TIP708: Why Wall Street’s Playbook Is Broken w/ Harris Kupperman
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You're listening to TIP. Today's guest is Harris Kupperman, the founder of Praetorian Capital, a fund that has absolutely crushed the S&P 500, delivering net returns of 711% since 2019, compared to the S&P 500's total return of 155%. Now, Harris has a unique investing style, blending businesses that benefit from secular inflections or cyclical tailwinds with event-driven special situations.

Like any value investor, he loves a good deal, and lately he's been finding plenty in hard assets. While many investors have shifted towards capital-light businesses, Harris has taken an opposite approach. About half of his capital is invested in hard, asset-rich companies. His reasoning is pretty compelling. Inflation drives up the replacement costs of these assets that benefit existing owners.

There's limited supply in industries that he's invested in, such as shipping, energy, and real estate. And this limited supply strengthens pricing power. Many of these assets generate massive amounts of cash flows. And then on top of that, Wall Street tends to undervalue hard assets, which creates great buying opportunities. And then since these assets are undervalued and you mix that with the strong cash flows, this allows companies to buy back shares below intrinsic value.

And then on top of that, the reason this kind of opportunity exists today is that institutions have offloaded some of these assets for non-investing reasons, which have created these opportunities with significant upside and lower risk.

Another thing that makes Harris stand out to me is how he runs his fund. Instead of structuring it like a traditional investment vehicle, he truly treats it like his own personal account, with others just along for the ride. While many fund managers invest a large portion of their net worth in their funds, they often face restrictions on what they can and can't buy due to institutional constraints. Harris has structured his fund to remove much of that, allowing him to invest exactly as he would if he were only managing his own money.

His approach does come with some pretty wild price swings, but he expects that. He's not focused on relative returns. He's after absolute returns. Since the industry is so benchmark-driven, that leaves opportunities for investors willing to buy businesses that may struggle for a few quarters, but have a bright future ahead. That's where Harris prefers to fish. If you enjoy learning about unconventional but highly effective ways to succeed in today's markets, you won't want to miss this conversation.

Now, let's dive into this week's episode with Harris Copperman. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve.

Welcome to the Investors Podcast. I'm your host, Kyle Grieve. And today we welcome Harris Kupperman onto the show. Harris, welcome to the podcast. Hey, thanks for having me on.

So one thing that I found super fascinating about your investing story is just your overarching strategy, which is a lot different than a lot of the people that we've talked to on the podcast here. So a big part of that strategy is making concentrated bets specifically on macro inflections. And what really interested me here is that there's so many investors that clearly are trying to profit from macro events, but they usually end up getting either the event itself incorrect or the market's reaction to a wrong. So

I would just love to dig in here. How have you been able to do this so successfully, given how low the average investor's success rate is with this kind of approach?

I don't know if my accessory has been very good either. I'm probably batting about 50-50. I think the difference is that when I get it right, I get it really, really right because I let these things run. And when I get it wrong, I don't lose too much. I try to set up every trade with a risk-reward where I'm buying a bunch of equities that are beaten down, that are unloved, that have super low expectations, low valuations. And look, when I get it wrong, I really get a lot of these wrong.

I usually get my money back plus or minus 10%, 15%. And when I get it right, I'm not putting any time on the books that it's at least a 5x in the next three years. But I'm really looking for more than that. And so pretty good, right? I get it really right. And when I get... Like I said, a lot of times, it's not so much that you lose money when you get it wrong. It's like it ties a capital for...

a year, 18 months. And the theme is sort of working. It's just on that strength to push the equity multiple because it's not just earnings growth. It's really when you're looking at it, you're trying to find things where other guys can get excited about too. And so sometimes, yeah, your earnings are growing, but you thought you should have grown 30%. They're growing like 12%. So you make a little bit of money. And I think that's the key to this.

Make sure that when you set up your trade, you chill this money. That's always the general rule of investing. Yeah, exactly. And I think that speaks to the frequency and magnitude effect, right? You can be wrong, but as long as, like George Soros says, it doesn't matter as much as just when I'm right, I need to make a lot of money. And when I'm wrong, I need to hopefully minimize my losses. Right. I mean, if you look at kind of the history and I've had a fund now, this is year seven for our fund, but I've been doing this a long time before.

You know, it's either a lot of things work, you know, a lot of my ideas are just working in unison. And, you know, we're going to be up huge that year. Or nothing really happens. And, you know, we're up or down smallish. Usually links to the upside, you know, just to venture. And I think we'll talk about that in a little bit. But yeah, it's just usually the return profile. It's odd for us to ever have like an up 40 year, you know. We're either going to be up triple digits or, you know, we're going to be kind of, you know,

hunch or 15, 10, 15 on either side of hunch, hopefully we're already big down years. That's the real goal. If you avoid your mistakes and you get out of your mistakes fast, the winners solve most of the problems for you.

So something else that really stood out to me was how you kind of balance both these shorter event-driven trades to kind of self-fund some of your longer core positions or longer-term inflection bets. So you use this specifically so that you can fund these long-term bets when there's market drawdown. So I'd love to dig into this a little bit. Are you usually staying completely fully invested? And is this the strategy that helps you free up capital when those big opportunities do end up coming around?

I mean, we're usually pretty well invested. I mean, look, there's more to do than I have capital. That's always been the case. Sometimes we'll get a little skittish and pull back, but there's always a lot to do. On the event-driven side, when the markets are volatile, we tend to make money. Event-driven means a lot of things to me. We're tracking about 25 event-driven corporate events. There's like spinoffs, privatizations, demutualizations, restructurings, CEO change. We're tracking about 25 of these things.

They tend to give you really interesting setups where you know something's going to happen, you know roughly the timeline of this thing happening, and there's usually a probabilistic trading opportunity around those events. We're active in a lot of these. Obviously, there's going to be hundreds of them a month, and we're going to choose five, but we're active in these. We're also really active just in what's in the news. I'm an originally good discretionary trader, and when stuff's in the news,

When markets are volatile and moving around, I'm just going to be taking trades. And that's additive. The whole point of event driven is you never want to lose more than 100 pips in a mistake. So you size it appropriately based on risk-reward. And you try to do this over dozens of situations during the quarter. You're trying to grind your way forward.

And occasionally, you get a steep velocity on something and it really hits it on the arc. Now, you're just really trying to set up situations where you can't really lose much and you make some. And it produces a really consistent cash flow. In my experience, event-driven will have a couple months each year where it's very profitable, a bunch of months each year where it sort of makes small. And then one, maybe two, where you lose a little. But it's pretty rare that we lose more than 50 or 100 bps in a month on event-driven. Robert Leonard

it's quite likely that we'll be up a couple of hundred bips in a month. So, you have this additive cash flow in a way. And I hate to use Berkshire analogies because they're overused, but Buffett has an insurance business which produces cash for him in most years. I went to venture and it produces cash for me. And when the markets are volatile, which for instance right now they are volatile because you never know what Trump's going to tweet next. And I don't even know if Trump knows.

There's going to be a lot of pin actions. There's going to be a lot to do. Implied volatility is structurally five to seven points higher now than Trump, which means that every time something happens, you can sell puts and calls and earn your yield that way. There's just a lot to do right now. The core book is not doing so great. The markets are trending lower this year. And

And the Event Driven has really offset a lot of that drawdown in my book and given me cash so I can just keep averaging down my favorite ideas. And it's doing exactly what it's meant to be doing. And yeah, I'm super happy with the way it's been going this year. And that's how it goes most years. It's rare that we ever have a losing year at Event Driven. It's rare we would have a losing quarter, but we tend to make good money.

And so are you tracking specifically which side of the book, whether that's event-driven versus core, has been driving the most returns? It sounds like you definitely do. We definitely track it, yeah. Yeah. And so is there kind of, would there be kind of a time in the market where you'd go maybe all in or focus more on one side, depending on the opportunity set that you have?

Yeah. I mean, look, event driven goes in cycles. You'll have a couple of good months, then it kind of trails off, you'll have a couple of good months. And when things are good, you work for a little more capital to event driven. The way event driven works though, is it's often self-liquidating. If you write a put on something that's oversold and you say, look, stock's gone from 60 to 40 and I don't mind owning it at 35. Well, I'm going to write the 35 put, I'm going to get paid my $2. And 45 to 60 days later, either I've gotten...

my stock and I got it below the price where the put was, or I've earned my yield. And these things tend to be very self-liquidating. And it tends to be that by the time that put expires, the stock's either moved up or it's moved down and I've been assigned. So I can overdraft in a way off the core portfolio. Say we're running a 110 exposure in the core book,

I could always overdraft another thousand reps, which lets me write puts or do a couple of these strategies. It gets me to 120, which we target between 15 and 125 range. So it gets me right into the middle of my target exposure. We can take exposure out if something is really good and event-driven, or we can sell a position if we need something event-driven. If there's a really good privatization or a really good spin or a really good bankruptcy emergence, and we say, "Look,

We're going to size this. A lot of the adventure stuff is like 50 to 100 bps exposure. We're going to size this 500 reps. We really like this. Well, then I got to go find 500 reps somewhere. I can't just go from 120 to 125. You start pushing your exposure too much and you never want to get too overexposed. There's a couple of times a year where maybe it makes sense. And about once every 10 years where it really, really makes sense. But on that 125, 130, that's really a ceiling. You don't want to go above that, especially because we don't short. We don't really hedge.

So another thing that I think really resonated with me was your focus very specifically on absolute returns. So you've had some just incredible years. I mean, you already mentioned here that you had a couple of years here where you've had triple digits and that was in 2020 and 2021. And then even in 2022, when the market was kind of getting slaughtered, you ended up with a positive return, which was very interesting. So let's dive in more into how you develop this mindset kind of to focus more on absolute performance when it seems like

99.9% of other funds are very locked into specifically relative returns compared to an index. Right. Well, I think most hedge funds start with the initial principle of, I want to build a return stream that lets me go market.

The big money comes from institutional investors, pensions, endowments. So I'm going to build a return stream that the teachers, pension of Cleveland, and the firefighters in Mississippi, these guys want this return stream where we don't have any down orders, hardly any down months. And we make 1% to 2% of most positive on average. And we end the year up 13. And that's a really good return stream. That lets you manage tens of billions of dollars

become a very, very wealthy man. The problem is most people can't achieve it. I approach this with a very different approach. I say, "Look, this is my PA, private account, sorry, PA. I'm going to run it like my PA. And if anyone wants to come along, they can pay me a fee and they get exposure like it is my PA." But I really treat this just as my PA. And it's a very different approach. And it means we have a different return stream. But the approach is where I do this with my own money.

What do I want to do with my own money? Look, I want to make the most money possible in my PA, right? And I don't care if it's volatile. I don't care how we get there. I just want the best rolling three-year returns I can achieve. And there's always in the markets, these weird opportunities that are created by this institutional incentive structure of turning into 10 billion of asset. And when you want a really smooth return profile, it means you can't do a lot of the things that we do.

I think one of the most obvious ones is that most investors right now, cheap bonus stock, I think Q1 earnings will be bad. So if you know that Q1 is going to have a bad print, but you think Q2 and Q3 will be great, and then Q4 outstanding, we can't buy it until after the Q1 prints. And if you think Q2 will be sort of mediocre and maybe Q3 is the inflection, then you can't buy until the Q2 prints. Well, I take a very different view and say stock prices are sort of random.

We've become not super large. We've gotten larger. So we're going to impact price sometimes. Well, I'm just going to average in. If Q1 is terrible, I'm going to buy some more. If Q2 means the stock goes down another 10%, I'll just buy more. Eventually, I'm going to have a really good cost basis. And I feel like a lot of funds also are very IRR focused, which means they have to catch where it's going up. So...

If a stock is at 12 and you say, "Well, the chart do the squiggly thing and every time it goes to 13, it stops. And every time it goes to 11, it stops. I'm going to buy it at 12. And I'm not going to buy it at 12. I'm not going to buy it at 13. I'm going to buy it and break out at 14." Okay, great. You just paid up 15 or 20%. I'm saying, "Look, I'm going to buy it at 11. I'm just sit there at 11. And if it goes to nine and a half, I'm going to buy more."

Because if you're going to buy it at 14, what does that do? It means you're going to sell it when it drops to 13 or 12. If you stop at it and you buy it again next week at 14, it makes no sense. I just want to buy it as cheap as possible. And this is because most of my net worth invested in this fund and my focus isn't IRR. My focus is not losing money. My focus is buying as cheap as possible, so as little downside as possible.

And then when it turns, no one knows when it's going to turn. I'm going to catch that turn. And then the guy who's buying at 14, I'm going to look at him and say, I bought it at 11. You missed out on a 25%, 30% loss. I mean, in our industry, that's called a good year. I don't understand that logic, but like I said, you know,

A lot of things don't make sense to me in finance. And a lot of people from the institutional world tell me stuff and I go, "Okay, that's nice. I don't know why you could do it this way." I do it my way and my way seems to work for me. It doesn't work for other people. And I've sort of accepted that. And that's just me running my own PA with 190 people coming along for the ride.

So I'd love to dig in a little deeper. I mean, we've talked a lot about here about the core book and your event-driven book. And I know you don't like using these Warren Buffett-isms, but I can't help but mention him here one more time. So he kind of somewhat similar to you, not exactly, but he had multiple buckets when he was running his partnerships where he had his generals, which were kind of similar to what your, I guess, your core book would kind of be. And then he had his turnarounds and workouts that I guess would end up offsetting sometimes when the generals would...

not be performing so well. So I'd love to know, how are you thinking about balancing these two parts of your portfolio in terms of concentration? How does concentration maybe shift where the best opportunities lie, especially in relation to the core book?

Well, I think it's just exactly what you said. Where the best opportunities lie. Event-driven has a bunch of stuff coming. And what's event-driven is that we're tracking these things. So sometimes stuff comes out of nowhere, like a CEO change, and they just press release it. But a lot of times, you know there's going to be a demutualization, and you know it's coming for the next six months. So you know there's a pretty good chance for me to make capital in this situation. So we need to free up capital. You

So there's a lot of that. I mean, sometimes something happens in the news and so sometimes it's very reactionary. But a lot of it is

We never run fully investing. We have a self-imposed cap at 150 exposure. You never want to get there, though. If you got to 150, it's a danger zone. But we're usually running this at 115 to 125, like I said, which gives us at the midpoint 120, which gives us 1,000 nips of room to flex up our exposure at any moment. And when you flex up exposure, you don't want to immediately have to sell something because you don't want to impact price, but

you look at the book and you say, "Well, where do we go find ourselves? 500 pips to take the exposure down." And then over the next couple of weeks, you better take your exposure down somewhere. And so it's really just where the best opportunities are. We have some names in the book that we've owned for a few years. We're probably going to own them in a few years. So that's an Apple reflex. But one day, those stocks will get valued fairly and we'll get that capital back. It's more that we have a bunch of names that cycle through the book. They tend to be

a couple of weeks on the bedroom side, maybe a month or two. We have a bunch of other things that are more inflection-oriented where it's a clear catalyst, it's coming in the next six to 12 months, we're positioned ahead of the catalyst, and we're probably going to sell three months after the catalyst. There's a bunch of that sort of stuff. It's got a six to 24-month duration on it, and so that recycles pretty fast. Robert Leonard

And do you have any constraints specifically each side of the book? Like, you know, do you prefer to keep your core book, you know, at a specific concentration level or does it need to stay above a specific level?

No. I mean, when there's nothing to do, you take it down. I started getting bearish in the US economy last spring. And we kind of have a culling, we called it, or it's a purge, it's kind of what we called it internally. And we're a bunch of names that, you know, if the US economy is going to soften, and it has softened, I think, it might not show up in the official data as yet. I mean, the official data says the economy is still growing, but you know,

Everything in finance is on our rate of change. And so the rate of growth is slowing, your second derivative, which means that every prices are going to decline. You want to get out before that. And we made a lot of sales. I wish we sold more, but honestly, anything that had GDP exposure, we sold. And having done this for a long time, I know that there's always some illiquid things. Well, not totally illiquid, but when you own a couple percent of a company, it's going to take you maybe a couple of weeks, a couple of months to get out, especially if you don't want to impact price.

And so you just kind of know, like, it's going to take me 60 days to get out of this. Well, you better get going, you know? And so we kind of cleave up the book that way. We do that from time to time. We just cleave up the book. But no, I mean, there's no target. We just kind of go where the opportunities are. Let's take a quick break and hear from today's sponsors.

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So let's talk a little bit more here about culling your portfolio, because I really enjoyed reading about that. You had an article and you also mentioned it in your shareholder letters. So basically what it was, was that you felt like there were specific positions maybe that were lower conviction bets or just smaller positions in your portfolio. And why keep those when you have higher conviction ideas that you can put some more money behind? But the question here is, with someone with maybe more of a value investor mindset,

How are you building the discipline to really sell off some of these smaller positions? Even if, you know, like right now, I'm sure a lot of these smaller positions are probably looking really cheap and attractive.

So we have some of these names that we've had for a while. I'm just pulling a ticker right now. I'm sorry. No wonder I'm in. You know what? We owned an Italian newspaper company, media company, RCS. We owned quite a lot of it. And it had been a large position for us. And as we had inflows and as we had performance, the position just got diluted down to...

The point where it was 1%, a little less than 1% of our capital, we said... I have a very strong view that I don't want to have anything that's less than 500 BIPs. Either we have tons of confidence that we're going to make it bigger, or if we don't have the confidence to make it 500 BIPs, then we should know that. It forces you to concentrate on your best ideas. It forces you to really know your names. I have a team that supports me here. And so it's super helpful to have them. But

I mean, we go out to dinner once a week and go through all our book and it's never the little names that you focus on. It's always the big ones. And so I feel like we avoid landlines that way. And then you kind of want to jettison the things that you're not really focused on in the same way. So we have a stock and we knew it was cheap. We loved it. We love management. And we just said, it went down from a couple hundred bips to less than a hundred bips. And you can't size it up just because it's not that liquid. Let's just exit it.

I'm looking at the chart now and it's up a lot since we entered. It's up almost 50%. We sold it last summer. It doesn't hurt me. It doesn't bother me. We took a bunch of dividends out of it over time. It was actually an okay IRR, not great. But

I don't look at these things bottom. Yeah, I'm not really very backwards looking. It's more of a... And it wasn't like there was anything wrong with the names either. It was just that we said, either we take this to 500 VIPs, which would be probably difficult, or we shouldn't have it. And I don't mind having a large position in a cheap Italian newspaper company, but it's just not what...

I thought there would be better opportunities. And I just have no regrets. And there were a lot of things like this that we just kind of sold. A lot of things that started off as 500 bips or 300 bips, or it was a basket of two, three times and the basket diluted. There were also a lot of things, like I said, that had just economic sensitivity, especially the US ones.

And we looked at these and we just said, "We think we're going to have a slowdown. I don't want anything with economic sensitivity. Let's get rid of them." And a lot of those sort of things are down 30% to 50% from what we sold. And so I'm glad we had the column because especially when it's going to take you 60 or 90 days to get out, I'm glad we got out before because now it's daunting on people to see a recession and there's no bids left. Robert Leonard :

So you mentioned there that you prefer to have a position that you can take to 5% of your portfolio or even more. So let's dig into a little bit more about concentrating bets here. So I know you've mentioned that you've had just three bets making up over 50% of your portfolio at any one time. So clearly you're willing to go very heavily concentration in something that you believe in. But given that you also have these short-term trades in the mix, how do you kind of decide how concentration goes across the whole portfolio? And you know,

what makes an idea strong enough to warrant one of these very large allocations.

So when you look at a cause and the first thing, and this is the most important, is what's your downside? If you're looking at a situation where there's almost no downside, I mean, look, everything has downside. You have stuff happens, you know, exogenous events happen, you can't predict. But when you don't think there's a lot of downside, when you think there's a lot of upside, well, then you put it on, you know, and you resize it up. There's a lot of situations where you can look down and you can say, I think it might be 30% downside, but maybe it's 1000% upside. When you

You can't size that 20% of your portfolio because you don't want to lose 600 dips. And you just start going through what the math on it is. I'd much rather have a position that I think is only 3x upside, but it has no downside. It's trading for less than cherishing and it's profitable. Mark to mark, I can do whatever I want, but it has no downside. So maybe it doesn't change our aquatics threshold, but if you lose money, then play it big.

I think that's a lot of what goes into it. It's also just what you think the best things are, what have the strongest elements, what's really working. And yeah, I like to play it big. There's not a lot of opportunities within the market. You have this sport called investing, in terms of the smartest people in the world. Every day is like an MVP, ball-star game. And you're going up against the smartest people and the smartest computers and

It's just not a lot of really interesting stuff to do. Most things are fairly priced. And so when you find something that's really quirky and interesting, well, you can play it big. And the whole point of a hedge fund is we're supposed to dramatically up the fort in my world of rolling through your period. I mean, you can't just have 20 ideas because you're going to sort of look like the benchmark.

And no one wants to pay you for that. You better be able to outperform. You outperform very much. So you've mentioned here in that example that you gave earlier, where you have no problem with averaging down onto a position if the price goes down, depending, like you said, if one or two quarters is going to be soft. So I'd love to know more about just generally how you get into a position. There's kind of these two schools of thought that I've generally seen where certain people are like,

You should know everything you know about a business. Then you just go all in on one position and, or not all in, but just like, you know, take it to whatever concentration levels you want at a reasonably fast pace. And then there's another field of view where people are like, okay, well, you know, maybe I'm going to get to understand this business at a reasonably high level. Let's call it 60, 70%. And then over time, as I start

understanding the business more and more, seeing how it plays out over a few quarters. I'm going to add more and more over a few quarters. So which line of thought are you on that spectrum?

Well, we're usually looking at something that's inflecting. We're usually looking at something where we think it's going to be dramatically higher and the results will be much better. And something that's play. And as a result, we like to think we're intelligent, but there's a lot of smart people that might just be a couple days behind us in figuring something out. And so we like to buy or die one third, one half of the work, start buying. And as we do the work,

"I want to buy some more." But we have this knowledge that if we figured something out or we thought we figured something out, someone else will come up behind us. And so we'll have exit liquidity if we decide we don't want to be in. But it's usually something really emotion. I gave you the example before of something where we think Q1 is a bloodbath, but we think Q2 is the turn and then Q3 is going to start looking good. Well, then, will I bunch now?

Because by the time we announced the bloodbath quarter, they're going to be guiding higher already. And then everyone's going to forget that last quarter, that's rear view. Everyone's going to be looking forward. And so maybe it drops 10% on the earnings spread, and it's probably just going to end the week higher. And so we're usually buying at the moment that it started.

My biggest mistakes are the ones where I'm buying and then averaging down and buying. If I'm averaging down, I made a mistake. I saw a market crash or something. If I'm averaging down, I made a mistake. I'm not saying I'm always averaging up. I'm usually out there fighting for shares against a couple other guys that threw out the same thing I figured out. I'd say the other time we're buying is... If you look at when you cycle in these trends, we do a lot of cyclical industries. Let's say the cycle is going to add to the last 10 years. It's just made of number.

And usually, at the bottom of the cycle, when we're buying, the company's losing money. But we have line of sight that it's going to get a lot better.

we're buying a lot. Then it starts making money, things are good, the stock goes up 2, 3, 4 times. And then eventually, there's gonna be a bad quarter or two because the way these industries work, people overstock the product. There's a destocking phase. It's like a sine curve and it's upward sloping. And so because it's such a cyclical industry, everyone goes, "Oh, the cycle's over. It's only 18 months in. The cycle's over. I'm just going to take my ball and go home."

And then the problem is that the cycle is not over. It's just a de-stocking. The price of the Gizmo, it went from $100 each to $200 each, and it cost you $150 to produce it. And now it's pulled back to $160. So it's like sort of making money and everyone's like, "Okay." And the stock will be down like 60%, right? So you might stock at 10, it goes to 50, and then it drops to like 25 or something. And

And everyone panics. And that's usually when we've now had two years to learn this industry. We've usually figured out what's happening. We have a much better understanding of what's happening. We have a good relationship with management. That's usually when we double and triple dip on it. Because before, we were buying something that was sort of...

funky that we were really hoping and praying would fix itself. And here we are, they've had a year or two of retained earnings, they've delevered, they've maybe bought some competitors, consolidation is always great for whatever cyclical industry it is. And it's now cashflow positive and they're using that cashflow for buybacks, which means you're going to have a...

ownership of it. And everyone's freaked out when they think the cycle's over. We're like, "No, guys." Because we do so much of this cyclical stuff too. We're just like, "No, guys. The cycle's not over." Everyone who is good at capacity expansion, they just put it on hold. The banks said, "Whoa, we're not lending you this." The boards of directors are like, "No, guys. It's going to be lever." It puts the whole process on hold.

That's why cycles last 10 years, let's say, instead of 4 years. And so that's usually what we're adding on the way down. And for some reason, I always buy too soon. I always... It goes from 50 to 30. I'm like, "Guys, it's so cheap." And then it goes to 25. And I'm like, "Oh, I'm buying." It bottoms at 19. It's that crazy day where it drops to 17. And suddenly, I get some margin call. And it's funny. All the brokers that are like, "I have $100 price target."

Six months later, they're like, "Yeah, we're at $12 price target and we're a strong sell." Six months later, they're back to $100 price target. It's like, you guys have never seen a commodity cycle? Come on. That's the only time we're buying in the pullback. As I get older, I'm already kind of an old man. As I get older, I want to make sure that I'm a little more patient on those pullbacks. I think that's where I'd probably be a little sloppy. I just get so optimistic about these things.

I feel like other people have actually done homework, but in reality, no one's done homework and they just get spooked out. I mean, we're in one of these right now and I get like 10 emails a day from people that ask what's happening. And I'm saying, "Nothing's happening. I could go buy some."

So back in January of 2024, you pointed out that the Meg 7 were driving much of the index's gains. And we fast forward to now and they're up another 44% as of March 5th, 2025. With that in mind, I'd love to get your latest thoughts on market blow-offs, which you've discussed in some of your articles. So you mentioned that there's certain moments in time where you

the markets end up blowing off. And an example that you gave was a tech bubble where capital would rotate out of these expensive names and then go into cheaper names after the bubble popped. So are you thinking that you're seeing this play out right now? And is that a kind of a catalyst that you're looking for to drive returns in certain businesses you own, like things like St. Joe or some of the offshore services plays that you own?

So I think we have had a bubble in, call it MAG20. Everyone knows the MAG7, but I'd add in a bunch of other things like Walmart and Costco and Starbucks. These mega cap stocks, a lot of them, say what you want, at least most of the MAG7 stocks are reasonably good businesses that have a lot of cash flow. And outside of Tesla and Nvidia, they're not particularly expensive.

You look at Walmart, it's 40 times earnings and it doesn't really grow. I mean, it grows a little. Starbucks is shrinking business. You look at some of these things and you just wonder why they treated the valuations they do. And it's been just nonstop passive inflows since the United States. It's created a bubble because the capital goes to the largest stocks. And I think that bubble, you know,

Think about a capacitor, right? And it takes in all this energy and then finally it just releases. And so it's taking in all the world's liquidity, right? Now I have a lot of friends who live overseas and I'm asking them about their markets. We're long Brazil, we're long Turkey, we're long... All these emerging markets that are doing phenomenally well. I asked them, "Are you guys investing in your own money markets?" They're like, "I'm not. We only own S&P."

I'm like, "Why don't you own yours?" They're like, "Well, it never goes up." I'm like, "Have you guys looked for the last little bit? It's starting to go up." They're like, "Oh, really?" It's like reading the capacitor. It's just like, "Oh!" All the capitals would come out and it's going to go back to these other markets. I hope some of my names get a little bit of that capital release. I think it just goes everywhere. It's going to help the valuations of these abandoned equities, I guess, is what I'd call it.

There's just a lot of capital locked up in things that don't really make sense in terms of valuation. It's been like this for so long now that we've all come numb to it in a way. There's a lot of these large US tech stocks that

don't really make much money. What money they do make mostly goes to offsetting stock dilution. After stock dilution, it actually loses money. You could say SBC is not in cash. But I don't know. If you didn't pay these people piles of options and RSUs, could you pay an engineer $200,000? Or would that engineer want a million bucks? And if that's the case, well, your business doesn't make any money.

I don't know. At some point, you have to look at this and say, "These aren't really very good businesses." They're just not very good. They're cash-generative, I guess. But it's kind of like this weird cash stock option laundering operation that helps the company raise capital as a deferred capital raise through stock options. That's how they get their cash flow. Some of these things, like Amazon, literally have no cash flow. There's a working capital.

cash flow. But it's really without an SBC, then that's their cash flow. You look at these and it's like, "Okay, it's a mature business. It doesn't really... It makes some money." It's a little hyperbole to say it doesn't make any money. But if you look at these, I don't get it. I don't understand who's buying this thing. They have multiple giant businesses at a huge scale, and they don't really make any money still. Their ROAC is just terrible.

for a scale of business. But we don't short much. We're not trying to take sides in these things. We're just looking at best and saying, "Wow, this is weird." And it's gone on for so long, you stop thinking about it. And so we stopped thinking about it. And we're focusing on a bunch of things that are really growing fast at three to five times cash flow. That's what we've always done. And that's what makes us money. Robert Leonard :

So you've highlighted how valuation agnostic traders create opportunities for long-term investors. So there was an example that you gave, let's just say ESG, where there was the opportunities created because having an ESG fund and in order to get to that status, they had to sell positions that maybe they had in high quality businesses and they were just basically essentially becoming for sellers. So you seem to have played this in kind of a basket bet kind of way. You have investments into companies like Valeris, Tidewater, and Noble.

So I'd just love to learn a little bit more about this strategy. How are you kind of finding these opportunities in battered industries and maybe not, maybe not even just industries, but specific companies that nobody seems to want to invest in?

Well, ESG was a weird thing because for the history of investing, it goes back to thousands of years. We have trade receipts on papyrus going back 3000 years ago. People were lending money to guys who ordered a ship and they were going to move a cargo from one place to another. It's just been going on forever. And for the first time ever in the history of society, a bunch of people decided they didn't want to make money. They were going to try to make the weather better.

It's like a weird call, right? I don't want to go into climate, but I don't think one portfolio manager buying or selling coal stocks is going to make the weather better. I think it's totally irrelevant. I've come to the conclusion that we run a decently sized hedge fund, but we can't fix the weather. It's just out of my capacity. And a lot of people convince themselves they could fix the weather.

And they all sold stocks. And it was great for us because we bought a bunch of irreplaceable assets at 5% and 10% of replacement costs at a time when they were cash flow positive.

Hips, the companies are buying that box of stock. It was hard not to make a lot of money. As is always my curse, I was a bit early because it seemed so obvious to me, but it seemed not obvious to anyone else. And eventually, the selling ended. I think ESG is... If I had a watermark of ESG, hopefully, it disappears and we never hear about it again. But there was a moment in time where I was a year and a half early. And there was just waves of selling. There weren't enough guys like me to come by.

And eventually, the shares got absorbed, mainly by the companies with their own buyback programs. They only made a lot of money, a lot of money. I always ask myself, where are there people that are totally uneconomic? I think the most obvious one is that someone's getting a margin call. They might love their stock. But if the broker says you have to sell, you have to sell. And oftentimes, really, really rich people got really wealthy because they

borrowed a lot of money to get there. And they overextend themselves. Sometimes whole countries do this. And so you have these idiosyncratic crashes. And it's either one tycoon going bust or a sector or a country. And I think that's interesting.

I think what's happening with pod shops right now where they say they can be delta neutral. So every time they buy something, they have to short something. And oftentimes, they're totally valuation agnostic. They're much more focused on rate of change. So they're always showing up in the morning and asking themselves, "What industries are getting better? Let's go buy those. What industries are getting worse this month? Let's go sell those." They have credit card data, they have satellite data, they have all this data, right? And so in real time, they're putting positions on what's getting better and what's getting worse.

And they don't share my valuation. They don't read your spreadsheet. They're looking at web traffic or something else. And you get in situations where you have companies where 20%, 30% of the shares outstanding are shorted. And it trades at three times earnings. And yeah, maybe it's going to get worse. And maybe it's next year five times earnings. You kind of look at this and it's like, it's a single industry. Yeah, we know it's getting worse, but it's really cheap. I don't think we have to do something today. But you put in the back of your brain that...

Once a month, I want to check up on this thing because when it starts turning, all these guys need to cover and then the project would go long. So, you know, it's just going to be this huge cycle. You know, I think the pod shops have created more opportunity than anything else. I mean, even it's a little bit more dispersed than ESG, but I think there's a huge amount of opportunity. I mean,

I'd say a lot of what we do at our fund is we sit around drinking beers and we say, what's happening in the world? Politicians usually have a two or four-year election cycle. And cause and effect isn't really a strong point with politicians. They don't really understand economics. They often don't really care about the effects because either they get reelected, they'll figure it out next cycle, or they don't get reelected and it's someone else's problem. And so you have this weird setup where there's a lot of...

There's a lot of opportunity created just by having a sort of Austrian libertarian mindset of how economic cycles work. And if you have a really high dose of cynicism, you're going to make a lot of money as long as you're willing to have a one-year or 18-month timeline of what's going to happen because some politician just made an unenforced error in their domestic economy. These are the sort of things you look about and think about.

always something happening in the news. Every day, something happens. And my job is to say, is this just noise? Or will this dramatically change something? And oftentimes, it changes one little subsector, and you kind of risk it. But sometimes, even one of those subsectors, someone in my firm is knowledgeable about that. And they say, hey, copy. We think this is about to happen. Okay, let's go buy some. And that's where a lot of our opportunities come from.

Yeah, that makes sense. So you mentioned there a little bit about capital allocation with some of these businesses that no one liked the stock. And so they were very cheap. And then that was a perfect time to obviously do buybacks below intrinsic value. So I just wanted to ask you a question a little bit here on capital allocation at a business point level. So obviously with these types of businesses, once the buyback strategy is kind of maxed out and there's not enough liquidity to continue going down that road, they kind of have to either pay a dividend or reinvest back into the business. So

My question for you is, do you have a preference between the two of them or are you just purely looking at which offers the highest return?

Well, I mean, there's always capacity to buy bags. By the time it gets to the point where it destroys capital because it's not a creative, we've already exited, right? So it doesn't bother me there. I don't like dividends. Nobody shows up for 3%. We made 3% on the year. It's a terrible year for us. So I don't really know if it's fair. It's sort of offset your funding cost of having a slightly larger portfolio, but that's this new hitter there. I just don't like dividends. I don't feel like anybody buys a 2%, 3% dividend.

No one cares if the dividend gets increased by a new deal. It just doesn't matter, right? A lot of buybacks from new stocks. That's what I care about. Otherwise, I want to see consolidation. I don't want you to go into our new field, but consolidate the sector. We tend to be looking at second-world businesses. We tend to be looking at things where they probably haven't had a chapter in a while because the sector is a straight down. So if no one's having a new supply and the number of players is consolidating for bankruptcy,

And so at the top of the site, it was 20 guys. At the bottom of the cycle, after all the backups, it was seven. You get a little pricing power. And let's see if you can buy two or three more of these, we get an oligopoly with four guys and then push price. And in a fixed cost business, pricing is usually very high incremental margin, very high incremental ROAC. Toilet seat consolidation, that's kind of what I was really going to say. Stig Brodersen : Let's take a quick break and hear from today's sponsors.

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So a recurring theme in some of your 2024 letters was your focus on these kind of hard asset heavy businesses. And that seems to tie directly into kind of your macro view around persistent inflation and high interest rates coming up here into the future. So can you maybe walk us through a couple of scenarios and explain the kind of asymmetry that you're seeing in some of the investments that you made here in asset heavy businesses?

So I like asset-heavy businesses because obviously everyone looks at earnings, right? Earnings are just something people look at, right? It's weird. A while ago, 20, 30 years ago, maybe when Buffett was first started out, he looked at asset-heavy businesses. And he was very much an asset-focused investor. My stuff blew replacement costs. My stuff blew working capital. The world's really tipping you to Jewish earnings, I guess. Even though I'm really not an earner. It's definitely a Jewish flow.

And everything's dying these days. But EBITDA has been revolving, especially in businesses that are sick of it. EBITDA or Janus, they don't really. What you're really trying to figure out is like, but nothing ever gets valuable in this learnings, which is why I meet with guys like me who get to make money. When things are kind of bleak and they're losing money, these things are valued at a fracture or a place for costs. And they're cheap, they're valued three times for a place for costs, which incentivizes them to have capacity.

And, you know, we should, while, you know, the mid-cycle earnings is pretty flat. So I just look at a lot of these assets and business because it's an easy starting point for what you think you can earn. And until it goes, you know, the valuation goes above the replacement cost, they're in supply. So you have this kind of great, you know, the global economy grows with each year. You have no supply, but actually the demand catches up. But what happens in an inflationary environment is,

is that the replacement cost of this piece of equipment, it goes out. And so you're kind of making money. Let's look at shipping, okay? At the bottom of the cycle in 2017 or 2018, the VLCC carries 2 million barrels of oil. It does, let's call it an $80 million piece of equipment to buy new. Today, it's about a $130 million piece of equipment to buy new. Part of that's inflation. Part of that is that at the bottom of the cycle,

A bunch of Korean shipyards were basically losing money to build these things. They didn't want to lose their workers. And now they have some margin. But I think maybe half and half, half civilization. So let's say it costs you $20 million more to build this thing, $30 million more to build this thing. Well, if you have a five-year-old, why lose?

It's on your book. I know your $80 million cost minus depreciation. But in reality, to replace your cost of this, you can sell it to a liquid market. It's not that $80 million starting point. It's $105 million or $110 million starting point, which means if you're going to depreciate it over 20 years for residual value, you can move your whole curve up, which means that

it's actually appreciating your value. You do the math on this and you think you've suffered through depreciation, but in reality, it's probably worth more today than you purchased it for. That's the beauty of inflation in a current asset model. You look at this, obviously, the VLCC depreciates and it has a totally, totally higher life. Factory depreciates over time.

But I guarantee you, you can't rebuild being a petrochemical plant for what the stated value is. In fact, it's much more pre-unit of production than the stated gap value where even the market caps these things. And as a result, there's not a lot of money supply coming. And you can say, "Well, it's straight in capital. It's worth the bottom of your findings." Sure.

But you can look through this and say, "This asset's worth a lot more because eventually, you get more supply and it costs you much." And I think the best example of this is something we have a lot of, which is called St. Joe, where they own about 167,000 acres of land in Florida. That land appreciates every year.

And there's no depreciation. It's not like the refinery or this shit. A lot of Atlanta is just forestry. It has trees on it. It actually produces a couple percent a year on a yield in terms of growing trees, harvesting trees, making gear, and whatever else they can do. So you appreciate it. Plus, it gives you a yield. It's a great asset.

I like assets like that. And some years it appreciates faster. And during the GFC, I guess it probably depreciated for two years. But man, now it's just like the street light up because the population of Florida keeps growing and it keeps attracting wealthy people mostly into the tax benefits. And as a result, Florida land does great things. And St. Joe's, you

Economically, it's been a huge home run. Share price bias, not so much. One day, I think investors will realize how much of a leap in value is in science bets. And the same can be said for a company that owns ships or petrochemical plant or any factory, anything. Inflationary environment, you want things that have...

you know, a certain expense to build, but you want stuff that doesn't have a lot of maintenance because the maintenance capital means that if it costs 10% more each year to build it,

Then it's going to cost 10% more each year to maintain it, which means that your cash flow is illusory because it just goes back into maintenance cattle. I mean, you want something more like St. Joe where there is no maintenance. I guess they have some hotels and stuff, but maintenance cattle is 15 million, let's say. It's kind of negligible on a couple hundred million of revenue. And most of it is just land. It's no maintenance. It's just trees, ocean farm trees.

You've written that kind of your sweet spot for investing market cap wise is kind of in the one to $5 billion range. And that's an interesting number specifically because generally that excludes an investment from being part of, let's say the S&P 500. I think I was a couple of days ago, the lowest one was something like 4 billion and everything else in it was above 5 billion. So-

I'm interested in knowing, you know, are you specifically looking for that as a catalyst? You know, are you looking for inclusion and at a future point as a catalyst to help generate returns as part of your strategy? Or is it more of a case by case basis?

Well, it's case by case. I'm not opposed to buying something that's many billions of value, hundreds of billions of value. I'm not opposed to buying something that's 5 million market cap. I've done both in my life. But I've always done is try to figure out where the opportunity is in the market. And you have these cycles. Something works for a while,

But then a lot of people start making money at it and then it stops working. And something happens because when you shift all the money to one strategy, it means another strategy has opportunity. And so right now, what seems to be working best is because of the nature of passive, you want things that are going to get sucked up and absorbed by passive. So if you look at a company with like a $2 billion market cap, there's usually the founder, a couple of insiders, they own 10%, 20% of it.

There's usually a bit of passive, 10% of it. There's a bunch of hedge funds that own most of it. And there's some free float owned by everyone else. And as it gets to about $10 million market cap, so 5x, and remember, we're at an 80% without a 5x. When it gets to that $10 million...

The ratio of hedge funds that owns it goes down. The ratio of passive goes up. By 10 billion, it goes from 10% of the asset to maybe 40% of the asset. And so you have this forced buying. And usually, we're into things that have buybacks. I just find that a forcing mechanism forces the share price higher.

Remember, I don't think most of my money on earnings growth, though I do make some on a lot of just multiple expansion. I don't always say earnings multiple expansion. It's not like if I sell at 20% of replacement cost, I sell at two times replacement cost. Then that 10X with talking about inflation, your replacement cost, it's a very virtuous cycle.

I'm looking for stuff where passive starts buying. It went to $5 billion and they start buying. And because they're buying it, it goes to $6 billion, which is more passive buys. And eventually it's added, maybe not the S&P 500, but it goes into the S&P 600 and then the S&P 400 and the MSCI. And then the guy at Fidelity that calls it indexes, he has to buy some. And this other guy has to buy some. And it just becomes this like, when you think of the return profile, and this is not a win, obviously, not always.

But it's just like slow grind higher from 2 billion to 6 billion. And then from 6 to 15, it's like nine months. You have to own it for two and a half years to get that nine months at the end where it's passivized. I want to harvest that. Once you're in stuff that's in the S&P 500, it tends to be much more expensive. So you can look at two businesses, and once the S&P 500 trades at 25 times, and one that's not in anything, it trades at six times.

And the one that's smaller often is growing faster because just more large numbers means it's harder to grow. You always have the optionality that the big guy at 20 times buys you a figure six times. See, why buy this 20 times? You can buy the figure six times. And there's also a small chance that they get acquired, but a much bigger chance that

multiple spans and eventually get handed the index. And so we tend to be kicking around in that like one to five billion range. You know, look, it used to be when I first started in this industry, there were a lot of things in the 100, 200 million range that are growing really fast. Those things tend to stay private now. Public company costs are, you know, obsessive. And

And so it doesn't make any sense. Those things stay in the private market. Private equity owns them. They let those businesses mature outside the stock market. The stuff you see in the higher-million market, Java tends to just not be very good. It tends to be very fragile businesses. It tends to be very speculative stuff that needs every capital, like biotech or something. So that's not really where we go hunting. It doesn't mean we won't go hunting. But even like 500 million, it tends to be sort of like, eh, it's really in that billion range because it's different viable.

$100 million to $10 million, where you get that escape velocity or $6 billion, whatever the number is, you're looking at something that's 10, 20x, that's a really heroic return. But asking someone to get $2 billion to get $6 billion, that means you get a triple. That's not so hard to do. Just you retain some earnings, buybacks to stock, the earnings grow. It's not impossible to do over three years. And so I'd rather hunt it there. That makes sense. Robert Leonard :

And I'm sure if you ask me this question in five years, I'll tell you something totally different.

You mentioned a little earlier just about obviously capital inflows and outflows and how, depending on what's moving right now, like you said there, a lot of the US businesses are moving. And so people that you know in these really interesting and high growth emerging markets aren't even investing in their own markets. So I kind of wanted to circle that around to patients and asking you about patients, because obviously a big part of investing success requires patients. If you're not patient and you're constantly looking for

the next big thing to happen repeatedly, you're probably going to end up losing money because I think like you said, your first rule obviously is to not lose money and there's definitely a degree of patience required. So how are you dealing specifically with the kind of inevitable times you're in the market where you have to stay patient? How are you avoiding taking unnecessary action specifically because maybe you're bored and maybe a position that you really like hasn't moved over maybe call it a year or so?

I just got a servant. I got a farm. I got my farm. A lot of my success in this business is being really patient, really stubborn, and willing to suffer a lot. You know, I...

I find a lot of my friends, if something happens and the stock's down 10%, I'm like, "What's going on? Why should I sell something?" I don't know. Stocks just move. Stuff happens. Bad news comes out. "Is this cheese?" He says, "No, it's bad news." A lot of times, the best thing you can do is not be in front of your screens. You make decisions. Then you let those decisions mature.

And some are going to be good decisions, some are going to be bad. But you need to let it play out. I mean, all of a sudden, sometimes a piece of news comes out and you go, well, the thesis changed and you smash it. You just got to get out of it. That's kind of weird. Usually, theses don't change on press release. Theses change. It's just like over time, it kind of just doesn't work. It just kind of like grinds and it's always like two...

bad piece of news, one good piece of news. And so you have plenty of time to just say, "Let's reallocate the money." Being patient is really hard. Being unengaged in the day-to-day is the hardest thing to do in this business. You don't want a vacation, like I said, like a joke. You just need to leave the office and go surf and just get some distance between you and the screen. It's like,

Because if you share the screen, you're probably putting orders in. If you're putting orders in, you're probably just trying to get out. The venture inside is different. But our core book, if I'm trying to buy and sell, say, Joe, I don't know, interest rates go up, interest rates go down. Trump tweets every three minutes. I don't know what that means to the fact that I own a bunch of land at $0.20. Because it's a good spot to be. I mean, the land's going up. I'm earning high returns on my capital. So...

I think it's really hard to be patient. And I think, especially the world that we have, we're... Remember, we talked about the very beginning.

I want a hedge fund. A lot of people run hedge funds. Their hedge funds mostly are focused on having no down months, which means that they frantically have to avoid problems. "This is going down. I got to sell it. This is going down." When it's going down, I'm like, "I don't want to sell it for less than it was yesterday. I'm going to buy some more incrementally." But their mentality is you sell on the way down, you buy on the way up because you don't have down months. And my mentality is the average stock moves around a lot. It's really random.

Another point that I wanted to bring up here is how you run the fund unhedged for pretty much all time. And so your thought process there really resonates with me because kind of getting to your point here about what other funds do, a lot of the times they are hedged and they're using complex hedges. If I buy stock XYZ and it goes down, then ABC will offset it by going up. But in practice, I think the gains and losses from these hedges

tend to just cancel each other out over time, leaving you with kind of a mediocre performance. And worse, let's say you have a really, really good idea that has a long-term tailwind and can maybe compound over multiple years.

If you're then hedging it, you're basically just degrading that upside potential with another idea that's likely to underperform. So for some of the value investors that are listening, many of whom are definitely investors who are trying to build portfolios specifically catered to their best ideas, how do you think about the trade-off between accepting volatility versus trying to smooth the ride? And what advice would you give specifically to investors who feel tempted to maybe hedge, but may not realize that they're just watering down their best idea? Robert Leonard :

Man, there are times where hedging makes sense. Stocks, about every three to five years, go down a lot. And they last for about six months, and then it's over. And if you're really good at timing this stuff, you should be hedging. Most people are not good at timing this stuff, including me. I'm terrible at timing this stuff. I'm always too early, and I usually give up turning a hedge right to where it actually falls apart. That's why I don't hedge anymore.

I just don't believe in it. Well, stocks go up over time. They go up a lot over time. And if you own good companies, they're almost immune to the volatility. And oftentimes, whatever hedge you're going to use is going to be tied to MAC-20, which is probably not really correlated to what you own anyway. It's not correlated to what we own. So I don't really understand it. I mean, if you bearish MAC-20, go short MAC-20. But don't think of it as a hedge. Think of it as a directional thing.

But I found a lot of my friends in this hedge fund industry, they do really well in their long book. They're actually way better stock figures than the market. And then they suffer on their short book. And then they track the market, underperform slightly, which is unfortunate because let's say their long book is doing 1,000 bps of actual alpha, they lose 1,500 bps of the short book. And I don't understand why they do it.

Plus, when you're trying to hedge, there's always slippage costs as commissions, there's this virtual cost, taxes, which are made for clients. I don't think it makes any sense, really. I mean, what I look at it is that I know there's going to be volatility. I know that about every 18 to 24 months, we're going to have it down 30, 35 even. I tell my clients this, when the market really gets hit hard, we might have it down 50. I mean, we had it down 50 during COVID, it's going to happen again.

And the whole point is you set up your portfolios that when there is a down 50, you don't get kicked out of the game. You run with leverage profiles that lets you hold on to what you want to hold on to. And hopefully at the bottom of the cycle, it's going to be early, so you're going to average in too soon, and you get to buy some more.

And that's why we target 115, 125. It gives us room to add on a proper callback. It gives us room to cycle some stuff around. I know that I'm going to have it down 30. I don't know. But I like to say that Venture is going to do very well in a moment like that. It'd be additive. It would just let me have that cash flow to average down too. But I just accept it. And I think

Every client in my fund, I have told now that we will have a down 30 to 35, 18 to 24 months, we expect it. And if you're not prepared for that, don't invest. And if we have one of those, you should give us more money. It's a great time to invest. And basically, it's inevitable. And so you have the hedge fund that decides they're going to raise $10 billion. That's their business plan. I don't fault them.

They want to have no down ones, they have to be hedged. Fine. My business plan is to grow my PA. And I accept that we're going to have a lot of volatility. Once you accept this, it's very cathartic. It's very calming. It's just like, "Huh, we're down 10%. I guess we'll be down 10% to 20% more." And then it probably still doesn't go down much more. If it's happened to you a bunch of times in your career, you get used to it. And

I just think the hedge fund world, because of the need to always be raising capital, has just never accepted this fact. And because they can't accept it, they panic and they scramble and this makes the problem worse usually. And to any hedge funds listening to this or to anyone else who's listening, I mean, just accept that it's going to be volatile and you can't really do much about it.

You wrote, inflection investing works in most market environments, even the ones where most market participants are chasing, let's say, an AI bubble, assuming there actually is an inflection in underlying financial performance. So my question here for you is, what are the signs of an inflection point that maybe value investors should wait for before deploying capital into an optically cheap, but maybe stagnant business? I know you said that you're always too early here, but maybe you could share some of your lessons on how you can maybe optimize that into the future.

Well, I mean, it's obvious, but it's reflecting, right? I mean, what Wall Street cares about, there's only one thing they care about. They want to see revenue growing and they want to see earnings growing. That's it. And Wall Street tends to have a preference for revenue growth as opposed to earnings growth. Because of the Amazons in the world, they've been deluded into thinking that if you keep growing the revenue for long enough, eventually your earnings catch up.

Sometimes they do, sometimes they don't. But as a result, Wall Street really cares about revenue growth, which is why we had all these weird Ponzi bubbles where companies will buy a dollar of revenue because they do it in a negative 20 gross margin. And if you let me buy something worth a dollar at a discount, I'll buy a lot of it. So all this revenue grows and then they need to raise more money. And it's a nice little Ponzi bubble until it comes apart. We see a lot of these Ponzi cycles. Robert Leonard

But Wall Street wants to see that growth and they want to see it accelerate. Remember rate of change. So you look at a bunch of industries and you say, what industry will next year have both revenue growth and earnings growth? And the rate of change is going to accelerate. Because a lot of businesses are pretty steady. They grow at 10% a year every year. So you need the growth rate to accelerate to 20%. It needs to be faster than what everyone's modeling. A lot of things I look at, I kind of check around and break even. And if you think positive, it's really, really good.

Because you get more acceleration. But that's all you're looking for. It's pretty obvious. I mean, you don't have the AI thing. I'm kind of a little bitter that I didn't catch it. But look, these things accelerated. The revenue has exploded. The earnings actually, some of the businesses, there were earnings.

But the revenue has absolutely exploded. I get why people got excited about it. Totally get it, right? And I get why some of the things I own that went down last year, it didn't accelerate. It was year three of a 10-year cycle. We had deceleration this year. And so, okay, I get it. I use Suffer because my businesses are suffering. And those businesses need to prosper because it's actually electric. I get it conceptually. I mean, I'm one of those guys that likes to look at it.

earnings and valuation, but I understand that certain people don't care. So good. Look, let the tech guys have fun one year. It's not like they haven't won 20 years in a row. Go home and have homework a year.

So I really enjoyed one interaction that you shared with a friend who regarding Nvidia. So you said your friend was upset because he didn't own Nvidia. And since he was trying to track an index, which we've been talking to about a lot this episode, his performance was lagging behind that of colleagues who obviously did own a business like Nvidia. So I think this is a really interesting example because I feel it's kind of like an echo chamber of the market at large. Investors are pretty social people.

And they have an excellent idea of what their colleagues and friends buy because either they talk to them or there's a ticker flashing at them throughout the day telling them what's being bought and sold. But you've kind of managed your investing game specifically to bypass this pain point that most investors have navigated. I'm just interested, how exactly did you land on this approach? And also, more importantly, why do you think it's so hard for other investors to kind of navigate that issue?

Well, I think the reason it's hard is that for 18 months, all people talked about is NVIDIA. I mean, look, NVIDIA peaked out last summer. It's gone kind of nowhere, incrementally down. Everyone still talks about it all day because that's all the media wants to talk about. I mean, it treats tens of billions of stock a day, hundreds of billions of stock a day. I think the option treating NVIDIA is more than the stock market itself. So it's this giant casino and everyone wants to be in the casino. It's fun to go to the casino. I totally understand why there's a lot of focus on that.

And look, we've traded NVIDIA, mostly from the short side. We've done okay. But I understand why there's a certain draw. And when you have a very large stock that goes up every day, and it's a large piece of people's benchmarks, there's a certain incentive to overweight it because it's going up, which means that you have to overweight it more if it goes up. And it's very reflexive. And I can understand why a guy that runs a multi-billion dollar mutual fund where

where outperform is 50 or 100 reps, that fuels a lot of pressure when he's underweight NVIDIA and it just won't pull back and let him in.

I had a friend who was crying to me about it. The way he was crying, I thought he was short. No, he was just 100 bps underweight. I don't know. I just don't think that way. Well, I guess the video was a multi-bagger, but I'm mostly looking for stuff that will multi-bag. I have large cap stocks in these benchmarks. They don't multi-bag. Every year, it works. A lot of them, they do 20%, 30% a year. That's a really good year. I just don't care. It's

It's not my world. So I just don't really think about it much. I mean, you see it. Everyone talks to you about it, but it's just not my world. My world is a bunch of things that no one's talking about, no one's thinking about. And when they start talking about it, I actually exit. So Harris, I want to just say thank you so much for coming to the show today and sharing your insights with me and my audience. So I'd love to give you a handoff and maybe let you tell the audience where they can learn more about you.

Sure. I mean, I always say go follow me at Twitter. I guess they call themselves X this week. My handle is Eddie Chubby. Otherwise, go to my website, PRACAP, P-R-A-C-A-P.com. We have information on my blog there, but I also write a blog. I used to write a lot more. I tend to write when something is happening that's interesting. But honestly, it's been a really confusing world. So I've written less lately, but that goes in cycles.

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