TIP734: My Investment Philosophy w/ Clay Finck
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You're listening to TIP. In 2013, I bought my first stock at the age of 18 and managed to lose all my money. I was quite devastated, but that did not keep me from trying to figure out where I went wrong and how I could do better next time. Luckily, I bought Apple shortly after that first investment, which made me multiple times my investment in the years that followed. Over the past 12 years, I've made countless other mistakes and learned many lessons the hard way. In 2021, I

I managed to get my dream job working with The Investor's Podcast Network, and that's when the learning went into hyperdrive. In this episode, I'll share my overall investment approach, the potential edge I have as an individual retail investor, what asset classes I invest in, some of my portfolio holdings, and much more. My investment journey has been quite a wild ride, and I feel a great privilege to being able to share it with you all here today. So with that, let's get right into today's episode on my investment approach.

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, Playthink.

Welcome to The Investor's Podcast. I'm your host, Clay Fink. And today's episode is a bit of a different one. While most of my episodes on the show are interviews with great investors or a review of some of the best books on value investing, today I'm going to talk specifically about my own personal investment approach and some of my portfolio holdings. Since I joined The Investor's Podcast Network in October of 2021, my investment philosophy has changed drastically.

That's not to say that I found the magic formula or the quote unquote right way to invest, but I've discovered an approach that I feel suits my skillset and temperament, even though oftentimes I feel like I have no idea what I'm doing. I don't analyze equities full-time or manage my portfolio full-time like many of the guests here on the show. So sometimes I feel like I'm in a boxing match with one arm tied behind my back. Let's kick this episode off by saying that none of this should be taken as investment advice.

please consult an advisor before making investment decisions. So with that out of the way, let's get started. I first got into investing when I was around 18 years old. And ever since then, I've been enamored with the idea of making money by simply out thinking other people. Although investing has been quite a rewarding experience for me financially, what I love just as much is the game itself. Dan Rasmussen shared with me on the show that investing is like the intellectual Olympics.

The smartest minds show up to play, and at the end of the day, the results speak for themselves. There's no debate over "who won or lost," and you can clearly see what the best ideas were. It does not matter how upset someone is about the rise of Tesla's share price over the past decade. Your excuses as to why you were wrong don't really matter. The results speak for themselves, and shareholders can walk away with a ton of cash if they'd like. The "gold medal" for many in investing

is outperforming some sort of benchmark, oftentimes the S&P 500. Without a deep understanding of the game, you're bound to underperform. And one of the best parts is that the learning never stops. For me personally, my goal is not to outperform some arbitrary index, but to achieve my own financial goals with the main goal of becoming financially independent. Simply put, financial independence is when my liquid assets are equal to 25 times my annual expenditures,

Depending on your lifestyle and where you live, this number is going to vary drastically. So for simplicity sake, let's say that I can live on $100,000 per year, then that would require that I have a portfolio of $2.5 million of liquid assets. And by liquid assets, this would exclude things that I wouldn't want to sell and aren't very liquid. So think about things like your primary residence or your car.

The stock market obviously plays a key role in helping me achieve this goal of financial independence. Over the very long term, stocks have historically been the best asset class to build wealth in a somewhat passive manner. Over the past 30 years, the S&P 500 has average returns of 10.7% with dividends reinvested. And the stock market gives you access to invest in many of the best business models in the world. And you're allowed to diversify amongst them.

Should things change, you're free to enter and exit these stocks as you please. So when it's time for me to say buy a house, for example, I'll likely liquidate some of my holdings to help fund that down payment. And this really can't be done with a few days notice with things like private equity or real estate investment, for example. If I had to share what level of returns I'm targeting, I would be quite satisfied with average annual returns of 15% per year. I also

I also want to be sure that I'm outpacing the rate at which the US dollar money supply is expanding, which over the past 30 years has been 6.8% per year when measured by M2. This means that, say if I'm looking at bonds, for example, say if there's a 30-year bond that's yielding 5%, then this just is not interesting to me because the yield that I'm getting on those bonds is not exceeding the dilution rate of the US dollar. Robert Leonard :

So my approach to investing in stocks has been mostly influenced by three investors, Charlie Munger, Nick Sleep, and Chris Mayer. I'll start by touching on how each of these investors has influenced me. I've learned so much from all three of them. So starting with Munger here, I released an entire episode on Munger back on episode 598, shortly after his passing in November of 2023. Munger, of course, is an investing legend, and he's willing to bet big on his best ideas.

Although I'll never be able to build the level of knowledge and conviction that Munger has around an investment idea, it's something I can try and aspire to. One of my favorite quotes from Munger is, the big money is not in the buying or selling, but in the waiting. In many professions, the world rewards activity. A doctor might get paid more for having more appointments. A lawn care business expands by acquiring new clients and getting new lawns.

An e-commerce store grows by creating new products to increase the customer's lifetime value, but in investing, it's different. Many of the best investors are really good at doing nothing. When Buffett took control of Berkshire Hathaway in 1965, the stock traded at around $19 per share. And as of the time of recording, shares trade for nearly $750,000. Buffett and Munger made most of their fortune by simply holding onto their shares. Another powerful Munger quote,

is about how the returns of a stock eventually converge with the return on the business itself. He stated, I quote, "Over the long term, it's hard for a stock to earn much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return, even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years,

Even if you pay an expensive looking price, you'll end up with one hell of a result." End quote. Robert Leonard : Costco is, of course, a great example of this in Munger's portfolio, which has also been a key holding in Sleep's portfolio. Costco over many years has earned a high return on capital, and to no surprise, this has led to earnings increasing at a solid clip in the stock following suit. Of course, the stock is much more expensive here in 2025 than it was when Munger joined the company serving as the director in 1997.

but it's an excellent case study to learn from and better understanding the driver of excellent returns and the benefits of sitting on your hands. In addition to exercising patience, Munger's spear phishing approach also resonated with me. It's that idea that once you find a great stock, you want to bet big. I don't have the IQ points that Munger has to accept holding substantial amounts of cash and sitting on the sidelines in that manner. So I'm pretty much always fully invested.

But sometimes when you do find an amazing opportunity, you can fund that position by selling one of your other positions. And this is a move we don't want to take lightly as we often know our current holdings much better than the bright, new, shiny idea. While many investors claim that you need at least 20 or 40 stocks in your portfolio to be properly diversified, Munger is totally fine with holding three stocks in his portfolio. Again, I don't have near the IQ that Munger has. My portfolio has 10 stocks.

two of which we can call starter positions, which are relatively small, which I'll be getting into a little bit later. The last thing I'm going to do is advocate for a three-stock or nine-stock portfolio. Munger himself has admitted to making major mistakes throughout his career. Lastly, Munger encourages us to take a simple idea and to take it seriously. Investing is a game that I love, and for me, it's all about compounding. With every dollar in my portfolio, the intention is to compound it at a high rate

which for me is oftentimes 12% to 15% or more, depending on the position. A few months ago, my co-host Stig Brodersen shared a portfolio update with our mastermind community, and he said something that really resonated with me. He said, "I want to get the best possible return with the least amount of risk, and it matters less whether that is achieved only with stocks. If I could get 100% return without risk by putting my money in coffee futures or Brazilian treasuries, I would.

Similarly, I want to compound my portfolio at a high rate with the least amount of risk. All right, turning to a couple of lessons I've applied from Nick Sleep. Sleep has a fairly similar investing approach to Munger, but he really helped me reinforce many of the same ideas. So some concepts that come to mind are the focus on the long-term, patience, destination analysis, quality, concentration, and inactivity.

Studying an investor like Nick Sleep is really a breath of fresh air because it's a reminder that in a world filled with so much short-term pressure and people that are focused on the day-to-day headlines, Sleep is living proof that one can still be wildly successful by focusing on businesses with a long shelf life that can provide an immense amount of value to society and create a win-win all around. Nick Sleep

So when he shut down his fund in 2014, his investors were quite disappointed, but they really had no reason to be. Sleep had told his investors that they can simply do what he's doing, which is to put one-third of the portfolio in Amazon, one-third in Costco, and one-third in Berkshire. And Sleep has obviously done very well with those stocks, holding them since 2014 even. Sleep, of course, puts a tremendous amount of focus on business quality, but he's also weaved this idea of quality

into all aspects of his life. It's shined through in the way he's designed his fund, structured his life, structured his relationships. Sleep had stated, "You really want to do everything with quality, as that is where the satisfaction in peace is." To learn more about Sleep's investment approach, I put together an episode on his letters back on episode 492. Also, William Green in his book, Richer, Wiser, Happier, he dedicated a chapter to Nick Sleep and Kay Zachariah

which I also cannot recommend enough.

And then the third investor I'll mention here is Chris Mayer. I've had Chris on the podcast three times now, and I'll be interviewing him again this fall for his new book. Mayer's the author of the popular book, 100 Baggers, and is the portfolio manager at Woodlock House Family Capital. Chris did a great job at helping me simplify the game of investing. You can think of owning stocks as owning a compounding machine. Some machines are going to compound at very low rates or maybe even negative rates,

some machines are going to compound at really high rates. And this might oversimplify things in some cases, but I like to think about how the level of compounding is largely driven by the return that the business generates and how much capital is able to be reinvested to generate those returns. So let's take a company like Costco. Let's say that when Costco builds a new warehouse, they're targeting a 15% return on investment from building that store.

So they take the cash that their existing stores generate and use that to go out and build new stores. But Costco is like many businesses in the sense that they aren't reinvesting 100% of their earnings. Let's say that in this case, they've reinvested half their earnings and the rest is paid out as a dividend at a 1% yield here for simplicity's sake. So half the cash flows are reinvested at 15%, which for shareholders generates a 7.5% rate of compounding. Then you have the 1% dividend,

And then you also have the organic revenue growth on your existing store base. Let's say that's 2.5% in this example. So if we add all these numbers together, that gives us approximately an 11% rate of compounding for shareholders, not taking into account the starting valuation. Now, when you look at different businesses, you're going to find different reinvestment rates, different returns on capital, and each company's durability of returns is going to be different. Back in early 2023, I

I looked at Constellation Software. This was a business that was reinvesting all of their cash flows at more than a 20% return, and the stock was trading at around 30 times free cash flow. So I looked at Constellation. I saw a rate of compounding of 20% or more. If it turned out that they were starting to reach their limit of how much they could invest, then their returns would gradually decline to say 15% and eventually 10%, but they didn't show any indication that that would happen over the next few years.

Fast forward to 2025, they're still reinvesting everything. The stock has seen some multiple expansion as they've showcased their ability to continue to do larger deals, put hundreds of millions of dollars to work, and their revenue growth in 2024 was nearly 20%, so, so far, so good. On the flip side, my investment in Evolution AB did not fare as well. As their growth gradually declined, the market punished the stock severely.

Thankfully, I managed to exit my position at around 970 Swedish kronor. And it's an example that if you miss the mark on the assessment of the quality of the business, then the market has the potential to hand you a 50% drawdown or more after re-rating the stock. But the story of evolution certainly hasn't reached its conclusion. So we'll see how that one plays out over the next few years. Anyways, so that is one helpful mental model I've picked up in simplifying how to think about businesses

and the rate at which they're compounding and the durability of that rate of compounding. To a large extent, I've cloned a lot of what Chris likes to look for investing in companies. This includes high return on capital and high rates of compounding, oftentimes 15% or more, a long runway to grow and reinvest back into the business, a strong competitive moat in order to maintain those high returns, managers with high insider ownership and skin in the game, ideally they are founder-led, and a conservative balance sheet.

Chris especially helped me shed light on the importance of owner-operators with skin in the game. Having that strong leader navigating the ship seems to be especially important since they set the direction of the company and play a key role in impacting the culture. Investing alongside owner-operators with skin in the game ensures that you help avoid the agency problem where the interest of the manager is at odds with the interest of the shareholders. Once management has a significant share ownership, you then become partners and

and what's good for them is good for you and vice versa. As a general rule, people with their own wealth at risk tend to make better decisions than those who are hired guns.

My investment philosophy is also highly influenced by a study by Hendrik Bessembinder, who I had on the show back on episode 667. His study titled, Do Stocks Outperform Treasuries? Found that from 1926 through 2016, just 4% of stocks accounted for all of the net wealth creation over that time period. Said another way, a select few stocks in the market deliver the vast majority of the gains. Going through such a study is a humbling experience

and a reminder of just how hard it can be to pick winning stocks and generate good returns through stock picking. So my takeaway is first, I want to try and own the best of the best businesses. And second, when I found what I think might be one of these exceptional businesses in my portfolio, the most detrimental thing I could do is to sell it simply because it's doubled or tripled, or sell it because it's reached what I deem to be fair value. Two

Too often, the biggest mistake that an investor can make is to sell a great business too early. This study also highlights the power of skewness and asymmetry in the stock market and investing in general. Let's say you pick two stocks in over 10 years, stock A goes up 10X and the stock B goes to zero. Despite half of your portfolio being a terrible investment at the very beginning, the portfolio overall still would have compounded at 17% per year.

And funny enough, I had a very similar experience when I first started investing. Two of the first stocks I bought was an offshore drilling company called Cdrill, and then I also bought Apple. I put around $1,000 in each, which to me at the time was a significant amount of money. I bought Cdrill for the sole reason that my friend's uncle, who's a stockbroker, recommended it. And I assumed that since oil prices were low, then Cdrill would surely benefit once the oil prices recovered because of

kind of understood cyclicality at that time. And I probably assumed that if a company was publicly listed and recommended by someone who presumably knows what they're talking about, then surely it would make me money. And then I also bought Apple. Frankly, due to luck, I didn't have any great insights on that one. And I noticed that everyone had an iPhone. So how could that stock lose? Well, with time, the shares of Cedril would continue to fall and fall and fall and eventually go to zero. It was

It was quite a painful experience losing that $1,000 at a young age, but a valuable learning lesson. But my shares of Apple would go up 5X over the five years that followed. Although this was nothing more than pure luck as I was just starting out, it gave me early exposure to the power of asymmetry in the markets. I want to expose myself to opportunities in the market that I believe have limited downside and high potential upside if I hold on for five to 10 years.

Great businesses have a tendency to bail you out over time, even if you think that you're overpaying a bit initially. When you invest in subpar businesses, I just don't see that same level of positive asymmetry that I'm after. Let's take a quick break and hear from today's sponsors. If you're a high net worth individual, a family office, or an institutional investor managing significant Bitcoin holdings, there's one question you need to be asking. Is your Bitcoin insured against loss?

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All right, back to the show. Another lesson I picked up from my investment in Apple was that I was able to make a great return by buying shares in a company that everybody knew about. It's not that the information wasn't out there or that you had to find something that wasn't discovered by others. You don't need to have an informational edge as an investor. Sometimes it's just about being patient and being willing to hang on to a great company longer than most others are willing to.

Today, the average holding period for a stock is 10 months. So if you're able to find a great business at a fair price, hold onto it for more than five or 10 years, I think you can get a huge leg up over your peers. Peter Lynch has said, "If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain 10,000 or even 50,000 over time if you're patient." End quote. I wanted to mention another key piece of research that's influenced my approach.

This is from a June 2013 research paper by Credit Suisse. They studied hundreds of firms around the world from 1993 to 2013. And at the beginning of each quarter, starting from '93, they divided companies into four quartiles based on the returns of these underlying businesses. They found that over that 20-year time period, 51% of firms that started in the top quartile ended the period still in the top quartile.

And 79% of firms that started in the top quartile remained in the top half of firms as measured by the businesses' underlying returns. So they found little evidence of reversion to the mean and found that great businesses tend to remain great or become good businesses. In that paper, they wrote, I quote, "Corporate profitability is sticky. Wonderful companies tend to remain wonderful, and poor companies tend to remain stuck in the mud."

Our empirical evidence suggests that sustainable corporate turnarounds are difficult to execute." Another key finding from the study was that at the beginning, the whole world could see what the best businesses were when looking at the returns on capital, yet many in that top quartile would go on to deliver outstanding investment returns. If markets were truly efficient, then this wouldn't have happened. The prices of such stocks would have been bid up to the point where buyers couldn't earn these excess returns,

but they still did. So a lot of my approach stems on this belief that the market has this tendency to underprice quality over long time periods. Now, that's not to say that you can pay any price for a stock. Having a margin of safety is essential. Terry Smith stated, since stock markets typically value companies on the not unreasonable assumption that their returns will regress to the mean, businesses whose returns that do not do this can become undervalued.

Therein lies our opportunity as investors." End quote. Quality investing in theory looks easy, but in practice can be incredibly difficult because you can't exactly know which companies will remain high quality. One of the things I like to look for in a business is that it has multiple tailwinds at its back. So earnings growth is of course important and desirable for investors. But if you have multiple drivers fueling that earnings growth,

then a business can simply just point their sales in the right direction and let nature take its course. For example, booking holdings is seeing significant market share gains. They're expanding into new geographies. They're benefiting from travelers naturally booking more of their stays online. And they benefit from inflation as they oftentimes get a set percentage cut of the price of a traveler's stay. So all of these oftentimes lead to more earnings,

one year after the next, it's akin to what Buffett might call a one-foot hurdle. They don't need to go out and reinvent the automobile industry or send rockets into space at one-tenth the cost of what NASA does. Newton's first law of motion states that an object in motion stays in motion. Many companies simply ride things like a secular tailwind, and they benefit drastically. The trend is your friend.

I'd also like to talk about the importance of great management. While value investors pride themselves on being conservative in their assumptions regarding valuation, I feel that sometimes this can serve as a hindrance and keep them from partnering with exceptional capital allocators. The stock market serves as a chance for anyone to partner with world-class operators. And oftentimes, the market underestimates management's ability to effectively allocate capital.

This ties in well with the concept I've become a bit enamored with in recent years, which is sidecar investing. Sidecar investing is a term that was introduced by Richard Zeckhauser in his famous essay, Investing in the Unknown and Unknowable. And I think it's a must read for all investors. Zeckhauser wrote, "Most big investment payouts come when money is combined with complimentary skills, such as knowing how to develop real estate or new technologies."

Those who lack those skills can look for sidecar investments that allow them to put their money alongside that of people they know to be capable and honest." So from 1965 to 2025, Buffett is probably the best example of a sidecar investment. Buffett got paid a measly $100,000 per year to manage Berkshire Hathaway. It was a privilege to be given the opportunity to invest alongside someone as capable and honest as Buffett.

And I think that's taken for granted by too many people over the years. Exceptional managers get access to opportunities that everyday people just don't get access to. But that doesn't mean you can't benefit from those opportunities as well. For example, Buffett got access to an extremely profitable deal with Goldman Sachs preferred stock and common stock warrants during the great financial crisis. So not only did Buffett benefit greatly from that deal, but all of Berkshire shareholders did as well.

Zach Houser advises that when the opportunity arises to make a sidecar investment on favorable terms alongside such capable and honest individuals, we should not miss it. It also ties into the idea that success begets success or wealth begets wealth. Someone as smart and well-connected as Mark Leonard has a tremendous amount of resources and access to deals at his disposal. Most don't stand a chance going against him toe-to-toe,

but by simply buying shares in his company, you get to participate in that inherent advantage. It's not something you find in a line item on the balance sheet, but it's an asset that is very real. Additionally, a formal regulatory environment helps reduce the risk for outside passive minority shareholders. The world is a chaotic and unpredictable place. And by partnering with exceptional managers,

You are betting on the smartest people in the world being able to navigate through such choppy waters. Capitalism is brutal and management must know how to navigate the storm. However, we should never forget that no one creates a stock just so you can make money. Every stock is available to you only because somebody else wanted to sell it. In a recent talk, Monish Pabrai discussed the concept of buying and holding great businesses

and how we should be very reluctant to sell a great business that appears expensive.

Now, one of the reasons he shared is that we can never really know what the intrinsic value is. The future is unknowable, and since exceptional managers have a way of continuing to pull rabbits out of the hat, we should be extremely reluctant to part ways with such exceptional managers. In fact, I think exceptional managers almost remove the need to accurately assess the intrinsic value of a business and make forecasting close to unnecessary.

If you bought shares in Amazon, Meta, Berkshire Hathaway, Microsoft, or a host of other exceptional companies, you've done well essentially no matter when you bought it. Related to holding onto winners, Buffett has a quote to suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team, end quote.

What's also interesting about the sidecar investing approach is that it puts less focus on the underlying business and it prioritizes the people managing it.

Imagine how many people there are that own Berkshire, they've bet on Buffett, they really believe in the future he's building, but they know very little about railroads, soda, or insurance. Similar to the traits you see in someone like Buffett, I'm looking for managers who are authentic, they have a track record of success, they understand capital allocation and how to maximize per share intrinsic value.

They aren't keen to issue shares or hand them out to employees. They're extremely ambitious. Being a CEO is much more to them than simply earning a living, and they have skin in the game. One of the difficulties in discovering these outsider CEOs is that they tend to not be promotional. I take being promotional in itself as a sign to proceed with caution. I want to invest with plow horses, not show horses. What's also great about the stock market is that from time to time,

the market throws a fit and will misprice great businesses. In the 2000s, when Amazon's net margins fell substantially, the market took Amazon's share price from $60 to $40 on this news. The reality was that Jeff Bezos continued to reinvest in the company, suppressing short-term earnings to make the business look temporarily less valuable. Because you might see conservative accounting and the propensity to think long-term,

it can be easy for the market to underestimate the ability and the runway of a great manager. A friend and a fellow sidecar investor shared another theory with me. He said that the market undervalues great managers because the value they create can be lumpy and unpredictable. And markets do not like lumpy and unpredictable. I always like to say that great businesses tend to surprise to the upside, while subpar businesses tend to surprise to the downside.

Despite the popularity of William Thorndike's book, The Outsiders, a people-first investment approach isn't all that popular and unlikely to become too crowded. When I first got into investing when I was 18, all I cared about was the numbers. Whether it was the price to earnings ratio, price to book, the growth, et cetera, the investment industry attracts a host of people who think just like that. A people-first investment approach requires effectively judging management

which is not an easy thing to do, and certainly won't be found by looking at a number. This might be a controversial statement, but I think some of the best investments are when the numbers don't make a lot of sense when you look at it at first glance. The classic example is Bill Miller buying Amazon when it displayed little profitability. My sense is that Bill Miller did not necessarily bet on Amazon per se, he was betting on Jeff Bezos. Robert Leonard :

Now, in order to get different results than the crowd, you must do things differently than the crowd, which brings me to my portfolio. The first thing I'll say here is just reiterate that none of this is investment advice. I'm simply sharing what I'm doing with my own money. And when looking at all the positions, know that my cost basis might be much different than the current market price, either up or down.

The vast majority of my portfolio can be put into two buckets. I have my hard money bucket, which primarily consists of Bitcoin, and I have my bucket that consists of high quality equities. So starting with the first here briefly, I don't really have anything new to say about Bitcoin. It's a core part of my portfolio, and I got interested in it thanks to TIP, which first started producing content about it all the way back in 2015 when it was trading at around $200 a coin.

It's still out there online and you'd be able to find the episode if you're interested in checking that out. I started adding in size to Bitcoin relative to my net worth in 2020. And since then, the average annualized return of the asset is north of 60% per year. That's six zero, 60. And it goes without saying that past performance does not necessarily translate to future returns. As of the time of recording, my cost basis is around $24,000 per coin.

And I plan to continue to dollar cost average into the asset as long as I expect it to help me reach my financial goals. I have no clue what Bitcoin's going to do in the short term. It feels like the analysts in the space are as wrong about price forecasts as anybody, but the long-term thesis to me is compelling. If you'd like to learn more about Bitcoin, then I would simply point you to Preston Pitch's podcast, Bitcoin Fundamentals, which has really been an indispensable resource for me.

And then Jeff Booth and Lynn Alden, they also have been instrumental in how I view the asset. They do a lot of podcasts and have done some great work in terms of books and whatnot. Turning to the second bucket, we have high quality equities. As of the time of recording, I owned 10 individual stocks here in June, 2025. Topicus is my top position. Dino Polska used to be number two, but I actually just sold half of it

to buy a new name in Poland that is in the Constellation Software universe. That now makes Lumine my number two position. Constellation Software is number three. And then I own Booking Holdings and a few microcap and small cap stocks, many of which I'm not able to mention here on the podcast just due to the size of our audience. And we don't want to influence the market at all just due to the low amount of liquidity in some of these names. So I've discussed Topicus,

Constellation Software and Dino Polska on the podcast in past years here on the show. And just recently, I published a YouTube video on Lumine. So I've discussed many of these names publicly already. I also just did the episode on booking holdings with Kyle a month or two ago. And I'll be sure to get all those linked in the show notes for those interested. And typically, when you just search the names on the podcast app or YouTube, you should be able to find them as well. Robert Leonard

The Constellation Software family of companies is obviously a core part of my overall portfolio. To someone that's new to these companies, I would describe them as the Berkshire Hathaway of software. They're extremely rational and disciplined with capital allocation. They're very shareholder friendly and are able to compound free cash flows in a predictable and consistent manner. Just as Nick Sleep was comfortable sitting on Amazon, Costco, and Berkshire for 10, 20 plus years,

I feel quite similarly about these companies. Constellation is run by one of the greatest capital allocators in the world, Mark Leonard. He started the company in 1995, and he's grown it to a market cap of $74 billion today by just continually acquiring vertical market software companies. Many investors have neglected this stock because it's a serial acquirer, but Leonard has proven to continue to defy the laws of gravity.

and redeploy essentially 100% of their cash flows into new acquisitions that meet their hurdle rate criteria. And Topicus and Lumine take a very similar approach with a few caveats. These are both spin-outs of Constellation. Leonard, like Buffett, has this mindset that when he buys a company, he wants to own it forever. This speaks to his long-term thinking and the culture he wants to build at Constellation. They're also similar to Berkshire in the sense that once they acquire these businesses,

Oftentimes, they're very decentralized. They take a very hands-off approach. They incentivize managers of these businesses to achieve high returns on capital and generate some organic growth. Leonard's also been very candid in his past shareholder letters to help investors understand the company at a deeper level. I personally wish he still wrote these letters like he used to, providing updates on the business.

But management still shares their thoughts and they answer questions at the annual meeting, which I find to be quite valuable. The big question I have with the Constellation family of companies is how AI ends up impacting vertical market software long-term. Some people have told me that VMS will be a low hanging fruit for AI to disrupt. And then there's someone like the member in our mastermind community that's a former portfolio CEO at Constellation. He believes the opposite.

He thinks that AI could actually be beneficial to many VMS businesses. Time will tell how this ends up playing out, but so far, it doesn't seem to be an imminent threat. These companies all seem to be thriving to me. Serial acquirers also, in general, play a big role in my portfolio. It's not lost on me that most acquisitions destroy shareholder value, which can keep many investors away from serial acquirers, but there are some managers who are

Very good at understanding how to create value through acquisitions. I recorded an episode with Nicholas Savas on episode 713 for those interested in learning more about these types of businesses. A relatively smaller portion of my portfolio is in microcaps and small caps. These can sort of be a double-edged sword. On the one hand, you can have very large mispricings in this arena. But on the other hand, it can be more difficult to get at all the information that you're

that you would be able to get on a bigger name, such as Booking Holdings, for example, massive, massive company. The mispricings can exist in this arena for a number of reasons. First is that many institutions might have a mandate that they can't own a stock below a certain size or own something that's within a certain geography. For example, many value investors have started going hunting in Japan because overall that market seems to be trading lower.

than the US, for example. I recently purchased a microcap SaaS company that is based in Japan. And here's some of the characteristics of this name. The two co-founders own over 68% of the shares, likely making the stock too illiquid for the vast majority of institutions. They're the leader in their niche, and they actually recently just acquired their only significant competitor,

Their customer churn rate is below 1% quarter after quarter. They're growing their top line revenues by 15% per year and EBITDA by 20% per year. And the stock is trading at below 10 times owner's earnings. Now, I'm just not finding these types of opportunities in the land of large caps or in the US. And for better or worse, I'm willing to venture into new territory in search of some of the biggest and most compelling mispricings. I'm definitely excited to see how this one pans out over time. Robert Leonard :

The other thing that is appealing about many of my holdings in my portfolio is that I think there's a mispricing partly because I'm hunting where many investors wouldn't even consider going or maybe even looking. I can't count the number of people who roll their eyes about Bitcoin. Constellation Software, Topicus, and Lumine are domiciled outside of the US, and many investors quit their analysis on them once they find out that they're serial acquirers.

And when it comes to microcaps, many funds have a mandate to invest in businesses that are of a certain size, which automatically disqualifies them from investing in microcaps. The point of my approach isn't necessarily to find names that are undiscovered per se, but it can serve as icing on the cake in terms of having the potential to deliver strong earnings growth and multiple expansion. So let's say you have a business that doubles earnings over five years, this is a 15% return, and

let's say the multiple also doubles from 10 to 20. So the multiple expansion would help deliver returns of 32% instead of that 15% that you would get just from the earnings growth. However, when it comes to microcaps, I recommend treading lightly. Microcaps are filled with fraudulent or borderline fraudulent companies, and the gems can be few and far between. Let's take a quick break and hear from today's sponsors.

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All right, back to the show. Robert Leonard : My friend Ian Castle has covered the world of microcaps quite well. He wisely points out that you can weed out much of the junk in microcaps by focusing on profitable businesses. And he mentioned on our show that most of the greatest investors started their careers investing in small and microcaps. Think about Warren Buffett, Joel Greenblatt, Peter Lynch. You can just go down the list. Robert Leonard : Transitioning here to discuss a bit more about what I'm looking for and how I think about monitoring my positions,

One of my favorite mental models is one from William Green's book, Richer, Wiser, Happier. He shared the very simple mental model from Will Danoff. And it's this idea that stocks follow earnings. So over a five-year time period, if earnings per share double, you tend to see the stock double as well. This, of course, doesn't always happen, but it's generally the case, assuming the starting valuation isn't insanely high. And I'll also mention that you might need to make some adjustments to

the accounting earnings. So when he says stocks follow earnings, I kind of think about Warren Buffett's owner's earnings. So if I look at fiscal year 2024 for my holdings, here's what I see. Topicus, they increased their free cash flow available to shareholders by over 40%. Constellations, free cash flow available to shareholders, that increased by 27%. Booking Holdings, they increased their earnings per share by 47%.

And then Lumine, their financials are a bit messy with the fairly recent spinoff, but I'll note that their business is doing quite well. Their revenues grew by 33% over the year. The list goes on and I wouldn't expect this level of results going forward, but it certainly tells me that these businesses are heading in the right direction in terms of compounding shareholder value. Robert Leonard :

Buffett also has a quote in a similar light. He stated, "Your goal as an investor should simply be to purchase at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher 5, 10, and 20 years from now. Over time, you will find only a few companies that meet these standards, so when you see one that qualifies, you should buy a meaningful amount of stock."

put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value." So that's a long way of saying stocks follow earnings. I actually revisited the profile of Will Danoff in William Green's book. Danoff, he beat the market for more than 25 years, and he managed Fidelity's Contra Fund, which is America's largest actively managed fund run by a single person. In fact,

Danoff, he summed up his entire investment philosophy in just those three words, stocks follow earnings. It's so simple that many would believe that it's in fact too simple. Danoff had shared a chart of a Starbucks earnings growth with William during his interview. And over a two-decade time period, he showed him that Starbucks grew their EPS by 27% per year over two decades,

And the stock grew by 21%. And then you looked at the S&P 500 over that same time period, earnings grew by 8.4%, and then the index grew by 7.9%. William writes here, "With that principle in mind, Zanoff searches with relentless drive for best of breed businesses that he thinks will grow to be bigger in five years." Why? Because if a company doubles its earnings per share in the next five years, he believes the stock price will also likely double.

more or less. This generalization is easy to dismiss because it sounds suspiciously simplistic. But remember, investing is not like Olympic diving where the judges award extra points for difficulty." So the point I would like to add here is that some of the best opportunities might just be staring you right in the face. We shouldn't make the game unnecessarily complicated, which is a trap that I think some investors can fall into.

I feel like I can potentially fall for that trap at times too. Continuing here in the book, this mindset has led him to amass enormous long-held positions in dominant, well-managed businesses such as Berkshire Hathaway, a major holding since 1996, Microsoft, Alphabet, he was one of the largest shareholders in Google's IPO in 2004 and has held it ever since, Amazon, his biggest position,

In Facebook, he was among the biggest buyers in the IPO. "This is pretty basic stuff," he says. "My attitude with investing is why not invest with the best?" End quote. Again, Danoff has made a fortune owning many of these businesses that people already knew about. He focused on the fundamentals, saw that they were improving rapidly, they were very profitable, and he decided to hop along for the ride. Just one more excerpt here from the book.

His mantra doesn't sound particularly profound, but Danoff said lies partly in his consistent refusal to overcomplicate. His friend Bill Miller says Danoff consciously focuses on the questions that matter most instead of getting tangled up in distracting details. The pattern is clear. In their own ways, Greenblatt, Buffett, Bogle, Danoff, and Miller have all been seekers of simplicity. The rest of us should follow suit.

"We each need a simple and consistent investment strategy that works well over time. One that we understand and believe in strongly enough that we'll adhere to it faithfully through good times and bad." End quote. So I really deeply resonated with this section on Will Danoff. I aspire to invest in a pretty similar manner. I want to own the best of the best businesses, ones that are increasing their earnings at a good clip, earning a high rate of return on the underlying business.

and have managers that are both honest and capable, as well as having skin in the game.

So let's turn here to talk a bit about valuation. I think this is one of the more difficult parts of buying great businesses and where a lot of people can get tripped up, myself included. I like to take the approach of being approximately right rather than precisely wrong. So in the short run, valuation, it matters a lot. But over the long run, what matters most is people, culture, and capital allocation. Even Danoff is totally focused on

on figuring out how much earnings will grow. And he really doesn't worry all that much about valuation levels, except when they get ridiculous. When I look at the share prices of my holdings over, say, a one-year time period, pretty much every single stock has a drawdown of 20% or more at one point in time. So the market does continue to present opportunities to enter these great companies at discounted prices. And there are even periods when companies are executing at a high level

And the market might not fully appreciate the compounding that's taking place underneath the surface. So for example, in the first two months of 2025, Topicus, they were just firing on all cylinders, deploying more capital than probably anyone would have forecasted for the entire year. They did it in the first two months. Yet the share price was only slightly up on the year. I think I checked in and it was up like eight or 9% through February. So I decided to sell one of my positions

and allocate half of those proceeds to Topicus at around $139 Canadian dollars. The shares are already up 20% as of the time of recording. So the market seems to be rewarding Topicus for getting all that capital deployed. So I think there are certainly periods where the market does offer attractive opportunities. So if someone had looked at a business like Topicus, they likely would have considered it quite expensive without considering what was happening

in recent months within the company and all the capital they put to work at high rates. So in my view, it's well worth paying up for quality because quality companies are worth significantly more than your average company. As long as you're investing for the long term, say five years or more, then most of your attention should likely be on the quality of the business and the quality of the management rather than pinpointing the exact valuation. However, if you're investing in something like a cyclical or a deep value play, then yes,

Valuation is likely of utmost importance, but that's just not the game I want to play. Ironically, Ben Graham, the father of value investing, he himself made most of his money by owning high-quality businesses, even though 99% of his attention was on being a valuation-focused investor and finding the statistically cheapest securities he could find. Graham invested $712,000 in Geico in 1948. And by 1972,

That position was worth $400 million, giving him a 500 bagger. He wrote, ironically enough, the aggregate of profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partner's specialized fields, involving much investigation, pondering, and countless investment decisions."

So not only is buying and holding higher quality businesses more profitable, it also comes with less time, energy, and stress invested. What you might also notice about my portfolio is that I tilt pretty heavily towards software companies. The best businesses are able to grow with little additional capital investment, and that's exactly what you find with a lot of software companies. If you just think about a basic subscription model, it might generate high margins, have sticky customers,

They might be able to tick up prices by, say, the inflation rate, let's call it 3% per year to keep up with inflation. Then your expenses remain relatively fixed. To date, my returns have far exceeded that of the broader market, which I would honestly mostly attribute to luck. Everyone looks like a genius in a bull market, and we can't underestimate the impact that just being in the right place at the right time can be. Recognizing the role of luck is essential to

to keep your head during the good times and keep your ego in check. Humility, I think, is also a key trait for successful investing. I'd bet that if you looked at the investors who did the best over a five-year time period, they likely don't do so hot in the five years that follow. The reason is they probably just got lucky. Another thing I'll highlight is just to keep an eye on the prize, which is financial independence for me. In making investments going forward, I want to ensure

that I'm not sacrificing something that I need to potentially risk losing something that I do need or do really want. So this means not unnecessarily utilizing leverage or putting on a big short position, for example. As Charlie Munger said, you only need to get rich once. And once you get there, the number one priority is to stay there. Having a few big wins can make one feel invincible and like nothing can go wrong.

And putting humility aside and betting bigger on the next investment is what could lead to a catastrophic outcome. So there's a difference between getting rich and staying rich. Staying rich is about recognizing that things are always changing and absolute certainty never exists in the world of finance. Lastly, I wanted to include a section here on the importance of simplicity.

As I mentioned, I don't really have time to analyze and research stocks to the same degree that others in the industry might have. So it's essential that I take an approach that enables me to know and follow the businesses closely enough and not require really too much activity and in and out trading and whatnot. Part of simplicity is being able to easily say no to most things. Buffett said, "The difference between successful people and really successful people

is that really successful people say no to almost everything. So there are thousands of investable ideas at any given time. Most will be mediocre and a few might be compelling from time to time. If there's a reason I can't fully trust a management team, if the growth or return on invested capital doesn't meet my threshold, or if there isn't clear evidence of a moat, then it's totally fine to just pass on the opportunity.

It's easy to be overwhelmed with the number of options that we are presented in the world of investing. You have options, ETFs, active versus passive, growth, momentum, technical analysis, macro forecasting, and many more alternatives. I've simplified my approach by simply sweeping my excess cash flow each month into my two buckets of investments. I don't market time, and in my equities bucket, I put the cash to work in what I believe is the most compelling opportunity at the time.

I look back at some of the great investors I've interviewed over the years, think Francois Rochon or Joseph Siposchnik here on the show. And one of the things that I just love so much about their approach is that it's really pretty simple. They buy what they believe are great businesses at fair prices and hang on to them for the long run. Rochon made the comment to me a few months back that the average holding period in his fund is eight years. In a similar light in his 1977 letter,

Buffett laid out the four simple criteria for selecting any stock. First, he wants a business he can understand. Second, with favorable long-term prospects. Third, operated by honest and competent people. And fourth, available at a very attractive price. One of the unfortunate things about the financial services industry is that they have a tendency to not favor simplicity. Wall Street wants to create new, quote unquote, innovations like collateralized debt obligations,

and credit default swaps, many people in the industry who manage money, I think, feel the need to create complexity to try and justify their excessive fees for underperformance. If investing seems simple, like buying a low-cost index fund or exceptional businesses and holding them for the long run, it becomes harder to charge 1% to 2% annual fees. By layering in jargon like alpha, beta, factor tilts, tactical allocation,

institutions can create the illusion of expertise and control. As Joseph Shapochnik mentioned to me in the episode a couple of weeks back, much of the financial industry's incentives are broken and play against the investor's interests. And just for fun, I just went to CNBC's website to see what the top headlines are as I'm typing up my notes for this episode. And here, I'll read some of the headlines of what you're seeing in some parts of the financial industry and the media.

So the very first headline, the very first one, it reads, "Here are the three reasons why tariffs have yet to drive inflation higher." Another headline here, "This coffee chain's shares could see a buyable pullback according to the charts." And then one more, "Yellen expects Trump's tariffs will hike inflation to 3% year over year." And not to be rude or call out CNBC, as this is really par for the course for major finance publications,

But these articles just seem like a total waste of time to me. That's not to say that there aren't some people in the financial world or at CNBC who are doing good for others, adding value to their customers and charging a fair rate for their services. I think on the flip side, some investors, like I mentioned earlier, they can fall into the trap of overcomplicating things and sometimes overthinking it.

The investment industry naturally attracts some incredibly smart people. And I see some of them be the first ones to discover an incredibly good opportunity that's enormously undervalued. They might buy the stock, watch it double, and then sell out because they think it's at fair value, only to watch it double or triple again. Time and time again, investors with much more experience than me tell me that their biggest mistake was selling a winner too early.

But it's easy to do the smart thing and manage risk more effectively by selling your biggest winners because they've reached fair value.

I'll never forget the line that Moni shared, which is that we can't really know what the business's true intrinsic value is. Even by conservative measures, we can be off by a factor of five or 10 for the best businesses. This is one reason why I don't get too keyed in on building a complex spreadsheet to determine the appropriate valuation. For me, really the key variables are owner's earnings, the reinvestment rate, return on incremental invested capital, and

in the length of the runway. Then you also consider the different growth for each segment and other nuances that materially impact to the math. But other than that, much of what's included in a complex model is a rounding error to the intrinsic value, which again, we can never truly know since it's a concept that's essentially made up in our minds. Even when considering these numbers,

It's about being approximately right, knowing that the great management team can pull levers in the business that you didn't even know existed or were even possible.

Some might wonder, if your investment approach is so simple, what sort of edge can you have? What knowledge or skills would you have to beat the index while 90 plus percent of active managers fail to do so? And you're also up against an army of analysts and algorithms on Wall Street. Bill Miller is well known for saying that there are three edges an investor can have, informational, analytical, and behavioral. In terms of information, everyone has access to the company's filings and the internet.

made information widely accessible to everyone. I don't believe I necessarily have an informational edge or an analytical edge, so that really leaves behavioral. The biggest edge I think individual investors can harness is patience. I generally think that humans are biologically hardwired to be impatient, and most market participants aren't willing to look out five years on a great business with an optically high PE.

While Wall Street's focused on how tariffs will impact the market this year, what direction the index is going to go this year, and how much of the Magnificent Seven they should own in their portfolio to ensure they don't lag too much behind the index, I can simply focus on finding and holding best of breed companies run by honest and capable managers. Many active managers can be at a disadvantage because half of their job is people management in addition to asset management.

If they lag too far behind the index, then they risk clients pulling their money so they potentially can't handle a lot of volatility. For me, volatility can be my friend and has helped me achieve outsized returns. For example, many microcaps can be quite illiquid and have volatile share price movements. If you're concerned about clients pulling money, then investing in an illiquid security that's volatile can be a recipe for disaster.

it's much safer to own blue chips like Apple and Microsoft. Even owning businesses with a promising future, luck is still a part of the equation. When investor Joel Greenblatt was asked to explain his extraordinary success, he pointed out a few factors. First, he kept his fund small, which enabled him to focus on smaller businesses that had the largest mispricings. Second, he ran a very concentrated portfolio. And third, he got a little lucky.

Greenblatt once said that he likes to make things easy for himself, and that's by focusing on businesses he knew he could understand and pursue the one-foot hurdles rather than the 10-foot hurdles. But on those rare occasions when the market delivered a fat pitch right in his sweet spot, he did not hesitate to whack it with all his might. In William Green's book, Richer, Wiser, Happier, he shared four lessons in his chapter titled, Simplicity is the Ultimate Sophistication. So first, you

you don't need the optimal strategy. You need a sensible strategy that's good enough to achieve your financial goals. Second, your strategy should be so simple and logical that you understand it, believe in it to your core, and can stick with it even in the difficult times when it no longer seems to work. And third, you need to ask yourself whether you truly have the skills and temperament to beat the market. And finally, fourth,

it's important to remember that you can be a rich and successful investor without attempting to beat the market. I think that's a good note to end this episode on. So that wraps up the episode on my investment approach. Lastly, I wanted to also highlight an event that TIP is hosting this fall in the mountains of Big Sky, Montana in September of 2025. This event is called The Investor's Podcast Summit. We'll be gathering around 25 listeners of the show,

to bring together like-minded people and enjoy great company with a beautiful mountain view. We're looking to attract thoughtful listeners of the show who are passionate about value investing and are interested in building meaningful connections and relationships with like-minded people. Many of our attendees will likely be entrepreneurs, private investors, or portfolio managers, and each attendee will be vetted by TIP. I'm thrilled to be hosting this special event for our listeners, and I can't wait to hopefully see you there.

On our website, we have the pricing, frequently asked questions, and the link to apply to join us. So if this sounds interesting to you, you can check it out at theinvestorspodcast.com slash summit. That's theinvestorspodcast.com slash summit. Spots are limited, so be sure to apply soon if you'd like to join us. So with that, thank you for your time and attention today, and I hope to see you again next week.

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