again, the mistake was a perfect storm of both business-related mistake, management mistake, and then behavioral mistakes in terms of managing the position. And, yeah, it resulted in one of the, I think, worst investment mistakes I've ever made, but a lot of sort of rich data to take from that that improved my personal mistakes. process. And again, happy to get into specifics about what I tweaked and changed, etc. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer.

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Starting point is 00:50:26 Yeah, so one of the tweaks that I wanted to discuss that you just kind of brought up there was kind of to do with position sizing. I know I think that once you thought that this business would get acquired, you ended up adding to the position. So I'm interested in learning, you know, tell me a little bit more about your thoughts on the position sizing and the mistakes and lessons that you took from there. And then maybe discuss a little bit about what your current strategy is with position sizing. I know with a lot of microcap investors, they like, you know, starting smaller. investors just in general, starting with smaller positions, then waiting for the business to execute a little bit more and then adding as they get more and more comfortable. So, yeah, I'll hand it over to you to talk more on that. I certainly impartial crowd approach that you

Starting point is 00:51:04 mentioned, but I'll get to that in a second. It's very hard to derive a process-changing portfolio management rule from a single mistake. At least that's what I've learned. It's more a collection of things and then reflecting on kind of what went right, what has gone right and what has gone wrong. My biggest investment mistakes have actually been selling poly businesses with long growth runways too soon. It's not been investments that I got wrong. And I've been fairly decent at the portfolio management side of managing the stakes. I hope maybe others would disagree. And I'm pretty cognizant of when I've screwed something off and having to exit. In this case, again, the behavioral mistake was not doing so. And so the biggest lesson from

Starting point is 00:51:44 Polish specifically was that the position size should be zero and cut Ruth's, as soon as there's evidence that the thesis is not no longer intact or that I'm wrong about when I thought about the business. The two most important things that emerge from that are my focus on people and track records and incorporating some aspect of that into my process whereby I no longer, almost always, and no longer interested in backing a first-time CEO, their exception, meaning like a CEO that has started a business but has operated for 10 years and then takes it public is very different from a first-time CEO who's operating a business that is public for the first time.

Starting point is 00:52:21 And there's also nuanced in there. But young CEOs with a lack of track record and history are likely things that I avoid at this point. And the evaluating of people's side of things is also, there have been a lot of parts of my process that have been tweaked to do that in terms of the time I spend with management. There's been some much more pointed questions that have emerged from the process of going through polished in that investment that I think have helped me better assess the people behind the investments.

Starting point is 00:52:46 again, that sort of area of the due diligence has been just moved up to a higher priority. Not that it wasn't before, but I just made enough mistakes with evaluating the people involved that I changed some things. And evaluating corporate governance and making sure there's very shareholder-friendly management teams and boards in place is very important as well. And with Polish, there was not. And I think I overlooked it given the potential upside of the business. and that was also a mistake.

Starting point is 00:53:16 There were some significant problems with the board, with the experience level there, which the way they were treating the business and how they thought about moving the company forward with their communication policy. And all those things, again, yellow flag that kind of lead into red flag that I failed to act on. And so that's been, I think, evaluate, within small companies, I've come to understand that lack of evaluating corporate governance can be a source of inefficiency, kind of finding businesses that are growing, but have these really, really strong boards and management teams in place that have extensive knowledge and industry experience that can help move a business forward

Starting point is 00:53:51 in a positive way based on what they've done with larger companies that the company can rely on if they run into some issues. That's a huge one, and none of that existed with polished. There's a company in our portfolio, innovative food holdings. It's a food distribution, especially food distribution business that I believe has probably the highest quality management theme and board for a company of that size that I've ever seen, which I'm very excited about that business, and obviously check all of my boxes in terms of the management and corporate governance. And so that's been a big part of improving what I'm doing moving forward,

Starting point is 00:54:25 is just evaluating that side of thing and trying to as best I can. This is very hard as well, but trying as best I can to spend time with the management teams and the boards, but just get a center of who they are as well and kind of how they're thinking about the business. I like people who are kind of singularly focused on the opportunity set, likely again because they're owners. So that's been a big part of my process. But in terms of the moving forward and how I approach physician sizing,

Starting point is 00:54:49 I think my process has evolved to the point where I become much more patient now. There was a time, I think, when I first launched Greatstone and before, where I was not hesitant to enter into very large positions at cost. And that has changed for a number of reasons. You know, it does happen where I can kind of skirt the rules there if the right situation presents itself. but now I could be much more patient and I'm not afraid to average up or down to any particular position and I really like to see a company execute so I might sit in a core to 7 to 8% position for a period of time and then as risk is removed or as the company executes I would be happy with scaling

Starting point is 00:55:31 that up which I've done for a lot of the businesses in the portfolio sometimes at multiple higher than where I initially got involved the dynamics behind that are very situation dependent but overall it's a, I think an important part of my process to just be more patient and to kind of let, let the management teams execute and to see if I missed anything in my sort of initial due diligence. Because a really important thing that happens if you own companies for a long period of time is that I will get to know a business a lot better, no longer I own it. And after I start buying shares than beforehand, and obviously I do my best to check all my boxes and manage risk as best I can prior. to entering into an investment, but there's no substitute for owning the business. There's no substitute for following the sort of quarterly cadence over a period of a few years. And I've learned through that process that it's, again, depending on the situation, very okay to average up over

Starting point is 00:56:26 time, but usually very beneficial if things are working out well and if the runway for something remains long. So let's move on to some happier thoughts here, moving on from some of your mistakes, and let's move toward looking at some of the lessons that you learn from your winners. So I think a lot of value investors, myself included, really focused on Charlie Munger, who always says, you know, rub your nose and your losers and learn from your mistakes, which I think is really valid for the most part. But I also think, again, borrowing from Charlie Munger, if we clone some of the characteristics from the business or from management teams from our winners, hopefully we'll also see some

Starting point is 00:57:01 clues for what to look for in future opportunities and investments. So maybe if you could outline one or two kind of similarities of characteristics that you've noted in your winners that you now make sure to try to look for in all your future and analysis. Sir, my winners, I think, have a few things in common, a really high quality core business as we were talking about, a great management team and a really long runway for growth, excuse me, with earnings power that is growing over time. And where I can get some real juice on the return than kind of where things work out very, very well is when that earnings power for some reason is not apparent just by looking at the financials or reading the filings. And that is definitely, I think, provided a little

Starting point is 00:57:45 bit more torque for the investments that have worked out very well. And obviously, there's a lot of nuance there. But high quality core business, great management team, long runway for growth with to changing to the positive earnings power are very common characteristics for the investments that have worked out the best. I think changing expectations, as I talked about before, with kind of a changed view of the business has been a really good formula after success as well.

Starting point is 00:58:11 I mentioned syllogist earlier, which I won't continue to harp on, but there's another company in the portfolio called Limbock, and that has been a great example of everything that I just described and kind of captures the business itself captures nearly everything that I look for in a long-term holding. And Limbock is a building system solutions firm, so they partner with building owners, commercial building owners in the healthcare space, the data center space, industrial space,

Starting point is 00:58:40 to service their critical systems, like they're mechanical, their engineering, their plumbing, their H-PAC systems. And when I got involved with the business, they were maybe $150 million or $200 million market cap. The market cap is now over a billion dollars. Obviously, that has worked out well, but as the business has grown, that as I guess the stock has worked, which is kind of a lower priority focus for me, I kind of had to re-underwrite my assumptions over time, and the earnings power has grown so much that what I initially underwrote is no longer true. And as I mentioned Limbott being a great example of kind of everything that has worked out well, that's an excellent situation for Greystone

Starting point is 00:59:22 to continue to hold and for continued evaluation. So there's the expectation I was very wrong about the business to the upside in terms of what I thought they could accomplish. They've exceeded all of my expectation. And as time has gone on, as I mentioned, the earnings power has increased. Though considerably that I believe that the upside remain and the risk reward remains really, really favorable. But they possess all of these really interesting characteristics where I'm happy to get

Starting point is 00:59:51 into specific detail, but at a high level, there were a number of moving parts with the business where they had two different segments at the time, the one I just described, that is much more the service business, which is much more recurring revenue, high margin, less economically sensitive, lower cyclicality. And then they had this other segment of the business that was very much construction focused, and where they would participate in large-scale construction projects with building owners in terms of renovations and even building construction. Element of their business had run into some serious issues for a number of years. It was lower margin.

Starting point is 01:00:27 It was much more labor intensive. There were significant cost overruns and project delays. But it was something that the prior CEO spent a lot of time focusing on because it grew their revenue and he could take these large-scale projects and they would add to their backlog. And even if it was lower margin, he was much more focused on what he thought. I think Wall Street or the market wanted to see in terms of the business growing. And as a result, the business suffered. And I had followed Limbaugh for a number of years.

Starting point is 01:00:55 I deemed it uninvestable under the prior CEO. And the management team changed a few years ago. My ears perked up. They handed the business off after an extensive search to an internal candidate. They promoted the COO, who was somebody who had gotten to know, and who has just been excellent as an operator and capital allocator. and in addition to that management change, which is in line with some of those special situation elements we were talking about,

Starting point is 01:01:20 there was also a strategy shift where the new CEO said, well, now we're going to focus on the higher margin, more attractive, less cyclical part of our business, and we're going to return kind of to common sense and start doing things that make sense for our cost structure, our margin profile, and our cash generation. And that's exactly what's happened. And so they kind of shifted the business from 80% construction,

Starting point is 01:01:42 20% service to now 70% service and 30% construction today. It's had the effect of transforming the margin profile. Limbach has become kind of a cash gusher. They're allocating capital to acquisition, both organically and day acquisitions, where they can acquire businesses in their industry for very low multiple that are very accretive to their business. And there's a very long runway to do so. And at the time I found the company, they did check off some of these boxes if they

Starting point is 01:02:08 could just focus on kind of the core business. but they had the service business is a very good core business. They had a very good management theme, which had just changed. And there were these other special situation element involved. Again, management change, strategy shifts, changing margin profile that I didn't think were quite reflected in the valuation or what they could accomplish. And again, it has worked out brilliantly. Hindsight is 2020. Of course, I'm not too much focused on the outcome. I'm talking about the business when I say it's worked brilliantly. And I think the runway is very, very strong. And so I really try to find one of the most attractive situations for Graystone is to find a small business

Starting point is 01:02:45 that can become a larger one. And finding a company like Limbaugh that starts out when we get involved as a $150, $200 million market cap that can eventually become a billion dollar business is something that's really attractive to me. And if you're a larger fund, you have a very difficult time buying this business. You're probably spending less time on it, paying less attention because it looks overly cyclical. There's a number of things going on that make it something. know the earnings power is a bit obscured. But the sweet spot for a Greystone to kind of find a smaller company, ride it to a larger one, and now we can sort of participate in whatever institutional flows come from the company being above a billion dollars in market cap. And this

Starting point is 01:03:25 happens very often where I'll find an idea like Limbach. I'll kind of lay out the investment case. I'll find some insight into how that, why they're going to succeed moving forward. And I'll bring it to people and I'll say, hey, you should take a look at this business for XYD reasons. And they might banish more money than I do, and they'll say something along the lines of, let me know when it gets to a billion dollars in market cap. And that's fine, but I like to ride it from a 200 million to a billion or, you know, again, try to find those situations where it works. We can get the compounding engine going at a very small stage and make them larger companies. But if there's a takeaway from your question, which hopefully I've answered,

Starting point is 01:04:04 It's that I'm really just looking for quality business, quality management, long runway for growth, and kind of a changing hernia's power trajectory that's not quite captured in the valuation. So in your latest letter, you mentioned that you sold the position in your portfolio that you felt was potentially a really good investment, but not necessarily a great business. And obviously, you just outlined the importance of having a great business in your portfolio. So, you know, it seems like maybe you're reaching some sort of inflection point here where you're focused a lot more on quality to some extent. So I would just be interested in learning a little bit more about how your evolution and thinking has proceeded over time towards kind of that really high quality end of the

Starting point is 01:04:47 spectrum. I would say that this is one of those things that, again, was not so much a conscious decision made, but more, as you mentioned, an evolution of how I think and kind of what types of businesses I want in the portfolio. I've been doing some work on this recently, as I mentioned in my letter and kind of developed some clarity about how I want to move forward. And there's a big difference, as I mentioned in my letter also, there's a big difference between a great business and a great investment and or a quality business and a great investment. And I have no opinion about kind of which one investors should own. But analyzing my own past mistakes and successes, I've kind of revealed that I should be leaning more towards the quality side moving forward.

Starting point is 01:05:29 And that's because quality businesses, for many reasons, have much longer runways for growth. Their competitive and cultural advantages are much wider. Or sorry, they widen over time. The market's understanding of them evolves over time, similar to what I was just talking about with Limbaugh, meaning if things are working well, revisions are made to the upside, and there's a potential for a very long-term holding period. And as I mentioned previously, my worst and best of mistakes have been selling great businesses run by great management teams too early. And I've done this enough in the past to hopefully put my foot down finally and stop doing it. And on the great investment side, I always find that to just touch on NN, Inc. for a second and the selling of that position, I didn't view that as a great business. And for the reasons I just described, it didn't make sense to continue to hold it.

Starting point is 01:06:23 in the portfolio. One of the reasons is because I do like a management team, I think it will work out very well. But with NN, I found myself thinking about a specific valuation target or like price upside. And whenever I start doing that or overly focusing on future valuation or price ranges or start thinking about a business at a certain valuation and how I will ask when it gets there, that means by definition, I am not thinking about holding it for a long period of time. And the concept of intrinsic value can change very significantly for a business during the course of our ownership, both up and down. And there are many examples of businesses in the portfolio where, despite higher valuation,

Starting point is 01:07:09 the risk reward remains very good, again, referencing Limba. And I don't think that's something I would have been open-minded enough to sort of work Drew if I had a set valuation target for Limbock or other businesses. I think quality, that's why I kind of prefer leaning more towards the quality side or just owning a really good business because it allows me to think a little bit more directionally and not precisely and focus on what's taking place at the actual business. Not so much if they're hitting cash flow targets or what the multiples should be, you know, is this worth 12 times or 15 times, but more so is the business doing things today that will position it for success in the future

Starting point is 01:07:50 and how might that unfold over time relative to what their competitors are doing? And it kind of leans much more toward the qualitative side. Like when I say quality even, there's much more to be derived outside of the financials and quantitative work that comes across on a quarterly basis that I think is typically priced in. I think that's a big reason why you see some of these companies like in Amazon or or a Berkshire or even a Netflix, et cetera, just kind of grow into a new valuation over time because people start to come to appreciate these like competitive advantage and cultural aspects that really can't be replicated as a company scales and that kind of widen over time.

Starting point is 01:08:29 And there are lots of factors to discuss there, but I kind of am trying to lean more towards discovering those sorts of things among small companies and cause me to reevaluate a business like an N, which again, will probably work out fine as an investment, but where if it got to a certain price target, that would be my sort of way of thinking about cutting loose. And again, you know, with anything, I would evaluate that investment as well as it scale or as the share price went up or whatever. But I thought about the just what's behind that business, very cyclical. They don't, they're not really in control of their own destiny if something goes wrong with the economy. It didn't check some attributes, you know, that I, that I, that I, that I, that I,

Starting point is 01:09:10 really like to stick to moving forward. And as a result, I don't think it should very well. So it didn't make sense to kind of continue to hold that one. So one really, really good insight that I read in your latest letter was concerning this expiring knowledge versus permanent knowledge, which I really enjoyed reading about. So you use this example where certain types of knowledge becomes irrelevant, let's say after a specific quarter end. So making like a macroeconomic forecast would be put in this basket of expiring knowledge. Whereas when you contrast that with permanent knowledge, permanent knowledge compounds, you know, permanent knowledge might be something like understanding the competitive advantage

Starting point is 01:09:45 of a business or learning, you know, why a business is where it is today or, you know, why it's so good, which I know you spend a lot of time on learning. So permanent knowledge can therefore be used in the future to improve your decision making and it compounds and just gets more and more valuable over time. So I'm interested in learning a little bit more about what specific areas of expiring knowledge do you think the market spends too much time on? And, you know, what strategies have you found best save you from wasting too much time on that expiring knowledge end of the spectrum? That snippet in my letter was very much inspired by Morgan Housel's book, Same as Ever, which is

Starting point is 01:10:22 excellent. I finally got around to reading it this year, and there's some amazing anecdotes and stories and data in there. But he had a chapter or so on permanent versus expiring knowledge, and I think he's written about it before, and I've seen it in other places, and so that section of my letter was very much inspired by that. And I spent a lot of time just kind of taking long walks and thinking about what I want to include in my letters, which I try to make as useful as possible to both investors and people who are interested in looking at Greystone. And I went back and read all of the broad market commentary sections of each letter and walked away from that process with not a lot of useful takeaways, moving forward in terms of the types of things that I'd like to focus or talk about, or even just anecdotes that will help me over time. Yet I was spending a portion of time each quarter thinking about these things and trying

Starting point is 01:11:14 to get an informed opinion. And so I just became very obvious. I could kind of draw a straight line to the lack of usefulness to talking about that sort of thing and kind of what I derive from it. And so I just, again, one of those things where the evolution of what I'm doing over time and sort of put my foot down and decide I don't want to do it anymore. and would rather focus on learning something incremental about a business or an industry. And so in terms of what the market focuses on, it's hard to say what matters and what doesn't

Starting point is 01:11:43 on any given day, I would say. The market has become incredibly short-term focused, and I believe more so since I started Greystone. This can partly be blamed by the industry structure where the majority of active managers exist in these pod structures with very different risk-reward profiles and Greystone and very different mandate, but they control a large amount of capital, not the majority. And also there's quantitative-based strategies and passive investing, which play a role in this. But by and large, because of this current structure, I would say companies are judged very, very hard on the most recent quarter and even their short-term outlooks. And macro news also plays a huge part in investor decision-making and kind of daily trading activity.

Starting point is 01:12:29 and I think many of these things, whether it's a single quarter or some piece of macro news, have very short expiration dates. So XYZ company earned 10 cents a share in Q4 versus analyst expectations of 12 cents a share. That information, it becomes useless or irrelevant or goes away the second that you read the result. If you're an investor, it has no use moving forward other than what it told you relative to expectations right in that moment. And I think just have expensive time reflecting on this. It's not rocket science, but the more important thing to sort of understand and focus on would be what sort of factors are driving industry growth and why. How is the company setting themselves up and how are they best positioned to take advantage of what the industry is doing over time relative to competitors?

Starting point is 01:13:20 What things are they putting in place relative to their bench, employees, their culture, the types of things that they're doing in terms of their go-to-market strategy? that will best position them over time. In other words, how are any of these businesses that I own making themselves better over time, which then causes obviously positive financial results to flow through? And so I view a really large part of my job as number one determining where to spend my time, but also spending my time on the latter thing, which is, again, focusing on the actual businesses and the industry and uncovering the things that will help me when I research the next investment or will last a lot,

Starting point is 01:13:59 longer as patterns are built up in terms of what I'd like to look for. And less on, again, the sort of short-term news of like, here's what happened, here's what, here's how the share price reacted or how the market reacted. And then that information is kind of in one ear and out the other, in my head and outside of it as quick as it came in. And so it's become a much larger focus of mind to just try to think about this sort of easily answerable question of will this information matter in five to ten years? And will I be thinking about it? Will it drive the results that I'm going for in the portfolio and really just focus on what I'm consuming? We're really center when I'm consuming around those sorts of questions. That makes sense.

Starting point is 01:14:44 Absolutely. So Adam, I just want to thank you so much for coming on the show today. I want to hand it off to you. Where can the audience learn more about you? Yeah, thank you so much again for the invite. This has been really fun conversation. I appreciate all of the thoughtful questions. My website's probably the best place to go. Greystonevalue.com, Greystone is spelled G-R-E-Y. I'm also on Twitter at A.K. Wilk.

Starting point is 01:15:05 And I have a Greystone Capital handle as well. I'm always enjoying meeting, talking with, and getting to know like-minded investors. And I have a pretty active presence on there and share most of what I do publicly. So the website and Twitter are the best places to go. And there's contact information on the site and always happy to hear from investors or anybody else interested in talking about these obscure small

Starting point is 01:15:28 companies. Perfect. Thank you. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to The Investorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network.

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We Study Billionaires - The Investor’s Podcast Network - TIP705: The Quiet Winners: Unveiling Hidden Value w/ Adam Wilk

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