We Study Billionaires - The Investor’s Podcast Network - TIP723: The Art of Buying Growth Companies for Value Prices w/ Jim Zimmerman and Abigail Zimmerman

Episode Date: May 23, 2025

On today’s episode, Kyle Grieve chats with James and Abigail Zimmerman about the strength of growing and sustainable cash flowing businesses; the importance of strong balance sheets; how they navigate their circle of competence, and the steps they take to expand it; why simplicity is so important in an age of complexity, how they use cash as a boost, and not a drag on returns, and much more. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 02:28 - How communities—public and private—can spark better investment ideas. 07:06 - Why free cash flow yield is their north star metric. 10:09 - How to tell if value drivers are simple or deceptively complex. 14:00 - Why staying inside your circle of competence protects your downside. 19:22 - How “Fort Knox” balance sheets help survive any market storm. 28:23 - Key signals that suggest a business can sustain high ROIC. 32:56 - What truly shows management is aligned, not just insider ownership. 43:25 - The hidden risks that make many retailers dangerous investments. 53:07 - How an equity-bond lens helps compare all asset classes. 01:06:39 - When to double down on winners. And so much more! 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 about The Magic Formula here. Check out Value Investors Club here. Check out SumZero here. Check out MOI Global  here. Follow Kyle on ⁠⁠X⁠⁠ 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: Hardblock AnchorWatch Cape Intuit Shopify Vanta reMarkable Abundant Mines 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://premium.theinvestorspodcast.com/ 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 guests have outperformed the S&P 500 for most of the last 19 years, all while holding a 20% cash position on average. Let that sink in for a minute. Outperformance and a hefty cash cushion? That's incredibly rare. The father and daughter duo, James and Abby Zimmerman of Lowell Capital, have an investing strategy based on a simple but powerful idea,

which is to focus on resilient and cash-generating businesses that they understand deeply. This means they actively search for companies that have cash flow today, not tomorrow. They want businesses as close to the center of their circle of competence as possible. They're looking for overlooked businesses with Fort Knox balance sheets, which require minimal capital to maintain operations, all while factoring in growth. We'll explore their investing journey, starting with where they source ideas from popular investment idea factories such as the Valley Investors Club. We'll examine how they use the equity bond framework to aid in their decision making.

We'll discuss their approach to keeping things simple, how they stay disciplined around portfolio construction, and some non-obvious signals that management is aligned with shareholders. One of my favorite topics was how they navigate the delicate balance between growth and value. While many investors put themselves firmly in one camp, they've managed to play both sides of the pendulum in a very value accretive way. And their ideas just simply work. I recently came upon a tweet that showed the 30 best performing stocks in Canada over the last three years. And I was very impressed to see that Lowell Capital invested in three of them. And these

three were in the top five of returns to boot. You'll also learn how they use cash as a strategic tool to navigate uncertainty, reduce risk, and seize opportunities while competitors are forced to the sidelines. Let's get right into this week's chat with Jim and Abby Zimmerman and learn how to buy growth businesses at value prices. 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 James Zimmerman and Abby Zimmerman from Lowell Capital onto the show. James, Abby, welcome to the podcast. Thanks for having us. Yeah, thank you very much for having us. Appreciate it. I really enjoy it. So one thing that I found really interesting while reviewing your investor letters is just the frequency, which with you mentioned things such as the Value Investor Club, Sum Zero, and M-O-I Global.

So I personally have used Value Investors Club before and have been really impressed with the quality of some of the write-ups on there. So my question for you here for today is how has your strategy for generating ideas kind of evolved over the years? So I would say, I mean, all of these websites have been genuinely really valuable resources for us over the years. We read a lot of write-ups on Polly Investors Club, and we read almost all of them, even the ones that may not make sense for us. It's just part of our process. And I would say that nine times out of 10, they don't make sense for us. And it doesn't mean they're not great ideas. It just means they're not within our circle of competence.

I would try to be very strict about that. So I'd say we tend to steer clear from industries like biotech, financial services, real estate, oil and gas. For us, they just tend to be pretty volatile and a bit unpredictable. And we tend to gravitate towards more service companies, software companies, industrial IT. We're just looking for simple, good businesses that are easy for us to understand resilient during difficult economic periods and have some kind of sustainable economic. moat that differentiate them from competitors. So I'd say we get a lot of really great ideas from all of these sites. And we're mostly looking for just small, underfollowed companies that are already generating strong free cash flow with low or no debt, what we like to call Fort Knox

balance sheets. And so all of these websites have really helped us find some of those overlooked companies. And so we'll essentially create a short list. And if something catches our eye, we'll do our own due diligence process and we'll have direct calls with management teams we'll go deeper into the financials and we really just learn that a lot of companies don't make sense for us. They either just don't have the cash generation,

they don't have the balance sheet that we're looking for or the valuation. And so I'd say our process has really become more structured around repeat patterns that we've seen work in our winners and the ones we've considered to be compounders. We have a very simple approach. which is, let's evaluate companies if we own the entire company. It's our company. You buy one share, you buy the whole company, right? What's the most important thing? Well, you want cash coming in.

You know, a company that flows cash, you could sleep at night. It's not that the other companies write-ups aren't great ideas, but our approach in what's worked over time is companies that generate cash and then can use that cash and grow. And so we'll look at the enterprise value, the net debt or cash, the market cap, and then look at how much cash are we getting against that from cash from operations, literally coming in the door, not EBITDA necessarily. And I would say, yeah, 19 out of 20 of the write-ups we read don't make sense for us, but we're sort of cutting them down very aggressively to just a handful that we can really hone in on. We don't need very many ideas. And there's 4,000, 5,000 public companies, North America alone, and we also

invested Western Europe, and we just need a handful. And so we're looking for a hack to slash those down to just a few that we can do a deeper dive on and start. And then the other thing is, Abby will look at the track record of the author. There's nothing more important than does this person he or she get things right? Do they not make mistakes? That's critical. And nobody in, you know, we don't, rather these write-ups are really, they're 20 pages and the person writing it up has got all these great insights and they're really smart. And we don't like that. We don't like that. that. We want something that you could, as Abby said, you know, do an alabator pitch to Peter Lynch, you know, running down. And what are the key points? And so not that all the other stuff will work

great, but this is just what worked first. And then, yeah, we want the Fort Knox balance sheet. We want something because it really reduces risk tremendously to not have that leverage when you've gone through the financial crisis or you've gone through COVID or you, and all of a sudden you don't have a good balance sheet. So it's just a whole process of how can we de-referral. and defensively involves invests in public equities. But there's so much brainpower on Vic and some of these other sites. We're just looking for a handful that work for us. It doesn't mean that all the other days aren't great.

It's just they're not kind of our type of thing. And we've kind of evolved to over time what produces the fewest mistakes because we're just trying to not make mistakes. We're not necessarily trying to hit the ball up. You've already brought up your circle of competence here. So let's turn to that. So even in your letters, I also have noticed that you bring it up quite often as well. So it's clearly an area that you focus on deepening and expanding over time.

However, let's kind of consider here the circumstance when you're analyzing a company and maybe just a completely unfamiliar industry or something that you've never maybe looked at in the past, which is a reality for most investors that are seeking new opportunities in kind of an ever-growing way. So what are kind of the first things that you tend to study to decide if it's even worth going and digging deeper and deeper into an idea? I would say when we first come across a business, our first step is really to ask,

is this simple enough to understand? And if we can't understand the business model clearly, we're going to pass on it pretty quickly. We'll also check on the financials as well. As I mentioned, is it generating a strong free cash flow today and does have that clean cash-rich balance sheet that we're looking for?

And we also look at specific dynamics that we've seen in many of our compounders, are winners, and those can include customer stickiness, some kind of really strong competitive advantage or strong returns on capital and trades at a low valuation. And so if those things are present, I'd say we're definitely interested. And those questions can really help us avoid wasting time and keeping us focus on businesses that we can truly understand because we're obviously a very small team. And so we only have so much time and resources. So it's important for us to have a strategy to kill ideas quickly so that we can focus on ones that are actually going to work out

for us. I would say we're looking for resiliency. We're looking for predictability. It's kind of the Buffett thing of there you get a card with 20 punches your whole life. You've got to be pretty careful about picking those. So something that people are excited about, something that's volatile, something that doesn't have a long track record. We're looking for stuff that's really steady. And when you look at Buffett in his portfolio, he owns the economy, like, you know, whether it's a furniture company or a jewelry company or the railroad or he's growing with the United States economy. And so if you can do that and your business is maybe better than the economy and more resilient,

you've got a winner. And so we really, you talk about a business we're not familiar with or we're probably going to shy away from that because we don't really need many good ideas. I think also the cash flow, if it doesn't flow cash, and it hasn't over multiple years, we're not looking at just one year of cash flow. We're looking at three, four, five years, how much cash is coming in against the enterprise value. And sometimes you could find stuff that, you know, the last three or four years, it's paid

off the entire enterprise value. So it doesn't mean it's going to work, but if it just keeps going like it is, you could buy the whole company back. And so we love stuff like that. Anybody buying massive amounts of their shares back, which still a good balance sheet, We kind of stick to industries that we can sort of figure out and understand. And anything that's kind of far afield or new or exciting, it's can't really handle that. We'd rather sleep at night.

So kind of piggybacking here on the circle of competence here is a really good concept, which is just simplicity, which I know you've also written a lot about. So it's something that I've unfortunately learned a lot about the hard way, which is mainly from losing money on investments that I ended up figuring out were a lot more complex than I'd originally envisioned. So how do you guys kind of determine if a company's value drivers are truly, you know, simple versus kind of having this deceptively complex nature underneath? So I would say in terms of determining a company value drivers, if they're actually simple or potentially deceptibly complex, we start with a couple of questions, kind of as like a filtering process.

So first, we'll ask, can we easily explain how the business makes money in a few sentences? If we are not able to do that or we feel there are too many conditions or moving parts, I'd say that's a red flag for us. Secondly, highly focused on cash flow. We're not focused on projections or future promises, but businesses that are already generating strong, sustainable free cash flow today and not based on multiple future steps going right. So we heavily like discount story stocks where success rely on the predictions

where multiple catalysts have to occur for the pieces to play out. I'd also mentioned we always keep in mind Charlie Munger's too hard pile where, you know, if we can't quickly understand the competitive moat or the business, we'll immediately just put in the too hard pile and move on to something that we feel could be a more simple business for us to understand. And I'd also say simplicity doesn't mean easy. And I think it can be natural to maybe associate it to in some way. But Steve Jobs has a great quote where he says that it takes a lot of deep thinking to reach something truly simple. And I'd say that's very much reflective in our due diligence process with our

multiple calls with management teams, studying customer stickiness, managed quality, just making sure that the simplicity is across multiple fronts is very important to us. And I'd say that true simplicity often shows up in how resilient a business performs across multiple environments and in how few things need to go right in order for it to work. Yeah, and I'd say also the fewer things that can go wrong, like somebody said, or Jim Roger, you know, that he likes to walk down and just sees a dollar on the ground and you stoop down and pick it up. And we're always asking, again, there's a lot of these elegant investment ideas with many pages. That's just not for us. How simple can we make it? How, you know, and you look at Steve Jobs when he designed the icon and the simplicity

he was focusing on just how could he simplify it even further. You know, so it's like Munger says, you know, invert, invert, always look at what can go wrong. So we're always trying to figure out, well, what can go wrong with this thing? Because stuff does. The world's very unpredictable. So simplify. And we don't really rely on projections. So you've got a picture of Ben Graham behind you there.

And when you read the Intelligent investor, he's constantly talking about not relying on projections, looking, buying businesses that are modest multiples of existing earnings. And then he goes back and looks at three or four or five years or ten years of earnings and averaging that. And so we're trying to kind of do that. Like what's already kind of working and has worked and can it just sort of continue? So you're going to surf that growth path. Those tend to work really well for us.

So we like to keep things simple, cheat. And a lot of times we can find companies that are sort of boring. The organic growth rate isn't very fast, but they generate a lot of cash and they're bolting on tuck-in acquisitions and then they generate cash. They pay the debt off and they go do it again. And they can get very big over time and do very well. We've got some really good luck with those. So just stuff we can kind of understand. That's our sort of approach. Keep it simple. Yeah. So last question here on circle of competence. So I think it's really important that if we are trying to expand our circle of competence, which I think everyone in investing probably

is to some degree, but some people maybe are trying to just force yourself to expand. into new areas where you might not have any actual strengths. So, you know, your team, like you guys already pointed out, you have three people, which is kind of a bonus because it means that you each have your own strengths that hopefully make the whole stronger than any single one of you. But, you know, given the fact that you have specific strengths that you are already aware of, how are you kind of deciding when is the right time to maybe push the boundaries of your circle of competence versus just trying to stay smack dab in the middle of it?

because obviously while it would be really good to just be able to stay smack dab in the middle of it, there's always the fact that we want to learn more and more and we want to try to test out maybe some of our new knowledge and enter into new realms and new types of investments. I would say we're very conscious of balancing the two, carefully expanding our circle of competence, but always with discipline and patience. I would say I think a big risk in investing can sometimes be confusing enthusiasm for expertise. And so I would say we know what we're good at, which are simple, cash filling businesses with durable competitive advantages. And I'd say when an idea comes across

our desk, our first question isn't, oh, is this really exciting and something new? It's more, can we understand this business? And so we're just extremely selective. And I think of Howard Marks often. And he just talked about the dangers of venturing too far outside of your area, true expertise. And we do take that very seriously. So I would say we really don't expand beyond our circle of competence much, just because we feel we do have such a clear analytical edge in what we do, unless there was an opportunity that was just so compelling and understandable that it would justify maybe pushing that edge a little bit. But I would say, you know, we feel that long-term performance really comes from not knowing a little bit about

everything, but knowing a lot about a few things. I'd just throw in there, too, one of the things we do that's kind of interesting, we will go through the transcripts of conference calls. And I've heard Brian others who's really smart guys talk about this and go through word by word, what is the management team saying for multiple calls? Do they deliver? Do they underpromise? Do they overperform? Are they salesy? Are they, you know, and so here's what they told us was going to happen and does everything they're saying make sense? And that's very interesting because there's a lot of information on those calls and they're getting asked questions off the cuff. They're not read from a script and they will drop little nuggets of gold many, many

times you can get an edge with what's going to happen. And so we tend to really when we we have a good size position in something, hone in those calls, everything they're saying, you know, what's the tone? Did they deliver what they said they were going to do? They under promise and over-deliver. And I think that is one way we do it. And then we did really well with Celestica, contract manufacturer. And the electronics manufacturing business had been horrible to investors. there was high turnover many, many years in a row. Investors just got really down on the company and the industry. And somebody had written about Flex and Celestica that the industry was changing.

And the relationships with the customers were multi-year, strategic, deep, deep, which is what we want to see. And so we spent our time and gradually built a position in Celestica, which was generating a lot of cash. We invested a very long multiple cash from ops, you know, five or six times with a great balance sheet. And we listened to the management team. We followed them for multiple years because it was an area that we were like, well, it looks like this is a real thing with these customer relationships. Then we had it at $10, $12 a share, and they were doing $2 share earnings. And we were like, what are we missing here? This is insane. They have almost no death. And so as always happens,

we hung in there and we were reading the conference calls in great detail and they were delivering everything they said and this management unit worked very, very hard over multiple years to build this strategic relationship inside the data centers and they were solving problems for the hyperscalers that the hyperscalers didn't even, you know, know for Google and really sophisticated stuff. And eventually the market woke up all of a sudden and realized, oh, this is kind of a backdoor play on AI and data centers, and they're deeply involved with these hyperscalers, and the stock went through the roof. But as always, it took a while for that to sort of happen, but we were sort of saying, gee, do we make a mistake, or what did we miss, or this thing's

got a $12 or $13 price that's doing $2 burnings with no debt? What's going on here? So, you know, that's kind of an area where we were straying outside going into a new type of business and but the company gushed cash and we were investing in a very low multiple they had very little debt the guy running at the CEO was still there had worked three or four or five years to build to get to this point you can kind of see that the work that's gone in and when you're in a position like that the shift in the business model often has multiple years to run they've done a lot of work and you're sure a piggybacking on it so that's one more worked out but that's kind of how we approach getting out of a little bit of our circle of competence.

And that one worked out really well. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year,

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on this interview so far is cash full yield. So I know that you guys are very, very laser focused on free cashful yields. Now, throughout your investment thesis in each quarterly letter, you write essentially what the free cashful yield is for pretty much every single one of your investment ideas. So my question here for you is how are you defining a sustainable free cashful yield and what kind of gives you confidence to underwrite that durability over a long period of time into the future? Yeah, I would say absolutely free cashful yield is at the center of our investment process and we don't want companies that are just profitable on paper. We want businesses that consistently convert those profits into actual cash.

And so when we talk about a sustainable free cash flow yield, what we mean is cash flows that are repeatable, resilient, and relatively predictable, and not dependent on one-time events or things like that. And so I would say in terms of a few specific things, we look forward to kind of underwrite that sustainability would be capital-like business models. We really like trying to find companies where maintaining and growing the business doesn't require a massive reinvestment and low capital intensity relative the revenues. We feel it is a great starting point. And just businesses that have the recurring revenue and a sticky customer

base. And we feel that that is one element that can contribute to sustainable, cashful generation, competitive modes as well, which we talked about several times so far. We spend a lot of time assessing whether there's something unique about a business, whether it's brand or scale or cost advantages or switching costs, something that can kind of protect margin and cash flow generation from being eroded from over time. Fort Knox balance sheets as well, we find that having that strong balance sheet really ensures that the free cash flow is truly available to equity holders and is not used for debt. And I would just say, you know, on the Fort Knox balance sheet, a company that has that kind of balance sheet, that's our kind of company. We're conservative, you know,

somebody that doesn't want a lot of leverage. Now, some businesses, You can have the leverage and they can handle it and they're fine. But we like, we're happy with management teams that want that super strong balance sheet because you never know what's going to happen, what the economy is going to do, the tariffs, the anything. And when you got a strong balance sheet, you can get through almost anything. And so the risk in the company is much lower. And the market doesn't really tend to look at balance sheets until it becomes an issue

in an economic cycle. And I think that's really missed. And we think there's a big factor of risk there that we try to adjust for. So we always talk about Fort Knox Galaxy and everyone teases us about it. And our fund has a Fort Knox Groundshy because we're holding a lot of cash. But that's just kind of how we roll and we like to have our powder dry to take advantage of really good opportunities. And it has tended to work out to be well over time. The other thing I would just throw in there is, again, you're going back to Ben Graham,

We look at multiple years of cash generation, so anyone can have one good year cash generation. You've got a mortgage servicer and the rates are low. And that doesn't mean anything to us. Like, tell us what she did over the last five years. So we really, like when we invested in sprouts, which we did really, that company had generated tremendous cash from operations when you added the last four or five years. It had no real net debt for grocery store, which is highly steady. it had a great new guy coming in with a strategy to differentiate.

And it had Abby as a customer at their Sprout stores, who I don't know all the keto and all the, but they had a strategy of like the people that do keto and vegan. And when the economy gets bad, they might buy a little less, but they're still going to go to sprouts and not Walmart. And their overlap with Walmart was 10 or 11%. So it was a very differentiated strategy. But they had that cash to allow them to execute their strategy. and then they started opening up stores.

And there, talk about free cash flow, we're laser focus on, okay, what's the payback on? You put that money out, how much do we get back? How fast do we get it back? Is the cash from ops climbing over time? And we'll stay in there. You know, we'll redo our work. So we did really well with Strauss. That works out really well for us.

But we really try to look at a long track record. We'd rather pay a little more for a business and let it execute and have it be working than and sort of take a risk and see if it's going to work or not. Well, it's kind of like a great line by Tom Gaynor. I was listening. He said, do more of what's working. And so if something's working, you don't even be a momentum person, but a lot of times the market won't react that quickly, and it's executing. And you can see in the conference calls what's going on, and you can get in there and take that ride. And it's a lower risk ride to us because they've executed all that. So that's sort of more on sort of the pre-cash flow and how we try to sort of make sure it's sustainable over multiple of years and has a history. It's not just a one-off.

So sticking here with durability, let's talk about one of the metrics that I think is one of the most important metrics in all of investing, which is return on investment capital, which I'll refer to as ROIC. So one thing that's been on my mind lately after reading a lot of research by Michael Mobison is just how sensitive REOC is to regressing towards. the mean of its industry average ROIC or just, you know, in simpler terms, over long periods of time, R OIC generally just gets dragged down by, say, a really good business down to the average of that industry. So what are some of the signals that you are searching for that might give you extra conviction that a business's capital efficiency metrics are truly defensible versus, you know, succumbing to that regression to the mean?

Yeah, I would say when we search for businesses where high returns of investment capital are truly defendable. I'd say there are a few key signal that really stand up to us. I'd say first, we heavily emphasize the existence of a strong economic moat. We've said that multiple times, and that's just part of our process. And we feel that without a moat, any period of high return and investment capital is unlikely to last. So we tend to study, deeply study how real and sustainable that moat is. And as Buffett says, the company with that wide economic moat has sustainable, competitive advantage that can shield it from competition and allow it to earn those high returns invested capital. So we mainly focus on that. I'd say secondly, we pursue business models that

are low capital intensity. And we feel that if a business doesn't require constant reinvestment to sustain its economic, it's more structurally resilient to competitive pressures. That can really help sustain that high return invested capital as well. And then I'd also say we definitely evaluate if the drivers of high returns on invested capital are internal rather than market dependent. And so I would say if a company's return is dependent more unfavorable macro conditions, we're much more cautious about cloud, of course, because we want returns that are driven by internal efficiencies, cost advantages, or proprietary offerings that are harder to replicate. Yeah, we're big fans of the green blight formula, which is broil.

and the magic formula, and we'll even look on there sometimes, but good businesses at low prices. And so we look at that, the networking capital, and we look at the tangible assets of the business, the PPNE, put those together and how much free cash flow or how much operating income or how much can that business generate? And then is it sustainable? What trend is it showing? And really, the whole economy has become more of a service economy with higher returns, which is why sort of the multiples of these companies that seem really high, they might be a little more sustainable than people think. And so we really look for high returns on invested capital, sort of the operating income,

there's sustainable operating income relative to how much assets it takes to sort of generate that operating income. And then what's the trend in that? So with the sprouts or with some of these other companies that are making investment to your acquisitions, is the cash from ops climbing based on the money going out. And the other thing we look really closely at is working capital. You know, companies that manage their working capital really well tend to have strong management teams and are very efficient. And we came through the pandemic where people had to sort of expand their working capital and they bringing it back down.

How well does it manage you can do that? But you can go bankrupt if you're with no debt, if you're working capital, really just goes the wrong way because it can keep it. expanding. And so we do ask the management team, well, how do you manage working together? What's the incentive to tightly control that? And the companies that can spend that very quickly and efficiently, those tend to be really well managed. So that's an area of REOIC that we watch very closely. Because I'd say the economy just generally has, it's a less capital intensive economy these days. It's you can rent almost anything with, you know, pay as you go software or, and so people are doing that. And it's very efficient.

But most of our businesses, as Avi said, have higher RIC because they generate free cash flow. And if you're stopped generating the free cash flow, the cash from ops goes the wrong way. We're sort of looking at the exit door, just trying to really get comfortable with why is this happening. And we tend not to wait around for, you know, we don't trade a lot. But if something's sort of questionable, we don't always want to just wait around and see if it works out or not. We'll move on to something that's working. So shifting here from returns on an invested capital year to more management. So one area of management that you guys have discussed a lot is alignment, which is an area

that I think is incredibly important. And the more and more experience I get investing, the more and more importance I understand that alignment really, really matters. But let's look beyond just looking at insider ownership. Obviously, that's a good barometer, but let's look a little bit deeper. So, you know, what are some of the other deeper signals that you're looking for that might confirm that management's incentive programs are genuinely aligned with shareholders. Yeah, I definitely say insider ownership is just one aspect when it comes to assessing alignment.

And we definitely do work to assess if genuine alignment is there beyond that. And so beyond insider ownership, I would say we tend to look for behavioral evidence over time that management thinks like owners. And there are some deeper signs that we'll look at closely, like their capital allocation with discipline and how they deploy cash, company that consistently reinvested cash into high return on invested capital opportunities to return capital via buybacks or dividends that show real shareholder orientation. Also companies that maintain that Fort Knox balance sheet as well to us indicate management teams that choose to operate conservatively with low or no

debt. To us, that often signals that they perhaps prioritize long-term resilience over maybe short-term leverage back growth. And we look at their track record as well. We do a deep dive into their track record. What have they done? Have they executed on what they've said they're going to do? We tend to really like companies with management teams that kind of under promise and over-deliver.

And so we kind of tend to view management teams as our business partners. And we want to ask ourselves if we feel confident that these are people we want to work with and we like and we trust and they're honest and great integrity. And then when we can find that alignment, we have found that that really becomes a powerful force for compounding over a long period of time. Yeah, I think this is again where you can look through the transcripts and you could hear the management team talk and you can go through what they're saying and you look very closely at it. And you can really get a sense of what they're like and personality and kind of risk tolerance and how they answer questions off the cuff. And do they, do they,

want a Fort Knox balance sheet? Is that kind of how they roll? Are they sort of lined with us? Do they admit mistakes? You know, Buffett's the obvious classic answer. You read his letters, he's very straightforward about what he makes a mistake. And so really going through those transcripts where they're asked questions, they're not really prepared for. We love that because a lot of times they're industry analysts, they're asking questions, but the answers are, relate more to cash flow and stuff. And there's just great information there. And no one's really paying attention to the answer. And you definitely read a few of those and you get a sense. We own this lighting company LSI. It's the guy running at Jim Clark's done a really good job. And he talks about they have a very

strong say-do ratio. So he wants to make sure that they do what they say, they can do and they deliver. And he puts it out there and they put projections. We like the management team that will stick a projection out there multiple years, they'll, hey, this is what we think we're going to do, and we'll put our neck on the chopping blocks if we don't make it, and just that type of stuff. But management teams that deliver and you can sort of read through what they're saying in responses and just their whole tone, you could get a pretty good feel as to whether you could be comfortable with someone. And we rely on that. And the stock ownership is obviously important too, but you can really get a sense of kind of do they under promise over deliver?

in reading through letters a lot of times. And so we will definitely do that. So I've enjoyed reading a lot of the ideas from your shareholder letters. And there's a lot of ideas that I've already explored myself before even hearing about you guys. And also there's some overlap with other investors that I've interviewed. And one area that I really appreciate about your investing strategy is how you've balanced value and growth.

So, you know, there's obviously this kind of these two schools of thoughts in investing, the value crew and the growth crew. And so while there are value investors that just look for super cheap, low single digit P.E. stocks and then just wait for them to re-rate and then repeat that process. It's just not a strategy I personally find very interesting. I think that's part of the reason why I've enjoyed just Buffett's transformation where he kind of went from looking for those cigar butts to now looking for quality businesses. So yeah, with that said, I'd love to just learn a little bit more about your guys's process here and how you've kind of balanced that strategy between both value and growth investments. Yeah, I'd say we're much more aligned with the Buffett evolution you referenced of buying quality businesses at reasonable prices that compound over time. And we try to strike that balance by focusing on buying growth companies at value prices. You met with one of our investors and we were more in detail explaining our philosophy and he's like, oh, you guys are kind of buying growth companies at value prices. And we're like, that's exactly it. So we've taken that phrase and ran with

it and we have that on our office door here to remind ourselves. But I'd say we really just want own businesses that are already generating strong free cash flow and high returns and invested capital, but trading at valuations that reflect low expectations. So we're looking for misperceptions. Maybe the company's in a misunderstood industry or has a new management team turning things around. The market doesn't recognize yet. Or just flying under the radar due to its size. I would say, like, one thing that's really awesome about companies that we study, most of them have little to know analyst coverage. And a lot of them, people aren't paying attention to. And one specifically, Hammond Power Solutions in Canada, they're like the number one producer

of dry type transformers. And I think the funniest story is we had a call set up with Bill Hammond, CEO. And this was before the stock went up like crazy. But we had a call planned with him and he was driving home and pulled over to the side of the road to do the call. He was like, oh, I'm on my way home from work and going to have dinner with my wife and kids. And we're just really excited you guys wanted to chat. So it makes sense because, you know, when management is so invested, obviously, and in their story and they really believe in it, to get that investor interest when no one else is really interested in is very excited. And that one was like an awesome winner for us. And yeah, I would just say, you know, we're trying to underwrite modest cash

flows over just two to three years from today's cash generating pace and just ask ourselves, could this business be worth more if the market kind of re-telaborated expectations? And so when we find a business that keeps compounding, we're happy to hold it longer, and it can grow into larger, more valuable enterprise. But yeah, I'd say our balance is really low expectations going in with high quality businesses that are underneath that the market doesn't yet recognize. Yeah, it's hard to know which ones are going to work. So we'll do a bunch of, not a bunch, but carefully study a Hammond Power and we'll talk to the management team. And you find no one's paying attention to these companies and they're working so hard and they're doing such a great job. And they're, I mean,

having power had a, has a really strong position in dry transformers, and they hooked up with these distributors who could deploy their better solution, more customized across, very quickly across North America, and they were just starting to execute that. And Bill Hammond had two or three times, and he was so excited to talk to us, it seemed like, you know, we didn't know what was going to work, but they had very little debt, they had really good cash flow. We were paying a very low multiple. And that's kind of the formula. And that one worked out really well. We had another one, Duratech in Australia, this defense sort of contracting company, a rehab company. They basically go and defense bases will do work on them or mediation work, but it's low risk. It's just remediation. They're

not building a new bridge or anything like they're just, so they're in defense and a lot of, and that company was trading. We invested a very low multiple of EBidon, cash flow. They had a net cash balance. And it's worked out really well. And it just seemed to us like, geez, he's got a lot of running room. So we'll deploy there. Is that one going to work?

We had Sterling construction that became sterling infrastructure, the guy there totally executed, generating lots of cash. So we don't know how well they're going to work, but we know some of them will probably work big. And as Abby said, you make you real money on the compounders and the ones that really grow. And I repeatedly, Gabby does to do this, but we buy it personally as well as for some investors.

I sell too early. You know, the multiple gets really high. And I'm like, you know, repeatedly, we've had ones that have gone far higher because the business was just so good and it may take a couple of years. But that's where your big money is and we've come to realize that.

So to use prize saying, you know, heads we win, tails we don't lose much. But sometimes you win really big. big and those, if it doesn't work, you get most of your capital back. And so that's kind of the formula. But really finding that good growth business is where you're going to make your really big money because you just need a handful of those and you can do very, very well. And even though we pare down as they go way up, we still have earned really good returns on some of these. And TerraVest is another one. We talked to that company quite a long time ago. Dustin,

fantastic. And he was telling us where he was going to do. He was just so thorough when he described how he'd bought companies and what he would do to make them profitable and how he could execute it and just no air about him whatsoever, the most down-to-earth guy. And we held on to that one for a while. We still have a little bit, but there's a person and a team there that the value was him and his team and he could keep doing this rinse repeat on adjacent industries. And the leverage got a little high, but he could handle it. But, you know, we got a little comfortable with that.

But just stuff like that, you know, you just need a couple of those and you can do quite well. So it's a strategy of do a lot of work on it, trying to make sure you're not making a mistake. And then some of those are going to work out really big and try to hang on to them and as long as you can, redo your homework as it goes up. And so, but yeah, the growth is obviously key. And compounders is an overused word, but it's, we are like everyone else looking for those. So hopefully that makes some sense. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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when interest rates have fallen pretty drastically. But you've also gone up pretty high, even exceeding, you know, 40% of the funds assets when you feel that you need a more defensive approach. So let's weave this into one of the biggest influences of mine, Howard Marks, which I know you've already referenced is probably a big influence on yours as well. So how have you utilized maybe some of his teachings on market cycles to help improve your decision making concerning your cash positions? Yeah, Howard Marks has definitely been a very significant influence on just how we think of market cycles and the role of cash as a strategic tool. And as we already mentioned, one of the lessons we referenced by frequently that we learned from Marks is the idea that markets are cyclical,

and you cannot predict, but you can prepare. And another quote he references often, it's not his quote. I can remember who said it, but there are two kinds of forecasters. There are those who don't know and those who don't know they don't know. And I love that quote.

And, you know, we want to be in the former camp. And so we use these phrases often in our approach. And while we don't try to time the market, we do calibrate our aggressiveness or defensiveness accordingly. And something else I like that Mark talks about is just the pendulum of investor psychology and how when optimism and risk taking are dominant, you should be more cautious and vice versa.

And so I would say we view our cash position as a dial for adjusting risk exposure. As I mentioned, we're not trying to predict macro events, but we do pay very close attention to where we think evaluations are and what sentiment is across the market. And we're very selective about what's in our portfolio. And so we have no problem holding substantial. cash to wait for really good opportunities. And so after the COVID shock, we deployed cash steadily, but cautiously, once we had a clear view on the implications of our portfolio companies,

interest rates effectively went to zero. We dialed down our cash, but then we moved deliberately, not all at once. So it's a very cautious, defensive approach, as we've mentioned. And then another thing we've touched on already, but is a concept that Marx talks about that the future holds a range of outcomes that you just cannot predict. I mean, I think he had mentioned in one memo that in January 2020, there was no economists that mentioned anything related to COVID-19 whatsoever. And so it's typically those things that you're going to throw you off track that you never would have expected. And so we feel that having cash really gives us optionality when the opportunity set changes. And I'd also say our primary objective is to survive. And we like to reference Tom Gainer and he often

and says, you know, you just have to be able to survive so you can ring the bell the next day. And that's how we've been able to manage through really difficult periods. Like, I mean, O-A and COVID was building up this cash position. Yeah, yeah, I mean, you look at who holds cash, Seth Klarman, Howard Marks, Warren Buffett, Steve Romick. So the point is, some investors like, well, I want you to always be fully invested. And we've generally done pretty well taking our time redeploying cash as we're doing now with the tariffs thing and what are the rules now Do we understand what's really going to happen here? And we generally can always find something interesting.

And we'll just do our work one other time and redeploy the cash. During the financial crisis, we went up to 50% cash at the end of 08. And we gradually deployed that through 09. And, you know, so many funds blew up or they had redemptions or they were poorly positioned. So you always want to be the last man standing if you can. You can't be all cash, but just in our experience, you know, and I hate to say this because you live to regret it, but usually having that cash, we can deploy it and earn good returns, and it doesn't hurt us that much to dial up the cash during periods of uncertainty and it helps us sleep at night. And we get worried too, we're normal worry. And so as we went into this tariff thing and we had a lot of very high multiple stocks that are run up a lot, we took chips off the table and we may go back into them. So we have just felt we can always find and do work on another idea that's really attractive as things get beaten down. And that certainly happened with the financial crisis. We just took

our time in. The bottom tick was March 09 and we just found a couple of things that looked really crazy cheap, deployed our cash into them. And we had a fantastic year. But we took our time. And so we're really not good at trading or managing. It's just a matter of if we get nervous about the macro picture, we can step back a little bit and pair things down, keep our favorite positions, but go back into them as our comfort level goes up. Other people have their appetite for volatility is much higher than ours, and they don't mind it. We like to even try to sort of manage that, but as Abby says, we always want to be around to ring the bell for the next round, or Buffett says, to finish first you have to first finish, and look at all the

cash he's holding now, you know, and he finds stuff. And so that's kind of our feeling. There's so many, you've got four or five thousand publicly trade companies just in North America. We're going to find something no one's paying attention to. We like stuff that a lot of people aren't looking at. And we'll do our work and put some capital to make that that there. And that's worked for us pretty well over time through these periods of uncertainty. And it doesn't mean it'll always work, but it's been pretty effective so far. So another concept that I really enjoyed learning about from your writing is because I've researched it a lot as well is just treating equities like bonds. So this is something I'm sure

you probably learned it from also from Warren Buffett or maybe from Benjamin Graham. But basically it's just for listeners who might not understand it's when you're evaluating a business, you just kind of look at the free cash flow yield of that business and then compare it to the bond market. And I think a lot of investors do this. It's just, you know, it's a super simple way to compare the opportunity cost of a stock versus the kind of guarantee. need risk-free rate. So the difference, though, is that the beauty of stocks is that they can reinvest those coupons, which bonds obviously can't really do. And if they can do that successfully, they can actually increase the future yields if they have a very, very good return on those

reinvestments. So my question is for you, how is this kind of bond framework changed how you tend to underwrite specifically equity investments? Yeah, I would say treating equities like bonds is a very simple but powerful mental model for us. That's worked very well for us. And we look at the unleveraged free cashful yield relative to bond yields as our starting point. And it really forces us to be disciplined and consider what cash my getting based on today's enterprise value. And how does that compare to the sure return I could get from something like a government bond where I know the cashfalls are fixed and guaranteed? So am I being paid enough today to take on that uncertainty of an equity investment? and if a company can sustainably reinvest those cash flows at high rates of return on capital,

the free cash flow today is really just the starting point to a much higher yield on the road. And so I would say our underwriting process begins with what is sustainable free cashful yield today and how confident are we that the business is defensible and recurring and doesn't need massive reinvestment just to stand still. I mean, part of what investing is, as Buffett says, it's putting up money today, get more money later, right? It's every asset's a bond, whether you're buying real estate, whether you're buying equities, whether you're buying junk bonds. You can always strip out the debt, look at the enterprise value, and see how much cash you're

getting in. You can make them all somewhat comparable. And that's kind of in the back of our minds, something that we're doing to convert the equity. Because at the end of the day, we're just trying to capture as much sustainable cash flow in our little fund as for ourselves as we can. And everybody's trying to do that. There's a certain amount of cash flow on the earth and you're always trying to buy some that can grow at a low multiple. And so thinking of equities as bonds is really normal. And when you look at Berkshire and the

companies they buy and they invest in very consistently the enterprise value of the business, justice for the balance sheet, with the cash coming in, you look at when Buffett, bought Apple and the multiple. I don't know what it was, but it was very low. It was very low. And so he has a business that is essential to people. And people were worried about all kinds of things, you know, and the next cycle of the upgrade. And this thing was gushing cash. It was at a very low multiple. And it's essential and very sustainable and it could grow. And when you'd go back in Ben Graham's day and even earlier, a good company would always be one that was paying a dividend. Why? Well, Well, because it had the cash to pay the dividend.

So that was how people judged companies way back when the 20s and 30s. So this is all the same thing. You know, it's all just converting what are you paying for the asset and how much cash is it generating? What are you getting for what you're paying? And I don't, you can really sort of take that approach with any asset and figure out, you know, okay, well, here's how much you're paying? How much is it going to grow? And maybe it'll really grow a lot.

and it's got a great business model. But we find doing that tends to make the investment less risky because we're requiring a lot of current cash flow as a bond. The return is being loaded more currently than maybe in the future with some technology company where maybe it'll do really well, but it's got massive negative cash flow before you ever get there. And maybe that's going to work. Maybe it's not.

But we'll get scared out of that investment when something bad happens we know in the future. So it doesn't work for us worse. We have something that is sort of paying us now, whether, you know, and a lot of our investments do pay really good dividends. You're loading a lot of the risk up front. And we feel that de-risk the investment process a little bit. And so that's kind of, you can have companies that can't really grow. And they, even though their equities, they really are a bond and they never really go anywhere.

And we definitely, we invested in some radio stations. And there was no growth, you know, great cash flow, but no. growth, we didn't really make a lot of money on it. So, but we also invested in, you know, the Celestica's, the sprouts, the sterlings, the Hammons, where cash is coming in and they were able to deploy it to create significant growth. And those went up a lot. So that's sort of, yeah, we do say we have a bond like approach to investment. People say, well, that doesn't sound very exciting. Well, if the bond can grow really fast and it can get very excited, the stock can go quite a lot. So it's sort of a downside way to look at stocks.

One thing I wanted to carry on here is in regards to your affinity for capital like businesses, which is also a business model that I also tend to look for as well. I think probably both like capital like businesses for the same reasons. I mean, you outlined it very well. It's just simply you don't need to put a lot of capital into them and they just output cash. And so I like those. So let's talk more about this in light of being maybe a traditional value investor. So, you know, capital light investments make strong investments specifically because they don't necessarily have to reinvest back into themselves. But that doesn't necessarily protect the downside.

If we're looking at, you know, say Benjamin Graham, he was obviously looking at businesses that had way more assets than the value of the company. And therefore, if it was liquidated, you would still get all your money back. Whereas nowadays, when you have these businesses that are gushing cash flows, but don't necessarily need to add to their capital base or their asset base, that kind of margin of safety is just changed now. So in light of this, how are you guys thinking about downside protection specifically in capital-light businesses? Yeah, I think it really, again, just comes down to the cash flow generation.

And as we mentioned, we really like the greenblot approach and we're trying to buy businesses at low multiple. And just really like businesses that don't require a lot of capital, whether it's CAPX or working capital investment. We're always looking at that free cash flow. And the fact that we're always looking for businesses that have a lot of free cash flow kind of already pushes us towards capital-light businesses. because if you have a lot of KFX, it's required, it's really not going to be a business we're interested in because it's not going to be generating a lot of free cash flow. So we find those capital-light businesses attractive

because, as we mentioned before, that cash generation gives companies a lot of options. And so you don't really have a lot of money going in to keep the business running. Again, it has to have a moat and what is it doing to generate revenues, generate those free cash flow sustainably, and help offend off competition, and what is unique about the good or service that that company is providing. And sometimes you have a business that does have a lot of capax,

but it could be growth capax like Sproutes. So they were opening a lot of new stores. And so that's very much growth capics. So we're going to want to see that flow into an increase in cash from operations as the business gets larger over time. And so if they're spending, if a company just in general spending that money and they're not getting a good return on that, we're probably going to exit. So we monitor that very carefully. Yeah, I think when you get the capital like business, the value is dependent on the franchise and that cash generation. So as Abby is saying, the moat becomes really important. But our economy is not really an asset, intensive economy anymore, right? It's all goods and services. And so people have really moved to that. So you're really sort of assessing

the franchise they have, as she said, the good or service they have. What are they doing that's unique? Are they doing something that other people can't do, whatever it may be? And how, how are they outperforming other competitors? With this LSI lighting company, you know, they probably come up with 20 or 30 new products a year for the customer and they try to solve the be a solution provider for the customer of not just a one product, but what is the lighting issue inside a convenience store, inside a grocery store, inside or outside or how can we design lights that you can put in very quickly and last a very long period of time? How do we manage the displays for Arby's or, you know, when you drive through?

And so they're trying to, in little subtle, super little subtle things, but they're sort of a partner for the customers, which tends to create a recurring relationship. And so it's, it gets down to stuff like that. You've got to be doing something coming up with new products, a lot of R&D, something, you know, that really ties you the customer. So the customer feels like they're not as concerned about the pricing, maybe. it's more of the value ad you're doing for them. So, yeah, I would say with the capital, like the moke, as Abby said, becomes really important

that it's got to be sustainable. And if you get that wrong, you know, you're going to have a bad outcome. So we'll look closely at that. And we just really don't do a lot of asset-intensive businesses because that's not really where the value in the economy is these days. So you wrote that you typically look no more than, say, two to three years out when you're underwriting an investment. And this is quite different for many investors who use forecasts where they're looking, you know,

10 years out determining a company's intrinsic value with something like a discounted cash full model. So I'm curious to learn more about what led you to settle on that specific horizon and not longer or shorter. Yeah. So we, as you mentioned, two to three years out and underwriting investments, obviously very different from the DCF model that stretches out five, 10 years. I'd say the main reason, which we kind of touched on, the main reason we limit our forecast horizon is simple. and we just believe that uncertainty compounds over time. And as we said before, the world is just so unpredictable between macroeconomic conditions,

competitive dynamics, customer behavior, technological shifts. All those things make long-term forecasting very difficult to do and very fragile. We believe that trying to predict business performance beyond two or three years often creates a full sense of precision. And so, as we've said several times, Howard Marraxey can't predict you could prepare. And so what we do is we can, we feel we can prepare by focusing on our analysis on what we can reasonably observe and control within a relatively short time. And as we've said before, we want to own businesses that are already producing significant cash flow with resilient and competitive positions and trade at low valuation. And I'd say another reason, you know, we stick to that two to three year horizon is more behavioral because we want to deliberately avoid overconfidence. we find that many investors, whether it's Investors Club or elsewhere, as we mentioned, have

like incredibly long write-ups that are very complex. And we get concerned about getting trapped into the thinking that you can forecast growth rate or margins like a decade out. And as we've discussed, we're opposite and we always want to know what's going to go wrong, very focused on the downside, what does management worry about? And we feel that it's much safer and more realistic to focus on businesses that are already working out today versus valuations or add valuations that are undemanding today. Yeah, I think Bob Rubin, the former head of Goldman Sachs and Treasury Secretary, a really smart guy said he had a line in one of his books. I don't even know if the sun's going to come up tomorrow, you know. And so it's really hard to predict the future. And

a lot of these people we write as we read, you know, they'll predict things that are going to happen four or five or ten years out in the future. And it's just, they're too confident for us. You know, we just don't, we want to keep what's happening very close to us the next year or two. By a year or two, if your investment thesis hasn't played out, there's probably some kind of problem. That's plenty of time generally to, you know, and we tend to be not that patient. So we're trying to load the whole investment into what's currently going on and what's going to happen over the near term, a very simple model out over a couple of years of a cash from ops, EBDA, CAPEX, net debt, net cash, blah, blah, blah. And it's just another way to try

to de-risk the investment relative to other alternatives. So that's what the thesis is. And I would say we're always, as Abby said, you know, we're looking at the downside, what can go along? Because there's so many things that happen. And you want to just make sure you have a good risk reward the investment. So we'd like to load the reward in fairly close to us as opposed to something that's going to happen in 10 years of this or, you know, predicting really anything. Again, it goes back to the intelligent investor, Ben Graham, you know, not wanting to rely on projections at all. That's the upside. If that works out great, you can do really well. Doesn't mean it will happen. And we'll, you know, if the company does well, we'll redo our work and we'll, we can hold on stuff

for pretty long time sometimes because of that. But really try to not have to go out too far for the investment to work. That makes sense. So kind of continuing on this theme of near term forecast, I know you guys are looking at metrics such as earnings EBITDA cash flow. And one area of investing that I just find very fascinating is learning about some of the accuracy of investors' predictions regarding a business's fundamentals after they make them. Peter Lynch, you guys have mentioned here, has said that a great investor is going to be

right only probably six times out of 10. So with that said, what do you think your hit rate has been historically on some of those shorter-term projections and when wrong, do you think your forecast have been conservative enough to protect from significant losses? Yeah, I would say if we can get two at a free right, we're happy with that. And when we do make a mistake, we try to get our capital back quickly and to lose a lot of money. We just try to be very careful and defensive. And if we have a situation that's not working out as we thought or we perhaps did make a mistake, which of course happens, we, you know, give it time to work and try to be patient. But ultimately, we will kind of

of cold down our position and take some chips off the table. And if we think that we can get two out of three right, get most of our money back on some of our mistakes, we feel that that has worked out pretty well for us over time. But we tend to, I mean, we watch it very closely. As we mentioned, we're not just buying holding or buying homework. So, you know, we'll buy a position. And if we can get some more confidence in whether it's through calls with management or that the business can grow, then we'll increase that position. But yeah, if it's not playing out, we, definitely will move on to something else and put our capital to work in something that we feel can be a winner for us. Yeah, I think Abby's, I agree with Abby, you know, two out of three is,

it had a pretty good batting average. That's probably something close to that. Sometimes it takes a while to work, you know, where the company's Celestica, you know, where they're executing and doing really well and the market doesn't really care. And did you miss something? What did they know that we don't know that market's pretty smart? What did we miss? What did we, that's what we're asking ourselves. And fortunately on that, when we hung on and the market finally recognized it, but people tend to be very confident about that they're right. And you just, it's very arrogant to pick stocks, as Claremont has said, you know, that you know more than what all this thing is out there. So you really have to find a misprice situation where you really feel like, and we try

to do them just one at a time, almost as if, you know, which we are, we have small family office for deploying our capital. Is it worth? What did we understand about this situation that people are missing or why aren't they paying attention to it or what's special about what were our insights. And if we can get two out of three right and hang on to them, we had some really big winners and then most of our capital back on the mistakes. And if the cash from ops starts going to go wrong way, we're going to exit stage left probably. We're not going to stick around. The company always has an explanation and we're like, well, you're probably right, but we're going to exit stage left and see how things play out from afar. We've had sort of better luck doing that

than staying in things. And a lot of investors, if the stocks go against them, they'll add to their position. And we kind of do the opposite. We just sort of hang on to what we got. And we're always questioning if we made a mistake. And there's a lot of self-doubt and concern. And that's just sort of our approach because investing in equities is an extremely difficult, volatile task. And we kind of try to respect that, I guess. Yeah. So we had a great chat before this interview so I could learn more about what you guys were doing at Lowell Capital. And when I asked you about some of your specific investments that you consider mistakes, you were very candid about two of them. So those two were Barnes & Noble and Tilly's. So you mentioned that these were mistakes for kind of a common reason,

which was that both businesses had stagnant or declining cash flows. and you know, mistakes can often sting often for a lifetime, whereas winners can kind of fade in importance. But in regards to this mistake, is this a mistake that you think you've put a lot of work on and improving? And kind of maybe what are some of the other errors from the past that you feel you've improved upon? Yeah, I would say that we tend to have a bad habit of really liking retailers because we've found some that generate a lot of cash. And we just have to be really careful because they can look really attractive, but we could be missing something, which has been the case for, as you mentioned, we did Tilly's and Barnes & Noble,

which were disappointing investments for us. Tilly's had great cash flow, but we didn't recognize that that was kind of more related to the pandemic and stimulus payments. So it wasn't really recurring, and it was more discretionary. And Barnes & Noble had great cash flows for difficult periods,

but just their business model couldn't survive well against Amazon. And so it didn't have as much of a moat as we thought. So I would say that we try to focus more now on industrial companies. We still do retailers. We've had some success with retailers, as I mentioned, sprouts, but we're just really careful and cautious and really want to understand what their differentiation is. Sprouts, they were very much focused on the health conscious consumer and having unique products you only get at sprouts and things like that. I mean, other retailers could

definitely work out very well, too. I mean, AutoZone with more non-discretionary products where people have to get their cars maintained with oil and auto parts. And it's not really a choice. You have to drive to get to work. So it's a bit more critical. And so I'd say just if we're doing retailers, really doing a deep dive on what their moat is and making sure we understand it and just having those deep calls with management teams. So I would say, as we'd said before, our patting average on retail could probably be better. We'll still do retail, but that's scenario. We've had several mistakes. So we try to be very cautious. Yeah, I mean, we've been very careful with retail going forward and just really, okay, what's special about this? And it's just such a competitive area.

And so there's definitely a learning there and we're very careful about looking at it. You know, we have had some big successes there. Industrial companies, we like those. But it just goes to what's the sustainability and resilience of the business. And in both those cases, it was nearly as strong as we thought. Now, we got out of both of them pretty quickly. We were just, you know, this isn't working. And so we exited with most of our capital back. But you just know, and that's a thousand in this business. And you have to really constantly redo your work on the investment and the mode and your thesis. And does it still make sense? Et cetera. So those are kind of the learnings there for us. So James, Abby, I want to thank you

so much for coming on to the show and sharing your insights with me and the audience. audience. So I love to give you a handoff and share with the audience where can they learn more about you and what you're doing. Yeah, definitely. I'd say if anything we spoke about today resonated with you. We would love to connect. We're located in the South Bay of Los Angeles, a ride by LX Airport. And so I'd say feel free to reach out to us via email. My email is Abigail at Lowellcap.com and James is J.E.Z at Lowellcap.com. And we always enjoy talking to like men and investors and people and just talking about different ideas. So feel for to reach out.

We really enjoy that. And yeah, thank you, Kyle, for having us on today. This is such a cool opportunity. And we're so grateful for it. Thank you very much. Really fantastic. We really enjoyed it. We enjoyed it.

We enjoy your show and watch your legislature. So appreciate you having us on. Very nice. My pleasure. 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 theinvestorspodcast.com.

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