TIP726: From Obscurity to Opportunity: Jon Cukierwar’s Investment Edge
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You're listening to TIP. John Sukirwar has quietly built one of the most impressive emerging track records in global investing today. Since the fund's inception five years ago, he's compounded returns at 15% per annum, crushing the S&P 500's returns of 9% per annum over the same time period.

But John's route to success hasn't been the most conventional. After cutting his teeth under legendary value investor Bob Rabadi, where he learned about the power of truly independent thinking and deep, bottom-up research, John launched his fund. But instead of focusing on deep value, John focused on business templates that resonated with him. These were global stocks that tended to be smaller in size and were often overlooked by Wall Street.

Now, while these companies may be obscure, they tend to tick the trifecta that John looks for, which are quality, growth, and value. Another interesting thing I learned about John was that he benchmarks his fund against the S&P 500 despite never holding a single stock inside of that index. His reasoning for competing with that benchmark is explicitly the response that I'd want to hear if I ever decided to have someone else manage my money.

We'll look at why John prefers foreign markets to US ones and how he crosses the hurdle of understanding businesses in foreign countries. We'll also have a much closer look at what John looks for during his site visits and talks with management. If you've never gotten a chance to read any of John's research, you're in for a treat. His research during the due diligence process feels more on par with something like investigative journalism than what you'd expect versus the average analysis. This is how he decides if an investment is a true no-brainer.

And speaking of no-brainer investments, we'll go over precisely what he looks for in these types of investments that have just gone on to produce some incredibly large multibaggers for him over a pretty short period of time. One other interesting topic we discussed was his thoughts on steady state earnings. This is a way of looking at the underlying free cash flow of a business if it weren't investing for growth.

He has identified many great companies where cash flow appears meager. Still, when adjusted for factors such as growth capital expenditures, they reveal some cash generating machines with some very impressive upside potential. So, if you're the kind of investor who values original and contrarian thinking, deep fundamental research, and the pursuit of multi-bagger stocks, you're going to love this episode. Now, let's get right into this week's chat with John Sukirwar. John Sukirwar

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 John Sukyarwar from Solara Peak Capital Partners onto the show. John, welcome to the podcast. Hi, Kyle. Thanks for inviting me here.

Now, let's rewind the clock a little bit here and start from the beginning, from before you were managing Solar Peak and talk maybe about one of the investors who I know you've learned a lot from. And I'm referring here to legendary value investor, Bob Rabadi. Now, I know part of the value proposition of bringing you in in the first place was based on the fact that you were willing to work for free. And this reminds me of the Warren Buffett offering of the same deal to Benjamin Graham many, many decades ago.

So can you review maybe some of the primary lessons that you took away from Bob Rabadi and other key value investors who have helped shape your investing strategy that you use today?

Yeah, absolutely. Oh man, that was 2016. I was 22 years old. And yes, the work for free, well, can be exactly for free because of wage laws and regulations, but think of it as close to it as you can get. And in hindsight, that was by far the best investment I've made in myself and my career. So a decision I'd make again, a hundred times over.

Yeah, it's interesting. I think back and there really were some powerful lessons from working there, being exposed in that environment at Rabadi and Company with Bob Rabadi. You know, I think the most important takeaway for me there was that they truly are independent thinkers, I would say almost radically independent thinkers and it's something you appreciate more when you leave the environment and just see how the rest of Wall Street, you know, thinks.

There's obviously, you go in their office, there's no TVs playing CNBC. There is a Bloomberg, but almost nobody ever uses it. I think the back office really uses it more than anybody. And look, there's no brokers. I never saw a single broker who came in there to pitch stocks. They don't subscribe to basically any sell-side research that I can think of. Look, they just want to get the facts

from the bottom up. They want to get the data up, see what companies are trading cheap and mispriced on a statistically cheap basis. I think it's the only office I've seen those old school value lines, the actual printout versions, right? Where you can flip through hundreds of companies. But yeah, they were not interested in what other people thought. Managers, you go to the rest of Wall Street, they want all the sell side initiation reports. They want to talk to their other manager friends to see what they think about stocks. But they want to come to conclusions on their own. And I think

you know, that is really powerful. You know, and as one of the managers there once told me who I really admire, every year, you know, 40,000 people fly to Omaha, they come to see, you know, Warren speak and, you know, they hang on to every word and they buy the, you know, the cherry Coke and Doritos and so on. But if you look back at Warren's career, his most important lesson was to think for yourself, right? Because if so much of what he did was really, you know, ahead of his time,

And so, yeah, so I think independent thinking was a critical thing. You know, obviously, there's other lessons. Valuation, they never, I don't even think anyone there is open Microsoft Excel, you know, the senior folks, at least. Every valuation can be done in an eight and a half by 11 inch piece of paper. But the point being, you know, the number should hit you over the head like a baseball bat, right? And that should not be, if you need hundreds of lines of Excel to tell you if something that's a good investment or not, you know, it probably, you probably don't have much.

And yeah, you know, aside from those, Bob himself, I've noticed is a very good behavioral thinker. He has, I would call it behavioral advantage. I know a lot of people like to think they do, but you know, I think he truly does. Just as far as, you know, his ability to, without stubbornness or blindness with conviction, just go against the tide when the market's increasingly disagreeing with him. And then eventually, you know, may take years, but you know, he's proven right and in a big way, you know, with a lot of his picks. So yeah,

A lot of great lessons I took from Rabadi and company. And it's one of those things, right? You read all your... You're in college and after you read your Buffett, you read your Munger, you read your Phil Fisher, you read everything. And all these principles that I just described, all the greats communicate. Then you go to Rabadi, you think, oh, yeah, well, obviously, this is how investors should think. And then afterwards, you see the rest of the investing world, wait a minute, this is not normal at all. That was certainly the exception, right? So...

Anyhow, look, terrific firm, great people, even better investors. Definitely learned a lot of great lessons there. So I know that at Rabadi, they obviously lean towards very statistically cheap companies. And I know that you, obviously, I've studied research, a lot of the businesses that you own and even own a few in common, look for these more high-quality businesses that I don't think Rabadi would even bother looking at given some of the valuation metrics.

So was there like some sort of moment or maybe some sort of case study or concept that caused your shift to go from where Rabadi was focusing on to what you're focusing on now? Yeah, I think that's a great question because you're absolutely right. I think statistically cheap companies and especially with kind of a bias for, maybe not bias, but just pension where the opportunity is for cyclical companies, right? Home building, energy, those have been successful themes for Rabadi and company.

And for me, I think part of it was really having the freedom to look at what I wanted at such a formative young age and in my journey. And I was looking at all sorts of different companies. And for one reason or another, investing can be very personal as to what you're comfortable with, what excites you. And for me, over time, those high-quality companies...

you can call it growth at a reasonable price. But really just the kind that Buffett might teach, Buffett might talk about a lot of it in his letters. And the later letters, of course, the partnership letters were a different story. But that really kind of, for one reason or another, just attracted me more. And again, look, there's so much money to be made in statistically cheap names and cyclical companies. Just at the end of the day, after spending a couple of years just kind of drinking from a fire hose at all ends of the spectrum,

you know, it was really more the quality, the growth, the long-term holdings, that's what attracted me more. So you're paying further up the multiple spectrum, of course, but free cash flows on average may be more durable and, you know, you may be getting higher growth rates. I did take a course, there was a very kind professor at Columbia's Executive MBA program, and he was very kind to let me, you know, audit his course. His name is Tom Triforos, and, you know, very influential figure to me over the years.

And his course was called A Study of the Elements of Great Businesses. So if I had to point to maybe one other item that influenced me, it was probably that course and just kind of what I learned from there and uses my foundation for how I view the investing world. And then ever since then, it's... Because if I had to look at today...

I definitely have this quality growth element, but I'm also want my cake and eat it too. And I want to find companies on the very low end of the valuation spectrum. So it's not for not, what I learned at Robati and the margin of safety and downside protection that can come from buying very statistically cheap companies at low multiples, right? I think it very much lives with me today. And my kind of investing approach today is definitely a blend of that statistically cheap approach and also the quality and growth elements of it.

I want to ask you here a little bit about your benchmark because you seem to be a part of a trend that I've noticed in some outperformers, at least ones that I've actually interviewed. And that's investors who invest in businesses that aren't even inside of the S&P 500 while actually using the S&P 500 as their benchmark. Now, I might be biased here because I'm usually interviewing fund managers who have outperformed. And obviously, if you outperform, it's a lot easier to compete with the S&P 500.

However, I still notice that there are fund managers maybe with less attractive returns who might even have holdings in the S&P 500, and they're using other indices such as let's call it the MSCI World Index. So can you tell me a little bit more about why you settled on specifically using that index, even though it's unlikely that you'll ever hold a business inside of the index and that you focus on businesses that aren't even in the US? Robert Leonard :

Yeah, that's a great question, Kyle. And I think to confirm, I don't believe I've ever held a company inside the S&P 500. So the factual statement on your part, though, it really is a great question because there's a lot of managers who use many different indices. If you look from day one of our partnership, from our founding letter, I gave a lot of thought as to, hey, we're choosing the S&P 500 as our index, and here's why. And at that time, we had no performance. And

And we had no idea if, you know, look, obviously, we strive to have great returns if it would be above the S&P 500, below the S&P 500. But, you know, the reasons are, you know, kind of twofold why I choose it. Number one is it just really has been for some time and should be the hardest index to beat, right? You know, from an institutional manager standpoint, and I think from retail investors as well, you know, consistently around 90% of managers, of mutual fund managers, asset managers,

fail to beat the S&P 500, right? And so if you have 90% of managers can't beat something and you can beat it, then you're probably demonstrating some skill and that, you know, your vehicle and your way of investing should generate, you know, volatility notwithstanding, greater returns over a long period of time. And number two is the way I view benchmarks, right? I think there's two trains of thoughts to view benchmarks. And the first is as opportunity cost. And the second is

mirroring all of the factors of your investing approach. Now, I think number one is a lot more relevant for us because when I look at, we're not an institutional product and I have no intention to be. My goal is to compound returns at the highest rate responsibly possible over a long period of time. And we're fortunate to have found many, many high net worth individuals and family offices who have aligned with that vision and who have partnered with us, right? Over 50 people to date. And I would argue of all those people,

they're a lot more interested in compounding their wealth at a high rate of return over time than seeing, okay, how did your portfolio do against a mirror image, factor complete version based on the global market? Because if I were to do that, you would have to start globally, you would have to go micro cap, small cap, you'd have to exclude emerging markets, you'd have to exclude much of US exposure because we on average have little US exposure.

And so I'm sure that maybe if you really customize it, there is some benchmark out there. But then even if you find the perfect one, to me, it's, "All right, well, I don't know what exactly we're accomplishing because I'm not choosing those factors because I want those factor exposures." It's a bottom-up process to generate high returns. So I think just at the end of the day, it's a lot more valuable for these people to see, "Okay, if we want to invest in the stock market," or they can invest in their own business opportunities, but because we're in the stock market, if you want to invest,

your own money, what are the most likely opportunity costs there would be? And for me, obviously, it's, you know, think of the average mom and pop person, you know, yeah, we'll invest in the S&P or, you know, I think because of our small cap exposure over time, I think the Russell 2000 is another very common index that people would look at, right? Now, you can, you know, expand it from here and there. But I think just really, you know, honing it and narrowing it down, you know, look, the S&P 500 is, I think, you know, the most fair index

opportunity costs and the most fair benchmark. It has proven to be the toughest to beat over time. And so I think going forward, my full intention is to continue using it forever as our partnerships benchmark.

One part of your investing process that I've always admired is just how in-depth your research is. So the first time that I got a chance to read your research was when I was having a DM conversation with Chris Mayer. I was trying to mine some ideas from him. And he suggested reading your Dino Polska report to learn more about that business. And full disclosure, I own shares in Dino Polska. And I have to say, to this day, it's probably the most insightful and informative research that I've ever read on a specific company.

Some other company reports, they're just very superficial, surface level, and just not informative. And oftentimes, they're just quant-based. They're just reiterating numbers. And it's interesting, I guess, if you're a quant, but if you're interested in actually understanding the fundamental reasons of why a specific business is really, really good, it leaves me wanting more. And yours definitely did not leave me wanting more. It was one of the most complete ones I've ever read. So I know that you have roots...

in analyzing specific businesses from your days at Tulane, where you took a course called the Birken Road Reports class. Now you researched a company Popeyes as an equity research analyst for that course. So can you please just maybe take us through your own research process when you do these site visits and discuss the advantages that it offers you?

Well, that's incredibly kind of you, the high praise for the report. And I didn't know that about Chris Mayer. I haven't met him, but incredibly kind of him to refer to it. And yeah, the Dino Polsko report, that research was a lot of fun. That trip was a lot of fun. I think generally, and I'm happy to use that trip specifically to give examples here. I think generally, my approach is pretty, I think, straightforward in conducting field research.

And, you know, if I had to outline it, I think there's just generally two buckets of data points I'm hoping to collect. You know, number one is you always want to go in with a straightforward hypothesis or hypotheses, right? It doesn't have to be just one thing, but hey, like, here's what I'm hoping to accomplish with this trip. Here are the reasons I'm going because I need to confirm, is this part of the thesis true? Is this part of the thesis true? Is that part of the thesis true, right? And it could be things that

The company's told you can be things that you've found through your own primary research, but things that are really only answerable or best answered for yourself. And by the way, a lot of people like to talk about Scuttlebutt and like to quote Buffett, but you'd be surprised at how very few people actually go and do the work for themselves and do the business for themselves. So I think generally speaking, if you're ever erring on the side of if you should do field research or not, do it. And you'll probably collect data points that most of your competitors aren't collecting.

So, you know, I think that's number one, you know, going in with the hypotheses. And number two is just, you know, being open-minded and observing the data points that you didn't know you were going to collect. And eventually, in just about every case, some of these data points end up becoming essential to your thesis, right? Whether that's confirming your thesis or disconfirming, you know, your thesis. So those are the two buckets that I generally look for, you know, when I'm approaching field research.

So one thing about Scuttlebutt, I've done a lot of research on it and I try to do as much as I can, although I obviously don't have full time to put into it. But one thing I've definitely noticed about it myself is I've had all these opportunities, especially with small cap managers, you probably know the same thing where I can actually get access to the CEO of the business. And so one thing that I've found is that it can sometimes feel like I might be getting biased because a lot of times you're friendly with these people and

you have positive feelings towards them. Obviously, you probably don't dislike them because they're taking time out of their day to meet you. So just speaking towards biases, how are you actively trying to fight your own biases when you're meeting these people and just trying to focus on finding the facts of the hypotheses that you have rather than allowing them to be good salesmen and selling you on how good their company is?

Yeah, look, I think that's a terrific question. The truth is, it's very hard to remove bias completely, maybe impossible to remove. You know, if there's one thing I've learned, you know, from reading all these books on psychology, how people work, how people operate, and then kind of getting experience in various ways, I'm convinced we're all hardwired to be vulnerable to many different heuristics. And the best you can do is really just try to minimize it, right?

So I think you're right. Look, I think it's an advantage usually when you, you know, especially international small cap companies, you're one of the first, you know, North American or US investors to visit them. And they typically roll out the red carpet, right? As far as, you know, sometimes it's hard to get 30 minutes on the phone with them. They will meet you at headquarters, you know, they will talk to you for four hours. And that can be incredible because you have a list of like 80 questions you want to get to, you know, in order of prayer, and you can get to just about all of them. And then, you know, you learn other things. And

And so, it's really good. And again, it's like how many other people have visited? Well, if they're telling you you're the first, then you're the first, right? And this is nobody else. No, but look, in general, I think it is something that, you know, you really do just, you know, and this is a hazy area of, you know, it's not something really quantitative, it's more qualitative, but you know, of just kind of, you know, judgment of another person, judgment of their, you know, their character, judgment of can you trust what they're telling you and, you know,

analysis along these lines. So yeah, look, generally, I think, you know, and I can think back to many instances where, yeah, like, I do feel this person, their salesmanship is showing and they're being a little and you have to balance that with, okay, the credibility of their statements and other things they're telling you. So I don't have like a blueprint answer here. But I think like what you're saying, like, it's very true. It's real, it is a risk. I think it is something you can minimize a lot. And I think it's something you just you kind of

you evaluate that on balance with everything else that you're learning from that CEO. Robert Leonard : Now, I want to discuss a few of your major edges. And I want to start with the fact that you invest primarily in small caps. So the average market cap of your portfolio over the last few years has been in the $250 million range. Now, this is kind of interesting because I think you can still find stocks that institutions don't heavily own at this market cap, which I know you've pointed out can be a pretty big advantage because you get this discovery process.

So can you kind of outline some of the other key benefits on top of the one that I just mentioned there of owning small caps and why you've chosen to focus on that market cap segment?

Yeah, I think there's a lot of benefits there. And I do think it really is a chance to describe our edge, our competitive edge here. You know, when you look at small caps in general, it's really well documented that small caps compared to, you know, larger caps, you know, mid caps, large caps, mega caps, of course, they just have a lot less analyst coverage and institutional coverage. Now, that's well documented. Everybody knows this. So parlaying onto that is, you know, if you look at the United States compared to other, you know, developed countries around the world,

Emerging markets too, of course, but we stick to developed markets. I've just found that the United States is very competitive relative to other markets. For every, let's say, 10 sets of eyeballs looking at a company, even in the small or micro cap realm, there's far fewer people, whether it's three sets of eyeballs, five sets of eyeballs, two sets of eyeballs in another country, looking at a similar stock.

And so, I think when you parlay that small cap company has less coverage, and then you kind of move into international countries, then you just really tend to get this niche areas where there's just very, very little coverage, and which kind of is the bottom line with these small cap companies, right? And you can even call microcap companies, of course. And so, when I think about our edge from a small cap standpoint,

When we're looking for things along the three pillars of quality, growth, and value, if you're looking at things small cap and develop global, you can really find companies that meet all three of these criteria. It's not easy. I think it's still, as somebody who does like to sleuth around, it's still very hard. And you might only find one or two of these opportunities a year that really, cruelly check the boxes. But if you find those one or two opportunities a year

That's really all you need because you can do very well on those opportunities.

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So another one of your major edges is, like you just mentioned, that you invest outside of the US. And I know that maybe over the past few years, this might have acted as a little bit of a hindrance as more and more capital has been going into US markets on the back of Magnificent Seven and AI, and that's been propping up those markets while maybe causing multiple compression as maybe there's some funds that were in your stocks or in indexes that held your stocks that would shift to other areas of the market.

But as you pointed out, there is the disconnect between US and international markets, and it'll likely close at some point, who knows when. Now, from your experience, I'd love to know a little bit more about how long it takes for global businesses to close this price and value gap compared to maybe a US comparison.

Yeah, closing the price to value cap. So I don't typically think of it that way. And I think that isn't... So I think there's two parts of the question here. One is generally referencing the shift in capital that's occurring. And number two is how those valuation, I guess the market valuation behaves in the US relative to other countries. So to kind of tackle the second one first, it's not something I really think about in the terms of, okay,

Is there going to be market discovery? And if it does, how soon will it happen? Because look, when I make investments, right, and the reason why I really prefer lower multiples to start on top of durability, on top of significant growth opportunity is because I'm looking for downside protection here, right? And I'm looking for, you know, if something goes wrong, you know, obviously, right, you know, how far can this price really collapse relative to expectations, right? And now, obviously, you don't want something where profits go to zero, where there's just, you know, or something horrible.

Because then, yeah, it doesn't matter what multiple you buy it, there's unlimited downside here. When I'm looking at these companies, I don't assume any multiple expansion for the thesis to work out and for us to earn satisfactory returns, right? If you're buying a company that you think should compound its free cash flow per share at 15% to 20% for the next three to five years, and you're buying it off a really low free cash flow multiple or earnings per share multiple, assuming that they're roughly similar, let's say of eight times or nine times, right?

you're probably not going to lose money in that scenario. And if you just forecast and set your expected returns based on that free cash flow per share growth, then yes, you should earn 15% to 20% per year. And to me, that's a very satisfactory return. Now, when you layer on the probability of multiple expansion or multiple contraction, then yes, odds are in these scenarios, you also will experience multiple expansion off of a low base because the company's delivering

in a powerful way, their market will be getting bigger. And if you're really like one of the first people to discover these stocks, then odds are eventually more people should discover it along the way as well. So in my experience, when you have a setup like that, it's almost usually leads to multiple expansion and sooner than later given discoverability. Because look, stocks these days relative to 20, 30 years ago, value gets realized a lot quicker, right?

So, when you find something, I guess the bad news is you don't have much time to get up to speed on an exciting opportunity. But the good news is if you do hold something and you think good things will happen fundamentally, it should get recognized sooner by the market. So, the US, but it's funny, it really depends on the country. There are countries that behave very similarly to the US, Australia, Canada,

Sweden. Yeah, a lot of these companies, if really good news happens, yeah, they will see stock price appreciation. And then there's some other countries that can be a bit slower to do so. And then there's a whole host of quirks in every country to be aware of. And that's why I think it's good before entering a market, it's great to do a lot of homework to really get your arms around the idiosyncrasies of each market. And also, another thing I found very helpful is

developing a local network of managers in every market too. And that really helps. You know, I can't tell you how many times I've had questions that I don't know where I'd be or where I would have received answers without them. And yeah, that's been very helpful. So yeah. And I think your first question was interesting too, referencing the capital flight. You know, look, and we could probably talk for hours about this, but this is not a macroeconomic conversation. And you know, I'm not making any macroeconomic predictions, but

I think it is interesting to note that, I guess, since the inception of my partnership and for well before that, since about 2009, we've experienced this period of what they would call US exceptionalism in the media, where in a nutshell, US assets, equities in particular, have just really outperformed the rest of the world. The US dollar has gotten stronger as well, which adds a reflexive loop to everything because if you're a non-US investor investing in the US,

and the US dollar appreciates, then your investment appreciates as well. And if you're in Europe, and it helps against your own benchmarks. Now, we're seeing for the first time in 15 years or so, things are going in reverse where foreign equities are outperforming in general, and who knows how long that'll last. But the US dollar, I think that's very interesting because that is depreciating against other currencies. And it has seen moves like this before, but

given the way history moves in cycles, there is some chance that this kind of headwind of the US dollar moving against you and US markets just substantially outperforming foreign markets, that could all kind of go in reverse for all we know. And if it does, for someone like us who predominantly invest outside the US, obviously, look, I think we've done okay. We've done well, despite any of this. And it's not something I take into account. But

Worth noting that it could be a tailwind for managers who do look at global stocks for the foreseeable future.

So you've mentioned, obviously we've been talking a lot about investing internationally. And so there's one more thing I really want to get your opinion on here. So obviously when you are investing internationally, in my opinion, there's the question of circle of competence. How well do you actually understand these other markets when obviously, like you said, you have this local investor network that you can rely on, but I'm sure you would also admit that you'll never get to the same level of understanding that they will of their local market. So

I know that you mentioned in another interview that you can do this, invest globally, because you specifically have a framework to allow you to do so successfully. Now, I assume this means the framework for finding good businesses doesn't really change, whether you're looking in the US, Canada, Australia, the UK, or Poland, which I know are markets that you like. But the part that I've always found a little trickier to navigate is accounting for unknowns in foreign countries.

There's things like regulation, culture, sentiment, political motivations, and they're all a little tougher to understand in foreign countries where you're not boots on the ground every day. So I'd just love to know, how have you managed to fit those types of variables into your investing framework?

Yeah, I think that's a good question. And I think what I mentioned before about having those local management relationships, as you referenced, I think that has helped a lot. And I really do think when you dive into a country, it's important to really, first of all, view it as a totally unique country. Yes, it can be a developed country in similar many ways. But at the same time, culturally, the way even the capital markets think and behave

everything can be very different and very idiosyncratic. And there are probably many examples I can give. And I think really just spending time to get your arms around, understand what's happening, how it works, even if it takes months, just deep understanding. And I think screening the stocks in that country helps too, just in a lot of subtle ways, just screening through hundreds and hundreds of stocks. You notice things. What are the table stakes for valuation over there?

what are some of the common ways that the annual reports read and the accounting, little things that they do slightly different than most other countries. And I think once you get comfortable with a country, for me, I think culturally, you are probably never, unless maybe you've lived there or you have ancestry there, you might never quite fully embrace how people behave with products or services. So for that reason, I do avoid

things on the consumer discretionary side. I do try to avoid things where there could be a big cultural blind spot where, "Hey, this seems so obvious to me, but who knows what could happen?" For that reason, by the way, I think exactly for this reason is why I avoid emerging markets, just because the tail risk, which maybe is not so tail risk necessarily, of just things that can happen, yes, with culture, but also

with geopolitics, with inflation and central bank behavior, even things you would never imagine in the United States, like confiscation of assets. I've had one situation in the past where you start questioning, okay, the stock looks extremely cheap on a multiple basis, and everything's going fine, and then the profits are stable. But then like,

you know, you kind of realize, wait, the money that they have in one of their countries might be trapped. And then you start to ask, is the money really theirs? And then you think, well, wait a minute, this is not really investable all of a sudden, is it? So those are questions you never want to worry about. And in developed markets that, you know, essentially kind of gets rid of, you know, all those big headaches. Now, look, and that's not to knock, there's plenty of smart people in emerging markets, right? I'm sure just not a game. I think Warren Buffett even had a line in the latest annual meeting of just

you know, not a game I think I do very well in, right? I think is, you know, maybe how I would phrase it. But yeah, look, I think, you know, I do tend to lean towards more kind of consumer staple, like durable, you know, businesses over there, things that are more simple, you know, less complex, more simple, and, you know, can give examples there. And, you know, things that have also businesses that have existed for 20, 30 years where, you know, okay, you don't really have to guess so much.

as to there's a new manager or a new business segment or a new business line. It's something that the same people have been doing for, let's say, 10 years, 20 years, 30 years. It makes all the sense in the world. It's a consumer staple product or something that's necessary in that industry for one way or another. And for me, I think that layering those on has helped me minimize those risks in these countries.

One thing I was ecstatic about when researching you was that you're also a fan of Buffett's owner's earnings, which is a metric that I really, really like, but I don't really see very often spoken about in shareholder letters. And so just to give an understanding of what that metric is for those unfamiliar, it's a metric that Buffett used to think about a company's cash flow. And basically, the main difference is that he differentiates between growth capex and maintenance capex.

So I know that you use this metric to help you determine a company's value. And you can often find some pretty wide discrepancies when comparing owner's earnings and say, just free cashflow. Obviously, free cashflow is great, but it can hide a company's true cash generation as it nets out growth investments. Now, while there's companies that have high free cashflow, and that can be excellent,

A company with low free cash flow, but ample reinvestment opportunity, I think is probably one of the optimal ingredients to make a compounding business. So can you comment on the importance of this metric and how you utilize it to maybe help you understand the business's underlying cash generation as well as valuation?

Yeah, owner's earnings is very important. And it's when I view a company and I look at their financials for the first time, owner's earnings is always just like the first calculation that I try to make just on a very crude basis. And you do need to do a bit more digging sometimes to get there. But yeah, owner's earnings, the other way that I view it is steady state free cash flow. I think that's a very important metric. And exactly what you said, sometimes there can be a wide discrepancy. Right.

right, between what the reported free cash flow is, the reported earnings is, and owner's earnings. Oftentimes, I think net income, free cash flow, and owner, they can be good proxies for one another. Yeah, look, first of all, obviously, CapEx is something that a lot of people will look at, and rightly so, looking at what the discrepancy is between depreciation and capital expenditures, and that CapEx, how much of that is gross CapEx, how much of that is maintenance CapEx, purchases of intangibles you include, obviously.

you look at leases and with the new lease accounting, it's not always clear what depreciation is. And so there's different schools of thought, but from my school of thought, I think you do need to parse that out because depreciation from operating lease expense, I think that's a real expense, like you're paying rent, you're paying whatever every month, every year. But a lot of people might add that back. But then the real kind of

discrepancies can lie in the income statement too. And you have companies, maybe they are more having an R&D and you have to make your own assessments and judgments there of, okay, how much of this is growth for the future? How much of this is just kind of on a maintenance basis? Customer acquisition costs in the form of sales and marketing can be big as well there if you really do the right math and look at the cohorts and really drill down.

I mean, but it's funny because I get questions sometimes, right? I own a couple of distribution-based businesses. Auto Partner, we can use specifically as one that we probably both know. And one common question I get is, hey, John, this is great. But if you look at their free cash flow or their cash flow statement, they have no free cash flow because it's all going into buying inventory. So therefore, I can't buy this stock. They have no cash flow. And Buffett would say, this is 100 times free cash flow. And I'm like, okay. Well, to which I would say, well, look,

Let's say this company tomorrow decided we're never going to grow again. What would their steady state, free cash, but where they have to maintain their competitive position, right? So they have to spend something to keep the facilities in check, keep the cars on the road, things like that. And how much should just not grow, not shrink the business, but just maintain their current profit levels? What you would see is they don't need to buy tons of added inventory every year, right? So the change in network capital would be essentially zero.

from an inventory perspective, right? Unless maybe the inventory gets slightly pricier every year, but then that gets offset by other. So yeah, so then in that case, like your owner's earnings or your steady state for cash flow, it will be a lot closer to net income, right? Probably very somewhat of net income compared to what the cash flow statement says today. So just thinking of it like, and again, I'm not saying there's a right or wrong answer. Everybody has a different way of thinking about it. For me, this makes all the sense in the world. This is the way I think about it. But I think it's generally a good tool to use in your arsenal.

So you mentioned previously today that you like back of the envelope type math and valuations. So therefore, you tried to maybe try to avoid overly complicated things where in order to come to an evaluation, you have to use a spreadsheet that's multiple tabs long. So for instance, let's say you're looking at a company and let's say it's trading at four times next year's owner's earnings or free cashflow or earnings per share or whatever. So using your

framework there. You don't really need to twist the numbers much because if that number is five times or six times, you still probably have a very good investment, especially if it's growing its intrinsic value at 15% to 20% per year. So tell me a little bit more about some of the key ingredients of a no-brainer investment like this one that I mentioned would look like to you.

Yeah, you know, there's a lot of different ways. There's a lot of different types of no-brainers investments, you know, that there can be special situations of all sorts, right? You can, you know, it's something that we've definitely participated in in the past, like American Coastal. Though, you know, from kind of the common, I guess, no-brainer that I look for is something that meets all three criteria of high-quality business, right? Now, we can talk about, you know, what quality means, but high-quality business and high-quality management team, right?

substantial growth opportunity ahead for many years, or put in industry jargon, a larger addressable market for them to penetrate. And the third would be valuation. And that's where just whether you're looking at free cash flow yield, whether you're looking at on a multiple basis, just as you said, it's just so obvious, you don't need to build a giant spreadsheet. And I agree with that. So that's typically what I would call a no-brainer investment from my end,

And kind of the final element there is my preference is in looking at these international markets and looking at the small microcap end is kind of meeting those criteria and not needing a variant view per se, but just approaching a situation where there is no prevailing view. So you don't need a variant view, you just need a view that is not really existent in the market. And so to me, it just worries some risk that, look,

There are so many smart people out there. There are tons of smart people out there. And I'm going to do my work and I'm going to come to the conclusion of, I think, whether I'm right or very convinced that I'm right. But there's always that risk that, hey, maybe the other smart people out there, they have a view and it seems to be the prevailing view. And maybe they're right and there's some risk that I'm wrong here. Hopefully, my downside isn't that big. And I'm doing what I can to protect it by buying cheap. If you have a situation where there is no prevailing view...

and you're totally convinced you're right. To me, it's a lot easier to get comfortable that you should do okay in this investment. And there's no looming consensus downside risk from these share price level.

So when I was reviewing your shareholder letters, I found your biggest investing mistake pretty amusing, and not just because of any Schadenfreude or anything like that, but specifically because I think that's probably the most significant problem that nearly every investor faces. And that's the problem of selling winners too early, unfortunately. Now, I know you've trimmed several of your multi-baggers maybe a little bit earlier than you'd like, given how far they've climbed after the fact, Mater Group being a good example. But

But you also mentioned that some maybe quicker multi-baggers can expose you to increased risk. Can you maybe describe how you balance the need to stay invested in winners while reducing risk as they appreciate in price? Yeah, that's an interesting subject. That's one, maybe one of the most difficult things that I've grappled with over the last several years and almost four years since starting the fund and evolving my thought process towards is...

you find these great companies, right? And it's easy from a position sizing standpoint and just from a conviction standpoint at the no-brainer stage. And then as they appreciate in price, durability and quality, if you're right about that, it shouldn't change much. The valuation side, it should change somewhat or it could change dramatically, right? Now, there's an extreme example where if you see, let's say, a 2020, 2021 bubble, we saw how silly...

some of these valuations can get. And then yes, it could be just maybe that'll be an easier decision. Hey, my thing went from 10 times to 100 times earnings. We should sell. There's a 1% yield here. I don't care what... You should sell. You probably should sell that stock unless it's growing at like 50% a year into perpetuity. Now, not at that extreme, but yes, you mentioned Mater Group, for instance. And I think that really everybody likes to say, well, you can't kick yourself over

mistakes of omission and so on and so forth. But yeah, I do think it was our biggest mistake, just even quantitatively, because if you take how much it appreciated after and how much we trimmed, then it probably is a greater missed gain than the biggest single loss we've had in the fund's inception, right? So it probably was my biggest mistake. Now, it's just hard because with these companies,

over time, if you take a long enough time horizon and they're earning really high returns on invested capital and they're growing at high rates, then the starting valuation shouldn't matter too much. And I think the right answer long-term is to err on the side of holding these stocks, holding shares in these companies. Because yes, over a one to three year horizon, you may be wrong or foolish for holding onto them if they then, the multiple contracts a lot and

you know, something happens short term. But over the very long term, if you think you're right, you know, you should still earn a very good return. And what I've learned is, and I think from this experience, is that, you know, in the short term, my thinking was, well, we were coming out of kind of the 2022 lows, this was my maybe one of my best performers. And the valuation was maybe, you know, one of the highest of my portfolio companies. And that will there's all these other great opportunities at really low multiples that I want to take advantage of. So

I guess in the sense that like recycling that capital into other opportunities, it was okay. But I think almost most of them did not perform as well as Mater Group. And so, long story short, the multiple expanded from say 18, 20 times earnings to 37 times, 38 times earnings at one point. And I miss all that as far as the trimming that I did in a short period of time. So,

Look, I think it's a tough question, but the more I speak to the older, the really successful investors who have lived for decades with this type of investing approach, they all say the biggest mistakes I've made in my investing career have been selling too early. There's always a good excuse for that. The stock had a good run. It looks expensive. Other things look cheap.

you know, some other reason, but you know, then you sell it and then it's just so hard even for these great people, they found it's just so hard psychologically to buy at a higher price than you sold and you end up waiting for that price and then it just never gets there again and you lick your wounds for the next 30 years.

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So a lot of what we've been speaking about today is quality. And I also, similar to you, love quality businesses. And also to your point here about buying when things go up in price, I had a question specifically about that. So when I first started investing, I had this bias, which was once I bought a stock, I would only ever repurchase it again once it was below my initial buy-in price. But as I've gained more and more experience and had actual stocks go up in price, I've

I've really observed that a lot of my winners would grow so much that in order for me to even re-enter in or buy more of it, I'd have to have a cataclysmic event that would allow me to purchase below my initial buy-in, which obviously as investors, we all want to avoid cataclysmic events. So I'd love to know just a little bit more about position sizing after you first buy in. Are you

Purchasing most of your shares right away at initiation, are you trenching in over time? And also, how do you think about averaging up or down once you've established a position?

When I look back at our best performing positions, I think in almost all of them, I have averaged up over time. And in each case, it wasn't because I wasn't actually actively thinking I should average up. I think it's more trying to stay disciplined and thinking, okay, at any given time, the way I monitor these portfolio companies is, okay, obviously, is quality still in check? And by the way, out of all my criteria, quality always has to be there, at least perceived quality.

If it's not, then just it's an exit candidate. So for me, quality is paramount. So you kind of confirm okay, quality is there. The growth opportunity, where is that at right now? When I underwrote this three years ago, here was the forward-looking growth opportunity. Have they kind of plucked the hanging fruit? Have the law of large numbers crept in? Is their addressable market runway maybe smaller and their growth rates are lower as a result or maybe greater? Things change for the better sometimes.

And then you look at, you know, valuation. So I think in all those opportunities, right, you know, you find something that's extraordinarily cheap for one reason or another. And, you know, it runs up and then you kind of get more conviction, you're more comfortable, you keep doing more work. And you kind of realize, I don't own enough shares of, you know, this company. I'd like to, you know, I think it deserves a bigger portion of my portfolio, even if it's run up 20%, 30%.

if you really think that this has triple digit return potential in some short period of time, yeah, you probably should buy it. So I think in most cases, like I have, but again, not because I'm thinking about I should average up or average down, but it's been more just from a discipline mindset that I try to keep, right? Looking at everything, all my portfolio companies together and okay, what deserves my capital? What deserves

you know, what doesn't deserve my capital maybe right now and, you know, re-evaluating and assessing things. And I think, you know, just as a side note, that's been a discipline that I really try to adhere to over time, right? Just, you know, always, you know, frequently reassessing things. I tend to be more of like a cynical or maybe not cynical, but just, you know, a suspicious mind when it comes to companies. And as a result, I just tend to be very careful. So if and when like something does happen, even if it's a minor event, like my mind immediately just goes to like, okay, like, like, like,

we need to be over careful here. We need to reevaluate or just check in on everything that you can. So this kind of mindset probably leads me to, yeah, I prefer the cheaper, safer multiples. I prefer the durable businesses. But when it does cross that threshold, when it does meet that threshold, I tend to sleep pretty well at night with these companies.

So since your fund's inception in 2021, you have quickly grown your partners to over 50. And you've noted that a lot of the capital at inception was your own. And obviously it's changed a lot since then, I assume. But since your strategy is based on small cap businesses, I'd love to know more about what your plans are for once you continue growing your fund. Obviously you're outperforming the market, meaning that your assets under management are going to grow.

And I just love to know, you know, what are your plans once maybe your assets under management grow so high that you maybe can't execute on the same strategy that you're using now?

I think that's an excellent question and something I've given a lot of thought to. I think it's an excellent question because of kind of the behavior that you see in the industry and that tends to play out. And what I think, you know, the right answer should be at least for, you know, from the perspective of compounding it at a high rate and doing what you say you're going to do, you know, so for our partnership and our strategy here, right?

I think the best way to approach this calculation is you look at your investment style in the past, you look at the companies you've invested in, what have been the average daily volumes at time of investment? What are your portfolio sizings that you're comfortable with to achieve these returns and invest in these companies? And when I've applied that, and not with the volumes today, like when we got in, when there was lower liquidity, when nobody knew about this,

you apply that, you apply your comfortable position weights such that you're not compromising your returns. And you extrapolate that to, okay, what's the maximum capital base at which we could operate this partnership? Based on my analysis, I think that kind of level, that range where we just really cap out at strategy is $150 to $200 million in AUM. Now, obviously, that seems a lot lower than what most people would say or think or

But for me, it's really, yes, that is the limit. And I have no intention of sacrificing our returns in order to raise more capital, right? Because the way you would do that is, well, okay, maybe we can manage $400 million, $600 million, $1 billion one day. But the sacrifice and the compromise that you have to make is all else equal. Let's say you find there's one or two no-brainer situations every year, you can no longer make it, say, like a 10% to 15% position.

you can only make it a 5% to 10% or a 3% to 5% position. And all of a sudden, look, if you're finding one or two of these a year and they're driving a substantial part of your returns, then you will be handicapping your returns. Now, people can say, "Oh, well, I'm a smart person. I'll find three to four of them or five or six of them every year." It's probably not going to work that way. Don't overestimate yourself. It's probably not going to work that way. Now, I think it's interesting because when you look at the industry,

I've seen this play out a lot in my short career, right? But you look at, you see other funds and you see these funds get to very big AUMs very fast. And the way that the allocator world works is once you get one allocator, you get two allocators, then you get the social proof from it, you get the big names on the door, and then it becomes a bit of a beauty contest and everybody kind of rushes in. But the point being, the managers, it becomes a lot easier to scale if they want to attract that capital, right?

So if you have a great track record, you're marketing well, you hit this breaking point in escape velocity, and you were $200 million, $300 million, and you're whatever the narrative might be, then you could, if you wanted to, and with all the right tools, and if you should be so lucky, scale to a billion dollars. And now I've seen a lot of managers who they did well in the micro, small, maybe small, mid-cap space. I don't know what they think, but I can only imagine, oh, it's somewhere in the back of their mind or

Yeah, I can do well in mid-caps, you know, because I'll be, you know, more mid-caps is going to be my straight. Yeah, I can do mid-caps or I'll find, you know, two or three times the small cap opportunities and just like a significant departure from where they built their returns in the past. And like four to five times, it doesn't really pan out well. Either, you know, there's kind of two scenarios I've witnessed. Either it's kind of a, you know, a slow bleed of, you know, mediocre returns or worse over some period of time. And then eventually, you know, they hold on to the capital as long as they can.

Or it's kind of a quick collapse if they get a bit overconfident and concentrated positions in some questionable companies and they don't do well. But I just think the incentives are bad because the managers, and again, not to manage specifically, but just general Wall Street behavior, the managers, if they get to keep their management fees, their performance fees, while they have that asset base, and they can make their however much amount of money, put some big number on it,

to them, they can say, I won, right? This is to many, many people. And look, there's nothing wrong with this. You know, this is an industry that attracts a lot of money. But if you say, but if your fund collapses or just, you know, you have a mediocre track record and you've made all this money, for a lot of people, I think that's winning for them, right? Now, for me, that's, you know, complete opposite, right? That's what gets me out of bed in the morning, right? For me, you know,

Yes, the money will come obviously, but the track record, the putting up the best numbers at the end of the day, making your mark on the industry, getting out of bed to find the next great company XYZ that really just gives you this thrill, this rush, that is what gets me out of bed in the morning. And so for that reason, I fully intend to abide by that cap. And I also want to go back to the plans for the fund and the partnership.

I really don't plan to raise capital above, call it $40 million, maybe a bit less, but roughly around that area. And I know a lot of people might say that's crazy, but I want to, for two reasons. Number one, if the capacity is, let's say, $150 to $200 million, I don't think it's good business or just a good idea to raise up to, say, $100 million. You have a couple of good years, let's say, and then all of a sudden, you have to tell your partners to just join, hey, I'm going to have to return your capital to you.

probably not going to go over well, just not good business in general, not good practice to treat people. Number two, I really look, I want those people, look, if you join while we're up to before $40 million and you get in, I can look them in the eye and say, "Look, I don't know how long it's going to take and I can't make any promises, but if we compound at the rates that I'm happy with, we can triple, quadruple, quintuple your money before we even have to have the conversation of who gets their capital back, whether it's a pro rata distribution,

So that, from a business standpoint, that is the plan for the fund. I'm in no rush to get there. The way I view it is I'm compounding capital the way that I'm comfortable with, that I think is going to make us money. And anyone who wants to join along for the ride for the long term, please join. So you've invested in several companies that I think are pretty low tech and boring, but have excellent unit economics. And boring to me, well, I think a lot of investors see that as a negative. I don't. Boring is beautiful to me, especially in investing.

So I think that it seems to me at least that you're intentionally looking for these kind of non-glamorous businesses and industries as maybe a fertile hunting ground for future opportunities. So I'd love to just know, what are some of the patterns that you've observed in some of the companies or industries that you've invested in that you think the market consistently is underappreciating?

Yeah, it's funny, I guess the boring or non-glamorous companies here. I think it's never been by design. It's been, you know, there are more maybe, you know, tech companies or companies in tech-adjacent industries and, you know, a bit more flashy. And I think the reason is just that from when you're screening and looking at their companies from a bottom-up standpoint, they just tend to be at higher multiples, right? And, you know, I mean, I look at it from, you know, more free cash flow, you know, owner's earnings, steady-state free cash flow.

And, you know, these companies trade on multiples of EBITDA, multiples of sales that I'm just simply never going to get comfortable with. If a company is not profitable, it's almost an absolute deal breaker for me. I don't think I have any companies in the portfolio today that are unprofitable. And so, you know, profitability is essential. And a lot of these companies, they are unprofitable or, you know, they're long duration stocks, I would call it, where you have some people who, you know, have a 10-year forward view. Hey, this company is very cheap on a 10-year forward basis. And if we're right, this will be like in a hundred bagger, right?

It's okay, just not for me. And so I think it just tends to be like the more boring, non-glamorous businesses that have these lower multiples to begin with. And that also, if they're in a more boring, non-glamorous industry, it probably also filters for less interest, less people looking at it, longer track records, and also less likelihood of disruption. If let's say it's an essential service, right? It's not too fast moving. And so

They haven't been disrupted for the last 30 years. It's not that they can't in the future, it's just that maybe they're just in an industry where it's really hard for tech, even like AI, to really change this radically in a short period of time. And oftentimes, for instance, you can see the beautiful thing is, I think is, and from a risk perspective, you can see the changes coming and you know what they're going to be. And you just know that it's going to be, okay, a really long time from now. We can take AutoPartner as an example.

it's a company we both know and that I've studied, electric vehicle adoption is a risk to the business. And it's one that, okay, you're selling auto parts right now, right? And that internal combustion engine cars, over time, they will spend more dollars for replacement parts than electric vehicles. So I think then the math becomes pretty straightforward. Okay, well, there's two things that really matter. Number one, how many years

until we see 100% adoption of electric vehicles or close to it? And then number two, what is going to be the reduction in spend over that time period for that? So you think, okay, if this is the biggest risk to the industry, then that's great because you can calculate, okay, let's say it takes 25 to 30 years, right? And look, Poland,

They import their cars that are like 13 years old from Western Europe. So there's like a 13-year delay behind what the first world's going to... And these things, they're actually moving in reverse this year because electricity is important. People want their gas cars. It's an adoption. I think it's just going to happen slower than people think. But let's say 25 to 30 years, right? And you can do the math yourself. And let's say, and I've done the work as well. Let's say we think there's going to be a 30% reduction in overall spend, right? There's fewer parts, but those parts have to replace or a lot more expensive. And they're just going to get more expensive over time.

But let's say there's a 30% reduction in lifetime spend per car in auto parts. So 30% over 30 years, you get to around a 1% reduction in spend. So it's like, okay, if I thought AutoPartner was going to kegger its profits at 13% for the next, let's say like 12% for the next 30 years, okay, well, let's subtract 1% from that. And now we're at 11%. Is that going to break your thesis? It shouldn't, and it doesn't, right? So I think that is actually a big positive of these non-glamorous, boring industries.

So we haven't had much of an opportunity today to discuss what you look for specifically in management teams that you're considering investing into. But I know you've made some excellent points that the CEO of a business has to make decisions on a daily basis that help guide the company into a better or worse state, and as well as that is shaping the culture of the business. But I'd love to know a little bit more about what other management aspects that you're actively looking for to determine if the management team is above average.

Yeah, management, you know, evaluation, that's an important part of the process for me. And it's something that I enjoy. I think, you know, there are, I suppose you can call it more, you know, quantitative aspects about a management team that you can screen for, right, from a screening standpoint, you know, that help me get comfortable. For instance, for me, sort of, you know, table stakes for me for companies are often, you know, not only has the company, has the company

uh, have had an impressive track record of, of stable and growing profits over, you know, a long period of time, you know, say at least 10 years, 30 years, 40 years, and have the people responsible for that growth, you know, are they still with the company, you know, and sometimes it might be somebody older, like as a chairman, but then at any case, okay, well, the people they pick to replace them and then the culture and the company probably is not radically different than when they were there. So, you know, so for me, like number one, yes, like that's,

If I had a company where there's very little track record, there's a new CEO, then it's just so tough for me to even get excited and comfortable with that. It's not a right or wrong answer, just my comfort level. So number one there. And number two, yeah, founders are obviously great. And people love founders for obvious reasons. They tend to be more ambitious. The company is personal to them. They want to see its success. They tend to live, eat, sleep the company. You can also have either a new CEO who is maybe promoted internally.

or that the founders steps aside to be chairman, but they handpick somebody. And you can kind of evaluate, okay, does this make a lot of sense? Mater Group, for instance, that worked out beautifully. They had a CEO who, he was an outsider, I think in 2021, give or take Justin Newich. And he's proved to be more than capable and the company has multiplied its profits in a short period of time under him. And one of the reasons, I think, there were many reasons, but one I remember was just they're looking to expand in North America.

he had from his career a very deep Rolodex of relationships in those areas. And that's a unique thing to the company. And you think for yourself, does that kind of make sense? So generally speaking, when I look for management teams, I like to see longevity in that standpoint. Are the people I'm investing with, do they have a track record usually of success here? Or is this a new team? So longevity

I do want to see ambition, right? Founders, this tends to be mostly the case, but with other folks, when you sit down and you spend an hour with somebody, at least in my experience, I think it's like a barbell of outcomes. Either they are very ambitious, and you can tell, like they're ambitious for the company, not for themselves, for the company. And they want the company to become the best of the world at what they do. And they do eat, sleep, and breathe

this company, every decision, every second of the day, their mind is consumed with like, what can I do to improve this company? Then you have the other end of people who, you know, it's just more of a job to them, right? They're here to collect a paycheck or there's some bonuses tied to some easy EBITDA bogey that they're going to achieve. And you just don't get that passion. It kind of oozes out of them, right? Either they have it or they don't.

And so, like, you know, that's so I think meeting people in person and going through questions, you know, asking them questions, seeing how they think, how they feel. I think that's important. Number three, integrity. Obviously, you need integrity. Right. And people it's one of these things like it's funny when I took the CFA exam, you know, there's like an ethics portion. A lot of people don't study it. Oh, I'm an ethical. And then they fail it. And that's a deal breaker, because if you fail that, you can ace the rest of the exam. But you actually fail the whole thing is the curriculum requires you to pass that one.

But I think same thing here, you think "Oh, it's like integrity", but it's so important because you need to look for because like these are kind of subtle breaches where they might do one or two or three like small things, like they tell you something here but then the results later on, you know, it's something totally different and then they kind of change your story. But you kind of have to remember "Okay, well, they're being inconsistent with me" or you know, it could take a lot of different shapes but then you know, there's never really one cockroach in the kitchen.

if you find them being a bit unethical or cutting the corners too much, these people, they move fast and break things, but they cut the corners too much, they do something where they cross it. It's usually not limited to one thing. So just leads to the question, okay, is the company doing things like that? Or are they going to do things to shareholders that aren't great? So integrity, obviously, you need to look out for. And then lastly, I think just alignment of interest. I think in this case, owning a lot of stock tends to be... And that's another quantitative screen, by the way, there.

The more companies I look at, it's one thing that I used to say, okay, well, you could overlook it to some extent. Maybe they're going to make enough salary and enough bonus, but I really think there's nothing quite that can replace large ownership right now. It could be like, let's say $10 million to them is only 3% of the company. That's still a meaningful amount usually to these people, unless they come from royalty, but then they're probably...

a second or third gen founder, I don't get excited about because they weren't the originals. And they tend to, I think studies show they tend to be worse outcomes. But look, it's usually meaningful to them. And you want to make sure as the company's profits are growing, the minority shareholders are going to see the spoils as well, right? Because if you have somebody, they don't know much stock, there could be some either through like bad incentives or whatnot, they are taking just big operational risks with the company, they might try to do things and

Charlie Munger says, you know, tell me the incentive, I'll show you the outcome. I think he's right. They could do things where, you know, they stand to make a lot of money if things go right. And if things go wrong, you're the one who's holding the bag, you know, heads I win, tails you lose. So I think, you know, alignment is very important. So I think those four things, you know, kind of sum up a lot of the management analysis there.

So there was another interesting concept that you wrote about in your letters, which was not letting good enough get in the way of perfect, which is the inverse of don't let perfect be the enemy of good. So you've noticed that many investors in markets make errors when they do things such as satisficing on investment that might not necessarily tick all the boxes. You've noted that your three boxes are quality, growth, and valuation. So can you maybe take us through an example of when you or someone you've observed has settled for just good enough?

as an investment and maybe how that decision played out.

Yeah. Well, I can cite somebody and that would be me. It's still very much something that I do. And I try every day to fight against and to improve in the sense that, look, I think it's more of like, if you think about not letting good enough get in the way of perfect, and I think that's right. I think it's a good mindset to have. And I think it's a goal. It's something you should strive for because in an ideal world, you think of the best investment that you've made over the last five years and the setup of that investment going into it.

And now imagine owning 10 of those or 15 of those in your portfolio. That would be like the perfect portfolio in a way, right? Something you're comfortable with, great setup, and they all do very well. Now you're going to make mistakes and, you know, not everything's going to pan out. So, you know, you can even if like 11 out of those 15 do really well, you're going to have a good outcome. But yeah, it's, you know, it's more like a challenge to remind yourself every day, because I think what a lot of people do and look at myself included is you, whether it's because you can't find, you know, these quote unquote perfect investments or just you kind of drift away, you know,

from that discipline, yeah, you might sacrifice or compromise a bit more on whether it's quality or growth or value or whatever the pillars that are important to you are. You just might drift away from them a little bit where the investment just... You take a step back and you think, wow, yeah, I definitely should pay more attention to that aspect. And then you end up paying the price for it. Maybe you don't. Anything can go up and you can be right for the wrong reasons or mixed reasons. But when you think about those

opportunities, you know, yeah, there's, I think even in my portfolio today, there's like elements of, you know, this is okay, this is good enough, but it's not perfect. Even if we look at Mater Group today, right? Now you size for it accordingly, right? It's no longer the big size it once was, but you know, that's something that, you know, could theoretically be replaced if I found a portfolio of 15 perfect companies, right? That were like a Mater Group with, you know, four years ago, right? With like a much lower multiple and the higher growth rate. Like, yes, like I would buy that one over the one today because like today,

It's no longer at nine times earnings. It's at, call it 18 or 20 times earnings, forward earnings, depending on how you look at it. The growth rate probably isn't 30% to 50%. Maybe it's closer to 20%, give or take for the foreseeable future. And quality, I think, is still the same. If anything, it's probably better because their position in Australia has gotten stronger and they've proven their North America opportunity. It was way more early stages. Now they've proven that they have a strong position there and they should continue to grow. And

this concept works in Canada and the United States. So if anything, quality has probably gone up and maybe you're more comfortable holding the stock for that reason. But yeah, that's probably might be more on the good enough side of things where at a 20 times, 19 times, 18 times foreign multiple, and that growth profile, all else equal, quality equal, yeah, you would do better in finding the major group before years ago. And so I see it as like a personal challenge for the portfolio. And it's something that I strive to all the time.

So I know that you've been spending some time these days looking at Japan. And Japan, unfortunately, has been historically a market that has been full of value traps. But there's new corporate governance reform going on now, and it seems like they're attempting to optimize more for creating shareholder value, which is great, of course. Now, I know many other value investors are looking in Japan as well, and they have been looking for a long time, and often not very successfully. But

I'd love to just know a little bit more about what you're doing specifically in Japan, maybe know a little bit more about what adjustments you're making to your investing framework, specifically when looking in Japan.

Yeah. And I'm a bit later to the party than many with Japan. It's very interesting. And it's something that I've been taking a serious look at recently. And, you know, with Japan, it's a developed market, of course, a terrific country in many respects. And definitely, you know, aside from communication, which I'll get to in a moment, definitely investable, like for all those good reasons. Now, you know, it's, I guess, going back to March 2022, somebody who I know well, and, you know, he'll know who he is.

But he urged me to look at Japan, said, "Hey, John, there's a bunch of corporate governance reforms that look like they're happening." And they were still kind of in COVID lockdown until October 2022. So in hindsight, yeah, that would have been an amazing place to invest. But the reason I didn't and the reason I still didn't foolishly until just a couple of months ago was because just the communication barrier to me has always been something tough to get around if you're going to build concentrated positions, right?

I'm perfectly comfortable translating documents in other languages. There's Google Translate, there's other AI-based tools out there where you can retain the format of the PDF or whatever the document is and translate it. And it's great. It's excellent. And you're just reading English, basically. It's the speaking to management that is more of the deal breaker for me, where let's say you have a scenario, I think it's the important scenario,

You own a stock there and you're two years into ownership and things are going well, pieces go up, and suddenly one day on a micro level or an industry level, something happens and the stock is down 40%. And most stocks that do well over a long period of time, studies show they will be down 30% or 50% at some point, if not many points.

It's down 40% and it seems scary in the moment. And you realize, you try to call the company to ask what's going on, get some comfort. And like, you can't really, you can get a translator, which everybody does. You can speak to them, but there's a lot lost in body language. There's a lot lost in intonation. And you're just kind of getting words. And generally speaking too, I've been told by many,

that Japanese CEOs, their communication is just not the same as in the West and not in a bad way. Look, every country is its own. It's just the way that we're used to. You're not going to get the same free-flowing information. It's just a different type of response and communication. All that being said, you're in a situation where you might sell the stock down 40% for the wrong reasons or for the right reasons, but either way. If I'm thinking about, okay, well, if I'm going to build a concentrated position in something,

and I'm almost like, that I'm underwriting the chance that at some point, it's going to be down 40 and I'm going to sell. You're just handicapping your forward returns tremendously. So now, to get around that, I have found a solution. And it's the first time I'm really considering this, but it's taking a basket approach to Japan, right? Not something I've done in other countries, but it's a bit more of a quantitative approach, so called like a quantum mental approach, like applying fundamentals, but from a much more quantitative sense of, look, there are pockets of Japan

in the small cap and micro cap areas that have done very well. From speaking to a lot of people, I posted something on X and it's incredible. You just get like everybody reaches out to you. It's still a wonderful community. And I had like six or seven conversations over the span of a couple of weeks. And a couple of the people especially were very helpful and I really appreciate them and shout out to them. And you kind of start looking, okay, in Japan, small cap territory, what has worked, what hasn't?

And there's pockets there where if you look at certain factors, they have CAGRs that you would be shocked by. Like there's, you know, there's kind of one factor that, you know, looking at in the small cap, like the 15, 25-year CAGR is like 17%. I think that's better than the S&P 500. And it's certainly better than the benchmark, which has done like 0% over the time in Japan. And so you think, okay, so, you know, you kind of, you can start there. And, you know, the beauty is like, there's something for everybody there. But I think, you know, while that's true, I think for me, it's you can tighten the screws even more. Like

look, at first, you filter okay, things that meets quality standards, meets growth metrics, and it's trading at below 10 times earnings for free cash flow, right? And then you get over 100 companies, and you're like, "Wait, wait, wait a minute. Any other country you screen for in the developed world, you might not find anything." But then, so you have permission to tighten the screws on book value, on

on that, you know, and CAV, like there's so many net nets out there on the cash on the balance sheet and, you know, maybe one day we'll come. And what you said about the capital reform is interesting because look, I think everything above 2 billion basically is kind of been picked over that game might be over or it's in the later innings, you know, because all the big asset managers who want to go for liquidity go there. And because look,

Just for those who might not have been reading about it recently, the government essentially said to all companies listed on the prime exchange, that's their kind of S&P 500 equivalent, if you're below one-times price to book, you have a deadline by, it was March 31st, 2025, to submit a plan of how you're going to get above one-times price to book. There's a lot of companies who were below one-times price to book, and the easiest way to solve that is to return capital. If you have a lot of net cash through one-time big buyback or dividend,

And a lot of them do that, and then the stock pops like 50% or 100% or 200% in a short period of time. Now, a lot of those have been picked over. But in the standard exchange where the small cap microcaps, there hasn't been as much pressure yet. 49%, as of a couple of months ago, might have ticked up, but 49% of companies have submitted a plan. And that doesn't mean you do the plan. You have, I believe, five years to do the plan. So essentially, in small cap Japan, even from the capital return angle alone,

you still have most of the companies who have either not submitted a plan or not taken any action on that plan. And so that's like a catalyst that can help. And if that doesn't happen, then there's so many companies out there that have done well with certain factors. So yeah, so to kind of summarize, very interested there, may take a basket approach and see how that goes.

Well, John, I just want to say thank you so much for coming on to the show today and sharing your insights with me and the audience. I'd love to give you a handoff and share with the audience where they can learn more about you. Yeah, Kyle, this has been great. Thank you so much and your team for having me on. If anybody wishes to learn more, you can visit my website, www.soropeakcapital.com. Accredited investors can see our letters and our research should be available to everybody.

And if anybody would like to reach out personally, you can find my email and send me a message. I'd love to hear from you. Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com.

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