Yet Another Value Podcast - Simon Kold, Author of "On the Hunt for Great Companies", on what makes a great company

Episode Date: March 14, 2025

Simon Kold, Author of "On the Hunt for Great Companies" and Founder & Portfolio Manager at Kold Investments, joins the podcast to discuss what makes a great company based on his research and writing of his new book, "On the Hunt for Great Companies."You can buy your copy of Simon's new book, "On the Hunt for Great Companies" here: https://www.amazon.com/Hunt-Great-Companies-Evaluating-Durability/dp/1394285744Chapters:[0:00] Introduction + Episode sponsor: Fintool[2:30] Why Simon decided to write the book[4:30] Authenticity of communication as an indicator of management passion / deviations from the norm[12:53] Maximizing shareholder value (pretenders vs. reality) / Founder CEOs / Project IRRs vs. buybacks[23:09] Value capture / over-earning vs. over-extraction[33:47] Industries with staying power / longer-term predictability (example of Alcohol industry) / building competitive advantages ($COST example)[44:42] Premise / value add of the book + final thoughtsToday's sponsor: FintoolFintool is ChatGPT for SEC Filings and earnings calls. Are you still doing keyword searches and going to the individual filing and using control F? That’s the old way of doing things before AI. With Fintool, you can ask any question and it’s going to automatically generate the best answer. So they may pull from a portion of an earnings call, or a 10k, whatever it may be and then answer your question. The best part- every portion of the answer is cited with the source document.Now- if you’ve tried to do any of this in ChatGPT you may know that the answers are often wrong or hallucinations. The way Fintool is able to outperform ChatGPT is their focus on the SEC filings. If you’re an analyst or a portfolio manager at a hedge fund, check them out at https://fintool.com?utm_source=substack&utm_campaign=yavb&utm_content=podcast280See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimer

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So look, if you're an analyst or a portfolio manager, try FinTool today at fintool.com and take your research to the next level. That's fintool.com. all right hello and welcome to yet another value podcast i'm your host andrew walker if you like this podcast i mean a lot if you could rate subscribe review wherever you're watching or listening to it with me today i'm happy to have on simon cold simon is the founder of cold investments and the author of on the hunt the it's on the hunt the hunt the quest for great investments i only listed on the hunt for great companies on the hunt for great companies simon how's it going it's going

good thanks for having me on i'm a long time fan of this show so happy to finally be here I appreciate, I appreciate the kind words. Appreciate you coming on. Look, having you on to talk about On the Hunt, we'll get there in a second before we do that. Just quick disclaimer remind everyone, nothing on this podcast is investing advice. That's always true, but maybe particularly true today because we're going to be talking about Simon's book on The Hunt. It lists who's who of all the great companies in the world and there. I don't think I have positions in any of them.

I'm not sure if Simon does or not. We can try and disclose when we get there. remember we're talking about the book we're not here to present financial advice any of that do your own work do your own diligence all that sort of stuff so simon let's uh let's quickly dive in you're on the hunt for great investments it's 15 chapters going through a bunch of like kind of examples of what makes a great company and then i don't want to call it quite a case study but an example or seven of it you know like just one that comes to mind uh you've got the chapter on value capture which i really want to talk about but you talk about how

how different people talk value capture. You use airlines as an example of a poor one. You use luxury as an example of a good one, but that sort of stuff. Let's just, I wonder I haven't told the examples, but I'd love to start just, why'd you write the book? What was the kind of the purpose of it? Yeah, so I found a note that's six years old on my computer a while ago, where I already outlined the ideas for this overall framework for empirically evaluating business quality,

like this overarching framework. like you have the hamilton helmer seven powers framework which is sort of like for for modes you know like i wanted to have this whole framework for for for overall business quality um but i think the idea to start the book really i started writing the first chapter in january 2023 and that was really when the the whole book idea came about i have always had a dream to write a book you know in my in my early 20s i used to do stand-up comedy in Denmark, actually, like I was on TV and on a national tour and all kind of stuff, but I actually had a failed dream to write a book back then, back then in my 20s that I had to abandon.

Don't the stand-up comedy shines through in the book, I would say. It's more on the dad-joke scale, but there's a lot of... Yeah, yeah, I mean, unfortunately in the, I would, if people want to check out the book, I would recommend the physical book, not the audio book, the comedy is the delivery of the comedy. I'm not so happy with that in the audio book, but there will be a link in the show notes if anybody wants to check out the book. But let's go through a few things. The first thing I want to jump out, you have Expediters International. You've got a commentary there, and you're talking about how Expediters International, this is on culture, if I remember correctly, company culture,

incentivization, all that type of stuff, right? Are you remembering the show? Yeah, it's on authenticity of communication as an indicator of management passion. Perfect. So there's the famous expediter's letter, right? Where he goes through and he's like, look, he's got a lot of stuff in there. One of them is I hosted all the executives at my house. I paid not the company, which would be very, very rare for a company. But I think the most famous piece of that letter, this is a famous letter.

People can look it up. It's from like 2010-ish. I can't remember. The most famous piece is, hey, every part of our company, everyone is incentivized and everything is a profit structure and that includes our parking lot like if you work at the parking lot you have an incentive structure nobody gets to park for free everybody pays you get paid when the parking lot does better you get a bonus you get and he's talking about how the people at the parking lot are just hustling they collect bonuses the parking lot never has a we are

full sign outside like they'll take anyone they're they're bringing cars in uh for you know they're trying to not just have the employees park there but the employees across the street all that sort of stuff. And that's a very famous example in value investor land. And I think that's interesting because expeditors did great over the time frame. But when I look at that, I say, hey, if I was an employee there, let's just use Google as a counter. Google famously gives their employees everything, right? Dry cleaning, lunches, dinners, everything. And I was just kind of thinking about that expedited example, I'm thinking of Google. And I was like, look, if I was a Google engineer and all of a sudden, the guy at the parking lot was hassling me, like, for an extra two bucks, it's distracting me

for, like, my engineering time's valuable. It's distracting me from that. It's leaving me pissed off. It's adding time to my day. I was just wondering, like, is that the best way to run a company to have everyone incentivize in these little fiefdoms? Because it does seem like that would create a lot of tension and that could kind of distract. And, you know, if you're really trying to maximize to maximize the parking lot, if you're at the parking lot and you're trying to maximize the parking lot, that might be great. But, you know, the parking lot's value is kind of pale in comparison to Google search engine so I just wanted to have that discussion with you yeah but I guess I mean I get I don't think that's the point I make

like the point I make is that I use this this snippet from this 8k filing as an example of like very very authentic management communication where you really feel the person behind it right and I have this I make all these determinants of management passion and I just thought this was like a really really great example to show people like, okay, this is someone who totally deviates from the norm, right? No earnings call. They just post this written Q&A with this question about the legend about whether the CEO pays for his own parking or not. And then he basically goes on this wild, wild detour of all this stuff and his opinion about corporate America and so on.

And I just thought that was like an example that really deserved to be in a book, you know. So I do hear you, but I want to just push on that point because it's one of the things, you know, I think with all these books, like you're on the hunt for great companies, good to great, outsiders, Thurndyx outsiders, like, it's really interesting to study those, but I really get curious about the dichotomies of like what separates in good to great. I think it was compact versus, I can't remember Best Buy or whoever, but that actually eventually went bankrupt as well. But, you know, I just look at the exporters example and such a thing. one because it's such a great letter. But then I look at a lot of the pieces of it and I say, hey, there are a lot of companies where not only would that not work for, it would actually be negative value cruel. And I'm just kind of trying to. Yeah, but I'm not, I'm not disagreeing with you on that. But I guess my point was my, my, the point I made in that, in that section, wasn't that that you necessarily should have kind of a hustling culture. I mean, that was not the point. The point is just that that you should, I mean, I at this look for when you're trying

to determine passion, right, passion of management. There's a range of determinants you look for, which I outline in that chapter. And this authenticity of communication is one of them. Like I also mentioned, the example with Masayos-Ison, and I had this example with Renkubing, Lentbo Bank, this Danish Regional Bank. It's just three different kind of specific examples

of communication that totally deviates from the norm as an example of passion, right? Because these people, there's this one thing, there's this willingness to being made fun of by others by deviating from the norm this is the this is the example with mr rose this is the example of marcia and also with this example maybe to a lesser extent the example with frankubing denverbank but just this that's what i'm looking for i'm just looking for the deviations of the norm you know when i'm trying to is there something interesting here when i'm trying to

to to to to say you know let's go to a slightly slightly different way to ask that question when you talk about deviations from the norm so i think i'll know the answer but i i still I'm curious. There are Warren Buffett writes great shareholder letters. There are a lot of companies that write letters in the Warren Buffett image, whether they're directly quoting Warren Buffett alluding to him or just kind of writing in his style. And I, you know, whenever I see that, A, one side of me wants to be like, oh, this guy gets it. He's part of the tribe. Yeah, yeah, yeah, yeah. But B, I'm like, oh, I'm about to get pants by a guy who's saying, oh, you know, I worship at the share the feet of Warren Buffett, shareholder value, frugleness, and then all of a sudden

it's like, hey, we've decided to buy a Bitcoin miner for 500 times EBDA, and I'm paying myself a big bonus, and, you know, the stocks on 90%. So I guess how do you differentiate? And I like that you use actually Masa San there, because Masa's on someone who said the highs and the lows, right? How do you differentiate, like, kind of seeing someone with that passion, maybe we want to give me fun? Yep. Well, I talked a little bit about that in the chapter, about capital allocation and when we also talked about Thondike's book, The Outsiders, right? You have seen now this generation of CEOs who have clearly read The Outsiders and who are imitating a little bit. Some of this sort of, they're very much like Persia, Persia, and I think there's a risk there.

You can see like I think the example with Mike Pearson of Valiant, for example, where he was, if you kind of use the framework from the outsiders, he kind of hits a very he kind of hits it very well, you know, and you would, and that was also some of the world's best investors who actually invested in Valiant, you know, who got burned on that stock, probably because they used this method as a, as a method to evaluate people, right? So I think there's this risk of imitators or you could say that people who have read the outsiders. I actually met Thorndyke recently and I told them that, you know, there's this negative side effect, you know. On the one hand side, you, you educate, CEOs on how to be better capital allocators, but you also educate them on how to pretend like they are good capital allocators. I have argued for a while. I think investors got, and I think it's come the other way, but investors were so into spinoffs that I think companies realize, hey, we can spin off any division and there's a group

of Andrew Walker's out there who will buy up any spin off and give it a multiple that it doesn't deserve. And like, you know, part of the reasons you buy spins is they are the cats and dogs of the company. But they were, you know, instead of the cats and dogs, they were spinning off the terminal cats and dogs. And people were buying them because, hey, spin-offs work. And I think these things were getting big multiples and people were using them to get bags out. So it's funny. Like, as investors pick up the tricks, the CEOs pick up the tools to trick the investors with the tricks. You mentioned Valiant, which was interesting. The moment I

saw it in your book, I knew I wanted to ask you about it. You know, you've got Vali, obviously famously negative example, effectively goes bankrupt. disaster on a lot of lines. And one of the negatives things you say about it is he was intensely, Pearson was intensely focused on creating shareholder value. And I also thought about this. I want to come to value capture. I think valiant is a great example of capturing too much value as well.

But I did just want to ask you, you know, like everyone looks for CEOs who are focused on maximizing shareholder value. Like what separates Mike Pearson's intense focus for maximizing shareholder value from to use Thorndyke's favorite, John Ballone, or. pick your CEO who cares about. Yeah, I think that's a hard question, right? But I think what I had this small section where I wrote about, like, focus on the different stakeholder groups, right?

But I think some of the example, the counter argument to that would be some of the examples in the outsiders. They are probably leaning more towards shareholders, right? But there's just, Mike Pearson is just sort of the extreme where it tells to the wrong. But I personally try to look for people where I think they're genuinely, generally obsessed with customers and they really, really care about the employees and so on. So they are passionate about what the company does in an internal motivation way, which is not 100% equal to maximizing the per share cash flow of the company. But it just tends to, it's like, I just don't think you don't maximize long-term per share value by aiming straight at it, right? That's kind of the point. You're not aiming straight at it.

You're aiming at creating super good value for your customers, being a good citizen in the world, taking care of your employees, and thinking about rationally how you can maximize shareholder value. And that's how you actually get to it, right? And I think there's some clues you can look out for in the way the management behaves. Go ahead. Why don't you listen? Sorry? Why don't you listen to the clues that you can look out for? But, I mean, for example, are they obsessed with the company's products, for example?

Are they really, when they talk about the company's products? Is it something that you think, are they personally using them? Are they really, really into those products? That's one thing, right? the retention of people of the company the first thing I look at when I look at a company is

I of course cannot obtain employee retention data right because that's something I would either have to do more due diligence or I would have to request it or somewhat but one thing that's really easy is just I showed this example in the book with Apple where I just showed how is the management team composed

five years ago just look up the annual report five years ago compared how it is today and just look at the turnover Or if people, if there's a lot of consistency in the people there, there must be some reason people like to say that. That can be kind of a rough proxy of employee retention to start with before you get, before you even sort of really spent time on the name. Can I pause you there? Because this is another one that I'm always obsessed with the exceptions to the rule, right? And I guess I noticed when you wrote that because I think it was like three pages after you wrote that, you used the example of Mark Benioff, who for 15 years tried to find a.

successor over at Salesforce, had multiple people come into the co-CEO role, leave the co-CEO role. And I was just struck by that because Salesforce has been a great organization. Mark Benioff is really passionate, but it was just interesting because I think it was actually three pages. It might have been a little bit more. But it was like, hey, look at the Apple example as one you listed. And there were a few other where the employee team is there for a really long time. And then two pages later, we're talking about Mark Baineyoff, who's having constant churn at the

top. Disney probably doesn't qualify this anymore, but if we had been filming this four years ago, we would have looked at Iger and his struggles with succession. And so I just, again, it's the exception I find interesting. Go ahead. Yeah. So there was this sort of, I think a lot of people, including myself probably, have a sort of a bias towards founders, right? So we have this tendency to equate founders with something that's good. And I think that's a huge, when you generalize from these anecdotes of these winners, there's a huge survivorship bias. And that generalization is probably not very statistically valid right so and then i i talked about when you evaluate founders like some of the stuff specific you could look out for right when you evaluate founders and one thing would

be for example if i would compare i think the example i mentioned was comparing the compensation package of brian chesky of a bnb to mark berniof they're both founders right so that's one thing and where chesky has a very extreme uh where he has uh you know arsuz that vests of a very long time and then they go to charity and then Bernie of, despite owning a massive piece of the company, still gets like a very, very aggressive competition package. And then the other thing would be that turnover, right? So if you, I think what I did was I showed the, how the management team was composed at three different points in time and there was like a more or less 100% turnover two times,

except for some of the other co-founders, right? And then he tried to transition in a co-CEO twice, which failed. But despite that, I mean, if you look at some of the other, aspects of passion. I think his course actually very great with those, right? So it's not easy. It's not very binary, passion, not passionate. I think it's difficult, right?

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and take your research to the next level. That's fintool.com. you know investing is more art than science and i think one of the things that breaks my brain sometimes is especially when i read a book like this where it's about 15 chapters and each one is like kind of the things you look for i as i said you list the rule and then i'm like with the exception to the rule is over here you know and it's one of the things that breaks my brain let me just wrap oh one more thing that i thought i want to do value capture because i thought that was the most interesting thing but just a few more random things before we get there

You gave the example of project IRAs versus buybacks, and if you remember the specific story you give, you can give it, but I can give it if you don't. Do you remember this story you give? Yeah, but what would I mean the specific story of my meeting with the company? Yes, yes, yes, yes. Yeah, yeah, yeah. I don't want to say which company it is. Like, it's anonymized, but no, no, it was just like I had a meeting with the chairman of a listed company where it was clearly valued very low.

for like a buyback and and they had just put out I think it was a three-year plan where it was very easy to do the math it was like super easy to do the math like if they if they hit those three-year targets and you assumed like some low multiple I think it was 12 times or something I used in the in the example I made sort of a slide and then I said okay so what would be the persia value if you did they were over capital like if you did buybacks now and if you didn't and kind of show the delta and but before presenting this to him I asked him like what was the hurdle rate for new investments and he had some number that they're like kind of very

very it was eight percent yeah like eight percent that that cost of capital was eight percent and then they had some additional premium depending on the risk and i just thought it's funny that to then first ask him this and then present him this to saying hey wait a minute you are if you bought back your shares i think you could make an incremental 25 percent i r on that capital you you bought back and i could just see that the idea had just totally not occurred to him so this was Listen, I have had similar meetings with companies, right? And to make numbers very simple, the stock trades for 10 times earnings, and they're investing into a project that 20 times earnings, right?

And I would hit companies over the head with, hey, you can't do this, right? The opportunity cost here is too great. You need to be directing your stock, your cash into buybacks at that opportunity cost. And then, of course, what happens is the companies change their assumptions on their, changed the assumptions on their investment so that it looks like they're doing better. But I had one CEO who told me, hey, Andrew, that sounds great, right? But if we start buying back our shares, yes, we agree we would be buying, and I'm just using my hypothetical numbers, we'd be buying stock at 10 and we'd be investing at 20.

We agree with you. But here's the issue. Our stock last year traded for 30x, this year's trading for 10x. if we stop the capital allocation on the growth side and we buy back stock, then we stop that we are cutting out growth for not just now, but for the next three years, right? Because we probably have to fire the people or we have to empty the warehouse. We have to idle it.

Like it takes a while for these things to build and the investment to build, let's say it was a new house or a new apartment building. It takes five years to build the apartment building. So we stop now. It's not like we can turn it back on in six months when our stocks at 30. So we have to weigh, hey, a share buyback right now, if we allocate that capital, we have to stop everything else. We might only get 1% of the shares and then the stock goes up and then what are we doing? Yeah, yeah, yeah, yeah.

I don't know if I agree with them or not, but that was a very thoughtful way of taking me out of my spreadsheet and saying, hey, there's real world implications where we think if they're building at 20x, we still think it's like a 11% weighted IRA, 12%, 15%, percent, whatever. That's above our cost of capital. So we're actually creating value and we're comfortable with that. I threw a lot out that you in that story, but I completely agreed with you in what you said, and I always said it. And that was the first really thoughtful answer I had from a company, so I just wanted to present it to you. Yeah, but I agree with you. I have had a similar discussion with operators of companies where it's a less extreme case as the one that I, than I used to make the point in the book, where it's clear that the company has some like 15% hurdle rate on projects and then they maybe adjust the hurdle rate slightly up and down depending on where they

see the share price but i mean they don't they they never go into like stop investing it's it's sort of just sort of under margin kind of like probably you and i maybe trimming our positions like or i don't know if you do or just let them run but it's kind of like small optimization around it but this this was just such an extreme opportunity to create a lot of per share value and and and i mean the in hindsight now because it's a while ago it would also have created a lot of value if they had done it back then, you know? So. Look at the chapter I found most interesting.

The chapter on value capture, right? And I found it most interesting because there's a lot of things in here. You have, hey, a company could be underpricing. A company could be capturing too much value, right? Excess value capture or they might, there's one other that's kind of in the middle. But I really liked that chapter because anytime you talk about specifically companies that are capturing too much value in the short term, it really gets my brain spinning because I have lost money on companies where they trade for six times earnings. I'm like, oh,

this thing is really cheap. And it turns out they were over-earning because you mentioned the cable companies in the 90s. They were overcharging their customers. And it's not even that their customers churned because it often is a monopoly. And then what happens is because they're price too high. They open up the door for somebody else to come in. In this case, Netflix comes in underneath them or something, but I just really thought a lot about companies that are curating so much about it. So I'd love to just hear from you a little bit more on that. Yeah, sure. So, I mean, I mostly, the way I presented this was sort of value extraction risk primarily, you know, not so much the pricing power upside. I think there's multiple things there, right? I think a lot of

people, that's kind of a recurring theme throughout my book, this criticism of people who are too obsessed with heuristics who with sort of metrics right return on capital price to earning so on like that hurts everything that's my everything that's a good starting point here i'm not saying heuristics is a good starting point i'm just saying you can do better like most of my stuff is but it's about sort of i think this book is primarily written sort of the the reader i had in mind is kind of a young in the weeds professional analyst early in their career looking for a complete full overview of how to evaluate business quality this is probably like the number one intended read of of the book right and and i'm just arguing that you you can do much better than that you can do there's much more

nuance uh to the to the situation than just heuristics um so you're looking at a company that is over that is just that has just raised prices aggressively right so what are you looking at in the data you're looking at a company that has a too high historical growth rate that is not representative of the underlying economics too high margins too high return on capital and too low a multiple right so you based on these heuristics you determine well the company is growing it's very profitable so it's a great company and it's cheap you know but you are being misled a little bit by that that's the point i'm making i made this analogy of you know you have tapeworms and honeybees right so a a tapeworm would be something that extracts

value from its host it doesn't add anything and at some point the host will die or the host will take measures to get rid of it or you have a honeybee which is something that it's sort of a net positive to the ecosystem that it's part of it only extracts a little bit it's under monetizing right it's it's taking a too small part of the of this societal surplus that it creates so so it the metrics of the honeybee should be maybe honeybee adjusted right it's it's it is not represent of the true underlying earnings power. So when I think of over-earning and over-extraction, to bring it back to Valiant,

Valiant and the spec pharma companies of the mid-2010s are the companies that come to mind to me. And for those who don't remember, basically what they did was they bought drugs and the drugs were selling for $100 a dose. And they said, these are life-saving drugs. Companies have not pushed pricing power on these highly enough. So they would take drugs that were selling for $100,

and they push it to $100,000, right? And they say, hey, you know, this is going to save someone's life. A hundred or $100,000, they'll pay. And I'm being a little loose, but that's very close. There was some other stuff, but that's very good. And then when I look at Valiant, like one of the things that has broken my brain, right, Valiant was a disaster. Transdime Constellation Software, which I don't think either are mentioned in the book,

but I'm sure you're at least somewhat familiar with them. A few other companies, like, they make their livings on. They buy Constellation Software talks about, hey, we buy VMS businesses. And one of the beautiful things about this is the VMS business kind of pushes the price up by 2% every year. And we think that's underselling it because every year

they upgrade their software, they get better software, they get deeper ingrained into the company. So we buy them and we have crazy amounts of pricing power. Transtime, very similar. They buy, it's the government is the buyer, they're sole source, they can take price up 5X. And I look at those two.

And one thing that's always working my brain is like, why is what they're doing, not over-extracting value. Like, it doesn't seem like they're being a honeybee, but they've been great. Maybe they'll be less great in the future, I know. But, like, how, why is what they're doing works and what Valiant did?

Well, I don't know those two companies good enough to comment on those specifically. I have a lot of experience looking at investing in online classifieds, for example. And in online classifieds, there has also been a lot of companies that has really, really raised prices a lot. And I am just not. personally comfortable with as i met i've been in discussions with other investors who make the point that

they have pricing power because look they are raising prices every year and this is i also may criticize that a little bit in the book like okay so because all you could make the same point with luxury brands and so on i think like just because you have raised prices a lot and you have when you have so you have exercised your real pricing power not your nominal pricing power that is a proof point of course that you had pricing power and because you had pricing power you could still have pricing power. So there's some kind of empirical proof that you had pricing power. Then you had another company that where there has maybe been, they have not had pricing power, they have maybe been some kind of industry crises that have been consolidation in the industry.

There's no proof that they have pricing power because they haven't raised prices, but they could have it, right? So it's not that easy. It's not just looking at, hey, these guys are raising prices. Yeah, therefore they have pricing power. Yeah, clearly they have had pricing power, but they have also used some of it, right? That's the point I make. I'm more comfortable with, for instance, I have personal experience investing in and looking at online classifies where it's very, very clear that they have been very hesitant to monetize because they were very aware of the kind of this network effect dynamic and not breaking this network effect dynamic, right? Where in more recent years, I think it has become just the norm for online classifies to just raise prices a lot. And I have become less interested in that area compared to maybe five years ago when I was really, really into that area, you know. Another one that you mentioned, and you clearly know this because you mentioned both in your book, Airlines is an example of things that create tons of excess value.

But for a variety of reasons, you know, Warren Buffett famously says, don't invest in airlines, then in 2018, he does. But for a variety of reasons, airlines create crazy amounts of value for everyone but themselves, basically, right? And you, I think you don't connect the to, but you do make the points like, that's very similar to railroads for 80 years until kind of the mid-2000s. And then Buffalo's is, hey, they've consolidated down. And I'm just curious, like, what makes that switch, you know, because I can think of a lot of industries that create a ton of value for everyone and they don't capture it. And if you can find one before they create that switch, well, hey, you can be like Buffett

with the railroads in the mid-2000s. I know he was thinking he saw that with airlines in 2018. What do you think makes that switch? Is it just consolidates not enough? Yeah, I think so. So I'm not making that direct, that direct, um, but I'm very close. And I, I think that is a, yeah, yeah. Yeah, but I'm, I'm personally a little bit interested in Ryan now, for example.

And I'm, I'm, I'm kind of interested in the dynamic where you have European airlines that keeps consolidating. And I think there's a chance, you know, that that could, be kind of a similar situation um so i think it's i think it's a fair it's a fair comparison but who knows how it will play out uh i think there's there's some differences though right i mean uh an airplane is a physical physical object you could move around and maybe where that's i mean it's it's it's it's dangerous with these sort of arguments from analogy sometimes in investing analysis i actually have this chapter and the appendix with these sort of logical

don't slip on a banana peel don't slip on the default like this is the this is the this is the this is the this is the so alibaba is the bar blah blah of you say you're kind of making these sort of analogous arguments and i think that that can sometimes be be be dangerous you you need to be really mindful of so what are actually the differences between those analogies and i think there's some pretty big differences between airlines and railroads also right absolutely but you know you can't they're so close to each other and the railroads were like that for 80 years and then they flip so it's always interesting to think about it uh you had a line that has just been you can talk about it if you want but i read and i was like oh that's how i really feel right now

i'd rather hug a cactus than invest with a long-tenured executive in a chronically underperforming company and i know i am a sucker for this company so cheap yeah the management team's been here for 20 years and destroyed value but it's so cheap like i'm charlie brown and they're lucy one football this time will be different tag you can talk about that line if you want but i just uh that line really resonated with me in my current day shape and form yeah i think it it came it came after i have really gone through this making this point of like long teenage executive looking at the career path of of that's back in chapter one about passion so something i always also do is like look at what was the career path of the individuals in the management like i like to see the situation where they

first of all they have been in the role for a long time they have been preferably at the company for a really long time if they have switched then preferably not switched industries uh and if they have made a recent switch then then preferably that is sort of a switch to become the CEO or something like that when you can see that then prior to that they had a long so i generally make this sort of this point of having been with the company is is good right and then i just wanted to throw that one in that it's not always good right it's not always good it's good if things are being good well. I was definitely thinking that. I wanted to talk about, you have the chapter, I think it's right after the chapter on value capture that tickled me so much. You have the chapter on industries with staying power. Anyone who's read Linde Industries, right, industries that have been here for a long time. And you use a big piece of that chapter is the example of brewers, which I think is really interesting right now, right? Brewing alcohol. So let's actually Let's just call it alcohol in general, right? Alcohol is quite lindy.

We've been drinking it for, what, 4,000 years? I don't probably look at that. I don't know. I do wonder about alcohol companies today. A lot of them sold off in the back half of last year, and I do wonder about alcohol companies right now with, there's a lot of research coming out, you know, 10 years ago, 20 years ago, it used to be, hey, a glass of red wine, one a day is great for you.

And I think there's some evidence coming out that probably not that great for you. So you're starting to have health issues, GLP1s, the younger generation, I think is drinking less. Alternatives like marijuana are getting legalized domestically, at least. Just want to ask you, like, when you look at an industry with staying power like that, Lindy, 4,000 years, how do you think about like the potential for changes? Because one of the most dangerous things is you invest in something that's supposed to be like a AAA bond, very stable, and then everything goes to the hell underneath it. Like, that's how you get big, big crashes, right?

So I wanted to ask about that particular Lindy example in the current kind of state of the market. Yeah. Yeah. I mean, there are multiple examples. What I tried to do in that chapter is just break down staying power into several different determinants, sort of piece by piece, what are the components of staying power, right? And having something that is as culturally rooted as beers and something where also if you look at the pace of technology, change in the industry i mean the biggest change in the brewing industry came with the invention of electricity right but really fundamentally just fermenting grains is is the same thing right i compared

to semiconductor industry and and so on if you look at the adoption curve the s curve the adoption curve of alcohol is it's a very elongated adoption curve it's it's culturally rooted if you look at the changes to the to how it's distributed there isn't like rapid changes and how it's distributed either i just think that it scores pretty well with many of the determinants outlined in that in that chapter then you could say are there any kind of fundamental technological changes i don't see them really i think so you make the point that there should maybe be some some substitute products that would take demand from from bia for example yeah yeah well i guess When I think about beer and alcohol today, I do think about like, now, they have worked

great for shareholders, but tobacco in kind of the 70s and 80s, right? Where I see alcohol starting to have alternatives with maybe marijuana and some other things that are getting legalized. I see 10 years ago, nobody really thought about the health risk except for if you were like drinking a ton and of course drinking and driving, whereas today I think people are starting to say, I know I don't drink anymore. no judgment to people who do. I used to drink all the time. But I know you're seeing increasing amounts of people who don't drink for a variety of reasons. And I just look at that. I wonder,

hey, is there a chance that 15 years from now, you know, if you and I had been having this conversation 50 years ago and there was Zoom, your background would be filled with smoke, right? Like you would have been smoking cigarettes the entire time, almost certainly. If we're having the conversation 20 years from now, I wonder if there's a chance for like, hey, you know, today I would tell you one in 30 of my friends smoke at most. I wonder if 30 years from now, I'm like, hey, right now, eight out of 10 of my friends drink at least casually, maybe 30 years from now I'm saying, hey, two out of 10 of my friends do, you know? Yeah, I think, I think that's a point, though, but the point I made in the book is not necessarily

that that beers for sure will be around 400 years, but I just, I just use it as an example to show it compared to the technological change compared to semiconductors to make this sort of very high contrast comparison.

I also show the S curve of in-ground pools and I think I compared the S curve of elevators to MIDI ringtones and so. You compare it to it's the piano keys

from the 90s. I love that, yeah. But I have a different chapter on long-term predictability where I talked about this, a little bit the point you're making

with something that has sort of negative whether it has objective harm and this is the point you are making right that if something has objective harm then all else equal it is less predictable in the really long term because you could make the case that some something else would substitute it that didn't have that harm right uh and and that's the point you're making here but i just still think that if you like i'm not making that necessarily arriving at a conclusion but i'm just saying that if you use the framework presented for staying power in my book, then brewers store very, very high.

No, I completely agree. I'm just thinking like, brewers and probably soft drinks are the two are like, hey, I could imagine like for years this has been the, you buy them, you sleep well at night type of investments. And I could imagine a few different worlds where that changes. Last question I want to ask, you talk about Costco a few times in the book. And Costco, you know, they hit into the pricing power. They hit into the pricing power. to the Nick's leap, the Nick's leap, shared economy, scaled economy shared, or whatever. They hit into a lot of the places you're mentioning. And there's what particular aspect of Costco that I find fascinating?

And that's the Kirkland brand. And this is not in the book, though you do mention the Kirkland brand in the book, but it's not the book, but I am curious, why do you think the Kirkland store brand works so much better to my mind than any other kind of house brand than any of their house brand does? I don't know. I don't know Costco well enough to, I think I don't know Costco better than you, but it's just such a problem with being a European and mentioning all the domestic stocks, man. But it's just such a good example. I think of, I think the point that the point I made with Costco, I think was this sort of, I think it's mentioned actually in the chapter you like on value extraction risk that, that if you look at Costco's metrics, you are, you're seeing a company that it's pricing its products at a, at a level where it could potentially price it higher and it wouldn't necessarily erode their competitive position in the short term, right? So you are a little bit being, if you're just

only looking at heuristics, you're not seeing the full picture. No, I love that point because for years, like when Charlie Munger used to talk about and say, hey, Costco's overvalued right now, I would always think about, and I think for one time I did in a small way, like, hey, isn't Costco a great market short hedge, right? Like, they're not going to outperform the market. It's trading at 50 times earnings or something like that. As you and I speak, I think it's actually, it's pushing, it's at 60 times earnings, right? But for a lot, this is the trade of 20. So you'd always be like, hey, interest rates go up, the multiple has to come down. Those economy gets rocky to multiply. Like, isn't this a great trip? And one thing I kind of came to appreciate just as I thought about

is it's one of those things where I think they charge $100 per year for a membership. I can't remember. But I was visiting a friend and he was like, there's a BJ's 10 minutes. from me and there's a Costco 45 minutes from me or an hour from me. And I'm tempted to pay the Costco price. I go once a week and I'm tempted to pay the Costco price, even though the BJs is much closer. And when he said that, I was like, oh my God, like it all, it kind of hit me like Costco is so much better than everyone else. Now, again, I'm not quite sure why. They're so much better than anyone else. But if they just took their pricing from 100 a year to 150 a year, their earnings would go up basically 33% because their earnings are kind of all

all membership fees their earnings would go up 33% overnight and I don't think they'd have much of any churn so it was just one of those ones where he's like you can't judge it on the short-term metrics I'm very interested in this dynamic in the context of companies that are in the face where they're building competitive advantages where it's where for example in the case of network effects let's say I'm without I'm mentioning the name of the company but I have in my portfolio, a company that's a three-sided network effect, where it's very clear now, if you interview employees and you ask them what would happen if they raise prices, it's very clear that if they raise prices, that would destroy this adoption curve, this S-curve on these three sides. So it would not be the rational thing to do. The rational thing to do would be waiting 10 years for the network effect to be so powerful, even

though you're kind of already a monopolist, you're kind of a weird monopolist that can sort of screw up your own network effect position, right? I'm very interested in those kind of situations where if you just look at the heuristics, you're not really seeing it. You're just thinking, is this company really that great? It's like, but if the adoption curve will continue on these three sides, then suddenly, boom, there will be a lot of pricing power. And I really like that. But I think in the case of Costco, the competitive advantage, I mean, I don't know Costco well enough, but I would assume that it has been built, you know, it has been built already. No, no, all great points. And you do have some interesting, you had some interesting

things from the early 1900s with the AT&T telephone example and the network effects in there, which are very obvious when you read them, but you had some quotes in there, which I'd never heard before, which I thought were really cool for both thinking about the network effects and thinking about the early, early day network effects of the telemark effects. Yeah, you can go online. It was actually pretty hard to pick the quotes to use because there were so many great ones. You can go online and find these early AT&T chairman's letter from the early 1900s. There's a lot of great points on network effects. That it's very, very, very clearly defined. It's really cool.

A reminder that today's podcast is sponsored by fintool.com. The chat, GPT for SEC filings and earnings transcripts. Just ask your question, and FinTool will pull the best answer from the relevant documents, whether it's a snippet from an earnings call or a key point from a filing. If you're an analyst or portfolio manager, try FinTool today at FinTool.com and take your research to the next level. That's fintool.com. That's great. Simon, I think we've walked through most of the chapters in the book, to be honest with you.

I think we've gone through most of my questions. I didn't, I liked, oh, you did right at the start. You have the stuff about being a hunting dog versus a day. douser. You've got a line about senior dowsers where they're so senior and high ranking that they don't need to do any real work. Basically, people bring them ideas and they can just overturn someone on a win. They think they can overturn someone on a whim based on past experience. And I love that because I definitely know a lot of portfolio managers who I talk to. I try not to talk to them as much anymore, but it's clear they're not doing the work. They're successful. And then you, you mentioned

something to them and they're like, oh, that reminds me of JP Morgan in 2007. You're like, dude, this is the fourth thing I brought to you that reminds you of J.P. Morgan in 2007, and none of them moving banks. I think we're like stretching the analogies. I don't think you're really looking at these things. But I think that the, the premise of the book was to basically, the whole idea was, I mean, all of these aspects of quality are already described in other books when you think about it. Right. So what's really the, what's really the value out of this book? Well, the value at, in my view, was to come up with these sort of let's sniff around boxes like is how can you actually implement all of these things in practice in your day-to-day analysis as a in-the-weeds kind of analyst and and I think the opposite to that is the person who just sort of a priori thinks about stuff and then after having coming up with the theory then validates it by anecdotal evidence and that's the dowser right that's the dowser and then then to exaggerate it you really have to make fun of the senior douser

Great. That's great. Lots of, I like how you construct the book, too, where you do the, you know, you give what it is, then you give a couple of examples, and then you've got kind of the bullet points of what people need to know to take away and everything. Yeah, this has been great. Seven, anything else you should be talking about the book? I mean, yeah, I think, I mean, actually, I think the most original part of the book is probably that checklist in the appendix to sort of self-evaluate your own sort of investment analysis reasoning. like ultimately typically an investment hypothesis is like four or five things that need to happen and then they typically follow some kind of standard forms of argumentation and and sort of self-criticism of that and using this checklist i think is very helpful at least it's very helpful to me and i think that's probably probably the most original part of the book actually i did i did like it and there's lots of pictures of people walking along paths and getting

ready to slip on banana peels, which I also very much appreciated in there. Cool. Well, Simon Cole, the book is On the Hunt for Great Companies. I'll include a link to the Kindle version of it in the show notes just because that's probably easiest for people to purchase. But Simon, this has been great. I appreciate you coming on. And maybe at some point you'll have to come on and tell us a little bit more about that

three-sided network company that you've got. Yeah. Okay. Thank you. Thank you so much. 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.