Patient Value Investing and America’s Industrial Advantage | Bob Robotti
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Before we get started, I just want to do a quick disclaimer that nothing we say here is investment advice. As well, nothing we say is marketing or advertising for Rabadi Advisors or any of their funds or strategies. Everything is meant to be informative about the fund management industry.

Hello, everyone. Welcome to another edition of Other People's Money. I'm joined today by Bob Rabadi, President and CIO of Rabadi & Company Advisors, a value-focused New York boutique asset manager, and one of the increasingly small class of investors who can boast an over 30-year track record.

Bob, thank you so much for joining me here today. Oh, my pleasure. Thanks. Always love talking about what we have a passion for. So thank you. You clearly do have a passion for it. I got to meet you a few years ago in Omaha for one of the last Berkshire meetings with...

with Warren, and you gave a talk and a lot of the things that you spoke about, you are still speaking about today, which is quite uncommon. Market narratives shift very quickly these days, and you are a proponent of patient capital, and you really have a long-term holding period compared to pretty much everybody in the market these days. Can you talk to me a little bit about why you believe patient capital is still

a value add for investors and increasingly quarter focused investment landscape. So there's a phrase that I've come across and it's by Bernard Baruch and it says data and information is no substitute for thinking. And so much today is news and information flow is just so strong and so heavy. What it does is it helps concentrate down into shorter timeframes, people's perspectives.

And, you know, that's great because it adds to market volatility. It adds to poor decision making. It adds to misallocation in capital. It adds to valuation issues that provide opportunities for those who can think three years, five years, 10 years about opportunities, investing, investing in companies. Right. It's not buying stocks. It's not trading in some name. And so the world's become more focused on that. The allocation of capital clearly is more important.

passive, you know, you don't buy a stock, you buy an index, you buy something so that you don't know what stock you're buying or selling. So that kind of flow of capital, you know, has clearly laid the groundwork, an opportune set of companies to invest in that have clear demonstrable advantages, very modest valuation, and yet also companies that have

You could understand there are cyclical structural changes that are on the way that potentially really benefit these companies. And therefore, there's a long-term opportunity for significant growth. So that's what I joke. I said, you know, today you can buy Ben Graham cigar butt companies that really have great growth in front of them. And for reasons they have...

barriers to entry and then for a long runaway of opportunity. So therefore you really have growth stocks that you're buying at very discounted prices. So it's a great time to be an investor if you have the ability to understand what's interested, what's coming as opposed to where we've been and what's in the past.

There probably are more investors who would agree with you. The problem is that they just don't have the mandate for it and the investor appetite isn't there. So a lot of it has to do with just who your investors are and their willingness to trust you. Now, if you've had relationships with people for 30 years, 20 years, 10 years, you know, it's a lot easier to get them to to trust you when you say it's all going to come back around. We're buying. Yeah.

Well, it is interesting. So that's right. And that is our advantage, right? The advantage is we can only be as patient as our capital is. And to the extent that we did not have investors with us. And so those investors have been with us. There's a group of them that probably came in like 1999, 2000. So they've been with us 25 years.

And the other group of investors is when we started. So they're 40-year people of friends and family. So the capital we have is extremely patient. They have experienced really good returns over time. So therefore, it's easier for them also to be patient in that process. So that's a critical differentiator. Clearly, 15 years ago, there were a lot of value investors that I knew and thought extremely well of.

hadn't also done well in terms of raising capital. And therefore, when the capital flowed in, therefore what they did and how they invested it became a little bit problematic and have had dramatic drawdowns because that capital doesn't stay. It's gone away. And therefore, you radically change that business. And so many of those businesses are either a fraction of what they used to be, or they've gone away. So the competitive landscape is substantially better than what it was. That is something that I've heard you talk about. You gave a talk recently

to a small group where you mentioned a conversation you had with Chuck Royce and Chuck was talking to you and he said, I've made money every year and we still get outflows. And if those are the type of people who are interested in the same names, even if they're making money, if they're getting outflows, they have to sell down those names and that's going to affect the share price. Pre-compensation, you pointed out that not only robotic advisors

manages money for people. We also, I started the business 40 plus years ago and I had audited Tweedy Brown and knew them extremely well from the inception of

the launching pad of Tweedy in 1975, and also then worked for Goobelly as a CFO of a small firm. And both of those were broker-dealers who over time morphed into the asset management business. And so that's what we did too. But the broker-dealer side of the business, of course, is really interesting in terms of the information flow we have, because who have we historically had done business with as small cap value managers?

And so that universe of potential clients has continued to dwindle and dwindle and dwindle. And then many of them got away. And, you know, Chuck Royce is an example of someone who, if he had a conversation with, he's not looking for a new idea. He's looking for what,

Cassell and his portfolio to meet the redemptions that he is consistently having. And that story is repeated across the small capital environment of active managers. So it's an interesting information source for us, the broker dealer who we talked to and now we have information with really smart, intelligent people who are coming few and fewer between, but

There's a new group of people who are getting into the business who, you know, have the same passion, have come across, have listened to, you know, people like you and Harris and say, gee, this is really something I am passionate about. And so that will continue to happen. And so new things will come to fill.

What do you think with Warren stepping back? Do you think like the Berkshire meeting is still going to be a big event that everyone goes to? Are people still going to show up? And my overall comment on that is that is nothing other than idle speculation. Right. There's really not much value in that. But of course, it's a topic of conversation you kind of can't get away from because if they do, if they don't, you know, that really won't make much difference really in terms of

doing bottom-up research, identifying companies, thinking about investing. And you'll still have all of the concepts of Buffett and how he's invested to be able to apply them and think about it, how it works for you and how the application is.

That said, I think that next year I'm open to the idea there's more people who will come than normal because that's the question. What's it going to look like? How's it going to be? So therefore you pique people's interest. And so I just don't see how that means you don't come because you want to see it. You wanted to see Warren when he said, oh, I have one more thing I want to bring up. So those things definitely will pull people in. And so, you know, I think that definitely the next year is

I'd be shocked if there were more people who want to come see what happens now. One thing I have noticed from my conversation with value investors is there is often a similarity in mindset, in investing philosophy. One of the things that I found from reading your letters was the difference in that you actually love industries that are beaten down. Most value investors are trying to find those pockets of value where things are looking good. Yeah.

You seem to be fishing where things are looking bad. Can you speak to me a little bit about why you like industries, companies that are facing headwinds rather than tailwinds? It's clear enough to think about, you know, you want you want to identify securities that are mispriced, something that's doing reasonably well, that is a niche that can do somewhat better.

is harder to do and harder to time and harder to get the valuations on. Something that is not making money has no prospect of making money. So, you know, as we talked about at the grants conference, I talked about in the Zombie 1000,

You know, that is part of the Russell. There are so many companies. People say it's a bad index. Well, but it's a great place to hunt for great ideas. Right. And so in that zombie 1000 are companies that you can clearly buy for. It's not 50 cents at a dollar. Right. You're buying these businesses for 20 cents at a dollar, 10 cents at a dollar because no one would build that business because it's not making money and doesn't have a prospect for it. So what's the catalyst? If there's no catalyst, I don't want to own it. So within the zombie 1000, are these companies?

declining businesses? Are these businesses that are facing more of a less of a secular headwind, more of a cyclical headwind? How do you discern from a melting ice cube with this is a company that's going to go bankrupt and one that is going through a hard time? Well, I don't necessarily think it's necessary to distinguish between those two things, because I think you could buy something that eventually over time will be a melting ice cube.

and still have really great returns uh you know on the investment but of course you really are looking for something that is a business that is not in decline there probably is reasons to believe that it's actually has a growth up a lot of growth opportunities right so the business itself is is just cyclically depressed um and yet the future is probably even better than it has been in the past for a multitude of reasons including

not only is the industry potentially, you know, optimally what you want is that it will grow, but clearly the company itself and its position in that industry is vastly different than what it used to be. So, yeah, I think people closely identify us with builders first source of distributor of lumber and lumber sheet goods to the home builders. And it's a, you know, a perfect example of a business where home building in America is definitely something that's going to increase over time. We need more homes and on a demographic basis, we'll have more people. So it is a growth business, ultimately,

You know, that was really sickly depressed. But also what happened to that company taking advantage of that. And that's what we believe is business is going through difficult times. Economics 101 really does matter because that's that's the catalyst that we believe in. We believe in the catalyst of economics, respond to the environment. People shut down, reduce unemployment.

pull-in capital and then consolidate and then opportune people can see the opportunities and take advantage of that and therefore substantially change the earnings power of the business. So not only is Builders First Source transformed from the company it was given what it's consolidated, but the industry is in a different place too. So it's a combination of factors. So in a way, that's the ideal, but it isn't always that because I would say the offshore oil service businesses, which I own, Harris owns, are businesses that are

are in terminal decline. Now, the question is, what's terminal decline? Is terminal decline a 30, 40-year period of time? And because if it is, then the cash flows in the 50s and 60s, you don't need a heck of, you know, they're not valued very much today anyway. And in the next 10 years, of course, in those situations, the next five years, you're going to generate more than enough cash to get a return on your investment. And so there's a significant window. But

Of course, you've got to be realizing the fact that this is a business that isn't going to grow. This is internal growth. You know, this is internal for a number of years flat, and then it's eventually going to decline. But that doesn't mean there isn't huge opportunity for great returns over that period of time.

You talk about the landscape has changed for building products. Obviously, there's a massive new entrant into the space with Brad Jacobs and QXO. How has his foray into building products and services impacted the landscape? It is an interesting business in that...

There are all these verticals and the verticals don't cross, which is interesting because I, you know, and having invested in the business, I always thought that was odd and how it would make sense for those verticals to cross. But the biggest thing I would say about Brad Jacobs entry into the business is it is an affirmation of the opportunity and the growth in the business. And, you know, he's done this because he believes, right, the fundamentals of the business are strong and will grow.

And then he also believes by executing, you can take advantage of, and there are opportunities for consolidation and optimization. Of course, in my mind, all that is is an affirmation of you can invest along with Brad, who paid probably a relatively fair price, I would think, to buy Deakin, to therefore have a platform in which he's going to do a lot of creative, smart things, I am sure. At the same time, of course, you could invest in Builders First Source at a

you know, lower valuation and a company that also had an affirmation that it's worth something because the chairman of the company who's been involved with it since 1998 and has built this business, just what happened to the open market and bought a huge amount of stock personally. So therefore, you know, there's an alignment from someone who owns a lot of stock personally running this business and they have the competitive advantage of the position that they have today is a much better competitive position in its vertical, lumber and lumber sheet goods, than Beacon in its business. So-

But to me, it's an affirmation of one of our investments. And once again, someone is saying this is a really good investment that has excellent long-term growth dynamics and it has valuations and a competitive advantage in its

And it continues through its own mechanism to try to do more and move outside the envelope and do more things associated instead of just lumber and lumber sheet goods. So doors, windows, sidings, more things. Of course, the digital solution that they bought four or five years ago that they've been working on really is an early stage to try to figure out how to do the whole house solution that will provide more of the products associated with it. So to grow it out organically...

you know, with a technology advantage. So he's already doing the things that Brad and have been doing them for five years, you know, in a thoughtful, intelligent way. So it seems to me, once again, they've got the headstart and they've got the platform that is a bigger, better platform. So thank you, Brad, for reiterating the fact that we have a really good investment and I'm sure you do really well. And that's great. And a good disciplined competitor in a vertical that they're not in is that

and yet they may try to get into that vertical is really good. Competitive pressures mean people who are well positioned work a little harder too. So I think it's an affirmation of our investment there. I think the chairman that you're referencing increased his share by over 40%, something like that, at 111 a share, I believe was the transaction. And I actually went to a talk that Brad Jacobs did at the

outset of QXO where he said, you know, he went to consultants. He wanted to do another roll up. Anybody who's familiar with his strategy. And he said he went to these consultants and they gave him said, what's your number one industry that is primed to be rolled up? And they said energy. And he's like, well, the problem with that is you can't raise any money for it.

And he's like, okay, well, what's number two and building products and services. So the, actually the number one that he wanted to roll up, he just said, I just couldn't, couldn't raise the money for it.

That was absolutely. The best thing was energy, but since the capital won't follow me into that, I'm going to do the second best thing. So that was once again an affirmation of we're invested in the right places. The valuations are really attractive and the opportunity is great. I want to talk about North American advantage. I mean, that is something that you have. You're obviously heavily focused on industrials, real products, energy.

and goods and services in the real economy. And you have for a number of years been highlighting the advantage of North American operations. Obviously, in the current landscape, the policy landscape with tariffs, that is something that the administration is actively trying to encourage is more reindustrialization. I'd be really interested in how your view of the North American advantage has

has shifted with this new policy. The North American advantage for industrial purposes, in my mind, is the fact that the U.S. has a lower, North America has a lower cost of energy than any developed market around the world. And that's a sustainable competitive advantage for at least the next 10 years and probably the next 20 years. And that is natural gas is overly abundant in North America. And that means that natural gas prices here are substantially below where they are in the rest of the world.

And that natural gas, one of its main uses is to convert and convert into electricity. So therefore, electric costs and power costs are lower. So energy intensive businesses in North America have a 10 to 20 year competitive advantage. And since pricing is set by the rest of the world, what that means is an excess profit to be realized by those companies based here. And that is the critical thing. So whether it's tariffs today or in the previous administration, it was carrots in the form of

the IRA, that isn't what really at the end of the day will determine the difference. Determine the difference is the economic reality. So that energy advantage, lower cost means, you know, so when the Europeans were complaining two years ago about, oh, the IRA is killing us because our European countries are closing down capacity and moving into North America. No.

The reason they're moving it here is because you have a really high cost of energy and they have a really low cost here. So they're competitively advantaged. So they're moving here. The IRA is the icing on the cake. You didn't even need it because it was going to happen anyway. And so it's interesting in my mind how the two presidents, like the opposites of the world, they would say, are really doing the same thing. But the key thing is that advantage exists without competition.

giving away carrots or trying to batter it away with sticks. So that will be at the end of the day because administrations will change and you do something because the government has a policy and therefore tries to incentivize it. That's a risk that that government policy doesn't persist or is ineffective. The fact of the matter is the underlying economics are the determinant fact and that is clear and obvious and sustainable. And so, yes,

industries, as people say, reshoring things coming to America because they're competitively advantaged. If they're an energy-intensive business, it makes all the sense in the world because this is the place that has a lower cost of operation. So as opposed to 40 years, 50 years ago, everything left the United States because it had a higher cost of operation. So that's what happens. You know, the...

The world's changing and globalization evolves. It isn't deglobalizing. You know, just kind of who's competitively advantaged. That advantage changes and it moves. And that reality is what really drives it over time. So do you think people who are skeptical of reindustrialization are overly focused on the labor cost?

So a great conversation that exemplifies this is talking to Kastenbaum, who ran Stelco, right? Recapped the company, did a phenomenal job, turned it around, ended up selling it to Cleveland Cliffs not long ago.

And chatting with him at one time, and that was a union operation that he ran. So he was, the union loved him and he loved the union. And that's what he would say. He said, listen, 10% of, because labor, it was energy intensive businesses tend to have relatively low labor cost of goods sold. So he said, it's 10% of my cost of goods sold is labor.

If I don't make money, it's because I paid too much for the energy, for the iron ore, for the met coal, for all of the variable costs that I determined.

the 10% to laborer, if I cut it by 10% or 20%, I'm changing my cost of goods sold by 2%. What am I doing? How does that work to my advantage? Instead, I want that 10% cost to be hardworking, focused on how I think the business should be run and optimizing the business. So they are my partners and thinking about them that way. So that's what I also think is reindustrialization also means laborer

has a participation in that process. So what we've spent post the financial crisis, the government policy has been, oh, the way to incentivize economic activity is only done through the cost of capital. So it's a modern day version of the trickle down effect. If we lower the cost of capital, suddenly people will throw money at things and you'll have economic expansion. Well, that didn't happen.

So the Fed policy, everybody talks about the Fed. The Fed is relatively ineffective at the things that really matter. So I would say the Fed policy to...

induced economic activity was a failure post the financial crisis. And so therefore low interest rates is only one part of the equation. Cost of capital is only one consideration. Are there opportunities for growth in the business? Can I deploy capital? There are a lot of other factors that therefore enter into those decisions. And it wasn't an environment that was conducive to that. And all you did by lowering the interest rate and leaving it there for 10 years was you caused inflation.

financial inflation, right? Financial assets appreciated. And then what happens? The 1% is have more and the 99% is have less.

You've exaggerated and you've accentuated that problem. So now the re-industrialization, the 99% is going to end up getting really good jobs. They're going to participate in that process. So the idea there's a participation and an economic advance that will happen. And at the same time, I think it's a really good chance that the way capital is allocated, the one percenters are going to lose 30% of their money because they're invested in things that weren't.

were winners in an environment where inflation was low, interest rates fell through the floor, money was given away for free, you allocated capital, you misallocated capital accordingly. And those are huge amounts of capital that have all kinds of valuation risks and have, you know, the future economic environment is not the same thing. And it won't be as conducive as it was to all of the good things they've had in the past. So the 1%-ers are going to lose 30% of their money. So that'll be... And the 99%-ers will kind of like that. You know, the idea that, you know, the...

I think I'd take a down peg. What are the industries that you think are definitely going to come back home? I mentioned Stolko. So we've followed the steel industry for the last three, four years. And I do think that, you know, North American steel in many ways is competitively advantaged from the point of view of

You know, we have all the coal here. We have all the iron ore here. We have low cost energy. Those are the three variable costs in making steel. We're competitively advantaged in those things. And so I think that's why you saw Nippon Steel, one of the largest steel companies in the world, wanted to buy U.S. steel because they want to have a bigger participation in a market that they see. Not only they think the opportunity is there, but Japanese companies...

we want to manufacture in North America because it's competitively advantaged. So that's where the customer is. So they're looking to get in front of the customer. So that's like an affirmation of it's an interesting place and an interesting industry. And the other thing about North American steel is that it's also environmentally advantaged, right?

Right. Nobody has the amount of EAF production and that's what it is, right? An electric arc furnace, the EAF, right, produces a ton of steel for a quarter of the CO2 than a blast furnace does. So,

But environmentally, we're better than the rest of the world by far. So we make the lowest CO2 polluting steel in the world. And we do that with locally sourced ingredients that we control. And in a market that I do think that that energy advantage means there's more and more activity and that activity means more.

You need steel, and whether that's for industrial purposes or whether that's for renewables. And so therefore, energy and the concern about energy is not going away. And, you know, renewables clearly are part of the equation for what you... And I think the world's need for energy is growing. It will continue to grow. And therefore, you know, you'll continue to need... Obviously, renewables are part of that solution. And so the steel and cement and all the tangible things needed to do that, the copper, all of these things are...

fully tapped out today. And yet you're going to increase the consumption of those things because you're going to make more of these things. So it's an interesting time where I think there's all kinds of structural advantages that are changing. Who's well positioned? Who's the right business? Who's going to be able to? And in that process, if we do have inflation and therefore higher interest rates, who also has pricing power? So therefore the supply and demand will determine the pricing power, not

inflation in the general world. You can have inflation in the world, but if my product is in high demand and short supply, I have pricing power. So if anything, these companies potentially are part of the cause of inflation. They're the beneficiaries of inflation because you need more of what they have and it is in short supply. So therefore, they have pricing power.

So industrials, what about slightly more advanced manufacturing? Yeah, I think so. And I think, you know, at different points, different places along the line. So I think there's a lot of things. Well, I also think clearly chemicals are advantaged. I think fertilizer is advantaged. Fertilizer is advantaged also. And also there's a structural change going on in the fertilizer business because all fertilizers start with making ammonia.

and the new uses of ammonia in terms of energy transition, whether that's going to be as a marine fuel, whether that's going to be blending it with coal to therefore reduce the coal burn and power generation. So all these things are increasing new uses of ammonia, whether ammonia is a facilitator for hydrogen and the use of hydrogen, which will also grow over time too. So

There's a lot of incremental uses so that that industry not only is competitively advantaged if they're making fertilizers here, ammonia, but ammonia's uses are continuing to expand to other things. So there's all kinds of organic growth from the fundamental product that well positioned. And in that regard, you know, one of the companies we like and we own, and I've been wrong for a long time is this LSB Industries, which I think is one of the smaller competitors in that space. But I think that

It's well managed. The owners really understand the opportunity. The valuation is extremely discounted. You can buy this company for, you know, and I don't know if it's 20 cents in a dollar for what it would cost to build the capacity they have, which is competitively advantaged position here in North America and has potential growth opportunities, right? There was a project that has come and gone, but no, it probably will come back. And that is making more ammonia here for exportation to other markets.

So that's an example, again, of another industry. The CF Industries, of course, is the nameplate in domestic production of fertilizers and a good company with a very modest valuation on it.

And so but LSB is the one that we think is particularly interesting. You talked about that cost of replacement metric. I'd love to get into that a little bit more. I mean, how important is looking at what is the idea of what is it going to cost for somebody to go out and start this business from scratch compared to what I can buy an existing business for today? How often is that a metric that you're looking at when you're evaluating a business? Frequently. Right. So when you're looking at a business that isn't making money,

what's it worth? And people do things like, well, it used to trade at seven times EBITDA. And I think the EBITDA could be this. And so you have to use metrics. So Builders First Source was like a perfect. So of course, we invested in Builders First Source. And then from that, we found a competitor that had come through bankruptcy and we invested in BMC and owned 22% of the company. So when people would think about the industries, I'm like,

There's no template for what this company is going to earn because what it did in the past and what that business was in the past is not the same as what it is today. So you really have to think about it in a different framework to understand what the earnings power of this business is. And so that's a repeatable pattern, though. And that's what we also think is that when you're buying things that are zombies, that aren't making money, all of those things,

If the business and industry is one in which we have a high conviction that the level of activity at least returns to where it was, in looking at what it would cost to build a facility to get into it, is an indication as to over time where the earnings power is going to go in that business. And so therefore, that's the true north. So whether that was buying boats when they weren't making any money, you didn't want to own a boat, you could buy a boat for 20% or 10% of what it would cost to build that boat. That is a relevant economic metric.

Of course, what you don't know is you don't know the timeframe, but again, when you buy it at 10 cents and 20 cents at a dollar, you can have an awful long timeframe and have a tremendous return on investment. And yet that's where it will go because at some point you will need incremental capacity. And therefore, what does it cost to build that? Can you build that? One of the industries that we're invested in, have invested in, and hasn't worked the forest the last two years has been lumber business.

It went into a decline two years ago, and therefore we think there's great opportunity because you could buy a lumber business, we think today, for a fraction of what it would cost to build that business. And we think the normalized earnings power of the business is you're buying them at two times earnings. So these things are extremely attractive, but in the meantime, they lose money, they continue to lose money, they go down. So people don't want to own them. And so again, you're buying it for a fraction of what it's worth. And yeah.

Lumber and the use of lumber is something that's an increasing product over time. And what happens is the same thing. The last two years, given pricing has been terrible, at break-even, below break-even, capacity has been taken out of the market. So you permanently reduce substantial amount of the capacity. That happened recently.

large pieces of it in 2024 continue to happen today. So you continue to take capacity out to therefore bring capacity down below a normalized level of demand. And so therefore, when demand returns to where it is, the earnings power of that business today, we say, is probably even better than what it used to be because there is less capacity available and the market will absorb all of that capacity and need more capacity. And where does it get it? How does that happen?

So repeatedly, we have the North Star of what does it cost to replace that business, that asset? And that's the relevant point that earnings return to over time. And if the staying power of the business and its ability to do things when things are down and potentially increase capacity is an opportune place that should get you really great annualized rates of return.

Okay. So you said lumber has been struggling. Obviously, Builders First Source has pulled back with rates staying higher than a lot of people anticipated. The housing market has been relatively slow compared to what it was before. I'm sure lumber maybe not as directly tied as building products, but pretty closely tied to the housing cycle. I mean,

I mean, how has that affected the industries that you're focused on right now? Lumber and lumber sheet goods are the vertical that Builders First Sources is in. And so lower prices for lumber means lower profits, right? Because they make percentage of it. The percentage doesn't change so much, really. And so, but the price is $350 a board foot instead of $700 a board foot. You make half the profit.

And so therefore the pricing is a clear, relevant thing. So the earnings today are depressed because A, volumes are a little bit light, but also the pricing is low. And so there's a

The earnings power of the business in a normal pricing environment for lumber, which we'll get to before we get to probably a strong market, because you continue to take capacity out of the market. So you're right-sizing capacity. So pricing gets back to $500 a board foot, which is probably what the industry needs to have reasonable return on capital. And so that's where we think it goes to. So therefore, there's an uplift that comes from that. And what inevitably happens in cyclical businesses like this

especially as you reduce capacity, reduce capacity, reduce capacity, you never move it to the right place you go too far. And there's a high degree of probability that when demand comes back, you're going to end up with pricing moving up

significantly to therefore send messages to the market, to therefore produce more to bring it onto the market. And you can't turn that around quickly. So as it takes time, that means prices rise beyond the normalized level too. They go below it. And of course, we saw that two, three years ago where lumber prices went as high as $1,600 a board foot. So builders first wish they did money in that environment. And that kind of an environment, it's priming up to do that again. You've

cleared out the inventory reducing capacity in the meantime builders you know is well positioned to distribute and continue to make money in any pricing environment and will participate on the upside although the lumber companies clearly have a lot more leverage to lumber prices and profitability i remember that period lumber was the eggs you know it was the uh commodity that was getting front page news for how high the prices had gone but i want to switch here a little bit to um

How you manage positions after you've identified a business that you think is attractive for all of these reasons that we've discussed, um, both engaging with management and also trading around as things get overstretched, as you said, they tend to do. I know you've, um, you know, traded around your, your builder's first source position as it's run up, as it's come down, same thing with Tidewater. Um,

but you've also engaged with management over time consistently. So I want to talk about both of those aspects. Well, since we're into these businesses, when it is in making money and there's a long runway of opportunity, it's also, we think, great. Because what ends up happening is, you know, Builders First Source, when I visited them in May of 2009 down in Dallas and met with the CFO, the CFO had no problem meeting with me because no one wanted to talk to him.

And so therefore, you know, you get to talk to the senior management because it's like the Maytag repairman. Nobody talks to them. Nobody's interested in them. And so therefore, you can develop relationships. In the meantime, you know, there clearly is a long runway of opportunity. So therefore, to spend time to understand the people, the competitors, the dynamics, and the people are a critical part of the equation, right? Who's the company that has the people that have the vision to be able to execute? Because clearly, build this first source

The advantage is the chairman of the company, Paul Levy, understood this opportunity and continued at various times to be able to push them to execute, you know, to lever up to buy ProBuild in 2015.

Right. You continue to look at, you know, when I was on the board of BMC back in 12, 13, 14, you know, I knew that Floyd Sherman, who ran Builders First Source, was interested in Builders First Source. The footprint of the businesses fit together, you know, in terms of when they both were in Texas and one went west and one went east to smile across the whole country.

part of the country that there's all kinds of development opportunity and new home building in. So, and eventually amalgamating and consolidating in with builders first source. So all of those things are critical elements to people.

And I also said to Paul Levy not long ago, I said, Paul, you know, the best thing that happened to Douglas First Sources, the business took longer to recover than everybody thought. Because by 2015, which of course the bottom was, you know, in 09. So here you are six years into a recovery, but the recovery was a slow recovery and therefore still difficult. So you had the Johnson family who owned ProBuild.

saying that's it I'm not writing another check for a hundred million dollars to keep this business in business I capitulate at the bottom of the market so they capitulate at the bottom of the market and Paul went out levered up the company and said this is the time to do it so you

you know, very opportunistically took advantage of that and of course helped transform the business. So those are critical elements. The right people too, because the right people with the right assets really substantially changed the earnings opportunity of the business. Obviously, this is an opportunity where you went in, you spoke the same language, you saw things the same way. What about times when you go in and they,

Are stuck in the sand and they maybe don't see it. Do you get more aggressive with your activism? Have you ever fought to change management in a business that you felt was going to turn around, but there was a problem with management?

Hard to do. Really hard to do. It is problematic. And maybe some people might even disagree with me, but I actually think I'm also, I have a problem in terms of my personality. That's not my personality to be that aggressive. And so therefore it's hard for me, even if I think that's the case. What I also will say is, that's one of the perpetual questions you want to, how critical is it? Would you invest in a business? Does it have a good manager and all those kinds of things?

So with the benefit of hindsight and the proximity of information that I had, here I accumulated 22% of BMC, I and two colleagues did, and joined the board. And therefore being on the board of the company, the person who was the CEO at the time, I don't think it was the optimal selection of CEO. And I don't think he fully understood the business. The fact of the matter was the business was in a position and in a place where

And that's what it is. It is also that business is one in which the guy who runs the market in Denver and the relationships he has with those customers and the guy who runs it in Jacksonville and the guy who runs it in Seattle, it's a very decentralized business. In many ways, they're the critical elements to the success of that company. You know, and who's in the CEO offices, you know, the allocation of capital and growth of the business and those things.

Those opportunities present themselves and being aggressive to execute on them, you know, is an important component. But you can have a company, I'd say that the manager isn't the right manager. And in that situation, my co-owner who had a bigger position than I

was a hedge fund who also was looking, had invested in '09, was looking for an exit, right? Because they are transitory owners. And so therefore they invested well, it was bought really cheaply, they had made a lot of money, and so they looked to move on. As opposed to our interest was, well, gee, we think this is a really long dated opportunity. And therefore we have no timeline in our investments. So therefore we want to be invested in as long as we think the price, the value is substantially discounted and the growth opportunity is clear and demonstrable and really

really interesting. So, yeah, he didn't want to change out the management because changing out the management would have then pushed back the ability to probably monetize this thing another two years. So therefore, you know, he has to weigh those things off in the process. So you like to find horses that are so fast they could win with a 200 pound jockey. Well, it is good. That may not happen. It's a combination of factors.

When you're invested in a company for so long, there are bound to be big run-ups and big pullbacks. And being active on both sides of those is very important for improving long-term returns. That, I will tell you, is not of my nature. And so instead, of course, what I've gotten

So I have a famous investment I talk about. My biggest loss ever was an investment I made in a company called, it's today called New Market at the time, was called Ethel Corporation, controlled by the Gottwald family. And that's what happened was I bought it. They bought back stock at 45. I

I took that as a cue since the Gatwolds are really smart. They didn't sell any stock. They bought that off Malusio Cooley. They thought that was much less than the business was worth. A year later, I could buy it at 35. So I patented myself with the back of pretty smart. I bought it for less than what the Gatwolds think this business is worth. It proceeded to have a tough time for a multitude of reasons and go to four.

But in that process, it's interesting. People talk about what's your self-discipline and they say, "Well, I recently was on a panel with someone and they said, 'Well, at 5% we look at it. At 10%, we totally re-underwrite the investment. At 20%, we're out.'" And so I'm like, "At 5%, I couldn't care less. At 10%, I don't even know if I noticed. At 20%, I'm like, 'Oh, maybe I should look at it again.'" So we have, of course,

clearly the opposite reaction. And even in businesses going through difficult times, we find that the price moves in advance of how difficult it tends to be. And so we bought more of a 35 all the way down to four.

But it recovers to 15. At 15, now everything's cleaned up. The balance sheet is really strong. The business is turned. The consolidation that they were participating in before they did the buyback has come to fruition. There are four competitors in an oligopoly thing, rationally competing in a very rational manner. And I say, next year, I'm talking to the CFO. And I say, next year, you're going to earn $4. You're a $15 stock. You weigh on the value. And the CFO, nobody

Nobody else talked to the CFO of Newark at the time. David Fiorenza, nobody called him up. Nobody cares about the company. It's like forgotten. And yet I know him for five years. And so we've been there. And of course, it's interesting when you invest in these big companies, you can appreciate

So he, of course, couldn't see the forest for the trees, right? Because in the last couple of years, he was at times where, I don't know, we may have to restructure the company. We have all kinds of issues. So every day he sees a new tree because he runs into a new tree. He can't see the forest necessarily and say, so he says, Bob, from your lips to God's ears, we're going to do four hours. And of course, next year they did four hours. And so I bought it at 15. I loaded it up. I made it a

over a 5% position and I'm feeling really smart. And then I started to sell it and I started to sell it at 42. I'm like, yeah, it's 42 on $4 of free cash flow. This is industrial business, pretty much. The fact of the matter was the runway of opportunity and the consolidation was just beginning. And so here I am selling in stock and they start to buy back stock. I'm at 48. I sell some more stock. I sold at 62. So eventually, no, it was eight years later. So this is all happening in 05,

And by '13, we got a $25 dividend and then I sold it for $275 a share. So the stock went to $300.

And so the loss I incurred by patting myself on the back, how clever I was in selling the stock, when that's what it is. You bought it for 10 cents and a dollar. And so selling it at 20 cents and a dollar isn't really fairly intelligent. So therefore, you know, we really do think there's opportunities and it's the price to value is really the determinant for do we sell a position or not, not portfolio sizing, all those kinds of things. So all of that, because you asked me, like, how do we get into these positions and how do we do it?

So we want to stay in for a long period of time. We still probably enter in too soon because if they are trading in 10 cents, it's almost like, I think again, it's a Bernard Baruch. You want to be in,

You don't want to be in for the first 20%. You don't want to be in for the last 20%. It's the 60% in between. So therefore, the idea that we would wade into these things more slowly, knowing it's difficult. And in the difficult times, things probably get worse before they get better. There will be opportunities to come. So deploying capital is better than

wait till you see the whites of their eyes you know so easy to say hard to do especially since you know you see the opportunity and so yeah 20 cents you got to get tempted you know you're not you don't know it's going to it'll stay there and go to 10 uh although i'm i've spoken too long here on a diatribe but recently we did that with a company called uh five point holdings we we waited we saw the whites of the eyes the whites were close they were right on us and then at

And at the last moment, we had the opportunity to therefore deploy a significant amount of capital in something that we had been watching, was clear, totally mispriced, and now suddenly was in the reaping phase as opposed to the latency. It will happen. It will come. It sounds like it's something you've gotten better at over time.

I would say I got better at it, but I just got lucky just recently. To now say, yes, I'm smart enough. We're going to do that on a regular basis is easy to say and hard to execute in practice. Well, a lot of people, they think about, okay, when you come into a stock, you first buy, if you've got a typical like position size at cost for your average position, maybe you buy a third and then you buy another third and then you buy a third. So for you, what is that like? If you know that you have this tendency to be early, are you buying early?

A 10th? A 20th? And then before you get to your full at-cost position size. Well, in this case, with the five-point holdings, we did the whole thing. This thing was two years past

It turning. It had turned. And not only had it turned, you could see the continued reaping that was going to come from this thing. So in that one, we went all in. We didn't say, well, let's weed into this thing. And it was an opportunity to do it. But you did. The reason I went to that whole long diatribe, you did ask me about trading around positions. And I said, normally, that's not my intent.

to trade around a position. Because I don't know if it's up, if I had sold a new market at some point and then gotten back in, would I get back in or would I miss it? And I've gone higher. You don't know when the pullbacks come. And so it's another thing, if the pullbacks do come and you do have capital and you put more into it. But in today's world, that's particularly opportune. So trading around the builders or trading around Tidewater, and I'd hardly say that I traded around it, but

What happens is the flow of capital is predicated on some externality and not the fundamental analysis. So stocks go, when they suddenly have runs, they go too far, too soon.

And so that's what I clearly believe was Tidewater's situation. It went too far too soon. So the business was recovering. It recovered dramatically. People could see the opportunity and see where its potential is and where it's likely to be sometime in the next two to three years, and therefore started to pay forward for that. But even that ascribes too much intelligence to the purchasing. So when it did well, it then got added to the S&P 600 small cap index. So we figured

internally at the company, we figured the amount of capital that is indexed to the S&P small cap meant that the market had to buy 6 million shares of a company with 52 million shares outstanding.

Without regard to what happened with the business, right? So therefore that capital was going to buy that stock without regard to price. So they were price indifferent. They had an own mistake. And then of course, once that happened, the momentum in the stock drew all this capital into it. So therefore, you know, it probably should have stopped at the 70 or 80. Instead, it went over 100.

And so therefore, when it went to those prices, we did have an opportunity in a window because again, we're insiders. And so therefore that limits when we can buy and sell the stock. And so we did sell a small piece of our position. But again, it was something at the margin we did, and it wasn't a big piece of our position because I still have that long-term focus on the opportunity set and the valuation in my mind and the achievability in the next three to four years.

that will be a modest valuation based on where I think the earnings can go for the business. Builders First Sources has been more volatile for longer because it's been more successful. So therefore, here it is at 110, 115.

A year ago, stock was over 200. And so therefore, at 200, the valuation also got fuller. And so therefore, for us to sell more of our position also was easier to do, as opposed to when we did sell time order, we didn't think the valuation was full. We just thought it was opportune to be able to do that. So those are similar and may look to the outside observer, but different in terms of how we thought about it and what our analysis was. And our sale of Builders First for us was...

a much larger percentage of what we own when it traded approaching 200 and over 200. We've talked about your temperament a little bit and how that affects your investment decisions. And I imagine it's probably easy for you to buy back in when something has gone lower. What about when something goes higher?

and you make a choice to sell something because you think it's opportune, maybe not because you think the valuation is full, but just because you think it's run too far too soon, do you have the temperament to buy back in at a higher price? Yes. And again, I would probably point out Tidewater is an example of that, right? So therefore, going back, I don't know, three years ago, it was right around when we were...

There was a lot of opportunities. So I think I bought a stock at 11 and 12. And then we announced the transaction with Swire Pacific. And again, another situation where what you want to do, invest in businesses that have the balance sheet and temperament that understand that the opportunity as the business starts to recover and not like, oh, well, I could have bought it for less money a year ago, so I won't buy it today. So, you know, we bought the Swire Pacific fleet. Of course, that was partial because we would, the company had been negotiating with for two years and

And so therefore it came to fruition then. And the sale was a terrible sale by Swire Pacific. It was capitulation at the bottom of the market. They had actually cleaned it up. They had tried to sell it a couple of years before. The prices that they were offered, they didn't like, didn't think was a full price. I'm sure that we ended up buying it for less than what Charles Fabricant was looking to buy for. They were going to sell it to him potentially three years earlier because they just didn't want to own it anymore.

So you got to buy for $200 million, something worth $2 billion to replace it. So you'll buy it at 10 cents at a dollar. So that opportunity kind of came to Tidewater. But when that happened, then part of the... And of course, we didn't pay $200 million to buy this wire Pacific Fleet. We paid more than that. Because what we did was we paid a third of it in cash, but we paid two thirds of it with a warrant that effectively was common stock. So we definitely use common shares.

And that's what happens when you use common shares. You don't know the price at which you're paying. So, you know, what's the really value of the business substantially? We believe substantially more. That's why we're investing in this business also. Now, there was probably an arbitrage clue in what we were paying for those assets and what our assets were worth at the time. And this is the advantage of synergies we got from multitude, whether that's cost, operations, integration, market share participation, therefore the ability to, uh,

Accelerate the pricing Improvement that was happening given the supply demand Then a lot of things happened So it made sense to do that but it was more money

So then Swire Pacific fortunately comes back and they weren't in it to own stock in time where they were in it to participate. And they thought there would be a positive uplift in the stock where there was. And so they came back at 17 and did a secondary. And of course, it's great. They did a secondary. It was messy. Who wants to invest in the company? So I think the stock was probably 2021 when they decided to do this. The next thing you know, the stock's at 18. The next thing you have the price to deal at 17. So what, 10% of the...

the piece they sold in the offering. And clearly the investment banker loved having an insider who participated in the process. So therefore to the others, you know, they could go to all these other buyers and say, well, you want to participate because after all he's buying the stock too. You're on the same side. And so I put a 17 and then

But long after they got rid of the rest of their stock, it had traded into the mid 30s and then it backed off and we ended up buying that at 30. So I bought it continually at higher prices. And it wasn't just smart because 30, it's almost back down. Now here it is at 40. So my purchases look so smart today. Of course, it's still a fraction of what the thing's worth. It's a great purchase. But also I had, because I owned it pre the restructuring, had warrants that struck at 65.

And so I also exercised my warrants at 65, even though stock was trading really at that level. So it wasn't an in the market deal that it was like a phenomenal deal, but to be able to deploy capital when I have limited windows of opportunity at a valuation that I thought is clearly attractive and still believed to be attractive today, even though you can buy much less than that. I did that. So I have bought stock at higher prices because

Having done this as long as I have, I understand there is a really long runway of opportunity and it's never a straight line to get there. There's bumps along the way in cyclical businesses. And when things slow down, the market will say, that's it. It's the end of the cycle of this thing. Get out of it. Get out of it. Get out of it. So the downward movements, if you look at the chart of Builders First Source in the 10-year period through the last number of years, there have been three or four periods of time where the stock pulled down almost 50%.

And so those were great opportunities to deploy more capital into something that was in the process of developing and working out, add valuations that were modest even at the time, and therefore just having the opportunity

ability to understand you're in the fourth inning. This is not the ninth inning. This is not overtime. So therefore you can do that. And it's still on a price to value equation and an opportunity set, a great deployment of capital and something you have knowledge and conviction of and understanding of, and is in the process of working out. I must admit, I feel a bit a wolf in sheep's clothing because I personally,

like to short BLDR on those pullbacks. My temperament is I like the unwinds of these long running things. I can't stay in it, but I like the unwinds. And so I'm actually actively, I have some puts on BLDR that I've been playing. It's been very fruitful for me. So I didn't want to drop it too early. Your movement helps with the movement of the stock price down further.

And so therefore, because other people, because it worked, you know, so therefore, you know, what you're doing made sense. So therefore, more capital goes in and does the same thing. And then it creates the opportunity to do that for the buyers. There's something for everybody in that process. So. And it's funny, I talked to. Let's put you now as someone who's profiting for that process. That's great. Yeah. And I was talking to a buddy about, he's like, it's such a good business. I'm like, I know that's why I'm short because there's so many people, there's plenty of sellers left. There's plenty of people.

There's plenty of sellers left because it's such a good business. But, you know, there will come a price. There'll come a price where I'll probably take the other side too. You just admitted you're doing the same thing with Tidewater from time to time also. No, no. Tidewater, the drillers, I...

Okay. I don't know enough. It's too complex. I mean, there's enough tie through to housing with the LDR. So there's the opportunity. Not only do you have many fewer value investors today doing bottom of stock research, thinking about these things, the ones that are left, hate cyclicals, hate commodities. So I'll talk to someone and they'll say, time where it seems really interesting, but I don't

I don't do that. I don't do energy. I can't do that. So therefore, people realize they don't have kind of the knowledge base and information to do that. So therefore, the amount of people who can say intuitively, I know it must make sense, but that's not what I do, is a very long list of things. So therefore, who's looking and who is willing to commit capital is a very small group of people today, which affects pricing and therefore affects profitability.

So I want to switch a little bit here to the business side. We alluded to it earlier, but I didn't know that you actually started out as the broker dealer and then the advisor came later. No, no, they were concurrent things. We always had both things. We did the Tweedy's business, Gabelli's business. So I started to work for Gabelli in 1983. And so he started in 77. And so I started in 80. His, the main business,

economics of his business was doing institutional brokerage business. So he was an institutional analyst at sell-side firms. And so he had relationships and therefore was doing that business. So he started to build the asset management business. So when I started, it was $7 million is what he managed in 1980.

And when I left in '83, starting a firm, it was still only $77 million. So the economics of his business were still the brokerage business. And of course, but the research ideas that he had were phenomenal ideas because he was a great investor. So therefore to internalize that and therefore to build out the asset management business is clearly intuitive and logical because it's a better business that has persistency and growth in the assets as opposed to a transactional business.

It grew. But of course, Cabelli still keeps the broker-dealer. Although, I don't know what it is. It's a non-function today because it really ties more into like a relationship building than it is. Because...

It's a terrible group. Who the hell wants to do brokerage business with small cap value managers? They have low turnover. Yeah, they don't trade. And of course, there's fewer of them. So therefore, the universe is small. So therefore, it's like trying to do business with people who don't have any business to do. So it's interesting. So he's still in both business. Tweenie, of course, had gotten rid of the brokerage business, closed it down. And they had started the partnership and it had started to grow. And that's what happened in 1975. Right. That's the huge market rotation.

So that's when Value Investing started to perform and outperform dramatically and eventually got the name Value Investing. Right before that,

didn't even have that name. It was just investing. Right. And so that's what it was. So me, I've just had been so fortunate. I've got so lucky. It is right place, right there. I graduated college. Senior year, I do an internship working the Posterino Pugliese, the accounting firm, working on the order to Tweedy Brown. And so this is a opening gun for value investing. So I won't get to a place and talk to all the principals of one of the firms that is helping to make

this universe, something that is extremely well known where everybody's putting capital to work at it. Obviously, Gabelli is still around and still very successful. But a lot of people from that era did not manage to continue to perform well through this new period of time. So what do you think it is about yourself and people like Gabelli who have been able to keep things going through this

this period where value has been out of favor. I guess we've been fortunate enough to, well, he's definitely fortunate enough to have enough money where he can afford to do it. And it's his, it's a passion and an avocation for him. And of course, for us, what we found is that having the broker dealer business is a great training ground, introduction ground. So therefore there've been multiple people who started at a broker dealer, talking to people, coming up with how to do research and think about it. So, you know, the first one is Mario Sibeli who runs Marathon Partners, extremely successful.

He's got a record of outperformance of the market over an extended amount of time. And so he did it originally as a sell-side person, developed his own ideas, realized his ideas were as good as my ideas, in many cases better than my ideas, but trained in that process and thinks in the right concept. And eventually started a partnership.

And so Jeff Chokobowitz is another guy who runs Simcoe Asset Management, very successful firm. Again, a record of our performance. Started to work for us in the broker-dealer side of the business. And therefore, over time, grew that out and then started a partnership. And therefore, has been extremely successful with managing money. So there's been others that also came. Chris Anson is another person who's done that same thing. Two young guys when they were in college, Ben Stein and...

And Zach Sternberg, run of friend of Bruce Al's Capital, again, came through the firm, started there. But there's been a lot of commentary about how hard it is for people who are on the equity research side, on the sell side, to move over to the buy side these days. Do you still think that that's...

a path for young people in the industry to get into the buy side? It's a lot harder to do for a lot of multitude of reasons. It's not as easy as what we used to do. Although even today, there are templates for us to continue to do that. We think there's still opportunity because we understand the longer view and the opportunity to do that. And we know that's what people want to do. They want to pick us. They want to run their own partnership. They want to invest.

So when a bright eyed young person starts off at robotic securities, what are the things that they think they know that just ain't so that you have found increasingly you have to dissuade them of? I am a very laissez faire manager. So if you're not if you're not motivated and hungry.

I'm not going to teach you how to do it. Now, I'll regularly talk to you. We'll talk to companies together. You can glean whatever intelligence they may have, which is probably limited, whatever else. But you have to do that and you do it your own way. So Sibeli is a really good example. So a lot of the companies he invests in are not the companies that we would invest in.

And so therefore, you know, his application of how do you think about march to safety, valuations, you know, analysis on businesses, what kind of businesses are you comfortable with, you have core competency or not, can be very different. So I'm not.

going to necessarily teach you and show you what to do. You can understand the framework because you could read plenty of things in terms of investing, value investing, and kind of the concepts behind it and how it works. But you have to figure out how to then do the application of that. You may run in a way that's funny, but you may be the fastest runner and I'm not going to show you how to run. You figure out how to run. There's not like the Rabadi way and everybody comes in and they learn the Rabadi way. It's very much through osmosis.

Well, initially you probably do run the Rabadi way, like what does Bob like? Why does he like it? Whatever else. But of course, you're not looking... Most people aren't looking to parrot what Bob does. They're looking to have the original idea. And so therefore they say, they look around and they find this thing. And then of course, the combination of factors, if they find this thing, they come to me and say, "Hey, this thing looks really interesting. What do you think?"

Obviously, the nature of people, it's not me personally, is to get affirmation from someone that they think understands what they're doing also is a good thing. So they're looking for affirmation from a multitude of things. But how they think about it and how they apply it is their own, and that's what makes them really successful and really compelling investors. And that's what we're looking for, people who are really thoughtful investors on their own.

Right now, on the advisor side, are you allowed to invest in the things, the ideas that you come up with, you know, at the broker dealer? How does that work?

We're not a high trading organization where we're pitching a stock. And first off, the stocks we pitch probably go down first. So therefore, it's not like we're running an idea. Well, if we did, we'd probably lose money on a regular basis. And of course, that's what it is, is the broker-dealer ends up talking to people about things that we're invested in. And so there's clearly a conflict of interest. We talk in our own book. Of course, we are. But there are things that we're doing it to try to get a commission out of you.

Because that is not an economic venture. We're really doing it because we're sharing an idea that we think makes sense, that we have our own capital. So we're, I think, clearly aligned.

in the things. And, you know, then that's probably interesting too, because you might say, of course, well, Bob loves that thing too much. Therefore, he may still like it, but I'm going to sell my pieces of it, which is perfectly fine. You can make your own decision, whatever else you're not. You don't execute in order because I told you to. I share an idea with you. If you think that that is a thoughtful idea or any of the other people who work at the firm, if they have an idea they share with you that they think is a compelling opportunity, you make your own decisions as a portfolio manager. You're not being induced into it

You're not buying it because you know that Goldman's going to put it on the recommended list or something like that. You know, Robadi puts it on the recommended list. I mean, who cares? So we don't move markets. And so, of course, a lot of those things are kind of like industry structural things and not specific to kind of what our business model is and how it really works and concerns that someone shouldn't really have.

Well, it's interesting you talk about, oh, they're just talking their book. You know, I've interviewed people. Some of them, you know, run money. They have a book and they could be talking their book. And then you have people who just do research. And then the criticism of them is, oh, well, they have no skin in the game. Bring on a guy who has money. And I feel like either way, either way I go, I'm either bringing on somebody who's talking their book or I'm bringing on somebody with no skin in the game. And either way, there's always a criticism.

And, you know, it's up to the person to decide. You can make excuses. You need to make it. You have to think about what you think makes sense. And that's your decision, not someone else's. Yeah. Now, I do have a question about, you know, LPs on the advisor side. I imagine you've had LPs for decades.

for long enough that you've probably had some who've passed away and the money has gone to the next generation of people. How do you deal with like succession of LPs when you have such long standing relationships? Do you find yourself dealing with the children of of your older investors?

Absolutely. That's part of the process. And, you know, you, as they, and it's their decisions to make as to what they want to do. And there's a multitude of things that go into that decision making. That's what it is, is to a certain extent, of course, the problem I have in recent years is, right, I have

The great thing about having investors for 40 plus years is that everybody has a life cycle. We'll have an exit date. And so therefore the combination of factors, whether you retire and therefore you need to take money out, a multitude of things happen or you die. And so therefore, you know, then the,

your beneficiaries may or may not want to be invested in it. And so therefore some leave, some stay. And that's just the reality, which also means that there is some constant churn of the capital. And in addition, the other churn of capital is, you know, the last number of years have been particularly good years. We've been able to reap some significant rewards of things that we've invested in for a long time. So there's taxes to pay. And so I too take money out of the partnership to pay my taxes because that's about my issues. So there's a,

The growth in our assets over the last number of years has been mitigated by the fact that there's an outflow of capital within the life cycle of our investors and the tax obligations. And it's been frustrating because the fact is, you know, here I have a 40 plus year track record of outperforming the S&P 500 and difficult to raise money. I haven't really... In the last year or two, we found one or two people who've invested with us. But before that...

And it definitely was. There was a significant amount of time post the financial crisis where our performance was less than what the S&P is, which is interesting because, of course, the S&P, here it is. It's an anomaly that we think about it just as an indication of the U.S. market. But the fact of the matter is it's the best mortgage to work for an extended amount of time. So you are measuring up against the highest thing to be outperforming against. So

So, you know, there definitely was that. Well, there was a mitigated loss of capital, even an extended period of underperformance. But the life cycle is one that's inescapable. I want to close with a question about benchmarks. Obviously, you are value focused. You've talked about, you know, you think that the Russell 2000, although it's been correctly identified as an index full of zombies, has maybe been maligned a little bit.

But how do you think about measuring your performance? Do you think that even if you are a value investor, you should be comparing yourself to the S&P 500? I've always compared our performance to the S&P 500 because that's what it is. The belief I always had was, why would I invest in a subsegment of the market that's a little bit esoteric if I'm not going to do better than that? If I can do

better. And the thing that's the broad base and well-known, and I know the companies, why would I do that instead of doing this odd thing? So the only reason to do an odd thing is that the odd thing over time outperforms the index. So I've always thought the S&P 500 is the index in which... Because as it is, we're here in America. And so people in America, clearly can invest in the S&P 500. So if you can't outperform what anybody could do, then the

No expectation you should get capital, be able to keep capital. Why would people sell optimally, allocate?

And yes, you may say that over time, the Russell outperforms and therefore I'll do that over time. Of course, the longer it hasn't outperformed, the harder it is to believe that that's the case. There's something that's changed fundamental. And so therefore capital flows. And I do think that's a huge issue today, right? That we have gone through an extended period of time. So for extended, right? The extended amount of time is right. 1982 was the peak in interest rates. The 1980 was the peak in inflation. And this

anomalistic period where you had for 50 years, 40 years, 50 years,

inflation go one way and interest rates go one way only, as opposed to they normally cycle. It didn't cycle. And to do it for as long as it did, the conviction is, well, this is the way it is. This is the new norm. This is the standard, as opposed to, no, that was an anomaly. This is the end of a period of time and things. There's the risk that there really is a more normal environment and more normal environments. There's some inflation. That's a regular recurring thing. And normally it doesn't go from

it disappearing to just a little, things tend to go in extremes. And therefore the idea that there's a risk that, oh no, it could peak up quite a bit, inflation be higher. And therefore inflation determines interest rates, not the Fed. The Fed can't affect really, it could do things at the margin and screw things up and misallocate capital, which it has done, but it really can't move that inflation as that determinant. And so do you have inflation? Inflation sets interest rates.

And the Fed tries to influence inflation ineffectively. And so therefore, things happen to it. So it's an interesting time in which we are. And I think potentially there's an inflection point. I think capital is allocated based on

historical performance. And in spite of the fact that everybody will say past performance is not a predictor of future results. But it is the best predictor. It's not a predictor, but it does happen to be the best predictor. It's the best predictor until you reach the inflection point when the underlying fundamentals change. And then suddenly it's not a good predictor. So go back and tell the buyers of the Nifty 50 in 1972.

That trend, which was a great trend, which was based on historical performances, and it was a predictor of future results. Suddenly, it wasn't a predictor of future results. And I'm thinking we are more likely, given the extent of time that's happened, the allocation of capital, that there's some things that change. And of course, a lot of assets are priced on the expectation, right? And that's priced in. This will be, there will continue to be that case. And therefore, that's not the case.

That's a huge adjustment. Suddenly, there's a whole bunch of people swimming naked. Oh, yeah. I mean, I'm a huge believer that vintage matters and affects the way people think about markets and the performance of assets. There's been a trope that it's like, oh, the bond guys are the smartest guys on the street. It's like, well, are they the smartest guys on the street or did they just have a 40-year bull market in bonds? Well, two years ago, we were going to have a recession. The recession was going to be predicated on the fact that the long bond was lower than the short.

And of course, at the time I said, "That's ridiculous. What's really going on here is the inflation has happened, short rates, you immediately turn over all the time. And so therefore they're priced properly. And five is the right rate. And three and a half on the 10-year treasury is not the right rate, but everybody holding that bond is hoping that inflation comes back down." So that pricing was predicated on the hope and expectation that maybe it'll go back to that lumber again and a refusal to take the loss.

And so therefore, that's why that was, I really do think. And of course, we've seen that now. Now we won't have a recession because now suddenly we don't have the inverted U code anymore, the short. It's getting longer. And so therefore, that means we're not going to have a recession. And all of that was the bond market was smarter and was predicting something. No, it was afraid and...

didn't move and it was tied to where it was. And the Fed was buying the 10-year treasuries to manipulate the market. And you bought into that because they'll be able to continue to buy and keep the rate where it is. So I don't need to sell my bond. I don't have that much exposure in it. So there's a lot of misconceptions that happen on a regular basis that, you know, based on past performance, they predict certain things. And bonds today are, you know, risky for the point of view. You want to own a bond if we're going to have a recession because bonds go up.

Rates go down in an recessionary way. To me, that's a speculative investment. It's a speculative investment in this thing that's supposed to be secure and safe. You're speculating there's going to be a recession and then capital will run to some place that they perceive to be low risk. And I'd argue when they didn't drive it down to three and a half percent, that's not low risk. You know, three and a half percent, you know, 10 year or longer maturity bonds have a huge amount of risk in them.

So maybe more than the Magnificent Seven in terms of valuation. But Bon, I mean, the sentiment is pretty blown out. I was talking to somebody last night who said you could lock in 2.75% in 30-year tips.

I mean, you know, if you're protected from the inflation, now you obviously that's the government inflation number that you're going to get. But that's for a real, real return. Like, that's pretty good. No, no, no, no. And of course, for 10 years, there was no real rate of return on the 10 year treasury. Yeah. Right. Which is which is interesting.

interesting from the anomalistic point of view, right? Any investment, well, what's my risk-free rate of return in a 10-year treasury at an equity investors probably is the base point. And what was the return in that? Well, it's like zero to negative. So how do you build a foundation of then putting a risk premium on top of something that the foundation's in the wrong place? Zero and below zero is not a risk-free rate of return. And that's what the 10-year treasury was priced at.

Totally. Well, Bob, where can people find you? Where can they find out more information about Robadi Advisors? Oh, well, of course, we've got a website that's, you know, pretty mundane. There's a bunch of talks I do that you can link to those things. I guess in the last year, two, three, I've been running my mouth more frequently. So there's a number of different things you can listen to, listen to me procrastinate. And even though I speak a little quickly, still turn up the speed because it's better. Yeah.

No, no, it's good. A lot of guys, you got to crank it up to two times. I think you're more like a 1.25, 1.5 times. As a podcast host, it's always wonderful to have somebody who's got the 2x speed on automatically. So, well, thank you so much. Those were some great questions and great. Thanks for giving me the opportunity to talk about something that I am passionate about. Thanks.