Yet Another Value Podcast - BONUS EPISODE: Keynote Q&A with Bob Robotti, Robotti & Co. LIVE in VEGAS

Episode Date: June 22, 2024

BONUS EPISODE: Keynote Q&A with Bob Robotti, Founder and CIO of Robotti & Co. - this interview was recorded live at the Planet MicroCap Showcase: VEGAS 2024. Topics covered: defining MicroCap/Small-Cap, Robotti's strategy, opportunity set for stock pickers, old economy stocks, all followed by Q&A from the audience. For more information about Bob Robotti and Robotti & Co., please visit: https://www.robotti.com/ Chapters: [0:00] Introduction + Episode sponsor: Daloopa [2:12] How Bob defines MicroCap, Small-cap / Robotti's strategy [6:49] Opportunity set for stock pickers [13:04] Magnificent 7 / AI; stock pickers will win the next decade [19:00] Old economy stocks (industrial businesses) [24:43] Q&A from the audience This episode is sponsored by our friends at Daloopa Hey there, fundamental analysts - Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let’s talk about something that could transform your workflow—Daloopa. Daloopa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance—all at your fingertips. And here’s the best part: Daloopa updates your models in near real-time, which is especially important during earnings season, tailored to your modeling format and style. Imagine never having to update your models again. With Daloopa, you can reclaim your time and focus on what really matters—analysis and research. Want to learn more? Create a FREE account at Daloopa.com/YAV All information presented in all forms at the Planet MicroCap Showcase or in press releases, videos, emails, or otherwise posted on its website, stocknewsnow.com or YouTube channel (the “Outlets”) is for informational purposes only and should not be construed as an offer or solicitation of an offer to buy or sell securities. Stock News Now, SNN Inc., and the Planet MicroCap Showcase, and their representatives are not licensed brokers, broker/dealers, market makers, investment bankers, investment advisers, analysts, or underwriters.

Are you tired of the endless grind of updating financial models, scrubbing documents, and hard coding? Let's talk about something that could transform your workflow, Delupa. Delupa delivers perfect historicals for thousands of public companies. That means every KPI, operating data, financial metric, adjustment, and guidance, all at your fingertips. And here's the best part. Delupa updates your models in near real time, which is especially important during earnings season, and it's tailored to your modeling format and style. Imagine never having to update your models again.

With DeLUPA, you can re-clean your time and focus on what really matters, analysis and research. Want to learn more? Create a free account at dilupa.com slash Y-A-V. That's Delupa, D-A-L-O-O-O-P-A dot com slash YAV. Today's bonus podcast is a recording of the keynote interview I did with Bob Robadi at Planet MicroCap in Vegas back in late April. Look, Bob is great. It was a really great interview, so we wanted to kind of get it out of.

into the public before it faded away until irrelevance because I thought people would really enjoy it. Look, Planet MicroCap, this was my second year going. It was an absolute blast. I had a blast last year. I had a blast this year. I'm really looking forward to next year. So, you know, enjoy the interview. And I am working on some things to hopefully I'd love to see more investors at Planet MicroCap next year because I had a blast two years in a row. And I think, you know, the more the merrier. So enjoy the interview. I hope to see you all at Planet MicroCap 2025 in Vegas. and I will be back with more regularly scheduled podcasts next week. I'm very excited to announce our keynote Q&A coming up here.

It is with two gentlemen. I respect, I mean, I've been following their careers forever, but it's also the host of one of my favorite podcasts in the financial community. And I say that completely unbiased, of course. It's Andrew Walker from yet another value podcast as well as working at Rangely Capital. and then, of course, the legend himself from small micro-nanocaps doing a Q&A with Bob Rabrb from Her Body and Code.

So, gentlemen, take it away. Thank you. Cool. Well, hey, thanks everyone for being here. Bob, I actually wanted to start off with you and I were having a conversation earlier. You know, we're at Planet MicroCap. Obviously, the focus on microcap, but we were talking

about how, you know, how do you find a microcap? How do you find a small cap, a mid-cap, a large cap, and how they evolve over time. So I'd love to just start off having a little bit of discussion on that and getting your thoughts on it. Well, I actually think it's kind of like labeling people with a microcap, small cap. It's really not necessarily indicative of the investment opportunity, and that's, I think, what people are interested in is like identifying situations that are extremely investable that have really great opportunities. And if some of them happen to be heavily discounted, therefore they happen to be small caps or microcaps. So the fact that the discounting potentially is large is potentially opportune.

And so, therefore, to categorize them and think, of course, and to eliminate them, I have had that just question recently. I guess we've had the good fortune recently of going over a billion dollars in assets in the management. And someone came to me and said, would you look at a small cap, microcap company? I'm like, I'm talking to a company in Canada that's got a $30 million market cap. So that's Canadian. So that's only $20 million real money. And so my thought process is really, what's my investment opportunity in the return I can make?

And, you know, that's plenty enough money for me to invest and therefore make great returns on. So, you know, I do think it's a definitional, transitory characterization that, you know, really obscures what the opportunity set potentially is with companies and public companies. You know, I think Bobby started off. I think when people think Robadi, they think small and microcrap stocks. And you've got a whole team who covers a lot of stocks. I mean, I know I've talked to some of your team members covering some of the most obscure, nicheous stocks over in particular Europe.

But, you know, you file a 13 effort. if we can look at your 13F, and it's chunky, concentrated, as you'd expect from a value investor. But some of the stocks, I think people would say, hey, that's not a small cap. That's a mid-cap now. Do you want to talk about how investing in companies, how that comes to be investing in companies that maybe are over that magic $1 billion range and start pushing from kind of the micro and small to mid? So again, we're cap agnostic really when it comes down to it.

So we recently had that, an institution came to us and said, listen, we're interested in giving money to a small-cap micro-cap manager. But we look at your portfolio, and 40% of what you own is mid-cap and 20% of what you own as large-cap. How to hell you define yourself as a small-cap investor? And so when we then looked at the numbers, the 40% that are mid-cap, 90% of those were small to micro-cap when we invested in them. And of course, the ones at a large-cap, it's the same thing.

90% of those were micro-cap, small-cap, when we invested in them. And of course, the story that people may know and associate us with is, of course, Builders first source has been a company that's been a phenomenal success. today has a $20-plus billion market cap on it, so clearly there's not even a mid-cap, it's a large-cap company. But, of course, when we both invested, there were two companies originally, BMC and Builders First Source, and one had a $200 million market cap, and the only one had $100 million market cap.

So they were, you know, micro-cap companies. And, of course, the investment opportunity, of course, they were transitoryly micro-cap companies because these were businesses that BMC had 23,000 employees that had, you know, huge size of this business. Both those businesses were, you know, probably large-cap companies at one time. And of course, the housing downturn, we all know, in 06, 08, meant that those companies, 1-1 almost went bankrupt, and they did go bankrupt. So, therefore, in that process, the, you know, caps substantially changed. So the definition of what those businesses are in cap world is different. Of course, what the opportunity set and what the business was

is very different than that. And therefore, that's what we're looking for, right? If we can identify businesses that, and that's the way we look, right? We tend to look in cyclical businesses that are going through difficult times because investors don't want to invest in companies that have no prospect of when it might make money, how much money it might make, and therefore it gets the valuation, gets substantially, totally disconnected from what the business is. And yet we think that there's huge opportunities, a cathartic process, in terms of cyclical turns and downturns, what happens. And then, of course, the opportunity to then, of course, the opportunity to then deploy capital and grow the business opportunistically at far less than what it would

cost to do that is like just a plethora of opportunities that you will find in small cap and micro cap that then you'll get stuck with the label of oh no you're a large cap investor so I'll take the the label of a large cap yeah no there was just something look it's a softball you know you're not investing in microcaps anymore because everything's up 10x and it's large cap it just it struck me as I tell people I'm not agnostic and people say oh you're mainly in small caps and I say yeah everything I invest in goes down 95% so it starts out at anything and it ends up that is smaller microcap.

You know, one of the things, you mentioned Builders Force source, and I did want to have a thought, there are a lot of different types of microcaps and small caps you can invest in, right? You can invest in the growthiest of companies, companies that are new or just came out and, you know, they're attacking huge Tams and they've got the potential for explosive growth. You can find, you know, kind of small caps or microcaps that have been around a while, and they're more capital return stories, they tend to be cheaper, they're going to buy back stock or do dividends.

You mentioned Builders First Source, which it's more of a, it's got more cyclicality to it. It has a big roll-up opportunity. It has the opportunity to deploy a lot of capital. All of them can be in the small-cap world. All of them can have great success if you're good at it, but there are three very different skill sets. And I did want to ask you, like, you know, do you think there's one in today's market that particularly has the, that has a particular opportunity for investors to kind of look at, get good

at, generate alpha? There's a particular opportunity in that field. Well, I generally think there's a lot of opportunity for stock pickers in every market cap, and that includes even large cap. I actually believe you've got to be a stock picker. You can't have money in an index and kind of like move accordingly. So bottom-up stock research is the fundamental differentiator to identify companies that have a substantially larger opportunity set than the market price reflects in it. You went through a number of different examples of companies, and so I will tell you in my portfolio, we own some of all of those things.

We own some businesses that are okay businesses that, you know, you can buy at a discount. to what the assets are. We buy some that, but of course the ideal situation over time has been the ones that have been cyclical, have been beaten up, have therefore been heavily discounted, and therefore really, that's what we say. I'm looking to buy a growth company because the ability for a business to return to its normalcy in a difficult time is a huge amount of growth. And therefore, and yet all it has to do is do what it used to do before, as opposed to it doesn't have to develop a new market, doesn't have to have the management team that can execute on developing a new market, doesn't have to have to have to have to

all those pieces. It already has, in large part, assets that are in a business that, you know, going through a difficult time. And so therefore, and you can buy them for far less and whether. So that's what I say is, you know, we're trying to buy, what people think about as better businesses with barriers to entry, their significant growth, and you buy them at, you know, Ben Graham's about your prices because there's no identifiable path to profitability, and therefore there's no way, people, markets aren't figuring out how to value things like that, and they get far disconnected, and they disappoint. And when they disappoint, what happens is There's only one way for stock to go when it disappoints.

It goes down. And who cares if it to trade at 20 cents and a dollar, it disappoints, it goes to 10 cents in a dollar. And so therefore, I do think that part of our process over time and our success has really been the ability to continue, so when it goes from 20 cents on a dollar to 10 cents in a dollar to buy more stock at 10 cents and a dollar. So therefore, to continue to invest and have a long time frame, because I really do believe there's a phrase by an economist who is up in MIT, and that is, in economics, things take

longer to happen than you think they will. And then they can happen much faster than you think they could. And so the longer the process takes, and that's what I think we've lived through. We live through an environment where small-camp, micro-cap companies have been, you know, I'm giving a talk later on in Omaha this week. And the message of my talk is really, it's the economics, stupid. And so people talk about small-cap, I mean, value is underperformed growth, and why is that when a good-value stocks can come back?

People aren't going to go buy value stocks because they're out of favor. They're going to buy value stocks because a bunch of the companies that have to have that classification are going to have economic situations that are radically different, and therefore significant growth in profitability and revenues. And therefore, the returns will manifest themselves, and that's what will attract, and therefore that's why that group gets, you know, then we'll get into favor. So it's not that it moves around mysteriously to be allocated into value

or to small cap. It gets allocated to companies that perform well, and especially ones that have performed poorly because the fact that the expectation changes, therefore radically, changes the valuation, so that's what the opportunity. So it's all about the economics, stupid. And so if you can identify the business and the opportunity and have a good sense as to how the economics play out,

and again, in businesses that are cyclical, you know, they will play out a pretty reasonable, predictable way, the timing of which is totally uncertain. And so therefore, that uncertainty probably is an opportunity for the patient investors who's done their work to identify those situations. You mentioned opportunity in there a few times, and you started off that by talking about the, dearth of, you talked about the opportunity for stock pickers, you talked about the opportunity

for patient investors. I guess I wanted to ask you, you know, you hear lots of people, especially value investors as they watch AI stocks rip to the moon or Dogecoin go to the moon, whatever it is. You hear a lot of people talk about, is the market broken? Is the market getting more inefficient? I'd love to get your opinions on, you know, is the market more inefficient? Is there more opportunity today than 15 or 20 years ago for someone willing to do fundamental work and pick individual stocks. Yeah, I'm absolutely convinced that the opportunity set is huge. And it's intuitive, right?

The idea that capital has flown out, capital's not interested, capital's looking at other places, and the market mechanisms in the allocation of capital have nothing to do with bottom-up stock research. And therefore, that means there's an opportunity for you to do work and to identify situations that people are not focusing on. So that's what I think. I think on a go-forward basis, I just don't see how the next 10 years,

stock pickers are going to substantially outperform indices. Because that's what it is. The flow of funds today is largely dictated by not intelligent thought, but the flow of capital. The flow of capital is predicated on high performance. The high performance means that you've done well, you contract more capital. You get more expensive.

We all know that. And the fact that matters, because we know it, and someone said that five years ago, and those stocks are still done really well, and your stocks have done really poorly, convinces you, like, well, maybe they're right. As opposed to, no, the rubber band just got stretched further. and therefore the irrationality is larger.

Where do you want to find opportunities today? What do you think the opportunities are? Do you think the opportunities are in the Magnificent Seven? Is that an undiscovered group that nobody kind of looks at and understands? Or is it where they're not looking and they don't understand, they don't focus on? Where do you think opportunity is going to be? Well, Sue, I agree with you, and you said you kind of cut off my next question, so you're a bad interview subject, but my next question was going to be five.

I would have said the same thing five years ago, right? The capital is going into indexes. And I think both you and I would agree, I mean, there have been fantastic opportunities, but by and large, five years ago, if you just said, hey, I'm just going to kind of blindly close my eyes and follow the passive flow funds, you, by and large, would have done better. And then, that's one point, but putting that aside, you asked, you talked about the Magnificent 7. And I do agree with you, but I guess the counterpoint would be, hey, 18 months ago, Facebook was at $80 to $100 per share, and today it's at $400.

And you could name multiple ones of these. You know, Nvidia, a year ago, it was starting to get pretty clear. AI was taking off, and I think people like you and me probably just sat there and said, oh, you know, this is interesting, things are accelerating, and it's outperform like crazy. So I do hear you on the rubber band snapping back, but when I look at these, I say, oh, these are some of the greatest business in the history? Am I just an idiot for not covering these nonstop and buying every pullback? Well, but I said stock pickers will win in the next decade.

And so stock pickers, and you're starting to see that, right? You're seeing deviation in the Magnificent Seven. Of course, it used to be Fang, but now it's Magnificent Seven. So they kind of change, right? And so therefore, and you say meta, you know, I don't own meta, but I know in other people who do, I think are great value investors, and it was probably really inexpensive two years ago. So again, if you picked the right stock at the right time, you would have done really well.

If you owned them all, you wouldn't have done nearly as well. Now, they all did relatively well, and so, but where's the differentiation? But that's what I really do think. I really think that the economics, so Greg Zuckerman is a reporter for Wall Street Journal in 2018, he said, we did an interview and he said to me, so, so, so, we did an interview you and he said to me, so why do you think that value is going to outperform? What's going to be, you know, why? Just because it has, it hasn't performed well, why should it perform well?

And I'm like, well, because what's going to happen is the companies were investing and are going to have a different economic fact pattern that will drive that. And so, of course, at the time I said it with limited conviction, because he asked me the question I hadn't really kind of thought through. So I was more kind of more knee-jerk, oh, yes, more value will rotate and all those things we rotate, but then like what it is. And so that's what I really spent the last. number of years, you know, getting hit over the head in terms of what's happening.

And that's what I do think. I think the world changed two years ago. I think the world post-the-financial crisis is an odd economic environment that we've never lived in before. And when you live in it, you forget that because you, it is, of course, it's logical because you're in the time. But yet how it existed and as long as what existed when inflation was as low as what it was, when you had low, no negative interest rates, therefore you had free capital.

So it was an end for not just a year or two, but you had it for 10 plus years. So that was a very odd environment. Today, we're in a very different place, I really believe. I think there are huge structural changes that are happening that are going to drive the demand for a lot of things that have been taken for granted and that have been pushed to decide and have been industries that have performed poorly that are now consolidated and really well positioned. But the materials in the industries they're in are in industries that are going to have significant. growth in front of them, and so therefore, there's a rotation that is in the process of starting, and one of the clear things is the cost of capital is different today.

How many times do you hear something like, oh, that used to make sense, but it's got a higher cost of capital. Those things driving crazy, because the correct way of saying there is it isn't that it has a higher cost of capital. Today, it has a cost of capital. Because two years ago, it had no cost of capital. That is not a sustainable economic environment. So there were companies that had no cost to capital.

So the cost of capital today, I still say, is probably on the low end. And so therefore, you know, adjusting to that number and adjusting all valuations, you know, what's my risk-free rate of return? What's inflation? Because the Fed is an irrelevancy. The Fed has no control over the economic environment, really. And there are two huge things they tried to do in the last 15 years they've been dismal failures at. So the idea that they control things, it's kind of like they follow the tea leaves like the rest of us do.

You know, the Fed was going to cut five times. Well, the Fed's looking at what goes on. The facts unplay, and it responds. So therefore, it doesn't lead that, it follows it. And so therefore, interest rates, inflation is a more persistent thing. It's a whack-a-mole. It continues to be reasons to think, like, there's plenty of reasons why inflation is going to be a persistent issue that will pop up and down, but be at a higher level.

Therefore, the risk-free rate of return, you know, we're getting close to it. It's getting close to 5%. The 10-year treasury probably should be at 5%. Maybe it should be higher than that. If it's at 5%, what's the risk on top of that you have to have. And therefore, there's a whole bunch of, you know, I think there are classes of investments, you know, one of them is I think is real estate. Real estate is all cap related.

And therefore, if you have an environment where the cap rates are lower because the interest rate is higher, what's the risk? If I get 5% than a 10-year treasury, what do I get? 7 and 8%. And so therefore, what's my cap rate? Well, I got to have growth then in the underlying income stream in order for me to have value that kind of persists. Well, if there's growth in the income stream of the rental, that means there's inflation. So therefore, that means there's higher interest rates. So, you know, it kind of goes the other way.

And, of course, the other thing, of course, is, you know, today people talk about how much money is passive, how much money is in active. Of course, what they don't think about is how much money today is in private markets. And, of course, private markets today are substantially larger than what they were, you know, 40 years ago. And that is part of the capital drain off and the opportunity set that's really there. And that's a market that is either reasonably overvalued to potentially substantially overvalued. And the critical element there will be, where does inflation really kind of come out at? Therefore, what's the right interest rate? Therefore, what's the right cap rate?

And therefore, how do you get to discount all those businesses? And you see it, right? Because it's this huge spread. All private equities raise new money, but they haven't deployed it. And all its private equity has it liquefied the positions they have because they can't. They're not willing to take the bid. The bid, spread, is huge. And the question is, who will win that bid as spread?

That'll be depending on where the inflation rate kind of caps out and where interest rates cap at it. Cool. Bobby, I'm going to try and get two more questions in, and then I think we're going to open up to the audience, some quick Q&A. I did want to talk about, I think you and I first met each other three years ago, and the line you had that stuck with me was revenge of the old economy stocks. And what you kind of meant was, look, there are all these old economy stocks, you know, oil and gas, coal would be a classic example, though maybe that's dying, but all these old economy sectors, anything

industrial, where they'd kind of been starved of capital for five to ten years. And what you were saying was, hey, they've been starved of capital, the cycle starting to turn, there's no supply, and demand is stable or going up, and these things are going to do fantastically. And we've seen this before in industries, you know, obviously like an oil and gas is cyclical. It doesn't get an investment for five years, gas prices go higher, blah, blah, blah. But we haven't seen it across huge swaths of the economy before. And I just want to ask you, you know, when you see it happening across so many different industries, is there anything in your career that that, you mentioned inflation, interest rates go higher,

you don't get any more investment. Is there anything across your career or any environment that reminds you of? Oh, no, no. This is a different, so there's a combination of factors. So, a, industrial businesses in North America have been competitively disadvantaged for 50 years, right? So 50 years ago, 1975, when I got out of college, inflation started to take up. But what really started to happen was, U.S. had lost this industrial base because we were not competitive, right? And so therefore, China took all these businesses, you know, so what was it in 1992 election is when Ross Perot said, oh, there's a giant sucking sound, everything's going to go to Mexico because of NAFTA. And of course, no, the giant It wasn't Mexico, when it was it, NAFTA, the giant sucking south for 40, 50 years was China. And so we lost jobs, we lost industry, and we all know that because, you know, Walmart's become a great success because it sells of stuff that's made in China for a lot less money than what we used to make it here, and whether the, and furniture and all these things, you know, the U.S. industry has gotten crushed. So it's been 40 years, right, in 40 years, which is also interesting, because 40 years is where you have an interest rate, you know, so in 1882, it peaks of 15, and it spends of 40 years going one way, so one part of one cycle, it goes down and down only, and all of the implications that come from the lower cost of capital and lower inflation is just tremendous, okay?

But you've had this industrial base leave America. And so now you suddenly have a very different world. And the world today, not only are the remaining companies consolidated and that's what I, I used to say, revenge of the old economy, what I talk about now is the metamorphosis of the old economy. These businesses are very different. They have, you know, the Buffett kind of comments about there's a barrier to entry to build some of these businesses in America. You can't do that anymore. And they've consolidated down.

So there's three guys left that supply pretty much all of the production that's here in North America. The North American production is competitively advantaged because it's an energy-intensive business, and therefore we have energy costs that are substantially less than the rest of the developed world. And that is a sustainable advantage. So from living in a world of 40, 50 years of industrial disadvantage, I live in a world today that sees North America's industrially advantaged over most of the world. Not only have you consolidated, and so therefore have this huge opportunity set, but more importantly, you have substantial growth in front of you. And, of course, that growth, of course, is only really starting to come, right, because all of the inflation reduction act and the infrastructure bills and all these things are, they're all coming.

You know, there's a tsunami. You know, a tsunami happens over here, and, you know, you're still there on the beach in Thailand, and you think, well, it looks pretty nice to me, but, you know, between here and there's this thing that's coming, and there's nothing stopping that. So the amount of money that will be spent, and therefore the impact on the economy, and therefore the impact on basic industries, whether that's steel, cement, chemicals, you name it, oil, gas, all of these things, will be particularly strong. And, you know, the demand for resources around the world will be, you know, because renewable energy and change in energy are clearly energy transition is, you know, here will accelerate and will continue to be there.

But how much steel and how much cement and how many of these things do you need to therefore build out that infrastructure is tremendous. And then in the meantime, we have this other, you know, the other macro concept we have is people talk about de-globalization. What it really is is the evolution of globalization. Globalization continues to move. Who's the guy who's got the new competitive advantage today? And China doesn't have the same competitive advantages it did 50 years ago when it ate our lunch.

And so there, but it has different advantages today. So I'm not in any way. We didn't implode 50 years ago when we lost all that business to China. So China's not going to implode in any way, shape, before. Put on a list, not allowed it to China. But the rotation out of China, but then more importantly, the rotation to America. And it's not reshoring, because that's a terrible use of the word, because most of it, a lot of it, is coming from Europe. Because we're competitively advantaged when it comes to industrial businesses versus to Europe.

Because we have access to low-cost, secure supplies of energy, and they do not. And so therefore, yes, the Inflation Reduction Act is doing something, but that's not really it. you know, whether it's the spin-off of Holcomb's cement business or whether it's the building of by Yarra of fertilizer plants here, ammonia plants, and then so we also talk about it's metamorphosis too. So one of the other things is, you know, we do have an investment in LSP industries, and so it is a fertilizer company, but the fertilizer business is radically changing given energy transition because the intermediate product they make is ammonia.

And ammonia has this three or four new uses that potentially can be as big as the current use to make fertilizer, that therefore there's tremendous growth in this as it becomes these other substitutes of these markets really grow. So therefore you've got tremendous growth in making something in a market where you're competitively advantaged and have excess cash flows and margins of profitability. And you can buy these businesses for far less than it would cost to build them because things happen. You know, the prices and profitability have temporarily come down and therefore, you know, everybody

runs for the door because the short-term news is the earnings are going down and may get weaker. Well, okay, that's fine. That's great, but that's not. If I look three to five years, which is what I think I need to look, I'm buying a business for a third of what it's worth. And yet, I think there's tremendous growth, and therefore it could be worth a lot more money given the growth opportunities that are in front of it. Perfect. Well, I have several more questions, but I know we want to get into a little audience Q&A. So we'll open up to the audience.

I think there's a mic. If you have any questions for Bob, you can raise your hand and we'll bring it around. And if not, I will just keep going with my questions. So any questions? See one over here. I enjoy the rosy picture that you paint about the U.S. economy, but one of the concerns that you mentioned the new normal is 5% interest rates. With that, we see an explosion of interest payments on the federal debt.

And we have for whether either presidential candidate were likely to continue to have large deficits. How does this end well? you adjust you live you live in a world in which you have high inflation you pay more money that's the price you do pay it does have some kind of constraining event that will happen and then of course I'd also point out when it comes to setting the right interest rate and what's inflation

I don't think anything that's happened in the last two years when inflation perked up had anything to do with the fact that the federal government's deficit and not just a federal government right every government around the world has huge deficits that they've just been building up so that's a that's a problem that they'll need to address in some way, shape, or form. But the critical thing is, what's your company, what's its position, what's its economic situation,

the fact that interest rates are higher in inflation or not higher, does it provide a service that is critical, that is in increasing demand and has pricing power, and therefore we'll have increasing profitability, because that's the critical element. So, you know, what happens to something else? What happens to the Magnificent Seven? I don't know what happens to those.

What I do know is what my portfolio companies are and how they're positioned, and all of those scenarios are things in which they will do, deal with and they are well positioned to deal with those things. So that will happen. How does it not happen, right? So. Hey, thanks, Bob. Can you talk to us about your portfolio construction, how you size positions, do you go all in at once, do you scale out, as much as you're willing to share? Thanks. So I guess I've been, I started Ravenswood in 19, November, in 1980 when I worked for Mario Gubelli, and so I've been doing it for a long time.

I haven't figured out how to do those things yet. Instead, what I do is I look at stocks and companies, I look at price to value, and if the price is such that it's substantially less than what the value is, I buy it, and if it goes down, I buy more of it, and it becomes a big portion of my portfolio, and yet the price to value is dramatic, I buy more of it, so I don't worry too much about it, and I have the good fortune of the capital that I have has been with me for an awful long time. So they give me a lot of rope here to go out and do these things. So portfolio construction and things like that, that's something what somebody else does

and therefore has less than optimal performance because they have to worry about, I have too much of this, I'm overweighted in this, if that happens. And in the interim, you know, energy prices do come down, well, it's going to hurt my investment. So therefore, the volatility in the portfolios can happen. But, you know, the critical element is price to value at any one time, and I'm not looking to size the portfolio and figure out how to manage your portfolio. I don't have to do that. But let me just throw one in there. You mentioned if it becomes a big piece of my portfolio. Like, what is the price to value you're looking for when you want something to become a big piece of your portfolio? Like, you know, I could imagine you say, hey, I look to start a position when it's at 50% of what I value it at, and I look to get max size when something's at 25%.

But the critical thing I've continued to realize what we do is we invest in businesses that are beaten up and out of favor. And so therefore what that means is inevitably they go down more because it gets worse than what we thought. And therefore the price goes down. So therefore, I've scaled in probably too much too early. And so therefore that's limited my ability to put more capital to work. But of course, what really over time when I realized is the last thing I want to do is make that my determinant. it. And instead, and I've done this in the last three years, as it's appreciated, and it's become a bigger portion of my portfolio, I bought more. And so because I'm thinking these

situations take time to play out. When they start to play out, I think there's a five-year opportunity, 10-year opportunity. And so, therefore, it's a better investment at 50% more than what I paid for it when I see the manifestation of the underlying economics that are in place. and therefore not to put more capital to work when he's broken through the line and there's nobody, there's 60 yards of running room between there and the goal line, why would you not want to own some more of that? Because it's clear the outcome. And so it's a better investment at a higher price because the higher price is that the market is beginning to reflect the realization of the economic environment that we thought was clear and obvious,

and that really has come to manifest. That's a really interesting point. being able to buy higher as it kind of inflex your way. We've got time for one more question? One more question, if there's one more question out there. Hey, Bob. Would you mind talking about one of your biggest mistakes you've made in your investment career? The biggest mistake leads me to where I am today.

And that is the biggest mistake was a company called originally Ethel Corporation and then it changed to the new market. And so I bought it in 1998. The Gottwald family controlled that they're out of rich. And smart people, smart capital allocators. They consolidated their industry. It was down to four players. In 1997, they bought back a lot of stock

because there was nobody else to buy. They levered up at the wrong time and they made a mistake. Stock then went from 45 to 35 a year later. I'm, hey, I'm smart. I'm buying it $10 less than what they got. Well, clearly the business is worth a lot more money than that. The business, though, having levered up

and having consolidation in the business and Oranite, a competitor, building a plant in the Far East, and that was the same time we had the Asia financial crisis. The business, for the number of years, slid down. So I bought it from 35 all the way down to four.

And so then the stock corrects it goes to 15. So, 2005, it's paid off all the debt, and I talked to the CFO. Now, in the meantime, that's a great thing of investing in these companies. You've been an investor, I've been an investor for six, seven, eight years. I'm the only one person talked to David Fierrenza, the CFO of the company. And I say to David, I say, David, I say, David, next year you're going to earn $4 in free cash. You have to tax. It's a $15 stock.

You paid off all the debt. This stock's like really cheap. And David says, Bob, from your lips to God's ears, two years ago, three years ago, I thought we might go bankrupt. And so all I know is I see every tree that I might run into. I can't see the forest. And so, therefore, I bought the stock. Oh, I double up, I file a 13D. I'm really smart.

I buy it. And then, sure enough, a year and a half later, the stock's like earned $4. Pat myself on the back, stock goes to $39. I'm like, well, you know, business, low growth business, you know, $39, the $4.

You know, that's a pretty full valuation, almost 10 times free cash flow. That's that. I start selling stock. And then a while later, the gut walls buyback stock at 42. And I'm like, what are they doing, buying back at 42?

And then I sell some more stock. They sell some more stock. They said, buyback, it's 68. I'm like, what the hell are they doing? Buying back's at 68. And I'm selling stock, selling stock, selling stock, selling stock. And so the whole thing is the situation had manifested and come together. The consolidated business had radically changed.

The growth in the business was reasonably good, and yet the growth and earnings were substantial because it ended up earning, I don't know what it earns today. I think it earns like $30 a share or something like that. So at the end of 2013, I sold the balance of my stock because that's when they changed the change the tax rule. So I got a $25 dividend, and I told the balance of my stock for $275 a share. So $300 a share. I bought it at 15.

I thought I was smart. I sold it at 39. I sold it at 42. I sold it at 50. And so the amount of money that I lost is more money than I probably still managed today from that investment. And so therefore, when these situations that you've identified turn the corner, the opportunity set is dramatic. To put more capital to work is the thing you have to do.

And the last thing you want to do is it never hurts to take a profit. It is funny how when you talk to a little more seasoned investors, every time you ask their biggest mistake, it's a mistake of, I guess, omission where they sell something that goes up more and they knew it was a great company. I don't think that's a stake of omission. I sold it. I didn't. I didn't know what I did it.

It's a mistake of commission because they pay their brokers commissions. And then when you talk to a younger investor, their biggest mistake is, oh, the thing I bought that went down, like most of my portfolio, 90 or 95%. But, Bob, this was fantastic. It's been great learning from you over the years. I appreciate you coming on. And thanks everybody for listening to us, Rumble, for 30 minutes. Thank you, sir.

A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.