We Study Billionaires - The Investor’s Podcast Network - TIP708: Why Wall Street’s Playbook Is Broken w/ Harris Kupperman

Episode Date: March 23, 2025

On today’s episode, Kyle Grieve chats with Harris Kupperman about his investing strategy based around concentrated bets on macro and events. Harris has decades of market experience and shares his thoughts on why investors have so much difficulty navigating the markets. Harris Kupperman is Praetorian Capital Management LLC's founder and chief investment officer. He focuses on inflecting trends and event-driven strategies. He’s also the author of Kuppy’s Korner, a widely followed investment blog. In addition to his investing work, he serves as Chairman and CEO of Mongolia Growth Group, giving him firsthand experience as an operator. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 02:57 - Unlocking macro investing secrets that actually work in real markets 15:58 - How Harris shifts between strategies based on market conditions 19:58 - Why cutting low-conviction positions can unlock capital for bigger winners 25:35 - The hidden advantage of focusing on absolute returns over benchmarks 28:18 How averaging up in commodity cycles can multiply your returns 31:13 - Why Harris believes many MAG-20 stocks aren’t worth the hype 42:38 - Why asset-heavy businesses still hold massive value in today’s economy 53:13 - Why stubbornness and patience are key to real investing success 56:54 - Hedging: A smart risk strategy or just a waste of returns? 1:01:32 - The case for moving fast when investing in inflection point businesses Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join Clay and a select group of passionate value investors for a retreat in Big Sky, Montana. Learn more here. Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Read Harris' articles here. Follow Kyle on Twitter and LinkedIn. Check out all the books mentioned and discussed in our podcast episodes here. Enjoy ad-free episodes when you subscribe to our Premium Feed. NEW TO THE SHOW? Get smarter about valuing businesses in just a few minutes each week through our newsletter, The Intrinsic Value Newsletter. Check out our We Study Billionaires Starter Packs. Follow our official social media accounts: X (Twitter) | LinkedIn | Instagram | Facebook | TikTok. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Learn how to better start, manage, and grow your business with the best business podcasts. SPONSORS Support our free podcast by supporting our sponsors: SimpleMining Hardblock AnchorWatch Human Rights Foundation Unchained Vanta Shopify Onramp HELP US OUT! Help us reach new listeners by leaving us a rating and review on Spotify! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Today's guest is Harris Cupperman, the founder of Pretorian Capital, a fund that has absolutely crushed the S&P 500, delivering net returns of 711% since 2019 compared to the S&P 500's total return of 155%. Now, Harris has a unique investing style, blending businesses that benefit from secular inflections or cyclical tailwinds with event-driven special situations. Like any value investor, he loves a good deal. and lately, he's been finding plenty in hard assets.

While many investors have shifted towards capital-light businesses, Harris has taken an opposite approach. About half of his capital is invested in hard, asset-rich companies. His reasoning is pretty compelling. Inflation drives up the replacement costs of these assets that benefit existing owners. There's a limited supply in industries that he's invested in, such as shipping, energy, and real estate. And this limited supply strengthens pricing power.

many of these assets generate massive amounts of cash flows. And then on top of that, Wall Street tends to undervalue hard assets, which creates great buying opportunities. And then since these assets are undervalued and you mix that with the strong cash flows, this allows companies to buy back shares below intrinsic value. And then on top of that, the reason this kind of opportunity exists today is that institutions have offloaded some of these assets for non-investing reasons, which have created these opportunities with significant upside and lower risk.

Another thing that makes Harris stand out to me is how he runs his fund. Instead of structuring it like a traditional investment vehicle, he truly treats it like his own personal account, with others just along for the ride. While many fund managers invest a large portion of their net worth in their funds, they often face restrictions on what they can and can't buy due to institutional constraints. Harris has structured his fund to remove much of that, allowing him to invest exactly as he would if he were only managing his own money. His approach does come with some pretty wild price swings, but he expects that. He's not focused on relative returns. He's after absolute returns. Since the industry is so benchmark-driven, that leaves opportunities for investors willing to buy businesses that may struggle for a few quarters, but have a bright future ahead.

That's where Harris prefers to fish. If you enjoy learning about unconventional but highly effective ways to succeed in today's markets, you won't want to miss this conversation. Now, let's dive into this week's episode with Harris-Cupperman. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Greve.

Welcome to the Investors' Podcast. I'm your host, Kyle Greve. And today we welcome Harris Cupperman onto the show. Harris, welcome to the podcast. Hey, thanks for having me on. So one thing that I found super fascinating about your business, investing story, just your overarching strategy, which is a lot different than a lot of the people that we've talked to on the podcast here. So a big part of that strategy is making, you know,

concentrated bets specifically on macro inflections. And what really interested me here is that there's so many investors that clearly are trying to profit from macro events, but they usually end up getting either the event itself incorrect or the market's reaction to a wrong. So I would just love to dig in here. How have you been able to do this so successfully, given how low the average investors success rate is in with this kind of approach? I don't know if my success rate has been very good either. I'm probably batting about 50-50. I think the difference is that when I get it right, I get it really, really right because I let these things run. And when I get it wrong, I don't lose too much. I try to set every trade with a risk reward where I'm buying a bunch of

equities that are beaten down, they're unloved that have super low expectations, low valuations. And look, when I can get it wrong, there really can a lot of these wrong. I just like get my money back plus or minus 10, 15%. And when I get it right, you know, I'm not pretty easy on the books. It is at least a flybacks in the next three years. But I'm really looking for, you know, more than that. And so pretty good right. I get really right.

And when I get, like I said, when I, a lot of times, it's not so much that you lose money when you get wrong. It's like it ties of capital for a year, 18 months. And the theme is sort of working. It just doesn't have the strength to, you know, push the equity local because, you know, it's not just earnings growth. It's really, when you're

multily, you're looking at it. You're trying to find things where other guys are going to be excited about it, too. And so sometimes, yeah, your earnings are growing, but you know, you thought it usually to grow up 30%. And they're growing like 12, you know, and so you make a little bit of money. I think that's the key to this, you know.

Make sure that when you set a new trade, you chill lose money. But it's always that everyone rules investing. Yeah, exactly. And I think that speaks to, you know, the frequency and magnitude effect, right? You know, if you, You can be wrong, but as long as like George George Sorrell says, you know, it doesn't matter as much as just when I'm right, I need to make a lot of money.

And when I'm wrong, I need to hopefully minimize my losses. Right. I mean, if you look at kind of, you know, the history and, you know, I've had a fun now since year seven for our fund. But, you know, I've been doing this a long time before. You know, it's either a lot of things work, you know, a lot of my ideas are just working in unison. And, you know, we're going to be up huge here. Martin, nothing really happens. And, you know, we're up or down, smallish.

usually links to the upside, you know, just because of Ventrimand. I think we'll talk about that in a little bit. But, yeah, it's just usually the return profile. It's odd for us to ever have like an up 40 year, you know? We're either going to be up triple digits or, you know, we're going to be kind of, you know, unch, you know, or 15, 10, 15 on either side of hunch, you know, hopefully we're already big down years, right? That's the real goal.

You know, if you avoid your mistakes and you get out of your mistakes fast, the winner's solve most of the problems for you, right? So something else that really stood out to me was how you kind of balance both these shorter event-driven trades to kind of self-fund some of your longer core positions or longer-term inflection bets. So, you know, you use this specifically so that you can fund these long-term bets when there's market drawdown. So I'd love to dig into this a little bit. You know, are you usually staying completely fully invested? So, you know, and is this the strategy that helps you free up capital when those big opportunities do end up coming around? I mean, we're usually pretty well invested. I mean, look, there's more to do that I have capital. It's always been the case. Sometimes, you know, we'll get a little skittish and pull back, but there's always a lot to do. On the event-driven side, the markets are volatile, we tend to make money. Event-driven means a lot of things to me. We're tracking about 25 event-driven, you know, sort of corporate events. They're like spin-offs, privatizations, demutualizations, you know, restructurings, you know, CEO change. We're tracking about $25 of these things. But they tend to even

you really interesting setups where you know something's going to happen, you know roughly the timeline of this thing happening. And there's usually a probabilistic sort of trading opportunity around those sort of events. And we're active in a lot of these. And obviously, there's going to be hundreds of them a month. And we're issues five. But you know, we're active in these. We're also really active just in what's in the news. I'm originally good just discretionary trader. And with stuff's in the news, when markets are, you know, volatile and living around, I'm just going to be taking trades. And it's an additive.

The whole point of event-driven is you never want to lose more than a hundred steps in a mistake. So you size it appropriately, you know, based on, you know, risk for reward. And, you know, you try to do this over dozens of situations during the quarter. You're trying to grind your way forward. And occasionally you get a steep velocity on something that really hits it out in the park. You're just really trying to set up situations where you can't really lose much and you make some. And it produces a really consistent cash flow.

In my experience, Eventriven, we'll have a couple months each year where it's very profitable, a bunch of months each year where it sort of makes small. And then one, maybe two, where you lose a little, but, you know, it's pretty rare that we lose more than, you know, 50 or 100 bips in a month on Eventroen. It's quite likely that we'll be up a couple hundred bips in a month. And so you have this additive sort of cash flower in a way. And I hate to use Berkshire analogies because they're over years. But Buffett has an insurance business, which produces cash for him in most years.

I have my venture of it. It increases cash for me. And when the markets are volatile, which, for instance, right now they are volatile because you never know what Trump's going to tweet yet next. And I don't even know if Trump knows. You know, there's going to be a lot of pin actions. You'd be a lot to do implied volatility is structurally like five to several points higher now to Trump, which means that, you know, every time somebody happens, you can sell

puts and calls and own your yield that way. There's just a lot to do right now. And, you know, the core book is not doing so great. You know, the markets are kind of trending lower this year. And, you know, the Eventerman has really offset a lot of that drawdown in my book and giving me cash to I just keep averaging down my favorite ideas. And, you know, it's doing exactly what it's meant to be doing. And, yeah, I mean, I'm super happy with the way it's been going this year.

And that's how it was most years. It's rare that we ever have a losing year in Event Drummond. It's where we would have a losing quarter. But we tend to make good money. And so are you tracking specifically which side of the book, whether that's event-driven versus core, has been driving the most returns. It sounds like you definitely do. We definitely track it, yeah.

Yeah. And so is there kind of, would there be kind of a time in the market where you'd go maybe all-in or focus more on one side depending on the opportunity set that you have? Yeah. I mean, look, if it ever goes in cycles, you'll have a couple good months. Then it kind of trails off. I feel a couple good months. And when things are good, you work for a little more capital of Ventraven.

The way Eventriven works, though, is it's often self-liquidating. You know, if you write a put on something that's oversold and you say, look, stocks gone from 60 to 40 and I'm going to owning it at 35, well, I'm right to 35 put. I'm going to get paid my $2. And 45 to 60 days later, either I've gotten, you know, my stock and, you know, I got it below the price I was, you know, where the put was. You know, I was right. or I've earned my yield.

And these things tend to me very self-liquidatings. And it tends to be that by the time when that put expires, the stock's either moved up or it's moved down and I've been assigned. So I can kind of overdraft in a way off the core portfolio.

And say we're running a 110 exposure in the core book, I can always over draft another thousand reps which lets me write puts or do a couple of these strategies that gets me to 120, which we kind of target between 15, 125 range. So it's just be right into like the middle of my target exposure.

You know, we could take exposure out with something is really good in event-driven or we can, you know, sell a position if we need something in event-driven, if it's a really good privatization or a really good spin or a really good bankruptcy emergence and we say, look, we're going to size this,

you know, a lot of the advent-driven stuff, like $50 to $100 exposure. We're going to size this 500 reps. We really like this. Well, then I've got to go find 500 rips somewhere. I can just, you know, go from 120 to 125. You start pushing your exposure too much and he never want to get too overexposed.

You know, there's a couple times a year where it made me it make sense. And about once every 10 years, it really, really makes sense. But, you know, I'm not 125, 1.30. That's really a ceiling. You don't want to go up there. Especially because we don't short and we don't really hedge. So another thing that I think really resonated with me was your focus very specifically on absolute returns.

So, you know, you've had some just incredible years. Like, I mean, you already mentioned here that you had a couple years here where you've had triple digits. And that was in 2020. 2021. And then, you know, even in 2022, when every, when the market was, you know, kind of getting slaughtered, you ended up with a positive return, which was very interesting. So let's dive in more into how you develop this mindset kind of to focus more on absolute performance when, you know, it seems like 99.9% of other funds are very locked into specifically relative returns

compared to an index. Right. Well, I mean, I think most hedge funds start with the initial principle of I want to build a return stream that lets me go market. The big money comes from institutional investors, pensions, endowments. So I'm going to build a return stream that the teachers, pension of Cleveland, and the firefighters in Mississippi, like these guys want this return stream where we don't have any downwaters, hardly any downloads. And we make 1 to 2% a most positive on average. And we end the year up 13.

And that's a really good return stream. That lets you manage tens of billions of dollars and become a very, very wealthy man. The problem is most people can achieve it. I approach this is a very different approach. I say, look, this is my PA, prime account, sorry, PA. I'm going to run it like my PA. And if anyone wants to come along, they can pay me a fee. And they get exposure like it is my PA.

But I really treat this just as my PA. And it's a very different approach. And it means we have a different return stream. But the approach is where I do is with my own money. What do I want to do with my own money? Look, I want to make the most money possible. in my PA, right? And I don't care if it's volatile. I don't care, you know, how we get there. I just want the best rolling three-year returns I can achieve. And there's always in the

markets, these weird opportunities they're created by this institutional instead of structure of turning into 10 billion of asset. And when you want a really smooth return profile, it means you can't do a lot of the things that we do. You know, I think one of the most obvious ones is that most investors right now, chip bought a stock. I think Q1 or it's will be bad, right? So if you know that Q1 is going to have a bad print, but you think Q2 and Q3 will be great, and then Q4 are outstanding, we can't buy it until after the Q1 print. And if you think Q2 will be sort of mediocre and maybe Q3 is the inflection, then you can't buy until the Q2 prints. Well, I take a very different view and say, stock prices are

sort of random. We've become not super large. We've gotten larger. So we're going to impact price sometimes. Well, I'm just going to average in. If Q1's terrible, I'm going to buy some more. If Q2 means the stock goes down with a 10%, I'll just buy more. Eventually, I'm going to go a really good cost basis. And I feel like a lot of funds also are very IRR focused, which means they have to catch it where it's going up. So if a stock is at 12 and you say, well, the chart, you know, do the swingy thing. And every time it goes to 13 and it stops, and every time it goes to 11 it stopped. I'm going to buy it at 12. I'm not going to buy it at 12. I'm not going to buy it at 13. I'm going to buy it at 13. Okay, great. You just paid up 15 or 20 percent. Like, I'm saying,

look, I'm going to buy at 11. I'm just sit there at 11. And it goes to 9 and a half. I'm going to buy more. Because if you can buy it at 14, what does that do? It means you're selling it when it drops to 13 or 12. You can stop out and you're buy it again next week at 14. It makes no sense. I just want to buy this cheapest possible. And this is because most of my net worth investor in this bond. And my focus isn't IRR. My focus is not losing money. My focus is buying as cheap as possible, as little downside as possible. And then when it turns, no one knows what it's going to turn, I'm going to catch that turn.

And then the guy who's, you know, buying it at 14, I'm going to look at him and say, I've won an 11. You know, you missed out in a 25, 30% lose. I mean, in our industry, that's called a good year. I think it's heat oiling. I just, I don't understand that in that logic, but like I said, you know, a lot of things don't make sense to me in finance and a lot of people from the institutional world tell me stuff. And I go, okay, that's nice. I don't know why people do it this way.

You know, I do it my way. And my way seems to work for me. It doesn't work for other people. And I've sort of accepted that. And that's just, you know, me running my own PA with 190 people, you know, coming along for the ride. So I love to dig in a little. little deeper. I mean, we've talked a lot about here about the core book and your event-driven book.

And, you know, I know you don't like using these Warren Buffettisms, but I can't help but mention him here one more time. So, you know, he kind of somewhat similar to you, not exactly, but he had multiple buckets when he was running his partnerships where he had his generals, which were kind of similar to what your, I guess, your core book would kind of be. And then he had, you know, his turnarounds and workouts that, I guess, would end up offsetting sometimes when the generals would, you know, not be performing so well. So I'd love to know, you know, How are you thinking about balancing, you know, these two parts of your portfolio in terms of concentration? You know, how does concentration maybe shift where the best opportunities lie,

especially in relation to the core book? Well, I think it's just exactly what you said. Where the best opportunities lie. You know, event driven has a bunch of stuff coming. And the event driven is that we're tracking these things. So like sometimes stuff comes out of nowhere, like a CEO change. They just press release it. But a lot of times, you know, you know who's going to be demutualization, and you know it's coming for the next six months, so you know, like, there's a pretty good chance that's pretty capital in this situation. So we even free up capital. You know, it's, um, you know, so there's a lot of that. I mean, sometimes something happens to the news. And so sometimes it's very reactionary, but a bit of a lot of it is.

It just we always, we never run fully in vast, you know, we have a self-imposed capital 150 exposure. You never want to get there though. Like, if you got to 150, you know, it's this danger zone. But, you know, we're usually running this at like 115 to 125 like a sign, which gives us at the midpoint 120, we guess it's a thousand dips of room to you flex up our exposure at any moment. And then when you flex up exposure, you don't want to immediately have to sell something because you don't want to be an impact price, but you kind of look at the book and you say, well, where do we go find ourselves, you know, five or tips to, you know, take the exposure down? and then over the next couple of weeks, you better take your exposure down somewhere.

And so it's really just where the best opportunities are. We have some names in the buck that we've owned for a few years. We're probably going to own them in a few years. So that's not what we'll reflex. But one day, those stocks will get them valued fairly and we'll get that capital back. It tends more than we have a bunch of names that kind of cycle through the block. They tend to be, you know, a couple of weeks on the bedroom side, maybe a month or two. And we have a bunch of other things that are more like inflection-y oriented where, you know,

It's a clear catalyst. It's coming to the next six to 12 months. We're positioned ahead of the catalyst, and we're probably going to sell three months after the catalyst. And there's a bunch of that sort of stuff. And it has got a six to 24 months duration on it. And so that recycles pretty fast. And do you have any constraints specifically each side of the book?

Like, you know, do you prefer to keep your core book, you know, at a specific concentration level or does it need to stay above a specific level? No. I mean, when there's nothing to do, you take it down. I started getting merrish in the U.S. economy last spring, and we'll kind of have a culling, we called it, or it's a purge, it's kind of what we called it internally. And we're a bunch of names that, you know, if the U.S. economy is going to soften, and it has softened, I think, it might not show up in the official data's yet.

I mean, the official data says the economy is still growing, but, you know, everything in finances is on our rate of change, and so the rate of growth is slowing, your second derivative, which means that every prices are going to decline. And you want to get out before that. And we made a lot of sales, I wish we'd sold more, but honestly, but anything that had GDP exposure, we sold. And having done this for a long time, I know that there's always some illiquid things. Well, not totally illiquid, but when you're on a couple percent of a company,

it's going to take you maybe a couple weeks, a couple months to get out, especially if you don't want to impact price. And so you just kind of know, like, it's going to take me 60 days to get out of it. You better get going, you know? And so we kind of cleave up the book that way. And we do that from time to time, we just clear of the book. But no, I mean, there's no target. We just kind of get where the opportunities are.

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Back to the show. So let's talk a little bit more here about culling your portfolio because I really enjoyed reading about that, you had an article, and you also mentioned it in your shareholder letters. So basically what it was was that you felt like there were specific positions maybe that were lower conviction bets or just smaller positions in your portfolio. And, you know, why keep those when you have higher conviction ideas that you can put some more money behind? But the question here is, you know, with someone with maybe more of a value investor mindset, how are you building the discipline to really sell off some of these smaller positions, even if, you know, like right now,

I'm sure a lot of these smaller positions are probably looking really cheap and attractive. active. So we have some of these names that we've had for a while. I'm just pulling a tickering right now. I'm sorry. No one around him? You know, look, we owned an Italian newspaper company, media company, RCS. We owned a lot of it. And it had been a large position for us. And as we had inflows and as we had performance on the position just got diluted down to the point where, you know, it was 1%, a little less than 1% of our capital. We kind of said, I have a very strong view that. I don't want to have anything that it's less than 500 bibs.

Either we have tons of conference and we're going to make it bigger, or if we don't have the confidence to make it 500 bibs, then we should know that, right? It forces you to concentrate on your best ideas. It forces you to really know your names. I have a team that supports me here, and so it's super helpful to have them. But, I mean, we go out to dinner once a week and go through all our book,

and it's never the little names that you focus on. It's always the big ones. And so I feel like, you know, we avoid land-wise that way. They kind of want to jettison the things that you're not really focused on in the same way. So we have the stock and we knew it was cheap. We loved it. We love management. And we just said, you know, it went down from a couple hundred bibs to less than

100 bibs and you can't size it up just because, you know, it's not that liquid. Let's just exit it. I mean, I'm looking at the chart now and it hits up a lot since we entered. And it's up like almost 50%. We sold it last summer. And it doesn't hurt me. It doesn't, you know, bother me. You know, we took a bunch of dividends.

out of it over time. And it was actually okay, IR, not great. But, you know, I don't let these things bother me. Yeah, I'm not really there in backwards looking. It's more of a, and it wasn't like there was anything wrong with the names either. It was just that we kind of said, either we take this to 500 reps, which would be probably difficult or we shouldn't have it. And I don't mind having, you know, a large position in a cheap Italian waste paper company, but it's just not what I thought there would be better opportunities. And I have no regret. And there were a lot of things like this that we just kind of sold. A lot of things that started off as 500 bibs or 300 bibs or it's a basket of two, three times,

and the basket that alluded. There were also a lot of things, like I said, that had just economic sensitivity, especially the U.S. ones. And we looked at these and we just said, we think we're going to have a slowdown. I don't want anything with economic sensitivity. Let's get rid of them. And a lot of those sort of things are down 30% or 50% of them will we sold. And so I'm glad we had to call them because, you know, especially when, you know, It's going to take you 60 or 90 days to get out.

I'm glad I'm going to have, you know, before because now it's don't have people to be a recession and there's no benefits left. So you mentioned there that you prefer to have a position that you can take to, you know, 5% of your portfolio or even more. So let's dig into a little bit more about, you know, concentrating bets here. So I know you've mentioned that you've had just three bets making up, you know, over 50% of your portfolio at any one time. So clearly you're willing to, you know, very heavily concentration in something that you believe in. But given that you also have these short-term trades in the mix, how do you kind of decide how concentration goes across the whole portfolio and, you know, what makes an idea strong enough to warrant one of these very large allocations?

So when you look at a concentration, the first thing that's the most important is what's your downside? If you're looking at a situation where there's almost no downside, I mean, look, everything has downside and you have stuff happens, you know, exogenous of minutes happen, you can't predict. But when you don't think there's a lot of downside, you think there's a lot of upside, but you put it on, you know, and you resize up. There's a lot of situations where you can look down and you say,

I think it might be 30% downside, but maybe it's a thousand percent upside. You can't size that at 20% of your portfolio because you don't want to lose 600 dips. And, you know, you just start, like, going through what the math on it is. I'd much rather have a position that I think is only three upsides, but it has through downside, you know, and it's trading for less than care since then. and his problem. Like, it has no ability to mark to market

to do whatever it wants, but it has no doubt on it. So maybe it doesn't change here at Flandix threshold, but it can't lose money than play it big. I think that's a lot of what goes into it.

It's also just what do you think the best things are, what have the strongest nail ones, you know, what's really working. And yeah, I like to play it big.

There's not a lot of opportunities with the market. I mean, you have this sport called investing that tracks the smartest people in the world, every day is like an MVP, you know,

a Wall Star game. And you're going up against smartest people and smartest computers, and it's just not a lot of really interesting stuff to do. Most things are fairly priced. And so when you find something that's really quirky and interesting, well, you could play a big.

And the whole point of a hedge fund is we're supposed to dramatically up for, in my world, a rolling through your period. I mean, you can't just have 20 ideas because you're going to sort of look like the benchmark. And, you know, no one wants to pay for that. Like, she better be able to say out before. You know, have a lot.

So you've mentioned here in that example that you gave earlier where you have no problem with averaging, you know, down onto a position if the price goes down, depending, you know, like you said, if one or two quarters is going to be soft. So I'd love to know more about just generally how you get into a position. You know, there's kind of these two schools of slot that I've generally seen where certain People are like, you should know everything you know about a business, then you just go all in on one position and or not all in, but just like, you know, take it to whatever concentration levels you want at a reasonably fast pace. And then there's another field of view where people

are like, okay, well, you know, maybe I'm going to get to understanding this business at a reasonably high level. Let's call it 60, 70 percent. And then over time as I start understanding the business more and more, you know, seeing how they, how it plays out over a few quarters. I'm going to add more and more over a few quarters. So, you know, which line of thought are you on that spectrum? Well, we're usually looking at something that's inflecting. You know, we're usually looking at something where we think it's going to be dramatically higher and the results can be much better than something that's, you know, play. And as a result, we like to think we're intelligent, but there's a lot of smart people that might just be a couple days behind us and figuring something

out. And so we like to buy, when we've died once every one-half of the work, start buying, And as we do the work, we'll maybe buy some more. But we kind of have this knowledge that if we figured something out or we thought we figured something out, someone else will come up behind us. And so we'll have exit liquidity if we decide we don't want to be at. But it's usually something really emotion. You know, I gave you the example before of something where we think Q1 is bloodbath, but we think Q2 is kind of, you know, the turn.

And then Q3 is going to start looking good. Well, then, well, I bunch now. because by the time they announced the bloodbath quarter, they're going to be guiding higher already. And then everyone's going to forget that last quarter, you know, that's a real review. You know, everyone will be looking forward. And so maybe it drops 10% on the earnest spread.

And the place is going to end the week higher. And so, you know, we're usually buying at the moment that it's turning. My biggest mistakes are the ones where I'm buying and I'm averaging down and buying. If I'm averaging down, I'm a mistake. I started like a market crash or something. Like, if I'm averaging down, I'm not. I'm always averaging up, but I'm usually out there fighting for shares against a couple of other guys that threw out the same thing I figured out. I'd say the other time we're buying is,

if you look at one of these sites, we're in these trends, okay? We do a lot of cyclical industries. Let's say the cycle is going to add to the last 10 years. Okay. It just just made a number. And usually at the bottom of the cycle, when we're buying, the company's losing money, but we have line of sight that it's going to get a lot better. We're buying a lot, right? Then it starts running money. Things are good. The stock goes up two. three, four times. And then eventually there's going to be a bad quarter or two because the way these industries work, you know, people overstock the product.

There's like a de-stocking phase. And it goes like, it's like a sign curve. And it's upper sloping. And so because it's such a cyclical industry, everyone goes, oh, the cycle's over. It's only 18 months. And the cycle's over. It's going to take my ball and go home. And then the problem is that the cycle's not over.

It's just a de-stocking, you know. The price of the gizmo. So, you know, it went from $100 each to $200 each, and it cost, you know, $150 to produce it. And now I was pulled back to 160. So it's like sort of making money. And everyone's like, okay, and the stock will be down like 60%, right? So it's like a 10, it goes to 50. And then, you know, it drops to like 25 or something.

And everyone panics. And that's usually when we've now had two years to learn this industry. We've usually figured out what's happening. We've got a much better understanding what's happening with good relationship with management. And then I just wish we double and triple dip on it. Because before we were buying something that was sort of funky that we were really hoping to prey and would fix itself, and here we got, they had a year or two of retained earnings. They'd de-leverage.

They'd maybe bought some competitors. Consolination is always great for whatever reciprocal industry it is. And it's now cash flow positive. They're using that cash flow for buy max, which means you're going to have a bigger ownership of it. And everyone's freaked out when they think the cycles over. We're like, no, guys. like because we do so much of cyclical stuff too.

We're just like, no, that's the second's not over. Like, everyone who is good, you know, capacity expansion, you know, they should put it on hold, due to the banks said, whoa, we're not lending to this. The boards of directors are like, no, guys, it's going to be whatever. Like, it puts the whole process on hold. That's why cycle has lasted 10 years, let's say, instead of four years. And so that's usually what we're adding on the way down. And for some reason, I always buy too soon.

I always, you know, it goes from 50 to 30. I'm like, guys, it's so cheap. And then it goes to 25 and I'm like, oh, I'm buying it, bottomed to like 19. It's that crazy day where it drops to 17 and, you know, like something I get to Marjorie call. And it's funny. All the brokers that are like, you know, I have a $100 price target. Six months later, they're like, yeah, I mean, like, $12 dollar price target and we're

strong sell. And, you know, like six months later, they're back to $100 price target. It's like, you guys have never seen a commodity cycle. Like, come on. So that's the only time we're buying in the pullback. And as I get older, and I get older. I don't know we already have an old man. As I had older, I want to make sure I'm a little more patient on those pullbacks.

I think that's where I'd have probably been a little sloppy. I just get so optimistic about these things. I feel like other people have actually done homework, but in reality, no one's done homework, and they just get spooked out. I mean, we're in one of these right now. And I get like 10 emails a day from people that ask what's happening. I'm saying, I think it's happening. I can go buy some.

So back in January of 2024, you pointed out that, the Meg 7 were driving much of the indexes gains. And, you know, we fast forward to now and they're up another 44% as of March 5th, 2025. With that in mind, I'd love to get your latest thoughts on market blowoffs, which you've discussed in some of your articles. So you mentioned that there's certain moments in time where, you know, the markets end up blowing off. And, you know, an example that you gave was a tech bubble where capital would rotate out of these expensive names and then go into cheaper names after the bubble popped. So, you know, are you thinking that you're seeing this play out right now? And, and, you know, is that a kind of a catalyst that you're looking for

to drive returns in certain businesses you own? You know, like things like St. Joe or some of the offshore services plays that you own. So I think we have had a bubble in, you know, called Mag 20. You know, everyone knows the Mag 7, but I'd add in, you know, a bunch of other things like Walmart and Costco and Starbucks. We see these like mega cap stocks. I mean, a lot of them And say what you want, at least most of the Mac seven stocks, you know, are reasonably good businesses. They have a lot of cash flow. And outside of Tesla and Navidio, they're not particularly expensive. You know, you look at like Walmart, it's 40 times earnings and it doesn't really grow.

I mean, it grows a little like, you know, Starbucks is shrinking business. Like you look at some of these things and you just kind of wonder why they treated the valuations they do. And I mean, it's been just nonstop passive inflows into the United States. It was created a bubble because the capital goes to the largest stocks. And I think that bubble, you know, think about like a capacitor, right? And it takes in all this energy. And then finally it just like releases, boom.

And so it's taking all the world's liquidity, right? Not a lot of friends who live overseas. And I'm asking them about their markets, you know, we're long Brazil, you know, we'll live on Turkey, you're long. Like all these emerging markets that are doing phenomenally well. I asked them like, are you guys investing your own money? markets, they're like, oh, no, we'll own, you know, in S&P. I'm like, why don't you own years?

They're like, one never goes up. I'm like, are you guys looking at last little bit? As it's starting to go up. You're like, oh, really? You know, and it's like, reading the capacitor, just like, oh, and all the capitals would come out and it's going to go back to these other markets. And, you know, I hope so my names get a little bit of that, you know, capital release. I think it just goes everywhere.

And it's going to shuffle the valuations of these abandoned equities, I guess, is what I'd call it. You know, there's just a lot of capital locked up in things that, I mean, don't really make sense. Like, in terms of valuation, I mean, it's been like this for so long now that we've all come numb to it in a way. Like, there's a lot of these large U.S. tech stocks that don't really make much money. What money they do make, mostly goes to offsetting stock dilution.

You know, after stock dilution, it actually kind of loses money. And you can say SBC is, you know, not in cash. But I don't know. You didn't pay these people, you know, piles of options at RSUs. I mean, could you pay an engineer 200 grand or then engineer won a million bucks? And if that's the case, your business doesn't make any money. I don't know. At some point, you kind of have to look at this and say, like, these aren't really very good

businesses, right? And they just not very good. They're cash generated at it, I guess. But it's kind of like this weird, like, cash stock option laundering operation that, like, It helps the company raise capital, as a deferred capital raise through stock options. And that's how they get their cash flow. I mean, some of these things like Amazon literally have no cash flow. I mean, there's a working capital, you know, cash flow.

But it's really without an SBC, like, then that's their cash flow. And you kind of look at these and it's like, okay, it's a mature business. It doesn't really, it makes somebody. I'm a little hyperboleant to say it doesn't like any. But I don't get it. Like, I don't understand who's buying this thing. I mean, they have multiple giant businesses at a huge scale. and they don't really make any money still.

I mean, their ROC is just terrible for a scale of business. But, you know, we don't short much. We're not trying to take sides in these things. We're just kind of looking at best and saying, wow, this is kind of weird, right? And it's gone for so long and you stop thinking about it. And so we stopped thinking about it. And we're focused on a bunch of things that are really growing fast at three to five times cash flow. That's what we've always done, and that's what makes us money.

So you've highlighted how valuation agnostic traders create opportunities for long-term investors. So there was an example that you gave, let's just say, ESG, where there was the opportunities created because, you know, have an ESG fund. And in order to get to that status, they had to sell positions that maybe they had in high-quality businesses and they were just basically essentially becoming four sellers. So you seem to have played this in kind of a basket bet kind of way. You know, you have investments into companies like Valeris, Tidewater, and Noble. So I'd just love to learn a little bit more about this strategy.

How are you kind of finding these opportunities in battered industries and maybe not, maybe not even just industries, but specific companies that nobody seems to want to invest in? Well, ESG is a weird thing because, you know, for the history of investor, it goes back to thousands of years, you know, if we have, you know, trade receipts on papyrus going back 3,000 years ago, people were, you know, lending money to, you know, guys who ordered a ship and they were going to move a cargo from one place or another. They've just been going on forever, right? And for the first time ever, in the history of society, a bunch of people decided they didn't

know what to make money, they were going to try to make the weather weather better. It's like a weird cold, right? Like, I don't want to go out to climate, but I don't think, you know, one portfolio manager buying or selling coal stocks is going to make the weather weather better. I think it's totally irrelevant. I've come to the conclusion that we run a, you know, decently sized hedge fund, but we can't fix the weather. It's just out of the capacity. And a lot of people convince themselves they could fix the weather. And they all sold stocks. And it was great for us because we bought a bunch of

irreplaceable assets at 5 and 10 percent of replacement costs at the time we never cash flow positive. The companies are buying that box of stock. It was hard not to make a lot of money. As is owning my curse, I was a bit early because it seemed so obvious to me, but it seemed not obvious to anyone else. And eventually it's selling into it. I think ESG is, you know, We've had a watermark of the industry, and hopefully it disappears. We never hear about it again. But there was a moment in time where I was a year and a half early. There was just waves of selling.

There were enough guys like me and they'd like to buy. And eventually the shares got absorbed, mainly by the companies with their own buyback programs, really didn't want a money, like a lot of money. I always ask myself, where are there people that are totally uneconomic? I mean, I think the most obvious one is when someone's getting a margin call, they might love their stock. But, you know, if the broker says you have to sell, you have to sell. And oftentimes, really, really rich people got really wealthy because they barred a lot of money to get there.

And they over-extend themselves. Sometimes whole countries do this. And so you have these kind of like, you know, you know, you know, some credit crashes. And it's either, you know, one tycoon building bust or, you know, a sector or a country. And I think that's interesting. I think what's happening with pawn shops right now where they say they're going to be Delta neutral. So every time they buy something, they have to short something. And oftentimes they totally valuation agnostic.

They're much more focused on rate of change. So they're always showing over in the morning and asking themselves, what industries are getting better? Let's go buy those. When industries are getting worse this month, let's go sell those. They have printed card data, they have satellite data. They have all those data, right? And so in real time, they're putting positions on what's getting better and what's

getting worse. And they don't share them evaluation. They don't read a spreadsheet. They're looking at web traffic or something else. And you get in these situations where we have companies where 20, 30% of the shares outstanding or shorted and trees it three times earnings. And maybe it's here we get worse. And maybe it's next year five times earnings.

If you kind of look at this and it's like, it's a single-gold industry. Yeah, we know it's getting worse, but it's really cheap. I mean, we have to do something today. But, you know, he put in the back of your brain that once a month I want to check up on this thing because when it starts turning, all these guys need to cover. And then the point could we go along. So, you know, it's just going to be this huge cycle. You know, I think the pod shops have created more opportunity than it.

anything else. We even, it's a little bit more dispersed than ESG, but I think it's a huge amount of opportunity. I mean, I'd say a lot of what we do at our fund is we sit around drinking beers and we say, what's happening in the world? Politicians usually have a two or a four-year election cycle and cause an effect isn't really a strong weight with politicians. They don't really understand economics. They often don't really champion the effects because either they get re-elected, they'll figure it out next cycle or they don't get her elected. It's so what else's the problem? And since, you have this weird setup where there's a lot of action, there's a lot of, you know,

opportunity created just by having a sort of Austrian libertarian mindset of how economic cyclists work. And if you have a really high dose of cynicism, you're going to make a lot of money. As long as you're willing to have a one year or an 18-month timeline of what's going to happened because some politician just been unenforced error in their domestic economy. These are the sort of things you look about and think about, you know, there's always something happening in the news, you know, like, like every day something happens. And, you know, my job is to say, is this just noise or will this dramatically change something? And oftentimes it changes one little subsector and you kind of risk it. But sometimes even if you're out of subsectors,

you know, someone in my firm is knowledgeable about that. And they say, hey, copy, like, we think this is about to happen. Okay, let's go buy some. That's where a lot of our opportunities go from. Yeah, that makes sense. So you mentioned there a little bit about capital allocation with some of these businesses that, you know, no one liked the stock. And so they were very cheap. And then that was a perfect time to obviously do buybacks below intrinsic value.

So I just wanted to ask you a question a little bit here on capital allocation at a business point level. So obviously with these types of businesses, once the buyback strategy is kind of maxed out and there's not enough liquidity to continue going down that road, they kind of have to either pay a dividend or reinbursed back into the business. So my question for you is, you know, do you have a preference between the two of them or are you just purely looking at which offers the highest return? Well, I mean, there's always a capacity to Dubai bags. By the time it gets to the point where it destroys capital, because it's not agreed with, we've already existed, right? So it doesn't bother me there. I don't like dividends. No one shows them for 3%. You know,

we made 3% on the year. It's a terrible year for us. So I don't really know if it's from that. It's sort of all-century funding costs and having a slight lower. portfolio but that's the new here there. I just don't like dividends. I don't feel like any buy as it to 3% dividend. You know what's yours is the dividend gets increased by it just doesn't matter right. A lot of buybacks from what new stocks. That's what I care about. Otherwise I want to see consolidation. I don't want you to go into our new fields, but consolidate the sector. We did be looking at second-in-law business so it's going to be looking at things where they probably haven't had a chat in a while because the sector is

straight down. So the golden's heading used fly and the number of players insolidated for bankruptcy. And so at the top of the side, it was 20 guys, the bottom of the cycle after all the bankruptcy was seven. You go a little of pricing power and let's see if you can buy two or three more of these, we get an all adopoly with four guys and then push pricing. And in a fixed-plus business, pricing is usually very high incremental margin, very high, criminal risk, always the consolidation. It's kind of one-hourly. and say. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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And Renese are just, somebody to look at it, right? It's weird. A while ago, 20, 30 years ago, maybe when Buffett was first starting out, he looked at, I said, every business. And he was very much an instant focus investor, you know, my stuff will have a replacement cause, my stuff with the Orki Capital. World's really tempting to Jewish Bernie's, I guess, even if you're not really, I think. Hebert out really, I earned it.

That's a Jewish fellow. And everything's died of, he could die of these days. But even also revolved, especially in the, businesses that are sick at full, EBIT or Gers, well, they don't metrics, really. You're really trying to figure out it is like, commuterical learnings, but nothing ever gets value in this like learning, which is why me people die of money, you know,

when things are kind of bleak and they're losing money, these things are in value in their fracture or Laceyboe boss, and the peak, they're about three-time for Gleaston, which incentivizes them the capacity. And, you know, each while, you know, amid cycle of studies three flats. So I just look at a lot of these access to me doesn't, It's an easy starting point for what you think you can earn.

And the valuation goes above the replacement cost. They're going to have this going to break. The global economy grows within each year. If you notice why, it usually demand catches out. But what happens to an inflationary environment is that the replacement cost of this piece of equipment, it goes out. And so you're trying to make money. You know, you know, let's let's let me like shipping, okay? At the bottom of the cycle in 2017 to 2018, the VLCC who carries two million girls in

oil, it was let's call it an $80 million piece of a permit to buy new. Today is about $130 million piece of permits by new. Part of that's inflation. Part of that is that at the bottom of cycle, a bunch of Korean shipyards were basically losing money to build these things. They didn't want to lose their workers. And now they have some margin. But I think maybe half and half, half inflation.

So let's say it costs you 20 million more to build this thing, 30 million more to build this thing. Well, if you have a five-year-old lab views, it's on your buck. You know, your $80 million cost, minus depreciation. But in reality, they're replaced from cost of this. You know, you can sell it to a liquid market. It's not that 80 million starting point. It's 105 million or 110 million starting point, which means if you're going to depreciate it over 20 years for residual value, you can move your whole curve off, which means that it's actually appreciating your value.

I mean, you do the math on this and you think you've suffered through depreciation, the reality is probably worth more today than you purchased it for. And that's the beauty of inflation in a hard asset model. And, you know, you look at this. Obviously, you know, the DLCC depreciates and it has a totally, completely higher life. And factory depreciates every time. But I guarantee you, you can't rebuild being a petrochemical plant. for what state of value is. In fact, it's much more pre-unit of production than a stated gap value

or even the market caps of these things. And as a result, it's not a lot of how many supply common. And you can say, well, you know, it's straight in capital. It's at the bottom of the refining cycle. Sure. But you can kind of look through with this and say this asset's worth a lot more because eventually they need more supply and it costs too much. And I think the best example, this is something we have a lot of which called St. Joe, where they long about 167,000 acres of land in Florida, that lane appreciates it every year. And there's no depreciation. It's not like, you know, the refinery or the shit. Like a lot of land is just forestry, has trees on it. And it actually, produces a couple percent a year yield in terms of growing trees, harvesting trees, leaking gear, and whatever else they get in trees.

So you appreciate, plus it gives you a yield to create an asset. I like assets like that. And some years it appreciates faster. And during the GFC, I guess you probably depreciated for two years. But man, that is just like the street light up because the population of Florida keeps growing.

And it keeps attracting wealthy people, mostly into the attack. benefits. As a result, the heart of land does great things. And, you know, St. Joe, economically, has been a huge role run. Your price bias, you know, not so much.

One day, I think that investors will realize how much elite values in benefits. And, you know, this can be set for, you know, a company that owns ships or petrochemical plant or any factory, anything. In inflation or environment, you want things that have, you know,

a certain expense to build. but you want stuff that doesn't grow a lot of maintenance because the maintenance capital means that if it costs 10% more each year to build it, then it doesn't cost 10% more each year to maintain it, which means that your cash flow is illusory because it's just go to the back into the maintenance cattle. I mean, you want something more like St. Joe,

where there is no maintenance. I guess they have some hotels and stuff, but maintenance cap is 15 million, let's say. It's kind of negligible on a couple hundred million of revenue. And most of it is just land. It's not maintenance. It's just trees. Oceanfront trees.

You've written that kind of your sweet spot for investing market cap-wise is kind of in the one to five billion dollar range. And that's an interesting number specifically because generally that excludes an investment from being part of, you know, let's say the S&P 500. You know, I think I was a couple days ago. The lowest one was something like $4 billion and everything else in it was above $5 billion. So I'm interested in knowing, you know, are you specifically looking for that as a catalyst, You know, are you looking for inclusion and at a future point as a catalyst to help generate

returns as part of your strategy or is it more of a case-by-case basis? Well, it's case-by-case, right? I mean, I'm not opposed to buying something that's many billions of value, the hundreds of value. I'm not opposed to buying something that's, you know, five million market cap. I mean, it's been both in my life. But I've always done is trying to figure out where the opportunity is in the market, and you have these cycles.

Something works for a while, but then a lot of people start making money at it. and then it stops working. And something the meaning happens because when you shift all the money to one strategy, it means another strategy has opportunity. And so right now, what seems to be working with us is because of the nature of passive, you want things that are going to get sucked up and absorbed by passive. So if you look at a company with like a $2 billion market down, there's usually the founder, a couple of insiders, they own 10, 20% of it.

is usually a bit of passive, you know, 10% of it. There's a bunch of hedge funds that own most of it. And there's some free float owned by everyone else. And as it gets to about 10 million market jobs, so 5x. And remember, we're out to 803 without a 5x. When it gets that 10 billion, the ratio of hedge funds that owns it goes down. The ratio of passive goes up. By 10 billion, it goes from 10% of the asset to maybe a 3% of the thousand.

And so you have this forced buying. And usually we're the things that have buybacks. You know, I just find out of forcing that of forcing that mechanism and force them share price higher. And remember, I don't think most of my money on earnings growth, though I do make some on a lot of just multiple expenditure. And I thought of what you see like earnings multiple expenditure. They should decide if I sell like a 20% of a relation cost,

to sell it two times our placement cost. You know, then that 10x with, you know, talking about inflation, your relation costs. It's a very virtuous cycle. And so I'm looking for stuff where passive starts buying. You know, it weighs to $5 billion, they start buying. And because they're buying it, it goes to $6 billion, which is more passive buys. And then she gets added, you know, maybe not the S&P 500, but it goes into the S&P 600,

and the SEP 400, and the MSCI and then the guy at Fidelity that calls an indexes, he has to buy some. And this other guy has to buy some. And it just becomes this like, when you think of the return profile, and this is not a win, obviously, not always. But it's just like slow grind higher from $2 billion to like $6 billion. and then from 6 to 15 is like nine months. You know, you have to own it for two and a half years to get that nine months at the end

where, you know, passivize it. And I want to harvest that. What's your eating stuff is in the SMB 500. It tends to be much more expensive. You can look at two businesses. And one is the SP 500 to trades it 25 times. And one that's not in anything. It trades at six times.

And the one that's smaller often is growing faster because, you know, just more of large numbers meets it's harder to grow. You always have, you know, the optionality that the big guy at 20 times bought your figure six times. See, why about this is 20 times? You buy the figure six times. And, you know, there's also a small chance, you know, that you get acquired, but a much bigger chance that multiple spans and eventually gets handed the index.

And so we tend to be kicking around in that, like, one to five billion range. You know, look, it used to be when I first started in this industry, there were a lot of things in a hundred, two hundred, two hundred million range. They're growing really fast. those things tend to stay private now. How would company costs are, you know, obsessive? And so it doesn't make any sense. Those things stay in the private market, private equity owns them.

They let those businesses mature outside the stock market. The stuff you see at a higher million market, Chappellate says that it just not be very good. It turns to be very fragile businesses. It doesn't be there expecting of stuff that needs every capital, like biotach or something. So that's not really where we go hunting. Doesn't we won't go hunting? But even like $500 million, it tends to be sort of like, eh?

it's really at that billion range. Because to get from $500 million to $10 million, you get that excuse me, get lost, or $6 billion, whatever the number is. Like, you're looking at something to $10.20X, like, that's a really heroic return. But asking something in $2 billion, you get $6 billion, that means you get a triple. I mean, that's not so hard to do.

Just, you know, you retain some earnings, you buybacks to stock, you know, the earnings grow. Like, it's not impossible to do over three years. And so I'd rather hunt you there. You know, that makes sense. And I'm sure if you asked me this question in five years, I'll tell you something totally different. You mentioned a little earlier just about obviously capital inflows and outflows and how, you know, depending on what's moving right now, like you said there, a lot of the U.S. businesses are moving.

And so people that you know in these really interesting and high growth emerging markets aren't even investing in their own markets. So I kind of wanted to circle that around to patients and asking you about patience because obviously, you know, a big part of investing success requires patients. If you're not patient and you're constantly looking for the next big thing to happen repeatedly, you're probably going to end up losing money because I think like you said, you know, your first rule obviously is to not lose money and there's definitely a degree of patience required. So how are you dealing specifically with the kind of inevitable times you're in the market where you have to stay patient? You know, how are you avoiding taking unnecessary action specifically because maybe you're bored

and maybe a position that you really like hasn't moved over, you know, maybe call it a year or so? I just got a servant. I got a farm. I got my farm. A lot of my success in this business is being really patient, really stubborn, and I'm willing to suffer a lot. You know, I find a lot of my friends, you know, something happens. And stocks down 10% or what's going on. Why some should I sell some, I don't know, like, stocks just move.

You know, this stuff happens. Bad news comes down. Does this cheese? thesis, no, it's bad news. A lot of times, and the best thing you can do is not be in front of your screens, you make decisions, and then you let those decisions mature. And some are going to be good, decisions, some are going to be bad. But you need to let it play out.

I mean, offsetting this, sometimes a piece of news comes out and you go, well, the pieces changed and you smash it. You just got to get out. That's kind of weird. Usually, thesis don't change our press release. Thesis changed. It's just like over time, it kind of just doesn't work. It just kind of like grinds and it's always like two bad piece of news, one good piece.

And so you have plenty of time to just say, let's reallocate money. Being patience really hard, being, you know, unengaged in the day-to-day is the hardest the hardest thing to do in this business. You don't want a vacation, like I said, like a joke, you know. You just need to leave the office and go surf and just get some distance between you and the screen. Like, because if you share it the screen, you're probably putting orders in. If you're putting orders in, you're probably to strike out. You know, the venture of inside is different.

But our clear book, like, if I'm trying to buy and sell St. Joe, like, I don't know, interest rates to go up, interest rates to go down. Trump tweets every three minutes. Like, I don't know what that means to the fact that I want to have a bunch of land at 20 cents to the dollar. Like, it could have been spot to be. I mean, the land's going up. I think, you know, I'm earning high interns in my capital. like. So I think it's really hard to be patient. And I think especially the world that we have,

where remember we talk about the very beginning. I want a hedge fund. A lot of could run hedge funds. Their hedge funds mostly are focused on having no down months, which means if we're franticent and we have to avoid problems, this is going down. I got to sell it. This is going down. Like when it's going down, I'm like, I don't want to sell it for less than was yesterday. I probably want to lie some more incrementally. And in their their mentality, is you sell on the way down, you buy on the way up, because you don't have down ones. And my mentality is the average stock moves around a lot. It's really random. Another point that I wanted to bring up here is how you run the fund unhedged for pretty much all time.

And so your thought process there really resonates with me because, you know, kind of getting to your point here about what other funds do, you know, a lot of the times they are hedged, you know, and they're using complex hedges like, you know, if I buy stock XYZ and it goes down, then ABC will offset it by going up. But in practice, I think the gains and losses from these hedges tend to just cancel each other out over time, leaving you with kind of a mediocre performance. And worse, like, let's say you have a really, really good idea that has a long-term tail win and can maybe compound over multiple years. If you're then hedging it, you're basically just degrading that upside potential with another idea that's likely to underperform. So, you know,

for some of the value investors that are listening, many of whom are definitely in who are trying to build portfolios specifically cater to their best ideas. How do you think about the trade-off between accepting volatility versus trying to smooth the ride? And what advice would you give specifically to investors who feel tempted to maybe hedge but may not realize that they're just watering down their best idea? Man, there aren't times where hedging makes sense. There are stocks about three to five years go down a lot. And it lasts for about six months and then it's over.

And if you really get the timing of this stuff, you should be hedging. Most people are not good at timing this stuff, including me. I'm terrible at timing this stuff. I'm always too early, and I usually give up turning to hedge right to where it actually falls a horror. That's why I don't hedge anymore. I just don't believe in it. Well, stocks go up over time. They go up a lot over time.

And you own good companies, they're almost immune to the volatility. And oftentimes, whatever hedge you're going to use is going to be tied to a Mac 20, which is probably not really correlated to what you own anyway. It's not fairly to what we own. So I don't really understand it. I mean, if you marriage MAC 20, you go short MAC 20. But don't think of it as a hedge. Think it as a directional thing.

But I found a lot of my friends in this hedgewood industry. They do really well in their long book. Like, they're actually way better stock figures than the market. And then they suffer on their short buck. And then they kind of track the market underperforms slightly, which is unfortunate because let's say their long buck is, you know, doing a thousand bips of actual alpha. that he lose $1,500 a bit of the short bug,

and I don't understand what I do it. Plus, when you're trying to hedge, there's always slippage costs, commissions, this virtual cost, taxes, which are, you know, for clients. I don't think it makes any sense, really. I mean, what I out of looking at it is that I know this can be volatility. I know that about every 18 to 24 months,

we're going to have it down 30, 35 even. I tell my clients this, you know, when the market really gets hit hard, we might have a down 50. I mean, we had it down 50 during COVID. It's going to happen again. And the whole point is you set up your portfolios that when there is a down 50, you don't be kicked out of the game.

You know, you run with leverage profile that lets you hold on to what you want to hold on to, and hopefully at the bottom of the cycle, it was going to be early. So you're going to average in too soon. You get to buy some more. And that's why we target that 115, 125. You know, it gives us room to add on a proper callback. It gives us room to, you know, cycle of stuff around. I know that I'm going to have it down 30, but I don't know.

But I like to say that adventure is they do very well in a moment like that. It'd be additive, because let me have that Chesh flow to average down too. But I just accept it. And I think, you know, every client in my fund I have told now that we will have a down 30 to 35, that create two to 24 months. We expect it. And if you're not prepared for that, don't invest. And if we have one of those, you should give me some more money since it's a great time to invest.

And basically, it's inevitable, right? And so you have the hedge fund that decides they're going to raise $10 billion. That's their business plan. I don't fault them. They want to have no down ones. They have to be hedged. Fine. My business plan is grow my PA.

And I accept that we're going to have a lot of volatility. Once you accept this, it's very cathartic. It's very calming, you know? I was just like, huh, we're down 10%. I guess we'll be down another 10 to 20% more. And then it's probably just don't go down anymore. You know, like if it's happened to you a bunch of times in your career, you get sort of used to it. And I just think it's the hedge fund world because of the need to always be raising capital has just never accepted this fact.

And because they can't accept it, they'd panic and they scramble and just make the problem worse usually. And, you know, to any hedge fund is listening to this or to anyone else who's listening. I mean, just accept it. It's going to be volatile. And you can't really do much. about it. You wrote, inflection investing works in most market environments, even the ones where most market participants are chasing, let's say, an AI bubble, assuming there actually is an

inflection in underlying financial performance. So, my question here for you is, what are the signs of an inflection point that maybe value investors should wait for before deploying capital into an optically cheap, but maybe stagnant business? I know you said that you're always too early here, but maybe you could share some of your lessons on how you can maybe optimize that into the future. Well, I mean, it's obvious, but it's reflecting, right? I mean, what Wall Street shares about, there's only one thing they share about.

They want to see revenue growing, and they want to see earnings growing. That's it. And Wall Street tends to have a preference for revenue growth as opposed to earnings growth. Because of the Amazon's in the world, they've been diluted into thinking that if you keep growing the revenue for long enough, eventually earnings catch up. And sometimes they do, sometimes they don't. But as a result, Wall Street really cares about revenue growth, which is why we had all these weird Ponzi models, where companies will buy a dollar of revenue

because they do it in a negative 20 gross margin. And, you know, if you let me buy something worth a dollar, you go at a discount, I'll buy a lot of it. So they'll give it all this revenue growth. And then they can raise more money. And it's a nice little Ponzi bubble until it comes part. We've seen a lot of this sort of Ponzi cycles.

But Wall Street wants to see that gross and they want to see to accelerate. Remember, rate of change. So you look at a bunch of industries and you say, what industry will next year have at both revenue growth and earnings growth, and the rate of change is going to accelerate. Because a lot of businesses are pretty steady at any, you know, they grow 10% a year

every year. So you need the growth rate to accelerate the 20%. You know, it needs to be faster than whatever world's modeling. A lot of things I look at, I kind of check around and break even, and if you think positive is really, really good. It can see you get more acceleration. But that's all you're looking for. It's should pretty obvious. I mean, go back to the AI thing.

I'm kind of a little bitter that I didn't catch it. But look, these things accelerating. The revenues are exploding. The earnings actually some of the businesses, like there were earnings, but the revenues absolutely exploded. I get why people got excited about it. Totally get it, right? And I get why some of the things I own that went down last year.

It didn't accelerate. You know, it was year three of a 10-year cycle. We had deceleration this year. And so, okay, I get it. I mean, I suffer because my businesses are suffering. And those businesses need to prosper because it's actually left. I get it conceptually. I mean, I'm one of those guys that likes to look at earnings and valuation,

but I understand that certain people don't care. So, you know, look, look, look, look, the tech guys have fun, you know, one year. You know, it's not like they haven't won 20 years or around. Look, I'm that homework a year. So I really enjoyed one interaction that you shared with a friend who regarding Nvidia. So you said your friend was upset because he didn't know on Nvidia. and since he was, you know, trying to track an index, if we've been talking to about a lot this episode, his performance was lagging behind that of colleagues who obviously did own a business like

Nvidia. So I think this is a really interesting example because I feel it's kind of like an echo chamber of the market at large. Investors are pretty social people and they have an excellent idea of what their colleagues and friends buy because either they talk to them or there's a ticker flashing at them throughout the day telling them what's being bought and sold. But, you know, you've kind of managed your investing game. specifically to bypass this pain point that most investors have navigated.

I'm just interested, you know, how exactly did you land on this approach? And, you know, also more and be more importantly, why do you think it's so hard for other investors to, you know, kind of navigate that issue? Well, I think the reason it's hard is that for 18 months, all people talk about is NVIDIA. I mean, look, the Vidiya peaked out last summer. It's gone kind of nowhere incrementally down. Everyone still talks about it all day because that's all the media wants to talk about. I mean, it treats tens of billions of stock a day, hundreds of billions of stock a day.

I think the option treating in Navidia is more than the stock market itself. So it's this giant casino and everyone wants to be in the casino. It's fun to go to Xito. I totally understand why there's a lot of focus on that. And look, we've treated NVIDIA, mostly in the short side, we've done okay. But I understand why there's a certain draw. And when you have a very large stock that goes up every day and it's a large piece of people's benchmarks, was a certain incentive to overweight it because it's going up,

which means that you have to elevate it moreover because it goes up and it's very reflexive. And I can understand why I'm a guy that wants a multi-dollar mutual fund where outperformers is 50 or 100 bibs. But the feels a lot of pressure when he's underweighted to video. I just won't pull back to let him in. You know, I had a friend who he was crying to me about it. The way he was trying, I thought he was short. No, he was just 100 bits underweight.

I just don't know. I just don't think that way, you know. Because, well, I guess the video was a multi-bagger, but I'm mostly looking for stuff in a multi-bag. And so, you know, I have large-cap stocks in these benchmarks. They don't multi-bag. I mean, every year we're too, and then well, but like, a lot of them they kind of do 20, 30% a year.

That's a really good year. Like, I just feel here. It's not in my world. So I just don't really think about it much. I mean, like you see it, you know, like, everyone talks to you about it, but it's just not my world. My world is a bunch of things that no one's talking about. about no one's thinking about and when they start talking about it, I actually exit.

So, Harris, I want to just say thank you so much for coming to the show today and sharing your insights with me and my audience. So I'd love to give you a handoff and maybe let you tell the audience where they can learn more about you. Sure. I mean, I always say go follow me at a Twitter. I guess they called themselves next this week. My hail is at each cubby. Otherwise, go to my website, Pratecap, P-R-A-C-A-P-com. We have interesting to show my fun there, but I also write a blog. I used to write a lot more. I tend to write them with something that's happening that's interesting. But honestly, it's been a really confusing world. So I've written less lately, but that goes and cycles. Thank you for listening to TIP. Make sure to follow We Study

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