had that discussion with them, but I told them, you know, I'm I'm not doing this project unless Bergkshire or Warren is okay with it. You know, it's their words. So, without their without their written, you know, I guess not approval is not the right word, but with if I can be sure that they don't disapprove, I'll go ahead with the project, but we got to make sure that's the case first. So, I so I wrote to Warren and asked if it was okay. I said, you know, as part of the project, considering that their words are like 98% of the text, I'll give away half of the proceeds to Glide, which is a charity that Warren has supported for decades through the the charity launch. So, yeah, I sent that out to them and couple days later, I got an email back from Warren's assistant at the time, Debbie. She said, "Yeah, Warren Warren says basically, as long as you don't suggest that he is involved with the project in any way, you're okay to go ahead." So once I got that, I was like, "Oh crap, now now I have to actually do this." >> This is Business Breakdowns powered by Micro Cap Club, a series of deep dive conversations with micro cap companies and the investors that know them best. Our goal is to explore the inner workings of Microap businesses while giving our community direct access to compelling companies and their leadership. I'm Ian Castle, founder of Micro Cap Club. Micro Cap Club is a private community of the world's best stock pickers. Since 2011, our members have profiled 1,400 companies and over 300 have turned into multibaggers. That's at least one big winner every month for 14 years. If you enjoy finding great companies early, well before Wall Street pays attention, Micro Cap Club is where you belong. I hope to see you in our community. And now, a quick disclaimer. This presentation is forformational purposes only and should not be construed as a recommendation to purchase or sell any security referenced herein. Planet Microcap Holdings LLC and Micro Cap Club LLC are not licensed brokers nor registered investment advisors. We, our partners, contractors, members, subscribers, guests, or affiliates may or may not hold positions in one or more of the securities mentioned in this presentation and may trade in such securities at any time. We recommend you consult a licensed investment adviser, broker, or legal counsel before purchasing or selling any securities referenced in this presentation. Welcome back to the Micro Cap Club podcast. This is a club conversation with Alex Morris who writes TSO investment research. Alex spent his career on the research side at investment firms before going independent in 2021 and he now runs a concentrated portfolio of 10 to 15 names publishing every position change before he makes it. He's also the author of Buffett and Mer Unscripted which took him two years of working through three decades of Berkshire Hathaway annual meetings. I sat down with Alex to hear how he decides when to swing. Let's get into it. Let's get right into it. And the first question, just as a starter, I want to ask you, what's the science of hitting? >> Sure. Well, this the science of hitting is uh what's a book by Ted Williams. And in the book, for people who don't know, Ted Williams is one of the greater greatest hitters in the history of baseball. Um and in the book he breaks down the strike zone into I believe it's 77 cells um baseball size cells and he essentially outlines what his batting average would be in different parts of the strike zone. You know where his sweet spot is versus say a pitch in the the low outside corner is harder to hit and he he wouldn't bat his batting average wouldn't be nearly as high if he was swinging at those pitches. So it's about really knowing what your sweet spot is. Um, you know, the reason I know about the book is, uh, well, many years ago now, probably more than 15 years ago, I heard I heard Warren Buffett mentioned the book as it related to the idea of, you know, waiting for a fat pitch and and finding your sweet spot. Um, and his little his addition to the Ted Williams um, explanation is in the world of investing, there's no called strikes. Uh for Ted Williams, that third pitch on the outside corner, if it was an 02 count, he had to swing because he was going to strike out and that'd be the end of his at bat. Investing, you can wait for something that's really right down the middle. Um to the extent that you're going to swing big. So that's the uh that's the backstory of the science of hitting. A name I TSO, a name I picked uh yeah, more than 15 years ago now, I'm pretty sure. Um, I I liked it at the time, but I think I probably lucked into a name that was a good one because I'm I'm glad I didn't pick some of the other ideas I was probably considering. >> Yeah, I think that's a pretty timeless name, right? >> Yeah, it's a good one. I like it. I'm also a huge baseball fan, so that helps, too. Yeah, actually here's when I understand how little I know about baseball because I I didn't understand the whole explanation about the strikes and stuff, but I guess it's a good segue for me to after this go and try to understand the rules a bit better. Yes. Yeah. For an international audience, maybe it wasn't the best uh the best name to pick. Um, I guess the for for for people out there who aren't baseball fans, maybe if you're a soccer fan, it's the equivalent of uh trying to score on the goal from the top of the sixyard box as opposed to trying to score from uh the edge of the 18. Uh, >> right. Right. That's a better explanation. >> Maybe some people understand that one if they don't understand the first one. >> Mhm. Yeah, I think that's great. Thank you for for making it all inclusive. Well, and how does that translate into your own philosophy and your substack? Because uh for the people that might not know this already, you write a blog, a substack, a newsletter, however you want to call it. And I think it's pretty cool. So uh yeah, tell us a bit more about that. Yeah, I mean how it translates is I mean in terms of my portfolio construction and and decision- making, my portfolio tends to be uh quite concentrated. I'd say on average in the ballpark of 10 to 15 names at any given time. Um with the largest positions, you know, north of 10% of the portfolio. That's not always the case, but certainly certainly what I aspire to when I see see a pitch really worth swinging at. You know, an important correlator to that is I don't swing very often. Um, at TSO Investment Research, I disclose all my portfolio changes before I make them. Um, I'd have to go back and check this though. Like if you look this year, for example, I' I'd guess I probably have made something like five portfolio changes. Um, so yeah, infrequent infrequent swinging, but also big swinging. Um, and it's a philosophy that, you know, it's in the same vein of the Warren Buffett 20 punch card idea. Um, getting to know companies over long periods of time, understanding what the business is, getting comfortable with the people and the strategy. Um, periodically when things change, I think fairly can argue that when those moments in time come, I have a better grasp of the historic relevance of this decision versus someone who's just showing up and trying to get up to speed at that point in time. Um so yeah that all informs what I think is a reason belief that periodically there are situations where I have a good grasp of what's going on and in combination with some patients on the right price um the the right decision is to swing big. It would be a mistake to not swing. So that's really it's a mindset that always kind of made sense to me and I think as time has gone on it's something that makes even more sense um with with the with the asterric that I also have developed more understanding of um particularly things like averaging down um and thinking about position sizing and thinking about what diversification really means in the context of a concentrated portfolio. So, so adding some of the some of the experience around that has has probably changed or tweaked how I approached some of these ideas, but the main framework or foundation is really the same as as kind of what I've believed for, you know, since I started investing call 20 years ago. >> Yeah, that's a very interesting explanation and uh I think it sums up pretty well your your whole strategy as well. So yeah, it was a lucky choice to pick that name and stick to that strategy I guess. Yeah. So looking at the companies you covered uh or you cover currently uh they are mostly large cap companies and as we have figured out at Micro Cap Club we are all about smaller companies. Is there any like intentionality in that or is it just like what you like to cover? Maybe explaining the reasoning behind that would be helpful. Yeah, I mean I think it was partly partly an accident of my own development as an investor and then particularly as I as I started working in the industry, the types of firms I worked at. Um you know they the desire was to find investment ideas amongst you know medium large mega cap companies as opposed to things that you know like for example the the firm I worked at most recently managed over a billion dollars when I left I believe somewhere in that ballpark. So, we would have had a lot of trouble making investments in companies that had, you know, $50 million market cap, something like that. Um, and I also think when I started off, there was a certain level of of comfort in the familiarity of certain names and more established businesses. Not to necessarily say it's a better place to invest, but it was it just felt more comfortable, right? It's something I can get my arms around a bit easier. Um, so all that said, we launched TSO investment research in 2021. So I've been outside of that more traditional job structure for, you know, 5 years now. Um, a big part of my push has been not necessarily micro cap, but moving towards uh smaller sized companies and trying to get in to an earlier stage of of corporate life. you know, whether it's a name like Fever Tree comes to mind, Vital Farms, and people go go look at the list of companies I've written up over time, but I certainly desire to to also look at smaller companies. Um, you know, a name that's well known in uh in the micro cap cap club world, something like an Expel. Um, those are those are of interest to me and I I certainly wouldn't be opposed to finding an Expel in uh 2016 or or 2011 as opposed to 2026 if possible. So, I'm very open to these ideas. It's uh it's just building the muscle and and finding them. Um so I'm I'm moving more and more in that direction over time. >> Great. Yeah. Glad to hear uh you're coming to the smaller size. >> Hopefully not companies that start big and get small to be clear. I want to find them starting small and getting bigger. >> Yeah. Yeah. So the companies the the next mega cups I guess. Uh sums it up pretty well. Nice. Okay. So, I think one of the greater ways to learn about one's process is through case studies and obviously we won't have the time to go like a toz, but uh maybe could you give us one company or case study of a company that worked well for you? Doesn't have to be a current investment, but yeah, something that really encapsulates well your uh whole process. Yeah, I mean maybe I'll one that comes to mind maybe I'll give two I'll keep this one brief because people probably know it by now but a formative investment for me is was definitely Microsoft. Um it's something that I bought in >> I originally bought in early 2011. Um and I've and I've owned it. It's basically been a top I want to say it's been a top three position. Let's say top five to be safe. It's been a top five position throughout the entire you know next 15 plus years. Um, and it started as a very traditional value investment, which is where I kind of came into the game. Um, and as as the business evolved over time and as management changed over time and as I lived through the period, especially in the mid2010s where it went from being priced like a value investment to being priced like something that was a bit more optimistic and where in hindsight a lot of traditional value investors were getting off the bus at that point in time. Um, and I looked at the situation and thought I had a really clear understanding of broadly where they were. I mean, not not down to the minutia of the actual tech underlying these these products, right? But I understood broadly where they were trying to go. I saw the company's financial results and appreciated how large these businesses could be over time, at least directionally. Um, I also had done a good amount of work on someone like Sachi Nadella to really understand who he was and what his mindset was and and when hit refresh came out his book. um which I believe maybe was in 2017 or 2018 somewhere in that time frame. A book like that really helped me to appreciate him even more than I had previously. So long story short, it it made that transition from a traditional value invest investment to something where I felt really comfortable holding it in size and and and really betting on the business as opposed to just betting on its cheapness. Um so it really has it really has informed in a big way my investment philosophy to this day. Um, so that's one example. Another maybe more more current one um is Dollar Tree, which I I followed for many many years. I've always I've always been a big fan of the retail concept or or that particular retail concept in terms of the pricing model and what they're selling. And you know, retail is funny. You're at the end of the day, you're basically competing with everybody. There's some there's a product sold at Dollar Tree that's sold at in my down here in South Florida, a regional ger Publix. You know, there's products that are sold at Publix that are sold at Target that are sold at Walmart, same product. So, it's obviously very competitive, but the nature of how the consumers stop shopping the store and the skew mix within the store, the merchandise mix in the store is a really important part of what the strategy actually is and their point of differentiation. So, so long story short, I've been I've been interested in Dollar Tree for a long time. Part of my issue with the company was they own Family Dollar, which I didn't think was particularly good asset. it was a second rate competitor to Dollar General, another company that I that I follow closely and own. Um, so I wanted them to put that behind them and to really focus on the opportunity opportunity at the core business, the core banner. Um, as as time was going on, they also tweaked the strategy from what was traditionally a a dollar price point basically for everything in the store. They took that from a dollar to a$125 because they just got compressed by inflation basically over time. They also moved to a multi-pric strategy which uh directionally is comparable to something that a Canadian retailer called Dollarama had done uh more than 10 years earlier. So there was a case study to go back and study there different retail environment between Canada and the US. But there is there is something to learn from what they've done. So, as I went and studied what what happened at Dollarama and thought about what Dollar Tree's business was today and where they would try to go over time in terms of the merchandise mix, the customer base, store conditions, labor standards, etc. Um, I thought that was an interesting addition to interesting addition to what I already thought was a really compelling core banner thesis. So, long story short, you had the the trifecta of they finally decided to get out of Family Dollar. The Dollar Tree core banner strategy was progress progressing as I thought it would or was hoping it would. And in mid to late 24, 2024, the stock price got to a level that I thought was really cheap. I mean, on my, as I wrote here fairly recently in an update on Dollar Tree, on my numbers, I thought it traded at something uh something around 10 times EBIT for the core banner. Um, so yeah, that was, you know, that was two years ago now and the and the stocks doubled subsequently and I think, you know, there's there's good reason to believe that it's still quite attractive here to the extent that they really capitalize on that opportunity and that and that strategic evolution. Um, but again, a lot of that it's it's just the it's the marrying of those two ideas of long-term focus and opportunism and willing to swing big while also being price sensitive. And you know, again, in the case of Dollar Tree, knowing at a moment in time that I should be swinging big now, I think in hindsight, you could look back and argue that I should have been even more aggressive than I was, but I was fairly aggressive. So, at least start there and be happy with that. But, um, those two investments, I think, are kind of good examples of, uh, my investment philosophy, or at least when it's working, we should say. >> Yeah. How do you deal with having an investment go up 2x or 3x or in the case of Microsoft I don't know how manyx um in terms of selling it because obviously it's a big time investment to get familiar with the business and really understand it. Uh, so I guess there's a bit of a sunk sunk cost bias in getting rid of a such a big position and something that's so fundamental to your portfolio. So guide us through that decision making process for you. It's kind of funny. It'd almost be it's it's almost like we it would be preferable to a lot of us if the stocks just went up 15% every year with no volatile just it's when they it's when they go up it's when they double in 12 or 18 months that we're like oh my gosh this is terrible. >> What do I do now? >> Um yeah it's it's tricky. It's tricky for sure. And I, you know, as as the Microsoft example kind of hints at, I I want to be really thoughtful about how I'm reacting to to price volatility. Um, another way to say that is I'm not someone who who takes the portfolio and force ranks it on 5year IRS every day and, you know, I look today and I look in a week and well, these numbers changed because this one's up 5% and this one's down 5%. So now we're tweaking the the waitings as a result. I I just feel like that's it makes sense philosophically and I I think it's far too cute at the end of the day and it makes the game it's uh it's too mathematical and what it guarantees is that you'll never own anything in size for an extended period of time basically and I and I purposely want to avoid making decisions that lead me there. Um, so like a lot of things I I have I have the markers for what I'm trying to do, which is own businesses and size for the long term while also hopefully holding them at prices where they have, you know, reasonable to attractive returns embedded at at that given price. And I try to be really thoughtful about when I tweak position sizing. So, what that looks like in practice is, you know, I've gotten to a place where, and this is one of the big mistakes I think I made, especially as a younger investor, particularly on value traps. Um, something would go down 5% or even 10% on bad earnings, and I would see that as a buying opportunity. Be down another 5%, I'm buying again, 5%, buying again. I've learned to really on both sides of the trade. I've learned to let time be a bit more of a factor, not acting. If you bought something last week and it's down 5%, you don't need to buy it again this week. You could you could hold off and wait a month or two. Um, and same with the the moves. Something being down five from where I bought it is whatever. Whereas previously, I would have, you know, I need to buy at the bottom tick was almost like that's what I thought the objective was, which, you know, being right about the investment is the far more important point, right? So that's one one of the tweaks I've made is being being less quick to act and then when I do make the decision still being, you know, fairly convicted in how I how I express that view. But yeah, being really thoughtful about the timing and also whether or not there's been material new information since the last time I made a decision. Uh if there hasn't been and the stock's just down 5 or 10%. You're just pressing it for the sake of pressing it, right? as opposed to having reason to believe that the thesis is actually evolving how you you think it should be in order to justify betting more. So that's that's been a pretty pretty notable change in terms of how I actually implement the philosophy. Before we get back to the program, I have an invitation for you. I'm Bobby Craft and I want you to experience our in-person live events. We bring many of the companies and guests you hear on this program directly to you in Las Vegas and Toronto. It's where the microap community connects and great ideas are found. Don't just listen to the conversation, be a part of it. Secure your seat today. Head over to planetmicrocap.com right now to register. See you there. That's very helpful. And um could you also on the other hand gives us give us an example of where things went wrong and you sort of learned from that as well? >> Sure. Um, yeah, I'll give two again since I gave two before. Since I got two good ones, I'll give you two bad ones as well. Um, you know, a prominent one for me was the cable companies. Um, I owned Comcast for I think I bought Comcast at some point in the mid2010s, maybe maybe even 2014. Um, always appeared somewhat cheap optically. Um, as time went on though, did not love what they were doing with the overall strategy, particularly as it related to NBCU and Peacock and the media businesses. I just didn't think I think they weren't they were dithering basically. They were not making the decisions they needed to make. And I thought the business was get was getting worse as a result. And I think that's I think that's evident today or has become increasingly true over time regardless of what the short-term P&L might say. And then on the on the cable side of the business, the broadband side of the business, you know, it's funny. They went through a period during the pandemic where, let me step back a little bit. In the period prior to the pandemic, Comcast had a extended period of, I believe, 13 or 14 years where they added more than a million net broadband subs each year. Um, to the point where the base of the business was at roughly 30 million subscribers. So call it, you know, in the earlier parts of that period, mid-s singledigit volume growth, in the latter parts of that period on the order of 3% volume growth. And went through the pandemic and got a large tailwind in volume growth. As we got to the to the backside of that, volume started coming under pressure. And a big question was whether or not this was just a hangover from the pandemic or if there was something more significant at play. Um, as time went on and the wireless companies released or, you know, became more focused on their fixed wireless product FWA, you started to see very significant net ads for a product that was, you know, inferior in terms of download speeds, but was also cheaper. Importantly, when you looked at thirdparty data, had higher NPS scores than broadband, um the data started showing that this was a real problem and was taking significant market share. And you know, I think I probably went through a period, and we can go back and check this in my work. I probably went through a period of 12, 18, 24 months where I didn't sufficiently appreciate what was changing. Didn't help that the companies didn't either. I mean, Charter famously, I think to this day, calls it cell phone internet, FWA, which is it's funny to kind of like have a have a name like that for a product that has higher NPS scores than your fixed your your wired internet product. Um, it's it's kind of revealing in terms of how customers feel about these companies. Um, so yeah, they all thought it was they all thought it was a temporary a temporary gain for FWA in terms of volumes and that it would eventually hit a wall and even peter off. Um, instead you're now at a point where I think at the end of this year there'll be something like 18 million FWA customers in the US. Um, which is again you're talking about Comcast and Charter each at on the order of like 30 million broadband customers. So they took they took you know quote unquote took 18 of that pie of you know 60 million C that didn't take it directly but what I'm trying to say is that's is a very relevant number compared to that 60 million. So, so it took me a long time to to get to the place where I just concluded, okay, competitive intensity here is is more severe than what I appreciated previously. It doesn't matter that this thing is trading at, you know, low teens multiple of of earnings um and with significant capital returns. Um my thesis was just wrong. So, it's time to time to step to the sidelines. So I think it was an investment that over the course of that I think I sold it in I want to say I sold it in late 22 uh maybe 23 um over the course of that almost decade run it was I think it was basically flat um it's like you know it's it's continued to poor to perform poorly subsequently so selling it certainly looks like the right idea at least as of now but um I I probably should have been quicker to see that that that was a mistake. Um, second example is is Disney, a company that I originally owned, 21st Century Fox. When Disney bought a meaningful chunk of their assets and paid equity, I converted that to a stake in Disney. Um, you know, I think the primary lesson on Disney was, and it's something that I also saw Walmart in the 2010s when they basically missed what was happening in e-commerce and omni channel, and they then took the better part of a decade to invest to try and catch up to primarily Amazon. um when Disney started going through the transition to streaming from the linear world, um I I didn't sufficiently understand or you know account for how long and how expensive it would be to get that business to where it needs to be. You know, they launched Disney Plus in 2019. Um Netflix had a more than a decade head start relative to Disney. And by the way, ne Netflix burned a decent amount of cash in the 2010s as well. So, um, yeah, it was a very I I kind of tracked Disney's video businesses as one overall business for the sake of having a understanding of the P&L. Think if I have my numbers correctly, it earned somewhere on the order of $8 billion in 2018 and at the at the lows of uh two years ago, it earned I think it was three $3 billion. So the $5 billion hole um over extended period of time obviously um so yeah I should have I should have more appropriately grasp the amount of time and the amount of investment it was going to take. Maybe that doesn't mean I would have sold the position entirely, but it surely would have influenced, you know, position sizing and thinking about again like where do I truly want to be adding to this position and how long is this thesis going to play to take to play out? And the answer in hindsight is, you know, we're 7 years into Disney Plus and there's there's green shoots here in terms of what the P&L looks like going forward, but it legitimately took at least 5 years for us to get here. say all that is being being long-term but not being indifferent to the short term and timing. And I think a lot of people or at least myself as a young investor you go h well this is a temporary hiccup this company's going to be better long term as a result of XYZ. I think you need to sit back and well one are you really really sure about that second comment and two how much are you getting paid to incur one two three four years of pain in the interim. you need to really get paid if you're going to be if you're going to be accepting that type of pain. >> Yeah. Uh I I think I was reading today in your book that basically Warren Buffett was breaking down um how much money you would have to make in pre-tax earnings to justify five 500 billion market cap and you wanted to get a 15% return. And so essentially he was saying that it's okay to sort of buy companies that maybe aren't earning their full potential right now and will earn more in the future, but the math gets ever more complicated. So yeah, I won't go through it now, but I think it's an interesting exercise as well. >> Yeah, absolutely. And since we mentioned your book, um you you wrote a book uh about basically all the interesting things that Warren Buffett and Charlie Mer have said in their annual meetings and you put it in a very digestible and easy to search way. Um, so yeah, guide us through the experience of writing the book. What motivated you to to write the book and then we'll get into the book itself. >> Yeah, I mean the the short version of the story is someone from Haramman House reached out to me about writing a book and at that time I actually had been working on a book. Um the the idea of the book was essentially at I worked for an investment adviser at this point in time and I had had discussions with people like my grandmother, my parents and some friends uh basically about what do I how do I manage my own money or how do I find somebody else to help me if I'm not going to manage my own money. So the book idea that I had been working on was essentially how do you work with a financial adviser? Like what are what are the realistic assumptions on your end? what should you be willing to pay for their services? What services can they even provide to you? Um, so as I worked through that process, I was talking about, you know, active versus passive and starting to get into some of the topics like financial planning and, you know, as I work through that is clear already from this discussion, my interest in the industry has always been this the stock picking and the individual equity research, financial planning and those things are very important, but it's not at all where my expertise is at. So, as I got into some of those topics in the book, writing about trusts and wills and, you know, different types of retirement vehicles, it's just not where my interest lies, nor my nor my knowledge is at. So, I kind of realized at that point, I was like, "Oh, I I am definitely not the person to write this book. Somebody else needs to write this." Um, so when Haramman reached out, I basically told them, >> I actually have been working on a book, but I just kind of realized like in the past couple weeks, I I don't want to write this book anymore. So, I essentially don't have anything. Um, relatively shortly after that, I pinged them again and I said, you know, I I do have one other thing that's kind of been on the back burner that I haven't really started working on in a serious way yet, but I think could be interesting. And it was essentially what became Buffett and Munger and scripted. this idea of going through all the old annual meetings and organizing it by topic in a similar vein to Larry Cunningham's essays of Warren Buffett which was a book that when I was you know in my in my late teens when I was in in college I it was one of the books that really got me interested in investing and helped me kind of set that foundation. So had that discussion with them, but I told them, you know, I'm I'm not doing this project unless Bergkshire or Warren is okay with it. Um, you know, it's their words. Um, so without their without their written, you know, I guess not approval is not the right word, but with if I can be sure that they don't disapprove, um, we can I'll go ahead with the project, but we got to make sure that's the case first. So I so I wrote to Warren, I wrote to his assistant and asked if it was okay. Um I said, you know, as part of the project, considering that their words are like 98% of the text, I'll give away half of the proceeds to Glide, which is a charity that Warren has supported for decades through the the charity launch, um or used to support through the charity launch. Um so yeah, I sent that out to them and couple couple days later, I got an email back from uh Warren's assistant at the time, Debbie. She said, "Yeah, Warren Warren says basically as long as you don't suggest that he is involved with the project in any way, you're okay to go ahead." So, uh, so once I got that, I was like, "Oh crap, now now I have to actually do this." Um, so yeah, that uh that started a that started a uh something like two-year process of of then actually 18 month two-year process of actually going through and like writing the whole thing and editing it and all that jazz. Um, so yeah, happy to answer anything about it, but that's kind of the the story of how it all happened. >> Sure. Yeah. So my idea is to actually grow go through some of my favorite quotes from the book and explain them or yeah just comment on them and maybe um trying to understand as well whether how it fits in your investment process so to speak. Um the the first one is uh a quote from Charlie Mer in 2009 where he was speaking about the time when he was managing his partnership I guess. Um and essentially the market was at a trough and he couldn't have he didn't have the money to to buy um more stocks. So I'm just going to read it and it reads it's nothing like 1973 1974. I knew that. Sorry. Uh there was some noise here. Um I knew when that happened that was my uh my time and my only time. I knew I was never going to get another trip to buy uh the counter like that one. Unfortunately, I had practic practically no money available at that time. That's why those times occur. If I were you, I wouldn't wait for 1973 1974. >> Yeah. Yeah. I I I it's interesting my my start in this business from a professional perspective. I graduated from college in 2011 and you know it's funny in hindsight if you go back and look at articles in 2011 2012 not to not to single anybody out but there's a particular quote from Seth Clarman that I'm thinking of where he effectively said he thinks it's likely that equities will deliver deliver zero return over the next decade. um that was a common sentiment in that period in terms of okay we've had a run out of GFC but you know that juice has been squeezed and you know now we're in 2011 2012 and people are talking about bubbles again and it's really been seared in my brain how how and I I've seen funds that had things like 50% cash allocations at that time and you can imagine uh to the extent they stuck with that strategy how how they're currently feeling 14 years later with a market that's run at, you know, mid- teens annualized rates over that over that time frame. Um, it just really made clear to me that I think one can have thoughts at any given point in time about the attractiveness or lack thereof in the broader market. But for me, that is not the focus at all. I I effectively run it fully allocated at all times. I think you should have a sensible asset allocation that aligns with your own age, income, savings rate, etc. Um, but beyond that, it's really a fool's errand to spend too much time worried about the macro. If you can go out and find interesting micro opportunities, that's all that matters. Um, you know, the the one aster I'd add there is the leeway to some people simply can't accept that as an answer. So if the you know prop quote unquote proper asset allocation for you is 7030 let's say 70% equities 30% bonds. If someone wants to have 10 points of leeway in either direction like if they think the market's super expensive right now fine they can go to 6040 as opposed to being 7030. But when you start getting outside of ranges like that, I just think you start playing a completely different game versus can I an analyze individual businesses and find 10 attractive opportunities, 20 attractive opportunities. Um, I just think you can get really off the rails. And again, I've seen I've seen people in funds do it over the past 15 years. And some people will retort, okay, well, this has been a really unique 15 years because of the Fed and a long list of other reasons. Like at the end of the day, we're still 15 years down the road. And particularly if you're a professional, um you know, you're you're not managing money anymore, most likely. So I I just I just I just don't see I don't think the juice is worth the squeeze in turn in terms of trying to play those games. You know, particularly if you're not thinking of someone like Bill Aman who I think has probably made a good amount of money on these macro type trades. The difference is he had the access to vehicles that allowed him to play like really asymmetric outcomes, right? That's a lot different than saying I'm going to burn 1% of my portfolio a year hedging against some specific risk that really pays off if I'm right. To me, that's drastically different than being like the market's overvalued. I have 40% in cash now. I I just I just really think you can get into a bad place doing that. >> Yeah, that makes a lot of sense even because I think Warren Buffett's approach or Bergkshire is that they have a micro approach even to the macros. So I guess that when they are not finding interesting opportunities then probably you'll have you'll see more cash in the balance sheet and that's what has happened over the better part of uh yeah this century I guess um >> it's funny at one of the meetings and it's relevant to that point at one of the meetings and this is this is a while ago I mean this is probably around 2010 Warren was asked by someone basically would it be would it make more sense for Bergkshire to park their cash in an index fund as opposed to having it sitting cash because it's effectively, you know, there's different ways to frame this in your head mentally, but you could make the argument that it's basically market timing. Um, and his answer was funny in terms of we can go back and pull specific text but or specific quote, but his answer was effectively, yeah, I think what you're saying makes sense. The main issue we have is size and the constraints of them moving the money to the extent that we want to. You know, they've talked in the past about deals that they have inked with people over the course of a weekend where the cash had to be there Monday morning. Well, you're running into a problem if you're now even in even if it's allocated to some sort of securities, right? Like I think you have a problem with whether or not you truly have that cash available at a moment's notice. Um, but he also mentioned something like the liquidity on getting in and out of different funds or whatever it may be. Point being like I think even Warren to some extent recognizes that um those are two different roads to go down, but it's certainly not necessarily ideal to to choose the cash route versus the staying invested route. Um, and again, I think the past 15 years have been like pretty instructive in terms of at a minimum the risk you're running from from being so I'm going to use the term underallocated, but hopefully people know what I mean by that. But yeah, that's the risk you run in these huge asset allocation swings. The same would go on the offensive side, by the way. Yeah, at the end of the day, uh I think that if you have 300 billion in cash, it's kind of hard, right? I I wouldn't I think probably no one else would do a better job with that. And I guess Greg Ael, and we can talk about that a bit, is trying to do something with it. Uh but yeah, it's it's not an easy job, I guess. >> No, I mean, it's it's a problem. might be happy to have but no it's it's not easy >> and by the way what do you think about the management change in Berkshire is such a I guess an important institution in the value investing world and in the world in general because it sets the standards for pretty much every other company. So why don't you give us a few comments on that as well? Yeah, I mean it's interesting having having obviously gone through all the meetings. Um I think the the topic of succession and war getting hit by a bus was mentioned at every meeting going back to 1994. So that's that's three decades of people asking what do we do? Uh what is B what happens at Bergkshire after you're gone? And the consistent answers were one from Warren that nobody's thought about this more than we have and nobody cares about the answer to this more than we have and we know what we're looking for. And uh I think to the extent that you're a follower of Warren and Charlie, you would agree with that statement that they have tons of experience in terms of what they're looking for and what they're not looking for. Um and the second answer is something from Charlie, which is yeah, you're probably not going to get another Warren Buffett. And you know, if that's your bar, then I'm sorry, you might be disappointed. Um, in terms of particularly the kind of investing activ, right? Um, I I think everything about Greg Ael suggests that in particular, that first point's accurate. Um, he seems like a very sensible choice to me in terms of his experience at Berkshire, in terms of how he can help to alleviate some of the capital allocation questions. He's clearly taking a different tact at least how he's talking about with shareholders, you know, addressing issues at at BNSF or GEICO, which I think we got to a point in time in the mid2010s where mid to late 2010s where the willingness to talk about those things open in honesty with investors was pretty lax. Warren just really didn't want to do it that much, which I can appreciate. But it also for the diehards like us, it got to the point where it's like, come on, you got to give us something. Um, particularly as the businesses are continuing to kind of lag their best-in-class peers, right? So, so yeah, I'm personally very confident. Um, I also think the biggest issues that Bergkshire has are its size, the cash, some notable issues at key operating entities I was just mentioning. Um, and all those issues existed three years ago when Warren was CEO as well. So, it's not like Warren Buffett was the answer to those problems necessarily. Um, they're just difficult challenges that that that are now put on Greg Abel's plate. But, I think he'll I'm confident that he'll do as good of a job as anybody can reasonably expect from this entity and having reasonable expectations is kind of the key the key part to grasp. >> Yeah, for sure. And I think that just having a fresh leadership can already be like a bit of a solution in itself. Obviously, it's not going to fix the problem just by changing the management, but at least it brings a fresh set of eyes to the problem and uh maybe a more operational uh type profile compared to to Warren. Obviously, Warren was also a great businessman, but yeah. Um, I guess he was most more focused on the investing side. And this is somewhat unrelated, but how do you feel about the recent Alphabet or Google investment they made? Um, I think most people weren't expecting that. >> No, I would I would say they weren't. It's um Bergkshire's whole experience with and I I wrote about this fairly recently whole experience with with IBM in the early 2010s and then specific comments at the meetings about about Google and Apple which is kind of funny those are the those are the two companies they you know the person didn't ask about other people have but this particular question I think you know the person didn't ask about Amazon or Oracle or even Microsoft they specifically asked about Apple and Google and Warren and Charlie said in in no uncertain words that basically they didn't have the level of confidence in the long-term you know trajectory of those businesses as they did in something like IBM. Um and Charlie said we'll never have that level of confidence. Um, and it's it's quite funny in hindsight to now look at, you know, the Apple investment in particular, which was at one point worth, I think somewhere around $200 billion and obviously was a massive home run for Bergkshire, created more value than maybe any individual decision in the history of Berkshire. I think that's probably fair to say unless there's a subsidiary that's worth, you know, north of $200 billion. Um so yeah it's a it's a fascinating part of Bergkshire's you know evolution and a look into Warren and Charlie's decision-m you know the alphabet decision is bit bit more of a mismash of you know who actually made the decision and who's making the decisions now in terms of the equity raise um you know at the end of the day I am a traditional value investor and uh and am put off by paying high prices after markets have had nice long extended rallies and in an industry where it feels like we're at the wrong end of the capital cycle theory, there's a lot of cash coming in. Um, and it feels like things are pretty uh pretty hot at the moment. Um, but we'll also see how this plays out in the fullness of time, right? Which I think is which is also an important part of being an investor and thinking about thinking about decision- making on a continuum. and you know knowing that the game keeps going and that there may be opportunities to do things in the future. Um you know I think there's a limit with what what dollar amount you'd be willing to put into something like relationship building but I do think this investment is a unique situation for someone like Bergkshire to have with Alphabet and it may present opportunities down the road depending how things play out. Um, so yeah, I think it's uh I think it's a very interesting investment and I I'll be quite interested to see how their relationship evolves over time and whether it portends the ability to put in uh sign significant incremental sums particularly if the world uh gets a bit a bit choppier in the near future than it has in the in the recent past. And to that point, I have here a 2000 uh a quote from the 2000. Um, and it's funny because it's both historically wrong in hindsight and goes right into the topic we were talking about. So Warren Buffett said, I would say that on balance for society, the internet is a wonderful thing. For capitalists, it's probably a ne net negative. It will improve the efficiency of American business. But all kinds of things improve the efficiency of American businesses without making it more profitable. I think it's way more likely to American business in aggregate to be worth less than compared to what I've been what it would have been otherwise. And then Charlie Mer said, "By the way, that's perfectly obvious and very little understood." >> Um, so yeah, just comment on this. No, I it's it's something I've thought about a lot. I mean, you have you have a few very specific examples, which we can just call the Mag Seven or whatever whatever the term is now for that collection of uh super mega cap tech companies that have obviously created a lot of value on the back of the internet and some other broader technological changes, right? When you look beyond those companies, you think about something like think about something like Athletic Apparel, Nike, and the world that existed 25 years ago where, you know, someone would walk into an outlet mall and see the pricing of the product or the level of discounting on product and, you know, you'd go to another mall across town that was more of a premium mall. And there was the ability to really segment by channel and there was a way to segment the visibility of the pricing actions you were taking by channel. Obviously, it may be advertised in the newspaper or somewhere else, but you had the ability to segment so much more so than you do today where, you know, someone can take a picture of a pair of shoes and ask an LLM now to to find where's the cheapest place to buy that pair of sneakers or you know what, like there's just so much more ability to to price shop to product compare. the competition level has has risen. And I think, you know, that's true in that's true in something like like athletic apparel. A version of that's true in in retail more broadly. You know, we've seen the changes in an industry like consumer package goods where the days of owning, you know, TV advertising meant that there was no competition for craft mac and cheese or the only competition that existed basically by private label or some second rate competitor. And now you have something like I believe it's called which is you know a just a more niche macaroni and cheese brand that has taken reasonably significant market share over the last couple years. So there's a bunch of examples like this in the world of CPG. Um, so yeah, I I think it's a statement that as I look around the world, I I think as is often the case in the fullness of time, it looks like they they correctly foresaw what impact this would have on, you know, competition generally in corporate America. Um, the world increasingly gets more competitive and more difficult. >> Yeah, that's a good point. uh and I guess the the tendencies to things to get efficient both from a company perspective but also from a market perspective. So nowadays we have as as you mentioned many ways to compare products and really make our uh decisions more rational and eliminate most of the inefficiencies of segmentation and stuff from a consumer point of view. Um, so that's that's definitely a very interesting uh point. Um, you can even think of it real quick. You can think of a brand like Disney, which they've talked about in glowing terms at points in time, even after they no longer owned it. And the idea of, you know, a parent walking into either a Walmart, like a Best Buy, something like that to buy a a VHS or a DVD, or even if they're walking into a Blockbuster to rent, like they would they would walk down the shelf and know that when they spent $12.99 or $15.99 buying a DVD, if they have like that Disney brand seal of approval, it was worthwhile for them to put their money down and to set their kids in front of it. And you kind of compare that to a world now where somebody pays 15 bucks or whatever for a Netflix subscription and you can just you can test every trial on there for no incremental cost. Every uh every title on there for no incremental cost. The barriers to and previously you had to drive to the store and actually pick a different box. So now you just sit on your couch and you you preview 20 different movies before you decide what you're going to just the barriers to selection and the barriers to triing competing brands or products have just kind of fallen away. Um and you know generally speaking that is it's not ideal for competition. And I also think a lot of these brands, not necessarily Disney as much, but particularly like you see C CPG brands, they've they've gotten squeezed in the middle over time as, you know, on one of the spectrum, you have kind of premium products, whether it's organic or some other claim gluten-free or, you know, whatever it may be. Um, you have a premium product that has kind of taken the high end of the market. On the low end of the market, you have much improved private label offerings. Most notably something like Kirkland at Costco where it's product quality is on par or better than a lot of the branded offerings and it's 30% cheaper per unit or per per measure of unit. Um the world that they live in in between those two sides has just become more and more difficult to defend. Um so yeah, it's uh I I think you see versions of that as you look across most industries if not a large majority of industries. >> Yeah. Even now things that probably before were thought as like super resilient uh stable businesses like accounting, you needed an accountant if you wanted to run a business. Now it's getting a bit uncertain whether you'll actually need one and whether you'll be able to do most of your legal or accounting work with a just a very niche LLM that knows your business better than anybody else. So, um yeah, um hopefully equity analysts are here to stay and we we won't be disrupted away. But I I guess that the probabilities are against us. >> Well, my dad's a plumber, so I'll I'll just have to go back to the family business if I uh if I can't if I can't swing into this one. >> Right. Right. That's a good point. Um, one of my largest positions is a HVAC company. Hopefully, they're hiring. Uh, so I already have the connection there. >> There you go. >> Okay. So, just wrap up this book topic. What's something you've learned in this research that you think is still misunderstood by the the wider sort of public? because Berkshire is obviously one of the most well-covered companies in the world and has probably the most nerds out there nerding out every single detail. Um, so yeah, what's what's something that you think it's still misunderstood? Yeah, I don't know if I'd necessarily say misunderstood, but I think the level of importance that Warren and Charlie both placed on this combination of capital allocation um in particular in the case of of let's say a company that at a publicly traded company the clarity of the capital allocation policy is told to the investors at Bergkshire subsidiaries the clarity of the capital allocation in terms of the incentive structure that set with the managers, which I talk about in some specific detail throughout the book. Um, this idea that that is so much of what determines the value of a business over time, effective and sound capital allocation. Um and you know as it relates to to investing in public markets a lot of companies have an internal use for cash flow that you have a relatively understandable level of what the ROI is I mean to the extent that the business hasn't changed significantly right in the case like a dollar we were talking about before it the the the ro of building that next unit. um where this really goes off track I think at public companies is when you then get into something like M&A or or share purchases being another prominent example. Um what's very clear from having gone through all the meetings and you know my other other work on Warren and Charlie over time is the huge importance that they placed on that part of the investment analysis um prominently at it was a huge part of the Apple thesis as as I interpret it at least it's a huge part of the prochina thesis um it's very clear from all the discussions around own businesses that they want to incentivize people very significantly based on whether or not they make intelligent incremental capital allocation decisions versus returning the cash to Omaha. Um it's a very significant part of what Warren focuses on. It's I think it can be tough particularly for a novice younger investor is again you get these big you get these big chunky decisions particularly in terms of M&A. Um, you know, again, picking Dollar Tree as an example, they paid they paid $8 billion or eight or nine billion to acquire Family Dollar in 2015. Uh, they sold it a few few years ago now or 12 to 18 months ago now for for a billion dollars. Um, and that that doesn't consider the opportunity cost in the interim, right? Um, >> that's a that's a big number relative to a company with, you know, as it's us writing right now, a company with a market cap of call it $20 billion. And I think that's those are the type of decisions that really that really impair the long-term value creation of a company and you have significant risk of those type of decisions at publicly traded companies. So I would say as an individual investor particularly like all of us minority investors who don't have any real impact on how these decisions are going to be made. How does management communicate what their strategic priorities are in capital allocation? What does their track record show? Are they honest about their mistakes? How frequently are they doing big chunky acquisitions? It's like all these things are paramount for understanding what it what might happen down the road and to the extent that you're going to be a long-term investor in a given business. Like those those days are going to come. So you you want to really understand whether or not the person making those decisions is someone who's aligned with you who seems to have a good head on their shoulders in terms of what you need to do in these types of decisions etc. Um, so that's that was one of the really really prominent takeaways in terms of kind of investment decisions. >> Yeah, that's that's definitely very interesting. And maybe I'd like you to also comment on at least u something I thought when I first started looking at Warren Buffett and his style and everything else. So I think there's a bit of this um idea that basically Warren looks at a company for 10 minutes and knows how to determine the exact value of it uh to decimal point and basically does very little research or at least doesn't take months and months to to make research. So what's your view on that? Do you think that's actually what's going on? And um yeah, I guess those are the questions. >> Yeah, I think it's I think it's going on to the extent that it's in a business, an industry that he has a really good grasp on. I mean, if you if you ask him about since we've been talking about it, if you ask him about Dollar Tree, like he he he knows that he's he's owned Walmart, they own the Nebraska Furniture Mart, like he's he's been directly involved with different types of retailers in the United States importantly. Um, and I think he probably has a very very good understanding of the landscape and what he would be worried about owning that business and what he would think the opportunities are, etc. So yeah, he could he could probably tell you in five minutes what he likes and dislikes and how he thinks about valuing that company. Um, you know, with something like a precision cast parts, is there more of a learning curve for him to really get comfortable with, you know, their relationship with a Boeing or whoever it may be and how that all works? Yeah, maybe it takes a little bit longer. Um, or at least at that point in time took a little bit longer. Um, but I think in general, yeah, he's uh he's sat around for he's sat around for eight decades or so now. Well, longer depending if you if you want to take his starting point of like six years old or whatever that put him at that that put him at nine decades of uh sitting around and trying to understand businesses and trying to think about valuations and you know these questions of Re and all that jazz. So yeah, he's he's seen it's probably safe to say if you just picked a company and asked him about it without purposely trying to trick him, um very good chance he's heard of it before and is pretty familiar with it. So to the extent that's the case, yeah, he could probably make the decision in uh in 30 seconds. How do you think he valued companies when he was 40 or 30 or when he was back in the days of the partnerships? Do you think it was always this way? Well, my sense would be that he he came out of the the bra Ben Graham style more more hard asset value. What is what can this truly be liquidated for tomorrow? And in in certain instances because it was going to be liquidated tomorrow, right? um you know applying that to a to a earnings based or cash flow based valuation mechanism you know it it has to account for the fact that you're talking about it as a going concern versus liquidating it. So it's it's it's a very different idea, right? And they've also prominently talked about, you know, the world has also changed in terms of you could look at a retailer or certain businesses back in the day and and value it based on we're going to shut this down. Everybody's going to be fired. We're going to liquidate the machinery and sell the real estate. And if we do that, we're going to double our money. And you know, Charlie's very prominently talked about it like something like a a business in France where you think you own that working capital and the real estate, but when you go to shut it down and do those things, the government's going to tell you that's not okay. Like, so some social standards like that have changed, I think, to where again, I don't know the extent that they've done this in and in in a lot of ways. Um, but those things are those liquidation type plays I just I think are tougher than they probably were at a point in time. Um, so you know, I think there's examples where I think the way he would frame something like the Washington Post would be, you know, probably a combination of those two ideas, right? Somehat somewhat based on a on a relative multiple to what you could get for the earnings power of the business and also some understanding of what the kind of hard assets were worth. Um, and then they've always thought about things very simply as what is the actual value of what's here. And the way that you specifically do that can can can differ depending on the situation. >> Yeah, that makes a lot of sense. And I guess that it's also easy to look at him at 90 or 80 and think, okay, he it looks so easy. But that's actually a knowledge base now that we are used to LLMs. He has basically all the data in the world to make a decision. He was basically chach GBT on steroids for investing. Yeah. Yeah. And they learn, you know, they learned a lot along the ways. Um, you know, they famously in the in the Seas Candies example where, you know, they're kind of kind of getting cheap on paying up for the price that the family was asking for. And someone I believe it was in Charlie Mer's office or you know someone someone who's like akin to a partner Charlie Mer basically told them like you guys are idiots if you don't pay this last 5 or 10% to to own what is a really good brand with very limited need for reinvestment um it's going to be a home run at this price and if you don't pay it if you don't buy it because it's 5% too expensive that's just dumb. Um, and as War as Warren has very explicitly said subsequently, like that type of learning and what they what they saw from owning that business is something that then leads you directly to like the Coca-Cola investment in the late '80s. So, I just think there's a ton of that throughout his career where he probably goes, "Oh, this reminds me of XYZ." And, you know, I can piece together what I like and dislike here as a result of that. Um, so yeah, there's something to be said for nine decades of experience in a game in a game where getting older I mean obviously at some point you hit your wall here, but getting older doesn't hurt you too much in investing. You can do a really good job at it at 75 just as good as you could when you were 25 or more likely most likely better. >> If you enjoy this conversation, I'm sure you'll love microcap club.com and subscribe if you'd like to follow along. Thank you so much for listening.