We Study Billionaires - The Investor’s Podcast Network - TIP726: From Obscurity to Opportunity: Jon Cukierwar’s Investment Edge

Episode Date: June 1, 2025

On today’s episode, Kyle Grieve chats with Jon Cukierwar about his unique global investing approach focused on undiscovered companies. They delve into Jon’s high-conviction strategy, his in-depth on-the-ground research process, and how he uncovers overlooked opportunities by combining valuation, quality, and growth. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 03:02 - Lessons Jon learned working for legend Bob Robotti 07:19 - Why Jon favours high-quality, growing businesses 17:26 - How Jon counters bias when meeting charismatic CEOs 25:50 - Why local investor networks unlock global insights 36:23 - Why Jon prioritizes owners’ earnings over net income 37:41 - The three essential traits Jon demands in investment and what makes an investment a “no-brainer” for Jon 39:47 - Why holding winners is harder than it seems 53:57 - Why Jon leans toward “boring” low-tech businesses 1:00:30 - What traits Jon values most in company leadership 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 Jon’s shareholder letters here. Read Jon’s research 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 • DeleteMe • Fundrise • Vanta • The Bitcoin Way • Unchained • CFI Education • Onramp • Shopify 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 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. John Suu Kiroir has quietly built one of the most impressive emerging track records in global investing today. Since the fund's inception five years ago, he's compounded returns at 15% per annum, crushing the S&P 500 returns of 9% per annum over the same time period. But John's route to success hasn't been the most conventional. After cutting his teeth under the legendary value investor Bob Robotti, where he learned about the power of truly independent thinking and deep bottom-up research, John launched his fund.

But instead of focusing on deep value, John focused on business templates that resonated with him. These were global stocks that tended to be smaller in size and were often overlooked by Wall Street. Now, while these companies may be obscure, they tend to tick the trifecter that John looks for, which are quality, growth, and value. Another interesting thing I learned about John was that he benchmarks his fund against the S&P 500, despite never holding a single stock inside of that index. His reasoning for competing with that benchmark is explicitly the response that I'd want to hear if I ever decided to have someone else manage my money.

We'll look at why John prefers foreign markets to U.S. ones and how he crosses the hurdle of understanding businesses in foreign countries. We'll also have a much closer look at what John looks for during his site visits and talks with management. If you've never gotten a chance to read any of John's research, you're in for a treat. His research during the due diligence process feels more on par with, with something like investigative journalism than what you'd expect versus the average analysis. This is how he decides if an investment is a true no-brainer.

And speaking of no-brainer investments, we'll go over precisely what he looks for in these types of investments that have just gone on to produce some incredibly large multi-baggers for him over a pretty short period of time. One other interesting topic we discussed was his thoughts on steady-state earnings. This is a way of looking at the underlying free cash flow of a business if it weren't investing for growth. He has identified many great companies where cash flow appears meager. Still, when adjusted for factors such as growth capital expenditures, they reveal some cash generating machines with some very impressive upside potential. So, if you're the kind of investor who

values original and contrarian thinking, deep fundamental research, and the pursuit of multi-bagger stocks, you're going to love this episode. Now, let's get right into this week's chat with John Sukhirwar. 14 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 Grieve, and today we welcome John Sukhruar from Sōra P Capital Partners onto the show. John, welcome to the podcast. Hi, Kyle. Thanks for inviting me here. Now, let's rewind the clock a little

it here and start from the beginning from before you were managing solar peak and talk maybe about one of the investors who I know you learned a lot from. And I'm referring here to legendary value investor Bob Rabadi. Now I know part of the value proposition of bringing you in in the first place was based on the fact that you were willing to work for free. And this reminds me of the Warren Buffer offering of the same deal to Benjamin Graham many, many decades ago. So can you review maybe some of the primary lessons that you took away from Bob Roboati and other key value investors who have helped shape your investing strategy that you use today? Yeah, absolutely. Oh, man, that was 2016. I was 22 years old. And yes, the work for free, well, can be exactly for free because

of, you know, wage laws and regulations. But think of it as close to it as you can get. And in hindsight, that was by far the best investment I've made in myself in my career. So a decision I'd make again 100 times over. Yeah, it's interesting. I think back and there really were some powerful lessons from working there being exposed in that environment at Robadi and Company with Bob Robadi. You know, I think the most important takeaway from me there was that they truly are independent thinkers. I would say almost radically independent thinkers. And it's something you appreciate more when you leave the environment and just see how the rest of Wall Street, you know, things. You know, there's obviously, you go in their office, there's no TVs playing CNBC. There

is a Bloomberg, but almost nobody ever uses it. I think the back office really uses it more than anybody. And, you know, look, there's no brokers. I never saw a single broker who came in there to pitch stocks. They don't subscribe to basically any sell side research that I can think of. You know, look, they just want to get the facts from the bottom up. They want to get the data up, see what companies are trading cheap and mispriced on a statistically cheap basis. I think it's the only office I've seen those old school value lines, the actual printout versions, right, where you can flip through hundreds of companies. But yeah, you know, they, like they, they were not interested in what other people thought.

You know, managers, you go to the rest of Wall Street, they want all the sell side initiation reports. They want to talk to their other manager friends to see what they think about stocks. But, you know, they want to come to conclusions on their own. And I think, you know, that is really powerful. You know, and as one of the managers there once told me who I really admire, every year, you know, 40,000 people fly to Omaha. They come to see, you know, Warren speak. And, you know, they hang on to every word and they buy the, you know, the cherry Coke and Doritos and so on. But if you look

back of Warren's career, his most important lesson was to think for yourself, right? Because of so much of what he did was really, you know, ahead of his time. And so yeah, I think independent thinking was a critical thing. You know, obviously, there's other lessons. Valuation, they never, I don't even think anyone there is open Microsoft Excel, you know, the senior folks at least. Every valuation can be done in an eight and a half by 11 inch piece of paper, but the point being, you know, the number should hit you over the head like a baseball bat, right? And that should not be, if you need hundreds of lines of Excel to tell you if something that's a good investment or not, you know, it probably, you probably don't have much. And yeah, you know, aside from

those, Bob himself, I've noticed, is a very good behavioral thinker. He has, I would call a behavioral advantage. I know a lot of people like to think they do, but, you know, I think he truly does. Just as far as, you know, his ability to, without stubbornness or blindness, with conviction, just go against the tide when the market's increasingly disagreeing with him. And then eventually, you know, may take years, but, you know, he's proven right and in a big way, you know, with a lot of his picks. So yeah, a lot of great lessons I took from a Bodian company. And, you know, it's one of those things, right? You read all your, you know, you're in college and after you read your Buffett, you read your Munger, you read your Phil Fisher, you read everything.

And all these principles that I just described, you know, all the greats communicate. Then you go to Robadi, you think, oh, yeah, well, obviously this is how investors should think. And then afterwards, you see the rest of the investing world, wait a minute, this is not normal at all. That was certainly the exception, right? So anyhow, look, terrific firm, great people, even better investors, definitely learned a lot of great lessons there. So I know that at Robadi, they obviously lean towards very statistically cheap companies. And I know that you, obviously, I've studied researched a lot of the businesses that you own and even own a few in common, look for these more high quality businesses that I don't

think Robadi would even bother looking at given, you know, some of the, you know, the evaluation metrics. So was there like some sort of moment or maybe some sort of case study or concept that caused your shift to go from where Robadi was focusing on to what you're focusing on now? Yeah, I think that's a great question because you're absolutely right. I think statistically cheap companies and especially with kind of a bias for maybe not biased, but just pensioned where the opportunity is for cyclical companies, right? Home building, energy, those have been successful themes for Robadi and company. And for me, I think part of it was really having the

freedom to look at what I wanted at such a formative young age and in my journey. And, you you know, I was looking at all sorts of different companies and, you know, for one reason or another and, you know, investing can be very personal as to, you know, what you're comfortable with, what excites you. And, you know, for me, over time, those sort of, you know, high quality companies, you can call a growth at a reasonable price. But really just, you know, the kind that, you know, Buffett might teach, Buffett might talk about a lot of it in his letters. And And the later letters, of course, you know, the partnership letters were a different story. But that really kind of for one reason or another just, you know, attracted me more.

And again, look, there's there's so much money to be made in statistically cheap names and cyclical companies. Just at the end of the day, after spending, you know, a couple of years just kind of drinking from a fire hose at all ends of the spectrum, you know, it was really more the quality, the growth, the long-term holdings. That's what attracted me more. So you're paying further up the multiple spectrum, of course. But free cash-fells and average may be more durable.

and you may be getting higher growth rates. I did take a course. There was a very kind professor at Columbia's executive MBA program, and he was very kind to let me audit his course. His name is Tom Traforos and very influential figure to me over the years. And his course was called a study of the elements of great businesses. And so if I had to point to maybe one other item that influenced me, it was probably that course.

and just kind of what I learned from there and uses my foundation for how I view the investing world. And then, ever since then, it's, you know, because if I had to look at today, I definitely have this quality growth element, but I also want my cake and eat it too. And I want to find companies on the very low and the valuation spectrum. So it's not for not. You know, what I learned at Robati and the margin of safety and downside protection that can come from buying very statistically cheap companies at low multiples, right?

I think it very much lives with me today. And, you know, my kind of investing approach today is definitely a blend of, you know, of that statistically cheap approach and also the quality and growth elements of it. I want to ask you here a little bit about your benchmark because you seem to be a part of a trend that I've noticed in some outperformers, at least ones that I've actually interviewed. And that's investors who invest in businesses that aren't even inside of the S&P 500 while actually using the S&P 500 as their benchmark. Now, I might be biased here because I'm usually in, I'm usually in, I'm usually in, I'm usually interviewing fund managers who have outperformed. And obviously, if you outperform, it's a lot easier to compete with the S&P 500. However, I still notice that there are fund managers, maybe with less

attractive returns who might even have holdings in the S&P 500, and they're using other indices such as, let's call it the MSCI World Index. So can you tell me a little bit more about why you settled on specifically using that index, even though it's unlikely that you overhaul the business inside of the index and that you focus on businesses that aren't even in the US. Yeah, that's a great question, Kyle. And I think to confirm, I don't believe I've ever held a company and so had the S&P 500. So the factual statement on your part, though it really is a great question because there's

a lot of managers who use many different indices. If you look from day one of our partnership, from our founding letter, I gave a lot of thought as to, hey, we're choosing the S&P 500 as our index. And here's why. And at that time, you know, we had no performance and we had no idea if, you know, look, obviously we strive to have great returns if it would be above the S&P 500, below the S&P 500. But, you know, the reasons are, you know, kind of twofold why I choose it. Number one is it just really has been for some time and should be the hardest index to

beat, right? You know, from an institutional manager standpoint and I think from retail investors as well, you know, consistently around 90% of managers, of mutual fund managers, asset managers, fail to beat the S&P 500, right? And so if you have 90% of managers can't beat something and you can beat it, then you're probably demonstrating some skill and that, you know, your vehicle and your way of investing should generate, you know, volatility notwithstanding greater returns over a long period of time. And number two is the way I view benchmarks, right? I think there's two trains of thoughts to view benchmarks. And the first is as opportunity costs. And the second is, you know, mirror

all of the factors of your investing approach. Now, I think number one is a lot more relevant for us because, you know, when I look at, we're not an institutional product and I have no intention to be, my goal is to compound returns at the highest rate responsibly possible over a long period of time. And we're fortunate to have found, you know, many, many high north individuals and family offices who have aligned with that vision and who have, you know, partner with us, right? You know, over 50 people to date. And, you know, I would argue of all those people, they're a lot more interested in compounding their wealth at a high rate of return over time then seeing, okay, how do your portfolio do against a mirror image, you know, factor complete

version, you know, based on the global market? Because if I were to do that, right, you know, you would have to start globally, you would have to go microcap, small cap. You'd have to exclude emerging markets. You'd have to exclude much of U.S. exposure because we, on average, have, you know, little U.S. exposure. And so I'm sure that maybe if you really customize it, there is some benchmark out there. But then even if you find like the perfect one, to me, it's, all right, well, you know, I don't know what exactly we're accomplishing because I'm not choosing those factors because I want those factor exposures. It's a bottom up process to generate high return. So I think just at the end of the day, it's a lot more valuable for these people to see,

okay, what is the, if we want to invest in the stock market, right? Or they can invest in their own business opportunities, but, you know, because we're in the stock market, if you want to invest, your own money, what are the most likely opportunity costs there would be? And for me, obviously, it's, you know, think of the average mom and pop person, you know, yeah, we'll invest in the S&P or, you know, I think because of our small cap exposure over time, I think the Russell 2000 is another very common index that people would look at, right? Now, you can, you know, expand it from here and there, but I think just really, you know, honing it and narrowing it down, you know, look, the S&B 500 is, I think, you know, the most fair opportunity costs and the most fair benchmark

It has proven to be the toughest to be it over time. And so I think going forward, my full intention is to continue using it forever as our partnership's benchmark. One part of your investing process that I've always admired is just how in-depth your research is. So the first time that I got a chance to read your research was when I was having a DM conversation with Chris Mayer and was trying to mine some ideas from him. And he suggested reading your Dino Polska report to learn more about that business. And full disclosure, I own shares in Dino Polska. And I have to say, you know, to this day, it's probably the most insightful and informative research that I've ever read on a specific company.

You know, some other company reports are just very superficial surface level and just not informative. And oftentimes they're just quant-based. You know, they're just reiterating numbers. And it's just, it's interesting, I guess if you're a quant, but if you're interested in actually understanding the fundamental reasons of why a specific business is really, really good, it's just, it leaves me wanting more. And yours definitely did not leave me wanting more. It was one of the most complete ones that I've ever read. So I know that you have roots. in analyzing specific businesses from your days at Tulane, where you took a course called the Birken Road Reports class. Now, you researched company Popeyes as an equity research analyst for that

course. So can you please just maybe take us through your own research process when you do these site visits and discuss the advantages that it offers you? Well, that's incredibly kind of you, the high praise for the report. And I didn't know that about Chris Mayer. I haven't met him, but you know, incredibly kind of him, too, to refer to it. And yeah, yeah, the Dino Polsco report, that research was a lot of fun. That trip was a lot of fun. I think generally, and I'm happy to use that trip specifically to give examples here, I think generally, you know, my approach is pretty, I think, straightforward in conduct

field research. And, you know, if I had to outline it, I think there's just generally two buckets of data points I'm hoping to collect. You know, number one is you always want to go in with a straightforward hypothesis or hypotheses, right? It doesn't have to be just one thing. but hey, like, here's what I'm hoping to accomplish with this trip. Here are the reasons I'm going because I need to confirm is this part of the thesis

true. Is this part of the thesis true? Is this part of the thesis true? Right. And it can be things that, you know, the company's told you can be things that you've, you know, you've found through your own primary research, but things that are really only answerable or best answered, you know, for yourself. And by the way, you know, a lot of people like to talk about Scuttlebutt and like to quote Buffett, but, you know, you'd be surprised at how very few people actually go and do the work for themselves and do the business for themselves. So I think generally speaking, if you're ever erring on the side of if you should do a field research or not, do it, and you know, you'll probably, you know, collect data points that most of your competitors

aren't collecting. So, you know, I think that's number one, you know, going in with the hypotheses. And number two is just, you know, being open-minded and observing the data points that you didn't know you were going to collect. And eventually, in just about every case, some of these data points end up becoming essential to your thesis, right? Whether that's confirming your thesis or disconfirming your thesis. So those are the two buckets that I generally look for, you know, when I'm approaching field research. So one thing about ScuttleBot, I've done a lot of research on it and I try to do as much as I can, although, you know, I obviously don't have full time to put into it. But one thing I've definitely noticed about it myself is I've had all these opportunities,

especially with small cat managers. You probably know the same thing where I can actually get access to the CEO of the business. And so one thing that I've found is that it can sometimes feel like I might be getting biased because a lot of times you're friendly with these people and you have positive feelings towards them. You know, obviously you're not, you probably don't dislike them because they're taking time out of their day to meet you. So just speaking towards biases, you know, how are you actively trying to fight your

own biases when you're meeting these people and just trying to focus on, you know, finding the facts of the hypotheses that you have rather than allowing them to be, you know, good salesmen and selling you on how good their company is. Yeah, look, I think that's a terrific question. The truth is, it's very hard to remove bias completely, maybe impossible to remove, you know, if there's one thing I've learned, you know, from reading all these books on psychology, how people work, how people operate, and then kind of getting experience in various ways, I'm convinced we're all hardwired to be vulnerable to many different heuristics.

and the best you can do is really just try to minimize it, right? So I think you're right. Look, I think it's an advantage usually when you, you know, especially international small cap companies, you're one of the first, you know, North American or U.S. investors to visit them and they typically roll out the red carpet, right? As far as, you know, sometimes it's hard to get 30 minutes on the phone with them. They will meet you at headquarters, you know, they will talk to you for four hours. And that can be incredible because you have a list of like 80 questions you want to get to,

you know, in order of prayer. And you can get to just about all of them. And then, you know, you learn other things. And so it's really good. And again, it's like, how many other people have visited? Well, if they're telling you you're the first, then you're the first, right? And this is nobody else. No, but look, in general, I think it is something that, you know, you really do just, you

know, and this is a hazy area of, you know, it's not something really quantitative, it's more qualitative, but, you know, of just kind of, you know, judgment of another person, judgment of their, you know, their character, judgment of can you trust where they're telling you and analysis along these lines. So yeah, like, generally, I think, you know, and I can think back to many instances where, yeah, like, I do feel this person, their salesmanship is showing and they're being a little, and you have to balance that with, okay, the credibility of their statements and other things they're telling you. So I don't have like a blueprint answer here, but I think, like, what you're saying, like, it's very true. It's real. It is a risk. I think it is something

you can minimize a lot. And I think it's something you just, you kind of evaluate that. that on balance with everything else that you're learning from that CEO. Now, I want to discuss a few of your major edges. And I want to start with the fact that you invest primarily in small caps. So the average market cap of your portfolio over the last few years has been in the $250 million range. Now, this is kind of interesting because I think you can still find stocks that institutions don't heavily own at this market cap, which I know you've pointed out can be a pretty

big advantage because you get this discovery process. So can you kind of outline some of the other key? benefits on top of the one that I just mentioned there of owning small caps and why you've chosen to focus on that market cap segment? Yeah, I think there's a lot of benefits there. And I do think it really is a chance to describe our edge, our competitive edge here. You know, when you look at small caps in general, it's really well documented that small caps compared to, you know, larger caps, big caps, large caps, mega caps, of course. They just have a lot less analyst coverage and institutional coverage.

Now, that's well documented. Everybody knows this. So parlaying onto that, is, you know, if you look at the United States compared to other, you know, developed countries around the world, emerging markets too, of course, but, you know, we stick to developed markets. I've just found that the United States is very competitive, right, relative to other markets. For every, let's say, 10 sets of eyeballs looking at a company, even in the small or, you know, microcap realm, there's far fewer people, you know, whether it's three sets of eyeballs, five sets of eyeballs, two sets of eyeballs in another country, looking at, you know, a similar stock. And so I think when you parlay that small cap, you know, company has, you know, less

coverage and then you kind of move into like international countries, then you just really tend to get this, you know, niche areas where there's just a very, very little coverage and which kind of is, you know, the bottom line, you know, with, you know, with these small cap companies, right? And you can even call microcap companies, of course. And so, you know, when I think about our edge from a small cap standpoint, when we're looking for things, you know, along the three pillars of quality, growth and value, if you're looking at, you know, things, you know, small cap and, you know, develop global, you know, you can really find companies that meet all three of these criteria. It's not easy. It's, you know, I think it's still, you know, as somebody

who does like to sleuth around, it's still very hard. And you might only find one or two of these opportunities a year that like really cruelly check the boxes. But, you know, if you find those one or two opportunities a year, that's really all you need, you know, because you can do very well, on those opportunities. 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,

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sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. So another one of your major edges is, like you just mentioned, that you invest outside of the U.S.

And I know that maybe over the past few years, this might have acted as a little bit of a hindrance as more and more capital has been going into U.S. markets on the back of Magnificent 7 and AI. And that's been, you know, propping up those markets, while maybe causing multiple compression as, you know, maybe there's some funds that were in your stock. or in indexes that held your stocks that would shift to other areas of the market. But as you pointed out, there is the disconnect between U.S. and international markets,

and it'll likely close at some point, who knows when. Now, from your experience, I'd love to know a little bit more about how long it takes for global businesses to close this price and value gap compared to maybe a U.S. comparison. Yeah, closing the price to value gap. So I don't typically think of it that way. And I think that isn't. So I think there's two parts of the question here. is generally referencing the shift in capital that's occurring. And number two is, you know, how

those valuation, I guess the market valuation behaves in the U.S. relative to other countries. So to kind of tackle the second one first, it's not something I really think about where in the terms of, okay, is there going to be market discovery? And if it does, how soon will it happen? Because look, when I make investments, right, and the reason why I really prefer lower multiples to start on top of durability, on top of significant growth opportunity, is that you. is because I'm looking for downside protection here, right? And I'm looking for, you know, if something goes wrong, you know, obviously, right, how far can this price really collapse relative to expectations, right?

And now obviously you don't want something where profits go to zero where there's just, you know, or something horrible because then yeah, it doesn't matter what multiple you buy it, that there's unlimited, you know, downside here. When I'm looking at these companies, I don't assume any multiple expansion for the thesis to work out and for us to earn satisfactory returns, right? If you're buying a company that you think should compound its free cash over share at 15 to 20% for the next three to five years, and you're buying it off a really low free cash flow multiple or earnings for share multiple, assuming that they're roughly similar, let's say of eight times

or nine times, right, you're probably not going to lose money in that scenario. And if you just forecast and set your expected returns based on that free cash flow of share growth, then yes, you should earn 15 to 20% per year. And that's, to me, that's a very satisfactory return. Now, when you layer on the probability of multiple expansion or multiple contraction, then, yes, odds are in these scenarios, you also will experience multiple expansion off of a low base because the company's delivering in a powerful way, they're a market going to be getting bigger. And if you're really like one of the first people to discover these stocks, then odds are

eventually more people should discover it along the way as well. So in my experience, when you have a setup like that, it's almost usually leads to multiple expansion and sooner than later given discoverability. Because look, it's, you know, stocks these days relative to 20, 30 years ago, value gets realized a lot quicker, right? So, you know, when you find something, I guess the bad news is you don't have much time to get up to speed on an exciting opportunity. But the good news is if you do hold something and you think good things will happen fundamentally, it should get recognized sooner by the market, right? So the U.S., you know, but it's funny, it really depends on the country. There are countries that behave very similarly

to the US, right? Australia, Canada, you know, Sweden, yeah, like a lot of these companies, you know, if really good news happens, yeah, they will, you know, they will see stock price appreciation. And then there's some other countries that can be a bit slower to do so. And then there's a whole host of quirks in every country to be aware of. And that's why, you know, I think it's good. Before entering a market, you know, it's great to do a lot of homework to really get your arms around the idiosyncrasies of each market. And also, you know, another thing I found very helpful is developing a local network of managers in every market too. And that really helps. You know, I can't tell you how many times I've had questions that I don't know where I'd be

or where I would have received answers without them. And yeah, that's been very helpful. So yeah, and I think your first question was interesting too referencing the capital flight. You know, look, and I, we could probably talk for hours about this, but this is not a macroeconomic conversation and, you know, I'm not making any macroeconomic predictions. But I think it is It is interesting to note that, you know, I guess since the inception of my partnership and for well before that since about 2009, you know, we've experienced this period of what they would call US exceptionalism in the media, right? Where, you know, in a nutshell, you know, US assets, equities in particular have just really

outperformed the rest of the world. The US dollar has gotten stronger as well, which adds reflexive loop to everything because if you're a non-U.S. investor, investing in the US and the US dollar appreciates, then your investment appreciates as well. well. And if you're in Europe and it helps against your own benchmarks, now we're seeing for the first time in 15 years or so, things are going in reverse where, you know, foreign equities are outperforming in general and who knows how long that'll last. But, you know, the U.S. dollar, I think that's very interesting because that is depreciating against other currencies. And, you know,

it has seen moves like this before, but given the way history moves in cycles, there is some chance that this kind of headwind of, you know, the U.S. dollar moving against you and, you know, U.S. markets just substantially outperforming foreign markets that could all kind of go in reverse for all we know. And if it does, you know, for someone like us who predominantly invests outside the U.S., obviously, look, I think we've done okay. We've done well, you know, despite any of this and it's not something I take into account. But worth noting that it could be a tailwind, you know, for managers who do look at, you know, global stocks for the foreseeable future. So you've mentioned, obviously, we've been talking a lot about investing internationally.

And so there's one more thing I really want to get your opinion on here. So, you know, obviously when you are investing internationally, in my opinion, there's the question of circle of competence. You know, how well do you actually understand these other markets when obviously, like you said, you have this local investor network that you can rely on, but you'll probably, I'm sure you would also admit that you'll never get to the same level of understanding that they will of their local market. So I know that you mentioned in another interview that you can do this invest globally because

you specifically have a framework to allow you to do so successfully. Now I assume, you know, this means the framework for finding good businesses doesn't really change whether you're looking in the U.S., Canada, Australia, the UK, or Poland, which I know in markets that you like. But the part that I've always kind of found a little trickier to navigate is accounting for unknowns in foreign countries. You know, there's things like regulation, culture, sentiment, political motivations, and they're all a little tougher to understand in foreign countries where you're not boots on the

ground every day. So I'd just love to know, you know, how have you managed to fit those types of variables into your investing framework? Yeah, I think that's a good question. And I think what I mentioned before about having those local management relationships, as you referenced, I think that has helped a lot. And I really do think, you know, when you dive into a country, it's important to really, you know, first of all, view it as totally, you know, unique country. Yes, it can be a developed country and similar in many ways, but at the same time, culturally, the way even the capital markets think and behave, everything can be very different and very idiosyncratic. And there are probably many examples I can give.

And I think really just spending time to like get your arms around, understand what's happening, how it works, even if it takes months, just deep understanding. And I think screening the stocks in that country helps too, just in a lot of, you know, subtle way is just screening through hundreds and hundreds of stocks, you kind of, you notice things. What are the table stakes for valuation over there? You know, what are some of common ways the annual reports read and, you know, the accounting, you know, little things that they do slightly different than the most of the countries. And I think once you get comfortable with a country, you know, for me, I think, you know, culturally, you are probably never, you know,

unless maybe you've lived there or you have ancestry there, it might never quite, you know, fully embrace how people behave with products or services. So by that reason, right, you know, I do to, I do avoid things on the consumer discretionary side. I do try to avoid things where, you know, there could be a big cultural blind spot where, hey, this seems so obvious to me, but who knows what could happen? For that reason, by the way, I think exactly for this reason is why I avoid emerging markets, just because the tail risk, you know, which maybe is not so tail risk necessarily, of just things that can happen, you know, yes, with culture, but also with geopolitics, you know, with inflation and central bank behavior, even things you would never imagine

in the United States, like confiscation of assets, right? I've had, you know, one situation in the past where, you know, you start questioning, okay, the stock looks extremely cheap on a multiple basis, but everything's going fine and then the profits are stable. But then like, you know, you kind of realize, wait, the money that they have in one of their countries might be trapped. And then you start to ask, is the money really there? And then you think, well, wait a minute, this is this not really investable all of a sudden, is it? So those are questions you never want to worry about. And in developed markets that, you know, essentially kind of gets rid of, you know, all those big headaches. Now, look, and that's not

to knock, there's plenty of smart people in emerging markets, right? I'm sure, just not a game. I think Warren Buffett even had a line in the latest annual meeting of just, you know, Not a game I think I do very well in, right? I think is maybe how I would phrase it. But yeah, look, I think, you know, I do tend to lean towards more kind of consumer staple, like durable, you know, businesses over there, things that more simple, you know, less complex, more simple and, you know, can give examples there. And, you know, things that have also businesses that have existed for 20, 30 years

where, you know, okay, you don't really have to guess so much as to, you know, there's a new manager or a new business segment or a new business line. It's something that the same people have been doing for, let's say, 10 years, 20 years, 30 years. It makes all the sense in the world. It's a consumer staple product or something that's, you know, like a necessary in that industry for one way or another. And that I, you know, for me, I think that layering those on has helped me minimize, you know, those risks in these countries. One thing I was ecstatic about when researching you was that you're also a fan of Buffett's owner's earnings, which is a metric that, you know, I really, really like, but I don't really see

very often spoken about in shareholder letters. And so, you know, just to give an understanding of what that metric is for those unfamiliar, it's a metric that Buffett used to think about a company's cash flow. And basically, the main difference is that he differentiates between growth capx and maintenance capx. So I know that you use this metric to help you determine a company's value. And you can often find some pretty wide discrepancies when comparing owners' earnings and say just free cash flow. Obviously, free cash flow is great, but it can hide a company's true cash generation as it nets out growth investments. Now, while there's companies that have high free cash flow and that can be excellent, a company with low free cash flow, but ample reinvestment

opportunity, I think is probably one of the optimal ingredients to make a compounding business. So can you comment on the importance of this metric and how you utilize it to maybe help you understand the business's underlying cash generation as well as valuation? Yeah, owner's earnings is very important. And it's when I view a company and I look at their financials for the first time, owner's earnings is always just like the first calculation that I try to make, just on a very crude basis. And you know, you do need to do a bit more digging sometimes to get there.

But yeah, you know, owners earnings, the other way that I view it as steady state free cash flow, I think that's a very important metric. And exactly what you said, sometimes there can be a wide discrepancy, right, between what the reported free cash flow is, the reported earnings is, and, you know, owners' earnings. Oftentimes, I think, you know, net income free cash flow and owner, they can be good prox for one another. Though, yeah, look, you know, there's, you know, first of all, obviously CAPEX is something that a lot of people, you know, will look at and rightly so, you know, looking at what, you know, the discrepancy is between, you know, depreciation and capital

expenditures and that CAPEX, how much that is gross, capex, how much of that is maintenance cap-ex, you know, purchases of intangibles you include obviously. You look at leases and, you know, with the new lease accounting, it's not always clear what depreciation is. And so there's different schools of thought, but, you know, from my school of thought, you know, I think you do need to parse that out because, you know, depreciation from operating lease expense, you know, I think that's a real expense. Like, you're paying rent, you know, you're paying whatever every month, every year. And so, you know, but a lot of people might add that back. But then, And, you know, the real kind of discrepancies can lie in the income statement, too. And, you know,

you have companies, maybe they are more having an R&D. And you have to make your own assessments and judgments there of, okay, how much of this is, you know, is growth in the future? How much of this is, you know, this kind of on a maintenance basis. You know, customer acquisition costs in the form of, you know, sales and market can be big as well there. If you really do the, do the right math and look in the cohorts and really drill down. I mean, but it's funny because I got questions sometimes, right? You know, I own a couple of distribution. in a business, auto partner we can use specifically as one that we probably both know. And one common question I get is, hey, John, this is great, but if you look at their free

cash flow or their cash flow statement, they have no free cash flow because it's all going into buying inventory. So therefore, I can't buy this stock. They have no cash flow and like Buffett would say this is 100 times free cash flow. I'm like, okay, well, to which I would say, well, look, let's say this company tomorrow decided we're never going to grow again. What would their steady state, right, free cashment wear, they have to maintain their competitive position, right? So they have to spend something to, you know, to keep the facilities in check, you know, keep the cars on the road, things like that. And, you know, how much you just not grow, not string the business, but just maintain their current profit levels. What you would see is they don't need to buy

tons of added inventory every year, right? So the change in network capital would be essentially zero from an inventory perspective, right? Unless maybe the inventory gets slightly priceier every year, but then that gets offset by other. So, yeah, so then in that case, is like your owner's earnings or your steady state for cash flow, it would be a lot closer to that income, right? Probably very somewhat in that income compared to what, you know, the cash flow statements has today. So, you know, just thinking of it like, and again, I'm not saying there's a right or wrong answer. Everybody has a different way of thinking about it. For me, this makes all the sense in the world. This is the way I think about it. But I think it's generally a good

tool to use in your arsenal. So you mentioned previously today that you like back of envelope type math and valuations. So therefore, you try to, you know, maybe try to avoid overly complicated things where in order to come to an evaluation, you have to use a spreadsheet that's, you know, multiple tabs long. So for instance, let's say, I'd be looking at a company and let's say it's trading at four times next year's owners' earnings or free cash flow or earnings per share or whatever. So using your framework there, you know, you don't really need to twist the numbers much because if that number is five times or six times, you still probably have a very good investment, especially if it's growing its intrinsic value at, you know, 15

and 20% per year. So tell me a little bit more about some of the key ingredients of like a no-brainer investment like this one that I mentioned would be look like to you. Yeah, you know, and there's a lot of different ways. There's a lot of different types of no-brainers investments, you know, that there can be special situations of all sorts, right? You can, you know, it's something that we've definitely participated in in the past, like American Coastal. Though, you know, from kind of the The common, I guess, no-brainer that I look for is something that meets all three criteria of high-quality business. Right now, we can talk about, you know, what quality means, but high-quality business

and high-quality management team, right? Substantial growth opportunity ahead for many years or, you know, put in industry jargon, you know, a larger addressable market for them to, for them to penetrate. And the third would be valuation, right? And that's where, you know, just, you know, whether you're looking at free cash yield, whether you're looking at on a multiple basis. As you said, it's just so obvious, you know, you don't need to build a giant spreadsheet and I agree with that. So that's typically what I would call a no-brainer investment, you know, from my end. And kind of, you know, the final element there

is, you know, my preference is in looking at these international markets and looking at the small microcap end, is, you know, kind of meeting those criteria and not needing a variant view per se, but just approaching a situation where there is no prevailing view. So you don't need a variant view. You just need a view that is not really existent in the market. And so, you know, to me, it doesn't worry some risk that, look, there are so many smart people out there. There are tons of smart people out there.

And I'm going to do my work and I'm going to come to the conclusion of, I think, whether I'm right or very convinced that I'm right. But, you know, there's always that risk that, hey, maybe the other smart people out there, they have a view and it seems to be the prevailing view. and maybe they're right. And there's some risk that I'm wrong here. Hopefully my downside isn't that big. And I do what I can to protect it by buying cheap.

If you have a situation where there is no prevailing view and you're totally convinced you're right, to me, it's just, it's a lot easier to get comfortable that, you know, you should do okay in this investment. And like, there's no looming, you know, consensus downside risk, you know, from these, from these share price level. So when I was reviewing your shareholder letters, I found your biggest investment. mistake pretty amusing and not just because of any Shaden Freud or anything like that, but specifically because I think that's probably the most significant problem that nearly every investor faces.

And that's a problem of selling winners too early, unfortunately. Now, I know you've trimmed several of your multi-baggers maybe a little bit earlier than you'd like, given how far they've climbed after the fact. Bader Group being a good example. But you also mentioned that some maybe quicker multi-beggers can expose you to increase risk. can you maybe describe how you balance the need to stay invested in winners while reducing risk as they appreciate in price? Yeah, that's an interesting subject.

That's one, maybe one of the most difficult things that I've grappled with, you know, over the last several years and, you know, almost four years and starting the fund and, you know, evolving, you know, my thought process towards is, you know, you find these great companies, right? And it's easy, you know, from a position sizing standpoint and just from a conviction standpoint at the no-brainer stage. And then as they appreciate in price, durability and quality,

if you're right about that, it shouldn't change much. The valuation side, it should change somewhat or it could change dramatically. Now, there's an extreme example where, if you see, let's say, a 2020, 2021 bubble, we saw how silly some of these valuations can get. And then, yes, it could be just,

maybe that'll be an easier decision. Hey, my thing went from 10 times to 100 times earnings, we should sell. There's a 1% yield year. I don't care what, you know, you should sell. You probably should sell that stock unless it's growing at like 50% a year into perpetuity. Now, not at that extreme, but yes, you mentioned major group, for instance. And, you know, I think that really, you know, everybody likes to say, well, you can't kick yourself over mistakes of omission and, you know, so on and so forth. But yeah, I do think it was our biggest mistake, just even quantitatively, because if you take how much appreciated after and how much

we trimmed, then it probably is a greater missed gain than the biggest single loss we've had in the funds inception, right? So it probably was my biggest mistake. Now, it's just hard because with these companies, over time, you know, if you take a long enough time horizon and they're earning really high returns on invested capital and they're growing in high rates, then the starting Having valuation shouldn't matter too much. And I think the right answer long term is to err on the side of holding these stocks, holding shares in these companies. Because yes, over a one to three horizon, you know, you may be wrong or foolish for holding on to them if they then, you know, the multiple contracts a lot and, you know, something happened short term. But over the very

long term, if you think you're right, you know, you should still earn a very good return. And what I've learned is, and I think from this experience, is that, you know, in the short term, my thinking was, well, we were coming out of kind of the 2022 lows. This was maybe one of my best performers. And the valuation was maybe, you know, one of the highest of my portfolio companies. Well, there's all these other great opportunities at really low multiples that I want to take advantage of. So I guess in the sense that like recycling that capital into other opportunities, you know, it was okay. But I think almost, you know, most of them did not perform as well as a major group. And so, you know, it, long story short, you know, the multiple expanded from say,

you know, 18, 20 times earnings to 37 times, 38 times earnings at one point. And I miss all that, you know, as far as the trimming that I did, you know, in a short period of time. So look, I think it's a tough question, but, you know, the more I speak to the older, the really successful investors who have lived for decades with this type of investing approach, they all say the biggest mistakes I've made in my investing career have been selling too early. There's always a good excuse for that. The stock had a good run. It looks expensive. Other things look cheap, you know, some other reason, yet. But you know, then you sell it and then it's just so hard, even for these great people, they found it's just so hard psychologically to buy

at a higher price than you sold and you end up waiting for that price and then it just never gets there again and you lick your wounds for the next 30 years. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform.

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I would only ever repurchase it again once it was below my initial buy-in price. But, you know, as I've gained more and more experience and had actual stocks go up in price, I've really observed that a lot of my winners would grow so much that, you know, in order for me to even re-enter it or buy more of it, I'd have to have like a cataclysmic event that would allow me to purchase below my initial buy-in, which, you know, obviously as investors, we all want to avoid cataclysmic events. So I'd love to know just a little bit more about position sizing after you first buy in. You know, are you purchasing most of your shares right away at initiation? Are you tranching in over time? And also, how do you think about averaging up or down once you've

established a position? When I look back at our best, you know, performing positions, I think in almost all of them I have averaged it up over time. Not because in each case, it wasn't because I wasn't actually actively thinking I should average up. I think it's more, you know, trying to stay disciplined and thinking, okay, at any given time, you know, the way I monitor these portfolio companies is, okay, you know, what, you know, obviously, you know, is quality still in check, right? And by the way, you know, if out of all my criteria, quality always has to be there, at least, you know, perceived quality. If it's not, then, you know, just it's an exit candidate, right? So, you know, for me, quality is paramount. So, you know, you kind of confirm, okay,

qualities there, you know, the growth opportunity, you know, where is that at right now, right? When I underwrote this three years ago, here was the forward-looking growth opportunity, have they kind of plucked low-hanging fruit, have the law of large numbers crept in as their addressable market runway, you know, maybe smaller and their growth rates are lower as a result, or maybe greater. You know, things change for the better sometimes. And then you look at, you know, valuation. So I think in all those opportunities, right, you know, you find something that's extraordinarily

cheap for one reason or another. And, you know, it runs up. But then you kind of get more conviction, you're more comfortable, you keep doing more work, and you kind of realize, I don't own enough shares of, you know, this company. I'd like to, you know, I think it deserves a bigger portion of my portfolio, even if it's run up 20%, 30%, if you really think that this, you know, has triple digit, you know, return potential in some, you know, short period of time, yeah, you probably should buy it. So I think in most cases, like I have, but again, not because I'm thinking about I should average

up or average down, but it's been more, you know, just from a discipline mindset that I try to keep, right, looking at everything, you know, all my portfolio companies together and, okay, like, what deserves my capital? What deserves, you know, what doesn't deserve my capital, maybe right now, I'm, you know, reevaluating and assessing things. And I think, you know, just as a side note, that's been a discipline that I really tried to adhere to over time, right? Just, you know, always, you know, frequently reassessing things. I tend to be more of like a cynical or maybe not cynical, but just, you know, a suspicious mind. when it comes to companies and as a result, I just tend to be very careful.

So if and when like something does happen, even if it's a minor event, like my mind immediately just goes to like, okay, like, we need to be over careful here. We need to reevaluate or just like just check in on everything that you can. So this kind of mindset, you know, probably leads me to, you know, yeah, like I prefer the cheaper, safer multiples. I prefer the durable businesses. But, you know, when it, when it does cross that threshold, when it does meet that threshold, you know, I tend to sleep pretty well at night, you know, with these companies.

So since your fund's inception in 2021, you have quickly grown your partners to over 50. And you've noted that a lot of the capital at inception was your own. And obviously it's changed a lot since then, I assume. But since your strategy is based on small cap businesses, I'd love to know more about what your plans are for once you continue growing your fund. Obviously, you're outperforming the market, meaning that your assets under management are going to grow. And I just love to know, you know, what are your plans once maybe your assets under management

and grow so high that you maybe can't execute on the same strategy that you're using now? I think that's an excellent question and something I've given a lot of thought to. I think it's an excellent question because of kind of the behavior that you see in the industry and that tends to play out. And what I think, you know, the right answer should be, at least for, you know, from the perspective of compounding at a high rate and doing what you say you're going to do, you know, so for our partnership and our strategy here, right, I, you know, you know, you, you know, you, I think the best way to approach this calculation is, you know, you look at your investment

style in the past, you look at the companies you've invested in, you know, what have been the average daily volumes, you know, a time of investment, you know, what are your kind of portfolio sizing that you're comfortable with to achieve these returns and invest in these companies? And you know, when I've applied that, you know, and not with the volumes today, like when we got in when there was like lower liquidity when like nobody knew about this, you apply that, you apply, you know, your comfortable position weights such that you're you're not compromising your returns, right? And you extrapolate that to, okay, what's the maximum capital base at which we could operate

this partnership, right? Based on my analysis, that I think that kind of level, that range where we just really cap out at strategy is $150 to $200 million in AUM. Right now that obviously that seems a lot lower than what most people would say or think or, but you know, for me, it's really, yes, like that is the limit and I have no intention of sacrificing our returns in order to raise more capital, right? Because the way you would do that is, well, okay, maybe we can manage 400 million, 600 million, one billion dollars one day. But the sacrifice and the compromise that you have to make is, you know, all else equal.

Let's say you find there's one or two no brainer situations every year. You can no longer make it say like a 10 to 15% position. You can only make it a 5 to 10 or a 3 to 5% position. And all of a sudden, look, if you're finding one or two these a year and they're driving a substantial part of your returns, then you will be handicapping your returns. Now, you know, people can say, oh, well, I'm a smart person. I'll find three to four of them or five or six of them every year. It's probably not going to work that way, right? Don't overestimate yourself. It's probably not going to work that way. No, I think it's interesting because when you look at the industry, you know, I've seen this play out a lot in my short career, right? But you look at,

you see other funds and you see, you know, these funds get the very big AUMS very fast. And, you know, the way that the allocator world works is, you know, once you get one allocator, you get two allocators, then it's, you know, you get the social proof from it, you get the big names on the door, and then, you know, it becomes a bit of a beauty contest and everybody kind of, you know, rushes in. But the point being, the managers, it becomes a lot easier to scale if they want to attract that capital, right? So if you, you know, have a great track record, you kind of, you know, you're marketing well, you hit this breaking point and escape velocity and you were $200 million, $300 million, and, you know, you're whatever the narrative might be, then you could, if you wanted to,

and with all the right tools and if you should be so lucky, scale to a billion dollars. And now, you know, I've seen a lot of managers who, you know, they did well in the micro, small, maybe small, you know, mid-cap space. I think, you know, and I don't know what they think, but I can only imagine, oh, you know, it's somewhere in the back of their mind or, yeah, I can do well in mid-caps, you know, because I'll be, you know, more mid-caps is going to be my straight. Yeah, I can do mid-cats or I'll find, you know, two or three times the small-cap opportunities and just like a significant departure from where they built the returns in the past. And like four to five times, it doesn't really pan out well. Either, you know, this kind of two

scenarios I've witnessed, either it's kind of a, you know, a slow bleed of, you know, mediocre returns or worse over some period of time and then eventually, you know, they hold on to the capital as they can. Or it's kind of a quick collapse if, you know, they get a bit overconfident and, you know, concentrated positions in some, you know, questionable companies and they don't do well. But, you know, I just think the incentives are bad because, you know, the managers, and again, you know, I'm not not to manage, but specifically, but just general Wall Street behavior, the managers, if they get to keep their management fees, their performance fees, like, while they had that asset base, and they can make their however much amount of money, right, put some big number on it. To them, they can say,

I won, right? This is to many, many people, and look, there's nothing wrong with this. You know, this is an industry that tracks a lot of money. But if you say, but if your fund collapses or just, you know, you have a mediocre track record and you've made all this money, for a lot of people, I think that's winning for them, right? And for me, that's, you know, complete opposite, right? That's what gets me out of bed in the morning, right? For me, you know, yes, the money will come, obviously, but, you know, the track record, the putting up the best numbers at the end of the day, making your mark on the industry,

I'm getting out of bed to find, you know, the next great, you know, company XYZ that, you know, that really, you know, just gives you this thrill, this rush. That is what gets me out of bed in the morning, right? And so for that reason, I fully intend to, you know, abide by that cap. And I also want to, you know, going back to the plans for the fund and the partnership, I really don't plan to raise capital above, call it $40 million, maybe a bit less, but roughly around that area. And I know a lot of people might say that's crazy, but, you know, I want to, you know,

for two reasons. Number one, if the capacity is, let's say, $150 to $200 million, I don't think it's good business or just a good idea to raise up to say $100 million. You have a couple of good years, let's say. And then all of a sudden you have to tell your partners to just join, hey, you know, I might have to return your capital to you. probably not going to go over well, just not good business in general, not good practice to treat people. And number two, I really, look, I want those people, look, if you join, you know, while we're up to,

you know, before $40 million and you get in, you know, I can look them in the eye and say, look, I don't know how long it's going to take and I can't make any promises, but, you know, if we compounded the rates that I'm happy with, you know, we can triple quadruple quintuple your money before we even have to have the conversation of, you know, who gets their capital back it's a pro rata distribution. So that, from a business standpoint, that is the plan for the fund. I'm in no rush to get there. The way I view it is I'm competent capital the way that I'm comfortable with

that I think is going to make us money. And anyone who wants to join along for the ride for the long term, please join. So you've invested in several companies I think are pretty low tech and boring, but have excellent unit economics. And, you know, boring to me, well, I think a lot of investors see that as a negative. I don't. You know, boring's beautiful to me, especially in investing. So I think that it seems to me at least that you're intentionally looking for these kind of non-glamorous

businesses and industries as maybe a fertile hunting ground for future opportunities. So I'd love to just know, you know, what are some of the patterns that you've observed in some of the companies or industries that you've invested in that you think the market consistently is underappreciating? Yeah, it's funny. I guess the boring or non-glamorous companies here. I think it's never been by design. It's been, you know, there are more maybe, you know, tech companies.

companies in tech adjacent industries and, you know, a bit more flashy. And I think the reason is just that from when you're screening and looking at their companies from a bottom up standpoint, they just tend to be at higher multiples. Right. And, you know, from, I mean, I look at it from, you know, more free cash flow, you know, owners earnings, steady state free cash flow. And, you know, these companies trade on multiples of EBITDA, multiples of sales that I'm just simply never going to get comfortable with.

If a company is not profitable, it's almost an absolute deal breaker for me. I don't think I have any companies in the portfolio today that are unprofitable. And so, you know, profitability is essential. And a lot of these companies, they are unprofitable or, you know, there are long duration stocks, I would call it, where you have some people who, you know, have a 10-year forward view, hey, this company is very cheap on a 10-year forward basis. And if we're right, this will be like in a hundred-bagger, right? It's okay, just not for me.

And so I think it just tends to be like the more boring, non-glamorous businesses that, you know, have these lower multiples to begin with. And that also, you know, if they're in a more boring, like non-glamorous industry, it probably also filters for like less interest, less people looking at it, longer track records and also like less likelihood of disruption if let's say it's an essential service, right? It's not too fast moving. And so, you know, look, they haven't been disrupted for the last 30 years. It's not that they can't in the future.

It's just that, you know, maybe they're just in an industry, you know, where it's just, it's really hard, you know, for tech, even like AI to really change this radically. in like a short period of time. And oftentimes, like, for instance, you know, you can see the beautiful thing is, I think is, and from a risk perspective, you can see the change is coming and you know what they're going to be. And you just know this is going to be, okay, a really long time from now. We can take auto partner as an example. It's a company we both know and that I've studied electric vehicle adoption, you know, is a risk to the business. And it's one that, okay, you're selling auto parts right now, right? And, you know, that internal combustion

engine cars, you know, over time, they will, you know, spend more dollars for replacement parts than, you know, electric vehicles. So I think then the map becomes pretty straightforward. Okay, well, there's two things that really matter. Number one, how many years until we see, you know, 100% adoption of electric vehicles are close to it? And the number two, what is going to be the reduction in spend, you know, over that time period for that? So you think, okay, if this is the biggest risk to the industry, then that's great because you can calculate, okay, let's say it takes, you know, They'll be 25 to 30 years, right, for full. And look, Poland, they import their cars that are like 13 years old from Western Europe.

So that's like a 13 year delay behind what the first world is going to. So it's like, I'm in these things, they're actually moving in reverse this year because electricity is important. People want their gas cars. It's an adoption, I think, it's just going to happen slower than people think. But let's say 25 to 30 years, right? And you can do the math yourself. And let's say, you know, and I've done the work as well, let's say we think there's going to be

a 30% reduction in overall spend, right? There's fewer parts, but those parts have to replace are a lot more expensive, and they're just going to get more expensive over time. But let's say there's a 30% reduction in lifetime spend per car and auto parts. So 30% over 30 years, you get to around a 1% reduction in spend. So it's like, okay, if I thought auto partner was going to keager its profits at 13% for the next, like, you know, let's say like 12% for the next 30 years. Okay, well, let's subtract 1% from that.

And that we're at 11%. Is that going to break your thesis? It shouldn't, but, and it doesn't, right? So I think that is actually a big positive of these non-glamorous, boring industries. So we haven't had much of an opportunity today to discuss what you look for specifically in management teams that you're considering investing into. But I know you've made some excellent points that the CEO of a business, you know, has to make decisions on a daily basis that help guide the company into a better or worse state and as well as that is shaping the culture of the business. But I'd love to know a little bit more about what other management aspects that you're actively looking for to determine if the management team is above. average? Yeah, management, you know, evaluation, that's an important part of the process for me.

And it's something that I enjoy. I think, you know, there are, I suppose you can call it more, you know, quantitative aspects about a management team that you can screen for, right? From a screening standpoint, you know, that helped me get comfortable. For instance, for me, sort of, you know, table stakes for me for companies are often, you know, not only has the company, has the company had an impressive track record of stable and growing profits over a long period of time, say at least 10 years, 30 years, 40 years, and have the people responsible for that growth, are they still with the company? And sometimes it might be somebody older, like as a chairman, but then it indicates,

okay, well, the people they picked to replace them and then the culture in the company probably is not radically different than when they were there. So for me, like, number one, yes, like that's, you know, look, if I had a company where, you know, There's like very little track record. There's a new CEO who I don't, then it's just so tough for me to even get excited and comfortable with that. It's not a right or wrong answer, just my comfort level. So number one, there.

And number two, yeah, you know, founders are obviously great and people love founders for obvious reasons. They had to be more ambitious. The company's personal to them. They want to see its success. They tend to live, eat, you know, sleep the company. You can also have, you know, either like a new CEO who was maybe promoted internally or that, you know, the CEO, the founders.

steps aside to be chairman, but they handpicked somebody. And you know, you can kind of about, okay, this does this make a lot of sense? Major Group, for instance, that worked out beautifully. They had a CEO who, he was an outsider, I think in 2021, give or take, Justin Newich. And, you know, he's proved to be more than capable in the company as, you know, multiplied its profits in a short period of time, you know, under him. And, you know, and one of the reasons, I think, you know, there were many reasons, but, you know, one I remember was just they're looking to expand in North America. He had, you know, from his career, a very deep rolodex of relationships in those areas. And, you know, that's a unique thing to the company. And you think for yourself, does that

kind of make sense? So generally speaking, look, when I look for in management teams, you know, I like to see longevity, right, in that standpoint. Now, are the people I'm investing with, do they have a track record usually, you know, of success here, right? Or is this a new team? So longevity, you know, I do want to see ambition, right? Founders, this tends to be all mostly the case. But, you know, with other folks, when you sit down and you spend an hour with somebody, at least in my experience, I think it's pretty, it's like a barbell of outcomes. Either they are very ambitious and you can tell, like they're ambitious for the company, not for themselves, for the company, and they want the company to become the best of the world at what they do. And they do

eat, sleep and breathe this company. Every decision, like every second of the day, their mind is consumed with like, what can I do to improve this company? Then you have the other end of people who, you know, it's just more of a job to them right there, they're here to collect a paycheck, where there's some bonuses tied to some easy e-bidabogi that they're going to achieve. And you just don't get that, you just don't get that passion. You can just, it kind of oozes out of them, right, that either they have it or they don't. And so, like, you know, that's, so I think meeting people in person and going through questions, you know, asking them questions, seeing how they think, how they feel, I think that's

important. Thing number three, integrity, obviously you need integrity, right? And people, it's one of these things, like, it's funny, when I took the CFA, you know, exam, you know, there's like an ethics portion. A lot of people don't study it. Oh, I'm an ethical break. And then they fail it. And that's a deal breaker because if you fail that, you can ace the rest of the exam,

but you actually fail the whole thing because the curriculum requires you to pass that one. But I think the same thing here. You think, oh, it's like, you know, integrity. But it's so important because, you know, to look for it because like these are kind of subtle breaches where they might do one or two or three like small things. Like they tell you something here, but then the results later on, you know, there's something totally different.

And then they kind of change your story. But you kind of have to remember, okay, well, they're being inconsistent with me. Or, you know, it could take a lot of different shapes. but then, you know, there's never really one cockroach in the kitchen. So if you kind of find them being a bit unethical or cutting the corners too much, right, these people, they move fast and breakings, but they cut the corners too much, they do something or that kind of cross the, like, it's usually not limited to one thing. So, you know, just leads to the question, okay, is the company doing things like that, or are they going to do things to shareholders that aren't

great? So integrity, obviously, you need to look out for. And then lastly, I think there's alignment of interest, right? I think in this case, owning a lot of stock tends to be, you know, And that's another quantitative screen, by the way, there, like, the more companies I look at, it's one thing that I used to say, okay, well, you know, you could overlook it to some extent. You know, they may be like they're going to make enough salary and enough bonus, but I really think there's nothing quite that can replace, like, large ownership right now. If it's, you know, it could be like, let's say, $10 million to them is only 3% of the company. That's still a meaningful amount, usually to these people, unless they come from, you know,

royalty, but then they're probably a second or third gen founder I don't get excited about because they weren't the originals and they tend to, you know, I think the studies show they tend to be, you know, worse outcomes. But, but look, it's usually meaningful to them. And, you know, you want to make sure as the company's profits are growing, the minority shareholders are going to see, you know, the spoils as well, right? Because if you have somebody, they don't know how much stock, there could be some, either through like bad incentives or whatnot, they are taking just big operational risk with the company. They will, might try to do things. And, you know, Charlie Munger says, you know, tell me the incentive, I'll show you the outcome. I think he's right.

they could do things where, you know, they stand to make a lot of money if things go right and if things go wrong, you're the one who's holding the bag, you know, heads and I went, tails you lose. So I think, you know, alignment is very important. So I think those four things, you know, kind of sum up a lot of the management analysis there. So there was another interesting concept that you wrote about in your letters, which was not letting good enough get in the way of perfect, which is the inverse of don't let perfect be

the enemy of good. So you've noticed that many investors in markets make errors when they do things such as satisfying on investment that might not necessarily tick all the boxes. You've noted that your three boxes are quality, growth, and valuation. So can you maybe take us through an example of when you or someone you've observed has settled for just good enough as an investment and maybe how that decision played out? Yeah. Well, I can cite somebody and that would be me. It's still very much something that I do. And I try every day to fight against and to improve in a sense that, you know, look, I think it's more of like, if you think about not letting

good enough get in the way of perfect, and I think that's right, I think it's a good mindset to have. And I think it's a goal. It's something you should strive for because in an ideal world, you know, you think of the best investment that you've made over the last five years and the setup of that investment going into it. And now imagine owning 10 of those or 15 of those in your portfolio. That would be like the perfect portfolio in a way, right?

Something you're comfortable with, great setup. And they all do very well. Now you're going to make mistakes and, you know, not everything's going to pan out. So, you know, even if like 11 out of those 15 do really well, you're going to have a good outcome. But yeah, it's, you know, it's more like a challenge to remind yourself every day because I think what a lot of people do, and look, and myself included, is you, whether it's because you can't find, you know, these quote unquote perfect investments or just you kind of drift away, you know,

from that discipline. Yeah, you might sacrifice or compromise a bit more on, you know, whether it's quality or growth or value or whatever the pillars that are important to you are, you just might drift away from them a little bit where, you know, the investment just, you know, you take a step back and you think, wow, yeah, like I definitely, you know, shouldn't pay more attention to that aspect. And then you end up paying the price for it. Maybe you don't, you know, anything can go up and you can be right for the wrong reasons or mixed reasons. But, you know, when you think about those opportunities, you know, yeah, there's, there's, I think even in my portfolio today,

there's like elements of, you know, this is, okay, this is good enough, but it's not perfect. Even if we look at Mater group today, right? Now, you size for it accordingly, right? It's no longer the big size it once was. But that's something that could theoretically be replaced if I found a portfolio of 15 perfect companies, right, that were like a major group with, you know, four years ago, right, with like a much lower multiple in the higher growth rate. Like, yes, like, I would buy that one over the one today because like today, you know, it's no longer at nine times earnings.

It's at, you know, call it, you know, 18 or 20 times earnings, right, forward earnings, depending on how you look at it. You know, the growth rate probably isn't 30 to 50 percent, maybe it's, you know, closer to 20 percent, give or take for the foreseeable future. And quality, I think, is still the same. If anything, it's probably better because their position in Australia has gotten stronger and they've proven their North America opportunity. It was more way more early stages. Now, they've proven that they have a strong position there and they should continue to grow. And this concept works in Canada and the United States. So if anything, quality has probably gone up and maybe you're more comfortable holding the stock for that reason. But yeah, that's probably, you know, might be more on the good enough side of things where, you know, added 20 times, 19 times, 18 times, 14 and multiple. you know, and that growth in a profile, all else equal, quality equal, yeah, you would, do better, you know, in finding the major group before years ago. And so I see it as like a personal challenge for the portfolio and it's something that I strive to, you know, all the time.

So I know that you've been spending some time these days looking at Japan. And, you know, Japan, unfortunately has been historically kind of market that has been full of value traps. But there's, you know, new corporate governance reform going on now. And it seems like they're attempting to optimize more for creating shareholder value, which is great, of course. Now, I know many other value investors are looking in Japan as well, and they have been looking for a long time and often not very successfully, but I'd love to just know a little bit more about what you're doing specifically in Japan, maybe know a little bit more about what adjustments you're making to your investing framework, specifically when looking in Japan. Yeah, and I'm a bit later

of the party than many with Japan. It's very interesting and it's something that I've been taking a serious look at recently. And, you know, in Japan, it's a developed market, of course, a terrific country in many respects. And definitely, you know, aside from communication, which I'll get to in a moment, definitely investable, like, for all those good reasons. Now, you know, it's, I guess going back to March 2022, somebody who I know well and, you know, he'll know who he is. But he urged me to look at Japan, said, hey, John, there's a bunch of corporate governance reforms that look like they're happening. And they were still kind of in COVID lockdown until October 2022.

So in hindsight, yeah, that would have been an amazing place to invest. But the reason I didn't and the reason I still didn't, foolishly until just a couple of months ago was because just the communication barrier to me has always been something tough to get around if you're going to build the concentrated positions, right? You know, look, I'm perfectly comfortable translating documents in other languages, right? There's Google Translate. There's other AI-based tools out there where you can retain the format of the PDF or whatever the document is and translate it.

And it's great. It's excellent, right? And it's you're just reading English, basically. It's the speaking to management that is more of the deal breaker for me where, you know, let's say you have a scenario, I think it's the important scenario of, you know, you own a stock there and, you know, you're two years into ownership and things are going well, and then suddenly one day on a microloor, you know, and suddenly one day on a microloor, level or an industry level, something happens and the stock is down 40%.

And most stocks that do well over a long period of time study show, they will be down 30% or 50% at some point, if not many points. It's down 40% and it seems scary in the moment. And you realize you try to call the company to ask what's going on, get some comfort. And like, you can't really, you can get a translator, which everybody does. He can speak to them. But there's a lot loss in body language. which is a lot loss and intonation.

And you're just kind of getting words. And generally speaking, too, I've been told by many that Japanese CEOs, they just, like, their communication is just not the same as in the West. And not in a bad way. It's look, every country is its own. It's just the way that we're used to. Like, you know, you're not going to get kind of the same, you know, free flowing information. And it's just a different type of response to communication.

Right. And so all of that being said, you know, you're in a situation where you might sell the stock down 40% for the wrong reasons. or for the right reasons, but either way, so if I'm thinking about it, okay, well, I'm going to build a concerted position in something, and I'm almost like, then I'm underwriting the chance that at some point it's going to be down 40 and I'm going to sell, you're just handicapping your forward returns like tremendously. So now, to get around that, I have found a solution, and it's the first time I'm really considering this, but is taking a basket approach

to Japan, right? Not something I've done in other countries, but it's, you know, a bit more of a quantitative approach, so it called like a quantumental approach, like, you know, like fundamentals, but from a much more quantitative sense of, look, you know, there are pockets of Japan in the small cap and microcap areas that have done very well. From speaking to a lot of people, you know, I posted something on X and it's incredible. You just get like everybody reaches out to you. It's still, you know, wonderful community. And I had like six or seven conversations and like over the span of a couple of weeks, you know, and a couple of, you know, a couple of the people, you know, especially were very helpful and, you know, really appreciate them and shout out to them.

And, you know, it was, you kind of start looking, okay, in Japan's small cap territory, you know, what has worked, what hasn't. And there's pockets there where if you look at certain factors, they have Kagers that you would be shocked by. Like there's, you know, there's kind of one factor that, you know, looking at in the small cap, like the 15, 25 year Kager is like 17%. I think that's better than the S&P 500. And it's certainly better than the benchmark, which is done like 0% over the time in Japan.

And so you think, okay, so, you know, you kind of, you can start there. And the beauty is, like, there's something for everybody there. But I think, you know, while that's true, I think for me, it's you can tighten the screws even more. Like, look, at first, you filter, okay, things that, you know, meets quality standards, meets, you know, like, growth metrics. And it's trading at, you know, below like 10 times earnings for free cash flow, right? And then you get like over 100 companies, 100.

And you're like, wait, wait a minute. Like any other country you screen for it and develop world, you might not find anything. But then, you know, so you have permission to kind of tighten the screws on, you know, on book value on net. And CAV, like there's so many net nets out there on the cash on the balance sheet and maybe one day you come up. And what you said about the capital reform is interesting because, look, I think everything above $2 billion basically has kind of been picked over.

That game might be over or it's in the later innings because all the big asset managers who want to go for liquidity go there. And because look, just for those who might not have been reading about it recently, the government essentially said to all companies listen on the prime exchange, right? That's their kind of S&P 500 equivalent. If you're below one times price to book, you have a deadline by, if you have a deadline by It was March 31st, 2025 to submit a plan of how you're going to get above one-time's price to book.

There's a lot of companies who are below one-time price of book, and the easiest way to solve that is to return capital. If you have a lot of net cash through one-time big buyback or dividend, and a lot of them do that. And then the stock pops like 50% or 100% or 200% in a short period of time. Now, a lot of those have been picked over. But in the standard exchange where the small cap microcaps, there hasn't been as much pressure yet, 49% as of a couple months ago might have ticked up, but 49% of companies have submitted

a plan. And that doesn't mean you do the plan. You have, I believe, five years to do the plan. So essentially, in Small Cap Japan, even from the capital return angle alone, you still have most of the companies who have either not submitted a plan or not taking any action on that plan. And so that's like a catalyst that can help. And if that doesn't happen, you know, then there's so many companies out there that, you know, have done well with certain factors. So, yeah, So, you know, to kind of summarize, very interested there, may take a basket approach and see how that goes. Well, John, I just want to say thank you so much for coming on to the show today and sharing

your insights with me and the audience. I'd love to give you a handoff and share with the audience where they can learn more about you. Yeah, Kyle, this has been great. Thank you so much and your team for having me on. If anybody wishes to learn more, you can visit my website, www. www. SORPEC Capital.com.

Accredited investors can see our letters and our research should be available to everybody. And if anybody would like to reach out personally, you can find my email and send me a message. I'd love to hear from you. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network, written,

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