We Study Billionaires - The Investor’s Podcast Network - TIP770: Mastering the Markets w/ Andrew Brenton

Starting point is 00:00:00 You're listening to TIP. On today's episode, I'm joined by Andrew Britton to discuss the inefficiencies he's seeing in today's market. Andrew's the CEO and co-founder of Turtle Creek asset management. Since its inception in 1998, Turtle Creek has achieved an average annual return of 18.8% versus just 8.7% for the S&B 500. $10,000 invested in their fund at inception would have grown to over $1 million today. And had that money been invested in the market, it would have been worth around $95,000. During this conversation, we'll cover Cliff Ascens' recent paper on the efficiency of markets,

Starting point is 00:00:38 whether today's market resembles the 1999 tech bubble, and Andrew also gives an overview of his investment thesis on Floor and Decor and Kenzel Capital. So with that, I hope you enjoyed today's discussion with Andrew Britton. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Playfink. Hey, everybody, welcome back to the Investors podcast.

Starting point is 00:01:21 I'm your host, Clay Fink. And today I'm pleased to be joined again by Andrew Brenton from Turtle Creek Asset Management. Andrew, welcome back to the show. Great to be back, Clay. So you've been a guest a few times on the show now, and I'm thrilled to have you back. We're going to be chatting about today's market. as well as a couple of your holdings a bit later. Let's talk by talking a bit about the efficiency of markets. So, as you know, value investors will shun the efficient market hypothesis and

Starting point is 00:01:50 pride themselves on trying to spot the market's biggest inefficiencies. How about we start by discussing why having efficient markets are important and something that we should even care about? Sure. I mean, if you believe the purpose of the capital markets, and I'm now talking private markets, the debt markets, the public stock market. If you believe the purpose is to allocate capital to the deserving groups at the right price or cost, then I think it's absolutely critical. It's a foundation of most the definition of capitalism. And it's the foundation of the success of the Western world since the Middle Ages or even predating that. So I think that foundational idea of how do you get information, that messy, messy process of figuring out what

Starting point is 00:02:43 a company is worth and therefore what you should pay for shares when that company needs to issue equity is absolutely a critical component of the modern world. And I think very important. So Cliff Asniss wrote this great paper titled The Less Efficient Market Hypothesis, and he actually believes that markets are becoming less efficient over time. And he points to three different factors here. So first, he mentioned the driver that everyone's familiar with, which is index funds and passive flows. The second is very low interest rates that we've had for a very long period of time. And third is just technology and social media leading to more this hurting effect where people are crowding into the same stocks and everyone has the same outlook.

Starting point is 00:03:27 There's a lot of group think happening. Do you agree with Ascens's train of thought that markets are in fact becoming less efficient over time? I think that's right. And it's funny when I was at school, which is probably around the time that Cliff Aspenis was at school, that was the height of the efficient market hypotheses. And I didn't start as an investor. I started in investment banking and mergers and acquisitions. And I quickly realized that, you know, came out of school thinking markets are perfect,

Starting point is 00:03:59 markets are efficient, and quickly realized that isn't true at all. We don't really, if you will, read a bunch of other stuff, if that makes any sense. Our approach is to be intensely owners of companies that happen to be public is how we think about it. But, you know, someone sent me a Cliff's paper. Actually, I think I saw it and read just the abstract and thought, yeah, that makes sense, but I didn't read the paper. And about six months ago, I actually sat down and read the paper. And it was actually a foundation for one of our quarterly commentaries this year.

Starting point is 00:04:37 And, you know, I do agree that markets have become less efficient. We've seen it over our 27-year now history at Turtle Creek. They're not less frenetic. They're not less liquid. So if you define efficiency as lots of reaction to the latest tweet, the latest quarterly results, that hasn't changed. That's actually become more extreme, but that doesn't necessarily equate to efficiency if you think. Efficiency means getting reasonably close to fair value for the shares of a company. And that's, I think, what most people would define as efficiency as opposed to

Starting point is 00:05:18 volumetric reaction to every new piece of news. I love the quote from Robert Schiller, the economist, and it goes along the lines of the thought that because the markets are reacting to every new piece of information, that they are then getting it right, there's no logic in that connection and it's the greatest economic error in thought in the 20th century. I mean, that's, I'm paraphrasing, but that's the essential thought. And if you think markets were inefficient always, to some degree, I do agree with Cliff's observation that in his career, markets have become less efficient, and we've seen the same thing. It's such an interesting thought experiment. A couple of thoughts come to my mind when it comes to the markets and efficiencies and how those

Starting point is 00:06:11 end up resolving themselves over time. I think part of the inefficiencies is just simply due to human nature. Humans are the ones doing most of the buying and selling or programming all these algorithms that do the buying and selling. And I think about how people just tend to be loss-averse, for example. So when a stock is dropping, our gut instinct usually tells us to avoid that stock, to avoid losing money. And, you know, many stocks drop simply due to things like uncertainty. Humans tend to hate uncertainty. And another human bias that I think plays in the markets quite often is just this natural tendency to extrapolate. So the market tends to assume that a company is growing as going to keep growing or a company that's experiencing decelerating growth is going to keep

Starting point is 00:06:55 experiencing de-celebrating growth. And then once the tide sort of turns, you can see the stock double fairly quickly. And I think there are plenty of examples that we could point to that sort of illustrate just how moody the market can be. You know, it's interesting, right? Recently, meaning the last 10 years with the whole rise of behavioral finance and all of that great work, like thinking fast, thinking slow, when I read about all of the biases, I look at them and say, that's not us.

Starting point is 00:07:24 And I read the next one and say, that's not us. So, for example, loss aversion, my view is if you have done the work ahead of time and you have a good fundamental view on what you think a company is going to do for the next 10 and 20 years, and if you also believe that there is no informational content in the share price, I think that's an important point. I can understand people on the outside looking in on a company that the market's telling them things aren't going well because the share price is down. But if you understand that very, very few people, an increasing number of fewer people are actually doing that fundamental work,

Starting point is 00:08:05 a declining share price doesn't fuss you or fuss us. But equally, a rising share price doesn't get excited. And so, you know, it's not really a fair description when the classic line of, you know, why do people get excited at the supermarket when tuna goes on sale, but not when stocks go on sale? And this simple answer is, people have an understanding of what the price of tuna is. You have to go fish it, you have to process it. You have to get it into cans. You have to get it into the stores. And so if a food store puts something on sale like that, you know you're getting a deal. The problem is, in the stock market, very few people have done the work to say, wow, at that lower price, that's a really good deal.

Starting point is 00:08:53 And so, as I say, it's not really a fair comparison. And if you think there are fewer fundamental investors in the market, and for sure there are. And then if you take the fundamental investors or the active investors and you put them into the bucket of closet indexers or quasi-closet indexers, and then, when you mentioned the three reasons that markets have become less efficient from Cliff Asnus's standpoint, the one that doesn't really resonate with me is necessarily low interest rates. It does create, you know, exuberance and easy money. So I get that. But I think there's a fourth, and that is the shift in active management from that longer term fundamental investor from

Starting point is 00:09:38 groups like a Fidelity or a T-Roe price to the pod shops, to the quons that are given the mandate, you know, you can't look beyond three months. We want you to figure out where their share price is going to be in the very short term. So their temporal situation is they have to think very short term. And so it's not just a move toward index funds. It's this, I think, a structural shift in the stock market to more of the trading or more of the activity who are people who are making their own decisions are doing it based on trying to figure out what's going to happen in the very short term. And maybe of all of those, maybe the most profound in terms of the impact on the market where we're sitting today. One of the other interesting points

Starting point is 00:10:26 I'd like to touch on is just this understanding of value investors needing to be patient, and sit through some periods of pain, let's call it. So one of the core principles of value investing is buying something for less than it's worth. And a lot of money can be made by simply waiting for the market to recognize that value. In some cases, a stock can go up 50% in six months after the market realizes it initially had it wrong. And in other cases, a stock might trade relatively flat for two, three years. And the market just simply doesn't care about it or for whatever reason. Maybe the story's too complicated.

Starting point is 00:11:01 and maybe the market's more interested in AI or quantum computing stocks or, you know, perhaps it's just in a sector that the market just doesn't like at that period of time and maybe their peers aren't doing as well. But eventually the market does tend to recognize that value. Based on your experience, how long do you think these really big inefficiencies tend to last on average? Well, I think it's probably getting longer. So I can only speak from our experience.

Starting point is 00:11:26 So 25 to 15 years ago, we were overwhelmingly Canadian equity. so I can only speak to the Canadian market at that time, and now we're the majority are U.S. companies. Generally, we use a five-year time frame. So our approach in terms of portfolio construction, in terms of how cheap something is, we give the market credit that over the next five-plus years, the share price will get dragged, kicking, and screaming toward our view of intrinsic value, if we're right in our view. And we've seen that borne out time and again. And to your point, sometimes it happens in a year or two, sometimes it takes more than five years. It's really hard to make this statement because I think we're in a unique stock market environment right now,

Starting point is 00:12:15 but for sure, it takes longer today than a decade ago. And I think that, again, was one of Cliff Asnes's point, that, you know, if you can take the approach of being truly understanding value and owning value, given the market structural changes, the opportunity set is greater, but you have to be willing to sometimes wait longer. And I think that was the most important summary in a way, conclusion that he made at the end of his paper. And we absolutely believe that. We see greater mispricing today than we've seen in the past. And I'll set the dot-com bubble aside, because that was a, you can analogize to today, but there was crazy mispricing then, but otherwise, if you think of regular markets, the mispricing on average is greater today than it was 10 or 20 years ago.

Starting point is 00:13:10 I think you hit on a really good point earlier of not falling prey to resulting. I think the stock market's just such a great place to gain humility because if you attribute success as an investor to a stock price going up and failure hasn't. investor to a stock price is going down. You can do some really silly things in the near term. And Asniss, he has this wonderful point in his paper that the enemy of the efficient market hypothesis is a bubble. According to Asinus, we're in a bubble when we have a large number of stocks that are trading at prices that can't be justified under any reasonable model. And I think a couple important points on that sentence is it needs to be a large number of stocks.

Starting point is 00:13:50 So it's not just, you know, maybe one little sector, maybe a few small caps that are trading at high prices. And also, their prices can't be justified under any reasonable model. So if there is a reasonable case for higher valuations, then it's more difficult to justify it, calling it a bubble. As you mentioned, today's market is particularly interesting, as there are several industries that are really struggling, or as you've stated, are really in a recession, while the broader market continues to march upward and is primarily being lifted by the market's big winners in tech and AI, how about you talk a little bit about if today's market does resemble the 99 tech bubble and maybe in what ways?

Starting point is 00:14:34 You know, what's the line? A history doesn't repeat itself, but it rhymes. And I think again in Cliff Asnes's paper and in other commentators who've been around for a while, I agree with this comment that you expect a bubble once in your life. time because once people realize it's the next generation that creates a bubble, and I guess it's being long enough now that it is the next generation. We were around for the dot-com bubble, and I remember at the time people asking my view on a Canadian company called Northern Telecom, 360 networks, global crossing, and Cisco. And Intel, in fact, Microsoft is the one that comes

Starting point is 00:15:18 through all of that, but it took a long time for them to come through in terms of recognizing what they're worth. And we refuse to give a view because we weren't doing work on those companies. And so it's similar for us today with the Magnificent Seven and AI in that, you know, our approach is to try to find the special company in an industry. And we're going to talk about two today, I think, that are really doing unique things in their industry. as opposed to trend investing or a thematic investing where we look at a theme like AI or synthetic biology and then try to find a company that is in that space. But just in terms of the attitude of people and what it feels like, and frankly the multiple

Starting point is 00:16:06 of the broad market, it feels very similar to the dot-com bubble. Again, you can always find arguments to say this time is different, but those are the four most dangerous words in investing. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the

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Starting point is 00:20:31 It's funny the other day I was chatting with a listener of the show and his son was a college student and he had the best returns of anyone I've heard of in the past year owning Palantir. Many of these AI stocks I haven't heard of that are up 3, 4x in the past year. And I think that's sort of some of the telltale signs of some of the things that happen during market euphoria. So let's get here to talk about two of your portfolio holdings. We have Flor and Decor and Kinzel Capital. And you believe that the market is getting the pricing of these stocks wrong and we'll get into why that is. How about we start with floor and decor? Talk about some of the things that you like about this business. You know, it's interesting. The two you mentioned play are,

Starting point is 00:21:15 they have similarities. We came across floor and decor a number of years ago. And it's interesting, I think, here in my office, one day years ago, I was having a thought experiment. And the thought experiment was, if we'd been active in the U.S. when Costco was, you know, early days, would we have understood the opportunity set that they had? Because our approach is not to just, you know, we're thinking out 10, 20 plus years and trying to be balanced in our forecasts. And I walked down the hall and spoke to some of the people on the investment team who were hanging out in the And I posed that point. I said, do you think we would have recognized it? And they smiled and looked to me and said, we think we have one for you. And it was floor and decor. And so if you think a good

Starting point is 00:22:06 value investor, I think, is not someone who's looking for a net net. That was 60, 70 years ago. And a good value investor is trying to find what's the present value of all future cash flows. Could be high growth, could be low growth. It's just what's it worth based on the future. And with Flore and the Corps, if you understand their business model, they set out 20 years ago to essentially recast the hard surface flooring market. As they describe it, they go direct to the mountain. So they have 250 vendors in 25 different countries around the world.

Starting point is 00:22:42 And the founder who is not running the company but is on the board, set out to democratize hard surface flooring. And I don't know what that means, but I think I understand the thought. Their structural cost advantage against the Home Depot's and the lows and the other specialty chains is shocking. They cut out the middlemen to the extent they can. They have their own big box stores, as you know. It's cash and carry. They've upended the market.

Starting point is 00:23:18 It's a true disruptor in their industry. And so when we found it and met with management and talked to them and understood it, one of the things I stress to the people working on that financial model is I will be as upset, right, looking into the future. If you are conservative in your forecast, we conclude, you know, it's not cheap enough to make it into our portfolio because we are very valuation focused. And then five, 10 years later, I look at what they've done and look at our original forecast, and we were woefully low.

Starting point is 00:23:54 So that will make me, in a way, more upset than if I look in five to 10 years and realize we were too high, if that makes any sense, trying to get it right company by company. And so it's a little surprising to me that a pure organic growth company that many investors understand that has that business model was cheap enough three years ago to make it into our portfolio, given our valuation criteria. So, you know, it needs to be a great company with great management, long tenured management typically, which this company meets all of that, high business quality. But then it has to be cheap enough to kick something out of our portfolio.

Starting point is 00:24:36 Would speculate that three years ago with the short-term focus on, you know, is the U.S. going into a recession, it got cheap enough to make it into our portfolio. And I'd also speculate that there'll be a point when things are fine out there because they're not fine right now, but when they are fine out there in North America, because this is such a attractive, organic grower taking share every year in their industry that it may well get to the point where the share price is such that it doesn't stay in our portfolio. During our previous interviews, we discussed in-depth the idea of buying and optimize instead of buy and hold. And looking back at floor and decor stock chart, buy and hold investors aren't faring too well over the past five years or so.

Starting point is 00:25:23 You know, in 2020, the stock price was 60. You see it double, get cut in half, double again, get cut in half again. And, you know, you look at the business and revenues have nearly doubled. The number of stores have also doubled. The earning side of the equation is struggling in light of, you know, the industry being in a cyclical downturn. So how about you touch a little bit on this buying optimized that we've touched on so many times in the past and how you manage that with a stock like Fuller and Decor?

Starting point is 00:25:52 Sure. I mean, I would start on this conversation to say, I worry that we overemphasize this as part of our process because it's different, right? The best investor of all time, Warren Buffett, preaches buying and hold. He doesn't practice buying hold, by the way, but he preaches it. And I understand why he does that. And it's funny, right, that my partners and I come out of private equity. We set up and ran the private equity arm of one of the big Canadian banks back in the

Starting point is 00:26:20 90s. And I looked at the public market and thought, there's this extra lever. You find good companies and you take a buy and hold mentality, the way you do in private equity. But then the price moves around. And it's just a lever to be additive to your return. So the fundamental idea, take a floor and decor is you've done the work, you have a full long-term forecast, and at a point in time, the share price is cheap enough to make it into our portfolio, and then, which means since we

Starting point is 00:26:50 have a target of a fixed number of holdings, it does push something out. And if nothing then were to happen, we wouldn't do anything. We are at core, a buy-and-hold mentality like any good value investor. But here's the thing about the public market, as you mentioned, we added it at around 60 a few years ago more than once. And I looked at the stock chart last night in preparation for talking to you today. It just reminds me how much it's moved around. And in the meantime, our view of what the company's worth hasn't really fluctuated that much. It's gone up over time because you move forward in time, so value is increasing as you move forward in time, almost by definition if you're a value investor, and they're making money and they're on

Starting point is 00:27:35 plan with what you forecast. So if we feel like we sized the position when we first bought it at 60 bucks, and at a point the stock's 120, to sit and say, oh, look how smart we are, the stock has doubled. If you don't say to yourself, we shouldn't own as many shares, we should actually make sure it's a smaller percentage waiting in the portfolio with that higher share price, then, and this is our thought experiment when we started Turtle Creek, was, hey, then if you don't want to sell stock at $100, you didn't own enough at $60. And of the things that we try to communicate, the most difficult thing to communicate with our philosophy is we are a buy and hold.

Starting point is 00:28:20 Unless Flore and Decor's valuation goes through the roof, we're going to own this company. for a long time. But the amount that we own is going to be a function of our view of value, which changes a little bit over time, right? But primarily it will be the margin of safety, right? What's the share price versus our view of intrinsic value? And it's something that we apply across the portfolio. But as I say, I want to make it clear. It's icing on the cake. it is the bulk of our returns come from adding a company like floor and decor at a good entry point and sizing it to the correct weighting to the best of our ability and then reacting to owning more at a lower price, but only less at a higher price.

Starting point is 00:29:06 I also just can't help but think about, you know, flooring decor is a great business, but in the 2010s, it has had this massive tailwind at its back. You know, being a hard word flooring company, they are very much tied. to the housing market. So if real estate prices are going up, if interest rates are going down, this is a major tailwind for floor and decor as a lot of homeowners go and refinance, do a home equity line, get some capital to go and redo parts of their home. And I think a lot of the investment case today is that the housing market or the hardware flooring industry is near a cyclical low and there's a lot of pent-up demand that's going to eventually be unlocked as the market

Starting point is 00:29:46 rebounds. I just checked prior to this interview, the operating income for floor and decor has gone from just shy of 400 million in 2022 to 256 million in 2024. I have this natural bias against trying to avoid many cyclicals just because I just never know where we're at in the cycle. So talk about how you think about where we are at in the cycle for floor and decor to ensure that, you know, we're not entering a value trap. I think of value trap as basically getting things wrong on our forecast. Floor and Decor is a company that's never going to issue equity. They're not at the point of returning capital to their shareholders because they have such a

Starting point is 00:30:31 runway for growth and can take all of their capital, even at this lower rate of earnings, and redeploy it into geographic growth. And the last time we spoke to the CEO, I did ask him, when are you coming to Canada? Because I recently did a renovation and I know how expensive it is for stone and slate and tile and understand the value prop that they provide. I don't believe in value traps if you've done a full model and you've done your best and you own companies that don't need a high share price. and then when they have surplus capital, they return it to their shareholders. And I think the reason why, as we found Flore and DeCorean did work on it, that the reason we own it is all of the things you just said.

Starting point is 00:31:23 If you have the ability to think long term to look past this, frankly, profoundly weak environment we're in in North America, I think that what we talked about earlier, the AI wave and the hyperscalers and the megaprojects and the data centers are clearly, I think, covering out quite a weak economy away from that. It was interesting when we spoke to management, I guess a few months ago, maybe six months ago now, they've taken their new store build for 2025 down twice. And we asked them, well, in what situation will you regret that decision? I think they went from 30 to 25 and then 25 to 20.

Starting point is 00:32:10 And they said, well, if we come out of this recession with a V recovery rather than like a U recovery. And so in their world, they've been in a recession for a number of years. And as you say, Clay, there is pent up demand since the great financial crisis in the housing bubble. Then household formations have been profound. New home builds have not been. And so there is pent up demand. There is no question about that. But we've got the time frame to not really worry about is it going to happen in six months

Starting point is 00:32:48 or a year or in three years because if you own the company in an industry that's just structurally advantaged as floor and decor is, and they're taking share from their competitors, they're still growing, as you say, they've doubled their store count over the last few years. And the point they made to us is, well, we've taken our store openings from 25 to 20. But by the way, we're still, we've acquired the land, we're building those stores. We're just not staffing them and putting inventory in them until next year. So it is still a high growth company that is taking share from competition. And we don't spend a lot of time thinking about, well, when does the turn happen? We're looking out five years, 10 years plus.

Starting point is 00:33:36 That's our focus. And I think because of that, there are a number of companies that have made it into our portfolio in the last three years because of the fact that the economy in North America is soft. And they're more impacted by that. And so the share prices have gotten to the point where we're able to say, if you have a long view, these are now cheap enough to make it into our portfolio to push other things out. And Flore and Decor is a good example of that three years ago. Yeah, I mentioned interest rates there and, you know, the low interest rate environment that fueled the real estate market. And now, of course, we're in a slightly higher interest rate era. How does recent interest rate cuts and just your outlook on the U.S. housing market,

Starting point is 00:34:21 How does that play into the thesis on floor and decor? In a way, it doesn't, right? Because this is a company with net zero debt. And even in this soft environment, they're making lots of money. So that thesis might play into where's the share price going to be a year from now. But it doesn't play into what's our view of the intrinsic value of the shares. So the macro environment is not a big factor in how we think. But let me be clear, if you gave us two.

Starting point is 00:34:51 companies that are equally attractive, well-run, one of them's floor and decor, one of them is a non-cyclical business. With the same cheapness, we would have more of the non-cyclical business. So we're not afraid of cyclicals like floor and decor, but we do titrate down how much we would like to own versus something that is non-cyclical. Like we own a U.S. company called SS&C and they are very non-cyclical. So at the same cheapness, we'd have a lot more in SS&C than we would in Flore and Decor. But they're not at the same cheapness today. So it's in our thinking, but it's more, we think about, well, what's the impact on their industry and what's happening to their competitors? I mean, one of their large competitors has filed for bankruptcy or did last year.

Starting point is 00:35:44 Sometimes the weak economy for a company like Flore and a core can actually be a positive if you're thinking out long enough because it's taking their competitors who don't have the same business model. It's taking them out of the market. And it just gives them greater share in five plus years when the economy is much stronger. It's a classic case of many mom and pops simply being undercut on price and these news. stores are being built across the country and, you know, stealing share from many of these smaller players that just are structurally disadvantaged. You mentioned being very valuation-focused. How about you talk a little bit about the valuation of floor and decor and in general, what sort of discount to intrinsic value you're looking for in your portfolio additions?

Starting point is 00:36:34 Sure. I mean, so when we say intrinsic value, you can think of it as what's the present value of all future, free cash flows back to shareholders. Is that about a 10? 10% rate. We've never played with that discount rate. When we started, rates were higher than they are today. And of course, rates for a long time went close to zero, as you mentioned. And now they're back to what I think of as a more normal environment if you have a very long view. So we've never changed our discount rate on our companies because of changing interest rates. And so when we talk about intrinsic value, that isn't where we think the shares should trade. And when people have share price targets, we don't have targets.

Starting point is 00:37:19 We just say there's a huge range over which Flore and Decor could trade. And it would be very defendable, right? People can always come up with a reason why it's trading where it is today. And as you mentioned, the share price has been north of 120, now it's back today, a little below 60. They're both fine. Those are reasonable prices. our view of intrinsic value is well above 120, but that doesn't mean we think it should trade

Starting point is 00:37:50 there. I mean, in a very rough way, you could think of it as the takeover price of a company, not that we think anybody's going to step up and offer a huge premium for a floor and decor. It's just not that kind of target. So what we do is we say the bigger the gap between the intrinsic value and the share price, adjusted by a bunch of aspects of a company like cyclicality, just as I mentioned. We just have a target waiting for each holding, and it's higher today than it was a month or two ago when the share price was actually quite a bit higher than it is today. And nothing's changed in the business. If something did change, if there was a new entrant and some structural change was occurring in the industry, we would really focus on that,

Starting point is 00:38:41 but none of that's happening with floor and decor. It's a very strong management team with some new additions and some recent very logical changes for executive management. So I think everything's good in the company, if you know what I mean. And so we just let the noise of the market wash over us, and we take advantage of that noise to do somewhat better than a long-term buy-and-hold. What we know is that the long-term buy-and-hold for us on floor and decor is going to be really good. 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

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Starting point is 00:42:56 that this might be a higher growth name relative to some of your other holdings. How do you think about making adjustments to the earnings of a company like Floor and Decor, if any, in this case? I mean, it's company by company. And in the case of a pure organic growth company under U.S. gap, it's not bad, right? There are some of our companies, we own a lot of what we call platform companies that they make acquisitions and then the accountants under the accounting rules you no longer amortize goodwill, but you put them in buckets of customer lists and things, intangibles, which doesn't make any sense to me. And then that impacts earnings per share. So there are some companies that you really have to make sometimes some pretty

Starting point is 00:43:42 material adjustments to the gap earnings or in our case in Canada, IFRS. But in the case of floor and decor, the gap earnings are not too bad in terms of a number. And it's funny, you mentioned 30 times. I had it in my head that it's more 40 to 45 times. So you're right. You've got a high growth company. And we have a lot of high growth companies, but then we own some 10% earnings growth companies over the next five years plus, and we own them because they're trading at a single digit price earnings multiple. And so it is a mix, but if you recognize that the earnings for floor and decor, they're obviously depressed at this point in time. So if you thought about a normalized number, it's lower. And then if you think about the growth they have for probably for

Starting point is 00:44:36 decades, it ends up being cheap. But we never think about the multiple in terms of our decisions. We do have these large financial forecasts and financial models. And so when we quote 10 or 11 times for the portfolio, we're just trying to find a way to communicate how attractive the portfolio as opposed to saying that's how we value companies, if you know what I mean. Excellent. Well, let's get to Kinzel Capital here. This is another stock in the portfolio that's fairly well known by our listeners. So this is a specialty insurer that's been successful in its strategy to grow in the excess and surplus market. They only have around 1.5% market share in their industry, and that share has doubled over the past five years. And one of your statements

Starting point is 00:45:27 that stood out to me in one of our first interviews was how you're looking for one of a kind, unique companies. And I think Kinsell certainly fits that description. Actually, previously worked in the insurance field. So I saw firsthand how slow and archaic some of these companies in the space can be, even when a highly disruptive player like Kensale steps into the industry. And, you know, this is another very high growth company. You know, you look back at previous years, many years they grew top line, but over 40%. Currently, they're growing around 20%. How has the story and thesis on Kinsale develop since we last spoke last year? In terms of develop, just everything is as we expected.

Starting point is 00:46:09 And as we get to know companies better, we either rate them higher or we de-rate them. And it goes both ways, right? The more time you spend with management, in the case of kinsale, I sometimes joke, we deal with companies, we follow them, we try to follow them closely, we speak to them when we can, trying to be respectful with the fact that they're running a company, in almost in a way of waiting for them to say something stupid. KinSail has never said anything stupid to us. And so that idea of it is what we look for, a highly intelligent company in a fairly mature market, although especially in excess, that share is growing from the regulated market.

Starting point is 00:46:56 and as you mentioned, they're taking share in that market. It's not just that they have a profound cost advantage, which they do. I mean, you can think of it as much as a technology company as it is an insurance company. And it's tough to imagine their larger competitors saying, hey, we should rip out our systems and do what Kinsale did from scratch. It's really hard to imagine that happening. And so they do have a meaningful cost advantage, but also, I think as an organization, they're just really good underwriters. They're thoughtful. And I'm not an insurance expert by any means.

Starting point is 00:47:36 Our approach is to find a highly intelligent company, and then you learn the industry from them. We know insurance a little bit at times. We've owned Fairfax Financial, which many people would know, terrific insurance company based here in Toronto. So we learn. from the company. And when you watch how they, you know, dial back their exposure, when you ask them about large policies like multinational corporations, what they explain is you probably don't want to underwrite that because they're big enough to self-insure. And so they're really just testing. Are you willing to give them a policy at a cheaper price than they're willing to write internally? So their focus is small and medium-sized businesses.

Starting point is 00:48:23 It's just, we've learned so much from them about their industry, and it just continues to impress us. So, you know, as I mentioned, we have all these aspects of a company that factor into our weightings away from just the intrinsic value, and whether it's management, business quality, which often is the management team has created the business quality. Kinsale gets really high marks, frankly, across the board. And so it's better than when we last spoke, I guess this is the way I would put it from our standpoint. And you mentioned, you know, looking out at least five years. I mentioned the market share today here in the U.S.

Starting point is 00:49:06 They have around 1.5% market share. They have around $2 billion in revenue and $130 billion market. So certainly room to continue to capture more share. Do you have a level of market share in mind that either the management team is looking forward to capturing or you guys are looking at? Or how do you think about, you know, how much room there is for them to grow into this market? I mean, that is the key question, right, with a high growth company with that kind of structural, self-created structural advantage. I mean, their expense ratio is much lower than the competition. And as I said, they're really good underwriters. So it's a terrific

Starting point is 00:49:44 combination. You know, will they be 5% market share at some point? I think it's inevitable. Will they ever be like Lloyds of London that our best guess is at 17%. I think Kinsa would say that would be a bad thing. You don't want to be that much of the market. So again, it's a thoughtful approach from management. If the market is soft, because we had a hard market and as you say they were growing top line premiums, written premiums of 40%, it's lower now. That's self-induced because they're not going to right, bad business. And as an example, that in the commercial property space, at least in certain regions in the U.S., they drastically reduced their policies written a couple of quarters ago, because they said, like, there's new competition who are going to lose money on these policies,

Starting point is 00:50:40 and we won't compete on that basis. So I think part of it is the market share will partly be determined by the competition. So they're not saying, oh, we want to be 10% or 6% or 5%. They just want to write good business. And last year, they announced their first ever share buyback authorization. And people in the insurance industry, when we talk about kinsale, say, oh, my God, they're looking at buyback shares at five times book. And they think the way we do. Well, by the way, they haven't, They bought very little stock so far, but they say, well, there's bookfilling, then there's intrinsic value. And if we can buy our stock at a discount to the intrinsic value, that creates value for our shareholders.

Starting point is 00:51:29 And so they're at the point now where because their returns on equity are so high, when they're not growing at 40%, they end up generating surplus capital. And that just adds another arm to the story, if you will, from being. overwhelmingly fixed income in their float to now feeling like they can have an increasing amount of equities at the right time. Not sure right now is the right time in terms of, for example, the S&P 500, but also adding the idea of buying a bit of themselves if the share price is attractive. And look, if you can find companies like that, you know the share price is going to be higher in five years and in 10 years. And from our standpoint, I hope the path

Starting point is 00:52:15 is jagged. It's so far, we've only owned Kinsale for two years. It's been a very jagged journey in terms of the share price, if you pull up a chart. And that's good for us. What we love are low intrinsic value volatility. And just a bonus is high share price volatility. I remember the first two quarters after we owned the company, the first quarter they reported for us kind of what we were expecting. The stock was down 20%. I don't know why. We bought more. stock. And then the next quarter, the results were for us in line, and the stock was up 20%. And so that's a nice thing for us. We embrace that as opposed to like a steady eddy share pros. I think you hit on a couple of really important points in relation to Ken Zale and the insurance

Starting point is 00:53:07 industry overall. You know, insurance can have some very irrational players. Buffett and Munger, I've talked about this for years where, you know, some insurers will, for whatever reason, get excited and want to write unprofitable business just to grow the top line. And, you know, that's when a company like Berkshire, a company like Ken Zale is going to take a step back and let them pursue some of that unattractive business. And then there can be periods where, you know, there's just opportunities everywhere to write business. And that's when they can step in. And you can just really appreciate the manager that, you know, recognizes opportunities when they present themselves and not playing the quarterly EPS Wall Street game right of how we need to hit

Starting point is 00:53:45 our quarterly number so we need to write this business to grow the top line or grow the EPS short-term. The repurchases, I think, is also worth highlighting there. Their first time they're doing share repurchases and as we know, the management team knows the business and knows the intrinsic value as well as anyone. So share repurchases are certainly a very good sign for a company as well around as this. Look, I mean, at the end of the day, it's what I had mentioned earlier. We own companies that are never going to issue equity. We started this conversation talking about efficient markets and the purpose of the why is it important that markets are efficient. It's capital allocation. But the other thing to understand about the public market is that good companies are public for a bunch of reasons. Often the original owners, it's a road for them to diversify their own portfolio, whether it was a family business. And so we own companies that are self-funded companies. They just happen to be public. And Kin Sales, a really good example of that.

Starting point is 00:54:50 They are so profitable, the debate as we go forward will be, well, how much capital do they have that will get returned to shareholders? I think of companies like that as slow motion management buyouts. The number of companies in our portfolio are over the years who have said to me, you know, either the share price is a lot higher in three years or you and I are going to own the whole company. So if you have companies like that, it's the classic, you know, the outsiders, that book by William Thorndyke, who, you know, it's a terrific profile of eight companies that have just knocked the cover off. And one of the attributes they have is really being focused. focused on capital allocation. And it was interesting when I first had dinner with Thorndyke,

Starting point is 00:55:40 and this is years ago now, he said, you know, Canada seems to have a disproportionate number of these outsider companies. You know, he mentioned Cush Tard out of Quebec and others, which may be true. And maybe it is the less of a aggressive Wall Street mentality here in Canada that allows those companies to be more outsider companies. I don't know. But yeah, If you find a company that thinks about, you know, that they're not going to try to be a Berkshire Hathaway, they're going to stay as a pure insurance company. And they're going to, as they have more surplus capital, at the right time, shrink the share account. Because it's funny, we think about share buybacks. There are a lot of groups or people who can criticize share

Starting point is 00:56:25 buybacks versus, let's say, dividends. We think of it as, well, why wouldn't you take your surplus capital and buy 100% of the shares from your shareholder who has the lowest opinion of what you're worth. And that's how we think about buybacks and good companies think the same way. Before we close it out here, I wanted to give you a chance just to talk about some of your recent performance, because when we look back at the history of your firm, you've had, you know, different periods of outperformance and underperformance. And today, you're in a period of underperformance, which really shouldn't be a surprise given the developments. with AI. And I know that you likely haven't flinched at all with regards to sticking with your

Starting point is 00:57:08 strategy. And I'd just like to give you a chance to reflect a bit on, you know, the importance of sticking with a strategy when it's going against you because all great managers are going to go through those periods. It's just an inevitable part of being a stock market investor. Yeah, for sure. I mean, it's funny as you were asking the question, it reminded me of somewhat, and this is a long time ago, who commented to me when we went through a bad patch within our first decade. And he said, it's a good thing you had those great early years to know that what you do works. And I said, I didn't need to have a few good years to know that owning high-quality companies, management and boards that are focused on shareholder value over

Starting point is 00:57:53 the long term, that I didn't need to have some decent results to know that that's the right approach. And the same thing applies today. So, yeah, we're lagging on a mark to market basis. It's one of the reasons that, well, it's the main reason why we actually print a change in intrinsic value, how we feel like we're doing based on the companies like floor and decor and kin sale. We didn't take our value up on floor and decor by 100% when the share price doubled. We didn't take it down by 50% when the share price fell back down to where it is. It's been a you know, never a perfect steady progression, but it's company by company trying to communicate, hey, this is how the portfolio is doing. The economy has been a headwind for some of our companies.

Starting point is 00:58:39 There's no question with floor and decor. That's the case. With Kinsale, it's not economically cyclical, but as you were describing, it's industry cyclical. You have a kind of a hard market and a soft market. It's not so much the shape of the economy. It's a new entrance and then there are three hurricanes that are devastating in one season and all of those new entrants leave. So every company has its own character. And so from a, you know, increase in intrinsic, it's business as usual. And, you know, one of the thoughts and or terms statistics in an investment world is something called active share. And we have an action. active share of 97.5%. We look nothing like the indices. I mean, if it was compared to the S&P 500,

Starting point is 00:59:29 it would probably be an active share of 99.9%. So what we do is we own a collection of high quality companies at any point in time at the most attractive valuation from the companies we follow. And you made the comment, it's inevitable, especially in the environment that we're in, that we're going to lag. It's happened to us before. and guaranteed it's going to happen at some point in the future. Yeah, well, not to make a statement about your future performance, but I think just looking at, in general, when you look at a number of great managers,

Starting point is 01:00:04 when the market is just roaring and some of these great investors, you know, aren't faring as well. I think, you know, that can be a sign of where we might be at in the cycle, certainly not a forecast, but always interesting to look back and compare and contrast how things end up playing out. But Andrew, as always, I thoroughly enjoy having you on the show and appreciate you, you know, sharing your thoughts on the market and discussing a couple of your holdings. Before I let you go, how can the audience learn more about you and Turtle Creek?

Starting point is 01:00:33 Well, we have a website, but importantly, it's dotca, not dot com, because we're Canadian. And yeah, there's plenty of information there, especially if you click that you're an international investor. Not that I'm suggesting that you should do that. And then if it is a U.S. resident, someone on the team will reach out and you get a code and you have full access. We've got a pretty good website with all of our communications and lots of information. We've written, I think, some decent stuff over the years and it's all there on the website. Thanks again, Andrew. I really appreciate it. Thank you so much. This was fun. Thank you for listening to TIP. Make sure to follow Hello, we study billionaires on your favorite podcast app and never miss out on episodes.

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We Study Billionaires - The Investor’s Podcast Network - TIP770: Mastering the Markets w/ Andrew Brenton

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